local currency Archives - The Automatic Earth

The phrase “trench warfare” comes to mind. On Friday evening the Greek prime minister, Alexis Tsipras, lobbed some choice words at his foes in Brussels, calling their proposed debt deal “absurd”. Days earlier, the IMF had joined its allies in Brussels to fire a volley of criticism at Athens. The Greeks already had “significant flexibility” to get out of their budget mess, IMF boss Christine Lagarde said, as she urged Athens to repay the €300m instalment of its bailout loan due on Friday. This could go on for several more weeks: Greece told the IMF it will have to wait until the end of the month to get its money, when it will “bundle” four payments together. And should the sides become more entrenched, this long-running war could still end in the disaster of Greek default.

In Washington, where the IMF is hunkered down, and in Europe’s finance ministries, the Greek stance is considered wilfully unreasonable. The Syriza government’s demand for the return of national pay bargaining, a relaxed timetable for pension reform and a lower budget surplus than that demanded by the EU, the IMF and the European Central Bank are all but ridiculed in Berlin, Helsinki and Riga. As Greece’s chief creditors, the EU and the IMF want Greece to adopt flexible labour markets, immediate restrictions on early retirement and a budget surplus big enough to accommodate some debt repayments.

While much of what the radical leftists want seems unreasonable – especially the slow pace of pension reform, which in effect would allow tens of thousands of people in their late 50s to grab early retirement – it is the demands being made by Brussels and the IMF that are unconvincing and, worse, untenable. Running a larger budget surplus is only going to destroy Greece, not build it up. As US economist Joseph Stiglitz and many others, including former IMF staffers, have pointed out, the troika of creditors badly misjudged the economic effects of the programme they imposed in 2010 and 2012. “They believed that by cutting wages and accepting other austerity measures, Greek exports would increase and the economy would quickly return to growth,” Stiglitz said last week.

“They also believed that the first restructuring would lead to debt sustainability. The troika’s forecasts have been wrong.” The current proposals repeat the same mistake. Seven years after the crash, the Greek economy is still 25% smaller than it was at its previous peak, 10% of households have no electricity and youth unemployment is running at more than 50%. Tsipras and his finance minister, Yanis Varoufakis, may specialise in needling their creditors, but the troika also need to take into account the fact that Syriza has formed a legitimate, democratically elected government and cannot be told that its electoral programme is irrelevant.

826th edition.

• Greece Updating Proposals It Sent To Lenders (Kathimerini)

The Greek government is redrafting the 47-page proposal it sent to lenders last week with the aim of securing an agreement that would allow the disbursal of €7.2 billion in bailout funding. Kathimerini understands that Athens is focussing its attention on adjusting the fiscal measures it proposed with the aim of getting closer to the revenue target set by lenders. However, the coalition is reluctant to adjust its VAT proposal, which sees three brackets (6, 11 and 23%) rather than the two proposed by lenders (11 and 23). Greece also seems prepared to raise slightly its primary surplus proposals from 0.6% of GDP this year and 1.5% next year. The institutions proposed 1% for 2015 and 2% for 2016.

The updated suggestion from the Greek side is not expected to reach these targets. While Athens is prepared to change the law regarding early retirement, saving 100 million euros, it does not seem willing to go as far as lenders are demanding in terms of pension reform. There are also substantial differences between Greece and its creditors on the issue of labour market regulations. The updated proposals are expected to be discussed between Greek officials and representatives of the institutions over the next few days, ahead of a meeting between Prime Minister Alexis Tsipras, German Chancellor Angela Merkel and French President Francois Hollande in the Belgian capital on Wednesday.

They want to make sure this sort of crisis will not happen again.

• Young Greek Radicals Don’t Just Want Power – They Want To Remake The World (PM)

At some point, as the Greek crisis lurches to its crescendo, Syriza – the radical left party – will call a meeting of something called a central committee. The term sounds quaint to 21st-century ears: the committee is so big that it has to meet in a cinema. You will not be surprised to learn that the predominant hair colour is grey. These are people who were underground activists in a military dictatorship; some served jail time, and in 1973 many were among the students who defied tanks and destroyed a junta. But they think, speak and act in a way shaped by the hierarchies and power concepts of 50 years ago.

The contrast with the left’s mass support base, and membership, is stark. In the average Greek riot, you are surrounded by concert pianists, interior designers, web developers, waitresses and actors in experimental theatre. It is usually 50:50 male and female, and drawn from a demographic as handy with a smartphone as the older generation are with Lenin’s selected works. Like young radicals across Europe and the US, they have been schooled in the ways of the modern middle classes: launching startup businesses, working two or three casual jobs; entrepreneurship, loose living and wild partying are the default way of life. Of course, every generation of radicals looks different from the last one, but the economic and behavioural contrasts that are obvious in Greece are also present in most other countries.

And this prompts the question: what do the radicals of this generation want when they win power? The success of Syriza, of Podemos in Spain and even the flood of radicalised young people into the SNP in Scotland makes this no longer an idle question. The most obvious change is that, for the rising generation, identity has replaced ideology. I don’t just mean as in “identity politics”. There is a deeper process going on, whereby a credible identity – a life lived according to a believed truth – has become a more significant badge in politics than a coherent set of ideas.

Just ask Abe and Kuroda.

• VAT Rate Hikes Always Reduce State Revenues (Thanos Tsiros)

Greece’s value-added tax rates have been raised three times since 2010, all within the space of one year: in March and July 2010 and then in January 2011. The hike that the government is negotiating with the country’s creditors will be the fourth in five years. Already the low and very low VAT rates have gone up by 44% since early 2010 – i.e. from 4.5 to 6.5% and from 9 to 13% respectively – while the main rate has grown 22%, from 19 to 23% nowadays. Those hikes, intended to increase the state’s income takings, in fact reduced revenues by 20%: In 2014 VAT revenues dropped below €14 billion, to €13.6 billion.

For this year, the budget had provided for VAT revenues of €14.4 billion, but in the first five months there has already been a shortfall of 350 million compared with the target for that point of the year. In comparison with 2008, the year that the recession started, VAT revenues shrank by €5 billion in 2014 in spite of the major hike in the rates. Modern Greek economic history has shown that any indirect tax rate increase leads to a reduction in consumption and an increase in tax evasion, meaning that revenues go down instead of up.

A rehearsed ploy.

• Juncker Vents Fury Over Greek Bailout Talks At G7 Summit (Guardian)

European Union officials delivered a blistering attack on the Greek government at the G7 summit in Bavaria, and world leaders including Barack Obama sought to avoid a transatlantic split over Ukraine by agreeing to maintain sanctions against Russia. In a day of secluded talks in the Alpine resort of Schloss Elmau, the biggest drama was provided by a verbal attack on the Greek prime minister, Alexis Tsipras, by the European commission president, Jean-Claude Juncker. The summit’s host, Angela Merkel, had hoped to solve the Greek bailout crisis before the summit, but instead Juncker felt forced to open proceedings by staging a press conference accusing Tsipras of undermining negotiations over new terms for a bailout and of effectively lying to the Greek parliament.

A visibly angry Juncker said he had told Tsipras during a meeting last Wednesday evening that there was room to negotiate but said the Greeks had been unwilling to take part in in-depth discussions at the meeting. Instead, he said, Tsipras had promised to send him his proposals the following day, but he was still waiting for them on Sunday. “Alexis Tsipras promised that by Thursday evening he would present a second proposal. Then he said he would present it on Friday. And then he said he would call on Saturday. But I have never received that proposal, so I hope I will receive it soon. I would like to have that Greek proposal,” he said. He told reporters he had said to Tsipras that he continued to exclude the idea of a Grexit – “because I don’t want to see it” – but that he could not “pull a rabbit out of a hat”.[..]

Juncker, perceived until now as an honest broker in the crisis – taking a softer approach than the Germans, who are viewed in Greece as the architects of austerity – has rarely been seen in such an irate state, sources close to the EU in Garmisch-Partenkirchen said. They warned that Greece might have lost its closest ally in its long fight to secure a rosier deal. Juncker said he had been disappointed by a speech Tsipras had given to the Athens parliament on Friday. “He was presenting the offer of the three institutions as a leave-or-take offer. That was not the case … He knows perfectly well that is not the case.” Juncker said Tsipras had failed to mention to parliament his (Juncker’s) willingness to negotiate over Greek pensions. [..]

In Athens Mega TV reported that relations between Berlin and Washington over Greece had become increasingly frosty – despite the exhortation from Barack Obama at the G7 for a quick solution to the European debt crisis. The Greek television channel, citing a senior German official, described the US treasury secretary, Jack Lew, imploring his German counterpart Wolfgang Schäuble to “support Greece” only to be told: “Give €50bn euro yourself to save Greece.” Mega’s Berlin-based correspondent told the stationthat the US official then said nothing “because, as is always the case according to German officials when it comes to the issue of money, the Americans never say anything”.

We have at least 3 weeks left. But after that, of course, Greece will have to plod on for many years.

• If You Think Greece’s Crisis Will End Any Time Soon, Think Again (Bloomberg)

Frustrated by Greece’s cat and mouse game with its creditors? Get used to it. Even if PM Alexis Tsipras clinches the €7.2 billion that creditors are withholding, he’s going to need another cash infusion shortly thereafter. What will ensue is a renewed battle after almost five months of trench warfare. The beleaguered country requires a third bailout of about €30 billion, according to Nomura analysts Lefteris Farmakis and Dimitris Drakopoulos. Tsipras says any aid must be on his terms rather than those of governments whose taxpayers have forked out billions in the past five years to keep Greece in the euro. “Any plausible deal at this stage is unlikely to do enough and it’s unlikely to be the end of the matter,” said Simon Tilford, deputy director of the Centre for European Reform in London.

“This could just play out again and again.” The latest episode in the five-year saga has focused on releasing the final tranche of Greece’s second bailout, which expires at the end of June. The amount at stake roughly equates to the bond repayments that Greece needs to make to the ECB in July and August. Here’s the problem for the policy makers struggling to avoid a default in Athens: Even if Greece muddles through until August, it faces a financing shortfall of at least €25 billion euros through the end of 2016. That’s likely to worsen as the economy slides deeper into recession and tax revenue shrivels. [..] “The dependence on our creditors will remain for two years in the best-case scenario,” said Aristides Hatzis, associate professor of law and economics at the University of Athens. “Greece is going to need cheap loans for the next two years.”

It was all there right from the start.

• 103 Years Later, Wall Street Turned Out Just As One Man Predicted (Zero Hedge)

In 1910, three years before the US Federal Reserve was founded, Senator Nelson Aldrich, Frank Vanderlip of National City (Citibank), Henry Davison of Morgan Bank, and Paul Warburg of the Kuhn, Loeb Investment House met secretly at Jekyll Island in Georgia to formulate a plan for a US central bank just years ahead of World War I. The result of their work was the so-called Aldrich Plan which called for a system of fifteen regional central banks, i.e., National Reserve Associations, whose actions would be coordinated by a national board of commercial bankers. The Reserve Association would make emergency loans to member banks, and would create money to provide an elastic currency that could be exchanged equally for demand deposits, and would act as a fiscal agent for the federal government.

In other words, the Aldrich Plan proposed a “central bank” that would be openly and directly controlled by Wall Street commercial banks on whose behalf it would solely operate, instead of doing so indirectly, behind closed doors and the need for criminal probe of Yellen’s Fed seeking to find who leaked what to whom. The Aldrich Plan was defeated in the House in 1912 but its outline became the model for the bill that eventually was adopted as the Federal Reserve Act of 1913 whose passage not only unleashed the Fed as we know it now, but the entire shape of modern finance.

In 1912, one person who warned against the passage of the Aldrich Plan, was Alfred Owen Crozier: a man who saw how it would all play out, and even wrote a book titled “U.S. Money vs Corporation Currency” (costing 25 cents) explaining and predicting everything that would ultimately happen, even adding some 30 illustrations for those readers who were visual learners. The book, which is attached at the end of this post, is a must read, but even those pressed for time are urged to skim the following illustrations all of which were created in 1912, and all of which predicted just what the current financial system would look like. Or, in the words of Overstock’s CEO Patrick Byrne, “that’s uncanny”

“..she also famously said “F—k the EU!” Obama is now seconding that statement of hers.”

• Obama Sidelines Kerry On Ukraine Policy (Eric Zuesse)

On May 21st, I headlined “Secretary of State John Kerry v. His Subordinate Victoria Nuland, Regarding Ukraine,” and quoted John Kerry’s May 12th warning to Ukrainian President Petro Poroshenko to cease his repeated threats to invade Crimea and re-invade Donbass, two former regions of Ukraine, which had refused to accept the legitimacy of the new regime that was imposed on Ukraine in violent clashes during February 2014. (These were regions that had voted overwhelmingly for the Ukrainian President who had just been overthrown. They didn’t like him being violently tossed out and replaced by his enemies.) Kerry said then that, regarding Poroshenko, “we would strongly urge him to think twice not to engage in that kind of activity, that that would put Minsk in serious jeopardy.

And we would be very, very concerned about what the consequences of that kind of action at this time may be.” Also quoted there was Kerry’s subordinate, Victoria Nuland, three days later, saying the exact opposite, that we “reiterate our deep commitment to a single Ukrainian nation, including Crimea, and all the other regions of Ukraine.” I noted, then that, “The only person with the power to fire Nuland is actually U.S. President Barack Obama.” However, Obama instead has sided with Nuland on this. Radio Free Europe, Radio Liberty, bannered, on June 5th, “Poroshenko: Ukraine Will ‘Do Everything’ To Retake Crimea’,” and reported that, “President Petro Poroshenko has vowed to seek Crimea’s return to Ukrainian rule. … Speaking at a news conference on June 5, … Poroshenko said that ‘every day and every moment, we will do everything to return Crimea to Ukraine.’”

Poroshenko was also quoted there as saying, “It is important not to give Russia a chance to break the world’s pro-Ukrainian coalition,” which indirectly insulted Kerry for his having criticized Poroshenko’s warnings that he intended to invade Crimea and Donbass. Right now, the Minsk II ceasefire has broken down and there are accusations on both sides that the other is to blame. What cannot be denied is that at least three times, on April 30th, then on May 11th, and then on June 5th, Poroshenko has repeatedly promised to invade Crimea, which wasn’t even mentioned in the Minsk II agreement; and that he was also promising to re-invade Donbass, something that is explicitly prohibited in this agreement. Furthermore, America’s President, Barack Obama, did not fire Kerry’s subordinate, Nuland, for her contradicting her boss on this important matter.

How will that be taken in European capitals? Kerry was reaffirming the position of Merkel and Hollande, the key shapers of the Minsk II agreement; and Nuland was nullifying them. Obama now has sided with Nuland on this; it’s a slap in the face to the EU: Poroshenko can continue ignoring Kerry and can blatantly ignore the Minsk II agreement; and Obama tacitly sides with Poroshenko and Nuland, against Kerry. The personalities here are important: On 4 February 2014, in the very same phone-conversation with Geoffrey Pyatt, America’s Ambassador in Ukraine, in which Nuland had instructed Pyatt to get “Yats” Yatsenyuk appointed to lead Ukraine after the coup (which then occured 18 days later), she also famously said “F—k the EU!” Obama is now seconding that statement of hers.

Absolutely in chracter.

• Masked Attackers Break Up Tent Camp On Kiev’s Maidan (RT)

Unidentified assailants wearing balaclavas assaulted and destroyed a tent camp set up on Sunday by protesters on Kiev’s landmark Maidan Square. Activists at the camp had been calling on the Ukrainian President to report on progress since taking office. The attack happened late Sunday evening, when a gang stormed the activist camp, forcefully removing tents and dispersing protesters. Police officers were reportedly stationed right next to the site and did nothing to stop the violent group. The organizer of the action, Rustam Tashbaev, was arrested, RIA Novosti reported. There were also blasts heard on Institutskaya Street near the Maidan. In Ruptly’s video, assailants are seen ripping through the camp, tearing everything apart, and dragging protesters out of the tents, while they can be heard screaming in the background.

“They took me and dragged me like I was in a sleigh. I screamed, thinking they would beat me up, but they quickly dispersed. It looked like a theater production because the police were nearby and did nothing,” one of the demonstrators told Ruptly video news agency. Earlier on Sunday, about 100 protesters set up several tents on Maidan, demanding President Petro Poroshenko and his cabinet report on what progress has been made in implementing the reforms which were promised last year. “We have launched this campaign, set up tents, and called this protest Maidan 3,” one of the organizers, Rustam Tashbaev, told Ruptly. “We demand these people perform the duties which they are obliged to perform.” Placards at the protest read “Out with [PM Arseny] Yatsenuk and his reforms” and “I’m on hunger strike against administrative dereliction.”

“..it costs the banks almost nothing to create new credit. That’s why we have so much of it.”

• Literally, Your ATM Won’t Work… (Bill Bonner)

While we were thinking about what was really going on with today’s strange new money system, a startling thought occurred to us. Our financial system could take a surprising and catastrophic twist that almost nobody imagines, let alone anticipates. Do you remember when a lethal tsunami hit the beaches of Southeast Asia, killing thousands of people and causing billions of dollars of damage? Well, just before the 80-foot wall of water slammed into the coast an odd thing happened: The water disappeared. The tide went out farther than anyone had ever seen before. Local fishermen headed for high ground immediately. They knew what it meant. But the tourists went out onto the beach looking for shells! The same thing could happen to the money supply…

Here’s how.. and why: It’s almost seems impossible. Hard to imagine. Difficult to understand. But if you look at M2 money supply – which measures coins and notes in circulation as well as bank deposits and money market accounts – America’s money stock amounted to $11.7 trillion as of last month. But there was just $1.3 trillion of physical currency in circulation – about only half of which is in the US. (Nobody knows for sure.) What we use as money today is mostly credit. It exists as zeros and ones in electronic bank accounts. We never see it. Touch it. Feel it. Count it out. Or lose it behind seat cushions. Banks profit – handsomely – by creating this credit. And as long as banks have sufficient capital, they are happy to create as much credit as we are willing to pay for.

After all, it costs the banks almost nothing to create new credit. That’s why we have so much of it. A monetary system like this has never before existed. And this one has existed only during a time when credit was undergoing an epic expansion. So our monetary system has never been thoroughly tested. How will it hold up in a deep or prolonged credit contraction? Can it survive an extended bear market in bonds or stocks? What would happen if consumer prices were out of control?

Jailing them would be better for shareholders value. And who in their right mind can claim it’s time to go easy on the banks?

• Banks’ Post-Crisis Legal Costs Hit $300 Billion (FT)

The total cost of litigation aimed at a group of the biggest global banks since 2010 has broken the £200bn ($306bn) barrier, according to a new study that challenges assumptions that banks are through the worst of post-crisis reparations. The annual study, carried out by the UK-based CCP Research Foundation, uses regulatory notices, annual reports and other public disclosures to tally the cost of fighting claims of misconduct over rolling five-year periods. In the latest report, which runs until the end of last year, the total for 16 banks stands at £205.6bn of fines, settlements and provisions — up almost a fifth from the previous year.

Despite that trend, many bank executives continue to act as if these are irregular charges from “legacy” issues, said Chris Steares, research director at the foundation. He noted that a recent flurry of settlements for currency manipulation cited abuses continuing until 2013. “If you ask the banks if their reputational risk is going to change, they’d have to say yes,” he said. “[But] with conduct costs continuing to be incurred, year after year, it does beg the question whether behaviours are being changed for the better.”

Some politicians in the US and UK have tried to draw a line under years of heavy lawmaking, taxes and fines, arguing that regulators should now go easier on the banks. Executives, too, have signalled that expenses have begun to fall, particularly after the resolution of cases linked to the mis-selling of residential mortgage-backed securities. Presenting earnings in April, for example, Bruce Thompson, Bank of America’s finance chief, noted two “much lighter” quarters of legal expenses which he hoped would allow the bank to hold less capital under international standards on operational risk.

Not unlikely.

• Will China’s Stock Market Explode On Wednesday? (MarketWatch)

Wednesday could be huge for Chinese stocks. On that day, about four hours before Shanghai opens for trade, MSCI will announce whether it will welcome China’s top yuan-denominated stocks into its extremely influential Emerging Markets Index, tracked by a mountain of roughly $1.7 trillion in assets worldwide. Such a move would be expected to ignite a significant rally in Shanghai blue chips, and a recent Wall Street Journal report cited major funds such as those of Vanguard Group Inc. planning to purchase Chinese equities ahead of the MSCI decision, which is due to be revealed Tuesday at about 5:30 p.m. EDT (Wednesday 5:30 a.m. in Shanghai) on the financial company’s website.

Hong Kong-listed shares of Chinese companies – known as “H-shares” – are already a sizeable presence in the MSCI EM Index. Rival FTSE Group (owned by the London Stock Exchange) recently added the mainland-listed stocks – known as “A-shares” – into transitional global indexes, and may add them to its benchmark EM index this September, according to HSBC. The possible MSCI move has been making big headlines in China’s news media, but that said, many analysts are not so sure the index compiler will take the plunge into Chinese equities this week, suggesting it will wait a little longer for the country’s financial reforms to solidify further.

Ironically, this means a huge increase in the trade surplus…

• China Imports Fall 17.6%, Exports Decline 2.5% (AFP)

Chinese imports fell for a seventh straight month in May while exports also sank, according to official data, as the world’s second-biggest economy shows protracted weakness even in the face of government measures to stimulate growth. The disappointing figures, out on Monday, also come as leaders try to transform the economy to one where growth is driven by consumer spending rather than government investment and exports. Imports slumped 17.6% year on year to $131.26bn, the Chinese customs department said in a statement. The decline was much sharper than the median forecast of a 10% fall in a Bloomberg News poll of economists, and followed April’s 16.2% drop.

“The May trade data … suggest both external and domestic demand remain weak,” said Julian Evans-Pritchard, an analyst with the research firm Capital Economics. Exports dropped for the third consecutive month, falling 2.5% to $190.75bn, customs said, although that was better than the median estimate of a 4% fall in the Bloomberg survey. The sharp decrease in imports meant the trade surplus expanded 65.6% year on year to $59.49bn, according to the data. In yuan terms, imports fell 18.1%, exports decreased 2.8% and the trade surplus expanded 65%. The figures provided further evidence that frailty in the Chinese economy, a key driver of world growth, has extended into the current quarter despite intensified government stimulus measures.

“Deutsche Bank is sitting on a powderkeg of derivatives dynamite..”

• Deutsche Bank CEO’s Forced to Resign Over Imminent Derivatives Melt-Down? (Doc)

The co-CEOs of Deutsche Bank unexpectedly stepped down. Recall that Deutsche Bank is now the largest holder of derivatives in the world. The ONLY reason these resignations would have been unexpectedly coerced like this is if Deutsche Bank was having a potentially uncontrollable problem in its OTC derivatives holdings. Because of accounting rules, we have no possible way of knowing what DB’s OTC derivatives book looks like. Although Jain oversaw the build-up of the book, it’s likely that not only does he not know where all the bodies are buried, he has lied to the board of directors and shareholders about the riskiness of the bank’s holdings. I know Jain from personal experience with him right after Deutsche Bank acquired Bankers Trust for BT’s derivatives capabilities.

It instantly put Deutsche Bank in the forefront of the fraud-based OTC derivatives business. Jain has lost money wherever he worked. He was brought over to DB from Merrill when Edson Mitchell assumed the reigns at Deutsche Bank’s US unit. I just remember thinking Jain was about as sleazy as they come. His sole charge was to build Deutsche’s derivatives book of business into the biggest in the world. From there he sleazed his way into the CEO position, a few years after Mitchell went down in plane accident. He then proceeded to climb to the top of Deutsche Bank by conspiring to “shoot” then-CEO Josef Ackerman in the back. Deutsche Bank is sitting on a powderkeg of derivatives dynamite. DB is also the entity that has leased out most of Germany’s sovereign gold.

From a good friend of mine who worked at DB and still keeps in touch with former colleagues: “Deutsche Bank is sitting on a lethal amount of derivatives and everyone at the bank knows it.” [..] “Like I said many times over the past 6 months…the derivatives in Europe have gone SIDEWAYS and there is blood in the back rooms of the world’s biggest derivative traders! News yesterday that $6B in derivatives were being “internally investigated” at the world’s largest derivative holder, Deutsche Bank, is followed today by the resignation of BOTH of it’s CEO’s!! Anshu Jain has thus overseen the world’s largest arsenal of deadly financial derivatives. When Deutsche Bank goes down in flames, the Jain’s bank account should be the first source of funding the losses. May whatever Higher Power there may be up above help us all when the derivatives financial nuclear daisy-chain starts to blow…

Moany spent locally is worth many times what is spent into box stores. Shopping at Wal-Mart impoverishes your economy, and ultimately you yourself.

• The Bristol Pound Is Giving Sterling A Run For Its Money (Guardian)

When his firm was going up against national companies for contracts to manage waste, Jon Free needed an edge to win the pitches. The answer he found was in the sense of community that existed among small businesses like his. By using his local currency, the Bristol pound, he saw companies were more willing to give their business to him and keep money flowing in the area. Launched almost three years ago, the community currency aims to keep money circulating among independent retailers and firms by encouraging people to use the local ‘cash’ instead of sterling, an idea that has inspired other towns and cities to take up similar schemes in the UK and abroad. “To be able to drop in and create a link to make [the money] a circular thing is a big part of it,” the managing director of Waste Source said.

“To say that we are registered with the Bristol pound shows that we are more community based.” In use since 2012, the system operates as both notes and in electronic form with each Bristol pound equal to one pound sterling. Some 800 businesses in the Bristol area now use the community currency, with coffees, meals, council tax and even pole-dancing lessons paid for with it. “The practical vision was to get something which would connect local communities with their businesses in a way which kept money building up in their local communities,” the currency’s co-founder, Ciaran Mundy, said. “What happens is that if you spend it at a large supermarket chain, 80% of that will exit the economy very quickly.”

While community currencies have a history going back to Victorian times, there has been a resurgence in recent years, with Bristol emerging as the standard-bearer in the UK. The system works by people exchanging their sterling for paper Bristol pounds – in single, five, 10 and 20 denominations – or by opening an account at the Bristol Credit Union. The currency can then be spent in participating businesses, or between businesses, in return for goods or services. So far, some £1m has been issued in the community currency, according to Mundy, of which about £700,000 is still in circulation. As it is a voluntary scheme, the currency can switch between sterling and Bristol pounds, he said.

The thinking behind the creation of the new currency, said Mundy, was to make a minor change to allow for more money to be spent in local areas. “I was looking for a technological and cultural innovation which allows people to conduct themselves in a way which is more sustainable. A big part of that is being aware of the impact of your economic activity,” he said.

Just did an interview with Max. Airs tomorrow on RT.

• Max Keiser’s Bitcoin Capital Continues to Attract Investors (NBTC)

Bitcoin Capital, a venture capital fund initiated by the celebrated finance journalist Max Keiser, is hinting to close on a very optimistic note. According to the details available at BnkToTheFuture.com, the VC fund has already generated a little over $1 million upon receiving support from 580 backers (at press time), especially when there are still three days left to the curtain call. The reports also claim that each investor has injected over $1,000 into the Bitcoin Capital, for which they are offered a 50% equity in the fund. A third part of the generated funds are promised to be invested in Bitcoin Capital’s Bitcoin mining rig in Iceland, a place which will also make sure that investors get to receive daily dividends in the form of newly-minted Bitcoins.

This step is planned to ensure speedy investment returns for the investors, something that puts Bitcoin Capital’s plan in an altogether different category, as it seems. But more than its promises, the VC fund is riding high on its backer’s reputation in the market. Max Keiser is known to be one of the most celebrated faces in the finance sector, for his previous professional collaborations with BBC News, Al Jazeera, Resonance FM and Huffington Post. He currently works for the last two, and also hosts a self-branded financial program on RT, titled Keiser Report. His activism for the cryptocurrency sector however was something that earned him a reputation inside the Bitcoin sector. He supported the idea of decentralization when every government and bank was rubbishing it right away.

“I have been critical of the traditional financial system for many years on my show” Keiser said. “I was the first global news outlet to cover bitcoin when it was trading at $3, recognizing its potential to change the world. Many startups in the bitcoin space credit Keiser Report for getting them started in the business. Bitcoin Capital allows the founders and investors to experiment with new crypto financial business models and currencies to transform global finance.”

Canada was once a nice country. Harper changed all that.

• Canada to Train Ukrainian Police as Russia Conflict Worsens (Bloomberg)

Canada will send officers and provide funding to bolster the Ukrainian police force, Prime Minister Stephen Harper said in his latest show of support for Ukraine on the eve of a Group of Seven nations summit. Canada will never accept the Russian occupation of Crimea or parts of eastern Ukraine, Harper said after meeting Ukraine President Petro Poroshenko on Saturday in Kiev. Work continues between the countries on trade talks and visa restrictions. “I’m proud to be here with you again to demonstrate our continued resolve in the face of the enormous challenge you and all Ukrainians are confronted with,” Harper said after earlier announcing the funding to help train Ukrainian police.

The conflict with Russia is “very high on Canada’s agenda” heading into the G7 summit in Germany, which begins Sunday, Harper said. He called on Russian President Vladimir Putin to withdraw all troops, equipment and support for separatists in Ukraine. “Canada will not, and the world must not, turn a blind eye to the near-daily attacks that are killing and wounding Ukrainians here on their own soil, soldiers and civilians alike,” Harper said. Poroshenko thanked Canada, and said he spoke Saturday with the leaders of the U.S., Japan and Germany. “The support by Canada in this very difficult and decisive time is very important for every Ukrainian,” Poroshenko said. “The relentless violation of international norms will not stand without punishment.”

Brussels lets others do its job and washes its hands.

• Greek Island Gateway To EU As Thousands Flee Homelands (Irish Times)

“Excuse me. Is this Greece?” asked a 24-year-old Pakistani man, whose suit was soaked to his waist. Behind him, a group of young Somali men struggled to lift the sole woman passenger from the boat to her wheelchair, the only possession she managed to bring from the other side. Later, Riyan (30), would explain that she had been shot in the back 15 years previously. She said she was making the journey on her own, and her aim was to reach Germany where she hoped she could have an operation. This migrant vessel was one of four to land last Tuesday morning near the beautiful town of Molyvos, with its medieval hilltop fortress that can be seen from miles around.

Tourism is the lifeblood of the place and the permanent population of about 1,500 relies almost exclusively on the money they make during the summer to keep them going during the difficult winter months after the tourists have gone. For weeks, Kempson, a British painter and sculptor who made his home in Molyvos 16 years ago, and his wife Philippa have been daily witnesses to the rapid increase in the numbers of refugees and migrants arriving from Turkey. “It’s been a nightmare for the last few weeks. We really need some help. Only a few of us have been trying to help. This story needs to get out there and Europe really needs to send some help,” he says.

About 70% of those arriving on the boats are Syrian refugees, including many families with young children. They are fleeing the four-year civil war that has devastated their country and, according to the United Nations, triggered the largest humanitarian crisis since the second World War. An estimated 7.6 million people are now displaced within Syria, while almost four million have fled to neighbouring countries, mostly to Turkey, Lebanon and Jordan, where the vast majority have remained, often in appalling conditions. Syrians in Molyvos say only Europe – by which they usually mean Germany or Sweden – can offer them and their families the safety and opportunities they desperately seek.

Smart Choices for the Coming Bust – Part 2

Jan 052014

January 5, 2014 Posted by Raúl Ilargi Meijer at 1:32 pm Finance Tagged with: community, globalization, local currency, localization 22 Responses »

William Gedney Cornett family, Kentucky. Boy covered in dirt smoking cigarette 1964

Here’s part 2 (actually it’s part 1, I inadvertently mixed them up, sorry!, see first part here.) of Nicole’s interview at Vancouver’s PeakmomentTV, along with Laurence Boomert, about the practical aspects of decentralization and alternative currencies, issues that everyone, in our opinion, should at least give some very serious thought.

Because whatever happens, and whether you think that the economy will crash or you don’t, communities can make themselves much wealthier from an -increased – localization of their economies.

Money spent locally is simply worth a lot more than that spent in big box stores, where profits disappear to some unspecified location like the Caymans, a process that forces the locals to bring in ever more money from outside their communities, just to play even. That’s truly and simply a vicious circle process.

Somebody recently estimated that the value to a local economy of US foodstamps is about $1.70 for every dollar’s worth. And foodstamps are far from an ideal example, because they are to a large extent still spent in box stores and fast food chains. I’ve seen estimates of $4 as the actual worth per dollar spent, and spent again, and kept, inside a local economy.

That means we could spend twice what we do today on for instance a pair of shoes, and, provided they are produced locally and the shoemaker spends what we pay, in the local economy, still come out twice as rich. Which would allow us to “subsidize” opening a local shoe “factory”, create jobs, and create wealth for everyone in the process. And so on and so forth.

I realize very well that this is largely theoretical (unfortunately), and that there are many intricacies and questions, but that doesn’t make the principle any less true. Yes, it’s true that we can’t produce everything in our community, but it’s just as true that we can produce a whole lot more locally than we do today, and certainly in basic necessities.

It’s in essence just a matter of preventing the fruits of local labor from being relentlessly drained out of a community.

Which is such an insidious cycle that the more you think about it, the harder it gets to see why we insist on engaging in this behavior. From a purely rational – let alone emotional – point of view, it makes no sense at all. Buying items on the cheap at box stores makes us poorer, it creates unemployment, and we increasingly lose control over our own communities, and hence our own lives.

You don’t need a crisis to see why that this is not the way to go, and that, moreover, if you do go that way, – more – crises are inevitable. You can’t constantly suck wealth from a community and expect it to still continue to do well all the time, year after year. Localization provides a cushion against crises in the larger economy, while centralization and globalization inevitably induce crises.

With the interview below, I included an article from Nicole dated January 3, 2012, entitled: The Storm Surge of Decentralization, that fits in very well with the topic.

Once again, I’d like to point out that much more of this material, and much more in depth, is available in our 4-hour video download series Facing the Future, which you can order from the TAE Store (click here). The Automatic Earth truly and badly needs your support at this point in time, so please keep your orders and donations coming in order to allow us to continue bringing you the biggest possible picture. Thank you.

We give you bang for your buck, even as we understand the irony, given the above, in not being in your community. You’ll have to get the ideas and the knowledge somewhere. Facing the Future, or its 2013 “sister”, A World of Change, may well be the best money you have ever spent, dollar for dollar. You can even burn the files onto DVDs and share them with your neighbors. Though we would prefer, of course, that everyone order their own copies, if only as a token of appreciation for our work.

Smart Choices for Meeting the Coming Bust, part 2

“How do we cooperate and build a collaborative culture now?” asks Laurence Boomert, founder of The Bank of Real Solutions in New Zealand. Local currencies, barter cards, and Time Banks not only create alternatives when money systems collapse, they allow people to get entrepreneurial and innovative. He gives examples of people sharing physical spaces equipped with tools and project materials, as well as people sharing their time.

One example is a story of idle young people doing weekly projects, even taking wheelchair-bound folks for a day of surfing! Everyone was a winner, feeling good about themselves and more connected to their community. “It’s vital to get young people involved,” concurs Nicole Foss, senior editor of The Automatic Earth, “No more throw-away people.”

Nicole Foss : The Storm Surge of Decentralization (from January 3, 2012 )

Nicole: One of our consistent themes at TAE has been not expecting solutions to come from the top down. Existing centralized systems depend on dwindling tax revenues, which will dry up to a tremendous extent over the next few years as economic activity falls off a cliff and property prices plummet.

We have already seen cuts to services and increases in taxes and user fees, and we can expect a great deal more of that dynamic as central authorities emulate hypothermic bodies. In other words, they will cut off the circulation to the fingers and toes in order to preserve the body temperature of the core. This is, of course, a survival strategy, from the point of view of the core. But it does nothing good for the prospects of ordinary people, who represent the fingers and toes.

Centralized systems also depend on the political legitimacy that has been conferred upon them as a result of public trust in them to serve the common interest. This trust is rapidly breaking down in an ever-expanding list of places, as ordinary people realize that their interests have been betrayed in favour of the well connected.

Those who played fraudulent ponzi games with other people’s money, and were in the best position to know what could result, have been bailed out time and time again, while the little guy has been told to expect more austerity measures. Protest is inevitable as political legitimacy fades. We are already seeing it spread like wildfire, which is exactly what one would expect given that human beings internalize, reflect and act on the emotions of others. Collective social mood that turns on a dime is very much part of what it means to be human.

The job of national and international politicians in contractionary times is typically to make a bad situation worse as expensively as possible, as they attempt to rescue the dying paradigm that has conveyed so much personal advantage in their direction. That paradigm is one of centralization – the accumulation of surpluses from a broad periphery at the centre of power.

However, the wealth conveyors of the past are breaking down, meaning that the periphery that can be drawn upon is shrinking. As the periphery shrinks, the remaining region within the grip of power can expect to be squeezed harder and harder. ‘Twas ever thus. Rome did the same thing, squeezing the peasants for tithes until they abandoned their land and threw in their lot with the surrounding barbarians.

Even if politicians were informed of what is unfolding on their watch, understood it, and were minded to act in favour of the common man as a result (which is itself unlikely), there would be nothing they could do. They are too deeply embedded in a system which is thoroughly hostage to vested interests and characterized by an extreme inertia that would drastically limit their freedom of action.

Such systems cannot be responsive within the timeframe that would actually matter in a financial crisis, where the risk is cascading system failure, potentially in a short period of time. Everything they might do would be too complex, too expensive and too slow to do much good. If we expect top-down solutions we will be disappointed, and more to the point, we will be unprepared to face a period of rapid change. By the time we realize that the cavalry is not coming, it may well be too late to do anything useful.

This is disheartening only to the extent that we see no other way to address our predicament. Fortunately, other strategies exist beyond attempting to preserve the unpreservable. What we must do is to decentralize – to build parallel systems to deliver the most basic goods and services in ways that are simple, cheap and responsive to rapidly changing circumstance.

We will not, of course, be able to provide for the level of wants our societies were previously able to cater to, but we can provide the most basic necessities if we prepare in advance. The key aspect is to align our expectations with reality, because the essence of our psychological conundrum is our sense that business as usual is a non-negotiable state of affairs that must continue.

It will not continue because it cannot. Business as usual is only non-negotiable in the sense that reality will not negotiate, it will dictate, and we will have to live within its parameters.

These topics and many others are discussed in Nicole Foss’ new video presentation, Facing the Future, co-presented with Laurence Boomert and available from the Automatic Earth Store. Get your copy now, be much better prepared for 2014, and support The Automatic Earth in the process!

There are many forms of decentralization – of opting out of the herd before it goes over the cliff. What they have in common is local resilience, a focus on local self-reliance and a thorough grounding in relationships of trust. As economies contract, so does the trust horizon.

Where there is no trust, systems cease to function effectively. Local initiatives work because they operate within the social space where trust still exists, and as they function, they reinforce those foundational relationships.

We need to be thinking in terms of local currencies, time banking (ie bartering skills), small transport networks, basic local healthcare, neighbourhood watch programs, adapting properties to multiple dwellings and permaculture initiatives that can rebuild soil fertility over time.

Also: rediscovery of local knowledge as to life conditions in the absence of current creature comforts, removing obstructive bylaws, small-scale food production free from structural dependencies on expensive and energy-intensive inputs, community power initiatives, communal water access, basic water treatment (like aid agencies employ in the third world), and perhaps intentional communities.

This is not meant to be an exhaustive list. There are many possibilities, and their relative importance will vary according to location and circumstances. So will their chance of success in a world that is path-dependent (ie where a society has collectively come from will shape how that society will respond to external stressors). The more we know about our region and our neighbours, the better our chances.

It is important to realize, however, that we are not going to be left in peace to do that which needs to be done. Solutions do not come from the top down, but interference does, because decentralization represents a threat to wealth concentration at the centre, and that is the goal of all human political systems.

Wealth is extracted from the periphery in favour of the centre, and the centre has an inexhaustible appetite. We are expected to pay our dues to that system, however onerous, not to try to reduce our own burden or that of our community.

As the centre seeks continually to solve the problems raised by excess complexity with more complexity, it also raises the cost (in terms of money and resources) of doing everything it touches. The periphery is then expected to cover the cost of the regulation that makes its own existence more precarious.

That regulation may even make life so expensive and difficult that parts of the periphery are driven towards a very marginal existence or out of an area altogether. Cumbersome, impenetrable and poorly communicated regulations are a recipe for raising revenues through fines for non-compliance, therefore we can expect worse governance to be implemented in the interests of the centre.

Fines may be completely disproportionate to the scale of the ‘offence’. Where such regulations are devised with no transparency or accountability, but plenty of discretion on behalf of enforcement personnel, they may also become an engine of corruption. This is a very common circumstance in many parts of the world.

I wanted to explore some examples of central authorities attempting to preserve wealth conveyance at the expense of attempts to adapt to a new reality, so that we might better understand what we are up against. See, for instance, the case of the desert dwellers of Los Angeles County, many of whom have been living self-reliant lives for decades.

They are being pursued by distant authorities for supposed nuisance violations, yet they are disturbing no one. Their ‘crime’ is the very self-sufficiency that allows them to exist independent of centralized systems, and therefore affordably. They are being told to connect to services such as mains power, at a cost of tens of thousands of dollars, or to destroy their own property and leave with nothing.

Local organic food initiatives are often more contentious. Industrial agriculture and food processing corporations are very powerful, to the point of having subverted regulatory mechanisms ostensibly geared towards the public good, but which now serve to safe-guard corporate profits and market share.

If groups of people are allowed to assert their independence by opting out of the corporate food machine, then they are less subject to external control, as well as ceasing to be profit providers. Organic agriculture therefore faces substantial regulatory barriers, and, increasingly, extreme over-reactions by central authorities.

See, by way of example, the case of Rawesome Foods in California. The cooperative had become a private club in order to be allowed to provide raw milk to those who choose to avoid the over-processed commercial variety. Nevertheless, they were subjected to a raid by armed police officers with guns drawn. Opting out of the system in order to share resources constitutes a threat, and that threat is being targeted.

Heavy-handed food regulation has descended on many small farmers in recent years. They face an uphill battle against the centralizing impulse. A regulatory regime that imposes huge costs on small operations makes it very difficult for them to compete. Some of the enforcement incidents are outrageous.

See for instance the film Farmageddon. Jim Puplava at Financial Sense Newshour did a Must Listen interview recently with its creator, which makes eye-opening listening to put it mildly.

Simply put, it is getting more and more difficult to operate outside of the corporate structure, particularly in relation to food. As Joel Salatin observed in a classic article on the subject of organic farming – Everything I Want to Do Is Illegal.

That means it is also getting more and more difficult in some places to purchase healthy food, as opposed to industrial food-like substances genetically-modified, tainted with all manner of chemicals, stuffed with addictive fillers such as high-fructose corn syrup, and vastly over-processed. The option to eat simple, wholesome, unprocessed, unadulterated, nutritious food is being whittled away, ironically on health grounds, just as demand for real food is skyrocketing.

It is also falling foul of spurious ordinances to protect the uniformity of neighbourhoods by defending them from vegetables growing where anyone can see them. Jail terms can be threatened for the crime of seeking seeking to be more independent. Occasionally the corporate world will explicitly complain that eating unprocessed food kills jobs, but it is more common to approach the issue tangentially rather than head on.

Although not yet a reality, direct taxation of home-produced food has been floated. Unfortunately this idea is all too plausible. States are indeed desperate for revenue, and the connections politicians have with large corporations gives them a direct incentive to protect the profit margins of those who feather their nests:

I heard a state legislator today on the radio talking about taxing home gardens that grow vegetables and other produce. This state is in serious economic trouble and they are looking at every possible source of revenue. The legislator stated that many home gardeners sell their produce at flea markets and do not pay any sales tax, that the produce grown even if not sold amounts to income and should be taxed.

In 2006, Britain was already contemplating taxing gardens, not yet for the vegetables they produce, but simply for the property tax revenue stream government could extract for any distinguishable positive feature of a property.

It is not that much of a stretch to imagine an attempt at taxing produce, although this would obviously be very difficult to enforce. Fortunately, there do exist places where the opposite approach is gaining a foothold. Long may they continue. And spread.

At an even more basic level, seed control threatens both independence and biodiversity:

Two thirds of the 1.2 billion poorest people in the world live in rural areas and are dependent on traditional agriculture. They do not have the financial means to buy commercially available seed or the input factors needed to cultivate them.

However, they often have long experience with, and a profound understanding of, local plant diversity within crops such as grains, potatoes, vegetables and fruit. By cultivating and developing these crops they are contributing to the preservation and development of global plant genetic diversity, which constitutes the basis for the world’s food production.

Legislation ostensibly aimed at food safety is being written vaguely and broadly enough to confer unaccountable discretion on enforcement agencies already in a state of regulatory capture. The very necessary processes of seed saving from year to year, and seed banking, are well on the way to being criminalized, for the sake of protecting profit margins:

But now the effort is to take over the whole game, going after even these small sources of biodiversity – by simply defining seeds as food and then all farmers’ affordable mechanisms for harvesting (collecting), sorting (seed cleaning) and storing (seed banking or saving) as too dirty to be safe for food.

Set the standard for “food safety” and certification high enough that no one can afford it and punish anyone who tries to save seed in ways that have worked fine for thousands of years, with a million dollar a day fine and/or ten years in prison, and presto, you have just criminalized seed banking.

The penalties are tremendous, the better to protect us from nothing dangerous whatsoever, but to make monopoly over seed absolutely absolute.

One is left with control over farmers, an end to seed exchanges, an end to organic seed companies, an end to university programs developing nice normal hybrids, and an end to democracy – reducing us to abject dependence on corporations for food and gratitude even for genetically engineered food and at any price.

On the other side of the Atlantic, EU seed control regulations are also making it difficult, and potentially expensive, to protect biodiversity:

[In February 2008], in France, the independent seed-saving and selling Association Kokopelli were fined €35,000 after being taken to court by corporate seed merchant Baumaux. Their crime was selling traditional and rare seed varieties which weren’t on the official EU-approved list – and, therefore, illegal to sell – thus giving them an ‘unfair trading advantage’.

As the European Commission met this week to prepare new legislation for seed control, due in 2009, which will further restrict the geographic movement and range of crop varieties, this ruling will set a dangerous precedent.

Kokopelli, the non-profit French group set up in 1999 to safeguard endangered seed strains, may be driven out of existence by the fine. Their focus is biodiversity, food security, and the development of sustainable organic agriculture and seed networks in the ‘global south’.

They have created one of the largest independent collections in Europe – with over 2500 sorts of vegetable, flower and cereals. Other non-government seedbanks are held by large agro-industrial companies like Limagrain, Syngenta and Pioneer – and guess what their main interest is money rather than starving subsistence farmers.

You may think that in an era of mass extinction it would be a no-brainer that we need to protect biodiversity and the heritage of the crop varieties which have been build up over centuries… but no.

Since the 1970s, laws in the UK and Europe mean that to sell seeds, the strain needs to be registered and everything else becomes ‘outlaw’ seeds, illegal to sell. In the UK it costs 300 per year to maintain the registration and 2000 to register a ‘new’ one which all disadvantages smaller organisations.

Garden Organic in the UK run a Heritage Seed Library, and they get around the law by not selling ‘outlaw’ seeds, but getting individual gardeners to become ‘seed guardians’ who pass around seeds for free to other members of the Library. Unlike other seedbanks, seeds are not kept in cold storage, but are living species which are continually grown and allowed to adapt to new environmental factors.

Another law-busting approach is seed swaps – which in recent years have sprouted up and down the country. People freely share seeds for another year’s growing – a co-operative way of maintaining genetic diversity.

Controlling the supply of necessities in order to generate monopoly profits is not new and is not limited to food. See for instance the erstwhile Bolivian water privatization that resulted in a requirement to obtain a permit even to capture rainwater. If access to affordable options is limited, people are forced to pay the rentiers their monopoly profits.

Collecting rainwater has been illegal in many western US states as well, since water rights are separate to property rights:

Like many Western states, Colorado employs a complicated system of water use known as prior allocation, which severs water rights from other property rights.

The system preserves an 80-year-old compact Colorado signed with other Western states (as well as a separate federal pact with Mexico) divvying up runoff from the Colorado River. It means you can buy a parcel of land in Colorado, but the right to any precipitation that falls on that land likely belongs to someone two houses over, two counties over, or even in another state.

It might also belong to a state or local government, but it probably doesn’t belong to you. Under Colorado law, then, collecting rainwater or reusing “gray water” from bathtubs or washing machines violates the rights of someone who may not see that water for months.

The recent change to the law to allow small-scale rainwater collection is a belated improvement. Previously it was illegal even to sell rainwater collection equipment.

“I was so willing to go to jail for catching water on my roof and watering my garden,” said Tom Bartels, a video producer here in southwestern Colorado, who has been illegally watering his vegetables and fruit trees from tanks attached to his gutters. “But now I’m not a criminal.”

Ben Elton’s brilliant (Must See) 1990 play Gasping explored the trend towards corporate control of necessities, and illustrated the point, taken to its logical conclusion:

Lockheart Industries are looking for a new product to make them huge sums of money. Their whizz-kid Philip comes up with the superb idea of designer air – Perrier for the lungs, in the form of their patent-pending Suck And Blow machine. For a while, all is well, and the machines are a huge success, as sales massively exceed all projections.

But greed forces up the price of air until the oxygen industry becomes privatised. And if you can’t afford to pay, you have no right to live. Philip’s conscience ultimately wins through at the end of the day, and he takes extreme measures to rectify everything he feels he has destroyed.

The need to move towards a decentralized future, and the hazards that may await the first movers who run into a brick wall of regulation, remind me of a British nature documentary called The Tides of Kirawira.

The scenario is that every year the great migratory herds of the Serengeti must cross seasonal rivers, but these rivers are populated with giant crocodiles. Every year the herd must cross, but it doesn’t pay to be the first or only gazelle, zebra or wildebeest in the river. There is safety in numbers. Once the whole herd is on the move, the vast majority reaches the other side.

One line from this that strikes a chord in relation to the collusion between government and corporations to fleece the little guy is: “The crocs work as a team. It’s easier to tear chunks of flesh from the bone when someone is holding the other end.” Regulations against decentralization immobilize people for corporate interests to extract their pound of flesh.

In this instance, we need to emulate the herd animals and cross the river all at once. This is our best hope of achieving a simpler, decentralized future that might be workable, unlike our current industrial paradigm. We are going to have to live without cheap energy and cheap credit because they are going away. Decentralization is the only real option we have, but if we are to achieve what we need to achieve, we need to mobilize on a large scale rather than take only a few tentative steps into the crocodile infested waters.

Smart Choices for the Coming Bust – Part 1

Jan 042014

January 4, 2014 Posted by Raúl Ilargi Meijer at 3:22 pm Finance Tagged with: community, globalization, local currency, localization 1 Response »

William Gedney Cornett family, Kentucky. Family in car, baby looking back 1972

Peakmoment TV in Vancouver, Canada just published a two part interview with The Automatic Earth’s Nicole Foss, and her co-speaker on her recent US and Canada tour, Laurence Boomert. Just prior to that tour, Nicole and Laurence recorded our new download video series Facing the Future, which you are cordially invited to order from the TAE Store. It contains over 4 hours of what you see in the video. Here’s Peakmoment’s first post and video, plus an article they refer to that Nicole published at The Automatic Earth on January 24, 2012 (see below).

Part 2 of the interview will be here tomorrow.

Smart Choices for Meeting the Coming Bust, part 1

Most people are woefully unprepared for the depression that is now unfolding, says economic analyst Nicole M. Foss, senior editor of The Automatic Earth. In a depression, there’s not enough money in circulation. “But by using alternative currencies, we can provide our own liquidity and support economic activity in local areas.” Laurence Boomert, the founder of The Bank of Real Solutions, shares several success stories. When government spending dried up, his town of Golden Bay, New Zealand used their alternate currency to keep educational programs going.

One guide to cope with the difficult years ahead is Nicole’s “How to Build a Lifeboat”:

How to Build a Lifeboat (from January 24, 2012 )

Nicole: Yesterday we talked about why we are facing deflation and today I wanted to review and explain the suggestions we have made previously for dealing with a deflationary scenario. In short, this is the list we have run periodically since we started TAE (with one addition at the end):

1) Hold no debt (for most people this means renting)

2) Hold cash and cash equivalents (short term treasuries) under your own control

3) Don’t trust the banking system, deposit insurance or no deposit insurance

4) Sell equities, real estate, most bonds, commodities, collectibles (or short if you can afford to gamble)

5) Gain some control over the necessities of your own existence if you can afford it

6) Be prepared to work with others as that will give you far greater scope for resilience and security

7) If you have done all that and still have spare resources, consider precious metals as an insurance policy

8) Be worth more to your employer than he is paying you

9) Look after your health!

1) The reason that getting rid of debt is priority #1 is that during deflation, real interest rates will be punishingly high even if nominal rates are low. That is because the real rate (adjusted for changes in the money supply) is the nominal rate minus inflation, which can be positive or negative. During inflationary times, this means that the real rate of interest is lower than the nominal rate, and can even be negative as it was during parts of then 1970s and again in the middle of our own decade. People have taken on huge amounts of debt because they were effectively being paid to borrow, but periods of negative real interest rates are a trap. They lure people into too much debt that they may not be able to service if real rates rise even a little. Most people are thoroughly enmeshed in that trap now as real rates are set to rise substantially.

When inflation is negative (i.e. deflation), the real rate of interest is the nominal rate minus negative inflation. In other words, the real rate is higher than the nominal rate, possibly significantly higher. Even if the nominal rate is zero, the real rate can be high enough to stifle economic activity, as Japan discover during their long sojourn in the liquidity trap. Standard money supply measures don’t necessarily capture the scope of the problem as they don’t adequately account for on-going credit destruction, when credit has come to represent such a large percentage of the effective money supply.

The difficulty from the point of view of debtors can be compounded by the risk that nominal interest rates will not stay low for years, as they did in Japan, but may shoot up as the international debt financing model comes under stress. For instance, on-going bailouts may cause international lenders to balk at purchasing long term treasuries for fear of their effect on the value of the dollar, even though those bailouts are not increasing liquidity thanks to hoarding behaviour by banks. We are not there yet, but the probability of this scenario rises as we move forward with current policies. The effect would be to send nominal interest rates into the double digits, and real interest rates would be even higher. The chances of being able to service existing debts under those circumstances are not good, especially as unemployment will be rising very quickly.

There is no safe level of debt to hold, including mortgages. For those who are not able to own a home outright, most would be much better off selling and renting, as real estate becomes illiquid faster than almost anything else in a depression. By the time you realize that you need to sell because you can no longer pay the mortgage, it may be too late. Renting is essentially paying someone else a fee to take the property price risk for you, which is a very good bet during a real estate crash. It would also allow you address point #2 – having access to liquidity.

2) Holding cash and cash equivalents (i.e. short term treasuries) is vital as purchasing power will be in short supply. Cash is king in a deflation. Access to credit is already decreasing and will eventually disappear for ordinary people. Mass access to credit has been a product of an historic credit expansion that expanded the supply of pockets to pick to an unprecedented extent, feeding off widespread debt slavery in the process. As you can’t count on the availability of credit for much longer, you will need savings in liquid form that you can always access.

When interest rates spike, not only will debt become a millstone round your neck, but a debt-junkie government forced to pay very high rates will be in the same position. As a result government spending will have to be cut drastically, withdrawing the social safety net just as it is most needed. In practical terms, this means being on your own in a pay-as-you-go world. You do NOT want to face this eventuality with no money.

3) Keeping the savings you need in the banking system is problematic. The banking system is deeply mired in the crisis in the derivatives market. Huge percentages of their assets are not marked-to-market, but marked-to-make-believe using their own unverifiable models. The market price would be pennies on the dollar for many of these ‘assets’ at this point, and poised to get worse rapidly as the forced assets sales that are coming will lower prices further. The losses will eventually dwarf anything we have seen so far, pushing more institutions into mergers or bankruptcy, and mergers are becoming more difficult as the pool of potential partners shrinks.

If we do see a rash of bank failures, each of which weakens the position of others as the sale of their assets and unwinding of their derivative positions can re-price similar ‘assets’ held by other parties, then deposit insurance will not be worth the paper it’s written on. When everything is guaranteed, nothing is, as the government cannot guarantee value. Savings held in these institutions are at much higher risk than commonly thought due to the systemic threats posed by a derivatives meltdown and spreading crisis of confidence. Fractional reserve banking depends on depositors not wanting their money back all at once, in fact with reserve requirements so whittled away in recent years, it depends on no more than a fraction of 1% of depositors wanting their money back at once. This is a huge vulnerability and the government deposit guarantee is a bluff waiting to be called.

4) The general rule of thumb in a deflation is to sell everything that isn’t nailed down and then sell whatever everything else is nailed to, for the reasons that assets prices will fall further than most people imagine to be possible, and the liquidity gained by selling (hopefully) solves the debt and accessible savings problems (provided you don’t lose the proceeds in a bank run). Assets prices will fall because everywhere people will be trying to cash out, by selling not what they’d like to, but what they can. This means that all manner of assets will be offered for sale at once, and at a time when there are few buyers, this will push prices down to pennies on the dollar for many assets.

For those few who still have liquidity, it will be a time when there are many choices available very cheaply. In other words, if you manage to look after the proceeds from the sale of your former assets, you should be able to buy them back later from much less money. Of course flashing your wealth around at that point could be highly inadvisable from a personal safety perspective, and you may find that you’d rather hang on to your money anyway, since it will be getting harder and harder to earn any more of it. During the Great Depression, some of the best farms in the country were foreclosed up on and received no bids at auction, not because they had no value, but because those few with money were hanging on to it for dear life.

Being entirely liquid has its own risks, which is why I wouldn’t sell assets that insulate you from economic disruption if you didn’t buy them on margin (ie with borrowed money that you may not be able to pay back) and if you have enough liquidity already that you can afford to keep them. For instance, a well equipped homestead owned free and clear is a valuable thing indeed, whatever its nominal price. It is totally different from investment real estate owned on margin, where the point of the exercise is property price speculation at a time when doing so is disastrous.

One important point to note with regard to commodities is that commodities have already fallen along way since I first published the above list of suggestions. At that time, selling commodities was a very good idea, but now, since commodities are already down a very long way, it may depend on the commodity in question. If you only own commodities in paper form then selling is still a good idea in my opinion, as there are generally more paper claims than there are commodities, and excess claims will be extinguished. At some point soon I will write an intro on my view of energy specifically, since energy is the master resource. In short, we are seeing a demand collapse now, but eventually we will see a supply collapse, and it is difficult to predict which will be falling fastest at which times.

5) If you already have no debt and have liquidity on hand, I would strongly suggest that you try to gain some control over the essentials of your own existence. We live in a just-in-time economy with little inventory on hand. Economic disruption, as we are already seeing thanks to the problems with letters of credit for shipments, could therefore result in empty shelves more quickly than you might imagine. Unfortunately, rumours of shortages can cause shortages whether or not the rumour is entirely true, as people tend to panic buy all at once. If you want to stock up, then I suggest you beat the rush and do it while it’s still relatively easy. You need to try to ensure supplies of food and water and the means to keep yourselves warm (or cool as the case may be). Storage of all kinds of basic supplies is a good idea if you can manage it – medicines, first aid supplies, batteries, hand tools, wind-up radios, solar cookers, a Coleman stove and liquid fuel for it, soap etc.

At the moment, there are many things you can obtain with the internet and a credit card, but that will not be the case in the future. Water filters are a good example, as the quality of water available to you is likely to deteriorate. You can buy the kind of filters that aid agencies use oversees for all of about $250, with extra filter elements for a few tens of dollars at sites such as Lehmans Non-Electric Catalogue or the Country Living Grain Mill site.

6) Most people will not be able to get very far down this list on their own, which is why we suggest working with others as much as possible and pooling resources if you can bring yourself to do so. Together you can achieve far greater preparedness than you could hope to do alone, plus you will be building social capital that will stand you in good stead later on.

7) If you have already taken care of the basics, then you may want to put at least some of whatever excess you still have into precious metals (in physical form). Although the price of metals should still have further to fall, since distressed sales have not yet had an effect on price, obtaining them could get more difficult. Buying them now would amount to paying a premium price for an insurance policy, which may make sense for some and not for others. Metals will hold their value over the long term as they have for thousands of years, but you may have to sit on them for a very long time, so don’t by them with money you might need access to over the next few years.

Metal ownership may well be made illegal, as it was during the Great Depression, when gold was confiscated from safety deposit boxes without compensation. That doesn’t stop you owning it, but it does make ownership far more complicated, and makes trading it for anything you might need even more so. You could easily attract the wrong kind of attention and that could have unpleasant consequences. In short, gold is no panacea. Other options may be far more practical and useful, although there is an argument for having a certain amount of portable wealth in concentrated form if you should have to move suddenly.

8) Being worth more to your employer than he is paying you is a good idea at a time when unemployment is set to rise dramatically. This is not the time to push for a raise that would make you an expensive option for a cash-strapped boss, and in fact you may have to accept pay cuts in order to keep your job. During inflationary times, people can suffer cuts to their purchasing power year after year, but they don’t complain because they don’t notice that their wage increases are not keeping up with inflation. However, deflation brings the whole issue into the harsh light of day.

People would have to take pay and benefit cuts for their purchasing power to stay the same, thanks to the increasing value of cash, but keeping people’s purchasing power the same will not be an option for most employers, who will be struggling themselves. In other words, expect large cuts to pay and benefits. As unions will never accept this, for obvious reasons, since their membership has its own fixed costs, there will be war in the labour markets, at great cost to all. You need to reduce your structural dependence on earning anything like the amount of money you earn now, and don’t expect benefits such as pensions to be paid as promised.

9) Your health is the most important thing you can have, and most citizens of developed societies are nowhere near fit and healthy enough. Already medical bills are the most common reason for bankruptcy in the US, and while you can’t protect yourself against every form of medical eventuality, you can at least improve your fitness. You will be be living in a world where hard physical work will be much more prevalent than it is now, and most people are ill-equipped to cope. The solution Ilargi and I have chosen, as we have mentioned before, is the P90X home fitness programme. While it wouldn’t be the right choice for everyone, if I can do it, as I have for 11 months already, then most people can. For others, there are gentler options available, but everyone should consider doing something to make themselves as healthy and robust as possible.

We here at TAE wish you the best of luck at this difficult time. We will all need it.