The President is convening a bipartisan summit on Monday to debate paying for the government's deficit. Many economists want the deficit cut now - in the midst of the greatest financial crisis in world history. They want cuts - not in funding for bank bailouts, but in entitlements costs in healthcare and social security'.
In other words, the middle class must pay for this crisis - a crisis not of their making. This great nation, the United States, does not have enough money, argue economists, to care for its sick and elderly; to fund healthcare and social security - and finance the recovery.
That is a nonsense. The US can finance what it needs. The US can finance its way back to recovery - and by doing so help the rest of the world recover.
When the economy recovers, the deficit will diminish, just as surely as night follows day. It always has, and it always will.
How you ask? With the help of a remarkable, but everyday invention, known as bank money.
Bank Money
We deal with bank money every day. We could not get by without it. Yet it is one of the best kept secrets in economics.
It is that intangible thing that pays wages, settles bills, and allows us to use credit cards for shopping. It's internet banking.
We never see it. Nor do we touch it. It's not like the coins and notes that we handle every day.
It is credit. And it is a most wondrous thing. It creates economic activity. Unlike taxes, it is not the result of economic activity.
Bank money is based on trust. The word credit derives from the Latin 'credo' - I believe, trust. 'I trust you will pay me.'
So when my employer wires a salary to my bank account, I trust she is paying me. She does not hand me gold or silver coins. She does not deliver greenbacks to my door. She pays with bank money.
There are two institutions that create money - and it costs them next to nothing. They are private banks and the Federal Reserve.
This is how. When you apply to a bank for a $300,000 loan, be sure the bank does not have $300,000 stashed away in its vaults as 'savings'. The bank does not need savings to create credit. It just needs you. Your guarantee - that you will hand over collateral - probably your property - if you can't repay the loan. Oh, and sign a form to pay interest on the freely-created loan.
Hey presto! $300,000 is conjured out of thin air, and deposited - as bank money - in your account. If you had not applied for the loan - that money would not have existed.
That's the easy part. The hard part is draining your pockets each month to repay the bank $300,000 - plus interest.
When the Fed or the banks create money for the US government, the process is more or less the same. The Treasury applies for a loan. For collateral the Treasury could offer a bill. The guarantor is the economy of the United States of America.
So if the government wants to raise $300 billion - it puts up collateral in the form of Treasury bills. The private banks, or the Fed, conjure up $300 billion out of thin air.
The Fed rate on that loan is currently 0 - 0.25%. So the government's borrowing cost could be 0%.
If government could always borrow at 0%, then "money" in the words of Abraham Lincoln, "would cease to be master and become servant of humanity. Democracy would rise superior to the money power." (Abraham Lincoln. Senate document No 23: National Economy and the Banking System of the United States. 1865.)
We could then afford what we need - healthcare and social security - and the US could finance economic recovery.
That's because the $300 billion - bank money - would allow us, the people, represented by a democratic government, to do things that are not being done already - by markets, by the private sector or the government. That money creates jobs and incomes - and savings. It could help begin to end this Great Depression 2.0.
But you ask, how does the $300 billion get paid for? From the taxes of future generations? Not necessarily.
The government might issue short-term bonds (3 months) to the banks to raise $300 billion. But it can later raise more funds by issuing a variety of bonds to the public - newly employed and with income.
So it's a cash-flow thing. The government spends the bank money, and then uses the money raised from bonds issued to the public to repay.
In the meantime the government has created more jobs, income and economic activity. This benefits not just the people of the United States, but foreign economies too.
In 30 years time, when the government has to repay the long-term bond, there's enough cash in the Treasury's vaults - from the taxes, income and economic activity generated.
Ha! you say - what about inflation? Relax. Inflation only becomes a problem in conditions of full employment. Right now full employment is as remote a possibility as bipartisanship on the Hill. Economists are scare-mongering again. The much graver threat is deflation.
Some people think that while low interest rates serve the government and the people as a whole, savers get a raw deal. But savers would be much worse off if the government allowed the economy to spiral ever-downwards.
Some savers have recently been lead to believe that they were entitled to Madoff-type rates of return. That era of excessive returns and fraud is ending.
In the 40s and 50s savers did not get such high rates of return. But the economy was stable, they had jobs and homes and increasingly prosperity.
That's because back then, democracy, in the words of Abraham Lincoln, "rose superior to the money power."
We must once again make money work for the people.
This statement is just flat out wrong. There was high unemployment in the 1970s and early 1980s when the US economy was well below full employment. If the US takes on too much debt, interest rates will rise and the value of the dollar will likely go down. Higher interest rates will mitigate economic growth and put further downward pressure on home prices, which will mean lower govt revenues and a higher budget deficit if spending is not cut. A weaker dollar will mean higher import prices and higher commodity prices, which means lower real incomes and less economic growth, resulting in less govt revenue and a higher budget deficit. As far as cutting entitlement programs, such spending is an enormous drain on the economy. It results in withdrawing large amounts of capital from the private wealth-producing sector and misallocating it toward unnecessary and expensive drugs and treatments that don't often result in better outcomes.
We have not fixed the money vacuums that caused this problem. Draining value from the system causes deflation. Too much is continually being drained.
Any salvation will involve re-forming our lifestyle -- a tough thing to sell. (Green is good. ) The stimulus helps here.
continuing drains:
1. fossil fuel energy -- Per capita and total use have increased for decades . This is like burning money on a bar-b-que.
2. constant war -- military expenses are vast and have little multiplier effect
(If you spend a lot of money for war or fuel and it stays in an economy, that spending is inflationary. But if the value completely leaves the economy the spending is deflationary.)
3. medical money pit -- Some med money is recirculated but much is sequestered.
4. financial -- the crises soak up huge amounts of money - derivatives alone could soak up all the money in the world.
5. no manufacturing in US -
Now everyone works for government, a utility, or medicine, all essentially services. Where is the production base that can create value?
2. burning fuel = burning money
Burning fuel wastes value.
ex: Guzzlers do the same job as efficient cars but use twice as much gas. That money goes to money heaven. It's money that cannot be used to buy food or build factories.
What is better about guzzlers? Social display - conspicuous consumption by people attempting to show social status.
I see on your blog that you are a fellow at The New Economics Foundation.
You should be proposing a system more in line with NEF and what Lincoln actually implemented.
In his credited speech on the money system, Lincoln made clear what the relationship should be between the people, the government, the money system and the banks.
Further quoting Lincoln from that speech:
""Money is the creature of law, and the creation of the original issue of money should be maintained as the exclusive monopoly of national government. ""
""Government, possessing the power to create and issue currency and credit as money and enjoying the right to withdraw both currency and credit from circulation by taxation and otherwise, need not and should not borrow capital at interest [from the private banking system] as a means of financing government work and public enterprise.""
"" The government should create issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers. The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government's greatest creative opportunity.""
So, if we're going to heed Lincoln, AND the New Economics Foundation - a MUST READ here:
http://www.neweconomics.org/gen/uploads/CreatingNewMoney.pdf
there is no need for government to borrow money that doesn't exist from anybody.
Debt-free, government issue of 21st-century United States Notes.
Greenbacks.
Monetary Transformation Now.
In the past, teh economist would have been called teh soothsayer, court vizier or seer. Same job; randomly make crap up and hope you can cobble together enough rationale to make it appear credible.
The only differenc eis that we invest in these charlatans an undeserved amount of trust and faith. Look at Nourbini for example. He's the perfect example. He has spent his entire career being absolutely wrong on virtually every single prediction but he gets lucky with one (sort of, he predicts a downturn for 10 years, knowing it has to hit eventually) and suddenly, the 99.9% of the time he was absolutely wrong is forgotten and we put faith in his visions.
Sounds oike Star trek next generation, why have money in the first place, its only paper. We barter our services for paper .
I guess the only glitch is the illusion that we are trying to attain a "higher" level by making more money, paper is essence.
You ever contemplate a world with no money ? In the end, that is where we are headed for. As a race, its a high hurdle to bridge, but imagine the freedom.
Or is that lambourghini somehow an impediment.
Much of what the government did to control wages caused long term problems. ie, you can trace our health care problems to government wage restrictions, which started fringe benefits like health care insurance being paid by the employer, and not taken care of by the individual.
An amazing amount of bare truth is laid out here.
Something for the Krugmans, the Bakers, the Kuttners and the Kleins, among many others, to get their heads around.
We have before us, finally, the legal tender issue.
The full faith and credit of the American people.
Paying our own way out.
Do not pass Wall Street.
Go directly to Freedom.
I don't agree with everything Ann has posted.
Just a couple of minor details.
Primarily, there is no need for the government to borrow the money in the first place.
As Ann says, the banks conjure it up out of thin air, and lend it to the government of we the people on the basis of the fact that we the people will make a repayment.
To WHOM ?
For WHAT ?
The sanctified money masters at the banks have no noble right to lend us the money.
Instead, WE just create it out of thin air.
Greenbacks.
Ann mentions Lincoln.
At the time, money was what was printed and minted.
Lincoln PRINTED the Greenbacks (United States Notes).
He did not go to any bank to get the either the permission or any financial standing beyond that which we the people provide to ourselves.
Trust Yourself, NOT the bankers.
I implore HUFFPO to keep this blog going for an extended discourse by its readers.
There is much more needs doing and we can thank Ann for getting us started.
Do you see a new currency in our future?
I believe the government changed the currency during the Great Depression. If I'm following this discussion correctly, then wouldn't issuing a new currency be a quick way to leverage down debt? (In essence - start over from scratch)...
Is this bipartisan? Hardly. It is robbery
When my car dies I expect my mechanic to tell me whether or not it is time to stop sinking money into it and buy a new one or if the repairs are cost effective. Instead of treating the economy like a car we treat it like the victim of a car crash, keep it alive at all costs.
I myself believe that rampant speculation and not capitalist investment for profit has led to every economic disaster I have read about. There is absolutely nothing wrong with investing in a company to make a money on its profits, nor is there anything wrong with stable secure investment in property. There is everything wrong with slight of hand hedge funds and betting on the stock market like it was a sure winning lottery ticket.
As for whether we can afford the health care and social security, the answer is absolutely yes. Other countries, much poorer than the United States, do so and manage just fine. I can't imagine why we can't. Oh, sorry I forgot, it may actually cost you a bit in tax bills rather than insurance premiums, and geez we know that writing a big check to an insurance company is SOOO much more noble than paying taxes. (note to Republican readers, that last comment is sarcasm)
well, with lincoln we would never have gotten to this situation to begin with.
lincoln distrusted the banks so much that he would have had even greater regulations on them than FDR after experiencing depresion 1.0 and never would have allowed the destruction of the glass-segal act lead by Phil Grahm and a repub congress....a repub congress (not lincoln's repubs mind you...Lincoln with a strong fed stand, agnostic to atheistic tendincies = wrote a public pamphlet denegrating xtianity and the bible as too convoluted, and the gay rumors due to sleeping in the same bed as men would be kicked out of today's repub party) with a veto proof vote majority forced clinton into signing because they would have over ridden his veto anyway.......
lincoln also would not have done what bush did in 2003 of over-riding state mortgage regulations based on an obscure 1860's phrase on the books. In fact lincoln like i said would have insisted on MORE!!!! regulations on banks and the mortgage industry due to depression 1.0 experience and his own distrust of banks so that depression 2.0 would never have occured
On entitlements such as social security and health care.
first off, are you saying you will refuse your own social security checks when you retire and all medicare when a senior?
When you publicly refuse your SS and medicare when retired then you can spout off on Lincoln's view of such.
I'll give you no argument on the need to provide reasonable regulations on the banking industry. A model that provides a stick for fiduciary malfeasance but does not involve governmental control or nationalization sounds very feasible. Furthermore I think they should receive zero taxpayer funding. The ones that operated a faulty risk-laden business model should fail, period. The vast majority of Americans do NOT work at those businesses when you factor the total sum of our employed population. If this or that company fails, it does not negate the basic need we as a society still have for products, services, homes and the rest. The failed businesses should fail, stronger ones will acquire them. Lincoln promoted a stronger UNION, not PapaSmurf Uncle Sam here to control everything and re-distribute to all.
Over the years, I have developed the greatest disrespect for economists who start from theories instead of reality. That's a lot of them.
NATIONALIZE!
We need to nationalize THE MONEY SYSTEM.
NOT the banks.
Banks should remain private entities with a limited right to lend on a 100 percent reserve basis.
In other words, banks lend real money they have in their vaults, not create new money as debt each time they make a loan.
Read Milton Friedman on 100 percent reserve banking as well as Simons and Fisher - all proponents of the Chicago Plan for monetary reform.
Respectfully.
Funding major government expenditures by having the Fed call money into existence would be disastrous. The economy needs trustworthy money to function, much more than it needs the government expenditures. If more money were being created by the hundreds of billions of dollars per year, the money would not be trustworthy.
http://video.google.com/videoplay?docid=-9050474362583451279
http://jimbernard.org/gpage16.html
An old friend of Lincoln's, Colonel Dick Taylor of Chicago was put in charge of solving the problem of how to finance the war. His solution is recorded as this. "Just get Congress to pass a bill authorising the printing of full legal tender treasury notes... and pay your soldiers with them and go ahead and win your war with them also." When Lincoln asked if the people of America would accept the notes Taylor said. "The people or anyone else will not have any choice in the matter, if you make them full legal tender. They will have the full sanction of the government and be just as good as any money; as Congress is given that express right by the Constitution."
Lincoln agreed to try this solution and printed 450 million dollars worth of the new bills using green ink on the back to distinguish them from other notes. "The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers..... The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government's greatest creative opportunity. By the adoption of these principles, the long-felt want for a uniform medium will be satisfied. The taxpayers will be saved immense sums of interest, discounts and exchanges.
Lincoln was seriously considering adopting this emergency measure as a permanent policy. This would have been great for everyone except the money changers who quickly realised how dangerous this policy would be for them. They wasted no time in expressing their view in the London Times. Oddly enough, while the article seems to have been designed to discourage this creative financial policy, in its put down we're clearly able to see the policies goodness. "If this mischievous financial policy, which has its origin in North America, shall become endurated down to a fixture, then that Government will furnish its own money without cost. It will pay off debts and be without debt. It will have all the money necessary to carry on its commerce. It will become prosperous without precedent in the history of the world. The brains, and wealth of all countries will go to North America. That country must be destroyed or it will destroy every monarchy on the globe."