CAUGHT BETWEEN A ROCK AND A HARD PLACE
OR
DAMNED IF YOU DO, DAMNED IF YOU DON’T
SOME THOUGHTS ON RESCUING THE AMERICAN ECONOMY FROM THE NEOLIBERALS AND OTHER CON ARTISTS
Notes on the present inflationary spiral and the collapse of the America economy, social upheaval and political chaos resultant of neoliberal economic policies and failed leadership. For an examination of the economic issue — political economics, if you will — Dr. Ellen Brown’s excellent article THE REAL ANTIDOTE TO INFLATION is attached.
Charles H. Sulka
(Updated 01-23-2022 2017 -0500)
.
In a podcast on a popular right-wing news channel recently, the talking heads offer their explanation for the inflationary spiral which is crushing the poor and middle-class (what’s left of the so-called ‘middle class’ anyway, after decades of neo-liberal economics have decimated America’s working class.) It is the right’s long standing proposition that inflation is caused by the government’s (all governments) propensity to create money ‘out of thin air’ (fiat money.) While it is true that money is created out of thin air, so to speak, in systems based on fiat currency, the cause of inflation is not so simple.
Remember, Republicans are not deep thinkers. It is true that enlarging the money supply by too great a measure contributes to inflation. Such practices are always a temptation to politicians, who, as the video points out, are prone to want to spend today, borrowing against a future in which they will not be around to take the blame when payment comes due. But the causes of inflation are far more complicated, and reflect deep-rooted failed policies.
Probably the biggest factor leading to inflation are idiotic tax cuts for the rich — those most able to pay taxes. This, too, is an over-simplification, but closer to the truth: irresponsible tax cuts result in lower revenues — especially in times of economic doldrums — meaning deficit spending is the only alternative. It is probably safe to say that the only thing politicians like more than spending money that doesn’t exist is claiming credit for tax cuts, which go primarily to the rich. And let’s face it, in America, virtually all elected officials who make tax policy are rich … or soon to be. (Or at least they want to be.)
Tax cuts which reduce revenues are the problem, but so are unsound fiscal policies. With only a few exceptions, government policy increasingly results in transference of public funds to the wealthy. Consider the theoretical (which in truth is imaginary) economic stimulus effects of the central bank’s prime interest rates. Contrary to popular notion, lower prime interest rates do not result in economic growth, especially in a stagnant — or worse, collapsing — economy. Businesses are not going to borrow money, even at low interest rates, to hire employees they don’t need, or to produce products which they cannot sell due to saturated markets or foreign competition from what are euphemistically called our ‘business partners’. Instead, low interest rates at the central banks leads to speculation and profiteering by businessmen and investors who use the money to underwrite the buy-back of corporate stocks, to pay themselves huge bonuses and dividends on poorly performing business ventures, and to speculate on imaginary and counter-productive financial instruments (scams.) The end result is further concentration of wealth in the hands of the elites (with disastrous social and political implications), divisive economic stratification, and further collapse of the real (productive) economy.
Government policies which only makes matters that much worse are the never-ending bail-outs of financial institutions. Insolvent, poorly managed, and often criminally negligent financial institutions must be propped up with public debt. The situation is the result of a total failure of leadership — the failure of the government to enforce anti-monopoly legislation which has allowed banks and financial institution to grow far beyond manageable size. This is a direct result of deregulation mania and neoliberal economic nonsense of the Reaganites. Congress has made a mockery of the constitutional mandate that it (Congress) shall regulate the economy.
The financial sector is a house of cards. The people are kept in the dark about the deplorable state of affairs in the financial sector and the government largesse that keeps the high rollers in luxury suites while honest working Americans are scrabbling to pay for food and clothing for their children. The reality of the situation is concealed behind secret government programs to shore up the private bankers with public debt — debt that our children will be burdened with. Just recently the Federal Reserve printed (created out of thin air) more than four TRILLION dollars in credit to bail out three humongous financial institutions — financial institutions that shouldn’t exist in the first place, and which play no productive role in the economy. To make things worse, this was all done in secret. (Americans still have not been told who the recipients were, or the amounts disbursed, or the terms and details of the government’s secret deal to bail out of the financial sector a decade ago.) That’s classified information. (!)
America needs to nationalize the entire financial sector — starting with the Federal Reserve — and give every American an ownership share in these private banks. After all, we are paying for their crimes and abuses … and never-ending bail-outs to keep these useless financial institutions afloat. The American taxpayer should get something for his money … and shares of insolvent banks are better than nothing. At least it looks good on paper.
It is this bogus economic activity that causes inflation. All the financial sector does is keep enlarging the numbers by trading stocks and bonds back and forth forever. How bad is it, really? One example is telling. If you were to buy shares in Tesla today, for example, it will take more than one thousand years for you to recover your investment based on the firm’s current earnings. (See Note 1)
One thousand years! A P/E (price-earnings ratio) that is over the moon. A Tesla stock buyer’s only hope of recovering his purchase price is to find some other sucker (er, I mean ‘investor’) willing to take a gamble on what is nothing more than a Ponzi scheme at this point. (And where are the government regulators?) Usually, it is pension funds and institutional investors who pony up the money used to buy off the earlier victims (er, stock buyers) as private investors do not have access to the astronomical amounts of money needed to play this game.
Most of this investment is imaginary — numbers on paper with absolutely no basis in reality. In truth, denying objective reality is absolutely essential to the functioning of the neo-liberal Ponzi scheme. The whole economy — which is nothing more than a house of cards — is fictional, imaginary … until the taxpayers get the bill for the trillions of dollars for bail outs for what is nothing less than an ongoing criminal conspiracy. Only this criminal conspiracy is legal.
Meanwhile, the parasitic, non-productive financial sector makes off with huge profits. Financial manipulators get rich, politicians get bribed, neoliberal economists pat each other on the back, and the only honest people in the whole country — ordinary working men and women — get the shaft.
Is America a great country, or what?
Republicans and neo-liberal economists refer to the relentless enlargement of the numbers as ‘wealth creation’. This misleading term conceals the inflationary nature of the process which is based on valuation of assets, not their worth, and certainly not productivity. If economists were being truthful, the expansion of the numbers in this fictitious economy would never be referred to as ‘wealth creation’. It would instead be called what it really is: inflation creation. This inflation creation is the cornerstone of Republican political economics.
People applaud when the stock market goes up. They have been tricked into believing that a rising stock market is a good thing. They are completely oblivious to the fact that they have been robbed by devious elite capitalists and fast-talking Wall Street shysters.
In reality there has been no actual growth. There has been no increase in consumer products, no price reductions, no better value for the items they purchase. Rents and food prices continue their inexorable climb, and medical care, especially hospitalizations, gets further out of reach.
The output of the real economy has not changed (in reality it has probably shrunk.) This ‘growth’ is nothing more than a contrivance on the part of economists — inflated numbers said to substantiate the stellar performance of the economy.
This growth is imaginary. The people have been fooled. In reality the pie isn’t any bigger. It just costs more (because of the inflated valuations.) What is not imaginary is the fact the workers’ share of the pie is now SMALLER. Deluded fools applaud; your pension fund, your IRA, your savings, all are now worth less. The people have been snookered. Over and over again.
Republicans are laughing all the way to the bank, or drinking champaign at soirees where they plot ways to cut food stamps for hungry children or deny medical care to their fellow Americans … all under the pretext of reducing inflation. While in reality, every penny of their wealth — that they did not inherit, that is — can be attributed to economic policies that result in never-ending inflation.
Now — and this is important — this expansion of both the money supply and the enlargement of asset valuations is important to the functioning of the so-called capitalistic system. It is especially important in times of a foundering economy (due to a saturated market or, again, foreign competition from our ‘business partners.’) Without this contrived ‘growth’ there would be no way to pay for government programs, debt, and entitlements … and of course the largest sector of the economy: waste, fraud, and abuse. Or the exorbitant fees and obscene profits extracted by the parasitic financial sector.
We need to get our priorities straight. It’s fine for people to starve and sleep in the streets, as long as government bails out the banksters. America needs these parasites, speculators, financial manipulators, globalists and free traders. Creative destruction is the way of the future in the New Economy. It’s what’s capitalism is all about.
Is America a great country, or what?
This economic system works well. Until it collapses in on itself, which of course is the eventual outcome of all such expansionary schemes. As the process continues, the workers are squeezed by lower wages and reduced purchasing power of what little wages they receive … while the economic parasites of the investor class live lives of luxury beyond imagining, without doing any productive work themselves. Capitalism works well … for some, for a while. But it ends in misery and degradation for the vast majority of the people, the honest working men and women.
Economic upheaval is always preceded by pain and suffering of the working class. This is hardly what the Good Lord had in mind for his children. A Biblical economic program would start with a repudiation of western capitalism. A Bible-based economic program would outlaw economic exploitation, outlaw monopolies and economic consolidation, outlaw usury (loaning money at interest), would require the periodic redistribution of wealth (Jubilee year to break up large land holdings) and would mandate periodic debt forgiveness. A Bible-based economic program would be the exact opposite of Republican political economics. (For those interested in understanding the will of God, try reading the Bible. It’s all in there.)
To get back to the issue of inflation, and where it leads….
Do not be fooled into believing that the problem is simply that the government pumps too much money into the money supply. This can be a problem, and it always will be. But the bigger problem is wasteful government spending (especially the military budget.) Waste, fraud and abuse — misguided fiscal policies — is the reason for our politicians’ failure to perform the most basic function mandated in the U.S. Constitution — responsible regulation of the economy. Deregulation mania and bogus economic principles (such as the laughable Laffer Curve and the lunacy of neo-liberal economics) are far more harmful factors than monetary policy.
Lavishing money on the rich is NOT the way to restore the health of the economy; nor is it the way to remediate the growing wealth inequality and income disparity, factors which inevitably lead to a rise in collectivist sentiment among the people. Communist revolutions are the result of the excesses and abuses of the rich.
Silly theories about ‘pump priming’ through interest rate adjustments are just that — economists’ silly ideas, ineffectual, a waste of time and talk. What must be done to prime the pump, so to speak, is to infuse money into the bottom of the economy, and not lavish money on the wealthy through tax cuts for the rich and trillion-dollar bail-outs of the foundering financial sector. Jobs programs will stimulate demand in the consumption-based economy while rebuilding the nation’s industrial base.
We can address changes to the economic paradigm at a future time; for now we have to work with what we have, and that is a consumption-based economic system. Massive government spending (like FDR’s New Deal) is required. As Margaret Thatcher might have said, had she not been completely off her rocker, a true believer in voodoo economics: “There is no alternative.”
We need to embrace MMT (Modern Monetary Theory) and sound economic principles. Direct government spending is the order of the day. America needs a new New Deal … and we need it now.
And then we need to undo the damage wrought by the Reaganites’ deregulation of the economy. Remember, the Constitution makes it clear that Congress is to regulate the economy, not turn it over to psychopaths, parasites, and speculators. Laissez-faire capitalism and Free Trade have brought the nation to its knees. It’s time to get America back on her feet. America was once a great nation. We can make America great again. We could, that is, if we can drain the swamp and instill true leadership in Congress.
In a political system like America’s present system, where special interest money controls — literally ‘owns’ — the government, we can never have true leadership. Leadership is distilled out of the system. Responsible regulation of the economy can never occur because our politicians are too ignorant; even if America’s elected officials weren’t corrupt they would not have the qualifications to perform such a challenging task. We can never hope to have a better class of leaders until we discard this failed political system and adopt a new paradigm. We need to implement a system which puts the best and the brightest people in leadership roles.
This can never happen under the present political system where money rules. The top priority must be to sever the ties between money and power, and create a new political system — social democracy based on open and free elections.
A new political system is no guarantee that the economic woes of the nation will be readily solved. The damage has already been done. Righting the wrongs of Reaganomics will take decades. Recovering from the ruling elites’ sell-out to the communists could take even longer. But one thing is certain: the existing political system is guaranteed to fail. The American economy is a house of cards. Our Lord has warned us of what happens when a house is built without a solid foundation. It collapses under the mounting pressure.
The end of the American economy is at hand. The damage is done. The economic parasites have sucked the life-blood out of the economy while the quislings in Congress have sold out to the communists. International bankers call the shots. The people are so confused by the lies of the ruling elites that they cannot fully comprehend how bad the situation really is.
The present economic paradigm is on the verge of collapse. Only a new political system can save the nation. Even so, it will be a long and painful struggle to cast off the chains of the oppressors and implement a just and fair economic system based on sound political principles.
You could say that we are caught between a rock and a hard place. It’s damned if you do, damned if we don’t. We are threatened by economic collapse leading to communist revolution, totalitarianism and subjugation of the human race on the one hand … and a mirage which leads to globalization, the neo-feudal New World Order, totalitarianism and subjugation of the human race on the other hand. These really are dangerous times.
Dangerous times, indeed. The last people we can rely on to lead us out of this mess are the politicians and elites who have created these problems in the first place.
Only a Second American Revolution can save the nation. Now is the time. It is now or never.
.
Note (1): For an excellent analysis of ‘supermoney’ and the speculative economy see the Naked Capitalism post, WHY ELON MUSK ISN’T SUPERMAN by Tim O’Reilly.
(Cut and paste URL): https://www.nakedcapitalism.com/2021/08/why-elon-musk-isnt-superman.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+nakedcapitalism+%28naked+capitalism%29
.
THE REAL ANTIDOTE TO INFLATION (UNZ REVIEW)(ELLEN BROWN)
https://www.unz.com/article/the-real-antidote-to-inflation/
The Real Antidote to Inflation
Stoking the Fire Without Burning Down the Barn
Ellen Brown
December 24, 2021
The Fed has options for countering the record inflation the U.S. is facing that are more productive and less risky than raising interest rates.
The Federal Reserve is caught between a rock and a hard place. Inflation grew by 6.8% in November, the fastest in 40 years, a trend the Fed has now acknowledged is not “transitory.” The conventional theory is that inflation is due to too much money chasing too few goods, so the Fed is under heavy pressure to “tighten” or shrink the money supply. Its conventional tools for this purpose are to reduce asset purchases and raise interest rates. But corporate debt has risen by $1.3 trillion just since early 2020; so if the Fed raises rates, a massive wave of defaults is likely to result. According to financial advisor Graham Summers in an article titled “The Fed Is About to Start Playing with Matches Next to a $30 Trillion Debt Bomb,” the stock market could collapse by as much as 50%.
Even more at risk are the small and medium-sized enterprises (SMEs) that are the backbone of the productive economy, companies that need bank credit to survive. In 2020, 200,000 more U.S. businesses closed than in normal pre-pandemic years. SMEs targeted as “nonessential” were restricted in their ability to conduct business, while the large international corporations remained open. Raising interest rates on the surviving SMEs could be the final blow.
Cut Demand or Increase Supply?
The argument for raising interest rates is that it will reduce the demand for bank credit, which is now acknowledged to be the source of most of the new money in the money supply. In 2014, the Bank of England wrote in its first-quarter report that 97% of the UK money supply was created by banks when they made loans. In the U.S. the figure is not quite so high, but well over 90% of the U.S. money supply is also created by bank lending.
Left unanswered is whether raising interest rates will lower prices in an economy beset with supply problems. Oil and natural gas shortages, food shortages, and supply chain disruptions are major contributors to today’s high prices. Raising interest rates will hurt, not help, the producers and distributors of those products, by raising their borrowing costs. As observed by Canadian senator and economist Diane Bellemare:
Raising interest rates may cool off demand, but today’s high prices are tightly tied to supply issues – goods not coming through to manufacturers or retailers in a predictable way, and global markets not able to react quickly enough to changing tastes of consumers.
… A singular focus on inflation could lead to a ratcheting up of interest rates at a time when Canada [and the U.S.] should be increasing its ability to produce more goods, and supplying retailers and consumers alike with what they need.
Rather than a reduction in demand, we need more supply available locally; and to fund its production, credit-money needs to increase. When supply and demand increase together, prices remain stable, while GDP and incomes go up.
So argues UK Prof. Richard Werner, a German-born economist who invented the term “quantitative easing” (QE) when he was working in Japan in the 1990s. Japanese banks had pumped up demand for housing, driving up prices to unsustainable levels, until the market inevitably crashed and took the economy down with it. The QE that Werner prescribed was not the asset-inflating money creation we see today. Rather, he recommended increasing GDP by driving money into the real, productive economy; and that is what he recommends for today’s economic crisis.
How to Fund Local Production
SMES make up around 97-99% of the private sector of almost every economy globally. Despite massive losses from the pandemic lockdowns, in the U.S. there were still 30.7 million small businesses reported in December 2020. Small companies account for 64 percent of new U.S. jobs; yet in most U.S. manufacturing sectors, productivity growth is substantially below the standards set by Germany, and many U.S. SMEs are not productive enough to compete with the cost advantages of Chinese and other low-wage competitors. Why?
Werner observes that Germany exports nearly as much as China does, although the German population is a mere 6% of China’s. The Chinese also have low-wage advantages. How can German small firms compete when U.S. firms cannot? Werner credits Germany’s 1,500 not-for-profit/community banks, the largest number in the world. Seventy percent of German deposits are with these local banks – 26.6% with cooperative banks and 42.9% with publicly-owned savings banks called Sparkassen, which are legally limited to lending in their own communities. Together these local banks do over 90% of SME lending. Germany has more than ten times as many banks engaged in SME lending as the UK, and German SMEs are world market leaders in many industries.
Small banks lend to small companies, while large banks lend to large companies – and to large-scale financial speculators. German community banks were not affected by the 2008 crisis, says Werner, so they were able to increase SME lending after 2008; and as a result, there was no German recession and no increase in unemployment.
China’s success, too, Werner attributes to its large network of community banks. Under Mao, China had a single centralized national banking system. In 1982, guided by Deng Xiaoping, China reformed its money system and introduced thousands of commercial banks, including hundreds of cooperative banks. Decades of double-digit growth followed. “Window guidance” was also used: harmful bank credit creation for asset transactions and consumption were suppressed, while productive credit was encouraged.
Werner’s recommendations for today’s economic conditions are to reform the money system by: banning bank credit for transactions that don’t contribute to GDP; creating a network of many small community banks lending for productive purposes, returning all gains to the community; and making bank behavior transparent, accountable and sustainable. He is chairman of the board of Hampshire Community Bank, launched just this year, which lays out the model. It includes no bonus payments to staff, only ordinary modest salaries; credit advanced mainly to SMEs and for housing construction (buy-to-build mortgages); and ownership by a local charity for the benefit of the people in the county, with half the votes in the hands of the local authorities and universities that are its investors.
Public Banking in the United States: North Dakota’s Success
That model – cut out the middlemen and operationalize community banks to create credit for local production – also underlies the success of the century-old Bank of North Dakota (BND), the only state-owned U.S. bank in existence. North Dakota is also the only state to have escaped the 2008-09 recession, having a state budget that never dropped into the red. The state has nearly six times as many local banks per capita as the country overall. The BND does not compete with these community banks but partners with them, a very productive arrangement for all parties.
In 2014, the Wall Street Journal published an article stating that the BND was more profitable even than JPMorgan Chase and Goldman Sachs. The author credited North Dakota’s oil boom, but the boom turned into a bust that very year, yet the BND continued to report record profits. It has averaged a 20% return on equity over the last 19 years, far exceeding the ROI of JPMorgan Chase and Wells Fargo, where state governments typically place their deposits. According to its 2020 annual report, in 2019 the BND had completed 16 years of record-breaking profits.
Its 2020 ROI of 15%, while not quite as good, was still stellar considering the economic crisis hitting the nation that year. The BND had the largest percentage of Payroll Protection Plan recipients per capita of any state; it tripled its loans for the commercial and agricultural sectors in 2020; and it lowered its fixed interest rate on student loans by 1%, saving borrowers an average of $6,400 over the life of the loan. The BND closed 2020 with $7.7 billion in assets.
Why is the BND so profitable, then, if not due to oil? Its business model allows it to have much lower costs than other banks. It has no private investors skimming off short-term profits, no high paid executives, no need to advertise, and, until recently, it had only one branch, now expanded to two. By law, all of the state’s revenues are deposited in the BND. It partners with local banks on loans, helping with capitalization, liquidity and regulations. The BND’s savings are returned to the state or passed on to local borrowers in the form of lower interest rates.
What the Fed Could Do Now
The BND and Sparkassen banks are great public banking models, but implementing them takes time, and the Fed is under pressure to deal with an inflation crisis right now. Prof. Werner worries about centralization and thinks we don’t need central banks at all; but as long as we have them, we might as well put them to use serving the Main Street economy.
In September 2020, Saqib Bhatti and Brittany Alston of the Action Center on Race and the Economy proposed a plan for stimulating local production that could be implemented by the Fed immediately. It could make interest-free loans directly to state and local governments for productive purposes. To better fit with prevailing Fed policies, perhaps it could make 0.25% loans, as it now makes to private banks through its discount window and to repo market investors through its standing repo facility.
They noted that interest payments on municipal debt transfer more than $160 billion every year from taxpayers to wealthy investors and banks on Wall Street. These funds could be put to more productive public use if the Federal Reserve were to make long-term zero-cost loans available to all U.S. state and local governments and government agencies. With that money, they could refinance old debts and take out loans for new long-term capital infrastructure projects, while canceling nearly all of their existing interest payments. Interest and fees typically make up 50% of the cost of infrastructure. Dropping the interest rate nearly to zero could stimulate a boom in those desperately needed projects. The American Society of Civil Engineers (ASCE) estimates in its 2021 report that $6.1 trillion is needed just to repair our nation’s infrastructure.
As for the risk that state and local governments might not pay back their debts, Bhatti and Alston contend that it is virtually nonexistent. States are not legally allowed to default, and about half the states do not permit their cities to file for bankruptcy. The authors write:
According to Moody’s Investors Service, the cumulative ten-year default rate for municipal bonds between 1970 and 2019 was just 0.16%, compared with 10.17% for corporate bonds, meaning corporate bonds were a whopping 63 times more likely to default. …[M]unicipal bonds as a whole were safer investment than the safest 3% of corporate bonds. … US municipal bonds are extremely safe investments, and the interest rates that most state and local government borrowers are forced to pay are unjustifiably high.
… The major rating agencies have a long history of using credit ratings to push an austerity agenda and demand cuts to public services …. Moreover, they discriminate against municipal borrowers by giving them lower credit ratings than corporations that are significantly more likely to default.
… [T]he same banks that are major bond underwriters also have a record of collusion and bid-rigging in the municipal bond market. … Several banks, including JPMorgan Chase and Citigroup, have pleaded guilty to criminal charges and paid billions in fines to financial regulators.
… There is no reason for banks and bondholders to be able to profit from this basic piece of infrastructure if the Federal Reserve could do it for free. [Citations omitted.]
To ensure repayment and discourage overborrowing, say Bhatti and Alston, the Fed could adopt regulations such as requiring any borrower that misses a payment to levy an automatic tax on residents above a certain income threshold. Borrowing limits could also be put in place. Politicization of loans could be avoided by making loans available indiscriminately to all public borrowers within their borrowing limits. Another possibility might be to mediate the loans through a National Infrastructure Bank, as proposed in HR 3339.
All of this could be done without new legislation. The Federal Reserve has statutory authority under the Federal Reserve Act to lend to municipal borrowers for a period of up to six months. It could just agree to roll over these loans for a fixed period of years. Bhatti and Alston observe that under the 2020 CARES Act, the Fed was given permission to make up to $500 billion in indefinite, long-term loans to municipal borrowers, but it failed to act on that authority to the extent allowed. Loans were limited to no more than three years, and the interest rate charged was so high that most municipal borrowers could get lower rates on the open municipal bond market.
Private corporations, which the authors show are 63 times more likely to default, were offered much more generous terms on corporate debt; and 330 corporations took the offer, versus only two municipal takers through the Municipal Liquidity Facility. The federal government also made $10.4 trillion in bailouts and backstops available to the financial sector after the 2008 financial crisis, a sum that is 2.5 times the size of the entire U.S. municipal bond market.
Stoking the Fire with Credit for Local Production
Playing with matches that could trigger a $30 trillion debt bomb is obviously something the Fed should try to avoid. Prof. Werner would probably argue that its policy mistake, like Japan’s in the 1980s, has been to inject credit so that it has gone into speculative assets, inflating asset prices. The Fed’s liquidity fire hose needs to be directed at local production. This can be done through local community or public banks, or by making near-zero interest loans to state and local governments, perhaps mediated through a National Infrastructure Bank.
This article was first posted on ScheerPost. Ellen Brown is an attorney, chair of the Public Banking Institute, and author of thirteen books including Web of Debt, The Public Bank Solution, and Banking on the People: Democratizing Money in the Digital Age. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.
(Republished from Web of Debt by permission of author or representative)