Paul Brinkkemper: Have you ever tried to explain to someone how money is created as a loan by banks? Then you most likely came across misunderstanding, disbelief and apathy. If the movement for monetary reform is to gain influence among the general public, we have to educate many people. To be effective we must find persuasive ways around the common psychological defensive reactions. To do this, we have created a board game called Money Maker to make it fun and easy to understand the banking system. In Money Maker every player becomes a bank that can create money, similar to how a modern fractional reserve bank works. While playing, players subconsciously create a credit boom and watch it fall apart in a big bust. In the end, only the richest player wins, but all players walk away with a fundamental understanding of our broken banking system, and if they pay attention, some pointers on how the system can possibly be improved.

What are the common reactions to hearing how banking works?

If you happen to have a conversation with friends or family on the workings of the monetary system, you may recognise one of three common reactions:

1. Many people simply do not care. “All that banking is very complicated, and abstract. I have better things to do with my time. Why bother? I don’t understand how it works, and I am not able to change it anyway.” An apathetic public is unlikely to catalyse any improvements in the money system.
2. Misunderstanding is also a very common reaction when talking about how the banking system works, especially when talking with trained professionals. When speaking about the money system with a banker or an economist, there is almost a Babylonian confusion where people use the same words but attach different meanings to them. Especially when using the word money. M0; M1; M2; M3; TMS, are a few of the many different definitions of money. It is very difficult for people to work together if they do not have a shared vocabulary of the tools at hand.
3. Disbelief is very common among people who have a certain degree of education or training on the subject. It can be very difficult to let go of a worldview that you have held onto for a very long time. “Why would this person talking about money creation now here tell me the truth? Surely, if it was that important, I would have learned about it in high school. Or otherwise I would have read it in the newspaper or heard it on television” is a typical reaction. We even met one journalist who was not allowed to write about money creation in his newspaper because “money creation is the topic of conspiracy theories.” When you cannot talk about something, it becomes nearly impossible to solve any issue related to it.

Why should we focus on changing the minds of people who don’t agree with us?

These reactions are what one might consider part of the cognitive dissonance that people employ to keep their worldview intact. Psychologically, we need to keep our worldview intact to function in the world: doubting the existence of gravity every five minutes can be troublesome. But if our attachment to our current worldview is too rigid, it can prevent us from learning new things and evolving.

From the perspective of the monetary reformers, this cognitive dissonance lies as a great psychological defensive barrier between our group and the public at large. If we are to influence the greater public, we will need to find a way around this psychological defensive barrier. This is exactly why we have created the board game Money Maker.

How do you play Money Maker?

You play an investment banker in a city during the renaissance. All players start out with some money and an infinite amount of credit that they can create. There is a market for production and consumption goods, commonly referred to as ‘work’ and ‘food’. Every turn the players can bid on investments, the highest bidder wins the investment. Investments cost a certain number and type of goods to build and produce a certain good every turn. Players can pay for goods and investments with money or credit. At the end of a players turn, a roll of the dice determines the influence of credit on the economy and whether there is inflation or a credit repayment event is nearing. During a credit repayment event, all players must repay their outstanding credit with gold coins. Players that repay their credit successfully, increase in credit rating and can employ a higher leverage. Insolvent players that cannot repay their credit must borrow from solvable players. In the end, the richest player wins.

How does Money Maker explain complex economic concepts?

Money Maker is a microcosm of the Fractional Reserve Banking System, so very early on players figure out that they can spend more credit than they have money to buy the best investments. This leads to great increases in the price of investments and goods: the psychology of credit causes a credit-fueled boom. Without realising it, players learn about the credit-fueled boom and bust cycle.

Eventually, the credit must be repaid. Players who have spent too much credit need a bail out from their more careful competitors. These competitors can exploit the need of these indebted players to demand interest or the properties of indebted players in exchange. In this way, players learn about the importance of solvability and liquidity.

Without focusing on the exact terminology, Money Maker highlights the importance of the concepts behind solvability and liquidity.

When players repay their credit successfully, their credit rating improves. A higher credit rating means that they can spread out their credit over more places. This reduces the chance that they need to repay all of their credit at once. A higher credit rating means that players can create more credit and that the credit boom enlarges. This helps players learn about the workings of leverage.

In the game box, there is also an easier version of the game where players play without being able to create credit. To play Money Maker without credit is similar to a full reserve / sovereign money banking system. Players then see that there is no more boom and bust cycle, and experience the stability that comes with this. There is also a possibility of a debt jubilee in the game, which allows the players to experiment with how a mass cancellation of all debts would affect the economy. This shows players how the money system can be reformed to work differently.

And what do people think of it?

Playing Money Maker is a great way to introduce people to the workings of the banking system because it is an engaging way of learning. Rather than learning from a book, players are experiencing it in a game. Since the parallels to the real world are obvious, you can hear players say things like “You are a total Greece, so deep in debt” or “you are a real Goldman Sachs, profiting of others misfortune.”

Most importantly, playing Money Maker is a great way to get around the common psychological reactions against hearing how the banking system works. Any misunderstanding amongst players is quickly resolved by consulting the rulebook. For the duration of the game there is a suspension of disbelief. This suspension then carries over into the real world at the end of the game. Since players have seen the fractional reserve banking work in miniature, they can easily imagine it working similarly in the real world. Instead of exhibiting apathy, players are engaged in the game and trying to win. They experience that their actions can have a positive impact on the outcome. And most importantly: they experience that the money system is a system that exists by consent, and that if they play by different rules, the money system can work much simpler and be more stable for all players.

To learn more about money maker, you can find out more at www.moneymaker.games, or get in touch via [email protected].

For IMMR members, we have special deals to resell Money Maker to your fans in your country, as an tool for fundraising, education and community building. You can find out more about this online at partner.moneymaker.games

The post Money Maker: the game to teach the world about banking appeared first on P2P Foundation.

Virtuous rent: a rudder that can transform our economy.

Peter Barnes: The London Underground abounds with warnings to “mind the gap,” referring to the space between station platforms and train doors. In our larger society similar warnings could be issued for the gaps between rich and poor and between humans and nature. These gaps must not only be minded, they must also be narrowed. The persistent question is how to do this, and I con­tend that a form of rent may be the best possible tool. But before we get to that, we must first become familiar with rent.

The term was first used by classical economists, including Adam Smith, to describe money paid to landowners. It was one of three income streams in the early years of capitalism, the others being wages paid to labor and interest paid to capital.

In Smith’s view, landlords benefited from land’s unique ability to enrich its owners “independent of any plan or project of their own.” This ability arises from the fact that the supply of good land is limited, while the demand for it steadily rises. The effect of landowners’ collection of rent, he concluded, isn’t to increase society’s wealth but to take money away from labor and capital. In other words, land rent is an extractor of wealth rather than a contributor to it.

A century later, a widely-read American economist named Henry George (his magnum opus, Progress and Poverty, sold over two million copies) enlarged Smith’s insight substantially. At a time when Karl Marx was blaming capital­ists for expropriating surplus value from workers, George blamed landlords for expropriating rent from everyone. Such ­rent­ extraction operated like “an immense wedge being forced, not underneath society, but through society. Those who are above the point of separation are elevated, but those who are below are crushed down.” George’s proposed remedy was a steep tax on land that would recapture for society most of landowners’ parasitic gains.

More recently, the concept of rent was expanded to include mono­poly pro­fits, the extra income a company reaps by quashing com­pe­tition and raising prices. Smith had written about this form of wealth extraction too, though he didn’t call it rent. “The interest of any particular branch of trade or manufac­tures is always to widen the market and to narrow the competition…To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can only serve to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.”

It’s important to recognize that the tax Smith spoke of isn’t the kind we pay to government; rather, it’s the kind we pay, much less visibly, to businesses with power. That’s because prices in capitalism are driven by four factors: supply, demand, market power and politi­cal power. The first two, which are omnipresent in economics texts, deter­mine what might be called fair market value; the last two, which are prevalent in the real world, determine rent. Actual prices charged are the sum of fair market value and rent. Another way to say this is that rent is the extra money people pay above what they’d pay in truly com­pe­titive markets.

More recently, the term has been further extended to include income from privileges granted by government—import quotas, mining rights, subsidies, tax loop­holes and so on. Many econo­mists use the term “rent-seeking” to describe the multiple ways special interests use govern­ment to enrich them­selves at the expense of others. If you’re wondering why Washington, D.C. and its envi­rons have grown so prosperous in recent decades, it’s not because govern­ment itself has become gargantuan, it’s because rent-seeking has.

In short, traditional rent is income received not because of anything a person or business produces, but because of rights or power a person or business possesses. It con­sists of takings from the larger whole rather than additions to it. It redis­tributes wealth within an econ­omy but doesn’t add any. As British economist John Kay put it in the Financial Times, “When the appropriation of the wealth of others is illegal, it’s called theft or fraud. When it’s legal, it’s called rent.”

Because rent isn’t listed separately on any price tag or corpor­ate in­come statement, we don’t know exactly how much of it there is, but it’s likely there’s quite a lot. Consider, for example, health care in America, about one-sixth of our economy. There are many reasons the U.S. spends 80 percent more per capita on health care than does Canada, while achieving no better results, but one of the biggest is that Canada has wrung huge amounts of rent out of its health care system and we haven’t. Every Canadian is covered by non-profit rather than profit-maximizing health insurance, and pharmaceuti­cal prices are tightly controlled. By contrast, in the U.S., drug companies overcharge because of patents, Medicare is barred from bargaining for lower drug prices, and private insurers add many costs and inefficiencies.

Or consider our financial sector. Commercial banks, the kind that take depo­sits and make loans, receive an immensely valuable gift from the federal gov­ernment: the right to create money. They’re allowed to do this through what’s called fractional reserve bank­ing, which lets them lend, with interest, about ten times more than they have on deposit. This gift alone is worth billions.

Then there are commercial banks’ cousins, investment banks, which are in the business of trading securities. They can’t mint money the way commercial banks do, but they have tricks of their own. For one, they charge hefty fees for taking private companies public, thus seizing part of the liquidity pre­mium public trading creates. For another, they make lofty sums by creat­ing, and then manipulating, hyper-complex financial “products” that are, in effect, bets on bets. This pumps up the casino economy and extracts capital that could otherwise benefit the real economy.

We could wander through other major industries—energy, tele­com­muni­ca­tions, broadcasting, agriculture—and find similar ex­tractions of rent. What percentage of our economy, then, consists of rent? This is a question you’d think economists would explore, but few do. To my knowledge, the only prominent economist who has even raised it is Joseph Stiglitz, a Nobel laureate at Columbia University, and he hasn’t answered it quantitatively.

The amount of rent in the U.S. economy, Stiglitz says, is “hard to quantify (but) clearly enormous.” Moreover, “to a significant degree,” it “redistributes money from those at the bottom to those at the top.” Further, it not only adds no value to the economy, it “distorts resource allocation and makes the econ­omy weaker.” 

So far I’ve described rent as a negative force in our economy. Now I want to introduce the concept of virtuous rent, a form of rent that would have distinctly positive effects.

A perfect example of virtuous rent is the money paid to Alaskans by the Alaska Permanent Fund. Since 1980, the Permanent Fund has distributed equal yearly divi­­dends to every person who resides in Alaska for one year or more. The divi­dends—which have ranged from $1,000 to $3,269 per person —come from a giant mutual fund whose beneficiaries are all the people of Alas­­ka, present and future. The fund is capitalized by earnings from Alaska’s oil, a commonly owned resource. Given the steady flow of cash to its entire pop­u­la­tion, it’s not surprising that Alaska has the highest median income and one of the lowest pover­ty rates of any state in the nation.

Broadly speaking, virtuous rent would be any flow of money that starts by raising the cost of harmful or extractive activity and ends by increasing the incomes of all members of society. Another way to think of it is as rent that we, as collective co-owners, charge for private use of our common assets. Think, for example, of charging polluters for using our common atmosphere and then sharing the proceeds equally.

There are two key differences between traditional and virtuous rent. The first has to do with how the rent is collected, the second with how it’s distributed.

Traditional rent is collected by businesses whose market and/or political power enables them to charge higher-than-competitive prices. It leads to higher prices that serve no economic, social or ecological function. Virtuous rent, by con­trast, would be collected by not-for-profit trusts that represent all mem­bers of a polity equally. It would be generated by charging private busi­nesses for using common assets that most of the time they use for free. Such rent would also lead to higher prices, but for good reasons: to make business­es pay costs they currently shift to society, nature and future genera­tions, and to offset traditional rent.

The second difference is distributional. Traditional rent flows upward to the small minority that owns most of the stock of rent-extracting businesses. Virtuous rent would flow to everyone equally.

When collection and distribution are merged, the effects of traditional rent are doubly negative: it diminishes the efficiency of our economy and the in­comes of all those who pay it but don’t get any. The effects of virtuous rent, by con­trast, are doubly positive: it increases the health and fairness of our economy and the security of our middle class.

At this moment, of course, traditional rent totals trillions of dollars a year, while virtuous rent (out­side of Alaska) is more of a concept than a reality. But virtuous rent can and should grow. To understand how this could hap­pen, it’s necessary to ex­plore two other concepts: common wealth and exter­nalities.

Common wealth has several components. One consists of gifts of nature we inherit together: our atmosphere and oceans, water­sheds and wetlands, forests and fertile plains, and so on. In almost all cases, we overuse these gifts because there’s no cost attached to using them.

Another component is wealth created by our ancestors: sciences and techno­lo­gies, legal and political systems, our financial infra­structure, and much more. These confer enormous benefits on all of us, but a small minority reaps far more financial gain from them than do most of us.

Yet another chunk of common wealth is what might be called “wealth of the whole”—the value added by the scale and syner­gies of our economy itself. The notion of “wealth of the whole” dates back to Adam Smith’s insight two-and-a-half centuries ago that labor specialization and the exchange of goods —pervasive features of a whole system—are what make nations rich. Beyond that, it’s obvious that no business can prosper by itself: all busi­nesses need cus­­tomers, suppliers, distributors, highways, money and a web of comple­men­tary products (cars need fuel, software needs hardware, and so forth). So the economy as a whole is not only greater than the sum of its parts, it’s an asset without which the parts would have almost no value at all.

The sum of wealth created by nature, our ancestors and our econ­omy as a whole is what I here call common wealth. Several things can be said about our common wealth. First, it’s the goose that lays almost all the eggs of private wealth. Second, it’s extremely large but also (like the dark matter of the universe) mostly invisible. Third, because it’s not cre­ated by any indivi­dual or business, it belongs to all of us jointly. And fourth, because no one has a greater claim to it than anyone else, it belongs to all of us equally, or as close to equally as we can arrange.

The big, rarely asked question about our current economy is who gets the benefits of common wealth? No one disputes that private wealth creators are entitled to the wealth they create, but who is entitled to the wealth we share is an entirely different question. My contention is that the rich are rich not so much because they create wealth, but because they capture a much larger share of common wealth than they’re entitled to. Another way to say this is that the rich are as rich as they are—and the rest of us are poorer than we should be—because extracted rent far exceeds virtuous rent. If that’s the truth of the matter, the solution is to diminish the first kind of rent and increase the second kind. 

Externalities are a better-known concept than common wealth. They’re the costs businesses impose on others—workers, communities, nature and fu­ture generations—but don’t pay themselves. The classic example is pollution.

Almost all economists accept the need to “internalize externalities,” by which they mean making businesses pay the full costs of their activities. What they don’t often discuss are the cash flows that would arise if we actually did this. If businesses pay more money, how much more, and to whom should the checks be made out?

These aren’t trivial questions. In fact, they’re among the most momentous questions we must address in the twenty-first century. The sums involved can, and indeed should, be very large—after all, to diminish harms to nature and society, we must internalize as many unpaid costs as possible. But how should we collect the money, and whose money is it?

One way to collect the money was proposed nearly a century ago by British economist Arthur Pigou, a colleague of Keynes’ at Cam­bridge. When the price of a piece of nature is too low, Pigou said, government should impose a tax on using it. Such a tax would reduce our usage while raising revenue for government.

In theory Pigou’s idea makes sense; the trouble with it lies in imple­mentation. No western government wants to get into the business of price-setting; that’s a job best left to markets. And even if politicians tried to adjust prices with taxes, there’s little chance they’d get them “right” from nature’s perspective. Far more likely would be tax rates driven by the very corporations that domi­nate government and overuse nature now.

An alternative is to bring some non-governmental entities into play; after all, the reason we have externalities in the first place is that no one represents stakeholders harmed by shifted costs. But if those stakeholders were repre­sent­ed by legally accountable agents, that problem could be fixed. The void into which externalities now flow would be filled by trustees of common wealth. And those trustees would charge rent.

As for whose money it is, it follows from the above that payments for most externalities—and in particular, for costs imposed on living creatures present and future—should flow to all of us together as beneficiaries of common wealth. They certainly shouldn’t flow to the companies that impose the exter­nalities; that would defeat the purpose of internalizing them. But neither should they flow to government, as Pigou suggested.

In my mind, there’s nothing wrong with government taxing our individual shares of common wealth rent, just as it taxes other personal income, but government shouldn’t get first dibs on it. The proper first claimants are we, the people. One could even argue, as economist Dallas Burtraw has, that government capture of this income may be an unconstitutional taking of pri­vate property.

This brings us back to virtuous rent. There are several points that can be made about this sort of rent.

First, paying virtuous rent to ourselves has a very different effect than paying extractive rent to Wall Street, Microsoft or Saudi princes. In addition to dis­couraging overuse of nature, it returns the money we pay in higher prices to where it does our families and economy the most good: our own pockets. From there we can spend it on food, housing or anything else we choose. Such spending not only helps us; it also helps businesses and their employees. It’s like a bottom-up stimulus machine in which the people rather than the government do the spending. This is no trivial virtue at a time when fiscal and monetary policy have both lost their potency.

VIRTUOUS RENT

Second, virtuous rent isn’t a set of government policies that can be changed when political winds shift. Rather, it’s a set of pipes within the market that, once in place, will circulate money indefinitely, thereby sustaining a large middle class and a healthier planet even as politicians and their policies come and go.

And third, though virtuous rent requires government action to get started, it has the political virtue of avoiding the bigger/smaller government tug-of-war that paralyzes Washington today. It thus can appeal to voters and politicians in the center, left and right.

A trim tab is a tiny flap on a ship or airplane’s rudder. The designer Buck­minster Fuller often noted that moving a trim tab slightly turns a ship or a plane dramatically. If we think of our economy as a moving vessel, the same metaphor can be applied to rent. Depending on how much of it is collected and whether it flows to a few or to many, rent can steer an economy toward extreme inequality or a large middle class. It can also guide an economy toward excessive use of nature or a safe level of use. In other words, in addi­tion to being a wedge (as Henry George put it), rent can also be a rudder. An economy’s outcomes depend on how we turn the rudder.

Think about the board game Monopoly. The object is to squeeze so much rent out of other players that you wind up with all their money. You do this by acquiring monopolies and building hotels on them. However, there’s another feature of the game that offsets this extracting of rent: all players get a cash payment when they pass Go. This can be thought of as virtuous rent.

As Monopoly is designed, the rent extracted through monopoly power greatly exceeds the virtuous rent players receive when pass­ing Go. The result is that the game always ends the same way: one player gets all the money. But sup­pose we tip the scale the other way. Suppose we decrease the extracted rent and increase the virtuous kind. For example, we could pay players five times as much for passing Go and reduce hotel rents by half. What then happens?

Instead of flowing upward and concentrating in the hands of a single winner, rent flows more evenly. Instead of the game ending when one winner takes all, the game continues with many players remaining.

The point I wish to make is that different rent flows can steer a game—and more importantly, an economy—toward different outcomes. Among the out­comes that can be affected by differing rent flows are the levels of wealth co­n­centration, pollution and real investment as opposed to specu­lation.

Rent, in other words, is a powerful tool. And it’s also something we can fiddle with. Do we want less extracted rent? More virtuous rent? If so, it’s up to us to build the pipes and turn the valves.

Photo by Paul Housberg

The post How to Create a Bottom-Up Stimulus Machine to Fix Capitalism appeared first on P2P Foundation.

Today’s advocates of blockchain and digital currencies describe the potential for more privacy, transparency, accountability, efficiency and competition in all forms of commerce, finance and bureaucracy. Some see blockchain as providing technologies for democracy itself, from elections to budgeting. While some claims seem overblown or premature, there are already some fascinating applications in the fields of logistics, inventory and supply chain management.

Despite these advances, there has been a growing backlash from opinion leaders as the technology’s drawbacks become better known. Perhaps you’ve heard that Bitcoin alone uses 0.25% of the world’s electricity? Other blockchain systems, such as Ethereum, use similar approaches that require computers to burn electricity unnecessarily. Perhaps you are concerned about the number of accidents, hacks and scams possible in this new space, where the law has not yet found its feet? Or you may have heard that crime and terror networks could use these technologies to transfer funds. Blockchains and digital currencies pose important questions to both their advocates and regulators.

Pioneers in the industry are alert to such concerns and have attempted collective self-regulation. The Brooklyn Project, an industry-wide initiative to support investor and consumer protection, was launched in November 2017.

“By acting responsibly today, we can help make sure we are collectively able to reap the benefits of this powerful technology tomorrow,” explained co-founder of Ethereum Joseph Lubin. The following month, a coalition of cryptocurrency organizations and investors representing $650m in market capitalization established Project Transparency. It seeks to protect investors by enabling more disclosure within the digital currency sector.

These initiatives are welcome, but neither address how the technology affects wider society and the environment. If this sector is going to disrupt incumbent organisations (management-speak for people losing their jobs) then the general public will soon ask what the upsides really are.

In recent months, many blockchain projects explicit about their social mission have launched. Bflow.io offers a system for reporting corporate sustainability. Alice.si strives for greater accountability from charities. Provenance.org tracks tuna from shore to plate, giving consumers confidence in sustainability. BitLandGlobal is seeking a step change in land registration by the rural poor. Specialist think-tank Blockchain for Good has been established to promote blockchain’s benefits for worthy causes. Nevertheless, on closer analysis, many of these ‘4good’ projects miss a crucial factor – the impact of their code itself.

Is it appropriate for people apparently seeking economic justice and equal opportunity to use a blockchain in which only heavily invested actors receive new tokens? Is it appropriate for those seeking to put a new medium of exchange in the hands of the masses to use a blockchain whose tokens are mostly hoarded by speculators? Is it appropriate for a carbon emissions reduction project to use a blockchain which emits as much CO2 as a small country?

These are not hypothetical examples. Most blockchain projects bolt a purpose onto code and governance systems that were designed without such public interests in mind. Just as it would not be acceptable to clear the ancient Borneo jungle to raise money for homeless orangutans, it should not be acceptable for a project to deploy socially regressive or climate-toxic code.

Fortunately, there is a new wave of mission-driven blockchain projects conscious about their total social impact. Initiatives like Holochain, Faircoin, Yetta and LocalPay explicitly connect their code base to their social cause. Faircoin uses a codebase that requires little electricity and allows the distribution of coins to socially useful projects. Providing the same smart contract functionality as Ethereum, the new Yetta blockchain is intended to be sustainable by design, with the low energy requirements of its codebase being moderated further by automated rewards for those nodes using renewable energy. It will also enable automated philanthropy to support the Sustainable Development Goals (SDGs).

Two of the most integral technology projects in this field take a post-blockchain approach. By sharing data and not using a single blockchain, Holochain reduces the energy and time involved, while avoiding being dependent on the decisions of unaccountable groups of computing “miners”, as so many blockchain projects are. Shunning digital tokens entirely, LocalPay runs on code that means its users in more than 300 local communities do not need to purchase or mine a currency to begin transacting. For them, currency is simply a unit that comes into being, for free, when they wish to trade.

These projects aren’t just putting lipstick on clones of existing projects. Their founders went back to the drawing board and created mission-driven roles for coders, entrepreneurs, investors, philanthropists, regulators and policymakers. They designed a technology to fit into an ecosystem, rather than to dominate it. They set up incentive structures for fair contributions and rewards. This generation of “integral blockchain” and digital currency initiatives aligns its codebase and internal governance with positive social and environmental outcomes. These projects strive to be an integral part of a healthy society, rather than ends-in-themselves.

Will blockchain technologies be killed in their infancy by regulators? Will they grow into monsters that consume energy while enabling tax evasion, crime and capital flight? Or could they provide meaningful services to humanity? Greater cross-sectoral dialogue and guidance is needed to help this last scenario emerge.

Originally posted in WeForum.org

The post Blockchain is facing a backlash. Can it survive? appeared first on P2P Foundation.

We talk to Brett Scott the alternative financial activist about the opportunities and challenges of transforming the economy.

Your work can be described as economic anthropology, an attempt to explore the historical origins and current approaches to economics. How cultural is our economic system?

I come from an anthropology background and one of the main ways anthropologists try to understand systems is by immersing themselves in them to understand the perspective of those involved. Sometimes that is called participant observation – participating in something while observing it. You can blend those elements in different ways: Hardcore anthropology can be weighted towards extreme participation with less structured observation, really immersing yourself. Some old-school anthropology is more weighted towards observation than participation, making it more prone to a ‘judging’ outlook.

The discipline of Economics has traditionally tried to fit economic activity into universal theories. The attempt to fit all societies over time into a single theory requires a level of abstraction that is often quite disconnected from actual practice, or how people experience themselves in economies. Anthropology, on the other hand, is more attuned to describing the differences between people – the specificities and variations – and more interested in showing the ways people have provisioned themselves over time, rather than just asserting that people have always traded as ‘self-interested agents’ on markets. In essence, Economics takes one form of economic activity, forged in a particular historical and political context, and implies that this is the only form of economic activity.

Also, economics as a discipline tends to make a strange distinction between economics and politics, as if the political sphere and economic sphere can be meaningfully separated from each other. Holistic forms of anthropology, though, would explore how different economic systems are formed in or imply different political or cultural systems – how they are all interlinked.

One of the insights that came out of anthropology and historical studies is that states cannot be meaningfully separated from our modern concept of markets. That is to say, market-based thinking was enabled by, or expanded by, modern states. Within traditional Economics, self-interest is presented as natural, timeless, and inevitable. If you look at the economist Adam Smith, he makes this assumption that people have always traded with each other since the beginning of time. Whereas, history and anthropology point out many instances of societies that do not rely on trade, or do not even have private property regimes, and that have completely alternative ways to provision themselves.

It is only in the context of modern state formations that you see the emergence of the modern conception of ‘markets’. In the time of Adam Smith, modern states had already formed and he was blind to the fact that many features of economies he was observing couldn’t really exist outside of that context. So economic anthropology and history will try to situate the economy within specific political and cultural epochs.

Modern academia has attempted to create discrete disciplines to describe and understand reality, such as politics, economics, psychology, and so on. But in your everyday life no-one experiences these things as separate from each other. You don’t experience your psychology as distinct from a decision to participate in a particular form of economic activity. They are all fused into one experience. So all economic activity is intensely cultural and political. It is concerned with the distribution of resources, your ability to act in a society. The idea that there is some realm of economic activity that is separate from culture is, frankly, bullshit.

If we change our culture, can we then transform the economy?

If you come from a strict Marxist background, you’d probably tend to say the material world conditions culture, or that the underlying relations of production support a ‘superstructure’ of beliefs and institutions. So the tendency – more or less – is to see cultural systems as being a reflection of the underlying economic situation. The question then is, “Can you change your underlying economic situation by altering your culture?” And yes, it probably is possible. But it is a complex process and I’m not sure I have a coherent answer. Within economic reform movements you have some people who say things like ‘all we need to do is make people think differently to effect change’, but that jars against the reality that every single day people need to enter an economy that has a particular structure, regardless of what they think. It’s not obvious what the link between changing people’s worldviews and changing economic structure is.

Take a look at small credit unions or local currencies. People are trying to think and behave differently – act out a different culture – but in reality they remain stuck within the vortex of a much more powerful economy. Sure, if everyone, at once, changed the way they behaved, you could probably change an economic system, but there is a huge coordination problem there. It seems more likely that change is a messy and contradictory process, driven by some things we consciously choose – like small changes in behaviour – and others that we do not, such as technological changes. It’s unpredictable. The Internet, for instance, has opened up new possibilities, but also created opportunities for new monopolies of power.

To shift the question slightly, we could ask, “How do you shift culture within a large financial institution, such as Goldman Sachs?” These institutions are huge, with like 35,000 employees. They have to go into work every day and keep doing the same thing. Even if individuals within the institution want to change their own personal behaviour, the day to day pressures and requirements won’t allow it. So if you wanted to change the culture you would have to press pause on the organisation for, say, three weeks, and then go around and convince everyone in it to behave differently. But there’s no way in hell that they can press pause, so any attempt to change culture has to happen on the fly, incrementally. But these cultures get locked into these institutions, and when it gets toxic they find it very hard to change it. Here’s an analogy: imagine you have a computer that has a load of viruses, but to get rid of them  will require a complete time-consuming reformatting. Now imagine you need to use it every day, and it’s not an option to be without it for a week, so you just keep using it. Likewise, we need to reformat financial institutions, but often we’re just superficially patching them up.

Access to capital is probably the most powerful dimension of our financial system. How can communities have more control over the circulation of capital at this stage?

The financial system as it stands, in most countries, operates at a large scale. It has centralising tendencies that give financial institutions lots of market power, and these large banks are also closely connected to government. In general, these banks find it easier and more profitable to deal with other large-scale players, directing capital to large corporations or large infrastructure projects, for example. Or else they invest in large numbers of standardised financial products that can be sold at scale, such as mortgages. They don’t have much ability, or desire, to sensitively respond to the niche needs of small-scale communities.

So how do you change that? Short of restructuring the entire system so such power does not exist, there are interim approaches such as banking regulation and reform. For example, you might lobby for quotas on banks to get them to support the real economy and smaller businesses.

Then there are attempts to bypass or augment the mainstream banks. This includes, for example, building community banking systems or municipal banks. Local banking advocates will insist that if you have a small financial institution rooted in an area, it is far more likely to serve local interests. In this debate, countries like Germany are often mentioned, as they have an older and more established system of local and regional banking. Co-operative banks are another approach. The idea is to change the ownership structure of banks to produce better outcomes, bearing in mind that co-operative banks often work at large scales and need not be local in orientation.

Then there are the local currency movements. This approach is not necessarily about accessing or raising capital, but creating economic exchange between people. This is different to raising money for a business. That said, mutual credit systems are currency systems, but they also provide access to short-term small-scale credit. They don’t solve the problem of accessing large-scale investment, but they can be very effective at allowing small businesses to trade on credit. Sardex in Sardinia is a good example.

A mutual credit system is when a network of people create an economic network and then set up a system to record when members give energy, labour or goods to another member of the network. The member who receives the labour goes negative, and the person who gave it goes positive. It’s essentially a ledger system for recording obligations between people. Members go in and out of credit and debt with each other. Over time, this is basically what a monetary system is: I contribute things, but I also needs things. When I contribute to the system I get positive credit, when I need things I am using up my credits or going into debt. This creates a cycle between members.You can create these networks with, say, 150 people, and I think they are one of the most undervalued approaches within local currency movements.

So there is local banking, local currencies, mutual credit, but there are also systems like community shares, which allow you to raise equity finance by offering shares to your local community. These have been relatively successful on a small scale.

You also have to bear in mind that is has been quite a while since there have been coherent communities in the UK. We often talk about ‘community’, but in London people often don’t know each other in their own neighbourhoods. There is a whole raft of work around community cohesion that is required before we even start to develop ways for communities to finance themselves.

I think with all of these things you have to have serious commitment. There are a lot of people trying to design local economic strategies that are volunteer-led or part-time. I’m not against small timebanks or other volunteer-led schemes, but they are not a serious challenges to the economic system. In the case of Sardex, it is a serious attempt to build a parallel currency system, and one that also integrates into the normal system. Recently I’ve become interested in the Greater London Mutual, and the network of new regional banks supported by the Community Savings Bank Association, which look like serious attempts to build local and co-operative banking.

If you can combine these alternatives with banking reform and policy changes, putting pressure on the existing banking system, you can then start to make a difference.

More recently you’ve been exploring what you call the ‘dash to a cashless society’. Could you explain how this offers new surveillance opportunities to private companies and governments, and how you understand the social consequences?

The term cashless society is a euphemistic way of saying the ‘bank payment society’. Within this system you need a bank account and you have to ask banks to facilitate payments. In a cashless society you always have to go through a financial institution.

Think about the traditional story given in any Economics course. A market is made up by two basic players – a buyer and a seller. The buyer gives money tokens to the seller who hands over tangible goods or services. In a cashless society, however, there is the introduction of a third player between every transaction – the money-passer, who moves money between the buyer and the seller in exchange for a fee. These payments intermediaries include the card companies and banks, who run the underlying infrastructure to allow this. So the ‘cashless society’ is an economic system that is predicated on every transaction passing through the banking system and groups like Visa and Mastercard.

There are a lot of institutions lobbying for this system – the banks themselves and digital payment companies who facilitate the movement of money between bank accounts. Then there is the state that can see many advantages to this. In particular it allows them to monitor all transactions. If you’re forced to use digital payment systems, all of your transactions are recorded and leave a data trail. This data can then be analysed. They are interested in this for anti-terrorism and crime detection, but also to monitor tax. There are also monetary policy interests, in particular the ability to introduce negative interest rates.

So the implications are far more than data about transactions, and it’s not just states that find this useful, but corporations, too. Large technology companies, like Google and Amazon, are trying to build payment infrastructure to expand their data monopolies and gain ever deeper insights into people’s economic behaviour. For example, big web platforms often are in the advertising business, but struggle to prove whether adverts convert into sales. So one endgame for some of these large technology companies is to discover the correlation between the adverts you see and how much you spend. So they have an obvious interest in receiving and analysing that data, and if they can track what you spend, they can also develop more efficient advertising.

Another endgame is machine learning and predictive analytics that try to predict, and ultimately steer, people’s behaviours. Banks themselves are interested in this approach, using data to influence behaviour.

There is no cashless society at present, but there is a big political push for it. In this context, it is interesting to explore crypto-currencies that create some form of counter power.

Blockchain technology has been offered up as one of the most recent transformative technologies, with use in supply chains, payment exchange, and its ability to decentralise the control of data. How do you see the political implications of this technology?

Blockchain is multi-layered. At its base, the original version, blockchain technology is essentially a means for a network of strangers to keep track of their positions relative to each other, without a central intermediary. In the case of Bitcoin, it is about keeping track of money tokens. The concept can be applied more broadly though.

Why is blockchain seen as a profound shift in technology? If you walk out in the street, right now, wherever you are, you are going to see a group of people you do not know – strangers. You don’t necessarily distrust them, but there is no easy way to extend your trust. Traditionally, the way we would deal with this is through state law – such as consumer protection laws – and big third-party institutions and corporations who mediate between these interactions. I can walk into a shop and buy something without needing to know the seller personally.

Then blockchain emerged as a technology that could facilitate transactions between people without requiring intermediary institutions. People have historically been able to do that in small-scale situations, but blockchain tech enables this at large scale. The first version of this was Bitcoin, which is a system that enables people to move tokens between each other without relying upon banks. Unlike the banking system, where transactions are recorded on private ledgers controlled by an oligopoly of banks, whose permission you require to move money around, Bitcoin is based on a public ledger that is updated by special players in a peer to peer network.

The second wave of blockchain – such as the Ethereum system – took the same concept, but moved towards developing more complex interactions between people beyond the exchange of money tokens. In particular they added the ability to deploy automated agents onto the network, which they – somewhat misleadingly – refer to as ‘smart contracts’. In Bitcoin you assume all players on the network are humans who make their own decisions about whether to send tokens. The automated ‘smart contract’ agents of Ethereum though, are like robots, forced to do certain things when members of the network interact with them. For example, if you want to raise money for a company, you can programme a smart contract to automatically send a share to someone who sends it money. To understand this, imagine a vending machine. It is an automated agent. You give it money and it gives you a drink. It has no choice. Now imagine this kind of thing in digital form. If you start to link these ‘smart contract’ entities together you can automate all sorts of interactions.

The third wave of blockchain tech – which is being hyped right now – is the corporate use of the technology. The first two waves were open systems in which anyone could join and, theoretically, everyone had the same rights. In wave three, which is known as private, closed or ‘permissioned’ blockchains, institutions or groups of institutions control who is able to join the system, and can give users different rights and powers within the system. This fundamentally changes the entire ethos. They’re just trying to make more efficient versions of business as usual. Banks, for example, already collectively run certain shared systems for things like payments, and they currently see private blockchain systems – or ‘distributed ledger technology’ – as just a more efficient way to do the same thing. So if American Express says it’s ‘using blockchain’, they’re going to be building a closed system, and this makes it confusing for the public, who often don’t know there is a difference between the open systems and closed systems.

So, to give an example, when I was working within the derivatives market, two traders would agree a deal – let’s say a trader at Goldman Sachs would do a deal with a trader at Barclays – but once they’d done that they report it to their separate back office staff, who would do all the dirty work of having to make the transfers and make sure both traders had recorded the same details about the deal. This takes time, and each bank has different systems that don’t necessarily jive with each other. So the interest for large banks is in finding ways to automate the coordination between themselves, so that they can fire all their back office staff who do the reconciliation work.

What is important here is the distinction between open public and closed private blockchain systems. That said, you could also use closed systems to launch co-operatives. If you were trying to create a co-operative version of Uber, a closed blockchain system could be very useful. So drivers could get together to coordinate themselves. So there is interesting potential.

With the Paradise Papers we are reminded again how tax policy and legislation is often written by the legal teams of large companies who are offshoring their assets and profits. This is a clear example of big finance’s political power. What are the opportunities for us to transform the policy and legal environment?

We are used to this tacky distinction between ‘states vs markets’, but I start from the assumption that there has always been a symbiosis between states and markets. The state creates the underlying structures that enable large-scale markets to operate. If you accept that, you can then think about which market players the state prioritises. Do they favour the large corporate players or the small players and ordinary citizens? This is kind of the historical battle between conservatives and labour: is the state there to facilitate the owners of capital, the CEOs, the elite entrepreneurs, or is it there to protect those with less market power, the employees and marginalised? The state is always going to be captured – the question really is who has captured it? Is it a corporate state, or a citizen’s state? This is a dynamic that goes back and forth.

I do think there are opportunities to transform the policy and legal landscape, and it has happened over the years. It is a fickle system, though. A positive policy change can be reversed by a new government, like a law to separate safe banking to risky banking that then gets repealed. In the long-term the ideal is to try build systems that do not rely on external regulation, but that have positive principles built into their DNA. I’d not give up on financial reform, but it’s difficult. I’ve just come back from spending time with Finance Watch in Brussels: they lobby for the public interest in finance, but they are outnumbered by highly paid private lobbyists that the financial industry deploys. They have to fight day to day against the odds.

In terms of the Paradise Papers, I feel there has been a political turn in the tax avoidance debate. I think there have been gains for tax justice groups. At the same time, there has also been a fatigue among the general public. We hear about new scandals frequently, but there is only so much outrage people can express. This is a long-term fight, not something you can win in quickly. So stick in there and enjoy the ride.

Alternative financial activists, such as the Robin Hood Co-operative and Debt Jubilee, use ‘traditional’ financial tools to challenge the system. How do you understand the strategic relationship between financial protest, financial reform, and the creation of new financial institutions, tools, and services?

Finance activism, financial reform, and alternative financial should, like you say, align with each other. I think they do, but those within these groups do not often attempt to overtly work together. Partially because of funding structures. If you are a critical artist exploring finance, like Paolo Cirio, his funding stream will come from arts funding bodies. And then if you’re FinanceWatch, your funding comes from NGOs and EU sources. This means they’re often having to play into different institutional spheres that don’t allow much overlap.

Also the energy required to work towards different campaigns means focusing obsessively on certain priorities. If your whole world is lobbying in Brussels or Westminster, you may become dismissive or intolerant of the direct action strategies of activists scaling the Houses of Parliament. There are cultural differences within financial reform and they don’t always recognise each other’s value. Sometimes because they are competing for media attention, funding and legitimacy.

But when I zoom out and think about how we will create financial change, I see all of these approaches playing a role. Financial activism and protest is very effective at getting media attention – Occupy Movement, Move your Money campaign, UK Uncut were very good at getting headlines and asking for extreme changes. This then creates space for more centrist organisations to draw up more technical proposals for financial reform. They come through with more palatable demands, which can create change.

The same with climate change movements. Earth First or Greenpeace open space for less overtly activist sustainable finance groups – like CarbonTracker – to come and make technical proposals. You have to zoom out to see the politics – take alternative finance platforms like peer-to-peer lending. Mainstream policymakers struggle to directly attack big banks, and may find it easier to support the alternative finance sector as a way to indirectly weaken banks. The alternative finance sector in the UK has actually been quite good at ‘playing the state’, presenting themselves as a useful alternative to address the shortcomings of the traditional finance giants.

On the extreme end of financial activism, there is little crossover with more ‘respectable’ alternative finance entrepreneurs. If you take Enric Duran, or the Robin Hood Co-op, they have no interest in reforming finance. They are trying to create parallel systems that do not rely on the current system. It’s not like the divestment campaigns, or ethical banking system, which are trying to reform the current system, and that’s an important distinction.

The divestment campaigns are an interesting case study. These campaigners are often criticised by those within more mainstream sustainable finance circles as lacking nuance or being counterproductive. But the divestment organisations have been great at driving the debate on unsustainable investment in a more public way. They actually indirectly support the work done by the technical sustainable finance community. The student activists are creating a space for more technical changes to be introduced.

Since I specialise in not specialising, it makes it easier for me to to see the points of intersection. There needs to be more people who hop between different approaches, overtly spending more time in different communities. The technology community, the localist community, the policy community, the artistic community, and so on. Hybrid approaches are often the most interesting.

Brett Scott is a journalist, campaigner and the author of The Heretic’s Guide to Global Finance: Hacking the Future of Money (Pluto, 2013). He writes for publications such as the Guardian, New Scientist, Wired Magazine and CNN. He is a Senior Fellow of the Finance Innovation Lab, and helps facilitate a course on power and design at the University of the Arts London.

Links

Follow Brett on Twitter at @suitpossum

Order ‘Power’, Issue 20 of Stir Magazine

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Published in STIR magazine no.20, Winter 2018

Illustration by Nick Taylor

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We are architects of economic space

Back in the day we were a group of hard core researchers of the coming forms of economy and organization.

We knew that it will not be a picnic when we started using thinkers like Michel Foucault, Jacques Derrida, Gilles Deleuze, Felix Guattari, and then the Italian autonomist writers, Toni Negri, Christian Marazzi, Paolo Virno, Maurizio Lazzarato, Franco Berardi, and others like Gabriel Tarde, Gilbert Simondon, George Bataille, Alfred North Whitehead, Rene Girard to study and understand economy, finance and organization. But we knew that this was the right way if we were to really grasp how post-Fordist economy, semiocapitalism, immaterial and affective labor, and the financial technologies work and intertwine with our destiny.

With these thinkers we were able to discern a couple of interesting things:

— How signs and meanings are part of real production and not only some kind ideology or superstructure of production. They have historically different ways of functioning.
— How the dynamic of the production of value is in the organization of a heterogeneity, of heterogeneous forces, and not only in the relationship between capital and labor.
— How information overflow and semiotic inflation lead to imitation.
— How finance can curb time, how it is essentially a technology to affect the future from the present.
— How economy is essentially about organization, not of action, but its potentiality.
— What is the nature of an organization which is not based on division of work, but on dividing into an open space, on opening to the uncertain and indeterminate possibility.
— How the meaning of autonomy is in internal displacements, shiftings, iterations, settlings and dissolutions that are the process of the self-composition. That autonomy means to be able to set the attractors of one’s own behavior.

So they helped us understand how the paradoxes of immaterial production and precarious work, the blurring of the boundaries between economy and politics, cause problems to the approaches and distinctions of industrial economy and its institutions. We needed to start creating new concepts and imagining new social and financial forms.

And we understood that the common ground of art and politics is in the collapse of old forms of society, economy and subjectivity and in the creation of new forms. This is where they meet, and this is where we found ourselves in work.

What can these new forms be today? How can they be created?

These questions meant the birth of Robin Hood Asset Management. It was a new form, a new combination, a paradox or a monster that didn’t fit the boundaries of our normal life, the easy flow of things and action. It was the first economic space we engineered.

Robin Hood Asset Management

So what do you do when you see what “financial services” offer ordinary people? Not services so much, rather a way to bail out financial industry with our tax money. Do you get depressed and cynical or get angry and go protest? Good! But maybe one can also get more hands on. With a hacker attitude; doing it yourself, doing it with others.

Our pilot in hacking finance to create new social and financial forms was Robin Hood Asset Management — a hedge fund with a twist. In fact, three twists. First, it is a cooperative. Individuals who buy shares become members and decide how the coop is run. One member, one vote. Second, per the Robin Hood principle, part of the profit generated by the fund is invested into projects building the commons. Third, the money put into the fund is managed by an algorithm called “the Parasite”. She logs into the brains of the bankers at Wall Street, deconstructs them into databanks, and uses big data analysis and structured finance to share their most important means of production to everyone.

By creating in our portfolio a synthetic replica of the emerging conventions of the financial elite at the market, we create a simulacrum, a monstrous false power, whose repetition yields a difference in kind. A bad copy of the financial asset accumulation model opens suddenly into something else. We copy the most important means of production of the fat cats at Wall Street — their knowledge, relations, positions — and use them in a way that does not belong to the orthodox economic space. This is what we call minor asset management.

Robin Hood, as an umbrella term, is a project towards giving people access to the operating system of finance, to open source finance. At the moment it is in the process of transitioning its member and share management on the Ethereum blockchain, which makes possible an effective secondary market for coop shares and the deployment of new algorithms, in addition to the Parasite. The new one in development is a shorting target identification algorithm called the “Sting”. Moreover, members can start managing and curating commons-oriented projects directly, without the need for overarching decisions by the whole coop. This is the vision for Robin Hood: to merge and re-engineer the financial and the social so that new forms become possible.

Economic Space Agency 

The next step takes the logic further: not only stealing from the rich and giving to the poor (like Robin Hood did), but exploring, building new ecologies, new ecosystems, new universes, new possibilities, new worlds of value. For this purpose the Robin Hood hydra grew a new head: a start-up company Economic Space Agency, Inc. (ECSA). Economic Space Agency builds tools with which we can create economic space — not only to distribute something existing or produced in a pre-existing space, but to reorganize/rebuild the space itself. Two trends are converging and making open source economy possible: the moldability and plasticity of financial technologies and the decentralization and disintermediation provided by distributed ledgers.

ECSA’s DNA contains all these things: hard core research (the team has published over 25 books), direct engagement with the power of art to create unforeseen (economical, social, political, financial, incorporeal) processes, financial first-in-the-world inventions (such as a hedge fund as a coop, and asset-backed cryptoequity), experimental hands-on attitude and an intimate lived experience of how the financial and the social co-determine each other.

We are developing tools with which you can tailor your own economic space, a place where we can autonomously set the parameters and attractors of our economic behaviour. The name of our first product, Sherwood, reflects the spirit of finding a place to plan, experiment and act together. It offers you a space and tools to “phase transition” what you are doing or want to do into a liquid form both financially and socially.

The new network technologies will produce a radically different economy. We are building tools for you to start exploring and operating it.

Image: Economic Space Agency

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More than 23,000 people in 20 countries were asked about who they think actually creates 95% of the money in circulation and who they think should create most of the money.

These questions were part of the Glocalities survey of Motivaction International and the Sustainable Finance Lab that was held in December 2013 and January 2014.

Here are the main results:

• Low knowledge in population of who creates money: Only a minority of 20% is aware that private/commercial banks create most money
• Even among financial sector workers there is a lot of misunderstanding about who creates money
• Only 13% of people want private/commercial banks to create more than 95% of the money in circulation, as is currently the case
• 59% want to assign the responsibility for creating most of the money to a public body (government/central bank)

The following graph shows the main results. See Appendix 1 and 2 for the scores of all countries surveyed:

Source: Glocalities survey Motivaction

“A necessary condition for informed debate on the future of our monetary system is that the public understands how it works. This research demonstrates that only a small proportion does so. It also demonstrates that, when they are taught the reality, most people do not like what they learn.”

Martin Wolf, Chief economics commentator, Financial Times

A minority of 20% is aware that private/commercial banks create most money

A significant proportion of people across the globe (80%) have no idea who creates most of the money in circulation. Half the people think it is a public institution (either a central bank or the government) that creates most of the money in the financial system. Only 1 in 5 respondents gave the right answer, that it is private/commercial banks that create more than 95% of the money. ‘’In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. Bank deposits make up the vast majority (97%) of the amount of money in circulation’’. Source: Bank of England paper on Money creation.

“Money affects every aspect of our lives, but as this survey shows, not enough of us really understand how it works. After the banking crises of the last few years, it’s time to ask whether banks should still be allowed to create our money.”

Fran Boait, Executive Director, Positive Money 

The majority of people want a public institution for creating most of the money and not commercial banks

When people are asked who they think should create most money worldwide only 13% prefers private/commercial banks to fulfil this responsibility (as is currently the case), against 59% who wish for a public institution (either government or central bank) to be the main creator of money. Among the minority of people who correctly state that private/commercial banks create most money in circulation, only 27% believe that this should continue to be the case, whereas 63% of them want to see this responsibility transferred to governments or central banks.

‘’It is instructive to learn that the majority of people internationally think that most money is created by public bodies and not by private/commercial banks, while in fact the opposite is true. Even among financial sector workers the majority is not aware of the key role that commercial banks play in creating money and only a minority of them would naturally assign this task to commercial banks. Now the world is facing numerous challenges that can only be tackled by smart investment policies it is time to rethink how the responsibility for creating money should be assigned and monitored.‘’

Martijn Lampert, Research Director Glocalities at Motivaction 

Most people in the financial sector do not know that private/commercial banks create money

The awareness in the financial sector about who actually creates most of the money is only moderately higher than in the general population. The answers of people who work in the financial sector in Western economies (Europe, USA, Australia, Canada) reveal that only 26% know that private/commercial banks create most of the money in circulation. When asked who should create most of the money the majority (61%) of financial sector workers also choose a public body and only 16% choose to assign this responsibility to private/commercial banks.

“The current financial system is still prone to crisis. Giving public bodies a larger role in money creation can help to stabilize the system and give governments the much needed funds to invest in sustainability”. Instead of embarking on an unprecedented and uncertain transition it might be wise to start with experiments.”

Rens van Tilburg, Director Sustainable Finance Lab

Download the report here

Photo by badgreeb RECORDS – art -photos

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An interview by Guns and Butter with Michael Hudson. His latest book is KILLING THE HOST: How Financial Parasites and Debt Bondage Destroy the Global Economy If you do not see the podcast player below, you can listen to it or download it here.

This discussion covers debt deflation, mortgage and other consumer debt, negative interest rates; currencies, and the erosion of the real economy.

This is Guns and Butter, April 5, 2016.

Most people think of the economy as producing goods and services and paying labor to buy what it produces. But a growing part of the economy in every country has been the Finance, Insurance and Real Estate (FIRE) sector, which comprises the rent and interest paid to the economy’s balance sheet of assets by debtors and rent payers. More and more money is being extracted from of the production and consumption economy to pay the FIRE sector. That’s what causes debt deflation and shrinks markets. If you pay the banks, you have less to spend on goods and services.

I’m Bonnie Faulkner. Today on Guns and Butter, Dr. Michael Hudson. Today’s show: The Slow Crash. Dr. Hudson is a financial economist and historian. He is President of the Institute for the Study of Long-Term Economic Trends, a Wall Street financial analyst and Distinguished Research Professor of Economics at the University of Missouri, Kansas City, as well as at Peking University. His 1972 book, Super-Imperialism: The Economic Strategy of American Empire, is a critique of how the United States exploited foreign economies through the IMF and World Bank. His latest book is Killing the Host: How Financial Parasites and Debt Destroy the Global Economy. Due out soon, J Is for Junk Economics. Today we discuss in detail the concept of debt deflation; housing, student loan and automobile debt; the oil market; the stock market; negative interest rates; currencies; and the shrinking real economy.

* * * * *

Bonnie Faulkner: Michael Hudson, welcome.

Michael Hudson: It’s good to be here again, Bonnie.

Bonnie Faulkner: You have indicated that as a result of United States and European debt deflation, there is an economic slowdown. First of all, how would you define deflation?

Michael Hudson: There are two definitions of deflation. Most people think of it simply as prices going down. But debt deflation is what happens when people have to spend more and more of their income to carry the debts that they’ve run up – to pay their mortgage debt, to pay the credit card debt, to pay student loans.

Today, people are having to spend so much of their money, to acquire a house and to get an education that they don’t have enough to spend on goods and services, except by running into yet more debt on their credit cards and other borrowings.

The result is that markets are slowing down. Deflation means a slowdown of income growth. Markets shrink, new capital investment and employment also taper off, so wages decline. That is what’s happening as deliberate policy in Europe and the United States. Falling or stagnant prices are simply the result of having less income to spend.

Bonnie Faulkner: Well, thank you for that, because that is confusing, because I think a lot of people consider deflation simply a decrease in price. Does that have anything to do with it?

Michael Hudson: The price decline is a result of having to pay debts. That drains income from the circular flow between production and consumption – that is, between what people are paid when they go to work, and the things that they buy. Deflation is a leakage from this circular flow, to pay banks and the real estate, called the FIRE sector – finance, insurance and real estate. These transfer payments leave less and less of the paycheck to be spent on goods and services, so markets shrink. Some prices for some products go down when people can’t afford to buy them anymore. There are more sales, there’s shrinkage, but especially incomes go down. Real incomes in the United States have been drifting down for 30 years because there is slower and slower market demand.

That’s why Bernie Sanders and Donald Trump are getting so many votes. When Hillary Clinton said she’s going to do just what Obama does and we’re going to continue to recover, most people know that we’re not recovering at all. We’re shrinking.

Bonnie Faulkner: So then, deflation has more to do with disposable income than it does with prices.

Michael Hudson: That’s correct, and that’s what is rarely pointed out. People tend to think that paying a debt is like going out and buying a car, buying more food or buying more clothes. But it really isn’t. When you pay a debt to the bank, the banks use this money to lend out to somebody else or to yourself. The interest charges to carry this debt go up and up as debt grows. As you have to pay more interest and amortization on what you owe, you’re left with less and less money to buy goods and services – unless you borrow even more and go further into debt.

So basically, unless you’re willing to write down debts and save the economy, you’re going to have deflation and a steady drain in purchasing power – that is, shrinking markets.

Bonnie Faulkner: So then the relationship between debt and deflation: Increasing debt creates more deflation. Would you say that’s the case?

Michael Hudson: Yes. In the 1930s, Irving Fisher wrote an article “The Debt Deflation theory of the Great Depression,” that established the obvious mathematical fact that paying debt service to banks leaves less income to buy goods and services.

Bonnie Faulkner: Oftentimes people wonder, what’s wrong with deflation? We’re always hearing about worries about inflation, but what is the danger in deflation, as you’ve defined it?

Michael Hudson: Markets shrink and unemployment goes up. Wages go down and living standards decline. When we say “people worry” about inflation, it’s mainly bondholders that worry. The labor force benefitted from the inflation of the ‘50s, ‘60s and ‘70s. What was rising most rapidly were wages. Bond prices fell steadily during these decades. Stocks simply moved sideways.

Inflation usually helps the economy at large, but not the 1% if wages rise. So the 1% says that it is terrible. They advocate austerity and permanent deflation. And the media say that anything that doesn’t help the 1% is bad.

But don’t believe it. When they say inflation is bad, deflation is good, what they mean is, more money for us 1% is good; we’re all for asset price inflation, we’re all for housing prices going up, and we’re all for our stock and bonds prices going up. We’re just against you workers getting more income.

Bonnie Faulkner: Right, because inflation puts more money, I guess, in circulation and we get more as a worker, for instance-

Michael Hudson: Well, if the economy is growing, people want to employ more workers. If you hire more labor, wages go up. So the 1% always wants to keep unemployment high – it used to be called the reserve army of the unemployed. If you can keep unemployment high, then you prevent wages from rising. That’s what’s happened since the 1970s here. Real wages have not risen, but the price of the things that the 1% owns has risen – stocks, bonds, trophy art and things like that.

Bonnie Faulkner: So if I were to ask you what is wrong with deflation generally, would the answer ten be that it shrinks the economy?

Michael Hudson: That’s exactly it – lower wages, lower living standards, and more money siphoned off to creditors at the top of the pyramid. When there’s deflation, it means that although most markets are shrinking and people have less to spend, the 1% that hold the 99% in debt are getting all the growth in wealth and income. Deflation means that income is being transferred to the 1%, that is, to the creditors and property owners.

Bonnie Faulkner: Well, Michael, it sounds like in your definition of debt deflation that you are describing exactly what’s going on here in the United States and also in Europe.

Michael Hudson: Yep, that’s exactly what’s happening,. It’s what I describe in Killing the Host.

Bonnie Faulkner: All sectors of the economy are certainly not deflating, that is if we’re going to talk about prices narrowly. What about the housing market? Are we looking at a housing bubble?

Michael Hudson: Certainly not a bubble yet. You still have 25% of American homes in negative equity – that is, when the mortgages are higher than the market value of the housing. So for many people, the mortgages they took out before 2008 are so high that they would be better off walking away from their houses. That is called “jingle mail,” returning the keys to the bank and saying, “You can have the house. I can buy the house next door that’s just like this for 20% less, so I’m going to save money and switch.” That’s what someone like Donald Trump or a real estate investor would do. But the banks are trying to convince the mortgage debtors, the homeowners, not to act in their own self-interest.

Bonnie Faulkner: Yes. I live in Northern California, in the Bay area, so I guess this is an exception to what’s going on overall across the country.

Michael Hudson: That’s a rich area, and houses in expensive areas are going up, but not as fast as they used to. Luxury housing in gated communities is going up. But for blue-collar-income neighborhoods and even middle-class neighborhoods, there has not been much of a recovery. It’s good news for burglar-alarm manufacturers, because crime is going up.

Bonnie Faulkner: It looks like the Bank of America is going back into the subprime loan market, albeit in league with U.S. Government. What do you make of Bank of America’s new Affordable Loan Program, which offers 3%-down mortgages with no mortgage insurance, and partners with Freddie Mac in something called the Self-Help Ventures Fund?

Michael Hudson: This reflects the degree to which the banks have been able to capture the Federal Housing Authority and Freddie Mac as well as the Federal Reserve. They are all trying to re-inflate the re bubble. The myth is that if housing prices go up, Americans will be richer. What banks – and behind them, the Federal Reserve – really want is for new buyers to be able to borrow enough money to buy the houses from mortgage defaulters, and thus save the banks from suffering from more mortgage defaults.

Actually, high housing prices don’t help the economy. They raise the cost of living. Everybody would be better off if they could buy housing for only, let’s say, a carrying charge of one-quarter of their income. That used to be the case 50 years ago. Buyers had to save up and make a higher down payment, giving them more equity – perhaps 25 or 30 percent. But today, banks are creating enough credit to bid up housing prices again.

The aim of promoting low down payments is to push prices back up so that fewer houses are going to be in negative equity and fewer people are going to walk away from the mortgages. That will save the from taking a loss on their junk mortgage loans.

Bonnie Faulkner: The FHA is offering subprime loans, as well. Isn’t that right?

Michael Hudson: For 3.5% downpayment. This was unheard of when I first went to work on Wall Street in 1961. I was working for the Savings Banks Trust Company – the central bank for New York State savings banks, which were the main mortgage lenders. At that time the rule of thumb was that home buyers needed a 30% down payment (equity), so that when the banks made a loan, the property would have to go down by 30% to make the bank in trouble. That was the homeowner’s equity that was at risk. It provided security for the banks.

Now, suppose that a homeowner puts down only 3% of their own money or 3.5% for the FHA. That means if prices go down by only 3%, the house will be in negative equity and it would pay the homeowner just to walk away and say, “The house now is worth less than the mortgage I owe. I think I’m just going to move out and buy a cheaper house.” So it’s very risky when you have only a 3% or 3.5% equity for the loan. The bank really isn’t left with much cushion as collateral.

Now, the banks argue, “Wait a minute. We’re making these loans to people with good credit ratings, and they have enough money to pay, even if the house’s price goes down.” But the banks are taking a risk that the homeowner is going to be naïve enough not to walk away and leave the bank holding a bad debt, so it’s very risky. It’s a degree of risk that no bank would have taken prior to Alan Greenspan’s tenure at the Fed.

Bonnie Faulkner: Why would the United States government be encouraging these risky loans?

Michael Hudson: Because the government is dominated mainly by the financial, insurance and real estate lobby, the FIRE sector. It’s called regulatory capture. The real estate interests and banks are in a kind of symbiosis. They’re the largest-growing part of the economy. This is the sector that backs the political campaigns of senators, presidents and congressmen, and they use this leverage to make sure that their people dominate the Federal Reserve, Treasury and the federal housing agencies.

Bonnie Faulkner: Just for clarification, why would the banks be pushing these risky loans if there’s a high degree of default?

Michael Hudson: When you say “bank,” a bank is a building, a set of computers and chairs and things. The bankers are the people running these banks. They’re the chief officers, and they push the loans because they don’t care if they go bad. For one thing, they may package these bad loans and sell them off to gullible institutional investors. If bankers can push the loans and make more profits for the bank, they get paid higher bonuses. They often also get stock options. If the bank goes under, they get to keep all of these salaries and options – and the government will bail out the bank. These guys will take their money and run, which is pretty much what they’re doing now. I think we’re in the take-the-money-and-run stage of the economy. So the banks may go under, but the bankers, who make the policy, clean up.

Bonnie Faulkner: Thank you for that distinction. What about automobile loans? You’ve referred to them as “junk loans.” How do you mean?

Michael Hudson: There’s been a large increase in loans to people to buy autos to get to work. Just like they’ve lowered lending standards on making home mortgages, they’ve lowered standards on auto loans. So default rates are going up, and so are repossessions of autos. It’s become a common sight in many neighborhoods. So banks are losing on defaults on auto loans, just as defaults are happening more and more on student loans, and are still going on in the mortgage market.

Bonnie Faulkner: You mentioned the student loan debt. How big is it?

Michael Hudson: It’s about $1.3 trillion by now. The government has guaranteed this student loan debt, so banks are eager to make loans to students. Often they’ll get the parents to countersign. The banks make money whether the students pay or not because the government has promised to pay the banks if the loans go bad. And defaults lead to lucrative penalty fees for the banks, which the government also guarantees.

The fact that you have government-guaranteed student loans has created a whole new sector in the American economy that didn’t really exist before – private for-profit universities that sell junk degrees that don’t help the students. They promise the students, “We’ll help you get a better job. We’ll arrange a loan so that you don’t have to pay a penny for this education.” Their pet bank gets them the government-guaranteed loan, and the student may get the junk degree, but doesn’t get a job, so they don’t pay the loan. The government pays the bank anyway, at a pretty high interest rate, 7% or 8%, plus all the penalties that banks charge. This makes student loans a way to organizing a government giveaway to the banks and to the junk universities they subsidize.

Bonnie Faulkner: Is it true that one cannot declare bankruptcy on student debt?

Michael Hudson: That’s right. Someone in Congress said, “We want to make sure the government can collect and the taxpayer doesn’t lose on this. So these loans are not subject to being written down by a bankruptcy proceeding.” Normally, if someone goes bankrupt, you wipe out the debt and get a fresh start. But that’s not permitted with student loans. So the effect is to impoverish many graduates with very high debts.

Just like a house is worth whatever a bank’s going to lend against it, an education is worth whatever the bank is going to lend the student to pay the university. So the availability of government-guaranteed student loans has vastly inflated the cost of education, just like it’s inflated the cost of housing.

But in housing you have jingle mail and you can walk away and leave the bank holding the bag. In the case of student loans, the debt follows you through life, and the banks or government will turn it over to collection agencies that are not very nice people and can do all sorts of harassing things to you. It’s becoming a nightmare.

Bonnie Faulkner: I also have read that with regard to student loans they can attach your salary. They can even attach your Social Security check.

Michael Hudson: Even the Social Security – mainly for parents who have countersigned for loans for their children. Their Social Security can be sequestered and attached by collection agencies. Most of the defaults are on junk education, the private for-profit diploma mills.

Education is something that should not be organized on a for-profit basis, because in that case its purpose is not really to provide an education. It’s not to teach students how to get better work, but how to provide banks with a free giveaway opportunity from the government, by making junk loans that are defaulted on. The effect may be to wreck the futures of the graduates that fall for the false promises that are being made.

Bonnie Faulkner: The default rate on these student loans is pretty high, isn’t it?

Michael Hudson: High and rising.

Bonnie Faulkner: Then there’s also, I noticed, something called a workout where they adjust your payment length and other factors to keep you from defaulting.

Michael Hudson: They try to prevent defaults because if banks show higher default rates, this gets the regulators to say, “You’re going to need higher capital reserves against these default rates.” So the banks say, “We’ll stretch out the loan. We’ll give you more years to pay. We’ll slow it down.” But the workout just increases the overall ultimate amount of debt service that has to be paid. It’s a short-term solution.

That’s the problem with the financial sector. Banks and the financial sector live in the short run, not the long run. In principle the government is supposed to make regulations that help the economy over time. But once it’s taken over by the financial sector, the government lives in the short run too.

Bonnie Faulkner: There’s a technology boom in the San Francisco Bay area. Do you think this tech boom could be in a bubble?

Michael Hudson: It’s only a bubble if the prices of technology firms are going up in the stock market. Right now, the stock market is funded on credit, just as the housing market and the student loan market. One of the reasons the Federal Reserve is keeping the interest rates low with Quantitative Easing and low interest rates is to keep sending the flow of credit into the stock market.

The other dynamic keeping the stock market up – both for technology stocks and others – is that companies are using a lot of their income for stock buybacks and to pay out higher dividends, not make new investment,. So to the extent that companies use financial engineering rather than industrial engineering to increase the price of their stock you’re going to have a bubble. But it’s not considered a bubble, because the government is behind it, and it hasn’t burst yet. A bubble is only called that after it bursts, after the insiders get out, leaving the pension funds and small investors, Canadians and other naïve investors holding the bag.

Bonnie Faulkner: In terms of keeping the stock market up, I thought that the Fed had ended QE.

Michael Hudson: QE is still going on. It means a zero interest-rate policy. The aim is to hold interest rates low at 1/10 of a percent. The Federal Reserve continues to make sure that interest rates are low, so we still have near-zero interest rates. And now they’re even talking about negative interest rates to help spur Wall Street gains.

Bonnie Faulkner: That was going to be my next question: What is your opinion of these negative interest rates? There’s a lot of talk of if you have a bank account you have to pay the bank rather than vice versa.

Michael Hudson: The idea is, number one, that banks won’t have to pay interest on your account. They’ll actually pay you less and less, while they’re making 29% on many of their credit-card loans, and while they’re making a killing on student loans. They can pay you less while they make more, increasing their profit margins.

So that’s part of the problem, but the underlying strategy of the Fed is to tell people, “Do you want your money to lose value in the bank, or do you want to put it in the stock market?” They’re trying to push money into the stock market, into hedge funds, to temporarily bid up prices. Then, all of a sudden, the Fed can raise interest rates, let the stock market prices collapse and the people will lose even more in the stock market than they would have by the negative interest rates in the bank. So it’s a pro-Wall Street financial engineering gimmick.

Bonnie Faulkner: That’s very interesting – the effect that a negative interest rate would have on stock market prices. I hadn’t thought of that.

Michael Hudson: They’re trying to convince people, “Do you want your savings deposits to go down or do you want to get a dividend return and buy stocks?” If a lot of money goes into the stock market, it’ll push up prices, making money for stock speculators. Then the insiders can decide that it’s time to sell out, and the market will plunge.

Stocks always go down much faster than they go up. That’s why it’s called a crash. People who put their money into the stocks will find, all of a sudden, that stock prices are no longer being supported by the debt leveraging that’s been holding them up.

Bonnie Faulkner: I understand that former Harvard University president Larry Summers has proposed the banning of large denomination currency, i.e., $100 bills. Similar proposals are being made regarding the euro. What do you make of this?

Michael Hudson: I think something like three-quarters of American currency is held abroad, by drug dealers, by tax evaders, Russians and Chinese. Other people think that they want to protect themselves against their own currency going down. When you have 75% of the currency and even more of the high-denomination $100 bills held abroad, you wonder whether these are people we really want to pay. If you get rid of the $100 bills, its foreign holders will be the main losers.

During the Bush administration and the war in Iraq, whole planeloads of shrink-wrapped $100 bills were used to buy off foreign officials and soldiers that are now ISIS. They bought off the Sunni army, they bought off the corrupt gangs, and essentially ISIS has been fueled by these shrink-wrapped billions of $100 bills that the US used to pay them to fight, people who wanted to control their own currency, or groups that want to be independent, such as Syria or Russia. So this basically is an attempt to hurt drug dealers and people who America doesn’t like.

Bonnie Faulkner: I was thinking that banning these larger denomination bills would take a lot of currency out of circulation. It seems to me that it would hurt the-

Michael Hudson: This is not really currency that circulates. It’s like the old joke about expensive vintage wine. Wine prices will go up and once in a while somebody will buy a 50-year-old bottle of wine and say, “Wait a minute. This has gone bad.” The answer is, “Well, that wine isn’t for drinking; that’s for trading.” These $100 bills aren’t meant to circulate. They’re not to spend on goods and services. They’re a store of value. They’re a form of saving.

Bonnie Faulkner: You know, Michael, when I’m in line at, say, Costco here in California – it’s a big, major store – I see people at the checkout counter pull out rolls of $100 bills to pay their food bill with. It seems to me that $100 bills … Well, now that prices of food basically are so high people actually use these bills.

Michael Hudson: That’s correct, but the people who use these bills, that’s only about 10 or 15% of all the $100 bills that are in circulation. The vast majority of $100 bills are abroad, not in the United States. So yes, of course there’s a use here but nowhere near as much as there’s a use for $100 bills abroad.

By contrast, in China the largest denomination bill they have is 100 yen, and that’s maybe $7. So here you have a whole economy working with only a $7 note as the largest denomination. The euro wants to get rid of the 500-euro bill just as the United States years ago got rid of the $1,000 bill because only the criminals used $1,000 bills.

Bonnie Faulkner: Don’t you also think, though, that getting rid of $100 bills is going to hurt the little guy, maybe the guy that’s working for cash under the table, maybe they’re skirting taxes. Wouldn’t banning $100 bills also hurt the people that are on the edge to begin with?

Michael Hudson: It’s not that hard to have two fifties instead of a hundred. It really isn’t that hard to use smaller denominations. That’s why I mentioned China.

Bonnie Faulkner: The price of oil is very low by historical standards. There are even reports of a gasoline glut in addition to an oil glut. Is the low oil price due to speculation or oversupply?

Michael Hudson: High prices can be the result of speculation, and maybe plunging prices can be attributed to the end of speculation, but low prices over time aren’t caused by speculation. That’s oversupply, mainly by Saudi Arabia flooding the market with low-priced oil to discourage rival oil producers, whether it’s Russian oil or American fracking.

Bonnie Faulkner: What does the price of oil have to do with debt deflation? Is there a relationship there?

Michael Hudson: No, it’s different. Debt deflation is when there’s less money that people have to spend out of their paychecks on goods and services, because they’re paying the FIRE sector. Oil going down is a function of the supply and demand of oil in the market. It’s a separate phenomenon.

Bonnie Faulkner: So the oil glut is real, that there’s too much oil?

Michael Hudson: Yes, it’s real.

Bonnie Faulkner: I see. Okay. And then, of course, perhaps the lower oil prices – and you mentioned Saudi Arabia flooding the market with oil – that this could also constitute, do you think, a financial war against Russia and Venezuela? I guess you’ve implied that.

Michael Hudson: That’s why the United States wasn’t unhappy to see this. So yes, it’s a kind of war. Recently, there have been a lot of talks between Russia and Saudi Arabia to try to resolve this.

Bonnie Faulkner: What about fracking and tar sands and new technology in general? What effect does new technology have on the oil price?

Michael Hudson: It increased fracking and therefore it increased the supply of oil and gas, so it’s contributed to part of the oversupply. But because it was very high-priced oil and gas, it has not really been responsible for the flooding of the market. It’s below the cost of fracking production.

In other words, oil now, as a result of the Saudi production, is priced so low that there are not going to be new fracking investments made. A lot of companies that have gone into fracking are heavily debt-leveraged, and are beginning to default on their loans. The next wave of defaults that banks are talking about is probably going to be in the fracking industry. When the costs of production are so much more than they can end up getting for the oil, they just stop producing and stop paying their loans.

Bonnie Faulkner: With the price of oil lower than the cost of production, is this a dangerous situation for the economy in general or not?

Michael Hudson: Not for the economy in general, no. Only for the frackers. I think the less fracking there is, the better it is for the economy and society. You have a choice. Either you can have more oil, or more clean water. Fracking is not good for the water supply. So nothing could be better for the economy than to get rid of fracking. What’s bad for the frackers usually is good for the rest of the world.

Bonnie Faulkner: I had asked you about re-inflating commodity prices, and you said that it’s hard to inflate commodity prices without massive hoarding. How do you mean?

Michael Hudson: In the case of the oil spike a few years ago, there have been a number of studies that have showed that almost all of the demand for oil that suddenly pushed prices up was speculative demand. People began to speculate not only in stocks and bonds and real estate, but also in commodities. The market went up for old tankers, which were used simply to store oil in. A lot of the oil was simply being stored for trading, not used.

The same thing happened in the metals market. Speculators were buying metals simply to store away, thinking that maybe they can push the price up. I remember 50 years ago when the price of silver went up from about $3 an ounce to almost $50 an ounce. At that time, only the small buyers and the Canadians were buying silver, and then it was all left to collapse back to about $3 an ounce. So you have speculative binges in these.

I don’t think that governments should permit speculation in raw materials, because they’re what the economy basically needs. The effect of metals speculation was to push up the prices that China had to pay to countries like Australia. This squeezed China. Once the speculative demand ended, all of a sudden the added production facilities that had been brought into production by the high prices went out of production again, and there was a glut.

Bonnie Faulkner: The price of gold is going back up. To what do you attribute the reversal in gold prices?

Michael Hudson: There are so many currency exchange rate problems that people are buying gold as a safe haven. Right now, gold looks like a safe haven if international exchange rates break down. The United States is pushing as policy division of the world into rival currency camps – the dollar area on the one hand, and the Russia-Chinese-Shanghai Cooperation Organization group on the other, especially now that the IMF has changed its rules. People think that if there are rival currency groupings and national currencies are going bust, we might as well use gold as a safe haven.

Bonnie Faulkner: We did an entire program on the change in IMF rules. That was very important. In terms of these rival currency camps, I guess you see the international financial system breaking down. What do you think the timeline is going to be on this? It’s already starting, right?

Michael Hudson: Probably later this afternoon. [Laughing.] I mean, it’s ongoing. Look at Ukraine. Its currency, the hernia, is plunging. The euro is really in a problem. Greece is problematic as to whether it can pay the IMF, which is threatening not to be part of the troika with the European Central Bank and the European Union making more loans to enable Greece to pay the bondholders and the banks. Britain is having a referendum as to whether to withdraw from the European Union, and it looks more and more like it may do so. So the world’s politics are in turmoil, not to mention the Mideast, where the US has mounted attacks from Libya to Iraq to Syria, and ISIS is attacking governments in today’s pipeline rivalry.

Bonnie Faulkner: Do you think the United States is conducting a financial war against Europe?

Michael Hudson: That’s a byproduct. The financial war is aimed first of all at China and secondly at Russia. Europe is the collateral damage in this, because the natural geopolitical arrangement is for Europe to be part of Eurasia, especially for Germany to develop trade and investment relationships with Russia. But US opposition to Russia and China has entailed sanctions against Russia, and Russia in turn has made counter-sanctions against Europe. So Europe is essentially sacrificing its opportunities for trade and investment in order to remain part of NATO. It is also agreeing to bomb Syria and the Near East, creating a wave of refugees that it doesn’t know what to do with.

It’s amazing that Europe says, “What are we going to do with these refugees?” It’s as if it doesn’t realize that being part of NATO and bombing these countries forces them to choose to live by fleeing, or to stay and get bombed. Europe is creating the flight of refugees that’s tearing it apart politically, and leading rightwing nationalist parties to gain power to withdraw from the Eurozone.

So Europe is acting in a very self-destructive manner, but is doing so because it’s trying to be loyal to the United States. Most of the European leaders look at themselves as having to follow the United States, because if the US opposes them, there will be a regime change.

Bonnie Faulkner: It seems as if the United States is willing to sacrifice Germany and the rest of Europe to conduct this war against Russia and China.

Michael Hudson: When you say the United States, we’re talking about really the neocons and a particular group within the U.S. Government. The neocons are led by the old Bush-Cheney people, including Obama and Hillary Clinton, who is to the right of Cheney. Hillary says that we should go back into Libya, that we should fight even more, and that Putin is Hitler. That means that when she comes to power you can be pretty sure that there’ll be a confrontation. If there is, a number of former generals in America have been warning that the chances of atomic war have never been higher. If Hillary gets in Russia’s going to go on an immediate nuclear alert and there’s a good chance of war. But Hillary is not the United States, although the United States may end up electing her, in which case, in my mind, there’ll be a disaster.

Bonnie Faulkner: Yes, it’s very terrifying, the prospect of her becoming president. She’s very scary. You say that the real economy is suffering debt deflation, and by the real economy you mean goods and services and real production not the asset markets of the 1%. So then, would you say that there are two different economies?

Michael Hudson: That’s the essence of the book that I’m writing. That was what I was describing in The Bubble and Beyond, and later in Killing the Host. Most people think of the economy as producing goods and services and paying labor to buy what it produces. But a growing part of the economy in every country has been the Finance, Insurance and Real Estate (FIRE) sector, which comprises the rent and interest paid to the economy’s balance sheet of assets by debtors and rent payers. More and more money is being extracted from of the production and consumption economy to pay the FIRE sector. That’s what causes debt deflation and shrinks markets. If you pay the banks, you have less to spend on goods and services.

Bonnie Faulkner: You have said that one could even say that China’s slowdown is a reflection of lower exports to the US and Europe as their economies shrink. In what ways would you say that our economy is shrinking? How would you describe it?

Michael Hudson: Well, employment, wage levels and overall wage payments for starters. And then, the shrinking proportion of net income available for spending after paying debts and real estate costs. If you look at payments to labor as a proportion of national income or gross domestic product, you find profits going way up, investment and savings going up. All the growth in the last 10 years of the economy, the rise in national income, has gone to the 1%, not to the 99%.

So when I say the economy is shrinking, it’s the economy of the 99%, the people who have to work for a living and depend on earning money for what they can spend. The 1% makes its money basically by lending out their money to the 99%, on charging interest and speculating. So the stock market’s doubled, the bond market’s gone way up, and the 1% are earning more money than ever before, but the 99% are not. They’re having to pay the 1%.

So there are two economies, not only of the 1% and the 99%, but a division between the economy of consumption and production – consumer spending and tangible capital investment on the one hand – and payments to finance, insurance and real estate on the other. That includes healthcare, insurance, and also FICA wage withholding to produce more of a budget surplus enabling the government to cut taxes on the higher income brackets.

They’re also cutting back pensions. One of the big problems in America’s economic polarization and shrinkage is that pensions can’t be paid. So there are going to be defaults on pensions here, just like Europeans are insisting in rolling back pensions. You can look at Greece and Argentina as the future of America.

Bonnie Faulkner: Do you think that there is another 2008 crash in the making, and if so, will this one look a lot different or will it be very similar?

Michael Hudson: Yes. It’d have to be very similar. The problems of 2008 were never cured. The Federal Reserve’s solution to the crisis was to lend the economy enough money to borrow its way out of debt. It thought that if it could subsidize banks lending homeowners enough money to buy houses from people who are defaulting, then the bank balance sheets would end up okay.

But the volume of debt was never written down. Mathematically, debts grow exponentially at compound interest. Banks recycle the interest into new loans, so debts grow exponentially, faster than the economy can afford to pay.

You’re having this in Europe, causing instability with Greece, Spain, Portugal, even Italy now. And you’re having it here. You’re also having shrinking markets in Argentina, which has just voted in a rightwing government and cut back spending. So you’re having government spending on the economy being cut almost everywhere. That means that the only source of spending for growth has to come from borrowing from the banking system.

Bonnie Faulkner: So then if there is another 2008 crash in the making, you think it will look similar to what then happened?

Michael Hudson: Yes, that’s how it happens. It’ll be yet more real estate going down, more bankruptcies, more government giveaways.

Bonnie Faulkner: I remember at that time, in 2008, the money market froze up. I remember this. It was really alarming.

Michael Hudson: This is why there’s been so much money going into treasury securities. Right now you can buy treasury securities and after you pay the management fees, whether it’s to Vanguard or someone else, you get a fraction of 1%, maybe a fraction of 0.1% in interest. People are putting their money into treasuries because they worry that the risk of putting their money into the bond market, the stock market or even the money markets is very high.

So Vanguard, for instance, which is one of the largest money management companies and best for the people. If you have a retirement account, Vanguard is no longer accepting treasury bond accounts into the overall money market because so much money is going in wanting to play it safe that there aren’t enough treasury bonds to absorb all of this flight to safety.

Bonnie Faulkner: Wow. So then would you say it’s only a question of time before we hit another financial panic?

Michael Hudson: Yes.

Bonnie Faulkner: What do you make of this Panama offshore banking haven that has hit the news?

Michael Hudson: I haven’t followed it that closely, because I’ve been working on completing by the end of the summer the new book that I’m coming out with, J is for Junk Economics. So I really haven’t followed it. Apparently the Atlantic Council and the US Government have wanted to expose certain politicians who are not on its favorite list. So it’s part of a political stunt.

I notice that in the news they keep talking about Vladimir Putin, although he hasn’t been tied at all directly to this. There’s so much propaganda in the way that the popular press has been treating this that it’s hard for me to make head or tail of it.

Bonnie Faulkner: That’s right. The propaganda in the mainstream news is actually quite important, because in order to try and figure out anything, you have to try and decide what’s real and what isn’t. And so much of it isn’t real.

Michael Hudson: I guess the main thing that came out of the Panama Papers was that Ukrainian President Poroshenko had promised to divest of his chocolate company and instead, he simply moved it into an offshore account. And on the very day that he was increasing the attacks on the eastern Donbass region of Ukraine, the export sector, he was signing documents to conceal his own money offshore. So the exposé of the Panama money laundering has hit some of the dictators that America is protecting and promoting.

Bonnie Faulkner: Would you like to describe your new book, Michael?

Michael Hudson: It’s basically a set of definitions on junk economics and showing that what people usually receive in the mainstream is what George Orwell would call Doublethink. It’s euphemism. When people are running up more and more debt for housing, they call that “real wealth.” It exposes what’s wrong in the mainstream economics and why most of the economics that justifies austerity programs and economic shrinkage is in the textbooks is not scientific. Junk economics denies the role of debt and denies the fact that the economic system we have now is dysfunctional.

Bonnie Faulkner: Is there anything that you would like to say that you think is most important for people to understand about the present economy?

Michael Hudson: Just that the economy is being run primarily by the banks for their own interest. The bank’s product is debt, because the banks want to make sure that they can get paid for the debt. But ultimately the only party that can pay the debt is the government, because it runs the printing presses. So the debts ultimately either are paid by the government, or they’re paid by a huge transfer of property from debtors to creditors – or, the debts are written off. Throughout history, the only way of restoring stability is to write down the debts That is treated now as if it’s something that can’t be done. But it’s the only thing that’s going to revive the economy.

Bonnie Faulkner: Michael Hudson, thank you very much.

Michael Hudson: It’s good to be here, Bonnie.

* * * * *

I’ve been speaking with Dr. Michael Hudson. Today’s show has been: The Slow Crash. Dr. Hudson is a financial economist and historian. He is President of the Institute for the Study of Long-Term Economic Trend, a Wall Street financial analyst and Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His 1972 book, Super-Imperialism: The Economic Strategy of American Empire, is a critique of how the United States exploited foreign economies through the IMF and World Bank. He is also author of Trade, Development and Foreign Debt and The Myth of Aid among many others. His latest book is Killing the Host: How Financial Parasites and Debt Destroy the Global Economy. Due out soon, J Is for Junk Economics. Dr. Hudson acts as an economic advisor to governments worldwide, including Iceland, Latvia and China, on finance and tax law. Visit his website at Michael-Hudson.com.

Guns and Butter is produced by Bonnie Faulkner, Yarrow Mahko and Tony Rango. Visit us at gunsandbutter.org to listen to past programs, comment on shows, or join our email list to receive our newsletter that includes recent shows and updates. Email us at [email protected]. Follow us on Twitter at gandbradio.

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In Extraenvironmentalist #92 we first speak with Paul Vigna about his new book The Age of Cryptocurrency: How Bitcoin and the Blockchain Are Challenging the Global Economic Order to discuss how the Bitcoin currency and the blockchain distributed ledger system are laying the groundwork for alternatives to today’s monetary system. Then, we talk about the potential influence of exponential technologies on education, learning and other areas of the economy with Jim Jubelirer.

// Books

The Age of Cryptocurrency: How Bitcoin and the Blockchain Are Challenging the Global Economic Order by Paul Vigna and Michael J. Casey

//Clips (in order of appearance)

Full Story: on Bitcoin
Bitcoin vs. Banks
This Money’s so Safe, You’ll Never Touch It

// Music (in order of appearance)

Postiljonen – Supreme (Niva Remix) via Soundcloud
Future Elevators – Modern World via The Planet of Sound
Rodriguez – Hate Street Dialogue (GingerAle Remix) via IndieShuffle

// Production Credits and Notes

Our editor Kevin via Sustainable Guidance Youtube Channel

Episode #92 was supported by donations from the following generous listeners:

Kathryn in Washington
Erin in Vermont
Robert in Kansas
Lee in Arizona

Cross-posted from the Extraenviromentalist.com

The post Decrypting Cryptocurrency appeared first on P2P Foundation.

Introduction

After Bitcoin forked, and remains in tatters, it is now blockchain technology that ignites visions of de-regulated and decentralized organization, all the while it is simultaneously being sanitized by commercial banks. Meanwhile the sharing and “service” economy lost its innocuous veneer and streaming services have failed and continue to fold the music industry. Despite the escalation of crowd-funding into crowd-equity and platform co-operatives, artists and designers struggle to financially support themselves. Meanwhile, the financial mediators of the previous centuries continue to drag themselves onward into global debt.

We are failing better, nonetheless. Worker’s unions are on the rise and numerous collectives are working together to collectively insure their own wellbeing and build alternative models of social governance. The aspirations of grassroots organizations such as Diem25, that promise to liberate social democracy from the stronghold of global finance, are gaining momentum across Europe. People’s parties such as Podemos and 15M even neared an electoral majority. This momentum has thrust radical economic alternatives into the central stage and governments around Europe have begun experimenting with progressive policies such as a living working wage and a universal basic income.

The search for economic forms of governance in the service of the commons remains urgent. Issues of trust, scale, distribution and ownership remain at the core of developing alternative models of economic exchange and governance and need to be addressed. Let’s prefabricate a perfect storm of untimely thinking and experimental engineering in order to interfere directly into hard-core social and economic issues.

Program

Session 1: Global Finance: Failing Better?

Beyond the culture of celebs, what comes after Ewald Engelen, Thomas Piketty, Yanis Varoufakis and David Graeber? How can we build bridges between economists and their critique of global finance, neo-liberal policies, financialization, shrinking middle classes and the ever-growing gap between rich and poor? Can we address the gap between the best selling financial book of the year and grass-roots social resistance?

‘Global Finance: Failing Better?’ addresses the need for a multitude of critical strategies that go beyond analysis and step up the game into action. As scores of citizens amass in public squares as part of Nuit Debout or campaign for political reform with people’s parties such as Podemos or the Five Star Movement, will the original underlying critique against global finance retain its sense of urgency? How has popular economic critique propelled or even overshot its evaluation of the financial crisis? Can popular economic literature engage directly with the current social movements to become, more than just a conversation piece, but a potential manual to reroute the austerity economy.

Session 2: Big Pocket is Watching You!

The explosion of new forms of alternate currencies and the persistent refusal to do away with physical cash indicates growing public concern over the way in which electronic monetary exchange enables large scale data surveillance. In a world without cash, every payment becomes traceable, allowing for unprecedented amounts of data to be collected on citizens. As more and more shops and retailers in large cities reject cash in favor of electronic money, important issues regarding privacy, data and surveillance become central to the future of money. These concerns echo wider debates around data and surveillance – the Apple vs. FBI backdoor encryption case has highlighted the mounting tensions between commercial and governmental data surveillance. The financial upheaval and internal reconfiguration of monetary transaction provides an optimum moment to discuss the future of money and digital banking.

What alternatives to electronic money can prevent citizen surveillance and inspire radical visions of the future of money?

Session 3: The Music Industry: The Last Dance?

The music industry is still in repair after the initial disruption of digital downloads and streaming sites in the mid 1990s. Traditional rights management laws continue to restrict the creation, distribution and profitability of music. In addition to this, public performances are now monetized with the use of audio recognition technology in music venues, turning bars, clubs and festivals into sites of data-based economic revenue for major publishers and labels.

How does this play in the ever-growing festival and club scene? What is the vision for a global industry that now relies on counting streaming playbacks and selling hand-made band t-shirts? Can the outcry for alternatives be met with distribution platforms that disrupt the dominant players and reach larger audiences? And how is the club scene itself being affected by the ongoing real-estate boom in the metropolitan areas, usually seen as the birthplace of new music currents?

Session 4: When Art Mirrors Marx

Artists are vital to de-constructing how finance and economics have affected our collective imagination, and to re-imagine alternatives. Artists have been monitoring, tracking and intervening into finance to provide new insights and potential escape routes. Moneylab#3 invites artists from diverse backgrounds and disciplines to present research, experiments and interventions into finance.

‘When Art Mirrors Marx’ presents a selection of artists that invert and disassemble the intrinsic value of art to re-imagine the scope of artistic production and distribution. We present works that reflect on the endemic characteristics of the 21st-century economy, and that initiate alternative value systems, from designing stock trading algorithms, to occupying private banks to eating and digesting of pages from ‘Das Kapital.’ What happens when life imitates finance art? Can artists’ investigations into finance create viable alternatives for the masses?

Session 5: Whose Commons?

‘Whose Commons’ is a timely examination of the commons as ideological battleground. Amidst a fresh wave of digital initiatives that focus on shared collective resources, that range from car-pooling to collective farming, the sharing and social support upheld within the commons has spilled into commercial ventures that see the virtue of the commons as the essence to a better future. As the values of the commons are incorporated, manipulated and brandished by both business models and co-operatives alike, how should we reflect on and manage our relationship to the often-idealized notion of the commons? As businesses and co-operations increasingly advance towards de-centralized, p-2-p business models what are the core values associated with the commons that we want to retain and permeate into wider social movements?

For further information please contact [email protected]”

Originally published here.

Photo by grace_kat

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“If the future of banking is going to be digital, we want it to be populated with those who value the deeper tenets of open source philosophy. Otherwise we could be left with increasingly alienating, exclusive and unaccountable financial surveillance states, presiding over increasingly passive and patronised users.”

The following is excerpted from another excellent and illuminating essay from Brett Scott, about the dark side of the algorithms that are running much of work and life, behind the screens, and much of it already applied in the world of finance.

We recommend reading the original essay in full.

Brett Scott:

“‘Algo-robotic’ systems are particularly adept at accumulating power. Unlike the simple machine that offers static options via an interface, an algo-robot – or a series of linked algo-robots – have a greater ability to react in multiple ways in response to multiple data streams, and therefore to organise and co-ordinate. This trait makes senior corporate management warm to them, because, after all, reacting and co-ordinating are core elements of what a manager does.

The old hierarchy within a corporation was one where owners used managers to co-ordinate workers and machines. This gave rise to the traditional battles between owners and managers, managers and workers, and workers and machines. The emergent hierarchy is subtly different. The owners – often a disparate collection of distant shareholders – grant power to high-level management, who increasingly use algorithmic systems as ‘middle management’ to organise their workers and more basic machines.

And this is where we see the changing conception of the robotic system’s ‘body’. Rather than being a mechanical assemblage with an algorithmic ‘mind’, the robot could be an algorithmic mind co-ordinating a ‘body’ constituted out of ordinary employees, who increasingly act like machine parts. Think about the Amazon deliveryman driving the van to act out an order sent to him by an algorithm. This ‘body’ doesn’t even have to be constituted by the company’s own employees, as in the case of self-employed Uber drivers co-ordinated by the Uber algorithms.

These arrangements are often difficult to perceive, but algo-robotic systems have been embedding themselves into everyday forms of finance for decades, not necessarily ‘taking over control’ but often creating a hybrid structure in which manual human actions interact with automated machine-robot actions. For example, the investment bank trader might negotiate a derivatives deal over the phone and then book it into a partly automated back-office system.

The quintessential example, however, is the retail bank branch. You can talk with employees behind the Barclays counters, but often they are just there to enter data into a centralised system that tells them how to deal with you. To some degree these employees have agency – the ability to make quasi-autonomous decisions – but the dominant trend is for them to become subservient to the machinic system they work with, unable to operate outside the bounds set by their computer. Indeed, many bank employees cannot explain why the computers have made the decisions they have, and thus they appear as the human face put there to break the news of whatever the algorithm has decided. We might even say they are a human interface to an otherwise algo-robotic system that is accountable only to the senior corporate management, who you will never deal with.

But, ‘human interfaces’ like that are actually quite costly to maintain. People are alive, and thus need food, sick leave, maternity leave and education. They also have a troublesome awareness of exploitation and an unpredictable ability to disobey, defraud, make mistakes or go rogue. Thus, over the years corporate managers have tried to push the power balance in this hybrid model towards the machine side. In their ideal world, bank executives would get rid of as many manual human elements as possible and replace them with software systems moving binary code around on hard drives, a process they refer to as ‘digitisation’. Corporate management is fond of digitisation – and other forms of automation – because it is a force for scale, standardisation and efficiency – and in turn lowers costs, leading to enhanced profits.

The process is perhaps most advanced in the realm of electronic payments, where money is shifted with very little human action at all. Despite recent talk of the rise of digital currencies, most money in advanced economies is digital already, and tapping your contactless payment card sets in motion an elaborate automated system of hard-drive editing that ‘moves’ your money from one bank data-centre to another. This technology underpins talk of a future ‘cashless society’. Bouncy startups like Venmo and iZettle have got into the payments game, adding friendly new layers to an underlying digital payments infrastructure that is nonetheless still dominated by the banking industry and credit card networks.

In the case of retail banking, an ideal situation for banks might be to get rid of the branches altogether, and to push for a world of ‘branchless digital banking’. This generally means slowly dismantling, delegitimising and denaturalising branches in the public imagination, while simultaneously getting people accustomed to ‘self-service’. Indeed, many banks are cutting branches, and many new forms of financial services are found only online, like digital banks Fidor and Atom. Digital banking startup Kreditech claims that bank branches won’t exist 10 years hence, “and neither will cost-intensive, manual banking processes”. “We believe algorithms and automated processes are the way to customer-friendly banking,” the startup declares confidently.

Such digital banking is but one strand in the digital trajectory. Digitisation is starting to be applied to more specialist areas of finance, too, such as wealth management. Wealthfront, for example, now offers automated investment advice for wealthy individuals. In their investment white paper they state that sophisticated algorithms can “do a better job of evaluating risk than the average traditional advisor”.

Digital systems like Wealthfront are often promoted as cutting out the middleman – assumed to be human, slow, incompetent and corrupt – and therefore as cutting costs in both money and time. Some startups use this to build a narrative of the ‘democratisation of finance’. Quantopian, a system for building your own trading algorithms, comes with the tagline: “Levelling Wall Street’s playing field”. Robinhood draws on the name of the folk hero to pitch their low-fee mobile stock-trading system.

It seems uncontroversial that these systems may individually lower costs to users in a short-term sense. Nevertheless, while startup culture is fixated upon using digital technology to narrowly improve short-term efficiency in many different business settings, it is woefully inept at analysing what problems this process may accumulate in the long term. Payments startups, for example, see themselves as incrementally working towards a ‘cashless society’, a futurist buzzword laden with positive connotations of hypermodern efficiency. It describes the downfall of something ‘old’ and archaic – cash – but doesn’t actually describe what rises up in its place. If you like, ‘cashless society’ could be reframed as ‘a society in which every transaction you make will have to be approved by a private intermediary who can watch your actions and exclude you.’ It doesn’t roll off the tongue very well, and alarms the critical impulses, but nevertheless, that’s what cashless society would bring.

Part of the reason for the pervasive acceptance of these developments is the deeper ideological narrative underpinning them, one which is found within the tech industry more generally. It is the idea, firstly, that the automation of everything is inevitable; and that, secondly, this is ‘progress’: a step up from the inefficient, dirty services we have now. In this context, questioning the broader problems that might emerge from narrowly useful automation processes is ridiculed as Luddite, anti-progress or futile.

Of course, ‘progress’ is a contested term. If you’re cynical, you may see it as shorthand for ‘the situation an organised set of commercial interests view as desirable in the short-term’. It doesn’t necessarily mean ‘the thing that would be good for the broader public in the long term’.

Indeed, it is apparent that many people don’t respond to ‘progress’ in the way they’re supposed to. We still find people insisting on queueing to use the human cashiers at big supermarkets like Tesco, rather than diligently queueing up for the automated checkout. Likewise, we still find people stubbornly visiting the bank branches, making manual payment requests; even sending cheques.”

* The dark side of digital finance:

“One key to developing a critical consciousness about technology is to realise that for each new innovation a new trade-off is simultaneously created. Think about the wonderful world of digital banking. A low-level bank branch manager might be subservient to the centralised system they work for, but can also deviate subtly from its rules; and can experience empathy that might override strict economic ‘rationality’. Imagine you replace such an individual with an online query form. Its dropdown menu is the digital equivalent of George Orwell’s Newspeak, forcing your nuanced, specific requests into blunt, standardised and limited options. If your problem is D, a system that only offers you solutions to A, B, or C is fundamentally callous. A carefully constructed user complaints system can build an illusion of accountability, while being coded firmly to bias the interests of the company, not the user.

Indeed, if you ever watch people around automated self-service systems, they often adopt a stance of submissive rule-abiding. The system might appear to be ‘helpful’, and yet it clearly only allows behaviour that agrees to its own terms. If you fail to interact exactly correctly, you will not make it through the digital gatekeeper, which – unlike the human gatekeeper – has no ability or desire to empathise or make a plan. It just says ‘ERROR’.

This turns out to be the perfect accountability and cost cushion for senior corporate management. The responsibility and energy required for dealing with problems gets outsourced to the users themselves. And lost revenue from unhappy customers is more than compensated by cost savings from automation. This is the world of algorithmic regulation, the subtle unaccountable violence of systems that feel no solidarity with the people who have to use it, the foundation for the perfect scaled bureaucracy.

So, in some future world of purely digital banking we find the seeds of a worrying lack of accountability and an enormous amount of user alienation. The loan you applied for online gets rejected, but nobody is there to explain what hidden calculations were done to reach that decision. To the bank management, you are nothing more than an abstract entity represented by machine-readable binary code.

…

Of course, the banks don’t want you to feel like that. In the absence of employees, they will have to use your data to create the illusion of some type of personally tailored service. Your historical interactions with the system will be sold back to you as a ghostly caricature of yourself, fed through the user-experience filters. And it is here that we find the emergence of new forms of financial artificial intelligence.

…

So how should one respond? One approach is to ride with the technology, rather than to resist it. In intellectual leftwing circles the accelerationist sect advocates an embrace of automation, standing against sentimental calls for more human, local systems. It’s an abstract position, founded on beliefs that automation will create conditions ideal for the downfall of capitalism. At some point it intersects with the cult of the Singularity, popular among evangelical tech entrepreneurs and transhumanists.

The ideological ambiguity is perhaps most acute in the emergent field of blockchain technology. Such systems potentially offer a way for strangers to freely interact with each other without central human intermediaries getting involved in the process. They may use blockchain systems to issue shares, enter into insurance contracts and form digital co-operatives, but the systems are underpinned by an extreme version of automation, one that is essentially autonomous. Indeed, the deep-level mission of projects such as Ethereum, a decentralised platform for ‘trustless’ transactions, is the replacement of human systems of institutional trust – like the legal and political systems that normally underpin all contracts and markets – with automated ones apparently detached from the human ambitions of those who historically have run such systems (‘the politicians’, ‘the regulators’, ‘the bankers’).

Libertarians long for an automated ‘Techno-Leviathan’ to replace the human sovereigns we have now, but it is a big question as to whether such automated systems truly provide a more ‘democratic’ infrastructure for interaction.
More down-to-earth are those who want to allow more creative interaction with the existing digital infrastructure. Take the Open Bank Project, for example, which wants to facilitate third-party customisation of digitised banking processes by opening up bank APIs, in the same way that independent developers might build third-party Twitter apps that draw data from Twitter’s API.

And, finally, we have those who authentically seek to harness digital technology to bypass and challenge the standard economic rationality of large scale, short-term profit-seeking financial beasts, taking advantage of the lower startup costs of a digital setting to promote peer-to-peer finance, alternative currencies, crowdfunding platforms and non-monetary sharing platforms.

So, the scene is set. One thing is for sure: if the future of banking is going to be digital, we want it to be populated with those who value the deeper tenets of open source philosophy. Otherwise we could be left with increasingly alienating, exclusive and unaccountable financial surveillance states, presiding over increasingly passive and patronised users.”

Photo by Sten Dueland

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