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Resurgence of Risk – A Primer on the Develop(ed) Credit Crunch
Stoneleigh, The Oil Drum
TOD editor Nate Hagens writes:
This is a post run just over a year ago, by emeritus TOD contributor Stoneleigh. It was instructive as much as it was prescient so I wanted to give its author a public hat tip. Both Stoneleigh and her writing partner Ilargi at The Automatic Earth have had a consistently, and unabashedly phenomenal call with respects to the financial and debt crisis. It is certainly not over, but we now begin to see the impacts that a financial crisis may have on future energy supplies – it’s like losing the battle as well as the war. Still, the quickness of the deterioration in the economy may be a blessing in disguise – more resources left in ground for some better planned use.
Below the fold, a reprint of Stoneleigh’s excellent primer on the credit crisis. Right about now is when it starts to impact the energy world.
We have been living in inflationary times, for as long as most of us can remember. The money supply keeps expanding and prices increase over time as a result. Central bankers have many tools at their disposal which they can use to tweak the economy-–they can raise or lower interest rates, can control reserve requirements for fractional reserve banking and can inject liquidity into the banking system, among other things – and we have become used to thinking that they can prevent the kind of ‘economic accidents’ that previous episodes of excess have led to in the past. Especially in recent years-–since the apparently successful containment of the dot com aftermath–we have acted as if risk were a thing of the past. Sliced, diced and spread around Wall Street and the rest of the global financial system, risk has seemed tamed, contained and controlled, until last week that is.
(10 October 2008)
Locabucks: Are local currencies a way to escape the liquidity trap ?
Big Gav, The Oil Drum: Australia/NZ
Locavores, locastores and locavolts have caught my attention lately – 3 strands of the “relocalisation” idea that tends to get a lot of attention in peak oil circles.
Another localisation oriented idea that gets less press attention is the concept of local currencies (or “locabucks” as I’m now dubbing them), an idea which has its roots in the Great Depression as a mechanism for escaping the liquidity trap – and thus might be relevant again in the not-too distant future if present trends continue.
The most frequently cited examples of local currency were issued in the Bavarian town of Schwanenkirchen and the Austrian community of Wörgl, described in this article on “Laboratory readings: Wörgl’s Stamp Scrip – The Threat of a Good Example?”:
On July 5th 1932, in the middle of the Great Depression, the Austrian town of Wörgl made economic history by introducing a remarkable complimentary currency. Wörgl was in trouble, and was prepared to try anything. Of its population of 4,500, a total of 1,500 people were without a job, and 200 families were penniless.
The mayor, Michael Unterguggenberger, had a long list of projects he wanted to accomplish, but there was hardly any money with which to carry them out. These included repaving the roads, streetlighting, extending water distribution across the whole town, and planting trees along the streets.
Rather than spending the 40,000 Austrian schillings in the town’s coffers to start these projects off, he deposited them in a local savings bank as a guarantee to back the issue of a type of complimentary currency known as ‘stamp scrip’. This requires a monthly stamp to be stuck on all the circulating notes for them to remain valid, and in Wörgl, the stamp amounted 1% of the each note’s value. The money raised was used to run a soup kitchen that fed 220 families.
Because nobody wanted to pay what was effectively a hoarding fee [technically known as ‘demurrage’ and often referred to as “negative interest”], everyone receiving the notes would spend them as fast as possible. The 40,000 schilling deposit allowed anyone to exchange scrip for 98 per cent of its value in schillings. This offer was rarely taken up though.
Of all the business in town, only the railway station and the post office refused to accept the local money. When people ran out of spending ideas, they would pay their taxes early using scrip, resulting in a huge increase in town revenues. Over the 13-month period the project ran, the council not only carried out all the intended works projects, but also built new houses, a reservoir, a ski jump, and a bridge. The people also used scrip to replant forests, in anticipation of the future cashflow they would receive from the trees.
The key to its success was the fast circulation of scrip within the local economy, 14 times higher than the schilling. This in turn increased trade, creating extra employment. At the time of the project, Wörgl was the only Austrian town to achieve full employment.
Six neighbouring villages copied the system successfully. The French Prime Minister, Eduoard Dalladier, made a special visit to see the ‘miracle of Wörgl’. In January 1933, the project was replicated in the neighbouring city of Kirchbuhl, and in June 1933, Unterguggenburger addressed a meeting with representatives from 170 different towns and villages. Two hundred Austrian townships were interested in adopting the idea.
Unterguggenberger was opposed to both communism and fascism, championing instead what he referred to as ‘economic freedom’. Therefore, it was deeply ironic that the Wörgl experiment was first branded ‘craziness’ by the monetary authorities, then a Communist idea, and some years later as a fascist one.
The Wörgl experiment was watched by John Maynard Keynes and Irving Fisher, who saw a fast-depreciating currency as a possible answer to the 1930s “liquidity trap” and documented the subsequent use of “scrip” in the United States (
(11 October 2008)
Long article by Big Gav with excerpts and comments. The idea of local currencies has been simmering for sometime. Perhaps the financial crisis will elicit more successful examples.
In a comment in the TOD discussion, Big Gav adds:
I think history shows that federal governments and central banks don’t ignore these schemes if they become successful – they act very quickly to stamp them out.
In the article I did note they probably only have a limited lifetime anyway – when a liquidity trap (which makes them viable in the first place) disappears, they probably will too.
I think the Worgl example showed that killing them too quickly is a bad idea, even from the centraliser’s point of view. In the recent example, the Argentinians waited until the economy had stabilised before suppressing the local currencies and mandating the central one once again.
If you’re a collapse minded doomer, of course, the central govt never gets to re-assert control. In that scenario they may become quite successful for long periods of time.
Also posted at Big Gav’s website: Peak Energy.
UPDATE (Oct 12, 2008)
I live in one of the areas where local currencies would be almost impossible – Silicon Valley with its stratospheric housing costs and plentiful economic opportunities.
On the other hand, there is alway the poor man’s approach: exchanging favors with family and friends, aka “the gift economy.” -BA
A new dawn for Iran
Chris Cook, Asia Times
I have been working for some seven years, with a background in global financial services at the highest level, to assist Iran in developing a coherent financial system fit for the 21st century.
Throughout this sometimes painful process I have made clear that the Western “market economy” is fundamentally unsustainable and that its collapse would occur sooner rather than later. Unfortunately, those decision-makers in Iran who received my advice took the mistaken – but conventional – view that the Western “Twin Peaks” financial market model based on “debt” (credit created as money by credit institutions) and “equity” (in corporations) was both sustainable and even desirable.
But, as I have been saying throughout, both privately and in articles published globally, this model never was sustainable.
… We must recognize the distinction between “money” and “money’s worth” and ensure that the financial system reflects this.
Over 70% of dollars created are in fact based on the value of land use – and came into existence as loans secured by a legal claim or “mortgage” over land. Most of the rest of the dollars are based on the value of carbon-based energy (notably oil), much of which originated in Iran.
Firstly, in relation to energy, I advocate the replacement of the literally worthless (because deficit-based) dollar created by the US Federal Reserve Bank with an asset-based energy dollar or “carbon dollar” value unit based on the intrinsic energy value of carbon-based fuels.
This currency would be created by unitizing energy as units redeemable against energy within the “PetroTrust” framework I am presenting in Tehran at the International Oil Refining Conference on October 11-12. Such units would then circulate globally, subject to mutual guarantees, within the framework of an International Clearing Union similar to that proposed by the great economist John Maynard Keynes at the first Bretton Woods conference in 1944.
Chris Cook is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and commentator.
(9 October 2008)
Chris Cook was involved with the creation of the Iranian oil bourse. -BA
Reality Report episodes on economics (audio)
Everyone’s talking about the economy. Take time to review a few back episodes of the Reality Report with Jason Bradford, exploring economic issues and theories.
(25 September 2008)