Eurozone: welcome to your currency board future

Izabella Kaminska

| Mar 31 13:05

 http://ftalphaville.ft.com/2015/03/31/2125259/eurozone-welcome-to-your-currency-board-future/

 

Citi’s Chief Economist Willem Buiter spent some time with FT Alphaville explaining why he believes Draghi’s concession on profit and loss sharing among ECB member national central banks turns, in all likelihood, the single monetary unit into nothing more than a glorified currency board.
Quick background: The ECB’s profit-and-loss sharing mechanism became a key negotiating point ahead of European QE. For the Bundesbank, QE was only viable if NCBs assumed most of the responsibility for losses on assets they brought into the consolidated balance sheet. In the end Draghi acquiesced by reducing risk-sharing to only 20 per cent of assets.
A currency board works by pegging liabilities (central bank reserves and currency) to an exchange rate target, rather than a CPI or employment target. The monetary authority managing the board achieves the target by ensuring all commercial entities served by the system can convert the authority’s liabilities into foreign currency at any point. In short, there’s a guaranteed FX convertibility promise at the central bank.

The flip-side to that conversion promise is if a commercial bank wants local currency liquidity from the currency board authority, it must pledge high-quality assets denominated in the currency being pegged to. If the bank has none, it’s booted out of the system (unless it can find someone who will lend the assets to it).
The ECB, however, dishes out euro liquidity against an eclectic pool of government assets all denominated in euros, its own unit of issuance. From that point of view, the ECB’s structure is nothing like a currency board. The asset-liability exposure on its books is circular, because the ECB can always add more euros into the system to serve and support the creation of euro-denominated assets.
The system works in a circular fashion for as long as the exposures on the euro-denominated assets created by the process are pooled within the system, and profits or losses absorbed by the system as a whole. It’s a system that can never be threatened with technical insolvency. (Insolvency by inflation is a different matter — and hardly a problem in the eurozone at present.)
According to Buiter, Draghi’s decision to introduce a profit-and-loss transfer mechanism undermines this sort of positive feedback loop in the system. It turns the structure into a much more rigid currency board, with much greater risks in tow for individual NCBs.
As he noted to FT Alphaville:

For central banks, you can’t have a central bank with 19 independent profit and loss centres. Since individual national central banks have no discretionary control over their ability to print money they look more like commercial banks or sort of periphery banks in a currency board that are at risk of being forced out or going bust. The only solution to that is profit and loss sharing, as should be the case under the ECB’s own rules for actions under taken by national central banks in the pursuit of single monetary policy. And here they have declared, unanimously I think, the council, that QE is monetary policy yet there is no risk sharing. Which is bizarre in the sense that it puts the very existence of the eurosystem at risk. But it’s also a direct violation of their own rules.

The logic is simple. Because NCBs will now be accountable for the quality of the assets they bring into the eurosystem, they will also be constrained on the number of assets they can create. Instead of a positive feedback loop, a vicious circle comes about very quickly.
From now on, as with a currency board, NCBs which lack enough high quality assets in their jurisdictions — because euro flows into their jurisdictions are not naturally forthcoming, meaning there’s not enough euros to redistribute to create assets without outright money-printing — will not be able to get the liquidity they need from the system. Instead, they end up facing the same sort of FX-exposure — in this case the Frankfurt controlled euro (because they can’t control the printing of their own euro liabilities) — that commercial banks on a currency board are exposed to because they too can’t control the inflow or supply of FX into their own systems.
This is why, in Buiter’s mind, Draghi’s profit-and-loss sharing ruling transforms the 19 NCBs of the euro-system into nothing more than dependent commercial entities of the master central bank: the ECB. In the long run, it’s a structure that puts more pressure on NCBs that don’t have naturally occurring euro inflows into their jurisdiction, and threatens NCB insolvency.
Hence why, according to Buiter, in the long run it’s a policy decision that at best delays the prospect of profit and loss sharing, rather than prevents it. At the end of the day, if an NCB was to go bust, the only way to save the system would be by post-event profit and loss sharing:

So, yes, the choice will be if central banks’ exposure to an insolvent sovereign, were to rise to the point that certain central banks faced insolvency , in a situation where the sovereign is unlikely to be able to recapitalise it because the sovereign going bank is the reason why the central bank is in trouble, at that point you have a choice. Either we settle ex-post and say we didn’t mean it, here comes the ex-post risk-sharing or the country with the insolvent central bank tries another monetary regime.
So that’s the very stark choice. And my guess is that in the great european tradition of saying one thing and doing something else if it becomes too costly to stick to what you first proposed, there would be ex-post risk sharing.

All of which, he noted, only adds needless uncertainty, lack of confidence, and market volatility into the system, including the possibility of bank runs, none of which would be there if the national central banks were just branches of the ECB.
In fact, according to Buiter, NCBs should probably have been transformed into ECB branches long ago. Furthermore, if an NCB was to go bust, chances are the market would create the conditions to allow such branches to manifest either way.
As Buiter explained:

…the Greek banks can’t go to the Bundesbank, but they could go, in principle, to Frankfurt — to headquarters –and if Frankfurt wanted to it could even open a small side office in Athens or wherever and bypass the national central bank. This wouldn’t be polite, but there’s nothing in the treaties that precludes the ECB itself from doing anything that the national central banks do. So the possibility of getting rid of this historically very understandable but completely ridiculous arrangement of 19 independent legal entities as national central banks and replacing it with one supranational entity the ECB is there.

In such a scenario, Buiter says cash in a bankrupted NCB’s jurisdiction would remain legal tender as would cash balances and deposits of the commercial banks at the national central bank in question.

They are eurosystem liabilities. You’re responsible under these strange own risk rules for losses on the assets, but you can’t just waive your liabilities goodbye.

Moonshine, Scam, & The Delusion Of Democracy

• 3 Charts To Prove That 'Shadow Banking' Could Collapse The Entire Financial System
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  Post date: 03/29/2015 - 09:03
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The American Dream Part 3 - Moonshine, Scam, & The Delusion Of Democracy

Submitted by Tyler Durden on 03/29/2015 12:45 -0400

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http://www.zerohedge.com/news/2015-03-29/american-dream-part-3-moonshine-scam-delusion-democracy

Submitted by Bill Bonner via Acting-Man blog,

Infection

When we left you yesterday, we were trying to connect the bloated, cankerous ankles of the US economy (Part 1) to the sugar rush of its post-1971 credit-based money system (Part 2).
Today, we look at the face of our government. It is older… with more worry lines and wrinkles. But whence cometh that pale and stupid look?
That is also the result of the same advanced diabetic epizootic that has infected American society.

Moonshine production facility in the 1920s …

Soft and Mushy

After real money and real savings left the economy circa 1971, GDP growth rates fell. Wages atrophied. And now, for the first time in 35 years, American business deaths outnumber business births. The body economic grew soft and mushy – unable to hold itself erect or to stand on its own two feet. Thenceforth, it needed the crutch of increasing credit.
The new credit-based monetary system meant that Americans had less real wealth. But until 2007, they could still get what they wanted by borrowing. Few noticed that they were borrowing from the company store and becoming slaves to their credit masters.
No one ever figured out how to create gold. So, Washington insiders changed the money system in two steps. In 1968, LBJ asked Congress to end the requirement for the dollar to be backed by gold. And in 1971, “Tricky Dicky” ended the direct convertibility of dollars to gold.
With the new dollar, unbacked by gold, they could create all the money they wanted. After the 1970s, instead of earning more money, or borrowing from the savings of his neighbors, the typical American had to grovel to the elite who controlled the credit machine.

The number of new business starts has been in a downtrend throughout the fiat money era – but in 2008, the birth rate crossed below the death rate for the first time ever, and has remained there ever since – click to enlarge.

The Making of a Modern Debt Serf

Government and its cronies in the banking sector created money ex nihilo. This money cost them nothing. Still, they lent it out just as though it were real savings. The typical American took the bait. He bought a house. He bought a car. He had a nice steak dinner and paid with a credit card.
Now, he was no longer a free man, in a free economy with real money in his pocket. He was a slave to the credit system. And he needed to work hard to keep up with it. The feds got the money for nothing. But he had to pay for it. Most often, he couldn’t pay off his debt. So, he became a debt serf – beholden to his masters for his home, his transportation, his education, his health care… and even his food.

If he wants a house, doesn’t he depend on Washington-backed Fannie Mae and Freddie Mac to help him get it? If he wants a car, doesn’t he need the Fed’s ultra-low interest rates to help him buy it? If he needs a job, doesn’t he need the Fed’s stimulus? Or failing that, at least Washington’s unemployment insurance, food stamps and disability payments?

Just look at the food-stamp program. From zero in 1970, the scheme now costs $75 billion a year – every penny of it to people who used to be capable of feeding themselves. The elegance of this scam is staggering. The banks get money at zero cost. They give the homebuyer a mortgage. Now, effectively, the bank owns the house and the “homeowner” pays it rent every month. The poor schmuck never realizes what has happened. He kisses the hand of the lender and practically begs him to sleep with his daughter.
When elections come he is ready to play his role – a proud citizen and homeowner, voting for more lashes.

In the 6^th year of the “recovery” that was bought with an inflation of the money supply by more than 100% (money TMS-2 from $5.3 trn. in 2008 to $10.8 trn. in early 2015) and a similarly large increase in the federal debt, a near record 46.5 million Americans continued to receive food stamps – click to enlarge.

Flabby Income Numbers

More and more Americans vote for “something for nothing.” Because nothing is all they have to bargain with. Here are the numbers from the Social Security Administration:

• 39% of American workers make less than $20,000 a year
• 52% of American workers make less than $30,000 a year
• 63% of American workers make less than $40,000 a year
• 72% of American workers make less than $50,000 a year

These flabby income numbers are also the result of the regulatory policies and artificial money that has been drip-fed to the American people over the last 44 years. By one estimate, had the economy remained on the track it was on in the 1950s and 1960s – before the new money and crippling restrictions took hold – the average American would earn $125,000 more a year today.
Instead, since the turn of the new millennium, the average household income has fallen to $52,000 from $57,000.

Real median household income (blue line) has recovered somewhat from its trough (note that the inflation adjustment is performed by using official CPI data, which are dubious, to say the least). Nevertheless, current levels were first seen about 25 years ago – click to enlarge.

The Delusion of Democracy

But we are still talking about money, aren’t we? Let us take another look at the face of our new government and draw a measure of its character. The skull may be the same as it was in 1970 – the Constitution hasn’t changed – but gone is the smooth, youthful, open visage. Over the years, the sour creases have multiplied. They tell an ugly story. What happened?
When a group of people can control an economy’s money, they tend to direct the spoils to themselves, their cronies and their pet projects. The rich, special interests, the well connected and the elites figure out how to play the game. And how to make it pay. They throw some bones to the plain people and take the meat for themselves.
The financial sector, for example, watched as its profits went from only about 15% of total corporate profits in the 1970s to 40% in the 2003-to-2007 period. How did that happen? Easy: They were lending money they never had to earn.
The corruption of the American system of government has taken place over more than half a century. But it is only in the last few decades that the body politic has begun to curl into a grotesque new shape. In a credit-based money system, the people who control the credit are like guards at a gulag. Pretty soon, they start acting like them. They decide who eats and who goes hungry.
They are not bad people or good people. They are just like all of us – eager to take advantage of opportunities as they present themselves. Gone is the delusion of democracy. Out the window is the hope of a free market. Forget the American dream. It is all fraud, scam and the old false shuffle.
Stay tuned …

The history of the financial industry’s share of total non-farm corporate profits. It is not difficult to tell who the biggest beneficiaries of the fiat money system are.

Buiter on soggy global growth in 2015

Izabella Kaminska

| Mar 27 12:21

 http://ftalphaville.ft.com/2015/03/27/2125141/buiter-on-soggy-global-growth-in-2015/

Willem Buiter, Citi’s global chief economist, believes global growth will come in at somewhere between “moderate and modest” in 2015, with his team shaving their growth target from 3 per cent last month (and 3.3 per cent six months ago) to 2.9 per cent.
As Buiter noted in a meeting in London on Friday, it’s also unlikely that in the long run currency wars, which wash each other out, will help to drive demand:

Globally, disinflationary pressures are not going to disappear. All the exchange rate changes will do is redistribute this global disinflationary pressure from countries whose currencies are depreciating to those that are appreciating. But there appears to be a global output gap.
If you look at the global inflation which we see at about 2 per cent or something like that, so there is a world where collectively, despite all the attempts by what is now 24 central banks to decouple from the dollar by being more expansionary, there’s still not enough demand stimulus to burst this global disinflationary pattern.
One would hope that at some point the combined efforts of those who have significant negative output gaps would outweigh those of whom are closing them fast, but it seems there are very few countries which have a positive output gap at this point, so this is a soggy global growth report, especially given the steady deceleration of emerging markets almost without exception, apart from one bright shining light, but with everything else from China to Russia to Brazil and now also Mexico being revised steadily down, but I think there’s more to come in the case of China.

As to where the demand stimulus could come from in the future, Buiter noted there aren’t many obvious areas:

So we are in a world which could do with additional demand stimulus. It’s unlikely to get it from the US, it’s getting some from the euro area, but I’d say still quite limited, €1.1 trillion sounds like a lot in terms of balance sheet expansion but it is of course undoing the shrinkage that has already occurred. The Japanese are shoving it out but again, the dollar equivalent of the yen is not worth a dollar. The fact that the US has stopped injecting dollar liquidity probably subtracts more from overall global demand than what the europeans and the japanese are putting in at the moment.

According to Buiter that’s all down to the fact that US QE is more equal than others due to the dollar’s reserve status:

The dollar is the only global reserve currency worth the name. The euro is in intensive care still, the yen is too small, sterling nobody has heard of, and the renminbi is not ready for prime time yet. The dollar, strangely enough, with the US economically being somewhat well over its peak, the dollar is more dominant today than I remember in a long time. And we’ve got the end of the expansion of dollar liquidity, the steading of the balance sheet of the fed is probably not compensating for the global liquidity by what goes on in Europe and japan.

The good news is, despite the unprecedented nature of the economic situation, including the persistence of very low risk-free rates and the disappearance of risk-premia, the US is still growing — albeit in a confusing manner. As Buiter noted:

This makes for a very unusual and unprecedented combination of soggy growth and refusal to price risk in any meaningful way. The good news is that the US is still growing, and the data we have seen recently, retail sales, durable goods, is not just a version of frosty the snowman like we saw last year. If the strong payrolls end with the next set of data, then at least we have a consistent picture. This would explain how come it was cold enough for people not to go shopping but not cold enough not to go to work. Which is what we had, we had both last year which makes sense. At the moment i don’t fully understand what’s going on.

But, Buiter concluded, it’s the continued absence of capex which is more of a worry. This, in his opinion, leaves the Fed sitting on its hands until at least December — especially if it turns out that the growth we’ve seen is down to “the kindest tax cut of them all, the oil price decline”, which he said had been primarily funded by oil exporters.

This entry was posted by Izabella Kaminska on Friday March 27th, 2015 12:21. Tagged with Citi, Global growth, Willem Buiter.

Bank of Canada Face Lawsuit for Conspiracy

Bank of Canada, Finance Minister, and Others Face Lawsuit for Alleged IMF Conspiracy

Crown lost two attempts to have case tossed, has days left for final appeal

By Matthew Little, Epoch Times | March 19, 2015

Last Updated: March 22, 2015 2:18 pm

http://www.theepochtimes.com/n3/1290580-bank-of-canada-faces-lawsuit-for-alleged-imf-conspiracy/

Toronto lawyer Rocco Galati, seen here in Winnipeg in July 2012, is arguing a suit that alleges the Bank of Canada has a duty to make loans to the country’s federal, provincial, and municipal governments. (The Canadian Press/Trevor Hagan)

TORONTO—It would be easy to assume the people suing the Queen of England, the Bank of Canada, and three ministers for a conspiracy against “all Canadians” wear tinfoil hats.
They don’t. They may be conspiracy theorists, but they are also intelligent, thoughtful people who have a lawyer with a history of winning unlikely cases.
And despite the government’s best efforts to have this case thrown out, it’s going ahead after winning an appeal that overturned a lower court’s ruling to have it tossed and surviving a follow-up motion to have it tossed again.
The government has one more chance to have it thrown out through an appeal at the Supreme Court, but that has to be filed by Mar. 29 and that looks unlikely.

That means the Committee on Monetary and Economic Reform (COMER) is going to have its day in federal court.
This little think-tank alleges that the Bank of Canada, the Queen, the attorney general, the finance minister, and minister of national revenue are engaging in a conspiracy with the International Monetary Fund (IMF), the Financial Stability Board (FSB), and the Bank for International Settlements (BIS) to undermine Canada’s financial and monetary sovereignty.
No major media have covered this story. That could be because of the powerful vested interests the suit targets, as Rocco Galati, the lawyer trying the case, suggests. Or it could be because there are parts of the statement of claim that read like they were pulled from the dark corners of some Internet conspiracy forum.
They weren’t. These are serious people with wide knowledge of the financial and monetary system. And their lawyer is no slouch.

Galati has a reputation for winning unlikely lawsuits. The Globe and Mail’s justice writer Sean Fine once called Galati Canada’s “unofficial opposition” for his propensity to have the government’s edicts tossed out in court.
One recent high-profile win saw Galati block the Conservative’s appointment of Justice Marc Nadon to the Supreme Court with a suit he won in March last year.

It’s not often a government has to defend itself against a conspiracy suit in court.

Toronto-based COMER and its fellow plaintiffs Ann Emmett and William Krehm are suing over fundamental changes to the Bank of Canada’s role that were made in 1974 when the bank stopped making loans to the government.
The Bank of Canada (BoC) was founded in the Great Depression and played a major role loaning money to the government. It helped finance Canada’s war effort during World War II and could loan money to the government, without interest, if it chose to do so. Any profits the BoC made were returned to the government minus the Bank’s operating expenses. That last point remains the case today, with $1.7 billion sent to the Receiver General annually.

No National Debt?

COMER alleges that by no longer providing these loans, the Bank and others named in the suit have forced the government to finance budget deficits by borrowing from private markets and paying hundreds of billions of dollars in interest. Last year, $28 billion—over 10 percent of the federal government’s $277 billion in expenditures—went to servicing the debt.
That’s more than what was spent on National Defence ($21.5 billion) and nearly as much as the Canada health transfer ($30.5 billion).
The Bank of Canada Act allows, or as COMER alleges—requires—the BoC to give the federal government loans up to a total value of one-third of the government’s predicted annual revenues. For provincial governments it is a quarter of those revenues. The loans have to be repaid within the first quarter of the next fiscal year. At that point, the government just needs to pay back the loan with incoming revenues, and take out another loan to make up any deficit.

The Bank of Canada is named in a lawsuit that has survived two attempts to have it thrown from court. The suit alleges the Bank is conspiring with the IMF and others to force the Canadian government to go to private markets to borrow money. (Matthew Little/Epoch Times)

The benefit of that is no national debt, according to Galati. However, there is a risk of inflation if too much money is poured into the economy. Some economists argue that any arrangement where central banks loan money directly to their national governments invariably leads to runaway inflation.
Galati disagrees, pointing out that the government can borrow as much as it wants from private markets and inflation is manageable.
The suit alleges that the BoC stopped providing these loans at the behest of the IMF, BIS, and FSB so private interests could benefit, presumably from interest paid on the national debt.
Galati predicts the government will try to delay the suit, but if it goes ahead, he said the facts will be borne out.
“A lot of the facts are not in dispute, believe it or not. They just don’t want this case heard.”
Galati plans to call the BoC governor, the finance minister, and others to testify if the case goes ahead.
The Bank can’t comment on the case directly because it is before the courts, said a spokesperson, though it did provide background materials on the Bank’s history.

How Money Works

The nature of money and debt is at the heart of the lawsuit COMER has filed. Representatives from the group told the Epoch Times that few people understand how money is created.
One might wonder, therefore, how much money the Bank of Canada has, and how the government can borrow from the country’s own central bank.
This is where conspiracy theory meets the cold hard facts—that the vast majority of the money in Canada’s economy was created by bankers with the push of a button. The BoC can do that also.
When someone takes out a mortgage, the borrowed money does not come from someone else’s savings. Instead, the money is created in that instant through the trick of double entry bookkeeping. The bank records the loan on one side as a liability, and the debt owed to the bank as an asset. As long as the two balance out, the system works pretty well.

Banks keep the system humming along smoothly by shuffling these balance sheets around each day. If they are short, they borrow from each other on the overnight market at the rate set by the BoC.
As long as everyone pays their loans, the systems works pretty well and basically creates wealth out of thin air. But if banks loan money to people who can’t repay it, the whole system falls apart. That is essentially what happened in the 2007 subprime mortgage debacle that brought on the global recession.
There is one problem with the system, according to its critics: interest. And if you are a government, that interest is significant.
Significant portions of COMER’s suit, including a tort portion seeking damages, were thrown out in those earlier rulings, though Galati said they could be amended and filed again. Both he and the government have until next week to file appeals of the previous ruling.
And even elements of his central argument were questioned in those earlier rulings which weighed, among other things, if the case had any chance of success. But courts are required to err on the side of permissiveness when deciding on motions to strike, as well as assume the facts claimed in the suit are true.
And so with the case set to move forward, Canadians could be in for a fascinating look at how our monetary system works and what role international financial bodies like the IMF play in Canada’s monetary and fiscal policy.
It’s not often a government has to defend itself against a conspiracy suit in court. This one promises to be interesting.

Bitcoin’s lien problem

Izabella Kaminska | Mar 24 13:53

Part of the BitcoinMania series

http://ftalphaville.ft.com/2015/03/24/2122678/bitcoins-lien-problem/

 

At cryptocurrency and fintech conferences, FT Alphaville often hears Bitcoin enthusiasts make the assertion that Bitcoin is superior to fiat currency because it eliminates debt from the monetary system.
But this, of course, is a fallacy.
Bitcoin may have the potential to create a fully-funded reserve system, but it certainly doesn’t eliminate debt from any system.
At best, Bitcoin’s public ledger records a transfer of digital access rights in the eyes of the clearing network. It does not, however, record or see the terms and conditions of that transfer.

Indeed, as far as the clearing network is concerned all it knows is that a transfer has occurred. Party A’s wallet has been debited while party B’s wallet has been credited.
This is something akin to witnessing a physical coin being passed from one hand to the other. Yet what the process doesn’t do is log the conditionality of the transfer — which is still the subject of private agreement and contract law.
For example, let’s hypothesise that Tony Soprano was to start a bitcoin loan-sharking operation. The bitcoin network would have no way of differentiating bitcoins being transferred from his account with conditions attached — such as repayment in x amount of days, with x amount of points of interest or else you and your family get yourself some concrete boots — and those being transferred as legitimate and final settlement for the procurement of baked cannoli goods.
Now say you’ve lost all the bitcoin you owe to Tony Soprano on the gambling website Satoshi Dice. What are the chances that Tony forgets all about it and offers you a clean slate? Not high. Tony, in all likelihood, will pursue his claim with you.
If and when Soprano’s done bruising you the distressed borrower — figuring out, perhaps, that you don’t have physical bitcoin to shakedown after all– what are the chances he follows up the debt trail and goes on to shake down Satoshi Dice? We’d argue pretty high, at least if the sum in question makes the collection effort worthwhile.
As far as contract law is concerned, even if Satoshi Dice received the bitcoin in good faith from Soprano’s debtor, Soprano himself (despite his unorthodox shake-down tactics) retains a right to seize his property back. And if they passed it on, he can pursue the next party. And so on. Especially since the bitcoin network makes it so easy to follow the trail due to the public nature of the ledger. Eventually, if the coin ends up with a high-value investor or institutional account whose identity is known to the system a formal claim can be made by means of the judicial system.
It’s these sorts of preceding property claims that the bitcoin system not only fails to eliminate, but arguably empowers by making the paper trail so incredibly transparent. But to what degree is the law really on Tony Soprano’s side when it comes to his claim? (And we’re not referring to his violent retrieval methods, which obviously remain illegal.)
George K Fogg at law firm Perkins Coie has been thinking about the problem of past claims (or liens) on bitcoins for nearly 14 months now.
His conclusion: under the United States’ UCC code (uniform commercial code) as long as bitcoins are treated as general intangibles, no high value investor can be sure that an angry Tony Soprano won’t show up one day to claim that the bitcoins they thought they received in a completely unencumbered manner are actually his. In fact, it’s only if and when Tony Soprano publicly renounces his claim to the underlying bitcoin collateral he is owed that the bitcoins stand a chance of being treated as unencumbered. Until then, a hot potato claim risk exists for every future acquirer of Soprano’s bitcoin.
Indeed, given the high volume of fraud and default in the bitcoin network, chances are most bitcoins have competing claims over them by now. Put another way, there are probably more people with legitimate claims over bitcoins than there are bitcoins. And if they can prove the trail, they can make a legal case for reclamation.
This contrasts considerably with government cash. In the eyes of the UCC code, cash doesn’t take its claim history with it upon transfer. To the contrary, anyone who acquires cash starts off with a clean slate as far as previous claims are concerned. It is assumed, basically, that previous claims on cash are untraceable throughout the system. Though, liens it must be stressed can still be exercised over bank accounts or people.
According to Fogg there is currently only one way to mitigate this sort of outstanding bitcoin claim risk in the eyes of US law. Rather than treating cryptocurrency as a general intangible, Fogg argues, investors could transform bitcoins into financial assets in line with Article 8 of the UCC. By doing this bitcoins would be absolved from their cumbersome claim history.
The catch: the only way to do that is to deposit the bitcoin in a formal (a.k.a licensed) custodial or broker-dealer agent account.
The precedent for this sort of action, Fogg states, comes in how society came to deal with the explosion of stock certificate trading in the 20th century. As stock trading intensified, he says, it soon became obvious that couriering bearer stock-certificates from one entity to the other multiple times in a day was not an efficient process.
In the US, the Depository Trust Company was established in 1973 to deal with the inefficiency. All stock certificates would now be centrally held in one location, reducing the need for couriers, whilst still allowing for the certificate’s ownership status to be changed according to instructions. For the system to gain the trust of the financial market, however, it was imperative for the UCC to treat such transfers as if they had been exchanged on a bearer basis (i.e. without granting seniority to those with previous claims on the certificates being transferred).
The UCC law thus grants a “security entitlement” to the holder which guarantees his claim will be prioritised versus that of the securities intermediary or the security intermediary’s creditors. In this way, the law allows investment securities to be transferred free of adverse claims that are not known about.
Critically, it’s a protection that is only granted to assets if and when the securities are pooled in an indirect way by licensed custodians or broker-dealers. Furthermore, the law doesn’t protect clients from the risk that the underlying collateral isn’t at the broker-dealer to begin with. But providing the assets are there, the claims of the holder in such a depository structure supersede all others.
The irony of all this for anti-government minded Bitcoin investors is that it’s only by transferring bitcoins into the established financial system that they can be sure to be protected from outstanding Tony Soprano claims on their bitcoin.
As Fogg notes:

My libertarian friends have a belief they have created something that is outside of any statutory governance, and my response is you have created something novel that can help in transferring value across borders but you can’t pretend that the UCC doesn’t exist and because it does exist it affects bitcoin. Bitcoin is governed by the UCC. You can be an ostrich and pretend that it’s not covered by it, or you can address that it is in fact covered by the statute and find a way to solve the problem.

Fogg adds that it’s unlikely that new entrant bitcoin dealers and brokers would constitute depository broker-dealer agents in the eyes of article 8 of the UCC. That means all bitcoins coming in and out of notable bitcoin brokers today cannot be classified as claim free, and thus do pose a risk to high value investors — either because the brokers may be acquiring bitcoin with previous claims on them without knowing about it, or because their own lenders would judge their bitcoin stock as a claimable security wherever it ends up.
The only way around that problem (at least the second one), says Fogg, is if all lenders to bitcoin businesses publicly renounced their rights to pursue claims on bitcoins transferred in and out of their accounts. This, he notes, could be achieved with contract law.
But even that won’t stop an angry Tony Soprano from showing up with a preceding claim to the bitcoin you think you own outright.

This entry was posted by Izabella Kaminska on Tuesday March 24th, 2015 13:53. Tagged with BitcoinMania.

Robertson Newsletter No. 50 - March 2015

Newsletter No. 50 - March 2015

Links to previous Newsletters can be found here.

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CONTENTS 

Introduction

1. Too Few Hedgehogs, Too Many Foxes

2. The Basis of Money System Reform

3. Recognising Our Global Crisis

4. Progress

5. Some Things To Be Changed or Stopped

6. One Glimpse of the Coming UK Election

INTRODUCTION

This is the 50th newsletter since January 2004. That and other features of the website owe much to Francis Miller, to whom I am very grateful.

To celebrate the occasion we have added the following items to the website:

(1) A Turning Point Paper on The Redistribution of Work (1981) at www.jamesrobertson.com/redistributionofwork.pdf joins the other Turning Point Paper on Impressions of the New South Africa (1996) at www.jamesrobertson.com/impressionsofthenewsouthafrica.pdf.

(2) Addresses for foreign translations of my books, including in Chile (Spanish), Germany, Indonesia, Sweden, Japan, Italy, Portugal, Russia, and France at www.jamesrobertson.com/books.htm.

(3) A free download of the text of Transforming Economic Life: A Millennial Challenge at www.jamesrobertson.com/book/transformingeconomiclife.pdf. (Due to a bug, the text of the book doesn't appear in the Firefox browser. To view it, please either use another browser or download the pdf onto your computer.)

 

1. TOO FEW HEDGEHOGS, TOO MANY FOXES

"The fox knows many things, but the hedgehog knows one big thing” (Archilochus, Greek poet, 7th Century BC). What did he mean?

Isaiah Berlin, in The Hedgehog and the Fox, 1953, suggested that Archilocus was underlining a fundamental distinction between people (foxes) who are captivated by the infinite variety of things, and other people (hedgehogs) who concentrate on a single big overarching concern. See www.amazon.com/The-Hedgehog-Fox-Tolstoys-History/dp/1566630193.

Archilocus could well be referring to our situation in the UK today in the run-up to our general election in May. Almost all our would-be leaders and their hangers-on are arguing about possible short-term political policies and alliances, while virtually none are interested in the one big question we face: how to avoid our potential suicide and achieve the survival of human civilisation. The foxes are bogged in detail, when we need is the concern of wise hedgehogs with that big question.

"The agenda of politics must change." That was the theme of a long article I wrote with Harford Thomas in The Guardian newspaper in July 1978 shortly before the UK general election expected later that year: "political parties suffer from institutional lag. They fall behind the pace of events. They fall back on old dogma. Yesterday's dogma is irrelevant today, and still more so for tomorrow."

See www.jamesrobertson.com/article/alternativesarticle-guardian1978.pdf for the full text.

Now, thirty seven years later, more people are aware that we need a new kind of political leadership, capable of the radical change on which the survival of our civilisation depends. We realise that our present ways of living are leading us to global self-destruction. We need to create a new democratic approach, seen by everyone as fair and ecological, effectively protecting our wellbeing and the natural resources on which our survival depends.

We won't achieve that change by more complicated policies and laws and rules. Quite the reverse. The present ones need rigorous simplification.

A central example of that is reform of the world's money system. By the ways it rewards and penalises what we do, money motivates how we live, and how we treat other people and the natural world. At present the way it works encourages us to behave unjustly to one another and to destroy the resources on which our future depends.

 

2. THE BASIS OF MONEY SYSTEM REFORM

Reform of today's money system should be based on the following core principles.

(1) Each of us should pay for the value we take from the common wealth, which is provided directly by the planet's resources or created by positive personal and collective human actions; and

(2) Each of us should receive a basic citizen's income as our share of that common wealth.

Practical Reforms

Those core principles can be met by the following practical reforms.

1. Provide the national money supply as a public service:

Stop the creation of money by banks as profit-making debt; and transfer responsibility to a public agency for creating a debt-free money supply as public revenue to be spent into circulation by the elected government.

2. Shift public revenue off 'goods' on to 'bads':

(a) Abolish taxes on incomes and profits and value added, which now penalise useful work and enterprise.

(b) Replace those taxes by taxing or charging things and activities that subtract value from common resources. That will include taxing or charging for land-rent values, and the use or right to use other common resources, especially the limited capacity of the environment to absorb pollution and waste.

3. Shift to people-centred public spending:

Apart from essential national activities like military security, public revenue should be spent on a Citizen's Income – a tax-free income paid to every man, woman and child as a right of citizenship. The additional costs of that should be met by reducing the costs of:

(a) interest on government debt,

(b) the provision of perversely damaging subsidies, and

(c) the provision of public infrastructure and services, either by an inefficient and wasteful public sector, or contracted out to commercial and financial businesses at bloated costs (e.g. PFI).

Those national reforms should be parallelled by similar principles at international and local levels. They provide a central core of principle and action on which it might be possible to build a surviving human future.

That is one "big thing" we should concentrate on.

3. RECOGNISING OUR GLOBAL CRISIS

(1) Climate Change is one, though only one, aspect of the global crisis that threatens our future.

The editor of the Guardian is stepping down this summer. After twenty years he says he has one regret: "that we had not done justice to this huge, overshadowing, overwhelming issue of how climate change will probably, within the lifetime of our children, cause untold havoc and stress to our species".

For what he is doing about it in the time left to him as editor, see www.theguardian.com/environment/2015/mar/06/climate-change-guardian-threat-to-earth-alan-rusbridger.

(2) The Simpler Way

"We must develop as much self-sufficiency as we reasonably can, both at the national level, meaning much less international trade, but more importantly at local and household levels. We need to convert our presently barren suburbs into thriving economies which produce much of what they need from local resources. ....

... Many in the Voluntary Simplicity, Permaculture, Downshifting, De-growth, Eco-village and Transition Towns movements are now enjoying living in the ways described and are working for transition to some kind of Simpler Way". See www.theconversation.com/the-simple-life-manifesto-and-how-it-could-save-us-33081.

(3) Protecting Nature and Dealing with Climate Change

"Protecting nature is no more an option than tackling climate change, both are necessary and one cannot outweigh the other."

See www. greenallianceblog.org.uk/2015/01/22/is-tackling-climate-change-more-important-than-protecting-nature.

(4) Climate change does not have to be a partisan issue. See www.greenallianceblog.org.uk/2015/02/16/climate-change-does-not-have-to-be-a-partisan-issue.

(5) Population, Development and Reproductive Health

"Population and the environment are inseparable factors in sustainable development ... The agreement of the 2015 Sustainable Development Goals this year offers an opportunity to recognise these issues and align action with other global policy frameworks. The Goals should include action on poverty, the promotion of family planning and sexual and reproductive health and rights and emphasise the role of the natural environment for increased resilience of societies around the world."

See www.royalsociety.org/~/media/policy/Publications/2015/01-22-15-rs-response-to-population-dynamics-post-2015-world.pdf.

(6) Limiting The Environmental Impacts. A team of scientists call attention to nine issues that must be considered if there is to be any hope of limiting the environmental impacts of the ongoing expansion of new roads, road improvements, energy projects, and more now underway or 'coming soon' in countries all around the world.

See www.sciencedaily.com/releases/2015/03/150305125407.htm.

(7) The Doomsday Clock

It's now “Three Minutes to Midnight”, warns the Bulletin of Atomic Scientists. This clock is "a visual metaphor to warn the public about how close the world is to a potentially civilization-ending catastrophe".

See www.marketwatch.com/story/10-excuses-americans-spout-to-deny-doomsday-is-at-hand-2015-01-30.

 

(8) Leadership In Its Finest Form

How to promote "the concept of stewardship in place of the present self- serving forms of 'leadership'.

See www.politicalcleanup.wordpress.com/2015/02/02/for-the-common-good-economists-advocate-a-moral-vision-to-rescue-our-manipulated-extractive-and-highly-unequal-economy.

 

4. PROGRESS

(1) How the Money Supply should be created.

Following the first discussion in November for 170 years by the UK Parliament, attention continues to grow on whether a nation's money should be created free of debt by a public agency in the interest of society as a whole, instead of by banks as interest-bearing debts on society. The run-up to the general election in May provides opportunities for progress.

See www.thomasattwood.wordpress.com/2015/01/28/positive-money-structures and www.positivemoney.org/get-involved/hustings.

(2) "Basic Incomes makes unprecedented political progess around the world". See www.basicincome.org/bien/pdf/Flash79.pdf.

(3) Pig ‘factory' plan thrown out.

"Now the Environment Agency has turned down the permit application by Midland Pig Producers on the grounds it posed risks to human health as well as human rights.

There is mounting public anxiety that industrial, intensive pig rearing systems cause stress and illness in animals and threaten human health. The regular over-use of antibiotics in such ‘factory' farm systems is producing antibiotic-resistant superbugs. The farms also pollute the air and water."

See www.farmsnotfactories.tumblr.com/post/111947709784/press-release-pig-factory-plan-thrown-out.

 

5. SOME THINGS TO BE CHANGED OR STOPPED

(1) A Manifesto for Global Justice and Global Justice Now

"Development has been co-opted... . If we want to re-energise a real movement for global justice, we need to confront development, and replace it with our own vision for a world based on equality, solidarity and democratic control."

See www.globaljustice.org.uk/blog/2015/feb/6/manifesto-global-justice and Dangerous Delusions - Seven Myths - www.globaljustice.org.uk/dangerous-delusions.

 

(2) The Board of HSBC Should Be Arrested and the Bank Taken Into Public Ownership

"Even when tax evaders have been caught the revelation that HMRC has been doing its utmost to avoid prosecuting them illustrates the fact that we have a two-tier system of justice when it comes to defrauding the taxpayer. Those found guilty of benefit fraud are maligned, shamed, and demonised while their rich counterparts are allowed to avoid the inconvenience of prosecution and court in return for an undisclosed pay off to make the problem disappear."

See www.huffingtonpost.co.uk/john-wight/hsbc-tax-scandal_b_6670490.html.

 

(3) Water Privatisation Should Be Ruled Out

"Water has emerged as the target of choice for the robber barons of globalization. As freshwater supplies dwindle, global investors are scrambling to own what's left. The World Bank already values water privatization at $1 trillion and predicts that many of the wars of the 21st century will be fought over water."

See www.greenmoneyjournal.com/march-2015/water.

6. ONE GLIMPSE OF THE COMING UK ELECTION

(1) Greener Britain Coalition of NGOS

Election Hustings in London on 23 March from 6.30pm. "If you can make it, please register here. And if you cannot come, do join in online."

See www.cpreviewpoint.wordpress.com/2015/03/13/vote-for-the-countryside.

(2) Remarkable Rise of Green Party Membership in UK

"Tens of thousands of new Green Party activists are gathering their strength for the biggest election campaign in the party's history. They may have vast mountains to climb, but their legs are fresh."

See www.bright-green.org/green-movement/how-the-green-party-changed-itself-to-make-the-greensurge-possible.

 

James Robertson

18 March 2015

ECB: How Central Banks Harness Governments

The ECB’s Noose Around Greece: How Central Banks Harness Governments

Posted on March 10, 2015 by Ellen Brown 

http://www.truthdig.com/report/item/the_ecbs_noose_around_greece_how_central_banks_harness_governments_20150311

 

Remember when the infamous Goldman Sachs delivered a thinly-veiled threat to the Greek Parliament in December, warning them to elect a pro-austerity prime minister or risk having central bank liquidity cut off to their banks? (See January 6^th post here.) It seems the European Central Bank (headed by Mario Draghi, former managing director of Goldman Sachs International) has now made good on the threat.
The week after the leftwing Syriza candidate Alexis Tsipras was sworn in as prime minister, the ECB announced that it would no longer accept Greek government bonds and government-guaranteed debts as collateral for central bank loans to Greek banks. The banks were reduced to getting their central bank liquidity through “Emergency Liquidity Assistance” (ELA), which is at high interest rates and can also be terminated by the ECB at will.
In an interview reported in the German magazine Der Spiegel on March 6^th, Alexis Tsipras said that the ECB was “holding a noose around Greece’s neck.” If the ECB continued its hardball tactics, he warned, “it will be back to the thriller we saw before February” (referring to the market turmoil accompanying negotiations before a four-month bailout extension was finally agreed to).
The noose around Greece’s neck is this: the ECB will not accept Greek bonds as collateral for the central bank liquidity all banks need, until the new Syriza government accepts the very stringent austerity program imposed by the troika (the EU Commission, ECB and IMF). That means selling off public assets (including ports, airports, electric and petroleum companies), slashing salaries and pensions, drastically increasing taxes and dismantling social services, while creating special funds to save the banking system.
These are the mafia-like extortion tactics by which entire economies are yoked into paying off debts to foreign banks – debts that must be paid with the labor, assets and patrimony of people who had nothing to do with incurring them.

Playing Chicken with the People’s Money

Greece is not the first to feel the noose tightening on its neck. As The Economist notes, in 2013 the ECB announced that it would cut off Emergency Lending Assistance to Cypriot banks within days, unless the government agreed to its bailout terms. Similar threats were used to get agreement from the Irish government in 2010.
Likewise, says The Economist, the “Greek banks’ growing dependence on ELA leaves the government at the ECB’s mercy as it tries to renegotiate the bailout.”
Mark Weisbrot commented in the Huffington Post:

We should be clear about what this means. The ECB’s move was completely unnecessary . . . . It looks very much like a deliberate attempt to undermine the new government.
. . . The ECB could . . . stabilize Greek bond yields at low levels, but instead it chose . . . to go to the opposite extreme — and I mean extreme — to promote a run on bank deposits, tank the Greek stock market, and drive up Greek borrowing costs.

Weisbrot observed that the troika had plunged the Eurozone into at least two additional years of unnecessary recession beginning in 2011, because “they were playing a similar game of chicken. . . . [T]he ECB deliberately allowed these market actors to create an existential crisis for the euro, in order to force concessions from the governments of Spain, Italy, Greece, Portugal, and Ireland.”

The Tourniquet of Central Bank Liquidity

Not just Greek banks but all banks are reliant on central bank liquidity, because they are all technically insolvent. They all lend money they don’t have. They rely on being able to borrow from other banks, the money market, or the central bank as needed to balance their books. The central bank (which has the power to print money) is the ultimate backstop in this sleight of hand. If that source of liquidity dries up, the banks go down.
In the Eurozone, the national central banks of member countries have relinquished this critical credit power to the European Central Bank. And the ECB, like the US Federal Reserve, marches to the drums of large international banks rather than to the democratic will of the people.
Lest there be any doubt, let’s review Goldman’s December memo to the Greek Parliament, reprinted on Zerohedge. Titled “From GRecovery to GRelapse,” it warned:

[H]erein lies the main risk for Greece. The economy needs the only lender of last resort to the banking system to maintain ample provision of liquidity. And this is not just because banks may require resources to help reduce future refinancing risks for the sovereign. But also because banks are already reliant on government issued or government guaranteed securities to maintain the current levels of liquidity constant.
In the event of a severe Greek government clash with international lenders, interruption of liquidity provision to Greek banks by the ECB could potentially even lead to a Cyprus-style prolonged “bank holiday”. And market fears for potential Euro-exit risks could rise at that point. [Emphasis added.]

Why would the ECB have to “interrupt liquidity provision” just because of a “clash with international lenders”? As Mark Weisbrot observed, the move was completely unnecessary. The central bank can flick the credit switch on or off at its whim. Any country that resists going along with the troika’s austerity program may find that its banks have been cut off from this critical liquidity, because the government and the banks are no longer considered “good credit risks.” And that damning judgment becomes a self-fulfilling prophecy, as is happening in Greece.

“The Icing on the Cake”

Adding insult to injury, the ballooning Greek debt was incurred to save the very international banks to which it is now largely owed. Worse, those banks bought the debt with cheap loans from the ECB! Pepe Escobar writes:

The troika sold Greece an economic racket . . . . Essentially, Greece’s public debt went from private to public hands when the ECB and the IMF ‘rescued’ private (German, French, Spanish) banks. The debt, of course, ballooned. The troika intervened, not to save Greece, but to save private banking.
The ECB bought public debt from private banks for a fortune, because the ECB could not buy public debt directly from the Greek state. The icing on this layer cake is that private banks had found the cash to buy Greece’s public debt exactly from…the ECB, profiting from ultra-friendly interest rates. This is outright theft. And it’s the thieves that have been setting the rules of the game all along.

That brings us back to the role of Goldman Sachs (dubbed by Matt Taibbi the “Vampire Squid”), which “helped” Greece get into the Eurozone through a highly questionable derivative scheme involving a currency swap that used artificially high exchange rates to conceal Greek debt.
Goldman then turned around and hedged its bets by shorting Greek debt.
Predictably, these derivative bets went very wrong for the less sophisticated of the two players. A €2.8 billion loan to Greece in 2001 became a €5.1 billion debt by 2005.
Despite this debt burden, in 2006 Greece remained within the ECB’s 3% budget deficit guidelines. It got into serious trouble only after the 2008 banking crisis. In late 2009, Goldman joined in bearish bets on Greek debt launched by heavyweight hedge funds to put selling pressure on the euro, forcing Greece into the bailout and austerity measures that have since destroyed its economy.
Ambrose Evans-Pritchard wrote in the UK Telegraph on March 2^nd:

Syriza has long argued that [its post-2009] debt is illegitimate, alleging that the ECB bought Greek bonds in 2010 in order to save the European banking system and prevent contagion at a time when the eurozone did not have a financial firewall, not to help Greece.
Mr. Varoufakis [the newly-appointed Greek finance minister] said the result was to head off a Greek default to private creditors that would have led to a large haircut for foreign banks if events had been allowed to run their normal course, reducing Greece’s debt burden to manageable levels. Instead, the EU authorities took a series of steps to avert this cathartic moment, ultimately foisting €245bn of loan packages onto the Greek taxpayer and pushing public debt to 182pc of GDP.

The Toxic Central Banking System

Pepe Escobar concludes:

Beware of Masters of the Universe dispensing smiles. Draghi and the . . . ECB goons may dispense all the smiles in the world, but what they are graphically demonstrating once again is how toxic central banking is now enshrined as a mortal enemy of democracy.

National central banks are no longer tools of governments for the benefit of the people. Governments have become tools of a global central banking system serving the interests of giant international financial institutions. These “too big to fail” behemoths must be saved at the expense of local banks, their depositors, and local economies generally.
How to escape the tentacles of this toxic squid-like banking hierarchy?
For countries with a bit more room to maneuver than Greece has, one option is to withdraw public and private deposits and put them in publicly-owned banks. The megabanks are deemed too big to fail only because the people’s money is tied up in them. They could be allowed to fail if public funds were not at risk.
The German SBFIC (Savings Banks Foundation for International Cooperation) has proposed a pilot project on the Sparkassen model for Greece. Other provocative options have also been proposed, to be the subject of another article.
_________
Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her nearly-300 blog articles are at EllenBrown.com. Listen to “It’s Our Money with Ellen Brown” on PRN here.