THE RETREAT OF THE SHADOW LENDERS: WHY DEFLATION, NOT INFLATION, IS THE ORDER OF THE DAY

While contrarians are screaming “hyperinflation!”, the money supply is actually shrinking. This is because most money today comes into existence as bank loans, and lending has shrunk substantially. That means the Fed needs to “monetize” debt just to fill the breach.

Read more here –
http://www.webofdebt.com/articles/quantitative_easing.php

39 Responses

  1. ELLEN:

    PLEASE POST A COMMENT TO THIS ARTICLE:

    http://writ.lp.findlaw.com/scripts/send_mail_friend.pl?action=send_form&url=/commentary/20090618_buchanan.html

    He asks the wrong question. The real question is whether money creation should be entrusted to the Fed at all!

    Peter J. of Minneapolis

  2. Just read the Fed will control the US economy now:

    Obama Regulatory Reform Plan Officially Establishes Banking Dictatorship In United States

    From Prison Planet and reposted at COTO: http://cotocrew.wordpress.com/2009/06/18/obama-regulatory-reform-plan-officially-establishes-banking-dictatorship-in-united-states/#comment-1776

    Was hoping you’d write something about this, Ellen.

    • I’m working on it. I’m writing on the Financial Stability Board part — we just delegated control of our financial system to Big Brother in Basel (the tentative title of my article).

      • Great. Look forward to it.

      • Ellen,

        It’s just a matter of connecting the dots, the information is available that reveals the overall plan. At first it is speculation but eventually becomes substantiated through actions. The only chance of reversing the tide is HR 1207. Unfortunately the contingency is likely that a major diversion will occur before it gets the attention it deserves.

        Time will tell. So far it has all been predictable.

  3. […] THE RETREAT OF THE SHADOW LENDERS: WHY DEFLATION, NOT INFLATION, IS THE ORDER OF THE DAY Posted on June 18, 2009 by Ellen Brown […]

  4. Oh, no! Shadow Lenders leave inflation strategy blown!

    Ellen, you really should allow a bit more wiggle room in your presentations. It is so depressing to learn things may well be going better than anticipated.

    My strategy, to hold gold and silver as hedge against an inflation of FRN$, and later to buy back a sufficient number of devalued FRN$, using a portion of the precious metals, to readily satisfy large personal debts, is in jeopardy without inflation. Meanwhile, this private debt swamp threatens to grow ever more menacing from the future realization of increased interest payments on the balance outperforming gold and silver gains.

    Perhaps you will allow that the ratio of gold and silver could increase dramatically against worldwide currencies, such as FRN$, as their FIAT element becomes squeezed out; and that this will occur sooner, rather than later, and could serve as a sort of pseudo-inflation? Or must I abandon this year old strategy as being totally unworkable?

    • That’s a good question and why I wrote it! I’m a gold and silver holder myself, so naturally I read all the contrarian warnings about hyperinflation and how precious metals are the place to be. I haven’t sold, but you notice they haven’t moved significantly for a long time. I don’t think gold is going to $5000, because I doubt hyperinflation is in the works; but the dollar is liable to slide in the ordinary slow way — from a heavy current account deficit and loss of reserve currency status globally — so gold could still go up gradually. It’s undoubtedly being held down by manipulation. That’s another issue — how long they can or will try to hold it down artificially. Ellen

  5. When gold/silver prices go sky high, who is going to come up with the dollars to buy gold/silver from you, especially when many people won’t have enough dollars? They’d rather buy food or practical items.

    • That’s entirely correct. Despite a shortage of rental properties (for some reason there are way more tenants than landlords) I can’t rent my units for more than the going rental rate two years ago. It appears that all my prospective tenants have a rent ceiling they cannot go over – and it’s below my rent floor (necessary to repay the bank’s loans).

      So, my assets are already suffering the same way metallic coins will suffer. They may be more valuable compared to the dollar – but no one will be able to afford them. You’ll have to break off tiny grains and attempt to sell them in crumb sized increments (to bad I can’t do that with my rental units…)

  6. Your last paragraph said:

    “If Ben Bernanke stands by his word and refuses to monetize the federal debt, Congress should consider issuing the money itself…. The true path to economic recovery – the path from an economy strangled in debt to one blooming in prosperity – is to reclaim money and credit as public resources, transforming money from private master to public servant. ”

    As you imply the immediate problem is deflation, unemployment, poverty and reduction of the middle class to the desperate class. This can be stopped in one minute by Federal spending of its sovereign currency into circulation as you advise.

    What next? If we do as you say?

    We should do for cash savings what Treas. Sec. Rubin and Pres. Clinton did of TIPS (inflation protected treasuries).

    This is a necessary, easy and CONTROVERSIAL step– because it does the easy way what we reformers want now: we want a way to fight hyperinflation in the event we monetize some of the future national debt (which would not exist if we monetize ahead with US sovereign currency).

  7. SUPPLEMENT TO MY COMMENT ABOVE:

    What happens if we index cash savings is that people can refuse to spend without fear that prices will rise later. Refusal to spend allows government to spend. Government can spend to accomplish economic recovery via jobs, energy independence, infrastructure, education, clean water and air, etc. With sovereign currency the amount can be ENOUGH to end recession/depression.

  8. The Austrian School, their fear of inflation, and morbid distrust of fiat money seem to dominate the public understanding like the physics of Newton still dominates the understanding of the physical world. The value of money is not relative, Ron Paul insists. They’re stealing your savings through inflation! They’re diluting true value because they create money out of thin air!

    It’s true that a dollar won’t buy what it used to, but that has less to do with the value of the dollar than it does with taxation and interest charges ( another type of taxation ). The “printing press” doesn’t drive up prices. Interest rates drive up prices. The tax that the possessors of money demand for the use of their money prevents real price deflation even in a situation like we’re in now when interest rate taxation ultimately sucks up all the liquidity and the people have no money to spend. The money supply contracts, demand collapses, but prices do not.. This is not from printing money, but from investors demanding their pound of flesh.

    The relative value of the dollar is held in check by the countervailing value of the debt it represents. Ron Paul doesn’t get it.

    Ellen seems to be the only voice in the economic wilderness who understands what Bernanke is doing and sometimes she even sounds like a Bernanke supporter, encouraging him to rev up those “printing presses” and increase the money supply.

    Sovereign money is the solution, certainly, part of it. Sovereign money without a strict limitation on interest charges wouldn’t solve the deflation we’re in. The tax on productivity has created this crisis. Too few people have too much and too many have too little, the inevitable result of a usury-based system, our private system.

    But public credit wouldn’t be any better without the elimination of usury. Our banks are de facto nationalized, but the usury-game continues. A private banking system built on usury is not substantially different from a public system built on usury.

    This is the elephant in the room whenever economists gather.to discuss solutions to the financial crisis. We’re so accustomed to the “right” of our money to “make money” that we don’t see that this is the problem.

    Whether the banking system is public or private does not matter as much as whether there are strict rules preventing the charging of excess interest. The financial problem boils down to one bottom line issue: how do we determine a sustainable rate of interest that will not ultimately create the situation we are in right now?

    And corollary question: how was credit allocated before securitization came along? Why was securitization even necessary? In other words: what happened to credit?

    Usury destroyed it.

    • Thanks Joseph. I would argue though that interest works mathematically so long as the banks are publicly owned, because the interest goes back to the community that issued the money to pay it. Simple case: the govt prints $105. It lends $100 to private parties at 5% interest, and spends the other $5 on its own expenses. $105 are now circulating in the economy and available to come back as principal and interest on the loan. It lends the $100 all over again and spends the $5; the money all comes back again as principal and interest, without either running the printing presses OR creating a spiraling debt.

  9. As I understand Ellen’s idea in this blog, “… the Fed needs to “monetize” debt just to fill the … [deficit in private investment and spending that commercial bank would have supplied — if they were flush with money and borrowers seemed likely to earn a good profit to pay back any loan].”

    I believe Martin Wolf of the Financial Times agrees.

    But, as Joseph D. says, Austrian school economists [and Republicans] do not want parliaments to monetize the national debt. They fear hyperinflation. Everyone fears hyperinflation to some degree — because its possibility is always with us.

    Does this not narrow our problem to presenting a credible way to prevent incipient hyperinflation from spiraling up and out of control?

    In other words, are not price and wage controls part of the financial box of tools necessary if government is to protect the nation by providing SUPPLY to fill need, JOBS to create morale and end destructive anxiety, and high enough wages to raise the minimum and median standards of living to the levels technology makes possible?

    One form of price control is to depress consumer demand. One way to do this is, as stated above, to protect savers from future high prices. One way to do this is to mimic TIPS bonds when people or firms save money.

    Ron Paul never calls for this. Neither does anyone else. Is the nation missing a bet?

  10. Ellen: Interest on sovereign money as a substitute for taxation does seem to make sense. But if the government’s interest charges are too high ( and I would argue that 5% is too high ), the process of wealth concentration will continue with government as beneficiary. But I suppose you would say that government would recycle this interest/ taxation by funding public works and the like, thus keeping the money supply at a steady level.

    Maybe it works out mathematically. Econometric models predicted that securitization works, too.

    I’m arguing the thesis of Edward Kellogg in his 1849 book Labor & Other Capital.

    Interest represents the power of money to grow, which should align with the productive capacity of the economy, which is ultimately the productive capacity of labor. When the power of money to grow exceeds the growth potential of the economy, deflation results. That’s where we’re at now..

    And we’ll be in this place in the future unless we invent some kind of calculus to predict the growth potential of the economy and the corresponding interest rate.

    Edward Kellogg did this in the 1840’s.

  11. I have a question, how many times can a dollar be earned be fore it evaporates through taxation?

    As I understand it money is created initially by central banks through the issuance of debt, it is expanded through the issuance of more debt by commercial banks, and everytime it is earned it is taxed to pay off debt, seems like eventually the dollar returns to it’s creator, which necessitates the need for more debt.

    When the central bank gets paid back, they give the interest earned after expenses and dividends (of course these are unverified) back to the Treasury. Of course the money returned to the Treasury is also owed for previous debt.

    This just seems like a shell game where you have to keep adding more shells to make sure that at least one has a coin under it.

    Why do banks have to be for profit entities? When I first learned of them I was told that they existed so that we could have a safe place to put our money, it sure doesn’t seem very safe anymore.

    • Dave, Nice post. It is a shell game. Some would call it a Ponzi scheme. I call it a “Monzi Scheme”. If you want to understand how the banking racket originated, watch the 47 minute animated video Money as Debt, by Paul Grignon. It tells the story of the evolution of banking from its earliest origins in temples, treasuries and warehouses up to modern day fiat currencies. Warehouse receipts for precious metals and gems were the original paper money. Then the bankers discovered they could issue many receipts on the same goods without anyone being the wiser, since few people ever demanded their gold or silver at the same time. Fractional reserve banking was thus born, multiplying profits many times. Over the last several hundred years the wealth of private banking syndicates has replace the power of sovereign money – money that was originally issued by the states, or nation-states. Now governments borrow the money they once directly issued. It’s spelled out better in the video: http://video.google.com/videoplay?docid=-2550156453790090544

  12. Hi Ellen,

    I strongly agree with you.

    Do you think the economy is going to crash?

    I think it will. Can’t see how so many companies can lose money indefinately, and there seems to be no end in site.

    • The short answer: yes. It has already “crashed”, if that is the correct word for what is happening. At least he Phantom Economy that is centered in around Wall Street is on “life support” at the expense of Main Street, and the taxpaying citizens. The crash has begun, but it will be a long slow decent, unless the system is completely changed.

      Obama’s efforts to prime the economy will work a little, and for a while, but it is really just kicking the can down the road, prolonging the inevitable collapse that will force systemic change upon us.

      Only a new money system that is geared to the REAL economy rather than the FALSE or Phantom Economy is going to save us, or resurrect the dying one we are foolishly trying to heal, and bankrupting ourselves in the process.

      That’s the view from here, and I think time will prove it correct.

  13. The issue at the moment is deflation or inflation?

    Should the American government, and its central bank (established by Congress and subject to congressional will), risk deflation– by allowing the enormous losses in spendable wealth suffered by American consumers and producers, in the past two years, determine current rates of investment and consumption?

    And/or, should that gov’t and CB risk inflation– by spending money as we know it, created by debt and taxes, if spent by Congress, or created by the CB without debt or taxes but by increasing the liquidity it controls for the national economy?

    Ellen assesses the current risk of deflation as the greater and less attractive risk. IMO, Obama, Bernanke, myself, and most others agree with her. But polls indicate there is also substantial fear of future inflation by intelligent observers everywhere.

    Money as debt and debt-free money are both in play. The video referred to above does not answer the relevant question: Should gov’t spend and lend or retreat to laissez faire?

    There is no doubt that the current administration, Congress and the CB are spending and lending as never before in history (when we not in a great war). We are in several wars. We are probably under-spending and under lending.

    Nevertheless, hyperinflation will result if our government fails to increase domestic manufacturing.

    The issues are profound. But to see the global economy as a shell game is to fail to notice the enormous reduction in poverty in Asia over decades of use of our imperfect monetary system of production.

    Our troubles are being fixed by CB debt-free money infusions, by reorganization of debt in and out of bankruptcy, and by reforms– spurred by careful thought about the history of money and banking and theories that may be developed from experience in business and in academia.

    What was obvious in the 1840’s was updated in FDR’s administration and in the Cold War: my favorite theoretician in support of spending and lending to reach full employment and end poverty is Abba Lerner, whose writing is summarized at http://www.ustaxreform.us/lerner.htm

  14. Please add the following url to the above comment (and add “were” to “when we were not in a great war”.

    http://www.ustaxreform.us/ff.htm

  15. Your comment is my first introduction to Lerner and Functional Finance. As such, my reaction is out of great concern that Lerner’s theory describes ‘government control for effect’.

    I have had it with government manipulation and mismanagement. The focus seems always to be on accomplishing government objectives at the cost of individual freedom and initiative.

    Rather, I would like to see a comparable theoretical analysis focusing on Finance as a Function of natural remedies people customarily employ to control their immediate monetary needs and desires under various scenarios, i.e. via savings, borrowing, investing, greater means of production, invention, etc. and the theoretical effectiveness of these homespun remedies.

    Perhaps, embedded in that new analysis would be the revelation that government stay the *&%#^% out of our business, and exist only as the necessary legal framework we demand in order to function for our individual purposes as a free society.

  16. Dan,

    You are exactly right ! Functional Finance is the application of laws on trade, government spending, revenue, and everything else, FOR EFFECT !

    Everyone reading this blog is unhappy with the effect of post 1980 government (and much between 1845 and 1980).

    Why?

    Because we have traded American jobs away for cheap retail operations. Because we have spent so little our infrastructure is in the toilet. Because we have failed to address the effect of squeezing wages and earnings of the middle class down as low as possible in order to increase profit — when we should have subsidized those wages and earnings to allow necessary profit PLUS necessary wages and earnings to grow economic output and maintain the greatest nation on earth at the highest living standard anywhere.

    Now the greatest nation on earth must sport the greatest government on earth: a government that listens to voices lie Ellen Brown’s, John Gelles, and Franklin Roosevelt who demand a second bill of economic rights, see http://www.ustaxreform.us/2nd-bill.htm , and effective ways to pay for those rights.

    You have asked for “focus on Finance as a Function of natural remedies people customarily employ to control their immediate monetary needs and desires under various scenarios, i.e. via savings, borrowing, investing, greater means of production, invention, etc. and the theoretical effectiveness of these homespun remedies.”

    That is exactly what Functional Finance asks for. It provides for zero income tax, low interest borrowing, subsidized investment, revolutionary improvements in production, really rewarding invention to make the nation strong and the individual secure, as well as heard, etc.

    Functional Finance gets the government out of your hair and face, as tax collector and servant of corporate twisted greed and traitorous trade policy, and puts government where it belongs as servant of the poor people, whom it enriches, the middle class whom it relies on, and the rich whom it allows to earn as much as possible and give to universities and hospitals.

    The people who hate government hate the government that has failed them.

    The people who love government love the government that defeated fascism and communism; is putting electrons, photons and all of the hard sciences to work to communicate as never before (ARPANET), build as never before (ARSENAL OF DEMOCRACY); and is preventing the deeds of thirty years of neoclassical economic destruction of rational political economy from ending democracy as well as the welfare state (OUR CURRENT BATTLE FOR RECOVERY AND RE-INVESTMENT).

    In Harpers at the moment is the article “Barack HOOVER Obama”. I believe it faults the government for, in effect, not following the logical direction of Functional Finance. I am about to read it.

  17. Darn it. NOT 1845, I meant 1945

  18. I could not read B. HOOVER O. by Kevin Baker for less that $16. Sorry. The Daily KOS had what it called the meat of it. All it called for was, “single-payer health care, a carbon tax, nationalizing the banks, funding for mass transit, closing tax loopholes for the rich.”

    If this is the case, Dan and friends, one more idiot in the media wants the wrong things.

    No wonder Dan hates government. I hate all its failures and the failures of the mass media to be any better.

    I love the Internet, where all of Functional Finance can be researched with the help of the New School, the University of Missouri Kansas City, and the Levy Institute at Bard College. And especially here, where we, as individuals, can observe and think for ourselves without the intellectual limits of mass media, government bureaucrats, self-appointed idiots who think they own the Internet, and other assorted knaves and fools.

  19. What’s wrong with Kevin Baker and Obama and right with Herbert Hoover:

    According to Baker, we ought to enact “single-payer health care, a carbon tax, nationalizing the banks, funding for mass transit, and closing tax loopholes for the rich.”

    These desired laws are not extremely popular. I, for one, want affordable subsidized health care — from one or several payers. I want insurance bureaucrats out and audit and inspection bureaucrats in to prevent fraud and abuse.

    I want no carbon tax. I want a prohibition on contributions to climate change.

    I want government to lend in competition with commercial banks — whom I would compensate for the competition by making them tax free like a church. Lending money is a moral act and performs a vital social function: it should ne free of taxes but interest should be capped at a very low rate consented to by popular referendum every year. Licensed banks would be allowed a zero percent reserve, and government competition would generally charge from 2 to 3% APR.

    I agree on funding mass transit with Baker and Obama. Only I would be prepared to build trains or other means better than France, Germany, Japan and China. They would offer transportation at fate that filled them to 90% capacity and cost would not be a factor. The green effect would be so high, there would be no need to track cost. Prize juries and passengers would both assess results and, based on results, with the President having the last word in th matter, system’s managing operators might be discharged for cause.

    I would first repeal all taxes — then close any loopholes in new taxes designed to prevent hyper inflation only.

    So there we have what’s not up to par about Baker and Obama.

    On Herbert Hoover — he gave us the Reconstruction Finance Corporation.

    The RFC have us enameled steel homes. But when the homes wer about to succeed the Democratic party tried to get a bribe from Lustron: and we lost the industry:

    “As the Lustron house came up for its decisive test in the hands of the dealers, there were two strikes against it. One of these was time and the other was price.

    “Lustron had missed the peak of the housing market: the back of the housing shortage had been broken and there were no longer six customers for every house-for-sale sign.

    “What urgent market pressure remained was in the low cost bracket – and Lustron’s price to the dealer, counting freight, was around $6000. For the price to the customer, the cost of the site labor, land and utilities had to be added. In Wisconsin, Lustron houses on lots were selling for $10,000, in Illinois for $11,000, in New York for $10,500, in Connecticut for $11,000.

    “These prices were not low cost houses. Without some additional financing steam from Lustron, they were not prices low enough to persuade dealers to take the risk of building the houses without a down payment from a waiting buyer.

    “In other words, even the limited mass distribution formula devised by the merchant housebuilder — who puts up a number of houses at once and takes the risk that he can find customers — was not yet working for Lustron.

    This was 1949. Within a short time the houses were being delivered and things were going well. The RFC was needed to continue financing the method. Hoover was out of office. Roosevelt was in. The Roosevelt crowd wanted $170,000 as a contribution to the party. Lustron would not pay it.

    We are still paying for this corruption.

    If yu thin this story has no point you’re wrong. The point is that audit and inspection is forever necessary. Homes are necessary. Enameled steel was a good solution. Better solutions should also have been financed by the market or the government. As they say, you can never be too thin or too rich.
    ….. You can also never have to many great homes until there are no homeless people and we learn how to teach people far away how to build enameled steel homes if they want them.

    Why do everything on the cheap when the result is anxiety in every quarter and war around the corner?

    People need to work and money can be a help–if we let it.

    There is no perfect system, but there is merit in having too many homes instead of not enough. When we have too many, we can slow production down and retrain our workers to build school rooms and clinics until they are also slightly surplus to expected need.

    You never know when another Katrina will strike and we’ll be glad we had more than enough to handle the emergency..

    • Imagine if one controlled the relative value of currencies and all the rules of the road for lending, I wonder if it would be possible to create inflation or deflation at will. Or better yet, maybe mask inflation while deflation was taking place, or the other way around.

      To me the question should be what is the overall plan and motivation for implementing it.

      The central banks are obviously a cartel.

      And while I’m at it, doesn’t it seem a bit odd that it appears there is never any real competition in the oil industry.

      I have a nagging suspicion that the various owners of the money monopoly franchises have been a bit irate about new money being created outside the framework established by their founders.

      I would also bet they are adamantly opposed to this occurring again, from their perspective to be granted the authority to regulate and police any financial institution or business that may pose a risk to their monopoly would be extremely beneficial. Also, if these powers were granted in such an ambiguous form they could be modified without question just in case something pops up they didn’t think about would be real helpful..

      Let’s face it, those pesky governments with all their rules and regulations have to be so tiresome.

      This part is pure speculation… what if the short term goal is to give ultimate powers to the Fed because it’s inevitable the economy is going to continue to deteriorate. They really want to pick the winners and losers.

      http://briefingroom.thehill.com/2009/06/16/read-president-obamas-white-paper-on-financial-reform/

      http://hill6.thehill.com/images/stories/news/2009/june/white%20paper.pdf

      Does anyone out there think it’s a little suspicious that banks need so much additional capital, and why was it so important when they initially did the bailout that they had to be given the ability to earn interest on excess reserves held at the Fed.?

      The solutions are simple; they just seem so far out of reach.

      • Yes, the solutions are simple but far out of reach! First, education; then we might actually get some action.

        • The conditioning that takes place is very effective.

          The vast majority of people believe the Federal Reserve is part of the government.

          The media consistently warns about the Government creating too much money, the associated risk of inflation, and our spiraling out of control national debt in the same breath.

          These reports are designed to reinforce the belief that the only way to fund a nation is by borrowing the money. It very rarely occurs to the average person to ask this simple question…

          If a government can create money why do they have a debt?

          The education must start at a very elementary level and I’m afraid there is so little time left.

  20. Gelles & Danison,

    The problem is the quasi-govt control by a private for profit monopoly cartel – period.

    Nixon was a Rockefeller puppet and whacked Keynesianism and statist corporatism are our only problems.

    Get govt out of everything and we can return to the pre-Fed days of crooked banks individually cured of the too little reserve frauds and run the the crooked ones outa business as free markets always do.

    Price fixing is sheer statist insanity.

    We need real commodity moneys of intermediary exchange that divides easily and is universally accepted. Market minted money valued by weight as it used to be and which was the most difficult for power to debase unlike fiat.

    The Austrians are 100% correct – you guys dont get it.

    Even Freidman finally capitulated.

  21. Ellen ends her BLOG entry of 18 June on this note:

    “If Ben Bernanke stands by his word and refuses to monetize the federal debt, Congress should consider issuing the money itself, as the U.S. Constitution provides. … The true path to economic recovery – the path from an economy strangled in debt to one blooming in prosperity – is to reclaim money and credit as public resources, transforming money from private master to public servant.”

    The degree to which Bernanke can monetize the national debt, now measured at 11.4 trillion dollars on the debt clock created for our convenience, is open to opinion. Not much, without Congress behind him, is my view.

    The prosperity we seek can not be bought by Bernanke alone or by Bernanke and Obama. We need Congress. To get them we will need each other and lots of voters.

    We do not seem able to get each other.

    I join with Ellen. I would like Obama and Bernanke to jawbone Congress into spending and lending enough to bring prosperity to these shores now.

    We are not only up against resistance from anti-Keynesian opinion in the West, we have rivals in the BRIC nations (Brazil, Russia, India, China) and in the Shanghai Cooperation Organization.

    Trying to connect the dots between economic and political events that may foretell our chances to re-industrialize and repair America is close to impossible.

    At Yekaterinburg in Eastern Russia, June 16, 2009. Leaders of Brazil, Russia, India and China, known as BRIC, gathered for the first summit of the world’s biggest emerging economies. They did not decide to fight the dollar now with their candidates for the worlds primary reserve currency. But some day they will.

    It is not likely the US will fail to recover before 2012. But if in November 2010 we have too few jobs and too much non-performing debt, the Republicans could take back the Senate. We might be back to stalemate and drift from bad to worse. But I think NOT.

    If nothing else, Obama seems to be lucky. Like Reagan who lived to see the Evil Empire change before our eyes, Obama will live to see education improve and energy independence a done deal under the sun with the wind at our back.

    What of the Web of Debt? I would like to see a sequel: “Putting Our Money Where Our Mouth Is”. Ellen would challenge us around the globe to index our savings accounts — to prevent too high a rate of inflation. This would allow governments to spend and lend to rebuild their manufacturing sectors so that China is not the only producer of useful manufactured items. As for deflation, spending and lending BIG TIME kills it.

    Not long ago, nobody would have thought we would have a president, half-black, half-white, and all together. He has been lucky. If his luck holds, so will ours. We are all being tested. Hope we don;t all flunk — each and every one.

    • Gelles:

      There appears a common thread to your arguments.

      Each mandates that we endow an elite minority of our numbers with the illegal right to harvest the fruits of all our successes, and by place a lien on all the future successes of ourselves and our posterity, and use this hard earned wealth as they will on the pretext that they, as the central government, will manage and solve problems that only they recognize as being advantageous through their dictation of solutions appearing most attractive to them, which are somehow superior to anything we might devise for ourselves, to scratch the backs of limited groups of people that promise to purchase for them the greatest amount of continuing support for their future elections.

      • (Oops! Sorry for the fragmentation in my writing, above. Celebrated Fathers Day too well yesterday.)

        Rather than through a central government, the better solutions bubble up from whichever of the ‘fifty united cauldrons of America’ have been stimulated to resolve their particular problems; persist only so long as does the problem, and then only while remaining the better solution.

        All this must be market driven. The cost of the solution then becomes borne only by its developers, who hope to profit, and by those encouraged to purchase the solution by some demonstration of its effectiveness..

        It is the sole perogative for the people within each state to determine which problems and solutions may legally be recognized when we follow the U.S. Constitution, therefore states may vary in the way in which their folks live and prosper. Some may allow gun toting in church. Others may provide “free” medical services for all.

        Because government solutions are indiscriminate be disqualified as being unnecessary tax burdens, especially for those who derive no benefit from them.

        • Oops! Meant to say, “Because government solutions are indiscriminate they should be disqualified as unnecessary tax burdens, especially to those who derive no benefit from them, which eventually becomes all but the paid providers and the politicians.”

      • Dan: You nailed it. Every “solution” Gelles advances is “Wall Street” oriented, as opposed to Main Street. He even misinterprets or misrepresents Ellen’s concluding statement:

        “If Ben Bernanke stands by his word and refuses to monetize the federal debt, Congress should consider issuing the money itself, as the U.S. Constitution provides. The “full faith and credit of the United States” is an asset of the United States, and it should properly be issued and lent by the United States rather than by unaccountable private banks and shadow lenders. The true path to economic recovery – the path from an economy strangled in debt to one blooming in prosperity – is to reclaim money and credit as public resources, transforming money from private master to public servant.”

        Ellen is talking here about “issuing the money itself” as Treasury Notes, similar to the Greenbacks of Lincoln’s issue. This is money issued without borrowing it from anyone.

        Ellen is NOT talking about “monetizing the national debt” with more interest bearing debt. Ellen is NOT talking about the desirability of having the privately owned FRS lend more money into circulation, except as an alternative to doing nothing.

        I believe that if the money supply is actually shrinking, then that is the result of “phantom wealth” or “bubble money” evaporating. My solution would be either: 1) a revamping of the entire US banking system, especially the Fed, to bring money creation under public, rather than private, control; OR 2) creating public interest free (or very low interest) money at the local levels by making credit available to ever credit worthy person.

        But you are correct about Gelles. All his main solutions are geared to make the rich richer and the poor poorer and essentially maintain private central banker control over the world and US economies. He wants to nibble around the margins when real systemic change is needed for our very survival.

  22. The explanation for why deflation rather than inflation is easy to understand.

    Money is created when loans are taken out. Money is destroyed when loans are repaid.

    Most everyone I know, including me, are repaying credit cards. I hardly purchase anything with credit cards anymore. I’m really tired of having an accumulated debt. My present actions, repaying the cards and curtailing new purchases, are causing deflation.

    Further, the real estate speculation has collapsed. Since more people are making payments on their existing loans than are borrowing money to buy homes in a falling market, more money is being destroyed through loan repayment than is created through new loans.

    Australian economist Steve Keen is a critic of the so called neoclassical school. Keen argues that the neoclassical analysis never predicts recessions or depressions because it bases its analysis on static rather than dynamic considerations.

    In a static analysis, the economy is always in a state of equilibrium. In this type of analysis, debts don’t matter.

    However, in the real world, the economy is rarely if ever in a state of equilibrium. The variables are always changing and factors such as the debt/output ratio determine in which direction the economy is heading. Currently, the private debt/GDP ratio is over 300%, a historical high. In 1929 this ratio was about 225%.

    The conventional economists, including Bernanke and Milton Friedman
    are neoclassical and don’t understand the effect of accumulated debt on the economy. The Austrians are just another branch and make the same errors. Yale economist Irving Fisher was the first to describe debt deflation, after he had failed to predict the stock market crash in 1929.

    The aggregate macroeconomy can be modelled as a single firm. A firm saddled with a huge burden of debt cannot grow out of a depression for a very long time. The problem with a depression is the irreparable harm that is done due to high unemployment. Richard C. Cook argues that the government should send everyone a check for $1000/month for the foreseeable future. Of course, sooner or later, this money printing becomes highly inflationary. Inflating debts to zero is not a good solution either because it robs creditors.

  23. I believe each commentator above believes HE follows the golden rule–and therefore he opposes poverty as he opposes slavery: were he alive in Lincoln’s day, he would have been relieved when slavery was permanently ended in a United Sates of America.

    Accordingly, let me assure assure I am a Keynesian and a devotee of the late John Kenneth Galbraith, John Maynard Keynes and Abba Lerner. I studied advance problems in Corporations under the Roosevelt brain trust member Professor Adolph Augustus Berle.Jr., who was a champion of the poor and disenfranchised, and was a scourge of Wall Street and his own class of wealthy brilliant lawyers. He authored with Means (Berle and Means) “Other People’s Money” a classic in the literature that brought reform to America in the 1930’s.

    My own pamphlet, ‘The Civil Right to Work at a Union Wage” proves my loyalty to people whom Wall Street has not sufficiently supported in our time.

    I do favor leaving the rich as rich as they are or richer. There is no inconsistency: because technologically supported green economic growth has the potential to make all the poor rich.

    Back to this blog entry: can we monetize the national debt?

    Yes we can with legal tender monetize all or some of the national debt.
    ….. If this is done, it is not done with DEBT but with MONEY.**
    (** Jere and I talk past one and other when it comes to technical aspects of money reform. I am sorry for that — but time will not permit us to clarify the matter.)

    Ellen and I would immediately monetize some of the debt in an attempt to reduce political pressure against jobs bills now — bills that could employ all persons looking for work and so end the current recession/depression/deflation.

    These bills are not enacted because voters see their own taxes as the source for all those new wages. If monetize the national debt in part, there will be no taxes to worry about: monetization pays the wages now.

    But the extra liquidity created by monetization of debt can cause unwanted inflation.

    That is the reason we need to consider indexed savings as a tool to fight inflation NOW. If it works, demand will not accelerate and government can continue to spend to accomplish log term goals.

    Dan O’Brien suggested what I consider to be a great idea: Fifty States ought to experiment with a variety of tools to solve the mess we are in. If we wanted to fairly empower the States to use debt-free money we could. And I would do that. The mechanism is simple. They could borrow, say huge justifiable amounts, from the CB at zero interest with ample rational time to repay principal. In due course, even principal might be forgiven IF technology really raises production to levels that make economic good sense.

  24. On Fathers day we ate out. The bill for two for buffet brunch was $35 (seniors). I left a $7 gratuity. I had a brainstorm.

    Although I would return to domestic manufacture, of everything we need to defend against tyranny (or rule by Ayatollah), I can see some merit in making private restaurants a major subsidized industry in the United States.

    People love to eat out. People love to own restaurants that make a good profit. All that stinks in the business is the high cost of labor. Uncle Sam should pay all wages due workers up to a “living wage”. Tips above that should be tax exempt. Chefs and entertainers would be paid premiums by the owners. Where owners had a good track record, loans would be available from Sam to keep restaurants open in slow times. Local city councils would have a voice in approving loans. Special audit and inspection teams would attempt to prevent fraud, waste, abuse and mafia racketeering.

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