Debate continues to rage between the inflationists who say the United States
money supply is increasing, dangerously devaluing the currency, and the
deflationists who say we need more money in the economy to stimulate
productivity. The debate is not just an academic one, since the Federal
Reserve's monetary policy turns on it and so does congressional budget policy.
Inflation fears have been fueled since 2009, when the Fed began its policy of
"quantitative easing" (effectively "money printing"). The inflationists point
to commodity prices that have shot up. The deflationists, in turn, point to the
housing market, which has collapsed and taken prices down with it. Prices of
consumer products other than food and fuel are also down. Wages have
remained stagnant, so higher food and gas prices mean people have less money to
spend on consumer goods.
The bubble in commodities, say the deflationists, has been triggered by the
fear of inflation. Commodities are considered a safe haven, attracting a flood
of "hot money" - investment money racing from one hot investment to another.
To resolve this debate, we need the actual money supply figures. Unfortunately,
the Fed quit reporting M3, the largest measure of the money supply, in 2006.
Fortunately, figures are still available for the individual components of M3.
Here is a graph that is worth a thousand words. It comes from ShadowStats.com
(Shadow Government Statistics or SGS) and is reconstructed from the available
data on those components. The red line is the M3 money supply reported by the
Fed until 2006. The blue line is M3 after 2006.
The chart shows that the overall US money supply is shrinking, despite the
Fed's determination to inflate it with quantitative easing. Like Japan, which
has been doing quantitative easing (QE) for a decade, the US is still fighting
deflation.
Here is another telling chart - the M1 Money Multiplier from the Federal
Reserve Bank of St Louis:
Barry Ritholtz comments, "All that heavy breathing about the flood of liquidity
that was going to pour into the system. Hyper-inflation! Except not so much,
apparently."
He quotes David Rosenberg: "Fully 100% of both QEs by the Fed merely was new
money printing that ended up sitting idly on commercial bank balance sheets.
Money velocity and money multiplier are stagnant at best." If QE1 and QE2 are
sitting in bank reserve accounts, they're not driving up the price of gold,
silver, oil and food; and they're not being multiplied into loans, which are
still contracting. The part of M3 that collapsed in 2008 was the "shadow
banking system", including money market funds and repos. This is the non-bank
system in which large institutional investors that have substantially more to
deposit than $250,000 (the Federal Deposit Insurance Corporation insurance
limit) park their money overnight.
Economist Gary Gorton explains:
[T]he financial crisis ... [was] due to
a banking panic in which institutional investors and firms refused to renew
sale and repurchase agreements (repo) - short-term, collateralized, agreements
that the Fed rightly used to count as money. Collateral for repo was, to a
large extent, securitized bonds. Firms were forced to sell assets as a result
of the banking panic, reducing bond prices and creating losses. There is
nothing mysterious or irrational about the panic. There were genuine fears
about the locations of subprime risk concentrations among counterparties. This
banking system (the "shadow" or "parallel" banking system) - repo based on
securitization - is a genuine banking system, as large as the traditional,
regulated banking system. It is of critical importance to the economy because
it is the funding basis for the traditional banking system. Without it,
traditional banks will not lend, and credit, which is essential for job
creation, will not be created. [Emphasis added.]
Before the
banking crisis, the shadow banking system composed about half the money supply,
and it still hasn't been restored. Without the shadow banking system to fund
bank loans, banks will not lend; and without credit, there is insufficient
money to fund businesses, buy products, or pay salaries or taxes. Neither
raising taxes nor slashing services will fix the problem. It needs to be
addressed at its source, which means getting more credit (or debt) flowing in
the local economy.
When private debt falls off, public debt must increase to fill the void. Public
debt is not the same as household debt, which debtors must pay off or face
bankruptcy. The US federal debt has not been paid off since 1835. Indeed, it
has grown continuously since then, and the economy has grown and flourished
along with it.
As explained in an earlier article, the public debt is the people's money. The
government pays for goods and services by writing a check on the national bank
account. Whether this payment is called a "bond" or a "dollar", it is simply a
debit against the credit of the nation. As Thomas Edison said in the 1920s:
If
our 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 the bond lets money brokers collect twice the amount of
the bond and an additional 20%, whereas the currency pays nobody but those who
contribute directly in some useful way. ... It is absurd to say our country can
issue $30 million in bonds and not $30 million in currency. Both are promises
to pay, but one promise fattens the usurers and the other helps the people.
That is true, but congress no longer seems to have the option of issuing
dollars, a privilege it has delegated to the Federal Reserve. Congress can,
however, issue debt, which as Edison says amounts to the same thing. A bond can
be cashed in quickly at face value. A bond is money, just as a dollar is.
An accumulating public debt owed to the International Monetary Fund or to
foreign banks is to be avoided, but compounding interest charges can be
eliminated by financing state and federal deficits through state- and federally
owned banks. Since the government would own the bank, the debt would
effectively be interest-free. More important, it would be free of the demands
of private creditors, including austerity measures and privatization of public
assets.
Far from inflation being the problem, the money supply has shrunk and we are in
a deflationary bind. The money supply needs to be pumped back up to generate
jobs and productivity; and in the system we have today, that is done by issuing
bonds, or debt.
Ellen Brown is an attorney and president of the Public Banking Institute,PublicBankingInstitute.org. In
Web of Debt, her latest of 11 books, she shows how a private cartel has usurped
the power to create money from the people themselves, and how we the people can
get it back. Her websites arewebofdebt.com
and ellenbrown.com.
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