Alasdair Macleod: Currency Crisis Dead Ahead

News & Current Events Public News & Current Events
,
1

This week's podcast interview introduces a new monetary measurement developed by Alasdair Macleod: the 'Fiat Quantity of Money', or FMQ.

Alasdair explains how FMQ is derived, as well as what it can tell us about the true levels of fiat money supply. In the case of the dollar, it reveals that levels are far above what is commonly appreciated – so far, in fact, that a currency crisis could arrive sooner than even many dollar bears expect.

What 'Fiat Money Quantity' (FMQ) Is Signaling

I started off with the desire to put together a metric of money which allows me to compare sound money with fiat money. My approach to this was to look at what happens in how fiat money was created.

It originally involved the money substitute. In other words, you and I or our great-grandfathers or our great-great-grandfathers would deposit gold in the bank for safekeeping. The bank would give them either notes, which they could then cash anywhere where it was accepted where that bank's credit was valuable, or alternatively, it would give them an account – a deposit account – which would show that yes, the bank holds the gold on your behalf. That was the starting point. So that was how deposits and cash were originally created as money substitutes.

Then the next thing happened: Central banks were invented. What happened was that they took over the note-issuing monopoly. They were given, by the government, essentially a monopoly. In return for that, all of the banks within the central bank's system would take the gold that was originally deposited and move it into the central bank in return for – guess what? – deposit accounts and nice new bank notes.

So really what I wanted to do was to quantify that process [by creating the FQM]. It involved taking cash, all of these instant-access deposits, or deposits which are readily accessible, plus the deposits that the banks have at the central bank, because that is money just the same as your deposit account is in your bank; it is exactly the same in that sense. If you look at that, you get some very interesting statistics.

Going from 1960 to the month before the Lehman crisis in 2008, the average exponential growth rate was around about 5.9%, year in/year out. It followed that track very closely. Then of course we had TARP and all of the rest of it. And then we had QE. And guess what? The level of fiat-money quantity is now over 60% above that long-term trend line. Now, if we stand back unemotionally and look at that chart, we would say that this is monetary hyperinflation.

Here we have this situation now where the Central Bank, the Fed, is having to produce money to finance the government deficit. It’s having to produce money to keep interest rates down so that the banks don't have balance-sheet problems. And if it slows down in that production of money, and even if it doesn't increase the rate of the production of that money, then our world is going to come to a rather nasty halt.

It looks like not only are we in a debt trap, but we are in a hyperinflationary trap, potentially. We need someone who is really quite strong and understands these things to be able to stand on the system and say, no more!

So my question to you, Chris, is, can anyone do that? Do you think Janet Yellen will do that?

One of the things that's interesting in this, which I think is a dynamic that is going to play out over the next few months, is, here we are expanding a quantity of money hugely. But at the same time, what we're not seeing is the prices of raw materials, of things like that really reflecting that expansion of money. Now, there is always a time lag between the two effects. But actually we are seeing this effect on certain things, and in a way in which one would expect. That is that asset prices, particularly things like property, are beginning to rise.

What FMQ Indicates for Gold

The one thing which I think is being triggered is gold. We had a good rise today. We had about a $40 rise. Now I think that this is something quite significant, really, for a number of reasons, but if I go back to my FMQ (fiat money quantity), if I adjust the price of gold from just before Lehman Brothers went under, I think I'm right in saying that in July 2008, the price of gold at the close of that month was $918/ounce.

Now, if you adjust that price by the extra fiat money quantity that is now in circulation, gold has actually gone down, in real terms if you like, by about 30%. Put another way, if the price of gold was to match in real terms that $918 level, it would today be about $1,860. So we have this extraordinary thing where gold, for whatever reason, has become extremely undervalued compared to where it was before Lehman Brothers went under. Now this is important, because before Lehman Brothers went under, not many people actually understood systemic risk. So the price of gold did not really include the weighting for systemic risk.

The other thing I would say is that since then, with our FMQ having taken off, there is a substantial hyperinflation risk that is going to affect prices somewhere down the line. And yet, gold is trading at a discount of 30% to where it was before all of this happened, so it is horribly mispriced.

Click the play button below to listen to Chris Martenson's interview with Alasdair Macleod 45m:56s):

This is a companion discussion topic for the original entry at https://peakprosperity.com/alasdair-macleod-currency-crisis-dead-ahead/

2

"Zimbabwe" The word just keeps popping into my mind. I can't keep it out. Is this schizophrenia?
Who cares if some minute country in the middle of Africa just prints its way to oblivion? It is a different kettle of fish when the whole world follows suit.

Sigh! And to think that I had such high hopes for people with the same skin colour as me. How disappointing.

Just for fun lets roll back the film and see what could have been done differently.

In the 1930's someone makes the astounding observation that oil is a one-off finite resource and it must be consumed wisely.

It is also observed that if the population curves were extrapolated that we would be in serious trouble. Therefore strict population targets were to be enforced. Anyone who breeds without a license to do so would be banished to Australia and never allowed back out. If you reject the rules you are quarantined. Bon Voyage.

Further, someone discovers that we live on the surface of a planet. The corollary of that is the fact that we are each a sub-set of the Living Planet. Anyone who propagates the myth of the lonesome cowboy or "I did it My Way" is prescribed 5 doses of the ego dissolving Ayahuasca. This is no time for niceties. 

Wars have to be paid for by the people who think it is a good idea up-front. And when their money is finished they have to pull more out of their own pockets. Further, they have to offer their own offspring up for recruitment. Why should everyone have to pay for someone else's follies?

Any law that is passed that gives any advantage to any section of society over any other section is recognised as discriminatory and is automatically illegal.

Company means the company one keeps. Therefore companies are recognised as people and the board of directors is held to be the embodiment of the body corporate. So any legal penalties attracted by the company are applied to the board of directors. For example:- the penalty for premeditated murder is whatever it is, and is applied to the board. The company is considered to be the company of the board of directors, so when they die the company dies with them or is passed on to their heirs and successors who would form a new "company of people".

3

Ok, aside from the Libor scandal, rigging the energy markets, foreign currency markets, interest rates, and the MF Global theft, what have the Banksters ever done that is underhanded and fraudulent?
You have to laugh to keep from crying!

http://www.youtube.com/watch?v=ExWfh6sGyso

And also from The Life of Brian, here's CONgress trying to decide how to rein in the excesses of the Banksters…

http://www.youtube.com/watch?v=gb_qHP7VaZE

http://www.youtube.com/watch?v=kHHitXxH-us

4

What a lovely interview. Sadly, right on the money, too.

5

Let all have a guess what will happen. Here are my guesses.
5 year moving average for world GDP will go negative and stay there. QE will stop because it fails to produce growth in GDP. Equity markets will crash to very low levels.  Bond yields will go to near zero and stay there.  Interest rates will stay at near zero.  Debt will never be fully repaid or paid back very slowly and will eventually be forgiven.  Inflation for short time (to burn off the QE money) followed by permanent deflation as wages fail to grow and energy and food prices increase in post peak NET energy world.  Japan showed us the way and we're following their script.

 

6
And if we see that beginning to happen, particularly on the domestic front, the first warning will probably come in the foreign exchanges, which are why I think the move in the dollar today is interesting, and certainly more than that at this stage. But what I'm looking for eventually is that, at some stage, people, like ordinary Americans, are going to start thinking that it's not prices going up, it's their money going down. Now, as that psychology gets hold, then there is actually no hope for the currency. So that is something we have to look out for, Chris.
Chris Martenson: I totally agree. I was reading an interview with a major hedge-fund kind of guy recently, and he noted that of all of the clients he was aware of, 0% of them were in any way hedged or prepared for inflation. So, inflation being the catch-all term, but again, as you said, inflation; not rising prices. But his clients were not yet positioned for the idea of falling value of their money.

So we have this extraordinary thing where gold, for whatever reason, has become extremely undervalued compared to where it was before Lehman Brothers went under. Now this is important because before Lehman Brothers went under, not many people actually understood systemic risk. So the price of gold did not really include the weighting for systemic risk.

Bolded sections my emphasis.

There was a recent article on PP that said something to the effect of 25% of Americans did not know what QE was. I personally suspect that number is a lot higher.  So with reference to the first paragraph above, to think the masses will understand prices are not rising but rather the dollar is falling is a pipe dream.

Furthermore, with regard to the second and third paragraphs, to deal with a hedge fund requires $$$. If these folks, and fund managers are zero invested in hard assets, and if they do not know or recognize systemic risk, then they are high on something too, to put it politely.

We are potentially at one of the most critical junctures in human history and whether we get the transition right or badly wrong, is a function of recognizing which things we need to stop doing, which things we need to keep doing, and which things we need to start doing.
There are but a miniscule number of us on a global scale who recognize what we need to stop doing. Most of us here on this site are doing what we needs to be done, and stopping that which must be stopped. But the multitude's who are oblivious are dragging us all down. We as individuals cannot do anything about a currency collapse, save for our personal preparations. My fear is that regardless of mitigation strategies, we are going to have to tough it out alongside the party til' you puke crowd. In many ways, that knowledge makes me sick.

Jan

7

Interesting discussion! Wrapping my mind around currency markets and exchange rates always makes my head spin, but as I try to contemplate all you are saying some comments and questions come to mind.
I would be hesitant to say the central bankers don’t understand the risk of currency, unless I’m misunderstanding you. Ever since going off the gold standard there has been the on-going battle between the pros and cons of fixed vs. floating exchange rates.  Central banks often target three important factors – the instability of exchange rates, the tendency for inflation and/or recession, and the inadequacies of the international capital market. In addition, the main causes of major exchange rate fluctuations seem to be divergences in monetary and fiscal policies between trading partners. And many problems seem to stem from governments not wanting to subordinate their domestic motives to exchange rate stability.

Is moving to a fixed exchange rate world realistic? Is it realistic to think countries would want to return to a fixed exchange pegged to gold or even a basket of commodities (which has been suggested in the past) since they have been given monetary policy freedom? Do you think most countries would give it up? Monetary policy freedom inevitably leads to fluctuating exchange rates.  Wouldn’t it also constrain international capital markets, including their choice of reserve assets?  Am I missing something? I don’t understand this as well you, so, just asking.

How do SDRs fit into this equation? I guess if exchange rates get too unstable, a fixed exchange rate with some centralized international bank is possible, and because trade and finance is global and basically instantaneous it would need to be an international bank. SDRs would definitely fit into this type of scenario, but would like to hear other opinions.

Having a centralized international bank is scary, but isn’t this kind of what we’re seeing on a global scale right now, a type of global monetary integration?

Also, your comments about central bankers not having trading experience is a little unsettling for me. I agree it would benefit the decision making to have some traders, but I wouldn’t want a room full of nothing but traders making the decisions, as traders don't necessarily impress me either. It reminds me of comments from those who say the government should be run like a business, and therefore, we need people who have run businesses to run the government. Macro and micro are two very different things, and governments absolutely should not be run like a business. Sometimes yes, but often times no.  Governments do need some business minds, but they also need a lot of other types of minds to have a balanced perspective (which seems to be missing at the moment, as we have a glut of finance/legal types now). I have a relative who was a past CEO and the guy has no clue about macro economics.  It’s rather embarrassing.

Thought provoking podcast! Thank you.

8

As a person without a background in finance, I find that I must ponder, summarize and create a Cliff Notes version …  

(This graph is from Alasdair Macleod's article at GoldMoney.)  The FMQ metric he created approximates the amount of fiat money in circulation.

I really appreciate this interview as it discusses the exponential pace of money creation that has accelerated to "hyper-exponential" in the last 5 years, and yet the paradox of the lack of obvious price inflation on the streets.  It explains how those closest to the printing press get the benefit of the new money, while those at the periphery of society are left to founder as the buying power of their puny Social Security checks withers.

Going from 1960 to ... 2008, the average exponential growth rate was at 5.9%....  Now, if we stand back unemotionally and look at that chart, we would say that this is monetary hyperinflation....

But … we're not seeing is the prices of raw materials…reflecting that expansion of money. [T]hings like property, [around the financial centers of London and New York] are beginning to rise. [P]rices in the financial centers for everything are considerably higher than they are elsewhere… [B]ankers and lawyers and all of the rest of it are making an awful lot of money out of this policy from the central banks, and they're spending it, lately. They're spending it in the restaurants. They're spending it on improving their homes. They're spending it on buying new country homes. … So they drive up prices around them. And you can see this in New York. I just came back from London today, and my goodness, I see it in spirit in London. So this effect, which is called the Cantillon Effect, where prices rise where the new money goes in [closest to the printing press].

On the other hand, we see the wealth depleting effect on people, far from the printing presses, who live on low-fixed incomes:  Social Security, retired people on pensions, the poor on Food Stamps, Medicaid and Medicare payments.  So this is why Wall-Mart sales are faltering and the American poor are hungry, while prices around the global financial centers bloom.

Thanks for helping tie this all together.

I'm going to start making regular donation to our local food bank.  The number of poor who will be needing help will be growing.

 

9

So if you just look at money supply, you are only seeing one part of the picture.  Its why the Fed missed the housing bubble - they weren't looking at growth in mortgage credit as inflationary.
Here's a chart that illustrates this.  Black line is home mortgages/GDP, red line is M2 Money Supply/GDP.  Which do you think better correlates with the housing bubble?  My answer: Mortgages.  They inflate at the same time housing does, and they also deflate when housing bubble is over.  The magnitude of the growth in the mortgages is also larger than in M2.  M2 on the other hand just slowly rises all during the period.

My contention: any attempt to predict either inflation OR hyperinflation with just money supply is doomed to provide an incomplete picture that is ultimately not that useful.

We also have to believe that all those excess reserves eventually have to come out of hiding and start moving around at high velocity for them to contribute materially to this long-awaited hyperinflation.

10

Bad news will eventually be seen as bad news. QE money is not ending up being loaned into the economy by Joe Public. Anyone with any sense is deleveraging and/or buying physical assets. The bursting of the equity bubble will be something to behold.
Question. If you have savings, do you pay back some of your mortgage on a rental property or buy physical gold when it gets manipulated down to $900 ?

11

I reread my post this morning and the sentence about not being impressed with traders was poorly written. I was tired when I wrote it.  What I meant to say was I would be equally not impressed with a room full of traders as I would be with a room full of academics. It takes all kinds to make the world go round.
Didn't want traders to think I don't appreciate their perspective! For example, especially DaveF's perspective…I had the same thoughts about M2, money pooling does not apply inflationary pressure.

Thanks!

12

good article…scary in fact. and jan, i highlight the same two paragraphs, they jumped out at me too.
it does boil down to value of money will someday devalue and i'll add so will the value of human labor. , perhaps soon, perhaps not…but the trigger is cocked so the trigger event is much more likely given it will take less of a pull.

i put a large share of my assets into hard assest , mostly on this homestead, not only providing food, shelter, water etc for my self, but into having the land set up to produce income should i need to use it . it's all bought outright. the value doesn't matter, it's mine.(til the army wants it then it;s theirs)

i've concensed down to:

money has way less value, buying power.

availability of "stuff" is questionable

affordability of "stuff" ,whatever you call it, my labor buys less, so my economic status drops from any starting point.and as i age and can do less.use my assets now to have a way to produce income completely independent of the markets…any of them.

unreliable electric grid

very expensive oil products.so less usage of them, less relying on them.

to not rely on feeling secure by my savings, excess

the psychological part the hardest, so i've given it the most time ,effort and thought.

and finally to be able to live independent from the masses. i need to be able to stay away

from people for long periods of time.

 

so i have focused on providing  what i need, not what is going to happen i can drive myself crazy with the futility on that …

i had to have things in place now  because i cannot build a fence when i'm 70, probably for all of the above reasons, so i built it 4 years ago.while stuff available , affordable, gas available, and my energy available, and the internet for education on how available. my model works well for no collapse and just aging.

since i feel in place, i no longer have to watch the news so closely and was able to completely ignor the govt shutdown bs.i didn't have that weighing on me one bit.my time and life are my own now. i've tried to set up so i can protect as much freedom and choice as i can.

all in all, i think living among wild and distressed humans will be the biggest challenge for most of us. and that has already begun

my take away from this article…money worth less as we go forward…

 

13

i should correct my 2nd line, it does boil down to value of money will someday devalue and i'll add so will the value of human labor to mean:   value has been lessening rapidly for some time and will continue to trend that way til it collapses .

14

Would stopping QE lead to higher growth than with QE in place?  Seems to me QE does help to keep rates lower than otherwise, and that alone could be reason it won't stop even though it isn't leading to appreciable growth in GDP.  After all, when it comes to decisions at the fed (or congress) these days the option chosen will always be the one that causes the LEAST IMMEDIATE pain.

15

gillbilly-Ha thanks for clearing up that trader comment!  But I kind of knew what you were saying anyway.  I feel the Fed should stick to its knitting, and not be involved with trading at all.  Just be a lender of last resort to the banking system, and stay out of the rest of the economy.  For that, they likely just need people with some practical banking experience, not traders.
Regarding FMQ, if historical prices are a guide, the simple existance of a pool of money doesn't in and of itself drive inflation.  This is just common sense: a trillion in cash sitting in the cellar isn't inflationary, as they say.
I view M2/FMQ as potential energy.  If the money comes out of hiding and the money multiplier (rate of circulation) increases, then yes it would seem that the larger the pool, the greater the damage it does when it decides it wants to be spent.
Some analyses I've read suggests that different pools mean different things.  Savings accounts represent a "slower" pool of money than demand deposits, and those are slower than currency.  So - theoretically at least - a trend of money moving from savings to checking, or from checking to currency, implies (possibly) an early detection of an increasing velocity of money.
Here is the order I have read, from slow to fast:

  • Time Deposits
  • Savings accounts, money market funds
  • Demand Deposits accounts
  • Currency
    So it would seem that if we watch movements between different pools we might be able to detect a velocity increase prior to it showing up in CPI, or in the quarterly M2V series.  I haven't done the legwork on that, but it might be interesting.  Maybe I'll go take a look…seems like it might have some promise.
    At the core, however, both FMQ and M2 are both asking the question, "what happens if every dollar sitting in an account somewhere decided it wanted to buy gold - and only gold - where would the price of gold go to?"  As goldbugs and/or sound money advocates (and I include myself in that group) its an interesting question to ask, but in terms of practical effect on the US economy and/or informing trading decisions, its a bit like a medieval Domincan discussing whether there is excrement in heaven, or whether two angels can exist in the same spot at once.  In other words, it's a Dr. John question, not a Fat Tony question.
    That is because so few members of the public in the west care about gold.  We Domincans are few, and the peasants (for whom angels, the existence of heavenly excrement, and the ultimate answer to our particular question are unimportant to their daily lives) are many.  And its the peasants who would be the ones driving any actual move to exchange dollars for gold.  What's more, as a percentage of GDP, M2 (and FMQ) are not crazy-high vs historical values.  If we are to consider that the USD is now practically backed by "the stuff you can buy with USD in America" - in some more practical sense money no longer needs to be underpinned by convertibility to gold, but rather its convertibility to property, goods, and services.  China buying the Chase Manhattan building in downtown NYC is an example of them converting USD into a big building, rather than gold.  Which likely explains why the peasants don't care.
    [A USD confidence vulnerability: if we start disallowing foreign buying of US assets.  Then USD get sold for sure.  Its the moral equivalent of slamming the gold window.]
    Here is M2 (Money Supply) divided by GDP - the ratio of money in circulation (and in bank accounts, etc) to our actual annual production.  You can see that while it is historically high, it hasn't gone nuts the way debt/GDP did over time.  My interpretation: there is more money than usual out there, but it is not factors of three above normal, the way the debt is right now.  Conclusion - debt: big problem.  Money supply: small problem.
    Being a sound money guy, I actually think the issue will matter more than it does currently at some point, since gold is one of those things that works when all other stuff fails.  Most likely, this will be when the world devolves into a bit more chaos than it has at the moment.  For instance, if I take my Chinese reserves of USD and buy a US building, if there is a war - who says I get to keep the building?  Or the gold mine.  Or the oil well.  Nationalization is always a popular thing, we've all seen it.  Whereas if I buy gold, I can most definitely take the gold outside the country and I can keep it regardless of the international relation situation.
    However until this independent movable asset store-of-wealth attribute becomes more important than it is now, its unlikely that the FMQ or M2 debate will have much relevance for the rest of the world.
16

Dave, Thanks for the post. I especially like the excrement in heaven, angels, and Fat Tony references. Lol I recently went back to the library stacks and read some papers from economists in the 1980s in regard to the move off of the gold standard and the effects of fluctuating exchange rates. One in particular by William Cooper was interesting (written 1986, can't remember the exact title of the article or the journal now).  He wrote a pretty damn accurate description of what the markets would be like in 2010. He was advocating a one world currency, and using SDRs as reserve and denomination. I don't hold an opinion on this, but rather I'm just trying to entertain many perspectives.I agree sound money can take the form of any type of commodity backing, or a combination of them, and I also agree that this will probably not happen until things become much more unstable, or a complete crash.The flexibility of monetary policy is too intoxicating for political reasons (to satisfy fiscal goals). I also don't understand why gold bugs get upset over market/price manipulation/intervention/etc. All markets are manipulated and intervened. You're a trader, I'm sure you see it in every market on daily basis. Why would the PMs be any different? One thing that isn't touched on (and I'll be the devil's advocate here) is that "efficient" markets advocated by free marketeers do not always result in fairness, and most often don't, so the manipulation of the FED/Govts is to redirect fairness (wealth distribution, employment, etc). Whether they see it or intervene appropriately is another matter. I know I'll probably get lambasted for that statement, but my caveat is that when the FED or govt intervenes in a market it is taking an active role in that market, and so its intentions also need to be questioned. That's just the way it is, at least for now. Anyway, isn't this what we are doing here at this site, questioning the intentions of intervention and manipulation? 
Thanks again for the posts and charts.

17

 Efficient Market Hypothesis and General Equilibrium Theory have been, for the most part, abject failures when applied to the political economy. Despite the supposed intellectual underpinnings that seek to convince us why no FED intervention should ever be the order of the day, these theories don’t work, never did work, and come to find out, never can work.
Like layers of an onion, the more you peel back and strip away failed and ineffectual theories, the more you get to see the extents of the chicanery and duplicity. Until finally what’s left on the cutting room floor is the rotting scraps of Marginal Utility Theory as the prima facie cause of some really, really, bad science.
 

What we see is the entire basis for Neo-classical economics called into question- and ironically, called into question by among others, traders. Of late there is a wave of quants migrating from the hallowed halls of the financial firms joining ranks with scientists, physicists, and mathematicians who are doing something that should have been done long ago, digging back into the economic textbooks which have been playing fast and loose with neo-classical theory, and specifically,  marginal utility. And what they are finding is pretty shocking, the basis for these theories cannot really be supported, which is a polite way of saying that these concepts, and the assumptions that underlie them, are just plain wrong. Not all of it (marginal utility) is wrong, but huge swaths of it are based on overly simplistic aggregations between micro and macro, half-baked theories of rational consumers, single agent entities representing an entire agency such as consumers or banks, and theories of marginal cost that suggest that as production quantities increase, so do prices, which as anybody that has ever set foot on a factory floor will tell you, is precisely the opposite of what really happens.

 

On top of these faulty assumptions are built towering edifices of economic theory, Keynesianism, Austrian economics, MMT, you name it, cascading blunders firmly anchored in the quagmire of marginal utility. These assumptions were plugged in to allow the dismal science to advance to macro, to evolve into explanations designed explicitly to replace Labor Theory as the dominant economic theory. The trouble is no one ever revisited the placeholder assumptions that were plugged in to the freshman economic texts, although the authors fully expected that someone would do so. No one ever did.

 

We have to interject a historical context, the supplanting of Labor theory with marginal utility was a tectonic event of huge proportion that took place late in the 19th century, largely set into motion by Alfred Marshall. Up until then, so-called Classical Theory governed economics, and Marshall’s theory of marginal utility ushered in the Neo-classical phase. The main difference was in the operating theory, which up until that point was centered on a theory of Value that specified labor as the sole input. This was perhaps most famously advanced by Adam Smith, followed by Ricardo, and brought to its penultimate form by Marx of course, in 1867. But there were problems with Labor Theory (or so it was thought at the time) and we had simultaneously the ascendancy of the Industrial Revolution which was to hit full stride at the end of the 19th century in America.

 

But there was trouble in River City, just as the capitalist mode of production was to hit full stride, we have the dominant economic theory based on, and wholly centered around, you guessed it- Labor.

 

This would never do.

 

Any top to bottom economic theory that uses labor as the centerpiece was going to be nothing but trouble, serving as a constant remainder of who exactly it was that buttered the bread, and giving a key role and high visibility to the rapidly assembling labor coalitions rising in response to the emerging robber/barons of the turn of the century Industrial Revolution.

 

Ostensibly in response to the abandonment of the Labor Theory of Value due to its “inconsistencies”, and it’s unsightly cousin, the Tendency of the Rate of Falling Profit, it became convenient to proffer a new top-to-bottom theory of economics, and the Neo-Classical regime went to the front of the class. Neo-Classical theory advanced none of the tedious shortcomings of its predecessor, instead, completely ignoring any semblance of Value Theory, suggested that prices were determined by consumer preference curves, as the “rational” consumer made choices based not on exchange value but on Pareto superior preference curves. (Apples and bananas were chosen based on utility as a function of comparative price).

From here it is just a hop, skip and a jump to Efficient Markets Hypothesis and General Equilibrium theory- and the notion that the market can fix itself.

 

Before I leave this subject I wanted to point out that marginal (cost) theory has no rigorous means of determining (historic) value, other than the temporal, real time free market exchange price. In contrast, Labor theory offered a highly detailed history of a commodities’ value, the value in a metal part could be traced back to the stamping plant, to the stamping equipment, to the iron ore used to feed the smelting plant, to the bricks used to create the plant, and the labor needed to extract the ore from the ground (and the shovel used to extract it). All of this traceability is gone in marginal utility, replaced by a single commodity price based on whatever someone is willing to pay, achieving near complete obfuscation of the price, labor inputs, and exploitation up until that point.

 

Exactly as intended.

 

Despite the obstacles, there is a growing group of heterodox physicists and scientists, operating as economists, challenging these assumptions using mathematics and dynamic systems analysis to properly characterize a dysfunctional economy. Below is a podcast interview with Professor Grasselli, where he discusses many of these topics.

 

http://fromalpha2omega.podomatic.com/entry/2013-10-12T12_21_15-07_00

18

Feral Hen

The value of your labor is only falling in our currant situation were there is a glut of labor, cheap energy, intricate supply chains and an industrial capability for producing stunning amounts of complex products at shockingly low "prices".  As we move to a situation were electronic financial transactions are impossible and no one will exchange anything for paper currency and there is little or no "money" (gold and silver coins) labor will be the only thing that has value.  When one looks at what it would take to reproduce a T-shirt and a pair of blue jeans that can currently be had for 4 hours of your time at todays minimum wage from scratch (that is, prepare the soil, plant, cultivate and harvest  the cotton.  Card, spin and weave the fibers into cloth.  Cut and stitch by hand the fabric into the finished garments) the mind boggles. And this presupposes that you already have a hoe, cards, spinning wheel, loom, scissors and needles and don't have to make those things from scratch as you go along. 

Perhaps a group of earnest young people will knock on your door and ask if they can help you work your place in exchange for a share of the crop.  Perhaps a potential "enforcer" has already got an eye on you and your place (I know several people, myself included, who are making notes on local resources.  One in particular who is already making plans on how to defend the dairy farm across the road from him ).  You, your knowledge and your preps maybe valuable enough to an emergent warlord to be worth defending.  Perhaps you and your preps will simply overrun and eaten.  Perhaps, perhaps.

Hmmm, I may have to lay in some more axes, saws and hoes.

John G

 

 

19

Aren't you clever. I thought for a moment you were going to say something profound. Sort of fizzled out at the end. In my opinion anyone espousing economic theories that don't incorporate energy production knows nowt, be it Marx, Neo-classical or whatever. Sorry.

20

 Finance minister Joe Hockey said that we in Australia need austerity amongst the little people  and the Big End of town needs printed money.
The debt ceiling is to be raised to half a billion, in a country of 23 million.

Woopie doo.

Seeing that I will be picking up the tab, am I going to have the the pleasure of spending it on my yacht?