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Wall Street Journal article and the “Database of Sovereign Defaults”

Quick break from the book (Update: It’s finished! Here – 1000 Castaways: Fundamentals of Economics) posts…

The new Wall Street Journal piece “Debt Denial Is a Threat to America” by Desmond Lachman reminded me of some recent IMF type absurdity that sovereign currency-issuers can default. (Desmond writes elsewhere “The most likely scenario is that the government arrives at the Treasury auction one day, and finds that there are not enough willing buyers for it to roll over expiring debts” Oh really Desmond? )

Ask any of their authors to name currency issuers that have actually defaulted in non-foreign denominated debt and of course they cannot.

They will point to this Bank of Canada article “Database of Sovereign Defaults, 2017” which claims 141 examples supporting their headline “ Database of Sovereign Defaults”.

But on closer inspection, only about 20 something of these are in what they call “Local currency debt”, and the “defaults” are mostly what they call “confiscatory currency reforms” defined as “ the exchange of old central bank currency for new on confiscatory terms”. Continue reading “Wall Street Journal article and the “Database of Sovereign Defaults””

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MMT & the Fourth Spark Plug: Descriptive vs. Prescriptive revisited

Imagine you are an experienced mechanic. One day your neighbour comes home with a newly purchased used car. It is running terribly – sputtering and running slowly with little power.

You look under the hood. It is a four cylinder car in good condition, and you notice that one of the spark plug cables is simply unconnected. The only thing that needs to be done to make the car run smoothly and with 100% power is to connect that spark plug so that all four cylinders fire.

This is the case with economics and the economy. There are a minority of economists, MMT and Post-Keynesian economists especially, who actually observe the real properties and understand the fundamentals of how the economy functions (as opposed to the scholastic mainstream economics founded on make-believe assumptions).

These economists are sometimes accused of being “normative” and reply that they are merely describing how economies actually function. Unproductive debate follows.

The misunderstanding is that sometimes describing is inevitably prescriptive, as with the car.

Once the actual mechanics of the economy are understand it is impossible to look at the way the economy is currently managed and not suggest increasing spending for public projects such as infrastructure, healthcare, and employment. There are idle resources alongside desired projects; there is no downside to employing them, and almost innumerable upsides.

Just as with the mechanic, there is no way to look at an otherwise well-running four cylinder car that is running needlessly on 3 cylinders and not mention “Errr,,,you know…it would run amazing if you simply connect that cable back, which I can do for free in 10 seconds.” (Which actually improves the functioning by far more than 25% since a non-functioning cylinder messes up the entire timing/function of the engine, it doesn’t just reduce the power proportionately).

Another way to say this: In this case there is in effect a “free lunch”. There is almost no effort involved in plugging the fourth cylinder in, but a massive gain that is currently being foregone for no reason. A similar way to say the same and actually talking about lunch: If someone left a very nice picnic spread on a hot summer day, and you salvage it before it rots, you do indeed have a free lunch, a lunch that would not have existed except for your (minimal) actions. It would have been permanently lost and you would have had to eat something else, but by simply not letting it go to waste you have a free lunch. We are letting a good bit of our economy “rot” for no reason. This is a permanent reduction of wellbeing for us and future generations.

MMT is hardly being “prescriptive” or “normative” when they point out the loose spark plug cables of our economy. There are gains to wellbeing that are relatively easily achievable now that have virtually no downsides.

MMT economists aren’t saying “you should convert that street car, put some big knobby tires on it, and start doing off road derbies!” That would be a normative change in lifestyle and design with many trade offs for wellbeing. But simply plugging the fourth spark plug cable is a pure gain.

This analogy can be extended to think about some recent criticisms of MMT and developing countries. MMT insights help any economy run optimally. What they cannot do is make the fundamentals of a country better. In other words, there can be old Ford Pintos, 4×4 Jeeps, and Ferraris all with loose spark plug cables. All of them have a pure benefit from having those cables noticed and reconnected. However, the cars themselves have fundamental differences in capabilities. It is silly to expect the advice to make the Ford Pinto run like the Ferrari. But both will run much better than they did previously.

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Decouple Spending From Bond Sales

Government bonds for funding are well understood to be an unnecessary, vestigial custom for currency-issuers.* There has been discussion of eliminating them as they serve no funding purpose.

An argument in favor of eliminating bonds is that they are the foundation for the widely held yet false belief that a “national debt” limits what public projects can be carried out. Eliminate bonds associated with “funding” and we achieve a more transparent, easy-to-understand system with no “national debt” for the media to discuss. This in turn enables the media and public to see the logic in optimizing spending up to the public’s own desired resource use for their own wellbeing (healthcare, education, a job guarantee) and in turn electing representatives who will do so.

Reasons often given for maintaining bond sales

The first objection to stopping bond sales is that bonds stop spending from being inflationary whereas direct spending would be inflationary. This is simply bad accounting.** That even “professionals” can fall for this highlights the need for making the system more understandable for the general public .

There are three further reasons commonly given for not eliminating government bond sales:

  1. government bonds have come to be relied on in pension programs

  2. it became customary to believe that their effects on interest rates are beneficial (stopping bond issuance would stop their “reserve drain” effect, causing base rates to fall permanently to 0 unless other government interest rate support policies were implemented, such interest on reserves, time deposits, or reverse repos)

  3. the accounting for spending with and without bonds is the same, it is just more complex with bonds. Thus the political capital needed to have the system changed is not worth the effort. It is better to use that political capital on trying to get the public to understand spending for the public purpose under the existing system. (Most “MMT” economists follow this approach.)  The political capital argument is also reinforced by (1) and (2); belief in both the utility of the pension fund purpose and interest rate effect of bonds each independently have immense support. Overcoming even one of these objections would be almost impossible, much less both of them at the same time.

So we soldier on with a byzantine system that allows the narrative that there is a “national debt” to impede us from spending more on healthcare, infrastructure, social security, pure research, and employment, and to dominate in the media and among the public. The public continue to vote for representatives (in all major parties) that promise to reduce a “national debt” and “balance the books” (even as I write, this popped up in The USA Today: The national debt wasn’t a big issue this midterm election, but it’s still a big problem” .)

Decoupling Spending From Bond Sales

There is no structural reason that the debate has to be either to maintain the system as it is or eliminate bond sales altogether. We could separate bond sales from the spending process without eliminating them.*** (This has been pointed out before; I am merely reiterating the usefulness of doing so).

This would allow the merits of each reason for bonds to be judged independently. (spending, interest rate policy, vehicles for safe savings).

Benefits: 

This would allow for the transparent spending procedure many have argued for (direct spending of tax-credits, whether from the treasury or central bank, it makes no difference; Overt Monetary Financing is a common term for one method). It becomes obvious there is no structural limit as tax-credits are merely ledger entries and have nothing to do with annuity issuance.

It would become straightforward to explain to the media and public that the only limit is the real resources that they themselves decide to dedicate to public projects (via their representatives), best measured and limited by the price index. The current Fed/Treasury system is so complex in the US that it is almost impossible to explain clearly even to advanced economics students, and is widely misunderstood even by professional economists. With this complexity comes opportunity for those who do not want spending for public purpose. The revised system would be understandable in televised debates, popular political barometers such as USA Today, etc. The inherent logic of functional finance would be much easier to get across to the public and subsequently acted on in Congress.

No debates necessary with the entrenched interests and customary beliefs of (1) and (2) above

“Bond” (actually annuity) sales could remain the same in quantity and quality as now.***

However, separating them from “funding” is in line with the reality that bond sales have no real connection to funding decisions; it more accurately reflects the real accounting decisions involved.

It makes clear that “bond” sales are just boring annuities for willing savers.

That they are voluntary and there are no “bond vigilantes.”

There are potentially long-run advantages for pensions as well. For example, Richard Murphy argues we have far too few safe assets that pay interest (UK context), that there should be more bonds sold. That debate can happen based purely on the merits of bonds  for the pension system, uncoupled from debates on the budget. It becomes obvious that savers who buy annuities are just that – merely savers, funding nothing.

Once their role as primarily annuity and retirement vehicles is isolated, it also becomes evident that that system can be optimized. We could increase the amount or change the types of securities to better serve pensions, without becoming bogged down with discussions of funding. Eventually, it might be realized that using public bonds to back complex, often private pension plans isn’t the optimal system, but that can be an entirely separate, and future, debate. (Just one possible example: government tontines as discussed in The University of Pennsylvania Law Review, see here, here, and here as well).

Relatedly, there are many good reasons to believe that interest rate manipulation is not useful for improving the economy (e.g., here ****). But that debate can also be had entirely separately from the tax-credit spending system. My suspicion is that the low, steady interest rate structures that prove most beneficial to pension plans will prove to be the most beneficial for overall “interest rate policy” anyway.

Overall, there is no structural reason to bind together discussions of spending, government annuities, and interest rate support as we do in the current system. 

Those who argue that eliminating bonds would take too much political capital may well be right. However, the primary benefit (public understanding of spending) is achievable merely by separating funding, annuity issuance, and interest rate policy. This is relatively easy to achieve politically as doing so would not need to bring about opposition based on pensions or those who believe interest rate policies are useful. Simply allow Overt Monetary Funding, still sell annuities, and, independent of funding, allow whatever interest rate support methods are deemed desirable. There is much to be gained from this and no obvious downside, regardless of one’s views on spending, pensions, or interest rate policy.

NOTES

* It is also vestigial that savers have access to tax-credits as cash, but not on ledgers, and cannot save and transact via ledgers in tax-credits($, £ etc). They are needlessly forced to convert savings to bonds if they wish to personally save tax-credits safely on ledgers. This is vestigial and easily fixed. The US Treasury, for example, already keeps accounts for savings-bond holders and could do so for tax-credits; the IRS easily tracks all the tax-credits in the nation; private banks have of course easily kept track of private debt for centuries; and public postal banks have existed in various countries. There is no technical obstacle to easily allowing the public to save and transact in real tax-credits (as opposed only in bank credit-money units) via a (digital) ledger system.

** This is based on the same bad accounting that allows the belief that bonds fund spending. Currency-issuers always spend by crediting accounts; the changing of already saved government tax-credits by savers into government bonds does nothing to change the impact of government spending. The buyers are already eager savers, and bonds can be liquified easily anyway, or used as collateral.

*** For currency-issuers, all spending methods shake out to be the same. So it might be argued that allowing bond sales to be continued under another name and separate from spending achieves nothing. And that if interest is paid on bonds (or interest rates are supported by interest on reserves, reverse repos etc.) then there is still a “national debt”. However, separating bonds from any discussion of funding better reflects reality. If the government voluntarily chooses to pay savers an annuity, that is clearly different than what the public now perceives as a “national debt” to private banks, foreign countries, and/or future generations, which is clearly what impedes much of the public now from voting for representatives who will fund “do-able,” publicly desired, welfare-enhancing projects now.

**** A few more reasons often given for why interest rate policy is not effective:

  • Changing saved tax-credits ($, £ etc)  into treasuries/gilts doesn’t affect the ability to spend since bonds can be liquified easily or used as collateral (I.e., there is no inflation control effect).
  • Interest rate effects are slower and less precise than fiscal automatic stabilizers
  • Business investment is inelastic to interest rates (although housing and consumption is not)
  • Interest rate policy is technocratic, by unelected officials, who further may have conflicts of interest
  • Protecting true small savers is relatively easily achieved in other ways; institutional investors should make their money and protect it in the market, there is no justification for “protecting” their savings from inflation
  • “Interest rate policy is used as an excuse to avoid the hard questions of taxing and spending; we shouldn’t let the government off the hook in making key decisions about economic policy”

Many of these issues are already laid out and usefully clarified by Brian Romanchuk and comments on Mosler, and by Neil Wilson and others, over at Bond Economics.

References

Forman, Johnathan Barry and Michael J. Sabin, 2015. “Tontine Pensions” University of Pennsylvania Law Review, Vol. 163: 755-831 .

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The Myth of the Currency Hierarchy

(response to Coppola’s “The Myth of Monetary Sovereignty” and related discussions)

PREFACE

A) Properly understanding the macroeconomy allows countries to operate at their full real-resource potential, whatever that might be.

B) Understanding the macroeconomy does not change the real resource potential of countries. That is a more fundamental question concerning the improvement of the institutions and productive capacity of a nation.

Understanding monetary sovereignty helps with (A). Frankly, no one has achieved any clear solutions for (B).

(A) and (B) can be pursued simultaneously. They are in no way mutually exclusive.

Not working to achieve (A) in developed and semi-developed countries in no way follows from the lack of progress on (B) in the least-developed countries.

THE “HIERARCHY OF CURRENCIES” VIEW THAT “MONETARY SOVEREIGNTY IS LARGELY A MYTH”

Frances Coppola supports her view based on three points:

1) balance of payments crises have happened to countries with floating currencies; this is because they borrowed; but they had to borrow because they are resource poor

2) weak/thinly-traded currencies are volatile

3) countries with weak institutions/capital markets have “hot money” flows

Regarding (1):  Balance of payments crises, of course, are only possible with a floating currency if there is foreign-denominated debt. Thus Coppola’s argument must immediately retreat to an argument that foreign-denominated debt is “inevitable” for developing countries, so they are in practice not monetarily sovereign.

At the international level (unlike the domestic level), the household analogy is true: If a country is unproductive and/or resource-poor, it can only sustainably take on debt that increases production, not debt for consumption. If it wants to import for consumption, the only sustainable way is with a current account surplus/reserves from export.** The constraint for developing countries is exports, not lack of monetary sovereignty. The proper economic focus on real resources, not finance, applies as always.

Leading scholars on financialization in developing countries, after much consideration, still manage to come to the exact same inescapable conclusion and policy prescription:

“Lending in hard currency should be available only to domestic borrowers with earnings in that currency, that is, exporters. Importers would have to find a way to obtain currencies, unless specific imports are deemed necessary for developing policy objectives.” (Bortz & Kaltenbrunner, 2018, p. 13) (and even these should be “for capacity-expansion objectives, ideally oriented to boost exports.”)

In other words, only import for consumption what you can pay for in the moment without becoming a foreign currency user (borrower).

The limit on these least-developed countries has nothing to do with monetary sovereignty and everything to do with the unresolved problem that the poorest countries are the ones that need more real resources yet have nothing to trade for them.

This is a real-resource issue. It is just plain silly to call it a monetary sovereignty issue.

Regarding 2) Weak currencies are volatile. True. (but…)

Regarding (3): Here we have a fundamental misunderstanding of monetary sovereignty from many sides.

Coppola rests her point on an Asian Development Bank paper that states “Emerging markets with naturally higher interest rates are swamped with hot money inflows.” (McKinnon and Liu 2013, abstract).

The dilemma Coppola and others highlight is that “hot flows,” due to higher interest rates, cause destabilizing inflows; yet developing countries can’t then respond by altering rates without causing further destabilizing swings. Relatedly, interest rates must be set high to “maintain demand” for their currencies but these higher interest rates cause private borrowers in the developing country to borrow in foreign currencies:

“the international currency hierarchy forces DEEs [developing and emerging economies] to adopt higher interest rates to maintain demand for their currencies. It is this policy, however, which encourages national agents to borrow in international markets, thereby increasing their foreign exchange exposure and adding to debt servicing outflows.” (Bortz & Kaltenbrunner, 2018, p. 14)

Coppola’s argument and the “hierarchy of currencies” and “hot money” literature is based to a large degree on the premise that developing countries must prop up their interest rates.

This is precisely what an understanding of monetary sovereignty shows to be false.

Monetary sovereigns run their economy by emitting domestic tax-credits, which are valued due to their sovereign (monopoly on force) ability to tax. The tax-credit unit in turn forms the unit-of-account for their private banking sector. These are the two fundamental traits of a monetary sovereign.

The idea that a currency-issuer must sell bonds at interest demonstrates a basic lack of understanding of how modern money works. If a currency-issuer “sells” bonds in exchange for their own tax-credit, then accounting-wise they have done nothing (swapping one government token for another government token temporarily, and voluntarily paying eager savers interest. This does not “stop inflation from spending” as there is no money multiplier from saved tax-credits).

Artificially propping up interest rates, in the belief that this must be done to sell bonds, is to not understand the capability of a modern monetary sovereign, regardless of their development level. (Vestigial bonds and their once-needed interest offering have in turn been encrusted by layers of epiphytic pro-interest arguments: saving against inflation, as a policy tool etc; all of these things are achieved more directly with no government interest-rate manipulation).

If rates are propped up in order to borrow, then the same real-resource constraints apply we have already discussed in (1). In other words, interest rate manipulation is no financial fix to any real-world constraint. There is no useful purpose served by artificially propped up interest rates above zero, nor does a monetary sovereign in any way need to pay interest on its tax-credits (via bonds) to “sell” them to manage its domestic economy.

The “hierarchy of currencies” concern for hot money issues is largely based on propped-up interest rates. Yet it is precisely a distinguishing feature of monetary sovereigns that they can run at zero interest. Forever.

This aspect of monetary sovereignty is still not widely understood. But that is an issue for another day.

………

Note: That it is interest rates driving the hierarchy is evident in the proposed solution: “Reform efforts should focus much more on international monetary harmonization that limits interest differentials” (McKinnon and Liu 2013,p. 11). Harmonizing at zero is the obvious natural choice.

**Countries indeed must roughly match imports with exports over time or inevitably suffer. Even if, like the US, you can export dollars like a commodity, doing so harms the long-term employment situation & manufacturing capacity of the country. Any useful discussion of international trade must deeply incorporate the role of trading in increasing vs decreasing returns industries to meaningfully discuss the full costs:benefits of exporting/importing.

~~~~~~~~~~

Bortz, Pablo and Annina Kaltenbrunner (2018). “The International Dimension of Financialization in Developing and Emerging Economies.” Development and Change, 49: 375-393.

McKinnon, Ronald and Zhao Liu, (2013). “Hot Money Flows, Commodity Price Cycles, and Financial Repression in the US and the People’s Republic of China: The Consequences of Near Zero US Interest Rates.” Asian Development Bank, Working Paper Series on Regional Economic Integration.

The Guernsey £: A Pirate’s Tale

[Update: See PPS at the end]

OK, not exactly a pirate.

But close enough for modern times.

Jacques S. Jaikaran, M.D. was (he passed away this year) a Caribbean émigré-cum-doctor (via Leeds, England)-cum-Houston, Texas bank-board member & plastic surgeon (losing his license for issues “involving moral turpitude”)-cum-author (“Debt Virus”)cum-US prisoner for tax-evasion & fighting for renewed Independence for the “Republic of Texas” (he tried to arrange for the “Republic of Texas” to purchase a “four-story building, similar to a compound, included machine gun turrets, a bomb shelter and a surgical operating room.”)

Perhaps because Jaikaran was a Texas author, his book ended up on display at my Dallas County Community College in 1992, where I read this interesting & informative story [this passage is from Google books with two excerpts from a physical copy]:

DV 1.png
DV 2DV 3DV 4

DV 5.pngDV 6DV 7.jpg⁠—⁠DV 8

 

Jaikaran also mentions currency issuance in Swanenkirchen, Bavaria and the Worgl Shilling ( https://wiki.p2pfoundation.net/Worgl_Shillings ).

He also includes a short history of the Channel Islands worth reading. The Wikipedia entry is similar, worth a read https://en.wikipedia.org/wiki/Guernsey.

Issues regarding sovereignty and currency issuance are clear.

The opening of Jaikaran’s chapter:

Screenshot (61)

For the record, Jaikaran’s views include the usual Fed-as-conspiracy type and Goldsmith-type stuff, and he didn’t understand the role of taxes. Nevertheless, considering the availability of information in the 1980s/early 90s (no Bill Mitchell blogs, no Center of the Universe blog, etc) it is not a bad attempt at seeing where mainstream economics makes no sense regarding spending, monetary operations.

I have long argued that the types of people who sense the mainstream view of “money” is wrong, yet didn’t have the good fortune to stumble across MMT at an early stage and instead end up with “goldsmith”/fractional-reserve/”we can’t pay all the interest!” views, or anti-horizontal-money type views and/or (better) aligning with Positive Money, are at least on the right track. These views can be unified (some links in the comment section here). (“Rohan Grey’s ‘Banking Under Digital Fiat Currency’ Proposal – A Guest post by Richard Taylor”)

Clint Ballinger

Your comment is awaiting moderation.

I have been wanting to see PM and MMT unify on horizontal money for a while, nice to see this 🙂
E.g. “OMFG, MMT & Positive Money Get Along” http://clintballinger.edublogs.org/2017/11/02/omfg-mmtpm-get-along/
&
“To what extent can Positive Money and Modern Monetary Theory join forces?” https://positivemoney.org/2015/03/positive-money-versus-modern-monetary-theory/

 

 

PS Need to add this: “As soon as the £180 was received each year, 180 States’ notes were burnt…At the end of ten years not one of the notes issued to pay for the [market] was left, no interest had been paid..& there was a steady income of £180”

This makes clear where taxes go – they shrink the balance sheet.

DV Market.jpg

PPS  I first heard this story through Jaikaran although it has been floating around in general. I checked for sources and (surprise surprise) found none for that chapter in Jaikaran’s book. I see now that he basically lifted it from another work – he seemed to have traveled to The Channel Islands so I thought maybe there was some original research in there…I think not though.

See “Guernsey’s monetary experiment” which includes this….

Preface, by James Glyn Ford…

“This pamphlet, “How Guernsey Beat the Bankers”, is a reprint of one issued in 1958 by the Social Credit Movement. It tells how the Guernsey States from 1819-1836 manipulated the issue of notes to allow a number of public works to be carried out — including both the construction of the Guernsey Market and the rebuilding of Elizabeth College — without increasing public debt. The details are contained within the pamphlet itself….”

ISBN 85694 239 1 
Guernsey Historical Monograph No. 23 
General Editor: J. Stevens Cox, F.S.A. 

HOW GUERNSEY BEAT THE BANKERS 
by 
EDWARD HOLLOWAY

The story of how the Island of 
Guernsey created its own money, 
without cost to the taxpayer, 
and established a prosperous 
community free of debt. 

TOUCAN PRESS 
MOUNT DURAND, ST. PETER PORT, 
GUERNSEY, C.I. 
1981 

A NOTE ON THE WRITER, EDWARD HOLLOWAY 

 

 

 

 

 

 

The Autocorrelation of Hyperinflation (about 7 events, not 58)

According to a CATO working paper (Hanke and Krus 2012), there have been 56 cases of hyperinflation. 58 if we include North Korea (they weren’t sure about the data quality) and Venezuela (which occurred after their paper).

There are several things I would like to point out that relate to recent twitter threads on hyperinflation but I will save for another day. However, I just thought it interesting to point out the very strong autocorrelation in these events. These cases are often discussed more or less singly, or by “type” (from war, regime change, supply shocks etc), and many lists are sparse, containing only a few well known events. The Hanke-Krus data is very complete, yet the list is constructed oddly – it is not in chronological, alphabetical, nor regional order. Re-arranging the Hanke-Krus list highlights something however: barring three outliers (France, 1795-1796, North Korea 2012, and Venezuela 2016-) there have actually been only five hyperinflation “events”, each associated with particular large, long-term global processes (involving war, decolonization, regime change, foreign denominated debt/currency pegs). The spatial and temporal clustering of these events is perhaps best expressed visually (Chile and Zimbabwe are temporal outliers within their cluster)
The re-arranged Hanke-Krus list:

EPISODE 1:

Germany Russia post WWI, Bolshevik

EPISODE 2:

post WWII

EPISODE 3

Latin America 1980s.JPG

EPISODE 4

Central Africa 1990s.JPG

EPISODE 5:

Post Soviet, early 1990s

 

I have some more comments on this list, the autocorrelation in these cases etc in a future post.

___________________________________________

Recently released (2019): 1000 Castaways: Fundamentals of Economics,  Ætiology Press.

“A renegade band of Modern Monetary Theorists has overturned mainstream economics in part by emphasizing that there is not one, but two systems of modern money, the “vertical” and the “horizontal.” They conclusively demonstrate how unifying our understanding of these is crucial for grasping modern economics.

“the key to understanding Modern Monetary Theory is this vertical-horizontal relationship”

(Warren Mosler)

   1000 Castaways develops Mosler’s statement into a concise, book-length treatment that is accessible to all readers, starting from first principles and, step-by-step, leading the reader up to the complexities of the real world.

Our one thousand castaways develop, before our eyes, a “perfect” economy, and demonstrate how the horizontal and vertical systems of money naturally emerge from even more fundamental organizational needs of a large society.

   1000 Castaways then contrasts the Island’s “economics” with real-world “economics,” in an enlightening illustration of the last few steps in our common economic understanding that we must take in order to run our modern economies in a way that maximizes wellbeing.”

Jerimiah

March 31, 2019

Book free on Amazon for 48 hours! (Kindle)

Hello everyone- I am making a Kindle version of 1000 Castaways: Fundamentals of Economics FREE on Amazon for reviewers for a short time – but anyone here can take advantage of this and get their free copy.
It is free for the next 48 hours  (all day Sunday & Monday, Pacific time USA). You guys can help out immensely by posting a review on Amazon – good or bad!! – if you feel it merits it. Thanks! (on the reviews, you will be considered a “verified purchaser” even though the price was “0” https://www.amazon.com/dp/B07PWRXTF2
Even if you don’t usually read ebooks, you can read/review this by using Amazons easy free kindle reader for desktops/laptops.
(This is how I am doing the ARC [Advance Reader Copy] for the forthcoming paperback rather than try to mail/print galley copies around the world etc.)

UK website https://www.amazon.co.uk/dp/B07PWRXTF2

Canadian website https://www.amazon.ca/dp/B07PWRXTF2

Australian website https://www.amazon.com.au/dp/B07PWRXTF2

Crusoe gets excellent advice from Friday :)

Crusoe is getting excellent advice from Friday, I plan on integrating it all, thank you.

“Friday

User Info

This is all very good. I can’t really find anything in these last four chapters worth quibbling with.
I did spot one typo here: eveident

I do think inflation needs more discussion, some people really care about it. You say both systems are not inflationary. I’m not convinced that is always true, but if it is where does inflation come from? And how can it be prevented or stopped?

I have revisited Chapter 1. I think it most important to eliminate commodity money entirely. It is not necessary for establishing a unit of account. Commodity money thinking is the source of the “inherited beliefs” you wish to dispel so why allow it a foot in the door.

“Promises to pay” is better than “promissory notes” but I think “IOUs” is better still. You should introduce them at the point you introduce commodity money, instead of it, which then allows ledgers to naturally develop as a record of who is owed what rather than appear as if by magic.

And I don’t think you’ve made it sufficiently explicit that the bank, er–the Farmers Group, is issuing IOUs (ie. money) based entirely on its good name (ie. nothing) rather than on its stock of barley or IOUs that have been lodged with it. This is another thing that commodity money thinking has trouble understanding.

You want to do this by showing a balance sheet. Tricky without having a whole (boring) Introduction to Accounting section. I think you need a lot more text describing how it actually works (taking deposits enables ex nihilo lending through the magic of accounting). And you want your readers to realise that you are talking about banks without actually saying so. A tall order, I know.”

My quick reply:
Clint Ballinger

Friday – thanks! I was just looking at trying to change the commodity money bit – just takes time to get to everything. I love the work of Graeber and Hudson, and want it to be reflected properly.
On inflation – you might have noticed I did an “internet only” section (Ch 5)? I also have a whole section written but that I cut on inflation. I felt it was too obvious for the readers I am aiming at (breadfruit trees with the crop ruined by a cyclone, that type of thing. That actually happened to me in Fiji lol!), but might still use it. I am still reading your comment and will get back to you, thanks again.

1000 Castaways, Additional Material (Chapter 5)

 

The Slings and Arrows of Outrageous Fortune (The Real World)

Consider our little Island with its well-balanced System One and System Two. What if instead it had had to grow its little economy in the midst of 9 other islands?

If they were 9 other completely peaceful Islands, and all endowed with the same abundant materials and climate that our Island had, things might have worked out about the same, for all 10 islands.

But imagine the other 9 islands had constant, murderous intent to invade your little island. Now there would be a sustained need to raise and maintain a military. Now imagine that often they were your immediate land neighbors rather than distant islands, generally ready to march into your territory, and often larger, richer, and more powerful than you.

Now further imagine that there are large differences in the amounts and types of raw materials between different territories. And your territory might have lacked not some but perhaps even most of the basics needed to feed and house and clothe a growing population. From the earliest stages of emerging states there would exist strong pressures for “international” trade and with that many added layers of complexity such as many different types of “money” (from commodity-based coins to various types of notes of credit) and thus foreign exchange, bills of exchange, and other complex credit- and insurance- instruments related to long-distance trade. [note that “commodity based coins” themselves were rarely if ever {ingot form} actually valued for their commodity value – the value was in practice from taxation/fine/tribute or the use of precious metals was a form of anti- counterfeiting, making “fakes” difficult, but not giving the actual value to the coins]

The proto-states that are the precursors to modern states developed in a world that was much more like this latter scenario than our peaceful, abundant little Island.

Imagine again…

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1000 Castaways, Chapter 5: The Real World, System Two

(←Chapter 4    Additional Material→)

System Two

The other main reason our real-world economies do not function as well as the Island is that we simply do not understand System Two, which organizes public projects and creates the vertical component of modern currency systems. The reasons for this stem from the long, complex process by which our modern economies emerged.

It might be expected that I will say that the inherited structure of our real-world System Two is sub-optimal and must be changed for our economy to run as efficiently as the Island economy. But the primary problem is actually our inherited beliefs, not structure…

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Emergence

Bank-of-England-founding-charter-sealed-in-1694

 

 

 

 

 

1000 Castaways, Chapter 4: The Real World, System One

(Chapter 3       Chapter 5)

Chapter 4

The Real World, System One

We have seen how our Island of 1000 Castaways developed an economy that, within the potential of their technology and resources, maximizes their wellbeing.

Our real-world economies are not organized so efficiently, and create countries where wellbeing is, given some set of resources and technology, less than it could be.

Why?

There are two primary reasons:

1) The Islanders efficiently manage System One, allowing it to grow to its maximum useful size but no more. In the real world we allow the finance sector to be much larger than is efficient, with everything beyond its maximum size reducing rather than raising wellbeing.

2) The Islanders understand how to use System Two. In the real world, quite simply, we do not.

System One

The primary reason for (1) above is simply that…

1000 CASTAWAYS: FUNDAMENTALS OF ECONOMICS is now available-

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