While Maven is spiffing up her new digs, she’s been emailing links to interesting articles. Her latest is to this Truthout article about our national debt and deficit. Cheney was right, national deficits don’t matter. Neither does national debt if it is incurred properly.
Keep in mind that the government is not like a family or a private business. Neither of those entities can issue their own money. Every time I hear some politician say that the goverment, like a family, has to live within its means (and that includes President Obama), I want to scream. No family can “create” its own “means.” The government can.
Read on.
Under our current monetary scheme, debt and deficits not only don’t matter but are actually necessary in order to maintain a stable money supply. The reason was explained by Marriner Eccles, governor of the Federal Reserve Board, in hearings before the House Committee on Banking and Currency in 1941. Wright Patman asked Eccles how the Federal Reserve got the money to buy government bonds.
“We created it,” Eccles replied.
“Out of what?”
“Out of the right to issue credit money.”
“And there is nothing behind it, is there, except our government’s credit?”
“That is what our money system is,” Eccles replied.“If there were no debts in our money system, there wouldn’t be any money.”
That could explain why the US debt hasn’t been paid off since 1835. It has just continued to grow and the economy has grown and flourished along with it. A debt that is never paid off isn’t really a debt. Financial planner Mark Pash calls it aNational Monetization Account. Government bonds (or debt) are “monetized” (or turned into money). Government bonds and dollar bills are the yin and yang of the money supply, the negative and positive sides of the national balance sheet. To have a plus-1 on one side of the balance sheet, a minus-1 needs to be created on the other.
Except for coins, all of the money in the US money supply now gets into circulation as a debt to a bank (including the Federal Reserve, the central bank). But private loans zero out when they are repaid. In order to keep the money supply fairly constant, some major player has to incur debt that never gets paid back; and this role is played by the federal government.
But the deficit! The debt! We’re going to go belly up!
Um. Nope. Not if we borrow from ourselves. Check out Japan.
Japan’s economy remains viable, although its debt-to-GDP ratio is nearly four times that of the United States, because the money does not leave the country to pay off foreign creditors. Rather, it is recycled into the Japanese economy. As economist Hazel Henderson points out, Japan’s debt is twice its GDP only because of an anomaly in how GDP is calculated: it omits government-provided services. If they were included, Japan’s GDP would be much higher and its debt-to-GDP ratio would be more in line with other countries.’ Investments in education, health care and Social Security may not count as “sales,” but they improve both the standard of living of the people and national productivity. Businesses that don’t have to pay for health care can be more profitable and competitive internationally. Families that don’t have to save hundreds of thousands of dollars to put their children through college can spend on better housing, more vacations, and other consumer items.
Locke calls the Japanese model “a capitalist economy with socialized capital markets.” The national debt has been “monetized” – turned into the national money supply. The credit of the nation has been turned into a public utility.
Thomas Hoenig, president of the Kansas City Federal Reserve, maintains that the largest US banks should be put in that category as well. At the National Association of Attorneys General conference on April 12, he said that the 2008 bank bailouts and other implicit guarantees effectively make the too-big-to-fail banks government-guaranteed enterprises, like mortgage finance companies Fannie Mae and Freddie Mac. He said they should be restricted to commercial banking and barred from investment banking.
“You’re a public utility, for crying out loud,” he said.
The direct way for the government to fund its budget would have been to simply print the money debt-free. Wright Patman, chairman of the House Banking and Currency Committee in the 1960s, wrote:
“When our Federal Government, that has the exclusive power to create money, creates that money and then goes into the open market and borrows it and pays interest for the use of its own money, it occurs to me that that is going too far…. [I]t is absolutely wrong for the Government to issue interest-bearing obligations…. It is absolutely unnecessary.”
But that is the system that we have. Deficits don’t matter in this scheme, but the interest does. If we want to keep the interest tab very low, we need to follow the Japanese and borrow the money from ourselves through our own government-owned banks, essentially interest-free. “The full faith and credit of the United States” needs to be recognized and dispensed as a public utility.
Back in 2009 I wrote this post on state-owned banks.
My friend sent me a link to this article by Ellen Brown wherein she outlines how states can remedy their insolvency crises by chartering state-owned banks. She cites the example of cash-rich North Dakota, which has had a state-owned bank since 1919, explains how it works, and then examines the bigger picture.
Some experts insist that we must tighten our belts and start saving again, in order to rebuild the “capital” necessary for functioning markets; but our markets actually functioned quite well so long as the credit system was working. We have the same real assets (raw materials, oil, technical knowledge, productive capacity, labor force, etc.) that we had before the crisis began. Our workers and factories are sitting idle because the private credit system has failed. A system of public credit could put them back to work again. The notion that “money” is something that has to be “saved” before it can be “borrowed” misconstrues the nature of money and credit. Credit is merely a legal agreement, a “monetization” of future proceeds, a promise to pay later from the fruits of the advance.
Furthermore, money that is now paid to Wall Street and private financial institutions in the form of interest goes right back to the state, rather than bonuses, perks and gargantuan salaries of those “irreplaceable” CEOs. Even better, the state would not be at the mercy of private financial institutions when it comes to interest rates either. The state bank can charge whatever rate it wants, allowing for very low cost financing of especially worthy projects.
I’m not seeing the down side of this. It would certainly help here in Nevada.
Or for our country either.
On a personal note, I’m off to southern California for a week to attend the ACHA conference, spend some time with my parents, and take another trip to Disneyland with daughter. Posting may be lighter than usual. Sweetie is holding down the fort at home. Have I mentioned what a great guy he is?
PS – It appears I put my seedlings in the ground too soon, and with the exception of the green beans, the snow peas, and perhaps the carrots, I will likely need to do start a new set of seeds when I get back. Hey, live and learn, right?
