California Free Press

Off the Top of My Head

Joe Biden's Policy: Speak Loudly but Carry a Small Stick

by John Lawrence

As opposed to Theodore Roosevelt's policy: speak softly but carry a big stick. I think Biden's policy is correct. By all means we don't want World War III. As Ellen Brown makes clear on Web of Debt blog, sanctions will not do much except hasten the day when the US dollar is not the only world's reserve currency. There are so many workarounds to sanctions, and billionaires can always replace their super yachts. Russia has a fiat currency just like the US dollar. Modern Monetary Theory has shown that a country with a fiat currency can have its central bank print as much of that currency as it wishes. The only constraining factor is inflation. Right now the US is more constrained by inflation than Russia is. There is no need for Russia's domestic economy to suffer because of inflation. Businesses can continue to receive investment loans from the central bank. International trade will continue with friendly countries like India, China, Venezuela and Turkey. Turkey is a member of NATO by the way, and India is the world's largest democracy.

Daily Sabah reported on March 11, 2022 in Turkish businesses expect progress on using rubles in trade with Russia :

"Since the currency dispute with shipping companies is causing problems in the delivery of goods passing through customs, Turkey should actively work to develop a mechanism to facilitate trade with Russia in rubles, Istanbul Chamber of Commerce (ITO) head Şekib Avdagiç said Friday. Avdagiç stated that the companies working with Russia see the withdrawal of Western countries from Moscow as a new opportunity and emphasized that it is important to enable the use of the national currency of Russia. The issue was also brought up during President Recep Tayyip Erdoğan’s phone call with his Russian counterpart Vladimir Putin, he reiterated. Erdoğan told Putin that, apart from the euro and dollar, trade between the two countries can be carried out using the Russian ruble and Chinese yuan."

Aljazeera reported:

Mumbai, India–Indian authorities are actively considering dedicated payment mechanisms for trade with Russia to enable existing trade obligations in the wake of sanctions imposed on the Kremlin, a move that will also pave the way for cheaper oil imports to meet the country’s energy demands. In the past month, as sanctions have been imposed on Russia, the scope of a payment mechanism in local currencies has expanded from being a means to sustain ongoing trade to possibilities of deeper engagement, including increasing bilateral trade.

Of course, US authorities are managing the news here just as they are in Russia. They don't want you to know that our erstwhile ally, India, the world's largest democracy is doing workarounds to avoid US sanctions. As Ellen's article points out, we in the US may be better off once the US dollar is not the only world's reserve currency. At that point we may have to rely more on our domestic economy and infrastructure just as Russia is being forced to do now. So we won't have to be at the mercy of supply chains from other parts of the world. More stuff will be manufactured here in the good old USA, and that's a good thing.

The Coming Global Financial Revolution: Russia Is Following the American Playbook

Posted on April 5, 2022 by Ellen Brown from Web of Debt blog

No country has successfully challenged the U.S. dollar’s global hegemony—until now. How did this happen and what will it mean?

Foreign critics have long chafed at the “exorbitant privilege” of the U.S. dollar as global reserve currency. The U.S. can issue this currency backed by nothing but the “full faith and credit of the United States.” Foreign governments, needing dollars, not only accept them in trade but buy U.S. securities with them, effectively funding the U.S. government and its foreign wars. But no government has been powerful enough to break that arrangement – until now. How did that happen and what will it mean for the U.S. and global economies?

The Rise and Fall of the PetroDollar

First, some history: The U.S. dollar was adopted as the global reserve currency at the Bretton Woods Conference in 1944, when the dollar was still backed by gold on global markets. The agreement was that gold and the dollar would be accepted interchangeably as global reserves, the dollars to be redeemable in gold on demand at $35 an ounce. Exchange rates of other currencies were fixed against the dollar. 

But that deal was broken after President Lyndon Johnson’s “guns and butter” policy exhausted the U.S. kitty by funding war in Vietnam along with his “Great Society” social programs at home. French President Charles de Gaulle, suspecting the U.S. was running out of money, cashed in a major portion of France’s dollars for gold and threatened to cash in the rest; and other countries followed suit or threatened to. 

In 1971, President Richard Nixon ended the convertibility of the dollar to gold internationally (known as “closing the gold window”), in order to avoid draining U.S. gold reserves. The value of the dollar then plummeted relative to other currencies on global exchanges. To prop it up, Nixon and Secretary of State Henry Kissinger made a deal with Saudi Arabia and the OPEC countries that OPEC would sell oil only in dollars, and that the dollars would be deposited in Wall Street and City of London banks. In return, the U.S. would defend the OPEC countries militarily. Economic researcher William Engdahl also presents evidence of a promise that the price of oil would be quadrupled. An oil crisis triggered by a brief Middle Eastern war did cause the price of oil to quadruple, and the OPEC agreement was finalized in 1974.

The deal held firm until 2000, when Saddam Hussein broke it by selling Iraqi oil in euros. Libyan president Omar Qaddafi followed suit. Both presidents wound up assassinated, and their countries were decimated in war with the United States. Canadian researcher Matthew Ehret observes:

We should not forget that the Sudan-Libya-Egypt alliance under the combined leadership of Mubarak, Qadhafi and Bashir, had moved to establish a new gold-backed financial system outside of the IMF/World Bank to fund large scale development in Africa. Had this program not been undermined by a NATO-led destruction of Libya, the carving up of Sudan and regime change in Egypt, then the world would have seen the emergence of a major regional block of African states shaping their own destinies outside of the rigged game of Anglo-American controlled finance for the first time in history.

The Rise of the PetroRuble

The first challenge by a major power to what became known as the petrodollar has come in 2022. In the month after the Ukraine conflict began, the U.S. and its European allies imposed heavy financial sanctions on Russia in response to the illegal military invasion. The Western measures included freezing nearly half of the Russian central bank’s 640 billion U.S. dollars in financial reserves, expelling several of Russia’s largest banks from the SWIFT global payment system, imposing export controls aimed at limiting Russia’s access to advanced technologies, closing down their airspace and ports to Russian planes and ships, and instituting personal sanctions against senior Russian officials and high-profile tycoons. Worried Russians rushed to withdraw rubles from their banks, and the value of the ruble plunged on global markets just as the U.S. dollar had in the early 1970s. 

The trust placed in the U.S. dollar as global reserve currency, backed by “the full faith and credit of the United States,” had finally been fully broken. Russian President Vladimir Putin said in a speech on March 16 that the U.S. and EU had defaulted on their obligations, and that freezing Russia’s reserves marks the end of the reliability of so-called first class assets. On March 23, Putin announced that Russia’s natural gas would be sold to “unfriendly countries” only in Russian rubles, rather than the euros or dollars currently used. Forty-eight nations are counted by Russia as “unfriendly,” including the United States, Britain, Ukraine, Switzerland, South Korea, Singapore, Norway, Canada and Japan. 

Putin noted that more than half the global population remains “friendly” to Russia. Countries not voting to support the sanctions include two major powers – China and India – along with major oil producer Venezuela, Turkey, and other countries in the “Global South.” “Friendly” countries, said Putin, could now buy from Russia in various currencies.

On March 24, Russian lawmaker Pavel Zavalny said at a news conference that gas could be sold to the West for rubles or gold, and to “friendly” countries for either national currency or bitcoin.

Energy ministers from the G7 nations rejected Putin’s demand, claiming it violated gas contract terms requiring sale in euros or dollars. But on March 28, Kremlin spokesman Dmitry Peskov said Russia was “not engaged in charity” and won’t supply gas to Europe for free (which it would be doing if sales were in euros or dollars it cannot currently use in trade). Sanctions themselves are a breach of the agreement to honor the currencies on global markets. 

Bloomberg reports that on March 30, Vyacheslav Volodin, speaker of the lower Russian house of parliament, suggested in a Telegram post that Russia may expand the list of commodities for which it demands payment from the West in rubles (or gold) to include grain, oil, metals and more. Russia’s economy is much smaller than that of the U.S. and the European Union, but Russia is a major global supplier of key commodities – including not just oil, natural gas and grains, but timber, fertilizers, nickel, titanium, palladium, coal, nitrogen, and rare earth metals used in the production of computer chips, electric vehicles and airplanes. 

On April 2, Russian gas giant Gazprom officially halted all deliveries to Europe via the Yamal-Europe pipeline, a critical artery for European energy supplies.

U.K. professor of economics Richard Werner calls the Russian move a clever one – a replay of what the U.S. did in the 1970s. To get Russian commodities, “unfriendly” countries will have to buy rubles, driving up the value of the ruble on global exchanges just as the need for petrodollars propped up the U.S. dollar after 1973. Indeed, by March 30, the ruble had already risen to where it was a month earlier. 

A Page Out of the “American System” Playbook

Russia is following the U.S. not just in hitching its national currency to sales of a critical commodity but in an earlier protocol – what 19th century American leaders called the “American System” of sovereign money and credit. Its three pillars were (a) federal subsidies for internal improvements and to nurture the nation’s fledgling industries, (b) tariffs to protect those industries, and (c) easy credit issued by a national bank.

Michael Hudson,  a research professor of economics and author of “Super-Imperialism: The Economic Strategy of American Empire” among many other books, notes that the sanctions are forcing Russia to do what it has been reluctant to do itself – cut reliance on imports and develop its own industries and infrastructure. The effect, he says, is equivalent to that of protective tariffs. In an article titled “The American Empire Self-destructs,” Hudson writes of the Russian sanctions (which actually date back to 2014): 

Russia had remained too enthralled by free-market ideology to take steps to protect its own agriculture or industry. The United States provided the help that was needed by imposing domestic self-reliance on Russia (via sanctions). When the Baltic states lost the Russian market for cheese and other farm products, Russia quickly created its own cheese and dairy sector – while becoming the world’s leading grain exporter.

Russia is discovering (or is on the verge of discovering) that it does not need U.S. dollars as backing for the ruble’s exchange rate. Its central bank can create the rubles needed to pay domestic wages and finance capital formation. The U.S. confiscations thus may finally lead Russia to end neoliberal monetary philosophy, as Sergei Glaziev has long been advocating in favor of MMT [Modern Monetary Theory]. …

What foreign countries have not done for themselves – replacing the IMF, World Bank and other arms of U.S. diplomacy – American politicians are forcing them to do. Instead of European, Near Eastern and Global South countries breaking away out of their own calculation of their long-term economic interests, America is driving them away, as it has done with Russia and China. 

Glazyev and the Eurasian Reset

Sergei Glazyev, mentioned by Hudson above, is a former adviser to President Vladimir Putin and the Minister for Integration and Macroeconomics of the Eurasia Economic Commission, the regulatory body of the Eurasian Economic Union (EAEU). He has proposed using tools similar to those of the “American System,” including converting the Central Bank of Russia to a “national bank” issuing Russia’s own currency and credit for internal development. On February 25, Glazyev published an analysis of U.S. sanctions titled “Sanctions and Sovereignty,” in which he stated:

[T]he damage caused by US financial sanctions is inextricably linked to the monetary policy of the Bank of Russia  …. Its essence boils down to a tight binding of the ruble issue to export earnings, and the ruble exchange rate to the dollar. In fact, an artificial shortage of money is being created in the economy, and the strict policy of the Central Bank leads to an increase in the cost of lending, which kills business activity and hinders the development of infrastructure in the country.

Glazyev said that if the central bank replaced the loans withdrawn by its Western partners with its own loans, Russian credit capacity would greatly increase, preventing a decline in economic activity without creating inflation.   

Russia has agreed to sell oil to India in India’s own sovereign currency, the rupee; to China in yuan; and to Turkey in lira. These national currencies can then be spent on the goods and services sold by those countries. Arguably, every country should be able to trade in global markets in its own sovereign currency; that is what a fiat currency is – a medium of exchange backed by the agreement of the people to accept it at value for their goods and services, backed by the “full faith and credit” of the nation. 

But that sort of global barter system would break down just as local barter systems do, if one party to the trade did not want the goods or services of the other party. In that case, some intermediate reserve currency would be necessary to serve as a medium of exchange. 

Glazyev and his counterparts are working on that. In a translated interview posted on The Saker, Glazyev stated:

We are currently working on a draft international agreement on the introduction of a new world settlement currency, pegged to the national currencies of the participating countries and to exchange-traded goods that determine real values. We won’t need American and European banks. A new payment system based on modern digital technologies with a blockchain is developing in the world, where banks are losing their importance. 

Russia and China have both developed alternatives to the SWIFT messaging system from which certain   Russian banks have been blocked. London-based commentator Alexander Mercouris makes the interesting observation that going outside SWIFT means Western banks cannot track Russian and Chinese trades.

Geopolitical analyst Pepe Escobar sums up the plans for a Eurasian/China financial reset in an article titled “Say Hello to Russian Gold and Chinese Petroyuan.” He writes:

It was a long time coming, but finally some key lineaments of the multipolar world’s new foundations are being revealed.

On Friday [March 11], after a videoconference meeting, the Eurasian Economic Union (EAEU) and China agreed to design the mechanism for an independent international monetary and financial system. The EAEU consists of Russia, Kazakhstan, Kyrgyzstan, Belarus and Armenia, is establishing free trade deals with other Eurasian nations, and is progressively interconnecting with the Chinese Belt and Road Initiative (BRI).

For all practical purposes, the idea comes from Sergei Glazyev, Russia’s foremost independent economist ….

Quite diplomatically, Glazyev attributed the fruition of the idea to “the common challenges and risks associated with the global economic slowdown and restrictive measures against the EAEU states and China.” 

Translation: as China is as much a Eurasian power as Russia, they need to coordinate their strategies to bypass the US unipolar system.

The Eurasian system will be based on “a new international currency,” most probably with the yuan as reference, calculated as an index of the national currencies of the participating countries, as well as commodity prices. … 

The Eurasian system is bound to become a serious alternative to the US dollar, as the EAEU may attract not only nations that have joined BRI … but also the leading players in the Shanghai Cooperation Organization (SCO) as well as ASEAN. West Asian actors – Iran, Iraq, Syria, Lebanon – will be inevitably interested.

Exorbitant Privilege or Exorbitant Burden?

If that system succeeds, what will the effect be on the U.S. economy? Investment strategist Lynn Alden writes in a detailed analysis titled “The Fraying of the US Global Currency Reserve System” that there will be short-term pain, but, in the long run, it will benefit the U.S. economy. The subject is complicated, but the bottom line is that reserve currency dominance has resulted in the destruction of our manufacturing base and the buildup of a massive federal debt. Sharing the reserve currency load would have the effect that sanctions are having on the Russian economy – nurturing domestic industries as a tariff would, allowing the American manufacturing base to be rebuilt. 

Other commentators also say that being the sole global reserve currency is less an exorbitant privilege than an exorbitant burden. Losing that status would not end the importance of the U.S. dollar, which is too heavily embedded in global finance to be dislodged. But it could well mean the end of the petrodollar as sole global reserve currency, and the end of the devastating petroleum wars it has funded to maintain its dominance. 

________________________________

This article was first posted on ScheerPost. Ellen Brown is an attorney, chair of the Public Banking Institute, and author of thirteen books including Web of Debt, The Public Bank Solution, and Banking on the People: Democratizing Money in the Digital Age. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com. 

Off the Top of My Head

Joe Biden's Trillion Dollar Budget Plan

by John Lawrence

Don't worry about how to pay for it. Any nation with a sovereign currency (let alone the world's reserve currency) and a floating exchange rate can never go bankrupt. The Federal Reserve can issue the money. In fact in the real world this is exactly how it works for any budgetary legislation passed by Congress and signed by the President. Let's say, for example, Biden's $2 trillion infrastructure plan is signed by him into law. The US Treasury has an account at the Federal Reserve bank. Let's say there is only a trillion dollars in that account. What happens next is that the Fed just augments the Treasury's account by a trillion dollars by means of a few keystrokes on a computer. Bingo the government now has all the money it needs to spend on infrastructure. It didn't have to receive tax money in advance of the money it needed to spend. At the same time the Treasury Department creates a trillion dollars worth of Treasury bonds and sells them to the primary dealers who are required by law to buy them. These are mainly big Wall Street banks. These banks sell the bonds in the secondary market. If they can't find enough buyers, the Fed "adds liquidity to the market" by taking the Treasuries onto its balance sheet in return for marking up the Wall Street banks accounts at the Fed with the appropriate amounts of cash. Now everybody is happy. The US government has the money it needs in its Treasury's account at the Fed. The Wall Street banks have plenty of liquidity in their reserve accounts at the Fed, and the amazing thing is that it didn't require any money from additional taxes.

Another amazing thing is that most politicians are totally ignorant about how government financing actually works. The Republican Governor of Ohio, Mike DeWine gets on TV and opines about the fact that the US is going into too much debt and how will our grandchildren ever pay it off. "Here in Ohio," I'm paraphrasing," we have to pay our bills and pay down our debts. Every household has to be fiscally responsible and pay their debts." Well households and states are in a different category from the Federal government. They actually do have to pay their debts. So what he is claiming is a half truth. States and households cannot issue a sovereign currency whereas the Federal government can. States and households use the Federal government's currency. The big lie, however, is that the US government has to pay off its debts. It never does, and no entity can force it to do so. The other constraint that Larry Summers and others worry about is inflation or currency devaluation. Inflation could be a problem, and that problem, should it arise, can be dealt with by sucking money out of the economy by means of taxes. Biden's plan to tax the rich will suck some of their superfluous wealth out of the economy thus forestalling inflation while tending to reduce the runaway economic inequality that is now threatening democracy in the US.

The Federal government is not like a household or a state. Households and states actually do have to pay back the money they borrow plus interest. That's why it's so important that the various COVID rescue plans provide the states and municipalities with money. Otherwise, they could become financially insolvent and go bankrupt like Orange County in California did a few years ago. Birmingham, AL also got itself in hot water and went bankrupt. Countries in the Euro zone have the same problem as states in the US. They gave up their sovereign currencies when they joined the EU. So now countries like Greece and Italy have to beg the European Central Bank for relief, relief they could have provided for themselves if they had retained their sovereign currencies like Britain did. Britain will not have any problem with financial shortages because, like the US, its government can issue whatever currency is deemed necessary to weather any storm.

So in addition to the Big Lie that Trump won the election, politicians of both parties are perpetrating another Big Lie that the US actually has to borrow the money to pay for Biden's trillion dollar infrastructure and safety net programs. Some politicians, like Bernie Sanders and AOC, actually know the truth, and, evidently, they have convinced Joe Biden thereof as well although they won't actually come out and say it to the media: the US government can just issue money into the private economy. It doesn't need to borrow it or even tax for it in advance in order to spend. So the real policy of the Biden administration is not tax and spend. It's spend and maybe tax later, but target those taxes on the wealthiest among us. As opposed to the Republican philosophy of giving tax breaks to the wealthy and taking the social safety net away from the poor.

Off the Top of My Head

Biden's Infrastructure Initiative: Don't Worry About How To Pay For It

by John Lawrence, March 30, 2021

Even Republicans agree that there is a need to upgrade the infrastructure of the US. But they don't want to raise taxes to pay for it. Good news! You don't need to pay for it with tax money. The US dollar is a sovereign currency. That means that the central bank, in this case the Fed, can just create the money. In fact this is how it's always been done. The deficit is just an accounting regime. Money created by the Fed need never be paid back. It just goes on the Fed's balance sheet. This is a fact known and agreed to by most economists but many politicians and the American public are totally ignorant of this basic fact about how the economy works. Modern Monetary Theory has attempted to explain it in books like "The Deficit Myth" by Stephanie Kelton. So why does Biden also propose tax increases on the rich to pay for it? These are really two separate issues. Taxes need to be raised on the rich to try to bring into balance the skyrocketing financial inequality that has been occurring, not to pay for the infrastructure bill. Why do politicians including President Biden continue to perpetuate the myth that appropriations bills need to be "paid for." Why don't they just come out and say the truth - that a nation with a sovereign currency can never run out of money?

When just a few people own most of the wealth, we're back in a neo-feudal society where the rich control the political process, and the rest of the people are merely peons who don't really have a stake in the society at all. The Republican attempts to change the voting laws to suppress the minority vote is a way to cement that fact in American society. That's why it's so important to liberalize the voting laws so that every American citizen is encouraged to vote, not discouraged from it. So the infrastructure initiative is really two or even three pronged: rebuild infrastructure such as roads, bridges, ports, rail lines, airports and broadband thus putting millions back to work in good paying jobs. Secondly, to build back better in the sense that, insofar as possible, address the problem of global warming, and, thirdly, to make a first step in addressing economic inequality. All these things are important.

The only thing to watch out for while spending all this money is inflation, and some economists like Larry Summers are already sounding alarm bells over that. By taxing the rich and corporations money will be sucked out of the economy thus tending to reduce inflation. If sucking money out of the economy reduces inflation, then the sucking must be addressed to those areas where excess money really exists: namely, the rich and corporations who have been getting away with murder for years under both Republic and Democratic administrations. Forbes reported that "The 3 Richest Americans Hold More Wealth Than Bottom 50% Of The Country." Forbes ought to know. Perhaps with Biden's plan to tax the rich, it'll take 10 of the richest to equal the bottom 50%'s share. As for inflation, so much money in so few hands has already produced asset inflation in the form of rising housing and rent prices making it problematic for the young and the poor to support themselves especially at a minimum wage that hasn't increased in 50 years. What Summers doesn't understand is that the inflation that has occurred has been in the money that has been made by the rich which is actually wealth inflation, not in the form of wage inflation of the poor and middle class. Therefore, in turning this process around Biden's infrastructure bill is actually pointing the American economy in the correct direction.

Off the Top of My Head

Inflation Probably Not a Problem If Biden Programs Are Carefully Targeted

by John Lawrence, March 14, 2021

Critics have said, "Oh, My your children and grandchildren are going to have to pay back all these trillions of dollars that have been spent by both the Trump and Biden administrations on COVID relief and to get the economy going again." Not True! Modern Monetary Theory has shown that the Federal Reserve can just create the money and the Treasury Department can just spend it without ever worrying about paying it back. Finance is not the problem. The problem is potentially inflation which economist Larry Summers has sounded the alarm about. Most of Biden's relief bill is targeted at the poor which means that that money will be sucked up to pay past due rent and mortgage bills as well as providing a decent lifestyle which should not be inflationary except if you believe the nonsense of the neoliberal Phillips curve which supposedly proves that a certain segment of the population has to live in poverty and penury in order to fight inflation. That has also been debunked by Modern Monetary Theory although most politicians are still on the wavelength of neoliberal economics which has been shown to be fallacious in this and many other regards.

State and local governments likewise will just suck up the money in the relief bill to bail themselves out of debt and provide an adequate level of social services. This also is not inflationary because the money will not be just sloshing around in the economy with nowhere to go. What is inflationary is tax breaks for the rich, but this money can be sucked out of the economy by taxing the rich. What Larry Summers fails to take into account is that the US and much of the rest of the world has a two tier economy. The rich and upper middle class are doing very well, thank you, while the lower middle class and the poor are suffering. The COVID pandemic illustrated this in even starker terms with the so-called K-shaped recovery. The upper classes made money; the lower classes are on the verge of losing whatever financial gains they had made during the Trump economy. Inflation is caused by too much money sloshing around in the economic system. Most of that inflationary money is held by the rich in assets like stocks and real estate. Money injected into the economic system targeted at the poor is immediately sucked out of the system to pay debts and to provide basic necessities. There is enough physical and material capacity in the system to provide basic necessities so this money is not inflationary.

Inflation is caused when there is too much money chasing too few goods. As long as there is the material and human capacity, money directed at those sectors of the economy will not cause inflation. The real problem in future Biden administration bills involving infrastructure and the Green New Deal is that the materials to build out infrastructure, namely, steel, cement and plastics, require fossil fuels to manufacture and the manufacturing processes themselves are inherently carbon dioxide emitting. This comes about from basic chemistry which involves the carbon and oxygen atoms every step of the way. Most basic materials are composed of carbon, oxygen, hydrogen and nitrogen, and the chemistry involved in manufacturing releases large amounts of carbon dioxide. The manufacture of solar panels requires mining high quality quartz and combining it with coal. It's hard to get away from fossil fuels as the Michael Moore movie, Planet of the Humans, pointed out. For this reason spending large amounts of money on infrastructure involving cement, steel, plastics and other materials could actually produce more global warming rather than preventing it. The finances are available; the proper materials are not. The manufacture of wind turbines and solar panels require the release of large amounts of greenhouse gasses.

Because of these fundamental limitations regarding materials, it doesn't make sense to throw trillions of dollars at either infrastructure or global warming mitigation. That would be either inflationary or misguided in the sense that large projects in these areas could produce even more global warming. As Bill Gates has pointed out, money should be invested in promising startups and research that can solve these basic problems and into digital nuclear which is the only renewable energy source that won't result in a lot of greenhouse gasses being created in the first place. Advanced nuclear is the most promising source of clean energy. Gates has invested in a company TerraPower which does research on advanced nuclear reactors. Their mission statement reads:

"TerraPower was founded by Bill Gates and a group of like-minded visionaries that decided the private sector needed to take action in developing advanced nuclear energy to meet growing electricity needs, mitigate climate change and lift billions out of poverty. Advanced reactors and other isotopic applications are now possible with technology and enhanced computing capabilities that were unimaginable a few decades ago. At TerraPower, we are innovating in nuclear to improve the lives of people everywhere and to build the clean energy of tomorrow – today."

So when the Biden administration gets around to their initiatives on infrastructure and global warming, they need to heed Bill Gates' warning about traditional manufacturing methods involving cement, steel and plastic. Energy from solar and wind are inadequate to solve the problem for many reasons. Large scale demonstration and build out of nuclear energy reactors should be the order of the day, They are the only clean energy source that has the potential for diminishing the world's reliance on fossil fuels.

Off the Top of My Head

How to Pay for a Green New Deal

by John Lawrence

In 1940 British economist J. M. Keynes’s book, How to Pay for the War: A Radical Plan for the Chancellor of the Exchequer gave the economic guidance for financing the Second World War. Following Keynes, massive financial resources were devoted to the war resulting in full employment without inflation. There is a model here that can be used for the Green New Deal (GND) which is the Moral Equivalent Of War (MEOW). Bill Gates and J.D. Alt have put an upper bound of $5 trillion a year, but closer and more exacting estimates have put it at $1 trillion a year for 10 years. Yeva Nersisyan and L. Randall Wray write: "Instead of simply adding up estimates of the government spending that would be required, we assess resource availability that can be devoted to implementing GND projects. This includes mobilizing unutilized and underutilized resources, as well as shifting resources from current destructive and inefficient uses to GND projects. We argue that financial affordability cannot be an issue for the sovereign US government. Rather, the problem will be inflation if sufficient resources cannot be diverted to the GND. And if inflation is likely, we need to put in place anti-inflationary measures, such as well-targeted taxes, wage and price controls, rationing, and voluntary saving. Following Keynes, we recommend deferred consumption as our first choice should inflation pressures arise. We conclude that it is likely that the GND can be phased in without inflation, but if price pressures  do appear, deferring a small amount of consumption will be sufficient to attenuate them."

Their analysis is the most astute to date. We know that the money is available because the Federal Reserve can create it with a few keystrokes on a computer. This has been demonstrated time and time again from the bank bailouts of the Great Recession to the COVID relief bills. Modern Monetary Theory (MMT) has provided the theoretical framework that explains how the Fed creates money and the fact that the US can never run out of money. The US government which has a sovereign currency does not have to pay back loans whereas a private household or even a US state does have to pay back loans or else suffer the consequences. The only potential consequence when the Fed creates money for public purposes is inflation which can be controlled by a variety of measures. In How to Pay for the Green New Deal, the authors write: "Viewed from the MMT perspective, the government uses the monetary system to mobilize real resources and to move some of them to pursuit of the public purpose. Affordability is never an important question for a sovereign government—the relevant question concerns resource availability and suitability. There is thus a natural alliance between MMT and the GND. If we can identify technologically feasible projects that would achieve the GND’s goals, and if we can identify the resources to devote to these projects, then we can arrange for the financing of the programs." Bill Gates has identified a number of promising new technologies that he has invested in to address the GND issue.

As Keynes pointed out, it's a question of available resources to tackle any public problem. If the resources are available, the money is no problem although resources may need to be switched from the private to the public sector. Republicans who favor that all economic activity be confined to the private sector may have a problem with this. Nevertheless, this is exactly what happened during the Second World War. Resources, both human and material, were activated within the public sector to fight the war while at the same time were withdrawn from the private sector. Consumption was held to a minimum and deferred till the war's end. Then private resources, both human, financial and material, were unleashed so that the post war era was one of the most prosperous that the world has ever seen. The deflation brought about by wage and price controls and rationing during the war offset the inflation caused by the public money that was spent financing the war. The same tactic is necessary for a Green New Deal.

Yeva Nersisyan and L. Randall Wray write: "The approach is simple but also profound: total the resources available to prosecute the war while meeting the consumption needs of the population. If the available resources fall short of what is needed, the solution cannot be found in the finances. Government can always spend more to shift resources to the war effort; if consumption spending is not reduced, the result is inflation that generates a combination of “voluntary” saving and excess profits as real consumption falls. To prevent this undesirable outcome, government must reduce consumption demand by some combination of voluntary saving, taxes, deferred compensation, rationing, and wage and price controls. To be clear, the purpose of these actions is not to provide government with the financial means to “pay for” the war effort but rather to relieve pressure on scarce resources."

There will be much opposition from the America First crowd which is really a euphemism for Me First. The people who put their own freedom to do whatever they want whenever they want will probably not take too kindly to making any sacrifices so that future generations will have a habitable planet to live on. There will be demagogues ala Trump who will appeal to their baser instincts of solipsistic selfishness. They will be all about their First Amendment freedoms to resist any effort that is for the public good especially if it involves doing anything of a salutary nature for people in other parts of the world. I can visualize bars and restaurants complaining that they can't get enough hired help because everyone is employed by the Green New Deal. Let's hope that the better angels of mankind will prevail.

Off the Top of My Head

Despite All the Talk, Practically Nothing Has Been Done About Global Warming

by John Lawrence

Every year 51 billion tons of Greenhouse Gasses (GHGs) go into the atmosphere. There has been no decrease in that number despite the Paris Accords, despite more hybrid cars, despite the build up of solar and wind renewables. 197 countries adopted the Paris Agreement at the COP21 in Paris on 12 December 2015, over 5 years ago and yet there has been no improvement in the number of tons of GHGs dumped into the atmosphere per year. Well, a couple of tons less this year due to the pandemic. In general it is slightly increasing according to Bill Gates in his new book, "How to Avoid a Climate Disaster." At the rate we are going, there is no way that the earth can escape the dire consequences of global warming. Should we just give up and enjoy the few remaining years of a habitable earth? I don't think so. What will it take to forestall catastrophe? Basically, it will take a Green New Deal or should we call it the Green Equivalent of World War II?

During World War II there was a huge amount of government deficit spending. Modern Monetary Theory has shown that this is no problem because a government such as the US which issues its own sovereign currency can never run out of money whether or not there are tax receipts to cover the spending. The problem is inflation which occurred in WW I despite more modest outlays. In the WW II years there were wage and price controls which effectively controlled inflation. There was also rationing. These measures made sure that all resources both human and material were devoted to the war effort. Everyone was on the same page. Is that possible for a Moral Equivalent of War (MEOW) today? Would people be willing to give up anything so that resources could be devoted to a MEOW as far as Global Warming is concerned? Many Americans are not even willing to wear a mask during a pandemic, and many also believe that global warming is a hoax. Would they sacrifice for a MEOW?

Bill Gates has invested his money in a variety of start-ups which have some promise of addressing the global warming issue. One of them is Direct Air Capture (DAC) in which carbon dioxide is removed directly out of the air. This is a feasible alternative which is already in use on a small scale. The problem is that it's the most expensive alternative out there. A combination of other methods to ameliorate GHGs in the atmosphere would not only be more feasible but cheaper. He estimates that removing 51 billion tons of GHGs per year would cost $5.1 trillion per year. This would be an upper bound on the cost of getting to zero GHG emissions. Actually this does not seem too unreasonable given the fact that between 2008 and 2015, the Fed’s balance sheet, its total assets, ballooned from $900 billion to $4.5 trillion. That means that the Fed "printed" $3.4 trillion with its Quantitative Easing (QE) program. The Fed has "printed" $3.5 trillion just in the year 2020 in response to the coronavirus pandemic to keep the economy from falling apart. This is the amount of money authorized by Congress in several spending bills. Add to that Joe Biden's $1.9 trillion COVID relief bill and you get a total of $5.4 trillion. And yet there has been no inflation.

So there is a little hocus pocus going on in the relationship between the Fed and the Treasury. The Fed by law is not allowed to buy US debt directly from the Treasury department. How it works is Congress authorizes a spending bill. The Treasury issues a Treasury bond if there aren't enough taxes to cover it. That bond is sold to the "primary dealers" which are mainly big Wall Street banks, and then the Fed buys the bond on the "open market" which means it buys them from the primary dealers. So by a roundabout method, the Fed buys up US debt by means of "printing" money although it's actually by means of a few keystrokes on a computer crediting the Treasury's account at the Fed and the Fed takes the bonds onto its balance sheet from which theoretically it could sell them some day. One little distinction: this is not QE. QE was a term coined when the Fed "printed" money to bail out the big banks aka providing liquidity. The Fed took all the toxic junk of mortgage backed securities and other assets onto its balance sheet and gave the banks all the money they needed to cover bets on credit default obligations and interest rate swaps and other casino garbage. So while it amounts to the same thing - the Fed "printing" money and adding it into the economy - the money injected now is going into the real economy whereas the QE went into the Wall Street economy.

But I digress. So Bill Gates says it would require at most $5.1 trillion to get our GHGs down to zero on an annual basis. In other words keep the goddam fossil fuels, cow farts and Keystone pipeline and just get those DAC machines humming. Seems reasonable to me. The Fed can just print up that $5.1 trillion and we're home clear. J.D. Alt estimates that solving the global warming crisis will cost $60 trillion over 10 years which is about the same amount per year that Bill Gates estimates although supposedly we will reach some point at which renewables and other technologies will result in zero emissions so we will not have to go on spending that amount in perpetuity. So why don't we just go ahead and do it? The Fed could just print the money. No inflation is in sight. Modern Monetary Theory has shown that any country with a sovereign currency (such as the US dollar) can never run out of money and as long as the resources are available (both human and material) the financial resources will always be available. The only problem is the stupidity of most of the US Congress (mainly Republicans) whose only response to any Democratic initiative is just to Just Say No as well as their economic ignorance. So it is of paramount importance that next year after the pandemic is over and before Republicans take over (hope not) one of the branches of Congress in 2022, that Congress passes a $5 trillion per year Green New Deal or a $50 trillion GND spread over 10 years.

Off the Top of My Head

The Two Strands of Modern Economic Theory

by John Lawrence, February 12, 2021

Ellen Brown with her book Web of Debt pointed out that public banks could save states and municipalities millions in interest compared to Wall Street banks. She also pointed out that money is created by banks when they make loans with fractional reserve banking. They just create the money with keystrokes; it doesn't come out of deposits. Ergo, all money comes from debt, but that's only half the story. The other strand explains how the Federal Reserve just creates money by keystrokes. In The Deficit Myth, Stephanie Kelton explains how countries with sovereign currencies can create money that really is not debt, despite the fact that conventional thinking says it is. When households or states or countries in the Euro zone take on debt, they do have to pay it back. When countries with sovereign currencies create money, they don't have to pay it back. It's as simple as that.

When European countries gave up their sovereign currencies and adopted the Euro, they gave up the right to create the money they needed to pay bills so they need to borrow on capital markets which can charge them whatever interest they want. This is how Greece and Italy and other European countries got into problems. On the other hand the U.K. which never gave up its sovereign currency can just create the money it needs without going to the debt markets. In the same way Orange County and other US municipalities got into trouble with spiraling debt which had to be paid back. This can get out of hand because the more indebted a debtor gets, the higher interest rate they get charged so that in the worst case they are just borrowing money to pay interest. The US can never get in this debt trap because it never has to borrow money on the open market and the Fed can set interest rates however it wants. Once authorized by Congress and required by law Treasury bonds are issued and can always be paid because the Fed can just create the money to pay them.

Modern Monetary Theory (MMT) has established that deficit spending, whether that comes from tax breaks or government programs or currently for coronavirus relief, is just an accounting entry on the Fed's balance sheet. The national debt never needs to be paid off. Also any country that owns Treasuries - for instance, China - could have them paid off tomorrow if they chose to cash them all in by the Fed just debiting money from the savings account of the People's Bank of China at the Fed and crediting their cash account also at the Fed. Countries with sovereign currencies, ^i.e. the US dollar, the British pound, the Japanese yen etc, can all create money in this way by having their central banks do it with keystrokes on a computer. Greece, Italy, California and New York can't do this because they don't have sovereign currencies.

So there is a difference between debt acquired by households, firms and countries which don't issue their own sovereign currency and countries which have central banks that do. The US Federal Reserve can buy up Treasury bonds as necessary to provide as much money as is authorized by Congress to the US Treasury. By law they can't buy them directly from the Treasury but must buy them on the open market. However, US primary dealers - mainly Wall Street banks - are required to buy them and the Fed can buy them from the primary dealers by providing "liquidity" - dollars which the Fed creates with keystrokes - to the Wall Street banks. The Fed also controls interest rates which at this time are 0.25% or almost zero. So the $1.9 trillion relief package proposed by Biden is no problem either for the US Treasury or the Fed. That money could just end up on the Fed's balance sheet the way the trillions of dollars it created to bail out the Big Banks in the Great Financial Crisis of 2008 did. The fact is that, when the US government deficit spends, that adds money to the private economy, and right now the private economy is hurting because so many are out of work and not able to pay rent or mortgages or car payments. Money added to the economy by deficit spending (deficit being really a misnomer) can be readily absorbed by unemployed workers to pay their bills. The point is that taxes are not necessary for government spending.

So Web of Debt applies to the private economy and The Deficit Myth applies to the national economy. The first book advocates public banking which can save states and municipalities money on interest because they do have to pay their debts. The second book describes how governments with sovereign currencies can just create money which need never be paid off. However, this money creation facility should, like alcohol, be used responsibly; otherwise, inflation can occur. But when huge numbers of people are unemployed and states are having a hard time paying their bills, it is incumbent on the central government to help them. The same applies to European countries in the Euro zone. US lawmakers need to get up to date on how the real economy actually works. In truth Republicans have lost all legitimacy when it comes to their harping on deficit spending.

Off the Top of My Head

Even With Unlimited Spending Some Problems Can't Be Solved

by John Lawrence

Modern Monetary Theory (MMT) has shown that unlimited Federal spending is no problem. The money is there, but it's a question if the productive capacity is there. For instance, since most products are manufactured in China, unlimited spending on products needed to counter the pandemic might only produce inflation. That's a problem of letting crucial industries be relocated to a foreign country and not manufactured here. If you can't ramp up production in a meaningful time frame, even though the finance is not a problem, the ability to produce needed products may be. In this situation MMT predicts inflation. Existing facilities to produce vaccines can only produce so many vials.You could go to 24 hour a day production, but beyond that you would have to build more factories and that takes time. Would the money spent to build more factories be well spent if the production facilities came online only after the crisis was over? No. MMT stands for spending money wisely to solve social problems like the pandemic and global warming, but the time frame within which the problems need to be solved is important. There's no sense in spending money to ramp up production if that production only is available after the problem has already been solved.

Yeva Nersisyan and L Randall Wray write:

"But what happens when ventilators and masks are not available for sale even as companies are operating 24/7? More money may not solve the problem, but the government still has a role to play. During the second world war, the US quickly became “the arsenal of democracy” by repurposing its productive capacity to meet the needs of the war. Through diligent planning “[l]ipstick cases became bomb cases, beer cans went to hand grenades, adding machines to automatic pistols, and vacuum cleaners to gas mask parts”. We were able to cut “production time for Liberty Ships down from 365 days to 92, 62, and, finally, to one day”. We can mobilize our resources once again to build temporary hospitals, and to ensure a sufficient supply of medical equipment and whatever else is necessary to overcome the crisis."

So it may be necessary to shift production from pre-COVID endeavors to provide the necessary human and material resources to deal with the problem. For instance, the restaurant industry which filled the gap from lack of time for home preparation of meals due to both spouses working has suffered the most during the pandemic because more people have the time for meal preparation at home. Those workers are now available for deployment in other more crucial industries such as the renewable energy industry. Other hospitality and entertainment sector workers can also be shifted to more crucial endeavors just as they were during World War II. The economy as it existed pre-COVID was composed mainly of profitable private sector activities, many of which were not designed to deal with the most crucial social problems.

The solution of the pandemic at least in the US has an expected solution within the next year. Global warming has a somewhat longer time frame, but requires much more money to be spent because, from a finance point of view, it's a much larger problem. Changing the infrastructure of the whole world will require much more money but over a longer time span. The time span for solving global warming is approximately 10 years so we have ten times as long to solve global warming as we do to solve the pandemic. The pandemic may never be completely resolved because wiping out the virus everywhere in the world completely may not be possible just as it has not been possible to wipe out a number of other viruses. Over time, however, the problem can become treatable and manageable. The same can be said of the global warming problem. It may be impossible to eliminate every source of greenhouse gas emission in 10 years, but if most of them are eliminated, the remaining problems may be manageable in the sense that the earth may ultimately be salvageable.

What we have learned from the pandemic is that much more money needs to be spent on research and development in virology so that we are better prepared to deal with pandemics and epidemics. Two infectious diseases have successfully been eradicated: smallpox and rinderpest. The rest still exist somewhere in the world. There are also four ongoing programs, targeting poliomyelitis, yaws, dracunculiasis, and malaria. Five more infectious diseases have been identified as of April 2008 as potentially eradicable with current technology by the Carter Center International Task Force for Disease Eradication—measles, mumps, rubella, lymphatic filariasis and cysticercosis. What we have also learned is that there is more of a threat to Americans and human beings in general from viruses than there is from foreign nations, both state actors and terrorists. Therefore, the money spent on the defense department should be drastically reduced while the money spent on human health should be vastly increased. Let's deal with the real threats not the imagined ones.

Off the Top of My Head

Why Are Home Prices Are So Expensive?: Asset Inflation

by John Lawrence, January 5, 2021

The government measures inflation based on a basket of consumer items including rent but excluding the price of homes. However, rents are a function of the cost of homes. As home prices go up, so do rents, and rents continue to go up despite people's ability to pay. The Federal Reserve could tackle increased home prices by raising interest rates, but this would discourage home sales and more not fewer homes and apartments are needed. MarketWatch reported: "While the Federal Reserve is busy worrying that wages might be rising too fast, the rest of us have a different concern: The rent’s too damn high. If we have an inflation problem, it’s that the cost of housing is rising faster than our ability to pay." Although there is little wage inflation, it is not hard to understand why there is asset inflation. So much money has been injected into rich peoples' pockets in the last couple of decades by means of tax cuts and the Fed's bailouts of the financial system among other things that the rich have increased their wealth many fold while the financial situations of the poor and lower middle class have stagnated. All this money floating around in the pockets of the rich has to go somewhere, and where it goes is not into consumption so much as into investing. So the financial assets of the rich are increasing while the poor have all they can do to pay increasing rent. One of the main assets that rich investors invest in is real estate which bids up the price of homes and, subsequently, rents.

If the rapid accumulation of wealth by the already wealthy continues to increase (they have accumulated an additional $1.8 trillion dollars just during 2020), asset inflation in terms of home prices and rents will continue to increase. However, the government doesn't seem to be as concerned with this form of inflation as they are with wage inflation. They are concerned with keeping the wages of working people down because this increases profits for business owners and keeps the cost of most consumer items low. If Walmart has to pay a living wage to its employees, it might have to raise prices, and this is the kind of inflation the current government is most concerned about. Perhaps those concerns will be mitigated under a new Biden Democratic administration which is more concerned about the wages and welfare of the poor and lower middle class than it is about the prerogatives of the rich and business owners.

As Stephanie Kelton points out in her book The Deficit Myth, inflation should not be a concern as long as there are resources which are laying idle. If government provided the money to utilize those resources, whether they are human resources or physical resources, this will not contribute to inflation. What does contribute to inflation is putting more money into the economy than can be soaked up by productive efforts. So while the unemployed represent a resource that is laying idle, and there is no lack of physical or material resources, putting people to work would not contribute to inflation whereas all the money that the Federal Reserve has used to bail out Wall Street banks, and also by virtue of low interest rates, there is a great deal of money sloshing around in the economy in the hands of the rich. That's why there is asset inflation (think real estate) and not wage inflation. The Federal Reserve has the capacity to print money and hand it to Wall Street without any other entity authorizing it. However, if the government needs money, for example, for programs to employ the unemployed building infrastructure, for example, Congress has to authorize it. If Congress authorizes it and tax receipts are not sufficient to cover the needed funds, deficit spending takes place automatically which means that the Treasury Department must sell Treasury bonds to cover the expenditures. They will never have a problem selling them because primary dealers (mainly Wall Street banks) are obligated to buy them. And the Fed stands ready to take these Treasury bonds off the Wall Street banks' hands if there is a "liquidity crisis." So by a round about process US deficits end up on the Fed's balance sheet if no one else wants to buy them where they disappear in a black hole although people believe erroneously that taxpayers are still obligated to pay them off at some point. They're not.

Deficit spending is somewhat of a misnomer. The spending could take place just by the Federal Reserve creating the money by a few keystrokes in a computer the way it does for Wall Street. The $4.5 trillion so created to bail out the Too Big To Fail Wall Street banks during the Great Recession did not require deficit spending. Some collateral in the form of mortgage backed securities went onto the Fed's balance sheet, but that collateral need not ever be sold back into the private economy. It can stay of the Fed's balance sheet forever and no entity has the authority to do anything about it. That's because the US dollar is a sovereign fiat currency. The thing to note here is that bailing out the banks did not add to the deficit, but government spending beyond tax receipts must be authorized by Congress and this does add to deficit spending. This is because of legal and political restrictions, but the final result is that the Federal Reserve just creates the money in both cases so that deficit spending is nothing to worry about any more than spending to bail out the banks, which is not deficit spending, is something to worry about.

So while financial deficits are nothing to worry about, Kelton points out that there are some deficits to worry about:

"The real crises that we are facing have nothing to do with the federal deficit or entitlements. The fact that 21 percent of all children in the United States live in poverty - that's a crisis. The fact that our infrastructure is graded at a D+ is a crisis. The fact that inequality today stands at levels last seen during America's Gilded Age is a crisis. The fact that the typical American worker has seen virtually no wage growth since the 1970s is a crisis. The fact that forty-four million Americans are saddled with $1.7 trillion in student loan debt is a crisis. And the fact that we ultimately won't be able to 'afford' anything at all if we end up exacerbating climate change and destroying the life on this planet is perhaps the biggest crisis of them all.

"These are real crises. The national deficit is not a crisis."

As Modern Monetary Theory points out, as long as there are real assets (human and material) not being used, deficit spending will not cause inflation and deficit spending in and of itself is nothing more than an accounting entry on the Federal Reserve's balance sheet. The Federal Reserve will provide whatever money Congress authorizes or is necessary to bail out Wall Street because it, as the Central bank, has the authority to issue money in the US financial system. The Federal government spends whatever monies Congress authorizes before the money is even made available. If some of it is not forthcoming from taxes, the rest of it will be created by the Fed in the form of deficit spending.

Off the Top of My Head

China is the only country to land successfully on the moon in the 21st century, and has done it three times

by John Lawrence, December 19, 2020

While the US is in the midst of the greatest public health and economic crisis it has ever faced, China is surging ahead economically and in the space race. This December 2020 China's Chang’e-5 spacecraft gathered about 4.4 pounds of lunar samples in a three-week operation that underlined China’s growing prowess and ambition in space. It was China’s most successful mission to date; yet there was nothing reported about it on the nightly news. What has been reported on the nightly news is the fact that Russia has hacked into our defense department and other sensitive institutions. The fact that this is even happening represents sheer stupidity on behalf of the Defense Department. The internet is a public space that represents, as far as the Defense Department is concerned, a direct pipeline between itself and Russian hackers. It is asking for trouble.

Why hasn't the Defense Department detached itself from the internet and created a private intranet disconnected from anything Russian hackers could access? They could have an intranet which would just be a connection among those American actors and institutions that would need to interact with each other. If they need to interact with people in other parts of the world, they have had secure communication networks at least for the last 70 years. No one hacked them during the Second World War although the British were able to hack the Nazis. For American sensitive institutions to be using the public internet or even to be connected to the public internet is a travesty. There are different levels of internet communications that could be used. For nonsensitve communications and data storage a more public internet can be used, but for sensitive systems a private internet not connected to the public internet that Russian hackers have access to is more appropriate. Then hacking is a non-issue.

The US is falling behind China economically and in many other ways. China has mastered the art of using its public banks to build infrastructure at home and abroad. It has lifted 800 million people out of poverty in the last 30 years. Meanwhile, US infrastructure is rated a D+ by the American Society of Civil Engineers. Ellen Brown writes:

A publicly-owned national infrastructure bank, on the other hand, would be mandated to lend into the real economy; and if the loans were of the “self funding” sort characterizing most infrastructure projects (generating fees to pay off the loans), they would be repaid, canceling out the debt by which the money was created. That is how China built 12,000 miles of high-speed rail in a decade: credit created on the books of government-owned banks was advanced to pay for workers and materials, and the loans were repaid with profits from passenger fees. 

Unlike the QE pumped into financial markets, which creates asset bubbles in stocks and housing, this sort of public credit mechanism is not inflationary. Credit money advanced for productive purposes balances the circulating money supply with new goods and services in the real economy. Supply and demand rise together, keeping prices stable. China increased its money supply by nearly 1800% over 24 years (from 1996 to 2020) without driving up price inflation, by increasing GDP in step with the money supply.

In the US the Federal Reserve has poured money into banks, hedge funds and various other financial entities but is forbidden by law from helping average Americans or Main Street businesses. There is Quantitative Easing for the banks, but not Quantitative Easing for the People. China has no such legal barriers for their central bank and public banks. While the US Congress quibbles endlessly over minuscule issues, China is going full steam ahead with economic development which benefits large majorities of its people as well as people outside of China with its Belt and Road initiative. The World Bank reports: "If implemented fully, the initiative could lift 32 million people out of moderate poverty—those who live on less than $3.20 a day, the analysis found. It could boost global trade by up to 6.2 percent, and up to 9.7 percent for corridor economies. Global income could increase by as much 2.9 percent. For low-income corridor economies, foreign direct investment could rise by as much as 7.6 percent."

While China has mastered the technique of generating money for infrastructure development inside and outside of China while also increasing world trade and economic well being, the US has only increased poverty and destroyed infrastructure with its never ending wars. It has squandered money on a military infrastructure which is larger than the next 10 countries combined. The US dollar is still the world's reserve currency and major world financial institutions like the IMF are still oriented towards the dollar. This could all change, however, as the Chinese renminbi gains ground. The US has a chance to reconstruct itself under a Biden administration and reorient itself towards a middle class democratic society which benefits its people rather than its elite. It's a tall order but maybe Joe Biden and his appointees can pull it off. A Green New Deal is necessary not only for the sake of reestablishing the middle class but also for saving the planet from global warming.

Off the Top of My Head

by John Lawrence, November 25, 2020

Why Janet Yellen is the Perfect Choice for Treasury Secretary?

Because as former Fed Chairman she knows where the bodies are buried, figuratively speaking of course. She was the first woman to head the Federal Reserve from 2014 to 2018, and now will be the first female Treasury Secretary. She knows that the Federal Reserve has the capacity to just print money and that money does not get added to the national debt or the deficit. The charade that goes on between Mnuchin and Nancy Pelosi represents an unnecessary exercise in futility The Fed has printed trillions of dollars to bail out the banks, and it has swallowed large amounts of Treasury bills if nobody wants to buy them at auction. The Fed's charter is 1) to insure full employment and 2) to check inflation. With all the money the Fed has printed so far with their policy of "quantitative easing", there has been no inflation. So money printing is a viable strategy to keep the economy functioning, but so far it has only functioned well for rich people. Now there can and should be a policy of "quantitative easing for the people." If Congress won't cooperate, Janet Yellen could do an end run around Congress and make a deal between her and the present Fed Chairman, Jerome Powell.

Joe Biden is going to need a lot of money to build green infrastructure, and Congress, if under Republican control, will deny him that money. Is that blunt enough? If MItch McConnell is leader of the Senate, he will make sure that what he did to Obama, he will do to Joe Biden, that is to deny him the wherewithal for any of his progressive programs even if they are less progressive than the left wing of the Democratic party wants. So let's expose this fiction that money is not available for a Green New Deal which amounts to doing what might not even be sufficient to forestall climate change. It would also create millions of good paying jobs by the way. What's wrong with that? Republicans will say that it will add trillions of dollars to the national debt. But did the trillions spent bailing out the big banks add trillions to the national debt? No, it didn't add a penny. That's because the Fed just printed the money, and it didn't increase inflation either. So the money is available for much needed social programs involving renewable energy and green infrastructure. A by product is eliminating unemployment and creating good paying jobs just like the Federal Reserve is tasked to do.

Fed Chairman Jerome Powell has spoken out to encourage more spending to help the economy. He knows that the Fed can and will pick up the slack by buying Treasury bills and deep sixing them on the Fed's balance sheet even as politicians keep up the fiction that Congressional leaders are concerned about the deficit:

Federal Reserve Chairman Jerome Powell on Tuesday urged Congress to spend more money to limit the economic damage of the COVID-19 pandemic, the latest in a chorus of current and past Fed officials to tell lawmakers that inaction could lengthen the recession.

“There’s a reasonable probability that more will be needed both from you, and from the Fed,” Powell told the Senate Banking Committee, echoing nudges he has made in nearly every public statement since the pandemic began.

Powell has noted that COVID-19’s economic devastation has fallen hardest on low-income workers — 40 percent of individuals making under $40,000 lost their jobs during the crisis.

Sen. Chris Van Hollen, D-Md., asked whether congressional spending would be a more effective response than the Fed’s monetary policy.

“In the short and medium term, yes: fiscal policy,” Powell said, adding that, in the long term, fiscal and monetary policies encouraging maximum employment were the way to go.

Powell’s urging has been voiced more explicitly by other Fed leaders past and present in recent days. Former Fed Chairman Ben Bernanke co-wrote a letter to congressional leadership Monday that was also signed by Janet Yellen, another former leader of the Fed, and 131 other economists.

“Insufficiently bold congressional policy responses to the Great Recession unnecessarily prolonged suffering and stunted economic growth,” Bernanke wrote, along with Washington Center for Equitable Growth CEO Heather Boushey and Cecilia Rouse, dean of the Woodrow Wilson School at Princeton. “Congress should not make this mistake again.”

In the past week, regional Fed presidents have also asked Congress to do more — not just to respond to the pandemic, but to encourage more inclusive growth as Black Lives Matter protests continue across the nation.

“Systemic racism is a yoke that drags on the American economy,” Raphael Bostic, president of the Atlanta Fed and the only African American to lead a regional Fed bank, wrote in a blog post on the regional bank’s website. “A commitment to an inclusive society also means a commitment to an inclusive economy.”

Those comments have been matched by the heads of the Fed’s San Francisco, Richmond and Dallas branches in recent days.

These comments reveal the barely disguised fiction that Congress has to act first in order to open up the flood gates of Federal Reserve money printing. However, even if that is the case, Congress needs to get off its butt. Because of arcane laws, the Fed can't act directly. Powell's barely disguised Fed speak is implying that money is available for bailing out the economy, and that the powers that be should just go ahead and use it. The argument that it would add to the national debt is null and void. The secret that some Congressional leaders want to maintain is that the Fed's trillion dollar bailout of the big banks in 2008 did not add to the national debt. Nevertheless, some Congressional leaders are aware of Modern Monetary Theory which maintains that Deficits Don't Matter. In 2014 the author of this book, Stephanie Kelton, was designated as Chief Economist for the Democratic Minority Staff of the Senate Budget Committee and later became an economic advisor to the Bernie Sanders campaign.

So money is available for a massive Green New Deal which will benefit both the economy and the salvation of the planet from global warming. Other aspects of Joe Biden's and Kamala Harris' agenda are also doable if the US can get off its butt and use the facilities that were available to bail out the big banks for the benefit of middle class and poor Americans and save the planet while doing it.

Off the Top of My Head

Increase Taxes on the Rich. Reduce Taxes on the Middle Class

by John Lawrence, October22, 2020

Finally, the Democrats are getting smart. Republicans have won on one issue: reducing your taxes. Unfortunately, they reduce them a lot more on the rich than they do on the middle class. So now Joe Biden has introduced some nuance. Can the American people comprehend it? Reducing taxes on everyone making less than $400,00 per year and raising them on everyone making more than $400,000. What a great idea! What took them so long? It's absolutely necessary if we want to decrease economic inequality which is out of control. So Joe Biden would increase taxes only on the upper 1%. To be among the upper 1%, a family needs an income of $421,926. In terms of wealth the upper 1% owns 38.5% of the nation's wealth. The upper 1% owns more wealth than the bottom 90%. The bottom 80% of Americans are net debtors. Debt is negative wealth; that should be obvious, but many Americans are financially illiterate. Financial literacy should be a course in high school. Wealth and income are two separate but related issues. Middles class Americans who own homes pay a wealth tax: property taxes. Rich people don't pay wealth taxes on most of their assets which are in stocks and bonds.

Wealthier Americans don't spend all their income on consumption. A portion of it just goes to add to their wealth. Middle class and poor Americans spend all their income on consumption, even going into debt to consume. So the wealthy extract rent and interest from the middle class and the poor who devote a huge share of their incomes to rent and interest. Now more than ever, Americans are drowning in debt. Prior to the Great Recession of 2008, many Americans were struggling to keep their heads above water. When the bubble burst, those with the most debt were left drowning in a sea of financial insolvency. While the country has since recovered financially, the COVID-19 pandemic is threatening to derail the economy once more. In order to diminish not only income inequality but wealth inequality, policies should be undertaken to tax both the wealth and income of the wealthy while encouraging the middle class and poor to build wealth and get out of debt. A small financial transactions tax would tax the wealth of the rich which is mostly comprised of stocks and bonds and real estate. If every stock trade were taxed, this would create a huge pool of money which could be spent in more constructive ways than simply adding to the wealth of the rich.

While the rich can go bankrupt and bail themselves out with golden parachutes, most struggling student loan debtors have no such option. The laws preclude them from going bankrupt. They cannot discharge their debts in bankruptcy. In addition to student loan debt, most middle class people who own a home have a lot of mortgage debt. So they don't really own the home; the bank does. They have the privilege of making payments on a home which include a lot of interest. If they are successful in paying off their mortgage, they will have an asset which represents wealth. This is the main way the middle class creates wealth for itself. Unfortunately, this wealth takes a life time to create so is unavailable to most middle class people until it's too late to enjoy it. The good thing though is that their children can inherit it. This represents an intergenerational transfer of wealth so that their children or grandchildren start out not from zero, where most children of the poor start out, but from a positive accumulation of wealth no matter how small.

Since most Americans overconsume and under save in many cases by necessity but in some just by predilection, they have nothing to fall back on when there is a disruption in the economic system like a pandemic. Since American GDP is predicated on 70% consumption, the American economy cannot stay out of recession if people stop consuming. That's why the Republican controlled government, understanding this, came up with the CARES Act. It was not so much out of a concern for the middle class and the poor as it was a consideration to keep up consumption which is essential to maintaining GDP and hence a necessary economic statistic. A Joe Biden administration will get the economy back on the right track which will increase the income and wealth of the poor and middle class while diminishing that of the wealthy. Financial literacy should make clear the importance of not going into debt but of creating wealth no matter what your income statistics are at the beginning of this process.

Off the Top of My Head

Let's Talk About the Communist Bogieman

by John Lawrence, October 8, 2020

After the vice Presidential debate last night Trump called Kamala Harris a communist. Let's be clear: communism is a system in which the government owns all property and makes all economic decisions. Let's also be clear about this: nowhere in the world today does communism exist. Not in Russia. Not in China. Not in Cuba. In Russia private ownership of enterprises and property had essentially remained illegal throughout the Soviet era, with Soviet communism emphasizing national control over all means of production. In the 1990s, during the Presidency of Boris Yeltsin, there was  large-scale privatization of Russia's state-owned assets, particularly in the industrial, energy, and financial sectors. Privatization shifted Russia from the Soviet planned economy towards a market economy, and resulted in a dramatic rise in the level of economic inequality. It facilitated the transfer of significant wealth to a relatively small group of oligarchs.

In China private property and state owned enterprises co-exist. According to the NY Times: "Today, the private sector contributes nearly two-thirds of the country’s growth and nine-tenths of new jobs, according to the All-China Federation of Industry and Commerce, an official business group." In fact the reason why China has pulled 800,000 people out of poverty in the last 40 years is that the economy has been partially privatized. There are more billionaires in China than in the US. Many people in China went from being poor to middle class due to the privatization of the housing market. So although China is still ruled by the Chinese Communist Party, its government is communist in name only. They should probably eliminate the word "Communist" from the party's name.

Now consider Cuba. In 2010, Cuban leaders Fidel and Raul Castro made the decision to abandon the old Soviet model of centralized planning. In 2011, new laws were enacted to expand the right to private property. In 2019, a new Constitution was approved which officially recognizes the right to private property, while also reconfirming the central government's authority over the regulation of production and land.

So if the accusation that Kamala is a communist is ridiculous, what about socialism? There is not one definition of socialism. Many of the western democracies like France, Germany, the UK and Sweden, which are US allies, have been governed by democratic socialist parties. These societies have market economies including the encouragement of entrepreneurialism, but also have a government provided social safety net including universal health care, free or inexpensive education from pre-K through college, allowances for child care, elder care etc. Sweden's government even owned a hamburger chain until recently and owns Sweden's state-run alcohol monopoly Systembolaget. The democratic socialism advocated by Bernie Sanders and others is nothing more than a model based on Sweden where there are high taxes on the wealthy which provide a government sponsored safety net for the middle class and the poor. Today there is one more reason why there should be a strong social safety net: global warming. It is clear that private enterprise is not up to the job of reducing greenhouse gas emissions to zero within a reasonable amount of time, reasonable meaning before the earth becomes uninhabitable.

Today in the US we  have a nominal capitalist or free market economy, but even in this economy the government institutes the rules within which the economy operates. The rules are set up and tweaked by those in power, those who have the money to hire lobbyists to convince legislators to write the rules in their favor, namely large corporations and the very wealthy. Don't be fooled by the meme that the powerful don't want government regulations. They do want regulations, but regulations that favor their interests and not the interests, necessarily, of the average person who doesn't have the resources to influence legislation by hiring lobbyists.

Today Kamala Harris and other Democratic progressives are really taking the realistic middle ground when they advocate for government policies which will mitigate and reduce climate change and provide a social safety net for the American people. This goes against the interests of the oil and gas industry to be sure. To advocate for universal health care is to advocate for the health care system that Canada and all our allies already have in pace. To advocate for policies that reduce the out of bounds economic inequality by taxing the rich and spending the money on raising the economic level of the poor and lower middle class only makes sense. None of these policies make Kamala Harris a communist since communism doesn't even exist in the world today. Formerly communist countries have given way to hybrid economies in which private enterprise and state owned enterprises coexist with, in the case of China, private enterprise having been the significant factor in improving the lives of the Chinese middle class.

Today, the US has gone way overboard towards an economy controlled by the rich and powerful in their own interests. Economic inequality has gotten way out of hand. The balance needs to be redressed and only a government which uses its authority to diminish the economic power of the wealthy and augment the power of the poor and middle class can provide the necessary change. Good paying jobs can be created which address infrastructure and climate change needs. So more or less a Green New Deal or whatever else you want to call it is necessary. Too bad that Republicans have gone out of their way to demonize that name as they've gone out of their way to demonize Obamacare or any other initiative progressive Democrats put forth. That is their stock and trade - not discussing the merits but demonizing the name.

Off the Top of My Head

Deficits Don't Matter?

by John Lawrence, July 23, 2020

Part 1

So says Dr. Stephanie Kelton in her new book, "The Deficit Myth." We know that The US Federal Reserve can just print money as they are doing in response to the pandemic. Fed Chairman Jerome Powell says they will print $3.5 trillion by the end of the year. In response to the Great Recession and its aftermath the Fed printed $3.9 trillion. Other central banks around the world have also launched massive money printing programs. CNN reports, "The world's four most powerful central banks have pumped more than $9 trillion into the global economy since the financial crisis in a bid to boost growth, inflation and employment." In response to the pandemic the European Central Bank announced a huge new money printing program aimed at keeping the region's financial system functioning and helping the economy cope. With all this money printing, doesn't this put taxpayers on the hook to pay all this money back. The simple answer is "No."

Kelton is an advocate of Modern Monetary Theory (MMT). She writes:

You've probably already seen MMT's central insights in action. I saw them up close when I worked in the US Senate. Whenever the topic of Social Security comes up, or when someone in Congress wants to put more money into education or health care, there's a lot of talk about how everything must be "paid for" to avoid adding to the federal deficit. But have you noticed this never seems to be a problem when it comes to expanding the defense budget, bailing out banks, or giving huge tax breaks to the wealthiest Americans, even when these measures significantly raise the deficit? As long as the votes are there, the federal government can always fund its priorities. That's how it works. Deficits didn't stop Franklin Delano Roosevelt from implementing the New Deal in the 1930s. [By the way the Reconstruction Finance Corporation which funded the New Deal actually made a profit.] They didn't dissuade John F Kennedy from landing a man on the moon. And they never once stopped Congress from going to war.

Although there are legal structures that need to be worked around, the main fact is that, however much the Federal Government spends, it can just be disappeared onto the Federal Reserve's balance sheet never to be seen again and never having to be paid back. The Fed just gave $1.5 billion to the banks to bail them out in 2008 by means of a few keystrokes on a computer keyboard. Congress was not even involved in this transaction. Under President Obama Congress authorized a $787 billion rescue package called the TARP program. This wasn't nearly enough to avert crises for millions of Americans who lost their homes in the Great Recession which was precipitated by a mortgage crisis. The Home Affordable Modification Program (HAMP) was supposed to help homeowners with their mortgages. Although the banks were bailed out, HAMP was a colossal failure at bailing out home mortgage holders. Even the money appropriated was not all spent. The Brookings Institution reported: "HAMP provided important relief, but it was restricted by the fact that it was a voluntary program. The program lived under the constant threat that, if it was too much trouble for the banks, then they could walk away. As a result, while providing important assistance to many homeowners, HAMP fell substantially short of its goals."

So how comes the Fed can just print money which is not added to the national debt while Congress has to appropriate money which is added to the national debt? The answer has to do with the fact that the US dollar is a "fiat" currency. A fiat currency is a currency that isn't backed by gold or any other precious metal. In 1971 President Nixon took the US off the gold standard. Prior to that anyone with dollars could exchange them for a certain amount of gold. Gold was worth $35 an ounce at that time so anyone with dollars could demand gold for them and the US was obligated to fulfill that transaction. As it turned out some foreign governments were demanding payment in gold which exceeded or soon would exceed America's gold reserves. Therefore, Nixon proclaimed that the US would no longer exchange dollars for gold. The value of the dollar would "float" and be worth a dollar just because the US government said it was. At the same time Nixon made a deal with the Saudis that they would sell oil only for dollars. This made every oil importing country have a need for dollars and establshed the dollar as the world's reserve currency.

Because the dollar could no longer be exchanged for gold, this freed up the Federal Reserve to just print dollars whenever it wanted. That's how come it can print trillions of dollars first to bail out the banks in 2008 and now to bail out the whole economy in the current pandemic. That's how come the US can run trillion dollar annual deficits ad infinitum. So if the Fed can just print dollars, why hasn't it printed a huge amount of them and given them to the poor or built infrastructure or used them for any other constructive purpose? The answer is that flooding the economy with dollars could lead to inflation. The threat of inflation is a concern that limits the Fed's printing presses from working full time. What the Fed spends its money on though is basically determined by political considerations. If the party in power wants the Fed to bail out the banks to give tax breaks to the rich and not give money to the poor, that's what the Fed will do. There are also some arcane laws and regulations about what the Fed can and cannot do which can always be changed by Congress.

Part 2

In the past the Fed has been restricted as to the kinds of bailouts it could provide. Now with recent Special Purpose Vehicles (SPVs) authorized by Congress, it can even bail out bicycle shops. The good news is that any money the Federal Reserve prints is not added to the national debt. The better news is that, even money authorized by Congress, that theoretically adds to the national debt, can be swallowed by the Federal Reserve because the Federal Reserve will buy any Treasuries left over from auctions. So if China or any other nation or individual investor doesn't want to buy any more US debt, the Fed will buy it and deep six it never to be seen again. Are you getting the feeling that the US can never go broke? You're right! Even better the US never has to pay off its debts because the Fed can just print more money to pay Treasuries which come due.

Kelton writes:

The real crises that we're facing have nothing to do with the federal deficit or entitlements. The fact that 21 percent of all children in the United States live in poverty - that's a crisis. The fact that our infrastructure is graded at a D+ is a crisis. The fact that inequality today stands at levels last seen during America's Gilded Age is a crisis. The fact that the typical American worker has seen virtually no real wage growth since the 1970s is a crisis. The fact that forty-four million Americans are saddled with $1.7 trillion in student loan debt is a crisis. And the fact that we ultimately won't be able to "afford" anything at all if we end up exacerbating climate change and destroying the life on this planet is perhaps the biggest crisis of all.

These are real crises. The national deficit is not a crisis.

So what is the solution? It's not a question any more of capitalism versus socialism. Even China is a capitalist country in terms of its economy. It's a question of what version of capitalism can be the most successful - successful in terms of filling the needs of most of its people, successful in diminishing inequality, successful in terms of generating the goods and services needed and wanted by people in the 21st century, successful in taking care of the environment and the earth, successful in terms of creating a healthy and well educated citizenry. Arguably, China has a better formula for capitalism that does the US. It has taken 800,000 people out of poverty in 40 years. It is building infrastructure not only in China whose infrastructure is light years ahead of the outdated US infrastructure but all over the world with its Belt and Road Initiative (BRI).

How is China able to do this? Their secret is the fact that the renminbi is a fiat currency just like the American dollar, just like the euro. As such the Chinese are able to print whatever yuan are necessary to employ its labor force at full capacity and employ them doing constructive activities within and without China. The US by comparison does not "direct" its private sector. If the US private sector wants to make money creating garbage which sells, garbage which is profitable, it will do that. If the private sector wants to install robots and/or do its manufacturing in countries where labor is cheaper leaving millions unemployed, it will do that. If there is no political will to modernize infrastructure, infrastructure in the US will be left to rust and wear out. The genius of the BRI is that it keeps China's labor force at full employment by exporting some of them to build infrastructure in other countries. This not only improves the economic situation in those countries, it adds to Chinese GDP because those workers return to buy Chinese products. This policy of building infrastructure inside and outside China evidently does not produce inflation in the Chinese currency. That's an important thing to note. Similarly, the Fed discovered that printing $1.5 trillion in 2008 to bail out the banks did not increase inflation either.

Meanwhile, the US spends $1 trillion a year on its military when it could have spent much less to meet its actual defense needs. The US does not need to spend $1.5 trillion on its F-35 fighter jet program in order to fight a few terrorists that have nothing more than primitive weapons like Improvised Explosive Devices (IEDs).The US economy leaves 500,000 people languishing in homelessness, many more - especially people of color - with a negative net worth, in other words in perpetual debt, with an economy that prints money to give tax breaks to the rich while cutting health and education programs and more. The undirected form of US capitalism allows the Fed to print money for frivolous and destructive purposes. In contrast China's directed form of capitalism has in a few short years demonstrated that it is more effective not only in increasing the wealth and consumption of the average Chinese citizen, but in winning friends and satisfying needs outside China including even US allies which are turning away from the US and towards China as a role model. Not to mention their more effective response to the coronavirus. Reactionary forces in the US, meanwhile, are trying to gin up a cold war against China and sanctioning even our allies who want to do business with China. While we warmonger, China is producing goods and services that the rest of the world wants.

Off the Top of My Head

Instead of Helping American Workers, the Fed Prints Money and Swallows US Debt

by John Lawrence, June 25, 2020

The Federal Reserve is printing trillions of dollars and buying US government debt. The market for US Treasury bonds is a hard sell these days because they pay so little interest: 1.37% for a 30 year bond, less than the inflation rate. China is dumping its Treasuries. It will probably accelerate the rate of dumping if tensions between the 2 countries continue. China was the US' largest creditor till recently when Japan took over that role. While the Federal Reserve has set interest rates effectively at zero, credit card companies are still charging as much as 30% interest which creates a huge number of Americans debtors especially when you throw in student loan debt which stands at $1.5 trillion. In fact, revolving consumer credit card debt reached nearly $1.1 trillion at the end of February 2020, according to the Federal Reserve G19 Report. Americans were paying as much as $121 billion in interest and fees combined by the end of 2019. That's no surprise since the Federal Reserve reported in February 2020 that the average interest rate on credit cards reached an astronomical 16.61%. While billionaires can borrow money at zero percent interest, average Americans pay 16% and up.

The effect of zero interest rates on savings accounts and Treasury bonds is to force everyone into the stock market which, although we're in a recession bordering on depression, continues to go up. It is totally divorced from reality; it wouldn't go down even in a depression like it did during the Great Depression. The Fed is keeping it artificially pumped up because so much American wealth is at stake there.

The Fed is buying Treasuries and mortgage backed securities (MBSs) to the tune of trillions of dollars. Wolf Street reported:

In March (2020) and April combined, the Fed monetized 100% of the additional Federal debt. Over the two-month period of March and April, the US government increased its debt by $1.56 trillion (most of it in April); and over the same two-month period, the Fed bought $1.56 trillion in Treasury securities (most of it in March) and thereby monetized 100% of the additional pile of debt during the two-month period.

The Fed is just swallowing all kinds of debt which is enriching the richest Americans and foreign banks even more. Problem is this forced feeding of cash by the Fed is not trickling down to the American people. It is not creating jobs. Now the Fed is creating even more ways to monetize debt by creating Special Purpose Vehicles (SPVs). These SPVs can buy assets the Fed is not allowed to buy, and they can lend to entities and rich individuals to buy certain assets. Under the arcane Federal Reserve Act, these SPVs require taxpayer backing from the Treasury Department to protect the Fed from losses. The SPVs can buy asset backed securities (ABSs) on a non-recourse basis which means that, if there are any problems, taxpayers take the losses. Indirectly via its Special Purpose Vehicles and its Primary Dealers, the Fed can buy even old bicycles, as long as taxpayers take the losses.

Wolf Street reported:

These ABS can be backed by credit card loans, auto loans, student loans, equipment loans, floor plan loans, insurance premium finance loans, some loans guaranteed by the Small Business Administration (SBA), and eligible loans on receivables. The loan amounts will be “equal to the market value of the ABS less a haircut and will be secured at all times by the ABS,” the Fed says.

A little history on Term Asset-Backed Securities Loan Facility (TALF) : At the end of 2010, under orders from Congress, the Fed released data on over 21,000 transactions it performed during the Financial Crisis, which revealed among many other outrageous acts, that the Fed lent to well-connected individuals and all kinds of hedge funds and others under its TALF program so that they would buy certain assets, such as these consumer loan ABS, drive up their prices, sell them to pension funds and others later for a huge profit, and pay back the loans to the Fed.

These well-connected individuals included John A. Paulson, Michael Dell, Christy K. Mack (wife of former Morgan Stanley CEO John Mack), Kendrick R. Wilson III (former Goldman executive and top aide to Hank Paulson Jr.), H. Wayne Huizenga (founder of AutoNation and Waste Management), Jonathan S. Sobel (head of Goldman’s mortgage department), etc. Some very wealthy people made a lot of money off the Fed’s bailout programs even as workers and the economy was in deep trouble.

So the Fed is paying John Paulson money by means of an SPV. Paulson is the guy who bet against the subprime mortgage market in 2007 and made one billion dollars in one day. Goldman Sachs had to pay him off, but eventually due to all the legerdemain in the financial markets, it was French and German taxpayers that paid him for his astute bet. That's casino capitalism at its best. Now he has direct access to the Federal Reserve's money printing press. Why? When there are so many poor and unemployed people in the US, why is the Fed intent on only bailing out financial markets, meaning rich people? Suffice it to say that the Fed is able to buy most anything from rich people and monetize their debt. Because of this and the fact that the rich can borrow at zero percent interest, they engage in risky bets. If they win, they pocket the money. If they lose, the Fed bails them out at zero percent interest.

Compare this with how the situation was dealt with during the Great Depression. Instead of force feeding wealthy people with interest free cash and adding trillions to the US National debt, FDR created the Reconstruction Finance Corporation (RFC). The original legislation establishing the RFC did not limit it to lending to financial institutions; it was also authorized to provide loans for railroad construction and crop lands. In other words it created jobs for average Americans. An amendment passed in July 1932 allowed the RFC to provide loans to state and municipal governments. The purpose of these loans was to finance projects like dams and bridges, and the money would be repaid by charging fees to use these structures. To help with unemployment, a relief program was created that would be repaid by tax receipts. Under the New Deal, the powers of the RFC were greatly expanded. The agency now purchased bank stock and extended loans for agriculture, housing, exports, businesses, governments, and disaster relief. The RFC actually made money on these loans.

So the RFC could actually create jobs for average working people (and not just for hedge fund managers) doing constructive things like building houses and infrastructure. Part of the New Deal was the Works Progress Administration (WPA) relief program which made the federal government by far the largest employer in the nation. A Green New Deal would create money much as the Fed does with a few keystrokes on a computer, but, instead of just providing liquidity to banks, hedge funds and rich people, it would provide money for productive jobs paid for by the government. The government needs to be employer of last resort in order to recreate a full employment economy.

A Green New Deal would convert the American economy from a fossil fuel dependent economy to one fueled by renewable energy. In so doing it would provide good paying jobs for those in American society who have been left out or left behind. The Fed should monetize the $3 trillion backlog in American infrastructure repair and rebuilding. Making the Fed a public bank instead of a bank whose main purpose is to swallow US government debt and give money to rich people in order to provide "liquidity" would go a long way to reducing inequality and bringing the American poor including minorities into the middle class. IMHO the COBID pandemic will insure that the old economy based on 70% consumerism is not coming back. The new normal will be based on government spending to create a Green New Deal or will sputter along at about half its former level.

Off the Top of My Head

China's Development of a Digital Currency Threatens Primacy of the Dollar as the World's Reserve Currency

by John Lawrence, May 20, 2020

China is the first country to develop a digital currency based on blockchain technology at the national level. The Guardian reported:

On 17 April [2020], the digital currency research institute at the People’s Bank of China, which is developing the system, said the research and development of a digital renminbi was “advancing steadily” and top-level design, functional research and development, and debugging had largely been completed, according to a CCTV report. ...

“A sovereign digital currency provides a functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion both at a country and company level,” last week’s China Daily report said.

The dollar has been the world's reserve currency since the Bretton Woods agreement of 1944. In 1971 President Nixon took the US off the gold standard so that the dollar floated against other currencies but not the Chinese renminbi. In recent years as China has become more of a market economy, its currency has become more important on the world stage. Recently the Trump administration has used sanctions against Iran in an attempt to cripple Iran's economy and force regime change. Other countries wishing to continue doing business with Iran, even US allies, were also threatened with sanctions. Recent use of sanctions has effectively weaponized the dollar as most business transactions worldwide are settled using US dollars.

The new Chinese digital system will effectively bypass the US dollar and allow transactions among different countries without the possibility of US sanctions. As the Chinese currency gets stronger and alternative financial institutions are developed that don't involve settlement in dollars, China might even use sanctions against the US some day. The main institutions which support the dollar as the world's reserve currency are the World Bank, the International Monetary Fund (IMF), the Bank for International Settlements (BIS) and the Society for Worldwide Interbank Financial Telecommunication (SWIFT). China's developing institutions include the Asian Infrastructure Investment Bank (AIIB) and the Belt and Road Initiative (BRI).

One of the advantages of the US dollar is that the US can spend beyond its means. We import more than we export. This creates a trade deficit, and the government spends more than it collects in taxes. This creates a fiscal deficit. The US sells Treasury bonds to make up the difference. Other countries, notably China, purchase this US debt and become US creditors. Lately, China has stopped buying US Treasuries, but still the world’s second largest economy is the largest US creditor. But what happens if China decides to dump its Treasuries on the world market? As a last resort the Federal Reserve can buy US Treasuries, with Wall Street banks acting as intermediaries, thus essentially disappearing the debt down a black hole. The Fed also has to worry about the strength and stability of the dollar, and, if it swallows too much US debt, the value of the dollar vis a vis other currencies may suffer.

It seems that China, if not holding all the cards, holds many of them. A good deal of American manufacturing is done there. It is the largest holder of US debt and it is developing peaceful economic relationships with other nations that allow for increased economic activity that will benefit China. It is developing economic and financial institutions which bypass the dollar and will allow for trade with nations the US has sanctioned. Meanwhile, the Trump administration is overstepping its bounds with regard to sanctioning other countries using a weaponized dollar.

Kishore Mahbubani writes:

In recent years, the US government has imposed even heftier fines on non-American banks for working with countries like Iran, Cuba, and Sudan. For example, BNP Paribas SA was fined US$8.9 billion in 2015. As a result, many countries that had trusted the US dollar now find it to be a double-edged sword, cutting the fingers of whoever holds it. This creates an obvious incentive to reduce dependence on the US dollar, which could eventually precipitate a fall in global demand for US dollars, crippling the US' ability to fund its twin deficits. Donald Trump has recently created an additional incentive for moving away from the US dollar through his calls to devalue the dollar. As the former French President Valery Giscard d'Estaing said, this is an "exhorbitant privilege" that Americans enjoy. Americans should be grateful that the rest of the world is funding this exhorbitant privilege. Trump is unappreciative. The rest of the world is genuinely bewildered, wondering why America is taking steps that could in the long run jeopardize this privilege.

Russia, China, Iran, Cuba and other nations have lately been taking other measures to bypass the dollar in world trade. The BRICS nations (Brazil, Russia, India, China and South Africa) have formed an alliance and are creating alternative financial institutions.The New Development Bank (NDB), formerly referred to as the BRICS Development Bank, is a multilateral development bank operated by the BRICS states. The BRICS Contingent Reserve Arrangement (CRA) is a framework for providing protection against global liquidity pressures. The CRA is generally seen as a competitor to the International Monetary Fund (IMF) and along with the New Development Bank is viewed as an example of increasing South-South cooperation.

Why Are Working People Forced to Sacrifice for the Common Good But Not the Titans of Capitalism?

Published on Sunday, April 26, 2020

by Common Dreams

Why is it that lawmakers can order workers to stop working, and small business owners to lock their doors, but not order landlords, bankers, and Wall Street investors to also suspend their activities?

by Scott Klinger

 

24 Comments

Larry Kudlow, the director of Trump's National Economic Council. (Photo: Gage Skidmore / Flickr)

When I was a child, I heard my parents say that when we save our money it works for us. I remember having to dress up in my church clothes when I went to the bank to deposit my birthday checks or money I saved from my allowances. 

These ideas that banks and Wall Street are secular versions of church, and that money works for everyone are deeply at play in our society today. 

In the name of protecting the common good, Governors across the country have ordered people to stay at home, and all non-essential worksites shuttered. But aside from some states adopting short-term bans on evictions and foreclosures, no leaders have gone further in ordering the financial economy to “stop working” and set aside the primacy of their business interests for the common good by forgiving rents and waiving mortgage interest while deferring mortgage principal payments. 

"If federal leaders and state governors fail to demand that banks and Wall Street pause too, efforts to shore up families with stimulus checks and business owners with paycheck protection, will be undermined, as those funds will pass quickly through the hands of families and into the already full pockets of Wall Street, deepening inequality and increasing the pain of the many, for the benefit of the few. "

The shut-down of much of our economy has thrown millions out of work and into a perilous place, because while much of the human economy of workers working, small businesses serving, and people shopping for their everyday needs, has been all but stopped, financial services firms continues to work hard, collecting monthly rents, mortgages and other debts. Some small business owners—restaurateurs, hair salons, clothing, book and hardware store owners have received government loans to keep paying their workers, they’ve received no similar protection from landlords demanding their monthly rent while their businesses are closed.  This will wind up sinking many of the businesses we depend on and love. As the little virus attacks people’s bodies, the bigger disease of an overly powerful corporate capture of our economy continues to wreak havoc on families, small businesses, and communities long after the health crisis is resolved. 

If federal leaders and state governors fail to demand that banks and Wall Street pause too, efforts to shore up families with stimulus checks and business owners with paycheck protection, will be undermined, as those funds will pass quickly through the hands of families and into the already full pockets of Wall Street, deepening inequality and increasing the pain of the many, for the benefit of the few. 

As families scramble to get together their monthly mortgage payments, banks continue with business as usual. Last week, Federal Reserve Chairman Jerome Powell was asked by the David Wessell of Brookings Institution whether Big Banks would be allowed to continue to distribute tens of billions of dollars annually as shareholder dividends (half of which go to people in the top 1%), he replied, “That’s a perfectly normal thing in our capitalist system.” Normal has been thrown out the window for workers and small business owners, it should be for the titans of our economy as well. 

Why is it that Governors can order workers to stop working, and small business owners to lock their doors, but not order landlords, bankers, and Wall Street investors to also suspend their activities, to pause as labor and the commercial sector have? Why do people have to sacrifice but not the owners of capital? 

Some landlords have demonstrated compassion and solidarity with their tenants. New York City landlord Mario Salerno is one of them. At the beginning of April, tenants in each of Salerno’s 18 Brooklyn apartment building found notes taped to the door saying: “Due to the COVID-19 pandemic affecting all of us, I am waiving rent for the month of April, 2020. Stay safe, help your neighbors and wash your hands!!! Thank you, Mario.” When asked by the New York Times about the hundreds of thousands of dollars he stood to lose as a result of the rent forgiveness, Salerno said that was not important: “My concern is everyone’s health. I told them just to look out for your neighbor and make sure everyone has food on their table.” More landlords could follow Mr. Salerno’s example if they knew the mortgage payments that they owed on their rental properties could be deferred. 

In contrast, forty large corporations, many of whom are controlled by Wall Street private equity funds, have bought up more than two million units of rental housing in the United States. So, far all have been silent on the issue of rent forgiveness. Most picked up their properties, often at fire sale prices and with the help of federal government assistance, after the 2008 housing crisis. Unless these powerful firms are ordered to put public health and family well-being before corporate profits, they are likely to again swoop in and extend their control of America’s housing stock even further as millions of families and smaller landlords lose their homes and businesses. 

Ordering landlords and mortgage holders to change the terms of their contracts is not unprecedented. Following the 2008 housing crash, the Federal Home Ownership Refinance Program (HARP), gave mortgage holders the right to renegotiate their federally backed mortgages on more affordable terms. Its success allowed many families to keep their homes. 

I haven’t gotten dressed up to go to the bank in more than half a century, it is time our leaders stop treating Wall Street like a church, and to instead demand the same sacrifices of capital that they have of workers and merchants.

Scott Klinger is Senior Equitable Development Specialist at Jobs with Justice and an Associate Fellow at the Institute for Policy Studies.

---

Our work is licensed under a Creative Commons Attribution-Share Alike 3.0 License. Feel free to republish and share widely.

Off the Top of My Head

Where is the Money Coming From for Stimulus and Relief?

by John Lawrence, April 14, 2020

Where are the deficit hawks like the Tea Party who insist on a balanced budget and less government spending? In recent weeks the Federal Reserve has coughed up $1.5 trillion and the Federal government has spit up $2.2 trillion, and there's more on the way. Just 12 years ago the Fed spent $4.5 trillion plus the $700 billion Troubled Asset Relief Program (TARP), the Federal government spent to purchase toxic assets from banks. Where is all this money coming from and do we the taxpayers have to pay it back? There's good news and bad news. The good news is that the Fed just created its money out of thin air with a few keystrokes on a computer. When the Fed takes Treasuries and other financial assets on its balance sheet, American taxpayers are not liable to pay back this money. It just disappears into a black hole. On the other hand the $3 trillion that was created on the "fiscal side" by the Congress of the US goes right on the deficit and the debt, and, theoretically, the American taxpayer is liable to pay this money back.

Practically, however, the American taxpayer will never have to pay back the national debt because, with Wall Street acting as the middle man, it will mostly just be transferred to the Fed's balance sheet. They do this in order to add "liquidity" to the economy. That's their rationale at least as cover for this shell game. In practical terms the Fed has taken on the role of not only bailing out the big Wall Street banks but also major "too big to fail" corporations like Boeing which has screwed up so much with its 737 MAX that it will probably never be profitable again.

So you might think that all this free money created by the Fed and even the Congress which went mainly to rich people in 2008 might also be spent on the hoi polloi for relief from the recession caused by the coronavirus. You might also think that Trump's huge tax cut should be reversed so that there is money there for the relief of American taxpayers. Never fear, you indeed can have it all just like the banks and hedge funds have had it all up to now. In its infinite wisdom the Fed and the superannuated Tea Party finally realize that the shell game played by the Fed can also be played to benefit them. Money created out of thin air by the Fed or by the Congress and Treasury Department in cahoots with the Fed can also benefit them, and without their having to pay more taxes.

The tax breaks perpetrated by the Republican party and most recently by Trump have made it necessary for the Fed just to create money out of thin air to keep the economy going. What the chairman of the Fed realizes is that American GDP is made up mostly of American consumer purchases. American consumerism represents 70% of the American economy so if average people don't have money to spend, American business is in deep shit. But no need to raise taxes on the rich to put it in the American consumer's hands so that they can go out and buy stuff. Instead the Fed just creates the money out of thin air and dispenses it to the people just as it had done previously just with the banks. Now the banks are flush, and the economy will go down the drain unless the American people have money to spend so they can keep up their 70% of GDP. George W Bush said, "Get down to Disney World in Florida. Take your families and enjoy life, the way we want it to be enjoyed." But, unfortunately, Disneyland is closed.

So why should we ever have to pay taxes again? Let the Fed just give everyone what amounts to a Universal Basic Income. Well, it's not quite as simple as that. The powers that be need to at least keep up the pretense that the government taxes and spends rather than that the Fed just prints whatever money is necessary to keep "liquidity" in the system which now includes the American consumer. That is just considered good fiduciary practice and fiscal prudence and will keep the American dollar more in good standing with the rest of the world than it would be otherwise. In the meantime, although people will lose their jobs and their businesses, the Fed will do its part to see that the American economy doesn't collapse altogether so it will keep the printing press going as long and as much as it takes.

Off the Top of My Head

Republicans Careful Not To Be "Overly Generous"

by John Lawrence, March 25, 2020

The $2 trillion coronavirus relief package is being held up because Republicans don't want to approve a provision giving unemployed workers $600 per week over and above their state unemployment benefits. This might actually give some workers more money per week than they were actually making when they were employed. Also gig workers such as me would be eligible for these benefits which makes Republicans absolutely apoplectic. My California unemployment benefits would be about $230 so $600. more would make my weekly take home $830 considerably more than what I usually make working about 30 hours a week. Republicans think this would be a total travesty of the free market system. But they miss the point.

What is necessary for the economy to keep working is for people to go out and spend money since consumption is 70% of GDP. Neel Kashkari, who was in charge of the $700 billion TARP bailout during the 2008 financial crisis said that the country would have been better off if the government had been "much more generous" to all homeowners, no matter how deserving they were. Instead, the country was overly generous to Wall Street banks no matter how undeserving they were. And that's just the crux of the matter. To keep the economy functioning the government has to be overly generous to average people who will go out and spend their money which contributes to the 70% consumption economy. The TARP program was supposed to help homeowners with their mortgages as well as the banks. It helped the banks, but fell far short of helping the homeowners.

The Week reported:

That's the key thing to understand: Under Geithner's TARP approach, returning the banks' balance sheets to health necessitated bleeding American families dry.

"Tim [Geithner] thought he was smart enough to have it both ways; that he could protect the bank executives and stockholders and get the same result when they actually restructure the banks," Silvers told The Week. "And he was wrong." That choice also goes a long way towards explaining why, even though the crisis in the financial system itself passed rather quickly, the massive collapse in employment took 10 grinding years to repair. It's why 10 million American families lost their homes, and why, almost a decade later, the bank bailouts remain a source of simmering rage, nihilism, and distrust among voters.

"It was an extremely costly mistake," Silvers concluded. "In terms of homeownership, jobs, small businesses, and perhaps most of all the American people's trust in their government."

The Home Affordable Mortgage Program (HAMP), which was a major part of TARP, was designed to keep 4 million homeowners out of foreclosure. However, only about 1.6 million people were helped. The failure was not for lack of funding. Hundreds of billions of dollars was available and could have gone directly to help struggling homeowners who were being driven out of their homes, but  “Treasury just sat on that money and didn’t do it,” Inspector General for the Troubled Asset Relief Program Neil Barofsky said.

So with that experience and that knowledge in mind, Democrats in Congress don't want to repeat the same mistake. They want money in the hands of the American people who will go out and spend it. Poorer Americans are more likely to spend any relief package given to them, and, if they end up getting more per week in unemployment benefits than they were making at their job, so much the better. The banks are already fully capitalized. Losing no time the Federal Reserve has already given $1.5 trillion to the banks and lowered interest rates to zero.

Off the Top of My Head

One Positive Thing: Lower Pollution and Greenhouse Gases

by John Lawrence, March 24, 2020

Among all the negative things that are happening because of the coronavirus, there is at least one positive thing: air pollution and the emission of greenhouse gasses (GHGs) is way down. The pandemic is shutting down industrial activity and temporarily slashing air pollution levels around the world according to satellite imagery. There are fewer cars on the roads, fewer airplanes flying, fewer ships at sea. The downturn in economic activity means that less power is being consumed; therefore, less coal is being shoveled into power plants around the world. It's a veritable demonstration that it is possible to reduce pollution, reduce global warming and in other ways have a cleaner, healthier planet.

Paul Monks, professor of air pollution at the University of Leicester, predicted there will be important lessons to learn. “We are now, inadvertently, conducting the largest-scale experiment ever seen,” he said. “Are we looking at what we might see in the future if we can move to a low-carbon economy? Not to denigrate the loss of life, but this might give us some hope from something terrible. To see what can be achieved. It seems entirely probable that a reduction in air pollution will be beneficial to people in susceptible categories, for example some asthma sufferers,” he said. “It could reduce the spread of disease. A high level of air pollution exacerbates viral uptake because it inflames and lowers immunity.” Agriculture could also get a boost because pollution stunts plant growth, he added.

One of the largest drops in pollution levels could be seen over the city of Wuhan in central China which was put under a strict lockdown in late January. The city of 11 million people serves as a major transportation hub and is home to hundreds of factories supplying car parts and other hardware to global supply chains. According to NASA, nitrogen dioxide levels across eastern and central China have been 10-30% lower than normal.

This period, when the pandemic is not under control, is an opportunity to think differently about the economy. What are essential goods and services? Definitely we need food, clean water and sanitation services. We need garbage collection. People need enough money to supply essential needs for themselves. We could also ask what are inessential needs? Some of these are going to sporting events, going to movie theaters especially when we can watch movies at home, going to music events at arenas especially when we can listen to music at home, going on cruises. With the increase of capabilities for working from home, going into the office is not a necessity for a lot of workers. This can be increased with the result that there will be fewer cars on the road, less rush hour traffic and less GHG emissions. Getting cars off the road is a long term goal for a green economy. This would mean fewer car sales, but it would be better for the environment.

We should ask what are essential activities to keep people healthy and safe and think about doing away with other activities which don't increase the health and welfare of human beings. After dithering for years over the homeless situation, homeless people are being put up in motels and hotels post haste as a public health issue. This is a positive development and goes to show that the homeless situation could have been ameliorated years ago if we had the will to do it. The provision of money to average Americans will not hurt the economy. It will only help the economy. During the 2008 Great Recession trillions of dollars were given to the banks to bail them out. Much of this money went to bail out investors and hedge funds which had made huge bets on the economy. Many of these bets paid off, and their bets were covered in full by the Federal Reserve when the individual Wall Street banks couldn't cover them. Obviously, these rich people did not need that money to continue to cover their own 'essential needs' or the needs of their families. It was money given to gamblers while Joe six pack got zilch. We don't need an economy which caters to rich gamblers and showers them with money when they bet the economy will go down bringing suffering to millions.

At this point the Fed has the capability of bailing out the average American family especially if they have lost their jobs so they can continue to eat and pay rent. This support for average Americans will function also to stabilize the economy and maintain GDP but at a lower level. Perhaps the 70% level that consumption contributes to GDP cannot be maintained, but this might actually be a good thing by eliminating things that are not essential to the health and welfare of the population while driving air pollution and greenhouse gasses down. Neel Kashkari President of the Minneapolis branch of the Federal Reserve siad on 60 Minutes that the Fed needs to be "overly generous" to the average family, something they weren't when the economy tanked in 2008. The Fed is committed to not letting any banks or major US businesses go under. They could just as well make sure that no American families go under. Andrew Yang's idea of a Universal Basic Income (UBI) not only helps families survive. It will help the economy survive.

Off the Top of My Head

China Out Capitalizes Capitalist Nations

by John Lawrence, March 23, 2020

Who would have thunk it? China has taken capitalist financial methods to the next level with the result that it is progressing more rapidly in material abundance and a consumer society than the proto-capitalist nations of the world: the US and Europe. Sure, politically, they are an authoritarian nation. But that expedites their development since all institutions are on the same wavelength. In particular their central bank, the People's Bank of China (PBC) funds infrastructure projects all over the world. This keeps China a full employment society. They put all the Chinese people to work building infrastructure which expands the money supply in a very widespread way. Essentially the PBC provides loans for all these projects which means it creates the money just as US banks do when they create loans or the Federal Reserve does when it provides "liquidity" to the markets through quantitative easing (QE).

The Federal Reserve has actually expanded the range of market interventions it can do. It used to be that the Fed could only set interest rates. That was it. Now it can buy corporate bonds, state and local bonds and give money directly to corporations to keep them afloat. In fact it can act more like the PBC which interacts directly in the Chinese economy. The Fed can take debts directly onto its balance sheet where they may remain forever. This is exactly what it did in the 2008 financial crash. It provided cash directly to banks in return for mortgage backed securities and Treasury bonds thus providing liquidity to the banks so that they would not go under. Now the banks are well capitalized, and, since they know that the Fed stands ready to bail them out again, they have no worries. In fact the term "bail them out" is actually a misnomer at this point. It can be replaced with "provide them with cash" as necessary.

There was an interesting interview on 60 Minutes with Neel Kashkari, Obama's Assistant Secretary of the Treasury, who was in charge of the Troubled Assets Relief Program (TARP) during the Great Recession. He noted that TARP, which was supposed to help out actual people with their mortgages did not go far enough. They were too stingy with it, and not very many people got helped. He says that this prolonged the recession. Instead of being stingy as they were, they should have been "overly generous." That is the lesson he learned. So now in the coronavirus recession, his advice is that the Fed should be overly generous in providing relief to actual everyday people and not just to banks. At this time the banks are doing very well, thank you.

It is well known that money is created by the banks themselves when they create a loan which they do with a couple of keystrokes on a computer. Why is this possible? Because money has no relationship to gold or any other precious metal any more. That's why it's called "fiat money." So what bankers and economists are realizing (which has been the secret of China's success all along resulting in their bringing 800 million people out of poverty in 40 years) is that the US central bank, the Federal Reserve can do the exact same thing. It can create fiat money just like the banks do, like Wall Street does. The only concern is that money so created would lead to inflation, but, as Kashkari noted, there was no inflation even after the Fed created trillions of dollars in 2008 most of which went directly to bankers, hedge funds and rich individuals and not to the average American. Now Kashkari, who is President of the Minneapolis branch of the Federal Reserve, is saying that the Fed could provide liquidity to the American people and not just to the banks. How this will probably happen is by Congress passing a bill on the "fiscal side" as they say. Then they will sell more Treasury bonds to cover the increased deficit. Wall Street banks will buy them since other countries are decreasing their purchase of US debt, and then the Fed will provide liquidity (cash) to Wall Street taking the Treasury bonds onto its balance sheet where they will reside forever probably. This is why the national deficits and debt are no problem because the Fed can print money to cover them ad infinitum. It's as if the Fed provided money directly to the US economy, but, by law, they have to do so indirectly.

Ellen Brown understood this possibility long before Neel Kaskari had his "awakening."

America’s chief competitor in the trade war is obviously China, which subsidizes not just worker costs but the costs of its businesses. The government owns 80% of the banks, which make loans on favorable terms to domestic businesses, especially state-owned businesses. Typically, if the businesses cannot repay the loans, neither the banks nor the businesses are put into bankruptcy, since that would mean losing jobs and factories. The non-performing loans are just carried on the books or written off. No private creditors are hurt, since the creditor is the government, and the loans were created on the banks’ books in the first place (following standard banking practice globally).

Precisely! So no need to worry about another Great Recession or Depression. The US could effectively provide a Universal Basic Income (UBI) to its citizens indefinitely as Andrew Yang proposed.

As observed by Jeff Spross in a May 2018 Reuters article titled “China’s Banks Are Big. Too Big?”:

[B]ecause the Chinese government owns most of the banks, and it prints the currency, it can technically keep those banks alive and lending forever.…

It may sound weird to say that China’s banks will never collapse, no matter how absurd their lending positions get. But banking systems are just about the flow of money.

Spross quoted former bank CEO Richard Vague, chair of The Governor’s Woods Foundation, who explained, “China has committed itself to a high level of growth. And growth, very simply, is contingent on financing. Beijing will come in and fix the profitability, fix the capital, fix the bad debt, of the state-owned banks … by any number of means that you and I would not see happen in the United States.”

There is no reason why the US could not emulate China. From an economic point of view QE or a UBI would not be inflationary as long as the dollars provided to the system were either invested in new plants and equipment, infrastructure or consumption. What is needed now is about $10 trillion worth of Green Infrastructure, a Green New Deal funded indirectly by the Fed. This money can be provided to the American people and not only rich billionaires as was done in 2008 and as China is providing directly to its workers who are kept busy building infrastructure in the Belt and Road initiative. It would also ease economic inequality and not induce inflation as long as the money is widely distributed.

Off the Top of My Head

The Fed Gives More Money to the Rich. None to You.

by John Lawrence, March 13, 2020

The Federal Reserve just announced that it would give $1.5 trillion to the rich, and lower interest rates to zero. That means more money available for gambling in the Wall Street Casino. According to the Federal Reserve Act, "The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." So the Fed traditionally raised interest rates when the economy was expanding too rapidly leading to too much inflation and reduced them when the economy was contracting and there was too much unemployment. However, what it is doing now and has been doing since 2008 is pouring money into the coffers of the big Wall Street banks with a spigot that is hardly ever turned off.

Most of the money coming from the Fed's spigot #1 never goes to the average Joe or Jane and #2 goes directly into gambling by Wall Street in an attempt to keep financial instruments such as the stock and bond markets from collapsing. There is so much money sloshing around in the coffers of rich people that it has no impact on the real economy. There is full employment and no inflation so the Fed shouldn't have to do anything because those are the twin goals it was set up to achieve. It wasn't set up to make sure the stock market never sold off. Yet this is what it is now all about. The economy has become so financialized that limiting inflation and controlling interest rates is some archaic thing that the Fed is hardly concerned with any more.

The New York Times reported:

The unscheduled move - the latest in a series of actions aimed at providing liquidity and reassurance as the outbreak grows and brings areas of the country to a veritable halt - came as U.S. stocks plunged nearly 10% in their biggest one-day losses since the 1987 market crash. The outbreak, which originally was thought to pose a limited threat to the U.S. economy, is now increasingly seen as the event that could bring a record-long economic expansion to an end, but with little clarity yet as to how severe the downturn might be.The economy is already being hit with waves of event and travel cancellations. Broadway and Disneyland are going dark and the professional sports industry is for now on hold. ...

"The Fed is likely to do more soon, including cutting rates to likely zero," Ebrahim Rahbari, chief currency strategist for Citi, said in a note to clients Thursday.

That would represent a dramatic turn of events for the Fed, reversing in a matter of months a decade's worth of effort to move interest rates back towards something like a normal level - only to see the twin shocks of a global trade war and now a global health emergency push them back down.

Interest rates at zero means pouring even more free money into the economy. That's the Fed's response to every situation now: free money for rich people. Nothing for the average Joe or Jane because if the average Joe or Jane had more consuming power, that would lead to higher prices, and, therefore, price inflation, another headache for the Fed.

Ronald Reagan did more to break the inflation of the 70s and 80s by breaking the unions. Once the country was deunionized there was no more wage inflation because workers were no longer in a position to demand higher wages. Their work was off shored to China where workers worked for pitiful wages so that American consumers could buy products at low prices. So there was no price inflation. So the Fed turned its mission instead into pouring money into the economy in the hopes that this would keep everybody working. But there is so much of this money sloshing around among rich people that they are not investing in new enterprises which is what is needed to keep the economy humming. So they are gambling with it instead and these gambles also add to GDP when they win.

Much of the American economy has to do with professional sports and entertainment. So when you have professional sports and Disneyland shut down due to the coronavirus, this naturally leads to a recession. People aren't traveling or going on cruises. This leads to a recession. Since the US GDP is 70% consumption, you can't have entertainment being shut down without diminishing consumption by a great amount. Entertainment and professional sports is a goodly percentage of consumption. Because of the coronavirus most nonessential consumption is being shut down. The bar and restaurant business is being shut down. The only businesses who are doing good are the toilet paper and bottled water industries.

So what the Fed is doing by adding $1.5 trillion to the economy at this time has nothing to do with getting people to go to events or eat out more often. It is just to satisfy the whims of rich stock and bond market investors who must be appeased at all costs.

Off the Top of My Head

The Secret to America's Booming Economy: Give Money to Rich People; Screw Poor People

by John Lawrence, January 18, 2020

In short tax breaks and loans at zero interest for the rich. No interest on savings accounts for the poor. No wealth tax on the rich. Wealth taxes in the form of property taxes on poor homeowners. Quantitative easing and bailouts for the rich. Foreclosures and evictions for the poor. Today interest rates are negative in some parts of the world. This means the bank will pay you to take out a loan if you're rich. Since financialized capital knows no boundaries, any hedge fund operator or big bank or corporation can make money by borrowing money. You and I can't do that. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400 percent. By comparison, APRs on credit cards can range from about 12 percent to about 30 percent. That's versus zero interest on savings accounts.

Many corporations pay no Federal or local taxes. In fact they will be paid to locate a plant in some favored jurisdiction. The Center for Public Integrity reported:

At least 60 companies reported that their 2018 federal tax rates amounted to effectively zero, or even less than zero, on income earned on U.S. operations, according to an analysis released today by the Washington, D.C.-based think tank, the Institute on Taxation and Economic Policy. The number is more than twice as many as ITEP found roughly, per year, on average in an earlier, multi-year analysis before the new tax law went into effect.

Among them are household names like technology giant Amazon.com Inc. and entertainment streaming service Netflix Inc., in addition to global oil giant Chevron Corp., pharmaceutical manufacturer Eli Lilly & Co., and farming and commercial equipment manufacturer Deere & Co.

Your Federal Reserve (well, really it's not yours; it's privately owned by Wall Street) bailed out the Big Banks in the 2008 Great Recession to the tune of  trillions of dollars. The Fed can electronically create money and use it to lend against collateral of various types, such as agency mortgage-backed securities or asset-backed commercial paper. This is effectively "printing money" and increases the money supply, which under normal economic conditions creates inflationary pressure. Ben Bernanke called this approach "credit easing", possibly to distinguish it from the widely used expression Quantitative easing. The Federal Reserve holds $2.5 trillion of U.S. Treasuries, which is roughly one-sixth of U.S. debt held by the public and one-eighth of the gross debt. The rest of the Federal Reserve's balance sheet contains other bonds and mortgage-backed securities bought as part of quantitative easing.

During the Great Recession the Fed printed money and loaned it to the Wall Street Banks taking risky asset backed securities off their books and onto the Fed's books. Today they're doing the same thing taking US government debt and effectively eating it. If the banks have risky loans or if the government can't auction off US debt (aka Treasury bonds), the Fed stands ready to eat this debt and print money to give to Wall Street and to the US government although it can't buy US Treasuries directly. So Wall Street is used as the middle man to buy the Treasuries, and then the Fed takes them off Wall Street's hands and books. All this activity comes at a price of course. The banks are paid handsomely for their activities in commissions. The Federal Reserve Bank of New York added $52.6 billion in short-term liquidity to the financial system Friday, January 17, 2020  to help money markets get through the weekend.

The Fed added the money in a repurchase agreement operation, or repos, that took in $10.9 billion in Treasuries and $40.8 billion in mortgages. The contradiction arises that if the Fed can effectively eat government debt which keeps the economy humming, why can't the money be used for a Green New Deal? Why does government deficit spending only have to be used to fund the military-industrial complex? It could be used to fund more worthwhile activities like the Green New Deal. During the original New Deal that's exactly what happened but with a bank created by the government, the Reconstruction Finance Bank. Unlike the Fed, this bank actually made a profit for the US government. And why can't individuals like you and me borrow at effectively zero per cent while speculators like hedge funds can? The Fed is essentially stepping in to bail out the speculators so that the whole system doesn't blow up again like it did in 2008. Meanwhile, the economy keeps humming proving that giving money to rich people and screwing poor people is the basis the US economy rests on. But it doesn't have to be this way.

The Fed Protects Gamblers at the Expense of the Economy

Posted on January 10, 2020 by Ellen Brown, Web of Debt Blog

Although the repo market is little known to most people, it is a $1-trillion-a-day credit machine, in which not just banks but hedge funds and other “shadow banks” borrow to finance their trades. Under the Federal Reserve Act, the central bank’s lending window is open only to licensed depository banks; but the Fed is now pouring billions of dollars into the repo (repurchase agreements) market, in effect making risk-free loans to speculators at less than 2%.

This does not serve the real economy, in which products, services and jobs are created. However, the Fed is trapped into this speculative monetary expansion to avoid a cascade of defaults of the sort it was facing with the long-term capital management crisis in 1998 and the Lehman crisis in 2008. The repo market is a fragile house of cards waiting for a strong wind to blow it down, propped up by misguided monetary policies that have forced central banks to underwrite its highly risky ventures.

The Financial Economy Versus the Real Economy

The Fed’s dilemma was graphically illustrated in a Dec. 19 podcast by entrepreneur/investor George Gammon, who explained we actually have two economies – the “real” (productive) economy and the “financialized” economy. “Financialization” is defined at Wikipedia as “a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production.” Rather than producing things itself, financialization feeds on the profits of others who produce.

The financialized economy – including stocks, corporate bonds and real estate – is now booming. Meanwhile, the bulk of the population struggles to meet daily expenses. The world’s 500 richest people got $12 trillion richer in 2019, while 45% of Americans have no savings, and nearly 70% could not come up with $1,000 in an emergency without borrowing.

Gammon explains that central bank policies intended to boost the real economy have had the effect only of boosting the financial economy. The policies’ stated purpose is to increase spending by increasing lending by banks, which are supposed to be the vehicles for liquidity to flow from the financial to the real economy. But this transmission mechanism isn’t working, because consumers are tapped out. They can’t spend more unless their incomes go up, and the only way to increase incomes, says Gammon, is through increasing production (or with a good dose of “helicopter money,” but more on that later).

So why aren’t businesses putting money into more production? Because, says Gammon, the central banks have put a “put” on the financial market, meaning they won’t let it go down. Business owners say, “Why should I take the risk of more productivity, when I can just invest in the real estate, stock or corporate bond market and make risk-free money?” The result is less productivity and less spending in the real economy, while the “easy money” created by banks and central banks is used for short-term gain from unproductive financial investments.

Existing assets are bought just to sell them or rent them for more, skimming profits off the top. These unearned “rentier” profits rely on ready access to liquidity (the ability to buy and sell on demand) and on leverage (using borrowed money to increase returns), and both are ultimately underwritten by the central banks. As observed in a July 2019 article titled “Financialization Undermines the Real Economy”:

When large highly leveraged financial institutions in these markets collapse, e.g., Lehman Brothers in September 2008, central banks are forced to step in to salvage the financial system. Thus, many central banks have little choice but to become securities market makers of last resort, providing safety nets for financialized universal banks and shadow banks.

Repo Madness

That is what is happening now in the repo market. Repos work like a pawn shop: the lender takes an asset (usually a federal security) in exchange for cash, with an agreement to return the asset for the cash plus interest the next day unless the loan is rolled over. In September 2019, rates on repos should have been about 2%, in line with the fed funds rate (the rate at which banks borrow deposits from each other). However, repo rates shot up to 10% on Sept. 17. Yet banks were refusing to lend to each other, evidently passing up big profits to hold onto their cash. Since banks weren’t lending, the Federal Reserve Bank of New York jumped in, increasing its overnight repo operations to $75 billion. On Oct. 23, it upped the ante to $165 billion, evidently to plug a hole in the repo market created when JPMorgan Chase, the nation’s largest depository bank, pulled an equivalent sum out. (For details, see my earlier post here.)

By December, the total injected by the Fed was up to $323 billion. What was the perceived danger lurking behind this unprecedented action? An article in The Quarterly Review of the Bank for International Settlements (BIS) pointed to the hedge funds. As ZeroHedge summarized the BIS’ findings:

[C]ontrary to our initial take that banks were pulling from the repo market due to counterparty fears about other banks, they were instead spooked by overexposure by other hedge funds, who have become the dominant marginal – and completely unregulated – repo counterparty to liquidity lending banks; without said liquidity, massive hedge fund regulatory leverage such as that shown above would become effectively impossible.

Hedge funds have been blamed for the 2008 financial crisis, by adding too much risk to the banking system. They have destroyed companies by forcing stock buybacks, asset sales, layoffs and other measures that raise stock prices at the expense of the company’s long-term health and productivity. They have also been a major factor in the homelessness epidemic, by buying foreclosed properties at fire sale prices, then renting them out at inflated prices. Why did the Fed need to bail these parasitic institutions out? The BIS authors explained:

Repo markets redistribute liquidity between financial institutions: not only banks (as is the case with the federal funds market), but also insurance companies, asset managers, money market funds and other institutional investors. In so doing, they help other financial markets to function smoothly. Thus, any sustained disruption in this market, with daily turnover in the U.S. market of about $1 trillion, could quickly ripple through the financial system. The freezing-up of repo markets in late 2008 was one of the most damaging aspects of the Great Financial Crisis (GFC).

At $1 trillion daily, the repo market is much bigger and more global than the fed funds market that is the usual target of central bank policy. Repo trades are supposedly secured with “high-quality collateral” (usually U.S. Treasuries). But they are not risk-free, because of the practice of “re-hypothecation”: the short-term “owner” of the collateral can use it as collateral for another loan, creating leverage – loans upon loans. The IMF has estimated that the same collateral was reused 2.2 times in 2018, which means both the original owner and 2.2 subsequent re-users believed they owned the same collateral. This leveraging, which actually expands the money supply, is one of the reasons banks put their extra funds in the repo market rather than in the fed funds market. But it is also why the repo market and the U.S. Treasuries it uses as collateral are not risk-free. As Wall Street veteran Caitlin Long warns:

U.S. Treasuries are … the most rehypothecated asset in financial markets, and the big banks know this. … U.S. Treasuries are the core asset used by every financial institution to satisfy its capital and liquidity requirements – which means that no one really knows how big the hole is at a system-wide level.

This is the real reason why the repo market periodically seizes up. It’s akin to musical chairs – no one knows how many players will be without a chair until the music stops.

ZeroHedge cautions that hedge funds are the most heavily leveraged multi-strategy funds in the world, taking something like $20 billion to $30 billion in net assets under management and levering it up to $200 billion. According to The Financial Times, to fire up returns, “some hedge funds take the Treasury security they have just bought and use it to secure cash loans in the repo market. They then use this fresh cash to increase the size of the trade, repeating the process over and over and ratcheting up the potential returns.”

ZeroHedge concludes:

This … explains why the Fed panicked in response to the GC repo rate blowing out to 10% on Sept 16, and instantly implemented repos as well as rushed to launch QE 4: not only was Fed Chair Powell facing an LTCM [Long Term Capital Management] like situation, but because the repo-funded [arbitrage] was (ab)used by most multi-strat funds, the Federal Reserve was suddenly facing a constellation of multiple LTCM blow-ups that could have started an avalanche that would have resulted in trillions of assets being forcefully liquidated as a tsunami of margin calls hit the hedge funds world.

“Helicopter Money” – The Only Way Out?

The Fed has been forced by its own policies to create an avalanche of speculative liquidity that never makes it into the real economy. As Gammon explains, the central banks have created a wall that traps this liquidity in the financial markets, driving stocks, corporate bonds and real estate to all-time highs, creating an “everything bubble” that accomplishes only one thing – increased wealth inequality. Central bank quantitative easing won’t create hyperinflation, says Gammon, but “it will create a huge discrepancy between the haves and have nots that will totally wipe out the middle class, and that will bring on MMT or helicopter money. Why? Because it’s the only way that the Fed can get the liquidity from the financial economy, over this wall, around the banking system, and into the real economy. It’s the only solution they have.” Gammon does not think it’s the right solution, but he is not alone in predicting that helicopter money is coming.

Investopedia notes that “helicopter money” differs from quantitative easing (QE), the money-printing tool currently used by central banks. QE involves central bank-created money used to purchase assets from bank balance sheets. Helicopter money, on the other hand, involves a direct distribution of printed money to the public.

A direct drop of money on the people would certainly help to stimulate the economy, but it won’t get the parasite of financialization off our backs; and Gammon is probably right that the Fed lacks the tools to fix the underlying disease itself. Only Congress can change the Federal Reserve Act and the tax system. Congress could impose a 0.1% financial transactions tax, which would nip high-frequency speculative trading in the bud. Congress could turn the Federal Reserve into a public utility mandated to serve the productive economy. Commercial banks could also be regulated as public utilities, and public banks could be established that served the liquidity needs of local economies. For other possibilities, see Banking on the People here.

Solutions are available, but Congress itself has been captured by the financial markets, and it may take another economic collapse to motivate Congress to act. The current repo crisis could be the fuse that triggers that collapse.

_________________________________________

This article was first posted on Truthdig.com. Ellen Brown chairs the Public Banking Institute and has written thirteen books, including her latest, Banking on the People: Democratizing Money in the Digital Age.  She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

The Disaster of Negative of Interest Rates

by Ellen Brown, Web of Debt blog

Posted on September 29, 2019 by Ellen Brown

President Trump wants negative interest rates, but they would be disastrous for the U.S. economy, and his objectives can be better achieved by other means.

The dollar strengthened against the euro in August, merely in anticipation of the European Central Bank slashing its key interest rate further into negative territory. Investors were fleeing into the dollar, prompting President Trump to tweet on Aug. 30:

The Euro is dropping against the Dollar “like crazy,” giving them a big export and manufacturing advantage… And the Fed does NOTHING!

When the ECB cut its key rate as anticipated, from a negative 0.4% to a negative 0.5%, the president tweeted on Sept. 11:

The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term.

And on Sept. 12 he tweeted:

European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports…. And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!

However, negative interest rates have not been shown to stimulate the economies that have tried them, and they would wreak havoc on the U.S. economy, for reasons unique to the U.S. dollar. The ECB has not gone to negative interest rates to gain an export advantage. It is to keep the European Union from falling apart, something that could happen if the United Kingdom does indeed pull out and Italy follows suit, as it has threatened to do. If what Trump wants is cheap borrowing rates for the U.S. federal government, there is a safer and easier way to get them.

The Real Reason the ECB Has Gone to Negative Interest Rates

Why the ECB has gone negative was nailed by Wolf Richter in a Sept. 18 article on WolfStreet.com. After noting that negative interest rates have not proved to be beneficial for any economy in which they are currently in operation and have had seriously destructive side effects for the people and the banks, he said:

However, negative interest rates as follow-up and addition to massive QE were effective in keeping the Eurozone glued together because they allowed countries to stay afloat that cannot, but would need to, print their own money to stay afloat. They did so by making funding plentiful and nearly free, or free, or more than free.

This includes Italian government debt, which has a negative yield through three-year maturities. … The ECB’s latest rate cut, minuscule and controversial as it was, was designed to help out Italy further so it wouldn’t have to abandon the euro and break out of the Eurozone.

The U.S. doesn’t need negative interest rates to stay glued together. It can print its own money.

EU member governments have lost the sovereign power to issue their own money or borrow money issued by their own central banks. The failed EU experiment was a monetarist attempt to maintain a fixed money supply, as if the euro were a commodity in limited supply like gold. The central banks of member countries do not have the power to bail out their governments or their failing local banks as the Fed did for U.S. banks with massive quantitative easing after the 2008 financial crisis. Before the Eurozone debt crisis of 2011-12, even the European Central Bank was forbidden to buy sovereign debt.

The rules changed after Greece and other southern European countries got into serious trouble, sending bond yields (nominal interest rates) through the roof.  But default or debt restructuring was not considered an option; and in 2016, new EU rules required a “bail in” before a government could bail out its failing banks. When a bank ran into trouble, existing stakeholders–including shareholders, junior creditors and sometimes even senior creditors and depositors with deposits in excess of the guaranteed amount of €100,000–were required to take a loss before public funds could be used. The Italian government got a taste of the potential backlash when it forced losses onto the bondholders of four small banks. One victim made headlines when he hung himself and left a note blaming his bank, which had taken his entire €100,000 savings.

Meanwhile, the bail-in scheme that was supposed to shift bank losses from governments to bank creditors and depositors served instead to scare off depositors and investors, making shaky banks even shakier. Worse, heightened capital requirements made it practically impossible for Italian banks to raise capital. Rather than flirt with another bail-in disaster, Italy was ready either to flaunt EU rules or leave the Union.

The ECB finally got on the quantitative easing bandwagon and started buying government debt along with other financial assets. By buying debt at negative interest, it is not only relieving EU governments of their interest burden, it is slowly extinguishing the debt itself.

That explains the ECB, but why are investors buying these bonds? According to John Ainger in Bloomberg:

Investors are willing to pay a premium–and ultimately take a loss–because they need the reliability and liquidity that the government and high-quality corporate bonds provide. Large investors such as pension funds, insurers, and financial institutions may have few other safe places to store their wealth.

In short, they are captive buyers. Banks are required to hold government securities or other “high-quality liquid assets” under capital rules imposed by the Financial Stability Board in Switzerland. Since EU banks now must pay the ECB to hold their bank reserves, they may as well hold negative-yielding sovereign debt, which they may be able to sell at a profit if rates drop even further.

Wolf Richter comments:

Investors who buy these bonds hope that central banks will take them off their hands at even lower yields (and higher prices). No one is buying a negative yielding long-term bond to hold it to maturity.

Well, I say that, but these are professional money managers who buy such instruments, or who have to buy them due to their asset allocation and fiduciary requirements, and they don’t really care. It’s other people’s money, and they’re going to change jobs or get promoted or start a restaurant or something, and they’re out of there in a couple of years. Après moi le déluge.

Why the U.S. Can’t Go Negative, and What It Can Do Instead

The U.S. doesn’t need negative interest rates, because it doesn’t have the EU’s problems but it does have other problems unique to the U.S. dollar that could spell disaster if negative rates were enforced.

First is the massive market for money market funds, which are more important to daily market functioning in the U.S. than in Europe and Japan. If interest rates go negative, the funds could see large-scale outflows, which could disrupt short-term funding for businesses, banks and perhaps even the Treasury. Consumers could also face new charges to make up for bank losses.

Second, the U.S. dollar is inextricably tied up with the market for interest rate derivatives, which is currently valued at over $500 trillion. As proprietary analyst Rob Kirby explains, the economy would crash if interest rates went negative, because the banks holding the fixed-rate side of the swaps would have to pay the floating-rate side as well. The derivatives market would go down like a stack of dominoes and take the U.S. economy with it.

Perhaps in tacit acknowledgment of those problems, Fed Chairman Jay Powell responded to a question about negative interest rates on Sept. 18:

Negative interest rates [are] something that we looked at during the financial crisis and chose not to do. After we got to the effective lower bound [near-zero effective federal funds rate], we chose to do a lot of aggressive forward guidance and also large-scale asset purchases. …

And if we were to find ourselves at some future date again at the effective lower bound–not something we are expecting–then I think we would look at using large-scale asset purchases and forward guidance.

I do not think we’d be looking at using negative rates.

Assuming the large-scale asset purchases made at some future date were of federal securities, the federal government would be financing its debt virtually interest-free, since the Fed returns its profits to the Treasury after deducting its costs. And if the bonds were rolled over when due and held by the Fed indefinitely, the money could be had not only interest-free but debt-free. That is not radical theory but is what is actually happening with the Fed’s bond purchases in its earlier QE. When it tried to unwind those purchases last fall, the result was a stock market crisis. The Fed is learning that QE is a one-way street.

The problem under existing law is that neither the president nor Congress has control over whether the “independent” Fed buys federal securities. But if Trump can’t get Powell to agree over lunch to these arrangements, Congress could amend the Federal Reserve Act to require the Fed to work with Congress to coordinate fiscal and monetary policy. This is what Japan’s banking law requires, and it has been very successful under Prime Minister Shinzō Abe and “Abenomics.” It is also what a team of former central bankers led by Philipp Hildebrand proposed in conjunction with last month’s Jackson Hole meeting of central bankers, after acknowledging the central bankers’ usual tools weren’t working. Under their proposal, central bank technocrats would be in charge of allocating the funds, but better would be the Japanese model, which leaves the federal government in control of allocating fiscal policy funds.

The Bank of Japan now holds nearly half of Japan’s federal debt, a radical move that has not triggered hyperinflation as monetarist economists direly predicted. In fact, the Bank of Japan can’t get the country’s inflation rate even to its modest 2 percent target. As of August, the rate was an extremely low 0.3%. If the Fed were to follow suit and buy 50% of the U.S. government’s debt, the Treasury could swell its coffers by $11 trillion in interest-free money. And if the Fed kept rolling over the debt, Congress and the president could get this $11 trillion not only interest-free but debt-free. President Trump can’t get a better deal than that.

______________________________

This article was first posted on Truthdig.com. Ellen Brown is an attorney, chair of the Public Banking Institute, and author of thirteen books including Web of Debt, The Public Bank Solution, and Banking on the People: Democratizing Money in the Digital Age.  She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com. 

Off the Top of My Head

The American Economy is Not That Great Except for the Rich

by John Lawrence, July 17, 2018

Thanks to the financialization of the economy, rising GDP doesn't mean that more money is going into workers' pockets. When a private equity fund strips a company and sells off the parts, GDP goes up because that economic activity is added into GDP. In 2012,Hostess Products, the makers of Twinkies, filed for bankruptcy under the private equity firm Ripplewood Holdings, and some 8000 workers lost their jobs. Hostess has bounced back and forth among multiple private equity companies with the result that executives of those companies have gotten rich and workers have lost their jobs. In every case the shenanigans of private equity firms and hedge funds have caused GDP to rise, but the only financial gains have gone to the very rich and not to the average worker. Deals like Hostess have helped make the men running the six largest publicly traded private equity firms collectively the highest-earning executives of any major American industry.

The Fed's policy of holding interest rates at zero has caused massive inflation in the real estate and stock markets, but this is not reported as inflation due to the way inflation is computed. Here too this rapid increase in home prices has made the GDP increase while pricing many average people out of the real estate market. Advantage: the rich. Disadvantage: everybody else. The American economy which seems to be in good shape with its various economic indicators like GDP, has mainly benefited the rich while seemingly benefiting everyone. But while economic indicators are all positive, the results are a further divide between the rich and the poor with the rich reaping all the gains of an economy in which the gains and increases go mainly to them.

Medium reported:

Adjusted for inflation, the US economy has more than doubled in real terms since 1975.

How much of that growth has gone to the average person? According to many economists, the answer is none or close to none.

In a recent gloomy study of the American economy, Thomas Piketty, Emmanuel Saez, and Gabriel Zucman find that between 1980 and today, almost none of the gains from economic growth accrued to the bottom half of the population. They write, “Looking first at income before taxes and transfers, income stagnated for bottom 50% earners: for this group, average pre-tax income was $16,000 in 1980 — expressed in 2014 dollars, using the national income deflator — and still is $16,200 in 2014.”¹ Piketty, Saez, and Zucman also found that incomes of the top 1% tripled over the same time period.

New York Times columnist David Leonhardt, reacting to this work, concluded “the very affluent, and only the very affluent, have received significant raises in recent decades.”

So the world's largest economy is essentially a bifurcated economy with the rich racking up phenomenal gains while the poor and middle class stagnate. However, some in the middle class are still doing OK. They are mainly the ones who bought stocks and real estate 20 or more years ago. Those stocks and real estate have inflated due to the Fed's interest rate policies. The other middle class group that has prospered are those who have benefited from a transfer of wealth from the previous generation. Those who have inherited neither stocks nor real estate and have had to start from zero are in the worst shape because they are likely to be the ones that have acquired student loan debt to get an education that purportedly would gain them a toe hold in the middle class. But that toe hold has slipped and they have ended up with no real estate (they can't afford a mortgage because of the student loan debt they have to pay off) nor have they been able to acquire stocks at greatly inflated prices.

The intergenerational transfer of wealth has exacerbated the wealth gap between white and black families. The Atlantic reported:

A forthcoming study from Meschede and Joanna Taylor, also a researcher at Brandeis, in the American Journal of Economics and Sociology, makes the point clearly. Building on a 2017 study of theirs that examined wealth accumulation among college graduates—as well as “intergenerational financial transfers,” like when a parent helps a recent college grad out with rent or, say, gives her $1,000 a month to spend on whatever she pleases—the two looked specifically at how family inheritances, which are usually larger and tend to come all at once, factor into building and maintaining wealth.

The two researchers focused specifically on inheritances among families where at least one parent has a college degree. They looked at families like this in order to test the notion that higher education is a great equalizer.

The differences that they found between black and white families were stark. “Among college-educated black families, about 13 percent get an inheritance of more than $10,000, as opposed to about 41 percent of white, college-educated families,” Taylor said in a release announcing the new research. More specifically, white families that receive such an inheritance receive, on average, more than $150,000 from the previous generation, whereas that figure is less than $40,000 for black families.

So far from being an equalizer between black and white families, a college education has only indebted black families on average even more. In other words they are worse off with a college education than they would have been without one. A college education for many blacks and poor whites has only been a debt trap, a debt trap that follows them to retirement where their social security is snatched away from them for repayment of their student loan debt.

So Donald Trump will probably fool a lot of voters who will be sold the bill of goods that the economy is doing great. They will wonder why that is not so for them, but will have to chalk it up to their own failings. Meanwhile, Bernie Sanders, Elizabeth Warren and others will have to try and explain a more nuanced picture - that the economy is doing very well for the rich but not for those at the lower end of the economic spectrum. Again people will probably not have the mental aptitude to grasp that distinction and will probably vote against their own interests.

Off the Top of My Head

Why Can't the 90% Vote to Raise Taxes on the 10% and Lower Taxes on Themselves?

by John Lawrence, June 25, 2019

The Repubs are Johnny One Notes when it comes to elections. "We will lower your taxes." Of course they lower taxes on the rich (the 10%) much more than they lower them on the 90%. People always fall for this. They always say "The Democrats will raise your taxes." Well now, Bernie and others are saying "We'll raise taxes on the rich, but not on the 90%." That's good because in this country the majority rules, and the 90% can outvote the 10% at least in Presidential and Congressional elections. The Dems, however, should go further. They should say, "Not only will we raise taxes on the rich, we'll lower them on everybody else." That would go over great if the general public could appreciate that much nuance.

Trump's tax cuts blew a whole in the national budget and raised the Federal debt to $22 trillion. Now over a trillion dollars a year just goes to paying interest on the debt. The debt can never be paid off. The American people are being sold a bill of goods and will wind up being perpetual debtors not only nationally but individually. That's just where the power elite wants them. Debtors are more easily controlled than those who have some agency. The only agency the American people have is the fact that majority rules, and they can vote the powerful out of office and vote in people like Bernie Sanders and Elizabeth Warren who stand on the side of the middle class.

Ellen Brown in her latest book, "Banking on the People: Democratizing Money in the Digital Age," has shown the way to a debt free America with low taxes. She has been telling us for years that the Federal government need not borrow money and then pay interest on it. It has the power to generate money and then distribute it into society. The American Congress is given the right in the Constitution to coin money, but it has delegated that right to privately owned banks. Then the Treasury issues bonds which are bought by private investors who expect to be paid interest on those bonds. The big Wall Street banks take a cut on every bond sold.

Recently the Federal Reserve bank has gotten into the act with Quantitative Easing (QE). It buys the bonds from the Wall Street banks and by law returns the interest to the Treasury. These bonds need never be paid off. Net result: the American Treasury gets free money. But instead of this shell game the American government could issue its money directly, and spend it into American society on infrastructure development and in many other ways. This is exactly what other societies, who have control over their own money supply, have done. This is how China manages to spend money on its Belt and Road initiative building infrastructure all over the world without going into debt. Meanwhile the US goes further and further into debt, and in the final analysis it's all because it has delegated the creation of money to privately owned banks including the Federal Reserve.

But there is a better way according to Ms. Brown. Congress could create its own money and spend it directly instead of borrowing it and paying interest on it. This is how Lincoln built the transcontinental railroad and won the Civil War. He issued greenbacks which were money created instead of borrowed by the Federal government. This is how Franklin Roosevelt did it with the Reconstruction Finance Corporation during the Great Depression. The whole thing here is that Congress on behalf of the American people could create its own money tax free and use it any way it pleases like the Green New Deal, for example. It could be used to cancel student loan debt as Bernie wants to do.

These are radical ideas to be sure, but in the age of global warming and the neo-feudalization of the American people, radical ideas are called for. Our Grandkids will thank us for not letting planet earth go up in smoke. Presently, the whole American midsection is being flooded out because it drains most of the water from the ever increasing torrential downfalls. It is in the process of becoming just one big flood plain. Let's get radical to save planet Earth. The first step is to let the American Congress, not privately owned banks, create the money supply and use it to build infrastructure for which there is never enough money under the present system.

Off the Top of My Head

The American Dream of Owning Your Own Home is Fast Fading

by John Lawrence, April 26, 2019

Single family homes are being bought up by hedge funds while young people entering the housing market have too much in student loan and credit card debt to afford to buy one. So they are in the position of renting from a hedge fund most of which are ruthlessly and relentlessly raising rents through the roof. Few if any college graduates these days will ever own their own homes unless they go into the FIRE sector of the economy: that's finance, insurance or real estate. The financialization of the economy has left little room for anyone else except celebrity athletes and movie stars to own real estate.

Sovereignman writes:

Single-family homes were one of the last bastions of investment freedom for the little guy.

Last week a huge merger was announced between Invitation Homes (owned by private equity giant Blackstone Group) and Starwood Waypoint Homes (owned by real estate giant Starwood Capital).

If the deal goes through, the combined entity would be the largest owner of single-family homes in the United States with a portfolio worth over $20 billion.

And this is only the latest merger in an ongoing trend.

Three years ago, for example, American Homes 4 Rent bought Beazer Pre-Owned Rental Homes, creating another enormous player. A few months later, Starwood Waypoint bought Colony American Homes.

And of course, Blackstone was one of the first institutional investors to start buying distressed homes, forking over around $10 billion on houses since the Great Financial Crisis.

At one point, Blackstone was reportedly spending $150 million a week on houses.

So is it any wonder that the middle class is disappearing? US Census Bureau statistics show that over the last decade there have been an increasing number of rental households and a decresing number of households which own their own homes. Sure we're approaching full employment, but most of the new jobs being created are for waitresses and bartenders. Wages are totally stagnant. They have about the same purchasing power as they did 40 years ago. Most wage gains have gone to the top tier of wage earners. Since 2000, usual weekly wages have risen 3% (in real terms) among workers in the lowest tenth of the earnings distribution and 4.3% among the lowest quarter. But among people in the top tenth of the distribution, real wages have risen a cumulative 15.7%, to $2,112 a week – nearly five times the usual weekly earnings of the bottom tenth ($426).

So it's clear what's happening. Foreclosed on homes and distressed properties are being scooped up by the likes of Blackstone Group. Or in other words - Wall Street. The very financial firms that caused the 2008 financial crisis which caused many people to lose their homes to foreclosure are now buying up those homes and turning them into rental properties. Then they raise the rent. Home prices and rental prices are increasing by the day. Those lucky enough to own their own homes are prospering. Everyone else is faced with the situation of paying higher and higher rents. The money being poured into the economy by the Federal Reserve, which goes mostly to the rich like those operating hedge funds, raises asset prices across the board. This does not help the average wage earner who is having his rent go up or is trying to buy his first home.

Off the Top of My Head

Joe Biden Not the Man for the Job

by John Lawrence, April 6, 2019

And it doesn't have anything to do with his "touchy-feelyness." To think President Pussygrabber has the noive to accuse Joe Biden of invading someone's personal space! I guess now that's a mortal sin. Forgive me Father for I have sinned. I invaded somebody's personal space. Anyway that's not the reason Joe Biden shouldn't run. It has to do with the fact that Biden was instrumental in getting the law changed so that student loan debt is not dischargable in bankruptcy. His state of Delaware is loaded with financial corporations chartered there because conditions are so favorable for them. Joe is just too cozy with all these behemoths just as Hillary was too cozy with Wall Street. As a result of Biden's efforts for the financial industry, Americans now have about $1.56 trillion in student loan debt. Not to mention credit card debt.

Joe Biden needs to apologize. He's worthless as a Democratic candidate for President. His state, Delaware, is home to the credit card divisions of the major banks because of laws passed that favor them. In February 1981, he supported the Financial Center Development Act, legislation that dropped restrictions on interest rates and gave tax breaks and other accommodations to the burgeoning credit card sector. It’s that bill which is now credited with supporting ballooning credit card debt, and those are the roots of why most of the national banking companies with offices in Wilmington have their credit card divisions there.

So good old union supporting Joe has his hands dirty on both credit card debt and student loan debt. Elizabeth Warren is right. He should just step out of the national political scene. His time is past. Forget about his invading personal space. He has invaded most Americans financial space while supporting big banks and giving rich people advantages in the state of Delaware. Salon reported:

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was passed in April, 2005 by the U.S. Senate in a 74-25 vote, including the "yea" vote of Joe Biden, and was quickly signed by President Bush.

In light of what occurred in its wake, this law is easily one of the most disgraceful aspects of the Bush and Biden legacies. The harm it did to middle-class Americans, especially during the crushing events of the recession four years later, is immeasurable. The bill made it nearly impossible for average families to file Chapter 7 bankruptcy protection, also known as "clean slate" bankruptcies intended to discharge nearly all debts, a matter of a few years before they'd need it the most. The bill instituted an all new means test to determine whether debtors with insurmountable financial hardships earned enough income to pay back all or part of their unsecured debts, specifically credit debt. If they earned too much, a clean slate bankruptcy became impossible, and they'd be forced to file Chapter 13, which would force debtors to pay back their debt over a five-year timeline, thus legalizing neo-indentured-servitude to creditors.

Among other things, the bill also forced debtors to enroll in an "instructional course concerning personal financial management." The requirement still exists even though there's little evidence of its efficacy. Additionally, the bill made it more difficult to force creditors to stop harassing debtors for repayment after bankruptcy protection had been filed. As if all of this wasn't bad enough, the Biden-supported legislation prioritized credit card debt repayment over child support repayment, forcing women who are owed back support to negotiate with credit card companies over the debts owed by their exes. Furthermore, the term "debtor" was changed by the BAPCPA to "household" so that the new means test would take into account the total earnings of an entire household, rather than one debtor -- including, for example, a teen daughter's babysitting money.

Worse yet, the bill contained nothing to crack down on abusive practices by predatory lenders, including punitive interest rates and penalties.

Unforgivably, Joe Biden was one of the leading cheerleaders of the bill.

Joe Biden has his handprints all over the indebtedness of the middle class and the increasing split between the wealthy and everyone else. While the banks were bailed out and given free fiat money in the 2008 crisis, Americans were screwed and couldn't even file for bankruptcy thanks to Joe Biden with all his folksy charm. Don't be fooled by this guy. His time has gone. He is not the man for the job. Let him go back to hair sniffing and "pressing the flesh." Biden's son also had ties to the financial industry as reported by the NY Times:

Mr. Biden’s role in the bankruptcy debate and his ties to MNBA were immediately an issue for him after he was selected as Mr. Obama’s running mate in August 2008. A day after Mr. Biden was introduced as Mr. Obama’s choice, campaign aides acknowledged that Hunter Biden, his son, had a consulting arrangement with MBNA and that vetting the Bidens’ connections with the card issuer had been especially delicate in picking him for the ticket. Mr. Biden played down the relationship at the time, telling NBC’s Tom Brokaw that there was nothing inappropriate about his ties to MBNA.

One hand washes the other. Good 'ol Joe now can't pretend that he didn't play a leading role in the impoverization of millions of Americans and the creation of a neo-feudal society. Besides all the other advantages of doing business in Delaware, it is also a tax shelter.

There is no sales tax in Delaware. It doesn't matter if a company's physical location is in the state or not; as a Delaware corporation, no in-state purchases are subject to tax. Additionally, there is no state corporate income tax on goods and services provided by Delaware corporations operating outside of Delaware.The state does not have a corporate tax on interest or other investment income that a Delaware holding company earns. If a holding corporation owns fixed-income investments or equity investments, it isn't taxed on its gains on the state level.Delaware also does not have any personal property tax. There is sometimes a county-level real estate property tax, but that tax is very low compared to other states. Corporations can own their own office spaces and reduce the amount of property tax compared to other states.The state has no value-added taxes (VATs), it does not tax business transactions, and it does not have use, inventory or unitary tax. There is no inheritance tax in Delaware, and there are no capital shares or stock transfer taxes.

We need a true progressive like Elizabeth Warren or Bernie Sanders in the White House, not a pseudo, phony like the Clintons, Obamas and Joe Biden. Remember it was Bill Clinton who supported the overturning of Glass-Steagall which separated commercial from investment banking and precipitated the 2008 financial crisis.

 

Off the Top of My Head

An Alternative to SWIFT?

by John Lawrence, September 6, 2018

It has become apparent that the US controls the world's monetary system and has weaponized it. Sanctions are used to punish other countries, corporations and individuals. Some of these sanctions are even used to punish US allies if they don't march to the lockstep of the Trump administration. For instance, any US ally that does business with Iran could have sanctions imposed on them. French corporations like Total which have contracts with Iran are forbidden by the US from continuing doing business with them.

Behind most international money and security transfers is the SWIFT system, a vast messaging network used by banks and other financial institutions to quickly, accurately, and securely send and receive information such as money transfer instructions. Every day, nearly 10,000 SWIFT member institutions send approximately 24 million messages on the network.

So any international transfer of money involves SWIFT, and the US controls SWIFT. Therefore, it can tell SWIFT just not to do any transfers of money from entities that it has sanctioned. This brings commerce to a halt. The important take away is that SWIFT is controlled by the US, not some unbiased and impartial international institution and can be used to impose sanctions.

Investopedia has a simple explanation for how SWIFT works:

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications. It is a messaging network that financial institutions use to securely transmit information and instructions through a standardized system of codes.  

SWIFT assigns each financial organization a unique code that has either eight characters or 11 characters. The code is called interchangeably the bank identifier code (BIC), SWIFT code, SWIFT ID, or ISO 9362 code. (See related: What's the difference between an IBAN and a swift code?) To understand how the code is assigned, let’s look at Italian bank UniCredit Banca, headquartered in Milan. It has the 8-character SWIFT code UNCRITMM.

• First four characters: the institute code (UNCR for UniCredit Banca)
• Next two characters: the country code (IT for the country Italy)
• Next two characters: the location/city code (MM for Milan)
•  Last three characters: optional, but organizations use it to assign codes to individual branches. (The UniCredit Banca branch in Venice may use the code UNCRITMMZZZ.)

Assume a customer of a Bank of America branch in New York wants to send money to his friend who banks at the UniCredit Banca branch in Venice. The New Yorker can walk into his Bank of America branch with his friend’s account number and UnicaCredit Banca’s unique SWIFT code for its Venice branch. Bank of America will send a payment transfer SWIFT message to the UniCredit Banca branch over the secure SWIFT network. Once Unicredit Banca receives the SWIFT message about the incoming payment, it will clear and credit the money to the Italian friend’s account.

Most Americans have never even heard of SWIFT. That's because most Americans are ignorant of how the financial system really works. In the good old days when everybody thought the US was really benign, it was thought by the international community that it was a good idea to let the US control the world's financial system. Now other countries, especially those that have been sanctioned, are not so sure. They are exploring alternatives to US controlled financial institutions that would avoid US sanctions.

Off the Top of My Head

Uber and Lyft Work For Me

by John Lawrence, June 25, 2018

As a recent retiree, I found that I wasn't quite meeting monthly expenses without taking money out of my reserves. This was not a good situation as eventually my reserves would be totally depleted. So the wolf was getting closer and closer to the door. When the reserves get down to zero, the wolf is at the door, and, finally, he gets inside, and the next thing you know, you're on the street. Not a good situation.

Luckily, I got the idea of replenishing my reserves by driving for Lyft and Uber. I'm glad I checked them out. Before long I was significantly adding to my reserves on a weekly basis, and the work was fitting completely into my lifestyle as a retiree. I still got my swim and my nap in. Anything else that came up that I wanted to do, I did that too. As someone said once, "You're never late for work." That's because you have complete and total control over your time. You do it when you want to do it, and, when you don't, you don't. There are not too many jobs that require essentially no training (I got 15 minutes with Lyft), no credentialing, no course taking, nothing but a good driving record and a decent car. It sort of puts the kibosh on 5 years of college and a ton of student loan debt.

I've heard a lot of blather about how Uber and Lyft drivers get no "employee benefits" because they are self-employed. It's BS. I was self-employed for 40 years of my life as a window cleaner. Not only do you get no employee benefits as a self-employed person, but you have the privilege of paying both the employer's and the employee's social security contribution which amounts to approximately 15% of your income. Still it's worth it to be your own boss in my opinion, and have the freedom to decide when and where you want to work.

Employee benefits don't amount to too much in my opinion. They used to have "defined benefit" pensions. That meant that you paid a little money to your employer out of your paycheck, and your employer invested that money so that, when you retired, you got a monthly check. However, all that money you paid in belonged to your employer, not you, so that when you died, your employer kept the rest of the money. It did not go to your heirs. Sweet for your employer, a screw job for you and your family.

Now they have the "defined contribution" retirement plan or 401(k). You can contribute part of your paycheck to the stock market. There is no guarantee that you'll ever realize enough from it to pay your monthly expenses when you retire. If the stock market crashes, you may lose all your money. It's basically a plan that enriches Wall Street. You still do not have control over your investments so, for instance, you can't invest in real estate.

As a self-employed person, you have to think about investing on your own terms so that the wealth you create can be passed down to your heirs and not go to enrich some corporation or Wall Street. For me, that meant real estate. So the idea is that you have to be in the business of creating wealth not just living on a monthly stipend as wages when you're working and a pension when you retire. Creating wealth means that you will be able to cash that in when you can no longer work. Hopefully, you will have enough at some point so that you don't have to work. You will have a nestegg or reserves.

That's where Uber and Lyft came in. I found that my nestegg wasn't big enough to sustain me even when my rental and social security income was taken into account. My social security income was about equivalent to what I can make in one week with Lyft and Uber, and that's even after the privilege of paying both the employee's and employer's share into it. I pity the other seniors who have to live off of that. Fortunately, I did invest in California real estate early on so I have some rental income. It's just not quite enough, that's all. I should have take this wealth creation bit more seriously, but that's not how I (or most people my age) were raised. I was raised to be an employee and have my employer take care of me. (Actually they were mostly taking care of themselves.)

So driving for Lyft and Uber, getting my swim and my nap in each day, and getting the wolf farther and farther from my door is a happy situation for me. I have a 5 year plan. When my new Toyota Camry Hybrid is 5 years old, it will probably be shot with the miles I'm putting on, and I will probably be shot too. At that time, I will probably be able to live off my reserves as a supplement to my other monthly income, and I will have the knowledge that I can pass it all on to my heir when the time comes for me to depart the planet.

10 Financial Resolutions for 2018

From Wallethub:

Roughly 45% of Americans make New Year’s Resolutions each January, and since money is our top stressor, it’s clear that many of them will be financial in nature. In recognition of that, WalletHub today announced its 10 Financial Resolutions for 2018 to help as many people as possible reach top financial fitness in the new year. This report comes on the heels of WalletHub’s 8 Financial Predictions for 2018, helping to provide a roadmap for financial improvement after the ball drops.

Below you can find a quick rundown of our resolutions, which are based in part on conversations with a panel of leading finance and consumer psychology experts.

1. Sign Up for Credit Monitoring
2. Pay Bills Right After Receiving Your Paycheck
3. Repay 20% of Your Credit Card Debt
4. Use Different Credit Cards for Everyday Purchases & Debt
5. Add One Month’s Pay to Your Emergency Fund
6. Improve Your Credit Score by 20 Points
7. Get an A in WalletLiteracy
8. Focus on Your Physical Health
9. Make a Realistic Budget & Stick to It
10. Look for a Better Job

For additional context and advice related to each resolution, plus a complete Q&A with our panel of experts, please visit:  https://wallethub.com/blog/financial-new-years-resolutions/9202/

Off the Top of My Head

Screwy Capitalism: When a Hedge Fund Runs a Profitable Company into Bankruptcy

by John Lawrence

Hedge funds are leveraged buyout artists. They borrow huge sums of money in order to buy up all the outstanding stock of some company. Then they make that company, not the hedge fund, responsible for repaying the debt. In many cases they can't do it and so go bankrupt. Meanwhile, the hedge fund managers have paid themselves handsomely out of the borrowed money which again is money owed to Wall Street banks by the company not the hedge fund managers. Another name for hedge funds is private equity funds. The game is the same. Borrow in such a way that the borrowers are not responsible for the debt. This is not what capitalism is all about, but is what it's morphed into.

Instead of investors taking risk, the useful work of private equity, they make risk for others, what John MacIntosh called its malevolent doppelganger. After stripping the company of any asset that can be stuffed into the pockets of the hedge fund or private equity managers, the risk associated with the weakened company is largely borne by its employees, suppliers and customers who get little (if anything) in return.

This is exactly what happened to Toys R Us recently. The Toys "R" Us debacle began in 2005 when private equity firms bought the company for $7.5 billion. Over the last 12 years, this original "take private" deal has probably sucked more than $5 billion out of the company: $470 million in "advisory" fees and interest to the private equity firms and $4.8 billion ($400 million per year for 12 years) in interest on the acquisition debt plus the tens of millions of dollars in legal fees Toys "R" Us will spend in bankruptcy. (It's ironic that the investors who bankrupted the company won't be paying any of these fees.) Yet despite a tough retail environment, Toys "R" Us actually made $460 million from selling toys in 2016 but that didn't help much since all of it -- 100% -- went to pay interest on the debt.

The media portrays the Toys R Us bankruptcy as the plight of brick and mortar stores being handed their lunch by online retailers such as Amazon. Nothing could be further from the truth. The bankruptcy had to do with a transfer of money from the 99% such as the employees and suppliers to the 1%, the bankers, lawyers and financiers. Since all the interest paid was tax deductable, taxpayers also got screwed.

The extreme perversity of this situation is that the borrowers of money are not on the hook to pay it back. If you borrow money to buy a car or a house, you are on the hook. Not so when the borrowed money is used to buy a company. The limited liability corporate structure developed in the mid-19th century as a "corporate veil" to encourage investors to put money into companies is what allows investors to take money out without being on the hook. This law can and should be changed so that hedge and private equity funds cannot bankrupt companies, load them with debt, screw the employees, make them take less in wages, destroy their unions and raid the pension funds. A country that allows this to happen is intent on increasing the economic divide between rich and poor.

These leveraged buyout artists are nothing but parasites preying on and destroying companies for their own profits. They do nothing constructive in the process!

A sane economic system would not let this happen. You can have a system which encourages entrepreneurship and economic growth without the perverse economic ramifications of American capitalism.

The Financialization of America

by John Lawrence from the San Diego Free Press

The Business of America is No Longer Business - It's Finance

The rich today are making money not from making things, but by manipulating money. This is being done in such a way that it is driving the inequality process. It is ruining the middle class while exporting their jobs. The tax structure of the US engineered by Ronald Reagan, Alan Greenspan and their Republican followers has incentivized the creation of great wealth in a few hands while driving the majority of people into poverty. So-called trickle down economics has only spurted up. While the rich have many ways of escaping paying taxes, the middle class is stuck with paying them to a larger and larger extent. The government needs money to operate, and, if the rich don't pay their fair share, the middle class has to make up for it. US tax policy makes sure that it does.

GE used to be a company that made things - refrigerators, stoves, appliances of every kind and stripe. But in the 1980s under CEO Jack Welsh and pressure from Wall Street to be more profitable, they started to concentrate more on the GE finance division at the same time as they started shipping jobs overseas. GE Capital became the largest issuer of commercial paper in the world and borrowed billions of dollars to make even more money. GE Capital made up 60 percent of GE’s earnings growth between 1990 and 2005. “Under Welch, GE came to rely on financial wizardry rather than new technological breakthroughs to satisfy investors,” Rana Foroohar writes in her book Makers and Takers: The Rise of Finance and the Fall of American Business.

One might ask why pressure from Wall Street to become more profitable is even a relevant consideration. Why should Wall Street be dictating to GE? Why does Wall Street know more about GE's business than GE does? Wall Street controls a lot of the levers that GE needs to stay in business. They recommend stock buys and sells; they control the flow of investor money. They control most everything concerning whether the company is profitable or not. Main Street is intimidated by Wall Street. They can give a thumbs up or a thumbs down, and they're only interested in short term profits. The needs of investors, not the needs of average middle class people, are paramount.

This is From Finance is Ruining America:

But as GE Capital was making money, GE was laying off staff, outsourcing jobs, and shifting more costs onto employees. Welch laid off 100,000 in five years and cut research-and-development spending as a percentage of sales by half, according to Foroohar. GE closed an Indiana refrigerator plant and relocated some of the production of models to Mexico. It cut 2,500 jobs in a turbine division to save $1 billion. In 2007, it shuttered a 1.4 million-square-foot plant in Bridgeport that had once, in the heyday of American manufacturing, made clocks, fans, radios, washing machines, and vacuums, and employed thousands of people. In short, investors were getting wealthy, but working class-people weren’t sharing the rewards. Instead, they were losing their jobs.

Executives Get Stock Options to Avoid Paying Taxes

Executives are increasingly taking their pay in the form of stock options and then doing whatever is necessary to drive short term stock prices up so they can cash in. Capital, including stock, is taxed at a lower rate than is income from actually working for a living. While the average slob pays taxes through the nose, the rich get a free ride.

Especially payroll taxes, which are impossible to escape, are stacked against the poor and the middle. They amount to a regressive flat tax, the kind conservatives are for and progressives are against. Progressive taxation means that those who make more pay a higher percentage, but payroll taxes are worse than regressive. If you're rich, you will pay a diminishing percentage of your income for FICA taxes because only $118,500. of your income is subject to the tax. Everything beyond that is tax free. But if you're self-employed, you will pay both the employee's and the employer's share of payroll or FICA taxes. The self-employed person's FICA tax rate for the year 2016 consists of the Social Security tax of 12.4% (6.2% + 6.2%) of the first $118,500 of net income plus the Medicare tax of 2.9% (1.45% + 1.45%) of every dollar of net income for a grand total of 15.3%, and that's before you even pay income tax!

One of the tricks corporations use to drive up short term stock prices is to buy back their own stock. The stock's value eventually falls again but not until after executives have cashed in. The investor class can take advantage of all these short term vagaries in the stock market while the working person with a 401(k) lacks the financial sophistication and literacy to do so. So working for a living sucks when the real money is being made by the "investor class" including hedge fund managers. CEOs figure out ways to drive up profits and get the approval from Wall Street by moving their companies, as well as their jobs, overseas to low tax or no tax jurisdictions. When stocks soar, CEOs cash in. The government then has to raise taxes on the middle class.

It is not hard to understand why the rich are getting richer and the poor, poorer. That's the way present day America is set up. While Republicans want to lower taxes, what they don't tell you is they want to lower taxes primarily on the rich. Any lowering of taxes on the middle class is puny in comparison with the result that taxes, in one form or other, are actually raised on the middle class by other means such as usage fees. The only other alternative is for the US to go further into debt. But US government debt is no big deal any more as long as Fed policy keeps interest rates low which also cheats savers out of any return on their money. But if the Fed raised interest rates, the US government would have to pay more on its Treasury bonds, and that would drive government debt even higher.

Investors Helping the Homeless - NOT

Much less investor money today is going into productive investments - investments that actually create jobs. According to a study from the Roosevelt Institute, every dollar of earnings or borrowing used to be associated with a 40-cent increase in productive investment. Since the 1980s, though, less than 10 cents of each earned or borrowed dollar is invested. This means fewer jobs created and more money winding up as shareholders’ profits.

Even "productive" investments provide millions of dollars for trivial games like Pokemon Go. At the same time the world is crying out for investments to forestall global warming, reduce poverty, house the homeless and repair roads and bridges. The way America is set up, however, investor money only goes to software trivia which creates few jobs instead of being for a multitude of other things which might solve vital problems. The world plays games while the earth burns and people are forced out on the streets because they can't pay skyrocketing rents. As Warren Buffet has said, "My class - the rentier class - has won the class struggle."

As an example of the trivial apps that investors are willing to spend millions of dollars on, the San Diego Union reported on October 1, 2016 about Metaverse, "a kind of parallel universe that employs augmented reality in the same fashion as Pokemon Go." Just what the world needs now, right? That app will take people on a scavenger hunt through the streets of San Diego in search of a $500 cash prize. Whoopee!! This company, GoMeta Inc, will provide you with another way to waste your time and investor money as if Pokemon Go wasn't enough. "Pokemon Go showed people that it's fun to walk around and discover things in the world," said Dmitry Shapiro, 47, who is CEO and co-founder of GoMeta. "And we're saying, 'Yes!'" I'm sure all the homeless in downtown will be very amused especially at the prospect of finding the $500. And the "scavengers" will have to watch a thousand ads while they're in the process of scavenging. That's how the company makes money. After all it's a "free" app.

The Union reported that "the local company behind it has raised an undisclosed sum of seed funding...". You see money is available for such bullshit trivia such as this, but money isn't available to solve the problems of homelessness or global warming. That's the way capitalism works. Americans play trivial games while earth burns and people are forced to live on the public streets. And a few guys will probably get rich. If this is what you call job creation, then you can have it. Money is available for entertainment, and we're being entertained to death. Do you suppose I would get any "seed funding" if I started a company to provide housing for the homeless?

To add insult to injury in terms of the way capitalism circa 2016 works, it was reported in the October 7, 2016 Union (Snapchat May Have $25 Billion IPO in Focus) that Snapchat, an app that was developed to facilitate sexting, is now going for an IPO which will net the company $25 billion. What for? There's no labor intensivity in an app like Snapchat. It'll all go to make the execs billionaires.

Snapchat also allowed people to take photos of themselves while going 100 mph. The New York Times reported (Snapchat at 107 M.P.H.? Lawsuit Blames Teenager (and Snapchat)):

Even in the age of social media, this particular selfie seemed extreme: a teenager strapped into a gurney, with blood running down her forehead, somehow taking the time to tap out a message to her Snapchat friends: “Lucky to be alive.”

The selfie quickly went viral and is a component of a lawsuit filed by a Georgia man accusing the teenager, Christal McGee, of recklessly using Snapchat while driving over 100 miles per hour and slamming into his vehicle last year, leaving him with severe injuries. He is also suing Snapchat, accusing the company of negligence.

So these guys who developed Snapchat are now to become billionaires? Where is the IPO for global warming? Where is the IPO for the homeless? That's just the way our economic system works. What the world doesn't need now is another app especially one like Snapchat. But they are rewarded while those who try to do good work get shafted. Rewarding those who don't deserve it while leaving the deserving by the wayside. And the economic divide widens. The rich get billions while there is a big fight over a few dollar increase in the minimum wage.

Why There’s a Bull Market for Stocks And Bear Market for Workers

by Robert Reich

Tuesday, March 5, 2013

Today the Dow Jones Industrial Average rose above 14,270 – completely erasing its 54 percent loss between 2007 and 2009.

The stock market is basically back to where it was in 2000, while corporate earnings have doubled since then.

Yet the real median wage is now 8 percent below what it was in 2000, and unemployment remains sky-high.

Why is the stock market doing so well, while most Americans are doing so poorly? Four reasons:

First, productivity gains. Corporations have been investing in technology rather than their workers. They get tax credits and deductions for such investments; they get no such tax benefits for improving the skills of  their employees. As a result, corporations can now do more with fewer people on their payrolls. That means higher profits.

Second, high unemployment itself. Joblessness all but eliminates the bargaining power of most workers – allowing corporations to keep wages low. Public policies that might otherwise reduce unemployment – a new WPA or CCC to hire the long-term unemployed, major investments in the nation’s crumbling infrastructure – have been rejected in favor of austerity economics. This also means higher profits, at least in the short run. 

Third, globalization. Big American-based corporations have been expanding and hiring around the globe where markets are growing fastest – even while the U.S. market is lackluster. Tax policies and trade policies have encouraged them.

Finally, the Fed’s easy-money policies. They’ve pushed investors into the stock market because bond yields are so low. On Tuesday, the yield on the 10-year U.S. Treasury note was just 1.9%.

All of this spells widening inequality in America, because the people who invest the most in the stock market have high incomes. Those who rely most on wages have lower incomes.

Corporate profits are claiming a larger share of national income than at any time in 60 years, while the portion of total income going to employees is near its lowest since 1966.

As my colleague Immanuel Saez recently found, all the economic gains between 2009 and 2011 (the last year for which data were available) went to the richest 1 percent of Americans. The bottom 99 percent has continued to lose ground.

And yet the tax code continues to give preference to capital gains over ordinary income — a huge boon to investors.

The sequestration is likely to make all this worse, since it will slow the U.S. economy and keep unemployment higher than otherwise.

It will also hurt the most vulnerable. Some $1.9 billion in low-income rental subsidies are being eliminated, affecting 125,000 people. Cuts to the Department of Agriculture will eliminate rental assistance for another 10,000 low-income rural people. Meanwhile, 100,000 formerly homeless Americans are likely to be removed from their current emergency shelters.

More than 3.8 million Americans receiving long-term unemployment benefits will have their monthly payments reduced by as much as 9.4 percent, and lose an average of $400 in benefits over their period of joblessness.

The Department of Education’s Title I program, which helps schools serving more than a million disadvantaged students, will be cut $715 million, and $400 million will be cut from Head Start, the preschool program for poor children. And major cuts will be made in the Special Supplemental Nutrition Program for Women, Infants, and Children, which provides nutrition assistance and education.

The health of an economy is not measured by the profits of corporations headquartered within it or the value of its stock market. It depends, rather, on how many of people have jobs and whether those jobs pay decent wages.

By this measure, we are a long way from economic health. Rarely before in American history have public policies so blatantly helped the most fortunate among us, so cruelly harmed the least fortunate, and exposed so many average working Americans to such widespread insecurity.

Why Neither Stimulus Nor Austerity Will Work to Revive Western Economies But Redistribution Will.

by John Lawrence

Think back a couple hundred years ago - before industrialization when economic life was much simpler. Let's assume that when a good or service was purchased, that the person who received the money spent it all - no savings. Therefore, money was circulated just like water can be circulated in a closed pipe. If the pipe makes a circle, then all that is needed to keep water flowing through the pipe is a pump. Similarly, when the blacksmith received $10. for shoeing a horse, we can assume that he took that money and spent it at the grocery. The grocer then took that same $10. and spent it with the farmer. The farmer took the money and spent it at the haberdasher's and so on. So the same $10. gets passed around from person to person until it lands back up at the blacksmith's again and the process repeats itself over and over. As long as all the yeoman in any given village have a good or service they can sell and as long as the money flows through the hands of each person in the village, that same $10. is used over and over; it is circulated round and round just like the water in the pipe. As long as the money flows fast enough, everyone can purchase what they need and business is good. GDP is a measure of how many transactions occur in any given year. The faster the money flows through the system, the greater is GDP.

Now what happens when one of the participants saves some of the money instead of spending it all? Then there is less money to flow through the system and economic activity and hence GDP will be lower. The more money that is saved, the more economic activity will decrease until the money supply is inadequate to meet people's needs. It is a well known fact that, when consumers spend more and save less, economic activity and GDP increase. That's why George W Bush sent everybody a check and told them to go out and spend it. When economic activity decreases enough, a recession or a depression occurs. In the US consumer spending accounts for 70% of GDP so, if consumer spending decreases, economic activity decreases. This would happen in the simple economy described above if, instead of the blacksmith spending his money at the grocer's, he saved it instead. So saving decreases economic activity and GDP. There is one caveat to that and that is, if instead of the blacksmith saving the money, he invested it by expanding his business and created a couple of additional jobs. Then those additional workers would also go out and spend their paycheck adding to economic activity.

When the economy goes into recession two things happen. Government revenues from taxes decline and consumers spend less because they have less money to spend. Keynsianism is a philosophy that says that the government should borrow money in a recession and spend it into the economy thus creating jobs and increasing economic activity or at least preventing starvation and dire need. The other way that economic activity can be expanded is for the central bank to loan money to banks which then loan it to businesses who want to expand their businesses thus creating jobs. So money is injected into the economy either by the government borrowing money or by the central bank printing money in the form of a loan. In either case debt is created and the economy becomes a debt based economy.

If we think of money circulating similar to water circulating in a network of pipes, if a business or an individual saves a portion of the money instead of spending it, there is a continual need for money creation to keep up the same level of economic activity. That's why capitalism has to be a growth based economy. When there was one blacksmith for every village, saving money was not a problem since the income from blacksmithing over the economy as a whole was dispersed to many blacksmiths who all spent most of it keeping it in circulation. If one blacksmith captured most of the business - let's say he called his business Blacksmiths Are Us - and franchised it throughout the whole economy, then all the profits would flow to one person - more or less - and money would be continually taken out of circulation necessitating growth and debt based money creation by the government or private businesses just to provide enough jobs to keep money circulating to all people with economic needs. Money saved and not spent is similar to water in a system of pipes entering a cul de sac or black hole from which it never emerges or to being siphoned off never to return to mainstream circulation.

In today's economy money is continually siphoned off by the major corporations who have not only nationalized but who have internationalized. It's as if Blacksmiths Are Us has gone global. That money which is taken out of the real economy goes into the financial economy which is a black hole from which money never emerges again into the real world economy. So there is a continual need for either the central bank to print money (increase the money supply) or for the government to prime the pump with debt based stimulus money (the fiscal method).

In a western capitalist economy there is a continual need for money to be created either by government borrowing and the provision of fiscal stimulus or by means of the central bank loaning money into the banking system. The only problem is that today, when the Federal Reserve (the central bank) loans money to other banks, the money goes not into the real economy where jobs are created but into the financial or casino economy. In other words it goes to rich people like Jamey Dimon of JP Morgan Chase or Lloyd Blankfein of Goldman Sachs who don't spend it in the real economy but who gamble it in the casino economy so it doesn't do too much good for the creation of jobs which provides for the distribution of money to all who need it. A job is seen as the only legitimate means for an economic unit to acquire the money it needs to meet its needs. Of couse, just giving the money to all who need it would increase economic activity and GDP, but that isn't seen as legitimate. Similarly, when the government borrows and spends, the money also does not circulate much since it is soon siphoned off by the Wal-Marts, the Exxon Mobils - the modern day versions of Blacksmiths Are Us - where it ends up in the financial economy. There is no very good way to keep the money circulating in the real economy since large corporations are siphoning it off at every turn which means that either the central bank has to keep printing money or the government has to keep borrowing and spending money, the Keynesian approach.

Therefore, neither the method of giving money to rich people through zero interest loans nor fiscal stimulus requiring more government debt will work in today's economy. Paul Krugman, who advocates fiscal stimulus and more government borrowing, is wrong and the Republican supply siders who advocate giving more money to the rich are also wrong. Obviously, the central bank cannot go on indefinitely printing money because of the devaluation of the currency and subsequent inflation and the government can not go on indefinitely borrowing money because interest on the debt eventually consumes all expenditures so what is the solution? Giving more tax breaks to the rich only compounds the problem of money being siphoned off from the real economy, taken out of circulation and placed in the financial or casino economy where it circulates only among the financial elite. The Republican solution is to speed up the process of redistributing money from the poor and middle class to the rich even more.

The only viable solution is to redistribute the money from rich to poor. The money that has been siphoned off and taken out of circulation by the Wal-Marts and Exxon Mobils of the world needs to be siphoned back into the real economy where it can continue to circulate. Too much money is ending up in the cul de sacs where it never reenters the real economy but instead circulates endlessly in the casino economy among very rich people. 300 years ago when the economy was much simpler and consisted of a yeomenry who provided a good or service and spent all the money they took in, money circulated endlessly in the real economy. Today, Wal-Mart and Exxon Mobil take most of the money out of the real economy in the form of profits. That money leaves the real economy and enters the financial economy which is a big black hole as far as the real economy is concerned. In order not to increase the money supply endlessly or to require the proliferation of new products and services, which provide a temporary increase in economic activity, new jobs and circulation of money to a wider distribution of individuals and families, money has to be recirculated and redistributed into the local real economy. And in order for the Federal Government not to have to borrow money endlessly, it needs to siphon money from the rich who won't spend it and redistribute it to the poor and middle class who will. In this manner the economy needs not to be based so much on debt based growth but can become more of a steady state, balanced economy. Money siphoned off by Blacksmiths Are Us is siphoned back again and redistributed to the local blacksmiths where it can circulate in the real economy again.

Another way the economy can grow without creating debt or increasing the money supply endlessly, which means just fueling the casino economy, is to take Ellen Brown's suggestios from her book Web of Debt, and that is for the central bank to not loan money into the economy with zero interest loans to the big banks, but instead to spend the money into the economy for infrastructure projects and the like. Thus the money supply is increased as needed without the creation of debt. This is the method Abraham Lincoln used to fight the Civil War and to build the transcontinental railroad. It is estimated he saved the nation $4 billion in interest by spending the money into the economy with greenbacks instead of loaning it into the economy at interest.

Taxing the rich amounts to siphoning back money which has been siphoned off from the real economy in the first place and putting it back into circulation amongst a wider distribution of people. The Blacksmith Are Us franchisees supply a uniform blacksmithing experience for weary travelers regardless of which village they happen to be in. As such they take business from the Mom and Pop blacksmiths and concentrate wealth at the central headquarters of Blacksmiths Are Us. We imagine that no matter which village George Washington or Thomas Jefferson was in, they could count on the fact that their blacksmithing needs were met with satisfaction when they shopped at Blacksmiths Are Us. However, this would diminish the amount of money in the real local economy due to the fact that the business of the local blacksmith would diminish since the profits would be shipped elsewhere.

A final note: with all the economic turmoil in Europoe over the eventual default by Greece on its loans and the fact that this could create economic chaos, instead it could be seen as an opportunity for Greece to set up its economy as non-debt based by having its central bank spend fiat money into the economy thus creating jobs and distributing income until the economy picks up steam of its own accord. Thus Greece could drop out of the eurozone with it's western debt based economic methods and align itself more with the non-western world to create a non-debt based society instead of one drowining in debt as it is presently constituted.

First World Governments Drowning in Debt

by John Lawrence

 

In her excellent book, "Web of Debt," Ellen Brown questions the whole notion that governments, whether they be the US or the Eurozone, should have to go into debt to private bankers such as Goldman Sachs and Deutsche Bank to get the money they need to finance their operations. Consider the Federal Reserve which is the primary creator of the money supply in the US. It is neither Federal nor is it a reserve. It is a private bank which creates money as an accounting entry on a computer screen. Recently, it loaned over $7 trillion to private banks at a ridiculously low .01% interest rate. That wasn't money it held in reserve; it was money that was "printed" or rather created out of whole cloth. And who do you think sits on the Board of the privately owned Federal Reserve? Jamie Dimon, CEO of JPMorgan Chase! Do you think that the Federal Reserve acts in the interest of anyone other than the large, too big to fail, banks? The banking system prints or creates money all the time, and not only central banks do it. It has been a longstanding practice of banks everywhere to loan out more money than they hold in deposits. This is called "fractional reserve" banking. For example, when a bank takes in $100 in deposits, it will loan out $1000 figuring that that will be sufficient for depositors who wish to redeem their deposits. Unless there's a run on the bank, that usually is sufficient. So money is created by the private banking system all the time and on a daily basis. Many multiples of the banks' deposits are then loaned out at interest.

Individuals, businesses, corporations and governments then borrow money from private banks to meet their needs for expansion and simply to pay their bills. The US government, for example, borrows the money it needs to function essentially from Goldman Sachs and other large banks and then pays interest to those banks. This happens because the US sells Treasury bonds to those large institutions in return for money to fund its wars and pay social security and medicare recipients among other things. The taxpayers are then on the hook for paying the interest on these bonds. Goldman Sachs got the money in the first place from the Federal Reserve so that by means of a little bit of subterfuge (the Federal Reserve cannot by law loan money directly to the US government), money is transferred from the privately owned Federal Reserve bank, which it created out of thin air, to the US government with interest to be paid by the taxpayers to private banking interests.  This begs the question that Ms. Brown makes a central point of her book: if a private central bank can increase the money supply by creating money out of thin air as an accounting entry on a computer screen, why can't the government itself create the money to fund its needs? In particular, if the government created the money instead of the private banking system, taxpayers wouldn't be on the hook for the interest payments which are rapidly eating up an ever increasing share of the Federal budget. Interest on the national debt is projected to be $241.6 billion in FY 2012; it will only increase every year as the national debt goes up. The question is why should US taxpayers pay interest to private bankers on the money loaned to the US government which was created by private bankers when the US government itself could just as well have created the money interest free?

The same line of reasoning holds for the Eurozone which is caught up in a debt crisis in which the private banking system is raising interest rates for countries that it considers weak. The rising interest rates make countries such as Spain and Italy even weaker and all this is being fueled by speculators who are shorting the bonds of these countries. Derivative trading such as shorting drives up interest rates since it makes it seem that investors are selling rather than buying the bonds of those countries.

The process of shorting can be simply explained as follows. Suppose my neighbor buys a lawnmower for $500. I then ask to borrow my neighbor's lawnmower to mow my yard. As I'm mowing, another neighbor drives by and offers to buy the mower for $450. As it happens, I know about a sale at the local Sears where I can buy the same exact lawnmower for $400. So I sell the lawnmower for $450., rush down to Sears and buy another one for $400., return the mower to the neighbor I originally borrowed it from and then pocket the $50. profit. Now in the dark world of derivatives markets it's not even necessary to borrow anything from a preexisting owner in order to short sell. These trades are called "naked shorts." The whole effect will drive up interest rates in Greece and Italy making their borrowing costs to turn over their loans even more expensive and hasten the day when these countries will default. Speculators stand to make big money if and when a Eurozone country does default because they have placed large bets on this outcome. It is to be noted that the European Central Bank (ECB) has the same deal that the US Federal Reserve has in that it can't give money directly to one of its member countries. Monies have to be funneled through banks. This means that they are subject to the machinations of the bond market and speculators. If the ECB created the money directly and then loaned it to member countries, the interest rate could be maintained constant as speculators would be eliminated and it would be lower as the private bankers would not be getting their cut.

If the whole notion of a central government creating the money supply as opposed to a private central bank creating it seems radical to you, please bear in mind that this is exactly what Abraham Lincoln did to fund the Civil War and the economic expansion following it including the transcontinental railroad, the land grant colleges and the Homestead Act which gave away free land to settlers in the west. Greenbacks were government created currency which was spent into the market. Today Federal Reserve notes are created by the privately owned Federal Reserve and are the official US currency. Ellen Brown maintains that any government can create a fiat currency. This simply means that the government created currency is declared to be the legal currency of that government. It doesn't have to be backed by gold or anything else. It is the official currency just because the government says it is. Ellen Brown characterizes the Greenback era as follows:

How was all this accomplished with a Treasury that was completely broke and a Congress that hadn't been paid themselves? ... Lincoln tapped into the same cornerstone that had gotten the impoverished colonists through the American Revolution and a long period of internal development before that: he authorized the government to issue its own paper fiat money. National control was reestablished over banking, and the economy was jump-started with a 600 percent increase in government spending and cheap credit directed at production. A century later, Franklin Roosevelt would use the same techniques to pull the country through the Great Depression; but Roosevelt's New Deal would be financed with borrowed money. Lincoln's government used a system of payment that was closer to the medieval tally. Officially called United States notes, these nineteenth century tallies were popularly called "Greenbacks" because they were printed on the back with green ink (a feature the dollar retains today). They were basically just receipts acknowledging work done or goods delivered, which could be traded in the community for an equivalent value of goods or services. The Greenbacks represented man-hours rather than borrowed gold. Lincoln is quoted as saying, "The wages of men should be recognized as more important than the wages of money." Over 400 million Greenback dollars were printed and used to pay soldiers and government employees, and to buy supplies for the war. The Greenback system was not actually Lincoln's idea. but when pressure grew in Congress for the plan, he was quick to endorse it. The South had seceded from the Union soon after his election in 1860. To fund the War between the States, these Eastern banks had offered a loan package that was little short of extortion - $150 million advanced at interest rates of 24 to 36 percent. Lincoln knew the loan would be impossible to pay off. He took the revolutionary approach because he had no other real choice. The government could either print its own money or succumb to debt slavery to the bankers.

So the war and the economic development following it were financed with goverment created fiat money, the Greenback. This would be perfect today for funding the $2 trillion in infrastructure repair and rebuilding that the IEEE claims is needed - in other words an infrastructure bank. This would solve a lot of the US' unemployment problems as well as bringing the US infrastructure up to par with China and other countries which are modernizing their infrastructure at rates far exceeding the US. The Eurozone ECB could also print or create euros without borrowing or funneling them through private bankers and subjecting the economies of certain countries to the whims of speculators. For the US it would be simple to move the Federal Reserve into the Treasury Department, transfer ownership to the public sector and keep the fact that the chairman would be appointed by the President. To keep its autonomy, Congress should not have the ability to interfere with the newly created Federal Reserve just as the situation exists now. So what would change? Only that the money created would be the equivlent of Greenbacks which would be non-interest bearing notes. Government created money would not be money that the government would have to pay interest on to private sector banks. These Greenbacks could coexist with Federal Reserve notes so that there would be two forms of currency in circulation both of which would be legal tender. Therefore, Federal Reserve notes would not have to be recalled. The new system could be created overnight with a minimum of disruption to commerce.

The Eurozone probably operates the same way. I'm not an expert but I surmise that the large European banks such as Deutsche bank, Societe Generale and ING loan money to Eurozone countries at interest. Even Goldman Sachs, since it is an international bank, probably has its finger in the pie of Eurozone money creation.  Even money created by the ECB needs to be funneled through these banks before it gets into the coffers of the respective Eurozone countries. This means that not only are countries such as Greece and Italy paying interest to the large European and international banks but the interest rates they are paying are subject to market speculation which drives them up even more. If the ECB issued euros directly instead of letting the large banks do it, the interest rate could be carefully controlled, the rates wouldn't be subject to speculation and the interest paid would go into the coffers of the ECB instead of into the coffers of large private banks.

Individuals and families in the US and throughbout the world are increasingly indebted to private banks for mortgage debt, student loan debt and credit card debt. Easy credit and low initial interest rates as well as declining wages have induced much of the population to go into debt in the same way that countries have gone into debt. Ultimately, these levels of debt are unsustainable especially if today's historical low interest rates start to rise. Of course the banks' major goal is to have everyone in debt paying interest money to them as a major part of their expenditures. If everyone is a debt slave, the banks are in the position of owning most of society's assets. Ellen Brown's ideas about taking money creation out of private bankers' hands and putting it into the hands of central governments strikes at the core of capitalist economics which assumes that money creation remains entirely privatized. However, other countries such as China have shown that government owned large banks can be a boon to economic development and growth.

Also in the US state owned banks such as the Bank of North Dakota maintain that state in a healthy economic condition compared to the US as a whole. Interest collected on loans goes back into state coffers defraying taxpayer expenses. So lower taxes are the result of a state owned rather than a privately owned bank. The same could be true for countries as well. Also loans can be more carefully controlled so that they go for socially useful purposes rather than fueling speculative investment. Finally, many countries including China and Norway have sovereign wealth funds which act to make those countries more creditworthy than countries which have no assets and only debts. As any banker knows, an individual's creditworthiness represents the difference between his assets and his debts. The same holds true also for countries. If governments created their own money, it could be loaned directly to families that are being foreclosed on instead of relying on private bankers to work out deals with them which they have been reluctant to do thus exacerbating the foreclosure crisis. Greater leniency could also be granted to student loan debtors than is the case now.

Lincoln saved the US an incredible amount of interest repayments by issuing Greenbacks instead of borrowing the money:

In 1972, the United States Treasury Department was asked to compute the amount of interest that would have been paid if the $400 million in Greenbacks had been borrowed from the banks instead. According to the Treasury Department's calculations, in his short tenure Lincoln saved the government a total of $4 billion in interest, just by avoiding this $400 million loan.

Finally, a quote from Thomas Edison from an interview in the 1921 New York Times:

If the Nation can issue a dollar bond it can issue a dollar bill, The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution, pays noboldy but those who contribute in some useful way. It  is absurd to say that our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People.

Therefore, the "full faith and credit" of the US government and the ECB could apply to currency as well as bonds, and private bankers and speculators could be eliminated from the loop.

Europe’s Deadly Transition From Social Democracy to Oligarchy

Counterpunch Weekend Edition December 9-11, 2011

Welcome to a new era of polarization as financial oligarchy replaces democratic government and reduces populations to debt peonage.

by MICHAEL HUDSON

The easiest way to understand Europe’s financial crisis is to look at the solutions being proposed to resolve it. They are a banker’s dream, a grab bag of giveaways that few voters would be likely to approve in a democratic referendum. Bank strategists learned not to risk submitting their plans to democratic vote after Icelanders twice refused in 2010-11 to approve their government’s capitulation to pay Britain and the Netherlands for losses run up by badly regulated Icelandic banks operating abroad. Lacking such a referendum, mass demonstrations were the only way for Greek voters to register their opposition to the €50 billion in privatization sell-offs demanded by the European Central Bank (ECB) in autumn 2011.

The problem is that Greece lacks the ready money to redeem its debts and pay the interest charges. The ECB is demanding that it sell off public assets – land, water and sewer systems, ports and other assets in the public domain, and also cut back pensions and other payments to its population. The bottom 99% understandably are angry to be informed that the wealthiest layer of the population  is largely responsible for the budget shortfall by stashing away a reported €45 billion of funds stashed away in Swiss banks alone. The idea of normal wage-earners being obliged to forfeit their pensions to pay for tax evaders – and for the general un-taxing of wealth since the regime of the colonels – makes most people understandably angry. For the ECB, EU and IMF “troika” to say that whatever the wealthy take, steal or evade paying must be made up by the population at large is not a politically neutral position. It comes down hard on the side of wealth that has been unfairly taken.

A democratic tax policy would reinstate progressive taxation on income and property, and would enforce its collection – with penalties for evasion. Ever since the 19^th century, democratic reformers have sought to free economies from waste, corruption and “unearned income.” But the ECB troika is imposing a regressive tax – one that can be imposed only by turning government policy-making over to a set of unelected technocrats.

To call the administrators of so anti-democratic a policy “technocrats” seems to be a cynical scientific-sounding euphemism for financial lobbyists or bureaucrats deemed suitably tunnel-visioned to act as useful idiots on behalf of their sponsors. Their ideology is the same austerity philosophy that the IMF imposed on Third World debtors from the 1960s through the 1980s. Claiming to stabilize the balance of payments while introducing free markets, these officials sold off export sectors and basic infrastructure to creditor-nation buyers. The effect was to drive austerity-ridden economies even deeper into debt – to foreign bankers and their own domestic oligarchies.

This is the treadmill on which Eurozone social democracies are now being placed. Under the political umbrella of financial emergency, wages and living standards are to be scaled back and political power shifted from elected government to technocrats governing on behalf of large banks and financial institutions. Public-sector labor is to be privatized – and de-unionized, while Social Security, pension plans and health insurance are scaled back.

This is the basic playbook that corporate raiders follow when they empty out corporate pension plans to pay their financial backers in leveraged buyouts. It also is how the former Soviet Union’s economy was privatized after 1991, transferring public assets into the hands of kleptocrats, who worked with Western investment bankers to make the Russian and other stock exchanges the darlings of the global financial markets. Property taxes were scaled back while flat taxes were imposed on wages (a cumulative 59 percent in Latvia). Industry was dismantled as land and mineral rights were transferred to foreigners, economies driven into debt and skilled and unskilled labor alike was obliged to emigrate to find work.

Pretending to be committed to price stability and free markets, bankers inflated a real estate bubble on credit. Rental income was capitalized into bank loans and paid out as interest. This was enormously profitable for bankers, but it left the Baltics and much of Central Europe debt strapped and in negative equity by 2008. Neoliberals applaud their plunging wage levels and shrinking GDP as a success story, because these countries shifted the tax burden onto employment rather than property or finance. Governments bailed out banks at taxpayer expense.

It is axiomatic that the solution to any major social problem tends to create even larger problems – not always unintended! From the financial sector’s vantage point, the “solution” to the Eurozone crisis is to reverse the aims of the Progressive Era a century ago – what in 1936 John Maynard Keynes hopefully  termed “euthanasia of the rentier”. The idea was to subordinate the banking system to serve the economy rather than the other way around. Instead, finance has become the new mode of warfare – less ostensibly bloody, but with the same objectives as the Viking invasions over a thousand years ago, and Europe’s subsequent colonial conquests: appropriation of land and natural resources, infrastructure and whatever other assets can provide a revenue stream. It was to capitalize and estimate such values, for instance, that William the Conqueror compiled the Domesday Book after 1066, a model of ECB and IMF-style calculations today.

This appropriation of the economic surplus to pay bankers is turning the traditional values of most Europeans upside down. Imposition of economic austerity, dismantling social spending, sell-offs of public assets, de-unionization of labor, falling wage levels, scaled-back pension plans and health care in countries subject to democratic rules requires convincing voters that there is no alternative. It is claimed that without a profitable banking sector (no matter how predatory) the economy will break down as bank losses on bad loans and gambles pull down the payments system. No regulatory agencies can help, no better tax policy, nothing except to turn over control to lobbyists to save banks from losing the financial claims they have built up.

What banks want is for the economic surplus to be paid out as interest, not used for rising living standards, public social spending or even for new capital investment. Research and development takes too long. Finance lives in the short run. This short-termism is self-defeating, yet it is presented as science. The alternative, voters are told, is the road to serfdom: interfering with the “free market” by financial regulation and even progressive taxation.

There is an alternative, of course. It is what European civilization from the 13^th-century Schoolmen through the Enlightenment and the flowering of classical political economy sought to create: an economy free of unearned income, free of vested interests using special privileges for “rent extraction.” At the hands of the neoliberals, by contrast, a free market is one free for a tax-favored rentier class to extract interest, economic rent and monopoly prices.

Rentier interests present their behavior as efficient “wealth creation.” Business schools teach privatizers how to arrange bank loans and bond financing by pledging whatever they can charge for the public infrastructure services being sold by governments. The idea is to pay this revenue to banks and bondholders as interest, and then make a capital gain by raising access fees for roads and ports, water and sewer usage and other basic services. Governments are told that economies can be run more efficiently by dismantling public programs and selling off assets.

Never has the gap between pretended aim and actual effect been more hypocritical. Making interest payments (and even capital gains) tax-exempt deprives governments of revenue from the user fees they are relinquishing, increasing their budget deficits. And instead of promoting price stability (the ECB’s ostensible priority), privatization increases prices for infrastructure, housing and other costs of living and doing business by building in interest charges and other financial overhead – and much higher salaries for management. So it is merely a knee-jerk ideological claim that this policy is more efficient simply because privatizers do the borrowing rather than government.

There is no technological or economic need for Europe’s financial managers to impose depression on much of its population. But there is a great opportunity to gain for the banks that have gained control of ECB economic policy. Since the 1960s, balance-of-payments crises have provided opportunities for bankers and liquid investors to seize control of fiscal policy – to shift the tax burden onto labor and dismantle social spending in favor of subsidizing foreign investors and the financial sector. They gain from austerity policies that lower living standards and scale back social spending. A debt crisis enables the domestic financial elite and foreign bankers to indebt the rest of society, using their privilege of credit (or savings built up as a result of less progressive tax policies) as a lever to grab assets and reduce populations to a state of debt dependency.

The kind of warfare now engulfing Europe is thus more than just economic in scope. It threatens to become a historic dividing line between the past half-century’s epoch of hope and technological potential to a new era of polarization as a financial oligarchy replaces democratic governments and reduces populations to debt peonage.

For so bold an asset and power grab to succeed, it needs a crisis to suspend the normal political and democratic legislative processes that would oppose it. Political panic and anarchy create a vacuum into which grabbers can move quickly, using the rhetoric of financial deception and a junk economics to rationalize self-serving solutions by a false view of economic history – and in the case of today’s ECB, German history in particular.

*         *         *

Governments do not need to borrow from commercial bankers or other lenders. Ever since the Bank of England was founded in 1694, central banks have printed money to finance public spending. Bankers also create credit freely – when they make a loan and credit the customer’s account, in exchange for a promissory note bearing interest. Today, these banks can borrow reserves from the government’s central bank at a low annual interest rate (0.25% in the United States) and lend it out at a higher rate. So banks are glad to see the government’s central bank create credit to lend to them. But when it comes to governments creating money to finance their budget deficits for spending in the rest of the economy, banks would prefer to have this market and its interest return for themselves.

European commercial banks are especially adamant that the European Central Bank should not finance government budget deficits. But private credit creation is not necessarily less inflationary than governments monetizing their deficits (simply by printing the money needed). Most commercial bank loans are made against real estate, stocks and bonds – providing credit that is used to bid up housing prices, and prices for financial securities (as in loans for leveraged buyouts).

It is mainly government that spends credit on the “real” economy, to the extent that public budget deficits employ labor or are spent on goods and services. Governments avoid paying interest by having their central banks printing money on their own computer keyboards rather than borrowing from banks that do the same thing on their own keyboards. (Abraham Lincoln simply printed currency when he financed the U.S. Civil War with “greenbacks.”)

Banks would like to use their credit-creating privilege to obtain interest for lending to governments to finance public budget deficits. So they have a self-interest in limiting the government’s “public option” to monetize its budget deficits. To secure a monopoly on their credit-creating privilege, banks have mounted a vast character assassination on government spending, and indeed on government authority in general – which happens to be the only authority with sufficient power to control their power or provide an alternative public financial option, as Post Office savings banks do in Japan, Russia and other countries. This competition between banks and government explains the false accusations made that government credit creation is more inflationary than when commercial banks do it.

The reality is made clear by comparing the ways in which the United States, Britain and Europe handle their public financing. The U.S. Treasury is by far the world’s largest debtor, and its largest banks seem to be in negative equity, liable to their depositors and to other financial institutions for much larger sums that can be paid by their portfolio of loans, investments and assorted financial gambles. Yet as global financial turmoil escalates, institutional investors are putting their money into U.S. Treasury bonds – so much that these bonds now yield less than 1%. By contrast, a quarter of U.S. real estate is in negative equity, American states and cities are facing insolvency and must scale back spending. Large companies are going bankrupt, pension plans are falling deeper into arrears, yet the U.S. economy remains a magnet for global savings.

Britain’s economy also is staggering, yet its government is paying just 2% interest. But European governments are now paying over 7%. The reason for this disparity is that they lack a “public option” in money creation. Having a Federal Reserve Bank or Bank of England that can print the money to pay interest or roll over existing debts is what makes the United States and Britain different from Europe. Nobody expects these two nations to be forced to sell off their public lands and other assets to raise the money to pay (although they may do this as a policy choice). Given that the U.S. Treasury and Federal Reserve can create new money, it follows that as long as government debts are denominated in dollars, they can print enough IOUs on their computer keyboards so that the only risk that holders of Treasury bonds bear is the dollar’s exchange rate vis-à-vis other currencies.

By contrast, the Eurozone has a central bank, but Article 123 of the Lisbon treaty forbids the ECB from doing what central banks were created to do: create the money to finance government budget deficits or roll over their debt falling due. Future historians no doubt will find it remarkable that there actually is a rationale behind this policy – or at least the pretense of a cover story. It is so flimsy that any student of history can see how distorted it is. The claim is that if a central bank creates credit, this threatens price stability. Only government spending is deemed to be inflationary, not private credit!

The Clinton Administration balanced the U.S. Government budget in the late 1990s, yet the Bubble Economy was exploding. On the other hand, the Federal Reserve and Treasury flooded the economy with $13 trillion in credit to the banking system credit after September 2008, and $800 billion more last summer in the Federal Reserve’s Quantitative Easing program (QE2). Yet consumer and commodity prices are not rising. Not even real estate or stock market prices are being bid up. So the idea that more money will bid up prices (MV=PT) is not operating today.

Commercial banks create debt. That is their product. This debt leveraging was used for more than a decade to bid up prices – making housing and buying a retirement income more expensive for Americans – but today’s economy is suffering from debt deflation as personal income, business and tax revenue is diverted to pay debt service rather than to spend on goods or invest or hire labor.

Much more striking is the travesty of German history that is being repeated again and again, as if repetition somehow will stop people from remembering what actually happened in the 20^th century. To hear ECB officials tell the story, it would be reckless for a central bank to lend to government, because of the danger of hyperinflation. Memories are conjured up of the Weimar inflation in Germany in the 1920s. But upon examination, this turns out to be what psychiatrists call an implanted memory – a condition in which a patient is convinced that they have suffered a trauma that seems real, but which did not exist in reality.

What happened back in 1921 was not a case of governments borrowing from central banks to finance domestic spending such as social programs, pensions or health care as today. Rather, Germany’s obligation to pay reparations led the Reichsbank to flood the foreign exchange markets with deutsche marks to obtain the currency to buy pounds sterling, French francs and other currency to pay the Allies – which used the money to pay their Inter-Ally arms debts to the United States. The nation’s hyperinflation stemmed from its obligation to pay reparations in foreign currency. No amount of domestic taxation could have raised the foreign exchange that was scheduled to be paid.

By the 1930s this was a well-understood phenomenon, explained by Keynes and others who analyzed the structural limits on the ability to pay foreign debt imposed without regard for the ability to pay out of current domestic-currency budgets. From Salomon Flink’s The Reichsbank and Economic Germany (1931) to studies of the Chilean and other Third World hyperinflations, economists have found a common causality at work, based on the balance of payments. First comes a fall in the exchange rate. This raises the price of imports, and hence the domestic price level. More money is then needed to transact purchases at the higher price level. The statistical sequence and line of causation leads from balance-of-payments deficits to currency depreciation raising import costs, and from these price increases to the money supply, not the other way around.

Today’s “free marketers” writing in the Chicago monetarist tradition (basically that of David Ricardo) leave the foreign and domestic debt dimensions out of account. It is as if “money” and “credit” are assets to be bartered against goods. But a bank account or other form of credit means debt on the opposite side of the balance sheet. One party’s debt is another party’s saving – and most savings today are lent out at interest, absorbing money from the non-financial sectors of the economy. The discussion is stripped down to a simplistic relationship between the money supply and price level – and indeed, only consumer prices, not asset prices. In their eagerness to oppose government spending – and indeed to dismantle government and replace it with financial planners – neoliberal monetarists neglect the debt burden being imposed today from Latvia and Iceland to Ireland and Greece, Italy, Spain and Portugal.

If the euro breaks up, it is because of the obligation of governments to pay bankers in money that must be borrowed rather than created through their own central bank. Unlike the United States and Britain which can create central bank credit on their own computer keyboards to keep their economy from shrinking or becoming insolvent, the German constitution and the Lisbon Treaty prevent the central bank from doing this.

The effect is to oblige governments to borrow from commercial banks at interest. This gives bankers the ability to create a crisis – threatening to drive economies out of the Eurozone if they do not submit to “conditionalities” being imposed in what quickly is becoming a new class war of finance against labor.

Disabling Europe’s central bank to deprive governments of the power to create money

One of the three defining characteristics of a nation-state is the power to create money. A second characteristic is the power to levy taxes. Both of these powers are being transferred out of the hands of democratically elected representatives to the financial sector, as a result of tying the hands of government.

The third characteristic of a nation-state is the power to declare war. What is happening today is the equivalent of warfare – but against the power of government! It is above all a financial mode of warfare – and the aims of this financial appropriation are the same as those of military conquest: first, the land and subsoil riches on which to charge rents as tribute; second, public infrastructure to extract rent as access fees; and third, any other enterprises or assets in the public domain.

In this new financialized warfare, governments are being directed to act as enforcement agents on behalf of the financial conquerors against their own domestic populations. This is not new, to be sure. We have seen the IMF and World Bank impose austerity on Latin American dictatorships, African military chiefdoms and other client oligarchies from the 1960s through the 1980s. Ireland and Greece, Spain and Portugal are now to be subjected to similar asset stripping as public policy making is shifted into the hands of supra-governmental financial agencies acting on behalf of bankers – and thereby for the top 1% of the population.

When debts cannot be paid or rolled over, foreclosure time arrives. For governments, this means privatization selloffs to pay creditors. In addition to being a property grab, privatization aims at replacing public sector labor with a non-union work force having fewer pension rights, health care or voice in working conditions. The old class war is thus back in business – with a financial twist. By shrinking the economy, debt deflation helps break the power of labor to resist.

It also gives creditors control of fiscal policy. In the absence of a pan-European Parliament empowered to set tax rules, fiscal policy passes to the ECB. Acting on behalf of banks, the ECB seems to favor reversing the 20^th century’s drive for progressive taxation. And as U.S. financial lobbyists have made clear, the creditor demand is for governments to re-classify public social obligations as “user fees,” to be financed by wage withholding turned over to banks to manage (or mismanage, as the case may be). Shifting the tax burden off real estate and finance onto labor and the “real” economy thus threatens to become a fiscal grab coming on top of the privatization grab.

This is self-destructive short-termism. The irony is that the PIIGS budget deficits stem largely from un-taxing property, and a further tax shift will worsen rather than help stabilize government budgets. But bankers are looking only at what they can take in the short run. They know that whatever revenue the tax collector relinquishes from real estate and business is “free” for buyers to pledge to the banks as interest. So Greece and other oligarchic economies are told to “pay their way” by slashing government social spending (but not military spending for the purchase of German and French arms) and shifting taxes onto labor and industry, and onto consumers in the form of higher user fees for public services not yet privatized.

In Britain, Prime Minister Cameron claims that scaling back government even more along Thatcherite-Blairite lines will leave more labor and resources available for private business to hire. Fiscal cutbacks will indeed throw labor out of work, or at least oblige it to find lower-paid jobs with fewer rights. But cutting back public spending will shrink the business sector as well, worsening the fiscal and debt problems by pushing economies deeper into recession.

If governments cut back their spending to reduce the size of their budget deficits – or if they raise taxes on the economy at large, to run a surplus – then these surpluses will suck money out of the economy, leaving less to be spent on goods and services. The result can only be unemployment, further debt defaults and bankruptcies. We may look to Iceland and Latvia as canaries in this financial coalmine. Their recent experience shows that debt deflation leads to emigration, shorter life spans, lower birth rates, marriages and family formation – but provides great opportunities for vulture funds to suck wealth upward to the top of the financial pyramid.

Today’s economic crisis is a matter of policy choice, not necessity. As President Obama’s chief of staff Rahm Emanuel quipped: “A crisis is too good an opportunity to let go to waste.” In such cases the most logical explanation is that some special interest must be benefiting. Depressions increase unemployment, helping to break the power of unionized as well as non-union labor. The United States is seeing a state and local budget squeeze (as bankruptcies begin to be announced), with the first cutbacks coming in the sphere of pension defaults. High finance is being paid – by not paying the working population for savings and promises made as part of labor contracts and employee retirement plans. Big fish are eating little fish.

This seems to be the financial sector’s idea of good economic planning. But it is worse than a zero-sum plan, in which one party’s gain is another’s loss. Economies as a whole will shrink – and change their shape, polarizing between creditors and debtors. Economic democracy will give way to financial oligarchy, reversing the trend of the past few centuries.

Is Europe really ready to take this step? Do its voters recognize that stripping the government of the public option of money creation will hand the privilege over to banks as a monopoly? How many observers have traced the almost inevitable result: shifting economic planning and credit allocation to the banks?

Even if governments provide a “public option,” creating their own money to finance their budget deficits and supplying the economy with productive credit to rebuild infrastructure, a serious problem remains: how to dispose of the existing debt overhead now acting as a deadweight on the economy. Bankers and the politicians they back are refusing to write down debts to reflect the ability to pay. Lawmakers have not prepared society with a legal procedure for debt write-downs – except for New York State’s Fraudulent Conveyance Law, calling for debts to be annulled if lenders made loans without first assuring themselves of the debtor’s ability to pay.

Bankers do not want to take responsibility for bad loans. This poses the financial problem of just what policy-makers should do when banks have been so irresponsible in allocating credit. But somebody has to take a loss. Should it be society at large, or the bankers?

It is not a problem that bankers are prepared to solve. They want to turn the problem over to governments – and define the problem as how governments can “make them whole.” What they call a “solution” to the bad-debt problem is for the government to give them good bonds for bad loans (“cash for trash”) – to be paid in full by taxpayers. Having engineered an enormous increase in wealth for themselves, bankers now want to take the money and run – leaving economies debt ridden. The revenue that debtors cannot pay will now be spread over the entire economy to pay – vastly increasing everyone’s cost of living and doing business.

Why should they be “made whole,” at the cost of shrinking the rest of the economy? The bankers’ answer is that debts are owed to labor’s pension funds, to consumers with bank deposits, and the whole system will come crashing down if governments miss a bond payment. When pressed, bankers admit that they have taken out risk insurance – collateralized debt obligations and other risk swaps. But the insurers are largely U.S. banks, and the U.S. Government is pressuring Europe not to default and thereby hurt the U.S. banking system. So the debt tangle has become politicized internationally.

So for bankers, the line of least resistance is to foster an illusion that there is no need for them to accept defaults on the unpayably high debts they have encouraged.  Creditors always insist that the debt overhead can be maintained – if governments simply will reduce other expenditures, while raising taxes on individuals and non-financial business.

The reason why this won’t work is that trying to collect today’s magnitude of debt will injure the underlying “real” economy, making it even less able to pay its debts. What started as a financial problem (bad debts) will now be turned into a fiscal problem (bad taxes). Taxes are a cost of doing business just as paying debt service is a cost. Both costs must be reflected in product prices. When taxpayers are saddled with taxes and debts, they have less revenue free to spend on consumption. So markets shrink, putting further pressure on the profitability of domestic enterprises. The combination makes any country following such policy a high-cost producer and hence less competitive in global markets.

This kind of financial planning – and its parallel fiscal tax shift – leads toward de-industrialization. Creating ECB or IMF inter-government fiat money leaves the debts in place, while preserving wealth and economic control in the hands of the financial sector. Banks can receive debt payments on overly mortgaged properties only if debtors are relieved of some real estate taxes. Debt-strapped industrial companies can pay their debts only by scaling back pension obligations, health care and wages to their employees – or tax payments to the government. In practice, “honoring debts” turns out to mean debt deflation and general economic shrinkage.

This is the financiers’ business plan. But to leave tax policy and centralized planning in the hands of bankers turns out to be the opposite of what the past few centuries of free market economics have been all about. The classical objective was to minimize the debt overhead, to tax land and natural resource rents, and to keep monopoly prices in line with actual costs of production (“value”). Bankers have lent increasingly against the same revenues that free market economists believed should be the natural tax base.

So something has to give. Will it be the past few centuries of liberal free-market economic philosophy, relinquishing planning the economic surplus to bankers? Or will society re-assert classical economic philosophy and Progressive Era principles, and re-assert social shaping of financial markets to promote long-term growth with minimum costs of living and doing business?

At least in the most badly indebted countries, European voters are waking up to an oligarchic coup in which taxation and government budgetary planning and control is passing into the hands of executives nominated by the international bankers’ cartel. This result is the opposite of what the past few centuries of free market economics has been all about.

This was first published in the Frankfurter Allgemeine Zeitung on December  3, 2011, as “Der Krieg der Banken gegen das Volk.”

MICHAEL HUDSON is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, forthcoming from AK Press.
He can be reached via his website, mh@michael-hudson.com

Global Economic Crisis: Finance Is the New Mode of Warfare

by Prof. Michael Hudson

Global Research, July 18, 2011

I’m Bonnie Faulkner. Today on Guns and Butter, Dr. Michael Hudson. Today’s show, “Guns, Finance and Butter: Finance is the New Mode of Warfare.” The jobless recovery Michael, I read the in the newspapers that the great recession, so-called, has long since ended, but unemployment remains stubbornly high with only a measly 18,000 jobs created in June. I believe the term that was coined some time ago is a jobless recovery. What is a jobless recovery?               The economy is getting worse and worse – deeper negative equity (mortgage debts in excess of property prices), shrinking markets, stores going out of business, rising defaults and foreclosures, job layoffs – with new graduates having to pay student loans but not having a job.             That’s why the stock market is down 160 points today. The financial sector realizes that the game is over. From America to Ireland, Greece and the rest of Europe, financial interests are insisting that governments take responsibility for paying off the bad bank debts to their bondholders and other bankers in cross-deals and gambles on derivatives that have gone bad. The problem is that these banks have made bad real estate loans and other gambles. In Ireland, the collateral backing these loans is only about 20 percent of the face value of the mortgages.             Somebody has to lose when loans go bad. In this case, it is taxpayers. Governments have taken these bad loans onto their own balance sheet, so that bondholders and big creditors to these banks (typically foreigners) would not lose. But it is very expensive for governments to take on obligations to pay bad debts – that is, negative equity where the debt is higher than the collateral assets are worth. So now, having spent enormous sums to make sure that bankers and bondholders don’t lose a penny, governments are trying to balance their budgets by cutting off spending throughout the “real” economy. In other words, governments have sacrificed the economy so that the financial sector won’t take a loss. And even worse, the governments have left the bad real estate debts, personal debts, education debts and credit card debts on the books. So the “real” economy is being shrunk by debt deflation, while tax policy is being steered to benefit the financial sector.             The policy that started in the United States after September 2008, with Sec. Paulson’s Troubled Asset Relief Program (TARP) and later with the Treasury taking Fannie Mae and Freddie Mac ($5.3 trillion) onto the government’s balance sheet. This policy quickly spread to Europe, starting in Ireland. Its government went broke bailing out the bankers. And now in Greece, the government is told to start selling off over $50 billion worth of public land and other public-sector assets to pay down debts so that its bondholders won’t lose a single euro. Greece is slashing its public spending, unemployment is spreading, and the sell-offs are beginning – of the sort that we already have seen in Chicago, which sold its sidewalk rights to financial investors installing parking meters. Economies are being turned into rentier “tollbooth economies” to generate the funds to pay debts that the “real” economy simply can’t sustain. It’s a losing game in the end. So the financial sector is trying to take as much as it can right now, and run. This is happening throughout the world. In that sense the U.S. debt deflation and government bailouts to Wall Street provided the model for Europe, and now Europe’s debt deflation and the political crisis that goes with it is providing a model for the United States. In Athens, for instance, when the Greek demonstrators protested the austerity program in front of their Parliament, there were signs referring to the Wisconsin demonstrations in the United States earlier this spring.             The problem is that trying to pay debts rather than writing them down to realistic ability to pay (or writing down mortgages to the market price) and increasing taxes is pushing the U.S. and foreign economies into a depression. And the worst thing is that this is viewed as a solution – supposedly making economies more “competitive” by “squeezing out the fat.” What it is doing is passing the fat to the top of the economic pyramid, like globules floating on the broth, as Werner Sombart described the rentier class a century ago.             In the United States, President Obama has bought into the idea that the only way to get recovery is to cut wages by about 30 percent. He’s doing that in two ways. At the Federal Reserve he empowered Chairman Ben Bernanke to lower interest rates by flooding the economy with money. QE2 injected $600 billion, which banks quickly sent out of the country. This pushed down the dollar against BRICS currencies, Australian dollar and currencies of other raw-materials exporters, which raised their own interest rates to prevent their domestic economies from overheating. These higher rates abroad mean that U.S. banks can borrow at only 0.25% from the Federal Reserve and buy Australian bonds at 5.75%, pocketing the arbitrage difference. In fact, they can get a free lunch simply by borrowing and leaving this money on deposit at the Federal Reserve here in the United States. These “excess reserves” have soared since the Fed began to pay interest on them back in September 2008, when Lehman Bros. collapsed – the watershed date for the post-Bubble financial order.             When the Fed and Wall Street push the dollar down, the main victims are consumers. Import prices rise, while devaluation lowers the price at which their labor exchanges for that of foreign economies. When you devalue a currency, what you’re really devaluing is the price of labor, because all the other costs are globally fixed. Oil and raw materials prices, machinery prices and shipping remain fixed worldwide prices, so all exporting countries have a common cost structure for basic commodities and technology.             So Obama believes that reducing the purchasing power of American labor in terms of foreign exchange will make the economy more competitive. He also believes it will help deflate the economy to reduce the budget deficit. The economy needs government spending to revive employment and markets, but he’s acting like President Coolidge in the Depression. Republican Treasury Secretary Andrew Mellon said that the solution had to be to liquidate labor, liquidate housing and liquidate the economy. That tunnel vision is being fed to Mr. Obama by his Clinton- and Bush-era advisors, from Larry Summers to Tim Geithner. He is doing what nobody really imagined was the kind of change that was possible when he was elected. He has let Michelle Bachman and the Republican Tea Party tax cutters move to the left of his position.            Rep. Bachman recently pointed out that she voted against TARP from the beginning, as did other Republicans opposing the giveaway to the Wall Street interests. The Republicans also haven’t called to cut back Social Security to pay Wall Street. That’s the Obama-Geithner position. It’s put Democratic Congressional leadership in a bind, because they have difficulty opposing a president even though he’s moved to the right of the Republican Party.              So what is happening today was signaled even before Mr. Obama took office, by the right-wing economic appointments he made – Larry Summers, who had pushed bank deregulation and replacing the Glass-Steagall Act as his chief economic advisor; Tim Geithner, the bank lobbyist as Secretary of the Treasury; and Rahm Emanuel representing Wall Street interests in the way that the Democratic Leadership Committee had done since the Clinton administration. Later, after Mr. Obama appointed Bush Administration carry-overs Ben Bernanke at the Fed and Defense Secretary Gates, he said that in order for there to be a recovery, the banks had to be made whole. That meant, not take a loss – and leaving their management in place even when the government took over their stock, as in the case of Citibank.             The Obama administration raised the financial sector’s bailout to $13 trillion.This has vastly increased the government debt. And now, Mr. Obama wants to bring it back down by cutting back Social Security, Medicare, Medicaid and other social spending – to transfer wealth and income to the top of the economic pyramid. At the start of his administration he appointed a Deficit Reduction Commission led by advocates of cutting back Social Security and Medicare: Republican Senator Alan Simpson (McCain’s economic advisor!) and Clinton chief of staff Erskine Bowles, representing the right-wing Democratic Leadership Committee cited above. The aim of this commission was to give Mr. Obama an “experts’ report” supporting the diametric opposite of the liberal constituency that voted for him.             This is how he is doing what politicians are supposed to do: delivering his constituency (liberals, racial minorities, urban dwellers and the poor – in fact, the American mainstream) to his campaign contributors. In that respect Mr. Obama is America’s version of Tony Blair, or Greek Prime Minister Papandreou, nominal head of the Socialist International – taking a position way to the right of Greece’s Conservative party when it comes to imposing austerity and privatization sell-offs to bail out bankers to save them from taking a loss. And Sec. Geithner has been pushing Europeans to take a hard line to make sure that bondholders do not take a loss on their bad investments. He is insisting that Europe impose depression conditions as bad as those in the United States. With full support from Mr. Obama!             He did not introduce the public option in health insurance that he promised. He has not even urged the government to bargain directly with pharmaceutical companies for lower drug prices. Over the weekend he’s encouraged Republicans to consider Social Security cutbacks, as well as for Medicare, cut back Medicaid, especially the payments to the poor. So looking back on the last debate he had with John McCain before the 2008 election, he and McCain were bidding for campaign contributions from Wall Street and the real estate sector. These are the contributors that the Democrats and the Republicans are all vying for, and to whom Mr. Obama is now delivering his constituency.             Last weekend’s New York Times magazine had an interview with Sheila Bair, whose five-year term heading the Federal Deposit Insurance Corp.(FDIC) expired last week. Now she can begin to tell what happened. She said that Mr. Obama promised her that he would try to prevent the mortgage frauds that were occurring, especially in subprime mortgages, and support better bank regulation. But then she would learn, just an hour before he gave a speech, that he would have changed the draft that she had seen, and took out what he’d promised her. The rewrites apparently were done mainly by Tim Geithner, who acts as a lobby for the big bank contributors. Instead of running the Treasury to benefit the U.S. economy, he’s benefiting his Wall Street constituency. Significantly, he was a protégé of Clinton Treasury Secretary Robert Rubin, who gave the name “Rubinomics” to pro-Wall Street opposition to bank regulation and a dismantling of public control over the banking system.             Ms. Bair said that that when she opposed giveaways to banks, Obama’s officials would say that there would be a meltdown if they didn’t save Citibank, AIG and other financial institutions that had acted recklessly. She pointed out that the FDIC had successfully wound down Washington Mutual and other insolvent institutions. This was the FDIC’s business, after all. Even Citibank had enough assets to cover insured depositors. The problem was its gambles on derivatives and junk mortgages. The government could have taken it over and made normal insured depositors whole. But there weren’t enough assets in Citibank and AIG to pay the gamblers and the big players. She complained that in every case she was told the big gambling institutions – basically, the nation’s wealthiest one percent – couldn’t lose a penny.             Mr. Obama has bought this position. To save bondholders and speculators from taking losses on their bad bets, consumers and the rest of the “real economy” needs to pay. They have to pay via higher Social Security taxes and other regressive tax policies, instead of making the higher brackets pay as occurs under progressive taxation. Mr. Obama is willing to cut back Medicare. We can’t charge the pharmaceutical companies by bargaining with them for bulk discounts as Canada’s government does. We have to let them set the prices with no argument – as if this is the “free market.” So Mr. Obama has made an accommodation with the Republicans to pursue what really are Bush Administration policies, and now even Tea Party policies. The debt ceiling and default charade What is your assessment over the current debate in Washington concerning the raising of the debt ceiling? This debate seems to be taking place between the Obama administration and the Republicans without much input from Democrats.          It’s a good cop-bad cop charade. The Republicans are playing the role of the bad cop. Their script says: “You cannot raise taxes on anybody. No progressive income tax, no closing of tax loopholes for special interests, not even prosecutions for tax fraud. And we can get a lot of money back into the economy if we give a tax holiday to the companies and individuals that have been keeping their money offshore. Let’s free the wealthy from taxes to help us recover.’             Mr. Obama can turn around and pretend to be the good cop. “Hey, boys, let me at least do something. I’m willing to cut back Social Security. I’m willing to take over what was George Bush’s program. I share your worries about the budget deficit. We have to balance it, and I’ve already appointed a Deficit Reduction Commission to prepare public opinion for my cutbacks in the most popular programs. But you have to let me get a little bit of revenue somewhere.”             In the end the Republicans will make some small token concessions, but they’ll get their basic program. Mr. Obama will have sold out his constituency.             The problem is, how can Mr. Obama move to the right of where George Bush stood? The only way he can do this is for the Republicans to move even further to the right. So the Republicans are accommodating him by pushing the crazy wing of their party forward, the Tea Party. Michelle Bachman, Eric Cantor and their colleagues are coming with such an extremist, right-wing attitude that it gives Mr. Obama room to move way to the right as he triangulates, depicting himself a the less crazy alternative: “Look. I’m better than these guys are.”             He’s hoping that people will vote for him just because he’s not as extreme as the Tea Party. But the reality is that there is another alternative. People can “vote with their backsides” and stay home. There may not be many people showing up to vote on the Democratic side. So it’s possible for the Republicans to get in, now that there is so little real difference between their position and that of Mr. Obama. What’s the point of voting?             The silver lining for the Republicans winning in 2012 would be that the Democratic Congress would find its backbone again, once it’s in opposition. It would say “No” to the Republicans trying to push the policy that Mr. Obama is now trying to push. But it can’t say no to Mr. Obama. That’s why his presidency is turning out to be such a disaster.             The economy is sinking because investors realize that his deflationary attempt to cut public spending looks like a done deal. Trying to run a budget surplus will push the economy deeper into depression. When Clinton ran a budget surplus, the banks provided the increase in credit to keep the economy going. But now they have pulled back, as there is little surplus that has not already been pledged to pay the banks. So Mr. Obama’s advisors have convinced him to do what European political front men also are doing. A depression is deemed necessary to cut living standards and labor by about 30 percent. Mr. Obama’s aim is to lower American wage levels.             To do this, he needs an excuse, a cover story. The reality is that a depression will make the budget deficit even larger. Just as the plans to invade Iraq were written up before 9/11 provided a crisis atmosphere that became the opportunity to introduce them, so the response to the federal budget deficit is already outlined: Social Security and other “entitlements” will be cut back, as well as revenue sharing with the states and cities. So governments at the local level will have to sell off land, roads and whatever is in the public domain. The American government will look just like Greece and Ireland – so you may want to look at them as dress rehearsals.             Cutbacks in federal spending mean that the states can’t cover their own budgets – and their constitutions prevent many from running deficits. It looks like there will be little federal revenue to share with Minnesota or Wisconsin or the city of Chicago.They’re going to have to sell their roads and streets, sell their infrastructure and their public utilities, sell off whatever business enterprises they have that can bring in credit. These assets themselves will be sold on credit, to buyers who then will “expense” their profits as tax-deductible interest. So governments will not get the potential user fees that result from putting up parking meters on their sidewalks, tollbooths on their roads and other rent extraction facilities on their other assets. The financial sector will take all this.             The federal government may also become a seller. It has the Postal Service, and already is privatizing its army to private contractors. Newspapers have joked about Greece selling its Parthenon and other tourist sites. Imagine the U.S. Government selling its national parks and forests – to buyers who borrow the money from the banks. This would let the banks “earn their way out of debt” by creating a huge new market for them in privatizing and cutting up what used to be the public domain. It will end up in the hands of the wealthiest 10 percent of the population.             In this respect the class war is back in business. We’re going into a depression that is unnecessary – except to drive down wage levels and strip away government obligations to pay for Social Security, Medicare and other public programs. This will enable the government to get rid of what remains of progressive taxation on the higher wealth and income brackets.             The stock market may fall, of course, and the bond market too as interest rates rise. But investors expect to be able to buy back these stocks at a lower price. Meanwhile, the game is over – the idea of investing in a growing market. The new game is to grab what one can and bail out. This is the post-bubble phase of the financial “cycle.”             The Democratic leaders feel boxed in. Nobody is prepared to challenge Mr. Obama in 2012. He still has his constituency in the Democrat party locked up. So they can’t run against him. Under Rahm Emanuel the Congressional leadership has promoted the worst of the Blue Dog Democrats. Fortunately, they were the major losers in the last election. But we’re still living with the consequences of Mr. Emanuel’s quip that a crisis is too good an opportunity to waste. He advised the President to use it to lock in the Democratic Leadership Committee’s pro-Wall Street program. This is the program of Clinton, Gore and Joe Lieberman. It is the mentality that led Mr. Obama to appoint Erskine Bowles and like-thinking members to the Simpson-Bowles Commission. He is now pushing its recommendations claiming that this is bipartisan. But I would say that it’s basically Republican, if I didn’t think that this really is where the Democratic Party also now stands – just as in Greece, austerity plans and privatization are being promoted by ostensible socialists. Mr. Obama wants to cut $4 trillion out of the budget, while Republican leader Boehner only wants a 2.4 trillion cut over a shorter period. I’ve read that it was Obama, not the Republicans, who proposed putting Social Security cuts on the table. Why would he be proposing much larger cuts than the Republicans?           The main reason is that he is in a unique position to deliver enough Democratic votes to let the sell-out (“compromise”) go through. No Republican administration could get away with cutting Social Security. This is the most basic income protection program that Americans have. But now, it’s being depicted as a welfare program that is hurting the economy. Only a Democrat posing as a left-winger could really pull off what Mr. Obama is proposing.   China China has warned the U.S., “Do not default.” What would be the ramifications of a default? Would it put the global banking system into crisis? Would a U.S. default send interests rates soaring? If so, what would be the economic effect?             An interest rate wouldn’t matter if you default. If you tell me that I can write you an IOU but you're not going to collect, I’ll give you 20 percent. But seriously, the bond market has not given any hint that interest rates will rise at all. As I said above, this is a just-pretend pseudo-crisis to give Mr. Obama the opportunity to do what politicians do – to sell out his constituency to his campaign contributors on Wall Street.             It looks like he will go down in history as a Herbert Hoover, being blamed for the depression that was not necessary and that the Republicans could not have gotten away with intensifying. Only a Democrat posing as a left-winger could support the anti-labor, anti-wage, pro-Wall Street policies that his advisors have been putting into his hands. This is what came out in the New York Times interview with Sheila Bair. So this kerfuffle about a possible debt default is a charade for public consumption?             The idea is to create an illusion of crisis, to create a pretense for introducing a solution that makes fortunes for financial predators – or at least gives them enough room to take their money and run, by swapping their bad loans for Treasury securities. The tragedy is that the way in which Mr. Obama is resolving today’s non-crisis of the budget limit is impoverish the population for the next decade, bringing on a depression rather than avoiding it.             This is a tragedy because it’s not really necessary. It’s a policy choice.  Are there elements in the U.S. establishment that actually want a default?           Nobody wants it. The safest investment is in Treasury bills. America would lose its international position. The basis of American diplomacy and military power is its unique ability to write IOUs that it never intends to pay. So in that sense you could say America defaulted back in August of 1971, when President Nixon closed the gold window. What can China do with its Treasury bonds even under today’s conditions? The Americans will be glad to give them new Treasury IOUs for old ones. But they won’t let China buy oil companies or filling stations or anything else deemed of potential economic importance. It won’t let them buy industrial or technology companies. So in this sense the global monetary system based on the dollar has been in default for the last 30 years.  Is the U.S. in an economic war with China?             No, but there’s always a jockeying for position in international diplomacy. I haven’t heard anti-American sentiments in China. But I hear China-bashing here on MSNBC and from liberals such as Paul Krugman. Blaming foreigners diverts attention away from the bad Democratic and Republican economic programs. The Democrats are especially guilty. Take for instance a recent Financial Times report:             Erskine Bowles, co-chair of Mr. Obama’s debt commission, said a small, short-term solution [to the budget deficit] would not be enough. “That is not going to fool our creditors, many of whom do not love America as we do,” he said. China is the biggest foreign holder of US debt.           The message is that is that it’s China that is making the U.S. Government impose austerity on the economy, not that Mr. Obama wants to do this as a policy choice.  Greece: Banks, not countries, receive the bailouts Let’s talk a bit now about Europe, starting with Greece. You have written that the Greek economy will not end up with the proceeds of any European central bank bailout. The banks will get the money. Can you explain that?           The condition attached to the loans the EU and the IMF are making to Greece is that all the money must be paid to the bondholders of these banks, mainly in France and in Germany. Even Angela Merkel protested, saying that this isn’t how a free market is supposed to work. Banks and bondholders that make bad loans and investments should take a loss, even if they’re German. Depositors should be protected, but not necessarily bondholders. But her comments caused an angry response from Europe’s central bankers.The problem in Europe is thus the same that Sheila Bair described in her New York Times interview. But the European Central Bank (ECB) insists that bondholders must be first in line for bailout money, the domestic economy later. And the ostensibly socialist government of Greece agrees.             This brings up what we were talking about at the beginning of this show. You have in Greece a nominally socialist government whose premiere, Papandreou, is head of the Socialist International. He’s pushing for an austerity program and bank bailouts that will push Greece into depression and force it to sell off much of its economy to pay debts that all observers except the ECB see will go bad. The conservatives are opposing this, just as Michelle Bachman points out that she opposed the TARP and the bank bailouts. The same thing happens in Britain, where the Labour Party privatized the railroads and other infrastructure that even Margaret Thatcher and the conservatives didn’t go for. In Iceland the Social Democrats pushed for bailing out British and Dutch bank authorities, against the referendum of the population at large. All across Europe the Socialists have moved to the right of the conservative parties as far as financial policy is concerned.             The terminology and political concepts that existed a century ago when the Social Democratic and the Labour parties were being formed were concerned with wages, labor unionization and other employer/employee workplace relations much more than with bank policy. “Capital” meant mainly heavy industry. That’s not the case today. You have a war of finance not only against consumers and employees, but against industry – and most of all, against government, which is the only power able to restrain finance and tax it. Financialization has turned into asset stripping. It focuses on the public domain because this is still where most of the assets are. Also, national treasuries are able to create public debt – and make future taxpayers pay tribute to the financial oligarchy, which is un-taxed.             They actually teach short-term financial engineering in business schools. Bob Locke and J. C. Spender are coming out this fall with a good book, Confronting Managerialism, about how this management philosophy is disabling economies. Financialization also has disabled socialist and left wing politics. In a turnaround from their origins, you don’t hear much about financial issues from the Democrats in America or from the Socialist parties in Europe. They focus on cultural issues, minorities, sexual equality, but not banking and finance, or even privatization except when it threatens labor unions.             The result is an absence of a political alternative. Meanwhile, economic democracy is being turned into a financial oligarchy. This is going to be the main problem for the next century: how to cope with the financial oligarchy that the bubble’s bailout terms have empowered. When the Bush and Obama Treasuries gave $13 trillion to Wall Street’s managers, they vested a new century’s power elite, much as the 19th-century railroad barons were empowered by giving them the western lands and all the money for the railroads. Similar public giveaways and insider deals vested land barons and power elites in most of the world.             The re-assertion of today’s rentier oligarchies is the opposite of what was expected from the early 19th century into the 1930s. In the middle of the Great Depression, in 1936, Keynes wrote his General Theory. His last chapter called for “euthanasia of the rentier.” What we have now instead is euthanasia of employees, euthanasia of industry and of entire economies to siphon off rent extraction, interest and financial fees to the top of the economy.             Nothing like this has occurred in Western civilization since the conquest of Europe a thousand years ago. It occurred in the Roman Empire when the creditors took over. We all know what happened then. We had a Dark Age. You asked about recession. Well, we’re not only moving into a depression but the question is now whether it is going to keep on going? What kind of a society are we going to have if we persist in today’s tax shift off wealth onto employees, onto consumers and industry, onto the cities and states, while privatizing and selling off basic infrastructure. Governments are now conducting a kind of pre-bankruptcy sale. But nobody at either end of the political spectrum is talking about the emerging oligarchy.   Will the IMF and EU bailout for Greece lead to another default?             Yes. There’s no conceivable way in which Greece can pay the revenue that is being demanded. The Financial Times has been clear on this for the last month or so. The columns on its editorial and op-ed pages show that almost everybody realizes that these debts can’t be paid. The premium for default insurance for Greek bonds shows that “the market” sees this. So if Greece can’t pay, why is the world going through this charade?             The main reason is to give commercial banks and bondholders enough time to sell their bonds to European governments, leaving the European Central Bank and perhaps IMF holding the bag. It’s harder for Greece to default on an inter-governmental debt. So this would end up pitting the governments of Europe against Greece, while the commercial banks will be free.             The Greeks can turn around and say, “We know the game you're playing. You lent us the money to pay the bank. We didn’t get a penny of it. You paid your own banks, so the debt is now your problem. We’re not going to pay you. If you don’t like it, kick us out of the Eurozone.” How is the European Central Bank different from central banks of other countries?             This is an important question. From the Bank of England in 1694 to the Federal Reserve in 1913, central banks were founded to finance government spending – that means deficits.The idea was for governments to create money on their printing press, or now in their computer keyboard. This is how credit is created whether commercial banks or central banks do it. But the European Central Bank is not allowed to fund government deficits. And EU governments are not allowed to fund each other. Furthermore, the Lisbon Treaty restricts government debt and deficits to specified low shares of GDP, blocking them from pursuing counter-cyclical “Keynesian” spending to pull the continent out of depression.             These rules put Europe in a financial strait jacket. The idea behind the European Central Bank is to make governments pay commercial banks for what they could really do for themselves for nothing.They let commercial banks use their computer keyboard to create hundreds of billions of dollars worth of IOUs that bear interest. But the European Central Bank has its own keyboard. It could create this credit just as well. So from the outset, its crippled condition is a result of bank lobbyists. They want to extract interest and financial fees as a result of their public privilege – their monopoly – of being able to create credit.             This privilege should be viewed as a public utility. You can think of money and credit as a public utility just like electricity or water. In America, electric companies and other public utilities are regulated to keep their charges in line with the cost of producing the electricity and gas that they sell the customers. Money and credit can be created simply on a computer keyboard if you’re a bank and can find a customer. In Europe, governments have agreed to be the customers and pay interest to the commercial banks. The cover story is the ideological claim that banks will be more “responsible” and non-inflationary than governments. But today, in the wake of the bubble economy and asset-price inflation we’ve all gone through, this obviously is just a pack of nonsense spouted for public consumption by bank lobbyists and their useful idiots in academia.     So you’re saying that only private banks create credit in Europe, not the Central Bank?             That’s right.The central bank is specifically prevented from doing what central banks are supposed to do – funding government deficits. And European governments are not allowed to bail out other governments. That’s in the Lisbon Treaty. It’s as if saying that Washington cannot have revenue sharing with the states and cities. But for the last few decades, that’s what has kept them afloat.             I don’t see how Europe can survive under the deflationary financial rules of the Lisbon Treaty. It tied the hands of government financially. This is one of the reasons why the Euro has gone down against the dollar. In spite all of the dollar’s problems that you’ve mentioned, it’s the Euro that’s going down more. The way it was created is unworkable.   So do you think that the European Union must either change the rules or break apart? Yes. European banks hold debt from faltering EU countries such as Greece, Ireland and Portugal. But American banks have sold European banks credit default swaps. That means that they have insured European debts. How will this play out if European governments default?           It complicates matters. In Ireland’s case a month or so ago, Europe apparently was prepared to realize that the Irish government made a terrible mistake in taking the bad bank debt onto the government balance sheet, making the taxpayers liable for the banks’ bad loans. European governments were discussing a write-down or “haircut” for bank bondholders. The basic principle is that a debt that can’t be paid won’t be.             But then it was rumored that Treasury Secretary Geithner told the Europeans not to make the banks or their bondholders take a loss, because Wall Street had taken a huge gamble that the government would pay. So he intervened to oppose a debt write-down. This puts Irish taxpayers on the hook. And now the same thing is being rumored for Greece. It’s said that Geithner again has told the Europeans that American banks have made a big gamble that the Greek people will be defeated. The U.S. banks think that the oligarchy will win, and that the oligarchy will succeed in pushing them into depression in order to help U.S. banks win on the gamble they’ve taken. The message is: “Destroy yourselves, because otherwise our banks will lose their bets, and we’re not willing to lose a dollar.”             This explains what Secretary of State Hillary Clinton did on her recent visit to Greece, praising its austerity plan as a model for the United States to follow! “‘We stand by the people and government of Greece as you put your country back on a path to economic stability and prosperity,’ Ms. Clinton said, noting that this progress was essential for the United States, too.” But not too much austerity when it came to supporting Obama’s war against Libya. She “emphasized Washington’s ‘strong support’ for Greece’s commitment to right its debt-ridden economy through tough austerity measures, and she thanked the Greek government for its contribution to NATO-led operations in Libya …”             This blather about “standing by the people” is Orwellian in view of the popular demonstrations in front of the Parliament in Athens: “She praised the determination of the Greek government to impose a new raft of austerity measures, which were voted through Greece’s Parliament last month amid violent street protests, describing the initiative as ‘vital first steps and acts of leadership.’” The government acted against the democracy to obey the European Central Bank.             Europe’s response is to ask just who put Mr. Geithner and Ms. Clinton in power over European governments. Who put the American Treasury and State Department in a position to demand that Ireland, Greece, Portugal, Spain and other countries impose economic depression in order to pay their debts and help American casino capitalists win on their bets that the oligarchy will defeat democracy and lead the world down to a race to the bottom?             When I was in Norway earlier this year, one of its politicians sat next to me at a dinner and said: “You know, there’s one good thing that President Obama has done that we never anticipated in Europe. He’s shown the Europeans that we can never depend on America again. No matter how good he sounds, no matter what he promises, we’re never again going to believe the patter talk of an American President. Mr. Obama has cured us. Our problem is what to do about the American people that don’t realize this nightmare that they’ve created, this smooth-talking American Tony Blair in the White House.”   What is your assessment of the new head of the IMF, Christine Lagarde?             She made her reputation as a corporate lawyer lobbying against labor unions and how companies could oppose attempts to improve workplace conditions. So she’s in the right position, because austerity is what the IMF is selling. Its product is austerity. She’s an appropriate person to impose poverty. She supports the banks and the neoliberal IMF philosophy.   You describe a class war of banks against all the rest of society, cutting across the notion of left or right in political terms. Could you elaborate on that?           This is hard to get across, because finance really isn’t a class. Classical economics ended up defining classes in terms of “factors of production.” Money and credit are not factors of production; they are external to the technological production process. An important discussion of this occurred in the 1970s and '80s in Russia. Stalin had asked leading ancient historians to look at class conflict in antiquity to see whether there was any basis for the theory of Oriental despotism. Muhammad Dandamaev wrote a good book published by the University of Illinois Press on slavery in ancient Babylonia. He said finance isn’t really a class, because everybody is a creditor and a debtor simultaneously. He said creditors were a legal “estate.”             In America, employees save money and have Social Security savings as well as owing debts. Nearly everyone is a creditor to somebody, as well as being a debtor. If you look at the 19th-century discussions about class warfare, it was about owners of industrial capital. There also was a land-owning class, but bankers were not treated as a class. They were seen as intermediaries, providing credit for commerce. But most people thought of wealth as being land or stock ownership. So I use the terminology of finance as a class very loosely, not in the classical sense of the term.             What is key here is the “miracle” of compound interest. It enables the financial oligarchy to get the rest of society into debt. Now that interest-bearing credit can be created on bank computer keyboards without limit, banks can appropriate wealth by pushing the rest of society into debt – up to the point where the entire surplus is used to pay interest and financial fees, not to raise living standards, invest in tangible industrial capital formation, or pay taxes.             So today’s analysis of class economic warfare should focus on what national income economists call the FIRE sector – finance, insurance and real estate. It is a symbiotic sector that’s emerged to become the core where most economy planning now occurs. A hundred years ago people thought heavy industry, the steel companies, railroads and public utilities would do the planning – with finance playing a coordinating role in production. Debt was expected to be productive, created to finance new means of production.             Increasingly, early 20th-century writers expected governments to coordinate the planning – not only the socialists but observers in general. But what has emerged is not governments doing the planning, or industry, but Wall Street and the financial sector. Nobody a hundred years ago expected anything like this. You have essentially a new class, indeed a new bureaucracy – but not the bureaucracy that Hayek warned about in The Road to Serfdom. Wall Street in America, the city of London in England, the Bourse in France and Frankfurt in Germany are much more centralized planning bureaucracies. And they have gained control of government. Central banks are supposed to be “independent,” meaning controlled by financial interests rather than by elected political representatives. So financial interests have managed to centralize planning power and the economic surplus in their own hands.             The tragedy of all this is that they are doing this in a way that’s impoverishing the rest of society. This is something entirely new. The political system has not come to terms with it. The financial planning time frame is short-term, and focuses on hit-and-run extractive activities.             A paradigmatic example is the wave of leveraged buyouts and corporate raids since the 1980s. This is the kind of thing that is taught in business schools – how to carve up an economy, extracting the surplus in outright predatory ways. Take the recent case of Sam Zell’s takeover of the Chicago Tribune. Here’s what a JPMorgan Chase financial analyst, Jieun (Jayna) Choi, wrote in an e-mail on how her bank could collect commissions in a parasitic way: There is wide speculation that [Tribune] might have [taken on so much debt that all of its assets aren’t gonna cover the debt in case of (knock-knock) you know what. Well that’s what we [the bank’s Tribune team] are saying, too. But we’re doing this ‘cause it’s enough to cover our bank debt. So, lesson learned from this deal: our (here I mean JPM’s) business strategy for TRB, but probably not only limited to TRB is ‘hit and run’ – we’ll s_uck the sponsor’s a$$ as long as we can s_uck $$$s out of the (dying or dead?) client’s pocket, and we really don’t care as long as our a$$ is well-covered. Fxxk 2nd/private guys – they’ll be swallowed by big a$$ banks like us, anyways.               Here you have the guiding spirit of today’s financial planning in a nutshell. What is not immediately clear is that the ECB and U.S. Federal Reserve support precisely this kind of asset stripping. This is what I mean when I said that finance has gained control of governments.   You said that when you devalue a currency, what you’re really devaluing is the price of labor.               All countries have a common global price schedule for fuels, raw materials, machinery and hard currency credit. So this global price list for these basic inputs remains unchanged by devaluation. What are affected when the currency goes up and down are domestic prices and incomes. These are mainly payments for labor and real estate.             In the 1980s, for instance, when the United States was pushing Japan to raise the value of the yen, it did indeed rise in price against the dollar. But the Japanese paid the same global rate for their oil, iron and steel, copper and other raw materials as did U.S. producers.The only cost that went up were Japanese labor costs. And inasmuch as their trade was “price inelastic,” American consumers paid more. Where this was not the case, Japanese producers accepted lower profit rates.             By the same token, if the U.S. dollar’s exchange rate is driven down, America’s still must pay the same price as other countries for its fuels and raw materials and equipment. What will become less expensive is the price of labor. It will be worth less in terms of euros or other currencies. Likewise in Greece. If it leaves the eurozone, adopts the drachma and devalues, its foreign debts will be in hard currency. So it will have to pay more in drachma for its euro debts, dollar debts and other foreign currency debts. This will offset much of what it “saves” in lower labor costs. Meanwhile, Greece must continue to pay world prices for its basic inputs. So the idea is to lower the cost of labor, but export prices will not fall anywhere near in proportion to the degree that the currency is devalued.             One way the Greek government could help would be to devalue the drachma, and then pass a law denominating all debts in its own local currency. This is analogous to what President Roosevelt did when he negated the “gold clause” in U.S. debts when he devalued the dollar in 1932. As a sovereign country, Greece has the right to do this under international law.             Of course, it is harder to devalue debts owed to international organizations such as the IMF or European Central Bank than it is to screw commercial bankers and bondholders. That is why the current bailout is so dangerous for the Greek people, and why its Socialist government is acting so seriously against national interests.   So you’re saying that with a dollar devaluating, American labor actually earns less, and has less buying power.               The price of what Americans imports from China will go up, for instance. Walmart will have to charge people higher prices. The cost of its oil and metal also will rise. This will squeeze the budgets of employees and raise the economy’s domestic cost structure faster than wages rise. This lag is what leads employers to support the idea of devaluing the dollar. It will raise the cost of living faster than wages rise. This will increase the rate of exploitation of labor.   That makes sense, in view of the fact that most things that people buy these days are imported.             That’s right. As America has deindustrialized, it has shifted production abroad, so it now is importing more consumer goods. Its exports are primarily food and arms. It’s now trying to raise the price of world grain by using corn and other crops for gasohol. This creates a shortage of world grain, driving up its price – and hence, U.S. export earnings – while driving down the price of oil. This changes the terms of trade in America’s favor, against food-exporting countries. Now that America is using its grain to make alcohol and gasoline, there’s much less available to feed people. The result is African starvation as official American policy.             This aim is similar to the Carter administration’s plan to create a food crisis to make Third World countries more dependent on the United States. The idea was that the U.S. Government could agree to give them more food, in exchange for their selling their raw materials to American firms. Their governments would have to replace democracy with government that we appoint. This would put the U.S. Secretary of State in charge of their policy, not its own people.             This is how the Americans have impoverished Third World countries, by insisting – for instance through the World Bank and IMF – that they will only be given loans if they agree not to feed themselves but depend on American grain.   So you’re saying that the United States uses the World Bank and the IMF to force other countries to import our farm products.               I’ve described this aim as Super Imperialism. For the last fifty years the mainstay of the U.S. balance of payments has been agriculture, not industry (except for arms sales, mainly to the oil-exporting dictatorships). The oil exporting countries are permitted to charge as much as they want for their oil, as long as they agree to spend it on American tanks and warplanes, and keep their savings in U.S. banks and securities. Saudi Arabia is now using U.S. tanks against local populations, especially in Bahrain. So the United States balances its payments with these countries by arming them to prevent their populations from bringing about a democratic government that would be less “dependable.”             The Arab Spring is a reaction against this policy of wasting their economic surplus on buying American arms and agreeing to buy American food. That’s the role of the World Bank and IMF – to make other countries dependent on the United States.   And the way they effect that is to get other countries in debt.             That’s right. Not only in debt, but also in food dependency on the United States so that at the stroke of a pen the Secretary of State can say: “You’re not on our approved list. We are going to starve your population until you agree to follow American policy and sell off your public domain to American companies.”             This is why I said that finance is the new mode of warfare. Finance and food dependency achieve today what military invasion did in times past.   Now Dr. Hudson, just to clarify, how can the United States force other countries not to be self-sufficient in their agriculture? How are they forced to not grow their own crops?               There were proposals in the 1950s for the United Nations and the United States to promote land reform. I’m told that David Rockefeller at Chase Manhattan gave John Deaver, the economic research director (and my former boss) a copy of the Forgash Plan (named for Morris Forgash of U.S. Freight. The plan was drafted by my own mentor, Terence McCarthy, and put before Congress by Sen. Smathers of Florida). The plan was for a World Bank for Economic Acceleration, and a central aim was to promote land reform and finance domestic-currency investment in agriculture.             Unfortunately, Mr. Deaver is reported to have said that in every country that has undertaken land reform to grow their own crops, there’s been an anti-American feeling. Well, ever since, this anti-Americanism reflects the fact that American foreign policy is dictated largely by U.S. agribusiness interests, especially the large grain dealers. The mainstay of the U.S. balance of payments is food. This promotion of foreign food dependency is the most constant element of U.S. foreign policy since World War II.             The financial counterpart is that when other countries need foreign exchange to develop, the United States seeks to have its banks create this credit. It threatens to create a foreign exchange crisis if countries do not follow U.S. dictates. So these  countries are faced with a choice: either to withdraw from the world trade and financial system and go their own way, or remain in it, on terms that surrender their financial and food sovereignty. The price of remaining a member in good standing with the World Bank, IMF and WTO is to agree not to protect their own agriculture but to build in a special favoritism to U.S. agriculture; and not to promote their own domestic credit creation, especially by the public sector, but let commercial banks (especially U.S. bank affiliates) do this. My book, Super Imperialism, explains how this system was put in place to distort international trade and finance.   I’ve always been mystified as to why countries join the IMF and the World Bank. Why don’t they go it alone?               The question is, who are the “they” that you mean? Who is Argentina? Who is Brazil? It’s not as if the whole country makes the decision.These countries are very largely their own oligarchies. For instance, when I started the Third World Bond Fund for Scudder Stevens in 1990, Brazilian and Argentine bonds were yielding 45% interest. Nobody would buy these bonds in America. Scudder was unable to sell shares in this fund to American or European buyers. The investors were wealthy families in Brazil and Argentina, because they knew that they were going to pay the debt. So the “Yankee dollar” imperialists being blamed for Latin America’s balance-of-payments problem were actually Argentinean and Brazilian oligarchs, operating through offshore funds with the dollars they’d siphoned out of their own country.             If you have a country run like Saudi Arabia or other dictatorships, a client oligarchy is kept in place by U.S. diplomacy. That’s why America backed dictators in Latin America for fifty years after World War II. President Johnson said: “They may be bastards, but they’re our bastards.” The oligarchy’s interest is to weaken their currencies, because the oligarchs have their money outside these countries. There’s massive capital flight, and the more their currency sinks, the more dollars they have to borrow. They borrow many of these dollars from their own domestic oligarchy. Its hard-currency offshore assets rise in value against their domestic labor, whose wages are being depreciated.             The rentier oligarchy floats on top, as Werner Sombart said, like globules of fat on the soup of the economy. They benefit from this while the economy suffers as a whole. This is the problem with neoliberal reform. It has created oligarchies throughout the former Soviet Union, from the Baltics to Central Asia. We can see the same in Latin America, and in what the U.S. and Europe have been promoting in the Near East. The interest of Saudi Arabia and Bahrain is not that of their citizens; it’s that of the rulers on top of these economies.   You have written that the bailout of Greek sovereign debt amounts to financial warfare seeking the Greek Islands, ports, water and sewer systems as booty. How is this asset stripping accomplished?               The European Central Bank and the IMF told Greece that it had to run a budget surplus or at least minimize its budget deficit to meet the eurozone criteria. But it was not to balance the budget by taxing the rich. That’s the ECB’s constituency, after all. Greece was told to sell off its ports and public domain, and counting this as budget revenue. So it would balance the budget not by progressive taxation, which is how America and Western Europe got rich, but by selling off the public domain – mainly to foreigners.             The idea that the Greek economy could become more efficient and lower-cost by selling off these public assets is without foundation. The new buyers are not going to lower the prices charged for water and ports services. This is mythology based on junk economies. When you privatize a basic infrastructure, it’s done on credit. So the new owners factor their interest and financial charges into the cost of doing business. They also pay themselves enormous salaries, much higher than the public sector would pay. And they use their monopoly position to put tollbooths on the roads, on water and sewer usage – tollbooths everywhere.             If governments don’t have a price-regulating system in place to treat these infrastructure investments like public utilities – to keep their prices in line with the necessary costs of production – then the economy will be drained by what economists call rent extraction. “Economic rent” consists of predatory monopoly charges, much like rent racking by landlords (charging as much as the market will bear), but instead of being charged for land it is charged for access to water, sewer services, use of broadcasting spectrum, telephones and so forth. You end up with an economy that looks like Mexico, where they privatized the telephones to Carlos Slim. He became the wealthiest person in the world by making Mexicans pay the highest prices in the world to make phone calls and use the communications spectrum.             This is the neoliberal mode. It pretends that Greece can get rich by letting the Carlos Slims of the world come in and take over its economy. What is unique today is that this is not being done with an army. No paratroopers are going to land. European and other foreign banks and governments will give political contributions to Socialist lawmakers members to vote in favor of giving the country away. All this is being done financially without bloodshed – except for firing on demonstrators in the streets.             And now Ms. Clinton calls this democracy, not oligarchy.   Michael Hudson, thank you very much. Thank you, Bonnie. Dr. Hudson is a financial economist and historian. He is president of the Institute for the Study of Long Term Economic Trends, a Wall Street financial analyst and Distinguished Research Professor of Economics at the University of Missouri-Kansas City. His 1972 book, Super Imperialism: The Economic Strategy of American Empire, is a critique of how the United States exploited foreign economies through the IMF and World Bank. He is also author of Trade, Development and Foreign Debt and Global Fracture: The New International Economic Order, among many others. Dr. Hudson has been a consultant to foreign governments including Canada, Mexico and Russia. Visit his website at www.michael-hudson.com. That’s Michael dash H-U-D-S-O-N dot com.   Guns and Butter is produced and edited by Bonnie Faulkner and Yarra Balko. To leave comments or order copies of shows, email us at blfaulkner@yahoo.com.Visit our website at www.gunsandbutter.org.

Michael Hudson is a frequent contributor to Global Research.  Global Research Articles by Michael Hudson