International banking and money as a commodity

The Economist this week has an article about international banks and the problems of their retreating to their home markets.

The big problem here is that we treat money as a commodity when it really should be an intangible token which represents the goods and services produced by an economy.

Money represents purchasing power and gives its holder command over goods and the services of people.  International financial transactions should then represent and match exchanges of goods and services between different countries.

Historically we have mostly used gold, a commodity with limited usefulness, as the token.

By treating money as a commodity we have given it a value of its own and made transactions that do not match the exchange of goods and services.  This has made the financial system complicated, convoluted and chaotic.  It is no wonder there are lots of problems.

Managing water shortages

Wow!  I’ve finally come across an article which takes a moderately realistic approach to the management of resource shortages, in this case water.and the effects of water shortages on food production.  Water and food are so important in our lives that one hopes lots of people will read this and that some of those people will be decision makers in the food/agriculture industry.

How to regulate gambling

The current issue of The Economist has in its internet edition and article on betting shops.

For most people who gamble it is a form of entertainment which will always be here.

The best way to deal with it is to increase competition so that margins will drop and more of the money will be returned to players.  The way to increase competition is to make licenses easier to obtain and require hosts to publish information about themselves  and their businesses.  This should include any criminal convictions they might have, the percentage of money returned as winnings and profit and loss statements.

(The author of this comment has a web log on economics at

Ridiculous explanations for the economic crisis

This post was prompted by the Buttonwood columnist in The Economist.

Sometimes it seems that some economists come up with ridiculous theories to explain the economic crisis.  These theories divert our attention from basic issues and allow some people, including columnists, to ignore the obvious and maintain their faith that the world will soon return to its golden age of prosperity.

When I studied economics the professors would draw on the blackboard an x shaped graph.  Sometimes the lines would be labelled to represent the financial side of the economy and the physical side of the economy .  This is an important distinction but it is forgotten as soon as we leave the blackboard.  This could be because it is easier to measure the physical side of the economy in financial terms.

Both sides of this graph have the potential to cause economic chaos.

On the financial side the way in which money is created is so complex and convoluted that even bankers won’t believe it.  Not only is it complex but interest is charged on the money created making it into a sort of Ponzi  scheme

On the physical side we have been using resources at such a rate that those which are left require a lot of energy to extract.  It’s hardly surprising that “of 34 advanced economies, 28 had lower GDP per head in 2011 than they did in 2007. ”

To deal. with the economic crisis, rather than thinking up theories which blame it on some scapegoats, we need to look at the basics and do some sour searching regarding our own lifestyles.

Extending “too big to fail”

This weeks Economist has an article about extending the definition of “too big to fail” to include a number of other types of financial business.

When dealing with banks I think we need to distinguish between too big to fail and too important to fail,

When any business fails its shareholders and customers stand to lose. Is it the responsibility of government to protect shareholders and customers from the risks of doing business?

Financial intermediaries which take deposits, make loans and follow fractional reserve policies, i.e. banks, are  special cases in that in making loans they are creating the money supply with which we exchange goods and services.  This makes them too important to fail because a bank failure decreases the money supply.

One has to note most bank deposit customers are protected by deposit insurance to the extent there is enough money in the insurance fund.

This money creation role provides the rationalization for regulating banks and other financial intermediaries.  But what is the rationalization for regulating other types of business that handle money?  Perhaps by extending regulatory powers it appears the authorities are doing something about the economic crisis.

The economic policy dilemma

An article in The Guardian calls upon the European Central Bank to drop its commitment to austerity and instead go for quantitative easing and inflation.

The problem is that either way some people, different people, perhaps even all of us  are going to suffer.

Austerity means some people are going to lose their jobs.  Inflation means that people with savings are going to see their savings eroded and possibly reduced to nothing.  Quantitative easing is intended to provide stimulus to economic activity.  However, if it is correct that the root cause of current economic problems is resource depletion, then this will only use even more resources and bring forward an even worse economic collapse.

I figure that as well as resource depletion we also have to deal with some serious problems in the way in which money is created.  A suggestion as to how to deal with these problems is given in the essay “LETS go to market: dealing with the economic crisis” on this weblog.

Okanagan Indians. religion and trade

Early in the 1900s a Scotsman named James Alexander Teit studied and wrote about a number of the British Columbia interior  Indians includng those who lived in the Okanagan valley which runs through southern British Columbia and into Washington State.

He reports (page 253) that these people “claim that  the earth was made by the ‘Father mystery’ or ‘great mystery’ –  a mysterious power with masculine attributes ….”   I like the word “mystery” as I figure religion attemps to explaine things we cannot know by empirical observation.

“He (the great mystery) said that everything on earth should be subordinate to the people, and everything would be for their use as they were all his children; and all the people should have equal rights in everything, and would share alike.  This is why all food was shared among the people, and no one thought of  debarring any one else from access to anything required for life.”

I wish this were a part of our current religion although one can speculate the natives did not have an over population problem.  There are numerous reports that they were very helpful to the first white people to enter their territory.

Horses were probably introduced early in the eighteenth century.  It appears horses had considerable impact on the social and economic life of the people.  Previously travel was on foot or by canoe. (Some of them had access to extensive water ways.) Horses allowed more people to travel greater distances and to carry a greater quanitity of goods.  Horses also allowed new methods of hunting and transportation of food over greater distances.  There was greater intertribal trade and even intermarriage.

Today these people are mostly Roman Catholic or fundamentalist,   they live on reservations,  have to deal with terrific social problems including alcohol and drugs. I have been told that 90 percent of them were sexually abused as children. I usually get depressed every time I deal with any of them.

Franz boas and James Teit, Coeur D’Alene, Flathead and Okanogan Indians, Fortyififth Annual report of the Bureau of American Ethnology,  1927-1928,  United States Government Printing Office, Washington, 1930.

Headlines good and not so good

We’re starting to see headlines that at least in the United States the economy is starting to recover.  At the same time there are lots of news articles about how people  continue to suffer economic pain.

Perhaps it depends upon what style of hat one wears.  For some people things are going to improve but for lots of others it will continue to be tough.

I figure the economy is fractal in nature with lots of ups and downs of varying durations..  If this is correct then the first question is which way is it trending,  the second question is how long before it turns down again.and the third question is how do we prepare for the next downturn.

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