Just read an interesting article/review about Thomas Piketty's new book "Capital", written by a well respected English economics journalist Paul Mason. Here it is :- http://www.theguardian.com/books/2014/apr/28/thomas-piketty-capital-surprise-bestseller. What do you think Coincube ? Inherent contradictions within capitalism ? Sounds a bit like Marx doesn't it   ? Sounds to me like Professor Piketty has absolutely hit the nail on the head AND managed to capture the zeitgeist.
   (ps. interesting he mentions the Marikana mining massacre - if that incident had occurred in Zimbabwe the PM would be calling on Parliament to send in the troops - unfortunately it happened in South Africa. The mine there is own by a London listed UK company, Lonmin. The miners were shot for demanding more than what they were getting - namely living conditions that we in the west wouldn't deem worthy of our pet dogs. 34 men dead. Welcome to global capitalism.)

ps. why are you quoting Anonymint in an article on economics   ? Don't you know that he's only paraphrasing Martin Armstrong, and that Armstrong is only paranoid that TPTB are gonna come hunting for his ill gotten gains again  

  - it would be nice if it did - it was, after all, the upper class that created the debt in the first place - unfortunately "finance" and the upper class are, if not the exact same people, certainly feeding from the same trough.


- it would be nice to see this "sagging" in practice. It did, I believe, occur on the British upper class during the 1920's and 1930's. Unfortunately, today, they have been replaced (after what, a 50 year interlude ?) by a much more robust and resilient upper class via global capitalism. If some people have their way they will become virtually impossible to tax at all.

There has never been and never will be hyperinflation on a global scale. Hyperinflation requires the ability to run from a low-tier currency regime to a more stable currency regime.

That is why global deflation via bezerk G20 coordinated government asset seizure is so dangerous. This leads to a Dark Age and it is very difficult to get out of.

Make sure you understand this point. It is a critical point at this juncture.

http://armstrongeconomics.com/2014/04/28/is-a-crash-inevitable-the-spiral-vortex-of-debt-and-corruption/

Essentially society is trapped in a cycle of ever increasing economic inefficiency. Our collective lack of understanding of the fundamental cause will result in attempted "fixes" that will worsen the underlying problem. The end result is economic collapse. The world will not end but we are facing something that is likely to exceed the Great Depression.

To understand why, and why society cannot avoid it (although individuals can) you have to understand the linked works. It's not an easy read.

Do you believe that banks will tell you the truth that they print money to buy assets around the world?
...
If you follow this path, you will never understand bitcoin, just like if you follow the FRB path, you will never understand money creation  

@ CoinCube
If you have a particular argument for parasitic behaviour, I will be interested to
read it.

Finance Part III: Divide, Conquer, Enslave


Central banking is a resilient institution. Historically there have been many attempts to destroy it but it always grows back stronger then ever.
In Part I and Part II we explored how fractional reserve banking exploits the power of money creation to impoverish the middle class. Today we will see that the upper classes are not immune. They too are eventually decimated by finance.

Fractional reserve leads inevitably to cyclical boom and bust. Our tolerance of this system has profound social and economic consequences. With every rotation of the "business cycle" the  middle class finds it harder to maintain a quality standard of living. As the populace suffers from cyclical but progressive economic strangulation many find they simply cannot get ahead. Intuitively they feel the system is rigged against them but they do not understand how or why. Growing progressively desperate they turn to the only actor willing to help. They petition the government.


Responding to public demand government steps in and tries to halt finance induced crashes. However, government does not simply print money to mitigate the cyclical monetary crunch. True money printing would harm vested financial interests and is taboo. Instead government enters the arena meekly as the sucker borrower of last resort. Once government is ensnared the triumph of finance is complete.  Government debt is paid via taxation and taxation primarily targets the upper class. Thus with the capture of government finance gains the ability to siphon wealth from the upper class.

A time honored strategy in war is divide and conquer. It is easier to subjugate a people who are fighting amongst themselves. Finance and fractional reserve divides the public into two competing blocks of victims. The poor as we have seen become ever poorer with each "business cycle". They  look at the relatively well off and cry Thief! The entrepreneurs and productive increasingly suffer under ever higher tax burdens. They point to government and the welfare recipients and cry Thief!

Government does not handle this conflict well. Unable to decide between competing citizen demands it waffles. It spends to support the poor but does not raise taxes. The result is ever larger government debt. Each attempt by government to buffer the finance induced downturn simply delays the liquidation of middle classes assets by transferring that liability to the government and eventually to the upper classes via increased taxation.  Bailouts are thus a transfer wealth from the productive upper classes to well-connected financial interests. Finance uses the business cycle to harvest the  poor, and bailouts to harvest the rich.

The long-term costs of all this are borne out by the majority of the ill-informed public who are too busy fighting over a myriad useless conservative versus liberal disputes to address the root cause of their suffering. Meanwhile government in its misguided attempt to "help" becomes so indebted that eventually it can no longer service its loans.


Government can and does shield the people from their folly for a time. However, its ability to do so comes to an abrupt end when it reaches the limits of its solvency. Once the solvency threshold is reached  government must choose to either default, cut spending, or raise taxes. The effects of inertia, a population dependent on government benefits, and powerful financial interests will ensure it chooses to raise taxes. Matt Taibbi of Rolling Stone described the most powerful investment bank as a "great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." This image neatly  captures the reality of finance today. Feeding the squid just increases its appetite.

Eventually the upper class starts to sag under the weight of ever higher taxation. This slows growth and leads to jobs becoming hard to find. As the economy declines the clamor for ever more government intervention grows louder. The predictable result is more deficit spending more debt and eventually more tax increases. Both conservatives and liberals are complicit as both argue only for their own narrow interests. Conservatives argue for minimal government and low taxes while simultaneously supporting the finance induced vampirism that decimates the middle class. Liberals correctly feel that the deck is stacked against the poor and look to level the playing field via big government and taxation regardless of the damage these policies do. The great beneficiary of this battle between idiots is finance.

Eventually rising taxes will hit the laffer maximum where an increase actually lowers revenue obtained. Various academic studies have placed this rate as somewhere between 40-70%. The French are already taxing high earners at 75%. Once governments hit this maximum they face a stark choice between default, printing money (direct printing not bond issues), or seizing assets. The obvious choice for politicians is to seize assets via some form of wealth tax. Such seizures will become ever more common as governments around the world slide into insolvency. The result will be  progressive deflation not inflation as wealth tries to get off the grid and hide from the taxman and the velocity of money declines.


It is only much later when assets can no longer be effectively seized that government will turn on the printing press. Those in the know will have placed their funds in hard to seize assets prior to this time. The hum of the printing press will signal the start of hyperinflation.

In short fractional reserve is a disease which progressively weakens and consumes its host. Left unchecked it corrupts society driving us to extremes of debt, taxation, and eventual systemic failure. It does thus while masquerading as a natural part of the economy.  It's closest biological parallel is that of metastatic cancer.

Finance Part I: Understanding the Parasite
Finance Part II: The Parasitic Cycle
Finance Part III: Divide, Conquer, Enslave
Finance Part IV: The Rise of Cryptocurrency (Coming Soon)

References:
Shelby Moore III, Understand Everything Fundamentally
http://www.coolpage.com/commentary/economic/shelby/Understand%20Everything%20Fundamentally.html
Matt Taibbi The Great American Bubble Machine, Rolling Stones July 9, 2009
http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405
Ludwig von Mises. Human Action: A Treatise on Economics 1949
http://mises.org/Books/humanaction.pdf

And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.

The nine most terrifying words in the English language are "I'm from the government, and I'm here to help."

The people are blind to the mechanism which is enslaving them and reducing their prosperity. Thus, since they will not change the mechanism, centralization of governance will grow stronger from the current financial crisis

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Banks create deposits from loans.  They don't loan out a multiplier of their reserves as the fractional reserve myth alludes to.  After they create the loan they look for the reserves.  If they don't have the reserves available they borrow it.  If no one lends it to them the Central Bank as as lender of last resort.

Both Minsky & Keen have an endogenous view of money.  They would hate BTC because it's inelastic.  Most of Post Keynesians would hate BTC because they all have a liquidity preference for money.
BTC is designed to be inelastic and non liquid

I don't think that's what Minsky or Keen says.  

Minsky proposed theories linking financial market fragility, in the normal life cycle of an economy, with speculative investment bubbles endogenous to financial markets. Minsky claimed that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As a result of such speculative borrowing bubbles, banks and lenders tighten credit availability, even to companies that can afford loans, and the economy subsequently contracts.

@coincube

Seems like you understand money creation but I don't get how you can go from that to Rothbard.

IMO Minsky has a more "real world" understanding of banking like the pdf you link,  rather than the anti-Central Bank theme of your articles

Hmmmm. I would see government as the parasite, favouring stable ongoing symbiotic relationships that enable the maximum to
be extracted from the host without killing it. Banks then function as a competing parasite or as a predator, with the dynamics
favouring the predator (IMHO.) I do not have a reference to hand, but some have suggested that parasite-host-predator systems
accelerate evolution, and that perhaps these systems are "a natural part of" the ecosystem.

I cannot comment on Minsky, and I cannot recall Keen speaking specifically on fractional reserve banking. My own view is
that fractional reserve lending ended when "we" broke the link to gold as the benchmark for money and replaced it with the
US dollar (FRN). Also, when "light touch" regulation was applied, governments gave the "market" the power to decide what bank
leverage ought to be. We now know how well that worked.

There is no secret regarding modern money creation, I like the explanation on Wikipedia:

http://en.wikipedia.org/wiki/Money_creation

Not to disagree entirely with your thesis, but your math is somewhat suspect.

Your PartII seems to suggest a predator-prey model instead of your Parasite-Host thesis.

Have you read any of Professor Keen's work? His models suggest that these cycles
will occur regardless of the intention of any banker actions.

As the scorpion said, "It's in my nature"

Why we need anonymity.

http://armstrongeconomics.com/2014/04/21/how-your-cell-phone-threatens-your-liberty/

You haven't brought up anything new, other then the typical summary of someone's Austrian economic youtube video.
...
The unanswered and unsolved economic issue in the west is usury. None of these "schools" even adress it, they all make up absurd theories to try and justify it. The worst thing to ever happen to economics was when it was divorced from moral philosophy and became a pseudo-science.

When historian's look back on the internet, they will find not only was it not a harbinger of innovation but worse, a total propagator of bad ideas and old errors.

"Don't move," a voice warned, according to a recording obtained by CNN affiliate YTN. "If you move, it's dangerous. Don't move."

"Kids were forced to stay put," one survivor told CNN affiliate YTN"

Finance Part II: The Parasitic Cycle

Modern economics obscures the truth about the process of money creation. In Finance Part I: Understanding the Parasite we explored how money is actually created. Today we explore the devastating economic consequences that inevitably follow.


The modern industrial economy is characterized by cyclical boom and bust. Massive growth is followed by recurrent busts. With only minor hand waving we are told by most economists that this "business cycle" is caused by mysterious and natural periodic shifts in savings and consumption. Karl Marx noticed that before the Industrial Revolution, these cyclical boom and busts did not occur. Marx concluded that the cycles must therefore be an inherent feature of capitalism. Various schools of modern economic thought, regardless of their other disagreements have all agreed on this sacred scripture. The business cycle (we are told) must be rooted deep within the free-market economy a natural boom and bust if you will. These crashes seem to just… happen.

We must go further back in history to find a true counter to the modern narrative. David Hume and David Ricardo would not have agreed with current orthodoxy. Hume was the first to point out that another critical institution had developed and grown strong alongside the industrial system. This wondrous creation of wealth extraction creation is our fractional reserve banking system. Could this powerful institution be responsible for the cycles? Ludwig von Mises answered this question definitively in 1912 with his groundbreaking book Theory of Money and Credit.  

Mises saw that true cause of the recurrent boom and bust cycles was fractional reserve banking. Banks create money, but each loan they make creates more debt than money. To pay back these loans the interest due must in be drawn from the larger economy. This interest can only be paid via two mechanisms.

1) Someone somewhere in the economy must take out even more debt to pay the initial loan.

Or

2) Somewhere debt must go into default and its underlying collateral seized.

The bank's costs to create money are fixed at a low price by the central bank (not the free market). Central banks keep this rate at the lowest possible level that avoids significant inflation. It is "good for the economy" or so we are told. Debt requires ever more debt to sustain.


When interest rates are artificially low, entrepreneurs are led to believe the income they will receive in the future is sufficient to cover their near term investment costs. In an environment where the money supply is continually expanding via debt, entrepreneurs mistakenly conclude that investments are really available for long term projects when in fact the pool of available funds has come solely from artificial credit creation that can and will be contracted at will by the banking sector. Entrepreneurs see spending in the economy and assume consumer demand exists for their projects when in fact consumer demand is artificially and unsustainably elevated.

As bank credit percolates through the economy it moves downward from business borrowers to landowners and capital owners who sold assets to the newly indebted entrepreneurs, and finally onto other factors of production like wages, rent, and interest.

No punch bowl stays full forever. The artificial boom from artificial credit raises prices and if left unchecked runaway inflation. Banks cannot allow that. As inflation picks up the central bank overseer signals the end of the party. Interest rates are rise and the squeeze begins.

When banks start to squeeze (often in response to inflation) the party quickly ends and there is a critical economy wide liquidity shortage. By definition there is never enough money to pay off debt. Without sufficient new debt what existing liquidity exists must be redirected towards an ultimately unpayable debt. Assets must be sold and prices drop.  Investors suddenly find their projects are unsustainable; banks call in loans and then seize the underlying collateral capturing the work and effort of the investor.
Some investments made during the artificial monetary boom were inappropriate and "wrong" from the perspective of the long-term financial sustainability. Others should be sound but nevertheless fail due to the economic distortion and contraction triggered by sudden credit tightening.

The boom is revealed for what it is, a period of wasteful malinvestment, a "false boom" where the investments undertaken during the period of fiat money expansion are revealed to lead nowhere but to insolvency and unsustainability. Seizure of collateral and general price deflation or reduction in inflation ensues. The longer the false monetary boom goes on, the bigger and more speculative the borrowing, the more wasteful the errors committed and the longer and more severe will be the necessary bankruptcies, foreclosures and depression.

As we have seen, an increase in the supply of money benefits the early receivers, that is, the government, the banks, and their favored debtors or contractors, at no point is this more true than at the bottom of the business cycle when asset prices are artificially depressed and only favored borrowers are allowed to borrow. It is at the bottom that favored insiders can still borrow allowing assets to be purchased at depressed prices.

In any economy not on a 100% percent commodity or cryptocurrency standard, the money supply is thus used as a vehicle for wealth extraction. Monetary inflation and the inevitable resulting parasitic cycle erroneously referred to as the "business cycle" is the method by which the banking system, and favored political groups are able to partially expropriate the wealth of other groups in society. Those empowered to control the money supply issue new money to their own economic advantage and at the expense of the remainder of the population. The parasitic cycle is a direct result of fractional reserve banking. The creation of new money is limited only by the top down imposed cost set by the central bank. This value is not set by individuals optimizing their economic savings decisions but a single top down controller, a controller who's charter mandates it to act in the best interest of its member banks.


Once inflation is safely tamed and another cycle of assets seized, the central bank signals the start of the next "boom" and low rates are initiated once more with the goal of "helping reduce the unemployment" caused by the "business cycle". However, the parasitic cycle is self-limiting. It only works if banks can identify individuals with collateral to harvest lend to. Eventually those people run out of assets to seize. The highly productive learn to avoid debt whenever possible and thus partially opt out of the game.

Once the parasitic cycle has run its course banks need a way to forcibly harvest the wealth of those who opt out of the system. To succeed they need a more efficient suction mechanism. Specifically they need powerful centralized government and taxation powers. Stay tuned for Finance Part III.

Finance Part I: Understanding the Parasite
Finance Part II: The Parasitic Cycle
Finance Part III: Divide, Conquer, Enslave
Finance Part IV: The Rise of Cryptocurrency (Coming Soon)

References:
Murray N. Rothbard, Economic Depressions: Their Cause and Cure
https://mises.org/daily/3127
Ludwig von Mises Institute, Austrian Business Cycle Theory
http://wiki.mises.org/wiki/Austrian_Business_Cycle_Theory#cite_note-6
Christina D. Romer, Business Cycles
http://www.econlib.org/library/Enc/BusinessCycles.html

Banking is a very treacherous business because you don't realize it is risky until it is too late. It is like calm waters that deliver huge storms.

Credit creation makes it appear as if the supply of "saved funds" ready for investment has increased, for the effect is the same: the supply of funds for investment purposes increases, and the interest rate is lowered. Borrowers, in short, are misled by the bank inflation into believing that the supply of saved funds (the pool of "deferred" funds ready to be invested) is greater than it really is.

The empirical evidence is strongly on the side of the view that deviations from full employment are often the result of spending shocks. Monetary policy, in particular, appears to have played a crucial role in causing business cycles in the United States since World War II. For example, the severe recessions of both the early 1970s and the early 1980s were directly attributable to decisions by the Federal Reserve to raise interest rates. On the expansionary side, the inflationary booms of the mid-1960s and the late 1970s were both at least partly due to monetary ease and low interest rates. The role of money in causing business cycles is even stronger if one considers the era before World War II. Many of the worst prewar depressions, including the recessions of 1908, 1921, and the Great Depression 1930s, were to a large extent the result of monetary contraction and high real interest rates.

Figure 1: Unemployment Rate and Recessions