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New Martenson Report ready

Saturday, December 27, 2008, 6:54 PM

In this report for subscribers, I explore a remarkable article by Mr. James Grant that appeared in the December 20th edition of the Wall Street Journal. I found it remarkable because Grant correctly identifies the Fed as the source of current economic troubles and makes the case that, under a gold standard, we might have a different set of troubles, but we wouldn't be facing an extinction-level event for finance. With the deft use of historical examples, he makes a strong case that our current ills stem from very common mistakes that have plagued central banking ever since it was first invented. I expand on several of his arguments to steer towards the conclusion that inflation lies in wait.

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25 Comments

jrf29's picture
jrf29
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Re: New Martenson Report ready

What is even more remarkable is that on Dec. 23rd, the WSJ printed two letters in response to Mr. Grant's article.  Both letters cast current Federal Reserve practices in a dim light.   An exerpt from one one them is:

Quote:

Ludwig von Mises wrote that sound money, such as gold, is as
important to our freedom as bills of rights and constitutions. For
those who cannot envision a nation without a central bank, America's
great industrial expansion between the Civil War and World War I was
accomplished without a central bank, proving that one was not necessary
for what probably was the greatest economic expansion in the history of
the world. The current massive debasement of central bankers' fiat
money, enforced by coercive legal-tender laws, is nothing more than
theft by counterfeiters.

Patrick Barron
West Chester, Pa.

I think that for the Wall Street Journal, this is quite extraordinary.  Especially considering that they could have reprinted any two letters they pleased.

 

EndGamePlayer's picture
EndGamePlayer
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Re: New Martenson Report ready

Though I'm in 100% agreement that the Fed fiat system does not work, I do not believe the only solution is in gold backed dollars. I for one, would like to see more community dollars, and other forms of money to (once and for all) end the gluton of wealth that occurs on the backs of thos who finds ways to manipulate centralized  anything.

Any solution that does not empower the larger portion of the population will eventually fall short of workable.

Search for peace!

EndGamePlayer 

jrf29's picture
jrf29
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Re: New Martenson Report ready

The problem with so-called "community dollars" and why they always fail, I think, is that they must always be accepted at a discount to compensate for the fact of their limited circulation. 

In other words, a person who is being paid in "community dollars" will demand more community dollars in relation to US dollars to compensate him for the fact that he cannot spend them in as many places, and the place where he ultimately spends them will also demand a similar discount.  This, even though the cost to produce the goods and services which back the community dollars remains fixed in US dollars.  Therefore any person who pays in US dollars will always be at an advantage compared with a person attempting to pay in "community dollars", and a merchant who accepts community dollars will always be at a disadvantage compared with a merchant who receives full payment in US dollars.  Since community dollars are not exchangeable into other currencies, this process naturally operates to slowly push the community dollars out of circulation until the local currency system collapses.  The local currency finally collapses because at last perhaps the only thing you can buy with your "community dollar" is a massage, a hotdog, and a septic system pump.

That is why gold was always so popular:  it was liquid everywhere, not just in the small community or hamlet where the coin was issued.  That is also why it drove out other currencies of more limited circulation, in the same way that non-convertable community dollars are driven from circulation.

rufus's picture
rufus
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Re: New Martenson Report ready
jrf29 wrote:

That is why gold was always so popular: it was liquid everywhere, not just in the small community or hamlet where the coin was issued. That is also why it drove out other currencies of more limited circulation, in the same way that non-convertable community dollars are driven from circulation.

Spot on. Gold and silver will always be the best money. It will beat all currencies as long as it is a fair fight and not fixed by government legal tender laws. Why should anyone want paper money that is not backed by anything when they can get curreny backed by gold?

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James Wandler
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Re: New Martenson Report ready
EndGamePlayer wrote:

Though I'm in 100% agreement that the Fed fiat system does not work, I do not believe the only solution is in gold backed dollars. I for one, would like to see more community dollars, and other forms of money to (once and for all) end the gluton of wealth that occurs on the backs of thos who finds ways to manipulate centralized  anything.

Any solution that does not empower the larger portion of the population will eventually fall short of workable.

EndGamePlayer,

I completely agree with you.  Here's my recent post on this same topic:

http://www.peakprosperity.com/comment/10393#comment-10393

For a complementary currency that does work please see: http://saltspringdollars.com/  Although this currency is backed by an investment trust fund I don't believe this would be necessary or is even desirable. 

As for the comment about gold and silver driving out bad money (paper money) please look up Gresham's Law which works the other way around: bad money drives out good money.

Please consider the following thought experiment: 

Imagine that you are in a small town that is removed from the world at large (no outside trade) but each of the citizens specialize in their own sustainable occupation.  Some are farmers generating a variety of foodstuffs, some process the food further (make cheese, grind wheat into flour, etc.), some are contractors who build strawbale homes, some operate local businesses such as a biodiesel plant, some provide services to the other citizens - perhaps a tavern...  *

Now, let's say that there isn't any gold.  Can the town function?

Sure.  Perhaps someone (I'm an accountant) is willing to keep score for the rest of the townspeople by documenting their trades with each other.  Maybe to make it easier to conduct trade pieces of paper are printed up, numbered and signed by two wise town elders and given out equally to each person to begin trade.  If the townspeople find that there aren't enough pieces of paper to conduct trade efficiently (not enough liquidity) then the process continues by printing up more paper, numbering them, and signing them and again giving them equally to each townsperson - not too much paper money - just enough.  But if someone runs out of paper then they have to cut down their consumption and switch to more productive activities to restore their balance of payments with the other townspeople.  They are not bailed out by being given more of the paper money.

The system works.  Paper money is a social technology invention.  It facilitates trade.  It can be expanded to accomodate ever increasing amounts of trade.  There isn't anything inherently wrong with it.  What is wrong is when it is abused, when balance of payments don't occur, when its supply grows faster than the trade. 

So do you want to accumulate the paper money in this town?  What good would it do?  The wealth is in the land labor and capital - the paper money is still paper - its purpose is to keep circulating to keep score without the records of the accountant. 

Now imagine that one of the townspeople discovers a gold mine nearby and convinces the town that their paper money doesn't have real value but instead they should use gold.  Would this work?

It depends.  Are we going to have one person own the gold mine and exchange their gold for the efforts of the rest of the town?  If so, how are you going to get the gold to be currency for the rest of the town - only one person has it?

So perhaps the owner of the gold mine decides that they will start the process the same way that the paper money was started - they will give everyone an equal amount of it to use to conduct trade.

Do you see any problems?

What if the owner of the gold mine slips away and brings up more gold?  Wouldn't this start to unbalance trade?  Especially as I've indicated above that the purpose of the currency (paper money or gold) is to conduct trade - not to store wealth?  What purpose does the gold serve - what purpose but to facilitate trade which the limited supply of paper money signed by the two wise elders served adequately and efficiently?

OK, ok.  But surely this wouldn't happen in the real world.

Well, Adam Smith covers the problems of "hard money" in chapter XI of The Wealth of Nations called "Rent of Land" and within that chapter discusses in detail on the variations in the value of silver over a period of centuries (during this time only a bushel of wheat generally held its value). 

Similarly in Empire of Debt the authors outline the problems for the Spanish of the excess of gold from the New World which hollowed out their empire as they overconsumed. 

So gold isn't a panacea.  I'm not against gold or silver - they are certainly a useful temporary store of wealth and I'd much prefer them to US dollars.  My issue with gold and silver is that they themselves cannot continue to create wealth - unlike other forms of wealth based on human labor and ingenuity, manufactured capital and natural capital.  I just want to keep us focused on the fact that gold has a purpose - but isn't an end in itself.  If we want the world to be a better place at the grassroots level we have to build it.  Sitting with piles of gold around ourselves... (using the example of the town above)....won't put food on the table, process our food, keep us warm, or provide us with energy. 

I'm also trying to point out that you don't need gold to operate a small town.  But you do need the other factors of wealth - and no one is going to build those for us.  That's why I focus on sustainable farming - because with just land, sun, water, grass, and livestock you can directly create sustainable wealth that can feed, say 100, that come looking for food. 

I hope this helps.

James 

[* - this town isn't very exciting...now I understand where the empire building comes in...until we wish again for the peace of such a small town...alas]

TRK29's picture
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Re: New Martenson Report ready

I have just read the Grant article in full and, living as I do in the UK, I see a very similar if not identical situation developing in Western Europe. Our prime minister, Gordon Brown, keeps telling us that doing something must be better than, as he puts it, doing nothing. His definition of "doing nothing" includes anything which he has not suggested. He uses the word "global" in almost every sentence when he speaks on the economy, in an effort to minimise the wrath of the people of the UK, when his actions apparently have no effect on the crisis. It was only earlier this year that he was proudly boasting that the days of boom and bust were gone for ever, and that a fantastic future, full of opportunity, lies ahead.

Is it not the case that we are observing the beginning of a global banana republic, where we all, like lemmings, collapse together, because we have unknowingly reached the curve in the hockey stick for the growth of so many parameters at the same time, as described in the Crash Course.

Maybe the main strength of the Crash Course will be that it has produced a blueprint for a recovery towards a more balanced way of living when we have to pick up the pieces. I doubt very much if this will be a truly global effort. 

I am Scottish, and the position we are all in now reminds me of a popular story which describes the Scottish version of God. When the people had been exceptionally bad during their lives and were having their fate in the after-life decided, they pleaded with God with the words " Oh Lord, we didna ken, we didna ken".(translation: we did not know) Then God , in his infinite mercy said, as he dispatched them to Hell, " Weel ye ken noo!" (well you know now!)

I hope that  events prove that I am being unduly pessimistic about the future, but, whatever happens, may I wish  that in the New Year there is an epidemic of common sense, which spreads across the globe. 

 

 

 

Farmer Brown's picture
Farmer Brown
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Re: New Martenson Report ready
I agree that gold and silver cannot "create wealth".  I do not think anyone is advocating that they can.  
 
The Paper Money in your town cannot "create wealth" either.  Both the PM system and the gold or silver systems are used to represent or store wealth or capital.  The difference is that gold and silver actually do represent wealth. Both require huge amounts of labor and capital to extract from the ground, refine and mint whereas the PM does not represent anything except the will of the townspeople if they so choose to base their system of trade on it.  
 
I think it would be more likely that such a town, in the absence of gold, would use something other than Fiat money to trade with, i.e., something actually derived from human labor and capital, such as seeds which actually have been used as "trade units" in the past.  
 
I'm not saying your theoretical town couldn't function at all.  I suppose if everyone was in agreement, and there really were "elders" whom could be trusted, then it could function.  But why bother risking your economy on the sound judgement of "elders" when you can base it on something that can only be "manipulated" by exerting labor in exchange for it, i.e., seeds or some other commodity?
 
If someone manages to accumulate a large amount of seeds, perhaps they would be disposed to issuing "credit" in the form of demand-deposits for seeds accumulated in their silo.  Those demand-deposits perhaps might evolve into a form of paper currency, but it would actually be backed by something real.   
 
Patrick 
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amitkeerti
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Re: New Martenson Report ready

I was going through the article on wsj. It finds lot of similarity in what chris says.

I was wondering if the whole thing is running in a cycle. Chris uploads the video. Mr. James Grant goes through the videos and does his research and writes an article.
Chris inturn makes a report on the article by James...

Just a thought ... he he he...

bliar's picture
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Re: New Martenson Report ready

I too am in the UK (see username Laughingand have been trying to make sense of the relative ongoing positions of the US $, UK £ and the Euro. As far as I can tell, the prospects for all three are very much the same, ie the governments involved will do anything they can to avoid deflation, with the result that the onset of inflation will be brought forward and inflation will be high. [On a related note, and just to make matters worse, most if not all of the govts. involved have institutionalised Ponzi schemes / time bombs of massive scale, ie vast unfunded pensions black holes.]

 

So does anyone care to have a go at ranking the relative strengths of the three currencies in say one and two years time...........? 

NLP's picture
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Re: New Martenson Report ready

James,

I am currently in discussions with a small local bank to circulate a common currency.  I have visited saltspringdollars--looked at Mendo Moola--- Berkshirebucks--- and interested in MilwaukeeBucks (if that happens).

My question is this:  In a common currency how does one control or limit counterfeiting?  This was the FIRST question posed by the bankers.  Honestly the threat of counterfeiting hadn't even occurred to me as circulation would be local.  To my thinking whatever possible gain to be had from counterfeit currency would have curtailed limits on usage as it couldn't be redeemed quickly at a bigbox store or the gas station.  The common currency idea is very provocative--- and right now the bank is interested in the idea but the "ball is back in my court" as I have to remedy the counterfeit worry.  Any ideas or suggestions?

Per your complementary thread I will pick up a copy of Deep Economy today.  Thanks for your take on this issue.

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gyrogearloose
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Re: New Martenson Report ready
rufus wrote:

Why should anyone want paper money that is not backed by anything when they can get curreny backed by gold?

Care to compile a list currencies that were backed by gold ?

Can you find any that exist today............

Paper money backed by gold is just...... paper money.

 

Cheers Hamish

rufus's picture
rufus
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Re: New Martenson Report ready
James705ca wrote:

As for the comment about gold and silver driving out bad money (paper money) please look up Gresham's Law which works the other way around: bad money drives out good money.

Gersham's Law applies when the bad money is backed by fiat (leal tender laws). Because people are forced by law to accept inferior money. When there are no legal tender laws, the good money should drive out the bad money

Blind Joe's picture
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Re: New Martenson Report ready

npeykani,

Right on. If you have a local bank interested in local currency, you're already half way there. That's typically the major hurdle for community currencies: building enough trade volume so that major local institutions will recognize them. Having an established bank facilitating local transactions will make it much easier and more convenient for people to build trade volume in the local currency, which will make city hall more inclined to accept the currency as payment for taxes and fees, and use it to cover their payroll; the chamber of commerce will be more likely to accept the currency from businesses, all of which incentivizes more volume and velocity...... and that's good - greater insulation from the Fed.

As far as counterfeiting, the best way to protect against that is to use the bank's own VISA debit card system. You don't necessarily need to use paper at all. (See LETs mutual credit systems) The bank would function as a clearing house for credits and debits via their own cards, online accounts, phones, similar to how Paypal operates.

If you're set on paper, which is definitely an added convenience - and can, of course, also be integrated into the virtual system - you can prevent counterfeiting by sourcing specialty paper, adding serial numbers, using a professional printer that can incorporate foil, embossing, etc. Same strategies that everyone else uses. But on the local level, it should be pretty easy to design bills (or coin, whatever) that will be prohibitively expensive to counterfeit, given their limited local usefulness.

Good luck!

jrf29's picture
jrf29
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Apparent Benefits of a Self-Depreciating Local Currency

In studying the Wikipedia article on local currencies, I found a very interesting piece.  An excerpt follows:

Quote:

The Worgl experiment that was conducted from July 1932 to November 1933 is a
classic example of the potential efficacy of local currencies. Wörgl is
a small town in Austria with 4,000 inhabitants that introduced a local
scrip during the Great Depression. By 1932 unemployment in Wörgl had
risen to 30%. The local government had amassed debts of 1.3 million Austrian Schillings (AS) against cash reserves of 40,000 AS. Local construction and civic
maintenance had come to a standstill. On the initiative of the town's
mayor, Michael Unterguggenberger, the local government printed 32,000
in labor certificates which carried a negative 1% monthly interest rate
and could be converted into schillings at 98% of face value. An
equivalent amount in schillings was deposited in the local bank as
cover for the certificates in case of mass redemption and earned
interest for the government. The certificates circulated so rapidly,
that only 12,000 were ever actually put into circulation. According to
reports by the mayor and economists of the day who studied the
experiment, the scrip was readily accepted by local merchants and the
local population. It utilized the scrip to carry out 100,000 AS in
public works projects involving construction and repair of roads,
bridges, tanks, drainage systems, factories and buildings. The scrip
was also accepted as legal tender for payment of local taxes. In the
one year that the currency was in circulation, it circulated 13 times
faster than the official shilling and served as a catalyst to the local economy. The heavy arrears in
local tax collection declined dramatically. Local government revenue
rose from 2,400 AS in 1931 to 20,400 in 1932. Unemployment was
eliminated, while it remained very high throughout the rest of the
country. No increase in prices was observed. Based on the dramatic
success of the Wörgl experiment, several other communities introduced
similar scrips.

In spite of the tangible benefits of the program, it met with stiff
opposition from the regional socialist party and from the Austrian
central bank, which opposed the local currency as an infringement on
its powers over the currency. As a result the program was suspended,
unemployment rose and the local economy soon degenerated to the level
of other communities in the country.

The Worgl experience would seem to provide a tangible example of benefits caused by the introduction of a self-depreciating (inflationary) currency, which, in conformity with Gresham's Law, drove good gold-backed currency from circulation and itself circulated far more rapidly than the national gold-backed currency (which was pegged directly to the value of the gold Austro-Hungarian Kronen coin, still available after the dissolution of the Austro-Hungarian Empire in 1919). In so doing, it apparently accomplished great good.

I have absolutely no idea what to think of this, but it is clearly a very important topic of discussion.  What went on there?

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Re: Apparent Benefits of a Self-Depreciating Local Currency

I recommend everybody the book "The Future of Money" by Bernard Lietaer.

He suggests possible solutions based on 'hard' currencies backed by a basket of commodities (not just gold and silver)
and 'soft' currencies based on trust in local communities. Although he does not provide the final answer to our current problems, it is a very interesting read that at least points out a direction where to look for solutions.

 

 

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RubberRims
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Re: New Martenson Report ready
TRK29 wrote:

where we all, like lemmings, collapse together, because we have unknowingly reached the curve in the hockey stick

How life is realy a large construction of interpretation. Like "In God we trust" this is also the official motto of the United States.

While many people believe that lemmings commit mass suicide when they migrate, this is not the case. Driven by strong biological urges, "they will migrate in large groups when population density becomes too great".The myth of lemming mass suicide is long-standing but untrue.

 I could not resist adding this as, it show nature from the perspective of a lemming! Small creature not unintelligent just laking the foresight to rationalise and see beyond it's horizon. Not to dissimilar to us in some respects. 

Sorry this is my sarcastic perspective on a problem that lacks a plausible solution at this moment in time. And yes I know Sarcasm is the lowest form of wit. Any how please take a look at the youtube video. 

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Blind Joe
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Re: Bernard Lietaer

Fombie, funny you should mention Lietaer.  I was just about to start a thread about him.  I think he's one of the best thinkers out there, and he's just recently updated his website with loads of new material.... http://www.lietaer.com/

The interview with Yes! mag back in 1997, under "Published Articles" is a really good introduction to his ideas... fascinating stuff.

And the most recent October 08 "Options for Managing Systemic Banking Crises" is a must read on complementary currency -- and about as close to a final answer as you're going to get.

He's been advocating ROCS on the local level for years.

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Re: Apparent Benefits of a Self-Depreciating Local Currency

I'm not sure that Gresham's Law really applies in the Worgl case -- or if it ever applies enough to be considered a law at all. That acutally gets right to some questions I was going to raise about demurrage (or negative interest) and Gresham's supposed law...  but I'll have to save them for later.

In the case of Worgl, Schillings were scarce there already.  Worgl notes didn't drive them out, they relieved the scarcity of money in general.  We're facing a similar situation today.

And when you have a completely stalled economy, demurrage charges that increase the velocity of a money can help put people back to work faster.  Note that demurrage, or negative interest, is not the same as inflation.  Only hoarded money loses value.  Money that continues circulating retains value, as does newly created money.

I would also completely get rid of the idea that gold backed money is necessarily good money, and fiat is necessarily bad.  I don't know much about the issuance of Schillings at that time, but obviously there was a problem.  Worgl notes were automatically better money (at that moment), because they were issued closer to the point of exchange, and therefore a better reflection of the potential exchange of goods and services.

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James Wandler
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Re: New Martenson Report ready
npeykani wrote:

James,

I am currently in discussions with a small local bank to circulate a common currency.  I have visited saltspringdollars--looked at Mendo Moola--- Berkshirebucks--- and interested in MilwaukeeBucks (if that happens).

My question is this:  In a common currency how does one control or limit counterfeiting?  This was the FIRST question posed by the bankers.  Honestly the threat of counterfeiting hadn't even occurred to me as circulation would be local.  To my thinking whatever possible gain to be had from counterfeit currency would have curtailed limits on usage as it couldn't be redeemed quickly at a bigbox store or the gas station.  The common currency idea is very provocative--- and right now the bank is interested in the idea but the "ball is back in my court" as I have to remedy the counterfeit worry.  Any ideas or suggestions?

Per your complementary thread I will pick up a copy of Deep Economy today.  Thanks for your take on this issue.

npeykani,

I'm glad I could be of some assistance.  I haven't ventured too far down this road yet - but it is on my to do list - so I'll be looking to you for advice after you've blazed the trail.  I'd suggest that you contact Salt Spring Dollars directly and I'm sure that they would be passionate about helping you.  Their website shows that they have considered counterfeiting very carefully so they should be a good source of advice.

You might want to look at the website www.complementarycurrency.org - this was the site that I used to find a selection of complementary currencies.  I also noticed the following http://en.wikipedia.org/wiki/Local_currency and from there there are lists of local currencies in the US:  http://en.wikipedia.org/wiki/List_of_community_currencies_in_the_United_States so perhaps you contact them.

I do believe in pooling of resources so I encourage others interested in the concept to email npeykani (I see you've listed your email address) and offer their assistance.  For instance, I'm sure that there are lawyers on our site and their expertise would be highly valuable.  This is a very important initiative.

I have considered how to structure complementary currencies and I hope you find the following helpful.  I can only comment on economic considerations - not legality which may conflict.

I've noticed that some complementary currencies involve a discount so that a portion of funds are used to support charity.  Now I can understand, in the case of the Toronto Dollar, that there may be some benefit for charities to compensate welfare recipients for their labor without disturbing their welfare benefits.  I am sympathetic to this but for me this is a problem of welfare, which I'm opposed to, (see Mohammed Yunus' book The End of Poverty to understand how welfare prevents poverty from being eliminated) and likely wasn't your motivation anyways but I point it out because you may encounter this or have this suggested to you.  I view welfare as a drain on the resources of society and insidious to the recipient because it saps the happiness of providing for themselves and from providing worthwhile service to others.  Since I view sustainable farming and its subsequent processing of food to be labor intensive and value added I'd encourage people to contact a sustainable farmer and become an entrepreneur rather than accepting, or continuing to accept, welfare.  Other options would include being entrepreneurial in an area around sustainable farmers so that there is mutual benefit and you are close to your food supply.

How should your complementary currency be issued?  To me the value of the currency should be labor based so the party that issues the currency should receive labor in exchange for the currency.  Bill McKibben in Deep Economy suggests that local government could therefore provide a portion of the compensation to their employees in the form of the complementary currency - and that citizens could later pay for their property taxes using the currency.  This system should work well and benefit all in the community but the local leaders need to understand that they will debase the currency if they don't reduce their budgets and collection of property tax proportionately on issuance of the currency.

Here's an idea I came up with this morning: allow people to purchase the currency using their local legal tender without convertibility back to the local legal tender.  This might seem odd but if your goal is to protect yourself from hyperinflation of your country's legal tender then you actually want the value of your complementary currency to stand on its own merits.  Thus at some point you could raise the amount of local legal tender that it would take to buy your complementary currency.  The other benefit of not allowing convertibility is that you now have a pool of funds that can be used to benefit the community (stone soup parable).  Perhaps you could issue shares in the company that issues the complementary currency and this company could fund social entrepreneurial activities - for instance to purchase a biodiesel plant for the community or other items of local wealth generation that can allow the community to be more selfsufficient (machinery to crush locally grown wheat into flour)? 

Have fun being a capitalist!

I hope this creates some ideas.

James

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Re: New Martenson Report ready
npeykani wrote:

James,

I am currently in discussions with a small local bank to circulate a common currency.  I have visited saltspringdollars--looked at Mendo Moola--- Berkshirebucks--- and interested in MilwaukeeBucks (if that happens).

My question is this:  In a common currency how does one control or limit counterfeiting?  This was the FIRST question posed by the bankers.  Honestly the threat of counterfeiting hadn't even occurred to me as circulation would be local.  To my thinking whatever possible gain to be had from counterfeit currency would have curtailed limits on usage as it couldn't be redeemed quickly at a bigbox store or the gas station.  The common currency idea is very provocative--- and right now the bank is interested in the idea but the "ball is back in my court" as I have to remedy the counterfeit worry.  Any ideas or suggestions?

Per your complementary thread I will pick up a copy of Deep Economy today.  Thanks for your take on this issue.

npeykani,

I worked on the issue of bringing a local currency to Brattleboro VT for a while.  The effort came and went and my main learning from that is that having the right people in place is essential.  It sounds like you are starting in the right places and you have their interest.

In studying this issue, I met with Bernard Leitier, attended a BALLE conference on the subject, read books, websites, and talked with actual managers of local currency efforts.

I am thoroughly committed to the idea of local, parallel currencies.  Not as total replacements, but as supplements to FRNs.   Each currency type enforces its own sets of behaviors.  Each has unique pros and cons.

My main learning was that any money requires active management.  For FRNs we call these managing institutions "banks".  The biggest mistake of any local currency movement is the idea that it can happen with volunteer effort only.  So far, I have not seen that to be the case.  In the case of Ithaca Hours, one of the most successful efforts out there,  the success can be directly laid at Paul Glover's feet.  Paul was a tireless promoter and without him it's a near certainty that Ithaca Hours would not exist.  Berkshares are subsidized by the efforts of the paid staff of the Schumaker society.  Burlington Bread has a paid coordinator.

Unless people are passionate about "why" a local currency is needed and find a way to directly support it, the efforts nearly always fail. 

So my advice, based on my experiences, is that you should first seek to promote awareness and excitement about the concept of a local currency before moving too far down the path of actually picking one.

To help frame this some, you might find the first six pages of the PowerPoint document I was in the process of preparing for the Brattleboro effort before I wandered off to continue my work on the Crash Course.  I think the first 6 pages will be especially useful to you.  At least I hope so. 

You can download the .ppt from a link at the bottom of this page:  http://www.peakprosperity.com/act  

Happy to discuss further at any time - perhaps this needs its own forum thread?

Best,
Chris

TRK29's picture
TRK29
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Joined: Dec 21 2008
Posts: 17
Re: New Martenson Report ready

Re 16  Thanks for the video clip reference and a reminder that "you learn something new every day!"

However my analogy was not too far fetched since the migration of lemmings is their response to local overpopulation, which can lead to a correction in the form of drowning or starvation. This is the lemming equivalent to reaching the curve in the hockey stick on their growth curve.

Humans often have a similar reponse which accounts for a lot of the migration from one country to another. The problem for us is that man is running out of places to run to!

Something else we and lemmings may have in common is the ease with which we get sucked into booms and busts. I have just watched a fascinating video which told the story of the Wall Street Crash.

http://video.google.com/videoplay?docid=7233622324068640582

The parallels with today's situation are very striking and support the oft made observation that "Men do not learn from history is history's biggest lesson".

 

 

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mike_montagne
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Posts: 16
Re: New Martenson Report ready

 

cmartenson wrote:

[1] I found it remarkable because Grant correctly identifies the Fed as the source of current economic troubles and makes the case that, under a gold standard, we might have a different set of troubles, but we wouldn't be facing an extinction-level event for finance. [2] With the deft use of historical examples, he makes a strong case that our current ills stem from very common mistakes that have plagued central banking ever since it was first invented. [3] I expand on several of his arguments to steer towards the conclusion that inflation lies in wait.

Of course it's become fashionable to blame "the Fed" for "troubles," but exactly how is the Fed to blame for exactly what troubles?

 

1. Grant of course is neither exhibiting a genius for solution or even wading into new waters; and I have to question why he would do so but to falsely promote the gold standard, as any issue he can raise was solved by mathematically perfected economy™ 30 years ago. 

What does he mean "might have a different set of troubles"? We can and have determined exactly what those troubles can and would be, long ago; we've also solved those problems already.

He then says, "but we wouldn't be facing an extinction-level event for finance." (?)

How exactly so? Everyone promoting the gold standard is advocating retention of interest. How do they even have a reason to advocate the gold standard then, if it is interest which inherently and irreversibly multiplies debt in proportion to the obligated circulation -- to the very consequences we are suffering?

Not only do Ron Paul and the so called Austrian "economists" advocate interest; without detailing/qualifying how they are to work, they actually advocate higher rates of interest, which can only multiply debt all the faster: they increase the periodic interest we will have to re-borrow into circulation to maintain a vital circulation; and so they increase the rate of multiplication of debt into a terminal sum of debt, shortening the potential lifespan. You remember why Greenspan reduced interest rates so long ago? We would have collapsed far sooner if Ron Paul had his way.

Von Hayek, God of the Austrian "economists" gives us the rationale for the preservation of interest. We should all understand what the Austrians are really about, because this is what von Hayek says:

Quote:

"I am more convinced than ever that if we ever again are going to have a
decent money, it will not come from government: it will be issued by
private enterprise, because providing the public with good money which
it can trust and use can not only be an extremely profitable business;
it imposes on the issuer a discipline to which the government has never
been and cannot be subject."

Now that's straight from the horse's mouth at von Mises Institute pages.(http://mises.org/story/3204)

How backward are these people advocating the gold standard? So knowingly backward that they refuse to debate the proposition or its solution with yours truly.

Not only so; they disallow mathematic assertions (unless they make them), ostensibly because mathematics cannot account for "indeterminate" human behavior. Yet they routinely apply this rule to all things as well which have no dependence whatever on "indeterminate" human behavior (such as inherent, irreversible multiplication of debt in proportion to a circulation by interest), if it disqualifies any of their other equally unfounded beliefs. In short, routine denial is a defense mechanism.

But what is the extinction level financial event? It's an inevitable, terminal sum of debt which you can readily project from any point in a purported economy subject to interest, by simply accumulating whatever rates of interest are paid to service debt, having to borrow that back into circulation as subsequent sums of debt, perpetually increasing therefore so much as periodic interest.

So, eventually of course, the very (intended) nature of the currency makes von Hayek's extremely profitable "business" ever more profitable and ever more profitable at even an inherently escalating rate, until we can't afford to service the debt any longer, or therefore, borrow further, to replenish the vital circulation of what we're paying out of it.

Boom. Dead horse.

Von Hayek is so sharp, he's arguing that the extremely profitable business be placed in private hands, because "government" can't be trusted to provide a currency with integrity -- which of course is the usual argument. But even when he made the speech at a lecture delivered at the Gold and Monetary Conference in New Orleans, November 10, 1977, of course, *it was not the government*, but in fact *private "enterprise"* which *was* and has since 1913 been issuing the currency. So Hayek even had that exactly backwards.

 

2. If he understands the alleged ills as would an author of solution, why in the world would he advocate gold?

Can gold arrest multiplication of debt by interest without advocating interest? No. So what solution can gold provide? None.

Can gold sustain industry exceeding finite monetary reserves? No. So what solution can gold provide? None.

Can gold sustain the value of currency when existent production might constantly vacillate either above or below it, up and down...? How so? No such principle, proof or theorem of such a capacity exists; and gold bugs themselves regularly testify to the contrary, asserting that prices will fall, as if this is even a benefit to us, when of course wages/salaries/earnings will have to fall likewise -- leaving it an even more impossible task to service the debts we are already committed to, and which can only multiply further under interest.

So where is the benefit of gold? Name *ONE* plausible benefit, or one solution gold provides.

Event the ostensible fact of redeemability is only a recourse for the wake of failure! That's the whole principle of an alternate monetary solution -- *because* you don't have a monetary solution for all the issues at hand, you provide alternate redeemability which can be exercised in the wake of failure.

Furthermore, there are no genuine examples of any kind of stability ever imparted by a gold/silver standard, etc.. Now, Ron Paul constantly says so. But where are the facts?

Does it stand to reason that if there is $10 in monetary gold reserves and $10 in circulation (paper, plastic, whatever, representing that), that if industry increases from say $100 annual production to $100,000, gold gives us some kind of "stability" which somehow smooths everything out and makes all this right?

Absolutely not. As wages/salaries/earnings have to fall to fit within unaccommodating circulation (or jobs/industry are eliminated), well... just what does that do to our ability to service pre-existing debts? What about the further debts we might have to assume to generate that industry? Can't do it. No can do. Not enough ridiculously expensive currency -- not only with no advantage whatever, but with preclusive disadvantages... such as its redundant scarcity and cost.

Those who claim (like Ron Paul again) that gold would prevent us from issuing too much currency don't even establish what is the right volume of circulation. What is the proper volume of circulation? What is the upper limit which gold prevents us from exceeding, to some ostensible advantage? And what is the advantage of having less than we should have, if that is more than monetary reserves?

According to the CIA Fact Book, there's about $70 b in gold reserves available to the U.S. Treasury. How are we going to operate on such a circulation?

We'd go down pretty fast, wouldn't we? Servicing *how much* public and private debt? Any chance we could afford to do anything else?

Not a chance in eternity.

 

3.  It doesn't matter that inflation lies in wait. 

The CAUSE of the monetary failure has already precipitated the failure. Thus, unless you fix *THE* cause (which can't be "inflation" which hasn't even manifested yet), you just get to suffer the further consequences that gold likewise has no power whatever to save you from.

Here's a little ditty I did on inflation or Hyper-Inflation just a few days ago:

http://perfecteconomy.com/wp/2008/12/21/mike-montagne-rebuts-hyperinflat...

 

Blind Joe's picture
Blind Joe
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Joined: Oct 17 2008
Posts: 11
Re: New Martenson Report ready
Quote:

Happy to discuss further at any time - perhaps this needs its own forum thread?

I would be in support of that. In fact, I think this belongs in the Crash Course.

If I could make a constructive criticism of this site, it would be that the content is way long on (very cogent) analysis of the problems and almost completely lacking in discussion of possible solutions, of which you're obviously aware.

How many people that visit this site are aware of the success of the WIR in Switzerland?

Just like in the 30's, I think we're about to be awash in local scrip. Back then, most of it was very poorly conceived. Maybe this time we can get it right and make it stick like Switzerland?

Sounds like Mike has some ideas about how we could do that........ 

gyrogearloose's picture
gyrogearloose
Status: Platinum Member (Offline)
Joined: Sep 8 2008
Posts: 537
Re: New Martenson Report ready
mike_montagne wrote:

According to the CIA Fact Book, there's about $70 b in gold reserves available to the U.S. Treasury. How are we going to operate on such a circulation? .

jrf29 wrote:

America's great industrial expansion between the Civil War and World War I was accomplished without a central bank, proving that one was not necessary for what probably was the greatest economic expansion in the history of the world.

And was not gold used as money for most of that period ?

mike_montagne wrote:

So where is the benefit of gold? Name *ONE* plausible benefit, or one solution gold provides.

The people in charge of the printing presses can not just print more money.


Your system my be mathematically perfect, but the people who will run it are not and history has shown that those who have the power have not resisted the temptation to run them....

James Wandler's picture
James Wandler
Status: Martenson Brigade Member (Offline)
Joined: Aug 11 2008
Posts: 219
Re: New Martenson Report ready
mike_montagne wrote:

Here's a little ditty I did on inflation or Hyper-Inflation just a few days ago:

http://perfecteconomy.com/wp/2008/12/21/mike-montagne-rebuts-hyperinflat...

Mike,

I want to express my gratitude to you for the spreadsheet that you are offering on your website.  I've been struggling with the concept of the problems of the money supply (for months now!) and with your excellent spreadsheet I was able to understand the problem in a short period of time (although I do work with spreadsheets for a living).  Thank you.

Here is my initial observation (my language): 

The problem in the money system seems to be that when the rate of interest (cell D3) on the debt exceeds the growth rate of the money in circulation (cell F3) then eventually the interest exceeds the money in circulation and system default is triggered.

To understand this better I eventually did the following:

- set the principal repayment figure to zero in cell C3 [while this is valid in triggering earlier system default it is not the factor that triggers the default - making this zero eliminated a valid but complicating variable]

- changed the formatting in cell D3 to be a percentage so that I understood that this was an interest rate [while equivalent to a decimal people commonly think of interest as a percentage so I initially didn't understand what this cell was trying to accomplish]

- realized that the small decimal above 1 in cell F3 was the growth rate of money in circulation (so that 1 was zero growth rate of money in circulation, 1.01 is a 1% annual increase in money in circulation, 1.02 is a 2% increase in money in circulation, etc.)

Therefore when C3=0 and D3 percent was greater than the 1+% in cell F3 default is eventually triggered - although if the two percentages are close this will occur outside the 100 year boundary of your spreadsheet.

The graphs at the top were useful illustrations of the extinction point where money in circulation (item 4 in lime) slams into periodic cost of servicing debt (item 1/2/3 in blue/red at the bottom) at which point system default occurs.

It would be apparent that creating more money can (temporarily) fight off the default - but where should the money be created?  However I am beginning to understand why either a) people understand this with perfect clarity but don't want us to understand or b) they don't understand.  And now I understand why Chris says that he isn't sure which is worse.

The social consequences to all of this that you've written about would take me time to consider but since this has been your life's work you've obviously had a lot of time to think about it. 

Thanks again - this has been very valuable to me.   

James

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