Category Archives: Banks/Banking

Bank Report Reveals Where Ruling Class Lives

While clearly not intended as a tool for the subversion of capitalism, the 2019 Credit Suisse Global Wealth Report provides a fascinating glimpse at the inequality that the neoliberal era has produced, who has benefitted and those who have been left behind.

According to the tenth edition of the report, recently released, “The bottom half of wealth holders collectively accounted for less than 1% of total global wealth in mid-2019, while the richest 10% own 82% of global wealth and the top 1%  alone own 45%.” (Note that this a study about wealth and not income. It measure assets [housing, stocks, bonds etc.] minus debts.)

Further evidence of the incredible inequality generated by neoliberal capitalism:

  • North America and Europe together account for 57% of total household wealth, but contain only 17% of the world adult population;
  • 2.9 billion people, 57% of all adults,  have wealth below $10,000 US in 2019. Of course many of these have more debts than assets;
  • Average wealth per adult in Africa is $6,488 while that figure for North America (which seems to be defined as Canada and the USA) is $417,694. For India it is $14,569 while in Latin America the average wealth is $22,502;
  • Average wealth in “socialist” China has grown more rapidly than elsewhere over the past two decades to $58,544. (It seems government intervention in the economy is good for wealth creation);
  • The share of total global wealth owned by millionaires (47 million or 0.9% of adults) has grown from 34% in 2000 to 44% today;
  • About 40% of millionaires reside in the USA and more than half of the 1.1 million who achieved that status in the past year live in the land of Trump. The U.S. growth of millionaires exceeded that of the next nine countries combined (Japan, China, Germany, the Netherlands, Brazil, India, Spain, Canada and Switzerland);
  • Australia lost 124,000 millionaires over the past year, primarily due to declining real estate prices;
  • The wealth of 41 million of the millionaires was between 1 and 5 million dollars. Another 3.7 million are worth between 5 million and 10 million, and almost exactly 2 million adults now have wealth above 10 million. Of these, 1.8 million have assets in the 10–50 million range, leaving 168,030 with a  net worth above 50 million;
  • Of these 168,030 members of the capitalist ruling class, 80,510 (48%) live in the USA. China has 18,130 (11%) , Germany 6,800 (4%), the UK 4,640, India 4,460, France 3,700, Canada (3,530), Japan 3,350, Russia 3,120 and Hong Kong 3,100.

The importance of knowing where rich people are and might be popping up next is what has produced this annual “most comprehensive and up-to date survey of household wealth”.

In ancient Greece people would consult the oracles in order to choose the fruitful path, but today the most common source of such divination is the wisdom of the dollar and its associated deities. Rather than seek advice from experts at interpreting the various Hellenic gods, we consult those who specialize in illuminating where “the money” has been and is going. The ancient oracles could be found at shrines to the various gods; the modern version of these advice givers reside in universities, think tanks, mutual fund companies, brokerages, banks and the ever-present business media. The offerings of those seeking the guidance of today’s financial gods support a multi-billion dollar information and advice industry.

This seems “rational” behavior only because we live in an economic system that distributes power on a one-dollar-one-vote basis. To divine where the dollars are is to learn where best to seek the power that comes from them. In other words, the rich get richer and those who want to catch the crumbs as they fall off the banquet table need to be present at the court of King Capital.

Like the royal courts of feudal Europe that moved around its realm from castle to castle, money, in the form of capital, travels around its planetary realm from country to country, city to city, economic sector to economic sector, searching for the highest profit. This movement of capital creates real estate and other booms in favored locations then financial crises when the wealthy decide it is time to move on.

According to supporters, capitalism is supposed to be all about competition. The system is supposed to reward merit. Winners and losers are legitimate because everyone has an equal chance to succeed. But this is clearly not true in the actual world as described by the Credit Suisse report.

How can the 2.9 billion adults who own less than $10,000 in net assets compete fairly against 47 million millionaires, let alone the 168,030  who own $50 million or more?

The system is rigged. In a neoliberal capitalist competition to buy the most profitable companies, processes, patents, ideas, and anything else that can be made “property” the winners will always be those with the most money.

This report illustrates the pyramid of capitalist wealth and the peculiar property of money that guarantees most of it floats to the top.

The only way for billions of people, most countries and entire continents to escape the inevitable “the rich get richer and the poor get poorer” is by using the power of collectivity (call it government, socialism or mutual aid) to counter the power of one-dollar-one-vote capitalism.

Is the Run on the Dollar Due to Panic or Greed?

What’s going on in the repo market? Rates on repurchase agreements (“repo”) should be around 2%, in line with the fed funds rate. But they shot up to over 5% on September 16 and got as high as 10% on September 17. Yet banks were refusing to lend to each other, evidently passing up big profits to hold onto their cash – just as they did in the housing market crash and Great Recession of 2008-09.

Since banks weren’t lending, the Federal Reserve Bank of New York jumped in, increasing its overnight repo operations to $75 billion; and on October 23 it upped the ante to $120 billion in overnight operations and $45 billion in longer-term operations.

Why are banks no longer lending to each other? Are they afraid that collapse is imminent somewhere in the system, as with the Lehman collapse in 2008?

Perhaps, and if so the likely suspect is Deutsche Bank. But it looks to be just another case of Wall Street fattening itself at the public trough, using the funds of mom and pop depositors to maximize bank profits and line the pockets of bank executives while depriving small businesses of affordable loans.

Why the Repo Market Is a Big Deal

The repo market allows banks and other financial institutions to borrow and lend to each another, usually overnight. More than $1 trillion in overnight repo transactions collateralized with U.S. government debt occur every day. Banks lacking available deposits frequently go to these markets to fund their loans and finance their trades.

Legally, repos are sales and repurchases; but they function like secured overnight or short-term loans. They work like a pawn shop: the lender takes an asset (usually a federal security) in exchange for cash, with an agreement to return the asset for the cash plus interest the next day unless the loan is rolled over.  The New York Fed currently engages in two types of repo operations: overnight repurchase agreements that unwind the next business day, and 14 day repurchase agreements that unwind after 14 days.

The Fed re-started its large-scale repo operations in September, when borrowing rates shot up due to an unexpectedly high demand for dollars. The Fed said the unusual demand was due largely to quarterly tax payments and Treasury debt settlements. Other factors proposed as contributing to the cash strains include regulatory change and a decline in bank reserves due to “quantitative tightening” (in which the Fed shrunk its balance sheet by selling some of its QE acquisitions back into the market), as well as unusually high government debt issuance over the last four years and a flight into U.S. currency and securities to avoid the negative interest rate policies of central banks abroad.

Panic or Calculated Self-interest?

The Fed’s stated objective in boosting the liquidity available to financial markets was simply to maintain its “target rate” for the interest charged by banks to each other in the fed funds market. But critics were not convinced. Why were private capital markets once again in need of public support if there was no financial crisis in sight? Was the Fed engaged in a stealth “QE4,” restarting its quantitative easing program?

The Fed insisted that it wasn’t, and financial analyst Wolf Richter agreed. Writing on Wolfstreet.com on October 10, he said the banks and particularly the primary dealers were hoarding their long-term securities in anticipation of higher profits. The primary dealers are the 24 U.S. and foreign broker-dealers and banks authorized to deal directly with the U.S. Treasury and the New York Fed. They were funding their horde of long-term securities in the repo market, putting pressure on that market, as the Fed said in the minutes for its July meeting even before repo rates blew out in mid-September. Richter contended:

They’d expected a massive bout of QE, and perhaps some of the players had gleefully contributed to, or even instigated the turmoil in the repo market to make sure they would get that massive bout of QE as the Fed would be forced to calm the waters with QE, the theory went. This QE would include big purchases of long-term securities to push down long-term yields, and drive up the prices of those bonds ….

Prices were high and yields were low, a sign that there was heavy demand. But the dealers were holding out for even higher prices and even lower yields. … Massive QE, where the Fed buys these types of Treasury securities, would accomplish that.

But that’s exactly what the Fed said it wouldn’t do.

What the Fed was doing instead, it said, was to revive its “standing repo facility” – the facility it had used before September 2008, when it abandoned that device in favor of QE and zero interest rate policy. But it insisted that this was not QE, expanding the money supply. Overnight repos are just an advance of credit, which must be repaid the next day. While $165 billion per month sounds like a lot, repo loans don’t accumulate; the Fed is just making short-term advances, available as needed up to a limit of $165 billion.

In Wall Street on Parade on October 28, Pam and Russ Martens pointed to another greed-driven trigger to the recent run on repo. The perpetrator was JPMorgan Chase, the largest bank in the U.S., with $1.6 trillion in deposits. Quoting David Henry on Reuters:

Publicly-filed data shows JPMorgan reduced the cash it has on deposit at the Federal Reserve, from which it might have lent, by $158 billion in the year through June, a 57% decline. … [T]he data shows its switch accounted for about a third of the drop in all banking reserves at the Fed during the period.

This $158 billion drawdown in JPMorgan’s reserve account is evidently what necessitated the Fed’s $165 billion in new repo offerings. But why the large drawdown?

Henry attributed it to regulatory changes that increased the bank’s required reserves, but according to the Martens, something more was involved. “The shocking news,” they write, is that “according to its SEC filings, JPMorgan Chase is partly using Federally insured deposits made by moms and pops across the country in its more than 5,000 branches to prop up its share price with buybacks.” Small businesses are being deprived of affordable loans because the liquidity necessary to back the loans is being used to prop up bank stock prices. Bank shares constitute a substantial portion of the pay of bank executives.

According to Thomas Hoenig, then Vice Chair of the Federal Deposit Insurance Corporation (FDIC), in a July 2017 letter to the U.S. Senate Banking Committee:

[If] the 10 largest U.S. Bank Holding Companies [BHCs] were to retain a greater share of their earnings earmarked for dividends and share buybacks in 2017 they would be able to increase loans by more than $1 trillion, which is greater than 5 percent of annual U.S. GDP.

Four of the 10 BHCs will distribute more than 100 percent of their current year’s earnings, which alone could support approximately $537 billion in new loans to Main Street.

If share buybacks of $83 billion, representing 72 percent of total payouts for these 10 BHCs in 2017, were instead retained, they could, under current capital rules, increase small business loans by three quarters of a trillion dollars or mortgage loans by almost one and a half trillion dollars.

Hoenig was referring to the banks’ own capital rather than to their deposits, but the damage to local credit markets is even worse if deposits are also being diverted to fund share buybacks. Banks are not serving the real economy. They are using public credit backed by public funds to feed their own private bottom lines.

The whole repo rigmarole underscores the sleight of hand on which our money and banking systems are built, and why it is time to change them. Banks do not really have the money they lend. To back their loans, they rely on their ability to borrow from the reserves of other banks, generated from their customers’ deposits; and if those banks withhold their deposits in the insatiable pursuit of higher profits, the borrowing banks must turn to the public purse for liquidity. The banks could not function without public support. They should be turned into public utilities, mandated to serve the interests of the people and the productive economy on which the public depends.

This article was first posted on Truthdig.com

The Disaster of Negative of Interest Rates

President Trump wants negative interest rates, but they would be disastrous for the U.S. economy, and his objectives can be better achieved by other means.

The dollar strengthened against the euro in August, merely in anticipation of the European Central Bank slashing its key interest rate further into negative territory. Investors were fleeing into the dollar, prompting President Trump to tweet on August 30:

The Euro is dropping against the Dollar “like crazy,” giving them a big export and manufacturing advantage… And the Fed does NOTHING!

When the ECB cut its key rate as anticipated, from a negative 0.4% to a negative 0.5%, the president tweeted on September 11:

The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term.

And on September 12 he tweeted:

European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports…. And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!

However, negative interest rates have not been shown to stimulate the economies that have tried them, and they would wreak havoc on the U.S. economy, for reasons unique to the U.S. dollar. The ECB has not gone to negative interest rates to gain an export advantage. It is to keep the European Union from falling apart, something that could happen if the United Kingdom does indeed pull out and Italy follows suit, as it has threatened to do. If what Trump wants is cheap borrowing rates for the U.S. federal government, there is a safer and easier way to get them.

The Real Reason the ECB Has Gone to Negative Interest Rates

Why the ECB has gone negative was nailed by Wolf Richter in a September 18 article on WolfStreet.com. After noting that negative interest rates have not proved to be beneficial for any economy in which they are currently in operation and have had seriously destructive side effects for the people and the banks, he said:

However, negative interest rates as follow-up and addition to massive QE were effective in keeping the Eurozone glued together because they allowed countries to stay afloat that cannot, but would need to, print their own money to stay afloat. They did so by making funding plentiful and nearly free, or free, or more than free.

This includes Italian government debt, which has a negative yield through three-year maturities. … The ECB’s latest rate cut, minuscule and controversial as it was, was designed to help out Italy further so it wouldn’t have to abandon the euro and break out of the Eurozone.

The U.S. doesn’t need negative interest rates to stay glued together. It can print its own money.

EU member governments have lost the sovereign power to issue their own money or borrow money issued by their own central banks. The failed EU experiment was a monetarist attempt to maintain a fixed money supply, as if the euro were a commodity in limited supply like gold. The central banks of member countries do not have the power to bail out their governments or their failing local banks as the Fed did for U.S. banks with massive quantitative easing after the 2008 financial crisis. Before the Eurozone debt crisis of 2011-12, even the European Central Bank was forbidden to buy sovereign debt.

The rules changed after Greece and other southern European countries got into serious trouble, sending bond yields (nominal interest rates) through the roof.  But default or debt restructuring was not considered an option; and in 2016, new EU rules required a “bail in” before a government could bail out its failing banks. When a bank ran into trouble, existing stakeholders–including shareholders, junior creditors and sometimes even senior creditors and depositors with deposits in excess of the guaranteed amount of €100,000–were required to take a loss before public funds could be used. The Italian government got a taste of the potential backlash when it forced losses onto the bondholders of four small banks. One victim made headlines when he hung himself and left a note blaming his bank, which had taken his entire €100,000 savings.

Meanwhile, the bail-in scheme that was supposed to shift bank losses from governments to bank creditors and depositors served instead to scare off depositors and investors, making shaky banks even shakier. Worse, heightened capital requirements made it practically impossible for Italian banks to raise capital. Rather than flirt with another bail-in disaster, Italy was ready either to flaunt EU rules or leave the Union.

The ECB finally got on the quantitative easing bandwagon and started buying government debt along with other financial assets. By buying debt at negative interest, it is not only relieving EU governments of their interest burden, it is slowly extinguishing the debt itself.

That explains the ECB, but why are investors buying these bonds? According to John Ainger in Bloomberg:

Investors are willing to pay a premium–and ultimately take a loss–because they need the reliability and liquidity that the government and high-quality corporate bonds provide. Large investors such as pension funds, insurers, and financial institutions may have few other safe places to store their wealth.

In short, they are captive buyers. Banks are required to hold government securities or other “high-quality liquid assets” under capital rules imposed by the Financial Stability Board in Switzerland. Since EU banks now must pay the ECB to hold their bank reserves, they may as well hold negative-yielding sovereign debt, which they may be able to sell at a profit if rates drop even further.

Wolf Richter comments:

Investors who buy these bonds hope that central banks will take them off their hands at even lower yields (and higher prices). No one is buying a negative yielding long-term bond to hold it to maturity.

Well, I say that, but these are professional money managers who buy such instruments, or who have to buy them due to their asset allocation and fiduciary requirements, and they don’t really care. It’s other people’s money, and they’re going to change jobs or get promoted or start a restaurant or something, and they’re out of there in a couple of years. Après moi le déluge.

Why the U.S. Can’t Go Negative, and What It Can Do Instead

The U.S. doesn’t need negative interest rates, because it doesn’t have the EU’s problems but it does have other problems unique to the U.S. dollar that could spell disaster if negative rates were enforced.

First is the massive market for money market funds, which are more important to daily market functioning in the U.S. than in Europe and Japan. If interest rates go negative, the funds could see large-scale outflows, which could disrupt short-term funding for businesses, banks and perhaps even the Treasury. Consumers could also face new charges to make up for bank losses.

Second, the U.S. dollar is inextricably tied up with the market for interest rate derivatives, which is currently valued at over $500 trillion. As proprietary analyst Rob Kirby explains, the economy would crash if interest rates went negative, because the banks holding the fixed-rate side of the swaps would have to pay the floating-rate side as well. The derivatives market would go down like a stack of dominoes and take the U.S. economy with it.

Perhaps in tacit acknowledgment of those problems, Fed Chairman Jay Powell responded to a question about negative interest rates on September 18:

Negative interest rates [are] something that we looked at during the financial crisis and chose not to do. After we got to the effective lower bound [near-zero effective federal funds rate], we chose to do a lot of aggressive forward guidance and also large-scale asset purchases. …

And if we were to find ourselves at some future date again at the effective lower bound–not something we are expecting–then I think we would look at using large-scale asset purchases and forward guidance.

I do not think we’d be looking at using negative rates.

Assuming the large-scale asset purchases made at some future date were of federal securities, the federal government would be financing its debt virtually interest-free, since the Fed returns its profits to the Treasury after deducting its costs. And if the bonds were rolled over when due and held by the Fed indefinitely, the money could be had not only interest-free but debt-free. That is not radical theory but is what is actually happening with the Fed’s bond purchases in its earlier QE. When it tried to unwind those purchases last fall, the result was a stock market crisis. The Fed is learning that QE is a one-way street.

The problem under existing law is that neither the president nor Congress has control over whether the “independent” Fed buys federal securities. But if Trump can’t get Powell to agree over lunch to these arrangements, Congress could amend the Federal Reserve Act to require the Fed to work with Congress to coordinate fiscal and monetary policy. This is what Japan’s banking law requires, and it has been very successful under Prime Minister Shinzō Abe and “Abenomics.” It is also what a team of former central bankers led by Philipp Hildebrand proposed in conjunction with last month’s Jackson Hole meeting of central bankers, after acknowledging the central bankers’ usual tools weren’t working. Under their proposal, central bank technocrats would be in charge of allocating the funds, but better would be the Japanese model, which leaves the federal government in control of allocating fiscal policy funds.

The Bank of Japan now holds nearly half of Japan’s federal debt, a radical move that has not triggered hyperinflation as monetarist economists direly predicted. In fact, the Bank of Japan can’t get the country’s inflation rate even to its modest 2 percent target. As of August, the rate was an extremely low 0.3%. If the Fed were to follow suit and buy 50% of the U.S. government’s debt, the Treasury could swell its coffers by $11 trillion in interest-free money. And if the Fed kept rolling over the debt, Congress and the president could get this $11 trillion not only interest-free but debt-free. President Trump can’t get a better deal than that.

This article was first posted on Truthdig.com.

Will the IMF, FED, Negative Interest and Digital Money Kill the Western Economy?

The IMF, has been instrumental in helping destroying the economy of a myriad of countries, notably, and to start with, the new Russia after the fall of the Soviet Union, Greece, Ukraine and lately Argentina, to mention just a few. Madame Christine Lagarde, as chief of the IMF had a heavy hand in the annihilation of at least the last three mentioned. She is now taking over the Presidency of the European Central Bank (ECB). There, she expects to complete the job that Mario Draghi had started but was not quite able to finish: Further bleeding the economy of Europe, especially southern Europe into anemia.

Let’s see what we may have in store to come.

Negative interest, we have it already. It’s the latest banking fraud stealing money from depositors to give to large borrowers. It’s a reverse cross-subsidy, the poor financing the rich. That’s the essence. It’s a new form of moving money from the bottom to the top. Now, a Danish bank has launched the world’s first negative interest rate mortgage. It provides mortgages to home owners for a negative rate of 0.5%. The bank pays borrowers to take some money off their books. Of course, as usual, only relatively well-off people can become home owners and benefit from this reverse cross-subsidy. It is a token gesture, duping the public at large into believing that they are benefitting from the new banking stint. The bulk of such operations serve large corporations.

The borrower pays back less than the full loan amount. Switzerland may soon go into the direction of Denmark. Bank deposits with central banks pay negative interest almost everywhere in the western world, except in the US – yet. It’s only a question of time until the average consumer will have to reimburse the banks for their central bank deposit expenses, meaning, the customers are getting negative interest on their deposits. That’s inflation camouflage. A sheer fraud, but all made legal by a system that runs amok, that does not follow any ethics or legal standards. A totally deregulated western private banking system, compliments of the 1990s Clinton Administration, and, of course, his handlers. As Professor Michael Hudson calls it, financial barbarism. We are haplessly enslaved in this aberrant ever more abusive private  fiat money banking shenaniganism.

RT’s Max Keiser recently interviewed Karl Denninger of Market-Ticker.org. Denninger told Keiser:

Negative yielding bond is forced inflationary instrument: you buy it, you’re guaranteed inflation in the amount of a negative yield.

He blasted the tool as plain “theft” by any government that issues these bonds, which is done in an effort to nominally expand a country’s GDP.

If the government is issuing more in sovereign debt their GDP is expanding in nominal terms. If you have negative interest rates on those government bonds, you’re creating excess space for the government to run the fiscal deficit […] in excess of GDP expansion. Nobody in any civilized nation should allow this to happen because it is theft, on the scale of that differential, from everybody in the economy,

To make sure the little saver doesn’t think about depositing his savings under his mattress or in a hole in the ground instead of bringing it to the bank, money will be digitized and cash will disappear. Madame Lagarde has already more than hinted at that, when she gave a pre-departure speech at the IMF – explaining on how she sees the future of monetary banking. The future, according to her, being no more than 15 to 20 years away, is a no-cash society. Just enough time for the elder generations, those that may still feel an instinct of rejection and have some consciousness about personal privacy, those that may resist money digitization, may have died out. The young, up-and-coming age groups may be brainwashed enough to find a cashless society so cool.

Since Madame Lagarde is moving to head the ECB in Frankfurt, it is fair to assume that Europe will be one of the largest test grounds for digitized money; i.e., towards a cashless society. In fact, it is already a test ground. Many department stores and other shops in Nordic countries — Sweden, Norway, Denmark, Finland — do no longer accept cash, only electronic money. In Denmark already up of 80% of all monetary transactions are made digitally.

Imagine, for your chewing gum wrapper, pack of cigarette, or candy bar, you swipe a card in front of an electronic eye, and bingo, you have paid, not touching any money – “that’s mega cool!”.  That’s what the young people may think, oblivious to leaving a trail of personal data behind, among them their bank account details, their GPS-geared location, what they are shopping, a pattern of data that is in ten years-time expected to amount to about 70,000 points of information about an individual’s characteristics, emotions, preferences, photos, personal contacts… what Cambridge Analytica in the superb documentary “The Great Hack” revealed as already today on average 5,000 points of data per citizen. The system will know you inside out better than you know yourself. And you will be exposed to algorithms that know exactly how to influence every action, every move of yours. Cool!

That, combined with face recognition which is advancing rapidly around the globe, will be super cool.

A horrendous trial on how an entire country, India, with the world’s second largest population, may react to demonization, was introduced in 2016 by President Modi, bending to the pressure of the western financial system, with support of the IMF and implementation funding by USAID. It amounted in a disastrous and cruel demonetization, invalidating almost over-night the most popular 100 Rupee (Rs) bank note, replacing it with a 200 Rs note which in most places, especially in rural towns, where banks are scarce, was not available. Never mind that less than half of the Indian population has a bank account, where the bank note exchange transactions had to be carried out.

The sudden disappearance of the most popular bank note – more than 80% of all monetary cash transactions in India took place in 100 Rs notes – was a proxy to digitization of money. Countless people starved to death especially in rural areas, because their 100 Rs were declared worthless and became unacceptable to buy food.

The 340,000 citizens of Iceland have already a fully digitized e-ID, now moving towards a mobile ID; i.e., accessible through your smart phone uniting every possible data that belongs to you, from medical records to insurance policies, all the way to dog, cat and car registrations. You name it. Most say they trust their government and are not unhappy with their divulging their most intimate data. Many have no or little idea, though, to what extent the private sector is involved in setting up such a hermetic countrywide data bank for the government. Even if the regulator is within the government and you trust your government, how much can you trust the profit-oriented private sector in protecting your data?

The surveillance state that you, among other clandestine intrusions into your privacy, will allow by willy-nilly accepting digitization of money, and eventually digitization of your entire private data, pales Orwell’s imagination of “1984”. Every citizen is registered in every western “security agency’s” electronic data bank, and, of course, those of the empire and Middle East affiliate, Israel, CIA, NSA, FBI, Mossad, and so on.  No escaping anymore.

It just so happens that you, dear citizen, are oblivious to all of what is going on behind your back, since your attention will be captured by massive marketing and directed towards the nefarious machinations of the corporate elite-ruled, globalized world, making you an eternal and ever-more intense consumer. You must spend the last penny of your income on trendy stuff, all those fashion things that will be pumped non-stop day-in-day-out into your brain, what’s left of it, by propaganda on television, radio, electronic cartoon-like billboards, internet, and that at every turn you take. And let’s not forget sports events.  They increase every year and are the most direct deviation tactic take-over from the Roman Empire.

The most aberrant trends will be cool, like shredded jeans, for which you pay a premium, body-paintings called tattoos, footballer hair styles, because they are fashionable and your looks are key to fit into a standardized, globalized society that has seized thinking for itself, no more interest in politics, in what your non-democratically elected representatives decide for you. It’s what Noam Chomsky calls the marginalization of the populace.

You are made to believe that you are living in a democracy where you can do what you want, shop what you want, watch what you want, and even when the elections or occasional referenda are offered to request your opinions, you are cheated into believing your choice is free. Of course, it is not. It is all programmed. Algorithms drawing on your profile of 70,000 points of information on emotions, desires and dreams, will clandestinely help the ‘system’ to enslave, cheat and master you, and you won’t even notice.

That’s where we are headed, largely thanks to digitalization of money – but not only, because surveillance will also follow all your steps on internet, on Facebook, Twitter, Instagram, Whatsapp – and many more of those especially created marketing tools, implanted in societies’ social media, that make life and communication so much easier.

And there is more to digital money. Much more. In 2014, the unelected European Commission (EC) has put on its books of regulations, following a similar decree in the US, the rule that an overextended bankrupt too-big-to-fail private bank will no longer be rescued by the state, by your tax money – which used to be called a “bail-out”. Instead, there will be “bail-ins”, meaning that the bank will seize your deposits, your savings and sanitize itself with money stolen from you. You have no choice. There will be no ‘run on the banks’  because there is no cash to withdraw. We have seen signs of this when Greece collapsed after 2010, and cash machines spitting out no more than 20 € per day, if at all. For many Greek citizens, especially the poorer class living from day to day, this meant often cruel starvation.

Bail-ins are little talked about, but they happen already today and ever more so. In 2014, the Austrian bank Hypo Alpe Adria – the Heta Asset Resolution AG, was given green light by the Austrian Banking Regulator, the Austrian Financial Market Authority (FMA), to refinance itself by a so-called “haircut” of an average 54%, meaning, stealing 54% of depositors’ money.

But the first and largest “haircut” test took place in Cyprus, when in 2013 the Bank of Cyprus depositors lost about 47.5% in a “haircut” to bail out their bank. Of course, the big sharks were forewarned, so they could withdraw their money in time and transfer it abroad.1

It could get worse. The state, tax authority, an institution, a corporation says you owe them money which you deny, possibly for a good reason, but they have access to your bank account and just seize the amount they pretend is their due. You are powerless against these tyrannical monsters and may have to hire expensive legal service to get your stolen money back if at all. Because the “system” is run by the “system”. And once that level has been reached, a form of Full Spectrum Dominance, a key target of the PNAC (Plan for a New American Century), there is hardly any escaping. That has all happened already, in front of our publicity-blinded eyes, little spoken about, the trend is growing and this even without necessarily a digitized world.

Is it that the kind of society you want?

Then there are the rather prominent gurus who bet on gold and bitcoins to replace the faltering dollar, like a last-ditch solution. None of them is any more viable than the fiat dollar. Gold is highly volatile due to its vulnerability for manipulation – as it is largely controlled by the BIS (Bank for International Settlement, in Basle, Switzerland, also called the central bank of all central banks, and yes, the same bank that helped the FED finance Hitler’s war against the Soviet Union.  (So you see where this bank is coming from.) It is entirely privately owned and largely controlled by the Rothschild clan. And as an associated side note — few people talk about it — there is in excess of 100 times more paper gold in circulation than you could ever cash in, if you needed it. It is another one of those bank-invented ‘derivative’ bubbles that will explode and serve to enrich them when the time is ripe.

Bitcoins, the most prominent of some 3,000 to 4,000 cryptocurrencies flooding the world, is totally unreliable. A year after it was created in 2008 allegedly by an unknown person or group of people using the name Satoshi Nakamoto, bitcoin’s value in 2009 was US$ 0.08, It gradually rose and eventually jumped in December 2017 briefly above US$ 20,000, but dropped within a year to about US$ 3,500. Today bitcoin is hovering around US$ 9,500 (August/September 2019). Bitcoin – along with other cryptocurrencies – is highly speculative, lends itself to Mafia-type money-laundering and other fraudulent transactions. It is about equivalent to fiat money and certainly inept to be the backing for a monetary system.

And let’s not forget, the latest Facebook initiative — a cryptocurrency, the Libra, to be launched in 2020 out of Geneva, Switzerland – is expected to dominate within a few years 70% to 80% of the international money market. You see, the same clan that has been manipulating and cheating you with the dollar, is now ‘banking’ on you falling for the Facebook currency  as it will be so easy to use your smart phone for any kind of monetary transaction, thus, avoiding traditional predatory banking. Looks like a good thing at the outside – right? – Nope! It’s entirely privately owned and run by an unscrupulous mafia that is being set up to continue milking the masses for the benefits of an ever-smaller elite.

There is ,however, a role for blockchain cryptocurrencies, to circumvent private banking, those that are government controlled and regulated. China and Russia are about to launch their government-controlled cryptocurrencies and others – Iran, Venezuela, India – are following in the same steps. But they all ban privately run cryptocurrencies in their countries and rightly so. A combination of government-regulated blockchain cryptos and public banking, where no private profits are in the fore, but rather the well being of the citizen and the country’s economy, may be a viable solution into a new monetary scheme, protected from the kleptocracy of western banking.

Desperation about the dollar losing its world hegemony is growing – and growing fast. To salvage the western fiat monetary system, Madame Lagarde and others are also talking about some kind of Special Drawing Rights (SDR) to replace the dollar as a reserve currency, since there is no escaping – the dollar as reserve currency is doomed. The current IMF SDR basket consists of five currencies, the US-dollar (weighing 41.73%), the British Pound (8.02%) the Euro (30.93%), the Japanese Yen (8.33%) and since 2017 the Chinese Yuan, the currency of the world’s largest economy compared by Purchasing Power GDP (10.92%).

At this point thinking of any reshuffling of the SDR basket’s contents is purely speculative. However, it can easily be assumed that the dollar would remain in a very prominent position within the basket, as it should remain the leading hegemon of world economy. Let’s not forget, the US Treasury controls the IMF with an absolute veto, in other words, 100%. It can also be assumed that the Chinese Yuan would either be kicked out altogether or would be given a minor weight in the basket so to diminish its role. If this was to become the chosen option by the US Treasury, it could and probably might prompt China to withdraw the Yuan from the SDR basket, as the Yuan does no longer need SDR recognition in the world to be considered a primary reserve currency.

Unless this is stealthily done — outside of public sight and in disguise of countries still holding major US-dollar reserves — the world would unlikely accept such an alternative, especially since it is widely known among treasurers of countries around the globe that the Chinese Yuan is rapidly raising to become the key world reserve currency.

As reported by William Engdahl’s analytical essay “Is the Fed Preparing to Topple the US Dollar?”, the outgoing Governor of the Bank of England, Mark Carney, delivered at the recent annual meeting of central bankers in Jackson Hole, Wyoming, a set of ideas that went into a similar direction, towards a shift away from the dominant role of the US dollar as a reserve currency. Similar to Mme. Lagarde’s earlier remarks about an SDR-type reserve currency, he made it understood that though the Chinese Yuan, the currency of the key trading nation, may have a role in the basket, it would – for now – not be an important one. He also was clear about the current disturbing and destabilizing imbalance where a faltering dollar still pretends to hold the hegemonic scepter over the world economy.

Keeping the dollar still in a leading role, while the US economy is declining, was no longer a viable option for an increasingly globalized world economy. Carney was hinting at a multipolar monetary and reserve system for a multipolar globalized world. Similar remarks came from former New York Federal Reserve Bank chief, Bill Dudley. However, Dudley, hinted that for the United States to give up her dollar dominance, the backbone for her world hegemony, may not come voluntarily. Might that lead to a major, maybe armed world conflict?

Much of this is speculation from the western perspective. It is, however, clear that there is a tremendous and mounting uneasiness about the western dollar-based fiat monetary system, backed by nothing, not even by the western economy. You compare this with the Chinese Yuan and the Russian Ruble, both backed by gold and – more importantly – by their own economy. It becomes increasingly clear that much of the speculation and efforts by influential central banking figures to save the western monetary Ponzi scheme maybe just propaganda to calm the minds of western financiers – holding them back from jumping ship.

• First published in New Eastern Outlook (NEO)

  1. See: Peter Koenig: “Infringing upon the Eurozone’s Sovereignty on behalf of Wall Street.  The EBC’s “Haircut” Measures, Undermining Trade and Investment with Russia and China“, Global Research, November 7, 2015; and Peter Koenig, “Retrenchment, Robotization and Crypto-Currencies: The Runaway Train Towards Full Digitization of Money and Labor“, Global Research, December 27, 2017.

The Key to a Sustainable Economy Is 5,000 Years Old

We are again reaching the point in the business cycle known as “peak debt,” when debts have compounded to the point that their cumulative total cannot be paid. Student debt, credit card debt, auto loans, business debt and sovereign debt are all higher than they have ever been. As economist Michael Hudson writes in his provocative 2018 book, “…and forgive them their debts,” debts that can’t be paid won’t be paid. The question, he says, is how they won’t be paid.

Mainstream economic models leave this problem to “the invisible hand of the market,” assuming trends will self-correct over time. But while the market may indeed correct, it does so at the expense of the debtors, who become progressively poorer as the rich become richer. Borrowers go bankrupt and banks foreclose on the collateral, dispossessing the debtors of their homes and their livelihoods. The houses are bought by the rich at distress prices and are rented back at inflated prices to the debtors, who are then forced into wage peonage to survive. When the banks themselves go bankrupt, the government bails them out. Thus the market corrects, but not without government intervention. That intervention just comes at the end of the cycle to rescue the creditors, whose ability to buy politicians gives them the upper hand. According to free-market apologists, this is a natural cycle akin to the weather, which dates all the way back to the birth of modern economics in ancient Greece and Rome.

Hudson counters that those classical societies are not actually where our financial system began, and that capitalism did not evolve from bartering, as its ideologues assert. Rather, it devolved from a more functional, sophisticated, egalitarian credit system that was sustained for two millennia in ancient Mesopotamia (now parts of Iraq, Turkey, Kuwait and Iran). Money, banking, accounting and modern business enterprise originated not with gold and private trade, but in the public sector of Sumer’s palaces and temples in the third century B.C. Because it involved credit issued by the local government rather than private loans of gold, bad debts could be periodically forgiven rather than compounding until they took the whole system down, a critical feature that allowed for its remarkable longevity.

The True Roots of Money and Banking

Sumer was the first civilization for which we have written records. Its notable achievements included the wheel, the lunar calendar, our numerical system, law codes, an organized hierarchy of priest-kings, copper tools and weapons, irrigation, accounting and money. It also produced the first written language, which took the form of cuneiform figures impressed on clay. These tablets were largely just accounting tools, recording the flow of food and raw materials in the temple and palace workshops, as well as IOUs (mainly to these large public institutions) that had to be preserved in writing to be enforced. This temple accounting system allowed for the coordinated flow of credit to peasant farmers from planting to harvesting, and for advances to merchants to engage in foreign trade.

In fact, it was the need to manage accounts for a large labor force under bureaucratic control that is thought to have led to the development of writing. The people willingly accepted this bureaucratic control because they viewed the gods as having decreed it. According to their cuneiform writings, humans were created to work in the fields and the mines after certain lower gods tasked with that hard labor rebelled.

Usury, or the charging of interest on loans, was an accepted part of the Mesopotamian credit system. Interest rates were high and remained unchanged for two millennia. But Mesopotamian scholars were well aware of the problem of “debts that can’t be paid.” Unlike in today’s academic economic curriculum, Hudson writes:

Babylonian scribal students were trained already c. 2000 BC in the mathematics of compound interest. Their school exercises asked them to calculate how long it took a debt at interest of 1/60th per month to double. The answer is 60 months: five years. How long to quadruple? 10 years. How long to multiply 64 times? 30 years. It must’ve been obvious that no economy can grow in keeping with this rate of increase.

Sumerian kings solved the problem of “peak debt” by periodically declaring “clean slates,” in which agrarian debts were forgiven and debtors were released from servitude to work as tenants on their own plots of land. The land belonged to the gods under the stewardship of the temple and the palace and could not be sold, but farmers and their families maintained leaseholds to it in perpetuity by providing a share of their crops, service in the military and labor in building communal infrastructure. In this way, their homes and livelihoods were preserved, an arrangement that was mutually beneficial, since the kings needed their service.

Jewish scribes, who spent time in captivity in Babylon in the sixth century B.C, adapted these laws in the year or jubilee, which Hudson argues was added to Leviticus after the Babylonian captivity. According to Leviticus 25:8-13, a Jubilee Year was to be declared every 49 years, during which debts would be forgiven, slaves and prisoners freed and their property leaseholds restored. As in ancient Mesopotamia, property ownership remained with Yahweh and his earthly proxies. The Jubilee law effectively banned the outright sale of land, which could only be leased for up to 50 years (Leviticus 25:14-17). The Levitican Jubilee represented an advance over the Mesopotamian “clean slates,” Hudson says, in that it was codified into law rather than relying on the whim of the king. But its proclaimers lacked political power, and whether the law was ever enforced is unclear. It served as a moral rather than a legal prescription.

Ancient Greece and Rome adopted the Mesopotamian system of lending at interest, but without the safety valve of periodic “clean slates,” since the creditors were no longer the king or the temple, but private lenders. Unfettered usury resulted in debt bondage and forfeiture of properties, consolidation into large landholdings, a growing wedge between rich and poor, and the ultimate destruction of the Roman Empire.

As for the celebrated development of property rights and democracy in ancient Greece and Rome, Hudson argues that they did not actually serve the poor. They served the rich, who controlled elections, just as rich donors do today. Taking power away from local governments by privatizing once-communal lands allowed private creditors to pass laws by which they could legally confiscate property when their debtors could not pay. “Free markets” meant the freedom to accumulate massive wealth at the expense of the poor and the state.

Hudson maintains that when Jesus Christ preached “forgiveness of debts,” he was also talking about economic debt, not just moral transgressions. When he overturned the tables of the money changers, it was because they had turned a house of prayer into “a den of thieves.” But creditors’ rights had by then gained legal dominance, and Christian theologians lacked the power to override them. Rather than being a promise of economic redemption in this life, forgiveness of debts thus became a promise of spiritual redemption in the next.

How to Pull Off a Modern Debt Jubilee

Such has been the fate of debtors in modern Western economies. But in some modern non-Western economies, vestiges of the debt write-off solution remain. In China, for instance, nonperforming loans are often carried on the books of state-owned banks or canceled rather than putting insolvent debtors and banks into bankruptcy. As Dinny McMahon wrote in June in an article titled “China’s Bad Data Can Be a Good Thing”:

In China, the state stands behind the country’s banks. As long as authorities ensure those banks have sufficient liquidity to meet their obligations, they can trundle along with higher delinquency levels than would be regarded safe in a market economy.

China’s banking system, like that of ancient Mesopotamia, is largely in the public sector, so the state can back its banks with liquidity as needed. Interestingly, the Chinese state also preserves the ancient Near Eastern practice of retaining ownership of the land, which citizens can only lease for a period of time.

In Western economies, most banks are privately owned and heavily regulated, with high reserve and capital requirements. Bad loans mean debtors are put into foreclosure, jobs and capital infrastructure are lost, and austerity prevails. The Trump administration is now aggressively pursuing a trade war with China in an effort to level the playing field by forcing it into the same austerity regime, but a more productive and sustainable approach might be for the U.S. to engage in periodic debt jubilees itself.

The problem with that solution today is that most debts in Western economies are owed not to the government but to private creditors, who will insist on their contractual rights to payment. We need to find a way to pay the creditors while relieving the borrowers of their debt burden.

One possibility is to nationalize insolvent banks and sell their bad loans to the central bank, which can buy them with money created on its books. The loans can then be written down or voided out. Precedent for this policy was established with “QE1,” the Fed’s first round of quantitative easing, in which it bought unmarketable mortgage-backed securities from banks with liquidity problems.

Another possibility would be to use money generated by the central bank to bail out debtors directly. This could be done selectively, by buying up student debt or credit card debt or car loans bundled as “asset-backed securities,” then writing the debts down or off, for example. Alternatively, debts could be relieved collectively with a periodic national dividend or universal basic income paid to everyone, again drawn from the deep pocket of the central bank.

Critics will object that this would dangerously inflate the money supply and consumer prices, but that need not be the case. Today, virtually all money is created as bank debt, and it is extinguished when the debt is repaid. That means dividends used to pay this debt down would be extinguished, along with the debt itself, without adding to the money supply. For the 80% of the U.S. population now carrying debt, loan repayments from their national dividends could be made mandatory and automatic. The remaining 20% would be likely to save or invest the funds, so this money too would contribute little to consumer price inflation; and to the extent that it did go into the consumer market, it could help generate the demand needed to stimulate productivity and employment. (For a fuller explanation, see Ellen Brown, “Banking on the People,” 2019).

In ancient Mesopotamia, writing off debts worked brilliantly well for two millennia. As Hudson concludes:

To insist that all debts must be paid ignores the contrast between the thousands of years of successful Near Eastern clean slates and the debt bondage into which [Greco-Roman] antiquity sank. … If this policy in many cases was more successful than today’s, it is because they recognized that insisting that all debts must be paid meant foreclosures, economic polarization and impoverishment of the economy at large.

• This article was first posted on Truthdig.com

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