Tertiarymatt

By Joe Costello, the author of Of, By, For: The New Politics of Money, Debt and Democracy. Cross posted from Alternet

Over the last year, some deep truths about oil and the oil industry have begun to bubble to the surface. Not necessarily that they were ever hard to see, but they were easy to obscure and maybe more importantly, without too much effort, ignore. No longer. Spread across the oil companies’ quarterly reports and the pronouncements of government agencies from the U.S. Energy Information Agency to the International Energy Agency are the hard facts that the era of cheap oil is over. It’s impacting the U.S. and global economies and forcing a fundamental rethinking and restructuring of our economic activities and thinking.

Four decades ago, it was abruptly brought to the world’s attention oil was a limited resource. This was of greatest concern for the United States, who at that point had built an economic infrastructure completely oil dependent. With only 5% of the global population, the U.S. consumed over 25% of the world’s oil, a model neither sustainable or exportable to the vast majority of earth’s population.

Nonetheless, little was done to change these circumstances and most amazingly U.S. oil based development was adopted by other parts of the world, most notably China, whose oil consumption in the last three decades has quintupled, becoming the second biggest oil consumer in the world. Simultaneously, the greatest action taken by the U.S. was spending trillions of dollars “securing” much of the remaining conventional oil sources around the Persian Gulf, doing little to nothing to cut demand.

However, during this time, there’s been significant change in the industry itself. For most of oil’s history, the global industry was run by a handful of private companies in the U.S. and Europe. Today, the five biggest – Total, BP, Exxon, Chevron, and Shell – account for only 13% of global oil, while national companies including Saudi Aramco, Russia’s Rosneft, and China National Petroleum Company control over 75%.

This led to a tightening of supply available to the private companies, while just as importantly, an increasing number of former big oil exporting countries, such as Indonesia, Mexico, Venezuela and Norway produce an ever decreasing amount of oil. In the first seven years of the century, the price of oil went up from $10 a barrel to over a $100 dollars a barrel. In 2008, the difference between global oil supply available and growing global demand shrunk to the smallest amount in oil’s brief history, helping spike price to $150 a barrel and pushing the world into the worst economic recession in seventy-five years.

With the global recession, supply constraints gained a short reprieve as demand slackened, going down over 12% in the U.S. and over 20% in parts of Europe. Yet, after a brief dip, oil prices remained stubbornly high. For the past two years, even though the global economy remains lackluster, oil remains at $100 barrel. In the past year, the tightening supply and growing cost of any new oil began showing-up in the quarterly reports of the oil companies, who despite having plus a $100 barrel prices, revealed increasingly small profit margins, growing expenditures for all new oil and declining production. In the second quarter of 2013, the oil companies balance sheets became increasingly alarming led by Exxon’s 57% profit decline and eight consecutive quarters of production declines.

This disruption continues with the oil companies 2014 first quarter reports. All five top oil companies announced declining production numbers despite increased expenditures. At an oil conference last month, the Houston Chronicle reported Chevron CEO John Watson stated, “That new reality for our industry is that costs have caught up to revenues for many classes of projects. Essentially, for a company like mine and many others, $100 a barrel is becoming the new $20 in our business.”

This is an extremely important development, especially for an industry which for over a century printed money. The oil industry is now becoming ever more capital intensive, not a printer of a money, but a growing capital black hole. Yet incredibly, as shareholders begin to grumble, the old majors begin to cut their expenditures and divest of future reserves to maintain non-sustainable dividend levels. The Los Angeles Times reports, “Exxon’s capital and exploration expenditures fell 28 percent in the first quarter(2014), which helped deliver higher profits even though oil and gas production fell 5.6 percent.”

Obviously, not a long term strategy, but what is the oil industry’s long term strategy? Well for the last few years, we’ve heard a lot about the great “shale revolution,” even President Obama hailed it in his 2012 State of the Union speech. Yet, as oil analyst Chris Nedler stated, “Shale’s not a revolution it’s a retirement party.”

Shale is both expensive and not nearly as plentiful as been propagated. The great shale revolution is greatly distorted by mountains of Wall Street generated debt, it might most accurately be described as “subprime” energy. Take for example the greatest shale company, Chesapeake, loaded with debt that’s created unprofitable and unsustainable prices. They’ve found it hard to make much profit in the last couple years – for an oil and gas company, that truly is a revolution.

In order to survive with over 13 billion dollars in debt, over the last couple years, Chesapeake shed billions of dollars in assets. Just last week, the prestigious oil industry publication, “The Oil and Gas Journal” announced Chesapeake’s latest divestiture, a rather unintentionally amusing and revealing report on the business and “accounting” of shale:

Chesapeake Energy Corp., Oklahoma City, has decided to proceed with spinning off its oil field services business, currently conducted through its wholly owned subsidiary Chesapeake Oilfield Operating LLC (COO), almost 3 months after reporting that a spinoff or outright sale of the business was under consideration. COO will also convert into a corporation and change its name to Seventy Seven Energy Inc.

Upon completion of the spinoff and an expected recapitalization, $1.1 billion of consolidated COO debt will be eliminated from Chesapeake’s balance sheet and Chesapeake will receive a $400 million dividend that will be applied to pay off intercompany debt from the oil field services business, the company said.

But, it’s not just the industry leader having trouble profiting from shale, so to the massive oil service company BHP Billiton, who in 2012 wrote down almost $3 billion in shale assets and the old oil companies such as Shell, which this year wrote down $3 billion of their own shale plays. Bloomberg announced recently that “shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent.” The entire shale industry has $162 billion in debt and a massive “shakeout” is inevitable.

Importantly, it’s not only no one can make money on shale, but there’s not nearly as much of it as Wall Street proclaimed. Recently, the Energy Information Agency stated the Monterrey Shale in California, which was being promoted to account for two-thirds of developable shale oil in the US, only contained 4% of previous estimates, a 96% drop! Thus, there’s only one-third as much shale oil as been touted in the financial press, that too is a highly suspect number.

Globally, the production of conventional oil – “black gold, Texas Tea” – plateaued ten years ago at around 75 million barrels per day. Meanwhile “unconventional” oil and oil substitutes such as Natural Gas Liquids, have seen the biggest growth in oil accounting. However, they are neither cheap or simple substitutes for crude.

Four decades after learning oil was a limited resource, the world, and especially its most oil dependent member the United States, now face a hard accounting. The present hundred dollar a barrel oil has created a serious drag on a global economy that for a hundred years has grown on cheap oil, while oil has kept its price, despite five years of a largely stagnant or deflating global economy.

All new oil is going to be less plentiful and more expensive. It is going to take increasing amounts of money both to find and bring to the surface. The once mighty oil companies, that strode across the global landscape like giants, are going to increasingly shrink in stature and power.

We need to undertake an all encompassing energy transition which will impact every aspect of our economy and our lives. We can look at what the energy component, particularly that which comes from oil, is of everything, from transportation, to food, to money itself, figuring out how it will be replaced with other sources of energy, accomplished by using less energy, or abandoned.

Ready or not, the great energy transition has arrived. It can no longer be ignored, a new world is in the offing.

The woman who lived in sin with a dolphin Telegraph

More Pet Brands Target Owners Who Like to Cook Their Own Dog Food Wall Street Journal

Cynical? You may be hurting your brain health ScienceDaily (Chuck L). This looks like junk to me. How do you define “high levels of cynicism” v. garden varieties of cynicism? Plus in this case, the cynicism may actually be a proxy for other issues that lead to poor outcomes, namely, weak social bonds or financial insecurity (aka stress).

The Enduring Promise of a Thinner You New York Times

Buried Carbon Causes Deep Concern Truthdig (Chuck L)

Nuclear-waste facility on high alert over risk of new explosions Nature

It’s simple. If we can’t change our economic system, our number’s up Guardian (Lawrence)

After the Sun (Microsystems) Sets, the Real Stories Come Out IEEE Spectrum (Chuck L)

Microsoft shows off real-time universal speech translator for Skype, coming in 2014 ExtremeTech (furzy mouse)

Turn Gmail Into an RSS Reader With IFTTT Gizmodo

Animated Map Visualizes NYC’s Raging Workaholism Fast Company

Come Saturday Morning: The Worst Places to Work, Worldwide Phoenix Woman, Firedoglake

China denounces Japan and US over ‘provocative’ speeches BBC

Southeast Asia’s Regression From Democracy and Its Implications Council on Foreign Relations (furzy mouse). Free download

Want to unwind Thailand’s coup? Look to palace politics Christian Science Monitor

Sex, Drugs and Accounting in Europe Bloomberg

Climate change to boost summer flash floods, says study BBC

RBS could fail due to ‘£100bn black hole’ – with British taxpayers in line to lose their entire £45bn stake Independent. FYI, the book is by Ian Fraser, a sometimes contributor to NC.

Bank of England governor: capitalism doomed if ethics vanish Guardian. A bit late to be worrying about that. However, as Harry Shearer points out: “Can you imagine a head of the Fed talking like this?”

Caracas Goes Thirsty as Taps Run Dry and Bottles Vanish Bloomberg

Venezuela: A plan for coup d’état and assassination of Maduro failed evolution

Ukraine

Ukraine Fights Separatists in East, Approaches Russian Gas Deal Bloomberg

Russian ForEx Reserves and Balance of Payments Vulnerabilities Menzie Chinn, Econbrowser

Encyclopedia of Ukrainian oligarchs Eurozine (Richard Smith)

Alexander Lebedev and Vladislav Inozemtsev: Western financiers welcomed dirty money but now it must be stopped Independent (Richard Smith)

Big Brother is Watching You Watch

What a Drone Can See YouTube (Lawrence)

New federal database will track Americans’ credit ratings, other financial information Washington Examiner (Chuck L)

Frontline, in case you missed it: How the NSA Can Get Onto Your Computer, How the NSA Can Get Onto Your iPhone, How the NSA’s Secret Elite Hacking Unit Works

Another viewing item if you didn’t see it last week: Edward Snowden Exclusive Interview with NBC Brian Williams YouTube

5 Reasons The Deficit Has Fallen By Nearly $5 Trillion (And Why That’s A Bad Thing) National Memo

New Law ‘Facilitates Privatization’ of US Water Systems Mint Press (furzy mouse)

Police didn’t search database showing Calif. shooter had bought guns Washington Post (furzy mouse)

Daily Meme: Hit Me With Your Best Shot American Prospect. Revealing Dean Baquet remarks.

George Clooney ‘planning to launch career in politics after marriage to British lawyer’ Daily Mail

The New Paradigm for Banks Mohamed A. El-Erian

Fed Officials Downplay Financial Stability Concerns WSJ Economics

Reconciling Hayek’s and Keynes’ views of recessions VoxEU

FT v. Piketty

Everything You Need to Know About Thomas Piketty vs. The Financial Times New York Times

You shouldn’t use a spreadsheet for important work (I mean it) Daniel Lemire. Ahem, some of the problems are not due to spreadsheets in general but Excel in particular. I can’t stand to use Excel because it is a terrible tool. I relied on Improv because even in the early 1990s you could build multi-dimensional models (oh, and easily rotate them), plus it documented formulas using the labels you input (as in your column/row names) making them easy to check. It also has all sorts of complicated financial and mathematical formulas built in as function choices, so you don’t have to generate them. IBM refused to sell Improv after it acquired it, despite many offers, so some developers built an imitation, Quantrix, and then improved on it. Unfortunately, it cost over $1500 , so if a reader connected with the company is feeling generous, I’d love a copy.

Class Warfare

Not Walking the Walk on Board Diversity Gretchen Morgenson, New York Times

Tech Titans on Income Inequality and Their “Stingy, Stingy” Industry re/code

Fast Food Workers’ Movement: Union 2.0? Real News Network

eBay Shrugged: Pierre Omidyar believes there should be no philanthropy without profit Mark Ames Pando. Important. Also documents more of Omidyar’s relationships to the US security state.

Don’t believe brokers, the government, or Piketty: Your property values won’t grow faster than your paycheck Amar Bhide, Quartz. Today’s must read.

Antidote du jour (furzy mouse):

See yesterday’s Links and Antidote du Jour here.

Yves here. Michael Husdon spoke last week on Real News Network about the EU parliament elections, and after his interview, provided some additional, pithy remarks on his website. As he did, I’m starting with his latest thoughts, and then including the interview proper, which includes important background on the EU parliament election significance and results.

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is “The Bubble and Beyond.” Cross posted from his blog

Reflecting on this topic, I add:

The US press and newscasts make it appear that Europeans have voted against poor immigrants and foreigners. What they voted against wasthe super-rich, the oligarchy. The “foreigners” being opposed include the United States insisting on drawing NATO into its wars in Libya,Iraq, Syria and Afghanistan – and now, subsidizing Ukraine to confront Russia. The “nationalist” parties voted against the EU constitution written by the oligarchy to favor the banks against labor. It is a neoliberal constitution that prevents governments from running budget deficits of more than 3% of GDP – except of course to bail out banks and bondholders. It centralizes foreign policy in a US- and NATO-appointed bureaucracy of “technocrats.”

The US press characterized Sunday’s May 25 vote opposing this bureaucratic circumventing of democracy as a vote against “democratic Europe.” This is an Orwellian description of what happened.

Already in 2005, France and the Netherlands rejected the EU constitution. The EU’s response was to impose the right-wing Lisbon Treaty by fiat, not permitting any vote on membership. When Greek Prime Minister Papandreou sought a referendum, he was quickly replaced by a technocrat. Likewise in Italy, when Prime Minister Berlesconi sought a referendum, he was quickly removed by an EU “technocrat.”

This is not democracy. It is oligarchic extremism. And yet the anti-EU voters seeking to recover power for their national governments to run budget deficits to lower the unemployment rate below its current 10.5% is called extremist.

The underlying issue on May 25 was whether voters would support more economic austerity and privatization sell-offs. It is obvious that they didn’t.

They also didn’t want a new Cold War with Russia, or yet more contributions to NATO to support US unipolar world. So when the nominally Socialist parties joined with the right-center to support more financial austerity, and centralization of Eurozone policy in the hands of unelected bankers, they suffered a resounding defeat.

Neocons and neoliberal pundits have tried to focus on the “poison” message of the right-wing parties. But the real story is the inability of the left to provide an alternative.

A century ago the socialist, labor and social democratic parties had an economic program. It included progressive taxation, taxation of land and natural resources, and public infrastructure investment so as to prevent monopolies from occurring. This included a public banking system.

Today, the left wing has reversed all these policies. Tony Blair led the British Labour Party to make a right-wing run around the Conservatives, even to the point of privatizing railways and the Public/Private Partnership giveaway to the City of London. In America, Bill Clinton abolished Glass Steagall and deregulated derivatives trade. Then Barak Obama achieved what a Republican president could not have done: He is leading the fight for the Trans-Pacific Partnership to dismantle financial regulation altogether, along with public environmental regulation. He has escalated the Cheney-Bush military policy seeking to grab foreign oil and gas resources, most recently in Ukraine where Secretary of State Kerry’s and Joe Biden’s families have taken a kleptocratic position in that poor country’s gas resources.

So where is the left?

Today’s political situation is much like 1968, when George Wallace – a “southern cracker” – was the only candidate talking about economic policy and urged withdrawal from Vietnam. He was shot.

The vote against what Marine LePen calls “the Brussels Monster” was against the capture of the EU bureaucracy by NATO neocons and neoliberals opening the immigration floodgates to what threatens to be a wave of “Ukrainian plumbers” and other refugees from America’s most recent attempt to tear up a nation Syria-style, Libya-style or Iraq-style. The vote also was against the TTIP, the Transatlantic Trade and Investment Partnership.

But stock markets soared, because the pro-US and pro-austerity parties are still on top, especially in Italy where the right-wing Democrat party won behind Renzi, and Germany’s Christian Democrats in support of Merkel.

So all one can say is that the Euro-Parliament elections provided a dress rehearsal for the national elections coming up. Only a renewed assertion of national governments can oppose the bad pro-austerity EU constitution. If it cannot be rewritten and if the euro cannot be reformed to promote growth instead of austerity, then there is little reason for labor and industry to support it.

Michael Hudson says that the nationalist parties will not challenge austerity in Europe despite widespread discontent with economic policy.

ANTON WORONCZUK, TRNN PRODUCER: Welcome to The Real News Network. I’m Anton Woronczuk in Baltimore. And welcome to another edition of The Michael Hudson Report.

Now joining us is Michael Hudson. Michael Hudson is a distinguished research professor of economics at the University of Missouri-Kansas City. His two newest books are The Bubble and Beyond and Finance Capitalism and Its Discontents.

Thanks for joining us, Michael.

MICHAEL HUDSON, PROF. ECONOMICS, UMKC: Good to be here.

WORONCZUK: So, Michael, let’s talk about the EU parliamentary election results. What were the main political issues surrounding the elections? And how did the different parties fare?

HUDSON: The main political issue is that unemployment is over 10.5 percent in Europe. But the European Parliament has no power over the domestic policy that’s dictating austerity. That power is in the hands of the bankers, who are imposing austerity and unemployment. The Euro-Parliament also has no power over foreign policy. That’s in the hands of a NATO-linked bureaucracy.

So the nationalist parties in France, England, Denmark and other countries are saying, wait a minute, we want a real government that can use a central bank to restore employment by running a budget deficit. The European Lisbon Treaty won’t let us do that. We want a government that’s not going to contribute to NATO to go to war in Afghanistan and Libya and Iraq, and now maybe Ukraine. We want to spend this money at home, because we’re in a depression.

Newspapers call this a victory of the right, but the right only got 25 percent overall. So they will simply be cut out of Euro-policy making by the center-right parties in line with the social democrats. So the most important result isn’t so much the rise in the right, but that voters have lost faith in the left, or what still call themselves “Socialist” and “Labour” parties. They’ve become pro-austerity parties whose plan is mainly to cut taxes and pro-privatize public assets to balance government budgets. The result is that throughout Europe there’s been a rejection of these parties that call themselves socialist.

The reason is clear enough. Ever since Tony Blair sort of made a right ring run around Thatcher and out Thatcherized the Conservatives in England,you’ve had “New Labour” doing much what the Clinton-Gore-Obama “New Democrats” have done in the United States. They’ve taken the lead in urging austerity and kindred anti-labor policies.

It’s as if there’s no memory at all of what socialism advocated a century ago – to increase government spending on industry subsidies, and to promote higher living standards by public education, public health and so forth. The once-socialist parties have been co-opted by the right-wing, so there really isn’t any party that’s having an alternative to the current austerity that’s just tearing Europe apart.

The real increase in voting was nonvoters: people voting with their backsides rather than voting for nominal socialists, conservatives or the so-called right-wing. None of these parties have an alternative to the austerity neoliberal neocon economic model that is being operated out of Brussels.

The two parties that do have an alternative did quite well: Syriza in Greece, and Spain’s Podemos (“We Can”) party, which was just created a few months ago and already polled third. Spain’s opposition Socialists failed to unseat the existing right-wing party, because voters obviously found that they don’t really have any alternative program at all. And in Greece, the former governing Socialist Party of Papandreou has now shrunk to near invisibility. Syriza’s success shows that indeed populations do want what traditionally was called a socialist alternative.

WORONCZUK: You said earlier that the EU Parliament doesn’t really have any influence over some major national policies, like banking policy and foreign policy. What powers does it have?

HUDSON: Very little. It has the power to say yes; yes, please; and yes, thank you to the bankers and the neoliberals when they insist on more unemployment; when they say, we’ve got to tighten money against inflation, we’ve got to basically squeeze labor, and we’ve got to bail out the banks so that the banks can pay the bondholders. They don’t really have the power to say “No” to any of this, because it’s not really the kind of a parliament that you’d have in a nation state.

A real nation state is defined as controlling the money supply, which the EU Parliament doesn’t do, the power to declare war, which the European Parliament has relinquished to NATO, and the power to set taxes. There is no real eurozone tax system. The taxes that are being supported are taxes that fall only on labor–the value added tax and the income tax, and they’re charging labor for the Social Security and the health taxes.

So the fact that the parliament has so little power is what is leading the nationalist parties to say, “Wait a minute, if Europe isn’t going to have these powers, if only nation states have the power to say this, then let’s withdraw from the eurozone and let’s create a nation state that can do what governments are supposed to do – pull us out of the depression, subsidize industry, and make us grow again like we did before the eurozone and the euro came in to being.”

WORONCZUK: Talk about this co-option of the political left by the right-wing parties. How did this happen?

HUDSON: Many people, especially in Italy say, well, the Americans have a National Endowment for Democracy (meaning oligarchy). And the Americans have been subsidizing the most right-wing leaders within the socialist parties. So in England you had Tony Blair saying that the way to get votes for the Labour Party is to move to the center and to out-Thatcher Thatcher, to actually become an anti-labor party. I guess you could say what has happened is a lack of economic theory to counterpoise to the neoliberal theory that imposes austerity, and the theory that giving money to the banks will all trickle down. The socialists becametrickle-down theorists.

When a few socialists have raised their hands and said, wait a minute, maybe we ought to have a referendum on this, they’ve been very quickly removed–for instance, in Greece, when the socialist Papandreou said, Let’shave a referendum on whether to repay all of Greece’s creditors, he was removed within a week. And in Italy, when Berlusconi said, Let’s have an Italian referendum on the euro, he was quickly removed. So there’s a feeling that the eurozone bureaucracy has turned into an oligarchy that’s not democratic it all. You could say that the people who are called anti-democrats and extremists in reality are democratic, because they’re saying, “No” to the oligarchy. They want to protect the democracy from the oligarchic takeover that’s occurred out of Brussels.

WORONCZUK: Do you think the SYRIZA gains in Greece are going to offer a challenge to this, the neoliberal governance, throughout the EU?

HUDSON: Yes. To me, that’s the best result of all of this. In practice, in the European Parliament, the fact that the opponents of neoliberalism are only 25 percent means that they’re going to be ignored. The election will have zero effect on what the European Parliament actually does, because they cansay, “We’re in the majority, we don’t have to give you anything at all.” That’s what happened in the Baltics to opponents of neoliberals.

So in terms of actual political policy making, all the SYRIZA victory means is that they can show the people, “Look, we’ve done it here, we can win; now we need a national election, and if youelect us as a national election, we will then stop paying the foreign debts and we’ll try to make the Greek economy grow again so that you don’t have to emigrate in order to find work.”

WORONCZUK: Much of the press coverage of the election results have focused on what’s happened in the U.K. and what’s happened in France, Germany, and Greece. What about theBaltic states? Is anything interesting happening there?

HUDSON: Well, the U.S. coup in Ukraine frightened the Baltic voters. One politician from Latvia told me yesterday that most Latvians didn’t vote, because they weren’t going to vote for austerity. But the pro-austerity newspapers said that Russia is about to invade, and urged Latvians to vote for the neoliberal parties supporting austerity, or else the other parties – especially Harmony Center, which has mostly Russian-speakers – might invite the Russians in. So you had the usual saber-rattling about Russia as a means of supporting the right wing. Harmony Center only got 13% (compared to nearly a third of the last national election vote).

The strategy is like the old McCarthyite mudslinging in the United States, calling everybody who opposes unemployment, neoliberalism and the austerity “communists” – or in this case, pro-Russians. So many Latvians were panicked into supporting the right wing.

Quantum phenomenon shown in $15m D-Wave computer BBC

Canadian Weather Forecasters Forbidden From Discussing Climate Change IFI Science (RR)

U.S. Sway in Asia Imperiled as China Tests Alliances New York Times

China on Wrong Path, Warns U.S. Commander Wall Street Journal

No end in sight to Sino-Vietnamese maritime clash Nikkei

Hazardous level of trace metals in Hong Kong’s air as scientists warn of health crisis South China Morning Post

No, China Isn’t Really Rebalancing Bloomberg

Pictured from a passenger plane: Menacing 12-mile-high ash cloud looms over Indonesia’s ‘Mountain of Spirits’ after volcano erupts Daily Mail

Thailand’s secret story: the battle for a $37b royal estate Australian Financial Review

ECB poised to cut main interest rates Financial Times

The Result of Austerity and Neo-Liberalism is the Rise of the Neo-Fascist Right Ian Welsh

Financialization and the Collapse of European Social Democracy – Costas Lapavitsas on Reality Asserts Itself Real News Network

Syria: Obama To Work With Assad? Moon of Alabama

Ukraine

War Nerd: What’s happening in Eastern Ukraine is very simple, rational, and straightforward Pando (bob, Richard Smith)

Ukraine makes part payment on Russian gas debt BBC

Even With Pullback, Russia Holds Huge Financial Sway Over Ukraine WSJ Economics

Big Brother is Watching You Watch

NBC’s Snowden Interview Overlooks Pre-9/11 Data Collection by the NSA Real News Network

Daniel Ellsberg: Snowden would not get a fair trial – and Kerry is wrong Guardian (RR)

What Would REALLY Happen to Snowden If He Returns to the United States? George Washington

EFF Accuses the Government of Spoilation of Evidence Marcy Wheeler (Chuck L)

US cybercrime laws being used to target security researchers Guardian

Cisco purchase of CIA-funded company may fuel distrust abroad reddit (Maxwell)

“TrueCrypt is not secure,” official SourceForge page abruptly warns ars technica

Obamacare Launch

Gallup: Health Care Law Still Unpopular Jon Walker, Firedoglake

IRS says it will penalize employers dumping employees into Obamacare Lexology

Health Insurance Options for Early Retirees Huffington Post

New Allende Overthrow Info Reconfirms US Suppresses Economically Rebellious Democracies Truthout

Bernie Sanders Talks Koch Problems YouTube (furzy mouse)

Fox News Suffers Worst Ratings In Thirteen Years – And That’s Not Their Big Problem Daily Kos (furzy mouse)

L.A. Sues JPMorgan Chase For Pushing Minorities Into Cruddy Mortgages Consumerist

Lower mortgage rates unlikely to boost the housing market Walter Kurtz

US money slump flashes warnings as economy contracts Ambrose Evans-Pritchard, Telegraph

Inflation Creeps Higher But Undershoots Fed Target For Two Years WSJ Economics

Investors Have Forgotten What Normal Economic Growth Looks Like Business Insider

William D Cohan on Wall Street whistleblowers Financial Times (Richard Smith)

Kenneth Rogoff is an Even Worse Criminologist than Economist Bill Black

Private Equity

Banks deny KKR buyout loan amid regulatory crackdown Reuters (Scott)

PSERS to pull alternative investment contracts from public view Chris Witowsky. FYI, “PSERS” is the Pennsylvania public pension fund that entered into the limited partnership agreements that we released.

Class Warfare

Someone finally polled the 1% — And it’s not pretty Daily Kos

Rich People Apparently Dumb Gawker

Friends without Benefits Baffler (Harry Shearer). Today’s must read.

Antidote du jour (mark w):

See yesterday’s Links and Antidote du Jour here.

Yves here. This post is an interesting “be careful what you wish for” warning as far as the legalization of marijuana is concerned.

By Sasha Breger, a lecturer at the Josef Korbel School of International Studies at the University of Denver and author of the recent book Derivatives and Development. Her research includes global finance, derivatives, social policy, food, and farming. Cross posted from Triple Crisis

Passed in 2012, Colorado’s Amendment 64 legalized the growing and selling of marijuana on a recreational basis. With medical marijuana, recreational marijuana has helped lift the people of Denver out of the Great Recession by inspiring leagues of new small businesses, creating new jobs, boosting commercial real estate values, and increasing state and local tax revenues. It turns out that the local marijuana market is fairly recession-proof and is actually bolstering local resilience to global crisis.

As I’ve watched this novelty unfold over the past couple of years (with considerable delight, to be frank) and witnessed first hand the important benefits for our local economy, I’ve grown increasingly concerned about the possibility of legalization on the federal level. While state level legalization has—for all of its still considerable problems—motivated economic recovery and helped working and middle class folks earn more income, get better jobs and enjoy more robust public services, federal legalization risks these benefits leaking out of local economies into the pockets of Big Business.

As things stand today, the $2.3 billion legal U.S. marijuana market is the domain of small pot shops and grow operations, slightly larger local chains (with a handful of stores), a few inter-state mid-sized retail establishments with outlets in two or more states, and other generally smaller local businesses that provide inputs and services to the marijuana growing and retail firms.

In Colorado, a few different dynamics explain the structure of this highly decentralized and relatively competitive marketplace. First, state regulations work to limit the size of growing and retailing firms by regulating the number of plants that a single firm can grow, the amount of marijuana a single person can purchase and possess, and increases/decreases in firm space and capacity, among other constraints (go to this link and this link for the most recent state laws). Because the state has established residency requirements for marijuana firm ownership and operation, out of state ownership is effectively prohibited.

Second, and perhaps more importantly in the long-run, federal level illegality prevents larger businesses from outside of Colorado from engaging in growing and retailing, and even from providing certain services to Colorado marijuana firms. Federally insured banks, for example, cannot provide banking and financial services to the marijuana industry for fear of incurring federal penalties for violation of the Controlled Substances Act. Federal illegality has meant that Colorado’s pot revenues flow into local credit unions, and will soon support a network of local banking cooperatives.

I’m deeply worried about Colorado’s economic fortunes should federal level legalization occur. I fear that the local and decentralized marketplace will be replaced by a national or even international market governed by large multinational firms that whisk their profits away to other places, degrade product quality, and stymie innovation and employment.  The evolution of the global food system is instructive in thinking about what may happen to pot in a fully legalized world.

Small and innovative firms will be bought out by ever-larger conglomerates seeking to add one more brand to their portfolio. Mass, centralized, industrial pot production will displace local artisanal and craft production. Indeed, rumor has it that Marlboro already attempted to patent the name “Marley” in anticipation of federal legalization. If we’re not careful, you’ll soon be able to buy Marley’s by the case at the Wal-Mart near you. If the Waltons are smart, they’ll probably be shelved right next to the Twinkies. Multinational input providers will displace local garden and hydroponics stores, providing cheap fertilizers and grow equipment at prices with which the mom and pop stores can’t compete. Round-up Ready AK-47 clones from Monsanto, anyone? Pfizer and GlaxoSmithKline will patent strains that have been pioneered by Colorado locals to treat various health problems. I can hear the drug commercials now: speak with your doctor to see if Canna is right for you! Don’t forget that the global financial system will also intervene—Visa and Mastercard will take 5% of every pot transaction, Goldman Sachs will develop an exchange-traded Global Marijuana Fund, and maybe we’ll be able to start trading “weed” futures on the Chicago Mercantile Exchange. If the rest of the world goes the way of Uruguay and Jamaica, then we can also look forward to Cargill and Archer Daniels Midland monopolizing the global weed trade and buying up all of the world’s pot storage facilities. Who knows? Perhaps the World Bank will even incorporate weed into structural adjustment programs, and start recommending marijuana exports to developing countries as a way to finance debt repayment.

If the food system is any indication, federal legalization of pot will impoverish vibrant, local marijuana economies. Local economic benefits will leak out to already wealthy and powerful MNCs. In a world where big monopolistic companies rule the formal economy, grey markets like Colorado’s marijuana market provide a safe-haven for small businesses and a stimulus to local economies.

By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. Originally posted at New Economic Perspectives

In previous instalments we have established that “taxes drive money”. What we mean by that is that sovereign government chooses a money of account (Dollar in the USA), imposes obligations in that unit (taxes, fees, fines, tithes, tolls, or tribute), and issues the currency that can be used to “redeem” oneself in payments to the government. Currency is like the “Get Out of Jail Free” card in the game of Monopoly.

Taxes create a demand for “that which is necessary to pay taxes” (and other obligations to the state), which allows the government to purchase resources to pursue the public purpose by spending the currency.

Warren Mosler puts it this way: the purpose of the tax is to create unemployment. That might sound a bit strange, but if we define unemployment as a situation in which job seekers want to work for money wages, then government can hire them by offering its currency. The tax frees resources from private use so that government can employ them in public use.

To greatly simplify, money is a measuring unit, originally created by rulers to value the fees, fines, and taxes owed.

By putting the subjects or citizens into debt, real resources could be moved to serve the public purpose. Taxes drive money.

So, money was created to give government command over socially created resources.

As Warren puts it, taxes function first to create sellers of real goods and services, and have further consequences as well, including what falls under ‘social engineering’, which are political decisions—something we’ll discuss a bit more below.

This is why money is linked to sovereign power—the power to command resources. That power is rarely absolute. It is contested, with other sovereigns but often more important is the contest with domestic creditors. Too much debt to private creditors reduces sovereign power—it destroys the balance of power needed to govern.

We also know that money’s earliest origins are closely linked to debts and recordkeeping, and that many of the words associated with money and debt have religious significance: debt, sin, repayment, redemption, “wiping the slate clean,” and Year of Jubilee. In the Aramaic language spoken by Christ, the word for “debt” is the same as the word for “sin.” The “Lord’s Prayer” that is normally interpreted to read “forgive us our trespasses” could be just as well translated as “our debts” or “our sins”—or as Margaret Atwood says, “our sinful debts.”

Records of credits and debits were more akin to modern electronic entries—etched in clay rather than on computer tapes—than to what is erroneously called “commodity money” such as stamped gold coins. And all known early money units had names derived from measures of the principal grain foodstuff—how many bushels of barley equivalent were owed, owned, and paid.

All of this is more consistent with the view of money as a unit of account, a representation of social value, and an IOU rather than as a commodity. Or, as we Chartalists say, money is a “token,” like the cloakroom “ticket” that can be redeemed for one’s coat at the end of the operatic performance.

Indeed, the “pawn” in pawnshop comes from the word for “pledge,” as in the collateral left, with a token IOU provided by the shop that is later “redeemed” for the item left. St. Nick is the patron saint of pawnshops (and, appropriately, for thieves who pawn their stolen goods), while “Old Nick” refers to the devil (hence, the red suit and chimney soot—and “to nick” means to steal) to whom we pawn our souls.

The Tenth Commandment’s prohibition on coveting thy neighbor’s wife (which goes on to include male or female slave, or ox, or donkey, or anything that belongs to your neighbor) originally had nothing to do with sex and adultery but rather with receiving them as pawns for debt.

Somehow, the admonition “Don’t covet thy neighbor’s donkey” just doesn’t have the right ring to it today.

We all know Shakespeare’s admonition “neither a borrower nor a lender be”—and religion typically views both the “devil” creditor and the debtor who “sells his soul” by pawning his wife and kids (and four footed friends) into debt bondage as sinful—if not equally then at least simultaneously tainted, united in the awful bondage of debt.

And, as we know, Lucifer records the debts—of the souls he will collect. He’ll sell you a good time now, but your soul lies in the balance. You buy now, you pay forever. Sort of like Student Loans in America.

For most of humanity today the original sin/debt is to the tax collector, because as they say, the only things in life you cannot escape are death and taxes. Old Nick has a lock on both of those—the tax collector who calls at death.

It is said that only death can “wipe the slate clean” as “death pays all debts;” however, once your soul is sold, there is no escape because hell is the roach motel—you’ve checked in and you will never get out. But Christ is the redeemer—he’s a sin eater, repaying your debts to let you sinners get to heaven.

You can redeem your tax debts by delivering the sovereign’s own IOUs in payment. Widespread debts to the sovereign ensure widespread acceptance of the sovereign’s own IOUs. This means that many will work for the sovereign, or work to produce what the sovereign wants to buy. Even those without tax debts will work for the sovereign’s IOUs knowing that others need them.

This is now the most common way that sovereign government moves resources to the public sector: In recent centuries through taxes, although as we go back in time, other liabilities such as fines, fees, tithes, and tribute were more important.

Of course, there are other ways to move resources to the public sector. On one end of the spectrum of alternatives we have the military draft or eminent domain. On the other we have volunteerism—Peace Corps or VISTA.

For many purposes, however, “monetization” has proven to be more effective for a variety of reasons that need not detain us now. Monetization proceeds in two steps: the first is to impose a monetary tax and the second is to put a monetary price on the resources government wants.

(That leads to issues related to pricing power and hence inflation—topics for another day. As monopoly issuer of the currency that is required to “get out of jail free”, sovereign government potentially has a great deal of power to set prices that it pays, far more than it normally exercises. Not saying that it necessarily should exercise those powers, however, this is part of MMT’s answer to hyperinflation hyperventilators.)

From this vantage point, taxes do not “pay for” government spending. Indeed, no taxes can be collected until government has spent. Taxes create a demand for the government’s spending and logically precede that spending.

As we’ve argued, it is neither correct nor politically sensible to link “give to the poor” policy to “tax the rich” policy. The purpose of the tax is to free up resources to pursue the public purpose—including anti-poverty programs.

But our tax system is already doing a HECKUV A JOB creating unemployed resources. We can spend on the poor (and on a full range of other public policies) and thereby mobilize those unemployed resources. We do not need more taxes—now—to cause even more unemployment.

If Congress ever got hold of its senses (no, I’m not holding my breath), it would increase spending (or reduce taxes) to employ idle resources. At some point (probably later rather than sooner) we could come up against resource constraints. At that point we might need to curtail spending and/or raise taxes.

We can examine how to deal with the happy problem of chock-full employment later—we haven’t seen it in the US since WWII and it isn’t on any horizon at present.

Taxes can serve other purposes, too, as I’ve argued earlier in this series. We can use taxes to discourage “sins”—in which case the purpose of the tax is to eliminate “sin” so the optimal sizing of the tax would eliminate sin and hence raise no revenue at all.

Previously, I argued that we can view excessive riches as a sort of “sin” that we want to tax away. Some commentators have argued that high tax rates on high incomes in the early postwar period “worked” by discouraging corporations from paying high incomes to top executives. Exactly! That is how sin taxes are supposed to work. The goal is not to raise revenue but to reduce sin.

I have argued that “predistribution” rather than “redistribution” works better. Once you’ve let the rich become super rich, they have the incentive and the power to defeat the effort to tax them. In my view, those horses have already got out of the barn.

Warren Mosler puts it this way: it is better to tackle inequality at the source. You tackle inequality at the bottom by providing jobs. MMT supports the job guarantee.

You tackle it at the top by constraining the rewards. Warren agrees that high tax rates on the rich is a legitimate political decision, and falls under what he calls social engineering (not to raise revenue but to change behavior). However, he’s proposed what might be more effective measures, such as eliminating treasury securities (that provide interest income to rentiers), banning stock ownership by pension funds backed by the federal government (PBGC), and regulations to constrain and narrow permitted banking activities–all of which remove most of the highest incomes in question at the source.

I’d add limits on executive pay packages at corporations.

We’ve already hinted that a broad-based tax makes sense if the goal is to move resources to the public sector. However, we need to also look at issues of fairness and incentives.

This series will continue with a look at which taxes make the most sense from a public policy perspective.

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Testosterone Pit.

This is precisely what shouldn’t have happened but was destined to happen: Sales of existing homes have gotten clobbered since last fall. At first, the Fiscal Cliff and the threat of a US government default – remember those zany times? – were blamed, then polar vortices were blamed even while home sales in California, where the weather had been gorgeous all winter, plunged more than elsewhere.

Then it spread to new-home sales: in April, they dropped 4.7% from a year ago, after March’s year-over-year decline of 4.9%, and February’s 2.8%. Not a good sign: the April hit was worse than February’s, when it was the weather’s fault. Yet April should be the busiest month of the year (excellent brief video by Lee Adler on this debacle).

We have already seen that in some markets, in California for example, sales have collapsed at the lower two-thirds of the price range, with the upper third thriving. People who earn median incomes are increasingly priced out of the market, and many potential first-time buyers have little chance of getting in. In San Diego, for example, sales of homes below $200,000 plunged 46% while the upper end is doing just fine. But the upper end is small, and they don’t like to buy median homes [read… Housing Bubble 2 Veers Elegantly Toward Housing Bust 2] 

Yet it’s going according to the Fed’s plan. Its policies – nearly free and unlimited amounts of capital for those with access to it – have created enormous wealth in a minuscule part of the population by inflating ferocious asset bubbles, including in housing. But now electronic real-estate broker Redfin has made it official: in 2014 through April, sales of the most expensive 1% of homes have soared 21.1% year over year, while sales in the lower 99% have dropped 7.6%.

And it wasn’t the first year. In 2013, sales of 1%-homes jumped 35.7%, while sales of the other 99% rose 10.1%. And in 2012, sales of 1%-homes rose 17.5%, while the rest of the market inched up a mere 2.9%.

The downtrodden who have to make do with buying the remaining 99% of the homes, these modern hoi polloi so to speak, whose real incomes have stagnated or declined as they face the soaring home prices of the Fed’s second housing bubble in less than a decade, to be financed at still historically low mortgage rates, well, they’ve hit a wall.

But at least luxury is thriving. In 9 of the 29 markets Redfin tracked, sales of the priciest 1% of homes jumped by over 50%. The top three were all here in the Bay Area – not surprisingly, given the miracles of the worldwide money transfer machine of IPOs and multi-billion-dollar startup acquisitions [Momentum Stock Fiasco Pricks San Francisco Housing Bubble].

In Oakland, sales of 1%-homes skyrocketed 96.2%, in San Jose 91.2%, and in San Francisco 72.2%. But in all three cities, sales of the 99% are down so far this year! So this isn’t exactly a booming housing market but a booming luxury market. A lopsided monstrosity that looks like this:

In a number of cities, including in some of the red-hottest housing markets of last summer, sales of homes in the 99% category have plunged. The worst: Los Angeles -11.7%, San Diego -12.3%, Minneapolis -12.5%, Orange County -12.7%, Sacramento -15.5%, Phoenix  -15.7%, Las Vegas -16.3%, and Ventura -16.3%.

Some of these cities aren’t exactly cheap places to buy a 1%-home. In San Francisco, the median price is already over $900,000. But the minimum 1%-home? $5.35 million, according to Redfin. You’ll need enough after-tax income – if you’re not plunking down the cash you got from selling your startup – to cough up a monthly mortgage payment of $21,300. LA is second in line with the minimum 1%-home setting you back $3.65 million, or a monthly mortgage payment of $14,600. That’s the minimum. On the upper end, only the sky is the limit….

Location, location, location. Prices of 1%-homes vary by neighborhood. In my crazy San Francisco, Redfin found that Presidio Heights came out on top at $7.48 million for the average 1%-home, neck to neck with neighboring Pacific Heights at $7.18 million, and well ahead of Russian Hill at $6.53. But Presidio Heights was only the 6th most expensive neighborhood in the report, the top five all being in LA. King of the hill: Beverly Glen, where the average 1%-home costs a cool $11.86 million.

There are more expensive towns in the Bay Area, like Atherton, that could compete with the priciest neighborhoods LA has to offer. But they’re too small to make it into the stats. And these stats are a perfect illustration of what the Fed has set out to accomplish: the “Wealth Effect” – a semi-religious doctrine propagated by the Greenspan Fed and elevated to a state religion by the Bernanke Fed.

The relentless money-printing binge and zero-interest-rate policy did what it was designed to do: inflate asset bubbles and make some players rich, but not all. A home that cost $150,000 and jumps 50% in price will make the owner $75k. A home that cost $15 million and then jumps 50% will make the owner $7.5 million. A private equity firm that can borrow at near zero cost to buy up 40,000 homes might hope to gain around $5 billion. That’s how the Wealth Effect works.

The problem for the housing market is that there aren’t enough home buyers in that coddled 1%-category. The few can push up prices for a while but aren’t numerous enough to push up sales of the overall market. And they don’t like to buy median homes. Yet, as prices rise, homes move further out of reach of the 99%, and inevitably, sales drop further. At some point, something has to give. We already know from the last housing bubble and bust cycle what will give: prices. And afterwards, we’ll wonder, as we sort through the debris, how the Fed managed to sucker us into a second housing bubble and bust in just one decade.

The equation might not have gone so horribly awry if each class of college graduates had seen their incomes skyrocket in line with their student debt. But that’s a crummy joke in America. Read….This Chart Is The Fate of Housing In America As Student Loans Bankrupt A Whole Generation

By Lambert Strether of Corrente.

I like to think that economics should be like plumbing, and if you had my house you’d see why I’d be happy if there were a Sveriges Riksbank Prize for the great plumbers of the world. Good plumbing is very important, as you know if you’ve ever had the pipes fail. There is also an ethic to plumbing; the plumber should exercise all this skills of their craft as a contractor, shouldn’t put in cheap stuff when good stuff was specified, should warn you if you are about to do something stupid, and needs to deliver toilets that actually flush and sinks that actually drain, and needs to ensure that sewer gas doesn’t blow up the whole house. (We could think of neo-liberals as rotten plumbers who did blow up the house.) And although every plumber has a slightly different toolbox, and a slightly different techniques and points of emphasis, nevertheless there is scientific reasoning behind plumbing — for example, “water runs downhill” — and you can go to plumbing school and learn about it. Of course, I could never be a plumber, though some days I wish I could have been, because I don’t see very well and I’m all thumbs. However, I know enough about plumbing, and enough about my house, to find a good plumber when I need one. A plumber that will free up the pipes and get the job done.

And I like to think of MMT as the kind of plumber I’d like to have work on the economy. I’m not an economist and didn’t go to that school. But I think I know enough about MMT, and enough about political economy, to pick my plumber.

My reasons are simple and pragmatic: I want people like me (working people) to have nice things — concrete material benefits. Lots of them. And I believe MMT — unlike other schools of thought, but especially neo-liberalism — can deliver on that promise, given the chance. But there are obstacles: MMT, like plumbing, isn’t all that simple, it’s not all that well-known, and it’s “heterodox,” where neo-liberalism is Orthodox with a capital O.

So I took on the project of putting “Why MMT” onto a postcard. That’s not the same as getting an entire textbook of MMT onto a postcard, but I hope to at least persuade you to put the postcard up on your fridge and keep it there. Here it is:

Let me just go point by point. (I’m going to be linking mostly to the MMT Primer[1] at New Economic Perspectives, but also to this trenchant article from Professor Paul Davidson, and transcripts from the 2010 Fiscal Sustainability Conference. Not being an expert or especially creative, I have to go to the sources and quote them. I apologize in advance for any severe pain caused to those quoted.[2])

1) Federal taxes do not fund Federal spending (fiat money system)

Stephanie Kelton said in her presentation at 2010′s Fiscal Sustainability Conference:

[T]he government is the issuer of its currency. It is not like a household. It doesn’t have to raise money by borrowing or collecting taxes in order to spend. Those of us in the private sector have to earn or borrow dollars before we can spend. The government must spend first. And we say this, and sometimes people have a hard time understanding that. How can the government spend first? How can it not spend first? How could the government collect taxes, in dollars, first? It first had to have spent those dollars into existence. The spending has to come before the payment or the collection of taxes. The government must spend first. Government spending is not (we use this term a lot) operationally constrained by revenues. It doesn’t need tax payments and bond sales in order to fund itself. It is not operationally constrained. The only relevant constraints are self-imposed constraints. We talked a little bit about this earlier, things like debt ceilings. That’s a self-imposed constraint. Rules that prevent the Treasury from running an overdraft in its account at the Fed. That’s a self-imposed constraint. It is a constraint that is imposed by Congress. Rules that prevent the Fed from buying Treasury bonds directly from the Treasury, so-called monetizing the debt, is a self-imposed constraint.

So why do we have taxes, then? To give money value! Rebecca Rojer in The New Enquiry:

Forcing people to pay their taxes in a money that is otherwise worthless creates demand for money and gives it its value. This idea, called chartalism, is one of the core building blocks of Modern Monetary Theory. “Modern money” is fiat money, state-issued currency not backed by precious metals or any other commodity. … You cannot trade in fiat money with the state for a fixed quantity of gold or barley, but you still need it to pay taxes.

Sovereigns [like the United States] create money as a tool to obtain the labor and other resources they need to fulfill their political goals. The sovereign steers the ship, at least initially, not some money god. If sovereignty lies with the people, money can be used to serve the common good. If people lack formal political power, more democratic layers of sovereignty may be possible in the shadow of the official sovereign, provided the means of production exists within a community. An understanding of modern money, and its relationship to sovereignty, would be necessary but far from sufficient to bring about such transformations.

Here I should address the pre-2008 pre-2016 hope and change “tax the rich” meme being pushed by the same crowd that brought us Obama. MMT, as such, isn’t against taxing the rich, and many MMTers are for it. For example, I think it’s good to tax the rich to prevent the formation of an aristocracy of inherited wealth, to prevent the rich from buying the government up with their loose cash, and for the sake of their children, to whom wealth often does not bring happiness. However, a program of taxing the rich is often coupled with the claim that such taxes are needed to fund services, a claim that puts us squarely into “it’s what they know that ain’t so” territory.

2) The US can never run out of money (it’s a currency issuer)

Stephanie Kelton had this to say in her presentation at 2010′s Fiscal Sustainability Conference:

Can the government run out of money? The U.S. government can’t run out of money any more than the Washington Nationals Baseball team stadium can run out of points. Every time a ball game is played at Washington National Stadium, some team scores some points and they appear on the screen and then the other team scores and some more points appear on the screen. And there’s nobody behind the screen going, ‘Hey Johnny, we’re running out of points here’, you know, right? Look in the trust fund. That’s not the way it happens. You just add the points.

Same exact thing with the way the government operates. And this is the quote that Marshall brought up earlier and the one that Warren likes to use a lot, and I like it too. So here it is in writing so that you know we didn’t make it up. This is Ben Bernanke in an interview on Sixty Minutes just last year when Pelley asked him, “Is that tax money the Fed is spending?” And Bernanke says, “It’s not tax money. The banks have accounts at the Fed much the way that you do, have an account at a commercial bank. So when we want to lend to a bank, we simply use the computer to mark up the size of the account they have with the Fed.

Note that this demolishes the constant refrain of Beltway institutions like the Peterson Institute, or Bowles-Simpson, or the Can Kicks Back, that “we’re running out of money.” Not only are we not, we can’t. The United States is sovereign in its own currency, creates it by fiat, and literally and truly cannot run out. Bill Mitchell writes:

[T]he government in a fiat monetary system is not “revenue-constrained”.

Intuitively this is hard to accept because we are so wedded to the idea that nothing is certain but death and taxes and that the latter is to raise money for governments to spend. The issue of taxation is also very emotional – as we see in some comments on my blog – taxation is linked by conservatives to concepts of slavery; loss of freedom; etc.

So the idea of a government that is not revenue-constrained is hard to grasp at the emotional level.

It is. It is indeed.

3) Real resources limit Federal programs (and not money).

Quoting (at Warren Mosler’s suggestion) Professor Paul Davidson:

The U.S. dollar is not legally convertible into anything by the government on demand [and hasn't been since Nixon closed the gold window]. It is, however, designated by the government as the only means of discharging federal tax liabilities. Tax liabilities are an ongoing debt the private sector owes the government, and they create a continuous need for dollars. The private sector obtains the needed dollars primarily as payment for the transfer of real goods and services to the government, and it is government spending or lending that provides the dollars needed to pay taxes. For purposes of this analysis, government spending includes spending by the government or any of its agents. For example, when the central bank buys foreign currency, it is the same, for cash flow analysis, as the treasury buying military equipment. This is commonly referred to as viewing the treasury and central bank on a consolidated basis.

The imperative of taxation is to create sellers of real goods and services willing to exchange them for the unit of account selected by the government. Dollar denominated tax liabilities function to create sellers of real goods and services who must have dollars to extinguish their tax liabilities. Raising revenue, per se, is of no consequence to the government, as dollars are not a limited government resource, but a liability, or tax credit, that can be issued at will. The government’s ability to raise revenue does not limit what it is able to purchase. The purchasing power of the government is limited only by what is offered for sale in exchange for dollars.

“[W]hat is offered for sale in exchange for dollars”: That is the real resources. Look around you. Is there work that needs to be done? Are there the real resources to do it? Then we can afford to do it. Rebecca Rojer writes:

Those at the very tip of our economic pyramid understand that fiat money is unlimited, but most everyone below believes it to be scarce.

How those at the tippy top must be laughing!

4) So, no SS/Medicare financing problem

Stephanie Kelton on Social Security:

”Funding Social Security is always and everywhere a political choice. The strongest evidence of this comes directly from the 2009 Annual Report of the Trustees. In that report, they predict gloom and doom for Social Security because “there is no provision in current law that would enable full payment of benefits, once the Trust Funds are exhausted”.

In contrast, the Supplementary Medical Insurance (SMI) Trust Funds are “both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year’s expected costs.”

It is that simple. The former is in ‘trouble’ because the government isn’t committed to making the payments, and the latter gets a clean bill of health because the government will always make the payments.”

Exactly the same logic applies to Medicare.

5) So, unemployment means the deficit isn’t big enough

Bill Mitchell, on What Causes Mass Unemployment:

The purpose of State Money is to facilitate the movement of real goods and services from the non-government (largely private) sector to the government (public) domain.

Government achieves this transfer by first levying a tax, which creates a notional demand for its currency of issue.

To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency. This includes, of-course, the offer of labour by the unemployed.

The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.

This analysis also sets the limits on government spending. It is clear that government spending has to be sufficient to allow taxes to be paid. In addition, net government spending is required to meet the private desire to save (accumulate net financial assets).

It is also clear that if the Government doesn’t spend enough to cover taxes and the non-government sector’s desire to save the manifestation of this deficiency will be unemployment.

6) The Jobs Guarantee enables democratic control over a living wage

How would the JG work from the perspective of a working person (not an owner?) Or from the perspective of the millions of permanently disemployed? The MMT Primer:

If you are involuntarily unemployed today (or are stuck with a part-time job when you really want to work full time) you only have three choices:

1. Employ yourself (create your own business—something that usually goes up in recessions although most of these businesses fail)
2. Convince an employer to hire you, adding to the firm’s workforce
3. Convince an employer to replace an existing worker, hiring you

The second option requires that the firm’s employment is below optimum—it must not currently have the number of workers desired to produce the amount of output the firm thinks it can sell. …

If the firm is in equilibrium, then, producing what it believes it can sell, it will hire you only on the conditions stated in the third case—to replace an existing worker. Perhaps you promise to work harder, or better, or at a lower wage. But, obviously, that just shifts the unemployment to someone else.

It is the “dogs and bones” problem: if you bury 9 bones and send 10 dogs out to go bone-hunting you know at least one dog will come back “empty mouthed”. You can take that dog and teach her lots of new tricks in bone-finding, but if you bury only 9 bones, again, some unlucky dog comes back without a bone.

The only solution is to provide a 10^th bone. That is what the JG does: it ensures a bone for every dog that wants to hunt.

It expands the options to include:

• There is a “residual” employer who will always provide a job to anyone who shows up ready and willing to work.

It expands choice. If you want to work and exhaust the first 3 alternatives listed above, there is a 4^th: the JG.

It expands choice without reducing other choices. You can still try the first 3 alternatives. You can take advantage of all the safety net alternatives provided. Or you can choose to do nothing. It is up to you.

If I were one of the millions of people permanently disemployed, I would welcome that additional choice. It’s certainly far more humane than any policy on offer by either party. And the JG is in the great tradition of programs the New Deal sponsored, like the CCC, the WPA, Federal Writers’ Project, and the Federal Art Project. So what’s not to like? (Here’s a list of other JGs). Like the New Deal, but not temporary!

OK, what do you mean by “democratic control over the living wage,” then? The MMT Primer describes JG program design:

The national government provides funding for a universal program that would offer a uniform hourly wage with a package of benefits.  The program could provide for part-time and seasonal work, as well as for other flexible working conditions as desired.

The package of benefits would be subject to congressional approval, but could include health care, child care, old age retirement or social security, and usual vacations and sick leave.  The wage would be set by government and fixed until government approved a rate increase—much as the minimum wage is usually legislated. …

And this program wage cannot be “market determined”. It must be socially determined: government offers an infinitely elastic demand for labor at the wage (plus benefits) it chooses to pay. It sets the wage as public policy, then hires all those who accept the offer of a job. To get workers, the private sector will have to offer something better than the JG compensation package. It could be a higher wage, better benefits, better working conditions, or better opportunities for career enhancement.

Intuitively: What the JG does is set a baseline[3] for the entire package offered to workers, and employers have to offer a better package, or not get the workers they need. When I came up here to Maine I’d quit my job voluntarily and so wasn’t eligible for unemployment. Then the economy crashed, and I had no work (except for blogging) for two years. There were no jobs to be had. I would have screamed with joy for a program even remotely like this, and I don’t even have dependents to take care of. It may be objected that the political process won’t deliver an offer as good as the Primer suggests. Well, don’t mourn. Organize. It may be objected that a reform like the JG merely reinforces the power of the 0.01%. If so, I’m not sure I’m willing to throw the currently disemployed under the bus because “worse is better,” regardless. Anyhow, does “democratic control over the living wage” really sound all that squillionaire-friendly to you? Aren’t they doing everything in their power to fight anything that sounds like that? The JG sounds like the slogan Lincoln ran on, to me: “Vote yourself a farm!” [3]

So, what does the JG for the economy? MMT was put together by economists; from an economists perspective, what is it good for? Why did they do that? The Primer once more:

some supporters emphasize that a program with a uniform basic wage[4] also helps to promote economic and price stability.

The JG/ELR program will act as an automatic stabilizer as employment in the program grows in recession and shrinks in economic expansion, counteracting private sector employment fluctuations. The federal government budget will become more counter-cyclical because its spending on the ELR program will likewise grow in recession and fall in expansion.

Furthermore, the uniform basic wage will reduce both inflationary pressure in a boom and deflationary pressure in a bust. In a boom, private employers can recruit from the program’s pool of workers, paying a mark-up over the program wage. The pool acts like a “reserve army” of the employed, dampening wage pressures as private employment grows. In recession, workers down-sized by private employers can work at the JG/ELR wage, which puts a floor to how low wages and income can fall.

Finally, research indicates that those without work would prefer to have it:

Research by Pavlina Tcherneva and Rania Antonopoulos indicates that when asked, most people want to work. Studying how job guarantees affect women in poor countries, they find the programs are popular largely because they recognize—and more fairly distribute and ­compensate—all the child- and elder care that is now often performed by women for free (out of love or duty), off the books, or not at all.

Enough of this crap jobs at crap wages malarky!

7) The Jobs Guarantee wage determines the value of the dollar

Quoting Professor Paul Davidson once again:

The proposed [JG] program recognizes that the government is a monopoly supplier of its currency. Price is set through the [JG] wage, which defines the purchasing power of the currency.

The current monetary system is a classic monopoly with the traditional analysis of monopoly sufficient to describe all aspects. The government is the monopoly issuer of the dollars needed by the private sector to pay taxes. … With a gold standard, gold can always be considered fully employed as gold can always be sold to the government at the fixed price. Likewise, with an [JG] policy, labor can always find a buyer. … The government sets the [JG] wage and lets the market allocate all other resources accordingly. This is the same process that determines relative value under a gold standard. Under the ELR proposal, the government adjusts fiscal and monetary policy to maintain the ELR pool much the same way that a government adjusts fiscal and monetary policy to maintain a buffer stock of gold with a gold standard.

All this said, the house design as a whole is not up to the plumber, but the architect. In a democracy, we the people are the architect! And it is up to us to design an ethical house, and also to determine the plumber to hire — I hope MMT — and to design the plumbing. Democratically.

ACKNOWLEDGEMENT: I would like to thank letsgetitdone (Joe Firestone), Scott Fullwiler, and Warren Mosler for their help with the points on the card. Any errors on the card or in the post are, of course, my own.

NOTE [1] Granted, it’s 52 chapters of Primer goodness. Professors! But many of those chapters are responsive to questions or critiques, and others address issues brought up by particular schools, like the Austrians. So just like Wagner’s music is better than it sounds, the MMT Primer is shorter than it looks. So it’s a textbook that needs to be popularized and simplified like the work of every other economic school. Of course, MMT doesn’t have think tank and entire economics departments funded by well-endowed squillionaires to get that work done. Go figure.

NOTE [2] The metaphor that MMT is a toolkit or smorgasbord is appealing but limited. I can’t do justice to Joe Firestone’s work on “knowledge claim networks,” but here’s a discussion.

NOTE [3] At this point, the real economists blanche, and point out that JG jobs are conceived of as “transitional,” and aren’t supposed to replace private jobs, merely to supplement them. And that is probably where the temper of the country is, right now. But I think democratic control over the living wage is a good thing to have until the glorious day when the soviets really do take power, or, more prosaically, until a lot more co-operatives start shaping the political economy to the liking of their members.

NOTE [4] Why doesn’t the minimum wage do this? You must be employed :-):

But the more important point is this: with the JG in place, the program wage and benefits set an effective floor, an effective minimum wage. As Hyman Minsky used to always argue, without the JG the legislated minimum wage is a lie. The true minimum wage is zero—if you cannot find a minimum wage job, you get a zero wage. With the JG in place, the true minimum is the program wage (plus benefits).

NOTE OK, there should be no plumbing! We should all use composting toilets in our back yard! I’m down with that, I’m a permaculturalist! It’s just a metaphor!