Category Archives: Banks/Banking

Neoliberalism Has Met Its Match in China

Ellen Brown chairs the Public Banking Institute and has written thirteen books, including her latest, 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.

When the Federal Reserve cut interest rates on July 31 for the first time in more than a decade, commentators were asking why. According to official data, the economy was rebounding, unemployment was below 4%, and GDP growth was above 3%. If anything, by the Fed’s own reasoning, it should have been raising rates.

The explanation of market pundits was that we’re in a trade war and a currency war. Other central banks were cutting their rates and the Fed had to follow suit, in order to prevent the dollar from becoming overvalued relative to other currencies. The theory is that a cheaper dollar will make American products more attractive on foreign markets, helping our manufacturing and labor bases.

Over the weekend, President Trump followed the rate cuts by threatening to impose a new 10% tariff on $300 billion worth of Chinese products effective September 1. China responded by suspending imports of U.S. agricultural products by state-owned companies and letting the value of the yuan drop. On Monday, August 5, the Dow Jones Industrial Average dropped nearly 770 points, its worst day in 2019. The war was on.

The problem with a currency war is that it is a war without winners. This was demonstrated in the beggar-thy-neighbor policies of the 1930s, which just prolonged the Great Depression. As economist Michael Hudson observed in a June 2019 interview with Bonnie Faulkner, making American products cheaper abroad will do little for the American economy, because we no longer have a competitive manufacturing base or products to sell. Today’s workers are largely in the service industries – cab drivers, hospital workers, insurance agents and the like. A cheaper dollar abroad just makes consumer goods at Walmart and imported raw materials for US businesses more expensive. What is mainly devalued when a currency is devalued, says Hudson, is the price of the country’s labor and the working conditions of its laborers. The reason American workers cannot compete with foreign workers is not that the dollar is overvalued. It is due to their higher costs of housing, education, medical services and transportation. In most competitor countries, these costs are subsidized by the government.

America’s chief competitor in the trade war is obviously China, which subsidizes not just worker costs but the costs of its businesses. The government owns 80% of the banks, which make loans on favorable terms to domestic businesses, especially state-owned businesses. Typically, if the businesses cannot repay the loans, neither the banks nor the businesses are put into bankruptcy, since that would mean losing jobs and factories. The non-performing loans are just carried on the books or written off. No private creditors are hurt, since the creditor is the government, and the loans were created on the banks’ books in the first place (following standard banking practice globally).

As observed by Jeff Spross in a May 2018 Reuters article titled “China’s Banks Are Big. Too Big?”:

[B]ecause the Chinese government owns most of the banks, and it prints the currency, it can technically keep those banks alive and lending forever.…

It may sound weird to say that China’s banks will never collapse, no matter how absurd their lending positions get. But banking systems are just about the flow of money.

Spross quoted former bank CEO Richard Vague, chair of The Governor’s Woods Foundation, who explained, “China has committed itself to a high level of growth. And growth, very simply, is contingent on financing.” Beijing will “come in and fix the profitability, fix the capital, fix the bad debt, of the state-owned banks … by any number of means that you and I would not see happen in the United States.”

To avoid political and labor unrest, Spross wrote, the government keeps everyone happy by keeping economic growth high and spreading the proceeds to the citizenry. About two-thirds of Chinese debt is owed just by the corporations, which are also largely state-owned. Corporate lending is thus a roundabout form of government-financed industrial policy – a policy financed not through taxes but through the unique privilege of banks to create money on their books.

China thinks this is a better banking model than the private Western system focused on short-term profits for private shareholders. But U.S. policymakers consider China’s subsidies to its businesses and workers to be “unfair trade practices.” They want China to forgo state subsidization an it’s d other protectionist policies in order to level the playing field. But Beijing contends that the demanded reforms amount to “economic regime change.” As Michael Hudson puts it:

This is the fight that Trump has against China.  He wants to tell it to let the banks run China and have a free market.  He says that China has grown rich over the last fifty years by unfair means, with government help and public enterprise.  In effect, he wants the Chinese to be as threatened and insecure as American workers.  They should get rid of their public transportation.  They should get rid of their subsidies.  They should let a lot of their companies go bankrupt so that Americans can buy them.  They should have the same kind of free market that has wrecked the US economy. [Emphasis added.]

Kurt Campbell and Jake Sullivan, writing on August 1 in Foreign Affairs (the journal of the Council on Foreign Relations), call it “an emerging contest of models.”

An Economic Cold War

In order to understand what is happening here, it is useful to review some history. The free market model hollowed out America’s manufacturing base beginning in the Thatcher/Reagan era of the 1970s, when neoliberal economic policies took hold. Meanwhile, emerging Asian economies, led by Japan, were exploding on the scene with a new economic model called “state-guided market capitalism.” The state determined the priorities and commissioned the work, then hired private enterprise to carry it out. The model overcame the defects of the communist system, which put ownership and control in the hands of the state.

The Japanese state-guided market system was effective and efficient – so effective that it was regarded as an existential threat to the neoliberal model of debt-based money and “free markets” promoted by the International Monetary Fund (IMF). According to William Engdahl in A Century of War, by the end of the 1980s Japan was considered the leading economic and banking power in the world. Its state-guided model was also proving to be highly successful in South Korea and the other “Asian Tiger” economies. When the Soviet Union collapsed at the end of the Cold War, Japan proposed its model for the former communist countries, and many began looking to it and to South Korea as viable alternatives to the U.S. free-market system. State-guided capitalism provided for the general welfare without destroying capitalist incentive. Engdahl wrote:

The Tiger economies were a major embarrassment to the IMF free-market model.  Their very success in blending private enterprise with a strong state economic role was a threat to the IMF free-market agenda.  So long as the Tigers appeared to succeed with a model based on a strong state role, the former communist states and others could argue against taking the extreme IMF course.  In east Asia during the 1980s, economic growth rates of 7-8 per cent per year, rising social security, universal education and a high worker productivity were all backed by state guidance and planning, albeit in a market economy – an Asian form of benevolent paternalism.

Just as the U.S. had engaged in a Cold War to destroy the Soviet communist model, so Western financial interests set out to destroy this emerging Asian threat. It was defused when Western neoliberal economists persuaded Japan and the Asian Tigers to adopt the free-market system and open their economies and their companies to foreign investors. Western speculators then took down the vulnerable countries one by one in the “Asian crisis” of 1997-98. China alone was left as an economic threat to the Western neoliberal model, and it is this existential threat that is the target of the trade and currency wars today.

If You Can’t Beat Them …

In their August 1 Foreign Affairs article, titled “Competition without Catastrophe,” Campbell and Sullivan write that the temptation is to compare these economic trade wars with the Cold War with Russia; but the analogy, they say, is inapt:

China today is a peer competitor that is more formidable economically, more sophisticated diplomatically, and more flexible ideologically than the Soviet Union ever was. And unlike the Soviet Union, China is deeply integrated into the world and intertwined with the U.S. economy.

Unlike the Soviet Communist system, the Chinese system cannot be expected to “crumble under its own weight.” The US should not expect or want to destroy China, say Campbell and Sullivan. Rather, we should aim for a state of “coexistence on terms favorable to U.S. interests and values.”

The implication is that China, being too strong to be knocked out of the game as the Soviet Union was, needs to be coerced or cajoled into adopting the neoliberal model. It needs to abandon state support of its industries and ownership of its banks. But the Chinese system, while obviously not perfect, has an impressive track record for sustaining long-term growth and development. While the U.S. manufacturing base was being hollowed out under the free-market model, China was systematically building up its own manufacturing base, investing heavily in infrastructure and emerging technologies; and it was doing this with credit generated by its state-owned banks. Rather than trying to destroy China’s economic system, it might be more “favorable to U.S. interests and values” for us to adopt its more effective industrial and banking practices.

We cannot win a currency war by competitive currency devaluations that trigger a “race to the bottom,” and we cannot win a trade war by competitive trade barriers that simply cut us off from the benefits of cooperative trade. More favorable to our interests and values than warring with our trading partners would be to cooperate in sharing solutions, including banking and credit solutions. The Chinese have proven the effectiveness of their public banking system in supporting their industries and their workers. Rather than seeing it as an existential threat, we could thank them for test-driving the model and take a spin in it ourselves.

Neoliberalism Has Met Its Match In China

Donald Trump and Chinese President Xi Jinping (Andy Wong/AP)

When the Federal Reserve cut interest rates last week, commentators were asking why. According to official data, the economy was rebounding, unemployment was below 4% and gross domestic product growth was above 3%. If anything, by the Fed’s own reasoning, it should have been raising rates.

Market pundits explained that we’re in a trade war and a currency war. Other central banks were cutting their rates, and the Fed had to follow suit in order to prevent the dollar from becoming overvalued relative to other currencies. The theory is that a cheaper dollar will make American products more attractive in foreign markets, helping our manufacturing and labor bases.

Over the weekend, President Trump followed the rate cuts by threatening to impose, on September 1, a new 10% tariff on $300 billion worth of Chinese products. China responded by suspending imports of U.S. agricultural products by state-owned companies and letting the value of the yuan drop. On Monday, the Dow Jones Industrial Average dropped nearly 770 points, its worst day in 2019. The war was on.

The problem with a currency war is that it is a war without winners. This was demonstrated in the beggar-thy-neighbor policies of the 1930s, which only deepened the Great Depression. As economist Michael Hudson observed in a June interview with journalist Bonnie Faulkner, making American products cheaper abroad will do little for the American economy, because we no longer have a competitive manufacturing base or products to sell. Today’s workers are largely in the service industries—cab drivers, hospital workers, insurance agents and the like. A cheaper dollar abroad just makes consumer goods at Walmart and imported raw materials for U.S. businesses more expensive.

What is mainly devalued when a currency is devalued, Hudson says, is the price of the country’s labor and the working conditions of its laborers. The reason American workers cannot compete with foreign workers is not that the dollar is overvalued. It is due to their higher costs of housing, education, medical services and transportation. In competitor countries, these costs are typically subsidized by the government.

America’s chief competitor in the trade war is obviously China, which subsidizes not just worker costs but the costs of its businesses. The government owns 80% of the banks, which make loans on favorable terms to domestic businesses, especially state-owned businesses. If the businesses cannot repay the loans, neither the banks nor the businesses are typically put into bankruptcy, since that would mean losing jobs and factories. The nonperforming loans are just carried on the books or written off. No private creditors are hurt, since the creditor is the government and the loans were created on the banks’ books in the first place (following standard banking practice globally). As observed by Jeff Spross in a May 2018 Reuters article titled “Chinese Banks Are Big. Too Big?”:

[B]ecause the Chinese government owns most of the banks, and it prints the currency, it can technically keep those banks alive and lending forever. …

It may sound weird to say that China’s banks will never collapse, no matter how absurd their lending positions get. But banking systems are just about the flow of money.

Spross quoted former bank CEO Richard Vague, chair of The Governor’s Woods Foundation, who explained, “China has committed itself to a high level of growth. And growth, very simply, is contingent on financing.” Beijing will “come in and fix the profitability, fix the capital, fix the bad debt, of the state-owned banks … by any number of means that you and I would not see happen in the United States.”

Political and labor unrest is a major problem in China. Spross wrote that the government keeps everyone happy by keeping economic growth high and spreading the proceeds to the citizenry. About two-thirds of Chinese debt is owed just by the corporations, which are also largely state-owned. Corporate lending is thus a roundabout form of government-financed industrial policy—a policy financed not through taxes but through the unique privilege of banks to create money on their books.

China thinks this is a better banking model than the private Western system focused on short-term profits for private shareholders. But U.S. policymakers consider China’s subsidies to its businesses and workers to be “unfair trade practices.” They want China to forgo state subsidization and its other protectionist policies in order to level the playing field. But Beijing contends that the demanded reforms amount to “economic regime change.” As Hudson puts it: “This is the fight that Trump has against China. He wants to tell it to let the banks run China and have a free market. He says that China has grown rich over the last fifty years by unfair means, with government help and public enterprise. In effect, he wants the Chinese to be as threatened and insecure as American workers. They should get rid of their public transportation. They should get rid of their subsidies. They should let a lot of their companies go bankrupt so that Americans can buy them. They should have the same kind of free market that has wrecked the US economy. [Emphasis added.]”

Kurt Campbell and Jake Sullivan, writing on August 1 in Foreign Affairs (the journal of the Council on Foreign Relations), call it “an emerging contest of models.”

An Economic Cold War

To understand what is happening here, it is useful to review some history. The free market model hollowed out America’s manufacturing base beginning in the Thatcher/Reagan era of the 1970s and ’80s, when neoliberal economic policies took hold. Meanwhile, emerging Asian economies, led by Japan, were exploding on the scene with a new economic model called “state-guided market capitalism.” The state determined the priorities and commissioned the work, then hired private enterprise to carry it out. The model overcame the defects of the communist system, which put ownership and control in the hands of the state.

The Japanese state-guided market system was effective and efficient—so effective that it was regarded as an existential threat to the neoliberal model of debt-based money and “free markets” promoted by the International Monetary Fund (IMF). According to author William Engdahl in “A Century of War,” by the end of the 1980s, Japan was considered the leading economic and banking power in the world. Its state-guided model was also proving to be highly successful in South Korea and the other “Asian Tiger” economies. When the Soviet Union collapsed at the end of the Cold War, Japan proposed its model to the former communist countries, and many began looking to it and to South Korea’s example as viable alternatives to the U.S. free-market system. State-guided capitalism provided for the general welfare without destroying capitalist incentive. Engdahl wrote:

The Tiger economies were a major embarrassment to the IMF free-market model. Their very success in blending private enterprise with a strong state economic role was a threat to the IMF free-market agenda. So long as the Tigers appeared to succeed with a model based on a strong state role, the former communist states and others could argue against taking the extreme IMF course. In east Asia during the 1980s, economic growth rates of 7-8 per cent per year, rising social security, universal education and a high worker productivity were all backed by state guidance and planning, albeit in a market economy — an Asian form of benevolent paternalism.

Just as the U.S. had engaged in a Cold War to destroy the Soviet communist model, so Western financial interests set out to destroy this emerging Asian threat. It was defused when Western neoliberal economists persuaded Japan and the Asian Tigers to adopt a free-market system and open their economies and companies to foreign investors. Western speculators then took down the vulnerable countries one by one in the “Asian crisis” of 1997-8. China alone was left as an economic threat to the Western neoliberal model, and it is this existential threat that is the target of the trade and currency wars today.

If You Can’t Beat Them …

In their August 1 Foreign Affairs article titled “Competition without Catastrophe,” Campbell and Sullivan write that the temptation is to compare these economic trade wars with the Cold War with Russia; but the analogy is inapt:

China today is a peer competitor that is more formidable economically, more sophisticated diplomatically, and more flexible ideologically than the Soviet Union ever was. And unlike the Soviet Union, China is deeply integrated into the world and intertwined with the U.S. economy.

Unlike the Soviet communist system, the Chinese system cannot be expected to “crumble under its own weight.” The U.S. cannot expect, and should not even want, to destroy China, Campbell and Sullivan say. Rather, we should aim for a state of “coexistence on terms favorable to U.S. interests and values.”

The implication is that China, being too strong to be knocked out of the game as the Soviet Union was, needs to be coerced or cajoled into adopting the neoliberal model and abandoning state support of its industries and ownership of its banks. But the Chinese system, while obviously not perfect, has an impressive track record for sustaining long-term growth and development. While the U.S. manufacturing base was being hollowed out under the free-market model, China was systematically building up its own manufacturing base and investing heavily in infrastructure and emerging technologies, and it was doing this with credit generated by its state-owned banks. Rather than trying to destroy China’s economic system, it might be more “favorable to U.S. interests and values” for us to adopt its more effective industrial and banking practices.

We cannot win a currency war through the use of competitive currency devaluations that trigger a “race to the bottom,” and we cannot win a trade war by installing competitive trade barriers that simply cut us off from the benefits of cooperative trade. More favorable to our interests and values than warring with our trading partners would be to cooperate in sharing solutions, including banking and credit solutions. The Chinese have proven the effectiveness of their public banking system in supporting their industries and their workers. Rather than seeing it as an existential threat, we could thank them for test-driving the model and take a spin in it ourselves.

• First  published on Truthdig.com

Trump’s Effective Intimidation of the Powerful Federal Reserve

The Federal Reserve (the Fed) – the United States’ version of a Central Bank – is a strange duck. It is the U.S. government’s most powerful regulatory agency. It, after all, regulates money and interest rates. Yet, its budget comes entirely from the banking industry and relationships with the financial industry. So Congress, which appropriates money for all other federal agencies, has little leverage over the Fed’s operations.

This independence – except from the big banks – is by design, when the Fed was devised by President Woodrow Wilson over one hundred years ago. The Fed, a secretive, private government inside a public government presents problems for a democratic society. The alternative was deemed worse by its boosters, allowing “politics” to determine the Fed’s Board of Governors decisions.

It is as if the Federal Reserve/banking complex does not deal with political power by its own definition. The Fed entrenches the power of the banks without accountability inside Washington. Ask Republicans in Congress whether they generally oppose government regulation of a business and most will say “yes.” Ask whether they want to deregulate the Federal Reserve and they will say “Of course not.” Somebody has to assure monetary stability.

But the Fed’s announced quarter of a percent cut in interest rates, which were already low by historical standards at 2.25 to 2.50 levels, will affect people, beyond abstract monetary theories. Tens of millions of Americans who rely on income from their savings accounts and money market accounts will receive less money. Some will jump into the high flying stock market, presumably to get more income and introduce real risk to their principal.

The $2.9 trillion Social Security trust fund will receive less income from lower yielding Treasury Bonds. That’s not good for seniors. It is also really bad for pension funds, not to mention the returns on certain life insurance policies.

The Fed mumbled something about the trade war and a recent small decline in manufacturing indices as reasons to head off trouble.

But companies are piling up idle capital without knowing what to do with it other than to spend trillions of dollars on unproductive stock buybacks. There is no shortage of capital. Lowering the interest rate will just encourage more unnecessary corporate debt, with its deductible interest payments, instead of corporations using their available equity.

Venerable business columnist Allan Sloan does not think that a quarter-point cut by the Fed “will generate job-creating investments in the United States by companies that are uncertain about the future because of trade wars, threatened trade wars, interrupted supply chains and other actual and potential instabilities”(See Allan Sloan’s article here).

Sloan gave other cogent reasons against a Fed interest rate cut, while conceding that it might help borrowers. That assumes gouging lenders (pay day loans, auto loans, credit card charges) pass the savings along.

Conventional critics of the Fed’s cut this week point to already low interest rates and what they call a hefty economy, modest inflation, and a low unemployment rate.

Some former Fed governors called out the Fed for not clearly and specifically explaining its decision to cut rates. As former Fed Governor and Deputy Secretary of the Treasury, Sarah Bloom Raskin, said: “The Fed has really had a bit of a communications blunder… If Americans don’t understand exactly what is happening and why, they may think that Chairman Jerome Powell is caving into presidential bullying.”

No kidding. Trump has been pounding the Fed and threatening to take away Chairman Powell’s Chair for months. He is demanding sharp reductions in interest rates. He renewed his denunciation after the Fed’s quarter of a percent cut this week, tweeting that it was nowhere near enough!

Presidents almost never do this publicly to the Fed. But Trump, the failed gambling czar knows better. Intimidation through the mass media again and again works for Trump.

Although the Fed wanted to resist his pressure, hey, why take greater chances with crazy Donald? Instead, they threw him a bone.

How to Pay for It All: An Option the Candidates Missed

The Democratic Party has clearly swung to the progressive left, with candidates in the first round of presidential debates coming up with one program after another to help the poor, the disadvantaged and the struggling middle class. Proposals ranged from a Universal Basic Income to Medicare for All to a Green New Deal to student debt forgiveness and free college tuition. The problem, as Stuart Varney observed on FOX Business, was that no one had a viable way to pay for it all without raising taxes or taking from other programs, a hard sell to voters. If robbing Peter to pay Paul is the only alternative, the proposals will go the way of Trump’s trillion dollar infrastructure bill for lack of funding.

Fortunately there is another alternative, one that no one seems to be talking about – at least no one on the presidential candidates’ stage. In Japan, it is a hot topic; and in China, it is evidently taken for granted: the government can generate the money it needs simply by creating it on the books of its own banks. Leaders in China and Japan recognize that stimulating the economy is not a zero-sum game in which funds are just shuffled from one pot to another. To grow the economy and increase GDP, demand (money) must go up along with supply. New money needs to be added to the system; and that is what China and Japan have been doing, very successfully.

Before the 2008-09 global banking crisis, China’s GDP increased by an average of 10% per year for 30 years. The money supply increased right along with it, created on the books of its state-owned banks. Japan, under Prime Minister Shinzo Abe, has been following suit, with massive economic stimulus funded by correspondingly massive purchases of the government’s debt by its central bank, using money simply created with computer keystrokes.

All of this has occurred without driving up prices, the dire result predicted by US economists who subscribe to classical monetarist theory. In the 20 years from 1998 to 2018, China’s M2 money supply grew from just over 10 trillion yuan to 180 trillion yuan ($11.6T), an 18-fold increase. Yet it closed 2018 with a consumer inflation rate that was under 2%. Price stability has been maintained because China’s Gross Domestic Product has grown at nearly the same fast clip, by a factor of 13 over 20 years.

In Japan, the massive stimulus programs called “Abenomics” have been funded through its central bank. The Bank of Japan has now “monetized” nearly 50% of the government’s debt, turning it into new money by purchasing it with yen created on the bank’s books. If the US Fed did that, it would own $11 trillion in US government bonds, four times what it holds now. Yet Japan’s M2 money supply has not even doubled in 20 years, while the US money supply has grown by 300%; and Japan’s inflation rate remains stubbornly below the BOJ’s 2% target. Abe’s stimulus programs have not driven up prices. In fact, deflation remains a greater concern than inflation in Japan, despite unprecedented debt monetization by its central bank.     

China’s Economy: A Giant Ponzi Scheme or a New Economic Model? 

Critics have long called China’s economy a Ponzi scheme, doomed to collapse in the end; and for 40 years China has continued to prove the critics wrong. According to a June 2019 report by the Congressional Research Service:

Since opening up to foreign trade and investment and implementing free-market reforms in 1979, China has been among the world’s fastest-growing economies, with real annual gross domestic product (GDP) growth averaging 9.5% through 2018, a pace described by the World Bank as “the fastest sustained expansion by a major economy in history.” Such growth has enabled China, on average, to double its GDP every eight years and helped raise an estimated 800 million people out of poverty. China has become the world’s largest economy (on a purchasing power parity basis), manufacturer, merchandise trader, and holder of foreign exchange reserves.

This massive growth has been funded with credit created on the books of China’s banks, most of which are state-owned. Even in the US, of course, most money today is created on the books of banks. That is what our money supply is – bank credit. What is different about the Chinese model is that the Chinese government can and does intervene to direct where the credit goes. In a July 2018 article titled “China Invents a Different Way to Run an Economy,” Noah Smith suggests that China’s novel approach to macroeconomic stabilization by regulating bank credit represents a new economic model, one that may hold valuable lessons for developed economies. He writes:

Many economists would see this approach as hopelessly ad hoc, haphazard, and interventionist — not the kind of thing any developed country would want to rely on. And yet, it seems to have carried China successfully through several crises, while always averting the catastrophic financial crash that outside observers have been warning about for years.

Abenomics, Helicopter Money and Modern Monetary Theory

Noah Smith has also written about Japan’s unique model. After Prime Minister Abe crushed his opponents in October 2017, Smith wrote on Bloomberg News, “Japan’s long-ruling Liberal Democratic Party has figured out a novel and interesting way to stay in power—govern pragmatically, focus on the economy and give people what they want.” He said everyone who wanted a job had one; small and midsize businesses were doing well; and the BOJ’s unprecedented program of monetary easing had provided easy credit for corporate restructuring without generating inflation. Abe had also vowed to make both preschool and college free.

Like China’s economic model, Abenomics has been called a Ponzi scheme, funded by central bank-created “free” money. But whatever it is called, the strategy has been working for the economy. Even the once-dubious International Monetary Fund has declared Abenomics a success.

The Bank of Japan’s massive bond-buying program has also been called “helicopter money” — a policy in which the central bank directly finances government spending by underwriting bonds – and it has been compared to Modern Monetary Theory, which similarly posits that the government can spend money into existence with central bank funding. As Nathan Lewis wrote in Forbes in February 2019:

In practice, something like “MMT” has reached a new level of sophistication these days, exemplified by Japan. . . . The Bank of Japan now holds government bonds amounting to more than 100% of GDP. In other words, the government has managed to finance itself “with the printing press” to the amount of about 100% of GDP, with no inflationary consequences. [Emphasis added.]

Japanese officials have resisted comparisons with both helicopter money and MMT, arguing that Japanese law does not allow the government to sell its bonds directly to the central bank. As in the US, the government’s bonds must be sold on the open market, a limitation that also prevents the US government from directly monetizing its debt. But as Bank of Japan Deputy Governor Kikuo Iwata observed in a 2013 Reuters article, where the bonds are sold does not matter. What is important is that the central bank has agreed to buy them, and it is here that US banking law diverges from the laws of both Japan and China.

Central Banking Asia-style

When the US Treasury sells bonds on the open market, it can only hope the Fed will buy them. Any attempt by the president or the legislature to influence Fed policy is considered a gross interference with the sacrosanct independence of the central bank.

In theory, the central banks of China and Japan are also independent. Both are members of the Bank for International Settlements, which stresses the importance of maintaining the stability of the currency and the independence of the central bank; and both countries revised their banking laws in the 1990s to better reflect those policies. But their banking laws still differ in significant ways from those of the US.

In Japan, the Bank of Japan is legally free to set interest rates, but it must cooperate closely with the Ministry of Finance in setting policy. Article 4 of the 1997 Bank of Japan Act says:

The Bank of Japan shall, taking into account the fact that currency and monetary control is a component of overall economic policy, always maintain close contact with the government and exchange views sufficiently, so that its currency and monetary control and the basic stance of the government’s economic policy shall be mutually compatible.

Unlike in the US, Prime Minister Abe can negotiate with the head of the central bank to buy the government’s bonds, ensuring that the debt is, in fact, turned into new money that will stimulate domestic economic growth; and he is completely within his legal rights in doing it.

The leverage of China’s central government over its central bank is even stronger than the Japanese prime minister’s. The 1995 Law of the People’s Republic of China on the People’s Bank of China states:

The People’s Bank of China shall, under the leadership of the State Council, formulate and implement monetary policies, guard against and eliminate financial risks, and maintain financial stability.

The State Council has final decision-making power on such things as the annual money supply, interest rates and exchange rates; and it has used this power to stabilize the economy by directing and regulating the issuance of bank credit, the new Chinese macroeconomic model that Noah Smith says holds important lessons for us.

The successful six-year run of Abenomics, along with China’s decades of unprecedented economic growth, have proven that governments can indeed monetize their debts, expanding the money supply and stimulating the economy, without driving up consumer prices. The monetarist theories of US policymakers are obsolete and need to be discarded.

Kyouryoku,” the Japanese word for cooperation, is composed of characters that mean “together strength” – “stronger by working together.” This is a recognized principle in Asian culture and it is an approach we would do well to adopt. What US presidential candidates from both parties should talk about is how to modify the law so that Congress, the Administration and the central bank can work together in setting monetary policy, following the approaches successfully modeled in China and Japan.

First posted under another title at TruthDig.org

How to Pay for It All: An Option the Candidates Missed

The Democratic Party has clearly swung to the progressive left, with candidates in the first round of presidential debates coming up with one program after another to help the poor, the disadvantaged and the struggling middle class. Proposals ranged from a Universal Basic Income to Medicare for All to a Green New Deal to student debt forgiveness and free college tuition. The problem, as Stuart Varney observed on FOX Business, was that no one had a viable way to pay for it all without raising taxes or taking from other programs, a hard sell to voters. If robbing Peter to pay Paul is the only alternative, the proposals will go the way of Trump’s trillion dollar infrastructure bill for lack of funding.

Fortunately there is another alternative, one that no one seems to be talking about – at least no one on the presidential candidates’ stage. In Japan, it is a hot topic; and in China, it is evidently taken for granted: the government can generate the money it needs simply by creating it on the books of its own banks. Leaders in China and Japan recognize that stimulating the economy is not a zero-sum game in which funds are just shuffled from one pot to another. To grow the economy and increase GDP, demand (money) must go up along with supply. New money needs to be added to the system; and that is what China and Japan have been doing, very successfully.

Before the 2008-09 global banking crisis, China’s GDP increased by an average of 10% per year for 30 years. The money supply increased right along with it, created on the books of its state-owned banks. Japan, under Prime Minister Shinzo Abe, has been following suit, with massive economic stimulus funded by correspondingly massive purchases of the government’s debt by its central bank, using money simply created with computer keystrokes.

All of this has occurred without driving up prices, the dire result predicted by US economists who subscribe to classical monetarist theory. In the 20 years from 1998 to 2018, China’s M2 money supply grew from just over 10 trillion yuan to 180 trillion yuan ($11.6T), an 18-fold increase. Yet it closed 2018 with a consumer inflation rate that was under 2%. Price stability has been maintained because China’s Gross Domestic Product has grown at nearly the same fast clip, by a factor of 13 over 20 years.

In Japan, the massive stimulus programs called “Abenomics” have been funded through its central bank. The Bank of Japan has now “monetized” nearly 50% of the government’s debt, turning it into new money by purchasing it with yen created on the bank’s books. If the US Fed did that, it would own $11 trillion in US government bonds, four times what it holds now. Yet Japan’s M2 money supply has not even doubled in 20 years, while the US money supply has grown by 300%; and Japan’s inflation rate remains stubbornly below the BOJ’s 2% target. Abe’s stimulus programs have not driven up prices. In fact, deflation remains a greater concern than inflation in Japan, despite unprecedented debt monetization by its central bank.     

China’s Economy: A Giant Ponzi Scheme or a New Economic Model? 

Critics have long called China’s economy a Ponzi scheme, doomed to collapse in the end; and for 40 years China has continued to prove the critics wrong. According to a June 2019 report by the Congressional Research Service:

Since opening up to foreign trade and investment and implementing free-market reforms in 1979, China has been among the world’s fastest-growing economies, with real annual gross domestic product (GDP) growth averaging 9.5% through 2018, a pace described by the World Bank as “the fastest sustained expansion by a major economy in history.” Such growth has enabled China, on average, to double its GDP every eight years and helped raise an estimated 800 million people out of poverty. China has become the world’s largest economy (on a purchasing power parity basis), manufacturer, merchandise trader, and holder of foreign exchange reserves.

This massive growth has been funded with credit created on the books of China’s banks, most of which are state-owned. Even in the US, of course, most money today is created on the books of banks. That is what our money supply is – bank credit. What is different about the Chinese model is that the Chinese government can and does intervene to direct where the credit goes. In a July 2018 article titled “China Invents a Different Way to Run an Economy,” Noah Smith suggests that China’s novel approach to macroeconomic stabilization by regulating bank credit represents a new economic model, one that may hold valuable lessons for developed economies. He writes:

Many economists would see this approach as hopelessly ad hoc, haphazard, and interventionist — not the kind of thing any developed country would want to rely on. And yet, it seems to have carried China successfully through several crises, while always averting the catastrophic financial crash that outside observers have been warning about for years.

Abenomics, Helicopter Money and Modern Monetary Theory

Noah Smith has also written about Japan’s unique model. After Prime Minister Abe crushed his opponents in October 2017, Smith wrote on Bloomberg News, “Japan’s long-ruling Liberal Democratic Party has figured out a novel and interesting way to stay in power—govern pragmatically, focus on the economy and give people what they want.” He said everyone who wanted a job had one; small and midsize businesses were doing well; and the BOJ’s unprecedented program of monetary easing had provided easy credit for corporate restructuring without generating inflation. Abe had also vowed to make both preschool and college free.

Like China’s economic model, Abenomics has been called a Ponzi scheme, funded by central bank-created “free” money. But whatever it is called, the strategy has been working for the economy. Even the once-dubious International Monetary Fund has declared Abenomics a success.

The Bank of Japan’s massive bond-buying program has also been called “helicopter money” — a policy in which the central bank directly finances government spending by underwriting bonds – and it has been compared to Modern Monetary Theory, which similarly posits that the government can spend money into existence with central bank funding. As Nathan Lewis wrote in Forbes in February 2019:

In practice, something like “MMT” has reached a new level of sophistication these days, exemplified by Japan. . . . The Bank of Japan now holds government bonds amounting to more than 100% of GDP. In other words, the government has managed to finance itself “with the printing press” to the amount of about 100% of GDP, with no inflationary consequences. [Emphasis added.]

Japanese officials have resisted comparisons with both helicopter money and MMT, arguing that Japanese law does not allow the government to sell its bonds directly to the central bank. As in the US, the government’s bonds must be sold on the open market, a limitation that also prevents the US government from directly monetizing its debt. But as Bank of Japan Deputy Governor Kikuo Iwata observed in a 2013 Reuters article, where the bonds are sold does not matter. What is important is that the central bank has agreed to buy them, and it is here that US banking law diverges from the laws of both Japan and China.

Central Banking Asia-style

When the US Treasury sells bonds on the open market, it can only hope the Fed will buy them. Any attempt by the president or the legislature to influence Fed policy is considered a gross interference with the sacrosanct independence of the central bank.

In theory, the central banks of China and Japan are also independent. Both are members of the Bank for International Settlements, which stresses the importance of maintaining the stability of the currency and the independence of the central bank; and both countries revised their banking laws in the 1990s to better reflect those policies. But their banking laws still differ in significant ways from those of the US.

In Japan, the Bank of Japan is legally free to set interest rates, but it must cooperate closely with the Ministry of Finance in setting policy. Article 4 of the 1997 Bank of Japan Act says:

The Bank of Japan shall, taking into account the fact that currency and monetary control is a component of overall economic policy, always maintain close contact with the government and exchange views sufficiently, so that its currency and monetary control and the basic stance of the government’s economic policy shall be mutually compatible.

Unlike in the US, Prime Minister Abe can negotiate with the head of the central bank to buy the government’s bonds, ensuring that the debt is, in fact, turned into new money that will stimulate domestic economic growth; and he is completely within his legal rights in doing it.

The leverage of China’s central government over its central bank is even stronger than the Japanese prime minister’s. The 1995 Law of the People’s Republic of China on the People’s Bank of China states:

The People’s Bank of China shall, under the leadership of the State Council, formulate and implement monetary policies, guard against and eliminate financial risks, and maintain financial stability.

The State Council has final decision-making power on such things as the annual money supply, interest rates and exchange rates; and it has used this power to stabilize the economy by directing and regulating the issuance of bank credit, the new Chinese macroeconomic model that Noah Smith says holds important lessons for us.

The successful six-year run of Abenomics, along with China’s decades of unprecedented economic growth, have proven that governments can indeed monetize their debts, expanding the money supply and stimulating the economy, without driving up consumer prices. The monetarist theories of US policymakers are obsolete and need to be discarded.

Kyouryoku,” the Japanese word for cooperation, is composed of characters that mean “together strength” – “stronger by working together.” This is a recognized principle in Asian culture and it is an approach we would do well to adopt. What US presidential candidates from both parties should talk about is how to modify the law so that Congress, the Administration and the central bank can work together in setting monetary policy, following the approaches successfully modeled in China and Japan.

First posted under another title at TruthDig.org

Guns and Chips and Irony

I had Doctor Daniel Brown from Harvard spend 70 hours with Sirhan over almost three years [and] he comes away with this staggering, staggering evaluation. He says Sirhan was hypnoprogrammed ….. a technique of using chemicals as well as hypnosis ….. The program on him makes him forget everything within a certain time frame ….. He remembers when he gets a pinch on the neck [that] what he sees is not Senator Kennedy. It’s a paper target of a human being.

— William Pepper, 2013, speaking at Concordia University in Montreal, Quebec, Canada

Two issues made explicit in the U.S Constitution had to do with personal protection and the creation of money. Regarding the Second Amendment, its single sentence is blunt: “A well regulated Militia, being necessary to a free State, the right of the people to keep and bear Arms, shall not be infringed.” (Infringe: to limit or control) The authors, informed by history, knew that governments typically grow despotic, and that being armed provides a measure of protection for citizens against a government grown oppressive and unaccountable. In Thomas Jefferson’s words, “…. to protect themselves against tyranny in government.”

Yet there is a growing call for governmental control of guns in the hands of citizens, the call coming from within the citizenry itself, and the reason is evident: Every so often in recent years an apparently deranged individual goes on a shooting spree in a school or public space. With each shooting the chorus to rein in gun ownership grows ever louder, and ever more politicians, sniffing out prevailing public sentiment, make gun control a campaign issue. Ideas range from the registration of all firearms to the outlawing of weapons that might give citizens parity with, say, a militarized police force.

But here’s an interesting question: Might devious elements within a government, intent on disarming its populace, resort to the creation of false-flag scenarios designed to frighten and to produce justification for ever-tightening control? Might it be a question of “LIHOP” (let it happen on purpose) or “MIHOP” (make it happen on purpose), to use the lingo of what CIA-tutored media figures call “conspiracy theorists”? It’s just a question. I’m not so cynical as to imagine such intent, but the notion that such could be the case definitely exists among many who are inclined to ferret out details of certain events like the sinking of the Maine, the Lusitania, Operation Northwoods, Pearl Harbor, the Gulf of Tonkin. Things like that.

The fact that elements of the U.S. Government have developed and refined mind control techniques, such as those apparently applied to Sirhan Sirhan, is old news. The CIA’s Program MKUltra was born more than 60 years ago, and although it was reported as having been officially terminated in the 1970s, anyone who would accept that as fact resides in the kind of comfortable mental Happy Place that seems to be an American specialty.

Shootings themselves make excellent ‘news’, as they produce an uptick in public attention (and anxiety), which is important to those with a stake in maintaining narratives and crafting prevailing public opinion. And when poignant biographies of victims are aired as news items, with touching facial photos, evocative descriptions of their generosity and good works, and how they were so beloved, the victims are transformed for viewers into something akin to neighbors, and the shootings become a viewer’s neighborhood issues. Something must be done! And so public demand for gun control continues to grow.

Would central banks jump to the rescue and offer a fully anonymous digital currency? Certainly not. Doing so would be a bonanza for criminals.

— Christine Lagarde, IMF Director, 2018, speaking at the Singapore Fintech Festival

It is Congress that was granted the power “to coin money [and] establish the value thereof”, or at least that‘s how the U.S. Constitution would have it. But times changed, as did our governors, so in 1913 the Congress and President decided, despite multiple warnings from Jefferson to Lincoln (and others in between and since) to turn that process over to a private banking interest given the grossly misleading title “Federal Reserve”.

Those whom we allowed to become the masters of our money are now herding us toward an electronic global currency. The concept has been widely discussed since at least 1988 when a cover article in The Economist predicted a single world currency by 2018 along the lines of a theoretical “Phoenix”. The stepwise route described would be at first allowing — then later encouraging — the use of some form of private-sector money to be used in addition to existing national currencies. Thereafter, over time, the public would come to prefer it on the basis of its greater convenience. While the 2018 prediction was itself a miss, cryptocurrency had by that time become all the rage in some quarters, and the concept of cryptocurrency as a global reserve currency is now being discussed.

Meanwhile, the use of credit- and debit cards continues to rise, in some European countries virtually the sole means of making purchases. Banks and credit unions are now offering incentives for their use, even as powerful governmental forces are advocating the banning of cash altogether. Follow the threads and the world that emerges is one in which our every transaction is an electronic record. Consider, though, that a personal “chip”, that dreaded item of ultimate control in the worst of all dystopian futures, needn’t be a microscopic subcutaneous transmitter. A plastic card willingly (and, in a cashless society, necessarily) produced with every exchange works perfectly for recording the where and what of each individual’s every movement.

With cash a relic of the past, there would be no place to protect savings were The Economy to require negative interest rates and “bail-ins”; accounts would be docked automatically. Anyone deemed an irritant to the government would simply have his or her “chip” turned off (It happens!) leaving the offender absolutely disabled in a cashless world. With the loss of one’s card an ever-present possibility, instinct would naturally tend toward protective self editing, and the inevitable result would be a population rendered ideal from the standpoint of an oppressive and unaccountable government: obedient and submissive.

And the irony? If governmental and social forces now in motion continue unabated and unopposed, Americans, who proclaim themselves “lovers of freedom”, will have essentially disarmed and chipped ourselves. Having been made fearful, we don’t merely allow, we insist, on governmental control of personal arms. And through a process of multigenerational social engineering, our attachment to our plastic identifiers has been so reinforced and normalized that we have failed to realize what they represent and how they can be used against us.

Trump Invites Debates over Omnivorous Crony Capitalism

Donald J. Trump’s 2020 election strategy is to connect his potential Democratic opponents with “socialism.” Trump plans to use this attack on the Democrats even if Senator Bernie Sanders, who proudly calls himself a “democratic socialist,” doesn’t become the presidential nominee (Sanders has been decisively re-elected in Vermont).

Senator Elizabeth Warren is distancing herself from the socialist “label.” She went so far as to tell the New England Council “I am a capitalist to my bones.”

Sanders and Warren are not what they claim to be. They are both updating Roosevelt’s New Deal and more closely resemble the Social Democrats that have governed western European democracies for years, delivering higher standards of living than that experienced by Americans.

The original doctrine of socialism meant government ownership of the means of production – heavy industries, railroads, banks, and the like. Nobody in national politics today is suggesting such a takeover. As one quipster put it, “How can Washington take ownership of the banks when the banks own Washington?”

Confronting Trump on the “socialism” taboo can open up a great debate about the value of government intervention for the good of the public. Sanders can effectively argue that people must choose either democratic socialism or the current failing system of corporate socialism. That choice is not difficult. Such an American democratic socialism could provide almost all of the long overdue solutions this country needs: full more efficient Medicare for all; tuition-free education; living wages; stronger unions; a tax system that works for the people; investments in infrastructure and public works; reforms for a massive, runaway military budget; the end of most corporate welfare; government promotion of renewable energies; and the end of subsidies for fossil fuels and nuclear power.

In my presidential campaigns I tried to make corporate socialism – also called corporate welfare or crony capitalism – a major issue. Small business is capitalism – free to go bankrupt – while corporate capitalism – free to get bailouts from Washington – is really a form of corporate socialism. This point about a corporate government was documented many years ago in books such as America, Inc. (1971) by Morton Mintz and Jerry Cohen.

Now, it is even easier to make the case that our political economy is largely controlled by giant corporations and their political toadies. Today the concentration of power and wealth is staggering. Just six capitalist men have wealth to equal the wealth of half of the world’s population.

The Wall Street collapse of 2008-2009 destroyed eight million jobs, lost trillions of dollars in pension and mutual funds, and pushed millions of families to lose their homes. Against this backdrop, the U.S. government used trillions of taxpayer dollars to bail out, in various ways, the greedy, financial giants, whose reckless speculating caused the collapse.

In May 2009, the moderate Senator from Illinois, Dick Durbin, said: “The banks – hard to believe when we’re facing a banking crisis that many of the banks created – are still the most powerful lobby on Capitol Hill. And they frankly own the place.”

Is there a single federal government agency or department that can say its most powerful outside influence is NOT corporate? Even the Labor Department and the National Labor Relations Board are under more corporate power than union power.

Who better than Trump, on an anti-socialist fantasy campaign kick, can call attention to the reality that Big Business controls the government and by extension controls the people?  In September 2000, a Business Week poll found over 70 percent of people agreeing that big business has too much control over their lives (this was before the horrific corporate crimes and scandals of the past two decades). Maybe that is why support in polls for “socialism” against “capitalism” in the U.S. is at a 60 year high.

People have long experienced American-style “socialism.” For example, the publicly owned water and electric utilities, public parks and forests, the Postal Service, public libraries, FDIC guarantees of bank deposits (now up to $250,000), Social Security, Medicare and Medicaid, etc.

What the public is not sufficiently alert to is that Big Business has been profitably taking over control, if not outright ownership, of these public assets.

In the new book, Banking on the People, by Ellen Brown, readers can get an idea of the way large banks, insurers, and the giant shadow banking system – money market funds, hedge funds, mortgage brokers, and other unregulated financial intermediaries – speculate and shift deep risk and their failures onto Uncle Sam. These corporate predators gouge customers, and, remarkably, show a deep aversion for productive investment as if people matter.

Moreover, they just keep developing new, ever riskier, multi-tiered instruments (eg. derivatives) to make money from money through evermore complex, abstract, secret, reckless, entangled, globally destabilizing, networks. Gambling with other people’s money is a relentless Wall Street tradition.

The crashes that inevitably emerge end up impoverishing ordinary people who pay the price with their livelihoods.

Will the Democrats and other engaged people take Trump on if he tries to make “socialism” the big scare in 2020? Control of our political economy is not a conservative/liberal or red state/blue state issue. When confronted with the specifics of the corporate state or corporate socialism, people from all political persuasions will recognize the potential perils to our democracy. No one wants to lose essential freedoms or to continue to pay the price of this runaway crony capitalism.

The gigantic corporations have been built with the thralldom of deep debt – corporate debt to fund stock buybacks (while reporting record profits), consumer debt, student loan debt, and, of course, government debt caused by drastic corporate and super-rich tax cuts. Many trillions of dollars have been stolen from future generations.

No wonder a small group of billionaires, including George Soros, Eli Broad, and Nick Hanauer, have just publicly urged a modest tax on the super wealthy. As Hanauer, a history buff and advocate of higher minimum wages, says – “the pitchforks are coming.”

Libra: Facebook’s Audacious Bid for Global Monetary Control

Payments can happen cheaply and easily without banks or credit card companies. This has now been demonstrated – not in the United States but in China. Unlike in the US, where numerous firms feast on fees from handling and processing payments, in China most money flows through mobile phones nearly for free. In 2018 these cashless payments totaled a whopping $41.5 trillion; and 90% were through Alipay and WeChat Pay, a pair of digital ecosystems that blend social media, commerce and banking. According to a May 2018 article in Bloomberg titled “Why China’s Payment Apps Give U.S. Bankers Nightmares”:

The nightmare for the U.S. financial industry is that a technology company—whether from China or a homegrown juggernaut such as Amazon.com Inc. or Facebook Inc.—replicates the success of Alipay and WeChat in America. The stakes are enormous, potentially carving away billions of dollars in annual revenue from major banks and other firms.

That threat may now be materializing. On June 18, Facebook unveiled a white paper outlining ambitious plans to create a new global cryptocurrency called Libra, to be launched in 2020. The New York Times says Facebook has high hopes that Libra will become the foundation for a new financial system free of control by Wall Street power brokers and central banks.

But apparently Libra will not be competing with Visa or Mastercard. In fact, the Libra Association lists those two giants among its 28 soon-to-be founding members. Others include Paypal, Stripe, Uber, Lyft and eBay. Facebook has reportedly courted dozens of financial institutions and other tech companies to join the Libra Association, an independent foundation that will contribute capital and help govern the digital currency. Entry barriers are high, with each founding member paying a minimum of $10 million to join. This gives them one vote  (or 1% of the total vote, whichever is larger)  in the Libra Association council. Members are also entitled to a share proportionate to their investment of the dividends earned from  interest on the Libra reserve – the money that users will pay to acquire the Libra currency.

All of which has raised some eyebrows, both among financial analysts and crypto activists. A Zero Hedge commentator calls Libra “Facebook’s Crypto Trojan Rabbit.” An article in FT’s Alphaville calls it “Blockchain, but Without the Blocks or Chain.” Economist Noriel Roubini concurs, tweeting:

It will start as a private, permissioned, not-trustless, centralized oligopolistic members-only club. So much for calling it “blockchain”. … [I]t is blockchain in name only and a monopoly to extract massive seignorage from billions of users. A monopoly scam.

Another Zero Hedge writer calls Libra “The Dollar’s Killer App,” which threatens “not only the power of central banks but also the government’s money monopoly itself.”

From Frying Pan to Fire?

To the crypto-anarchist community, usurping the power of central banks and governments may sound like a good thing. But handing global power to the corporate-controlled Libra Association could be a greater nightmare. So argues Facebook co-founder Chris Hughes, who writes in The Financial Times:

This currency would insert a powerful new corporate layer of monetary control between central banks and individuals. Inevitably, these companies will put their private interests — profits and influence — ahead of public ones. . . .

The Libra Association’s goals specifically say that [they] will encourage “decentralised forms of governance”. In other words, Libra will disrupt and weaken nation states by enabling people to move out of unstable local currencies and into a currency denominated in dollars and euros and managed by corporations. . . .

What Libra backers are calling “decentralisation” is in truth a shift of power from developing world central banks toward multinational corporations and the US Federal Reserve and the European Central Bank.

Power will shift to the Fed and ECB because the dollar and the euro will squeeze out weaker currencies in developing countries. As seen recently in Greece, the result will be to cause their governments to lose control of their currencies and their economies.

Pros and Cons

In a June 9 review in Forbes, Caitlin Long, co-founder of the Wyoming Blockchain Coalition, agreed that Libra was a Trojan horse but predicted that it would have some beneficial effects. For one, she thought it would impose discipline on the US banking system by leading to populist calls to repeal their corporate subsidies. The Fed is now paying its member banks 2.35% in risk-free interest on their excess reserves, which this year is projected to total $36 billion of corporate welfare to US banks – about half the sum spent on the US food stamp program. If Facebook parks its entire US dollar balance at the Federal Reserve through one of its bank partners, it could earn the same rate. But Long predicted that Facebook would have to pay interest to Libra users to avoid a chorus of critics, who would loudly publicize how much money Facebook and its partners were pocketing from the interest on the money users traded for their Libra currency.

But that was before the Libra white paper came out. It reveals that the profits will indeed be divvied among Facebook’s Libra partners rather than shared with users. At one time, we earned interest on our deposits in government-insured banks. With Libra, we will get no interest on our money, which will be entrusted to uninsured crypto exchanges, which are coming under increasing regulatory pressure due to lack of transparency and operational irregularities.

UK economics professor Alistair Milne points to another problem with the Libra cryptocurrency: unlike Bitcoin, it will be a “stablecoin,” whose value will be tied to a basket of fiat currencies and short-term government securities. That means it will need the backing of real money to maintain its fixed price. If reserves do not cover withdrawals, who will be responsible for compensating Libra holders? Ideally, Milne writes, reserves would be held with the central bank; but central banks will be reluctant to support a private currency.

Caitlin Long also predicts that Facebook’s cryptocurrency will be a huge honeypot of data for government officials, since every transaction will be traceable. But other reviewers see this as Libra’s most fatal flaw. Facebook has been called Big Brother, the ultimate government surveillance tool. Conspiracy theorists link it to the CIA and the US Department of Defense. Facebook has already demonstrated that it is an untrustworthy manager of personal data. How then can we trust it with our money?

Why Use a Cryptocurrency at All?

A June 20th CoinDesk article asks why Facebook has chosen to use a cryptocurrency rather than following WeChat and AliPay in doing a global payments network in the traditional way. The article quotes Yan Meng, vice president of the Chinese Software Developer Network, who says Facebook’s fragmented user base across the world leaves it with no better choice than to borrow ideas from blockchain and cryptocurrency.

“Facebook just can’t do a global payments network via traditional methods, which require applying for a license and preparing foreign exchange reserves with local banking, one market after another,” said Meng. “The advantage of WeChat and AliPay is they have already gained a significant number of users from just one giant economy that accounts for 20 percent of the world’s population.” They have no need to establish their own digital currencies, which they still regard as too risky.

Meng suspects that Facebook’s long-term ambition is to become a stateless central bank that uses Libra as a base currency. He wrote in a June 16 article, “With sufficient incentives, nodes of Facebook’s Libra network would represent Facebook to push for utility in various countries for its 2.7 billion users in business, investment, trade and financial services,” which “would help complete a full digital economy empire.”

The question is whether regulators will allow that sort of competition with the central banking system. Immediately after Facebook released its Libra cryptocurrency plan, financial regulators in Europe voiced concerns over the potential danger of Facebook running a “shadow bank.” Maxine Waters, who heads the Financial Services Committee for the US House of Representatives, asked Facebook to halt its development of Libra until hearings could be held. She said:

This is like starting a bank without having to go through any steps to do it. . . . We can’t allow Facebook to go to Switzerland and begin to compete with the dollar without having any regulatory regime that’s dealing with them. 

A Stateless Private Central Bank or a Publicly Accountable One?

Facebook may be competing with more than the dollar. Jennifer Grygiel, Assistant Professor of Communications at Syracuse University, writes:

. . . [It] seems that the company is not seeking to compete with Bitcoin or other cryptocurrencies. Rather, Facebook is looking to replace the existing global financial system with an all-new setup, with Libra at its center.

At least at the moment, the Libra is being designed as a form of electronic money linked to many national currencies. That has raised fears that Libra might someday be recognized as a sovereign currency, with Facebook acting as a “shadow bank” that could compete with the central banks of countries around the world.

Caitlin Long thinks Bitcoin rather than Libra will come out the winner in all this; but Bitcoin’s blockchain model is too slow, expensive and energy-intensive to replace fiat currency as a medium of exchange on a national scale. As Josh Constine writes on Techcrunch.com:

[E]xisting cryptocurrencies like Bitcoin and Ethereum weren’t properly engineered to scale to be a medium of exchange. Their unanchored price was susceptible to huge and unpredictable swings, making it tough for merchants to accept as payment. And cryptocurrencies miss out on much of their potential beyond speculation unless there are enough places that will take them instead of dollars . . . . But with Facebook’s relationship with 7 million advertisers and 90 million small businesses plus its user experience prowess, it was well-poised to tackle this juggernaut of a problem.

For Libra to scale as a national medium of exchange, its governance had to be centralized rather than “distributed.” But Libra’s governing body is not the sort of global controller we want. Jennifer Grygiel writes:

Facebook CEO Mark Zuckerberg . . . is declaring that he wants Facebook to become a virtual nation, populated by users, powered by a self-contained economy, and headed by a CEO – Zuckerberg himself – who is not even accountable to his shareholders. . . .

In many ways the company that Mark Zuckerberg is building is beginning to look more like a Roman Empire, now with its own central bank and currency, than a corporation. The only problem is that this new nation-like platform is a controlled company and is run more like a dictatorship than a sovereign country with democratically elected leaders.

A currency intended for trade on a national—let alone international—scale needs to be not only centralized but democratized, responding to the will of the people and their elected leaders. Rather than bypassing the existing central banking structure as Facebook plans to do, several groups of economists are proposing a more egalitarian solution: nationalizing and democratizing the central bank by opening its deposit window to everyone. As explored in my latest book, “Banking on the People: Democratizing Money in the Digital Age,” these proposals could allow us all to get 2.35% on our deposits, while eliminating bank runs and banking crises, since the central bank cannot run out of funds. Profits from the public medium of exchange need to return to the public, rather than enriching an unaccountable, corporate-controlled Facebook Trojan horse.

• This article was first posted under a different title on Truthdig.org.

The Bankers’ “Power Revolution”: How the Government Got Shackled by Debt

This article is excerpted from my new book Banking on the People: Democratizing Money in the Digital Age, available in paperback June 1.

*****

The U.S. federal debt has more than doubled since the 2008 financial crisis, shooting up from $9.4 trillion in mid-2008 to over $22 trillion in April 2019. The debt is never paid off. The government just keeps paying the interest on it, and interest rates are rising.

In 2018, the Fed announced plans to raise rates by 2020 to “normal” levels — a fed funds target of 3.375 percent — and to sell about $1.5 trillion in federal securities at the rate of $50 billion monthly, further growing the mountain of federal debt on the market. When the Fed holds government securities, it returns the interest to the government after deducting its costs; but the private buyers of these securities will be pocketing the interest, adding to the taxpayers’ bill.

In fact, it is the interest, not the debt itself, that is the problem with a burgeoning federal debt. The principal just gets rolled over from year to year. But the interest must be paid to private bondholders annually by the taxpayers and constitutes one of the biggest items in the federal budget. Currently the Fed’s plans for “quantitative tightening” are on hold; but assuming it follows through with them, projections are that by 2027 U.S. taxpayers will owe $1 trillion annually just in interest on the federal debt. That is enough to fund President Donald Trump’s trillion-dollar infrastructure plan every year, and it is a direct transfer of wealth from the middle class to the wealthy investors holding most of the bonds.

Where will this money come from? Crippling taxes, wholesale privatization of public assets, and elimination of social services will not be sufficient to cover the bill.

Bondholder Debt Is Unnecessary

The irony is that the United States does not need to carry a debt to bondholders at all. It has been financially sovereign ever since President Franklin D. Roosevelt took the dollar off the gold standard domestically in 1933. This was recognized by Beardsley Ruml, Chairman of the Federal Reserve Bank of New York, in a 1945 presentation before the American Bar Association titled “Taxes for Revenue Are Obsolete.”

“The necessity for government to tax in order to maintain both its independence and its solvency is true for state and local governments,” he said, “but it is not true for a national government.” The government was now at liberty to spend as needed to meet its budget, drawing on credit issued by its own central bank. It could do this until price inflation indicated a weakened purchasing power of the currency.

Then, and only then, would the government need to levy taxes — not to fund the budget but to counteract inflation by contracting the money supply. The principal purpose of taxes, said Ruml, was “the maintenance of a dollar which has stable purchasing power over the years. Sometimes this purpose is stated as ‘the avoidance of inflation.’

The government could be funded without taxes by drawing on credit from its own central bank; and since there was no longer a need for gold to cover the loan, the central bank would not have to borrow. It could just create the money on its books. This insight is a basic tenet of Modern Monetary Theory: the government does not need to borrow or tax, at least until prices are driven up. It can just create the money it needs. The government could create money by issuing it directly; or by borrowing it directly from the central bank, which would create the money on its books; or by taking a perpetual overdraft on the Treasury’s account at the central bank, which would have the same effect.

The “Power Revolution” — Transferring the “Money Power” to the Banks

The Treasury could do that in theory, but some laws would need to be changed. Currently the federal government is not allowed to borrow directly from the Fed and is required to have the money in its account before spending it. After the dollar went off the gold standard in 1933, Congress could have had the Fed just print money and lend it to the government, cutting the banks out. But Wall Street lobbied for an amendment to the Federal Reserve Act, forbidding the Fed to buy bonds directly from the Treasury as it had done in the past.

The Treasury can borrow from itself by transferring money from “intragovernmental accounts” — Social Security and other trust funds that are under the auspices of the Treasury and have a surplus – but these funds do not include the Federal Reserve, which can lend to the government only by buying federal securities from bond dealers. The Fed is considered independent of the government. Its website states, “The Federal Reserve’s holdings of Treasury securities are categorized as ‘held by the public,’ because they are not in government accounts.”

According to Marriner Eccles, chairman of the Federal Reserve from 1934 to 1948, the prohibition against allowing the government to borrow directly from its own central bank was written into the Banking Act of 1935 at the behest of those bond dealers that have an exclusive right to purchase directly from the Fed. A historical review on the website of the New York Federal Reserve quotes Eccles as stating, “I think the real reasons for writing the prohibition into the [Banking Act] … can be traced to certain Government bond dealers who quite naturally had their eyes on business that might be lost to them if direct purchasing were permitted.”

The government was required to sell bonds through Wall Street middlemen, which the Fed could buy only through “open market operations” – purchases on the private bond market. Open market operations are conducted by the Federal Open Market Committee (FOMC), which meets behind closed doors and is dominated by private banker interests. The FOMC has no obligation to buy the government’s debt and generally does so only when it serves the purposes of the Fed and the banks.

Rep. Wright Patman, Chairman of the House Committee on Banking and Currency from 1963 to 1975, called the official sanctioning of the Federal Open Market Committee in the banking laws of 1933 and 1935 “the power revolution” — the transfer of the “money power” to the banks. Patman said, “The ‘open market’ is in reality a tightly closed market.” Only a selected few bond dealers were entitled to bid on the bonds the Treasury made available for auction each week. The practical effect, he said, was to take money from the taxpayer and give it to these dealers.

Feeding Off the Real Economy

That massive Wall Street subsidy was the subject of testimony by Eccles to the House Committee on Banking and Currency on March 3-5, 1947. Patman asked Eccles, “Now, since 1935, in order for the Federal Reserve banks to buy Government bonds, they had to go through a middleman, is that correct?” Eccles replied in the affirmative. Patman then launched into a prophetic warning, stating, “I am opposed to the United States Government, which possesses the sovereign and exclusive privilege of creating money, paying private bankers for the use of its own money. … I insist it is absolutely wrong for this committee to permit this condition to continue and saddle the taxpayers of this Nation with a burden of debt that they will not be able to liquidate in a hundred years or two hundred years.”

The truth of that statement is painfully evident today, when we have a $22 trillion debt that cannot possibly be repaid. The government just keeps rolling it over and paying the interest to banks and bondholders, feeding the “financialized” economy in which money makes money without producing new goods and services. The financialized economy has become a parasite feeding off the real economy, driving producers and workers further and further into debt.

In the 1960s, Patman attempted to have the Fed nationalized. The effort failed, but his committee did succeed in forcing the central bank to return its profits to the Treasury after deducting its costs. The prohibition against direct lending by the central bank to the government, however, remains in force. The money power is still with the FOMC and the banks.

A Model We Can No Longer Afford

Today, the debt-growth model has reached its limits, as even the Bank for International Settlements, the “central bankers’ bank” in Switzerland, acknowledges. In its June 2016 annual report, the BIS said that debt levels were too high, productivity growth was too low, and the room for policy maneuver was too narrow. “The global economy cannot afford to rely any longer on the debt-fueled growth model that has brought it to the current juncture,” the BIS warned.

But the solutions it proposed would continue the austerity policies long imposed on countries that cannot pay their debts. It prescribed “prudential, fiscal and, above all, structural policies” — “structural readjustment.” That means privatizing public assets, slashing services, and raising taxes, choking off the very productivity needed to pay the nations’ debts. That approach has repeatedly been tried and has failed, as witnessed, for example, in the devastated economy of Greece.

Meanwhile, according to Minneapolis Fed president Neel Kashkari, financial regulation since 2008 has reduced the chances of another government bailout only modestly, from 84 percent to 67 percent. That means there is still a 67 percent chance of another major systemwide crisis, and this one could be worse than the last. The biggest banks are bigger, local banks are fewer, and global debt levels are higher. The economy has farther to fall. The regulators’ models are obsolete, aimed at a form of “old-fashioned banking” that has long since been abandoned.

We need a new model, one designed to serve the needs of the public and the economy rather than to maximize shareholder profits at public expense.

An earlier version of this article was published in Truthout.org.

Insidious “Habituations”…

First, they came and said they would borrow your money and pay you a 2% annual interest rate for it. They called themselves a Savings Bank, so you accepted it.

Then they came and said you could borrow money from them at a variable rate, probably 6% (but just maybe as high as 30%). They called themselves a Financial Service, so you accepted it. Soon, they came and said that home “ownership” was a great personal investment and, that notwithstanding inflated market-”bubbles” and the like, it was a great idea to obtain a 30-year-mortgage with an “adjustable” rate. They called themselves a Lender, so you accepted it. Later, they came and said that, since your taxes were being used to kill foreigners rather than pay for your medical “needs,” you needed to “insure” that your personal medical bills would not cause personal bankruptcy. They called themselves an Insurance Company and said that, notwithstanding deductibles and co-payments and claims examiners, they would protect your interests. So you accepted it. (Some years later, jobless due to automation and “outsourcing,” you were ordered to continue buying such insurance–without the income to pay for it–but at a special, “affordable” rate. They called themselves the Government, so you accepted it.

But soon, as you became dependent on drugs called medications which were very expensive, you realized that cheap “generics,” manufactured in South Asian sweatshops, would have to do. After all, the Government had approved this–so you accepted it.

About this time, the President had suddenly urged all citizens to support, and pay for, a massive military invasion of a distant land. He insisted on starting a war–after all, the distant land in question might at some point threaten to start a war. Although no evidence was ever presented to substantiate such a threat, the President said this–so you accepted it. As the resultant war continued, causing unspeakable, mass suffering, the President periodically demanded an extra $200 billion-or-so to pay for his senseless, criminal war–and you accepted it.

Not much later, it was found that the Lender aforementioned had approved mortgages for millions who could not really, under the provisions, afford them in the long-term. Your Lender, having known this all along, had sold off these bad mortgages as a high-interest, “junk” investment which would certainly fail, then invested in lucrative hedge funds predicting such failure–and then paid bribes to the politicians to receive the usual tax-funded Bail-outs. Since economists and other self-styled experts seldom questioned this chain-of-events, you accepted it.

And right now, as it happens, much-worshiped Technocrats are declaring in commanding tones that you cannot even “live” without their daily, constant, intrusive oversight. They know already– and will monitor you all-inclusively–to calculate precisely what you really want–product-wise and “lifestyle”-wise! No need for you to choose–they will choose for you! Moreover, they will connect everything, from your child’s babbling in the nursery to your toaster in the kitchen, to “help” you! And…since they are all-knowing Technocrats, able to know you as you’ve never known yourself…you are accepting this??