Yes I agree, it is the trouble with words, each can mean many things and I would think “control” in engineering just considers what parameters have what affects and how can they be attuned to a desired outcome – Bright Spark may have a better definition. So in the case of an economy, outcome aims might be, say, a productive, equitable and socially stable one.

It is captivating the notion of engineering to economics but while it certainly cannot do any harm to analysis, radical new frameworks of economics based on them might have unexpected consequences. Sorry to say and it may be just a lack of my vision or limited understanding, but as example, I’m left wondering how a company will attract investment if it’s share price stays fixed at $1 for 25 years and particularly so any new companies with say great technology concepts but with no cash to pay dividends. Also is not share ownership not a quirk of legislation but rather to the heart of capitalism, private ownership and is about shared risk in an enterprise and of course shares can be diluted or bought back by the company and are not bonds a very different dynamic relating to debt creation and secure interest payment.

While we romance from possible reaction to such initiatives - to housing; if our goal is equitable home ownership, why not just create feed back loops that encourage owning our homes. As example: at the moment the incentive is to the housing investor/developer (and the banks also who have profited immensely with capital appreciation and interest on that and of course its been detrimental to the next generation wanting home ownership) with half the capital gains tax to savings; so why not say reverse this to double the capital gains on property investment, then add to that 50% tax on gross rent and then say also give some form of rebate on tax for mortgage payments and new home purchases. Then say also double tax on bank profits above 10% and while we are at it reduce by 25% the capital gains tax on investments in new technology developments that are held longer than one year and 50% if longer than 2 years. Then also if the charts show a deviation of house prices to GDP, increase such measures or reduce accordingly. I’m sure this could be worked out better but that idea anyway.

Also, if I may, regarding Central Banks: This is probably a debate you are aware of and that many are entrenched in and it is unlikely to be resolved here, but I think the following emphatically needs to be looked at: is Central Banking actually government regulation? Briefly some points- the central banks are independent of Government, have some history of not following government agendas and their leadership is drawn from the banking fraternity; in the US the Federal Reserve stock is held by the dominant banking interests and not just of the US; such stock can only be held by the banks and the FED paid a total dividend of just under 1 billion dollars for 2007; and the FED is well into its process of swapping it’s previous $800 billion surplus (public money) to these main banks for bad debt, and our banks are accessing the futures fund to the same end and the process of transferring losses to the public continues onward (as Marc Faber apparently puts it, “profits are privatized and losses are socialized”). Hence in whose interests have central banks acted the private banks or the public?

To the notion Central Banks are in actuality an extension of the private banking system, I found this quote attributed to Thomas Jefferson fascinating:

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

– Thomas Jefferson, Letter to Treasury Secretary Albert Gallatin (1802)

[I also posted this quote on Contrarian’s web site (as dt), see http://cij.inspiriting.com/?p=489#comments

I’ll make a few comments here, but largely the debate necessitates that I lay out in full detail my model of money creation. It is a large part of why I disagree with Contrarian over the viability of a 100% reserve system.

It’s also why I agree largely with Brightspark et al that engineering methodology should be used to understand the economy at a broad brush level–if not to “control” it, which I think is how some of those not so acquainted with engineering methodology might interpret engineer-speak.

I won’t get a change however to do that till after August 26, when I have an immovable book (chapter) writing commitment on a different topic. So briefly here:

This experience of Central Bank mediated finance has made me much less a fan of government regulation. I agree with Contrarian that the scale of debt we’ve got to simply couldn’t have occurred in an unregulated system, since systemic failure would have set in at a far lower level of debt. So the crisis we’re entering has, to a significant degree, been caused by government intervention in the form of central bank manipulation–especially under Greenspan.

However, to take a leaf from Brightspark et al., that occurred because Greenspan and friends were using an invalid model of the system. One of Greenspan’s inspirations was Ayn Rand, so paradoxically in a way he was closer to the Austrian School of thought than the neoclassical (and certainly Keynesian). But his interventions rescued the system from each crisis, only encouraging it to go further in that direction.

An engineering feedback model of his behaviour and the systems could easily have forecast this outcome.

So Central Banking has been a failure–as it has been practised. No argument. But what would free banking look like? The 19th century American data gives a fair simile there, and there was a substantial financial crisis roughly every 20 years–because the same enducements to Ponzi Financing existed in the legal framework of that society as exist in ours.

This is the issue. “Free” does not mean “without laws”. So the laws that define property play a role in any market system–that can’t be avoided. If you have laws that make it possible–and temporarily profitable–to speculate on asset prices with borrowed money, then you will have periodic crises.

The only way to truly stop this phenomenon is to redefine property itself so that speculation on shares and land is far less profitable. IF, for example, shares in a company were issued at $1 each, had a 25 year life, and were they redeemed by the company for $1 in 25 years time, there would be a damn sight less profit available in share speculation.

The fact that shares live forever (or until the company goes bankrupt), whereas bonds have a limited life, is a quirk of legislation. It is a side issue as to whether the banking system is “free” (no government ordained central bank) or “regulated” (wit a government ordained central bank).

To me, the real problem with capitalism is the secondary market for assets. That’s the cause of this current crisis–and all its predecessors too, under relatively “free” banking. A Ponzi-financed, debt-driven driven asset price bubble pops, credit evaporates, and the economy goes into a funk.

Here the engineers come into their own: design a system where that particular positive feedback loop doesn’t exist. It’s not an attempt to “control” as non-engineers understand it: it’s simply the use of engineering methodology, which emphasises the importance of feedback loops, to suggest the removal of a particularly powerful positive feedback loop and see what happens.

In that sense Contrarian, your suggestion of 100% Reserve banking is exactly the same: you see an unstable positive feedback loop in fractional banking, and want to remove it.

On that point, I disagree–again, from having applied a feedback-aware methodology derived from engineering to look at this issue. A complete explanation will have to wait a full post after August 26, but in a nutshell, fractional banking is only one way that credit can be created in a banking system.

The second is the capacity of a banking system to create credit money (and hence also debt) in the complete absence of government money and a fractional reserve system. This capacity would continue to exist even in a 100% reserve system, and would I believe undermine it just as the same capacity has undermined the fractional system we live in.

Hence I believe that we should change the legislative framework to reduce the appeal of Ponzi speculation.

That will have to do for now. I’ve just sent out Debtwatch No. 25 and I’ll now revise that as a post for the blog. Thanks again tout le monde for a fantastic discussion.

“The name mirrors that of the “Dutch disease” [could have an Australian parallel now], which was coined to describe the impact of the rapid development of the oil&gas sector in the Netherlands on therest of the economy: the high profitability of the new sector captured a high share of investment, thus weakening other parts of the economy, which were partly neglected; in addition, the fact that it created a large boost to exports pushed the currency up, thus further making other industrial activities uncompetitive in what was a largely export-oriented economy. The “Dutch disease” describes that shrivelling of the rest of the economy as money flowed to oil&gas producers.

[I]n today’s economy [global], the cannibalistic sector is not oil&gas, but finance. Bankers, through debt, have the ability to convert future cash-flows into immediate profits. Such immediate returns attract more capital, talent and resources (which cannot go to other sectors) and impose an iron discipline on the rest of the economy … So not only the rest of the economy gets squeezed for any extra drop of profitability, but the language of financial analysts becomes the dominant one of not only economic discourse but also political discourse.

[O]ne of the more attractive features of the financial world, for its promoters, is its ability to concentrate huge fortunes in a small number of hands, and promote this as a good thing (these people are said to be creating wealth, rather than capturing it). Making money, lots of it, is the ultimate arbiter of not just success, but also morality.

[O]f course, the reality is that such wealth concentration is created by squeezing the rest, as is obvious in the stagnation of incomes for most in the middle and lower rungs of society. This is not so much wealth creation as wealth redistribution, from the many to the few. But what has made this unequality (the fundamental feature of the Anglo Disease) tolerable is that the financial world itself was able to provide a convenient smokescreen, in the form of cheap debt, provided in abundance to all. The wealthy used it to grab real assets in funny money, and the rest were kindly allowed to keep on spending by tapping their future income rather than their insufficient current one”

On solutions he puts:

“If, to the contrary, policies are focused on propping incomes for the poor and the middle classes rather than profits, on investing in the real economy rather than in monetising its existing activities (for instance via plans to boost energy efficiency in the household sector and renewable energies), on taxing today’s wealthy rather than tomorrow’s citizens, then there is a chance to limit the crash. “

and,

“Maybe it’s time to stop listening to what is highly self-interested drivel, and take back what they grabbed: it’s not theirs. And maybe it’s time to actually worry about using lots less oil (and gas and coal).
And, wonderfully, a programme to invest in housing and vehicle energy efficiency, renewable energy, and infrastructure, paid for by massive tax hikes on the rich, will help solve the current recession and the oil crisis.”

From European Tribune
Anglo Disease - a summary by Jerome a Paris http://www.eurotrib.com/story/2008/2/3/10253/66655
and,
http://europe.theoildrum.com/node/4115

Governments surpluses have had both effects. Neo classical economics does not take into account secondary and feedback effects.

On employment, before 1975 when the borrowing binge started Australia was CAD/CAS neutral and we had full employment (by accurate assessment that is by pro-rata underemployment). Now unemployment is high, much higher that the current figures indicate. Low CAD and low debt has always meant low unemployment. The problem lies with neo-classical economic theory. The debt binge is the result of messianic application of this. The apparent prosperity was all borrowed. The bubble is now rupturing discrediting these theories. We have been trading-in tomorrow for today.

We can’t look to import replacements because we have far less technological capability than the average “developing” country. And we do not have a captive communist style enslaved workforce. We have so little technological capability that we can no longer even successfully import major technological infrastructure as evidenced by the NSW Tcard and many other such debacles.

Unemployment figures are just a horrible joke but we had the lowest REAL unemployment when we were CAS/CAS $0. When Whitlam started the tariff reductions the CAD went up and the unemployment went up. John Howard’s bench mark for his low unemployment was always 1976 after this drastic rise in unemployment had commenced. Just before this (c1970) the current egregious method of determining unemployment was adopted.

The extent of real unemployment is much greater than you stated in your post on unemployment. I am sure that if the unemployment figures for the great depression were surveyed and calculated using todays criteria the numbers would be much the same as unemployment right now. In the great depression many people were working 2 or 3 day weeks and this was calculated as pro-rata unemployment. Using todays criteria they these people would be 100% employed.

We must return to zero CAD/CAS, zero net debt, and a controlled net capital inflow. If we do not the communist Chinese and others will eventually stop helping us.

We must deal with this by protection of our workforce from enslaved workforces and this would reduce the CAD and reduce unemployment. There is no alternative. It is the only scenario that has worked in the past.

There will also be lots of unemployed. Easiest way of reducing demand. The central problem is that our economy is run to produce short-term objectives: high pay, low unemployment, asset appreciation and ignore the debt. Start dealing with the debt both foreign and local means also dealing with the reasons for unemployment.

Also it is not just wide screen TV’s there is an increasing volume of food and other manufactured goods (ETMs in funny speak)coming in at ridiculously low prices. We have also run down our skill and education base to the extent that we have insufficient skilled people to maintain private and public infrastructure. When you consider that a skilled worker on $30 per week in China can afford a material lifestyle equivalent to a skilled Australian worker on $800 per week you get some idea of the joke that is referred to as “free trade”.

At the time of his “banana republic” statement Paul Keating claimed that interest rate increases would turn around the current account.
Since then its “don’t mention the CAD”.

One other point, can we build up foreign capital reserves without running a CAS? I do not think so. Any foreign capital would need to to borrowed.

By permitting increases in credit supply through “securitisation” the governments over the last 35 years have created this enormous problem “bubble”. They have inflated the cost of housing and passed the burden for paying interest on foreign debt onto home buyers. And now, because the home buyers cannot afford to pay any more (here and in the US) the fun begins!

History of course tells us that this doesn’t last forever, so eventually our currency collapses so as well as loss on investments there is foreign exchange losses.

If we had wanted to stop the inflow there were options available. Higher interest rates to reduce borrowing and offsetting any inflow of foreign capital by building foreign capital reserves. Then we wouldn’t have been able to afford all those large screen TVs and expensive imported cars. Very unpopular but better in the long term.

Thanks for the reference. I thought it interesting that both capital requirement and reserve requirement can play a part in credit creation. As the article notes regarding capital reserve requirements; “Our example contains another important feature of the government-controlled money system. Government regulation requires banks to keep a certain ratio between risky assets (loans and bonds) and equity capital. In our example, the capital ratio is 8%.[6] Economically speaking, the capital requirement implies a multiplier: with a given US dollar of equity capital, banks can create US$12.5 of credit.”

I may be way off mark here, but another point to I wonder to, is the potential Australian asset bubbles having been influenced by international finance and capital that come into both real-estate, stock, capital and resource markets. I’ve read that Japan as example has apparently been churning out 0% interest loans to the carry over trade in the money markets since the early 90’s and of course the US now has very low rates. How has all that money out of Japan, that some call ‘Funny Money’, influenced prices in our local market and distorted the perception of long term apparent asset price stability and so the illusion of limited risk and with that artificially low interest rates (ie interest rates could be set lower because the risk rate of default is lowered by a constant up trending market supported by ‘Funny Money’). This in turn would encourage further local speculation with no apparent risk and low interest debt borrowing perpetuating an upward spiral.