Saturday, August 31, 2013

No Jam Ever Again

"The rule is, jam to-morrow and jam yesterday – but never jam to-day."
The White Queen says this to Alice in Lewis Carroll's Through the Looking Glass.  However false the hope is, the White Queen at least holds out hope that tomorrow will be better than today. Our planners do not give us even that much encouragement any more. It is all about scarcity and doing more with less – more for them, less for us. Peter D. Schiff's 2012 book The Real Crash is a case in point. His idea is that unless we take steps, there will be another economic crash even bigger than the last one. He says,

"My prescription ... is this: we need to stop bailouts, government spending, government borrowing, and Federal Reserve manipulation of interest rates and debasement of the dollar. ... We need to let wages fall, allow people to pay down debt and start saving, and allow companies to make capital investments so that America can start making things again."

This does not make much sense on the face of it. How would letting wages fall allow anyone to pay down debt? This is a very peculiar construct that does not have logical meaning. Perhaps we will understand it better if we assume it has political meaning. If we interpret "let wages fall" as more unemployment and "allow people to pay down debt" as the unemployed defaulting on their mortgages and losing their homes, then it starts to make sense. In support of this interpretation, Schiff later says,

"My proposal is to soften the blow. Instead of a violent crash, my plan would give us a painful, but limited, recession."

Well, thank you for another painful recession, Mr. Schiff, one that might – maybe – "soften the blow." Not to mention giving rich people like you another opportunity to kick us out of our homes so that you can buy them on the cheap.

How about a different plan, Mr. Schiff? How about we inflate the dollar by a factor of two so that it becomes twice as easy for us to pay for our homes? Sure, that would cut your wealth in half, but that seems more fair to us than your plan. Your plan would leave us with nothing, and you rich people have already done that to us before.

You talk about moral hazard, Mr. Schiff, but you do not seem to realize that moral hazard is a danger only for the rich, not for the poor. Only the rich have enough control over other people's money that mismanaging it can bring down the whole economy. At we like to say, "Moral hazard is a banker with an idea." Or just, "Moral hazard is a banker."

Finally, how about an even better plan, Mr. Schiff? Why don't we send you and your rich friends off to play in your own monetary sandbox? A place where you can no longer threaten the rest of us with "painful recessions" as cures for economic conditions that you create. That is what is about. We propose multiple exclusive currencies and markets so that you and the other rich can plan recessions for yourselves if that is what you want, leaving the rest of us alone.

The rich are preparing the rest of us to accept "austerity" as our inevitable future. "Austerity" meaning poverty, of course. They provide all sorts of reasons. Peter Schiff's reason is to head off a supposed "even worse" economic meltdown. His reasoning is bogus, but will appeal to many other rich people. Against their poverty plans, proposes that we separate our money from the money of the rich. That way, they can no longer plan recessions for the rest of us.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (

Copyright © 2013 TheOtherSideOfCapitalism

Friday, August 23, 2013

The Other Side of Finance

We need multiple exclusive currencies and markets so we can reduce the regulatory burden on the rich. If you have been paying attention to the recent technical problems with the NASDAQ exchange, you will hear regulators saying that we need more regulations to "keep this from happening again." Those who run the exchanges are equally convinced that this incident was just a glitch. Let us not over-react, they say. The exchanges are over-regulated as it is, they say.

We would not need a heavy burden of regulations if the rich and their managers could resist putting the boot in when the poor are down. It is not that the poor are better than the rich, it is just that in any group of people, only some can resist the temptation to take advantage of weakness. Government has to step in to protect the "weaker hands."

Rich people, pay attention – we have a way for you to have your totally unregulated exchanges. You know that you want it. Your need to avoid regulation is why those "dark pools" of capital were created. You had to get away from public scrutiny.

A better way to do it is with multiple exclusive currencies and markets. Make the separation official and easy to enforce. Without all those small investors working in the same markets that you do, there will be no need to protect them.

It does not make any sense to let children on the same field where the adults are playing. The measures taken to protect the children from getting hurt will make sure that no one has any fun.

In a similar way, our financial regulations take a lot of fun out of our markets. The regulations try to accomplish two things at the same time. They try to keep the markets open and free, but at the same time, they try to restrict what he rich do because it might hurt the poor. That is, our regulations try to promote opportunity and restrict it at the same time. No wonder they do not really work.

If we had multiple markets at different levels of financial competitiveness, separated by firewalls of different and exclusive currencies, then the regulations for each level could be rational and focussed to benefit those at that competitive level. The financial instruments at each level would be denominated in the currency at that level, limiting the impact of disruptions in other markets.

Financial services would improve. Small brokers in less-competitive markets could survive and offer services to small investors. As it is, the large brokers eat up the small brokers, and the small investor is ignored. It is just too expensive for large brokers to take on small accounts because the regulatory costs and legal risks outweigh any tiny profits they might make from the accounts.

There are other points we could make, but mainly we want you to stop and think a bit about the advantages of multiple exclusive currencies and markets. Many of the rich are reactive rather than thoughtful about having a single currency that is used in all the markets. However, maybe the extra complexity of multiple currencies is justified. Would the cost of any inefficiencies be worse than the regulatory climate that we have today?

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (

Copyright © 2013 TheOtherSideOfCapitalism

Saturday, August 17, 2013

Damned Horse!

Note: We first want to announce that we are changing our approach to this blog a bit. Now and in the future, we intend to write shorter weekly posts with more focus. We need to claw back some time from the longer weekly posts so that we can invest that time into a tosoc book and other projects. The intent is that these shorter posts will have more in them than updates but less than in our previous efforts. Occasionally we may revert to our previous style in the attempt to tie things together.


Today let us talk about Peter D. Schiff, CEO of the broker-dealer Euro Pacific Capital Inc., and his book The Real Crash. As we said about Meredith Whitney in Deer in the Headlights II, we generally like his descriptions (with reservations) but are not impressed with his prescriptions. First, regarding his descriptions, he sees things exclusively from the wrong side of capitalism. Also, his view is too narrow.

For example, he thinks that borrowing to produce things is always good while borrowing to consume is always bad. As we have pointed out before, however, consumption has to match production if production is to be done at a profit. It can be very bad to borrow in order to produce things that no one can buy or wants to buy. His view is far too simplistic.

He also thinks that reducing U.S. consumption and paying off debt with the savings would be a good thing. It would be good for the worldwide rich, yes. It would create a depression for the U.S. poor, however. It might be catastrophic for the worldwide poor. The trouble is that U.S. consumption supports about 17 percent of the worldwide GDP. If the U.S. decreases consumption to any signficant extent, a billion people could be threatened with starvation. The fact is that the world badly needs to keep U.S. consumers employed and spending, for the time being at least. That is why there is almost no chance of Mr. Schiff's dollar hyperinflation in the near future. The world will continue to buy U.S. debt because it has to.

Mr. Schiff presents a rather unsophisticated view of government debt as well. He compares it to corporate and even individual debt. He also sees it as bad debt to finance consumption rather than good debt to finance production. He is incorrect. Sovereign government debt of currency-printing nations is quite different. The primary purpose is control of the money supply and interest rates. Governments need large and active bond markets so that they can buy and sell in them, either printing money and increasing the money supply (buying bonds) or decreasing the money supply (selling bonds). Paying off the debt is generally not especially important.

Rather than the debt itself, the issue is servicing the debt. Can the nation keep up on its debt payments?

Regarding Mr. Schiff's prescriptions to cure our financial ills, his plan is basically to bring on economic catastrophe. Decrease consumer spending, increase savings, and pay off debt. He does not emphasize these aspects, but it means deflation, lower wages, and a massive increase in U.S. unemployment. After which, he assures us, the economy will "heal itself." He thinks austerity is needed. What it really means is more poverty for those who are already poor.

A rich man rode his horse into a swamp one day. He got off, looked around at the mess he was in, and exclaimed, "Damned horse!" That is how Mr. Schiff sounds to those of us on the other side of capitalism.

We do not need to be ridden into another economic swamp. What we need is partnership, not domination. We need currencies and markets that suit us and are controlled by us, not one currency and one market dominated by the rich. Competing directly with the rich is a loser's game. The better way to deal with them is collectively.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (

Copyright © 2013 TheOtherSideOfCapitalism

Saturday, August 10, 2013

Ascend and Triumph

None of our readers should be surprised by now to find that has eclectic interests. One idea of interest is "the heat death of the universe" introduced by Lord Kelvin in 1852. The idea is that the free energy of the universe is being used up, bit by bit, according to the laws of thermodynamics. The end result is thought to be a totally dead universe in which there is no energy left to do anything. How depressing.

We see a parallel to this in the many "decline and fall" stories that abound today. Starting with Gibbon's The History of the Decline and Fall of the Roman Empire, followed by Malthus and then Spengler's Decline of the West, dystopic predictions and visions of the future are prominent in the media up to and beyond recent stories such as Suzanne Collins' The Hunger Games.

One might believe from these that there will be a "heat death of society and culture." There will be a gray future with diminishing prospects, opportunity, and wealth for everyone. Expect it, get used to the idea, and accept it when it comes. We are at the peak and the only way forward is down. The future will be about basic survival, not about progress and achievement. We are a declining people in a declining universe. Doubly depressing.

Let us take another look at the heat death of the universe, however, to see how well it stands up today. To explain the speed of galactic rotation, the strength of galactic gravitational lensing, and the acceleration of receding galaxies, physicists have been forced to create two new concepts: Dark Matter and Dark Energy. These are still fairly nebulous concepts at this point, but the idea of Dark Energy is particularly interesting for this topic. It seems that space is not empty of mass-energy as we once thought, but in fact exerts a negative pressure. This pressure exerts the force that accelerates distant galaxies away from one another.

In other words, the universe is not cooling down, it is firing up. It seems that energy is being injected into the universe. Of course, those with the dark spot of the doomsayer in their souls see this in a negative light. They no longer talk about the heat death of the universe, but about the "Big Rip." If the Dark Energy of empty space forces matter apart, then the fate of the universe will not be to slow down and stop, but to speed up and fly apart in total chaos. Everything will come to pieces.

Perhaps. But for our purposes here, the future in this vision is not a long fall into darkness but a long ascent into the light.

Now let us take another look at the "using up" of energy, or entropy. Shannon and Weaver showed in 1949 that the amount of information possible in a signal is calculated the same way that the amount of entropy is calculated. That is, if we pack the maximum amount of information into a signal, that signal will also have the highest possible entropy.

Keeping in mind that a signal is just data that might or might not contain information and that the information might or might not be meaningful, Shannon and Weaver's findings allow for a universe of ever-increasing complexity and data. Combining this with our earlier comments, this will be fueled by the empty-space energy pump of Dark Energy.

Extending these ideas further, we conclude that Shannon and Weaver's work plus Dark Energy also allow for a universe of ever-increasing information and meaning. If we can indulge briefly in speculation that might inspire science fiction writers, these ideas might mean that the universe is not yet dying, but is just now coming alive.

Bringing these ideas back into the realm of society and economics, we are really just casting doubt on the idea that simplifications and oneness are desirable social and economic goals. (See our post Economic Tolerance and Diversity.) Even among "capitalists" there are many who want one market and one currency to serve it. They are against the additional complexities and costs of multiple markets and currencies. Why, they might have to employ more people and purchase more capital equipment to handle the load! Heaven forbid!

Viewed from The Other Side of Capitalism, they seem to want to impose the heat death of the economy on the rest of us for no good reason. They never seem to consider that the costs of greater complexity might be worth paying. They pay lip service to the idea of Creative Destruction when it enriches them while at the same time exerting every effort to freeze the economy in a form that keeps their own wealth safe. No matter what the cost to other participants in the economy, of course.

In fact, the history of the success of capitalism is not one of limiting options, but of ever-increasing complexity in jobs, numbers of workers, information, and products. The increase of this kind of "entropy" has not resulted in a decline as some have feared, but massive growth and profits.

Therefore we think that the "capitalists" are actually the greatest enemies of capitalism. Whether politically liberal or conservative, whether Democrat or Republican, they are really all quite conservative in the sense that it is in their short-term interests to maintain our economic system frozen in place. No matter how progressive they sound in their speeches, they work to keep things as they are. That is, the wealthy keep gaining wealth and the losers keep losing.

We propose multiple new markets and currencies in part because these will break the choke hold that the wealthy increasingly apply to our opportunities. They represent new frontiers freed of the chains of our single currency because they will exclude the rich from direct, unregulated interference. These new frontiers will also free the government to operate in the interests of the people rather than those of the rich.

What we have said here is that the capitalists are the ones ultimately responsible for the austerity mentality because it benefits them. It is an excuse for their managers to tell us that, due to the economy, we have to work ever-longer hours for ever-less money. Instead of accepting that at face value, we should rather break their hold on us by dissociating our wealth from theirs using separate markets and currencies. Rather than preparing ourselves for an inevitable decline and fall, we should be thinking how we can ascend and triumph. Not just for the few, but for the many.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (

Copyright © 2013 TheOtherSideOfCapitalism

Saturday, August 3, 2013

Deer in the Headlights III: Accountability

After the Black Death had killed half of his peasants, one of the French dukes of that time found that his hearth taxes had also been cut in half. Collecting even that much might seem cruel given the horrors and social dislocations of the time. Still, it is mathematically reasonable to collect only half the previous taxes since there were only half the workers left to earn them.

Governments are not even that reasonable, however. It is said that in order to maintain his income, the duke simply doubled the hearth taxes. At the very time that the people had lost half their parents, half their children, and half their communities to the Black Death, they were ordered to pay twice as much in taxes. Governments can rarely resist trying to put the tax boot in when one is down.

This kind of government "reasoning" still goes on today, even in the U.S. Banking analyst Meredith Whitney covers this ground in her 2013 book Fate of the States. (We also mentioned this book in our previous companion post, Deer in the Headlights II.)

See her Chapter 5, "The Negative Feedback Loop From Hell." She explains that the economic crisis has led to lower house prices and therefore to lower tax revenue. Lower tax revenue has led to budget deficits. Then can come that hellish feedback loop: "... budget deficits beget tax hikes and spending cuts, which drive away jobs, further eroding the tax base and deepening the budget crisis that the hikes and cuts were intended to fix. Look at what happened in the actual Greece."

Some states have indeed raised taxes. Illinois raised its income tax by 66%. It is not clear whether the French duke actually maintained his income by raising taxes and it is not clear yet whether the State of Illinois will be able to gain significantly more tax income by raising taxes, either. Ms Whitney does say what happened in Greece when it raised income taxes. Unemployment went up to over 24% and GDP declined 6% a year for two years. Now Greek individuals and businesses who can do so are leaving Greece and taking their economic activity to friendlier economic environments.

The same kind of thing can happen even if governments do not raise taxes, however. State governments have to make their bond and pension payments before any others. Therefore if state revenue cannot be raised enough, budget deficits have to be paid for by cuts in services. As Ms Whitney says, the money comes out of education, libraries, parks and recreation, trash collection, and fire and police protection. As we said above, higher taxes will drive out invididuals and businesses, but so will poor education, trashy neighborhoods and parks, and poor public safety. As much as anything else, these things sank Detroit.

While we appreciate Ms Whitney's analysis, her thinking remains stuck firmly on the old, outdated side of capitalism. She does not really have solutions because she accepts poverty and accepts the fate of the states that have suffered from poor financial decisions. Just like she accepts the fate of Detroit. Aside from privatization, which has its own problems, her basic solution for our financial problems appears to be smarter decisions, time, and hard work. At most what she does is just describe the differences between the states that she thinks are improving versus those she thinks are declining. She is very smart, but as far as our current financial troubles are concerned, she is just as a much a "deer in the headlights" as any other person in business, or politician. does not find financial instability and poverty acceptable as "just the way things are." Ms Whitney says in chapter 2 of her book that people in 1940 were "... motivated by the goal of moving up the ladder of financial stability." We may have gained national wealth since then, but we have made no progress on national financial stability. For rich individuals, their wealth has meant individual financial stability, but national wealth has not meant national financial stability. National financial stability now should be the goal.

Ms Whitney also takes for granted the new, increased velocity of capital (or money). The advantage of it is that resources can be allocated more quickly to more productive uses. The danger is that people can be impoverished faster than ever before. That means that capital controls are more important today than they were in the past when it was quite difficult to move capital around the world. Yet we have fewer capital controls now than in the past.

We need more capital controls, but we should be careful with them. The advantages of rapid capital flows must be preserved as much as possible. Capital controls cannot be blunt instruments like they have been in the past. We need to distinguish between capital flows that have positive effects and those that have negative effects.

Capital controls today should focus on the effects of job movement. As things change, jobs will be lost and others created. Take Detroit for example. If automobiles can be manufactured cheaper elsewhere, then there is no point in investing in Detroit. It would be wasting capital. In fact, capital should be moved out of Detroit. The employees of auto manufacturers in Detroit will and should lose their jobs. In fact, they did lose their jobs.

The problem is not so much the job loss but the instability that comes with it, financial and otherwise. Houses were lost, communities were destroyed, families broken up, and worst of all, a culture of poverty was created. When money stops working for you, you stop using it.

Things would have been different if the employees had been members of a less competitive internal market and if they were paid in an internal currency. Under the full tosoc program, their homes would have been guaranteed as well as the other basic living requirements. There would have been jobs available, if not as good as the auto manufacturing jobs. Plenty of internal money would have been available to keep Detroit's local markets going.

Note that the regulation of the relationship between the different currencies in the tosoc program automatically imposes capital controls. The rich could not so quickly impoverish an area by moving capital around because they could not own the internal currencies.

Therefore under the tosoc program, many people in Detroit might have lost their higher auto manufacturing incomes and become poorer, but no one would be in poverty. Society would still have revolved around making money and choosing how to use it rather than living on welfare benefits. In the culture of poverty, most everyone is a loser with no real hope for the future. In the market culture, the attitude is about winning. That is why even the worst job that earns any kind of money is better than living off of charity.

Finally let us take a look at Walmart in relation to the tosoc system. Walmart is a huge disruptive influence in local markets because it displaces local businesses. Our critique of Walmart is not precisely that, however. It is that Walmart suppresses the local entrepreneurial spirit. Small communities with a Walmart find it harder to retain talent because a Walmart store restricts the kinds and quantities of business opportunities and jobs available. A rural town can be a nice place to grow up, but it has nothing to offer its brightest offspring. That is true to some extent of all small towns, but the problem is worse with a nearby Walmart.

One way to view Walmart's role in a community is that Walmart sucks dollars out of the community. The money is not invested locally. That is the point, after all, because each store is supposed to make a profit that is controlled by the company leadership and invested elsewhere. Everybody in the community knows that they cannot compete with Walmart, so they do not even invest in one another. Many townspeople work outside of town. The town sees only a very little of the money they earn because the workers shop at Walmart, too.

There is a risk in this trend, and not just because of Walmart, that wealth in the lower population areas of the country will be "strip-mined" away to the point where what remains is essentially valueless in price terms, even the land. At that point, when local prices have deflated enough, the rich will start buying everything in the rural areas and creating latifundia in the nation's heartland, displacing everyone else into the big cities. This might be similar to what happened in the Ancient Roman Republic, and it is not consistent with the survival of freedom and democratic institutions.

In the tosoc system, Walmart as a whole would definitely fall in the category of an external business and be required to use the external currency. Many Walmart customers today would be converted over to an internal currency. Presumably the local Walmart stores would also be converted and incorporated differently than the main company. Much like AT&T, Walmart would be broken up. The core company would be a large-scale buyer in the external markets, getting the best deals and distributing the results to internal markets under government supervision.

It might be that all of the core Walmart's sales income would come from selling goods to local, internal-market Walmart stores at a profit. However, under government supervision, it might be that some profit would also come from conversions of internal currency profits into the external currency. However, since the point would be to keep Walmart from unbalancing local markets with its enormous economic power, then its ability to "strip-mine" an area of cash would be regulated. The difference between the external currency and the internal currencies in the tosoc system provides a natural way to do this.

To the extent that Walmart has unbalanced local markets it has been a source of financial instability and poverty. That is, large companies can create urban pockets of poverty like Detroit, but they can also create rural pockets of poverty. Walmart contributes to that using our single currency and the free flow of capital, limiting the growth of small communities by transporting their wealth out.

Therefore stopping the process of poverty creation necessarily requires that a minimum of local wealth be retained locally rather than transported to areas where it will be used "more efficiently." The case can be made that we are recommending our own creation of poverty in the tosoc system by not supporting the most efficient use of capital. The problem with this opposing view is that one's view of economic efficiency depends on the breadth of one's vision. Since the automobile companies do not have to pay for the cost of Detroit, then they feel that they were quite efficient in their use of capital and that they are not connected with Detroit's problems.

Similarly Walmart sees itself as just an economic competitor, and if small-town businesses cannot keep up in the free market, that is their problem.

This denial of accountability for the messes the rich make or the messes that are made for them is no longer acceptable. We no longer accept that pollution is an acceptable public cost in the pursuit of manufacturing efficiency. We are coming to the point where we will no longer accept that mountains of eternal trash are an acceptable public cost in the pursuit of packaging efficiency. We must come to the realization that financial messes are no longer acceptable public costs in the pursuit of maximum private economic efficiency.
In each case above we have been or ultimately will be willing to hold private businesses accountable for the public messes they leave behind. Strip-mined areas and peoples of any type must be restored. That must become a cost of doing business, too. has some of the tools we need to make that work and is devoted to solutions, not just hand-wringing descriptions of the problems.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

TheOtherSideOfCapitalism (

Copyright © 2013 TheOtherSideOfCapitalism