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Tackling the Debt Ceiling With Carbon-Backed Money

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Two well-known quotes from Dick Cheney are apropos to the current crisis in Congress over the debt ceiling: "Deficits don't matter" and "Go F- yourself."

1) "Deficits don't matter"

Cheney's quote about deficits is still true. The federal government can continue to run deficits as long as there are buyers of Treasury bills. The current monetary system ensures that.

The US dollar is the currency used for the majority of international trade and dollars make up a huge percentage of all the reserves held by the world's central banks. Having a reserve currency (the technical term is seigniorage) allows the U.S. a benefit that no other country has, because it creates a demand for dollars without the need to provide goods or services. Some observers believe that the U.S. invaded Iraq to defend the dollar's primacy in seigniorage against the euro. But the dollar would lose its unique and exalted status if the U.S. defaults, or even if investors, especially the Chinese, lose faith in the U.S.'s ability to meet its financial obligations.

Many foreign financial crises are brought on by global financial speculators. Strangely, if this default occurs, it would have originated domestically by right-wing "tea party" ideologues who are applying an incorrect metaphor to national accounting. They believe that the federal debt is analogous to household debt. Then they apply strict father morality to this, and conclude that federal debt is immoral and must be stopped immediately.

These ideologues pride themselves in placing their sense of right and wrong above "practical" considerations such as re-election or predicted economic meltdown. They have no understanding of the debt's role in allowing our monetary system to function. They are not alone. Most people do not understand how money is created and what gives it its value.

All dollars are created as debt. That's right. When loans are taken out from a bank, an entry is made in a ledger (electronically of course), and money magically appears in the account of the loan recipient. On the other side of the ledger sits the debt, to be collected by the bank, with interest. If there were no debt, there would be no dollars, and no economy. Erase the debt, erase the economy. In fact, economic downturns are often caused or exacerbated when large companies go bankrupt, sucking money out of the economy as their debts are erased.

The structure of the monetary system means that paying down the debt is pointless. The bottom line for Republicans who want the economy, as currently configured, to grow is to welcome the debt. Republicans who understand this must tell their tea party friends that the metaphor of federal debt to household debt is incorrect.

2) "Go F- yourself."

In addition to money's debt backing, the current monetary system also requires all bank loans to be paid back with interest. This is the cause of the federal government's need to raise the debt ceiling. And because interest compounds exponentially, the bigger the debt gets, the more often and higher the debt ceiling must go.

The interest rate increases social inequity as it sends more and more money from debtors, the poorest members of society, to lenders, the banks and their shareholders, the wealthiest members of society. In this way, if the Republicans were to pursue a "strategic default" simply to raise interest rates, alongside the institutionalization of the inequitable tax system, fiscal austerity measures, and dismantling of the social safety net that they say are necessary for their votes to avert the crisis, it could be seen as class warfare in the broadest sense.

Savvy Republican strategists are using a necessary aspect of a misunderstood monetary system to impose austerity budgets on a Democratic President, maintain inequitable tax benefits for the wealthy, and control the domestic agenda through the next election cycle.

The Money and Climate Link

As Congress takes us to the brink of economic collapse, we are also at the point of global climate meltdown. And the linkage between high oil prices and economic contraction goes deep, as predicted in an article posted on the the Foundation for the Economics of Sustainability (FEASTA) website back in 2004. The article predicts that a rise in oil prices would increase oil producers' earnings so much that, as in 1973 and 1979, they would be unable to spend the money. They have no option but to lend their surplus back as deposits in banks. But the money stays in those banks rather than being lent out again, and low, near zero, interest rates might not be low enough to make extra borrowing attractive. Without the extra borrowing, however, the global money supply would contract, plunging the world to a depression. So global economic activity contracts in step with the decline in oil and gas supplies. Constant contraction and depression could be the norm. Even the oil producers would not do well out of this because their output would be sold in depression conditions for a lot of the time. In frequent recessionary conditions, the oil price would be very unstable and not provide the constant economic signal needed for investments in renewable energy.

Cap and Share -- the way out of this downward spiral

The solution to this joint economic-climate crisis must provide an escalating price signal on oil, and distribute the proceeds equally to the people, not the fossil fuel corporations. This can be done globally through a Contraction & Convergence model, or nationally through a Cap & Dividend approach. It starts with an agreement to cap either carbon emissions or oil production (same thing really) and return the revenues to the people as a dividend or share. This would create a resource-backed social safety net to help us through the economic instability.

More ambitious would be to develop the concepts for a new complementary monetary system that does not need to replace existing system, but could be created alongside it. Ironically, tea party icon Ron Paul understands some of the problems with debt-backed currency. He has part of the diagnosis correct, but idealizes the archaic and impractical Gold Standard. However, what if another scarce resource could provide the backing for a tradable unit of value? Carbon emissions. The distribution of carbon shares to all adults residents would take place each month, quarter, or year, as a carbon cap reduced the total emissions allowable from upstream companies. The Shares would avoid the current monetary system's problems of debt-backed currency with inequitable interest rates.

Of course, there are other options. We could believe the right-wing echo chamber and allow needless austerity to keep us from investing in green technologies that might otherwise turn around the economy and help the climate. We could base decisions on inappropriate metaphors and watch our affluence evaporate. We could, as Cheney would say, "go F- ourselves." Or not.