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Renegade Economists 284
Leading economics – energy – environment commentator Nicole Foss joins to discuss the state of finance. She is in Australia on an extensive speaking tour. Support her work and your economic literacy by attending!
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KF: Nicole, in terms of systems thinking, how does The Automatic Earth function?
NF: Well, basically the idea is to look at as many different subsystems of reality as possible and understand how the system works – what the time constants for change are in that particular system, and that allows you to prioritize which systems are going to be the key drivers at what time. Then the idea is to integrate those subsystems and get a picture of reality. We prioritize finance because finance has the shortest time constant, so it is going to be hurdle number one over the next few decades. Then, we would look at energy as being hurdle number two. Then we would look at resource shortages, carrying capacity, population, pollution, climate, psychology, realpolitik and all manner of other things – so the idea is to have the biggest possible “big picture” so people can navigate their way through a time of uncertainty and upheaval.
KF: In more detail, explain why finance is first cab off the rank.
NF: Because the world of finance is mostly virtual, and the time constant for change in virtual systems is really short. So what happens is when you reach a limit in finance – and these limits are endogenous, you don’t need to trigger an event – you reach a limit in finance, and the changes can be extremely rapid. So if you look at what happened in Cyprus for instance, in two weeks they went back 50 years – they went from being a modern economy to having the banks closed, the ATMs empty, the shops shelves mostly empty, a cash-only economy, capital controls, and the value of these banks went from their full value down to next to nothing in a very short space of time. And so when you have the value of human promises suddenly disappearing, you crash the system.
So the money supply is mostly credit – the vast majority of it is credit, which just means human promises to repay – these have value as long as we believe the promise. As soon as we stop believing the promise, the value goes away all at once. Then you can end up with a tiny fraction of what was previously your money supply. Then because there is no money in circulation, – and money is the lubricant in the engine of the economy, like motor oil is the lubricant in the engine of your car, -because there is no lubricant, the engine seizes up on you. You can’t collect buyers and sellers, producers and consumers, and you have an economic depression. So, because this can happen so fast and it is a very large impact, it amounts to crashing the operating system. When you crash the operating system, you can’t do anything with your resource base until you reboot the operating system. That’s really what these periods are, and this is why it’s the first hurdle because it simply happens so quickly.
KF: How then can we look to reform the finance system when we’ve essentially forfeited democracy to these banksters?
NF: I don’t think you can reform it – I think it’s beyond anybody’s control and history teaches that we have these large structures that rise and fall all the time. This is just our form of empire – our form of economic imperialism, and we’re going to see that collapse and then we will do something different. But, I don’t think it is a question of reforming what is already there – I think it will collapse all by itself. We don’t really have to do anything about that, we just have to concentrate on building something that comes out of the other side.
So it is “how do we reboot the operating system?” – there is no point trying to build a better dinosaur, let’s be mammals. The dinosaurs are going extinct anyway, no matter what anybody does. So let’s concentrate on building new systems of government from the bottom up – new systems for money, new operating systems. That tends to be my focus – I would say that all the large scale things will not work when you have a very large scale economic contraction, because trust determines effective organisational scale. You lose trust when the economy contracts – you lose political legitimacy at that high level of organisation, so those things over time go away anyway, and then you need to work at an effective organisational scale that’s much smaller and reboot the operating system from there.
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Renegade Economists Show #279
It’s time for an overview of the current state of the residential property market in Australia. Two words can describe it, says Dr Gavin Putland, “suspended animation”. Interest rate reductions have not made any substantial difference to housing affordability. First home buyers are even less inclined to buy now than last year. This limited change has been facilitated by record-low interest rates.
Renters have no encouragement to buy, and nor should they, says David Collyer, while the costs of buying are so far from long term averages. Stamp Duty, says Dr. Putland, is simultaneously penalising home-buyers for wanting to move. A land tax would make this huge financial burden redundant.
The “Don’t Buy Now” campaign continues to grow, encouraging renters to avoid a lifetime of record mortgage debt. No other generation has been forced to pay 40% of their income on somewhere to live, let alone being told its ‘perfectly normal’.
“Land tax assists with affordability because it imposes a cost on holding the land and hence it imposes a cost on sitting on the land waiting for the price to rise,” says Dr Putland.
Meanwhile, another secret subsidy has been revealed for Victoria. Land inside the urban growth zone (but outside the Precinct Structure Plans) has been deemed agricultural by default, exempting land-owners from Land Taxes. David Collyer has uncovered this remarkable news and explains the consequences on the show.
Locally, Melbourne is due to see another sky-scraper emerge. Dr Putland and Collyer discuss what this means for Victoria now and in the future.
Podcasters also can hear an assessment of the effect of Cyprus’ bailout conditions and alternatives.
Renegade Economists Show #279
This week on Renegade Economists we’re talking to Michael Hudson, economics research professor at the University of Missouri Kansas City, prolific writer and author of half a dozen books on the United State’s economy.
Michael’s been paying close attention to China as they prepare their speculative report on the next 30 years. Land taxation, a passion of ours at Earthsharing, is high on the agenda, according to Michael. The government are developing the infrastructure in the Western and Southern regions, and are looking to change the taxation system to make the increasing value of the land pay for these developments. “It’s what followers of Hengry George used to dream about!” Micheal says.
We’ve already had a bit to say about Chinese reforms around property, such as the doubling deposit buyers need to purchase their second home from 30% to 60%.
Meanwhile the United States is seeing record corporate profits, but is it an illusion? These profits, Micheal Hudson says, are financial profits not based on industry or any tangible creation of value. The employment sector is still failing with an unemployment rate of 9%. Shops and malls are empty and half of the population of Detroit has left, once the fourth largest city in America.
If you haevn’t caught this once yet, here’s a great clip about Micheal Hudson, a fount of knowledge – this interview covers a lot of the hot economic topics for the year: peer-to-peer banking, Wall St, American taxation policy, German gold repatriation. Don’t miss it!
Karl Fitzgerald (KF): It’s seems that the most exciting things happening around the planet are not happening in a democracy, they’re happening in China. The new Premier there Xi Jinping has a real reformist agenda.
Michael Hudson (MH): I think there’s a whole new generation coming in. I think they do things collectively in China, and then I was there a few years ago I was really happy to see how there’s a feeling of, uh, there are people in their 20s and 30s that they can really change society. That they really can get the reforms that they want to make it a really fair and prosperous society and I haven’t seen that degree of optimism in any other country. When I go to Russia for instance all the people could say is “Can you get me out of here? Can you get me to the United States?”. When I go to Germany they’re very down. But in China they’re very optimistic that they can change the whole structure of the system. And they just announced they’re publishing something later this month called “China in the next thirty years” where they have my article leading off, I’m told, and it’s about the need now to begin to tax land. The one thing that they haven’t done so far is address the tax problem.
What are you going to do to prevent Chinese putting all their money into real estate and just turning China away from a productive factory-based economy producing things into a speculative economy like the United States? They realise that’s what they’re trying to avoid. There’s been a shift in emphasis away from Shanghai which was sort of Thatcherite Marxism, if you can imagine that, towards Beijing and towards the west and there’s an attempt now to begin reviving or building up the western regions and the southern regions and they realise they don’t want this to become just a real estate promotion project, they want it to enrich the entire people and they want the tax basis basically to fall on the value of the land the government is building up by it’s enormous expenditure on transportation, it’s capital investment in roads and railroads, in new buildings. And so it’s what the followers of Henry George used to dream about! And in fact in China they’re aware of the fact that it goes back all the way to Sun Yat Sen, although they’re doing it they realise in the last hundred years there’s been a symbiosis between banking and real estate. And they certainly don’t want real estate to be bid up in prices by borrowed money and just meaning more debt and more debt for society as occurs in the western nations.
KF: Well they are opening up their financial sector there and there has been some concerns about these new developments. What do you see there?
MH: I don’t see them opening it up. There’s talk in America, the accusations by the Obama administrations that China has artificially been keeping its currency down and urging them to open their capital markets. But there’s so much liquidity in China, so many savings that if China did open there would be a huge outflow, of a diversification of investment outside of China, especially away from Chinese real estate into Western stocks and bonds, real estate, mining and Chinese currency – the RNB – would actually go down, rather than rise. So I don’t see their loosening these controls any time soon.
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The lure of the bureaucrats golden pen tick is set to distort democratic processes as we read today in Minister’s $10,000 dinners:
Planning Minister Matthew Guy helped to approve applications made by Melbourne property developers who had attended secret dinners with him and the then chief of the Baillieu government’s urban renewal authority after paying a Liberal fund-raising arm $10,000 each.
Plausible deniability was ensured by the $10K donation falling under the $11,500 declaration threshold. However, Premier Baillieu had banned ministers attending fund-raising events.
Liberal Party Planning Ministers have a habit of golden pen ticks that land them in hot water. Former Planning Minister Ian Maclennan was behind the controversial Philip Island re-zoning row that sent Matthew Guy quiet last year.
It would be remiss not to mention the golden pen tick in light of the NSW ICAC Inquiry, where former Minister for Mineral Resources Eddie Obeid saw during his tenure the millions to be made in re-zoning land from rural to mining. Now tipped as the biggest corruption inquiry since the Rum Rebellion, we see that Liberal insiders have also been caught up in the scandal.
For those outside the game, we can only watch in wonder at the secret world of deception that continues to push ‘democracy’ as a healthy process for decision making. The 1% can hide in private dining rooms but must realise that the awakening of the people cannot be too far off.
Renegade Economists Show #278
This week on Renegade Economists we’re talking to Phil Anderson, an economic forecaster of business cycles and director of the Economic Indicator Service. Phil’s an optimist and is expecting this cycle to be a strong one. Cheap energy and cheap money are the triggers for a new American future. We look into the crystal ball and discuss wide-ranging economic issues that we’ll be facing in the years to come.