Posted by: cjenscook | 01/29/2012

Taking Stock – Occupy the EU !

Perhaps the most striking statement made by David Cameron in his speech at Davos this year was right at the end….

But there is nothing about the current crisis that we don’t understand.

This may come to be seen as one of the most staggeringly complacent, blithely arrogant and completely and utterly wrong statements in political history.

Mr Cameron’s speech is a classic text in the Shock Doctrine genre. The € patient is bleeding to death from the effects of disastrous neo-liberal fiscal and monetary policies, and the apothecary’s remedy is a combination of the application of leeches and the removal of healthy limbs.

There is unfortunately nothing about the current crisis which Cameron or his audience in Davos understands since the € system is based upon a vacuum, and his rhetoric upon myths.

The Vacuum
The European Central Bank (ECB) is the Black Hole at the heart of a monetary system which is based exclusively upon interest-bearing debt. The € consists of credit created and lent or spent into circulation by private credit institutions (also known as banks) and by the ECB.

Private bank credit is essentially a pyramid scheme of credit based only upon a tiny sliver of bank capital.

The ECB is just a private bank writ large, and the public credit it creates as currency has no basis on any underlying value – such as tax revenue – and is supported by confidence and trust alone.

Credit is a Latin word meaning ‘he believes’ and the problem is that belief in the € system has been lost because the pyramid of debts upon which it rests is unrepayable which in turn means that the banks are almost without exception insolvent.

The Myths
Firstly, Banks do not take in deposits and lend them out again: that is the Fractional Reserve Banking myth. As stated above, banks create modern ‘fiat’ currency upon the basis of a small amount of capital when they lend or spend and this currency is simultaneously deposited into the system. Bank creation of money is not constrained by reserves of cash (ie liquidity); but by the bank’s reserves of capital (ie solvency).

Secondly, Treasuries do not collect taxation and then spend it: that is the Tax and Spend myth. For 500 years our sovereigns were able to spend and invest in public assets by issuing Stock (in the form of half of a wooden tally-stick) to those who provided value to them.

This Stock was then returnable to the Exchequer in payment of taxes. Indeed, the very phrase ‘rate of return’ described the rate over time at which stock-holders could return stock to the Exchequer for cancellation against taxation.

Unfortunately, from 1694 onwards, when the (then private) Bank of England started to manufacture credit with which to purchase government Stock, we have become accustomed to think that the source of credit is the banking system, rather than the Treasury on behalf of the people.

The € is based on a pyramid of debt built upon pyramids of debt. In order to re-base the € we must in a parallel process resolve unsustainable debt, and transition to a sustainable credit system based directly upon value, rather than claims over value manufactured by a bank.

Resolution – Euro Stock
Every EU national Treasury – or their Central Bank on their behalf – could issue undated Stock to the ECB at a discount, in much the same way that government branches issued Stock to each other.

So a €1.00 Unit of € Stock sold for 80c gives a 25% absolute return: the rate of that return depends upon the ability to return the Stock in payment of taxation, or to sell it to a tax-payer.

The ECB in turn could then issue a undated Consolidated € Stock (Euro Consols?) at a discount to investors in exchange for both ECB and domestic EU member debt. The amount of € Stock exchanged for a particular national debt issue would reflect the value of that debt in the market.

The outcome – at a stroke – is to resolve all dated Euro debt into undated Euro Stock the value of which would depend upon the flows of taxation within member countries.

This top down process would give a breathing space – since there is no longer any debt repayment – and stops the bleeding. But it will not put the € patient back on his feet, since it addresses only public sector debt.

Transition to a sustainable EU economy will take place bottom up through resolution of private housing debt, and networked community based investment in housing; renewable energy and – the cheapest energy of all – in energy savings or NegaWatts.

But that is another story.



  1. “The ECB in turn could then issue a undated Consolidated € Stock (Euro Consols?) at a discount to investors in exchange for both ECB and domestic EU member debt. The amount of € Stock exchanged for a particular national debt issue would reflect the value of that debt in the market.

    The outcome – at a stroke – is to resolve all dated Euro debt into undated Euro Stock the value of which would depend upon the flows of taxation within member countries.”

    The big question is: Would investors (read speculators) exchange their dated debt for undated stock? It is all a question of confidence in the system and one dated bird in the hand is a lot better than 10 undated ones on the roof!

  2. In fact the calculus is very different.

    Investment comes in three forms: there is ‘speculation’ which is investment with a view to transaction profit; inflation hedging, which is investment with a view to avoiding loss; and investment aimed at making a return over time

    Someone with €1m of dated debt has an extremely illiquid – probably one of a hundred different classes of debt in terms of date and rate of interest – investment which is probably worth a fraction of €1m on the market right now.

    If converted into €1m of stock there is no question that the stock will not be repaid, because it is not debt. And of course it may always be sold to taxpayers who will simply use it to pay tax.

    A market will then develop where taxpayers bid for the cheapest stock on offer, but will ALWAYS buy if a €1.00 unit of stock costs less than €1.

    So the only question is what will be the rate of return which will then – literally – be the rate at which stock can be returned for cancellation. That depends on how many years’ worth of taxes have been sold forward and ‘unitised’ and how many units of stock have been issued and exchanged for debt in the resolution process.

    The market price of €1m ‘stock’ will depend upon the expected rate of return but with € interest rates what they are it will be a multiple of the price of €1m of debt for countries like Greece, Italy and Spain in particular.

  3. The assumption here seems to be that investors will have faith in the value of the new stock because it can be used for paying taxes (as per the government of the day’s decree).
    But how much faith should you have in the government of the day?

    • You have political risk if you buy debt. You have political risk if you buy Stock.

      But Stock is demonstrably superior to debt is my point.

      As I said, this is only the Resolution bit: Transition to a sustainable fiscal system is something else.

  4. Three basic things govern our global economy:

    1st ~ Fractional reserve banking ~ the banks printing money out of nothing.

    2nd ~ Compound interest ~ when you borrow money, you have to pay back more than you borrowed which means that you, in effect, create money out of thin air, again which has to be serviced by creating still more money.

    3rd ~ We live in an ‘infinite growth’ paradigm.

    But the economic paradigm we live in now is a Ponzi scheme. Nothing grows forever. It’s not possible.

    As a great psychologist James Hillman wrote: “The only thing that grows in the human body after a certain age is cancer.”

    It’s not just the amount of money that has to keep growing it’s the amount of consumers. Consumers to borrow money at interest to generate more money and obviously, that’s not possible on a finite planet. People are now basically treated by the banks as vehicles to just create money, which must create more money to keep the whole thing from falling apart, which is what’s happening right now.

    There are really only two things anyone needs to know about the monetary system:

    1: All money is created out of debt. Money is monetised debt whether it materialised from treasury bonds, home loan contracts or credit cards or whatever. In other words, if all outstanding debt was to be repaid right now there would not be one pound/dollar/euro in circulation.

    2: Interest is charged on virtually all loans made, and the money needed to pay back this interest does not exist in the money supply outright. Only the principal is created by the loans and the principal is the money supply. So, if all this debt was to be repaid right now, not only would there not be any money left in circulation, there would be a gigantic amount of money still owed that is literally impossible to pay back, for it does not exist.

    The consequence of all of this is that two things are inevitable: Inflation and Bankruptcy.

    As far as inflation, this can be seen as a historical trend in virtually every country today, and easily tied to its cause, which is the perpetual increase of the money supply which is required to cover the interest charges and keep the system going.

    As far as Bankruptcy, it comes in the form of debt collapse. This collapse will inevitably occur with a person, a business or a country and typically happens when the interest payments are no longer possible to make.

    But there is a bright side to all of this… well, at least in terms of the market system. Because debt creates pressure. Debt creates wage slaves. A person in debt is much more likely to take a low wage than a person who isn’t, hence becoming a cheap commodity.

    So it’s great for corporations to have a pool of people that have no financial mobility. But hey – that same idea also goes for entire countries. The World Bank and the International Monetary Fund, which mostly serve as proxies for transnational corporate interests, give gigantic loans to troubled countries at very high interest rates. And then, once the countries are deeply in the hole and can’t pay, austerity measures are applied, the corporations swoop in, set up sweatshops and take their natural resources.

    Now that’s market efficiency.

    What makes you think THEY will ever allow anythying to interfere with that nice little earner?

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