The Big-Picture Economy, Part 1: Labor, Imports and the Dollar

It is impossible for the U.S. to maintain the reserve currency and run trade surpluses.

Many well-meaning commentators look back on the era of strong private-sector unions and robust U.S. trade surpluses with longing. The Progressive consensus (articulated by Robert Reich, among others) is that unions gave the working and middle classes bargaining power that has been lost in the decline of unions.

Other commentators look back with similar nostalgia on the large trade surpluses (i.e. current account surplus) of the same era--the 1950s and 1960s.

The two trends are connected. Unions had bargaining power because the corporations on the other side of the table were generally cartels (autos, steel, etc.) that were largely domestic, meaning that they were captive to domestic markets and politics.

All these conditions have changed. Present-day U.S. corporations are global, not domestic; up to 75% of their sales and/or profits are generated in overseas markets, and a similar percentage of their workforces are also overseas, not just for cost reasons but to stay close to the markets generating their profits.

Free-trade agreements restrict attempts to protect domestic markets from overseas competition, and as a result domestic unions have essentially zero bargaining power with either nominally American firms or their global competitors in most markets. The only sectors open to union bargaining power are domestic monopolies or cartels with no overseas competition, i.e. the government, which is why the union movement is now dominated by public unions.

The trade surpluses vanished for two reasons: global competition and to protect the dollar as the world's reserve currency. This is a difficult issue to grasp, so let's do it in parts:

1. When the global exporting nations recovered after World War II, their costs of labor and production were cheaper than American industry, which was hobbled by the strong dollar. For example, $1 bought 250 yen as recently as the early 1970s. Today, it barely buys 100 yen.

2. As a result, cheap imports took market share from domestic producers (believe it or not, BMWs were once relatively cheap), and the U.S. trade balance went negative, i.e. the U.S. ran trade deficits. To settle the deficits, the U.S. had to ship gold to the creditor nations.

3. As the trade deficits expanded, America's gold holdings shrank. The writing was on the wall: continued deficits would eventually shrink the U.S. gold holdings to zero, at which point deficits would be impossible to sustain.
4. As a result, President Nixon closed the gold window and the U.S. dollar floated in a market of supply and demand.

The second half of the story is Triffin's Paradox, an issue I have covered in depth:

What Will Benefit from Global Recession? The U.S. Dollar (October 9, 2012)

Understanding the "Exorbitant Privilege" of the U.S. Dollar (November 19, 2012)

Prior to 1971, the dollar was backed by gold, which acted as a supra-national anchor to the dollar's reserve status. The gold standard inhibited both massive trade deficits and money creation, so it was jettisoned.

The Triffin paradox is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country whose currency foreign nations wish to hold (the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfill world demand for this 'reserve' currency (foreign exchange reserves) and thus cause a trade deficit. (emphasis added) 

The use of a national currency (i.e. the U.S. dollar) as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Net currency inflows and outflows cannot both happen at once.

In other words, the U.S. must "export" U.S. dollars by running a trade deficit to supply the world with dollars to hold as reserves and to use to pay debt denominated in dollars. Other nations need U.S. dollars in reserve to back their own credit creation.

It is impossible for the U.S. to maintain the reserve currency and run trade surpluses. It's Hobson's Choice: if you run trade surpluses, you cannot supply the global economy with the currency flows it needs for trade, reserves, payment of debt denominated in the reserve currency and credit expansion.

If you don't possess the reserve currency, you can't print money and have it accepted as payment. (The euro and yen are quasi-reserve currencies based on the size of the European Union and Japanese economies, but neither acts as the primary reserve and as a result both are vulnerable to currency crises, despite the conventional wisdom that both are on the same footing as the U.S. dollar.)

Unions have little bargaining power in a global economy with surplus labor and mobile capital, and trade surpluses are impossible for the nation possessing the reserve currency. Some view this as a liability, but any currency that is not the reserve currency is vulnerable to a currency/credit crisis and collapse, for currency and credit are tied at the hip through reserves.

Those who disbelieve that the yuan, yen and euro are vulnerable to currency/credit crises--please check in around September 2015.


My new book The Nearly Free University and The Emerging Economy (Kindle eBook) is available at a 20% discount ($7.95, list $9.95) this week. 

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The Nearly Free University and The Emerging Economy:
The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?


We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.
Read the Foreword, first section and the Table of Contents.

print edition (list $20, now $18)
Kindle edition: list $9.95, for one week only, $7.95 (20% discount) 

---

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.

Kindle: $9.95       print: $24

Thank you, James B. ($50), for your outstandingly generous contribution to this site-- I am greatly honored by your support and readership.

Read more...

The Trouble with Asset Bubbles: If You Stop Pumping, They Pop

Asset bubbles are like super-nova stars: once they reach a critical extreme, they implode.

The trouble with inflating asset bubbles is that you have to keep inflating them or they pop. Unfortunately for the bubble-blowing central banks, asset bubbles are a double-bind: you cannot inflate assets forever. At some unpredictable point, the risk and moral hazard that are part and parcel of all asset bubbles trigger an avalanche of selling that pops the bubble.

This is another facet of The Fed's Double-Bind: if you stop pumping asset bubbles, they pop as participants realize the music has stopped, and if you keep pumping them, they expand to super-nova criticality and implode.

There are several dynamics at play in this double-bind.

1. The process of inflating a bubble (for example, the current bubbles in stocks and real estate) requires pushing investors and speculators alike into risky asset classes. This puts the market at increasing risk as everyone is pushed to one side of the boat.

2. Those on the other side of the boat (i.e. shorts) are slowly but surely eradicated as the pumping keeps inflating the bubble. When the bubble finally bursts, there are no shorts left to cover, i.e. buy stocks at lower prices to reap their profits.

3. As the bubble continues to expand, the money available to enter the market and keep prices rising declines. The very success of the pumping process strips the markets of new sources of new money, leading to a point where normal selling exceeds new-money buying and the bubble collapses.

4. Money pumping by central banks and governments follows a curve of diminishing return. One analogy is insulin insensitivity: as the systemic distortions build, markets become increasingly insensitive to money pumping. Authorities respond to this intrinsic process of increasing insensitivity by pumping even more money into the system.

But as with insulin insensitivity, at some point the system loses all sensitivity to money pumping: no matter how much money central authorities inject, the markets refuse to go higher. At this point, the stick-slip nature of bubbles manifests and modest selling triggers a collapse as participants all rush for the exits. Buyers have vanished and there is no longer a bid at any price.

5. Having pumped the assets higher with ever-greater injections of speculative risk and pumping, central banks and states have exhausted their ability to re-inflate assets as they collapse.

This growijng insensitivity to money pumping is visible in the stock market's response to each new QE program: each market advance is of shorter duration, and each rise is less robust than the last one.
This degradation of response to pumping has forced the Fed to pursue a policy of infinite QE, with no time or pumping limits.

The fantasy that authorities can massage their pumping to keep asset bubbles inflated at a permanently high plateau is about to be tested. The Fed is implicitly suggesting that it can adjust the dial of QE with such control that a few billion dollars withdrawn or added can keep the bubble inflated at current levels.
Systems cannot be controlled once risk and moral hazard have been raised to levels where instability is an intrinsic feature of the system. Those who actually believe the Fed can keep asset bubbles inflated at a permanently high plateau will discover their error in dramatic fashion, as the bigger the bubble, the more violent the implosion.

This is the super-nova nature of asset bubbles: if you try to deflate the bubble slowly, it pops, but if you keep inflating the bubble it eventually pops from its internal extremes.

My new book The Nearly Free University and The Emerging Economy (Kindle eBook) is available at a 20% discount ($7.95, list $9.95) this week. 

---

The Nearly Free University and The Emerging Economy:
The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?


We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Read the Foreword, first section and the Table of Contents.

print edition (list $20, now $18)
Kindle edition: list $9.95, for one week only, $7.95 (20% discount) 

---

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.

Kindle: $9.95       print: $24

Read more...

Why the Higher Education System Is Unsustainable (i.e. Doomed)

Higher education is a self-serving cartel that is failing students, the economy and the nation.

That which is unaffordable is unsustainable and will go away. The current system of higher education is profoundly unaffordable: it exists on an immoral foundation of student debt--$560 billion of which is Federal. Enormous expansions of student debt are required to keep the current system of higher education afloat. This chart shows the insane trajectory of Federal student debt:



Our Huge, Stinking Mountain of Debt: Student Loans (September 11, 2013)

But unaffordability is only one reason why the present system of higher education is unsustainable.

Before we start, it’s important to stipulate that the industry’s failings are systemic, and do not reflect the positive intentions and efforts of those working in higher education, any more than the systemic failures of U.S. healthcare reflect the good intentions and efforts of those employed in that industry. Despite the good intentions and hard work of individuals, these systems are broken.

Due to their size and structure, large systems such as national defense, healthcare and education limit the impact of individual initiative. This has several consequences. One is that individuals feel powerless to change the system and so they relinquish responsibility for changing it. As Voltaire observed, “No snowflake in an avalanche ever feels responsible.” A second consequence is psychological. Even if the system is visibly flawed or failing, insiders feel obligated to defend the system and their role in it, for two compelling reasons: self-preservation and the psychological need to believe in the value of one’s place in the institution.

Let’s start with what is self-evident about the basic structure of higher education:

1. As my colleague Mark G. described in Higher Education Cartel, Meet Creative Destruction, higher education is a legacy system based on the scarcity of recorded knowledge (printed and other media) and informed lectures. Both recorded knowledge and informed lectures are now essentially free and readily available. This is the material basis of the alternative system outlined in this book, the Nearly Free University (NFU), whose core is an open-enrollment, universally accessible, individually accredited curriculum designed for the emerging economy and the individual student.

2. The current higher education model is a factory composed of broadcast lectures and mass-distributed reading/coursework/tests. The student moves down the assembly line, attending the same lectures as other students, reading the same materials and taking the same tests. When the student receives a passing grade in a quasi-arbitrary number of courses, he or she is issued a diploma.

This factory model of education is fundamentally unchanged from the era of World War II, when the government expanded higher education from its traditional elitist function to serve the nation’s war production. While factories churned out war materiel with low-skill labor, behind the scenes the war effort demanded a vast increase in engineering and scientific skills. This began the transformation into a knowledge-based economy. The difference between an industrial economy that requires massive numbers of low-skill factory workers and a knowledge-based (often referred to a post-industrial) economy is the knowledge of its workers.

The factory model is obsolete in an era where a variety of nearly-free instructional materials and methodologies enable the student to select the most appropriate approach for his aptitudes and needs.

3. In terms of its financial structure, higher education is a cartel-like system that limits its product (accredited instruction) and restricts its output (credentials, diplomas). (A cartel is an organization of nominally competing enterprises that fixes prices and production to benefit its members. Cartels may be formal, such as the Organization of Oil Exporting Nations (OPEC) or informal like the higher education cartel. Informal cartels often rely on government regulations to restrict competitors’ entry into their market and on government spending or loans to fund their operations. To mask the uncompetitive nature of their cartel, they devote enormous resources to public relations.)

The cartel’s basic mechanism of maintaining non-competitive pricing is to enforce an artificial scarcity of credentials. The cartel’s control of a product that is in high demand (college diploma) frees it from outside competition and free-market price discovery, enabling it to charge customers (students) an extraordinary premium for a product whose value is entirely scarcity-based.

This is the very definition of a rent-seeking cartel, a cartel that extracts premiums solely on the basis of an artificial scarcity. By their very nature, rent-seeking cartels are exploitive and parasitic, drawing resources from those who can least afford to pay high premiums and misallocating capital that could have been invested in productive social investments. The term rents in this context means that the cartel collects a premium without providing any corresponding additional value. The rentier class includes landed aristocracy, who collect rents while adding no value to the production of their tenant farmers.

4. Since the higher education cartel is the sole provider of accreditation (college diplomas), it is unaccountable for its failure to prepare its customers (students) for productive employment in the emerging economy. If a diploma is portrayed as essential, students must pay the cartel even if the cartel’s product (education) is ineffective and obsolete.

5. The four-year college system is profoundly disconnected from the economy.That the cartel’s product has little practical application is not considered a factor in the value of the product (diploma), whose primary purpose is to act as a higher education passport that enables passage to a more expansive territory of employment.

6. The present system of higher education is unaffordable for all but the wealthy.The cartel’s solution to its high prices, $1 trillion in student loan debt (exceeding both credit card debt and vehicle loans), is a crushing burden on both individuals and society at large.

7. The higher education cartel is intrinsically elitist, as its survival as a rent-seeking cartel is based on limiting what is now essentially free: knowledge and instruction. In other words, the higher education cartel charges an extraordinary premium for a free product.

8. The only way the Higher Education cartel can continue to charge a premium for nearly-free products is to actively mystify its product (by attributing secular sanctity and civic value to its diplomas) and promote an artificial value for this product using public relations and political lobbying. In other words, the higher education cartel operates on the same principles as other informal cartels: it depends on the state to fund its operations, and it uses public relations to mask its cartel structure and systemic failure to fulfill its original purpose.

The higher education cartel’s dependence on federal funding and enforcement of student loans is readily visible in the Federal Reserve’s Flow of Funds report, Table L.105, which shows the Federal Government's assets and liabilities. Direct Federal loans to students have exploded higher, from $93 billion in 2007 to $560 billion in early 2013. This gargantuan sum exceeds the gross domestic product (GDP) of entire nations—for example, Sweden ($538 billion) and Iran ($521 billion). Non-Federal student loans total another $500 billion, bringing the total to $1 trillion.

A variety of cultural traditions have effectively obscured these self-evident truths, even as the system’s diminishing returns and rising costs have rendered it unsustainable.

The alternative is equally self-evident: knowledge and instruction should be nearly free, and students should be accredited directly, dissolving the monopoly on accreditation that gives higher education its cartel-like power to extract artificial premiums.

I am fully aware that this critique is exceedingly unwelcome to those whose livelihood depends on the higher education cartel. I am also aware that this critique upends most or all of the secularly sacred cultural traditions that the higher education system nurtures to justify its premium.

This is the key question: does the current higher education system exist to serve students, or does it exist to serve those employed by the system? Those with vested interests in the system will naturally answer “both,” but to answer this question fairly, we must ask if an alternative system that accredits each student could serve students more effectively than the current system of accrediting schools.

Let’s imagine another system, one in which the Nearly Free University and the existing higher education cartel compete to prepare students for individual third-party accreditation of the critical skills and knowledge base needed to establish and maintain a livelihood in the emerging economy.

If the Nearly Free University costs $4,000 for a four-year program (not including room and board) and the higher education cartel charges between ten and 25 times more for the same number of courses, then the higher education cartel had better be 25 times better at preparing students to establish and maintain a livelihood in the emerging economy, or it will lose its customers.

Limiting access to accreditation to skim enormous premiums based on scarcity is not just unethical; it is intellectually dishonest. Cartels are intrinsically extractive, exploitive and parasitic, and no amount of vested-interest justification changes this reality. Creating an artificial scarcity is financial manipulation, and all financial manipulation is ultimately a form of theft.

Progressives, by the very definition of their creed, must support the dissolution of all cartels. Those within the higher education system must choose between financial allegiance to their cartel or refusal to support cartels.

This essay was drawn from my new book The Nearly Free University and The Emerging Economy (Kindle eBook) which is available at a 20% discount ($7.95, list $9.95) this week. 

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The Nearly Free University and The Emerging Economy:
The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?


We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Read the Foreword, first section and the Table of Contents.

print edition (list $20, now $18)

Kindle edition: list $9.95, for one week only, $7.95 (20% discount) 

---

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Once we accept responsibility, we become powerful. 

Kindle: $9.95       print: $24

Thank you, readers, for your generous contributions to this site-- I am greatly honored by your support and readership.

Read more...

The Fed's Double-Bind

The Fed will blow up the economy if it continues money-pumping, but it will choke off the fragile recovery if it cuts back its money-pumping.

The Federal Reserve is in a classic double-bind: as its policies to boost growth bear fruit, interest rates rise, threatening the very recovery the Fed has lavished trillions of dollars of quantitative easing (QE) to generate.

Higher growth naturally leads to higher interest rates, which then choke off growth.

The Fed's goal was a self-sustaining recovery, in which growth reaches "escape velocity," i.e. is strong enough to support higher interest rates.

But the pursuit of that goal via trillions of dollars of asset purchases has inflated asset bubbles in stocks and real estate. The Fed's goal was to push speculative and institutional money into risk assets such as stocks, generating a "wealth effect" that was supposed to spill over into the real economy via higher borrowing and spending.

The pursuit of "the wealth effect" via inflating asset bubbles has created another double-bind: now that markets have become dependent on Fed money and liquidity pumping, the Fed cannot reduce its QE money-pump (currently $1 trillion a year) without tipping the stock market into free-fall.

If the Fed continues its massive monetary easing programs, asset bubbles will only inflate to speculative extremes, to the point where violent bursting becomes a matter not of "if" but of "when." (This is also known as "the music stopping.")

If the Fed cuts back its money-pumping and asset purchases, interest rates will rise, as interest rates will seek a market level that isn't pushed to near-zero by the Fed's financial repression.

Higher rates will choke off tepid Fed-induced growth. We already see home refinancing rates plummeting to 2009 recessionary levels.

So the Fed risks blowing asset bubbles that will devastate the economy if it continues the QE pumping, but it risks killing the tepid recovery if it cuts back its pumping. Darned if you do, darned if you don't.

Put another way: if growth is needed to boost corporate sales and profits, but growth leads to higher interest rates and reduced central-bank suppport of markets, this is a double-bind with no exit.


Note: blog entries and email will be sporadic for the next few weeks. Your patience and understanding are greatly appreciated.


My new book The Nearly Free University and The Emerging Economy (Kindle eBook) is available at a 20% discount ($7.95, list $9.95) this week. Read the Foreword, first section and the Table of Contents. 

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The Nearly Free University and The Emerging Economy:
The Revolution in Higher EducationReconnecting higher education, livelihoods and the economy
With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?


We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Read the Foreword, first section and the Table of Contents.

print edition (list $20, now $18)
Kindle edition: list $9.95, for one week only, $7.95 (20% discount) 

---

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.
Kindle: $9.95       print: $24

Read more...

The Infrastructure for a Community-Based Economy

Digital technology enables a community-based, full-employment economy that operates independently of the neofeudal state-corporate debtocracy.

Longtime readers know that in my analysis the economy has three interacting parts: the state (government) and the market economy (dominated by banks and global corporations) which together comprise the state-corporate debtocracy, and the largely forgotten third part, the community-based economy.

This part of the economy has been hollowed out, undermined and replaced by the state and corporate-banking sectors to the point that most of us have no understanding of what a community-based economy could be.

Correspondent Simon H. explains how the infrastructure for a community-based economy could work, using existing digital technologies. This is a revolutionary understanding of how ubiquitous digital technologies could serve as the foundation of a revitalized, full-employment economy.

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A Community Credit Based Trading Infrastructure

During the financial crisis there was a very real chance that without intervention the whole financial system could have collapsed. If this had actually happened then how would we have coped? Without being able to draw money out of cashpoints or make electronic card payments how would we carry on making exchanges with one and other which is the fundamental mechanism that enables an economy to function as such? Employees would receive no wages but would they carry on working regardless? In terms of a thought experiment - what would our social landscapes have looked like.

In the absence of any backup infrastructures, it is possible that communities and societies could have completely broken down and householders would have found themselves trying to defend their homes and precious resources against a tidal wave of crime. Reading comments on the web, particularly from US citizens, it is clear that those who believe the system will inevitably collapse are preparing by buying weapons and ammunition and stock piling tinned foods etc.

This is a sad indictment of the isolationist characteristics of the functioning of the post-industrial world which has effectively deconstructed communities and their ability to understand, define, develop and protect their collective interests.

This bleak outcome can only materialize because there is no adequate sense of who and what constitutes the community and that consequently there are no community based backup and disaster recovery infrastructures.

It is possible given a systemic collapse, that communities would have joined together in an ad hoc fashion and pooled their resources to collectively manage their survival and security in order to make a transition to some new financial system and community stability.

In such a situation, tightly knit communities with a strong sense of solidarity and good organizational skills and communications would be best able to distribute their resources and effectively manage their collective security.

Given such a systemic collapse, communities would clearly need some kind of infrastructure for managing these requirements. Communities would essentially have to know who they are and what they can do. It would not simply be a case a pooling resources such as food and fuel to ensure that they are used and managed in the most efficient way, but also pooling and organizing community time, labour, skills and talents most effectively.

In such circumstances every member has the opportunity to make some kind of contribution to the collective effort. One does not need to be interviewed or compete for positions one simply volunteers whatever you have to offer. No-one but the most elderly of infirm would be unemployed as such - as everyone is invited to pitch in and to contribute their time, resources and efforts in order to keep the community economy functioning as such.

One could leave this sort of backup infrastructure to chance and its being implemented to various degrees of success across all of our communities, or one could design the basic organizational and communication infrastructures now while there is still time. Such a technological infrastructure would only need to be developed once, but in principle if designed correctly and effectively - could be deployed and used by all communities across the world.

Before I go on to outlining how such a community based system of exchange could function I would like to look at the phenomenon of PayPal and eBay as they have functioned within the internet revolution and consider what aspects might be useful for a community based economy.

As an internet programmer, the first e-commerce application I wrote back in 1999, was integrated with the WorldPay on-line payment system owned and run by the Royal Bank of Scotland. In order to be able to set up an account and start trading on-line meant that one had to already have an existing business account and stump up a large sign-up fee along with yearly service charges and individual payment fees. The system was infrastructural restrictive in these terms and effectively this allows for the system’s control and regulation of participants.

For any budding e-commerce entrepreneurs, it placed far too many bureaucratic and financial hurdles in the way to begin trading on-line. This was essentially a limitation imposed by the infrastructures of the ruling financial institutions at that time and the limited range of options available to produce, buy and sell stuff.
When eBay and PayPal materialized on the internet they bought new infrastructures, interfaces and rules as to what was required to become an entrepreneur. Originally conceived as a simple auction site, EBay quickly evolved into the infrastructure of a free market place that enabled individuals to easily establish themselves as entrepreneurial traders.

The great thing about this business model is that the eBay system allowed for the blurring of the distinction between being a private citizen and a businessman. One could easily start trading in a small and unofficial way and slowly transform oneself into a fully-fledged trading entity. In order to trade stuff, all you needed was a supplier and buyers. You didn’t need retail premises and providing your supplier could deliver to you in a reasonable time frame you did not to even hold any stock. You could sell on EBay, have the supplier deliver the products you had sold within a day or two and then repost them on to the buyer within an acceptable time period.

If you are unemployed, this is a virtually cost free business model to set up which only requires getting your profit margins right to ensure that you can cover the sales and transaction fees and still earn a productive living. All you need to do is find suppliers and buyers.

As much as eBay provided the critical and simplified infrastructure for a new more democratically accessible trading system to emerge, then it was also essential for a simplified and more democratic infrastructure to emerge to facilitate exchanges in terms of payments.

It was no surprise then that EBay acquired they PayPal payment system as it was the missing piece of the jigsaw within their business model.

Compared to the demands being made by the traditional banks who controlled e-commerce prior to PayPal coming on the scene, establishing a PayPal account in order to receive money on-line was a complete doddle. One didn’t need to have savings to make any large advance payments, there were no annual service costs and the only costs borne by any budding entrepreneur was a cost-effective payment by payment transaction fee.

This made payment processing costs far more manageable The more you sold the greater the fees, but if your business plan was a complete failure, then you would lose nothing in fees to the payment service provider.

One wonders how great a role the eBay and PayPal systems have played in keeping families solvent since the financial crisis and how many businesses have been started as a direct result of these new infrastructures?

What must be abundantly clear is that the creation of new infrastructures has led to revolutionary changes in ways that we can be productive and earn some kind of living when the traditional system has reached capacity and has no room for for a growing population who find themselves on its margins.

Whilst eBay, PayPal and social media sites such as Facebook, have enabled individuals to earn money towards making a living, or to provide some form of basic virtual communities based on personal and referred friendships and common interests, none of them have a community-centric element based upon strict geography.

They do not enable any community-based immediate forms of trading and exchange, nor do they facilitate communities discovering, organizing themselves, managing themselves, expressing their interests and ultimately, fully realizing themselves and their potentials.Part of what is missing then, is an infrastructure that fulfills the basic trading functions of eBay and PayPal, but which is individually owned, maintained and run by communities themselves.

In terms of a community based economy, the fundamental requirement is for the members of a community to be able to instantly and freely advertise, manage and exchange the goods and services they have to offer and also operate an entirely independent system of payments or community credits - controlled by the community itself to facilitate its exchanges in order for a community centric economy to function in its most efficient and independent infrastructural form.

It is important to note here that both eBay and PayPal are not independent infrastructures as they are directly tied to the banking and taxation systems of our existing infrastructures. As such, in the event of a collapse of the financial and governmental revenue systems, any savings each individual has with PayPal are liable to disappear or be confiscated. In terms of their globalization and centralization they are relatively easy for our existing infrastructures to monitor, tax or confiscate should the need arise.
The PayPal payment system has only designed itself with such a flaw because of its global and national reach and that it saw a necessity for users to be able to sell directly in their own nationally defined and controlled currencies or exchange goods via the mechanisms of foreign currency exchange infrastructures.

This is necessary within a national model of supply and demand, where a trader’s supplier would naturally request payment in their own nationally acceptable currency, but there is no necessary requirement whereby a community based economy/infrastructure would need to function in the same way with the same rules and requirements.

However, given a systemic financial breakdown and the confiscation or collapse in the credibility of its credit, it would be possible for PayPal to issue all its members substitute PayPal credits which it could electronically print and issue, just as central banks have printed their own credits via quantitative easing. In this case however, the credit created would go directly to the masses and not to the tiny minority who have benefitted from central bank interventions.

At the end of the day, currency systems are not based upon intrinsic values or precious metals, they are based upon relationships of trust. In the absence of any other reliable currency, a PayPal credit could function just as efficiently providing we all accept and share a belief in its ‘value’ which is nothing other than its ability for exchanges to efficiently take place. I could accept PayPal credits when I sell something and the system stores the credits I receive until I need to convert them into goods that I need in the future.

If we had a community based trading and payment system along the lines of the eBay and PayPal systems then this could also be based upon a system of community issued credits. All a ‘currency’ has to do is facilitate exchanges to take place and provide for the accumulation and storage of credits.
If we accept a community credit as a basis for exchange and have faith in its ability to service this simple function then that’s all we need.

There are many advantages to a community based system of credit. Firstly it cannot be taxed or monitored by national agencies. Governments cannot confiscate or tax community credits as they have no way of spending them. They can only be ‘spent’ as such, within the community that issues and uses them. They are also not subject to any speculative activity or market collapse.

Once a community can effectively issue its own credit as virtual currency, the community can exercise QE in its own right as it can electronically create credits and then allocate them where it believes they are needed. In doing this it is merely creating or enabling a claim on the future efforts of all its participants and is actually enabling its members to participate and for community trade, production and development to take place on its own terms.

Whilst the majority blindly accept QE on a national scale despite the fact that it only favours 1% of the population, then a community centric form of QE could not make credit allocations on such a basis. It would know and see precisely where investments needed to be made and distribute the benefits of its investments across the community as it needs everyone to be strong within it and realize that it is only when the community realizes that its strength, prosperity and security is wholly reliant upon the all-inclusive integration and well-being of all its actors.

This also has an effect that all wealth generated through community trade, will always be directly circulated and multiplied within the community itself.

Once we have the infrastructure for a community based trading and payment system that is not possible to tax or regulate by national entities, then we need have no distinction between being a private citizen and an entrepreneur, no distinction between being unemployed and employed. There are no bureaucratic barriers to becoming productive and useful.

If you wanted to roast chestnuts and sell them in a market place tomorrow you could just go out and do it with no worries about regulations as you are technically not selling as such - merely exchanging and building credits and personal and community credibility within a self-regulating system based upon community unity, trust and common interests.

The more localized the system of trust, the more reliable it must necessarily be - as to abuse such local trust is to abuse someone whom one is very likely to have embarrassing social and economic contact with on a regular basis.
How could such a system even begin to be established given the basis of what would be initially, a zero level of trust in its systemic practicability?

A community based trading system could be established whereby every member of the community which joined it would receive a certain amount of community credits free. This could be the equivalent of a week or a month’s wages.

Initially then, it would start by enabling its members to trade and exchange things that they don’t use or are going to throw away.

A broken laptop has no value to one person, but another person with the knowledge to repair laptops who accumulates broken laptops and takes functional parts from donor machines to repair more viable machines, can be productive and useful and spend and earn community credits. Providing you acquire the skills to do this, and you can download service manuals which give step by step instruction to take laptops apart and there are hundreds of instructional videos on YouTube showing you how to repair or maintain just about everything, then you can easily make a self-trained transition from being unemployed to a productive and useful community member.

Similarly you might want to dispose of furniture or white goods or pretty much anything. Most of our stuff can be recycled in that there is always someone who can find a way to make use of it and hence rationalize its production by ensuring that it is properly used and consumed and is not simply a dust-gathering waste of resources.

Essentially this not only enables a basic community trading infrastructure it also establishes a highly efficient recycling infrastructure.

Unlike basic bartering systems our community trading system enables us to buy and sell things directly and to accumulate and store our community credits for when we will need them. All we need to do is establish the technological infrastructure that enables community trading to take place in its simplest and easiest terms so that it will be ridiculously easy for me to advertise what I want to sell and for you to buy it if you need it.

In order to gain ‘currency’ as such, all a system has to do is show than it can function effectively. Once we have proved that a community credit based system can function effectively and we realize that we can profit from our exchanges, we will have built a systemic trust in that system and we can begin to build upon what is possible to exchange. In addition to buying and selling second hand items one could buy and sell new items and also trade services.

All one needs for this to take place is the community infrastructure and a collective faith in its ability to serve its purpose which is simply enabling trade and exchange of goods and services to take place. Such a system can function alongside our existing infrastructures but most notably would carry on functioning in the event of the systemic collapse of our traditional financial infrastructure. It needs to be designed so that it is entirely independent of external financial systems and entirely controlled and regulated by the community of members themselves.

This is just a small part of the infrastructure that needs to be put in place. Initially what communities really need is an infrastructure that enables them to establish and manage clubs based around their own common interests. These could be sports, drama, arts, cookery, wood working, political, literature, environmental, developmental etc., etc.

The point being that given the right infrastructure, the community could be an economy or grand club of its collective clubs and interests. One could find them all in the same place and take part in any.
It is only when such infrastructures have been put in place that communities can begin to discover, know and understand themselves and realize their potentiality. It is only when a community

infrastructure is established that an effective community intelligence can emerge and be exercised.
This would enable communities to build a sense of unity and a real independent identity along with the communications and trading infrastructures required to successfully deal with and survive systemic crisis.

Build it and they will come to realize their own fields of dreams.

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Thank you, Simon, for providing the intellectual and technical groundwork for a community-based economy.


Note: blog entries and email will be sporadic for the next few weeks. Your patience and understanding are greatly appreciated.


My new book The Nearly Free University and The Emerging Economy (Kindle eBook) is available at a 20% discount ($7.95, list $9.95) this week. Read the Foreword, first section and the Table of Contents. 

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The Nearly Free University and The Emerging Economy:
The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.
It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?


We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Read the Foreword, first section and the Table of Contents.

print edition (list $20, now $18)
Kindle edition: list $9.95, for one week only, $7.95 (20% discount) 

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Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Once we accept responsibility, we become powerful.

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Read more...