Tuesday, January 24, 2006

Wizards of Money

This is one of the most important things I've so far encountered on the web.

Not the site you understand. Not that I have anything against it. It might be a brilliant site for all I know, but I've only visited that page for one specific reason. It is a mirror site for an amazing series of lectures on exactly the topic I mentioned in a recent blog - How Money Works.

This is a very deep and detailed examination, not for the short of attention span. Fortunately, if you're already a fan of some of my stuff, you probably have a taste for this kind of thing. There are no less than 22 audio episodes all with transcripts - except 10 and 12 which seem to be missing, at least from that particular mirror. Each episode lasts between about 45 and 55 minutes and she is not a professional reader. Nevertheless - if you are half as interested as I am in the subject matter, you'll be riveted.

In a very real sense, "Smithy" (a pseudonym required to protect her professional identity and role) carries on where Quigley left off. Although she covers the roots of Money she also deals with its much more modern manifestations. In Part 8 which I've nearly finished listening to, for example, she has finally explained to my satisfaction what really happened with Enron and the significance of what that collapse exposed to the public gaze.

After Part 7 I feel I now understand how the Money Cycle broke the Water Cycle causing widespread death and devastation in so many third world countries.

I particularly like the way - even better, in my opinion, than Quigley's effort - she has explained how all money is created from loans, (i.e. debt creates money - or, as Quigley puts it, Money is Debt) and the vast bulk of these loans are invested in real estate of one form or another, whether it be the mortgage for your house, or the budget for the Channel Tunnel.

And I'm fascinated by how flimsy she makes the whole system appear. It is a collossal smoke and mirrors confidence trick where the vital ingredient is "confidence". Money only works, according to Smithy, because people believe in it; which makes it sound like religion or homeopathy!

I'm particularly looking forward to what she has to say in Part 20 “The Battle of the Dragons - Oil vs Insurance” but I'm not going to cheat. I'll go through them in sequence - at least the first time. So far she has built upon previous episodes, so I might miss something important if I leap straight to the gunfight at the OK Corrall...

...Like who supplied the guns, and why...

Peace be upon you



theCurse said...


Is there much to it other than the obvious?

I'm not particularly interested in the raw facts if there's nothing really compelling about it. By that I mean, should I read through any of it if I don't want to be an expert on the subject or even a student.

Harry Stottle said...

Reasonable question. By way of answer all I can really do is explain my own interest.

One of my tasks - as I've outlined in previous blogs - is to promote democracy primarily by exposing the mistake in the minds of most western citizens. viz: their belief that they already live in democracies.

Democracy is a very simple concept - "People Power". It means that ALL the power should be controlled by ALL the people.

In that complete sense, it has never existed on this planet. This is because those who hold Power at the onset of their alleged "democracies" have never yielded that power to the People. Instead they've operated a restricted definition of both "People" and "Power".

In ancient Athens, where the concept was invented, they got closer to implementing a truly democratic system than we've had in the two and a half thousand years since. If it hadn't been for their regrettable exclusion of women and slaves from the process, it would have met all conceivable targets.

We didn't even match its definition of "People", in most of the Western World, until the nineteenth and twentieth centuries and we've never come close to its definition of "Power". Instead, Power lies where it has done for the past few centuries, in the hands of those who control Money.

That may sound like a Statement of The Bleedin Obvious, but it is nowhere near as obvious or transparent as it seems.

They way they achieve this control is simultaneously extremely simple and yet incredibly difficult to follow. People like Quigley and "Smithy" help to strip away the masks behind which these people operate and show how, why, where and when
they operate.

If you're wondering whether they're to your taste, why not check out the transcripts at random and see if they grab your attention...

Macneil Shonle said...

I wouldn't go so far to say that all money is debt. Banks create money by loaning it, to be sure.

For example, $100 can turn into $1000. Here's how it works: You get $100 and deposit it in the bank. By regulation, the bank must keep 10% of that $100 in reserve. So, the bank loans out $90 of it. Whoever took out the loan did it because they probably needed to spend the money on something (a house, say, or a business investment). Whoever is paid that $90 then deposits it, and that bank can loan out $81 of it. That becomes $72.90 for another bank to loan out... and then $65.61, $59.04, ... The sum of the series turns out to be $1000.

And so, that's how banks create money. That reserve rate is not set directly by the government. Instead, it's set by the Federal Reserve, a bank created by Congress for the purpose of regulating banks. At the beginning of the 1900s we actually saw *two* major financial crashes. The banks failed because they loaned out too much money, confidence dropped, and there was a run on the banks. The federal reserve regulates banks in two ways:

1) It sets the reserve rate. It's currently at 10%, but I think congress can let the Fed adjust it anywhere from 8%-12%. The Fed doesn't touch this rate much at all because it's hard for banks to plan for.

2) Most of the regulation by the Fed is the overnight lending rate. That's the rate the Fed sets for banks to borrow money overnight from other banks. (For example, if a bank were to run low on cash, it would borrow the cash from another bank for the service.) This ends up affecting other interest rates, but that's not the only thing that adjusts rates...

Macneil Shonle said...

... The Federal Reserve did not always do a good job, nor did the government have good economic policies during the great depression. Part of the problems were due to money.

But that doesn't mean we should just blame money: One of the very reasons we got to be so wealthy (in terms of real goods and services) is because money is an efficient means of trade. Inefficient bartering would cripple the economy.

An alternative would be to use gold, which has many useful properties for acting as a currency. But one problem with gold is that it causes deflation: The price of items are set by supply and demand, and the money supply itself is part of that equation. If the money supply is fixed (as it is with a gold standard) then as the number of goods increases, the price of all goods will decrease. Now, you don't have to have deflation with a gold standard per se: For example, America could borrow gold from England, which could match trade cycles, so that we in turn could loan to England.

But price stability is one of the goals of the Fed. Whenever new wealth is created, you want new money to be created to match that wealth. Thus "printing more money" does not imply there will be inflation: As in the case of loans, that newly created money will have new wealth standing behind it. When too much money is created, supply and demand will put an upward pressure on prices, causing inflation.

Setting interest rates can help control the growth of the money supply, but another concern is employment: If it is hard to get loans due to high interest rates, new business won't be created and people won't have new jobs.

So far, the Volker and Greenspan chaired Feds have done a great job. Much more is known about macroeconomics today than 50 years ago. To be sure, Bernanke knows very well that the job of the Fed is not to make the same mistakes again. (And, indeed, Bernanke is even anticipating problems that *could* happen in the US, but haven't-- for example, the problems Japan is having today, and how they are not addressing the problem.)

Macneil Shonle said...

... whops, wrong segue from my previous comment. I meant to get into what also affects interests rates is simple supply and demand. If a lot of people are depositing there money, interest rates will be low, because there is more supply available for loans. Also, if demand for borrowing drops (as in a recession) then interest rates can be lowered. Thus, it's not only the Fed behind the wheel. It is the interests of millions of people, organizations, and corporations. The Fed can at most apply some breaks and step on the gas, but what's steering it is the massive intelligence known as "the economy."

Harry Stottle said...

Greetings Mac
David tells me you're a friend of his, so welcome to the clan.

You're obviously more familiar with this stuff than I am. Are you also familiar with "Smithy's" stuff? If so what's your verdict?

Macneil Shonle said...

I'm not familiar with Smithy, but I know "the type". (Perhaps I'll need to take a deeper look.) Paul Krugman has an excellent analysis of Enron, by the way, and predicted what would happen well before the collapse. (Krugman actually said, "well, these are the incentives, so one of either two possibilities is what's happening...". I believe Krugman once consulted for Enron too, though obviously not with their shady deals.)

Anyway, the type I refer to are common among populist libertarians, like the Ayn Randians. Some even had theories that Greenspan (who was friends with Rand) was performing an elaborate act to "tear down" the machine.

All I would say is to keep on looking. The 1980s series "Free to Choose" with Milton Friedman is an excellent (10 hour) introduction to economics and economic arguments. Episode 9 is about banks and inflation. (Avoid the 1990 "remake" of the series, which eliminated the good debates and replaced them with less lively debates.) Perhaps someone is seeding the torrents on mininova.org still.

DaveT said...

I can only make one observation about our current system of money. It seems to be working well enough since the great depression ended.

Any comment on the national debt macneil?

Macneil Shonle said...

Re the debt: I'm not so concerned about the debt per se. In fact, as long as it grows no faster than our GDP, it's really not a problem.

What *is* a problem is our budget deficit. The Republicans have lost all sense of fiscal responsibility (here's Reason on it, well worth the read). I hope it's an issue the Democrats decide to pick up and go with. Already the Dems are more fiscally responsible, but if the *public* could know that, all the better.

Another concern is the dollar, which Brad DeLong has addressed in several blog entries. For their various reasons, China sure is lending a hell of a lot of money to the US. The dollar could take a dive the moment they decide not to lend so much. For Americans, a falling dollar isn't so bad... it's actually more a problem for the rest of the world.

DaveT said...

Budget defecit meaning the gov spends more than it takes in for a given year? So you're saying that debt is fine as long as it's shrinking rather than growing? It doesn't need to be paid of quickly?

Macneil Shonle said...

Yes: The deficit is a negative balance on our budget. Usually from spending more than we take in.

And the debt is fine: sometimes it's good for us to owe other countries money. (E.g., then maybe they wouldn't want to attack us.) And the debt as a percentage of GDP doesn't even need to shrink. So long as it's the same percentage it's ok. If it got to be too large (which would likely be the case if Bush keeps getting his way) then we would need to worry about paying it down. But so long as it isn't too large it's fine that we owe other people some money.

If the debt is a concern for you (i.e. you are worried that in the future you'll need to pay higher taxes as a result) you should "tax yourself" now by saving money and buying government bonds with it. I read about 5 years ago that each American's share of the debt is $10,000. So, buy that much bonds and *you'll* be the one loaning to the government. You can then start to sell the bonds to pay for the higher taxes.

(In terms of financial advice, however, I'd recommend you max out your 401k contributions and Roth-IRA contributions first, into a well balanced portfolio of index funds and some mutual funds; covering small-cap, mid-cap, large-cap and domestic and international indexes. Vanguard has a nice REIT index fund too, to give you more balance.)

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