By linking money supply to money demand, it is far better than systems which try and treat money supply as a stock, rather than a flow.

This is a hugely important concept at the moment because there's a lot of bad thinking being bandied about that a return to a gold standard and ending fractional reserve banking would solve the problems we now face. This is based on a misunderstanding of both theory and history.

Those in favor of the stock theory of money are those who control the stock, e.g., the financiers who own the gold outright or control the national treasuries that do. Things were not better historically when money was backed an independent standard of value such as gold. Rather, control was firmly in the hands of the elite who controlled the gold and they used it to advantage.

The Wizard of Oz is likely an allegory about the Eastern financial establishment, which favored the gold standard since they controlled the stock, and those represented by William Jennings Bryant, who favored bimetallism (gold and silver), so as to increase the stock so that more money could be printed to relieve indebtedness to the financial interests in deflationary times. The financial interests used the periodic busts (deflationary trends) to call in debts and ruin debtors. The debtors wanted increased money flow to be able to meet their debts.

In this allegory, Dorothy represented oppressed rural people, the Tin Man urban workers, the Straw Man farmers, and the Cowardly Lion William Jennings Bryant (who lost the election). Their trek East on the "yellow brick road" represents the gold standard. The Wizard of Oz is the Eastern financial establishment that pulls the levers from behind the curtain. When the Wizard is exposed, Dorothy returns to Kansas with her silver slippers, representing bimetallism. But, in fact, it didn't work out that way. The Eastern establishment prevailed and the gold standard remained in place.

The health of an economy is based on money flow, measured for example in volume of transactions. If there is too much money and credit in relation to goods, then inflation ensues. If there is too little, then deflation. Money and credit should ideal expand with the rate of growth of the economy, i.e., population increase and increase in productive capacity, thought to be about 2-3% a year in a contemporary developed economy. Monetary policy should accommodate this without leading to monetary inflation and economic overstimulation. The current crisis resulted from lack of monetary discipline and lack of discipline in risk management.

History shows that money stock alone is not capable of dealing effectively with money flow in a modern economy, because if the stock does not expand with economic capacity, then demand fails to meet the productive potential of the economy. The solution doesn't lie in looking back to a so-called "golden" age that is largely imaginative. If we were to return to strict monetary discipline based on a relatively constant stock without fractional reserve lending, credit would be either eliminated or highly restricted. Were that to happen, the economy would quickly grind to a halt, since the volume of transactions would dry up if people and businesses had to pay cash.

Finance is a highly developed technology that underlies modern economies. The way forward is through imposing discipline on a system without hobbling it. There are much better ways of doing this instead of going back to stock instead of flow. For starters, the elite have too much power in controlling the financial system in the name of making it politically independent. The result, as we now see, is the unacceptable increase of moral hazard, to the degree that ignoring systemic risk has caused a collapse, and those responsible now want taxpayers to pony up for their mistakes.

The present system grants too much freedom to too few, without clearly defined standards of responsibility and strict accountability. The answer is not throwing the baby out with the bath water, but rather imposing tighter standards of responsibility and accountability, along with stringent independent oversight and strong penalties, while redesigning the operation of the Fed or else replacing it with another monetary authority. But what is clear that the foxes cannot be allowed to continue to manage the hen house on the assumption that they will only eat as many hens as they need to sustain themselves.

which is to say the license to invent money, accrue to some few people but not others.

If we need fractional reserve accounting for our economy to function, then banking should be operated with public accountability, and profits made thereby should accrue to the public. If plutocrats want to make money by working the system to their advantage, they should go get the capitalist version of "real jobs" by sponsoring productive business that makes goods, services, and technology. If banking is as indispensable and critical and sovereign as a government function, and the taxpayers are to be on the hook for the downside risk, then it should just be a government function.

The US economy has been treading farther and farther out on a limb by predicating its presumably endless growth on financial tricks rather than real productive economic activity. The collapse that's currently unfolding was inevitably going to arrive sooner or later because of this trend. If it hadn't been precipitated by an unwinding of bogus mortgage-based derivatives, it would have been kicked off by something else. We had an inverted pyramid of an economy, and globalization removed the bottom block. Before the MBS crisis, we were already treading along like Wile E. Coyote who has walked off the edge of the cliff but hasn't yet realized his predicament.

Just like it's a terrible mistake to believe that hard currency is the only real form of money, it is a mistake to believe that banking and manipulating money is a real form of productivity. It produces nothing-- all the profits it generates are sucked out of something else. It's like the sewer system-- not a source of productivity, but a necessary condition of productivity.

but are not.

Think on this.

We would be better off if we did.

But we aren't going to.

Think on this.

President Obama whipped for TARP in its old form, and stopped any changes.

Think on this.

Many of us are calling Obama a compassionate conservative, not a liberal.

Think on this.

The New Deal (and UK Labor movement) was a cram down on the wealthy in response to the conditions that led to the Great Depression, and Thatcherism-Reaganism is a claw back of concessions made to workers, such as labor rights and benefits (sharing the pie). That claw back is still going on, and the Obama administration seems to be on board. Moreover, so far, the new administration shows no signs of instituting any significant new cram down on the wealthy. Instead, taxpayers are picking up the tab and are being told that everyone has to be held responsible instead of the people that caused the debacle.

Those that see Obama as a progressive are looking through rose-colored glasses. So far, both domestic and foreign policy are same-o, same-o. They just seem different because this administration does not seem to be corrupt, or at least as corrupt as the previous one. But the overall policy goals are the same, even though the policies and strategies may differ in how to get there.

OK, it's only the first week. But ......

Interesting read:

Death agony of Thatcher era By F William Engdahl

Here's a good one from Mish, too:

Bankers' Worst Nightmare Materialize

The Washington Independent notes that Analysts Fear $1 Trillion Credit Card Market Could Be Next Crash.

Guess who is going to pay for all this. And, no, it is not going to be the Chinese this time. Right now, it's the Fed that's buying overpriced Treasuries.

It's the very small sliver at the top who use almost all of the resources. Population collapses also don't herald political or social collapse. In fact, quite the reverse: they often, by removing intractable social problems, free a society to pursue more active goals.

Consider, for example, the Black Death in Europe. It destroyed between half and a third of the population over most of Europe. Within 100 years the renaissance had begun, and within 150 years the "age of discovery" had started, which dramatically expanded Europe's reach, power, wealth, and productivity.

The United States had a war over marginal productivity in the form of the Civil War, within 35 years the US was a global power.

Linear materialism doesn't work here, as much as it is often predicted to, and as much as it appeals to nerdy types, because it deals with realities that they can measure and see. Instead the political structure and the physical structure have a very different relationship. The collapse of pre-Columbian Inca and Aztec empires was not based on their internal dynamics, but based on contact with an external power. Similarly, Rome could have continued for quite some time were it not for barbarian invasions.

The test of whether we make it through this period will not be in the amount of oil or in global warming, the changes these will create are both easy to survive as a species basis. What is upsetting to people is that the risk that they will not survive, at least as they have known their life, is growing rapidly.

"Just because life will go on, doesn't mean your life will go on."

If the current political and social order is not resilient enough to deal with these problems, it, and some fraction of the people who rely on it will die.

I also take issue with "long term" thinking as a savior. Very often societies which are about to collapse are obsessed with long term thinking. Most particularly, they are obsessed with setting in stone their social and political arrangements, and spend all of their energy and attention in doing this. Crisis forces short term thinking extra-ordinary. Long term thinking is a luxury of those people who have one. Some examples of eternalism: Hilter's Thousand Year Reich, the late Qing dynasty, and England on the eve of losing the American colonies. Far from being short term only thinkers, they were directed very heavily at trying to flatten the future. Much as Americans have tried to do over the last 20 years since "the end of history."

If the current political and social order is not resilient enough to deal with these problems, it, and some fraction of the people who rely on it will die.

This is the point I intended, if I did not make it clear. However, at this point in time, there is little reason to think that the global ruling elites who pull the levers are working in this direction, in spite of Obama's fine rhetoric. (In fact, some suspect that an eliminationist policy is in place.) So far, solutions, let alone a comprehensive solution, are either not contemplated, are pie in the sky, or are only at the margins, and increasingly individual countries are going it alone, trying to exploit any advantage they can find. Moreover, there is little reason to believe that the next ruling elite that takes charge will fare any better. Sarah Palin in 2012?

Crisis forces short term thinking extra-ordinary.

Well, maybe I am missing the extraordinary, but so far, I don't see much either short, intermediate, or long tern thinking about the present financial crisis in perspective, other than rescuing the people who got us in this mess to begin with. Yes, some "needed regulation" is being floated, but we'll see how far it gets before it is effectively gutted, just as the so-called rescue of the people has become a bailout of the perps.

Bailout Recipients Hosted Call To Defeat Key Labor Bill

Stimulus Includes Tax Cuts That Obama Economists Panned As Ineffective

Global warming 'irreversible' for next 1000 years: study

Bernanke was hired because he is a long term thinker. Bush wanted to privatize Social Security in the name of a crisis not due to arrive until 2040. The right wing's economics is dominated by a theory of "the infinite time horizon." Rove looked at the idea of a 72 year Republican dominance (which he might get, but not the way he expected). The Iraq war's apologists were "the Project for a New American Century."

There is a great deal of long term thinking going. Rent is very long term in it's thinking. It's just static. Static thinking is the sign of a society in decay.

So let me hammer that point home: not thinking long term is not the problem now, nor is it the problem in most social collapses that I have studied, in particular classical era Athens. The Athenians were thinking very long term, the Third Reich, the old Soviet Union, and now late Qing dynasty. The primary sources in all of these cases show that long term thinking, and a rather concrete knowledge of the problems they faced were visible. Diamond is wrong on this one. Instead, complaints about short term thinking are almost always the province of people who do not like the present social contract, but see no leverage to change it.

Static thinking is the indicator of decay because it leads to the theory that by spending an inordinate amount of resources now, some nagging problem, or clear threat to the established order can be permanently destroyed. The elites, fearing their ability to manage this problem as it grows, often because they see it as an exponential curve that must be throttled before it gets started, then proceed to see almost any amount of blood and treasure as worth stopping the problem in embryo. They then proceed to pour the entire effort of the society into their fix. The fix generally does not work, and the society is also exhausted, and vulnerable to the the problems that were not dealt with. Thus it looks like "short term" thinking, since what kills a society is, in general, something that could have been fixed with appropriate effort.

will be worse. That's why real change is going to be 12 to 16 years from now. Not just because of the US political cycle, but globally we are seeing a swing to the right driven by an aging society that wants to hold on to a disproportionate share of income for their retirement. They are therefore willing to do almost anything to keep their current entitlement bundles.

They will fail, because the disutility that has been deferred is coming due, however, it isn't quite due yet. This financial crisis isn't because of global warming and peak oil, it is because global warming and peak oil are now being priced into financial instruments, among other long term risks. These risks make the present investment supply inadequeate to pay the price of investment demand.

As for global warming being permanent, we could deal with the warming level that present carbon levels present, but only with dramatic changes. Since those changes are not coming, it's best just to write off about 500 million people. That may seem like alot, but it is only 10 million incremental deaths over 50 years. Many of these "deaths" aren't deaths, but people who won't be born because of conditions. Human tragedy yes, but not catastrophically unbearable. We currently have 15 million deaths because of poverty a year globally, and another 5 million "unbirths." This would increase by 33%,with attendant wars in places like Congo and so on.

Arms dealing will be a growth industry.

Would it be better if we did it some other way? Certainly. But that's not the question. The question is "will the people with the effective control over resources do better some otherway?" They don't believe that yet.

Bucky Fuller showed decades ago that increased electrical energy use per capita in a society swiftly reduces the number of offspring per couple. Developed societies replace themselves but not much more, while population growth in underdeveloped societies is exponential.

The solution that Bucky proposed was bringing higher living standards to the underdeveloped world as quickly as possible through electrification in order to control population. Resources can be conserved through design science. He observed that the thinking that goes into designing ships is very different from that which goes into designing houses, since constrains are different. As a result, he holds, a lot of waste in built into the system because too little attention is paid to the most productive use of resources, e.g, on land, it doesn't matter how much a house weighs.

While the technology of that time is obsolete, it seem that the way to do this now would ideally be through a global energy grid that draws on many alternative sources of sustainable electrical power.

To being this home to Afghanistan, Pakistan, etc., there are failed states that military power will be ineffective to deal with without resorting to a policy of elimination. The most effective and least expensive solution is globalization based on distributive justice with respect to resources and technology

" global energy grid " Not feasible in the next 20 years. Technology is not in place.

Local/Regional Grids? Yes.

Not feasible in the next 20 years

Twenty years is not a long time in terms of long term planning. China stared its population control program fifty years before disaster due to exponential growth was forecast.

The point is that if we don't think about bringing the underdeveloped world along as feasibly as possible a lot of people are going to be eliminated and competition for resources is going to become much more intense.

the root cause is a reduction in infant mortality and increased disincentives to having children. Birth control means that women can respond to those disincentives without limiting sexual activity. We can cut the developing world's population growth relatively cheaply by building schools, clinics and supplying people with birth control.

As Sachs has pointed out, the marginal cost for this is less than zero: it will save more trouble than it costs to do.

I will note that funding for family planning was cut by Obama when the Republicans bitched about it.

While what you say is true, the religious-sexual politics isn't conducive to implementing that solution in the foreseeable future. It will actually be simpler to throw hundreds of billions into development -- and, after all, there's money to be made -- certainly the clergy won't object to that.

IMO, population is a problem and, while I'm no "Al Gore Fan Boi," his movie shows that C02 and population are correlated-- an inconvenient fact.

Americans, of course, consume 1/5th-- or did, of the world's energy output even though we have 1/20th-- or something like that => 300 of 6000 million, of the population.

What it comes down to I think is: a smaller population is only notable if the per capita consumption remains flat or falls and that's not the way our economy works.

so something has to change. (source :A Primer On The Nature Of Growth.)

i.e. if the population grows at the rate of 1.3%, then the mass of the human population would equal the mass of the earth after 2400 years! that's impossible of course.

...by a guy (can't remember his name) who said the optimal population for the U.S. was 50 million. At this level; he maintained the resources were sustainable forever. I never forgot that and now here we are at 6> times that level and clearly; we can't sustain our existence. Us humans do seem to be self defeating, no?

...dominance in killing technology is by constantly testing it in real life situations. We need wars to continue to test the new weapons and maintain the lead in the fine art of murder. Too cynical? I think not.

For a more positive spin on life; http://iauthorbooks.blogspot.com/