Debt is Not Money
"Everything predicted by the enemies of banks, in the beginning, is now coming to pass. We are to be ruined now by the deluge of bank paper. It is cruel that such revolutions in private fortunes should be at the mercy of avaricious adventurers, who, instead of employing their capital, if any they have, in manufactures, commerce, and other useful pursuits, make it an instrument to burden all the interchanges of property with their swindling profits, profits which are the price of no useful industry of theirs."
--Thomas Jefferson letter to Thomas Cooper, 1814.
Are we standing at the edge of a Great Inflation (like Weimar Germany), a second Republican Great Depression, or a return to the middle class prosperity of the Roosevelt/Eisenhower New Deal era? Until Americans understand the difference between "money" and "debt," odds are its going to be one of the first two, at least over the next few years.
Money
"Money" is a convenient replacement for barter in an economy. Instead of my giving you five pounds of carrots, so you wash my car, then you trade the carrots for a new shirt, and the clothing store then trades the carrots to a trucker that brings them their inventory, we all just agree to use a ten-dollar bill. Because a nation's money supply represents that nation's "wealth" -- the sum total of goods, services, and resources available in an economy/nation -- it needs to have a fixed value relative to the number/amount of goods, services, and resources within the nation.
As an economy grows -- more factories, more goods, more services -- the money supply grows so one dollar always represents the same number of carrots. (And with a fractional reserve banking system like we have, that growth is created mostly by banks lending money and creating it out of thin air in the process.)
If the money supply contracts, or grows slower than the economy, then we experience deflation -- the value of money increases, goods and services become less expensive (fewer dollars to buy the carrots), but because the value of money has increased it becomes harder to get. When this happens quickly, because of its economically destabilizing influence (businesses and people can't get current money -- cash -- or future money -- credit -- because money is more valuable), it's called a Depression.
On the other hand, if the money supply expands or grows faster than the economy, there are more dollars than there are goods and services so the number needed to buy a pound of carrots increases. This is inflation, and when it happens suddenly and on a large scale, it's called hyperinflation.
Therefore, one of the most important jobs overseen by Congress and executed by a Central Bank (or the Treasury Department if we were to go with the system envisioned by the Founders and Framers of the Constitution) is to "regulate the value" of our money (to quote Article I, Section 8.5 of our Constitution) by making sure the number of dollars in circulation always steadily tracks the size of the overall economy. If the economy grows 2%, then that year there should be 2% more dollars put into circulation. More than that will create inflation; fewer will create deflation.
Debt
"Debt" is not money. Instead, it's a charge against future money. But even though it's a charge against future money, it can still be spent as if it was today's money -- except that it must be repaid with interest. And therefore debt must have some sort of a balanced relationship to the total size of the economy -- albeit the future economy -- for it not to be destabilizing.
In other words, if over the next twenty years (the term of a typical and healthy mortgage) the economy is expected to grow by X percent or X number of dollars, then the total amount of twenty-year debts that can be issued should be limited to X. But if it's greater than X, then when the future arrives there won't be enough circulating money to repay the debt, because the economy (and the money supply) won't have grown as great as the debt repayment demand. The only two options are for debt holders to default (bankruptcies, foreclosures, etc. -- Depression), or for the government to suddenly increase the supply of money (inflation).
The same is true of one-year debt (credit cards), four- or five-year debt (car loans, typically), and all other forms of debt. In aggregate, if the amount of debt is allowed to grow faster than the economy will grow over the term of the debt, when the debt is due there will be a problem, and if it's grown hugely, a disaster.
This is what we're experiencing right now. Over the past three decades -- largely since Reagan -- debt (both private and public/government) has expanded much more rapidly than the economy has grown. "Now" was "the future" when the debt was issued, but the economy hasn't grown to the point where there are enough dollars (in reality, enough value -- goods and services) to repay that debt. Thus we are experiencing a "wringing out" of that debt -- bankruptcies and foreclosures -- relative to the current wealth of the economy.
This is the most critical thing to see clearly -- without adhering to this simple concept, a government or central bank will always either create boom/bust cycles (depressions/recessions) or inflation. Without regulating debt, a government will be taken hostage and an economy destroyed by for-profit institutions that are able to create debt without regulation (banks).
Panics
Although Thomas Jefferson and Alexander Hamilton -- two opposite sides of the national bank debate -- both understood this simple concept, it wasn't brought into the realm of law until the mid-1930s with a series of strict regulations on the abilities of banks to create debt (loan money), and strong political limits on the ability of government to go into debt outside of wartime. That's why from the founding of this nation until 1935, we experienced a "banking panic" at least once every 10 to 15 years from 1776 until 1935.
Then Roosevelt took the banks in hand, by creating a series of regulatory agencies and empowering them with strict laws. The result was that for fifty years in the United States -- roughly 1937 to Black Monday of 1987 -- we didn't experience a single national "panic" or consequential bank failure. The stock market grew steadily (allowing for the blips surrounding WWII).
It was also hard to get a credit card (short term debt), buy a car (medium-term debt), or get a mortgage (long-term debt) without proving that you would be able to repay the amount in the future -- in other words, that there would be future expanded-economy dollars that you could lay claim to because of your particular job and skills. Credit was regulated.
Reagan changed the rules of the game, particularly when he brought in the anti-regulation Libertarian Alan Greenspan as Chairman of the Fed. He ran up a massive federal debt -- greater than that of every president from George Washington to Jimmy Carter combined -- in just eight years, and began the process of loosening the power of bank regulators.
That process was finished by a Republican Congress (particularly Phil Gramm) and President Bill Clinton (with help from Rubin and Summers) and then booted out the door by George W. Bush, who borrowed even more than Reagan. Bush even used an obscure 19th century law to fight states' attorneys general who wanted to regulate or prosecute fraud among banks and mortgage lenders in their states (see the article by Eliot Spitzer in the Washington Post just before his being outed for sleeping with a hooker).
Green Eyeshades
During the "Great Stability" -- that period from the 1935 onset of the New Deal and the beginning of its end with Reagan's massive tax cuts of 1981 and 1986, leading directly to the stock market crash of 1987 and the S&L debacle -- banking was, as Paul Krugman noted in a recent column, "boring." Credit and currency were considered part of the commons, not something off which a small elite should profit. Like the utilities in the game Monopoly, banks provided a predictable but relatively low profit. Nobody got rich, but nobody lost anything, either.
Bankers were the safe and predictable guys who wore green eyeshades at work and pocket protectors in their shirts. The nation's main products were goods and services; nobody "made money with money" in any big way.
Since the serial deregulations of the financial services sector brought on by Reagan, Bush, Clinton, and Bush, however, bankers became fabulously rich. They called themselves the "Masters of the Universe." They came to dominate contributions to politicians, and facilitated the takeover of most major US newspapers, all the while using debt as their mail tool to make money (burdening those newspapers with such debt that many are now going out of business because they can't repay it).
By 2005, fully 40 percent of all corporate profits in the US came from the financial services sector -- a group of people who didn't produce anything at all of value, nothing edible or usable, nothing that would survive into future generations. They invented fancy derivative "products" that they "sold" at high commission rates around the world so others could "make money with money." In fact, they weren't making money -- they were taking money. Behavior that would have been criminal during the Roosevelt, Truman, Eisenhower, Kennedy, Johnson, Nixon, Ford, and Carter administrations became "normal" and was even encouraged: more than half of all the graduates from many of America's top colleges and universities went into finance so they could get in on the very lucrative scam.
They created debt. As Ellen Brown notes at www.webofdebt.com, according to the Bank of International Settlements, they created and sold at a profit over 900 trillion dollars worth of debt- and risk-based "instruments." That's a pretty mind-boggling number when you consider that the GDP of the United States is around 14 trillion and the GDP of the entire planet is around 65 trillion.
All of these "products" were made and sold based on the assurance that when "then" became "now" the economy would have grown fast enough for there to be enough dollars to pay it back. But the reality of a debt bubble that exceeds the world's GDP many times over came crashing in on us in 2007 -- and still hasn't fully crested -- producing the "crisis" we currently face.
Are we there yet?
Are we recovering from it all now? Will things soon be back to normal?
If by "normal" we mean like life during the "Great Stability," the answer is: "Not a chance." Back then we had in place tariffs and trade policies, first initiated in 1791 by Alexander Hamilton, that protected our domestic manufacturing industries. We still made things -- in fact, the USA was the world's largest exporter of manufactured goods, and the world's largest creditor. Like today's China, for over 100 years we'd loaned other countries money so they could buy our stuff!
On the other hand, if by "normal" we mean how things were over the past 28 "Reaganomics" years -- a stagnating middle class, disintegrating manufacturing sector, and piles of money being made by bets and debts -- then maybe. After just the first decade of Reaganomics, we went from being the world's largest exporter of manufactured goods to being the world's largest importer; we went from being the world's largest creditor to being the world's largest debtor.
None of that has changed. We haven't repealed Reagan's disastrous tax cuts, which have exploded our nation's budget deficits. We haven't repudiated NAFTA and the WTO and gone back to an international trade policy that puts American interests over those of transnational corporations. We have not re-regulated the banks, and have not brought back 6000-year-old laws against usury (excessive interest rates on debt).
The bankers, in fact, are fighting it tooth and nail -- the financial services industry in whole has spent over $5 billion lobbying Congress over the past ten years -- and their acolytes like Lawrence Summers and Tim Geithner play major and consequential roles in the Obama administration.
It appears that the plan today is not to regulate the amount of debt that banks can create, but instead to both print more money and do everything possible to reinflate the debt bubble. (Lacking a return to Hamilton's national manufacturing and trade policy, as a nation we just continue to slip deeper and deeper into Third World status as an importer and debtor -- this may be our only choice if we don't wake up soon.)
If followed, the Summers/Geithner policy can have only one of two outcomes: inflation or another, more serious crash. It's possible we could have both. Apparently the bankers and Summers/Geithner's hope is that neither or both don't happen for at least three and a half years...
Thom can be heard daily on his radio show 12pm - 3pm ET visit www.thomhartmann.com to stream live or find a station near you.
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This was an ok read, but I hate to break it to you, Mr. Hartmann: "money" is "debt". That is why it says "note". A note is a negotiable claim. If you have a Dollar bill in your pocket, you are a creditor of the issuer of that note. The narrative you weave of money being some mystical substitute for barter is mythology that ignores the institutional history of money. Money is in fact debt, oddly enough.
money represents what I am owed... if I have 10 dollars, I am owed 10 dollars worth of someone else's services, supposedly because I provide someone else with 10 dollars worth of my services... so yes, it does replace bartering AND it is debt...
It is not what you are owed by "someone else" - it is what you are owed by the issuer of the note. In this case the federal government. That is why it used to be the case that issuers of money would have to keep piles of gold in storage to back up the notes. Now they are backed up by some psychadelic mystical concept called "full faith and credit" of the issuer.
The Political/Financial Masters Of The Universe have hijacked our democracy and completely annihilated our middle class. Our political leaders sold us out with " free trade ", no healthcare, no regulations, out sourcing and H1-B s. Unemployment will continue to rise as long as we allow companies to not employ Americans before H1-Bs. Our businesses are driven by short-term profits and they will continue with this model unless Americans have decided they have had enough. Geithner/Summers worldview is skewed because all they have known and practiced is no regulations and creating debt for profit, can't expect a different outcome with these Financial Masters.
And to think for this we are paying our leaders, the politicians and that is the best they can do. First, they stand by idly or even help to manufacture such a crisis and then they try to rectify the situation by making it worse. Fire them all!
I think that Thom Hartmann is one of the most brilliant analyst in America today, but he is wrong on this one. He would be right if Obama and Geithner were not making large-scale changes that could potentially reap windfalls, i.e. stem cell research, energy independence, a reformed auto industry. All of these actions and I suspect more to come can have mult-trillion dollar positive effects on our economy over time. This debt may be gone a whole lot quicker than Hartmann or Krugman think. Obama's no fool and I suspect that Geithner isn't either.
Thom Hartmann's analysis is excellent, which is why I'd like to hear him address the good point you have brought up here. Do these burgeoning industries really have the potential to set a whole new course for us, economically? Or have we already fallen too behind on these groundbreaking industries to other countries, for the effect you suggest.
It seems that President Obama is addressing this right this minute and knocking it out of the park as usual. Hartmann, Krugman, and other skeptics and critics need to take a long term view of the state of our economy. It seems that they lack faith in progress in this matter. Strange for Progressives, don't you think?
Part One --
The financial crisis explained in simple terms:
Heidi is the proprietor of a bar in Berlin . In order to increase
sales, she decides to allow her loyal customers - most of whom are unemployed
alcoholics - to drink now but pay later. She keeps track of the drinks consumed on
a ledger (thereby granting the customers loans).
Word gets around and as a result increasing numbers of customers flood
Into Heidi's bar.
Taking advantage of her customers' freedom from immediate payment
constraints, Heidi increases her prices for wine and beer, the most-consumed
beverages. Her sales volume increases massively. Cont'd ...
Part Two
A young and dynamic customer service consultant at the local bank
Recognizes these customer debts as valuable future assets and increases Heidi's
borrowing limit.
He sees no reason for undue concern since he has the debts of the
alcoholics as collateral.
At the bank's corporate headquarters, expert bankers transform these
customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These
securities are then traded on markets worldwide. No one really understands what these
abbreviations mean and how the securities are guaranteed.
Nevertheless, as their prices continuously climb, the securities become top-selling items.
One day, although the prices are still climbing, a risk manager
(subsequently of course fired due his negativity) of the bank decides that slowly
the time has come to demand payment of the debts incurred by the drinkers at
Heidi's bar.
However they cannot pay back the debts.
Heidi cannot fulfill her loan obligations and claims bankruptcy.
DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better,
stabilizing in price after dropping by 80 %.
The suppliers of Heidi's bar, having granted her generous payment due
dates and having invested in the securities are faced with a new situation.
Her wine supplier claims bankruptcy, her beer supplier is taken over by a
competitor.
The bank is saved by the Government following dramatic round-the-clock
consultations by leaders from the governing political parties.
The funds required for this purpose are obtained by a tax levied on
the non-drinkers.
Finally an explanation I understand . . .
easy explanation LOL, good one!
You missed that part after the risk manager was fired and ignored when finally, a person who held part of the debt tried to sell it into the market, and found no buyers. Then, and only then, did they try to collect on the debt.
Excellent!
Mr. Hartmann, great article, one of the best I have ever read about this subject, if not the best. Thom, I enjoy you on the radio when i get a chance to listen, very informative, keep up the great work. I just don't get Washington any longer, they again want you to go out and spend like there's no tommorow(and there might not be). Finally, the savings rate of Americans goes up and they want you to blow it! A true economy can't be 70% consumption. And the financial services "industry", what the hell do they make other than money for themselves. We are in deep sh*t.
As I wait for the Geithner plan to begin, I begin to wonder WTF? I noticed yesterday that the Financial Times had an article saying it would take 6 months to begin.
I have trouble believing in the Geithner plan if it takes 6 months to begin.
I think Obama is speaking about the economy today. I really want to hear how this is going to work.
I used to look forward to listening to Thom Hartman on Air America; it is no longer on in South Florida. There is no progressive radio here at all, they made it into a sports station. This is terrible, I hope he finds another station to be on soon. Randi Rhodes too, has been missing in action for months. No one seems to know a thing.
Now THIS is was huffpost should be about! Thom Hartmann is the most informative, and one of the most intelligent host one all of political talk radio. He has written several books, and what you have just read is typical of his presentation. I suggest everyone reading this do themselves a favor, and check out thomhartman.com to listen in, or find out when his show is on terrestrial radio. None of this is elicited by thom, but I've been a listener since his airamerica days, and I was hooked ever since.
Thank you, thank you for a fabulous post.
One of the first on Huffingtonpost that has told the full truth of our predicament.
But right now I have that awful feeling that we are in the burn cycle.
Like in "Goodfellas" when the gangsters couldn't charge anymore debt on that poor sot's restaurant, rather than pay the debts they torched the place.
We are being torched by the criminal banksters.
"Debt is not money," AND ... "this is not Debt."
This is a leprechaun's swindle, spinning gold out of straw but only until morning.
We must declare these practices to be specious and illegal, and having done so we must declare the mega-banks to be what they truly are ... insolvent.
Our world has a legitimate and vital need for legitimate banking. But that's not what this is; nor will it ever be. It's a rapaciously destructive, foolish thing that we must eliminate from our collective midst. With it, we must also purge Usury.
To clarify:
"Debt" is a security, the simplest form of a security, because in the end a security is "a negotiable promise." You can either exercise your promised rights, or sell those rights to someone else for a sum agreed-upon between you. It's your choice.
Obviously, any security involves some risk, because "ka-ka occurs." Okay, everybody knows that.
However: if you materially mis-represent the actual risk of your proposition to your buyer, or if the "negotiable promise" simply cannot by any means actually be kept, then you have just stepped over the line of the law. You are now swindling, just as surely as Mr. Ponzi ever did.
A relatively small handful of "mega-bankers" (sic...) have quite-literally swindled millions of people both in their own nation and in many other nations. Now, they seek to swindle the United States Treasury itself, and it would seem that they've got help.
Mark my words: ONLY in an environment of genuine trust and trustworthiness can either national or international business prosper. USA can either be a part of it, or it will forever be excluded. The consequences in either case of this HIGH CRIME are quite dire.
Excellent point, except for that trade able rights stuff. Debt is only trade able if that is part of the terms, currently, it is usually part of the terms.
But for example, in Canada, the banks tend not to sell their mortgages, but to hold them. Remarkably, in Canada, our banks seem to be the strongest in the world right now, if you believe the gossip. Of course, ever since the 30's battles, where government took control of our central bank, we've been pretty proud of our strong banks, and didn't given in to the Bush team temptations of wall street, thank goodness.
Aside from Canuk hucksterism, the point is that it may not be wise to make all debt trade able. Certainly there is a role for government to determine legal terms for certain types of debt.
This is required reading.
Very good.
Your last sentence is interesting...
-----
If followed, the Summers/Geithner [and Obama's?] policy can have only one of two outcomes: inflation or another, more serious crash. It's possible we could have both. Apparently the bankers and Summers/Geithner's hope is that neither or both don't happen for at least three and a half years.
-----
This is a time bomb situation, and I wonder to what degree has it been charted out on the political calendar?
Does it really matter if its been charted out on the political calendar? If the last election has taught us anything, its that it doesnt matter who we elect. Obama's campaign rhetoric was primarily populist support the middleclass, but once he got into office, all we have gotten is Trickle Down 2.0 (transfer huge amounts of wealth from the taxpayer to the wallstreet elites for "the benefit of everyone")
I dont think the Masters of the Universe trouble themselves with such insignificant details as the political calender. I think they have more than proven they can buy off anyone we try to elect.
GD, how true.
Thanks for such an insightful and educational piece. There is a piece missing and I wish you would write about it. That is the consolidation of the media and lack of information available.
Boss Limbaugh is on 600 plus stations selling this BS and brilliant, entertaining progressive radio hosts like Thom Hartmann are on a handful (relative) of stations. If brainwashed righties listened to Thom's program...we would have a revolution....
I dont watch cable news, has there been very many stories on Obama's economic policies?
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