Monetary wars. Gary North. Lawyers.

Some people are just blowhards.

There’s a guy named Gary North.  He writes about matters economic.  He’s a good writer.  He keeps his sentences very short.  And pointed.

He’s very sure of himself.  If there’s nothing else you can glean from his writing, you can glean this:  he knows everything there is to know about anything that’s important.  He’s made a fortune, he tells us, writing his newsletters and buying and selling properties and operating daycare centers.

He’s been having this ongoing, online/offline tiff with Ellen Brown – lawyer, best-selling author, amateur economist.  Brown and North agree on a lot of economic problems, but not about the solutions.  Brown doesn’t like a central bank, neither does North.  But Brown thinks money-issuance should be a purely government function.  It’s not clear what North thinks, other than that he disagrees with Brown on this point.  North may tend towards a gold standard with no government money issuance.  But he’s sort of cryptic about it all.

The reason for that?  Before he publicly commits, he wants to be sure he is in a position to profit and crow about it.

Sometimes I think some people were picked on as children and never get over it.  They become misanthropic adults.  They silently, maybe subconsciously vow to attain power so that they won’t be vulnerable to others’ cruelty anymore.  That approach to life and to others increasingly comes to define their opinions, their emotions, their thinking, and their relationships with others.  Their very personalities, in other words.

Before Ellen Brown, there was “Mish” Shedlock, North’s bete noire of 2009.  North engaged in a spirited and somewhat less acrimonious debate with the very popular economics blogger over whether the world was looking at inflation or deflation.

The pattern is the same.  After a few public exchanges, North declares victory and maintains he has demolished his opposition.

In his debate with Shedlock, North tackled the problem of “pushing on a string”, sort of.  But he doesn’t really understand the concept, since he doesn’t really understand how “money” is created in a central bank system, like the one we have.

All money, every last red cent, is loaned/borrowed into existence.  Thus a breakdown of lending and borrowing is simultaneously the curtailment of money creation.

Is that “deflation”?  Kind of.  What difference does it make?  Both inflation and deflation are monetary phenomena.  And monetary phenomena are a proxy for reality, not reality itself.  To the extent you have inflation or deflation the monetary system is not reflecting reality, and since it is supposed to reflect reality that’s a problem, but not as big a problem as when reality itself is deteriorating.  As when people go to war, for example.

Economics is a really important subject and people have strong opinions about it.  Fine.  But it is not the most important subject.  It is a social science.  It is subordinate to philosophy.  Law.  Mathematics.  Physics.  Biology.  It – the discipline of economics – is required to conform to them, not the other way around.

In that sense, North and Shedlock and all the other economists are making the same mistake.  Ellen Brown may not be making the same mistake, but she is making others.

I was over at Crime & Federalism yesterday, offering my opinion (a terrible and foreboding thing, I know) in the comments section that lawyers, not economists, are the key to the financial crisis thing, as long as we don’t abdicate.

But we have abdicated so much, for so long.  I don’t think that pattern is going to change.  And it’s a pity.

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5 Comments

Filed under financial crisis

5 responses to “Monetary wars. Gary North. Lawyers.

  1. Rob

    This is an interesting and meaty post. You may be disinterested in the exercise, but I’d appreciate an elaboration of the sentence, “All money, every last red cent, is borrowed/loaned into existence.” I understand fiat money is “created” or “printed” and has no intrinsic value and nothing backing it. But what about when someone works 40 hours and then is issued a paycheck? How is that money borrowed or loaned? Or is that money simply further down the chain of custody. It doesn’t have to be repaid by the worker but the money still must be repaid by someone?

    Your remark that economics is subordinate to law and philosophy is quite interesting. Hypothetically (hell–practically too), when people are poor and starving they lose respect and stop obeying laws. Economics then comes to trump the law. Similarly, the hungrier people are the less, on average, they care about philosophical issues. I think it’s fair to say that only when a stable economy (not the same thing as “economics” but a stable economy usually comes after discussions of economics) exists do people discuss philosophy.

    Perhaps counter-intuitively, only when economic issues and the economy are stable do subjects like philosophy take precedence. Of course, even as I’m typing I can think of counter points. Aren’t economic considerations really value judgments and aren’t value judgments the purview of philosophy? How a culture distributes wealth, while economic on its face, is a question that demands deeper reflection on how people relate and interact with one another.

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    • Let me first address the money thing. When someone works 40 hours and gets their paycheck, the money to pay them is not thereby “created”. It was created previously by being loaned to someone. The paycheck is a transfer of previously existing money from one party to another.

      The “money” that is loaned is created at the instant the loan is made. It did not exist before. It is true that in one way it is not “backed” by anything. But giving the system its due, it is theoretically backed by the borrower’s promise to repay it. It can also be secured by some real object. Like a mortgage is secured by the home it is lent against.

      Money is a larger category than just currency. In the US system, currency is in the form of Federal Reserve Notes. A note, as you know, is a promise to pay. A $1 Federal Reserve Note is a promise by the Federal Reserve to pay $1 to the “bearer”. It is what is described in the Uniform Commercial Code as “bearer paper”. The Federal Reserve never actually pays the dollar; its promise to do so constitutes legal payment in and of itself, by virtue of its being “legal tender”.

      This is messed up, but it’s of relatively little significance, because only a small portion of “money” is in the form of currency. The phrase “fiat money” refers most specifically to currency.

      Most “money” is held on account, as a balance in a bank account at some bank. In this form, it is always owed by the bank to the owner of the account. But when it was initially created, it was a loan, and it was owed by the borrower TO a bank or other lender.

      Once created, money moves about freely and is transferred from one party to another in commerce. But the creation of it, through a loan, is a tightly regulated event. The loan is made by the lender (usually a bank) who in turn is regulated by the larger system, and the ultimate authority in this system is the Federal Reserve. Which is why the Fed is referred to as a “central” bank. It provides a great deal of centralized influence over the money creation process (i.e., loans) and thus the economy. It does this because somebody – not everybody, but somebody – owes it back to the banking system. Plus interest, but that’s another subject.

      I was going to say “control” and not “influence”, but the latter is better. Because there are limits to the Fed’s power, and there are situations beyond which they can’t control things. The “pushing on a string” problem is one such. The Fed can do a lot to augment bank reserves, which would tend to generate more borrowing and lending, and thus more money creation ex nihilo; but what if the problem is that there are not enough qualified borrowers, and those that are qualified do not want to borrow? The Fed can put the banks in a position to lend, but they can’t make people or companies take out loans from banks.

      This explains why Chairman Bernanke’s famous remark about dropping currency from helicopters over Manhattan was sort of an inside joke. I mean, such a thing could be done: it is not physically impossible. But it is systemically impossible, because this would be newly created money that was put into circulation without anyone owing it back. And that’s the joke. That can never, ever be done in this system. The banking system with the Fed at its core has its tentacles firmly wrapped around every dollar in existence, because it is all ultimately owed – all of it – back into the banking system whence it came, though not necessarily by the person who possesses it.

      And that is the game that is set up. The winners are the ones who possess money, or who are owed money. The losers are the ones who owe money and do not possess it. But the banking system as a whole can never be a loser as long as the system is functioning.

      And that’s why they worry so much about bank failures. It is not that they care so much about this or that bank. But they do care about keeping the system going, and bank failures are a sign that the system is breaking down.

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    • Take a more concrete example. General Motors borrows $50 million. They pay it out to their employees, their suppliers, the tax man, and so on, in pursuit of a hopefully profitable manufacturing venture. The people they pay it out to don’t owe it back to the banking system, but General Motors still does.

      In this way the banking system keeps control of all money, in the sense that someone is always on the hook for any money that has been created. The $50 million did not exist until it was loaned to GM, and GM remains on the hook for $50 million, no matter what they did with it. If their venture is profitable as they expected, they pay it back with interest with other money that has been drawn from circulation. If they lose money on the venture they have a problem. And so does the lender.

      The borrower is always the servant of the lender, just like the Bible says.

      You can see that this system has a certain sense to it. GM is betting that its debt financed venture will be profitable enough to justify the loan. If they win this bet, and like bets, they are a successful company. But they are always beholden to their lenders.

      Their lenders likewise are betting that GM has made a good decision in taking out the loan. To the extent they win this bet and like bets, they are a successful lender. But they are in a position to make demands of GM; the reverse is not true.

      To hedge this bet, the lender can buy insurance in case GM defaults. These are credit default swaps. They can factor the cost of that into the cost of the loan, and pass the expense of hedging the bet onto the borrower.

      Isn’t that sweet?

      This becomes, duplicated over and over throughout an economy, a giant risk spreading process. Everything is interconnected, everyone depends on everyone else, and in that sense it reflects reality. In theory it should work, and does, up to a point.

      What causes it to break down is when the lenders, acting as a group or class, become too self-serving. The system places them in a very advantaged position relative to everyone else: they can create money out of nothing. This is a power – a largely illusory power, but that’s another big subject – that cannot help but be abused. It is Tolkien’s ring.

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    • Regarding the rest of your post it appears I am largely preaching to the choir. In the behavioral sense, yes, economic reality takes precedence. You have to have a well ordered economy before the higher social and intellectual pursuits take center stage. But this does not mean that economics is more important. Eating and eliminating is required in order for a human being to solve a math equation, but that does not make eating and eliminating more important than the math equation.

      And you are very much on the money, in my view, (no pun intended) when you say that economic questions yield ever more fundamental questions that call for reflection and understanding human and social relationships. You wind up discussing philosophy. Even religion.

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  2. Rob

    Thanks for the elaboration. The explanation is clear and concise. I still need to re-read the thing several times, however, before I feel safe to comment further. I will say this though: I’m taking Tax 1 right now and the professor absolutely loves to talk about the promise to repay.

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