Out of Thin Air

The US has a fiat currency, where money is created out of thin air with a stroke of the keyboard. For political reasons, we allow banks to enjoy the advantage of money creation rather than having the US Treasury issue it directly.

“Financial institutions are able to borrow funds through the interbank lending market as well as the discount window and both rates charged to the bank will be below the rate that a bank imposes upon a customer therefore the bank is not constrained by the amount of reserves entered in their accounting ledgers.  The most important aspect regarding the methods that banks employ to accumulate funds to maintain solvency is that connections are established between households, firms, banks and the government.  Financial institutions therefore do not lend from reserves but create money by issuing liabilities, within this system the bank is only monetarily constrained by the amount of credit worthy borrowers wherein the solvency of the loans made rely on the ability of the initial debtor to make good on the loan.”

Ellen Brown, author of Web of Debt, argues provocatively that the ability to create money allows a cartel of international bankers to control our country.

“Today, Federal Reserve Notes and U.S. dollar loans dominate the economy of the world; but this international currency is not money issued by the American people or their government. It is money created and lent by a private cartel of international bankers, and this cartel has the United States itself hopelessly entangled in a web of debt.”

We discussed the immense power and reach of banking and finance in the last post. However, the ability to create money goes a long ways toward explaining why the, too big to fail, too big to jail, banks appear omnipotent. As Amschell Rothschild is claimed to have declared–“Give me control of a nations money supply, and I care not who makes it’s laws.”

Many Americans seem to have forgotten that President Nixon took the country off the gold standard in 1971. To be blunt, the conventional wisdom concerning money is incredibly fucked-up. Even otherwise smart and sophisticated Americans seem baffled by the idea of a fiat currency that is created out of thin air, and still falsely believe that our country is like a household, with the threat of default forever hanging over us. If you don’t believe me, examine all the wailing and rending of garments by the fiscal scolds who warn darkly of a descent into economic Armageddon, like Greece. What were the Tea Baggers so exercised about? Oh yeah, government debt.

That our executive and legislative branches make statements regularly that belie the understanding of how money is created is not an accident. I’m enough of a cynic to think that much of this misdirection on monetary policy is deliberate, in pursuit of neoliberal goals of advancing capital at labors expense.

Here’s the Congressional Budget Office (CBO) fear mongering about how the evil deficit is going to end life as we know it.

“Less National Saving and Future Income–Large federal budget deficits over the long term would reduce investment, resulting in lower national income and higher interest rates than would otherwise occur. Increased government borrowing would cause a larger share of the savings potentially available for investment to be used for purchasing government securities, such as Treasury bonds. Those purchases would crowd out investment in capital goods—factories and computers, for example—which makes workers more productive.”

And, President Obama gravely intones that, “small businesses and families are tightening their belts. Their government should, too.”

This is completely wrong but it sounds right to all the serious people who believe that people like you and I should suffer. Basically, it’s all just a fucking morality play.

The US government is not like a household, there is no threat to funding available for private investment in capital goods, and no threat to the growth rate of future national income.  The President’s and the CBO’s analysis is completely inconsistent with how the modern financial system actually works.

Speaking slowly–the only way that the US government can default on debt in its own currency is to willfully refuse to pay the debt.

There is a method to the madness, politically speaking, in articulating over and over the falsehood that the US government is funded solely through tax receipts to fund government programs and commitments. After all, this fictional fiscal constraint prevents us from funding any sort of progressive spending on healthcare or education, or even repairing our infrastructure.

Modern Monetary Theory–MMT, articulates a novel way of understanding how money is created, as well as defining a framework for progressive policy, going forward. According to MMT, the debates over the deficit and spending are political not economic problems. The fact that government can spend an unlimited amount of money does not mean it should, and ultimately the choice of how much a government should spend is a political question. MMT aims at promoting political processes that allow the will of the people to be expressed as well as possible, free of unnecessary financial constraints.

And, this is where we the people are supposed to step in and demand that our leaders discuss our economic and monetary policies in good faith without all the bullshit about deficits and balanced budget acts.

Recent history demonstrates just how dishonest and craven our leaders, Republican and Democrats, have been. The Bush, and Obama administrations shoveled trillions of dollars into Wall Street banks in the aftermath of the Wall Street crash of 2008. Where did that money come from? Did we borrow it from the Chinese? And, what about quantitative easing? Where does that money come from?

You get the idea. These are political decisions–to give money to banks but not American citizens. Not because they don’t have the money. The truth is, our leaders just don’t want to spend money on progressive policies that would help the vast majority of Americans at the expense of their banker friends.

The ultimate expression of this attitude was expressed by Obama’s Treasury Secretary Tim Geithner, who thought his job was to foam the runway for crashing banks using the money appropriated to help homeowners.

There is another choice.

The US government could use our fiat currency to carry out direct sovereign spending—the issuing of sovereign fiat dollars to pay for collective goods and services.

There is much that needs to be done. Repairing our infrastructure, educating our students, providing healthcare to all Americans, are all good and worthy goals.

The money is there, waiting.

Update: Economist, Michael Hudson, explains how quantitative easing works.

“So the Fed was pretty open in what quantitative easing is supposed to do since 2008. It’s supposed to lower the interest rates, which raises bond prices, and it inflates the stock market. And since 2008, they’ve had the largest monetary inflation history–$4 trillion of quantitative easing by the Fed. But it’s all gone into the stock market and the bond market.

So what has this done? Well, it’s helped stock and bond holders get richer. And who are the stock and bond holders? They’re the 1 percent and they’re the 10 percent. And people are wringing their hands and saying, why isn’t the economy getting richer? Why is it since 2008 economic inequality and the distribution of wealth have worsened instead of gotten closer together? Well, it’s because of quantitative easing. It’s because quantitative easing has increased the value of the stocks and the bonds that the 1 percent or the 10 percent hold, and it hasn’t helped the economy at all, because the Fed is really concerned with its constituency, which are the banks.”



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