[p2p-research] Job Losses and Productivity

[Michel Bauwens]

ryan, education is emphatically Not a product meant for the markets to
consume, it is a education for citizenship and human happiness, that as a
sideproduct, should create people who can contribute to the wellbeing of
society through their work and activities ... and for this of course, they
need skills as well as education ..

here is an article I hope you will read, on sovereign credit, and why, it is
not over, and why the people of Europe and elsewhere should not acquiesce in
the neoliberal holdup and destruction of social structures of support and
solidarity,

Michel


via http://www.webofdebt.com/articles/hyperinflation.php

 TIME TO GET OUT THE WHEELBARROWS?
ANOTHER LOOK AT THE WEIMAR HYPERINFLATION

Ellen Brown, May 19th, 2009
http://www.webofdebt.com/articles/hyperinflation.php
------------------------------

“It was horrible. Horrible! Like lightning it struck. No one was prepared.
The shelves in the grocery stores were empty.You could buy nothing with your
paper money.

–  Harvard University law professor Friedrich Kessler on on the Weimar
Republic hyperinflation (1993 interview)

Some worried commentators are predicting a massive hyperinflation of the
sort suffered by Weimar Germany in 1923, when a wheelbarrow full of paper
money could barely buy a loaf of bread. An April 29 editorial in the San
Francisco Examiner warned:

“With an unprecedented deficit that’s approaching $2 trillion, [the
President’s 2010] budget proposal is a surefire prescription for
hyperinflation. So every senator and representative who votes for this
monster $3.6 trillion budget will be endorsing a spending spree that could
very well turn America into the next Weimar Republic.”1

In an investment newsletter called *Money Morning* on April 9, Martin
Hutchinson pointed to disturbing parallels between current government
monetary policy and Weimar Germany’s, when 50% of government spending was
being funded by *seigniorage* – merely printing money.2 However, there is
something puzzling in his data. He indicates that the British government is
*already* funding more of its budget by seigniorage than Weimar Germany did
at the height of its massive hyperinflation; yet the pound is still holding
its own, under circumstances said to have caused the complete destruction of
the German mark. Something else must have been responsible for the mark’s
collapse besides mere money-printing to meet the government’s budget, but
what? And are we threatened by the same risk today? Let’s take a closer look
at the data.
History Repeats Itself – or Does It?

In his well-researched article, Hutchinson notes that Weimar Germany had
been suffering from inflation ever since World War I; but it was in the two
year period between 1921 and 1923 that the true “Weimar hyperinflation”
occurred. By the time it had ended in November 1923, the mark was worth only
*one-trillionth* of what it had been worth back in 1914. Hutchinson goes on:

“The current policy mix reflects those of Germany during the period between
1919 and 1923. The Weimar government was unwilling to raise taxes to fund
post-war reconstruction and war-reparations payments, and so it ran large
budget deficits. It kept interest rates far below inflation, expanding money
supply rapidly and raising 50% of government spending through seigniorage
(printing money and living off the profits from issuing it). . . .

“The really chilling parallel is that the United States, Britain and Japan
have now taken to funding their budget deficits through seigniorage. In the
United States, the Fed is buying $300 billion worth of U.S. Treasury bonds
(T-bonds) over a six-month period, a rate of $600 billion per annum, 15% of
federal spending of $4 trillion. In Britain, the Bank of England (BOE) is
buying 75 billion pounds of gilts [the British equivalent of U.S. Treasury
bonds] over three months. That’s 300 billion pounds per annum, 65% of
British government spending of 454 billion pounds. Thus, while the United
States is approaching Weimar German policy (50% of spending) quite rapidly,
Britain has already overtaken it!”

And that is where the data gets confusing. If Britain is already meeting a
larger percentage of its budget deficit by seigniorage than Germany did *at
the height* of its hyperinflation, why is the pound now worth about as much
on foreign exchange markets as it was nine years ago, under circumstances
said to have driven the mark to a trillionth of its former value in the same
period, and most of this in only two years? Meanwhile, the U.S. dollar has
actually gotten *stronger* relative to other currencies since the policy was
begun last year of massive “quantitative easing” (today’s euphemism for
seigniorage).3 Central banks rather than governments are now doing the
printing, but the effect on the money supply should be the same as in the
government money-printing schemes of old. The government debt bought by the
central banks is never actually paid off but is just rolled over from year
to year; and once the new money is in the money supply, it stays there,
diluting the value of the currency. So why haven’t our currencies already
collapsed to a trillionth of their former value, as happened in Weimar
Germany? Indeed, if it were a simple question of supply and demand, a
government would have to print a *trillion times* its earlier money supply
to drop its currency by a factor of a trillion; and even the German
government isn’t charged with having done that. Something else must have
been going on in the Weimar Republic, but what?
Schacht Lets the Cat Out of the Bag

Light is thrown on this mystery by the later writings of Hjalmar Schacht,
the currency commissioner for the Weimar Republic. The facts are explored at
length in *The Lost Science of Money* by Stephen Zarlenga, who writes that
in Schacht’s 1967 book *The Magic of Money*, he “let the cat out of the bag,
writing in German, with some truly remarkable admissions that shatter the
‘accepted wisdom’ the financial community has promulgated on the German
hyperinflation.” *What actually drove the wartime inflation into
hyperinflation, said Schacht, was speculation by foreign investors, who
would bet on the mark’s decreasing value by selling it short*.

*Short selling* is a technique used by investors to try to profit from an
asset’s falling price. It involves borrowing the asset and selling it, with
the understanding that the asset must later be bought back and returned to
the original owner. The speculator is gambling that the price will have
dropped in the meantime and he can pocket the difference. Short selling of
the German mark was made possible because private banks made massive amounts
of currency available for borrowing, marks that were created on demand and
lent to investors, returning a profitable interest to the banks.

At first, the speculation was fed by the Reichsbank (the German central
bank), which had recently been privatized. But when the Reichsbank could no
longer keep up with the voracious demand for marks, other private banks were
allowed to create them out of nothing and lend them at interest as well.4
A Story with an Ironic Twist

If Schacht is to be believed, not only did the government not cause the
hyperinflation but it was the government that got the situation under
control. The Reichsbank was put under strict regulation, and prompt
corrective measures were taken to eliminate foreign speculation by
eliminating easy access to loans of bank-created money.

More interesting is a little-known sequel to this tale. What allowed Germany
to get back on its feet in the 1930s was the very thing today’s commentators
are blaming for bringing it down in the 1920s – *money issued by seigniorage
by the government*. Economist Henry C. K. Liu calls this form of financing
“sovereign credit.” He writes of Germany’s remarkable transformation:

“The Nazis came to power in Germany in 1933, at a time when its economy was
in total collapse, with ruinous war-reparation obligations and zero
prospects for foreign investment or credit. Yet through an independent
monetary policy of sovereign credit and a full-employment public-works
program, the Third Reich was able to turn a bankrupt Germany, stripped of
overseas colonies it could exploit, into the strongest economy in Europe
within four years, even before armament spending began.”5

While Hitler clearly deserves the opprobrium heaped on him for his later
atrocities, he was enormously popular with his own people, at least for a
time. This was evidently because he rescued Germany from the throes of a
worldwide depression – and he did it through a plan of public works paid for
with currency generated by the government itself. Projects were first
earmarked for funding, including flood control, repair of public buildings
and private residences, and construction of new buildings, roads, bridges,
canals, and port facilities. The projected cost of the various programs was
fixed at one billion units of the national currency. One billion
non-inflationary bills of exchange called Labor Treasury Certificates were
then issued against this cost. Millions of people were put to work on these
projects, and the workers were paid with the Treasury Certificates. The
workers then spent the certificates on goods and services, creating more
jobs for more people. These certificates were not actually debt-free but
were issued as bonds, and the government paid interest on them to the
bearers. But the certificates circulated as money and were renewable
indefinitely, making them a *de facto* currency; and they avoided the need
to borrow from international lenders or to pay off international debts.6 The
Treasury Certificates did not trade on foreign currency markets, so they
were beyond the reach of the currency speculators. They could not be sold
short because there was no one to sell them to, so they retained their
value.

Within two years, Germany’s unemployment problem had been solved and the
country was back on its feet. It had a solid, stable currency, and *no
inflation*, at a time when millions of people in the United States and other
Western countries were still out of work and living on welfare.  Germany
even managed to restore foreign trade, although it was denied foreign credit
and was faced with an economic boycott abroad. It did this by using a barter
system: equipment and commodities were exchanged directly with other
countries, circumventing the international banks. This system of direct
exchange occurred without debt and without trade deficits. Although
Germany’s economic experiment was short-lived, it left some lasting
monuments to its success, including the famous Autobahn, the world’s first
extensive superhighway.7
The Lessons of History: Not Always What They Seem

Germany’s scheme for escaping its crippling debt and reinvigorating a
moribund economy was clever, but it was not actually original with the
Germans. The notion that a government could fund itself by printing and
delivering paper receipts for goods and services received was first devised
by the American colonists. Benjamin Franklin credited the remarkable growth
and abundance in the colonies, at a time when English workers were suffering
the impoverished conditions of the Industrial Revolution, to the colonists’
unique system of government-issued money. In the nineteenth century, Senator
Henry Clay called this the “American system,” distinguishing it from the
“British system” of privately-issued paper banknotes. After the American
Revolution, the American system was replaced in the U.S. with banker-created
money; but government-issued money was revived during the Civil War, when
Abraham Lincoln funded his government with U.S. Notes or “Greenbacks” issued
by the Treasury.

The dramatic difference in the results of Germany’s two money-printing
experiments was a direct result of the uses to which the money was put.
Price inflation results when “demand” (money) increases more than “supply”
(goods and services), driving prices up; and in the experiment of the 1930s,
new money was created for the purpose of funding productivity, so supply and
demand increased together and prices remained stable. Hitler said, “For
every mark issued, we required the equivalent of a mark’s worth of work
done, or goods produced.” In the hyperinflationary disaster of 1923, on the
other hand, money was printed merely to pay off speculators, causing demand
to shoot up while supply remained fixed. The result was not just inflation
but hyperinflation, since the speculation went wild, triggering rampant
tulip-bubble-style mania and panic.

This was also true in Zimbabwe, a dramatic contemporary example of runaway
inflation. The crisis dated back to 2001, when Zimbabwe defaulted on its
loans and the IMF refused to make the usual accommodations, including
refinancing and loan forgiveness. Apparently, the IMF’s intention was to
punish the country for political policies of which it disapproved, including
land reform measures that involved reclaiming the lands of wealthy
landowners. Zimbabwe’s credit was ruined and it could not get loans
elsewhere, so the government resorted to issuing its own national currency
and using the money to buy U.S. dollars on the foreign-exchange market.
These dollars were then used to pay the IMF and regain the country’s credit
rating.8 According to a statement by the Zimbabwe central bank, the
hyperinflation was caused by speculators who manipulated the
foreign-exchange market, charging exorbitant rates for U.S. dollars, causing
a drastic devaluation of the Zimbabwe currency.

The government’s real mistake, however, may have been in playing the IMF’s
game at all. Rather than using its national currency to buy foreign fiat
money to pay foreign lenders, it could have followed the lead of Abraham
Lincoln and the American colonists and issued its own currency to pay for
the production of goods and services for its own people. Inflation would
then have been avoided, because supply would have kept up with demand; and
the currency would have served the local economy rather than being siphoned
off by speculators.
The Real Weimar Threat and How It Can Be Avoided

Is the United States, then, out of the hyperinflationary woods with its
“quantitative easing” scheme? Maybe, maybe not. To the extent that the
newly-created money will be used for real economic development and growth,
funding by seigniorage is not likely to inflate prices, because supply and
demand will rise together. Using quantitative easing to fund infrastructure
and other productive projects, as in President Obama’s stimulus package,
could invigorate the economy as promised, producing the sort of abundance
reported by Benjamin Franklin in America’s flourishing early years.

There is, however, something else going on today that is disturbingly
similar to what triggered the 1923 hyperinflation. As in Weimar Germany,
money creation in the U.S. is now being undertaken by a privately-owned
central bank, the Federal Reserve; and it is largely being done to settle
speculative bets on the books of private banks, without producing anything
of value to the economy. As gold investor James Sinclair warned nearly two
years ago:

“[T]he real problem is a trembling $20 trillion mountain of over the counter
credit and default derivatives. Think deeply about the Weimar Republic case
study because every day it looks more and more like a repeat in cause and
effect . . . .”9

The $12.9 billion in bailout funds funneled through AIG to pay Goldman Sachs
for its highly speculative credit default swaps is just one egregious
example.10 To the extent that the money generated by “quantitative easing”
is being sucked into the black hole of paying off these speculative
derivative bets, we could indeed be on the Weimar road and there is real
cause for alarm. We have been led to believe that we must prop up a zombie
Wall Street banking behemoth because without it we would have no credit
system, but that is not true. There is another viable alternative, and it
may prove to be our *only* viable alternative. We can beat Wall Street at
its own game, by forming publicly-owned banks that issue the full faith and
credit of the United States not for private speculative profit but as a
public service, for the benefit of the United States and its people.11

Ellen Brown developed her research skills as an attorney practicing civil
litigation in Los Angeles. In *Web of Debt*, her latest book, she turns
those skills to an analysis of the Federal Reserve and “the money trust.”
She shows how this private cartel has usurped the power to create money from
the people themselves, and how we the people can get it back. Her earlier
books focused on the pharmaceutical cartel that gets its power from “the
money trust.” Her eleven books include *Forbidden Medicine*, *Nature’s
Pharmacy* (co-authored with Dr. Lynne Walker), and *The Key to Ultimate
Health* (co-authored with Dr. Richard Hansen). Her websites are
www.webofdebt.com and www.ellenbrown.com.

------------------------------

   1. “Examiner Editorial: Get Ready for Obama’s Coming Hyperinflation,” *San
   Francisco Examiner*, April 29, 2009.

   2. Martin Hutchinson, “Is It 1932 – or 1923?”, *Money Morning* (April 9,
   2009).
   3. See Monthly Average Graphs, x-rate.com.

   4. Stephen Zarlenga, *The Lost Science of Money* (Valatie, New York:
   American Monetary Institute, 2002), pages 590-600; S. Zarlenga, “Germany’s
   1923 Hyperinflation: A ‘Private’ Affair,” *Barnes Review* (July-August
   1999).

   5. Henry C. K. Liu, “Nazism and the German Economic Miracle,” *Asia Times
   * (May 24, 2005).

   6. S. Zarlenga, *op. cit*.

   7. Matt Koehl, “The Good Society?”, *Rense* (January 13, 2005).

   8. “Bags of Bricks: Zimbabweans Get New Money – for What It’s Worth,” *The
   Economist* (August 24, 2006); Thomas Homes, “IMF Contributes to
   Zimbabwe’s Hyperinflation,” www.newzimbabwe.com (March 5, 2006).

   9. Jim Sinclair, “Fed Actions a Bandaid on a Gaping Economic Wound,”
   reprinted in *Go for Gold*, September 18, 2007.

   10. Eliot Spitzer, “The Real AIG Scandal, Continued! The Transfer of
   $12.9 Billion from AIG to Goldman Looks Fishier and Fishier,”
*Slate*(March 22, 2009).

   11. See Ellen Brown, “Cash Starved States Need to Play the Banking Game,”
   webofdebt.com/articles (March 2, 2009).



On Wed, May 19, 2010 at 10:56 PM, Ryan Lanham <rlanham1963 at gmail.com> wrote:

> Hi Michel,
>
> I doubt there is any sovereign credit left for most nations.  Even those
> with low national debts (e.g. Canada and Norway) have exceedingly high
> consumer debt loads.  Two countries looking relatively good long term are
> Russia and Brazil.  Both are politically unstable (comparatively) but
> economically promising.  Politics is relatively easy to fix.
>
> I want to say very specifically (and i work for a Ministry of Education)
> that education is NOT a priority.  It is a long-term payback and the systems
> do not now produce a "product" that the markets want to consume. That is,
> schools don't work.  There is no good evidence they do work.  Organizations
> like Don Bosco in India are doing far better than many schools.  TVET is the
> answer.  And TVET could be done through co-ops better than in schools.
> Literacy is falling even with intensive school investment.  Cuba has very
> high literacy, what does it gain them?  Are they happy?  Are they free?  Are
> they satisfied?  If so, why do they continuously try to leave?
>
> What is needed is low debt, high investment in innovation, and lots of
> skills.  The best models for that now are the BRICS and the US.  Much as I
> wish I could sign on to the traditional liberal model of being
> pro-government, pro-public schools, pro-debt, it's over.  It is simply
> over.  The sooner the left accepts that and finds a new way, the sooner the
> world will be a better place before it is wrecked utterly by the right.
>
>   On Wed, May 19, 2010 at 10:44 AM, Michel Bauwens <
> michelsub2004 at gmail.com> wrote:
>
>> Hi Ryan,
>>
>> I agree there are obviously financial and debt issues, but it is not
>> immaterial that public money was used to bolster a predatory financial
>> system ... in fact, it is what suggests the answer, to stop and regulate
>> financial speculation in unproductive activities, tax financial gambling,
>> stop usury payments, and create credit commons ... as ellen woods (web of
>> debt) shows with many examples, sovereign credit is not inflationary when it
>> is used for productive investments,
>>
>> so we could, using your language, agree with "no more debt" (for predatory
>> finance), but sovereign credit for public investments in productive
>> endeavours (can be done locally, does not need to be done by central nation
>> state), and mutual credit systems for civil society, and a pollen tax on
>> financial transactions
>>
>> education is a priority funding issue, of course, I agree, it does not
>> necessarily have to go to buildings and centralized schools, and we can have
>> autonomous local schools that do not necessarily need 'buildings', but that
>> is a side issue for me
>>
>> as for europe, yes of course we are in trouble, but have you noticed that
>> it is the least socialist countries, with the weakest social systems that
>> are in trouble, while the socialist countries, in american parlance, i.e.
>> scandinavia, are doing very well ..
>>
>> china, apart from pushing debt, is also doing very interesting things,
>> like schemes with alternative currencies to stimulate consumption etc... I
>> wonder how much that is part of the success (this money is used in typically
>> gesellian fashion, as otherwise thrifty chinese would just put it under the
>> pillow ..)
>>
>> as for my native country, my wife just informed me of the curfew in
>> chiangmai, where a bus was burning in front of the school of the children ..
>>
>> sad and dangerous times, but the growth of democratic movements is not
>> necessarily a bad thing,
>>
>> Michel
>>
>>
>>
>>
>>   On Wed, May 19, 2010 at 10:30 PM, Ryan Lanham <rlanham1963 at gmail.com>wrote:
>>
>>>   On Wed, May 19, 2010 at 9:58 AM, Michel Bauwens <
>>> michelsub2004 at gmail.com> wrote:
>>>
>>>> Hi Maria,
>>>>
>>>> I'm personally for strong  public education, which does not necessarily
>>>> mean dysfunctional ones, including in the rural areas,
>>>>
>>>> it's perfectly possible to subsidize and sustain a wide variety of
>>>> distributed schooling based on free choice, as long as equal opportunity is
>>>> protected at the same t ime,
>>>>
>>>> after the 10 trillion dollar (2 officially, the rest through other
>>>> means) bailout of the banks, the reasoning that there is no funding
>>>> available has no credence,
>>>>
>>>> as for farming, far from dying out, it's due for a big resurgence ...
>>>>
>>>> of course, Ryan's suggestion may come out if extreme neoliberalism
>>>> succeeds in destroying the rest of public infrastructure,
>>>>
>>>> michel
>>>>
>>>
>>> Hi Michel:
>>>
>>> Sorry you are having these intrigues with our Greek friends.  Sounds like
>>> typical research funding issues to me, but alas, politics is everywhere.
>>>
>>> The real global issue now is sovereign debt.  How governments use funds
>>> is the crux.  Regardless of how those funds have been used in past (for war,
>>> for paying old people, for paying doctors, or for bailing out banks), for
>>> most nations, we are at the end of the rope.  There is not future in more
>>> debt.  Therefore priorities need readjusting.  Schools will not be a
>>> priority.  First, the payback is not clear.  Second, they are hopelessly
>>> labour intensive for no good reason.  Computers can replace much if not most
>>> of it (I prefer Tony Bates' and Stephen Downes' arguments as my surrogates.)
>>>
>>> Regardless, the issue is labour and debt.  Employment cannot increase
>>> without market capacity.  Therefore, real wages are frozen, unemployment
>>> is rising, and traditional Keynesian stimulus is only adding to debts.
>>> There is now some evidence that the US has broken this cycle (it seems ahead
>>> of where Europe finds itself.)   But the politics are easier in the US where
>>> socialism is less entrenched.  Europe, I must say, appears to be in a
>>> very bad way...particularly the so called PIIGS.  (Portugal, Ireland,
>>> Italy, Greece and Spain.)  But France and some of the Nordic countries are
>>> not that far behind.  The UK as well.  It looks grave.
>>>
>>> The real question is what China does.  If China starts to consume, then
>>> Europe might be saved.  That seems unlikely.  China wants the US to go
>>> greater into debt so it can sustain its foreign currency funded growth.
>>> That too seems unlikely.  The net of all this is that capitalism, for the
>>> most part, will remain stegnant (especially in Europe) for a generation.  If
>>> that is true, Asia will grow, Europe will become poorer, and global
>>> environmental crises will worsen.  That is the outcome I predict.
>>> Regardless, it will be a terrible time to be poor.  That's what makes
>>> deploying co-ops all the more vital.
>>>
>>> I am very sorry, by the way, for what is happening in your adopted land.
>>> I don't see any good outcomes emerging.  Sadly, it seems civil war is
>>> likely.
>>>
>>> R.
>>>
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>>>
>>>
>>
>>
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>>
>>
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>
>
> --
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> rlanham1963 at gmail.com
>  Facebook: Ryan_Lanham
> P.O. Box 633
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>
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