A Finance Primer 2

Previously we learned what securities were: financial instruments designed to swap debt all over the place (we’ll ignore ownership for now). Basically, they’re just IOUs.

The financial “industry” consists of trading and gambling with these securities. For every financial transaction, there are parties and counterparties. Like the tango, it takes two.

As I mentioned, banks and other financial institutions loan to each other all the time. This turns out to be quite important. I want to outline a little more of the financial system using that concept.

THE FED FUNDS RATE AND REPO MARKET

As I said above, financial institutions such as banks lend to, and borrow from, each other. But they don’t do it the way they lend to and borrow from you and me. They buy and sell IOUs.

If you deposit $100 and then return a month later to take out your $100, it’s not the exact same $100 you deposited. When you give the bank your money, they invest it and the money they give you is the money they’ve made. Banks are trying to make money from their deposits just like everyone else, so that’s why they loan it out to other institutions. One place where they do so called the financial repo market. This is basically banks loaning to other banks.

Recall that banks have a reserve requirement, which is the ratio of deposit liabilities (what the bank owes its customers) to loanable money.

If a bank has more reserves at the central bank than they need, they loan it out to other banks who may be short. This is done through what are called repurchase agreements, which is where the term “repo” comes from.

So if Bank A has an additional $50m at the end of Thursday, and Bank B needs to get $50m on its books to comply with regulations, Bank A will loan out their extra $50m for an agreed interest rate, and will repurchase the loan on Friday morning. Hence repurchase agreements.

The way this is done is by selling securities. In the above example, Bank B sells Bank A securities in exchange for cash. It agrees to buy back the securities from Bank A at a later date at an agreed-upon (usually higher) price.

Example: Transition Borrower sells government bond worth $100 to lender for $100 cash Borrower agrees to buy back bond for $101 in 1 year 1 year later… Borrower buys bond back for $101, lender receives $101.

So what happened here? Changing the verbiage to what makes more intuitive sense, the borrower gave a lender an asset in exchange for $100 cash. 1 year later the borrower paid back the initial amount ($100) plus an extra amount that they had previously agreed upon ($1) and got the asset back.

Repo Rate (for 1 year repo) = (Final Price-Initial Price)/Initial Price so in this case we see the Repo rate is 1%.

ELI5: What is the repo rate? (Reddit)

Recall that Treasury securities is basically another word for the government’s debt; i.e. the “national debt.” The same national debt that you hear all the scary stories about. Turns out that the debt is necessary for the financial system to function–something the horror stories never manage to tell you. Having no national debt would actually be a problem. Banks are, in fact, actually required to hold a certain amount of U.S. debt in the form of treasury securities.

If the U.S. paid off its debt there would be no more U.S. Treasury bonds in the world…The U.S. borrows money by selling bonds. So the end of debt would mean the end of Treasury bonds.

But the U.S. has been issuing bonds for so long, and the bonds are seen as so safe, that much of the world has come to depend on them. The U.S. Treasury bond is a pillar of the global economy.

Banks buy hundreds of billions of dollars’ worth, because they’re a safe place to park money. Mortgage rates are tied to the interest rate on U.S. treasury bonds.The Federal Reserve — our central bank — buys and sells Treasury bonds all the time, in an effort to keep the economy on track.

If Treasury bonds disappeared, would the world unravel? Would it adjust somehow?

What If We Paid Off The Debt? The Secret Government Report (NPR)

The agreed interest rate that banks charge each other for 1 day loans is called the Fed Funds Rate. The interest rate banks lend to each other obviously affects the rate at which banks lend to you. That’s why it’s extremely important to the financial system as a whole. It sets many of the other domestic interest rates in a sort of domino effect.

The federal funds rate is the rate at which depository institutions (banks) lend reserve balances to other banks on an overnight basis (or slightly longer). Reserves are excess balances held at the Federal Reserve to maintain reserve requirements. The rate is primarily determined by the balance of supply and demand for the funds.

[The Fed Funds Rate] is just about the most fundamental metric in the entire financial system. Everything from government bonds, to commercial loans, to your mortgage is influenced by how much banks have to pay to square their books at the end of the day.

ELI5: What exactly is the financial repo market? (Reddit)

If there is not enough cash in the system, the Fed Funds rate will increase, affecting the entire system. If the rate is being affected not by market fundamentals, but by some sort of financial crisis for instance, more money is injected via the Federal Reserve to try and bring the rate down.

The Fed Funds rate…is not strictly controlled by the Federal Reserve, but is a market effect that’s a result of Fed actions. Specifically, the Fed buys or sells bonds. If the Fed buys bonds there is more cash in the economy (which means in bank coffers) and fewer interest-paying bonds. This makes rates go down because money supply is higher and banks need to entice someone to borrow it. Inversely, if the Fed sells bonds it pulls cash out of the economy and can make rates higher…Buying or selling bonds a little at a time lets the market naturally adjust the rate to where they want it.

Why does the Fed raise interested [sic] rates (Reddit)

If banks need to borrow money directly from the Fed itself, this is called the discount window, for reasons I’m not entirely sure of, except to make this more complicated and obscure. The Fed is just the national bank, and the interest rate banks pay to borrow from the Fed is called the discount rate. This rate is determined by the Fed. When the Fed wants to inject more money into the system, they lower the discount rate so banks can borrow more money.

Money is a commodity, and it’s “price” is the interest rate. So the Fed doesn’t “declare” an interest rate. It sets a target interest rate, and then buys or sells bonds in order to achieve that interest rate.

We said last time that bonds (IOUs) are a way of “locking up” money for a while. You can imagine dollars being removed temporarily from society like prisoners sitting behind bars in a jail cell if you like. The length of time the bond is for (term) is the “sentence” for the money locked away in the bond. By the time the bond “gets out of jail,” it has had a baby called interest. How many “babies” it has had is determined by the amount of time it has been locked up for.

Selling treasury bonds takes cash *out* of the system (because people pay cash for the bonds.) Selling bonds puts cash back *into* the system (because the bonds are redeemed in cash). Sometimes, of course, the bond is not redeemed for cash, it is simply “rolled over”–one IOU is exchanged for another IOU–in which case cash is not injected back into the system.

The removal and injecting of cash into the system influences the amount of overall money in the system, which consequently determines the interest rate–the price for money. The rate the banks lend to each other helps determine the rate at which they lend to you and everyone else.

Peter Conti-Brown describes the process:

The [Federal Open Markets Committee], in its eight annual meetings, establishes the target federal funds rate, or the rate it wishes to see in the markets for these interbank, short-term loans.

To reach this target, the Fed buys or sells securities on the open market, through the trading desk at the Federal Reserve Bank of New York. Here’s the connection to the federal government: the New York Fed’s primary conventional tool to accomplish the FOMC’s objectives is the purchase and sale of short-term government securities.

When the FOMC decides to raise interest rates, the New York Fed pulls cash out of the financial system by selling the short-term government debt securities the Fed keeps on its books; when the FOMC decides to lower interest rates, the New York Fed injects cash into the finacial system by buying those securities back from the market participants.

When the Fed buys a Treasury security on the open market, it provides the bank on the other side of the transaction with cash–an electronic modification to the bank’s balance sheet. This purchase removes the security from the bank’s balance sheet, and replaces it with greater reserves in the bank’s account at its local Federal Reserve Bank.

In this way, the Fed has expanded the money supply by removing from the banking system an asset that that is harder to sell on the market–a government bond or, more recently, a mortgage backed security–and replacing it with cash, literally Federal Reserve Notes (mostly electronic, of course). These notes are easier assets to use to exchange for other goods and services. Indeed, as the notes themselves report, they are “legal tender for all debts public and private.” In the monetary metaphor, cash is the most “liquid” of assets.

The Fed regulates how much cash banks must keep in their reserves, which are deposited at the bank’s regional Fed. If the bank already has the requisite level of reserves required by the Fed, the cash that is added to its balance sheet through its sale of a Treasury security to the Fed is is something extra.

The Power and Independence of the Federal Reserve pp. 131-132

The money injected into the banks in this way is called “high powered money” because the banking system can multiply that money through the fractional reserve lending. If the reserve requirement is adjusted down, banks can hold less cash and the money multiplier effect is greater, expanding the money supply. If the reserve requirement goes up, banks can lend less of their deposits, resulting in less money creation.

Banks are generally in the business of taking the “something extra” and injecting it into the economy in the form of bank loans. Under normal circumstances, the bank will lend the cash it has received from the Fed in exchange for its more illiquid security. Doing so expands the money supply in the economy as the bank borrower spends that money and multiplies the money’s reach through a daisy chain of spending, investing, and saving.

Because most consumers of bank credit–usually businesses, but also individuals–don’t carry around much cash in their wallets or under their mattresses, the money the first bank receives through the Fed’s initial market transaction goes to another bank or business, which gives to another bank or business, and on and on. The effect is a more or less predictable expansion of the money supply throughout the banking system. ibid. pp. 132-133

In a financial panic the banks need cash. Based on the above, what happens? Rather than being locked up, money is set free. The Fed buys Treasury securities, i.e. government debt. Or it buys the mortgage-backed securities (which are theoretically backed by people paying their mortgages, except in the financial crisis they weren’t, meaning that they were essentially worthless paper). That’s why the debt increases. It has to. That’s how the system is designed. Remember, treasury securities are the government’s debt.

US Fed balance sheet increases to record $6.62 trillion (Deccan Herald)

So we see that the selling of bonds has nothing to do with the government needing to get the money from the private sector in order to spend. The sovereign never needs to “borrow” the currency over which it has the exclusive right to issue–that is logically ridiculous. It does so by convention (holdovers from the gold standard era and mercantilism), which ends up providing a risk-free asset–Treasury securities–for the private sector to hold cash. The selling and buying of this asset help to stabilize the price of money by injecting it into, or taking it out of, the banking system.

Of course, as we learned last time, the fractional reserve theory of banking is obsolete. Now that demand deposits are the main way of conducting transactions, and are treated like cash, the loan itself creates the deposit on the bank’s balance sheet.

In the [intermediation of loanable funds] (ILF) model [of banking], bank loans represent the intermediation of real savings, or loanable funds, between non-bank savers and non-bank borrowers. But in the real world, the key function of banks is the provision of financing, or the creation of new monetary purchasing power through loans, for a single agent that is both borrower and depositor.

The bank therefore creates its own funding, deposits, in the act of lending, in a transaction that involved no intermediation whatsoever. Third parties are only involved in that the borrower/depositor needs to be sure that others will accept his new deposit in payment for goods, services, or assets. This is never in question, because bank deposits are any modern economy’s dominant medium of exchange.

Furthermore, if the loan is for physical investment purposes, this new lending and money is what triggers investment and therefore…saving. Saving is therefore a consequence, not a cause, of such lending. Saving does not finance investment, financing does. To argue otherwise confuses the respecting macroeconomic roles of resources (saving) and debt-based money (financing).

Bank of England Working Paper No. 529: Banks are not intermediaries of loanable funds–and why this matters. Zoltan Jakab and Michael Kumhof.

So we saw three ways the Fed can influence the amount of money in the banking system, and hence, the economy: 1) Manipulate the fed funds rate by buying or selling Treasury securities; 2) Lower the discount rate; that is, the cost to borrow from the Fed 3.) Lower the reserve requirement—the amount of deposit money banks must keep in their accounts at the Fed.

What if the price of money is already so low that it’s practically free? Turns out that’s now. When that happens, rates can’t really go lower, so it’s a problem. We’ll discuss that another time.

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If a particular bank didn’t have enough reserves, it would borrow from other banks in the system, as we said above. But in a financial panic, when bad loans are roiling the entire system due to bad harvest or something, every bank is trying to make sure it has enough money to stave off a bank run, and no bank wants to lend out money. They can’t get a temporary loan from the other bank, because the other bank is in the exact same boat! And so on, throughout the entire financial system.

So in that type of environment, where would the banks get the money they needed? Who would loan it out? Often the answer was a bailout organized by wealthy Wall Street financiers getting the money from London or something. But after enough of these ad hoc rescues (the last one famously spearheaded by J.P. Morgan), everyone knew that some sort of permanent bank “above” all the others was needed to loan out money from the federal government during times of banking panic or financial crisis. And these banking panics used to happen a lot. And I mean a lot. As “Adam Smith” writes:

The framers of the law that created [the Federal Reserve] were literally panic-stricken. Schoolchildren once learned the dates of bank panics in history as if they were battles: the Panic of 1837, the Panic of 1873, the Panic of 1893, the Panic of 1907. Boom, bust, the agitated lines of depositors stretching out into the street, people anxious to get their money out while it was still possible; then collapse, and depression.

When Congress established this Reserve system in 1913, it contemplated that the Reserve could stop a run on the country’s banks with money that was not gold, not silver, not anything in the vaults. By a series of mechanisms, the Federal Reserve could add money to the government’s own bank account. Stricken banks would have a senior friend, and the Federal Reserve, the central bank, would regulate the county’s supply of money. This office had great financial power. PAPER MONEY, pp. 15-16

Thus, the Fed is the lender of last resort. Peter Conti-Brown describes:

Maturity transformation is what makes banks so vulnerable to failure. The system relies on an assumption that only a few short-term depositors will withdraw their money on a given day. When more depositors show up at a bank demanding even more in withdrawals than is on deposit in the vaults, the bank will fail unless new cash can be secured.

The first priority of a bank facing a panic, then, is to publicly and ostentatiously demonstrate that it has secured new funds, usually from another bank. As soon as the panic is stabilized, a bank with a well-managed portfolio will pay back both its emergency debts to the other banks that have stepped in to the breach and those the bank owes to its regular depositors. (In the sometimes confusing vernacular of banking, the bank’s “assets” include the loans it is owed by homeowners, business owners, and the like; its “liabilities” include the deposits that savers can demand at any time.)

If the panic spreads, however, the usual sources of short-term credit to the first scared banker–other banks–are themselves tied up trying to fend off bank runs of their own. At that point, a localized panic has become systemic.

In that event, banks scramble in a dash to find liquidity in the system, wherever liquidity can be found. The central bank is the solution to the scramble for liquidity. The central bank is the “lender of last resort,” the bank that exists to restore order to the financial system.

Peter Conti-Brown; The Power and Independence of the Federal Reserve, p. 152

So the problem with all the “End the Fed” dipshits is, how ya gonna stabilize the banking system, then? Or should we just let it crash every ten years?

In the bad old days, if a bank failed, you lost all your money. Now deposits are insured, up to a limit. If your bank fails, you will be reimbursed by the insurance payout for the amount you lost up to the insurance limit (so that $1000.00 in your account is safe.) This was an innovation of the Great Depression and it pretty much eliminated bank runs.

But, as you can see above, a lot of assets on the bank’s books are loans for real estate, i. e houses. There are always some people who default on their mortgages, or course. But if enough of those mortgages go bad all at the same time, then assets go poof, and the bank’s balance sheets become insolvent all of the sudden. And if it happens all over the entire country, then the above scenario applies—each bank is trying to save its own balance sheet, and so has no money to loan to other potentially insolvent banks in the system. The Federal Reserve has to step in.

And that, my friends, is what 2008 was all about.

Debt is a tradable commodity, and when wound back to the source somebody is paying that debt. And when they stop paying, that debt suddenly becomes a worthless commodity. Multiply that by a few trillion and you’ve got an economic crisis on your hands. So goes the financial system.

Making it worse was that the mortgage debt was “sliced and diced” into mortgage backed securities and traded all over the place. So some pension system in Oregon or somewhere was dependent on a bunch of mortgages in Las Vegas, and now it’s gone bust too. Plus, many had taken out insurance policies on these securities, and the underwriters assumed they’d never have to pay up. When everything went bad at once, the claims they had to pay overwhelmed the money supply they had on hand the insurance companies went belly-up too.

Why did this happen? Well, the banks made shady loans. And, in a perfect world, banks that made shady loans should go under. But when it’s endemic throughout the whole damn banking system, you can’t just let the entire banking system itself go under, because capitalism requires a banking system in order to function (which hopefully is obvious). So it’s got to be saved, and so some people who made the original shady deals got rescued too by default. Kind of like if terrorists blew a hole in a ship, and then got pulled from the water during the rescue along with all the other drowning passengers in the aftermath. It would have been nice if we had at least prosecuted the shady dealers in the courts, but, oh well, you know…

The problem now is that the money is disappearing because businesses can’t do business, and workers can’t earn money because they’re unemployed. Even those who are not unemployed are not spending it because 1.) they’re stashing it away because of uncertainty, or 2.) everywhere they would have spent it is closed. Nonessential businesses are prohibited by governments from doing businesses at all, and many workers can’t leave their homes except for essential errands and enjoying the outdoors while keeping their distance from everyone. With no revenue coming in, business can’t pay back their loans–and loans are the bank’s assets, remember. With businesses not doing business and people not earning salaries, money is disappearing, and loans are going bad left and right.

Because banks have accounts at the Fed, as we saw above, they are first at the trough for money. We ordinary citizens do not have accounts at the Fed. Although an interesting proposal suggests that maybe we should:

Now more than ever, therefore, we need an alternative to entrusting our security to institutions so prone to disaster, which is why Fed accounts for all is a proposal that is not only attractive and practical, but also urgent. Bankers can tell you that the Fed is an enviably indulgent loan-officer, charging minimal interest rates – currently 2.5 percent—on loans which, when passed on to customers in the form of credit card debt, carry hefty (17 percent!) profitable interest rates. So why shouldn’t the rest of us get in on the act?

This is no fringe proposal, having been advanced by a number of responsible authorities and even in a paper published last year by the eminently orthodox Federal Reserve Bank of St. Louis. The authors, two Swiss economists, proposed “central bank electronic money for all” allowing “all households and firms to open accounts at central banks, which then would allow them to make electronic payments with central bank money instead of commercial bank deposits.”

Forget Checks, How About Giving Everyone a Federal Reserve Account? (The American Conservative)

This would also allow the government to replace the lost paychecks from everyone either losing their job or being forced to stay at home:

Finally, this necessary reform would pave the way for an equally useful innovation: universal basic income. The notion of assuring everyone of a guaranteed income with no strings attached has been gaining increasing attention and support around the world in recent years, and in the presidential campaign of Andrew Yang. It has indeed been implemented in a number of locales with striking success.

One notable example, the Alaska Permanent Fund, distributes up to $2,000 to every Alaskan citizen every year. When the fund was inaugurated (by a Republican governor) in 1976 the state ranked highest in poverty rates in the country. Twenty years later, Alaska had the lowest. When the British Labour Party proposed a move toward UBI in its election manifesto prior to last year’s election, the proposal elicited a predictably choleric response from some, with the Financial Times sputtering that “rewarding people for staying at home, is what lies behind social decay”. Given that we are all now encouraged or forced to stay at home, the complaint seems ironic in the extreme.

Thus we see that the Fed is 1.) A lender who lends money to solvent banks when no one else can or will (lender of last resort); and 2.) The thing that manipulates the price of money by buying and selling securities in the market to keep the supply of money in line with what the economy actually needs. This results (hopefully) in not too much inflation or deflation.

We’ll talk about those two things next time.

Where Money Comes From

(Originally from previous post—broken apart because of length)

By now, hopefully you should know that new money is created when people and businesses take out loans.

That is, money is injected into the economy by governments through banks as intermediaries.

This is something that is quite controversial in economic circles. For a long time–and still often today–many economists do not accept this explanation, despite overwhelming evidence for it.

For a long time, in fact, economists did not really think about money at all. This may seem odd, in that most of us think that economics is the study of money! But they portrayed money as simply a means of exchange–the intermediate good that allowed one thing to be exchanged for another thing in the real economy. It was not worthy of note in and of itself, they thought. Sure, how much of it there was floating around might be important, but beyond that you didn’t really need to think about it too much.

To explain how money was created, economists developed three alternative theories of banking. Let’s look at each one in turn.

1.) The loanable funds theory. This is the idea that banks are simply intermediaries between savers and borrowers.

So you save $100 dollars a week out of your paycheck, let’s say. Multiply that by thousands of workers and businesses throughout the entire economy and you’ve got increasing piles of cash piling up in bank’s vaults (or, rather, balance sheets) over time.

At the same time, you’ve also got people who need money. They want to do some sort of profitable enterprise, but they don’t have the money to do it right now. Or they want to buy something that they can’t pay for on the spot, but can pay back over a period of time, like a house or car for instance. Where do they go? To the bank, of course!

If you’re a bank, you pay savers a particular interest rate to get the money into your vaults, and then you loan out that money at a higher interest rate to those who want to borrow. That’s how you make your money.

So the banks are the intermediaries between savers and borrowers—those who want to save and those who want to borrow. Those are never perfectly in sync in any particular bank, so banks borrow from and loan to each other as a routine matter. But the banking system as a whole functions as an effective intermediary between savers and borrowers. The rest of the money is circulating, presumably.

In this scenario, only when the desire to borrow is greater than the desire to save, is new money injected into the system by governments through various means. Banks borrow new money from the government’s central bank to loan out.

2.) The fractional reserve theory. This idea is similar to above, but allows for money to be created not by individual banks, but through the banking system as whole through the process of “multiple deposit expansion.” That is, while the banks themselves are still intermediaries just as above, but when the central bank injects money into the banking system, that money is multiplied through the actions of banks making loans–the multiplier effect.

With a reserve of 10 percent, a bank would lend out 90 percent of a deposit, which would increase the deposits at other banks in the system, who would subsequently lend out 10 percent of those deposits, resulting in an expansion of money throughout the banking system due to the process of loaning money. Any individual bank still has to get deposits in order to lend, according to the theory. But that act of lending does create new money elsewhere in the system. George Goodman (a.k.a. “Adam Smith”) explains how it works. He imagines an oil company depositing $100.00 in a U.S. bank:

Now the bank has a deposit, let’s say…of $100. The Federal Reserve says that bank has to keep 10 percent of the deposit as a reserve. You walk in and borrow $90. You put that money in a checking account; now it’s a deposit there, and your cousin Charley can walk in and borrow $81, because that fractional reserve is set each time. Your cousin Charley deposits his loan in his checking account, and the bank lends $72.90 to the next borrower. That’s the way the multiplier works, and it keeps on going. If the Federal Reserve wants more money in the banks, it lowers the fractional reserve, so that you can borrow $95 instead of $90, and your cousin Charley can borrow $85.50 instead of $81. if the Federal Reserve wants there to be less money, it raises that fractional reserve.

PAPER MONEY, p. 245.

This system allegedly originated in the goldsmith’s discovery that he could make more loans than there was actual gold in his vaults, so long as too many people didn’t show up to claim their gold all at once.

Paper money, it is said, originated with the goldsmiths of Europe who held the private gold hoards deposited by wealthy citizens for safekeeping. The goldsmith issued a receipt for the gold deposit, and over time, it became clear that the receipt itself could be used in commerce since whoever owned that piece of paper could go to the goldsmith and claim the gold.

Modern banking originated in the goldsmith’s discovery that they could safely write more receipts and lend them to people, exceeding the total gold that was on hand, so long as they always kept a reasonable minimum in reserve to honor withdrawals. This was the origin of fractional reserve banking and the bank lending that created money.

This private money system endured for centuries and was inherited by the American Republic: privately owned banks created money by issuing paper bank notes, paper backed by a promise that at any time it could be redeemed in gold.

In nineteenth-century America, the money in use consisted mainly of these privately issued bank notes, backed by gold oor silver guarantees. The money’s value was really dependent, therefore, on the soundness and probity of each bank that issued notes. Banking scandals were recurrent, particularly on the frontier, where ambitious bankers, eager to make new loans for enterprises, sometimes printed paper money that had no gold behind it. Governments imposed regulations to keep banks honest, but the bankers still were free to create their own varieties of money. When banks failed, their money failed with them.

SECRETS OF THE TEMPLE; William Grieder pp. 227-228

3.) The credit creation theory. In this view, new money is created when loans are extended. That is, the bank does not have to make sure it has enough deposits to make the loan; it simply creates a deposit for the amount of the loan that the lender can draw against.

The third theory of banking is at odds with the other two theories by representing banks not [simply] as financial intermediaries — neither in aggregate nor individually. Instead, each bank is said to create credit and money out of nothing whenever it executes bank loan contracts or purchases assets.

So banks do not need to first gather deposits or reserves to lend. Since bank lending is said to create new credit and deposit money, an increase in total balances takes place without a commensurate decrease elsewhere. Therefore according to this theory, over time bank balance sheets and measures of the money supply tend to show a rising trend in time periods when outstanding bank credit grows — unlike with the financial intermediation theory, where only existing purchasing power can be re-allocated and the money supply does not rise.

A lost century in economics: Three theories of banking and the conclusive evidence; Richard A. Werner

William Grieder summarized this process in his mammoth book, Secrets of the Temple. First, he describes the transition from bank notes hypothetically backed by gold, to demand deposits delineated in bank ledgers:

The money illusion was transferred to a new object with the rise of demand deposits, better known as checking accounts. Instead of currency, the paper money created by banks, people hesitantly came to accept that money also existed simply as an account in the bank’s ledger, redeemable by personal drafts or checks. In the United States, the transition was inadvertently stimulated by government regulation. The National Bank Act, enacted during the Civil War, placed a heavy tax on new bank notes issued by state banks, and in order to avoid the tax, banks encouraged customers to use demand deposits–writing personal checks instead of drawing out their money in cash.

It took generations for the public to overcome its natural distrust of checks, but by 1900 most people were persuaded. Personal checks, written by the buyers themselves, were accepted as just as valuable as dollar bills. Currency remained in use, but demand deposits were by now the bulk of the money supply. The nationalization of currency issuance, completed with the creation of the Federal Reserve in 1913, simply continued this arrangement. A new dimension of trust had added to the illusion. pp. 227-228

He then goes on to describe just how money is created using these demand deposit accounts via the banking system:

New money was created not only by the Federal Reserve but also by private commercial banks. They did it by new lending, by expanding the outstanding loans on their books. Routinely, a bank borrowed money from some group, the depositors, and lent it to someone else, the borrowers, a straightforward function as intermediary. But, if that was all that occurred, then credit would be frozen in size, unable to expand with new economic growth. On the margins, therefore, bankers expanded their lending on their own and the overall pool of credit drew–and the banks credit turned it into money.

A bank officer authorizes a $100,000 loan to a small-business man–a judgement that the businessman’s future earnings will be sufficient to repay the loan, that his enterprise would create real value in the future, which would justify the risk and the creation of the additional money. Ordinarily the banker would not hand over $100,000 in dollar bills. He would simply write a check or, more likely, enter a credit in the businessman’s bank account for $100,000. Either way, money has been created by the simple entry in a ledger.

Implausible as that might seem, it was a reality that everyone would accept, even if they were unaware of its audacity. The businessman would go out and spend the money, writing checks on his new account, and everyone would honor their value. The creation of new money, thus, was really based on bank-created debt.

This concept is what baffled and outraged so many critics of the money system. Money ought to be “real,” they insisted. It should be based on something tangible from the past, accumulated wealth like gold, not on a banker’s hunch about the future.

How could such a system possibly work? Why didn’t it collapse and produce social disaster? The short, simple explanation was: trust. People trusted the banks…They believed, perhaps not even knowing the actual mechanics, that bankers would use this magic prudently. Banks would make sound loans that would be repaid, and they would always keep enough money on hand so that any individual depositor could always withdraw his when he needed it. pp. 59-60

Clearly, the trust in banks described by Grieder above has been undermined due to the financialization of the economy, not to mention the bailouts. David Graeber sums up the three school of banking in the New York Review of Books:

Economists, for obvious reasons, can’t be completely oblivious to the role of banks, but they have spent much of the twentieth century arguing about what actually happens when someone applies for a loan.

One school insists that banks transfer existing funds from their reserves, another that they produce new money, but only on the basis of a multiplier effect (so that your car loan can still be seen as ultimately rooted in some retired grandmother’s pension fund). Only a minority—mostly heterodox economists, post-Keynesians, and modern money theorists—uphold what is called the “credit creation theory of banking”: that bankers simply wave a magic wand and make the money appear, secure in the confidence that even if they hand a client a credit for $1 million, ultimately the recipient will put it back in the bank again, so that, across the system as a whole, credits and debts will cancel out. Rather than loans being based in deposits, in this view, deposits themselves were the result of loans.

The one thing it never seemed to occur to anyone to do was to get a job at a bank, and find out what actually happens when someone asks to borrow money. In 2014 a German economist named Richard Werner did exactly that, and discovered that, in fact, loan officers do not check their existing funds, reserves, or anything else. They simply create money out of thin air, or, as he preferred to put it, “fairy dust.”

…Before long, the Bank of England (the British equivalent of the Federal Reserve, whose economists are most free to speak their minds since they are not formally part of the government) rolled out an elaborate official report called “Money Creation in the Modern Economy,” replete with videos and animations, making the same point: existing economics textbooks, and particularly the reigning monetarist orthodoxy, are wrong. The heterodox economists are right. Private banks create money.

Central banks like the Bank of England create money as well, but monetarists are entirely wrong to insist that their proper function is to control the money supply. In fact, central banks do not in any sense control the money supply; their main function is to set the interest rate—to determine how much private banks can charge for the money they create. Almost all public debate on these subjects is therefore based on false premises. For example, if what the Bank of England was saying were true, government borrowing didn’t divert funds from the private sector; it created entirely new money that had not existed before.

Why is this important? It’s important because it shows that if private borrowing creates new money, then it is excessive levels of private borrowing that will expand the money supply. Consequently, debt defaults will contract the money supply. So there’s more to macroeconomic stability than merely “government money printing.”

All this is a prelude to two very important points:

1.) Private debt and public debt are two very different things. It is private, not public debt which is a cause for alarm.

And

2.) A crucial distinction must be made between the “real” economy of providing goods and services, and the banking/financial sector of the economy which makes money from debt and interest.

A lot of the mistakes in understanding the modern economy have come from just those two misunderstandings. But without understanding these facts, you cannot understand what is really going on in the economy, and you’ll be making the same mistakes as all those armchair commentators worrying about “excessive government debt,” or hyperinflation “any day now.”

A Finance Primer

“Just as the rich rule the poor, so the borrower is servant to the lender.”
PROVERBS 22:7 (NLT)

“Neither a borrower nor a lender be; / For loan oft loses both itself and friend.”
HAMLET, Act 1, Scene 3

I’m not going to try and explain all the bailouts, even if I pretended I knew exactly what is going on. There are others who are doing that.

But I would like to make some important points about finance in general, and hopefully make it a bit more clear. I hope people find this “explain like I’m five” somewhat useful.

From a very, very big picture perspective, haute finance is the creation and propagation of financial instruments. That’s it. The swapping and trading of these financial instruments constitutes the main activity of finance.

In the jargon of finance, these instruments are called securities. Both stocks and bonds are examples of securities, but there are many, many more.

More broadly, you can think of these as legally binding claims to some kind of resource. That could be real, tangible resource, or something less tangible like a loan or income stream.

The “legally binding” thing is important. A security has to hold up in court. You have to be able to take people to court and have the claim hold up in court for a security to mean anything. Hence the term “secure.” Securities are regulated by the Securities and Exchange Commission (SEC) in the United States.

The term “security” is interesting in itself. It is intended to inspire confidence like so many other financial terms like trust and credit. It is intended to express something fundamentally safe and sound, coming from the Latin securitas, meaning “free from care.” That is, no need to worry—your money is being kept safe.

Securities have two important characteristics: they are fungible, which means they can be turned into other things. The most obvious example is turning stocks or bonds into cash. You can also do the reverse: turn cash into stocks or bonds by buying them from a broker. Securities are protean by design.

How easily one thing can be converted into another thing is called its liquidity in financial jargon. Liquid assets can be converted into other things very easily. Illiquid assents can’t be. For example, I can’t convert stocks directly into bonds. And I can’t change from real estate to stocks unless I sell my real estate first (or find someone willing to exchange one for the other).

Cash (i.e. money, banknotes, or currency) is the ultimate liquid asset, in that it can be converted into pretty much everything else very easily—stocks, bonds, real estate, insurance policies, commodities, what have you.

The other important property of securities is that they are negotiable. Negotiability means that they can be easily passed along from person to person, with ownership passing to each person in the chain. I can pass along a security to you, or the guy over there, or the government, with ownership to the underlying claim passing to each entity in turn. That is, negotiable instruments do not have your name on them; they are not tied to you as a person. Ownership is always temporary and at-will.

Basically, if it can be traded, it’s negotiable.

That, then, is a security: a fungible, negotiable financial instrument that conveys ownership rights or creditor rights (an IOU). It can pass from owner to owner without limit and can be converted into cash. It’s an investment as either an owner or a creditor in which the investor hopes to make a profit. If it can easily be converted into cash, it is called a marketable security in the jargon.

If I buy a security, I give up the use of my money for a specified period of time. Why would I do that? I do it in the hope of getting more money back in the future. The longer I give up the use of my money, the more I will expect back in the future, generally speaking.

[Tangentially, I would argue that the concept of investing money now, in order to get back more money later (whether as profit or interest or whatever) is the core, animating idea behind capitalism.]

So when you hear the word “security,” think “financial instrument designed to transfer debt (or ownership claims).” And you will hear the term used all the time in financial jargon. What you should ask yourself when you hear the term is, “from whom to whom?” And why.

Securities are of just two major types: debt and equity; that is, ownership or loanership (or a mixture of the two). Equity is just a fancy term for ownership. Equity is an ownership claim on some real underlying resource.

The principle example of an equity security is stock. Businesses issue stocks to raise money from the public. When you buy a company’s stock, you buy a small slice of ownership in the company. It is an ownership claim. In the jargon, you have equity in the company.

Equity is typically ranked. In other words, some ownership claims take precedent over others. This is determined by a country’s laws.

Stocks are issued by companies, typically very big companies. The biggest companies of all are the corporations listed on the various stock exchanges we always hear about: The Dow Jones Industrial Index, the Standard and Poors (S & P) 500, the NASDAQ (National Association of Securities Dealers Automated Quotations), and so on. Different countries list their companies on their own stock exchange. Governments do not issue stock; you cannot purchase equity in the United States or Japan, for example. This is because governments have the ability to tax, which companies to not have.

The value of all the stocks on the index in the aggregate determines whether the index of that particular stock market is “up” or “down.” Theoretically, the value of the stock is determined by the underlying value of the company issuing it—how profitable it is, expectation of future growth, etc. (in practice, however, this is often rather different).

A debt security is simply an IOU.

An IOU expresses a debtor/creditor relationship. The holder of the IOU is the creditor. The issuer of the IOU is the debtor. In financial jargon, the person owning the security is called the bearer (or payee), and the entity issuing the security is called the maker, payer, or most commonly, the issuer.

So an IOU is simply a way of raising money. Typically, an IOU comes with the promise that more money will be repaid in the future over and above the original amount. That is why people buy them, after all—the expectation of getting more money back in the future. In the financial jargon, the original amount of money loaned is called the principal. The additional money you get back is the interest. The length of time of the loan is the maturity. That could be anywhere from overnight to thirty years, and everything in between. The total amount you receive from the bond purchase is called the yield.

In a pettifogging sense, there doesn’t have to be interest. I could loan you 50 bucks, and you pay me back 50 bucks. But since I’m giving up the use of that money for a specified period of time, the thought is that I should be compensated for the opportunity cost of not having that money available to me right now. Hence the interest. It’s basically a motivator for the loan. Its the cost of renting money.

The likelihood you will ever see that future cash is what determines the interest rate on the IOU, broadly speaking. If you are almost certain you will be paid back: low interest rate. If you are pretty uncertain you will ever get paid back: high interest rate. Loan to the neighborhood millionaire: low interest rate. Loan to your unemployed deadbeat brother-in-law: high interest rate. And so on.

The basic idea is that you need additional motivation in order to make a risky loan. The higher the risk, the higher the (potential) reward. If the debtor welshes on paying back the loan, it is called a default. If they don’t pay back anything, it is a full default, otherwise if they pay back a portion it is a partial default. In either case, the bond holder is said to have taken a haircut (!!).

For every debtor, there is an equivalent creditor. That’s something to keep in mind, and it will put you ahead of 99 percent of the galaxy brain armchair commenters on the internet. When you hear about the debt—any debt—don’t just think about the debt, think about who the creditor is, because there cannot be one without the other. It’s simply impossible. In order for their to be debt, there has to be a loan, and in order for a loan to exist, there has to be to somebody, somewhere, who loaned the money in the first place.

The principle example of a debt security is a bond. It is the most common debt instrument. A bond is an IOU. Unlike stocks, bonds are issued by both governments and businesses. Like stocks, they are a way of raising money. As noted above, typically in order to motivate people to lend to it, the entity issuing the bond pays it back with interest. The perception of reliability in paying back the bond determines what that interest rate is. They are typically issued for a fixed term, which is a specified amount of time for the money and the interest to be paid back.

One very common type of security is a treasury security. As the name implies this is an IOU issued by the treasury department of a government. The treasury borrows money, and pays it back in a certain amount of time. It is a government IOU. You become a creditor on the government by buying a treasury security.

You may be wondering what the difference is between a treasury security and a government bond, or whether they are, in fact, the same thing. Really, they’re different names for the same thing. Again, the financial jargon here makes it less clear. But typically, the IOUs issued by the government are classified according to how long the loan to the government is for.

The shortest-term loans are called “T-bills” (‘T’ for “treasury”) and are for only four weeks to a year. “T-notes” are for a longer period of time—between two and ten years. “T-bonds” (i.e. government bonds) are the longest term securities—thirty years—and pay interest annually. Investors use a combination of all three of these to manage money. Long-term bonds in the UK and some Commonwealth nations are commonly referred to as “gilts” because the original paper bonds issued had gold edges. Many early gilts had no maturity date; that is, they were perpetual.

Treasury securities are a way of taking money out of the system (i.e. “locking it up”) for a specified amount of time. How long it’s locked up for is the term of the security. Taxes, by contrast, are away of taking money out of the system permanently. That is, taxes are “unprinting money.”

The government buys and sells securities via its central bank to manipulate the amount of money floating around in the system, and hence to manipulate the overall interest rate (i.e. the price of money). That’s a big topic which we’ll leave alone for now.

Earlier I said that bonds are a way to raise money from the public. In the case of government this seems prima facie true, but it is not the actually the case; the government is the sole issuer of currency and does not need to raise money in order to spend. It is true, however, in the case of currency users like state and local governments, which do not issue their own currency. At the national level, then, governments issue bonds as 1.) safe havens to store money, and 2.) a way to transfer debt liabilities between entities, especially the public and the private sector, but also between nations (typically via central banks).

Treasury securities are usually considered the safest assets to own by investors. That’s because, unlike private entities, the government has a printing press (or, more realistically, keystrokes). Consequently, the interest rate on treasury securities is typically quite low. The only concern with such securities is whether the money that the security is converted into will be worth more or less in the future, which is determined by whether there is inflation or deflation. That’s a topic for another time.

At the other end of the spectrum, bonds issued by entities with a very low likelihood of paying back the money are called junk bonds.

Securities are issued by entities (governments or businesses) typically through financial intermediaries (called brokers). In rare cases, they are issued directly to the public. Once they are released into the wild, they are then traded around all over the place from person to person, entity to entity, in what are termed secondary markets (because they are negotiable, remember).

The interest rate (yield) paid by the bonds is determined determined by the face value of the bond, regardless of the price the bond is traded for in secondary markets. This means that if bonds can be bought on the cheap, there is a large potential for profit.

If we had a Venn diagram, then, all of the T-notes, bills and bonds are all treasury securities, which fall into the larger category of securities, which includes both stocks and bonds. Into that larger circle of the Venn diagram of securities we would also place other things like options, promissory notes and bills of exchange, which I’m ignoring for now. Outside of it would be things like insurance policies or retirement accounts (IRAs or 401Ks), which hold securities but are not securities themselves—don’t worry too much about this distinction).

An ordinary person like you or me does not issue stocks or bonds they way governments and companies/corporations do. They do take out loans, however. Both individuals and households often have outstanding debts from loans. These are usually paid back over time from their income.

Another dyadic relationship is the one between assets and liabilities. For every liability there is a corresponding asset. In total, these sum to zero. From the perspective of the lender, for example, the loan is the asset, the thing the loan is for is the liability. For the debtor’s perspective, the thing they took out the loan for (a house, say) is their asset, and the loan is their liability. Again, one cannot exist without the other. That mirrors the creditor/debtor relationship.

A bank’s assets are all the money it is owed. It’s liabilities are the money it must pay out to others. A $1,000 loan to someone is an asset (as long as they are able to repay it). A check drawn on the same bank for $1,000 is a liability. Recall that banks also borrow from, and lend to, each other. A bank’s (or any company’s) assets must exceed its liabilities in the long term, otherwise it is insolvent. Because loans are typically paid back over time, a bank could be solvent, but still illiquid (i.e. not enough cash on hand for current use). In such cases, central banks are designed to bridge the gap.

Thus, financial instruments (securities) are ultimately ways of transferring debt and ownership about. Debt and ownership are saleable commodities, just like aluminum or pork bellies. That’s the basic, underlying concept of finance. The sheer numbers and complexity of these exchanges is what makes it mind-boggling to the average person on the street, but hopefully the above explanation may help you to understand the basics a little better.

The big, big picture problem with the financial system is that the steps from the original borrower and the original lender (or from the original owner to the current owner) are so confusing and convoluted thanks to all the secondary markets and wheeling-dealing going on around the world that the system resembles nothing so much as the proverbial Gordian Knot—unknowable and unwindable. So someone taking out a loan from a bank to buy a house in Michigan, for example, may find that his mortgage repayments are funding a pension system in Lithuania, or some such.

TRANSFERRING RISK

Insurance is not a security; it is a way of transferring risk.

Options are also ways of transferring risk, but the are securities. An option is a right (but not an obligation) to buy or sell an asset (a security or commodity) at a specified price (called the strike price) at some point in the future. If the option is for buying, it is a call option. If it is for selling, it is a put option.

Basically, these are bets on whether the underlying asset will go up or down in price.

From a call perspective, if you expect the price to drop, you are short, if you expect it to go up you are long. From a put option perspective, the reverse is true. Often times options contracts are written on securities that the options trader does not actually own.

In general parlance, to short something means that you think it will go down in price or become less valuable (“shorting a currency”). To go long means that you expect it to go up in price or become more valuable.

If the value of an asset is dependent upon what the market does, it is considered to be a speculative asset. Speculation in financial jargon is just a fancy term for gambling.

Here’s a good explanation of futures contracts courtesy of a Reddit user:

[F]utures contracts are essentially pre-ordering something, hoping it sells out, and then scalping it on eBay, but on a far larger scale. You have a contract agreeing that you’ll buy something at a certain price (the settlement price) at a certain date (the settlement date). Let’s say that you make orange juice, and I want to buy orange juice. I offer to pay you $3 for a gallon of orange juice that I’ll pick up next Saturday. When Saturday comes by and I pick up the orange juice, if the price goes up to $5 a gallon, you still have to honor our contract and give it to me. I then can sell it for a $2 profit. If the price had gone down to $2 a gallon, I’d be left with a $1 loss.

IS MONEY A SECURITY?

Is money (cash) a security? Well, it depends on how you look at it. Most definitions would say no; money is what you use to buy securities. But I think it is possible to see money as another kind of security.

There is a good historical argument that paper money began in China as circulating IOUs from prominent merchants in place of cumbersome iron coins. These IOUs then started to be passed from person to person within the province. That is, they were fungible, since they could be converted into other things (real goods, securities, real estate, etc.), and they were negotiable, in that they could pass from person to person. Eventually, the government got in on the act and began issuing their own IOUs which could be used to pay taxes. Often these had an expiration date (like bonds, but unlike modern currencies). These became a form of portable, anonymous wealth based on paper.

Thus, money is the government’s liability. What backs it is the wealth of the nation issuing it, along with its laws and institutions. They are government IOUs in the sense that you can always settle your debts to the government with them. The government also declares them to be legal tender for the settlement of private domestic debts as well. Since everyone needs them to pay taxes, fees and fines, they become broadly accepted as a means of exchange and payment in the wider society.

The way that MMT economists often express this is that money is circulating tax credits. The money that is in circulation—in people’s bank accounts and wallets and so on—are tax credits that have not been redeemed yet.

On the other hand, securities are often distinguished from cash in that they are not perfectly liquid, and they can expressed in terms of currency. By contrast, the value of currency can only be expressed in terms of itself. Securities also typically provide some sort of return, although this is not absolutely necessary—you can have a zero (or even negative) interest bond, for example.

But cash by its nature does not provide any sort of return. If you put it in a bank account it does, but then the bank account is the security, not the money itself. That is, a security is typically considered to be an investment, whereas cash is clearly not an investment. Also, in the U.S. at least, money is legally exempted from being a security. See: https://economics.stackexchange.com/questions/14772/is-cashcurrency-a-security-and-a-debt-instrument

Nevertheless, in terms of exchanging value and being an IOU issued by the government, I think it’s safe to think of money as another type of security for now, albeit a very special and unusual one.

Money is exchanged for securities; securities are changed back into more money, that money is once again exchanged for securities (or securities are simply rolled over); so goes the pulsating heartbeat of finance all over the planet. That’s really what it is at heart—swapping securities all over the place. And everyone’s doing it—governments, businesses, individuals, and so on. It’s basically debt-swapping on a global scale.

So that’s haute finance in a nutshell: everyone is trying to at least preserve their existing wealth and, preferably, to increase it relative to everyone else. But again, the question is: who’s doing the swapping, what for, and what is ultimately lying beneath it all. That’s what you should be asking yourself whenever you hear about all this financial stuff in the press.

Covid-19: The Good and The Bad

There’s a lot of talk about whether the Covid-19 pandemic will lead to a better world or a worse one. I’ve seen plenty of opinions on both sides. No one knows for sure, but let’s take a look at some of the evidence.

Good: Health care tied to your job is widely seen as a disaster. This system was absolutely cruel, insane and counterproductive from the start; a historical accident due to temporary World War Two wage restrictions and previously high unionization rates.

Now, with unemployment soaring while a pandemic is ravaging the country, the sheer insanity of tying health care access to your job is being seen as the abomination it is by increasing numbers of people. I don’t see how anyone besides anti-government zealots and outright social Darwinists can defend it anymore.

Surveys have shown that a vast majority of Democrats and Independents, and even a slight majority of Republicans favor some sort single-payer health care system not tied to employment. It seem like that is finally winning the intellectual argument. Will this finally be the impetus that makes it inevitable? If not, what will it take???

Yet the Democratic Party has put their thumb on the scale for a candidate who has expressly said he would veto Medicare for All even if it somehow got through Congress. It pulled out all the stops to prevent the only candidate running on a health care reform platform from gaining the nomination for president. But how many times can it do this in the face of widespread public support for the policy? How long can the “good cop, bad cop” two party duopoly hold off this desperately needed reform in order to keep the money spigot from health care profiteers flowing? How long can the U.S. hold out being the only rich nation on earth that lets thousands of its citizens die or go bankrupt every year due to health care costs? Forever???

In addition, the federal government is claiming that it will pay health care providers directly for Covid-19 treatment. The question will increasingly be: why stop there? Why keep people from going broke over Covid-19 virus treatment, but allow them go broke if they get anything else like cancer, or Lyme disease, or some other unexpected malady? Hopefully more and more people will begin asking this question.


Good: this will change how a generation thinks about politics.
The generation that came of age during the Great Depression had no time for the bootstraps myth or lectures about “personal responsibility” from the wealthy and their toadies. They knew how unpredictable and fickle unregulated markets are. They saw with their own eyes people who worked all their lives going hungry, losing their homes and suffering. So will this generation.

It’s a cliche about the Baby Boom generation, but in my experience largely true: they grew up in a time of unprecedented affluence thanks to a system managed by government that they largely dismantled. They repeatedly voted for their own selfish interests above the national good. They pulled the prosperity ladder up after themselves and left future generations to drown. They outsourced their thinking to Fox News and wholly bought into the world view espoused by billionaire-funded right-wing think tanks. Having achieved prosperity largely thanks to hidden socialism, they left future generations to deal with capitalism with the gloves off.

Every toxic idea in the country right now is sustained by the older generation. It’s not even close. Look at the age breakdown of those who voted for Biden versus those who voted for Bernie. Look at where the majority of Trump’s support is. It’s heavily concentrated in the over-50 age cohort. And the older you go, the stronger the support. OK Boomer.

https://twitter.com/floridamanic/status/1248681990016073728

And the idea that the younger generation will somehow morph into conservative Republicans as they get older and amass wealth? Forget about it. First of all, they’re not going to amass wealth. That was clear even before Great Depression conditions, thanks to stagnant wages and high education costs. And the healthcare industry will siphon off a large chunk of that wealth, making sure that it doesn’t trickle down to younger generations through inheritance (unless you’re in the top ten percent). The financial industry will take much of the rest.

Plus, a lot of those people are going to be downwardly mobile as they get older, not upwardly moble. I know I am. I’ve made less and less money with each job I’ve held in the last decade, rather than more, and I suspect I’m not alone. Besides, why would someone who believes that health care is a basic human right suddenly change their views because they turn 40, have kids or buy a house? It doesn’t make any sense.

The Great Depression and WWII changed the way we talked about the economy: left to its own devices it would wreak havoc on people’s lives (massive unemployment), “heedless self-interest [is] bad economics” (FDR), and governments can effectively pursue the public good (defeat fascism, provide economic security). As the memories of that era faded along with the social solidarity and confidence in collective action that it had fostered, another vernacular took over: “there is no such thing as society” (Thatcher) – you get what you pay for, government is just another special interest group.

Another opportunity for a long-needed fundamental shift in the economic vernacular is now unfolding. COVID-19, along with climate change, could be the equivalent of the Great Depression and WWII in forcing a sea change in economic thinking and policy.

The Coming battle for the Covid-19 Narrative (VoxEU)

I’m not a big fan of historical determinist literature like “The Fourth Turning” that are often touted by futurists. But a valid point that books like that make is that generations are shaped by the historical circumstances they have experienced. We’ve had a generation that has been shaped by terrorism, endless foreign wars in the Middle East, blatant government corruption, decreasing living standards, a financial panic that devastated the global economy, staggering levels of inequality, unaffordable housing and rampant homelessness, and now a global economic depression caused by a pandemic worsened by forty years of anti-government neoliberalism. They are angry and desperate. They’ve seen the world disintegrate in front of their eyes. They’ve endured extreme suffering. Their hopes and dreams have been dashed forever. There’s no way they are going to vote for the status quo when they gain the reins of power (assuming voting is allowed, however, see below).

Bad: the end of democratic elections. I live in Wisconsin. Perhaps you’ve heard about what happened here this past Tuesday. I’ve seen reports on it all over the world:

Wisconsin is the first state in three weeks to hold a primary with in-person voting since stay-at-home orders swept the nation amid the coronavirus pandemic. The Badger state imposed its own lockdown on 25 March. All other states have postponed their primary season elections or moved entirely to postal votes while the country remains in the throes of its health emergency.

Wisconsin has recorded more than 2,500 coronavirus cases and 92 deaths.

On the eve of the election, Wisconsin’s Supreme Court blocked Governor Tony Evers’s last-minute executive order to suspend in-person voting.”No Wisconsinite should ever have to choose between exercising their constitutional right to vote and being safe, secure, and healthy,” the governor said.

But the Republican-controlled legislature immediately took Mr Evers – a Democrat – to the state Supreme Court, where conservatives hold a 4-2 majority. That same day, the US Supreme Court intervened, barring an extension of postal voting. Pollsters expected a lower turnout on Tuesday to benefit the conservative judicial candidate – who was endorsed by the president – for the state’s highest court.

https://www.bbc.com/news/world-us-canada-52208440

This past Tuesday I didn’t vote. I couldn’t vote. Normally, I would walk to the pavilion in the park next to my house to vote. When I go after work (because we don’t get time off to vote in the U.S.) I often to have to wait in line (queue), but it’s not too extreme. Even in busy election, it usually takes less than half an hour.

This past election, polling stations in the city of Milwaukee went from 180 to 5. Five, in a city of over 500,000 people. And people had to maintain six feet of distance while waiting in line. If everyone eligible to vote had done so, lines would have stretched to the Illinois border, and polls would still be open a week later.

Waiting in line for Wisconsin voting from gifs

And the usual workaround of mail-in or absentee voting didn’t work. Personally, I don’t even know how to do any of these things. I guess I’m supposed to request a ballot weeks ahead of time. I know I don’t get one automatically. But how was I to know that any of this was going to happen?

And from what I’ve been hearing, even the people who requested mail-in ballots didn’t get them in many cases. And attempts to extend the deadline for mail-in votes were quashed by the state supreme court and upheld by the national supreme court.

[T]he Badger State was turned into a civic punchline by its Republican legislature, which used the COVID crisis for a power grab. With the country in the grip of a deadly pandemic and the state already under a stay-at-home order, Wisconsin’s lawmakers refused to reschedule the primary, essentially smothering the turnout for the sole purpose of re-electing a single key judge to the state supreme court.

Not everyone thought this was prudent. Gov. Tony Evers, a Democrat, sought to convert the primary to a vote-by-mail format and extend balloting until May 19, which would keep people from breathing on each other at polling stations.

So the GOP legislature went to court. And after the U.S. Supreme Court struck down a lower court opinion that had changed the date and extended the absentee ballot deadline — with Trump’s appointments casting the deciding votes, mandating that the show go on — the State of Wisconsin put the lives of their voters at risk and held the primary as scheduled.

You probably saw what happened next: Workers at hundreds of polling stations were no-shows, and lines became intolerable — and more dangerous — in the most urban venues. Milwaukee, which has 330,000 voters and the state’s largest minority population, opened just 5 of its 180 polling sites, with wait times averaging 2 hours. Green Bay had only 2 polling places, downsized from 31.

Welcome to Wisconsin, where democracy goes to die (NJ.com)

It’s disenfranchisement of voters on scale beyond that of even the most corrupt third-world kleptocracy. And it happened in America, the supposed “leader of the free world.” And it was officially sanctioned by the Supreme court. Imagine if this had happened in Russia or Venezuela.

Trump Adviser Caught on Tape Discussing ‘Aggressive’ Voter Suppression in 2020 (Rolling Stone)

This may very well be the beginning of the end of elections in the United States. There’s already massive disenfrahisement due to the disproportionate influence rural areas have over urban ones, and outdated institutions like the electoral college. And even though Democrats won the most votes for the Wisconsin state Senate, thanks to gerrymandering, the Republicans hold a supermajority despite receiving less votes overall.

Bad: Increasing government control over our movements. I see Edward Snowden is warning about governments using the pandemic to build “an architecture of oppression.” I think that’s a valid concern. The excuse that we need to monitor every last citizen 24 hours a day in order to ensure public health may lead to widespread monitoring of people’s movements to an unprecedented degree. Chinese-style monitoring of the citizenry may become the norm the world over. That should give us serious pause.

Can you imagine a world where you won’t even be allowed to leave your house without a special permission slip from government, or where you are forbidden from having a second person in the car with you when you go for a drive on penalty of a fine? Well that’s the reality right now in Spain. If you had told me that this would happen before the pandemic, I would have thought you were crazy or paranoid. Now it’s real. In Italy drones are taking people’s temperature and issuing fines.

Italy was the first Western democracy to enter a national lockdown in the face of a disease that has officially killed more than 18,000 in the Mediterranean country and nearly 100,000 worldwide. It is now one of several European nations using police drones to an extent that would have seemed unimaginable — and almost certainly unacceptable — just a month ago.

And now there’s talk of people having to carry around some sort of paper around validating that you were vaccinated or had already had Covid-19 in order to travel or to attend certain public events in the future. That’s a scary world to live in. It’s also ripe for abuse. What else might those papers say about who can travel and who can go outside, I wonder? Will we be greeted by that sinister phrase from the days of the Iron Curtian, “papers please” everywhere we go now? Will this be just an accepted part of everyday life around the world?

I’ve even heard talk of people’s home thermostats and cell phones monitoring their body temperature at all times and relaying that information to the government. Again, this will be portrayed as necessary, and it’s hard to argue that it isn’t necessary right now. But at what cost do we superempower governments to do things like this? And what is the cost if we don’t?

Good: increasing labor unrest among the lowest-paid tier. There’s a lot of unrest among workers in the country who are deemed to be “essential” and yet not given the necessary protective gear to do their jobs safely. That is, some of the lowest-paid workers in the country are risking their lives and the lives of others (many live with older adults, for example) for a pittance.

This is resulting in widespread outrage, as it should. Thankfully, some workers are fighting back.

Across the United States, we are seeing workers walk off the job in wildcat strikes in response to the employers’ failure either to shut down the workplace or to make it safe. The strikes are too few to call them a strike wave, but we should be aware that on their own initiative workers are taking what practically is the most powerful action they can: withdrawing their labour. The strikes are taking place in both the private and public sector, in both unionised and non-union workplaces large and small.

Wildcat strikes across the US as pandemic spreads (Red Flag)

It’s disorganized now, but after taking everything dished out by the rich and corporations for years, it looks like workers may finally be fighting back. Just being told to “get a better job” rings hollow when there are no jobs to be had. Minimum wages are not enough to risk the lives of your parents and elders.

It’s become clear that things like mandatory paid sick leave are necessary for the good of everyone, not just the workers themselves, and that private corporations won’t provide this stuff unless compelled to do so by the state. Libertarian notions of “individual contract negotiation” by workers are increasingly seen as the bullshit they are.

Bad: a surfeit of labor leading to lower wages and more inequality. When unemployment is sky-high, it exerts downward pressure on wages.

After the Black Death, wages and living standards went up due to the shortage of necessary labor. In this crisis, by contrast, widespread layoffs are reducing the need for labor, while the number of people removed from the labor force through mortality is insignificant. Already in the United States, sixteen million people have been “officially” removed from the labor force (likely an undercount), against a total of two million deaths in the absolute worst-case scenario–deaths concentrated among those already out of the labor force. The official death toll right now is “only” about 100,000 worldwide.

That will strengthen, not weaken the hand of employers. That’s not good.

And employers are already becoming more brutal and thuggish. The leaked Amazon memo demonstrated the degree to which the fortunes of plutocratic billionaires are predicated on suppressing worker wages and unions, meaning that, yes, it is a zero-sum game.

There is a very real concern that wages will actually fall across the board in the years to come, exacerbating already unprecedented levels of inequality. A lot of economic forecasting I’ve read is calling for depressed economic activity for an entire decade!

We’re approaching French Revolution levels of inequality across the entire planet. How much more can we take before sometime, somewhere, we have a Storm the Bastille moment???

Bad: elimination of small and local business. It’s no secret that small and local businesses will bear the brunt of the shutdowns and be a disproportionate number of the bankruptcies that result. And large national businesses like Amazon will be the major beneficiaries. Every forecast I’ve seen has shown this. This will make the economy even more concentrated and monopolistic. It will empower capitalist oligarchs even more. The only silver lining might be that the old “anyone can start their own business” justification for employer abuse will ring increasingly hollow. But it’s certainly not a good thing overall.

Bad: increasingly authoritarian governments worldwide. This trend started well before the outbreak, of course. But there is a very real fear that the outbreak will accelerate the worldwide embrace of authoritarian and quasi-fascist governments that has going on since perhaps 2012.

This is due to the human herd instinct to rally around leaders in a time of crisis, no matter how bad or incompetent those leaders might be. From that standpoint, the crisis is actually a boon to bad and incompetent leaders. We can see this with approval ratings for Trump, for example (although they’ve recently dipped slightly).

Hungary seems to be the canary in the coal mine. Viktor Orban has passed what amounts to an Enabling Act using the outbreak as a sort of Reichstag fire. But in the United States as well, all sorts of institutions are being sidelined and disabled using the pandemic as a convenient distraction, including oversight of the vast sums money being distributed to corporations and the financial sector. The rush to embrace authoritarian and fascist leaders during the Great Depression is often cited as an example of this trend–Mussolini, Hitler, Franco, etc.

Another tactic empowering authoritarians is using the virus to scapegoat already marginalized groups in order to gain popularity:

Bad: scapegoating and xenophobia. Already there is a coordinated and concentrated effect to deflect blame from government incompetence to other parties. Who those parties are varies depending on the enemies list of the particular authoritarian leader.

Already the Republican Party in the U.S. is seeking to blame the Chinese and stoke racist fears to rile up their base. An example is a recent anti-Democrat attack ad:

At one point the ad flashes to an image of former Washington Gov. Gary Locke (D), the Seattle-born Chinese American who also served as former President Obama’s ambassador to China.

Democrats said the image, which features Locke standing near Chinese flags, is indistinguishable from the other images of Chinese officials and was included either because Locke looks Chinese or in an effort to stoke suspicion around him because of his ethnicity.

Democrats say Trump campaign ad singles out Locke over race (The Hill)

Combine that with the pivot towards referring to Covid-19 as “the Chinese virus,” or “the Wuhan virus” among Republicans. It’s clearly a deliberate messaging effort.

And I’ve been seeing a sudden and dramatic uptick of extremely virulent anti-Chinese rhetoric online in places like Reddit, which is replete with various bots, trolls, and government influencers. It’s almost like we are being primed for something…

Good: support for UBI. Support for a universal basic income has gone up since the crisis began. I’ve seen reports that Spain is planning to roll out a permanent UBI. I’d be very surprised if Spain ends up being the first country to actually do this for real, but we’ll see. I know that Switzerland, the Netherlands and Finland have all flirted with the idea in the past but never had the guts to pull the trigger. Will they embrace it now?

But if a country does manage to successfully implement UBI somewhere, it proves that it is possible. Right now, the examples pointed to are all partial implementations that are nowhere near the scale and ambition of the most serious UBI proposals that I’ve seen. But I’ll be skeptical until I see it.

Officials are still sorting out many of the details. There’s no concrete start date yet, though Calviño has said that the Spanish government aims to roll out the new program “as soon as possible.” It’s also unclear what the monthly sum will be, and how it will be determined. Calviño hinted that some families might receive more or less “depending on their circumstances,” which sounds like some sort of means-testing. It’s a massive undertaking, to say the least, and many wrinkles remained to be ironed. But make no mistake: this is a huge fucking deal.

Spain’s UBI Is A Wake-Up Call For Americans (Current Affairs)

Good: public outrage over bailouts. After 2008, there was a widespread narrative that the very people who were most responsible for the financial crisis had been bailed out by the government, while people the average person was left to fend for himself or herself, often losing their home in the process. This was oversimplified, of course, but true in many ways in a broad brush sense.

Now I’ve seen much the same narrative surrounding the current series of bailouts. Trillions for companies and CEOs, with nothing but crumbs for the millions of workers suddenly laid off from their jobs through no fault of their own. An easy to fill out one-page form to get billions in government loans, with crashed web sites and busy phone lines for those trying to claim money from an unemployment system that they’ve already paid into.

And this torches-and-pitchforks outrage is going to have political consequences down the line. How many times are the people going to allow trillions of dollars of what they’ve been gaslit into believing is their “taxpayer money” to be shuffled to Wall Street and CEOs, while rents can’t be paid and food pantries are overwhelmed with demand? Is this a situation of “Charlie Brown and Lucy with the football” forever? People who question this absurd system are going to become increasingly popular in the months ahead:

“Why does anybody ‘deserve,’ using your word, to get wiped out from a crisis created like this?” replied Wapner.

“Just be clear, like, who are we talking about?” said Palihapitiya, himself a billionaire. “A hedge fund that serves a bunch of billionaire family offices? Who cares? Let ’em get wiped out. Who cares? They don’t get to summer in the Hamptons? Who cares!”

After Wapner suggested it would be “immoral” to let any company get wiped out in the economic crisis, Palihapitiya responded that “on Main Street today, people are getting wiped out.”

“And right now, rich CEOs are not, boards that had horrible governance are not, hedge funds are not. People are,” said Palihapitiya. “Six million people just this week alone basically saying, ‘Holy mackerel, I don’t know how I’m going to make my own expenses for the next few weeks, days, months. So it’s happening today to individual Americans. And what we’ve done is disproportionately prop up and protect poor performing CEOs, companies, and boards. And you have to wash these people out.”

Palihapitiya’s interview quickly went viral on social media…

Venture Capitalist Stuns CNBC By Saying We Should Let Hedge Funds Fail (Truthout)

Of course last time much of that anger ended up being captured by a well-funded and organized Right via the so-called “Tea party” movement. Will the Left drop the ball and let that happen again? The coronation of Joe “nothing will fundamentally change” Biden by the DNC does not bode well for this.

Good: low oil prices and less air pollution. I’ve written about this before, so no need to say much more. BUT

Bad: less support for renewable energy. With oil prices low, the incentive for renewables will be decreased. Government support for renewable energy will also be curtailed.

…in the new Covid-19 era, renewables are expected to waffle in the coming years since many projects also need government backing and assistance to be viable. Most Western democracies are currently burning red ink to fund their economies to get throught the Covid-19 crisis, spiking what were already hefty debt levels.

Consequently, many countries will simply be unable to afford to back renewable projects, even as both solar and wind were becoming more cost efficient, achieving economies of scale, and were increasingly being included in many countries’ power development plans.

The loss of financial support for renewables will cause them to cede their growing market share back to oil and gas producers. This will be good news for global oil majors and their price war ravaged balance sheets, and bad news for the environment and activist investor causes.

OPEC Deal Won’t Revive Ravaged Oil Prices (Asia Times)

Local pandemic chalk art.

COVID-19 Thoughts 2

Thanks for all your kind words and comments. For right now, at least, I’m all right financially, so any extra money you have lying around, please donate however you can to those who are on the leading edge of this crisis. I’ll return to this at the end.

1. Work hours

I saw an amazing statistic recently: if the average U.S. worker stayed home for two solid months, they would still have worked the same number of hours as the average German worker.

As the kids say, I can’t even…

What are all those extra hours getting us?

Germany is a rich country, after all. Despite working less hours, they are still able to extend health care coverage to all of their citizens. There are no medical bankruptcies, either. And so, I ask again, what exactly are we getting for all those extra hours?

I think you can guess the answer. Someone is benefiting from those hours, but it’s not the workers themselves.

2. Neoliberal health care

The United states has struggled with procuring adequate medical supplies and having enough hospital beds. In this, we’re not unique—many counties around the world are also struggling.

But there is a critical difference. The difference is, the United States spends almost twenty percent of it’s GDP on health care. The most recent statistics I’ve seen are 17 percent.

Put another way, more than one out of every six dollars in our economy is spent on health care. Seventeen cents out of every dollar exchanged goes to health care. Here are the 2018 statistics from the OECD: https://www.statista.com/statistics/268826/health-expenditure-as-gdp-percentage-in-oecd-countries/

No other country is even close. The next highest is Switzerland with 12 percent. And the irony is, when it comes to public (i.e. “taxpayer”) money, the spending of the U.S. and Switzerland is pretty much the same!

How does health spending in the U.S. compare to other countries?

The above page also shows that we pay *double* the expenses per capita of the OECD average.

So we should theoretically be the *most* prepared country in the world, right. Right?

Where is all that extra money going?

Clearly it’s not going to more beds, more hospitals, more doctors, more equipment, cheaper drugs, or more patient care.

No, once again, I think you can see where this is going: the only beneficiaries are a tiny sliver of well-placed elites at the apex of the system who make out like bandits, not the people whom the system is hypothetically designed to serve. Because every necessary civic function in America is based on grift (see also: education, finance).

Related, see this tweet:

Recall my post about Neoliberalism: that only markets can allocate things efficiently is the core animating idea of Neoliberalism. And that competition drives efficiency. Well, we see how well that’s working now, don’t we? Case in point: rather than a coordinated, centralized virus response across the country, it appears that states are having to bid against each other for necessary supplies in the private market:

Only a portion of the medical supplies being flown in by the Federal Emergency Management Agency from overseas are being allotted to critical hotspots prioritized by the agency and the Department of Health and Human Services.

The rest will resupply the private market, where competition between states and the federal government has been a source of frustration for governors trying to shore up equipment to treat patients with coronavirus, according to multiple officials.

The Trump administration has touted the incoming flights, billing them and the equipment they’re bringing in as a reprieve to states desperate for supplies. But states are not the sole recipients of the equipment, according to a FEMA spokesperson. Supplies will also be sent to the private market, where states have been in fierce competition with each other to get hold of hard-to-come-by supplies.

Only some medical supplies from overseas going directly to coronavirus hotspots (CNN)

Supplying these private sector distributors seems quite problematic for at least a couple reasons, to put it mildly.

First is that there’s no clear mechanism to allocate these supplies on the basis of need based on a coherent national plan or framework. Secondly, it opens the door to massive profiteering. Even if companies aren’t technically gouging, that’s what bidding is. And you really can’t call this a legitimate private sector market if every state is having to bid with private companies to secure medical supplies during a historic national health emergency. The private sector rationale is also undermined if the US military has taken over a significant part of the fulfillment process.

You Need to Look at This (Talking Points Memo)

This is something states have been doing with businesses and jobs since the 1980’s under neoliberalism, after all. States would compete against one another as to who could offer businesses and corporations the most tax breaks, subsidies and giveaways, along with who could legally give the least support to workers in terms of benefits and salaries. The federal government, instead of putting a stop to this race to the bottom or at least ameliorating it, just let it rip in the name of market efficiency.

Now they’re competing for masks and ventilators to save lives. Because markets.

Let me see if I’ve got this right. The Federal government essentially forces states to bid against one another, because that’s how capitalism is supposed to work (?) and then, the winning state has what it has won in the bid confiscated by the Federal government so that the supplies can be distributed by private entities because that’s how capitalism is supposed to work (?). This would seem to make the communism of the USSR look like a model of efficiency.

Gee, I wonder why:

Republican fundraiser looks to cash in on coronavirus (Politico)

How much blood will Neoliberalism have on its hands? And will anyone remember?

3. Oil

I’m really stunned right now that the price of oil may go to $0.00. That is people may pay you to take the oil off their hands. You can pump the stuff out of the ground, but if no one wants to use it and there is no place to store it, it is ultimately useless. Maybe store it underground?

This oil glut is creating a scenario where some obscure grades of oil already have actually dropped below zero. For instance, a Wyoming crude grade was recently bid at negative 19 cents a barrel, Bloomberg News reported last week.

Shrinking storage capacity means that oil producers in some cases have to pay someone just to take the barrels off their hands.

“The price is trying to go to a level to force companies to keep the oil in the ground. If it has to go negative to incentivize that behavior, then it will,”…

Subzero oil prices are certainly bizarre, but there is some limited precedence in the energy market.

Last year, US natural gas prices in West Texas traded in negative territory for more than two weeks because there were not enough pipelines to carry the gas away, Reuters reported.

The world could soon run out of space to store oil. That may plunge prices below zero (CNN)

Imagine if I had predicted back in 2008-2009 that not only would we NOT be out of oil, but that it would be practically free. That is would be at historic lows. That you practically couldn’t give the stuff away.

You would have thought I was insane. Peak Oil people would have laughed in my face.

Imagine, then, if I had also predicted that in 2020 there would be another Great Depression; that it would be global in scope; that U.S. domestic GDP would be cut in half, that unemployment levels would go to 30 percent, and that barter would make a comeback.

Those very same people would have said, “Yes, of course that’s going to happen!” That’s exactly what a lot of the Peak Oil experts were predicting would happen, after all.

But of course, none of the above was caused by a lack of oil. Quite the opposite.

And, on top of that, two of the major oil producing countries have actually increased their production, against any reasonable semblance of logic. There is a lot of speculation as to why, but from what I can tell, no one is exactly sure. The most popular theory is that Russia and Saudi Arabia want to put U.S. shale and tight oil companies out of business. These companies have apparently been unprofitable since their inception.

No one, and I mean no one, predicted that.

Nobody predicted this level of demand destruction.

And this leads us to the perils of prediction.

This was a problem I had with a lot of the end-of-the-world scenarios all the way back when they started to become popular during the first decade of the twenty-first century. A lot of Peak Oil experts and pundits were so sure they knew exactly what was going to happen. There was no doubt in their minds whatsoever. They even published books and put up web sites telling us exactly how it was going to play out.

They were wrong, of course.

Oh, they weren’t wrong about the basics. Fossil fuels are a finite resource. They won’t last forever. The earth isn’t making more of them on any timeline that would be useful to us. And our entire industrial civilization is predicated on us using vast amounts of them, without which the modern industrial way of life would be impossible. But how it played out in the real world was not linear at all from the above facts. Wikipedia summarizes:

Since the oil price peaked about US$147.50 in summer 2008 many projects have been brought online, and domestic production increased from 2009 to 2015. In 2012 the oil production of the USA increased by 800,000 barrels, the highest ever recorded increase in one year since oil drilling began in 1859. The US had recently increased its oil drilling location as it has passed Saudi Arabia and Russia. Oil-bearing shales in North Dakota and Montana are producing increasing amounts of oil. As of April 2013, US crude production was at a more than 20-year high, since the shale gas and tight oil boom; production was near 7.2 million barrels per day. Peak production was 10,044 barrels per day in November 1970. A second, but lower peak of 9,627 barrels per day was achieved in April 2015.

Now all those shale oil and tight oil extractors are going bankrupt. How will this play out? Nobody knows. According to some estimates, we may be reaching Peak Oil demand. If that’s the case, then a collapse of industrial civilization would appear unlikely. If demand continues to stay at a lower level due to a combination of societal factors induced by the pandemic such as working from home and traveling less, along with governments getting serious about reducing carbon in the atmosphere, we may have averted a crisis, even if fossil fuels are inevitably set to decline.

Oil wells responsible for almost 1m barrels a day may have already been shut down because the price of oil is now lower than the cost of shipping it, according to US banking giant Goldman Sachs, with the number of wells growing “by the hour”. This is likely to “permanently alter the energy industry and its geopolitics” and “shift the debate around climate change”, said Jeffrey Currie, head of commodities at the bank.

Demand for oil has plummeted as the coronavirus locks down people in their homes and airplanes on runways. “The virus will bring forward peak demand for fossil fuels,” said Kingsmill Bond, at analysts Carbon Tracker. This latest cyclical oil shock is hitting an industry already heading towards a structural peak created by nations committing to net zero future emissions, he said.

“As for the impact of the virus on the timing [of peak demand], it depends of course on the severity,” he said. In 2018, Carbon Tracker estimated peak demand would come in 2023 but Bond said it was possible that the crisis has advanced this by three years. “That means that peak emissions was almost certainly 2019, and perhaps peak fossil fuels as well,” he said. “It will be touch and go if there can be another mini-peak in 2022, before the inexorable decline begins.”
While the oil companies themselves have long argued peak demand is too far off to put a number on, most observers thought it would happen this decade. Mark Lewis, head of climate change investment research at BNP Paribas, agreed the crises could bring it closer.

Will the coronavirus kill the oil industry and help save the climate? (Guardian)

4. Pollution

I’ve already pointed out the benefits of the economic shutdown in terms of less pollution. While reports of dolphins swimming in the canals Venice appear to be inaccurate, all over the world the lifiting of the pollution cloud has led to a glimpse of a world with less frivolous economic activity in the name of growth for growth’s sake.

I thought this was interesting:

Jalandhar Residents Wake up to View of Himalayan Range as COVID-19 Lockdown Leaves Air Cleaner (News18)

Leaving aside the deleterious effects of particles on lung health, what is a view of the Himalayas worth? What price can be put on it? Is it worth more than the economic activities that generate all the pollution that takes away the view produce?

That’s a clunky way of saying that pollution itself is a cost. Like Herman Daly said, there’s wealth and illth, and illth needs to subtracted from wealth to get a true accounting of the benefits of growth.

And the carbon reduction we should have been doing all along has been effected by the economic shutdown:

“I wouldn’t be shocked to see a 5% or more drop in carbon dioxide emissions this year, something not seen since the end of World War Two,” Jackson, a professor of Earth system science at Stanford University in California, told Reuters in an email.

“Neither the fall of the Soviet Union nor the various oil or savings and loan crises of the past 50 years are likely to have affected emissions the way this crisis is,” he said.

A U.N. report published in November found that emissions would have to start falling by an average of 7.6% per year to give the world a viable chance of limiting the rise in average global temperatures to 1.5C, the most ambitious Paris goal.

“I don’t see any way that this is good news except for proving that humans drive greenhouse gas emissions,” said Kristopher Karnauskas, associate professor at the Department of Atmospheric & Oceanic Sciences at the University of Colorado Boulder.

Coronavirus could trigger biggest fall in carbon emissions since World War Two (Reuters). So much for denying that humans have any effect on the atmosphere.

Of course,

…the improvements are for all the wrong reasons, tied to a world-shaking global health emergency that has infected more than 950,000 people – while shuttering factories, grounding airlines and forcing hundreds of millions of people to stay at home to slow the contagion. Experts warn that without structural change, the emissions declines caused by coronavirus could be short-lived and have little impact on the concentrations of carbon dioxide that have accumulated in the atmosphere over decades.

And:

The coronavirus pandemic is shutting down industrial activity and temporarily slashing air pollution levels around the world, satellite imagery from the European Space Agency shows.

One expert said the sudden shift represented the “largest scale experiment ever” in terms of the reduction of industrial emissions.

Readings from ESA’s Sentinel-5P satellite show that over the past six weeks, levels of nitrogen dioxide (NO2) over cities and industrial clusters in Asia and Europe were markedly lower than in the same period last year.

Paul Monks, professor of air pollution at the University of Leicester, predicted there will be important lessons to learn. “We are now, inadvertently, conducting the largest-scale experiment ever seen,” he said. “Are we looking at what we might see in the future if we can move to a low-carbon economy? Not to denigrate the loss of life, but this might give us some hope from something terrible. To see what can be achieved.”

Monks, the former chair of the UK government’s science advisory committee on air quality, said that a reduction in air pollution could bring some health benefits, though they were unlikely to offset loss of life from the disease.

“It seems entirely probable that a reduction in air pollution will be beneficial to people in susceptible categories, for example some asthma sufferers,” he said.

“It could reduce the spread of disease. A high level of air pollution exacerbates viral uptake because it inflames and lowers immunity.” Agriculture could also get a boost because pollution stunts plant growth, he added…

Road traffic accounts for about 80% of nitrogen oxide emissions in the UK, according to Monk. For the average diesel car, each kilometre not driven avoids 52 milligrammes of the pollutant entering the air.

“What I think will come out of this is a realisation – because we are forced to – that there is considerable potential to change working practices and lifestyles. This challenges us in the future to think, do we really need to drive our car there or burn fuel for that,” said Monk.

Recall item #1 above, Americans could stay home for two months and still work the same number of hours per year as the averge German–Germany being a very rich country. Of course, the Trump administration is using the crisis as an excuse to roll back environmental protections.

If there’s any future human civilization, they’ll be able to detect this pandemic in the ice cores. Speaking of which, an interesting article came out on the BBC showing that we can detect past historical events using ice cores:

Lead and silver are often mined together and in this period, mines in the Peak District and in Cumbria were among the most productive in Europe. Lead had many uses in this time, from water pipes to church roofs to stained glass windows. But production of the metal was clearly linked to political events according to the authors of this latest research.

The researchers were able to match the physical records from the ice with the written tax records of lead and silver production in England.

“In the 1169-70 period, there was a major disagreement between Henry II and Thomas Beckett and that clash manifested itself by the church refusing to work with Henry – and you actually see a fall in that production that year,” said Prof Christopher Loveluck, from Nottingham University.

Excommunicated by the Pope in the wake of the murder, Henry’s attempt at reconciliation is detailed in the ice core. “To get himself out of jail with the Pope, Henry promised to endow and build a lot of major monastic institutions very, very quickly,” said Prof Loveluck. “And of course, massive amounts of lead were used for roofing of these major monastic complexes. Lead production rapidly expanded as Henry tried to atone for his misdemeanours against the Church.”

The researchers say their data is also clear enough to show the clear connections between lead production rising and falling during times of war and between the reigns of different kings in this period between 1170 and 1220.

Thomas Becket: Alpine ice sheds light on medieval murder (BBC)

5. What Socialism is Not

I’ve seen a lot of memes arguing that the checks from the government are in some way socialism.

The government sending people money is not socialism.

It plays into this idea in America that any time the government spends money–or does anything, really–it’s somehow socialism.

That definition actually plays into the hands of the critics. It’s like the meme that we need to raise enough taxes to pay for stuff. It does more harm than good.

6. Collapse-prone

There was the the 2000 Dot-com crash, the 2008-2009 housing bubble, and now Coronavirus. By my estimation, in the twenty-first century we’ve had a major stock-market crash about every ten years so far.

Tell me again how we should put all our faith in the Market?

7. Historical echoes

When the last great economic crisis of this magnitude hit, we also had a Republican president who believed–along with everyone in his party–that the private sector was best, and that government “interference” in the economy was unwarranted, or should at least be kept to an absolute minimum. That didn’t work out well. From a Slate article review on a biography of President Herbert Hoover:

When the crash came, Hoover offered soothing rhetoric—”The fundamental business of the country … is on a sound and prosperous basis”—that in retrospect seems tone-deaf but at the time amounted to a reasonable attempt to rally the nation. Following his voluntarist philosophy, he got labor and business to agree to a program to prop up wages. He even promoted public works on a small scale.

Yet his obsession with restraint exposed his conservatism. “Prosperity,” he intoned, “cannot be restored by raids upon the public Treasury.” He spurned a huge relief effort for the growing ranks of the destitute, deeming reports of want exaggerated. “Nobody actually starved,” Hoover said. The hospitals and morgues told a sadder tale. Not until a year after the crash did he set up an employment commission, which, Leuchtenburg seethes, “churned out press releases with pap topics such as urging people to ‘spruce up’ their homes.” A mediocre speaker who shunned the bully pulpit, Hoover did little even to “talk up” the economy or public morale.

Hoover’s boldest stroke, the creation of the Reconstruction Finance Corp. in 1932, was too little too late. Authorized to lend money to banks, insurance companies, and other firms, the RFC struck some observers at first as a happy volte-face for Hoover, with government now given a key role in the intended recovery. (Others wondered why bankers, but not the jobless, were now on the dole.) But Leuchtenburg maintains that Hoover enacted the RFC only when the civic-mindedness that he expected from financial and industrial leaders didn’t materialize. “Only unwittingly—by revealing the inadequacy of his voluntaristic approach—was Hoover the progenitor of FDR’s enlargement of federal authority.”

The Riddle of Herbert Hoover (Slate)

I was reminded of that once again by this comment:

Here’s the thing, tho (if I may draw a historical parallel…), this is what got Hoover kicked out of office in 32. He did the same thing Trump and (apparently) Trudeau is doing, which was asking nicely for big business NOT to fire people and to provide help when they could instead of hoarding what liquid capital that they could. With the DC police descending on the “bonus army” months before the election (Great War vets who had come to ask for their bonus they were to get on retirement early), Hoover’s goose was cooked by FDR… Unfortunately, Biden is no FDR…

He certainly is not. As I sarcastically said last week, if only the opposition party had a politician with radical populist ideas who modeled his career and governing philosophy on FDR, that would be ideal at a time like this. As for what made Herbert Hoover, a Stanford-educated engineer and philanthropist who had managed the American relief effort that provided food to starving Western Europeans after World War One so ineffective while in office:

A pro-business ideology that believed that the problem should be solved by the private sector (both business and civil society), not government. He did not want to regulate markets or corporations, pure and simple. The pro-business wing of the GOP had won out by then. While Trump is surely not a great philanthropist, he is a firm believer in the supremacy of the private sector and in government not regulating businesses at all.

While Communism seems to have died, market fundamentalism seems to keep resurrecting itself, no matter how invalidated by historical events over and over again.

Incidentally, the exact same thing as above happened during the Great Depression: see the 1933 Wisconsin Milk Strike.

8. Rising to the challenge

What could be accomplished with a Rooseveltian president:

GE already has a division of the company that makes medical equipment. But workers at the Lynn facility and other GE Aviation branches say their equipment can be retooled to make ventilators, and thanks to the years of downsizing, they have plenty of space to do it.

Similar battles are taking place at GE facilities across the country, some of which have been hit by the sweeping layoffs the company announced last week (Lynn has been spared job cuts for the time being). The nationwide IUE-CWA identified at least seven different facilities that had both the capacity and capability to make ventilators, which gives the company the option to both put laid-off workers back on the job and manufacture a product in extremely high demand by the government and hospital systems across the country.

“We’re going to get out front of this… to say you’re not going to use this crisis to line your pockets again,” Adam Kaszynski, the president of the IUE-CWA Local 201 in Lynn told Rolling Stone. “Workers know what to do. We have empty buildings, we have communities you can put jobs and manufacturing back into, making a product that is heavily needed by society right now.”

Kaszynski’s fear is that GE will use the crisis to shift production to non-union plants, rather than meet workers demands for a safe workplace and productive work to serve a national good. “This is disaster capitalism,” Kaszynski said. “They’re going to have to explain to everyone their vision of the world if they shift jobs out of this community.”

And for the workers that remain, the ongoing epidemic is a constant fear.

General Electric Workers Want to Build Medical Equipment to Fight Coronavirus. Management Is Standing in the Way (Rolling Stone)

Yup, we’re laying off workers that could be producing desperately needed medical equipment. If that’s not an indictment of neoliberal capitalism, then what is?

Imagine if after Peal Harbor, Roosevelt had politely asked the car manufacturers and oil plants and rubber plants and other industrial barons whether they might want to voluntarily pitch in and help the war effort, you know, if it didn’t affect their bottom line too much. That’s not what happened. If it did, we’d probably be speaking Japanese or German today, as the saying goes.

Yet after 40+ years of Neoliberal conditioning that has convinced us that the most terrifying words in English are “I’m from the government, and I’m here to help,” (an actual quote from Ronald Reagan), Americans can’t even conceive of another way of doing things. It is the private sector that runs the government, not the other way around. And all the private sector cares about is profit. So much for the idea that we are advancing as a society. In many ways, we’ve regressed.

9. Bottom-up collapse

The polemical writer Umair Haique has been writing up a storm recently. Unfortunately, only a limited number of articles can be read on Medium, but this one about bottom-up collapse is interesting.

Haique argues that what’s causing collapse is the destruction of the lowest strata of societies and ecosystems by superpredation from above. Once the scaffolding goes, those that think they are above it all soon find themselves temporarily suspended in midair, like Wile E. Coyote.

Everywhere we look today, we see bottom-up collapse — savage, violent, runaway predation, which causes the bottom to be depleted, which causes the middle to implode, which takes the top away with it, too.

When we deplete the bottoms of systems, which are also their foundations, whether in natural systems, or human, socially-constructed ones, like economies — we unleash second and third order effects, which we don’t often anticipate. (Sure, people like you and me might point them out — but who’s listening to us?) Those effects are things like what happened in America and Britain — growing poverty didn’t lead to people making sensible choices, it led to people being blinded by rage. In just the same way, the collapse of insects and glaciers doesn’t just exist in a vacuum — the second and third order effects mean runaway extinctions, nonlinearities, accelerations, discontinuities…

The Age of Collapse (Medium)

On a related note, this comment from Reddit makes much the same point. We are trying to save the roof, while letting the foundations crumble.

This pandemic has laid bare the absolute truth that our society, economy, and civilization as a whole functions from the bottom up, not the other way around. We have been sold this top down, trickle economic bullshit for centuries. But what’s keeping us from completely falling off that cliff we are looking at right now? All of those “burger flipping” and “unskilled” folks who have no other choice but to keep working. But they don’t deserve to make enough to support themselves? THEY are disposable?

Business will recover as long as people have money to spend. It doesn’t matter how much money we pump into failing businesses if there is no market for their product. It is known that putting money into the hands of people who need to use it greatly increases the velocity of every dollar. But we still sit here talking about writing blank checks to corporations that haven’t learned a thing from the last 2 recessions. Corporations that will just turn around and reward their executives, while raising prices and laying off workers. They will continue buying back stock with cash reserves, and leveraging artificially high stock prices to acquire more debt in order to continue the cycle. Rinse and repeat.

It’s true, societies function from the bottom up, not the top down. One of the factors in the Secular Cycles model takes into account predatory elites. When elites are able to prey without constraint; when they are able to channel so many of society’s resources to themselves that average people can’t even reproduce themselves, that is a factor in societal collapse. You enter the phase of declining living standards and stagflation.

Yet despite this, elites still feel themselves invulnerable to pressure from below. They’ve got money coming in directly from the government and people with guns guarding them, after all. But how long can society withstand the forces that are causing it to crack? Ian Welsh points out:

The vast spread of guillotine memes over the past 4 years should alarm our elites, but they still mostly seem to feel invulnerable and are still working to preserve their position in the system rather than fix the system and the society. You can see this in how Democrats are standing up a clearly senile Biden and denying the peasantry health care, even in the face of pandemic.

Why Western Elites Are So Incompetent and What the Consequences Are (Ian Welsh)

10. Personal

Thanks for all your kind words. I can’t say everything is fine; I would be lying. But it’s the weekend, at least.

A recent study found that people’s happiness and life satisfaction hit rock bottom at the age of 47 (47.2 to be precise). Guess how old I am.

‘Out of nowhere I felt really sad’: readers on how they felt at 47 (Guardian)

I also noticed that around this time is a pretty common age for people to make that decision: List of suicides on the 21st century (Wikipedia)

Maybe that’s why I feel like checking out right now. Add to that the fact that you’re pretty much locked-in to whatever you life is at this point, whether for better or worse. When I look back and reflect on my life, I realize I haven’t enjoyed any of it. Not a single moment. Not at all.

It’s like sitting through a movie that’s absolutely unbearable. Take your pick–The Room, Leonard Part Six, Glitter–if you are suffering watching a movie that you absolutely can’t stand, wouldn’t you walk out? Wouldn’t you leave. Wouldn’t you be, in fact, better off leaving? Why not?

I mean, life’s a lot of pain and sorrow. The endless competition for jobs, the constant need for money, bill collectors hounding you, the pressure to perform at work, worrying about an accident or bankruptcy taking everything, and so on and so on. Add to that the loneliness and complete social isolation in my case.

Where’s the joy? Where’s the happiness? I know haven’t found it. It’s just work ’till you die. There is no turning point. There is no happy ending. Like the awful movie, it doesn’t get better as it goes on; only steadily worse.

What are signs that someone is secretly unhappy? (Reddit)

Anyway, those are where my thoughts are at these days.

I had thought of putting up a Patreon earlier this year, and I may do that once this is all over. But for now, a lot of people are hurting financially more than I am. One of the advantages of wanting to move is that I have been squirreling away money for years for just that purpose. It should be enough to survive, at least until this blows over in six months or whenever.

BONUS:

Seen while taking a walk through the park next to my house. Not sure the context here, but I hope it’s a medicine chant for us all.