Thursday, January 22, 2015

Hawaii’s Solar Push

Deep solar penetration is harder than it looks.

Kauai is the fourth largest of the Hawaiian Islands at 562.3 sq mi (1,456 km2). It lies at 22°N which locates it in the Tropic of Cancer yet is very temperate with averages of 71 °F (22 °C) in winter to 79 °F (26 °C) in summer.  With a population of just slightly less than 70,000 to power, this would seem a perfect site for solar.  The Germans solar engineers must be green with envy.

But even with perfect climatic conditions, true 100% solar is still a highly complex problem and the folks on Kauai are still trying to sort it out. They are not trying anything truly exotic but even a "simple" PV array combined with shipping containers full of lithium batteries is still suffering teething problems.

Here the MIT's Technology Review brings us up to speed on this project.  It is a pretty good reminder of just how difficult a transition to the solar society will be.  Of course, the more such projects succeed, the easier and more reliable other transition efforts will be.  Even so, most of us will live to regret that we didn't get serious about going solar decades ago.

Hawaii’s Solar Push Strains the Grid

Kauai’s utility takes a second stab at battery storage as solar heads toward 80 percent of peak power.

By Peter Fairley on January 20, 2015

WHY IT MATTERS

The intermittent nature of solar power is limiting how much and how widely it can be used.

Shipping containers full of lithium batteries will stabilize Kauai’s grid when passing clouds interrupt power flows from the island’s newest solar farm.

The prospect of cheaper, petroleum-free power has lured the Kauai Island Utility Cooperative (KIUC) to quintuple utility-scale solar capacity over the past year, building two 12-megawatt photovoltaic arrays. These facilities are the biggest and a significant contributor to the island’s 78-megawatt peak power supply. When the second plant comes online this summer, peak solar output on Kauai will approach 80 percent of power generation on some days, according to Brad Rockwell, the utility’s power supply manager.

That puts Kauai on the leading edge of solar power penetration, and KIUC has bruises to show for it. Power fluctuations from a first large plant installed in 2012 have already largely burned out the big batteries installed to keep solar from destabilizing the island’s grid.

Now KIUC is taking a second try with batteries and hoping energy storage technology has progressed sufficiently to keep the same problems from recurring. The new system, installed beside the solar farm nearing completion on Kauai’s northeast shore, is one of the first commercial installations of grid-scale lithium-ion batteries manufactured by the French battery giant SAFT.

The intermittent nature of renewable energy sources like solar power presents a range of challenges to utilities, depending on their grid’s size and design. Kauai’s difficulty is most acute when clouds drift over a solar plant. That can slash a plant’s power output by 70 to 80 percent in less than a minute. If the plant is providing a substantial share of the grid’s power, that rapid power loss can cause the frequency of the grid’s alternating current to drop well below 60 hertz, damaging customer equipment or even causing a blackout.

Kauai’s first energy storage system, at the six-megawatt photovoltaic plant at Port Allen on Kauai’s west side, was designed to mitigate such “frequency droops” by releasing stored power when output crashed. But when the plant went live in December 2012, Rockwell and his engineers quickly discovered that, as Rockwell puts it, the battery is “just not what it was cracked up to be.”

The $2 million system, designed and manufactured by Xtreme Power of Lyle, Texas, has plenty of muscle, releasing up to 4.5 megawatts in quick bursts. What it lacks is stamina. Frequency droops occurred more often than KIUC had expected, and on partly cloudy days the battery quickly ran out of energy.

Running down the charge day after day, meanwhile, degraded the batteries’ energy capacity. While Xtreme Power called them “advanced” lead-acid batteries because they initially packed more energy and power than their predecessors, they suffer from the same sensitivity to repeated cycling long associated with lead-acid batteries. The Xtreme Power system was designed to last eight years, but two years in it has “very little” capacity left, according to KIUC.

As a result, KIUC has had to ask more of its diesel and gasoline-fired generators, improving their ability to ramp up during frequency droops. The heavy ramping puts wear on the machines, increases air pollution, and negates some of the petroleum savings promised by the solar plants. “I think we have lost a couple of percentage points on efficiency over the last year,” Rockwell says. “The maintenance impacts are yet to be seen.”

A bigger battery and better software controls might have delivered better results from Xtreme Power’s lead-acid batteries, says John Jung, CEO of Greensmith, a storage systems provider based in Emeryville, California. But the problems KIUC encountered were shared by other Xtreme Power clients, and Xtreme Power declared bankruptcy in January 2014. The Berlin-based energy storage firm Younicos bought the company three months later, minus the battery manufacturing assets.

Lithium-ion batteries, which KIUC is pinning hopes on now, endure cycling better than lead-acid batteries. John Cox, KIUC’s engineering manager, says SAFT’s lithium-ion batteries are rated for four to six times as many full charge-discharge cycles as Xtreme Power’s.

Patches of clouds drifted over Anahola earlier this month when I visited the site of KIUC’s next solar plant, where eight 22-foot-long shipping containers full of SAFT’s batteries were already in place beside the plant’s 57,000-plus photovoltaic panels.

SAFT’s $7 million system can deliver six megawatts of power continuously and up to 12 megawatts in short bursts—equal to the Anahola array’s peak output. And SAFT claims it can absorb up to 4.5 megawatts continuously.

Recharging should be fast enough to keep the battery operating throughout every day with power fluctuations of no more than 1.2 megawatts per minute, according to Jim McDowall, business development manager for SAFT’s Connecticut-based subsidiary SAFT America.

McDowall is especially confident about the Anahola installation, which has extra energy storage capacity at KIUC’s insistence. This extra capacity is unlikely to go to waste, he and Rockwell say. It will enable the Anahola battery to arrest some of the frequency drooping caused by Kauai’s other solar farms, easing the strain on KIUC’s conventional generators. Extra storage capacity at Anahola could also help Rockwell manage a new problem that he expects to confront before the end of this year: excess solar power generation.

After Anahola comes online, Rockwell expects Kauai to see days when clear skies result in solar generation beyond what KIUC’s grid can carry. Instead of throwing away the excess, McDowall says, KIUC could use the Anahola battery storage system to absorb it and then release that power after the sun goes down. more

Wednesday, January 21, 2015

Palast on the Greek elections

One of the more puzzling phenomenon is the enthusiasm for the EU I have witnessed in my highly educated European friends.  Once I carefully explained the damage certain to be caused by the Maastricht monetary agreements to some friends from Finland who looked at me as if I clearly didn't get it.  For them, joining the Euro was a chance to prove to the world that formerly poor, isolated, colonized Finland had arrived in the big time.  I am certain that the same sort of thinking was repeated in many of the other small entrants to the EU from Estonia to Portugal.  This was a point of national pride.  Unfortunately, the neoliberalism of Maastricht was designed to take advantage of the small and weak who were joining a yacht club they could clearly not afford to join.  The fact that income inequality is a global phenomenon pretty much proves how effective these economic policies are in redistributing wealth upward.

Of course, the poster child for all the bad things that can happen to the little fish who joined the EU is Greece.  Now they are about to elect a government that promises to abandon the EU-mandated austerity measures that are crippling their country.  But notice, they still want to stay in the club.  Veblen was right—the desire for status emulation is such a powerful motivation, it is even more powerful at times than the survival instincts.  Example xxxx is Greece's Syriza Party.  Palast mocks this silliness so much better than I could (see below).

Tuesday, January 20, 2015

Peak everything?

What we have here is a group of diligent researchers putting numbers to a suspicion that many of us already harbor and that is: Whatever the product, it seems like we have bumped up against some resource limitation that causes production to peak.  For example, I live in the Corn Belt of North America.  When I was 10, a good farmer could grow about 35 bushels per acre.  Now the number is nearly 250.  So recent history would suggest this sort of yield improvements are "normal" so long as everyone keeps improving methods.  But 700% in 55 years is unlikely to happen again.  There is a limit to a strategy of planting closer together, corn needs about the same water per plant and there are physical limits to how much water and nutrients the soil can supply, etc.  The farmers can see it.  One told me he saw his biggest yield nine years ago.  "Peak corn?" I asked.  "Hope not," he replied.

According to Michael Hudson, the Sumerians understood peak production over 4000 years ago.  But, argue the technological optimists, we can certainly outproduce the Sumerians so those resource limitations don't seem so fixed, after all.  And over the years, the Producers have done amazing things turning cheap resources into valuable products—sand into microchips, anyone?  But even here, there may be a limit on how many rabbits the Producers can pull out of their hats.  Fortunately, "peak innovations" may prove not to be the same sort of problem as Peak Oil.

The simplest explanation for why there seems so many human endeavors peaking simultaneously, of course, is that because we managed to power so many things with oil, peak oil will become peak something else very easily.

Monday, January 19, 2015

Black on monetary policy

“It is well enough that the people of the nation do not understand our banking and monetary system for, if they did, I believe there would be a revolution before tomorrow morning.” Henry Ford

Black asks what would happen if the public really understood money.  It is obviously a question I find fascinating because I have been drawn to it from my early teenage years.  It is a question that has fascinated some of greatest political minds since well before the Declaration of Independence.

Part of the fascination comes from the fact that as Ken Galbraith put it "The process by which banks create money is so simple that the mind is repelled."  Compared to a subject that is really difficult like say, the structural analysis of a skyscraper, money really IS ridiculously simple.  But that doesn't mean that convincing folks to make political decisions about money is easy.  That's because it is even easier to believe the lies the moneychangers tell us.

This time, however, it really matters if the country gets the thinking about money straight.  It matters because if we do not create money to pay for better infrastructure, life as we know it on planet earth is most certainly doomed.

Sunday, January 18, 2015

Peter Cooper on bankers in government

For many years, I have used Peter Cooper as an example of someone who knew a whole lot more about the nature of money and monetary policy than almost anyone who ever broached the subject—and that most especially includes the mediocrities that have run the various central banks in the last 40 years.

Unfortunately, what I knew of Cooper came second-hand.  I knew he was the guy who sold the idea of Greenbacks to Lincoln when it became obvious that conventional banking sources were not about to fund the Civil War.  I also knew that he was the oldest man to have ever run for President at 85 as the standard-bearer of the Greenback Party in 1876.  I also knew that that virtually all of the monetary ideas supported by the People's Party could be traced back to him.  But in all honesty, I really had not read his writings.  Well, it turns out that he was a prolific writer who wrote clearly and beautifully.  In 1883, the year of his death, a collection of his writings appeared under the clunky title of Ideas For a Science of Good Government: In Addresses, Letters and Articles on a Strictly National Currency, Tariff and Civil Service.  In 2009, this collection was reissued thanks to the benevolence of the Microsoft Foundation.  You can buy it for $25 from Amazon but far more interestingly, you can download it for free at Archive.org.

Cooper was certainly one of the USA's more interesting nation-builders.  In 1830, he built the first steam locomotive in North American called Tom Thumb. Among his other achievements were his supervision of laying the first trans-Atlantic cable in 1858, and the founding of the Cooper Union in 1859, a first rate school of design and engineering that is still with us.

Now that I have a digitized copy of Science of Good Government: I intend to publish interesting excerpts once a week for the foreseeable future.  And because the biggest problem facing the USA government these days is the pernicious influence of Wall Street and those it hires to corrupt our public affairs, here is Cooper on how the founding fathers felt about allowing moneychangers into the temple of democracy.

WASHINGTON AND ADAMS OPPOSED HAVING BANK OFFICIALS OCCUPY SEATS IN CONGRESS


On page 20 of the Journal of the United States Senate, first session of the Third Congress, commenced at Philadelphia, Pennsylvania, December 2, 1793, can be found the following resolution, offered on the 23d of December the same year, and passed by the United States Senate with but two dissenting votes, and signed by George Washington, President, and John Adams, Yice-President : "ANY PERSON, HOLDING ANY OFFICE OR ANY STOCK IN ANY INSTITUTION IN THE NATURE OF A BANK FOR ISSUING OR DISCOUNTING BILLS OR NOTES PAYABLE TO BEARER ON ORDER, CANNOT BE A MEMBER OF THE HOUSE WHILST HE HOLDS SUCH OFFICE OR STOCK."

Yet, a late Congress was composed of one hundred and twenty bankers, ninety-nine lawyers, fourteen merchants, thirteen manufacturers, seven doctors, four mechanics, and not a single farmer or day laborer. This is agreeable to a statement made by Moses W. Field, " I think this law was invoked to prevent A. T. Stewart, the largest importer of foreign goods, from becoming Secretary of the Treasury."

Why should it not be enforced now to oust speculators from our Congress, where they are making laws in their own favor and against the interest of the people? The wise men, who achieved the Independence, drafted the Constitution and established our Government, well knew that it was unsafe to trust the governmental law-making to bankers, usurers, or any one interested in such business. They knew it was morally impossible for persons, interested in money-lending, not to attempt to legislate in their own favor and against the good of the people.

I ever did and ever shall advocate a purely national currency, as long as I live, as the only remedy against periodic stagnation, caused by special legislation, suggested and voted by banking representatives and speculators in the seats of our Congress.

Thursday, January 15, 2015

Creating Money Out of Thin Air and Trained Incapacity

Two days ago, I posted on DailyKos a summary of the very important article on money creation that Jon had featured. Jon asked me to also post my DailyKos summary here, which I am happy to do.

But I also want to draw your attention to some of the comments my DailyKos posting attracted, because they are a wonderful example of the "trained incapacity" Veblen analyzed in in his 1914 book, The Instinct of Workmanship and the Industrial Arts. As regular readers of this blog know, Jon and I have had more than one occasion to invoke "trained incapacity" in trying to understand the absurdity and inanity of political and economic positions, ideas, and arguments of people who otherwise appear to be smart. Jon has a number of posts on the subject of trained incapacity here - just scroll down until you see the phrase on the left.

There were at least three commenters to my DailyKos post who simply refused to accept the fact that banks create money out of nothing. They insisted that the banks would later have to meet reserve requirements, or that the borrower was the actual source of the money created because the borrower signs a pledge to pay back the money. One pointed to the Basel requirements regarding banks' T1 capital, a strong sign that that person is professionally involved in banking and finance. Yet another objected that it is the property pledged as security for the loan that is actually the money which I mistakenly believe (according to them) was created out of thin air. Another snidely argued that if banks can create money out of nothing, no bank would ever go bankrupt, so why "not lend to everyone under the sun, without expectation of repayment?" Then added, trying to dismiss the idea that banks create money out of nothing as the fantasy of some wild-eyed radical, "That may be in fact be what the diarist is driving at: what a wonderful world that would be to live in!" This person either did not see or deliberately failed to mention Jon's observation, which I quoted near the beginning of my posting, "don't create money will-nilly—only create money to pay for things that make the society richer."

When I asked a couple commenters, "Then please explain how the amount of money (measured as M2) grew from $1.28 billion in 1867, to $11,654.3 billion now. Where did the $11.653 trillion come from? Which accounts was it withdrawn from? Who created $11.653 trillion in money, and how, over the past 148 years?" one of my interlocutors could only reply, "economic growth." 

Now, I also want to point out that these people objecting to the idea that banks create money out of thin air, are supposedly "on our side." These are not knuckle-dragging conservatives or Republicans; they are liberals and progressives who regularly follow and contribute to one of the leading openly partisan Democratic Party websites on the tubez. With friends like these, who needs enemies?!? Are these people serious about addressing the problem of climate change? If they are, then I feel it is their duty to us, and to humanity in general, to explain what solutions they propose, and how to fund them. If they are not serious, I feel they should be candid and forthright, and express their rejection that climate change is the problem almost all scientists contend it is - a problem that threatens the very survival of our existence as a species.

Alternatively, they can be candid and forthright in informing us they are willing to allow the planet be burnt and rendered uninhabitable, rather than accept economic paradigms that are contrary to their beliefs of what reality is.

The other alternative, of course, is they are just being stupid by clinging to their belief of how money is created. In which case, we come back to Veblen's analysis of trained incapacity. As John Kenneth Galbraith once noted, "The process by which banks create money is so simple that the mind is repelled."

The thing to understand is that the real political fight in the USA, and the rest of the world, is not Democrat versus Republican, or liberal versus conservative, or left versus right. As Jon has pointed out numerous times, the real fight is the Producer Class versus the Predator Class (the Leisure Class as Veblen named it). What makes the prospect of a Hillary Clinton presidency so distasteful to many people who conservatives and Republicans stupidly believe are lefties and therefore Hillary's hardcore base? It is the fact that the Clintons sold out to, and became part of, the Predator Class many, many, many years ago, and the policies they support and espouse will do serious material harm to the members of the Producer Class. So go through the comments, and see for yourself the taint of the Predator Class within our own ranks.

As one of the Predator commenters wrote: "The real issue is that a faction here hates banks and wants to undermine the system somehow." That's exactly what we want to do, and that's what the Predator Class is terrified of.

He or she was exposed by another commenter.

Creating money out of thin air

...it can now be said with confidence for the first time – possibly in the 5000 years' history of banking - that it has been empirically demonstrated that each individual bank creates credit and money out of nothing, when it extends what is called a ‘bank loan’. The bank does not loan any existing money, but instead creates new money. The money supply is created as ‘fairy dust’ produced by the banks out of thin air. The implications are far-reaching.
That's the conclusion of a December 2014 article, by Richard A. Werner, in the scholarly journal International Review of Financial Analysis, entitled Can banks individually create money out of nothing? — The theories and the empirical evidence. I don't know what I can write to convince you how important this article is. The implications for economic and financial policies of government the world over are staggering - and in a good way. A very good way. Because anyone who looks at the simple evidence presented in this scholarly paper can reach no other conclusion than
  • we really don't need banks,
  • we don't need bankers,
  • we don't have to borrow money to fund government programs,
  • we don't have to cut social programs to balance government budgets,
A big tip of the hat is due to Jon Larson, at Real Economics, for highlighting Dr. Werner's article at RE. This is important material, because the cost of stopping climate change has been pegged by experts at $100 trillion, as I wrote a few weeks ago. And, as Larson explains:
...if guys like Tony and I are going to run around telling folks that their only hope for survival lies in spending $100 trillion for infrastructure upgrades, we owe it to them to explain where all that money will come from.
Actually, the source of that money is blindingly obvious—we will get those funds the same way modern society always gets those funds. We will create them out of thin air. But, scream the monetary Puritans, if you just create money willy-nilly out of thin air, what will stop us from becoming Zimbabwe with runaway inflation? Again the answer is obvious—don't create money will-nilly—only create money to pay for things that make the society richer.
There are three basic hypotheses of money creation that professional economists recognize. First, and probably the most widely accepted among professional economists today, is the financial intermediation theory of banking. This idea is that banks are merely intermediaries between savers and borrowers: the banks take in deposits, then when someone needs a loan, the banks lend them some of the money they have collected as deposits. Thus banks do not really create money, they just aggregate it and distribute it. Moreover, since any other institution can do pretty much the same thing - General Motors Acceptance Corp, for example, or General Electric's GE Capital, or even your local chain of grocery stores, then banks are really not that special, and all those fancy models of how the economy works can pretty safely ignore the existence of banks. Uh huh. Well, that's their theory, and they're sticking to it, even though it has, cough, cough, some difficulty in explaining why what happened in 2007-2008, uh, happened.

The second basic hypothesis is the fractional reserve theory of banking. This was the predominant hypothesis in economics from the 1930s to the late 1960s. In this view, banks are financial intermediaries, just like in the first view, but the banks as an aggregate system can create money by lending out some fraction above and beyond what they actually hold in deposits. For example, say a bank has $100 million in deposits. It can lend out $90 million and hold a reserve of $10 million. The borrower of the $90 million then deposits it in another bank, which in turn can now lend out $81 million while holding a reserve of $9 million. The borrower of the $81 million then deposits it in yet another bank, which, in turn, can now lend out $71.9 million while holding $8.1 million in reserve. And so on and so on, to the final iteration. In this way, the banking system as a whole can create new money, while any one individual bank cannot. Bank regulators can adjust the "reserve requirement" to either increase or decrease the amount of new money the banking system as a whole can create and lend out.

The third basic hypothesis of money creation is the credit creation theory of banking, and it holds that banks create money out of nothing when they grant a loan. The key to understanding why all this arcane banking stuff is so important is to realize that if the credit creation theory of banking is correct, then why does it necessarily have to be banks that do the creating? Why can't it be governments also? Interestingly, most professional economists - including Keynes - dismiss the credit creation theory of banking as the work of a lunatic fringe. But the credit creation theory of banking has been gaining adherents since the financial crashes of 2007-2008, as people like you and me have turned our attention to these matters that were previously the lonely province of professional economists. Or as Dr, Werner puts it:
Since the American and European banking crisis of 2007–8, the role of banks in the economy has increasingly attracted interest within and outside the disciplines of banking, finance and economics.
As the credit creation theory of banking has fought for acceptance, the debate has been rather furious at times: recall the controversy a few years ago over the idea of the U.S. national government erasing its budget deficit by minting a special coin with a face value of $1 trillion, and depositing it with the Federal Reserve. The thing is, as Dr. Werner dryly notes in his paper:
Surprisingly, despite the longstanding controversy, until now no empirical study has tested the theories.
So what Dr. Werner, a German-born economist at the University of Southampton in Britain, and some colleagues set out to do was to borrow a large sum of money from a bank, and track what actually happens in the bank's internal accounting and management systems.
The simplest possible test design is to examine a bank's internal accounting during the process of granting a bank loan. When all the necessary bank credit procedures have been undertaken (starting from ‘know-your-customer’ and anti-money laundering regulations to credit analysis, risk rating to the negotiation of the details of the loan contract) and signatures are exchanged on the bank loan, the borrower's current account will be credited with the amount of the loan. The key question is whether as a prerequisite of this accounting operation of booking the borrower's loan principal into their bank account the bank actually withdraws this amount from another account, resulting in a reduction of equal value in the balance of another entity — either drawing down reserves (as the fractional reserve theory maintains) or other funds (as the financial intermediation theory maintains). Should it be found that the bank is able to credit the borrower's account with the loan principal without having withdrawn money from any other internal or external account, or without transferring the money from any other source internally or externally, this would constitute prima facie evidence that the bank was able to create the loan principal out of nothing. In that case, the credit creation theory would be supported and the theory that the individual bank acts as an intermediary that needs to obtain savings or funds first, before being able to extend credit (whether in conformity with the fractional reserve theory or the financial intermediation theory), would be rejected.
Dr. Werner and his colleagues approached a number of banks in Europe, but all the big banks they asked declined to be involved in the experiment. All the big banks gave two basic reasons for their refusal: they were unwilling to risk compromising their internal management and IT systems, and the amount of money the team wanted to borrow - 200,000 Euros - was too small. I quote: "... the transactions volumes of the banks were so large that the planned test would be very difficult to conduct..." OK, then.
It was therefore decided to approach smaller banks, of which there are many in Germany (there are approximately 1700 local, mostly small banks in Germany). Each owns a full banking license and engages in universal banking, offering all major banking services, including stock trading and currencies, to the general public. A local bank with a balance sheet of approximately €3 billion was approached, as well as a bank with a balance sheet of about €700 million. Both declined on the same grounds as the larger banks, but one suggested that a much smaller bank might be able to oblige, pointing out the advantage that there would be fewer transactions booked during the day, allowing a clearer identification of the empirical test transaction. At the same time the empirical information value would not diminish with bank size, since all banks in the EU conform to identical European bank regulations.
Thus an introduction to Raiffeisenbank Wildenberg e.G., located in a small town in the district of Lower Bavaria was made....
It was agreed that the researcher would personally borrow €200,000 from the bank. The transaction was undertaken on 7 August 2013 in the offices of the bank in Wildenberg in Bavaria. Apart from the two (sole) directors, also the head (and sole staff) of the credit department, Mr. Ludwig Keil was present. The directors were bystanders not engaging in any action. Mr. Keil was the only bank representative involved in processing the loan from the start of the customer documentation, to the signing of the loan contract and finally paying out the loan into the borrower's account. The entire transaction, including the manual entries made by Mr. Keil, was filmed. The screens of the bank's internal IT terminal were also photographed. Moreover, a team from the BBC was present and filmed the central part of the empirical bank credit experiment (Reporter Alistair Fee and a cameraman).
Dr. Werner presents the full results in his article, including
  • a numbered sequence of the steps the bank took in reviewing and granting the loan, then crediting the loan amount to the researcher's account;
  • the bank's balance sheet the day before the loan was made, and the balance sheet the day after the loan;
  • the key asset positions of the bank the day before the loan, and the key asset positions the day after;
  • the key liability positions for the same periods;
  • the account summary table for the new account of the borrower;
  • a standard T-account of the transaction from the borrower's perspective.
The critical question is: where did Raiffeisenbank Wildenberg e.G. obtain the funds from that the borrower (researcher) was credited with?
Well, you can probably guess the result of this very, very interesting experiment. It turns out that the bank neither took the €200,000 from the funds it already had as deposits, nor did it obtain €200,000 from a regional or national banking authority, or from the European Central Bank. The €200,000 was simply credited to the borrower's account. Period. The €200,000, in other words, was, created out of thin air. I will close by quoting from the U.S. Constitution.
Article I, Section 8, Clause 5: The Congress shall have Power…To coin Money, [and] regulate the Value thereof...
Aargh... if only the Framers had used the word "create" instead of "coin"! Then it would be much more difficult for the oligarchs who now control the creation and allocation of money and credit, to convince the chowderheads on the right that "government has to live within its means" is our big problem, instead of what our big problem really is: the creation and allocation of money and credit is being misused and abused by oligarchs who speculate and arbitrage with that new money and credit, instead of using it for something economically productive.

Wednesday, January 14, 2015

Stephanie Kelton goes to Washington

One of the main reasons I don't take Marxists very seriously is that I believe them to be very weak on the subject of monetary policy.  I can cite dozens of examples but my current favorite concerns José Manuel Durão Barroso, the former Prime Minister of Portugal who was until 31OCT2014, the President of the European Commission.  Not surprisingly, he is a reliable (fanatical?) neoliberal.  Slightly more surprising, in his university days, he was one of the leaders of the underground Maoist MRPP (Reorganising Movement of the Proletariat Party, later PCTP/MRPP, Communist Party of the Portuguese Workers/Revolutionary Movement of the Portuguese Proletariat).  It seems the journey from Maoist to neoliberal is both short and easy.

Enter Bernie Sanders, the only USA Senator who calls himself a Socialist.  Now normally that would make me nervous but recently, he named Stephanie Kelton of UMKC as his chief economist.  Because that school can legitimately lay claim to being the only place in USA where one can learn such heterodox economic theories as Institutionalism, I think we can safely assume that Sanders will be getting better economic advice than any USA President since Jimmy Carter.  Whether he listens to her and makes the economics she teaches central to his political campaign is another question but for once on the lifetime of the vast majority of Americans, there will be something more enlightened than neoliberalism to choose from.

All I can say is, it's about damn time!

Bernie Sanders opens a new front in the battle for the future of the Democratic Party

Dylan Matthews on January 10, 2015

President Obama's biggest problem in the Senate is obviously its new Republican majority, but opposition from the left wing of the Democratic caucus appears to be growing too. Most prominently, Sen. Elizabeth Warren (D-MA) has clashed with the White House on a key Treasury Department position and the CRomnibus spending package. But new budget committee ranking member Sen. Bernie Sanders (I-VT) is poised to break dramatically from traditional Democratic views on budgeting, from Obama to Clinton to Walter Mondale and beyond.

His big move: naming University of Missouri - Kansas City professor Stephanie Kelton as his chief economist. Kelton is not exactly a household name, but to those who follow economic policy debates closely, tapping her is a dramatic sign.

For years, the main disagreement between Democratic and Republican budget negotiators was about how to balance the budget — what to cut, what to tax, how fast to implement it — but notwhether to balance it. Even most liberal economists agree that, in the medium-run, it's better to have less government debt rather than more. Kelton denies that premise. She thinks that, in many cases, government surpluses are actively destructive and balancing the budget is very dangerous. For example, Kelton thinks the Clinton surpluses are nothing to brag about and they actually inflicted economic damage lasting over a decade.

A drastic theoretical break

Usually, when Democrats hire economists, they hire nice, respectable Keynesians, who use mainstream economic models and often agree with conservative economists on a lot of theoretical matters while drawing different policy conclusions from them. For example, Greg Mankiw, who served as George W. Bush's top economic advisor, and Christina Romer, who served as Obama's, were both influential in developing New Keynesianism, a macroeconomic theory that emerged in the 1980s and arguably dominates the field today. What really set Romer and Mankiw apart was policy, not economic theory.

Kelton disagrees with Romer and Mankiw on economic theory. In fact, she disagrees with just about every economist Bush or Obama ever hired about economic theory. Kelton is among the most influential advocates of Modern Monetary Theory (MMT), a heterodox left-leaning movement within economics that rejects New Keynesianism and other mainstream macroeconomic theories.

MMT emphasizes the fact that countries that print their own money can never really "run out of money." They can just print more. The reason we have taxes, then, is not to pay for stuff, but to keep people using the government's preferred currency rather than, say, Bitcoin. In some rare cases, consumer demand gets too high, so sellers raise prices and inflation ensues. Then, you need to raise taxes to cool the economy down. But the theory holds that this eventuality is pretty rare. James Galbraith, another MMT-influenced economist, once told me that the last time it happened was in World War I.

The main takeaway from this is that you really don't need to balance the budget over any time horizon, and attempts to do so will hurt the economy. That's what Kelton argues happened after the Clinton surpluses of the late 1990s / early 2000s. Any dollar of government surplus must show up as private debt, she reasons. And the private sectors just can't run up debt like that indefinitely. "Eventually, something will give," Kelton once wrote to Business Insider. "And when it does, the private sector will retrench, the economy will contract, and the government's budget will move back into deficit."

A minority view

Plenty of people criticize Obama's economic policies (or Clinton's) from the left, but this is very much a minority view in economics — even among liberals. Paul Krugman, for example, has argued that MMT gets this all wrong. You still need people to buy government bonds, and if the interest rates on those get too high, then paying for it all might be hard to do without triggering runaway inflation. "Once we’re no longer in a liquidity trap, running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation," Krugman writes. Joe Gagnon, an economist at the Peterson Institute, also notes that Australia and Canada ran surpluses for years without suffering economically as a consequence. (You can see MMT responses to these points here and here.)

Before recently, mainstream economists and policymakers could comfortably ignore MMT. Galbraith told me that when, on a panel for an April 2000 event at the White House, he argued that the US's new budget surplus would harm the economy, the hundreds of economists in attendance laughed in his face. That's all changed. The financial crisis created a huge appetite for new economic thinking, and MMT helped meet it. Now, people like Krugman are expected to at least grapple with its claims. Kelton's elevation to the budget committee is another important step in mainstreaming the theory, and making it safe for left-wing Democrats to embrace.

If you want to learn more about MMT, I wrote a long profile of the movement back in 2012 that explains the basics. But theory aside, in concrete political terms this is a sign that Sanders is likely to reject the consensus-oriented approach of his predecessor, Patty Murray, and produce big spending budget frameworks that many members of his own caucus — as well as the White House economic team — would reject. That's going to be a headache for an administration that would like to count on a unified group of Democrats as it heads into inevitable battles with the Republicans. more

Tuesday, January 13, 2015

Wray on MMT

Modern Monetary Theory is a concept that makes me a tad nervous because I find that most monetary ideas have been around for at least a century and likely more.  In fact, it is pretty damn hard to top the monetary ideas of Lincoln and his Greenbacks, or for that matter, Peter Cooper and the Greenback Party of the 1870s.

But since MMT seems to be the preferred description of the current monetary position of progressives, I am trying to get myself up to speed.  First up is a positive explanation of MMT by L. Randall Wray of U Missouri Kansas City followed by a really thoughtful discussion of progressive monetary ideas by Bill Mitchell.  All I can say is that if this is what they are calling MMT, it is certainly something that would have made old Peter Cooper happy.

Monday, January 12, 2015

Creating money out of thin air

This week, I intend to cover the subject of money creation.  It is not like I haven't covered this subject pretty thoroughly before.  In fact, I made it the subject of Chapter Six of Elegant Technology.  The reason is pretty obvious—if guys like Tony and me are going to run around telling folks that their only hope for survival lies in spending $100trillion for infrastructure upgrades, we owe it to them to explain where all that money will come from.

Actually, the source of that money is blindingly obvious—we will get those funds the same way modern society always gets those funds.  We will create them out of thin air.  But, scream the monetary Puritans, if you just create money willy-nilly out of thin air, what will stop us from becoming Zimbabwe with runaway inflation?  Again the answer is obvious—don't create money will-nilly—only create money to pay for things that make the society richer.

What the monetary Puritans forget is that while money can be made valuable by specifying convertibility to rare metals like gold, the really important value of money is the ability to convert it into necessary items of survival—food, shelter, energy, water, etc.  Fiat money derives its value from funding the clever use of resources.  Producers make money valuable!  And so long a money is created to fund Producer projects—and converting the world into a giant solar-powered fire-free zone would most definitely qualify as a Producer project—new money brings actual prosperity and NOT inflation.

Besides, creating money out of thin air is what bankers do!  It is the rest of us who make that money valuable.  They create a new mortgage with a few keystrokes and folks like us work like slaves for 30 years to pay it off.  It is our hard work that makes that money valuable.  Starving the society of funds necessary for the creation and maintenance of our infrastructure is easily sin #1 of the bankster classes.  Because of this madness, we are not only destroying the only inhabitable biosphere for light-years in any direction, we are going broke doing it.

Thursday, January 8, 2015

Toyota opens up their fuel-cell patents

As regular readers know, I have been following the fuel-cell story so carefully I actually attracted the attention of Toyota.  And while I consider a working fuel-cell car to be a remarkable triumph of very sophisticated engineering, I also believe that without a LOT more infrastructure, no one will buy a car that requires hydrogen to start.  I could see a cab company with a central garage and fueling station buying such a problem-fueled vehicle, and maybe if Toyota were to build a super-clever taxi around their fuel cells, they might gain some market share.  But for the general public, the infrastructure problem is probably fatal.

That doesn't mean that Toyota will go down without a good fight.  This is an age where open-source is still considered a valid development strategy.  Besides, hardly anyone—especially in Asia—is terribly concerned about enforcing patents anyway.  And so we see that Toyota has announced that they are willing to share their fuel-cell-car inventions.  Making fuel-cell technology open-source is a nice move but I seriously doubt it is enough to counter the infrastructure elephant in the room.

On the other hand, building the world's most perfect taxi would be an incredible marketing campaign.  Cities with smog problems could specify a zero emission taxi fleet that could be fulfilled with fuel-celled cars.  Passengers would get a demonstration of how quiet and agile electric cars can be.  And folks would gain experience in building and supplying hydrogen fueling stations.  From there, the infrastructure could be built out.  I mean, an all-electric fleet of personal transportation is imperative or there will be no personal transportation.  So the question becomes, will hydrogen fuel cells be a better choice than storage batteries?

Wednesday, January 7, 2015

Germany losing its nerve over energy?

Even as far away from Germany as the center of North America, you can feel their enthusiasm for a solar-powered future just leaking away.  I have no inside information for why this is happening or why now, but Institutional Analysis provides us with informed guesses.
  • In spite of some serious costs and great effort, Germany's transition to a solar society has basically grabbed the low-hanging fruit.  Even solar's biggest boosters have to acknowledge that they have only climbed the foothills and the big mountains still lie ahead.  Not surprisingly, many are losing their nerve.
  • Transmission lines.  Even those who love the sight of big graceful wind turbines turning slowly on the horizon are appalled by the prospects of transmission lines all over the country.  Yet because there are long distances between good wind sites and the large consumers, transmission is inevitable.
  • Europe's ongoing economic crises is beginning to frighten the sane.  Yes neoliberalism has been pretty good for Germany but the ultimate reward for their diligence and aggressive business practices may be that they are left holding the bag when all this crazy debt defaults.
  • Asia has already gotten their hands on the green technologies the Germans struggled to perfect.  So even after paying the price of being first, Germany is discovering there isn't even a likely payoff.
  • No one is following Germany's lead.  Poland builds more ways to burn brown coal while France believes HER nukes are just fine because they are run by people with elite France skills and training.  But mostly, no one can follow the Germans because it is quite obvious that even they cannot pay to finish their big plans.
Of course, right after destroying the baleful influence of the neoliberals scattered throughout the German economy, she must figure out a way to get back in the good graces of Russia.  If the Germans, of all people, don't understand the madness of provoking hostilities with Russia, they are obviously not teaching their history very well.  To piss away years of solid work over a political "crises" that has you lining up on the side of the bad guys who foment violent coups is literally beyond crazy.  I most certainly hope that 2015 is the year we see the return of the sane German.

Tuesday, January 6, 2015

A course adjustment for real-economics

It's a new year.  Tony and I have been kicking around some ideas we want to try.  It's not that we are unhappy with our little blog, it's just that we believe we must rise above a continuous critique of the current approaches to economics, politics, and especially environmental and resource management.  I'll let Tony explain his thinking but for me, I believe those of us who have been given insights into the methods of community and nation-building should devote our energies into promoting a much more constructive agenda.

Both of us have some interesting opportunities in the near future to promote a builder's agenda.  Tony will pitch his vision to a gathering of progressive activists in North Carolina while I will address one of the volunteer "think-tanks" of Minnesota liberalism.  While Tony will stress political organizing and grass-roots activism, I intend to appeal to theoretical roots of economic thought—a battle that must also be won.

Tony has already produced a rough draft of his Powerpoint presentation.  As you can imagine, it is replete with examples of how USA became an industrial powerhouse with a middle class that was the envy of most of the world—before the deindustrialization disasters since the mid 1970s.  Anyone who believes that USA became powerful using the notions of Free Trade will be in for a long evening.  This is good stuff!

My approach will start with an examination for why 45 years after Earth Day One, the planet is in dramatically worse shape.  Mostly it will explain why a Leisure Class approach will NEVER solve problems based in physics and the consumption of energy.  Those who have read Elegant Technology will know what I am going to say.

What we both will have in common is the price tag—$100 trillion.  We intend to introduce some serious sticker shock.  Both of us agree that the problems we are facing are so enormous, it is blatantly dishonest to suggest that there are any more ways to fix them on the cheap.  After all, the first step to the solution for any problem is a clear and honest assessment of its nature and size.

So I can devote more energy to this and other projects like it, I will be cutting back my posts to four per week—Mon-Thu.  This blog will also serve as a home base for our new "positive" agenda.  I hope we don't come off as too "commercial" but we have an agenda to promote.  This is a ridiculously ambitious task (suggesting that there is a way to save human existence on planet earth and further suggesting that we have discovered what that is) and I wouldn't come near to trying except for one extremely important fact—neither Tony nor I have to invent one damn thing.  Everything we are suggesting is based on historical experiments that turned out great.  Humans HAVE made progress since we lived in caves.  We probably still have a lot of progress left in us.

Monday, January 5, 2015

The role of the police

Not long after the students had been gunned down in cold blood during a harmless protest march at Kent State Ohio May 4, 1970, someone at U Minnesota organized a teach-in about the role of police and national guards in the suppression of dissent.  UM still had a month left of spring quarter but finishing the school year was hopeless.  The campus was essentially shut down because everyone had come to the conclusion that there were more important things than classes so finding a meeting place was pretty easy.

I don't remember much about the details.  The folks I knew were in shock.  We all knew the USA had become crazy violent with political assassinations, open riots in the "ghettoes", the Vietnam War, the killing of civil rights workers in the South, the police riot at the Chicago Convention, and other situations too numerous to remember.  But somehow, we really didn't think they would come shooting at people like US.  Weren't Universities supposed to be places that encouraged dissent?  Is our government really willing to shoot the very children who have successfully navigated the mazes laid out to test them?  So it was a primitive response.  It amazing how much more folks pay attention to folks like themselves getting shot.

One of my political science profs got up and scolded us for our hopeless naiveté.  "What do you think the police are for?  They aren't the crime fighters of TV and fiction.  Hell, for the first 100 years of their existence, the police existed mainly to bust the heads of anyone who wanted to organize a union.  Certainly, they have branched out into lucrative sidelines such as the casual extortion from automobile owners and the the kickbacks from the various vice trades, but mostly they exist to keep the lower orders in line.  The National Guardsmen shot those students at Kent State because that was their job.  Keeping groups like those at Kent from forming is in fact their only real mission.  They are armed with weapons and live ammunition because the people that hire them want occasional bloodbaths."

That little speech was easily the most enlightened insight I learned in all my days at UM.  So now as we see the police in New York in open rebellion against the very idea of civilian standards and oversight, it is well that we review just how we got into this mess.  The police are clearly out of control and not just in New York.  And we haven't even begun to speculate on what might happen when all these "crime-fighters" stop busting pot smokers and have to get real jobs.  People armed with a sense of entitlement, high-powered weapons, and the status-panic of losing a middle-class job are remarkably dangerous.

(Another excellent source of info on the origins of the police.)

Thursday, December 25, 2014

And a Happy New Year

Posting will be lighter than normal until Jan 5, 2015.  This blog is a lot of work and I need a break.  My SO thinks I am looking weary.  I'll bet I am.

This blog turned five years old December 5.  I have created over 2100 posts in those five years.  Some of them are still very relevant so if you need a real-economics fix, I encourage you to wander through the archives.

Merry Christmas

...and on earth peace, good will towards men.
Luke 2:14—the absolute central message of Christmas

Yes, I know, there are plenty of people who call themselves "Christians" who are lying, warmongering, thugs who literally worship ignorance.  Those of us who hail from the more enlightened precincts of the faith are truly embarrassed by such creatures.  But what can you do?  Blithering Buffoons like Mike Huckabee (and seemingly the whole cohort of Baptist divines) are useful to the multi-$billion military-industrial complex.  The peacemakers obviously are not.  Huckabee is a regular on TV.  Guys like my dad—not in a thousand years.

In the spirit of peace, some pictures from winters past.  We will have a snow-free Christmas this year.