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Rastafari Speaks Archive 1


Global trade has forced all countries to adopt a market economy. Yet the market is not the economy. It is only one aspect of the economy.

A market economy can be viewed as an aberration of human civilization, as economist Karl Polanyi (1886-1964) pointed out. The principal theme of Polanyi's Origins of Our Time: The Great Transformation (1945) was that market economy was of very recent origin and had emerged fully formed only as recently as the 19th century, in conjunction with capitalistic industrialization. The current globalization of markets that followed the fall of the Soviet bloc is also of recent post-Cold War origin, in conjunction with the advent of the electronic information age and deregulated finance capitalism. A severe and prolonged depression could trigger the end of the market economy, when intelligent human beings are finally faced with the realization that the business cycle inherent in the market economy cannot be regulated sufficiently to prevent its innate destructiveness to human welfare and are forced to seek new economic arrangements for human development. The principle of diminishing returns will lead people to reject the market economy, however sophisticatedly regulated.

Prior to the coming of capitalistic industrialization, the market played only a minor part in the economic life of societies. Even where marketplaces could be seen to be operating, they were peripheral to the main economic organization and activities of society. In many pre-industrial economies, markets met only twice a month. Polanyi argued that in modern market economies, the needs of the market determined social behavior, whereas in pre-industrial and primitive economies the needs of society determined market behavior. Polanyi reintroduced to economics the concepts of reciprocity and redistribution in human interaction, which were the original aims of trade.

Reciprocity implies that people produce the goods and services they are best at and enjoy producing the most, and share them with others with joy. This is reciprocated by others who are good at and enjoy producing other goods and services. There is an unspoken agreement that all would produce that which they could do best and mutually share and share alike, not just sold to the highest bidder or, worse, to produce what they despise to meet the demands of the market. The idea of sweatshops is totally unnatural to human dignity and uneconomic to human welfare. With reciprocity, there is no need for layers of management, because workers happily practice their livelihoods and need no coercive supervision. Labor is not forced and workers do not merely sell their time in jobs they hate, unrelated to their inner callings. Prices are not fixed but vary according to what different buyers with different circumstances can afford or what the seller needs in return from different buyers. The law of one price is inhumane, unnatural, inflexible and unfair. All workers find their separate personal fulfillment in different productive livelihoods of their choosing, without distortion by the need for money. The motivation to produce and share is not personal profit, but personal fulfillment, and avoidance of public contempt, communal ostracism, and loss of social prestige and moral standing.

This motivation, albeit distorted today by the dominance of money, is still fundamental in societies operating under finance capitalism. But in a money society, the emphasis is on accumulating the most financial wealth, which is accorded the highest social prestige. The annual report on the world's richest 100 as celebrities by Forbes is clear evidence of this anomaly. The opinions of figures such as Bill Gates and Warren Buffet are regularly sought by the media on matters beyond finance, as if the possession of money itself represents a diploma of wisdom. In the 1960s, wealth was an embarrassment among the flower children in the US. It was only in the 1980s that the age of greed emerged to embrace commercialism.

In a speech on June 3 at the Take Back America conference in Washington, DC, Bill Moyers drew attention to the conclusion by the editors of The Economist, all friends of business and advocates of capitalism and free markets, that "the United States risks calcifying into a European-style class-based society". A front-page editorial in the May 13 Wall Street Journal concluded that "as the gap between rich and poor has widened since 1970, the odds that a child born in poverty will climb to wealth - or that a rich child will fall into middle class - remain stuck ... Despite the widespread belief that the US remains a more mobile society than Europe, economists and sociologists say that in recent decades the typical child starting out in poverty in continental Europe (or in Canada) has had a better chance at prosperity." The New York Times ran a 12-day series this month under the heading "Class Matters" that observed that class is closely tied to money in the US and that "the movement of families up and down the economic ladder is the promise that lies at the heart of the American dream. But it does not seem to be happening quite as often as it used to." The myth that free markets spread equality seems to be facing a challenge in the heart of market fundamentalism.

People trade to compensate for deficiencies in their current state of development. Free trade is not a license for exploitation. Exploitation is slavery, not trade. Imperialism is exploitation by systemic coercion on an international level. Neo-imperialism after the end of the Cold War takes the form of neo-liberal globalization of systemic coercion. Free trade is hampered by systemic coercion. Resistance to systemic coercion is not to be confused with protectionism. To participate in free trade, a trader must have something with which to trade voluntarily in a market free of systemic coercion. All free trade participants need to have basic pricing power that requires that no one else commands monopolistic pricing power. That tradable something comes from development, which is a process of self-betterment. Just as equality before the law is a prerequisite for justice, equality in pricing power in the market is a prerequisite for free trade. Traders need basic pricing power for trade to be free. Workers need pricing power for the value of their labor to participate in free trade.

Yet trade in a market economy by definition is a game to acquire overwhelming pricing power over one's trading partners. Wal-Mart, for example, has enormous pricing power both as a bulk buyer and as a mass retailer. But it uses its overwhelming pricing power not to pay the highest wages to workers in factories and in its stores, but to deliver the lowest price to its customers. The business model of Wal-Mart, whose sales volume is greater than the gross domestic product (GDP) of many small countries, is anti-development. The trade-off between low income and low retail price follows a downward spiral. This downward spiral has been the main defect of trade deregulation when low prices are achieved through the lowering of wages. The economic purpose of development is to raise income, not merely to lower wages to reduce expenses by lowering quality. International trade cannot be a substitute for domestic development, or even international development, although it can contribute to both domestic and international development if it is conducted on an equal basis for the mutual benefit of both trading partners. And the chief benefit is higher income.

The terms of international trade need to take into consideration local conditions, not as a reluctant tolerance but with respect for diversity. The former Japanese vice finance minister for international affairs, Eisuke Sakakibara, in a speech titled "The End of Market Fundamentalism" before the Foreign Correspondent's Club in Tokyo on January 22, 1999, presented a coherent and wide-ranging critique of global macro-orthodoxy. His view, that each national economic system must conform to agreed international trade rules and regulations but need not assimilate the domestic rules and regulations of another country, is heresy to US-led, one-size-fits-all globalization. In a computerized world where output standardization has become unnecessary, where the mass production of customized one-of-a-kind products is routine, one-size-fits-all hegemony is nothing more than cultural imperialism. In a world of sovereign states, domestic development must take precedence over international trade, which is a system of external transactions made supposedly to augment domestic development. And domestic development means every nation is free to choose its own development path most appropriate to its historical conditions and is not required to adopt the US development model. But neo-liberal international trade since the end of the Cold War has increasingly preempted domestic development in both the center and the periphery of the world system. Quality of life is regularly compromised in the name of efficiency.

This is the reason the French and the Dutch voted against the European Union constitution, as a resistance to the US model of globalization. Britain has suspended its own vote on the constitution to avoid a likely voter rejection. In Italy, cabinet ministers suggested abandoning the euro to return to an independent currency in order to regain monetary sovereignty. Bitter battles have erupted among member nations in the EU over national government budgets and subsidies. In that sense, neo-liberal trade is being increasingly identified as an obstacle, even a threat, to diversified domestic development and national culture.

Global trade has become a vehicle for exploitation of the weak to strengthen the strong both domestically and internationally. Culturally, US-style globalization is turning the world into a dull market for unhealthy McDonald's fast food, dreary Wal-Mart stores, and automated Coca-Cola and bank machines. Every airport around the world is a replica of a giant US department store with familiar brand names, making it hard to know which city one is in. Aside from being unjust and culturally destructive, neo-liberal global trade as it currently exists is unsustainable, because the perpetual transfer of wealth from the poor to the rich is no more sustainable than drawing from a dry well is sustainable in a drought, nor can stagnant consumer income sustain a consumer economy. Neo-liberal claims of fair benefits of free trade to the poor of the world, both in the center and the periphery, are simply not supported by facts. Everywhere, people who produce the goods cannot afford to buy the same goods for themselves and the profit is siphoned off to invisible investors continents away.

Trade and money
Trade is facilitated by money. Mainstream monetary economists view government-issued money as a sovereign-debt instrument with zero maturity, historically derived from the bill of exchange in free banking. This view is valid only for specie money, which is a debt certificate that entitles the holder to claim on demand a prescribed amount of gold or other specie of value. Government-issued fiat money, on the other hand, is not a sovereign-debt but a sovereign-credit instrument, backed by government acceptance of it for payment of taxes. This view of money is known as the State Theory of Money, or Chartalism. The US dollar, a fiat currency, entitles the holder to exchange for another dollar at any US Federal Reserve Bank, no more, no less. Sovereign government bonds are sovereign debts denominated in money. Sovereign bonds denominated in fiat money need never default since sovereign government can print fiat money at will. Local government bonds are not sovereign debt and are subject to default because local governments do not have the authority to print money. When fiat money buys bonds, the transaction represents credit canceling debt. The relationship is rather straightforward, but of fundamental importance.

Credit drives the economy, not debt. Debt is the mirror reflection of credit. Even the most accurate mirror does violence to the symmetry of its reflection. Why does a mirror turn an image right to left and not upside down as the lens of a camera does? The scientific answer is that a mirror image transforms front to back rather than left to right as commonly assumed. Yet we often accept this aberrant mirror distortion as uncolored truth and we unthinkingly consider the distorted reflection in the mirror as a perfect representation. Mirror, mirror on the wall, who is the fairest of them all? The answer is: your backside.

In the language of monetary economics, credit and debt are opposites but not identical. In fact, credit and debt operate in reverse relations. Credit requires a positive net worth and debt does not. One can have good credit and no debt. High debt lowers credit rating. When one understands credit, one understands the main force behind the modern finance economy, which is driven by credit and stalled by debt. Behaviorally, debt distorts marginal utility calculations and rearranges disposable income. Debt turns corporate shares into Giffen goods, demand for which increases when their prices go up, and creates what US Federal Reserve Board chairman Alan Greenspan calls "irrational exuberance", the economic man gone mad.

If fiat money is not sovereign debt, then the entire financial architecture of fiat-money capitalism is subject to reordering, just as physics was subject to reordering when man's world view changed with the realization that the Earth is not stationary nor is it the center of the universe. For one thing, the need for capital formation to finance socially useful development will be exposed as a cruel hoax. With sovereign credit, there is no need for capital formation for socially useful development in a sovereign nation. For another, savings are not necessary to finance domestic development, since savings are not required for the supply of sovereign credit. And since capital formation through savings is the key systemic rationale for income inequality, the proper use of sovereign credit will lead to economic democracy.

Sovereign credit and unemployment
In an economy financed by sovereign credit, labor should be in perpetual shortage, and the price of labor should constantly rise. A vibrant economy is one in which there is a persistent labor shortage and labor enjoys basic, though not monopolistic, pricing power. An economy should expand until a labor shortage emerges and keep expanding through productivity rises to maintain a slight labor shortage. Unemployment is an indisputable sign that the economy is underperforming and should be avoided as an economic plague.

The Phillips curve, formulated in 1958, describes the systemic relationship between unemployment and wage-pushed inflation in the business cycle. It represented a milestone in the development of macroeconomics. British economist A W H Phillips observed that there was a consistent inverse relationship between the rate of wage inflation and the rate of unemployment in the United Kingdom from 1861 to 1957. Whenever unemployment was low, inflation tended to be high. Whenever unemployment was high, inflation tended to be low. What Phillips did was to accept a defective labor market in a typical business cycle as natural law and to use the tautological data of the flawed regime to prove its validity, and made unemployment respectable in macroeconomic policymaking, in order to obscure the irrationality of the business cycle. That is like observing that the sick are found in hospitals and concluding that hospitals cause sickness and that a reduction in the number of hospitals will reduce the number of the sick. This theory will be validated by data if only hospital patients are counted as being sick and the sick outside of hospitals are viewed as "externalities" to the system. This is precisely what has happened in the United States, where an oversupply of hospital beds has resulted from changes in the economics of medical insurance, rather than a reduction of people needing hospital care. Part of the economic argument against illegal immigration is based on the overload of non-paying patients in a health-care system plagued with overcapacity.

Nevertheless, Nobel laureates Paul Samuelson and Robert Solow led an army of government economists in the 1960s in using the Phillips curve as a guide for macro-policy trade-offs between inflation and unemployment in market economies. Later, Edmund Phelps and Milton Friedman independently challenged the theoretical underpinnings by pointing out separate effects between the "short-run" and "long-run" Phillips curves, arguing that the inflation-adjusted purchasing power of money wages, or real wages, would adjust to make the supply of labor equal to the demand for labor, and the unemployment rate would rest at the real wage level to moderate the business cycle. This level of unemployment they called the "natural rate" of unemployment. The definitions of the natural rate of unemployment and its associated rate of inflation are circularly self-validating. The natural rate of unemployment is that at which inflation is equal to its associated inflation. The associated rate of inflation is that which prevails when unemployment is equal to its natural rate.

A monetary purist, Friedman correctly concluded that money is all-important, but as a social conservative, he left the path to truth half-traveled by not having much to say about the importance of the fair distribution of money in the market economy, the flow of which is largely determined by the terms of trade. Contrary to the theoretical relationship described by the Phillips curve, higher inflation was associated with higher, not lower, unemployment in the US in the 1970s and, contrary to Friedman's claim, deflation was associated also with high unemployment in Japan in the 1990s. The fact that both inflation and deflation accompanied high unemployment ought to discredit the Phillips curve and Friedman's notion of a natural unemployment rate. Yet most mainstream economists continue to accept a central tenet of the Friedman-Phelps analysis that there is some rate of unemployment that, if maintained, would be compatible with a constant rate of inflation. This they call the "non-accelerating inflation rate of unemployment" (NAIRU), which over the years has crept up from 4% to 6%.

NAIRU means that the price of sound money for the US is 6% unemployment. The US Labor Department reported the "good news" that in May 7.6 million persons, or 5.1% of the workforce, were unemployed in the United States, well within NAIRU range. Since low-income people tend to have more children than the national norm, that translates to households with more than 20 million children with unemployed parents. On the shoulders of these unfortunate, innocent souls rests the systemic cost of sound money, defined as having a non-accelerating inflation rate, paying for highly irresponsible government fiscal policies of deficits and a flawed monetary policy that leads to skyrocketing trade deficits and debts. That is equivalent to saying that if 6% of the world population dies from starvation, the price of food can be stabilized. And unfortunately, such are the terms of global agricultural trade. No government economist has bothered to find out what would be the natural inflation rate for real full employment.

It is hard to see how sound money can ever lead to full employment when unemployment is necessary to keep money sound. Within limits and within reason, unemployment hurts people and inflation hurts money. And if money exists to serve people, then the choice between inflation and unemployment becomes obvious. The theory of comparative advantage in world trade is merely Say's Law internationalized. It requires full employment to be operative.

Wages and profits
And neo-classical economics does not allow the prospect of employers having an objective of raising wages, as Henry Ford did, instead of minimizing wages as current corporate management, such as the Ford Motor Co, routinely practices. Henry Ford raised wages to increase profits by selling more cars to workers, while the Ford Motor Co today cuts wages to maximize profit while adding to overcapacity. Therein resides the cancer of market capitalism: falling wages will lead to the collapse of an overcapacity economy.

This is why global wage arbitrage is economically destructive unless and until it is structured to raise wages everywhere rather than to keep prices low in the developed economies. That is done by not chasing after the lowest price made possible by the lowest wages, but by chasing after a bigger market made possible by rising wages. The terms of global trade need to be restructured to reward companies that aim at raising wages and benefits globally through internationally coordinated transitional government subsidies, rather than the regressive approach of protective tariffs to cut off trade that exploits wage arbitrage. This will enable the low-wage economies to begin to be able to afford the products they produce and to import more products from the high wage economies to move toward balanced trade.

Eventually, certainly within a decade, wage arbitrage will cease to be the driving force in global trade as wage levels around the world equalize. When the population of the developing economies achieves per capita income that matches that in developed economies, the world economy will be rid of the modern curse of overcapacity caused by the flawed neoclassical economics of scarcity. When top executives are paid tens of million of dollars in bonuses to cut wages and worker benefits, it is not fair reward for good management; it is legalized theft. Executives should only receive bonuses if both profit and wages in their companies rise as a result of their management strategies.

Sovereign credit and dollar hegemony
In an economy that can operate on sovereign credit, free from dollar hegemony, private savings are needed only for private investment that has no clear socially redeeming purpose or value.

Savings are deflationary without full employment, as savings reduce current consumption to provide investment to increase future supply. Savings for capital formation serve only the purpose of bridging the gap between new investment and new revenue from rising productivity and increased capacity from the new investment. With sovereign credit, private savings are not needed for this bridge financing. Private savings are also not needed for rainy days or future retirement in an economy that has freed itself from the tyranny of the business cycle through planning.

Say's Law of supply creating its own demand is a very special situation that is operative only under full employment, as eminent post-Keynesian economist Paul Davidson has pointed out. Say's Law ignores a critical time lag between supply and demand that can be fatal to a fast-moving modern economy without demand management. Savings require interest payments, the compounding of which will regressively make any financial system unsustainable by tilting it toward overcapacity caused by overinvestment. Religions forbade usury for very practical reasons. Yet interest on money is the very foundation of finance capitalism, held up by the neo-classical economic notion that money is more valuable when it is scarce. Aggregate poverty, then, is necessary for sound money. This was what US president Ronald Reagan meant when he said that there are always going to be poor people.

The Bank for International Settlements (BIS) estimated that as of the end of 2004, the notional value of global OTC (over the counter) interest-rate derivatives is about US$185 trillion, with a market risk exposure of more than $5 trillion, which is almost half of 2004 US GDP. Interest-rate derivatives are by far the largest category of structured finance contracts, taking up $185 trillion of the total $250 trillion of notional values. The $185 trillion notional value of interest-rate derivatives is 41 times the outstanding value of US Treasury bonds. This means that interest-rate volatility will have a disproportioned impact of the global financial system in ways that historical data cannot project.

Fiat money issued by government is now legal tender in all modern national economies since the 1971 collapse of the Bretton Woods regime of fixed exchange rates linked to a gold-backed US dollar. Chartalism holds that the general acceptance of government-issued fiat currency rests fundamentally on government's authority to tax. Government's willingness to accept the currency it issues for payment of taxes gives the issuance currency within a national economy. That currency is sovereign credit for tax liabilities, which are dischargeable by credit instruments issued by government, known as fiat money. When issuing fiat money, the government owes no one anything except to make good a promise to accept its money for tax payment.

A central banking regime operates on the notion of government-issued fiat money as sovereign credit. That is the essential difference between central banking with government-issued fiat money, which is a sovereign-credit instrument, and free banking with privately issued specie money, which is a bank IOU that allows the holder to claim the gold behind it.

With the fall of the Union of Soviet Socialist Republics, the US attitude toward the rest of the world changed. It now no longer needs to compete for the hearts and minds of the masses of the Third and Fourth Worlds. So trade has replaced aid. The US has embarked on a strategy to use cheap Third/Fourth World labor and non-existent environmental regulation to compete with its former Cold War allies, now industrialized rivals in trade, taking advantage of traditional US anti-labor ideology to outsource low-paying jobs, playing against the strong pro-labor tradition of social welfare in Europe and Japan. In the meantime, the US pushed for global financial deregulation based on dollar hegemony and emerged as a 500-pound gorilla in the globalized financial market that left the Japanese and Europeans in the dust, playing catch-up in an unwinnable game. In the game of finance capitalism, those with capital in the form of fiat money they can print freely will win hands down.

The tool of this US strategy is the privileged role of the dollar as the key reserve currency for world trade, otherwise known as dollar hegemony. Out of this emerges an international financial architecture that does real damage to the actual producer economies for the benefit of the financier economies. The dollar, instead of being a neutral agent of exchange, has become a weapon of massive economic destruction (WMED) more lethal than nuclear bombs and with more blackmail power, which is exercised ruthlessly by the International Monetary Fund (IMF) on behalf of the Washington Consensus. Trade wars are fought through volatile currency valuations. Dollar hegemony enables the United States to use its trade deficits as the bait for its capital account surplus.

Foreign direct investment under dollar hegemony has changed the face of the international economy. Since the early 1970s, FDI has grown along with global merchandise trade and is the single most important source of capital for developing countries, not net savings or sovereign credit. FDI is mostly denominated in dollars, a fiat currency that the US can produce at will since 1971, or in dollar derivatives such as the yen or the euro, which are not really independent currencies. Thus FDI is by necessity concentrated in exports-related development, mainly destined for US markets or markets that also sell to US markets for dollars with which to provide the return on dollar-denominated FDI. US economic policy is shifting from trade promotion to FDI promotion. The US trade deficit is financed by the US capital account surplus which in turn provides the dollars for FDI in the exporting economies. A trade spat with the EU over beef and bananas, for example, risks large US investment stakes in Europe. And the suggestion to devalue the dollar to promote US exports is misleading for it would only make it more expensive for US affiliates to do business abroad while making it cheaper for foreign companies to buy dollar assets. An attempt to improve the trade balance, then, would actually end up hurting the FDI balance. This is the rationale behind the slogan: a strong dollar is in the US national interest.

Between 1996 and 2003, the monetary value of US equities rose around 80% compared with 60% for Europeans and a decline of 30% for Japanese. The 1997 Asian financial crisis cut the values of Asian equities by more than half, some as much as 80% in dollar terms even after drastic devaluation of local currencies. Even though the United States has been a net debtor since 1986, its net income on the international investment position has remained positive, as the rate of return on US investments abroad continues to exceed that on foreign investments in the US. This reflects the overall strength of the US economy, and that strength is derived from the US being the only nation that can enjoy the benefits of sovereign-credit utilization while amassing external debt, largely due to dollar hegemony.

In the US, and now also increasingly so in Europe and Asia, capital markets are rapidly displacing banks as both savings venues and sources of funds for corporate finance. This shift, along with the growing global integration of financial markets, is supposed to create promising new opportunities for investors around the globe. Neo-liberals even claim that these changes could help head off the looming pension crises facing many nations. But so far it has only created sudden and recurring financial crises like those that started in Mexico in 1982, then in the United Kingdom in 1992, again in Mexico in 1994, in Asia in 1997, and Russia, Brazil, Argentina and Turkey subsequently.

The introduction of the euro has accelerated the growth of the EU financial markets. For the current 25 members of the European Union, the common currency nullified national requirements for pension and insurance assets to be invested in the same currencies as their local liabilities, a restriction that had long locked the bulk of Europe's long-term savings into domestic assets. Freed from foreign-exchange transaction costs and risks of currency fluctuations, these savings fueled the rise of larger, more liquid European stock and bond markets, including the recent emergence of a substantial euro junk bond market. These more dynamic capital markets, in turn, have placed increased competitive pressure on banks by giving corporations new financing options and thus lowering the cost of capital within euroland. How this will interact with the euro-dollar market is still indeterminate. Euro-dollars are dollars outside of US borders everywhere and not necessarily Europe, generally pre-taxed and subject to US taxes if they return to US soil or accounts. The term also applies to euro-yen and euro-euros. But the idea of French retirement accounts investing in non-French assets is both distasteful and irrational for the average French worker, particularly if such investment leads to decreased job security in France and jeopardizes the jealously guarded 35-hour work-week with 30 days of paid annual vacation that has been part of French life.

Take the Japanese economy as an example, the world's largest creditor economy. It holds more than $800 billion in dollar reserves. The Bank of Japan (BOJ), the central bank, has bought more than 300 billion dollars with yen from currency markets in the past two years in an effort to stabilize the exchange value of the yen, which continued to appreciate against the dollar. Now, the BOJ is faced with a dilemma: continue buying dollars in a futile effort to keep the yen from rising, or sell dollars to try to recoup yen losses on its dollar reserves. Japan has officially pledged not to diversify its dollar reserves into other currencies, so as not to roil currency markets, but many hedge funds expect Japan to run out of options soon.

Now if the BOJ sells dollars at the rate of $4 billion a day, it will take some 200 trading days to get out of its dollar reserves. After the initial two days of sale, the remaining unsold $792 billion reserves would have a market value of 20% less than before the sales program began. So the BOJ would suffer a substantial net yen paper loss of $160 billion. If the BOJ continues its sell-dollar program, every day 400 billion yen will leave the yen money supply to return to the BOJ if it sells dollars for yen, or the equivalent in euros if it sells dollars for euros. This will push the dollar further down against the yen or euro, in which case the value of its remaining dollar reserves will fall even further, not to mention a sharp contraction in the yen money supply, which will push the Japanese economy into a deeper recession.

If the BOJ sells dollars for gold, two things may happen. There may not be enough sellers because no one has enough gold to sell to absorb the dollars at current gold prices. Instead, while the price of gold will rise, the gold market may simply freeze, with no transactions. Gold holders will not have to sell their gold; they can profit from gold derivatives on notional values. Also, the reverse market effect that faces the dollar would hit gold. After two days of Japanese gold buying, everyone would hold on to his gold in anticipation of still-higher gold prices. There would be no market makers. Part of the reason central banks have been leasing out their gold in recent years is to provide liquidity to the gold market.

The second thing that may happen is that the price of gold will skyrocket in currency terms, causing a great deflation in gold terms. The US national debt as of June 1 was $7.787 trillion. US government gold holding is about 261 million ounces. The price of gold required to pay back the national debt with US-held gold is $29,835 per ounce. At that price, an ounce of gold would buy a car. Meanwhile, the market price of gold as of June 4 was $423.50 per ounce. Gold peaked at $850 per ounce in 1980 and bottomed at $252 in 1999 when oil was below $10 a barrel. At $30,000 per ounce, governments would have to make gold trading illegal, as US president Franklin Roosevelt did in 1930, and we would be back to Square 1. It is much easier for a government to outlaw the trading of gold within its borders than it is for it to outlaw the trading of its currency in world markets. It does not take much to conclude that anyone who advises any strategy of long-term holding of gold will not get to the top of the class.

Heavily indebted poor countries need debt relief to get out of virtual financial slavery. Some African governments spend three times as much on debt service as they do on health care. Britain has proposed a half-measure that would have the International Monetary Fund (IMF) sell about $12 billion worth of its gold reserves, which have a total current market value of about $43 billion, to finance debt relief. The United States has veto power over gold decisions in the IMF. Thus the US Congress holds the key. However, the mining-industry lobby has blocked a vote. In January, a letter opposing the sale of IMF gold was signed by 12 US senators from western mining states, arguing that the sale could drive down the price of gold. A similar letter was signed in March by 30 members of the House of Representatives. Lobbyists from the National Mining Association and gold-mining companies such as Newmont Mining and Barrick Gold Corp persuaded the congressional leadership that the gold proposal would not pass in Congress, even before it came up for debate.

The Bank for International Settlements (BIS) reports that gold derivatives took up 26% of the world's commodity derivatives market, yet gold only composes 1% of the world's annual commodity production value, with 26 times as many derivatives structured against gold as against other commodities, including oil. The Bush administration, at first apparently unwilling to take on a congressional fight, began in April to oppose gold sales outright. But President George W Bush and British Prime Minister Tony Blair announced on June 7 that the US and UK are "well on their way" to a deal that would provide 100% debt cancellation for some poor nations to the World Bank and African Development Fund as a sign of progress in the Group of Eight (G8) debate over debt cancellation.

Jude Wanniski, a former editor of the Wall Street Journal, commenting in his "Memo on the margin" on the Internet on June 15, on the headline of Pat Buchanan's syndicated column of the same date, "Reviving the foreign-aid racket", wrote:

This not a bailout of Africa's poor or Latin American peasants. This is a bailout of the IMF, the World Bank and the African Development Bank ... The second part of the racket is that in exchange for getting debt relief, the poor countries will have to spend the money they save on debt service on "infrastructure projects", to directly help their poor people with water and sewer lines, etc, which will be constructed by contractors from the wealthiest nations ... What comes next? One of the worst economists in the world, Jeffrey Sachs, is in charge of the United Nations scheme to raise mega-billions from Western taxpayers for the second leg of this scheme. He wants $25 billion a year for the indefinite future, as I recall, and he has the fervent backing of the New York Times, which always weeps crocodile tears for the racketeers. It was Jeffrey Sachs, in case you forgot, who with the backing of the NY Times persuaded Moscow under Mikhail Gorbachev to engage in "shock therapy" to convert from communism to capitalism. It produced the worst inflation in the history of Russia, caused the collapse of the Soviet federation, and sank the Russian people into a poverty they had never experienced under communism.
The dollar cannot go up or down more than 20% against any other major currencies within a short time without causing a major global financial crisis. Yet, against the US equity markets, the dollar appreciated about 40% in purchasing power in the 2000-02 market crash. And against real-estate prices between 2002 and 2005, the dollar has depreciated 60% or more. According to Greenspan's figures, the Fed can print $8 trillion more fiat dollars without causing inflation. The problem is not the money-printing. The problem is where that $8 trillion is injected. If it is injected into the banking system, then the Fed will have to print $3 trillion every subsequent year just to keep running in place. If the $8 trillion is injected into the real economy in the form of full employment and higher wages, the US will have a very good economy, and much less need for paranoia against Asia or the EU. But US wages cannot rise as long as global wage arbitrage is operative. This is one of the arguments behind protectionism. It led Greenspan to say on May 5 he feared what appeared to be a growing move toward trade protectionism, saying it could lessen the ability of the US and the world economy to withstand shock. Yet if democracy works in the US, protectionism will be unstoppable as long as free trade benefits the elite at the expense of the voting masses.

Fiat money is sovereign credit
Money is like power: use it or lose it. Money unused (not circulated) is defunct wealth. Fiat money not circulated is not wealth but merely pieces of printed paper sitting in a safe. Gold unused as money is merely a shiny metal good only as an ornamental gift for weddings and birthdays. The usefulness of money to the economy is dependent on its circulation, like the circulation of blood to bring oxygen and nutrients to the living organism. The rate of money circulation is called velocity by monetary economists. A vibrant economy requires a high velocity of money. Money, like most representational instruments, is subject to declaratory definition. In semantics, a declaratory statement is self-validating. For example: "I am king" is a statement that makes the declarer king, albeit in a kingdom of one citizen. What gives weight to the declaration is the number of others accepting that declaration. When sufficient people within a jurisdiction accept the kingship declaration, the declarer becomes king of that jurisdiction instead of just his own house. When an issuer of money declares it to be credit it will be credit, or when he declares it to be debt it will be debt. But the social validity of the declaration depends on the acceptance of others.

Anyone can issue money, but only sovereign government can issue legal tender for all debts, public and private, universally accepted with the force of law within the sovereign domain. The issuer of private money must back that money with some substance of value, such as gold, or the commitment for future service, etc. Others who accept that money have provided something of value for that money, and have received that money instead of something of similar value in return. So the issuer of that money has given an instrument of credit to the holder in the form of that money, redeemable with something of value on a later date.

When the state issues fiat money under the principle of Chartalism, the something of value behind it is the fulfillment of tax obligations. Thus the state issues a credit instrument, called (fiat) money, good for the cancellation of tax liabilities. By issuing fiat money, the state is not borrowing from anyone. It is issuing tax credit to the economy.

Even if money is declared as debt assumed by an issuer who is not a sovereign who has the power to tax, anyone accepting that money expects to collect what is owed him as a creditor. When that money is used in a subsequent transaction, the spender is parting with his creditor right to buy something of similar value from a third party, thus passing the "debt" of the issuer to the third party. Thus no matter what money is declared to be, its function is a credit instrument in transactions. When one gives money to another, the giver is giving credit and the receiver is incurring a debt unless value is received immediately for that money. When debt is repaid with money, money acts as a credit instrument. When government buys back government bonds, which is sovereign debt, it cannot do so with fiat money it issues unless fiat money is sovereign credit.

When money changes hands, there is always a creditor and a debtor. Otherwise there is no need for money, which stands for value rather than being value intrinsically. When a cow is exchanged for another cow, that is bartering, but when a cow is bought with money, the buyer parts with money (an instrument of value) while the seller parts with the cow (the substance of value). The seller puts himself in the position of being a new creditor for receiving the money in exchange for his cow. The buyer exchanges his creditor position for possession of the cow. In this transaction, money is an instrument of credit, not a debt.

When private money is issued, the only way it will be accepted generally is that the money is redeemable for the substance of value behind it based on the strong credit of the issuer. The issuer of private money is a custodian of the substance of value, not a debtor. All that is logic, and it does not matter how many mainstream monetary economists say money is debt.

Economist Hyman P Minsky (1919-96) observed correctly that money is created whenever credit is issued. He did not say money is created when debt is incurred. Only entities with good credit can issue credit or create money. Debtors cannot create money, or they would not have to borrow. However, a creditor can only be created by the existence of a debtor. So both a creditor and a debtor are needed to create money. But only the creditor can issue money, the debtor accepts the money so created, which puts him in debt.

The difference with the state is that its power to levy taxes exempts it from having to back its creation of fiat money with any other assets of value. The state when issuing fiat money is acting as a sovereign creditor. Those who take the fiat money without exchanging it with things of value are indebted to the state; and because taxes are not always based only on income, a taxpayer is a recurring debtor to the state by virtue of his citizenship, even those with no income. When the state provides transfer payments in the form of fiat money, it relieves the recipient of his tax liabilities or transfers the exemption from others to the recipient to put the recipient in a position of a creditor to the economy through the possession of fiat money. The holder of fiat money is then entitled to claim goods and services from the economy. For things that are not for sale, such as political office, money is useless, at least in theory. The exercise of the fiat money's claim on goods and services is known as buying something that is for sale.

There is a difference between buying a cow with fiat money and buying a cow with private IOUs (notes). The transaction with fiat money is complete. There is no further obligation on either side after the transaction. With notes, the buyer must either eventually pay with money, which cancels the notes (debt), or return the cow. The correct way to look at sovereign-government-issued fiat money is that it is not a sovereign debt, but a sovereign-credit good for canceling tax obligations. When the government redeems sovereign bonds (debt) with fiat money (sovereign credit), it is not paying off old debt with new debt, which would be a Ponzi scheme.

Government does not become a debtor by issuing fiat money, which in the US is a Federal Reserve note, not an ordinary banknote. The word "bank" does not appear on US dollars. Zero maturity money (ZMM), which grew from $550 billion in 1971, when president Richard Nixon took the dollar off gold, to $6.63 trillion as of May 30, 2005, is not a federal debt. It is a federal credit to the economy acceptable for payment of taxes and as legal tender for all debts, public and private. Anyone refusing to accept dollars within US jurisdiction is in violation of US law. One is free to set market prices that determine the value, or purchasing power, of the dollar, but it is illegal on US soil to refuse to accept dollars for the settlement of debts. Instruments used for settling debts are credit instruments. When fiat money is used to buy sovereign bonds (debt), money cannot be anything but an instrument of sovereign credit. If fiat money is sovereign debt, there is no need to sell government bonds for fiat money. When a sovereign government sells a sovereign bond for fiat money issues, it is withdrawing sovereign credit from the economy. And if the government then spends the money, the money supply remains unchanged. But if the government allows a fiscal surplus by spending less than its tax revenue, the money supply shrinks and the economy slows. That was the effect of the Bill Clinton surplus, which produced the recession of 2000. While runaway fiscal deficits are inflationary, fiscal surpluses lead to recessions. Conservatives who are fixated on fiscal surpluses are simply uninformed on monetary economics.

For euro-dollars, meaning fiat dollars outside the United States, the reason those who are not required to pay US taxes accept them is dollar hegemony, not because dollars are IOUs of the US government. Everyone accepts dollars because dollars can buy oil and all other key commodities. When the Fed injects money into the US banking system, it is not issuing government debt; it is expanding sovereign credit that would require higher government tax revenue to redeem. But if expanding sovereign credit expands the economy, tax revenue will increase without changing the tax rate. Dollar hegemony exempts the US dollar, and only the US dollar, from foreign-exchange implication on the State Theory of Money. To issue sovereign debt, the Treasury issues Treasury bonds. Thus under dollar hegemony, the United States is the only nation that can practice and benefit from sovereign credit under the principle of Chartalism.

Money and bonds are opposite instruments that cancel each other. That is how the Fed Open Market Committee (FOMC) controls the money supply, by buying or selling government securities with fiat dollars to set a Fed Funds Rate target. The Fed Funds Rate is the interest rate at which US banks lend to each other overnight. As such, it is a market interest rate that influences market interest rates throughout the world in all currencies through exchange rates. Holders of a government bond can claim its face value in fiat money at maturity, but the holder of a fiat dollar can only claim a fiat-dollar replacement at the Fed. Holders of fiat dollars can buy new sovereign bonds at the Treasury, or outstanding sovereign bonds in the bond market, but not at the Fed. The Fed does not issue debts, only credit in the form of fiat money. When the FOMC buys or sells government securities, it does so on behalf of the Treasury. When the Fed increases the money supply, it is not adding to the national debt. It is increasing sovereign credit in the economy. That is why monetary easing is not deficit financing.

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