Deep T. would like you to meet STUART

Many things that occur in society defy rational or logical explanation. Society does not behave like the universe where science continues to unravel the workings through theory, experiment and testing. The universe is rationally predictable through the laws of science. Society or people are not, as collectives of humans influence their own outcome and that is the problem with economics. Some things that occur in society seem irrational but are so STUpid, they are smART for a collective of humans for a time, and that is the STUART effect.

Australia’s housing market is seriously distorting economic activity. What some call strong I call stupid. Not only does housing costs inflate the cost of doing business and employing staff on an internationally competitive basis but the costs of capital projects like infrastructure are also greatly inflated. It may be cheap to borrow but it’s expensive to build. You may feel smart if you’ve been in the housing market long enough but cashing out for retirement and investing at negative yields may not be the smart that was envisaged, even if STUART rules.

We’ll come back to STUART, but let’s review the signals and why Australia is heading for negative interest rates for a long time.

  • At over 125% of GDP, Australia’s household debt is the largest in the world.
  • Australia’s Public and Private foreign debt has reached astronomical height of 140% of GDP. This debt is growing and can only be repaid by selling the country
  • Debt creates money and if there’s too much debt, there is too much money
  • Australia’s economy is bar belled in that household debt is held by a group of borrowers and another group of depositors hold the money.
  • Australia’s private debt binge over the last 30 years has allowed house prices to rise to massive levels relative to median incomes all over the country.
  • Australia’s foreign debt binge over the last 30 years has allowed Australians to increase living standards and wealth in older generations whilst also ensuring that the current account deficit is paid for.
  • During the 30 year cycle Australia managed to transfer public debt to the private household sector but for the last 7 years has rebooted public debt in order to maintain growth in the economy whilst putting the AAA rating on the locked in path of downgrade.

Through the last 30 years did we have the policy debate that Australia was going to borrow itself to prosperity and eventually force interest rates to practically zero and beyond? Would we have thought that was a stupid or smart idea? Ask an individual and I’m sure most would call it stupid. But let the humans act as a collective, then it’s very smart. I’m calling STUART on that. Enriching much of a generation or two with little effort and with the fall-out to be dealt with by future generations who’ve yet to wake up to their plight is not new, but it works, for a time.

Under current settings, a continuation of the debt to prosperity policies and the above signals are all but impossible. So some things must give in order to reboot the economy to improve standards of living not just from debt but from increased productivity.

Simply put there is too much debt in the wrong hands and too much money in the opposite hands but this does not counter balance. In modern times, the rebalancing is usually done by having a financial crisis which results in loan losses, a destruction of money through equity and deposit losses and the resultant fall-out to employment. More recently, globalisation and the financialisation of almost everything, may mean that there is another yet stupid way of achieving the same thing.

Central banks around the world and our own RBA, have decreased interest rates to record lows on the basis of stimulating borrowing to keep our debt to prosperity model pumped. It has worked but not the way that was planned. Borrowing increased but mostly in non-productive assets like housing which had the effect of creating money and increasing asset prices but at the expense of productive investment. Not only that but the collective of humans worked on the basis that the RBA would keep decreasing  interest rates to avoid at all costs any rebalancing and a change to the debt to prosperity policy. To date that’s exactly what the RBA has done. So taking on massive debt amounts to buy overpriced assets, is not only low risk but is hugely profitable. I’m calling STUART.

As I’ve written previously, as interest rates move into negative territory asset prices and borrowing may still increase, but a funny thing happens, debt and money destruction starts to occur and the slow rebalancing of the economy commences without necessarily having a crisis. However, once the collective of humans is convinced that interest rates have hit bottom and the RBA cannot possibly lower further but must raise rates for fear of destroying too much money, then the whole STUART process goes into Reverse Gear (REG) and asset prices decrease in anticipation of higher rates and deleveraging. At this point the crisis hits with many losers through asset losses and income loss, but over time probably as many winners.

REG is not all bad however, the other thing that occurs at this point is that incentives now change considerably. The collective of humans, no longer wants assets decreasing in value but are incentivised, at the risk of losing a lot of capital, to invest in future productive cash flows. This may be hard for some to conceive but when the cycle turns, even when interest rates may be significantly negative, there will be little incentive to leverage assets because as asset values fall the cost of that debt rises to wipe out any notion of cheap debt. This is the point we must reach to reboot the economy, at the very least for the benefit of future generations.

Perhaps there are numerous reasons why rates will not go heavily negative, the best of which is that its politically unacceptable to have depositors losing money on deposits. Nevertheless, the resulting outcome when STUART meets REG will still be the same regardless of where rates bottom. There is too much money and debt in the wrong hands for continued financial stability and as the list grows of those locked into massive mortgages and those locked out of the housing market, the political will starts to sway away from protecting those with unearned gains to those wanting opportunities of their own.

Although many events could happen internationally to bring on our rebooting crisis earlier, as we are very vulnerable, the collective of us humans that want the economy rebooted and a more sustainable distribution of wealth should be creating their own STUART effect through a push for serious negative rates. Get on board and drive those rates down. Stupid hey, to believe that decreasing rates will cause the crisis? No, I call STUART. How low can they go before REG arrives and the reboot happens?


  1. Thanks Deep T, worth staying up for your post. I celebrate you joining the faction that embraces each new turn on this stupidity spiral, knowing that it bring us ever-closer the the ultimate reckoning.

    And we need the reckoning. You can’t recover until you hit rock bottom. And we need to slam into rock bottom super hard, to be sure!

  2. So we should do everything we can to bring Stewie and Reggie together. They’d make a great couple I reckon. A match made in heaven.

    Thanks by the way, very easy to understand.

  3. Always good to get a dose of Deep T’s writing. Thx. And…..

    Reading Yellen’s speech, however, you are left with the distinct impression that she actually knows less than the average household. The Chairman of the Federal Reserve claims that it is now necessary to study whether or not people and firms act differently. Technical jargon aside, the message is clear enough. Most people would respond to her by exclaiming, “What the hell have you been doing?”…… the biggest lie of the latter half of the 20th century and so far of the 21st (is that) economists are believed to be experts on the economy. They are not; they are statisticians and Yellen’s speech leaves absolutely no doubt as to this fact. I have been writing for years that ‘they’ really don’t know what they are doing. For once, the Fed Chair opened that door. When it (eventually) swings out wide enough, the recovery can begin.

    • Economists certainly are not statisticians – very few of them have any notion of correct statistical methodology.
      They have more in common with priests and theologians than statisticians.

  4. Very interesting, thanks Deep T.

    Phillip J. Anderson describes the “cycle” in a slightly different way in his book “The Secret Life of Real Estate and Banking”, but the end result is the same.

    However, it is disturbing that the UK never has a colossal bust and readjustment as you describe, just a continued chronic rising land price trend with shorter-term fluctuations that always quickly resume inflating from a higher and higher “trough” each time. Overcrowding and smaller dwellings, is the mechanism to compensate for the inexorable rise in land prices. The UK has such a strangulatory planning system, that the “supply of land” being “gamed” by speculators is always small. All greenfields land subject to the painful, drawn-out development permission process, truly is going through this process for the reason that it will be developed just as soon as it becomes possible. The housing shortages are chronic, and the planners assumptions that “redevelopment to higher densities” will provide a healthy supply of housing, is an illusion (but that is a subject for another essay). The actual land price inflation over the decades, relative to benchmark comparison cities in the USA without planning constraints, has reached a factor of 100 to 900 (the high end in London’s case). However, this is the result of a very long trend, not a one-cycle spike, the quantities of raw land traded are small, and the extent to which people are mortgaged or locked into renting and/or cohabiting, has found its own level.

    The bigger bust and readjustment you describe, requires large quantities of raw land being speculated in. For example, Spain was marked by a planning system that was a culpable participant in the “gaming” process for a pipeline of greenfields land supply that has been estimated by some economists to have been 7 years long. Local government ability to extract fee income, is leveraged by the creation of high levels of “planning gain” in a de facto quota racket. However, on top of this 7 years apparent pipeline of acquired sites (at inflated prices) could be added the land already being speculated in in anticipation of future rezoning. The bust is accompanied by a large amount of untenanted new buildings and semi-completed developments, but the aggregate damage (destroyed equity) also includes large amounts of greenfields land. Interestingly, the USA in the 1920’s boom and 1930 bust period, was marked by this phenomenon – automobility had not quite become mature enough as a system, to ensure the stable-price growth that became the norm subsequently.

    Unfortunately, it seems that politically and intellectually, the likely policy responses to experiencing a Spain-type bust, will be ones that move closer to the UK model, rather than reversion to the automobility-based competitive land supply model that worked so well for decades in most of the first world. Australia is heading for a real bust, but it seems possible to entrench a land racket over all future cycles by going full-on “undersupply” (and misguided, ineffective upzoning) in the planning.

    • @Phil….

      I think you’ll find Janet and Posse inc are dumbfounded the models [prophecy] have not corroborated with reality, such is the dilemma with religious iconography. She as much said the “rational agent” models in retrospect have not performed to spec and compartmentalization of human agency wrt expectations is a garbage in and garbage out exercise. What probably disturbs them the most is the booming voice from above [Fed fire side chats] does not have the intend effect it might[?] have once had because computational power does not fear the booming voice from above [behind the curtain].

      Disheveled Marsupial…. I think that crazy DJ Greensplain irrevocably broke the sound gear when his brain liquefied and poured out over the controls shorting out all the circuit boards….

      • Sorry Phil… but Bill Bonner’s ideological take on things gives me a migraine….

        This should highlight my concerns –

        In a series of articles earlier this year, Anthony Migchels and I exposed how Libertarianism and Austrian economics were sponsored by the elites as a dialectical counterpart to Communism during the 20th century. See especially:

        Old Rothschild- and Rockefeller hands controlled the Libertarian-Communist dialectic

        How the Money Power spawns Libertarians

        The sad truth is that not much has changed during the last 60 years. We already know that Ron Paul is backed by billionaire Peter Thiel, a member of the steering committee of the Bilderberg group.

        But what few people realize is that the entire Libertarian movement is still controlled by a handful of individuals who are directly connected to the highest elite circles, including the Rothschild dynasty. In this article, we will shed more light on these connections and expose the elites’ control of the Libertarian movement in the 21st century.

        The Agora Empire

        As documented in The Daily Bell Hoax?, blogger (and libertarian sympathizer) Lila Rajiva recently revealed that Ron Paul had a longtime partnership with James Dale Davidson, founder (with Lord William Rees-Mogg) of the financial conglomerate Agora Inc. Through the Agora network, Davidson, Rees-Mogg, and executives Bill Bonner and Addison Wiggin control most of the “hard-money” investment newsletters and “free-market” websites in the West, most of them ferociously pro-Paul. – snip

        Disheveled Marsupial…. that Bill Bonner gives one time libertarian grand wizard greensplain a shiv to the back, after his down fall, is just the modus operandi of the MPS posse, they did it to Raygun, Bush Jr, et al…. its what flexains do thingy….

    • @Phil: You say ” However, it is disturbing that the UK never has a colossal bust and readjustment as you describe, just a continued chronic rising land price trend with shorter-term fluctuations that always quickly resume inflating from a higher and higher “trough” each time. ”
      The UK had a significant recession and real estate bust in the early 1990’s when much of the western world had a major real estate recession.
      I remember that there was a crisis in banking with the number of homeowners with negative equity and with banks having to decide whether to allow underwater borrowers to sell in one place and buy in another to get a job in the other place so that they would not bankrupt their client and retain a chance of the vorrower eventually paying back more than the then firesale value of the property. The South and London were the hardest hit and they had enjoyed the biggest boom in house prices.

      • Yeah, but my point is that the UK’s urban land prices having inflated by a factor of 100+ already well before that bust you are describing, did not result in a land price collapse back to, say, “only” 50 times too high. Meanwhile other nations might have experienced a 30X land price inflation in their boom, followed by a bust down to, say, 10X, which nigh on destroys their macro-economy! The difference is the nature of “supply of land”. The UK has chronic and worsening undersupply, period. My point is that an “extractive rent” racket in land, has capabilities way beyond what we are considering in our “first phase” of property cycle volatility following imposition of quotas on land supply for the urban economy. I don’t know which is worse; but I do know that as transport technology was improving from 1890 onwards, the very high urban land rent that prevailed previously, trended downwards for decades, with each bust taking the new norm lower. This was because there was no central-planning curtailment of the transport system’s capabilities of bringing new low-cost land supply into the urban economy. The UK’s post-1947 trend is merely the opposite of the post-1890 trend in most of the West.

        Developing countries can be seen to be following differing patterns in land rent depending on their policy approaches to automobility. A new database has shown that median multiples as low as 3 are being achieved in cities like Bangkok, as automobile based development is letting rip just like it did in the USA mid 20th century.

    • Phil,

      I’m not sure what your point is here. Are you saying local governments in Spain didn’t respond to developer pressure in zoning decisions during the bubble?

      • “Developer pressure” in undistorted urban land markets, is merely “market demand on the part of real people, for housing”.

        This is swamped, in markets distorted by quotas, due to the triggering of speculative pressures. Most “developers” per se are merely “piggy in the middle”, needing to keep a workforce employed and capital equipment deployed, and having to compete for sites, with a whole lot of speculators. Developers per se are not responsible for a bidding war and inflation of the price of sites they need to stay in business, and even less responsible for land well in excess of that needed for “housing supply”, being bidded up. Ultimately the crash is damaging partly BECAUSE the bidding-up included a whole lot of land that was not even developed (and did not need to be either, to respond to actual housing demand). But adding to the damage, can be actual construction of unnecessary buildings. This latter phenomenon always involves speculation, usually with foreign involvement. Melbourne’s apartment bubble would not be happening without Asian investors, and Spain’s one was helped along by foreigners. No “pressure” on planners is needed to get apartments zoned for, this is part of a religious belief system on their part in current times.

        Local governments also find fee income a perverse incentive during these bubbles, adding to the pro-cyclical nature of their involvement – as after the crash, they need to hike local taxes to make up for the loss of revenue to which they had become accustomed.

      • It might be, or it might just be speculative demand. Are you saying developers only ever develop in response to greater consumer demand for housing? How do they judge this?
        Can you also clarify what you mean by quotas? Are you saying local councils fix the quantity of land supplied at any price?

  5. Good stuff Deep T The bullet points are a great summary of where we are at.
    Juat a warning to all – two things
    1. Any attempt to try the gradual adjustment” by reducing interest rates even further negative RAT while doing some damned thing or nothing is not an adjustment. It is reinforcing the current stupid distorted model
    2. This distortion has been going on for 60 years. The time when REG meets STUART (neat!!!) will not be pleasant in any way. There will be a FEW winners and one hell of a lot of losers. Significant change will take generations. For the losers it will be a disaster. At that point we face not only economic breakdown but social and political breakdown.
    Be careful what you wish for in your own lifetime.

    • >Be careful what you wish for in your own lifetime.

      You know what? Fuck it! I now kind of understand the poor souls we keep on those god forsaken islands welcoming death as a relief!

      Bring! It! On! Come on universe, you mostly empty wuss!

  6. …….and the surreal beauty of it all is that both of Australia’s mainstream sides of politics, the RBA and the Treasury are locked into Stuart, with Stuart having the most well funded (and resonant) presence n the media, and Stuart being the guy on the stage holding a gun at his head alongside a sign saying ‘nobody move or I shoot’ and everyone standing there, mouths agape, to see what happens next.

    …..and that of course is before we get to organisations like (the artist formerly known as) BREE, Austrac, the most influential Universities and ASIC who have gone beyond Stuart to eliminate Art, and embrace Stupid.

  7. Very good.

    “….However, once the collective of humans is convinced that interest rates have hit bottom and the RBA cannot possibly lower further but must raise rates for fear of destroying too much money, then the whole STUART process goes into Reverse Gear (REG) and asset prices decrease in anticipation of higher rates and deleveraging. ..”

    Not sure I follow why the RBA would raise rates to avoid destroying too much money. Raising rates will encourage deleveraging and that will destroy money by the bucket load. The RBA will rates eventually and for the express purpose of destroying money.

    I suspect that the majority of STU’s will NOT reach a point where they believe interest rates have bottomed. The herd usually only gets an idea once it has been flashing in 60 foot neon for an extended period.

    What they will respond to are interest rates being increased.

    So if the herd (speculator sub-type) will not stop borrowing and the RBA will not raise rates for fear of destroying money through deleveraging what might happen?

    Government will be forced to respond to slowing credit creation well before the herd has a clue what is going on. Pollies don’t last long if too many people are unemployed or underemployed.

    It will direct some imaginatively named and constructed government programs that amount to monetisation. By that I mean public money creation that does not look like it but is. When that happens the RBA will not be worried about destroying money (the private bank created variety) because it will be actively trying to do so to cut off inflation before it appears.

    Interest rates will rise as a result but whether the herd expects them to depends on how quickly they work out what government is doing.

    A few monetisation disguises to keep an eye out for.

    * Central Banks buying securities issued by semi-government agencies relating to infrastructure programs. Lots and lots of jobs can be created rebuilding and building infrastructure and having it paid for with central bank created money via some convoluted bond /securitisation model will disguise the monetisation. This is exactly what the Fee buying hundreds of billions of Freddie and Fannie RMBS amounted to.

    * Tax cuts funded by special low interest govt bonds that the RBA buys. This may be the option chosen by the pollies who hate the idea of public works.

    And yes the sound money hysterics will do their best to argue that any money creation by the public will result in Zimbabwe but that is just BS. They never seem to have a problem with private banks creating money hand over fist to spray at unproductive asset inflation. CPI Inflation is the one thing that all pollies fear so it is probably the least of our concerns at least compared to the out of control hyper asset non-CPI inflation of the last few decades.

    • “What they will respond to are interest rates being increased.” ah, wise you are, Pfh!

      Hopefully in a small Undiversified economy (lol! “Economy”) such as ours, the turnaround from low and falling interest rates to high and rising interest rates will be fast enough to give everyone whiplash!

      • Peachy,

        You might get to use that special Thanksgiving Sized popcorn container. Mainly because a transition that could be well managed could easily go pear shaped due to our growing reliance on manipulated foreign capital flows. If some of our lenders make the first move in the direction I suggest we are likely to find the terms on which we roll over our credit sour very quickly. Rapid adjustment – whiplash – will then follow.

    • You’ll like this thread 007…..

      October 17, 2016 at 10:50 am

      I dunno, I’d rather listen to Yellen than watch Steve Forbes get patted on the back for advocating returning to the gold standard, which seems to be something of a thing of late.

      October 17, 2016 at 11:01 am

      Well, people always try to return to the gold standard when they realize that the economists who are supposed to be the geniuses controlling our markets, don’t have a clue….can you blame them? It happens every time that people lose faith in what is happening in the markets. At least gold has value when it appears that our markets may not….
      Reply ↓

      October 17, 2016 at 11:09 am

      That’s easy enough to shut down. Just ask them if they’d like to dig up 20 trillion in gold somewhere to pay off the national debt. Or maybe buy it from Putin. They’ll quiet down.

      – Snip

      Disheveled Marsupial…. imagine a group think [main stream econ] that is impervious to all facts, evidence, and introspection – T or F, demonstrable thingy…. oh yeah… we have a parallel in some thousands of years old esoterica…

      • Skippy,

        At least the sound money / gold bugs understand there is a “problem” and it has something to do with money, it is just that they are looking to history for a solution and have adopted an old bad one.

        A public money supply that is functions in the interests of all society is at core what many gold bugs claim to be looking for but they don’t understand that it will never be something rooted in some non-government model – which is what a commodity based model is all about.

        Once you accept there needs to be some government you need to accept that govt should have the power to issue its own money.

        At some point they are going to have accept that a well managed public money model is the best way forward. Naturally the gold bugs who hate public property and love privatised wealth will not be satisfied but then they are by definition not really interested in the common good.

        Plus It is not as though a public money model is necessarily big or small government so they can pursue their dreams in that regard. They just need to add – money to defence and property protection as the things they will a weeny government to do.

        One thing that gold bugs do understand is that modern banking is a problem so to that extent they can be allies, to some degree, with everyone who has concerns about the financial deregulation and consequent financialisation of modern life.

        While there is disagreement on how to effectively manage public money and even whether its creation can be safely outsourced to private banks, there are a lot of people across the spectrum who understand that needs to be the priority area for reform.

        If some gold bugs can join that campaign all the better.

      • Once again we find that the monetarists – “sound money [ami] – gold bugs” – view all of humanities problems on money e.g. fix the money [preferences] and everything else will spontaneously fix itself. This is a complete refusal to acknowledge the long historical failures of this school of theory. This is in full or wilful failure to reconcile the last 50ish years of monetarists [quasi] machinations emanating out of America and influencing international institutions such as the world bank and IMF et al, made even more surreal by the fact that MMT is the operational system, but its been bastardized to suit the ideological preferences of the neoliberal [+plus friends] agenda.

        Now that it has all blow up in their faces they attempt to white wash history and reestablish a store of value, so they can safely squirrel away their ill gotten looting under the guise of some sorta lefty in some cases or conservative in others – here to help – PR…..

        Disheveled Marsupial…. I posted the 13 commandments of neoliberalism 007…. that is where the action is… not money forms…

      • Skippy,

        Everyone is concerned about the quantity of money.

        But there is a difference between a concern with the quantity of money and the Quantity Theory of Money which was obsessed with trying to find rock solid relationships between particular measures of the money supply and other phenomena. Its knobs and dials and levers were never fit for purpose.

        MMT is just as concerned about inflation and deflation as everyone else and that means MMT is concerned about the quantity of money.

        The issue is not whether the quantity of money is important as it clearly is. The issue is who has the power to alter that quantity and the means by which they do so.

        MMT reckons the current model of a mix between private and public “public money” creation can work with the right regulation. Most MMT fans tend believe that more public ‘public money’ creation is a good thing and should be used for things jobs guarantees etc or just cutting taxes.

        AMI and other chartalists groups reckon that public money should only be created by the public. Generally they have no objection to private parties creating private money to their hearts content. Its the mixing of the two that they believe doesn’t work.

        Suggesting that Chartalists like AMI and PM have anything in common with the gold bugs who generally reckon we should have a money supply that is independent of government and fixed to something like Gold or something even rarer say -honest politicians – is just fundamentally wrong. One denies a role for government the other makes it central.

        As I said above – a lot of gold bugs are concerned about the issue of what is the best way to ensure a public money supply that is in the public interest.

        That their preferred solution is wrong is unfortunate but people make mistakes all the time – with the best of intentions.

        On the other hand some people do understand that fiat money is a powerful tool of a modern society but think that the current system of public/private franchised public money creation can be fixed despite a century of empirical evidence that the franchisees (private banks) use their privileges to lobby for even more privileges until they destroy the system. Which is then rebuilt only to be handed back to them, under new regulations, to try again. They then start the process again of using their privileges to lobby for deregulation and more privileges.

        I hope those optimistic folk are right and the right regs and right bankers can be found but they haven’t made much progress so far.

      • Banks and lenders were pretty much sorted 007…. so it had nothing to do with MMT… so it must have been the economics and legal theory’s on which the operating system was applied that changed things….

        Like I noted –

        Your line of reasoning does nothing to redress any of this… in fact it would be preferable…

        Disheveled Marsupial… your use of terminology like the state et al is completely ambiguous, in fact most of your jargon and syntax is on par with M. Friedman and Co…. you know the architects of neoliberalism and the failed monetary theories based on wonky philosophical musings…. no thanks 007…. been there and done that…

      • Skippy,

        “..Banks and lenders were pretty much sorted 007…. so it had nothing to do with MMT…..”

        What do you mean by Banks and lenders were pretty much sorted?

        And what does whether they were sorted or not have to do with MMT anyway?

        MMT has nothing to say on whether or not bankers or lenders are well regulated or could be better regulated. It is an operational description.

        What does better regulated mean anyway?.

        Do you mean that private banks are regulated so they create less credit or less of particular types? Do you mean if they are regulated and create less credit for unproductive purposes, the public sector should step in and absorb any spare economic resources by creating money (public debt if you hold to the view that all money can only be debt) with things like a job guarantee?

        You realise that once you start making choices between private bank credit creation and the public sector fiscal form of money creation and wish to avoid inflation you are worrying about the quantity of money?

        Anyway MMT claims to be nothing more than a more helpful way of describing an operational reality.

        And it can do that whether or not bankers and lenders are behaving themselves. I have no problem with MMT turning attention on how our current monetary system operates. For the most part it is very helpful as it work from the perspective of chartalism/fiat and all that entails.

        The main criticism i have of MMT is that it doesn’t really seem to get the important ‘differences’ between public money created by banks pursuant to their franchise and public money created by the public sector EVEN though it is clear that many if not most MMT fans clearly think more public money creation is a good thing and seem to have reservations about how private bank public money creation seems to be directed to unproductive exercises like asset price pumping.

        Even though MMT does not seem to acknowledge a difference MMT fans do seem to get the difference and will generally support the public sector making more use of its fiat creation power.

        You certainly do even though you seem to have some fondness for keeping private banks in the public money creation business albeit on a very tight leash.

        Hudson gets the difference and I suspect that more MMT supporters will as well as time goes on. Certainly Bill Mitchell is talking about the difference a lot more these days. As they do the relatively minor differences between MMT and other chartlist groups like AMI and PM will reduce.

        Which is a good thing because ultimately we are all on the same side – using the power of public fiat to improve the common wealth.

        I will have a look at those 13 commandments – Mirowski is usually a good read so they should be good.

      • Had a read of those 13 commandments, very entertaining but the glue that holds them together was hard to discern.

        I think there is a simpler commandment driving neo-liberalism

        “Be a greedy individual and get as much as you can because it is all about you and you could die any moment”

        I must say after reading those 13 commandments including the one specially about bankers I struggle to understand how you maintain your optimism that the most valuable common property of all – public money power – can be safely entrusted to a group of bankers no matter how well regulated yet you seem to think that regulating that money power in public hands is far too risky.

        All the evidence points suggests we need to stop trying what repeatedly has not worked and try something new.

        That we keep recovering from banker abuse of public money power is a sign of its power not that there is something magical about giving control over it to a select group of bankers.

        Let the bankers only intermediate, that which the representives of the public have created in order to accomplish that which they have a mandate to undertake.

        That may not save us from the cult of individualism but it may help as it reminds us that the money power is shared communal wealth that must always remain in public or shared control.

      • 007….

        OK let see if I have this straight….

        You conflate MMT observations about inflation or deflation as the same as monetarists QTM, um no…. noone is talking about brackets, 2% [quasi gold standard] or natural rates. That for political and ideological reasons brenton woods was tweaked to make the USD reserve instead of bancor necessitated that America always had to have a trade deficit. This has nothing to do with interest rates as everything is just an asset seeking a price in time and space. The money is just a means to facilitate transactions of those assets or services because at the end of the day its the transactions that create value and not the money that enables it.

        As far as banks goes its a moot point at this junction, not to mention the shadow sector, the entire global financial system is tightly coupled and no amount of 40k feet introspection is going to change that. The first mob that tries pulling the trigger will send a trade shock that will wipe out more than the GFC by orders of magnitude.

        Next banks did not forward the MPS or Economic Libertarian agenda…. cough neoliberalism… as such making them the focal point is a bit misguided as its a derivative of the aforementioned and not corner stone of it… bad case of we must burn the village in order to save it thingy… But the agency did provide the “rational logic” which enabled them and others to conduct themselves in such an anti social manner.

        Disheveled Marsupial…. KISS Banks in and of themselves did not do this on their own… so the constant banks meme gets a bit tiresome…. the incessant propaganda folding in on its self necessitating the neoliberals to constantly up the dose, misdirect, and spew chaff seems to be pulling – society – apart and increasing dysfunction….

      • “Anyway MMT claims to be nothing more than a more helpful way of describing an operational reality.”
        If that was actually the case then it’s all good.

        Sorry but MMT claims to be much more than that. It transformed into a social engineering project where there are no limits. The external account imposed a limit to the social engineering so it was just abandoned as a concept. There is nothing modern about the operational reality bit so there would be no need for one of the M’s. What is modern is getting -2 +-2 to equal +4.
        MMRT was then born. However I have never seen any of the MMRT crowd actually deal with the external account issues and implications in any of their discussions. It’s a bit inconvenient so just leave it out.
        P.S. I don’t subscribe to pfh’s model re the private banking sector but that’s a debate for another time.

      • Skippy,

        “…You conflate MMT observations about inflation or deflation as the same as monetarists QTM….”

        Nope – the very opposite – true monetarism and QTM is very specific but you tend to call anyone who questions the role of private banks or talks about the money supply and inflation or deflation a monetarist. AMI and PM and a bunch of others including MMT are not monetarism. While invoking the name of Milton is a good tactic – Milton seems to have an opinion on everything and often they were not very consistent. Milton seemed to wax and wane on the issue of money and the role of banks and how they should be regulated.

        But the irony is that free market Milton is more likely to support your position on banking than mine.

        Nor do I have a problem with banks anyway. As intermedaries they are very important.

        It is not as though we actually disagree significantly anyway – your views re the importance of regulating when banks create credit and who gets it and for what would involve a massive change in the status quo. I am pretty sure the banks would consider your recommendations a significant ‘trigger’ that would end life as we know it.

        Considering that AMI and PM are just taking that reregulation one step further and require that banks secure the deposits before lending them we are talking about matters of degree. To their credit both AMI and PM see clearly that MMT is part of the same continum.

        Under both approaches banks still exist and have an important role but one aspect of that role – credit creation as public money would be reregulated and limited.

        But we have got off the track as my original point was that gold bugs and Austrians are potential allies – for different reasons – in the campaign to re-regulate finance.

        Flawse – what is that you don’t agree with – I thought we agreed on absolutely everything ……mostly 😉

      • Flawse….

        MMT is not a political or ideological camp, its just an observation of how autonomous monetary sovereigns payment systems work… en fin. Now if you want to talk about how ideologues and political stripes have used it and why – that’s a completely different conversation. Too which I would add some country’s are net exporters and others net importers whilst others are a blend, its all dependent on many factors and spread across significant periods of time – and changes. The ideal that sovereign nations that issue their own currency have to balance the budget every year or fall off the edge of the world is a falsehood. As Orsola Costantini: points out wrt The Cyclically Adjusted Budget (CAB)

        In fact it was all the ideologues and other political camps that demanded that the MMT camp had to attach social and economic policies to it, the only one really offered by MMT was to replace NAIRU with a JG for bloody obvious reasons, especially since there is a plenty of work to be done that the private sector has no interest in and would be great to have done before the environmental stuff becomes more complicated.

        Dishevled Marsupial…. I have contact with both AMI and the others for many years now and the whole thing revolves around the term debt, all they have done is fiddle around with the dialectical prose, its still all about debt free money and how magicly the state and everyone else with play nice with each other…

      • 007….

        Your not regulating banks, your attempting to create a hard money debt free means of exchange by proxy and let the free market unicorns frolic otherwise. For the most this would just be another austerity policy in the guise of enforcing sound ™ money theory.

        Disheveled Marsupial… I doubt you have read much Philip Mirowski or understand his point of view, especially in light of your camps neoliberal tendencies. Its sorta like old beardo over at NC thinking that because he was pro fiat, after having been a Mises fundamentalist gold bug, but could not grasp that all his basic thinking on economics and human nature was still fundamentally Austrian. See that is the the core issue Mirowski points out – the neoliberal [aet and neoclassical doctrinaires] make about humanity and its organization post hoc ergo propter hoc from axioms plucked from thin air e.g. their methodological frame work….

      • Skippy,

        There you go again – trying to characterise everyone who does not agree with your particular preference for a franchised fiat currency system as”hard money” proponents.

        One of the peculiarities of MMT proponents is their refusal to accept that MMT just describes one variant on the spectrum of possible approaches of how to run a fiat or chartalist monetary system. Considering most MMT fans insist it is only a description and not a prescription – it is hard to understand the attachment to a particular description.

        if the particular description had a long track record of good outcomes it might be understandable but what MMT describes has a dreadful record.

        You don’t seem to understand that EVERY variation in how private bank credit creation is regulated is essentially a different fiat monetary system. AMI and PM propose a model with zero private bank credit creation as public money. The current banking sector want a model where private bank credit creation as money has a complete monopoly. You are somewhere in between the two ends of this spectrum.

        You seem to want very tight regulation like what was introduced the last time credit creation as public money failed in the 1930s. As that is towards the AMI and PM end of the spectrum I am hardly going to argue against that but you don’t give any good reason why the particular regulation mix you favour has advantages beyond that you seem to think that limiting the powers of private banks more strictly is somehow authoritarian. When you make that claim you actually sound like an Austrian harping on about how every expansion of the role of the state is on the road to serfdom.

        Our current monetary model arrangements are weird but they have been weird since central banking attempted to solve the problem of private banks going bust when they ran their accounts too hot for too long. The franchise model is unstable. Sure you can hold it together with plenty of regulation sticky tape and wire but at some point you need to ask the question – Will the tape and wire ever hold for long?

        I don’t hold myself out as a Mirowski expert but I had hoped for more from that article. If anyone can distill what neo-liberal means from that they are doing very well because it is hard to see how anyone could evade the breadth of his 13 commandments.

        He started off by saying it is more than free markets but in the end all he seemed to be saying is that neoliberalism is about selfish individualism and calls for free markets is often just one expression of that selfishness. That is not surprising as Ayn Rand very kindly made it clear that she thought selfishness was a virtue! All of the 13 commandments appeared to be manifestations of selfish individualism – from genes to designer jeans.

        But then perhaps that is where he is coming from – he is arguing that everyone and everything is neoliberal these days whether they admit it or not because the infection runs so deep and there is little choice in the matter and no hope.

        That certainly sounds like you at times when you are in a very pessimistic mood.

        I accept that there is a lot of neo-liberalism seeping through the woodwork but I remain hopeful that a case can be made and sold that we can achieve a lot more by working co-cooperatively in communities arranged like Russian dolls from the local to the national than as atoms.

        Part of that for me involves the government using fiat / public money created without an interest charge to deliver essential services and if that supplies the economy with sufficient public money to enable the economy to grow and flourish I don’t see any reason to franchise private banks to create public money as well.

        The Commonwealth budget is approximately $420B – that is clearly enough to supply the economy with all the money it could ever need to function. The obsession with forcing the Commonwealth to use taxes to scoop all of that $420B back up again and run a ‘balanced budget’ just so private banks can create money and squirt it at asset prices just seems perverse and a very very neo-liberal thing to do.

      • 007….

        Hard to talk to someone that makes it up as they go….

        MMT is not a preference, if you want to prove otherwise then have at it, lingo like full or real or positive chartalist monetary system is just word games. There is no ideological preference involved, it only denotes the potential that the system has and how that relates to policy formation, it has no agency, that is imbued on it by ideologues and political forces. The same thing can happen to any monetary system and has, hence the cog dis with AMI aficionados in – believing – in their cure all, which imo is a preference establish on ideological underpinnings.

        MMT track record or the ideologues that weld it, waves at the Chicago school and friends…. MMT did not instruct some camps in using the rational agent model, leading to self regulation or regulatory capture, it did not inform the 3 amigos to misogynisticly brush off Born about new fangled derivatives, nor privatizing everything under the sun, public private partnerships, private equity… cough LBOs re-branded post Milken hollowing out productive enterprises, or the financialization of everything and the FIRE sector template…. Friedman’s share holder meme that Jensen then repeated, and a whole cornucopia of ill deeds…

        As far as Mirowski goes that’s the dumbed down version in lieu of numinous books, I posted and linked more, so the information is under you nose and I can’t force you to investigate further, but don’t try slinging shit when self imposed ignorance is your attack mode…

        If you think hes talking about “selfish individualism” then you defiantly don’t grok it, hes talking about grooming entire populations on how not only to perceive themselves, but everyone else from a market perspective first and for most and society last or not at all [see raygun and thatchers TINA]. Something both AET and M. Friedman [neoclassical] were up their eyeballs in and unwittingly you do your self with the manic fixation on the monetary system as the fundamental problem.

        The worst bit is there is like zero attention to historical events, its just money up in the head, in some experiment conducted in a vacuum [see economics of the last 50ish years] build bias first and then look at everything, then proclamation all is known, deflect all failures on something else… rinse and repeat…

        Good grief just look at the state of America and the EU… do you really think is all about monetary theory… sigh… its just so bloody ridiculously reductionist and based on a bunch of equally simplistic “assumptions” about what happens… not to mention implantation would require rolling depressions around the world and resulting serious wars.

        Disheveled Marsupial…. you really should talk to ethical people that have worked in field for decades, have an intrinsic understanding of it all and how its change since the 70s, you know a forensic examination based on facts and not conjecture… then understand the complexities unlike Yanis did [magnates son took a course in Marxist philosophy] and set back the fight against neoliberalism by probably 10 years… wow and some don’t understand the Stalinistic attributes of rapid generational social engineering…

      • Skippy,

        You have turned MMT into a monetary system but then deny that our monetary system is MMT.

        If MMT does not describe our current monetary system then what is it describing?

        Very convenient way of dodging the criticism that the first insight of MMT should be that the current monetary system needs reform.

        So what are the reforms you reckon that MMT demands? More regulation of banking, more restrictions of how and when banks create money as credit. Gosh that sounds like you want to control the volume of money. Monetarism Alert.

        Nothing that you have said about neoliberalism is inconsistent with my reduction to a simple sentence. That the population has been convinced doesn’t make a difference.

        I know you like to complicate the world and make your reading sound like the only path to enlightenment but sometimes life is a lot simpler than you think.

      • 007….

        Do you have comprehension problems….

        MMT is the monetary system and has been for yonks, that’s not to say there are hangovers from the past still attached to it, but that’s a political – ideological decision made by the dominate forces of the day. I don’t get how you arrive at accountancy has an having an ideological bent, its a projection of your personal biases, objects have no self will or agency.

        MMT does not state that there must reform, it only provides information on what potential possible policy formation is available – with in the operating system. MMT does recommend replacing NAIRU with a JG and applicable taxation for functionality and not because of some ideological stake driven into the ground. As I have noted before, its been other camps that have demanded that MMT camp come up with policies to substantiate its self, because that’s how the other ideological camps play the game i.e. endless jaw boning to seek some strawman that can then be used in concocting a bogeyman, then all stand around and point at it, because they – need – too try and affix some ideological agency behind it so they can trot out their pre canned talking points. Its a rhetorical game of trying to paint – maneuver MMT into some predetermined corner where the antagonists feel they control the narrative to their benefit.

        “Nothing that you have said about neoliberalism is inconsistent with my reduction to a simple sentence. That the population has been convinced doesn’t make a difference.”

        Completely disagree 007… neoliberalism is a multifaceted bio political aberration which seeks to shape a desired reality – homo economicus. That the population is informed is moot because they are not and as such can’t evaluate it nor make out heads or tails anything, thought the Bernays thingy covered that aspect.

        “I know you like to complicate the world and make your reading sound like the only path to enlightenment but sometimes life is a lot simpler than you think.”

        Yeah and Dawg makes the Universe simple for some too…. yet it has nothing to do with reality T or F ….

        Disheveled Marsupial…. you can’t always reduce reality to simple truisms… just so the cog dis is a low roar against ones collection of eviromental biases….

  8. Jumping jack flash

    This is brilliant!
    Thank you for a remarkable article that explains things how they actually are.

    Debt is the root cause of our current economic and societal problems, and houses are used to bring it into existence by unimaginable quantities at a time.

    Most importantly, it erodes global competitiveness because as employees take on debt mountains and try to maintain a standard of living simultaneously, they ask for more wages. Wages set prices. The prices of our once superior quality, but now standard quality, manufactured items rise which makes nobody on Earth want them when the same quality items manufactured in SE Asia are sold for half the price.

    • Debt is not a monolith, how and why its created, for what purpose, and its effects on the economy as a whole, with distributional factors is where the rubber meets the road.

      Plenty of debt for C-corp subsidies, military expenditure, entrapping 2ed and 3rd world countries in endless servitude, or keeps the currant misleadership class in power and accoutrements is all good…. but…. everyone else has to work for it… and hope the world does not get pulled out from under them…

      Disheveled Marsupial…. to put it another way…. I am in debt to everyone else in this country… I could not have the life I do without them… I do not live in a vacuum nor can I be everywhere at once… and if enough people are doing hard it effects the quality of my and mine lives…

  9. Your print about us going along a path towards negative interest rates is fascinating. Negative interest rates may be accepted as ‘ unconventional ‘ … and in this regard please refer to the content of the link below.

    Large scale intellectual (and practical) dis-satisfaction with the actual effectiveness of interest rate manipulation to influence the real economy has intensified over the past few years. For example, refer in the last paragraph of the link ‘’ … *Many are reaching the conclusion that unconventional monetary policy may not be very effective. Paul Volcker and Raghu Rajan are making the case for a rules-based international system, and Mario Draghi argued at Sintra in June that “we would all clearly benefit from enhanced understanding among central banks on the relative paths of monetary policy*

    My feeling is that we are at the closing stages of the negative interest rate experiment; the push for ‘rules-based’ monetary policy is gaining very strong traction, and this almost rules out continued reliance on negative interest rates. So, I am intrigued that you consider Australia is now apparently primed for a journey down that road.

    You may be wrong, but you may be right.

  10. Great work DeepT, I just have real doubts that Productive enterprises can once again be made globally profitable enterprises.
    Nine years after the GFC our core global problem is still excess production capacity (some might suggest it’s a demand deficit but IMHO additional demand is not serviceable due to the earths finite carry capacity) All means there can be no significant global investment in Production capacity until we destroy existing production capacity. I’m not sure that Negative Interest rates really change the equation because they don’t fundamentally result in the destruction of this excess production capacity.
    If you want a really bleak picture just add in the Robotics variable and you’ll notice (projecting forward just 10 years) that most of the worlds human labor is simply not worth the cost of the food that they consume.
    All suggests to me that a final solution will be found outside of the sphere of Economics and Finance.

    • >All suggests to me that a final solution will be found outside of the sphere of Economics and Finance

      (Emphasis is mine) that sounds particularly ominous. Kinda’ “harvest time” type of ominous…

    • Spoken like one who expects to find himself on the survivors’ side of any ‘Final Solution’. Not that I disagree with your prediction – it has been obvious for years that if AI & Robotics displace enough workers, those workers will pretty quickly lose what little political influence they have left, & the PTB will look for ways to get rid of them. Witness the co-ordinated LNP rhetoric against welfare recipients at the moment. Things will only get worse.

    • If you want a really bleak picture just add in the Robotics variable and you’ll notice (projecting forward just 10 years) that most of the worlds human labor is simply not worth the cost of the food that they consume.

      A theme I have mentioned numerous times on these pages.
      The problem is that the market value of certain people’s labour is less than the market value of decent shelter, food, etc that those people require to live a decent life.

      Now markets are interesting devices that society can choose to utilise, or not as the case may be. There is no reason why the market value of peanuts should always exceed the market value of fish. Similarly there is no reason that the market value of labour should exceed the market value of food or water or land. In some cases it will, in other cases not.

      There is nothing wrong with the market. The more basic flaw is that citizens accepted the notion that elites can claim all the land/water/food and then plebs must work (for the elites) in order to repay the elite for the land/water/food that the plebs consume based on market prices. This system only works when market value of labour generally exceeds market value of land/water/food. Automation threatens the system. Sure, welfare payments can act as a bandaid and allow the system to work for years longer. But eventually the plebs must (I hope) wake up and demand the real flaw in the system is fixed. If the plebs don’t wake up then a Hitler (nasty / unpleasant book/movie) style world will be served up to them by the vulgar elites.

      If you are a pleb you should demand that the elite do not claim ownership of all the land/water/food in the first place. As a pleb you must demand your fair share of land/water/food as a starting point.

      As humans we can choose to look after other people merely because their outputs are valuable to us, or we can choose to look after other people because their wellbeing is important to us. We already look after babies and old people with little output. Sure babies did tend to grow up to become productive. But not all babies did and old people certainly don’t. The concept of caring for others is not an alien concept.
      We need to adjust the caring concept to accept that many humans will never produce outputs valuable to us, but we can still care for them if we value their wellbeing.

      • As humans we can choose to look after other people merely because their outputs are valuable to us
        Agreed, that’s more what I was talking about. That said I’m also certain that if we can’t find a way to reorganize, revalue and redistribute the basic ingredients for life (food/shelter/water btw I’d add “meaning” to the list) than others will search for solutions that equate the Work ethic and Value of ones contributions with their right to freedom. We can already see this playing out in America, just look at any prison population. Who knows a true leader might even be able to turn this sentiment into a three word catchy phrase.

  11. It is difficult to extinguish all this debt without a lot of pain.

    Gold will be revalued to provide the solution.

      • In a June 27, 2016 Bloomberg interview, Alan Greenspan stated that as a result of Brexit, “we are in the early days of a crisis which has got a way to go,” and that the best solution would be a return to the gold standard that was the basis for international finance from 1870 to 1913. The former Fed chairman (1987-2006) was, in our opinion, an architect and intellectual predecessor for current radical central-banking activism. For him to make such a statement is an eye-opener, suggesting that this former policy insider no longer believes that the dollar-centric fiat currency system is workable.
        —John Hathaway, Tocqueville.

        Like many people you just haven’t got a clue as to the importance of gold.
        Gold limits the ability of the economy to borrow too much money and is the only extinguisher of debt.

      • athalone – so few people realise the capital destruction going on and then Pfh007 comes out with this piece of ignorance,
        Pfh007 – “Naturally the gold bugs who hate public property and love privatised wealth will not be satisfied but then they are by definition not really interested in the common good.”
        -A truly ignorant statement.

        Either there are free markets or there are not. Either interest rates are at an equilibrium (determined by free mkt forces) or they are not. Ofcourse captains of industry want access to capital at below free market rates, dah Pfh007 , a truly politburo logic moment. The Union of central banks for banks not people are not only command-economy in structure, they destroy free markets in everything that they touch. For all the fairly earnt capital in society that CB’s destroy, they create artificial capital to enrich themselves. LOWERING INTEREST RATES IN AN ECONOMY TO NIRP, IS LIKE A DOCTOR SAYING LET’S JUST PUT ANOTHER BULLET IN THE PATIENTS HEAD TO HEAL THEM, AND THEN RELOADING AND TRYING A FEW MORE TIMES. Then with each extra bullet discharged, the doctor increases his fee for services rendered on the corpses estate. Until eventually the doctor owns the lot, because he used ‘all his bullets’.

        Speaking of Politburo moments, DeepT. There are some countries that may be able to get away with nirp, these are countries that are rather creative in concealing current account surpluses from the let’s “punish them” politics that comes with it from the buying/importing country. Ie Japan export / import USA.

        NIRP cannot happen (or for long) outside the Japan-like experience. It cannot happen (or for long) in EU (Germany alone maybe), USA Australia etc etc etc. And the reasons are bleeding obvious, but just a bridge too far for central planners at the politburo for i/rates.

        DeepT’s essay rehashes some worthwhile points, but just like centrally planning ‘widgets’ in the command economy (int/rates in this case), these are the gasps of a failing/floundering deep state dictatorship, or we are moving into a more overt totalitarian state.

        And I haven’t even discussed real interest rates being neg, while int/rates slowly rise as inflation lifts with the price of oil. The possibility of the Fed rising in that scenario is very likely, but a bit too myopic around here.

        So no DeepT & co, conclusions and commentary are way off reality, outside of totalitarianism.


      • @athalone and counterfiat….

        Sorry… but nothing could be further from the historical facts…. the Great Depression happened on a gold standard as well as all the other busts during the 1800s and the 1907 dramas. The problem today is wrt underwriting standards, codes of conduct and the failures of “rational agent models” to perform as popular beliefs expected. Banking is not the only industry effected by this state of affairs and as such just focusing on banks and money forms is obsessing about features that are a result of more fundamental issues.

        And before the AET gold bugs get done in the head about the dominate economic camp during the last 50ish years it should be remembered that neoclassical is for all intents and purposes is AET with bad maths and physics applied, giving it a false sense of gravitas or empiricism like Nobell prizes and slapping on the science label.

        Disheveled Marsupial…. most of the so called econnomists during the period in question have been little more than useful tools for neoliberal flexians, as long as you write the prose they want and it gets them what they want its all good, once that state of affairs changes it a completely different thing, thrown on the rubbish heap and moving onto the next best thing.

      • Counterfiat,

        “…Pfh007 – “Naturally the gold bugs who hate public property and love privatised wealth will not be satisfied but then they are by definition not really interested in the common good.”
        -A truly ignorant statement…”

        Did you not read Skippy’s responses to my comments. He reckons I am a sound money gold bug in disguise.

        Very tough room when I can be both a inflationista money printer and a sound money gold bug at the same time.

        If you bothered to read what I wrote (without hyperventilating when i suggested some gold bugs are not interested in the public good compared to their private interests) you will have noted that I am supportive of where gold bugs are coming from. Doing so got Skip on my tail again as a closet gold bug.

        They don’t want a monetary system that is manipulated and distorted. I get that but they seem to miss the point that most of the distortions and money printing arises from the conduct of the private banks not the public sector. The money supply is almost a complete monopoly of private bank created money.

        The current monetary system is a rent seekers paradise controlled and run by the private banks (assisted by their tame regulators). It is their IOUs that are being treated as if they were public money.

        You blame the public sector for that when the problem is that the private banks have been given a public guarantee for their private IOUs and we use those IOUs as money – for the most part.

        You also seem to miss the point that return to the gold standard fixes nothing because most of the fraud under the gold standard was in the issuance of paper that claimed to be backed by gold but was not. Both private banks and the state engaged in this fraud.

        An IOU promising to pay the bearer gold is as flakey as one promising to pay the bearer another IOU. Don’t get carried away by promises to pay gold that will not be kept.

        Unless you plan on carrying around nuggets of the golden stuff the gold standard is just as vulnerable to fraud and manipulation.

        The best solution to a sound monetary system ( as against a system of sound money) is to:

        1. Allow everyone to create private money or money backed by gold to their hearts content – let the market decide

        2. Restrict public money creation to the public sector and regulate the crap out of it.

        If the public money is not run well it will depreciate against the private monies and vice versa.

      • 007….

        I go by the conversations and literature over the entire period in question and not just your personal statements or the change in dialectal stance.

        Disheveled Marsupial…. M. Friedman is just one factor, E. Brown is a whole nother’ kettle of fish, well meaning or not…. web of debt…. sigh….

      • Skippy,

        Good grief – Skip brings up Ellen Brown the great fruit juicer.

        You constantly conflate AMI and PM with Ellen Brown and monetarism when it clear that Ellen Brown is much much closer to your position where private bank creation of money with a trailing commission attached is fine – provided it is well regulated. Well Ellen agrees with you but she just wants to nationalise the technique.

        My understanding is that AMI and PM do not agree with Ellen Brown. For the simple reason they don’t agree that money needs to be debt and if does it does (to avoid tedious semantic arguments) it does not need to be private bank debt.

        Perhaps you should try one of Ellen’s lovely fruit smoothies you might enjoy it more than you think.

      • 007….

        “My understanding is”

        I sorry but brown was part of that posse, quibbles over semantics aside, its history. Again your arguing from an uninformed position, its purely speculative, and attempts to misdirect the readership by insinuation.

        The whole debt thingy is an antiquarian emotive mish mash of religious and philosophical sophism, forensic anthro predating the use of tokens strongly supports the perspective that in human social constructs the operative relationship[s is based on debt.

        So just implying that the moeny is Debt Free is an oxymoron.

        Again your entire line of reason is unsupported and purely armchair theoretical, suggest you try the evidence based approach and whilst your at it, sometime read some post Keynesian to understand the methodology at arriving at conclusions or theory’s based on available data.

        This book is coming out in December, I recommend it.

        The Reformation in Economics­­­­: A Deconstruction and Reconstruction of Economic Theory

        By Philip Pilkington



        Section I: Ideology and Foundations

        1. Economics: Ideology or Rationalistic Inquiry?
        2. The Limiting Principle: A Short History of Ideology in 20th Century Economics
        3. Deconstructing Marginalist Microeconomics
        4. Methodology, Modelling and Bias
        5. Differing Conceptions of Equilibrium

        Section II: Stripped-Down Macroeconomics

        6. Theories of Money and Prices
        7. Profits, Prices, Distribution and Demand
        8. Finance and Investment

        Section III: Approaching the Real-World

        9. Uncertainty and Probability
        10. Non-Dogmatic Approaches to the Economics of Trade

        Conclusion and Appendices

        11. Conclusion
        12. Philosophical and Psychological Appendices
        A. Determinism and Free Will in Economics
        B. Between Personal Responsibility and Poor Theory
        C. Economic Modelling: A Psychologistic Explanation

        Disheveled Marsupial…. The Science of Money… groan… its as bad as the oxymoron economic science….

      • You spend too much time looking at Wikipedia and doing your best to sound intellectual.

        Why don’t you take a deep breath and try common sense?

      • Atholone….

        Thank you for proving my point…

        I’ll file your triumphant comment of knowlage and blinding intellectual grunt under last refuge of an ideologue.

        The thing is being labelled when one holds a particular view in a particular instance. This comes from our conviction that all of us are dyed in some sort of ideology that cannot be escaped through logic and reason. We loosely use terms like debt and political leanings without understanding them or that their meaning can and do change with time. Was Howards response to a mass killing a lefty thing to do or was it just a reasonable response to events in a specific place and time, did he need to ask his economic team or consult the dusty tombs of his preferred biases – no – he and others were able to form policy and implement it because it was the rational thing to do….

        Disheveled Marsupial…. the unsupported accusations and projections are tiresome and more reflective of the authors than they are the intended…

        PS. “common sense” is just code for your collective environmental and unchecked biases. BTW it might help if you denote which philosophical bent of common sense your actually evoking, hint there is more than one….

  12. I appreciate your thoughts but think you have some correlations confused with causation and ignore that some things can only happen if other things happen (I am referring to the accounting identities used to describe our economy).
    Net credit can only exist if one group hold the deposits and another group holds the liabilities. Why society pay the banks a percentage margin on large borrowings if they had large deposits as well? Typically for most of the population the wealth in cash is held by the older generation and the wealthy and the majority of the debt held by businesses and the younger generation. It was ever thus.
    Australia has a special situation in that it is a net exporter of minerals and agricultural products which have always meant that we imported capital and sold the fruit of the land and this has kept our currency higher than it otherwise would be, leading to a Dutch Disease that varies at times from a mild cold to a 1918 influenza epidemic, and this creates some of our problems, particularly where there is massively parallel development of resource projects. This in turn means that we have a relatively smaller efficient manufacturing base, especially now that the car industry and its supplier chain are shuttering/shrinking.
    If you measure house prices in nominal dollars they have risen dramatically since the period of runaway inflation that was eventually ended by very high real interest rates, but if you measure them in years of work for a family to pay them off, they are probably cheaper now in that you get a much better home for the 25 years of work, but now there are two people doing paid work for say 50 Full Time Equivalent years per family, whereas in the 60’s it was probably only about paid 40 FTE years with much more domestic and child rearing time being spent by mothers on an unpaid basis.
    The constraint in the supply of housing land and servicing infrastructure in conjunction with higher borrowing capacity as rates gradually fell over most of 30 years has meant that housing was bid up as a multiple of income until we arrive at the current situation.
    The other trends bringing about the current situation are globalisation, freer movement of people and freer trade meaning less wages available to formerly higher paid people in developed countries, but hundreds of milions lifted out of poverty in other countries like China, India, Indonesia, Mexico and more competitors for jobs in western countries from immigrants, putting a cap on wages for all but the most the most closed shop occupations like medical specialists. To some the raising of hundreds of millions out of poverty might be seen as supreme social justice as those who have been replaced and their families in western developed countries have had the benefit of social safety nets and so not fallen quite so far as they might have.

    But we are now where we are and there is the quandry. The RBA and government know that they cannot raise rates significantly without bringing on recession, unemployment, foreclosure/mortgagee sales, bankruptcy and possibly a banking crisis. So, given politicians desire to maintain office and employment and not to be seen as responsible for causing massive unemployment, financial losses and banking crisis, what are the goals they will have? And waht are the policy options available?
    The goal will always be very few people to lose their house, very few people to lose their superannuation, relatively few people to have their businesses go bad and for most people to feel that they are comparatively better off than they were a few years ago, even if they have to whether a few bad patches and struggles along the way.
    So what policy options are available to achieve these goals?
    Interest rates can be cut 10% every year eg 10.00, 9.00, 8.10, 7.29, 6.56, 5.90, 5.31, 4.78, 4.30, 3.87, 3.48, 3.13, 2.82, 2.54, 2.28, 2.05, 1.85, 1.66, 1.5, 1.35, 1.21 etc etc. A 10% reduction in interest costs in nominal dollars each year is quite a bit of stimulus for most borrowers.
    Interest rates can be made negative if needs be as all money value in existence has to either be deposited or repaid (as if you buy a share or bond then unless the seller uses the money to repay debt, the money value has to be deposited). If banks get charged by the RBA for having surplus reserves then the banks will lend at any rate that saves them having to pay that impost eg if RBA charges 10% the banks will lend at -9% rather than have the money on deposit at the RBA at -10%
    If unemployment rises dramatically 457 visa holders could be sent home, or might leave for greener pastures anyway, particulalry if they have no unemployment benefits or medical insurance in this country.
    Governments that are financially sovereign such as Australia with the AUD can run deficits and if needs be have the RBA buy the Bonds issued by Treasury, thus doing fiscal helicopter drops into the real economy, as opposed to pure QE (ie no buying shares and non government paper, merely inflating both sides of the RBA balances sheet with the new money value being trapped in bank reserves at the RBA) The deficits are then spent on eg infrastructure to keep up employment and spending power and company profits and increase efficiency in the private sector as the money flows through the economy. This may lower our AAA rating and our currency, but it beats a great depression and it won’t affect our relative rating and currency if most other countries are doing the same thing and in any event we are late to this game and following the lead of a number of other countries.
    So in conclusion, don’t expect a doomsday much higher rates, much higher unemployment, big falls in house prices, lots of foreclosures, banks going bust scenarios because the government and RBA simply won’t let it happen while ever they can stop it.
    As Draghi said, they’ll do “whatever it takes”.

    • The gradual cutting of interest rates over the last 30 years has been the very cause of the destruction of capital resulting in our current situation.

      Continuing this policy as you suggest will only destroy more capital.

      Recessions are a normal solution of clearing previous malinvestment due to very low interest rates…it should be welcomed.
      If the central banks had allowed the Bear to do his natural work of clearing markets in 2000 and again in 2008, we would be in a much better situation today.

      • I am not suggesting that they should do it, just that they will do it because that is what preserves their jobs, power and prestige and reduces near term pain for the electorate.
        In the long run the resources run out, we are dead, our children may still be alive but they or their children will be living in a much different world.
        We will breed and consume until we can’t. And even if we don’t someone else will.

        Live the best life you can, whatever the definition of that is to you. It might be getting away with as much as possible even though you may get brought undone in a big way in the future, or it may be a life in the service of others, or just raising a well adjusted family that has happiness even if not the most material possessions.

    • Note: I DO appreciate that the need for brevity in here on complex topics means we sometimes leave out relevant details.
      As a practical roadmap I think you are exactly right as to what governments and the RBA will try!!! This kind of puts the mockers on the MB RE collapse theory.)
      For others I just need to clarify what might be misinterpreted
      1.Australia has a special situation in that it is a net exporter of minerals and agricultural products which have always meant that we imported capital and sold the fruit of the land and this has kept our currency higher than it otherwise would be, “”
      This is a fundamental error. The A$ is not overvalued because we export ‘stuff’ (although i would take the point that if we dig up and export resources then there should be something tucked away as an asset – a la Norway). Our dollar is overvalued because we have been borrowing huge amounts of foreign currency to pay for our imports. This borrowing is underwritten by constant asset sales to foreigners to maintain the value of the currency and prevent it collapsing.

      2. Aus cannot just print as you suggest. (Edit: Well not as any long term solution) We have a chronic CAD that has been running for 60 years. I believe, some may argue the extent, that pretty much ALL new money/credit (call it what you will) created ends up increasing the CAD. We DO pay for imported goods in currencies other than our own. No matter what duck-shoving and BS occurs after that this is the essential truth. We cannot print USD in which most transactions are nominated. IF a foreign company did, for their own reasons, accept A$ in payment it would only be so as spend those A$ buying up Aus assets. On a macro view this is exactly the case given that we already run a CAD so there is nothing anyone else wants.
      Even if you do a duck-shove and somehow magically convert your debt into A$, unless you devote your development to export and import replacement industries, you arrive at a critical point some time in the future where those A$ have to be paid back – which you can print but you have a flood of A$ then looking either to buy up our assets or the holder tries to convert into another currency which then causes the collapse of your currency value. Your actions merely postponed the day of reckoning not cancelled it!
      There is NO free money. Printing does not solve a single problem. We need fundamental reform of our society and economy. Printing will not give us that.

      • 1. I am not saying it is sustainable forever and in the face of other countries not doing it too.
        2. I am saying that it is what the politicians will in fact do until there is an electoral revolt, because it is in their self interest to do it. They will not voluntarily impose loss of houses,retirement funds, businesses, a stock market crash, house price crash through austerity or higher interest rates. The Libs could have raised taxes with the support of the Senate if they were targetted at the wealthy and the high income earners and the foreign corporations avoiding income tax but they didn’t wnat to because it would effect their constituency and donors, so the budget emeergency has been totally downgraded and deficits run on and public debt increases, because to the Libs that is the lesser evil. (and Labor would protect its constituency in the same way).
        3. You say we sell stuff because foreigners get our currency because of the CAD and that there buying supports our country. I think I am saying exactly the same thing but focussing on how a lot of the stuff we sell is our resources. You might be more focussed on our farmland, shares, new apartments and houses but it all counts in providing demand for our currency(although the AUD is a very heavily traded speculative currency based on perceptions fo future commodity prices as much as anything else).
        4. A government that is sovereign in a fiat currency and an army or police to enforce taxation in the sovereign currency can print for as long as it likes. Yes it may effect the currency and the credit rating and inflation but they can do it to keep the economy going for a very long time. You might not like it, it might not be good long term policy but don’t doubt that that is how a fiat currency works. Also remember that many other countries are doing the same thing and their currencies credit ratings and inflation are all being affected too, so where do you invest. There is a lot of “least unattractive” to consider.

      • Explorer
        You may have read my post before I added an edit or two! I too miss detail sometimes when i write just to try to keep the thing at something less than a PhD thesis.
        As I aid – I agreed that what you say is probably the path that will be chosen. It’s been my contention for quite some years.
        That is why I question the whole RE collapse theory on MB. Not saying it can’t happen but it is/has been dangerous to assume that it must happen and soon.

        Note I constantly warn of the dangers of anyone trying to ‘fix’ this at this stage. it will be a world none of us like!

      • flawse there is a solution to the monetary mess we are in – I have uncovered a buried solution of history. It is possible to do it without a gold standard, but surely the impetus for a gold standard would naturally grow once an honest society-benefiting model is implemented.

        The self-serving central banking model has other alternatives. That is what needs research!
        That is where answers and solutions are to be found, alternatives to the central-banking monopoly syndicate. And not necessarily a gold standard (it is one option), though honest systems will promote honest systems.

      • cf
        Thanks for the response. It’s past my level of competence I think. I’d originally thought the money supply ought to be hooked to something real – some index of pricing of resources or product.
        However I doubt we need to go that far. Take Australia! Would we really have such a problem if the CAD had continued to be part of our metric that we took some notice of in setting our money supply. Indeed money supply could have been set by some formula and let to look after itself. If we spent more on foreign goods than we earned the money supply went down. (Note it is essential to control the foreign capital account) As a result interst rates would rise, we would save, and the problem fixes itself. Now this is a bit simplistic but we get some idea of a model to which we ought head. Note Hawke/Keating reforms in relation to teh floating currency and opening up financial and ccapital markets were specifically aimed at removing these sorts of constraints and allowing the distortions, now so apparent, to magnify exponentially. That was better for them politically, and for Treasury/RBA et al, at the time than to admit that they had screwed up for the prior 30 years and that their theories were just a load of baloney. Had Aus grasped the nettle at the time, instead of taking the easy way out, we would have a very different sort of country today. I believe it is now too late for us. We are too socially and economically distorted for any ‘fix’ to work.

        I really believe the problem is that economists, especially the academics, have just abandoned factual economics in favour of models that suit their social policy agenda. Their have been quite a few articles around lately from respected economists on this matter. An essential part of this process of abandonment of facts in favour of social policy outcomes was attention to, or more correctly neglect of, the external account. Most modern economic theory has come out of the U.S. which is the reserve currency of the world. So the Americans have just regarded the world as their economy (which might make sense of some of their inane military adventures of the past decades). As such they had no external account and have just printed up whatever fiat that was needed at any time. As long as they didn’t get inflation, and they couldn’t with all the new world labour and resources pulled into their economy, then they could print money forever – well that’s what they think!!! Extravagant consumption became Religion of economics. Thus the level of international reserves exploded. Fortunately or unfortunately the main earners of these international reserves saved rather than spent. So the balancing in the U.S. economy, by those countries spending to buy U.S. goods, did not occur. Had the U.S. money supply reduced as per their CAD’s and foreign entities were not able/allowed to reinvest their USD in the US system this would have severely curtailed consumption in the U.S. economy. The USD would not be forced upwards in value because they could not be repatriated. This, of itself, would not stop China and Japan from cornering world resources if consuming nations (like Aus) were willing to sell them.
        Now if you pay attention to your external account then you have to pay attention to both the creation of credit in the private sector and in the government sector. Your controls are automatically in place.

        Now there are difficulties in this so hence a concept such as SDR come in to being. However whatever system we look at has to be better than where we are at with consumption as our religion and the quickest destruction of the planet as our aim.
        (best I can do in a short space and time.)

      • I am trying to work up some motivation to write a paper. I could give you a sentence or two to summarise as it is simple. But here in the peanut gallery I don’t think so.

    • Explorer, You’re ignoring few things:
      – Doing whatever is takes is fine as long as whatever is takes solves the problem. In this case, it’s not solving the problem just pushing it further down the line
      – You did not account for a massive shock such as a Chinese hard landing and its consequences for the global economy and Australia in particular
      – A significant drop in the exchange rate (likely what will give initially) will have serious consequences for consumption and the “wealth effect”
      – Your analysis of house prices and that “they are cheaper now” is dead wrong.. In the 90s they were 3 times annual income and now they are in the double digit.. not to mention that there was no speculation in the 90s compared to today..

      • Absolutely!!!
        That’s why I wonder around here in ‘Links’ why we get so much of the political economics of the Guardian or The Conversation and none of Doug Noland or Hussman!!

  13. So DeepT when is the article coming for the need for a cashless society to implement these plans? You know to stop the criminals – especially the evil hard cash hoarders trying to escape a neg 5% on their savings.