- Last week, England's new government said it would abandon
the previous government's stimulus program and introduce the austerity
measures required to pay down its estimated $1 trillion in debts. That
means cutting public spending, laying off workers, reducing consumption,
and increasing unemployment and bankruptcies. It also means shrinking the
money supply, since virtually all "money" today originates as
loans or debt. Reducing the outstanding debt will reduce the amount of
money available to pay workers and buy goods, precipitating depression
and further more economic pain.
- The financial sector has sometimes been accused of shrinking
the money supply intentionally, in order to increase the demand for its
own products. Bankers are in the debt business, and if governments are
allowed to create enough money to keep themselves and their constituents
out of debt, lenders will be out of business. The central banks charged
with maintaining the banking business therefore insist on a "stable
currency" at all costs, even if it means slashing services, laying
off workers, and soaring debt and interest burdens. For the financial business
to continue to boom, governments must not be allowed to create money themselves,
either by printing it outright or by borrowing it into existence from their
own government-owned banks.
- Today this financial goal has largely been achieved.
In most countries, 95% or more of the money supply is created by banks
as loans (or "credit"). The small portion issued by the government
is usually created just to replace lost or worn out bills or coins, not
to fund new government programs. Early in the twentieth century, about
30% of the British currency was issued by the government as pounds sterling
or coins, versus only about 3% today. In the U.S., only coins are now issued
by the government. Dollar bills (Federal Reserve Notes) are issued by the
Federal Reserve, which is privately owned by a consortium of banks.
- Banks advance the principal but not the interest necessary
to pay off their loans; and since bank loans are now virtually the only
source of new money in the economy, the interest can only come from additional
debt. For the banks, that means business continues to boom; while for the
rest of the economy, it means cutbacks, belt-tightening and austerity.
Since more must always be paid back than was advanced as credit, however,
the system is inherently unstable. When the debt bubble becomes too large
to be sustained, a recession or depression is precipitated, wiping out
a major portion of the debt and allowing the whole process to begin again.
This is called the "business cycle," and it causes markets to
vacillate wildly, allowing the monied interests that triggered the cycle
to pick up real estate and other assets very cheaply on the down-swing.
- The financial sector, which controls the money supply
and can easily capture the media, cajoles the populace into compliance
by selling its agenda as a "balanced budget," "fiscal responsibility,"
and saving future generations from a massive debt burden by suffering austerity
measures now. Bill Mitchell, Professor of Economics at the University of
New Castle in Australia, calls this "deficit terrorism." Bank-created
debt becomes more important than schools, medical care or infrastructure.
Rather than "providing for the general welfare," the purpose
of government becomes to maintain the value of the investments of the government's
- England Dons the Hair Shirt
- England's new coalition government has just bought into
this agenda, imposing on itself the sort of fiscal austerity that the International
Monetary Fund (IMF) has long imposed on Third World countries, and has
more recently imposed on European countries, including Latvia, Iceland,
Ireland and Greece. Where those countries were forced into compliance by
their creditors, however, England has tightened the screws voluntarily,
having succumbed to the argument that it must pay down its debts to maintain
the market for its bonds.
- Deficit hawks point ominously to Greece, which has been
virtually squeezed out of the private bond market because nobody wants
its bonds. Greece has been forced to borrow from the IMF and the European
Monetary Union (EMU), which have imposed draconian austerity measures as
conditions for the loans. Like a Third World country owing money in a foreign
currency, Greece cannot print Euros or borrow them from its own central
bank, since those alternatives are forbidden under EMU rules. In a desperate
attempt to save the Euro, the European Central Bank recently bent the rules
by buying Greek bonds on the secondary market rather than lending to the
Greek government directly, but the ECB has said it would "sterilize"
these purchases by withdrawing an equivalent amount of liquidity from the
market, making the deal a wash. (More on that below.)
- Greece is stuck in the debt trap, but the UK is not a
member of the EMU. Although it belongs to the European Union, it still
trades in its own national currency, which it has the power to issue directly
or to borrow from its own central bank. Like all central banks, the Bank
of England is a "lender of last resort," which means it can create
money on its books without borrowing first. The government owns the Bank
of England, so loans from the bank to the government would effectively
be interest-free; and as long as the Bank of England is available to buy
the bonds that don't get sold on the private market, there need be no fear
of a collapse of the value of the UK's bonds.
- The "deficit terrorists," however, will have
none of this obvious solution, ostensibly because of the fear of "hyperinflation."
A June 9 guest post by "Cameroni" on Rick Ackerman's financial
website takes this position. Titled "Britain Becomes the First to
Choose Deflation," it begins:
- David Cameron's new Government in England announced Tuesday
that it will introduce austerity measures to begin paying down the estimated
one trillion (U.S. value) in debts held by the British Government. . .
. [T]hat being said, we have just received the signal to an end to global
stimulus measures -- one that puts a nail in the coffin of the debate on
whether or not Britain would 'print' her way out of the debt crisis. .
. . This is actually a celebratory moment although it will not feel like
it for most. . . . Debts will have to be paid. . . . [S]tandards of living
will decline . . . [but] it is a better future than what a hyperinflation
would bring us all.
- Hyperinflation or Deflation?
- The dreaded threat of hyperinflation is invariably trotted
out to defeat proposals to solve the budget crises of governments by simply
issuing the necessary funds, whether as debt (bonds) or as currency. What
the deficit terrorists generally fail to mention is that before an economy
can be threatened with hyperinflation, it has to pass through simple inflation;
and governments everywhere have failed to get to that stage today, although
trying mightily. Cameroni observes:
- [G]overnments all over the globe have already tried stimulating
their way out of the recent credit crisis and recession to little avail.
They have attempted fruitlessly to generate even mild inflation despite
huge stimulus efforts and pointless spending.
- In fact, the money supply has been shrinking at an alarming
rate. In a May 26 article in The Financial Times titled "US Money
Supply Plunges at 1930s Pace as Obama Eyes Fresh Stimulus," Ambrose
- The stock of money fell from $14.2 trillion to $13.9
trillion in the three months to April, amounting to an annual rate of contraction
of 9.6pc. The assets of institutional money market funds fell at a 37pc
rate, the sharpest drop ever.
- "It's frightening," said Professor Tim Congdon
from International Monetary Research. "The plunge in M3 has no precedent
since the Great Depression. The dominant reason for this is that regulators
across the world are pressing banks to raise capital asset ratios and to
shrink their risk assets. This is why the US is not recovering properly,"
- Too much money can hardly have been pumped into an economy
in which the money supply is shrinking. But Cameroni concludes that since
the stimulus efforts have failed to put needed money back into the money
supply, the stimulus program should be abandoned in favor of its diametrical
opposite -- belt-tightening austerity. He admits that the result will be
- [I]t will mean a long, slow and deliberate winding down
until solvency is within reach. It will mean cities, states and counties
will go bankrupt and not be rescued. And it will be painful. Public spending
will be cut. Consumption could decline precipitously. Unemployment numbers
may skyrocket and bankruptcies will stun readers of daily blogs like this
one. It will put the brakes on growth around the world. . . . The Dow will
crash and there will be ripple effects across the European union and eventually
the globe. . . . Aid programs to the Third world will be gutted, and I
cannot yet imagine the consequences that will bring to the poorest people
- But it will be "worth it," says Cameroni, because
it beats the inevitable hyperinflationary alternative, which "is just
too distressing to consider."
- Hyperinflation, however, is a bogus threat, and before
we reject the stimulus idea, we might ask why these programs have failed.
Perhaps because they have been stimulating the wrong sector of the economy,
the non-producing financial middlemen who precipitated the crisis in the
first place. Governments have tried to "reflate" their flagging
economies by throwing budget-crippling sums at the banks, but the banks
have not deigned to pass those funds on to businesses and consumers as
loans. Instead, they have used the cheap funds to speculate, buy up smaller
banks, or buy safe government bonds, collecting a tidy interest from the
very taxpayers who provided them with this cheap bailout money. Indeed,
banks are required by their business models to pursue those profits over
risky loans. Like all private corporations, they are there not to serve
the public interest but to make money for their shareholders.
- Seeking Solutions
- The alternative to throwing massive amounts of money
at the banks is not to further starve and punish businesses and individuals
but to feed some stimulus to them directly, with public projects that provide
needed services while creating jobs. There are many successful precedents
for this approach, including the public works programs of England, Canada,
Australia and New Zealand in the 1930s, 1940s and 1950s, which were funded
with government-issued money either borrowed from their central banks or
printed directly. The Bank of England was nationalized in 1946 by a strong
Labor government that funded the National Health Service, a national railway
service, and many other cost-effective public programs that served the
economy well for decades afterwards.
- In Australia during the current crisis, a stimulus package
in which a cash handout was given directly to the people has worked temporarily,
with no negative growth (recession) for two quarters, and unemployment
held at around 5%. The government, however, borrowed the extra money privately
rather than issuing it publicly, out of a misguided fear of hyperinflation.
Better would have been to give interest-free credit through its own government-owned
central bank to individuals and businesses agreeing to invest the money
- The Chinese have done better, expanding their economy
at over 9% throughout the crisis by creating extra money that was mainly
invested in public infrastructure.
- The EMU countries are trapped in a deadly pyramid scheme,
because they have abandoned their sovereign currencies for a Euro controlled
by the ECB. Their deficits can only be funded with more debt, which is
interest-bearing, so more must always be paid back than was borrowed. The
ECB could provide some relief by engaging in "quantitative easing"
(creating new Euros), but it has insisted it would do so only with "sterilization"
-- taking as much money out of the system as it puts back in. The EMU model
is mathematically unsustainable and doomed to fail unless it is modified
in some way, either by returning economic sovereignty to its member countries,
or by consolidating them into one country with one government.
- A third possibility, suggested by Professor Randall Wray
and Jan Kregel, would be to assign the ECB the role of "employer of
last resort," using "quantitative easing" to hire the unemployed
at a basic wage.
- A fourth possibility would be for member countries to
set up publicly-owned "development banks" on the Chinese model.
These banks could issue credit in Euros for public projects, creating jobs
and expanding the money supply in the same way that private banks do every
day when they make loans. Private banks today are limited in their loan-generating
potential by the capital requirement, toxic assets cluttering their books,
a lack of creditworthy borrowers, and a business model that puts shareholder
profit over the public interest. Publicly-owned banks would have the assets
of the state to draw on for capital, a clean set of books, a mandate to
serve the public, and a creditworthy borrower in the form of the nation
itself, backed by the power to tax.
- Unlike the EMU countries, the governments of England,
the United States, and other sovereign nations can still borrow from their
own central banks, funding much-needed programs essentially interest-free.
They can but they probably won't, because they have been deceived into
relinquishing that sovereign power to an overreaching financial sector
bent on controlling the money systems of the world privately and autocratically.
Professor Carroll Quigley, an insider groomed by the international bankers,
revealed this plan in 1966, writing in Tragedy and Hope:
- [T]he powers of financial capitalism had another far-reaching
aim, nothing less than to create a world system of financial control in
private hands able to dominate the political system of each country and
the economy of the world as a whole. This system was to be controlled in
a feudalist fashion by the central banks of the world acting in concert,
by secret agreements arrived at in frequent private meetings and conferences.
- Just as the EMU appeared to be on the verge of achieving
that goal, however, it has started to come apart at the seams. Sovereignty
may yet prevail.