Essential Trends - Part II-A: The End of Engineered Stagflation - Eric Janszen

[c1ue]

Re: Essential Trends - Part II-A: The End of Engineered Stagflation - Eric Janszen

In a more normal true free market, the ONLY way to increase prosperity is through value adding. Buy some Iron ore and turn it into steel, value adding. Now you have a product to sell, but must accept the value the market places upon the steel. Your market is entirely dictated by the local prosperity. So THEY have to also find a way to add value .... sow seeds, reap crop, add value...

In such a true free market, the price paid is always dictated by the quantum of local prosperity. So in which case, as a seller of product, you can only sell what they can afford to buy.

But in a credit based system, NO ONE has to add value, all they need to do is borrow that which they do not have in the first place. Ergo, the market place is totally distorted.

While I don't disagree with your description of value add, I do disagree that any credit is necessarily bad.

The process you describe above is not so much different than what a bank 'should' be operating as: short term borrower, long term creditor.

In the process of transmuting short term deposits into long term credit extended to businesses, the bank serves a legitimate role no different than a steel smelter taking in ore and churning out railroad rails.

And while, as I've noted before, I do think your desire of having community based credit is admirable, it is not suited for many, many types of businesses.

Community based credit is likely fine for small, local businesses. It is likely fine for relatively low capital cost businesses. It is similarly well suited to low risk, 'lifestyle' type businesses.

It is not, however, well suited at all for high competitive risk, high capital intensity, highly speculative, or some combination of these three, type businesses.

How would community financing, for example, put together enough capital for a semiconductor wafer fab which costs in the $3 billion range?

While credit and money issuance certainly has been abused, and will certainly be abused in the future, the alternative of hard money is just as destructive.

[Chris Coles]

Re: Essential Trends - Part II-A: The End of Engineered Stagflation - Eric Janszen

While I don't disagree with your description of value add, I do disagree that any credit is necessarily bad.

The process you describe above is not so much different than what a bank 'should' be operating as: short term borrower, long term creditor.

In the process of transmuting short term deposits into long term credit extended to businesses, the bank serves a legitimate role no different than a steel smelter taking in ore and churning out railroad rails.

And while, as I've noted before, I do think your desire of having community based credit is admirable, it is not suited for many, many types of businesses.

Community based credit is likely fine for small, local businesses. It is likely fine for relatively low capital cost businesses. It is similarly well suited to low risk, 'lifestyle' type businesses.

It is not, however, well suited at all for high competitive risk, high capital intensity, highly speculative, or some combination of these three, type businesses.

How would community financing, for example, put together enough capital for a semiconductor wafer fab which costs in the $3 billion range?

While credit and money issuance certainly has been abused, and will certainly be abused in the future, the alternative of hard money is just as destructive.

Thank you C1ue, you make some interesting points. However, you seem not to fully understand where I am coming from; I am not advocating community credit; I am advocating local community savings invested as free enterprise equity capital into the first stage start up IN that local community as also a new way to fund the first stage of the invention process.

My argument being that these first stage companies should be much better capitalised so that they are more stable; better able to overcome normal "gusts". Again that by setting the challenge to the surrounding local community, over the long term, the local saver becomes an integral part of the success of the local employment environment.

At the moment, there is no connection whatever between saving money in a bank and local employment; other than that road seems to have depleted local employment; rather than enhanced it.

The point you make regarding the larger enterprise is again misplaced. If you look at the way such are funded in, say, Japan, they get money lent at rates below any that will create a return. I well remember Sony once getting hundreds of millions at 0.002% which is for all intents and purposes, equity.

No business can prosper for the long term without a solid foundation of equity capital to enable it to endure "Gusts"

In the distant past, all the larger enterprises were funded by far sighted savings institutions at the national level delivering equity capital and very long term low interest credit for working capital. At one time, all such working capital was 25 year @4% and the trade in such bonds was an integral part of the national economy.

Today, a large business might be paying nearer 20% for 4 year money.

What we need and if I have anything to do with it will be delivered; is an old fashioned savings institution that, once it has delivered the local community into stability; then it will set out to also adequately capitalise all the larger enterprises that underpin the national economy. That by long term leadership with credibility built from delivering free enterprise to the nation; savers will see the long term benefit to their own communities by also permitting a proportion of the overall savings to be so invested.

What we have today is exactly the opposite; moreover, that has failed to deliver.

Turning to the UK in the past; we did not have banks delivering any form of credit. We were, and to a large extent, still are, an agrarian society with farmers trading all over the nation in local auctions. Farmers markets were and still are the bedrock of the economy. I grew up watching farmers with large rolls of notes trading face to face with each other for profit in an auction based market where they could only get at the value in another farmers roll of notes. We have forgotten just how stable that can be. Price of wheat was sometimes stable for more than a century.

The idea that we can only move forward as a stable society with the underpinning of the likes of the big investment banks is a complete illusion. It is they that have failed. Yes, they might have spread enormous sums of debt right across the Western economies. But their model has now brought the entire Western economies to the brink of disaster.

We must return to a savings invested long term as equity capital economy. Moreover, particularly into tiny new manufacturing businesses in each and every local community. From that new solid layer of grass roots employment will stem the flow of new skills we need to be able to compete as a nation.

You grow successful crops from the seed with a good seedbed; and successful nations in the same way.

[Chris Coles]

Re: Essential Trends - Part II-A: The End of Engineered Stagflation - Eric Janszen

I suspect the ptb will try and keep the current system going for as long as possible and we will see many many years (decades) of continued decline in real economic activity. I imagine that at some time during this, people will lose it and the system will change and we will see something much fairer and more equitable (but not OWS style). If not, then I see techno feudalism being the theme for civilization forevermore.

Thank you labasta. This time, perhaps, you are being too pessimistic. We will see if you are right over the next few months as I am setting out to see if there is a potential for the change I see as imperitive. My view is some of the leadership is very good and far sighted; now we have to wait to see if they feel they can deliver.

[Chris Coles]

Re: Essential Trends - Part II-A: The End of Engineered Stagflation - Eric Janszen

one of the best things I've ever read, anywhere. brilliant explanation

Thank you sir; Deep Bow!!

[raja]

Re: Essential Trends - Part II-A: The End of Engineered Stagflation - Eric Janszen

The banks are so over their capital limits they cannot lend, (now even to each other), the people, riding around in their BMW's cannot afford to pay their bills and the manufacturers of all the every day products are watching their market reduce because their customers do not have any spare cash to buy them.
THAT is an output gap.

It's also demand destruction, an anti-inflation force.

The only way out is a long process of repaying the original debt while the economy shrinks to the level that allows the repayment.

No, there is another way.

Write off the debt,
Let the banks fail,
Nationalize them,
Prosecute the banksters and clawback their illgotten gains.

And, of course, rewrite and enforce financial regulations to take the power away from the Financial Elite.

This can be accomplished by Revolution, preferrably non-violent.

According to M Hudson:

By giving taxpayers this voice in government, the Dutch and British democracies provided creditors with much safer claims for payment than did kings and princes whose debts died with them. But the recent debt protests from Iceland to Greece and Spain suggest that creditors are shifting their support away from democracies. They are demanding fiscal austerity and even privatization sell-offs.


This is turning international finance into a new mode of warfare. Its objective is the same as military conquest in times past: to appropriate land and mineral resources, also communal infrastructure and extract tribute. In response, democracies are demanding referendums over whether to pay creditors by selling off the public domain and raising taxes to impose unemployment, falling wages and economic depression. The alternative is to write down debts or even annul them, and to re-assert regulatory control over the financial sector.

[gwynedd1]

Re: Essential Trends - Part II-A: The End of Engineered Stagflation - Eric Janszen

How will the fiscal policy driven infrastructure spending be financed, .... taxes, warbonds, fed monetization?

What will happen to the long bond in your view, when the output gap goes negative and inflation ramps up?

Will the fed try to restrain the yield from rising or is that part of the plan?

They've tried to kickstart housing with low rates and failed, and now they will switch to "remember the 1970's" and "better buy now as inflation hedge".

Do not higher yields on treasuries pose a problem for the "solvency" of the US -increasing interest payments on the US debt - and yield spiral up a la the 70's, or will the Fed soak up enough to supress yields.

Trying to keep up housing prices is the problem that got us here. Capital spending is always highest when rehabilitating worthless property for this reason. When people bought houses they could not afford they did not even have furniture in them, a simply proof. Thus the best way to ruin the the economy is to support housing prices. Though refinancing is somewhat canceling out this road to ruin.

Infrastructure spending is self financing with capital and labor surpluses now existent within the economy. However with the perverse monetarist accounting, its not apparently obvious to those in charge.

[gwynedd1]

Re: Essential Trends - Part II-A: The End of Engineered Stagflation - Eric Janszen

Let us put this another way. Take the sale of a new BMW, made in Germany and sold there for say, 50,000 Euro. Now in a normal free market society, if you want to sell your BMW in, say Greece, you have to accept the value that a Greek can afford to pay. The best way of finding that out is to sell the BMW at an auction. But there they might only get a value of, say, 20,000 Euro. So the value earned has a direct relationship to the local economy. If they cannot afford to pay, you have to reduce the price or not sell at all.

What went wrong is that the manufacturer is permitted to sell at the full German price throughout Europe. So, outside of Germany you need to have a source of funding to pay the German price. So the banking system provides excessive debt, right across the Western economies to allow the Greek to pay the German price.

Eventually there is so much debt and the debt then reduces the ability of the Greeks to pay their every day bills to the extent, they now cannot even pay for the existing debt they ran up to buy the BMW's'.

The banks are so over their capital limits they cannot lend, (now even to each other), the people, riding around in their BMW's cannot afford to pay their bills and the manufacturers of all the every day products are watching their market reduce because their customers do not have any spare cash to buy them.

THAT is an output gap.

The only way out is a long process of repaying the original debt while the economy shrinks to the level that allows the repayment.

It is the repayment of the debt overhang that causes the underlying problem of the gap; between what was normal before to what is possible today.

If every manufacturer was forced to accept the "Local" value obtainable by say an auction, then all the books would balance.

If you go back in history to where every town in the UK was what was called a Market Town, where all product was sold at auction at the market that day. Then you will note that the whole UK economy was both stable and fair.

What was paid in London was not what was paid in any other location that was less prosperous.

Today we live in a feudal mercantile economy where an large prominent manufacturer expects to be able to be paid their best price in every market they address.

That is not the way a true free market operates.

Ergo, that is where the output gap originates. From manipulation of the free market.

There are a lot of ways to put it. The problem with the Euro is that it didn't transmit the reality of the transaction which was the consumer + the Greek balance of trade. The BMW was purchased with the credit of Greece closing the value gap the consumer was not filling. Greece balanced the transaction with debt in the balance of trade. One pays off debt with either future productivity or their future income at a discount. If the debt cannot be met, then the seller is under their own illusion that they are making profits. Not a pretty picture indeed. A Greek currency of their own would have been seen as rising prices correcting this dynamically and to the consumer. Now they are left with a misallocation of resources.

If Greece pays with wealth producing assets this may have the effect of reducing their ability to pay, furthering the cycle. Unfortunately merchantalist minded forces behind this transaction inherently seek out these assets, and are not typically interested in raising the consumption of their own population. They are quite happy to skim the output of their own population which gives buying power to financial powers in predatory mechantalist fashion. This is a big money maker. Take the living standards and consumption of the host population and sell it to a foreign population which would hopefully expose an under producing asset and then purchase it (under producing because of the artificial balance of trade).

[gwynedd1]

Re: Essential Trends - Part II-A: The End of Engineered Stagflation - Eric Janszen

There aint no free lunch. This is not the 19th century, where the poor were left to die on the vine, or forced to emigrate. Now the state COULD get away with ignoring the 99%. People are kidding themselves if they think they can actually force anything on those in charge. What has changed is the fact that it is no longer politically acceptable to mow down crowds in the street with Maxim MGs. My concern is will they think of more creative means to accomplish the same?( wars, famine, disease, etc)

The modern welfare state is forced by political pressures to pay for this " output gap" with entitlements of course, the costs of which tend to get out of hand, even when/if the economy returns to normal( which it won't). Of course its cheaper and more productive to put people back to work, and let them take care of themselves. Most so called solutions I've heard never address this, which is really the heart of the matter. What do we do with all the superfluous humanity?

The wise nation that realizes the heart of the matter will return to their natural nationalistic tendencies. Especially those with stable population growth. Just like survivors in a lifeboat know to drop the oars and get the hell out of Dodge after a shipwreck. Look for the break up of the EU, and a return to nationalism, along with all the fun that goes along with that. You are not going to change the basic nature of man, regardless of how many conferences, Unions, and meetings you hold about it.

If people wanted to really do something about all this they'd spend more time figuring out how to encourage an end to the limitless growth economic model, which got us in this mess in the first place. But all I hear is talk about how those in power can keep what they have without fundamentally changing a thing.

Oh but there is a free lunch. They used to call it rent. The laws of conservation were written by those that owe their existence to the first cause where there is no cause. It does not seem so now since there is that class that think themselves fit to receive the inheritance and to rent it out. Its those that have no free lunch that are the most conspicuous because they do not have it.

[c1ue]

Re: Essential Trends - Part II-A: The End of Engineered Stagflation - Eric Janszen

Thank you C1ue, you make some interesting points. However, you seem not to fully understand where I am coming from; I am not advocating community credit; I am advocating local community savings invested as free enterprise equity capital into the first stage start up IN that local community as also a new way to fund the first stage of the invention process.

Thank you for the clarification.

My argument being that these first stage companies should be much better capitalised so that they are more stable; better able to overcome normal "gusts". Again that by setting the challenge to the surrounding local community, over the long term, the local saver becomes an integral part of the success of the local employment environment.

At the moment, there is no connection whatever between saving money in a bank and local employment; other than that road seems to have depleted local employment; rather than enhanced it.

While I understand what you are saying, it is unclear to me that explicitly linking local savings with local employment will stop the financialization of the economy.

It is this financialization which is primarily responsible for employment losses.

While TBTF banksters have a longer reach, it does not follow that a non-TBTF bankster is necessarily any better. We saw in the S & L scandal in the United States that white collar criminal activities are not in any way a pure function of size.

The point you make regarding the larger enterprise is again misplaced. If you look at the way such are funded in, say, Japan, they get money lent at rates below any that will create a return. I well remember Sony once getting hundreds of millions at 0.002% which is for all intents and purposes, equity.

No business can prosper for the long term without a solid foundation of equity capital to enable it to endure "Gusts"

In the distant past, all the larger enterprises were funded by far sighted savings institutions at the national level delivering equity capital and very long term low interest credit for working capital. At one time, all such working capital was 25 year @4% and the trade in such bonds was an integral part of the national economy.

Today, a large business might be paying nearer 20% for 4 year money.

I certainly agree a foundation of capital is necessary for any business, but it is unclear to me still how a large multinational exporter like Sony can in any way build a capital base on community savings. What exactly is the community a nascent Sony would depend on?

I'd also note that many of the large businesses today were built on savings: tax dollars redirected into subsidies by government, as well as government sponsored basic research, government paying for products (see semiconductors), government guaranteed loans, and so forth.

Be that as it may, I still do not see how a closed ecosystem of community savings and community businesses plays out in the world arena.

What we need and if I have anything to do with it will be delivered; is an old fashioned savings institution that, once it has delivered the local community into stability; then it will set out to also adequately capitalise all the larger enterprises that underpin the national economy. That by long term leadership with credibility built from delivering free enterprise to the nation; savers will see the long term benefit to their own communities by also permitting a proportion of the overall savings to be so invested.

What we have today is exactly the opposite; moreover, that has failed to deliver.

Turning to the UK in the past; we did not have banks delivering any form of credit. We were, and to a large extent, still are, an agrarian society with farmers trading all over the nation in local auctions. Farmers markets were and still are the bedrock of the economy. I grew up watching farmers with large rolls of notes trading face to face with each other for profit in an auction based market where they could only get at the value in another farmers roll of notes. We have forgotten just how stable that can be. Price of wheat was sometimes stable for more than a century.

The idea that we can only move forward as a stable society with the underpinning of the likes of the big investment banks is a complete illusion. It is they that have failed. Yes, they might have spread enormous sums of debt right across the Western economies. But their model has now brought the entire Western economies to the brink of disaster.

We must return to a savings invested long term as equity capital economy. Moreover, particularly into tiny new manufacturing businesses in each and every local community. From that new solid layer of grass roots employment will stem the flow of new skills we need to be able to compete as a nation.

You grow successful crops from the seed with a good seedbed; and successful nations in the same way.

I've said before and said again that your goal is admirable.

However, it is far from clear to me that it is a prescription for fixing our present ills.

The banker of yore wasn't a friendly person either; just because he wasn't a faceless bankster does not in any way change the fundamental basis of the profession. Banking by definition is trying to squeeze profit out of those being lent to, while paying as little as possible to those being borrowed from.

A simple thought experiment: if a bankster offers 6% interest on deposits, but the community savings fund only offers 3%, where do you think the money will flow to?

The point isn't that investment banks are good. They are not, though they do fulfill a role. The point is that there is a lot more necessary to have a correctly functioning and minimally parasitic FIRE component to an economy besides localization.

Regulatory and enforcement functions are necessary at all levels.

[Chris Coles]

Re: Essential Trends - Part II-A: The End of Engineered Stagflation - Eric Janszen

Thank you for the clarification.



While I understand what you are saying, it is unclear to me that explicitly linking local savings with local employment will stop the financialization of the economy.

It is this financialization which is primarily responsible for employment losses.

While TBTF banksters have a longer reach, it does not follow that a non-TBTF bankster is necessarily any better. We saw in the S & L scandal in the United States that white collar criminal activities are not in any way a pure function of size.



I certainly agree a foundation of capital is necessary for any business, but it is unclear to me still how a large multinational exporter like Sony can in any way build a capital base on community savings. What exactly is the community a nascent Sony would depend on?

I'd also note that many of the large businesses today were built on savings: tax dollars redirected into subsidies by government, as well as government sponsored basic research, government paying for products (see semiconductors), government guaranteed loans, and so forth.

Be that as it may, I still do not see how a closed ecosystem of community savings and community businesses plays out in the world arena.



I've said before and said again that your goal is admirable.

However, it is far from clear to me that it is a prescription for fixing our present ills.

The banker of yore wasn't a friendly person either; just because he wasn't a faceless bankster does not in any way change the fundamental basis of the profession. Banking by definition is trying to squeeze profit out of those being lent to, while paying as little as possible to those being borrowed from.

A simple thought experiment: if a bankster offers 6% interest on deposits, but the community savings fund only offers 3%, where do you think the money will flow to?

The point isn't that investment banks are good. They are not, though they do fulfill a role. The point is that there is a lot more necessary to have a correctly functioning and minimally parasitic FIRE component to an economy besides localization.

Regulatory and enforcement functions are necessary at all levels.

Aha! Now I see where you are coming from; you only see this as though at all times, funding for business comes from bankers. It was NEVER thus.

What I am doing is re-establishing the base foundations for an economy built upon an equity capital economy. NOT a banking economy.

The clue, (no pun intended ), is your repeated reference to banking.

You say the banker offering a higher percentage of interest will attract the savings. However, it is not interest that is paid from equity capital; it is dividend and historically dividends were always in the order of 8% to which you also may add capital appreciation as the business prospers and others surrounding the original investment see the ongoing potential for a better income from such investment than what they hold elsewhere.

Again, I say that the original funding always came from what is almost invisible today, the stock market "Jobber" .... who was the interface between the company wishing to raise funds and the stock broker. My perception came from all the papers left behind from my Paternal Grandfather who was a Jobber on the London Stock Exchange.

He had great adventures. Also he lived in a era where his word was his bond. So all we were left with were simple letters discussing this or that investment.

We must walk away from banking as a solution. In that respect, THAT is the underlying undercurrent of your debate; that "Financialization" is the twin edged sword.

You see it as; the banking system is the underlying funding for the large companies and that without such financialization we will not get such large and "seemingly" successful companies.

I say that history has been distorted by the PR emanating from banking that has driven everyone to believe that without banks there is no economy.

The true purpose for banking was always as a source of short term working capital. That was their marketplace and their function.

What has occurred over the last six decades or so, is that banking has forced themselves into a position of dominating the funding of lending disguised as "Capital"; against the interest of everyone other than a bank.

Today, everyone is at last waking up to the reality that banks do not create prosperity; other than for themselves.

My point is that when you change from bank funding of loans; for use as capital; to local savings invested as equity capital; you get several benefits.

You can see where your money is invested.

The money placed as equity capital, spent as purchases from that business, back into the local economy; REMAINS IN CIRCULATION WITHIN THE LOCAL ECONOMY.

It is the local economy that prospers from equity capital investment; not the banker.

That is the lost knowledge we have to relearn.

Now add that not only does your original investment retain the money spent within the local community; it retains employment that you can see with your own eyes; and, brings in additional prosperity from the profits of the business.

Again, if the business fails, all that has happened is your savings have been spread throughout the local economy; retaining the prosperity of the wider community.

Banking is a dead end.

Banking has failed as a business and presents no long term solution to the retention of prosperity within any community.

The large investment banks are a failed idea. All they have done is reintroduce a medieval feudal system we all thought was dealt a death blow at the end of WW2.

Yes, local banks serving their original function of providing that important working capital function; have a useful place within a equity capital based economy.

But banking as we know it today is a failure. The sooner we all wake up to that simple fact, the better for everyone.

[Chris Coles]

Re: Essential Trends - Part II-A: The End of Engineered Stagflation - Eric Janszen

Turning to the dividend. This is another aspect of the change from a equity capital based system to a bank loan system. Has everyone noticed that dividends have almost disappeared from many companies. Their market value has been brought in as a measure of the value of the investment. That is only to the benefit of the banks who are draining almost all the profits as interest to be paid back into their own business.

Bank interest paid for the loans, drains away the dividend. Indeed, as a dividend directly competes with the attractiveness of the rates paid to the saver by the bank; then dividends must be suppressed.

Slowly, over many decades, we came to lose sight of all the advantages of an equity capital based economy and instead fell into believing in the siren voice of a banking system that is always hell bent on getting their hands on every penny that they can. It is their business model.

The secondary effect was that they were followed down this dead end by executive governments that found they could borrow money from the banks simply by turning a blind eye to the banking systems use of high levels of leverage. That such new money allowed the government to also take the banking systems lead to stem the flow of private savings into new research and deliver all long term research money from government.

Today we seem to have also fallen into the idea that the economy is today driven by government. No one turns to a old idea called a savings institution; everyone turns to government.

Banking has failed to deliver; governments are so over borrowed, they cannot continue to pretend they also deliver. We have to turn the page and return to local savings creating new industries that then grow more slowly; always based upon the idea that true prosperity stems from value adding with the money supply, (instead of as now, driven by bank leverage), is driven by value adding.

Let a woman, for an example, take a needle and thread and a piece of cloth and create an attractive design and sell it. That is simple value adding. The profit she makes has to be adjusted by a slight addition to the overall money supply. Now take that simple message and extend it right across an economy and you can now see how, over even just a few decades, we can replace all that lost prosperity.

We have to return to a simple model of equity capital investment into any form of value adding. A recognition that any such investment does not decrease prosperity; it adds prosperity even if it fails.

Income from dividends must be the primary aiming point of any business so invested into by the local saver.

Now, all you need to do is allow a proportion of those local savings to be placed into a larger national savings institution; to permit those larger investments into the larger form of business and replace ALL government spending on all forms of business and research with equity capital.

No need for government borrowing.

All money, savings, so invested, retained within the nation as additional prosperity.

Central bank function; to slowly add to the money supply as and when needed, to allow for the function of value adding right across the nation.

To repeat; investment banking has become a failure; a failed idea that has reached its point of collapse. It simply does not work. All it has achieved is re-introduce a medieval feudal economy that simply DOES NOT WORK. PERIOD!

The future is an economy built upon local savings invested as equity capital; PARTICULARLY free enterprise equity capital, invested into any local, or national, business that can add value and create employment.

[gnk]

Re: Essential Trends - Part II-A: The End of Engineered Stagflation - Eric Janszen

EJ:

Europe, forced forward toward greater federalization by the prospect of a collapse of the euro and economic calamity will instead choose fiscal integration and, later, the implementation of an integrated tax and fiscal policy authority. The cost of the alternative -- a collapse of the euro and a total loss on euro bond debts of debtor nations in the zone -- is higher. They will choose the cheaper route, but they will take it in fits and starts.

I recall a quote attributed to Henry Kissinger, and I paraphrase:

"When I need to call China, or Russia, I know who I need to speak to. But when I need to speak to Europe, who do I call?"

The reason I bring this quote up is that it demonstrates there is no real central "de jure", as opposed to the current "de facto" leadership in Europe. On EJ's EMU analysis, I am in complete disagreement. The system is collapsing faster than "Merkozy" can react to it. There is no common language, there are extremely different economies, and the process of debt deflation/depression is accelerating. I see this daily. I live in Greece now and I am witnessing a huge change in people's perceptions. Talk of the drachma is not uncommon. People want to blame someone or something, and the Euro will take the hit. The Drachma is seeming like real alternative to many more people. I wouldn't be surprised if such currency nationalism exists elsewhere in the periphery. People are asking themselves: "if I starve under the Euro, why save it?"

When southern europeans start believing they have nothing more to lose, it is then goodbye to the Euro. A flashpoint will be reached just as in MENA. Blame needs to be assigned to someone or something. It will be the Euro. Germany wants to starve the periphery, and it will end in disaster. As I have written before, German plans of European domination always end in spectacular failure, this time is no different.

Peak Oil and The EU disaster will both take center stage next year. 2012 will be much more worse than EJ writes, JMHO. The full EU disintegration process can even begin this week. It's anyone's guess.

EJ, your conclusion of full integration requires a decisionmaker... someone to decide that a Euro collapse is more costly, and that same someone who also has the power to dictate a policy and outcome to the rest of Europe. Such a person does not exist.

Europe has no Ceasar.

Just as in the US, a financial junta has taken place in Europe. Italy's Monti is a former employee of Goldman Sachs, and Greece's Papdemos - a former employee of the Federal Reserve, and the ECB. This is the banksters' last stand. To appoint so called "technocrats" that can save the system. But are they technocrats, or mere bankers that have no idea how the system actually works... the same "technocrats" that devised the faulty Euro architecture to begin with? Probably the same technocrats that pitifully decried "no one saw this coming!"

Once it is apparent that these new leaders can no better deliver results than their predecessors.... it's game over.

[Slimprofits]

Re: Essential Trends - Part II-A: The End of Engineered Stagflation - Eric Janszen

U.S. re-entry into recession in 2012 is inevitable, followed by a new round of economic stimulus via deficit spending.

First part is probably spot on and the second part is laughable. Your assessment of politics is continuously missing something. From declaring that Obama was a FIRE candidate, to endorsing his candidacy months later, to declaring the Scott Brown election as some kind of righteous political awakening, the beat goes on....

[c1ue]

Re: Essential Trends - Part II-A: The End of Engineered Stagflation - Eric Janszen

Aha! Now I see where you are coming from; you only see this as though at all times, funding for business comes from bankers. It was NEVER thus.

I fear you are misunderstanding - I have never stated that banks are the only way by which capital can be gathered, then deployed to business.

You must further clearly define what a 'bank' is in your terms.

Strictly speaking, any institution which receives deposits (in return for paid interest) and then makes loans is a bank. You can have variations where the deposits don't receive interest as in a Jewish gamach, but the aim is still the same: short term borrow, long term lend.

There are alternate ways by which capital can be gathered and then deployed: angel funding (wealthy individuals), venture capital, government tax & subsidy, and so forth.

What I am doing is re-establishing the base foundations for an economy built upon an equity capital economy. NOT a banking economy.

The clue, (no pun intended ), is your repeated reference to banking.

You say the banker offering a higher percentage of interest will attract the savings. However, it is not interest that is paid from equity capital; it is dividend and historically dividends were always in the order of 8% to which you also may add capital appreciation as the business prospers and others surrounding the original investment see the ongoing potential for a better income from such investment than what they hold elsewhere.

The problem with your statement above is that you are using historical data which counts dividends from companies which historically were sponsored by the government. The East India company, for example, was one of the earliest corporations and was literally given a monopoly on East India trade. This is hardly a prime example of either a community funded enterprise nor a 'normal' dividend payment scheme.

You're also ignoring that early stage enterprises cannot afford to pay dividends. The growth stage of any company requires excess profits to be reinvested for growth.

You see it as; the banking system is the underlying funding for the large companies and that without such financialization we will not get such large and "seemingly" successful companies.

I say that history has been distorted by the PR emanating from banking that has driven everyone to believe that without banks there is no economy.

The true purpose for banking was always as a source of short term working capital. That was their marketplace and their function.

As I noted above, your impression is quite wrong.

What has occurred over the last six decades or so, is that banking has forced themselves into a position of dominating the funding of lending disguised as "Capital"; against the interest of everyone other than a bank.

In fact banks have always been the dominant source of funds. The only difference was in the past, the 'bank' as an institution may well have been a family like the Rothschilds as opposed to a corporation engaged in banking.

To say that banks only have dominated in the last 6 decades is to ignore the very real impact of such families as the Rothschilds, as well as more overt examples such as the Medici takeover of Florence.

The only difference between today and the past - as Dr. Michael Hudson has noted - is that in the past sovereign power trumped finance power. Sovereign rulers and states have soldiers, whereas finance power at best has mercenaries.

Today, everyone is at last waking up to the reality that banks do not create prosperity; other than for themselves.

I think this statement is far too strong. Warren Buffet, as a shadow bank, has done quite well both for himself and his entire holding company, including its employees, for many decades.

It is far from clear to me that the inherent abuses implicit in banking must always result in ruin.

My point is that when you change from bank funding of loans; for use as capital; to local savings invested as equity capital; you get several benefits.

You can see where your money is invested.

The money placed as equity capital, spent as purchases from that business, back into the local economy; REMAINS IN CIRCULATION WITHIN THE LOCAL ECONOMY.

It is the local economy that prospers from equity capital investment; not the banker.

That is the lost knowledge we have to relearn.

Now add that not only does your original investment retain the money spent within the local community; it retains employment that you can see with your own eyes; and, brings in additional prosperity from the profits of the business.

As I noted previously, these precepts might apply to a local business, but how would they apply to say, Groupon? Amazon? Taiwan Semiconductor? Siemens? General Electric's generator business?

Again, if the business fails, all that has happened is your savings have been spread throughout the local economy; retaining the prosperity of the wider community.

So now you're expanding the definition of the local economy upwards such that failures can be absorbed via collectivization of risk. What then is the definition of 'local' in a dollar or pound figure? In a regional aspect?

Note that a physical definition of local inherently disadvantages the less wealthy and less populous regions, whereas a monetary definition of local presents great challenges of its own.

The large investment banks are a failed idea. All they have done is reintroduce a medieval feudal system we all thought was dealt a death blow at the end of WW2.

I guess your definition of failed is different than mine. If the definition of success is growth and increased profits, the investment banks have done very well indeed.

You are also failing to distinguish between a deposit bank and an investment bank. Goldman Sachs is clearly the latter, but what is Bank of America? Citibank?

What proportion of the real estate bubble self reinforcing chain of transactions was investment bank? GS didn't originate a single mortgage, but it and its cohorts, as well as the supposed deposit banks, were clearly driving the entire chain from mortgage origination on up, as well as influencing ancillary functions like title law, appraisals, credit ratings, and so forth.

While I understand your desire to see a better deployment of local capital for local benefit, you have not successfully shown to me that the operational aspects of your proposal are viable.

You assert that dividends are a better ROI mechanism than interest, but dividends are the hallmark of mature companies. Dividends before maturity are rare and arguably fiscally unwise for companies; furthermore dividends are voluntary as we can see from the various tech companies like Apple and Google.

You also seem to imply that community investment presents less risk as individual investments are pooled throughout all the different individual investments in community businesses. Yet it is precisely the pooled money which allow investment banks their abuses.

What precisely prevents a community investment pool manager from exercising the exact same abuses his i-bank counterpart engages in?

How do you get everyone in the community to invest their savings into this pool? Or prevent multiple competing pools from forming?

It seems much of the issues you seek to solve assume altruistic or at least idealistic behavior on the part of both savers and managers. For i-banks, neo-liberal theory was that competition would force this behavior - we all know how well that has worked out.

To me it seems more that what is missing is effective regulation and enforcement - a supervisory function.

[Chris Coles]

Re: Essential Trends - Part II-A: The End of Engineered Stagflation - Eric Janszen

I fear you are misunderstanding - I have never stated that banks are the only way by which capital can be gathered, then deployed to business.

You must further clearly define what a 'bank' is in your terms.

Strictly speaking, any institution which receives deposits (in return for paid interest) and then makes loans is a bank. You can have variations where the deposits don't receive interest as in a Jewish gamach, but the aim is still the same: short term borrow, long term lend.

I agree with your definition of a bank.

However, before answering the detailed points you raise I must introduce a thought that sprang into mind as I read your comment; particularly the last sentence:

To me it seems more that what is missing is effective regulation and enforcement - a supervisory function.

That prompted me to remember a wonderful Cirque Du Soleil show played out in the City of Salisbury in Wiltshire here in England in the early 1990's. They played Faust, and the part I instantly remembered was when the poisoned challis was presented with their depiction of bright blue sparks emanating from the offered bowl of wine.....

So soporific, so sublime..... all we need is some regulation and all will be fine again. Go on, take a sip! No harm!

That in turn reminded me of all the many meetings I have had with bankers. One that brought in his junior so he could demonstrate how to humiliate me. Or the one who, when I was introducing another colleague, interviewed us in a broom cupboard.

Or the best of all a meeting over lunch with one who set out in detail why the banking system has to move their managers every 18 months or so, due to the propensity to steal money from client accounts to use for their own "projects". Particularly old lady's accounts that remain dead for most of the year.

What I have learned over a lifetime is that the idea of a bank has deep flaws that relate to their having so much of other peoples money in their hands, day after day. That when you factor in the immense universe of different personality traits within humanity; you get such a variety of solutions. Their business is to take some money in and lend it out, but not on a one to one ratio, instead on a many to one ration.

So banks lend out money, more than they hold as a reserve and always expect to receive back even more than they lend as additional interest earned. At first sight this is a rather easy thing to deal with..... except that it always ends with a drain on the rest of any national economy.

It always ends with a bust.

We keep going through a period of seeming prosperity; only to end with a downturn.

You are like the bridge engineer that has built a bridge that keeps falling down; next time it will be different, all we need is a little more regulation and I will get it right .... next time! Sic!

Banking has its use in an economy, but the banking model has a deep flaw, while at first glance it seems to bring greater prosperity; in the end, (as everything has to end), it drains away prosperity. The more the banks lend, the greater the instability.

Add, that as I have also discovered, it leads to two other problems; it gives governments the idea that they can also borrow to create new industry, outside of the private sector; and, that it has no mechanism to fund free enterprise equity capital investment into new, particularly creative, businesses.

The end result we can see all around us today, many millions of young people unemployed, whole nations on the brink of financial collapse.

Banking on it own ..... repeatedly ......... fails.

So, what is wrong?

As things stand, we do not have a recognised mechanism to replace that lost prosperity; to create all those millions of jobs.

Banking is like a strong acid, it needs an opposite; an alkaline to provide a balance; to neutralise the negative function of a banking dominated economy.

That function is an adequate source of free enterprise equity capital.

So, as you see, a debate helps to uncover the force of the underpinning thinking that brought me to write, nearly two decades ago, about an idea I called The Capital Spillway Trust. And, it has taken me that same length of time to discover another part of the underlying reasoning.

A balanced economy must have an equivalent flow, back into the economy, of equity capital, to balance out the depleting effect of interest bearing bank lending. That is, if you believe, as I do, in free enterprise and private, competitive business. True free enterprise, true free markets; to take the ideas of the millions and allow them to become a reality.

Banking has to have control and thus must be balanced by the freedom of free enterprise.

That free enterprise equity capital both balances economically as well as socially.

That, if we must have a banking system; we must also have at every level of society, equivalent savings institutions dedicated to the delivery of free enterprise equity capital back into the economy to neutralise the acidity of banking.

There are alternate ways by which capital can be gathered and then deployed: angel funding (wealthy individuals), venture capital, government tax & subsidy, and so forth.

I can only answer that it is my understanding that the Bank of England agrees with my view, that we do not have any functional mechanism to create free enterprise jobs at the grass roots of society using equity capital.

The problem with your statement above is that you are using historical data which counts dividends from companies which historically were sponsored by the government. The East India company, for example, was one of the earliest corporations and was literally given a monopoly on East India trade. This is hardly a prime example of either a community funded enterprise nor a 'normal' dividend payment scheme.

This is a red herring; I am always talking about the creation of true free market, free enterprise business. I am never talking about the actions of governments; other than to disparage them. We all agreed, many decades ago, that monopoly is not the way to produce a functional economy.

You're also ignoring that early stage enterprises cannot afford to pay dividends. The growth stage of any company requires excess profits to be reinvested for growth.

If you look at the detailed proposals as set out in The Capital Spillway Trust Response to the Green Paper; Financing a private sector recovery, www.chriscoles.com/page4.html you will see that I always accept that there must be a period between initial investment and profit. Indeed, if you also look at chapter 3 The Road Ahead from a Grass Roots Perspective www.chriscoles.com/page3.html you will also note that I quote from discussions with Japanese businessmen that told me about their one, ten and one hundred rules where they do not expect profit for at least ten years.

As I noted above, your impression is quite wrong.

In fact banks have always been the dominant source of funds. The only difference was in the past, the 'bank' as an institution may well have been a family like the Rothschild's as opposed to a corporation engaged in banking.

To say that banks only have dominated in the last 6 decades is to ignore the very real impact of such families as the Rothschild's, as well as more overt examples such as the Medici takeover of Florence.

It is true that there are many that attribute all our financial problems to the likes of families such as the Rothschild's; or, again, that they are the defining reason, as you so describe, for all of our past success. What I believe is that, as with any family business, if it works and brings in a profit, why change anything?

All I can add is that I do not believe in any conspiracy; simply that they need to look more deeply into the underlying problems their own prosperity has brought their surrounding nations.

That their own prosperity has been brought at a price they now must take into consideration. That banking, without the input of equity capital to balance the economies; is constantly becoming unstable. That on its own, it keeps failing to deliver stability.

The only difference between today and the past - as Dr. Michael Hudson has noted - is that in the past sovereign power trumped finance power. Sovereign rulers and states have soldiers, whereas finance power at best has mercenaries.

It is my humble opinion, openly expressed; that governments should NEVER be involved in any form of job creation. As all that brings is a bureaucratic model that inevitably develops into feudalism.

I think this statement is far too strong. Warren Buffet, as a shadow bank, has done quite well both for himself and his entire holding company, including its employees, for many decades.

All I will add is to ask him, please, to take a careful look around him and ask if the long term effect of working a feudal mercantile economy, has brought true, long term prosperity; to the wider nation that surrounds him.

It is far from clear to me that the inherent abuses implicit in banking must always result in ruin.

As I noted previously, these precepts might apply to a local business, but how would they apply to say, Groupon? Amazon? Taiwan Semiconductor? Siemens? General Electric's generator business?

The precepts I have set out are only set down as applicable to the very small first stage start up. I have never set out to exclude the needs of the larger enterprise...... except that I do believe that if we continue to only fund new start ups under the banner of venture capital, where the new business is funded to become a purchase by another, larger company; then we lose all the many benefits of a fully competitive industrial economy.

So now you're expanding the definition of the local economy upwards such that failures can be absorbed via collectivization of risk. What then is the definition of 'local' in a dollar or pound figure? In a regional aspect?

Note that a physical definition of local inherently disadvantages the less wealthy and less populous regions, whereas a monetary definition of local presents great challenges of its own.

One of the great challenges is to allow a less prosperous part of the wider economy to become involved with their own supply chain. Look back at history and it was quite the normal thing for the local population to turn out to "Build a Barn" for a neighbour. That is in point of fact, true local capitalism, Indeed, free enterprise capitalism. They do not take a share; they give their labour to help another to also prosper. What I am going to deliver is exactly the same mechanism, but this time set around the concept of local savings used, where the local community wish, (NOT imposed by any other mechanism), to create new employment.

I guess your definition of failed is different than mine. If the definition of success is growth and increased profits, the investment banks have done very well indeed.

Here we introduce a subtlety; my idea of success is that the many become both free, prosperous and thus successful. There are many today that do not believe that the investment banks have achieved that.

You are also failing to distinguish between a deposit bank and an investment bank. Goldman Sachs is clearly the latter, but what is Bank of America? Citibank?

What proportion of the real estate bubble self reinforcing chain of transactions was investment bank? GS didn't originate a single mortgage, but it and its cohorts, as well as the supposed deposit banks, were clearly driving the entire chain from mortgage origination on up, as well as influencing ancillary functions like title law, appraisals, credit ratings, and so forth.

In a very real sense, this paragraph shows exactly what I am talking about. It is a good description of the many ways the banks currently function. All inter-related. All have contributed to their difficulties.

While I understand your desire to see a better deployment of local capital for local benefit, you have not successfully shown to me that the operational aspects of your proposal are viable.

You assert that dividends are a better ROI mechanism than interest, but dividends are the hallmark of mature companies. Dividends before maturity are rare and arguably fiscally unwise for companies; furthermore dividends are voluntary as we can see from the various tech companies like Apple and Google.

This is a point for debate. As at present, there is no functioning mechanism to deliver the free enterprise equity capital; it is easy to say it will not work. So here we are with a new invention; and the only way to discover if it will work is to invest in it.

I have always said, publicly, that if I can get my hands on a fair value for the telecom IP I have previously created, then I would place a large proportion of that value into an introduction of the whole concept. That I am happy to place my own money where my mouth is. That exercise is taking more time than expected so, recently, I have opened up a discussion with the BoE to see if there might be another way for the exploitation of my IP value. I will keep iTulip informed.

You also seem to imply that community investment presents less risk as individual investments are pooled throughout all the different individual investments in community businesses. Yet it is precisely the pooled money which allow investment banks their abuses.

What precisely prevents a community investment pool manager from exercising the exact same abuses his i-bank counterpart engages in?

How do you get everyone in the community to invest their savings into this pool? Or prevent multiple competing pools from forming?

It seems much of the issues you seek to solve assume altruistic or at least idealistic behavior on the part of both savers and managers. For i-banks, neo-liberal theory was that competition would force this behavior - we all know how well that has worked out.

The local community has to form their own "Local" Capital Spillway Trust fund. They do not invest any savings, nor ask anyone to save with them. Their function is to enable the transfer of prosperity presently locked into the shadow banking system; back into their own local community via job creation.

No one takes a "skim" off the top. All they have to do is encourage others in their local community to create a business plan that is acceptable to an accountant and form a formal business. So both the local accountant and solicitor, (attorney in the US), are there to enable a professional overview.

Anyone may set up such a local operation. So, if there are those that believe others are not sticking to the rules as set out, then they may compete.

The new business gets their equity capital and access to working capital for every job they create by submitting a PAYE record. So the existing tax record system underpins the exercise. Not tax record of new employee, no funding.

The new business owner holds 80% of the equity rights with the balance, 20% staying with the local fund. But the aiming point for the new business is to pay dividends on the whole investment.

They may no pay themselves anything more than an agreed minimum income until profitable.

Their entire operation will be widely open to scrutiny by all the local people. This is the local communities Barn Building exercise.

By involving everyone, openly, in the new way to fund the creation of new jobs in each local community; I feel certain that while there will always be the possibility of stupidity; the general rules as set out will serve to reduce such to the very minimum.

This is an open exercise designed to encourage everyone within any local community to get involved in their local business community and thus their own local economy.

Their children need jobs; they can see the whole process working within their own control.

I have set out enough here. Go read the documents again if there are other concerns. The whole thing has been downloaded by many others world wide.

To me it seems more that what is missing is effective regulation and enforcement - a supervisory function.

See above.