It used to be that when the chairman of
the United States Federal Reserve spoke, the
market listened; but the chairman has lost his
mystique. Now when the market speaks, politicians
listen. Hopefully they heard what the market just
said: government cutbacks are bad for business.
The government needs to spend more, not less.
Fortunately, there are viable ways to do this
while still balancing the budget.
The
markets were supposed to rebound after the United
States debt ceiling agreement was reached last
Monday. But even before downgrade of the US debt
rating, the market apparently understood what
politicians didn't: that the debt deal was a death
deal for the economy. Reducing government spending
by US$2.2 trillion over a decade, as congress
agreed to do, will kill any
hopes of economic recovery.
We're looking at a double-dip recession.
The figure is actually more than $2.2
trillion. As Jack Rasmus pointed out on Truthout
on August 4:
Economists estimate the "multiplier"
from government spending at about 1.5. That
means for every $1 cut in government spending,
about $1.50 is taken out of the economy. The
first year of cuts are therefore $375 billion to
$400 billion in terms of their economic effect.
Ironically, that's about equal to the spending
increase from President Barack Obama's 2009
initial stimulus package. In other words, we are
about to extract from the economy - now showing
multiple signs of weakening badly - the original
spending stimulus of 2009! As others have
pointed out, that magnitude of spending
contraction will result in 1.5 million to 2
million more jobs lost. That's also about all
the jobs created since the trough of the
recession in June 2009. In other words, the job
market will be thrown back two years as
well.
We're not moving forward. We're
moving backward. The hand-wringing is all about
the "debt crisis" but the national debt is not
what has stalled the economy, and the crisis was
not created by Social Security or Medicare, which
are being set up to take the fall. It was created
by Wall Street, which has squeezed trillions in
bailout money from the government and the
taxpayers; and by the military, which has squeezed
trillions more for an amorphous and unending "War
on Terror." But the hits are slated to fall on the
so-called "entitlements" - a social safety net
that we the people are actually entitled to,
because we paid for them with taxes.
The problem is a shrinking money
supply The markets are not reacting to a
"debt crisis". They do not look at charts 10 years
out. They look at present indicators of jobs and
sales, which have turned persistently negative.
Jobs and sales are both dependent on "demand,"
which means getting money into the pockets of
consumers; and the money supply today has shrunk.
We don't see this shrinkage because it is
primarily in the "shadow banking system," the
thing that collapsed in 2008. The shadow banking
system used to be reflected in M3, but the Fed no
longer reports it. In July 2010, however, the New
York Fed posted on its website a staff report
titled "Shadow Banking". It said that the shadow
banking system had shrunk by $5 trillion since its
peak in March 2008, when it was valued at about
$20 trillion - actually larger than the
traditional banking system. In July 2010, the
shadow system was down to about $15 trillion,
compared to $13 trillion for the traditional
banking system.
Only about $2 trillion of
this shrinkage has been replaced with the Fed's
quantitative easing programs, leaving a $3
trillion hole to be filled; and only the
government is in a position to fill it. We have
been sold the idea that there is a "debt crisis"
when there is really a liquidity crisis. Paying
down the federal debt when money is already scarce
just makes matters worse. Historically, when the
deficit has been reduced, the money supply has
been reduced along with it, throwing the economy
into recession.
Most of our money now
comes into the world as debt, which is created on
the books of banks and lent into the economy. If
there were no debt, there would be no money to run
the economy; and today, private debt has
collapsed. Encouraged by Fed policy, banks have
tightened up lending and are sitting on their
money, shrinking the circulating money supply and
the economy.
Creative ways to a
balanced budget The federal debt has not
been paid off since the days of Andrew Jackson,
and it does not need to be paid off. It is just
rolled over from year to year. The only real
danger posed by a growing federal debt is the
interest burden, but that has not been a problem
yet. The Congressional Budget Office reported in
December 2010:
[A] sharp drop in interest rates has
held down the amount of interest that the
government pays on [the national] debt. In 2010,
net interest outlays totaled $197 billion, or
1.4 percent of GDP - a smaller share of GDP than
they accounted for during most of the past
decade.
The interest burden will
increase if the federal debt continues to grow,
but that problem can be solved by mandating the
Federal Reserve to buy the government's debt. The
Fed rebates its profits to the government after
deducting its costs, making the money nearly
interest-free. The Fed is already doing this with
its quantitative easing programs and now holds
nearly $1.7 trillion in federal securities.
If congress must maintain its debt
ceiling, there are other ways to balance the
budget and avoid a growing debt. Ron Paul has
brought a creative bill that would eliminate the
$1.7 trillion deficit simply by having the Fed
tear up its federal securities. No creditors would
be harmed, since the money was generated with a
computer keystroke in the first place. The
government would just be canceling a debt to
itself and saving the interest.
The
trillion dollar coin alternative The most
direct solution to the debt problem is for the
government to fund its budget with
government-issued money. One alternative would be
for the Treasury to issue US Notes, as was done in
the Civil War by President Lincoln.
Another alternative was suggested in my
book Web of Debt in 2007: the government
could simply mint some trillion dollar coins.
Congress has the constitutional power to "coin
money", and no limit is put on the value of the
coins it creates, as was pointed out by a chairman
of the House Coinage Subcommittee in the 1980s.
This idea is now getting some attention
from economists. According to a July 29th article
in the Johnsville News titled "Coin Trick: The
Trillion Dollar Coin":
The idea just started to get serious
traction the last few days as the debt stalemate
has grown more intense and partisan. Yale
constitutional law professor Jack Balkin floated
it as an option in a CNN op-ed (July 28).
Today the idea has gone mainstream. Even
Nobel economist Paul Krugman of the New York
Times has weighed in. Annie Lowrey of Slate
discusses it as one of several gimmicks the
government could use to resolve the debt-ceiling
debacle. Krugman added: These things [like coin
seigniorage] sound ridiculous but so is the
behavior of congressional Republicans. So why
not fight back using legal tricks?
The
debt ceiling itself was a legal trick, a form of
extortion based on a century-old statute that
conflicts with the Constitution. However, said the
Johnsville News article, "coin seigniorage is not
a scam. It is legal . . . . This plan looks like
it might be Obama's ace in the hole ..."
The article cites Warren Mosler, founder
of MMT (Modern Monetary Theory), who reviewed the
idea in a January 20th blog post and concluded it
would work operationally.
Scott Fullwiler,
associate professor of economics at Wartburg
College, also did a comprehensive analysis and
concluded that the trillion dollar coin
alternative was unlikely to result in inflation.
Comparing it to Ron Paul's plan, he wrote:
This option is much like Ron Paul's
proposal - actually identical in terms of the
effect on the debt ceiling and the Treasury -
except that his proposal would destroy all of
the Fed's capital (and then some), which is a
potential problem politically ... though not
operationally, and which the Fed is therefore
very unlikely to agree to.
On the
inflation question, just because the Treasury has
money in its account doesn't mean it can spend the
funds. It needs the usual congressional approval.
To keep a lid on spending, congress just needs to
be instructed in basic economics. They can spend
on goods and services up to full employment
without creating price inflation (since supply and
demand will rise together). After that, they need
to tax - not to fund the budget, but to pull
excess money back in and avoid driving up prices.
Spending more, borrowing less In
an economic downturn, the government needs to
spend more, not less, as history shows. This can
be done while still balancing the budget, simply
by taking back the government's constitutional
power to issue money.
The budget crisis is
an artificial one, and the current "solution" will
only guarantee a deeper recession and more
widespread suffering. Rather than obsessing over
deficits and debt, the government needs to turn
its focus to jobs, sales and quality of life.
Ellen Brown is president of the
Public Banking Institute and the author of eleven
books. She developed her research skills as an
attorney practicing civil litigation in Los
Angeles. In Web of Debt, she turns those skills to
an analysis of the Federal Reserve and "the money
trust." Her websites are WebofDebt.com and
PublicBankingInstitute.org.(Copyright Ellen Brown
2011)
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