mfioretti: money* + finance*

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  1.  For a small but committed group of economists, academics, and activists who adhere to a doctrine called Modern Monetary Theory (MMT), though, #mintthecoin was the tip of the economic iceberg. The possibility of a $1 trillion coin represented more than mere monetary sophistry: It drove home their foundational point that fiat currency is a social construct, and that there are therefore no fiscal limits on how much a sovereign currency-issuing nation can spend.

     To a layperson, MMT can seem dizzyingly complex, but at its core is the belief that most of us have the economy backward. Conventional wisdom holds that the government taxes individuals and companies in order to fund its own spending. But the government—which is ultimately the source of all dollars, taxed or untaxed—pays or spends first and taxes later. When it funds programs, it literally spends money into existence, injecting cash into the economy. Taxes exist in order to control inflation by reducing the money supply, and to ensure that dollars, as the only currency accepted for tax payments, remain in demand.

    It follows that currency-issuing governments could (and, depending on how you lean politically, should) spend as much as they need to in order to guarantee full employment and other social goods. MMT’s adherents like to point out that the federal government never “runs out” of money to fund the military, but routinely invokes budget constraints to justify defunding social programs. Money, in other words, isn’t a scarce commodity like silver or gold. “To people who’ve worked in financial markets, who work at the Fed, this isn’t controversial at all,” says Galbraith, who, while not an adherent, can certainly be described as “MMT-friendly.”

    According to this small but increasingly vocal cohort of economists, including Bernie Sanders’s former chief economic adviser, once we change the way we think about money, we can provide for everyone: We don’t have to “find” the money to “pay” for universal health care by “cutting” the budget elsewhere. In fact, our government already works that way: Spending must precede taxation, or there would be no dollars in the economy to tax. It’s the political will to spend on certain things, not the money to afford it, that’s lacking.
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  2. finance should, in an ideal world, be creating debt in order to finance growth of activity in the real economy. Instead, what has happened since the 1970s de-regulation of global finance, has been that finance has, over time, been increasingly financing…finance. That is, it has been financing itself. Indeed, in most of the western world, the growth of financial intermediation as a percentage of gross value added, has over the last two decades outpaced the growth of the real economy. That is until the bubble burst in 2007. Finding ways to redirect finance towards productive activity in the real economy is thus crucial.

    Third, in Italy, the effect of financialization has been made even worse by the presence of entrenched interests and “clientelismo” governing Italy’s economic system. Projects receiving loans are often not judged objectively, with criteria that are based on viable potential returns and the productive nature of an investment. Rather, they are often judged by clientilistic and nepotistic relations – as was made evident with the bank Monte Paschi di Siena (although this is really just the tip of the iceberg). Indeed, lets remember that the term “clientelismo” comes from the Latin clientes which means not modern day clients, but parasites feeding on presents (regalias) from the rich and powerful who, as described by the latin writer Giovenale, every day would visit their patronus for the morning salutatio. Italy’s sick banks are thus both a cause and a symptom of its never ending clientalist culture.

    Fourth, when growth is low—as it has been in Italy for the last two decades where both GDP and productivity have hardly grown at all—the above dynamic by which finance finances itself (or lends based on dodgy criteria in the real economy) becomes even worse. If finance has fewer good opportunities for investment in good companies and good projects in the real economy, then finding those opportunities in the speculative world of finance becomes even more appetizing. Indeed, research conducted in a large EC project on finance and innovation I coordinated some years ago showed that in many countries the problem is often not one of the supply of finance for firms, but the lack of good firms demanding finance. For example, most small medium enterprises that are innovative and productive, DO find the finance that they require. There are simply too few of those types of companies. Why? High growth innovative firms tend to prosper more in countries with dynamic innovation eco-systems, with strong links between science and industry, with high public investment in education and vocational training, high private spending on training programs for workers, strong R&D, and patient strategic long-term finance. When these are lacking growth will not follow – no matter how much emphasis a government puts on reducing red tape, or making labor markets less rigid (e.g. the Jobs Act). And when the real economy does not grow, finance becomes a betting casino.
    Tags: , , , , by M. Fioretti (2016-08-11)
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  3. Imagine a bank that pays negative interest. Depositors are actually charged to keep their money in an account. Crazy as it sounds, several of Europe’s central banks have cut key interest rates below zero and kept them there for more than a year. Now Japan is trying it, too. For some, it’s a bid to reinvigorate an economy with other options exhausted. Others want to push foreigners to move their money somewhere else. Either way, it’s an unorthodox choice that has distorted financial markets and triggered warnings that the strategy could backfire. If negative interest rates work, however, they may mark the start of a new era for the world’s central banks.
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  4. let’s recap what’s happening in China. The Chinese government has been lying about its growth numbers for years. Every year, the Government sets a target for the GDP. And miraculously, at the end of every year, the Government reports that it managed to beat its GDP target with an impressive growth rate of 7 to 10 percent. Economic growth is too important for the Chinese Government to rely on statisticians.

    Traders in New York know that, the IMF knows that, the Fed knows that, everybody knows that. And that’s exactly why stock markets already freaked out after the three-day devaluation of the yuan a couple of weeks ago. We don’t know exactly how well China is doing. Every little sign that says that the Chinese economy isn’t doing as well as expected leads to big market movements.

    So is there any way to know China’s actual economic growth? You can look at steel production numbers for example. As China needs to import most of its iron to produce steel, it can’t lie on these numbers. Steel production has been down 1.3 percent since January. Electricity production is another good indicator. It was up 7.7 percent in 2013, meaning that the country was producing more goods. It’s been up only 1 percent since January 2015.

    And yet, growth is key to China’s current situation. When China became a socialist market economy, the population and the Government sealed a tacit agreement. As long as the standard of living would improve, people wouldn’t interfere with the Government. And it has worked incredibly well so far thanks to low salaries, a huge domestic market and some very smart moves to attract foreign companies.

    But China’s real growth rate is way below 7 percent. Unemployment combined with an aging population is going to become a serious issue as there is no safety net. We are not there yet, but if the standard of living decreases in China, it could mark the beginning of an important transition period.
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  5. Blockchains are simply databases updated to work on the network. And those databases are ones with different properties than the databases made to run on tape. They're decentralised, you can't edit anything, you can't delete anything, the history is stored perfectly, if you want to make an update you just republish a new version of it, and to ensure the thing has appropriate accountability you use digital signatures.
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  6. At the moment, Russia is probably shipping 5 to 6 million barrels of oil abroad every day. That’s as much as one-third more than it exported last year. Its daily oil production is holding at around 10 million barrels, with no cuts in sight; unless domestic consumption were to spike — unlikely with the Russian economy on the verge of recession — those bumper exports will continue.

    But will they be enough? At current prices, Russia’s exports of crude oil could be worth close to $140 billion a year. Yet in 2013, when oil prices and the ruble were both much higher, the total came to $174 billion. Even at booming production levels, the value of Russia’s exports in dollars is still down by 20 percent.

    Indeed, this is why cutting production now, as the Organization of the Petroleum Exporting Countries (OPEC) wanted, would have been so dangerous for Russia. The idea of the cuts was to push oil prices higher in the medium term, but a temporary dip in the value of Russia’s exports would have left the ruble exposed.

    No, Russia must keep pumping to keep the ruble afloat on a sea of oil. But by doing so, it guarantees that prices will stay low for longer. It’s also depleting another kind of reserves — its oil reserves — in the worst possible way by selling more, not less, when prices are low. And it hasn’t even solved the problem.

    Unfortunately, the composition of Russia’s economy leaves few other options. In most countries, a weaker currency can be a self-correcting problem. It makes goods and services cheaper to foreign buyers, stimulating demand. When enough new demand reaches the market, the currency stabilizes. But Russia’s dependence on oil means it isn’t most countries – and oil isn’t most exports, either.

    Oil prices are set in a global market where Russia’s share is probably below 10 percent. When the ruble loses value, oil prices to foreign buyers don’t change. The buyers need the same amount of their own currencies to purchase each barrel, so they have no incentive to consume more. This wouldn’t be such a problem, except that more than two-thirds of all Russian exports are in the energy sector.

    Of course, there is one big thing Russia can do to save the ruble: end the crisis in Ukraine. With sanctions lifted, some of the tens of billions in foreign money that left Russia might return, boosting the ruble and the economy at the same time.
    Tags: , , , , , , by M. Fioretti (2014-12-05)
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  7. As the currency-commodity-technology’s true character comes to light, however, at least one finance expert feels it is set to drop to as low as $10 by the middle of this year.

    Bitcoin began 2013 at $13 a coin, only to ring in 2014 around $800 with worldwide fascination driving the 60-times gain. But according to Boston University Finance Professor Mark Williams the price has really been driven by an influential few. Just 47 people own 29% of all outstanding Bitcoins; 930 own 50%. Another 10,000 folks bring the total owned by the largest coin holders to roughly 75%, leaving a sliver to be split among about 1 million small-change Bitcoiners.
    Tags: , , , by M. Fioretti (2014-09-09)
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  8. The Fed, it seems, has finally run out of other ammo. It has to taper its quantitative easing program, which is eating up the Treasuries and mortgage-backed securities needed as collateral for the repo market that is the engine of the bankers’ shell game. The Fed’s Zero Interest Rate Policy (ZIRP) has also done serious collateral damage. The banks that get the money just put it in interest-bearing Federal Reserve accounts or buy foreign debt or speculate with it; and the profits go back to the 1%, who park it offshore to avoid taxes. Worse, any increase in the money supply from increased borrowing increases the overall debt burden and compounding finance costs, which are already a major constraint on economic growth.

    Meanwhile, the economy continues to teeter on the edge of deflation. The Fed needs to pump up the money supply and stimulate demand in some other way. All else having failed, it is reduced to trying what money reformers have been advocating for decades — get money into the pockets of the people who actually spend it on goods and services.
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  9. raising interest rates could implode the monster derivatives scheme. Michael Snyder observes that the biggest banks have written over $400 trillion in interest rate derivatives contracts, betting that interest rates will not shoot up. If they do, it will be the equivalent of an insurance company writing trillions of dollars in life insurance contracts and having all the insureds die at once. The banks would quickly become insolvent. And it will be our deposits that get confiscated to recapitalize them, under the new “bail in” scheme approved by Janet Yellen as one of the Fed’s more promising tools (called “resolution planning” in Fed-speak).

    As Max Keiser observes, “You can’t taper a Ponzi scheme.” You can only turn off the tap and let it collapse, or watch the parasite consume its food source and perish of its own accord.

    Collapse or Metamorphosis?

    The question being hotly debated in the blogosphere is, “What then?” Will economies collapse globally? Will life as we know it be a thing of the past?

    Not likely, argues John Michael Greer in a March 2014 article called “American Delusionalism, or Why History Matters.” If history is any indication, governments will simply, once again, change the rules.

    In fact, the rules of money and banking have changed every 20 or 30 years for the past three centuries, in an ongoing trial-and-error experiment in evolving a financial system, and an ongoing battle over whose interests it will serve. To present that timeline in full will take another article, but in a nutshell we have gone from precious metal coins, to government-issued paper scrip, to privately-issued banknotes, to checkbook money, to gold-backed Federal Reserve Notes, to unbacked Federal Reserve Notes, to the “near money” created by the shadow banking system. Money has evolved from being “stored” in the form of a physical commodity, to paper representations of value, to computer bits storing information about credits and debits.

    The rules have been changed before and can be changed again. Depressions, credit crises and financial collapse are not acts of God but are induced by mechanical flaws or corruption in the financial system. Credit may stop flowing, but the workers, materials and markets are still there. The system just needs a reboot.
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  10. Today, money comes into existence by debt creation when commercial banks borrow from central banks and when governments, producers or consumers borrow from commercial banks. Thus, the money supply of the economy can only be maintained if the private or public economic actors get into debt. Economic growth requires a proportionate increase in the money supply in order to avoid deflation that would paralyze business, but an increase in the quantity of money involves a simultaneous increase in debt. This way, economic actors run into danger of excessive indebtedness and bankruptcy. It is not necessary to say that overindebtedness causes serious problems to societies and individuals in the face of the ongoing debt crisis. It began as a debt crisis of private homeowners in the United States and then transformed into a debt crisis of commercial banks and insurance companies before being absorbed by national treasuries and so turned into a sovereign debt crisis. Reductions in national expenditure required to pay off public debt often lead to social unrest and are inequitable, because they impose burdens on citizens who did not profit equally from debt creation.
    Tags: , , by M. Fioretti (2014-05-09)
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