The power of sovereign economics

2011-12-19

Richard Moore

Bcc: FYI
rkm websitehttp://cyberjournal.org
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The power of sovereign economics

Economics: myth vs reality
There are many disempowering myths about national economies. Some of the most damaging myths are:

   – The spending power of a government is determined by income from taxation.
   – The currency needs to be backed by a commodity like gold or silver.
   – The value of a currency is measured by its external exchange value.
   – The ability to import goods depends on the external exchange value of the currency.

   – Unrestricted exports and imports are good for the economy.
   – Economic health is measured by economic growth.

In contrast to these myths, here are some truths about a sensibly managed national economy:
   – A government can simply print currency and spend it into the economy.
   – The internal value of a currency depends on the quantity that is in circulation.
   – The primary purpose of taxation is to take excess currency out of circulation, to prevent inflation.
   – The ability to import goods depends on the external value of exports.
   – Exports and imports need to be managed as part of overall economic strategy.
   – Economic health is measured by the quality of life of the population.
   – Sustainability is essential to any sensible economic system. 

Notice that I qualified these truths by ‘sensibly managed’. In fact most economies are not sensibly managed, and that’s one of the reasons why people think in terms of commodity backing – as a discipline – to give predictable value to a currency despite poor economic management. In fact, dependence on commodity backing unnecessarily constricts (deflates) an economy if the commodity is scarce, and leads to inflation if there is an excess supply of the commodity. 

There are many ways an economy can be mismanaged. One of the very worst is what we have in the USA, where the money supply is controlled by a privately-owned central bank. Under this system, the currency functions as a mechanism to extract wealth from the economy and concentrate wealth in the hands of the investors who own the central bank. Such central banks intentionally create cycles of inflation and deflation as wealth-extraction devices. During inflationary periods, wealth is extracted from profits on investments and interest on loans. During deflationary periods, wealth is extracted by purchasing real assets at bargain prices, using the profits from the preceding inflationary period. 

Wealth-extraction is what capitalism is all about. What else could we expect from a system where development is controlled by investors, who are seeking to get more out than they put in? The central-bank model is simply an evolved version of capitalism, where the top of the food chain has been monopolized by a small clique of investors. If we envision the exploitive food chain as a pyramid, then the central banking clique can be visualized as an all-seeing eye atop the pyramid.

In general, if an economy is controlled by cliques who are seeking their own private advantage, we can hardly expect the economy to be managed in the overall national interest. A common example is when a dictator is backed by external powers, and the dictator then allows his economy to be looted by the external powers, while he siphons off a fortune for himself to a Swiss bank account. 

We have a very similar situation here in Ireland, where the main political parties care only about the benefits they receive from sharing in power with the other parties, and they have no vision for Ireland outside the context of the EU and the Euro. The end result is the looting of the Irish economy by outside powers, no different than with tin-horn dictators.

But even when government leaders sincerely try to serve the national interest, there are many ways they can get it wrong. In particular, they may over-manage the economy, as we have often seen in socialist nations. Being aware of the evils of capitalism, they throw the baby out with the bathwater, and don’t make proper use of market economics. As Adam Smith correctly argued, competitive markets – properly regulated – are the most efficient way to run most sectors of a national economy. Centrally micromanaging economic activity leads to gross inefficiencies and misallocations of resources.

Free-market (laissez-faire) economics is a formula for exploitation. It puts power in the hands of the most wealthy. Internal to a nation, laissez-faire is a synonym for unregulated capitalism, and it leads to labor exploitation and the concentration of wealth in a few hands. Internationally, free-market economics enables wealthy nations to exploit the labor and resources of poor nations, and prevents poor nations from developing their economies in a healthy way. 

Libertarianism is a mythology, popular among those who happen to be doing well economically, that claims no system of governance is necessary, either politically or economically. To be more precise, libertarians imagine a magical form of government, which has enough power to prevent exploitation, but otherwise plays no role. It’s a completely unworkable concept, and it plays directly into the hands of wealthy cliques who want to control society for their own benefit, without interference by a governance system that represents the interests of society generally.

Globalization is a project of central-banking cliques. The goal of globalization is to eliminate national sovereignty, and create a global economic system managed directly by those cliques. With the recent orchestration of a credit bubble and collapse, we see the wealth-extraction mechanisms of central banks being applied on a global scale. We are now in the final stages of the globalization project, and the reassertion of national economic sovereignty is the only effective way to prevent that project from succeeding. 

Sensible regulation of imports and exports is essential to the health of a national economy. In the interests of ensuring long-term sustainability, the foundation of national economics needs to be based on local production for local consumption. This foundation can then be enhanced by mutual-benefit trade arrangements. Exports need to be sustainable – not depleting national resources – and the production of high-value exports is the most beneficial. 

Imports make sense for goods that cannot be sourced internally, or that can be sourced more cheaply externally – but with certain provisos: the balance of imports and exports must not decrease national wealth, and the internal capacity to produce essential necessities, such as food, should be developed and maintained whenever possible. Dependence on imports for survival amounts to a vulnerability in national sovereignty. 


Principles of a healthy national economy
The economic affairs of most nations today are in a complete shambles. Essential sovereignty has been given away to privately owned central banks, to the EU in the case of Europe, and lost due to free trade treaties. Onerous debt burdens drag down economies, particularly since the 2008 collapse. In many cases national assets have been privatized and are under the control of foreign interests. Economies are overly dependent on imports and exports, and on employment offered by foreign corporations operating in the nation’s territory. Most national economies are totally unsustainable and are operating contrary to good sense and to the national interests.

The first task of any sensibly governed sovereign nation is to undertake a comprehensive assessment of its resources, its economy, and its various entanglements with the outside world. A plan then needs to be developed, with the participation of all segments of civil society, to begin moving toward sustainability and sensible economic operations. Such a plan is likely to involve many things, including:
   – repudiation of odious debts and treaties
   – in the case of European nations, exiting from the EU and restoring the national currency
   – reclaiming sovereignty over national assets (expropriation)
   – bringing the central bank under public ownership and control
   – diversifying agricultural production and moving to sustainable, non-polluting agricultural methods
   – developing an energy-efficient transport infrastructure
   – repurposing production facilities toward sustainability and high-value exports
   – to that end, renegotiating arrangements with foreign-owned operations, or expropriating them
   – negotiating mutual-benefit trade arrangements with other nations
   – overhauling the regulatory framework for the domestic economy and for imports and exports
   – identifying which aspects of the economy are best suited to a market economy, and which are natural monopolies
   – for natural monopolies, such as rail, operating them as non-for-profit public utilities

This list is not complete, and any such plan will of course vary depending on national circumstances and priorities. Regardless of the details, we are talking about a comprehensive program of national economic development. Of course the order of implementation must be very carefully thought out, taking into account the negative reaction and potential sanctions that can be expected from outside powers. And such a plan cannot be cast in stone; learning and adjustments will happen along the way. National development is a dynamic process, involving the participation of all segments of civil society.

Within the context of economic mythology, few nations would be able to undertake such a program. Within the context of economic truths, any nation can undertake such a program. Those truths unleash the power of national economic sovereignty. The most important of these truths is the fact that the external exchange value of the national currency is not of central importance. Imports can be funded from hard currency earned from exports, and imports can be obtained through mutual-benefit exchange agreements. The primary role of the national currency is to facilitate operation of the domestic economy. And of course the repossessed national assets enhance the resource base for the development program.

In order to obtain the greatest benefit from imports and exports, it makes sense for external trade to be handled by an agency dedicated to that purpose. Goods produced for export can be purchased from the producers with the national currency, and the agency can negotiate for the best terms with foreign buyers, or with mutual-benefit exchange partners. This is analogous to how a company operates, where products are marketed systematically by the marketing and sales teams. Hard currency derived from exports goes into a pool, to fund imports.

Similarly, for imports, the agency negotiates for best terms to obtain items in bulk, either from mutual-benefit exchange partners, or from foreign suppliers, using funds from the hard currency pool. Again this is analogous to how a company operates, where the purchasing department specializes in getting the best deal for raw materials and supplies for company operations. Imported items are then sold for national currency to domestic customers, which might be private businesses or public agencies. 

It is essential that external trade be managed according to sound market principles. That is to say, we do not want producers churning out export goods for which there is no external market, nor do we want to import items for which there is no internal market. In the case of exports, this means that the agency issues purchase orders, as far in advance as possible, to domestic producers, based on agreements with mutual-benefit exchange partners, and on purchase orders from foreign buyers. For imports, the agency arranges to obtain items based on purchase orders from domestic customers, within the bounds set by the hard-currency pool. 

Management of the domestic money supply is the job of the central bank, which is a not-for-profit public agency. In order that the currency have a stable value, the size of the money supply must be kept in balance with the level of economic activity in the domestic economy. Associated with the central bank is a network of local, semi-autonomous, not-for-profit, public banks. 

These local banks operate under regulations established by the central bank, and are audited on a continuous basis by the central bank. The central bank issues credit on a non-debt basis to the local banks, based on their demonstrated need for credit, to fund productive economic activity. This is one of the ways by which money is introduced into circulation.

Public agencies are divided into two classes, national and local. National agencies, such as the external-trade agency and the transport agency, are funded by the central bank directly, and are monitored by the central bank to ensure they are operating on a sound basis. This is another way that money is introduced into circulation. Local agencies, such as fire departments and other local public services, are funded by the local banks, which are in a better position to monitor those local agencies. 

There are no arbitrary budget restrictions that constrain the credit that can be issued by the central bank. As long as there is a productive use, either public or private, credit can be issued. If the money supply is in excess, the central bank can impose taxes at an appropriate level, and in a way that does not discourage productive economic activity. If the money supply is too small, negative taxes can applied: money can be issued directly to the population to spur economic activity. 

Private businesses need to operate according to competitive market principles. If they do a good job they prosper, and if they don’t they may go out of business. In order that Adam Smith’s ‘invisible hand’ can operate, private businesses must be kept relatively small, and cartels must be rigorously prohibited. This does not mean that successful business must be prohibited from growing, but if they grow past a certain size they need to do so by spinning off fully autonomous businesses, not by growing into a market-distorting conglomerate. Providing credit to private businesses is thus always the province of the local banks, not the central bank directly.

The relationship between local banks and private businesses is one of partnership. The bank’s role is to support the development of successful businesses, not to make a profit from them. The bank provides free consulting to help develop sound business plans, and only issues credit when a sound business plan is in place. Credit is issued on an interest-free basis, and the credit disbursements and the the repayment schedule are tailored to fit with the business plan. 

If unforeseen circumstances arise, the business plan, the credit line, and the repayment schedule can be adjusted accordingly. The business needs to be regularly monitored by the bank, to ensure that the business plan is being followed and that the business is operating on a sound basis. If it becomes clear that the business will not succeed, the bank can work with the business to wind down its operation gracefully, and the outstanding debt can be written off.

There is no reason why the economy cannot operate at all times on a full-employment basis. If unemployment arises, that simply means that the national development plan can be accelerated through additional hiring by public agencies, or by the funding of new businesses, whichever makes the most economic sense and best serves the development plan. In this regard, the local banks can take a leadership role in setting up new businesses, in collaboration with those who are unemployed, based on their skills and on the market opportunities that are available. 

Management of the development process
The banking system, as described above, is responsible for seeing that public agencies and private businesses operate on a sound basis, but the banking system does not set priorities as to which public agencies or private businesses need to be established. These priorities are set by a development agency, in accordance with the evolving national development plan. The development agency is responsible for economic strategy, whereas the banking agencies are responsible for day-to-day economic operations.

It is essential that this development agency not be a centralized technocratic bureaucracy. That’s the mistake many socialist countries have made, and have suffered from. Rather, the development agency needs to be made up of a network of local agencies, each of which involves ongoing participation by civil society. As with the very successful Participatory Budgeting Process used in Brazil, the development plan and economic strategy are developed by a bottom-up consensus process based on citizen participation.

The role of the national-level development agency is to maintain the development plan in accordance with the consensus, set priorities for public agencies in accordance with the evolving plan, and to monitor the progress of economic development. The development and banking agencies, at all levels, need to work together on an ongoing basis, so as to ensure good progress in pursuing the development plan.

Under such a decentralized system, we an expect considerable diversity of priorities among the different regions and communities of the nation. Rural and urban areas, for example, would have different concerns, and different kinds of development projects underway. While rural areas might be developing farmer co-ops and working toward sustainable agriculture, urban areas might be setting up consumer co-ops and developing efficient and integrated transit systems. 

As part of the bottom-up consensus-building process, these diverse priorities would be reconciled and brought into synergy with one another. Links might be established between farmer and consumer co-ops, for example, and rural areas might set up agencies to work with urban families who wish to move the country and establish farms or businesses.

Governance
The functions we normally associate with government are subsumed within this economic development paradigm. Just as economic and regulatory affairs are handled by the banking, trading, and development agencies, another agency would be established to represent the nation in international forums. Policing would be handled by locally-responsive agencies, and whatever is needed in the way of a national defense force, would be handled by an agency responsible to the national development agency, in accordance with the policies established by the bottom-up consensus process.

Instead of elections, which give decision-making power to politicians and bureaucrats, policy at all levels would be determined by citizens themselves, through their participation in the consensus-building process. Instead of a legalistic and rigid justice system, there would be a process more in line with common-law systems, with responsibility in the hands of consensus-based citizen juries instead of lawyers and judges. Lawyers, rather than being partisan participants, would become consultants to these processes, pointing out the subtle ramifications of the decisions under consideration, and informing the juries of related cases that have come up in the past. 

In general, governance becomes a dynamic, participatory process, responsive to changing circumstances. Instead of a complex body of law, we have an evolving common law tradition, an evolving culture of self-governance and self-policing. One of the early tasks of the consensus-building process would be to draft a new national constitution, whose provisions would be limited to endorsing the bottom-up governance process, along with provisions akin the US Bill of Rights. 
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