Monday, June 11, 2012

Monetarist Malaria

This last weekend Spain was offered money from a slew of European acronyms none of which have themselves the money to give. The European Central Bank, the one entity that does, is so obsessed with the possible inflation of its singular charge that it appears willing to risk Europe itself to save the Euro. The ECB pays nothing to conjure this currency from the void yet refuses even to make a loan.  With Spain afflicted again by the cyclical fever of the ECB's monetarist malaria, one wonders at what point the keepers of the coin will concede its worthlessness in the absence of a European civilization? Will we need to see the kind of mass starvation that ended Mao's symmetrical insanity, his "Great Leap Forward"? Like the ECB he knew how the utopia to come must be, making it safe to ignore how his countrymen actually housed and fed themselves in the present. Have madmen of equal depravity seized the central levers of European power? 

Early in the last century when John Maynard Keynes called the recently expired gold standard a "barbaric relic" what he meant was that hard money was devastatingly incompatible with the urbanized, newly industrialized economies that had just abandoned it. A reversion would impose mindless barbarities on afflicted populations, precisely what we see today in Ireland, Greece and Spain, and precisely what England experienced when Churchill ignored Keynes warnings and put England back on hard money in 1925. Hard money had been abandoned because, a few decades before Keynes' comment, the industrially advanced economies of the Atlantic had for the first time in human history begun to make available the benefits of urban life to majorities of their populations: the essential corollary was the final and definitive foreclosure of rural subsistence as an economic activity available to citizens. Increasingly populous industrialized cities were inextricably yolked to industrially depopulated agricultural production and dependence of the growing urban majority on the money economy became an existential reality for the first time.

It is hard to overstate the importance of this change, although it is hardly ever spoken of at all. The ensuing contests between farmers and bankers and workers and capitalists have been entombed in a discourse of class conflict that, by framing the story around the conscious agency of protagonists in these conflicts, completely misses the identical cause of them all: the uniquely new existential dependence of majorities on money. Even the advanced money economies of ancient Rome or China had been constrained in their urban concentration by dependence on the biological energy of ox and horse and the biological predation of microbes. These constraints prevented urban density beyond what could be sustained by a city's immediate environs. Overwhelming majorities  remained tied to that land.

Scientific materialism has unshackled the money economy of cities from these constraints and sucked the rural population in. We live now in our man made urban environment with obvious infrastructures like vaccinations and utilities, but also deep ones like the monetary system, that have supported an exponential expansion of the human population across the world. Having mastered external constraint with scientific materialism, we've struggled this last century and a half with the internal constraint of ethics: what we owe to each other in this new habitat.

The monetary system is essentially the token of that question. It provides what we in modern industrialized societies owe each other. Money in my pocket is a contract recording the obligation of my civilization to provide me with benefit of the specified value. To acquire such benefit from my society I must first earn its obligation by providing value through my own effort: I work; society is in my debt; my pay is the record of societies obligation; my consumption is the redemption of societies debt. And in industrial society, those who create obligations to themselves through work do so in economic units organized to benefit maximally from the division of labor. This organization of society yields exponentially more than the sum of its parts by enabling ever advancing creativity to make what is understood about production more efficient and to continually push out the frontiers of what is understood. It is a social construct vastly greater than any individual and the sum of its parts. Money binds us all to this structure and derives its value from the productivity of this system: monetary value has no other source.

More than this, money introduces time risk into exchange by separating in space and time, at my convenience/risk, the act of earning the obligation from the act of redeeming it. Once I earn with money I can save rather than redeem and conserve societies obligations to me to my benefit. But only at the risk of some social failure affecting productivity of that vast social system on which we now all depend: should force majeure intervene my claims may after the event prove worthless or eroded depending on the condition of the larger social construct. It is the allocation of these existential risks that are at the heart of the disputes between capital and labor, between rich and poor and between creditor and debtor with the powerful always leaning their influence toward accruing money and displacing risk. 

This characteristic of money, its ability to distribute both exchange and risk across time at our convenience facilitated both the creation of all the other infrastructures of modernity, from the division of labor itself to information technology or medicine, and set the stage for the perpetual political struggle to allocate the ever growing rewards and risk. While money has always been at the heart of urban politics, the unique conditions of modernity subjugate all of modern society to the risks of the monetary system where in the pre-modern world only urban elites were subject to its fits and seizures, and even for them existence itself was not at stake in a monetary seizure. It is this ethical pressure, the real survival dependence of whole populations that has created the modern monetary infrastructure centered around currency issuing central banks. It is this near universal existential need for money that has banished hard money systems where real scarcity of the essential medium of exchange can occur. The existential risk is simply too great for too many people.

It is from the social organization, those economic institutions holding people in productive relationships supercharged in productivity by the division of labor, specialization and investment, that any value accruing to a system's money derives. It is the effectiveness of these relationships in supporting the total population that creates the value of modern money and it is this fact the monetarists at the ECB abhor. They want money itself to be value, and as such humanity to be its servant rather than the other way around. Gold is inert in the face of the social collapse of the "means of production" which looks just fine if your sitting on a mountain of gold. 

Monetarists, conservatives, delight in the quote "socialism is great until you run out of other peoples money", but in the post gold standard world in which we all live there is no other money than that which belongs to society, specifically that society engaged as social units with the means of production held in a powerful constellation of productivity by the legal regulations of the sovereign currency issuing state. In the erstwhile democratic western world, that makes our money, the Dollar, the Pound, the Euro the people's money: the money of the state belongs to the political unit nominally representing the population as a whole, from which citizens earn their money and to which they remit their taxes and from who's fixed capital society, citizens produce the real value justifying the need for money in the first place.

This is why modern societies abandoned gold standards: gold standards served the interests of whoever possessed gold, society was its slave. The finite supply of gold, and its universal propensity to concentrate itself in the vaults of creditors proved deleterious to urban populations in the periodic seizures and deflations the credit cycle with fractional reserve banking inevitably imposed. Because banks create money from thin air when they make a loan, in a growing economy they either create inflation or accelerate the flow of funds which can amount to the same thing. When doubt about growth creeps into the system and loans are called in, a vacuum is created in the monetary system equal  to the difference between the stock of gold and the additional bank created credit money. With the gold standard this vacuum was fatal to anyone who had more credit money than gold, which was most people as credit money is a great deal more portable and useful than the yellow metal which tended to advect into the gloam of vaults.

When the credit cycle turns and debts are called in, debtors divert money from consumption to creditors. This contraction in consumption spending is a reduction of income on the opposite side of the defunct consumption exchange where the reduction of income causes an equal contraction of consumption. As this process propagates through the system the "paradox of thrift" turns contraction into deflation where fixed debt service must be funded from shrinking income flows increasing the effective weight of debt. At a certain point debt service consumes all the income of the society and collapse ensues. This oversimplifies the process, but in a nutshell this is what has happened in accelerating cycles in Europe since the global financial crisis. 

The ECB manages the Euro as if it is a hard currency until the stresses of deflation become so large that some nation threatens default.   Mad with deflationary fever some nation stands to wipe out private banks in core countries holding significant  national and bank debt of that fevered nation's issue. When the convulsions becomes so severe as to threaten institutions of the core, the ECB fitfully remembers it has a fiat currency and stages its next "unique" rescue that will "finally fix the underlying problem". A gesture made, the fever breaks, debt deflation and the paradox of thrift enter remission until the underlying problems of hard money in a deflation force the issue again, perhaps somewhere else but always again. This is the fever cycle of the monetarist malaria the ECB is inflicting on Europe. It is something the ECB chooses to do. The only purpose served by this program is to prolong the extraction of ultimately un-payable debts until the next monetary injection at the next apex of crisis breaks the next fever. There is no future in this policy as is all to evident already in Greece. 

The Baltic countries, which are tiny, are held up as supposed models that this policy can result in some ultimate success, but even in the Baltic the new high growth rates are from the permanently lowered base of both collapsed banks and collapsed societies that are experiencing net emigration in addition to inadequate birth rates. The fevers the ECB is putting Europe through can only lead to the same result: smaller populations doing less with less fixed capital and exporting populations to places where policy is less bad. It is the hard money ideology at the heart of western banking that must change. Hard money was abandoned because it had exactly these affects on urbanized industrial societies. It destroys the social fabric to save the money system, it makes society a tool in service of money. It is sadistically insane. 

Europe as a whole can not export its population to somewhere else in Europe to build cost advantage in the perpetual race to the bottom Austerity requires. The absurdity of supposing ever lower wages in depressed economies will some how validate the balance sheets of the debt holders for these economies is so glaring it forces you to realize the motives are not constructive: the intent is to loot until there is nothing left to loot and austerity is the ideology that makes this looting the fault of its victims.

Thanks to Randal Wray for historical framing

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