Category Archives: Federal Reserve

QE Forever: The Fed’s Dramatic About-face

“Quantitative easing” was supposed to be an emergency measure. The Federal Reserve “eased” shrinkage in the money supply due to the 2008-09 credit crisis by pumping out trillions of dollars in new bank reserves. After the crisis, the presumption was that the Fed would “normalize” conditions by sopping up the excess reserves through “quantitative tightening” (QT) – raising interest rates and selling the securities it had bought with new reserves back into the market.

The Fed relentlessly pushed on with quantitative tightening through 2018, despite a severe market correction in the fall. In December, Fed Chairman Jerome Powell said that QT would be on “autopilot,” meaning the Fed would continue to raise interest rates and to sell $50 billion monthly in securities until it hit its target. But the market protested loudly to this move, with the Nasdaq Composite Index dropping 22% from its late-summer high.

Worse, defaults on consumer loans were rising. December 2018 was the first time in two years that all loan types and all major metropolitan statistical areas showed a higher default rate month-over-month. Consumer debt – including auto, student and credit card debt – is typically bundled and sold as asset-backed securities similar to the risky mortgage-backed securities that brought down the market in 2008 after the Fed had progressively raised interest rates.

Chairman Powell evidently got the memo. In January, he abruptly changed course and announced that QT would be halted if needed. On February 4th, Mary Daly, president of the Federal Reserve Bank of San Francisco, said they were considering going much further. “You could imagine executing policy with your interest rate as your primary tool and the balance sheet as a secondary tool, one that you would use more readily,” she said. QE and QT would no longer be emergency measures but would be routine tools for managing the money supply. In a February 13th article on Seeking Alpha titled “Quantitative Easing on Demand,” Mark Grant wrote:

If the Fed does decide to pursue this strategy it will be a wholesale change in the way the financial system in the United States operates and I think that very few institutions or people appreciate what is taking place or what it will mean to the markets, all of the markets.

The Problem of Debt Deflation

The Fed is realizing that it cannot bring its balance sheet back to “normal.” It must keep pumping new money into the banking system to avoid a recession. This naturally alarms Fed watchers worried about hyperinflation. But QE need not create unwanted inflation if directed properly. The money spigots just need to be aimed at the debtors rather than the creditor banks. In fact, regular injections of new money directly into the economy may be just what the economy needs to escape the boom and bust cycle that has characterized it for two centuries. Mark Grant concluded his article by quoting Abraham Lincoln:

The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.

The quote is apparently apocryphal, but the principle still holds: new money needs to be regularly added to the money supply to avoid an overwhelming debt burden and allow the economy to reach its true productive potential. Regular injections of new money are necessary to avoid something economists fear even more than inflation – the sort of “debt deflation” that took down the economy in the 1930s.

Most money today is created by banks when they make loans. When overextended borrowers pay down old loans without taking out new ones, the money supply “deflates” or shrinks. Demand shrinks with it, and businesses lacking customers close their doors, in the sort of self-feeding death spiral seen in the Great Depression.

As Australian economist Steve Keen observes, today the level of private debt is way too high, and that is why so little lending is occurring. But mainstream economists consider the rate of growth of debt to be irrelevant to macroeconomic policy, because lending is thought to simply redistribute spending power from savers to investors. Conventional economic theory says that banks are merely intermediaries, recirculating existing money rather than creating spending power in their own right. But this is not true, says Prof. Keen. Banks actually create new money when they make loans. He cites the Bank of England, which said in its 2014 quarterly report:

[B]anks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. . . .

In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

Loans create deposits, and deposits make up the bulk of the money supply. Money today is created by banks as a debt on their balance sheets, and more is always owed back than was created, since the interest claimed by the banks is not created in the original loan. Debt thus grows faster than the money supply. When overextended borrowers quit taking out the new loans needed to repay old loans, the gap widens even further. The result is debt deflation – a debt-induced reduction in the new money needed to stimulate economic activity and growth. Thus the need for injections of new money to fill the gap between debt and the money available to repay it.

However, the money created through QE to date has not gone to the consuming public, where it must go to fill this gap. Rather, it has gone to the banks, which have funneled it into the speculative financialized markets. Nomi Prins calls this “dark money” – the trillions of dollars flowing yearly in and around global stock, bond and derivatives markets generated by central banks when they electronically fabricate money by buying bonds and stocks. She writes, “These dark money flows stretch around the world according to a pattern of power, influence and, of course, wealth for select groups.” She shows graphically that the rise in dark money is directly correlated with the rise in financial markets.

QE has worked to reverse the debts of the banks and to prop up the stock market, but it has not relieved the debts of consumers, businesses or governments; and it is these debts that will trigger the sort of debt deflation that can take the economy down. Keen concludes that “no amount of exhorting banks to ‘Intermediate’ will end the drought in credit growth that is the real cause of The Great Malaise.” The only way to reduce the private debt burden without causing a depression, he says, is a Modern Debt Jubilee or People’s Quantitative Easing.

QE-funded Debt Relief

In antiquity, as Prof. Michael Hudson observes, debts were routinely forgiven when a new ruler took the throne. The rulers and their advisors knew that debt at interest grew faster than the money supply and that debt relief was necessary to avoid economic collapse from an overwhelming debt overhang. Economic growth is arithmetic and can’t keep up with the exponential growth of debt growing at compound interest.

Consumers need that sort of debt relief today, but simply voiding out their debts as was done in antiquity will not work because the debts are not owed to the government. They are owed to banks and private investors who would have to bear the loss. The alternative suggested by Keen and others is to fill the debt gap with a form of QE dropped not into bank reserve accounts but digitally into the bank accounts of the general public. Debtors could then use the money to pay down their debts. In fact, Keen says it should go first to pay down debts. Non-debtors would receive a cash injection.

Properly managed, these injections need not create inflation. (See my earlier article here.) Money is created as loans and extinguished when they are paid off, so the money used to pay down debt would be extinguished along with the debt. And the cash injections not used to pay down debt would just help fill the gap between real and potential productivity, allowing demand and supply to rise together, keeping prices stable.

A regular injection of money into personal bank accounts has been called a “universal basic income,” but better would be to call it a “national dividend” – something all citizens are entitled to equally, without regard to economic status or ability to work. It would serve as a safety net for people living paycheck to paycheck, but the larger purpose would be as economic policy to stimulate demand and productivity, keeping the wheels of industry turning.

Money might then indeed become a servant of humanity, transformed from a tool of oppression into a means of securing common prosperity. But first the central bank needs to become a public servant. It needs to be made a public utility, responsive to the needs of the people and the economy.

• This article was first published on Truthdig.com.

Why Germany Leads in Renewables: It Has Its Own Green Bank

The Green New Deal endorsed by Alexandria Ocasio-Cortez and more than 40 other US Representatives has been criticized as imposing a too-heavy burden on the rich and upper-middle-class taxpayers who will have to pay for it, but taxing the rich is not what the Green New Deal resolution proposes. It says funding will come primarily from certain public agencies, including the Federal Reserve and “a new public bank or system of regional and specialized public banks.”

Funding through the Federal Reserve may be controversial, but establishing a national public infrastructure and development bank should be a no-brainer. The real question is why we don’t already have one, like China, Germany, and other countries that are running circles around us in infrastructure development. Many European, Asian and Latin American countries have their own national development banks, as well as belonging to bilateral or multinational development institutions that are jointly owned by multiple governments. Unlike the US Federal Reserve, which considers itself “independent” of government, national development banks are wholly owned by their governments and carry out public development policies.

China not only has its own China Infrastructure Bank but has established the Asian Infrastructure Investment Bank, which counts many Asian and Middle Eastern countries in its membership, including Australia, New Zealand, and Saudi Arabia. Both banks are helping to fund China’s trillion-dollar “One Belt One Road” infrastructure initiative. China is so far ahead of the United States in building infrastructure that Dan Slane, a former advisor on President Trump’s transition team, has warned, “If we don’t get our act together very soon, we should all be brushing up on our Mandarin.”

The leader in renewable energy, however, is Germany, called “the world’s first major renewable energy economy.” Germany has a public sector development bank called KfW (Kreditanstalt für Wiederaufbau or “Reconstruction Credit Institute”), which is even larger than the World Bank. Along with Germany’s non-profit Sparkassen banks, KfW has largely funded the country’s green energy revolution.

Unlike private commercial banks, KfW does not have to focus on maximizing short-term profits for its shareholders while turning a blind eye to external costs, including those imposed on the environment. The bank has been free to support the energy revolution by funding major investments in renewable energy and energy efficiency. Its fossil fuel investments are close to zero. One of the   key features of KFW, as with other development banks, is that much of its lending is driven in a strategic direction determined by the national government. Its key role in the green energy revolution has been played within a public policy framework under Germany’s renewable energy legislation, including policy measures that have made investment in renewables commercially attractive.

KfW is one of the world’s largest development banks, with assets as of December 2017 of $566.5 billion. Ironically, the initial funding for its capitalization came from the United States, through the Marshall Plan in 1948. Why didn’t we fund a similar bank for ourselves? Apparently because powerful Wall Street interests did not want the competition from a government-owned bank that could make below-market loans for infrastructure and development. Major US investors today prefer funding infrastructure through public-private partnerships, in which private partners can reap the profits while losses are imposed on local governments.

KfW and Germany’s Energy Revolution

Renewable energy in Germany is mainly based on wind, solar and biomass. Renewables generated 41% of the country’s electricity in 2017, up from just 6% in 2000; and public banks provided over 72% of the financing for this transition. In 2007-09, KfW funded all of Germany’s investment in Solar Photovoltaic. After that, Solar PV was introduced nationwide on a major scale. This is the sort of catalytic role that development banks can play, kickstarting a major structural transformation by funding and showcasing new technologies and sectors.

KfW is not only one of the biggest but has been ranked one of the two safest banks in the world. (The other is also a publicly-owned bank, the Zurich Cantonal Bank in Switzerland.) KfW sports triple-A ratings from all three major rating agencies, Fitch, Standard and Poor’s, and Moody’s. The bank benefits from these top ratings and from the statutory guarantee of the German government, which allow it to issue bonds on very favorable terms and therefore to lend on favorable terms, backing its loans with the bonds.

KfW does not work through public-private partnerships, and it does not trade in derivatives and other complex financial products. It relies on traditional lending and grants. The borrower is responsible for loan repayment. Private investors can participate, but not as shareholders or public-private partners. Rather, they can invest in “Green Bonds,” which are as safe and liquid as other government bonds and are prized for their green earmarking. The first “Green Bond – Made by KfW” was issued in 2014 with a volume of $1.7 billion and a maturity of five years. It was the largest Green Bond ever at the time of issuance and generated so much interest that the order book rapidly grew to $3.02 billion, although the bonds paid an annual coupon of only 0.375%. By 2017, the issue volume of KfW Green Bonds was $4.21 billion.

Investors benefit from the high credit and sustainability ratings of KfW, the liquidity of its bonds, and the opportunity to support climate and environmental protection. For large institutional investors with funds that exceed the government deposit insurance limit, Green Bonds are the equivalent of savings accounts, a safe place to park their money that provides a modest interest. Green Bonds also appeal to “socially responsible” investors, who have the assurance with these simple and transparent bonds that their money is going where they want it to. The bonds are financed by KfW from the proceeds of its loans, which are also in high demand due to their low interest rates; and the bank can offer these low rates because its triple-A ratings allow it to cheaply mobilize funds from capital markets, and because its public policy-oriented loans qualify it for targeted subsidies.

Roosevelt’s Development Bank: The Reconstruction Finance Corporation

KfW’s role in implementing government policy parallels that of the Reconstruction Finance Corporation (RFC) in funding the New Deal in the 1930s. At that time US banks were bankrupt and incapable of financing the country’s recovery. Roosevelt attempted to set up a system of 12 public “industrial banks” through the Federal Reserve, but the measure failed; so he made an end run around his opponents by using the RFC that had been set up earlier by President Hoover, expanding it to address the nation’s financing needs.

The RFC Act of 1932 provided the RFC with capital stock of $500 million and the authority to extend credit up to $1.5 billion (subsequently increased several times). With those resources, from 1932 to 1957 the RFC loaned or invested more than $40 billion. As with KfW’s loans, its funding source was the sale of bonds, mostly to the Treasury itself. Proceeds from the loans repaid the bonds, leaving the RFC with a net profit. The RFC financed roads, bridges, dams, post offices, universities, electrical power, mortgages, farms, and much more; and it funded all this while generating income for the government.

The RFC was so successful that it became America’s largest corporation and the world’s largest banking organization. Its success may have been its nemesis. Without the emergencies of depression and war, it was a too-powerful competitor of the private banking establishment; and in 1957, it was disbanded under President Eisenhower. The United States was left without a development bank, while Germany and other countries were hitting the ground running with theirs.

Today some US states have infrastructure and development banks, including California; but their reach is very small. One way they could be expanded to meet state infrastructure needs would be to turn them into depositories for state and municipal revenues. Rather than lending their capital directly in a revolving fund, this would allow them to leverage their capital into 10 times that sum in loans, as all depository banks are able to do. (See my earlier article here.)

The most profitable and efficient way for national and local governments to finance public infrastructure and development is with their own banks, as the impressive track records of KfW and other national development banks have shown. The RFC showed what could be done even by a country that was technically bankrupt, simply by mobilizing its own resources through a publicly-owned financial institution. We need to resurrect that public funding engine today, not only to address the national and global crises we are facing now but for the ongoing development the country needs in order to manifest its true potential.

This article was first published on Truthdig.com.

Universal Basic Income Is Easier Than It Looks

Calls for a Universal Basic Income have been increasing, most recently as part of the Green New Deal introduced by Rep. Alexandria Ocasio-Cortez (D-NY) and supported in the last month by at least 40 members of Congress. A Universal Basic Income (UBI) is a monthly payment to all adults with no strings attached, similar to Social Security. Critics say the Green New Deal asks too much of the rich and upper-middle-class taxpayers who will have to pay for it, but taxing the rich is not what the resolution proposes. It says funding would primarily come from the federal government, “using a combination of the Federal Reserve, a new public bank or system of regional and specialized public banks,” and other vehicles.

The Federal Reserve alone could do the job. It could buy “Green” federal bonds with money created on its balance sheet, just as the Fed funded the purchase of $3.7 trillion in bonds in its “quantitative easing” program to save the banks. The Treasury could also do it. The Treasury has the constitutional power to issue coins in any denomination, even trillion dollar coins. What prevents legislators from pursuing those options is the fear of hyperinflation from excess “demand” (spendable income) driving prices up. But, in fact, the consumer economy is chronically short of spendable income, due to the way money enters the consumer economy. We actually need regular injections of money to avoid a “balance sheet recession” and allow for growth, and a UBI is one way to do it.

The pros and cons of a UBI are hotly debated and have been discussed elsewhere. The point here is to show that it could actually be funded year after year without driving up taxes or prices. New money is continually being added to the money supply, but it is added as debt created privately by banks. (How banks rather than the government create most of the money supply today is explained on the Bank of England website here.) A UBI would replace money-created-as-debt with debt-free money – a “debt jubilee” for consumers – while leaving the money supply for the most part unchanged; and to the extent that new money was added, it could help create the demand needed to fill the gap between actual and potential productivity.

The Debt Overhang Crippling Economies

The “bank money” composing most of the money in circulation is created only when someone borrows, and today businesses and consumers are burdened with debts that are higher than ever before. In 2018, credit card debt alone exceeded $1 trillion, student debt exceeded $1.5 trillion, auto loan debt exceeded $1.1 trillion, and non-financial corporate debt hit $5.7 trillion. When businesses and individuals pay down old loans rather than taking out new loans, the money supply shrinks, causing a “balance sheet recession.” In that situation, the central bank, rather than removing money from the economy (as the Fed is doing now), needs to add money to fill the gap between debt and the spendable income available to repay it.

Debt always grows faster than the money available to repay it. One problem is the interest, which is not created along with the principal, so more money is always owed back than was created in the original loan. Beyond that, some of the money created as debt is held off the consumer market by “savers” and investors who place it elsewhere, making it unavailable to companies selling their wares and the wage-earners they employ. The result is a debt bubble that continues to grow until it is not sustainable and the system collapses, in the familiar death spiral euphemistically called the “business cycle.” As economist Michael Hudson shows in his 2018 book And Forgive Them Their Debts, this inevitable debt overhang was corrected historically with periodic “debt jubilees” – debt forgiveness – something he argues we need to do again today.

For governments, a debt jubilee could be effected by allowing the central bank to buy government securities and hold them on its books. For individuals, one way to do it fairly across the board would be with a UBI.

Why a UBI Need Not Be Inflationary

In a 2018 book called The Road to Debt Bondage: How Banks Create Unpayable Debt, political economist Derryl Hermanutz proposes a central-bank-issued UBI of one thousand dollars per month, credited directly to people’s bank accounts. Assuming this payment went to all US residents over 18, or about 241 million people, the outlay would be close to $3 trillion annually. For people with overdue debt, Hermanutz proposes that it automatically go to pay down those debts. Since money is created as loans and extinguished when they are repaid, that portion of a UBI disbursement would be extinguished along with the debt.

People who were current on their debts could choose whether or not to pay them down, but many would also no doubt go for that option. Hermanutz estimates that roughly half of a UBI payout could be extinguished in this way through mandatory and voluntary loan repayments. That money would not increase the money supply or demand. It would just allow debtors to spend on necessities with debt-free money rather than hocking their futures with unrepayable debt.

He estimates that another third of a UBI disbursement would go to “savers” who did not need the money for expenditures. This money, too, would not be likely to drive up consumer prices, since it would go into investment and savings vehicles rather than circulating in the consumer economy. That leaves only about one-sixth of payouts, or $500 billion, that would actually be competing for goods and services; and that sum could easily be absorbed by the “output gap” between actual and forecasted productivity.

According to a July 2017 paper from the Roosevelt Institute called “What Recovery? The Case for Continued Expansionary Policy at the Fed”:

GDP remains well below both the long-run trend and the level predicted by forecasters a decade ago. In 2016, real per capita GDP was 10% below the Congressional Budget Office’s (CBO) 2006 forecast, and shows no signs of returning to the predicted level.

The report showed that the most likely explanation for this lackluster growth was inadequate demand. Wages have remained stagnant; and before producers will produce, they need customers knocking on their doors.

In 2017, the US Gross Domestic Product was $19.4 trillion. If the economy is running at 10% below full capacity, $2 trillion could be injected into the economy every year without creating price inflation. It would just generate the demand needed to stimulate an additional $2 trillion in GDP. In fact, a UBI might pay for itself, just as the G.I. Bill produced a sevenfold return from increased productivity after World War II.

The Evidence of China

That new money can be injected year after year without triggering price inflation is evident from a look at China. In the last 20 years, its M2 money supply has grown from just over 10 trillion yuan to 80 trillion yuan ($11.6T), a nearly 800% increase. Yet the inflation rate of its Consumer Price Index (CPI) remains a modest 2.2%.

Why has all that excess money not driven prices up? The answer is that China’s Gross Domestic Product has grown at the same fast clip as its money supply. When supply (GDP) and demand (money) increase together, prices remain stable.

Whether or not the Chinese government would approve of a UBI, it does recognize that to stimulate productivity, the money must get out there first; and since the government owns 80% of China’s banks, it is in a position to borrow money into existence as needed. For “self-funding” loans – those that generate income (fees for rail travel and electricity, rents for real estate) – repayment extinguishes the debt along with the money it created, leaving the net money supply unchanged. When loans are not repaid, the money they created is not extinguished; but if it goes to consumers and businesses that then buy goods and services with it, demand will still stimulate the production of supply, so that supply and demand rise together and prices remain stable.

Without demand, producers will not produce and workers will not get hired, leaving them without the funds to generate supply, in a vicious cycle that leads to recession and depression. And that cycle is what our own central bank is triggering now.

The Fed Tightens the Screws

Rather than stimulating the economy with new demand, the Fed has been engaging in “quantitative tightening.” On December 19, 2018, it raised the fed funds rate for the ninth time in 3 years, despite a “brutal” stock market in which the Dow Jones Industrial Average had already lost 3,000 points in 2-½ months. The Fed is still struggling to reach even its modest 2% inflation target, and GDP growth is trending down, with estimates at only 2-2.7% for 2019. So why did it again raise rates, over the protests of commentators including the president himself?

For its barometer, the Fed looks at whether the economy has hit “full employment,” which it considers to be 4.7% unemployment, taking into account the “natural rate of unemployment” of people between jobs or voluntarily out of work. At full employment, workers are expected to demand more wages, causing prices to rise. But unemployment is now officially at 3.7% – beyond technical full employment – and neither wages nor consumer prices have shot up. There is obviously something wrong with the theory, as is evident from a look at Japan, where prices have long refused to rise despite a serious lack of workers.

The official unemployment figures are actually misleading. Including short-term discouraged workers, the rate of US unemployed or underemployed workers as of May 2018 was 7.6%, double the widely reported rate. When long-term discouraged workers are included, the real unemployment figure was 21.5%. Beyond that large untapped pool of workers, there is the seemingly endless supply of cheap labor from abroad and the expanding labor potential of robots, computers and machines. In fact, the economy’s ability to generate supply in response to demand is far from reaching full capacity today.

Our central bank is driving us into another recession based on bad economic theory. Adding money to the economy for productive, non-speculative purposes will not drive up prices so long as materials and workers (human or mechanical) are available to create the supply necessary to meet demand; and they are available now. There will always be price increases in particular markets when there are shortages, bottlenecks, monopolies or patents limiting competition, but these increases are not due to an economy awash with money. Housing, healthcare, education and gas have all gone up, but it is not because people have too much money to spend. In fact, it is those necessary expenses that are driving people into unrepayable debt, and it is this massive debt overhang that is preventing economic growth.

Without some form of debt jubilee, the debt bubble will continue to grow until it can again no longer be sustained. A UBI can help correct that problem without fear of “overheating” the economy, so long as the new money is limited to filling the gap between real and potential productivity and goes into generating jobs, building infrastructure and providing for the needs of the people, rather than being diverted into the speculative, parasitic economy that feeds off them.

This article was first published on Truthdig.com

This Radical Plan to Fund the “Green New Deal” Just Might Work

With what Naomi Klein calls “galloping momentum,” the “Green New Deal” promoted by newly-elected Rep. Alexandria Ocasio-Cortez (D-NY) appears to be forging a political pathway for solving all of the ills of society and the planet in one fell swoop. It would give a House Select Committee “a mandate that connects the dots between energy, transportation, housing, as well as healthcare, living wages, a jobs guarantee” and more. But to critics even on the left it is just political theater, since “everyone knows” a program of that scope cannot be funded without a massive redistribution of wealth and slashing of other programs (notably the military), which is not politically feasible.

Perhaps, but Ocasio-Cortez and the 22 representatives joining her in calling for a Select Committee are also proposing a novel way to fund the program, one which could actually work. The resolution says funding will primarily come from the federal government, “using a combination of the Federal Reserve, a new public bank or system of regional and specialized public banks, public venture funds and such other vehicles or structures that the select committee deems appropriate, in order to ensure that interest and other investment returns generated from public investments made in connection with the Plan will be returned to the treasury, reduce taxpayer burden and allow for more investment.”  

A network of public banks could fund the Green New Deal in the same way President Franklin Roosevelt funded the original New Deal. At a time when the banks were bankrupt, he used the publicly-owned Reconstruction Finance Corporation as a public infrastructure bank. The Federal Reserve could also fund any program Congress wanted, if mandated to do it. Congress wrote the Federal Reserve Act and can amend it. Or the Treasury itself could do it, without the need even to change any laws. The Constitution authorizes Congress to “coin money” and “regulate the value thereof,” and that power has been delegated to the Treasury. It could mint a few trillion dollar platinum coins, put them in its bank account, and start writing checks against them. What stops legislators from exercising those constitutional powers is simply that “everyone knows” Zimbabwe-style hyperinflation will result. But will it? Compelling historical precedent shows that this need not be the case.

Michael Hudson, professor of economics at the University of Missouri, Kansas City, has studied the hyperinflation question extensively. He writes that those disasters were not due to government money-printing to stimulate the economy. Rather, “Every hyperinflation in history has been caused by foreign debt service collapsing the exchange rate. The problem almost always has resulted from wartime foreign currency strains, not domestic spending.”

As long as workers and materials are available and the money is added in a way that reaches consumers, adding money will create the demand necessary to prompt producers to create more supply. Supply and demand will rise together and prices will remain stable. The reverse is also true. If demand (money) is not increased, supply and GDP will not go up. New demand needs to precede new supply.

The Public Bank Option: The Precedent of Roosevelt’s New Deal

Infrastructure projects of the sort proposed in the Green New Deal are “self-funding,” generating resources and fees that can repay the loans. For these loans, advancing funds through a network of publicly-owned banks will not require taxpayer money and can actually generate a profit for the government. That was how the original New Deal rebuilt the country in the 1930s at a time when the economy was desperately short of money.

The publicly-owned Reconstruction Finance Corporation (RFC) was a remarkable publicly-owned credit machine that allowed the government to finance the New Deal and World War II without turning to Congress or the taxpayers for appropriations. First instituted in 1932 by President Herbert Hoover, the RFC was not called an infrastructure bank and was not even a bank, but it served the same basic functions. It was continually enlarged and modified by President Roosevelt to meet the crisis of the times, until it became America’s largest corporation and the world’s largest financial organization. Its semi-independent status let it work quickly, allowing New Deal agencies to be financed as the need arose.

The RFC Act of 1932 provided the RFC with capital stock of $500 million and the authority to extend credit up to $1.5 billion (subsequently increased several times). The initial capital came from a stock sale to the US Treasury. With those resources, from 1932 to 1957 the RFC loaned or invested more than $40 billion. A small part of this came from its initial capitalization. The rest was borrowed, chiefly from the government itself. Bonds were sold to the Treasury, some of which were then sold to the public; but most were held by the Treasury. The RFC ended up borrowing a total of $51.3 billion from the Treasury and $3.1 billion from the public.

Thus the Treasury was the lender, not the borrower, in this arrangement. As the self-funding loans were repaid, so were the bonds that were sold to the Treasury, leaving the RFC with a net profit. The RFC was the lender for thousands of infrastructure and small business projects that revitalized the economy, and these loans produced a total net income of $690,017,232 on the RFC’s “normal” lending functions (omitting such things as extraordinary grants for wartime). The RFC financed roads, bridges, dams, post offices, universities, electrical power, mortgages, farms, and much more; and it funded all this while generating income for the government.

The Central Bank Option: How Japan Is Funding Abenomics with Quantitative Easing 

The Federal Reserve is another funding option before the Green New Deal. The Fed showed what it can do with “quantitative easing” when it created the funds to buy $2.46 trillion in federal debt and $1.77 trillion in mortgage-backed securities, all without inflating consumer prices. The Fed could use the same tool to buy bonds ear-marked for a Green New Deal; and since it returns its profits to the Treasury after deducting its costs, the bonds would be nearly interest-free. If they were rolled over from year to year, the government would in effect be issuing new money.

This is not just theory. Japan is actually doing it, without creating even the modest 2 percent inflation the government is aiming for. “Abenomics,” the economic agenda of Japan’s Prime Minister Shinzo Abe, combines central bank quantitative easing with fiscal stimulus (large-scale increases in government spending). Since Abe came into power in 2012, Japan has seen steady economic growth, and its unemployment rate has fallen by nearly half; yet inflation remains very low, at 0.7 percent. Social Security-related expenses accounted for 55 percent of general expenditure in the 2018 federal budget, and a universal healthcare insurance system is maintained for all citizens. Nominal GDP is up 11 percent since the end of the first quarter of 2013, a much better record than during the prior two decades of Japanese stagnation; and the Nikkei stock market is at levels not seen since the early 1990s, driven by improved company earnings. Growth remains below targeted levels, but according to the Financial Times in May 2018, this is because fiscal stimulus has actually been too small. While spending with the left hand, the government has been taking the money back with the right, increasing the sales tax from 5 percent to 8 percent.

Abenomics has been declared a success even by the once-critical International Monetary Fund. After Prime Minister Shinzo Abe crushed his opponents in October 2017, Noah Smith wrote in Bloomberg, “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 midsized 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.

Not that all is idyllic in Japan. Forty percent of Japanese workers lack secure full-time employment and adequate pensions. But the point underscored here is that large-scale digital money-printing by the central bank to buy back the government’s debt combined with fiscal stimulus by the government (spending on “what the people want”) has not inflated Japanese prices, the alleged concern preventing other countries from doing it.

Abe’s novel economic program has achieved more than just stimulating growth. By selling its debt to its own central bank, which returns the interest to the government, the Japanese government has in effect been canceling its debt; and until recently, it was doing this at the rate of a whopping $720 billion (¥80tn) per year. According to fund manager Eric Lonergan in a February 2017 article:

The Bank of Japan is in the process of owning most of the outstanding government debt of Japan (it currently owns around 40%). BOJ holdings are part of the consolidated government balance sheet. So its holdings are in fact the accounting equivalent of a debt cancellation. If I buy back my own mortgage, I don’t have a mortgage.

If the Federal Reserve followed suit and bought 40 percent of the US national debt, it would be holding $8 trillion in federal securities, three times its current holdings from its quantitative easing programs. Yet liquidating a full 40 percent of Japan’s government debt has not triggered price inflation.

Filling the Gap Between Wages, Debt and GDP

Rather than stepping up its bond-buying, the Federal Reserve is now bent on “quantitative tightening,” raising interest rates and reducing the money supply by selling its bonds into the market in anticipation of “full employment” driving up prices. “Full employment” is considered to be 4.7 percent unemployment, taking into account the “natural rate of unemployment” of people between jobs or voluntarily out of work. But the economy has now hit that level and prices are not in the danger zone, despite nearly 10 years of “accommodative” monetary policy. In fact, the economy is not near either true full employment or full productive capacity, with Gross Domestic Product remaining well below both the long-run trend and the level predicted by forecasters a decade ago. In 2016, real per capita GDP was 10 percent below the 2006 forecast of the Congressional Budget Office, and it shows no signs of returning to the predicted level.

In 2017, US gross domestic product was $19.4 trillion. Assuming that sum is 10 percent below full productive capacity, the money circulating in the economy needs to be increased by another $2 trillion to create the demand to bring it up to full capacity. That means $2 trillion could be injected into the economy every year without creating price inflation. New supply would just be generated to meet the new demand, bringing GDP to full capacity while keeping prices stable.

This annual injection of new money not only can be done without creating price inflation; it actually needs to be done to reverse the massive debt bubble now threatening to propel the economy into another Great Recession. Moreover, the money can be added in such a way that the net effect will not be to increase the money supply. Virtually our entire money supply is created by banks as loans, and any money used to pay down those loans will be extinguished along with the debt. Other money will be extinguished when it returns to the government in the form of taxes. The mechanics of that process, and what could be done with another $2 trillion injected directly into the economy yearly, will be explored in Part 2 of this article.

This article was first posted on Truthdig.com

Forgive them their debts as they forgive those…

It is “budget time” again!

That is the season when the persons displayed on television screens as representatives of those who have no representation engage in the theatrical display of subordination to those who actually own things, like the countries we happen to inhabit. Although there have been a few publicised investigations and even some occasional criminal charges against (usually septuagenarians) some conspicuous miscreants, there has been no action which could restore some health or sanity to what most of us consider the daily economy. In some countries, like where I live, people go on strike. There is little indication that the fundamental message of the strikers gets heard. Perhaps that is also why the television seems obsessed with the marketing of hearing aids. There is a hearing aid for every occasion, except sessions of the national assembly, where such technology might really help.

One way of dealing with the hearing impaired is repetition. In scientific terms this means increasing the rate of signal in proportion to noise in the hope that the essential message is received. Although I wrote a version of this paper in 2014, four years later I cannot help feeling some repetition would do no harm. If every budget season one has to listen to the same set of distortions, then it is only fair to reproduce the corrections.

Like the absurd climate debate, which never includes the “carbon footprint” of the largest military machines, the budget debates (essentially interchangeable) never discuss the cost of subsidising international banks and corporations to facilitate their extraction of wealth from the national economy. There is no intelligent, let alone honest, discussion of what is meant by “public debt”—or why the taxpayers must bear losses to guarantee tax-exempt profits for investors.

I always ask myself when someone says or writes “loss”, where did the money go? Even when a ship is lost at sea there is generally wreckage. Of course, the ocean is bigger than the economy and it is possible that a ship’s remains disappear beyond recovery. The price of abandoning the very modest social gains of the New Deal in the US and social democracy in Europe with the ascendancy of Margaret Thatcher and Ronald Reagan has been enormous, not only for US and European working people but, for the rest of the world. In fact, the meter is still running with no indication of when it will stop.

The crisis no one cares to talk about any more comprises trillions in losses. If these losses are real, then that means the value has been forfeited in favour of someone else. E.g. after the Great War France and Britain were essentially bankrupt: they owed nearly everything to US banks. Without economic manipulation, war and terror, India would probably have occupied the same status vis a vis Great Britain in 1945 that Brazil gained vis a vis Portugal after the Napoleonic Wars. The claims against the productive capacity and assets of Old Europe were held by identifiable third parties, representing, then as now, a tiny band of bankers. Of course, those claims were so great that no normal income streams from taxation could satisfy them. Control of Britain was effectively ceded to the US, while India was wracked by civil war rather than collecting the wartime debt Britain owed to her.

The other meaning of loss is the inability to sustain a certain valuation of an asset or income stream. The nature of the initial valuation is then the problem. The continuous attempts in the IFRS (international accounting standards) to skirt around the issue of essentially fraudulent valuation illustrates that even the private sector’s notion of “value”, whether book value or fair value, is the product of casuistry.

Since European “banking” was reorganised on the US Federal Reserve model by creation of the European Central Bank, it is instructive to consider how grand theft in the state-banking sector of the US functions. In other words, the “losses” hidden on the books of the USG banks, “Fannie” and “Freddie”, are either notional or they reflect claims that were satisfied in favour of third parties beyond the capacity of those institutions to generate income. Again we know who those third parties are. The “losses” are essentially sacrificed sovereignty.

Government institutions pledge to private persons (corporations and foreign exchange pirates) the State’s capacity to pay, derived from the ability to tax the working population, beyond any realistic possibility to extract that income. This was called “tax farming” in the bad old days of “colonialism”. Frequently punitive military force was sent into any country that was not delivering enough booty (aka interest on foreign debt). In fact, as retired general of US Marines infamously confessed that was his main job in the Corps—protecting corporate plunder.

This is essentially the same principle imposed through the ECB—except that some nominal account has to be taken of national political systems. Since in Europe the State was far more frequently the owner of capital infrastructure, absorbing the cost of its operation and regulating labour as civil servants, considerable ideological work had to be performed to cultivate the generation, which privatised most of the national capital assets held by European states. The fact that since 1945 the US has controlled the international payments system has reduced the need for military intervention. Decisions taken in New York, London, Frankfurt or Brussels can deprive a country of any affordable means to engage in the most basic financial transactions. The entities involved are privately owned and therefore cannot be coerced except by measures that would “threaten private property”.

Just as the railroads and banks obtained control over most of the continental US by defrauding the US government in the 19th century, the surviving banks have defrauded most of the American population of its home equity today. Although it was established that a conspiracy of UK-based clearing banks illegally fixed the LIBOR/ EURIBOR rates, this had no serious consequences. If one considers very carefully that nearly all mortgage and commercial financing agreements base their interest computations on one of these benchmarks, the true scope of the fraud becomes apparent. Everyone who made an interest rate agreement assuming the “free market” condition of the underlying rate was cheated. It could be argued that the interest rate clauses of innumerable contracts were void due to fraud. A perusal of public debt instruments would no doubt reveal even more catastrophic deception.

The endless wars, funded by plundering the public treasury and the wealth of other countries, are part of that income extraction, too. Now the US government and those of its vassals are little more than one large mercenary enterprise, together as NATO, the most heavily armed collection agency on behalf of third party creditors on the planet. It does not matter who occupies the mansion at 1600 Pennsylvania Avenue.

Of course, there is plausible denial for any of the beneficiaries of this plunder since populations weaned on soap operas and “crime drama” are incapable of examining, let alone comprehending, the most obvious operations of US corporations and their agents– who almost never appear as criminals on television. The “crime drama” narrative dominates almost every bandwidth on the critical spectrum and as a much younger US director, Michael Moore demonstrated in Bowling for Columbine, corporate crime does not make acceptable television. The most elemental sociological truths, plain to anyone who has ever belonged to a club or worked in middle management of a company, namely that “democratic” and “meritocratic” decisions are regularly subverted by scheming among the ambitious at the expense of the docile– become discredited when the insight is applied to the polity as a whole. People who do not think twice about making a phone call to a “friend” to influence a decision in their social club or place of employment, become incredulous at the suggestion that the chairman of a major investment bank would dictate policy to the head of state whose election he had financed.

In short, the debate about the current global economic “crisis” is obscenely counterintuitive and illogical to the point of incoherence. Who is willing to “follow the money”? This dictum, popularised in the Woodward and Bernstein fairy tale of US President Richard Nixon’s demise– All the President’s Men— appears utterly forgotten, despite recurring astronomic fraud perpetrated by US corporations since the so-called “S&L scandal”– crimes for which no more than a handful of people were indicted, let alone tried or sentenced. Only one corporation was deprived of its right to do business, Arthur Andersen, and this was patently done to spare all the politicians from the reigning US president, most of the US Congress, and untold state and local officials who had been bribed or otherwise influenced by Enron.

If the stories reported by Pete Brewton in 1992, the documented history of the OSS “China insurer” AIG, and the implications of the 2002 Powers Report on the Enron collapse are taken seriously, then Houston lies on a financial fault line more devastating than the San Andreas. That fault line runs from Texas through Virginia to the bedrock of Manhattan. The economic earthquakes that have persisted since 1980 are both literally and figuratively the result of deployment of the US atomic arsenal and the policies that gave rise to it. The US dollar’s continued, if fluctuating, strength as a reserve currency is based on drugs, weapons, and oil– all traded in US dollars. However, this material reality is also based on an ideological or dogmatic constitution. The seismic activity induced by US corporations created gaping holes in the global economy– holes which could only be breached by the financial instruments developed in the weapons laboratories of Wall Street based on the same conceptual models as the neutron bomb and today’s nano-munitions developed at Lawrence Livermore. Indeed, the theory has been almost universally accepted that people are always to blame for the problems of government and Business is the sole and universal solution to all problems. Hence tax monies will only be spent on weapons, war, and subsidies for corporations—the things Business needs.

A considerable obstacle to any change in the US, short of its destruction, is the fact that as Michael Hudson and former assistant Treasury secretary under Reagan, Paul Craig Roberts, write repeatedly, the US government has absolutely lost whatever legitimate function it may ever have had as an instrument of popular will. In other words, the efforts of working people, whether immigrant or ex-slave to remake the plutocratic regime of the 19th century into a State responsive to their needs were frustrated by the massive assaults on labour, combined with the ideological warfare of the “Progressive” movement. The latter, funded heavily by the newly created super-philanthropies, including those of Rockefeller, Sage, Peabody, and Carnegie, predated CIA-style front organizations and infiltration. They helped turn popular sovereignty movements into the kind of technocratic organisations which prevail today– dependent on corporate donations and led by the graduates of cadre schools like the Ivy League colleges, Oxford and the LSE. With few exceptions the only remnants of the “popular will” in the US are those that drive lynch mobs, reincarnated in “talk radio” today.

The main work of the USG and the corporations for which it stands has been to undermine any notion that the State is rightfully an expression of the popular will for the realisation of popular welfare. The State has been reduced to a protection racket. By the time Ronald Reagan, imitating Margaret Thatcher, pledged to “get government off the back of the people”, the only “people” who counted were corporations and those in thrall to them.

It is easy to forget that the US was actually founded on the basis of a kind of white (in that sense “enlightened”), oligarchic absolutism– the British parliamentary dictatorship minus hereditary monarch. Its moral vision predated the Thirty Years War and, until John Kennedy was elected president, its hypocrisy was that of Cromwellian fanatics. In revolutionary France and countries that were inspired by France, as opposed to the American independence war, struggle continued on the premises that the State is not the King (in whatever incarnation) but created by the citizens (not the possessive individual) for the maintenance of the common weal– including the nutrition, health, housing, education of its people. The opposition to destruction of the public sector or public services and the debate that continues in Greece, France, Italy, and to a lesser extent Germany, defies comprehension in North America and Great Britain because of some unfortunate residues of that revolutionary vision of the State so violently opposed by Britain and the US ever since 1789– except when the resulting instability provided business opportunities. (Thatcher did not restore the spirit of Churchill to power—but that of Wellington.)

Moreover as Coolidge once said, “the business of America is business”. If a policy or action of government cannot be expressed in terms of someone’s maximum private profit then it is indefensible in the US. The conditions of the Maastricht Treaty establishing the euro and the ECB are an attempt to impose those same ideological and political constraints on the European Union enforced by adoption of the Federal Reserve Act in the US. The Federal Reserve is essentially a technology for naturalising usury and endowing it with supernatural legitimacy. But just as it has been argued in some quarters that the US Federal Reserve triggered the Great Depression– for the benefit of the tiny bank of banking trusts– the European Central Bank, urged by the right-wing government in Berlin, is being pressured to follow the same rapine policies as the FED is pursuing today. Of course, there are other countries ruled by financial terrorism or where banking gangs have turned their entire arsenal against sovereign peoples.

The “Crisis” is not really about the “debt” or the heinous losses. It is a crisis of sovereignty. The failure of popular sovereignty means that a microscopic bacterial colony of the immeasurably rich can make war on the rest of the world, destroying the common weal and commerce at home and everything else abroad. Germany’s citizens have been bludgeoned since 1945 by Anglo-American propaganda and the occupation forces to persuade them that they– not the great banking and industrial cartels on both sides of the Atlantic– were responsible for Adolph Hitler’s rise to power. When in 1968, student leaders like Rudi Dutschke tried to remind Germans that their democracy was destroyed before Hitler’s putsch and that they had the right and opportunity to demand a democratic Germany after the war, those young people were harassed and even killed. (Dutschke was shot in the head by an unemployed labourer. That “lone” killer later died in prison with a plastic bag over his head.) Attempts to create a truly popular democratic government in Germany have been frustrated by foreign intervention since the French Revolution. Nevertheless people in Germany still believe that the State is there to provide services to the people– and not to fight wars to further foreign trade as suggested by Horst Köhler before he was relieved of his duties (ostensibly resigning) as German federal president.

There is no doubt in Germany that former Chancellor Schroeder’s refusal to follow the US into Iraq—whatever motivated it—enjoyed the widest support, even among those who tend to believe anything the US government says. The resignation of former IMF director and Federal President Köhler expressed the sensitivity of the situation then. On one occasion he referred to the great banking interests as “monsters” and then broke the silence on the German war efforts in Central Asia by explicitly articulating what had been Chancellor Merkel’s, silent but deadly policy of supporting US counter-terror in Afghanistan. Köhler was not opposed to the future escalation of German belligerence, but by his calling a spade a spade on national radio, the right-wing government in Berlin almost had to defend its unconstitutional deployment of German soldiers in public. Already that April Angela Merkel had been forced to sacrifice an army general and a cabinet minister when it became known that German combat aircraft were also bombing civilians like their US counterparts—and trying to keep the fact a secret.

In the midst of the financial crisis, that is the plunder and pillage of the accumulated reserves of Europe’s working population after those of the US are exhausted, it is impossible to ignore the restoration of Asian political and economic prominence. This process started in the 1960s when Britain and the US launched their wars to secure footholds and control of the vast resources of Indonesia and Indochina. Although only partly successful, the destruction of national independence movements throughout South Asia created the conditions for de-industrialising Europe and North America. Mistakenly much of the North American and European Left judged the losses in Korea and Vietnam as defeats for US power. Such judgments have been based on assessments of the official war aims and not on any analysis of the underlying corporate and financial policy objectives. The long-term results of those wars included creation of the massive debt system that is at the root of financial collapse for the majority of US Americans. Of course, China remains the great unconquerable threat to continuation of US hegemony. The balance of power in Asia may be very delicate indeed.

Continental Europe remained somewhat insulated from those seismic forces until 1989. The “velvet” invasion of Eastern Europe and the former Soviet Union led by US capital, aided as usual by the combined secret services and economic “consultants” of Shock Therapy, began the destruction of the economic base for European social democracy and “real socialism”. The debt machine created to exploit Eastern Europe was applied in Germany first– destroying the GDR and financing that destruction with EU-generated debt, culminating in the euro. Introduction of the euro effectively destroyed half of the purchasing power of working people in the Euro Zone overnight, creating the conditions for consumer borrowing which had prevailed in the US since the late 60s and eroding wages and benefits drastically.

The final loss of control over archaic legislative instruments (whether in the US or Europe) is not only assured by the system of bribery that turns those in office into indentured servants of corporations. Full investigation of the Enron scandal would have proven once and for all that there is almost no one in the US Congress not owned by some corporation. Similar conditions have come to prevail in European legislatures where for decades US academic and policy exchange programmes have trained the political class to work first and foremost for Business.

The loss is also assured by the now entrenched belief that the only legitimate human goal is individual personal profit. As Hudson has suggested, this is the “theology of the Chicago School”. Since Margaret Thatcher was appointed to convert Britain to that dogma, nearly the entire political, academic and “civil” culture has been saturated with people who cannot think in any other terms– even when they assert that they are still social democrats or democratic socialists. The latter insist that “social policy” is merely a palliative to prevent the poor and destitute from becoming unsightly spectres in urban entertainment centres. They all have become positivists– reifying the prevailing economic relations and worshipping quantitative methods– subordinating human agency to pseudo-science and thinly disguised opportunism. The only kindness this ethical standpoint can express is “charity”. Charity, however, has nothing to do with the common weal or the State as an embodiment of the popular will. In fact, it is just as parasitic as the belief from which it springs. If those whom John Pilger called “the new rulers of the world” consent to relieve us– that is to allow us anything resembling our dignity and subsistence wages– then it will scarcely exceed the infamous “dimes” with which John D. Rockefeller cloaked his cynicism in piety and charity. Nowhere is the cynicism more profound than in the expression “giving back”. Of course, the pennies “given back” are microscopic compared with the billions “taken” in the first place. But those shiny pennies and dimes are enough to keep embedded intellectuals loyal to Bill Gates or George Soros. For a few dollars more they will even protect the likes of Blankfein or Buffett.

“Charity” is the gratification a person finds when scratching a mosquito bite. One feels better while scratching– although this provides no relief. The cause of the itch is the substance injected by the mosquito while sucking the blood from its victim. Of course, some mosquitoes offer only token charity and the itch disappears. But there are mosquitoes that carry other parasites– the effects of their charity can last forever, or at least until the victim dies.

Trump’s War on the Fed

October was a brutal month for the stock market. After the Federal Reserve’s eighth interest rate hike, on September 26, the Dow Jones Industrial Average dropped more than 2,000 points, and the NASDAQ had its worst month in nearly 10 years. After the Dow lost more than 800 points on October 10 and the S and P 500 suffered its first week-long losing streak since Trump’s election, the president said, “I think the Fed is making a mistake. They are so tight. I think the Fed has gone crazy.” In a later interview on Fox News, he called the Fed’s rate hikes “loco.” And in a Wall Street Journal interview published on October 24, Trump said he thought the biggest risk to the economy was the Federal Reserve, because “interest rates are being raised too quickly.” He also criticized the Fed and its chairman in July and August.

Trump’s criticisms are worrisome to some commentators, who fear he is attempting to manipulate the Fed and its chairman for political gain. Ever since the 1970s, the Fed has declared its independence from government, and presidents are supposed to avoid influencing its decisions. But other Fed watchers think politicians should be allowed to criticize the market manipulations of an apparently out-of-control central bank.

Why the Frontal Attack?

Even if the president’s challenges are a needed check on the Fed, some question whether he is going about it in the right way. Challenging the central bank in public forces it to stick to its guns, because it must maintain its credibility with the markets by showing that its decisions are based on sound economic principles rather than on political influence. If the president really wants the Fed to back off on interest rates, it has been argued, he should do it with a nod and a nudge, not a frontal attack on the Fed’s sanity.

True, but perhaps the president’s goal is not to subtly affect Fed behavior so much as to make it patently obvious who is to blame when the next Great Recession hits. And recession is fairly certain to hit, because higher interest rates almost always trigger recessions. The Fed’s current policy of “quantitative tightening”—tightening or contracting the money supply—is the very definition of recession, a term Wikipedia defines as “a business cycle contraction which results in a general slowdown in economic activity.”

This “business cycle” is not something inevitable, like the weather. It is triggered by the central bank. When the Fed drops interest rates, banks flood the market with “easy money,” allowing speculators to snatch up homes and other assets. When the central bank then raises interest rates, it contracts the amount of money available to spend and to pay down debt. Borrowers go into default and foreclosed homes go on the market at fire-sale prices, again to be snatched up by the monied class.

But it is a game of Monopoly that cannot go on forever. According to Elga Bartsch, chief European economist at Morgan Stanley, one more financial cataclysm could be all that it takes for central bank independence to end. “Having been overburdened for a long time, many central banks might just be one more economic downturn or financial crisis away from a full-on political backlash,” she wrote in a note to clients in 2017. “Such a political backlash could call into question one of the long-standing tenets of modern monetary policy making—central bank independence.”

And that may be the president’s endgame. When higher rates trigger another recession, Trump can point an accusing finger at the central bank, absolving his own policies of liability and underscoring the need for a major overhaul of the Fed.

End the Fed

Trump has not overtly joined the End the Fed campaign, but he has had the ear of several advocates of that approach. One is John Allison, whom the president evidently considered for both Fed chairman and treasury secretary. Allison has proposed ending the Fed altogether and returning to the gold standard, and Trump suggested on the campaign trail that he approved of a gold-backed currency.

But a gold standard is the ultimate in tight money—keeping money in limited supply tied to gold—and today Trump seems to want to return to the low-interest policies of former Fed Chair Janet Yellen. Jerome Powell, Trump’s replacement pick, has been called “Yellen without Yellen,” a dovish alternative in acceptable Republican dress. That’s what the president evidently thought he was getting, but in his October 24 Wall Street Journal interview, Trump said of Powell, “[H]e was supposed to be a low-interest-rate guy. It’s turned out that he’s not.” The president complained:

[E]very time we do something great, he raises the interest rates. … That means we pay more on debt and we slow down the economy, both bad things. … I mean, we had a case where he raised interest rates right before we have a bond offering. So you have a bond offering and you have somebody raising interest rates, so you end up paying more on the bonds. … To me it doesn’t make sense.

Trump acknowledged the independence of the Fed and its chairman but said, “I’m allowed to say what I think. … I think he’s making a mistake.”

Presidential Impropriety or a Needed Debate

In a November 2016 article in Politico titled “Donald Trump Isn’t Crazy to Attack the Fed,” Danny Vinik agreed with that contention. Trump, who is not a stickler for consistency, was then criticizing Yellen for keeping interest rates too low. Vinik said that while he disagreed with Trump’s interpretation of events, he agreed that the president should be allowed to talk about Fed policy. Vinik observed:

The Federal Reserve is, by definition, not independent. Unlike the Supreme Court, the central bank is a creation of Congress and is accountable to lawmakers on Capitol Hill. It can be changed—or abolished—by Congress as well. And to pretend it’s not—to treat the Fed as an entity totally removed from American politics—also leaves us powerless to talk about the ways it might be improved. …

The long tradition of deference to the Fed’s policy independence can even pose a risk: It creates an environment in which any critique of the Fed is seen as out of line, including the idea of reforming how it works.

Vinik quoted Andrew Levin, a Dartmouth economist and 20-year veteran of the Fed, who published a set of recommended central bank reforms in conjunction with the Center for Popular Democracy’s Fed Up campaign in 2016. One goal was to make the Federal Open Market Committee, which sets Fed policy, more representative of the American public. The FOMC is composed of the president of the New York Fed, four other Federal Reserve bank presidents and the Federal Reserve Board, which currently has only four members (three positions are vacant). That means the FOMC is majority-controlled by heads of Federal Reserve banks, all of whom must have “tested banker experience.” As Vinik quoted Levin:

The Federal Reserve is a crucial public agency, so there are lots of important questions—including the selection of its leaders, the determination of their priorities, and the specific strategy that they’re following—that should all be open to public discourse.

Vinik also cited Ady Barkan, the head of the Fed Up campaign, who agreed that questioning Fed policy is appropriate, even for the president. Barkan said the Fed’s independence comes from its structure: Its leaders are appointed, not elected, for long terms, which inherently insulates them from political pressure. But the Fed must still be accountable to the public, and one way policymakers fulfill that responsibility is through public comments. Monetary policy decisions, said Barkan, are therefore appropriate topics for political debate.

Reassessing Fed Independence

According to Timothy Canova, professor of law and public finance at Nova Southeastern University, the Fed is not a neutral arbiter. It might be independent of oversight by politicians, but Fed “independence” has really come to mean a central bank that has been captured by very large banking interests. This has not always been the case. During the period coming out of the Great Depression, the Fed as a practical matter was not independent, but took its marching orders from the White House and the Treasury; and that period, says Canova, was the most successful in American economic history.

The Fed’s justification for raising interest rates despite admittedly low inflation is that we are nearing “full employment,” which will drive up prices because labor costs will go up. But wages have not gone up. Why? Because in a globalized world, the availability of cheap labor abroad keeps American wages low, even if most people are working (which is questionable today, despite official statistics).

Higher interest rates do not serve consumers, homebuyers, businesses or governments. They serve the banks that dominate the policy-setting FOMC. The president’s critiques of the Fed, however controversial, have opened the door to a much-needed discourse on whether the fate of the economy should be in the hands of unelected bureaucrats marching to the drums of Wall Street.

Postscript: The stock market has turned positive as of this writing (Thursday), but the rebound has been led by the FANG stocks—Facebook, Amazon, Netflix and Google. As noted in my article of Sept. 13, these are the stocks that central banks are now purchasing in large quantities. The FANG stocks jumped in unison on Wednesday, although only one (Facebook) had positive news to report, suggesting possible market manipulation for political purposes.

•  Article first published at Truthdig

Brazil: Bolsonaro Towards a Military Dictatorship

   Jair Bolsonaro                   Fernando Haddad

One week before the second round of voting in Brazil, Jair Bolsonaro, the extreme right-wing candidate from the Social Liberal Party (PSL), against Fernando Haddad from the Worker’s Party (PT), Lula’s Party, for Brazil’s Presidential run-off elections, Bolsonaro leads to polls by double digits, about 58 against 42. And the gap is growing, despite the fact that as recent as end of September 2018, Brazilian women campaigned massively against Bolsonaro with the hashtag #EleNao (Not Him). His misogynist record left him with only 27% of women supporters only a couple of weeks ago. Massive cheat-and lie-propaganda increased that ratio by now to 42%. Does anybody seriously believe that Bolsonaro has changed his racist character and his women-degrading attitude?  It is mind-boggling how people fall for propaganda lies and manipulations.

The usual propaganda of deceit from the right has infiltrated every election in the last 5-10 years, starting with the sophisticated internet and propaganda fraud invented by Oxford Analytica (OA), which is largely believed having brought Trump to the White House, Macri to the Casa Rosada in Buenos Aires, Macron to the Elysée in Paris and Mme. Merkel for the fourth time to the German Federal Chanceller’s office in Berlin – among others. OA is also said having helped the BREXIT supporters. In the meantime, OA’s dirty election manipulation methods have been mainstreamed to the mainstream media – with lots and lots of corporate and banking money.

In fact, the frontrunner Bolsonaro is currently being accused by his opponent Fernando Haddad, of a ‘fraud and fake news’ campaign, and that just a few days before the run-off. The charge is that Bolsonaro is running a multi-million-dollar defamation campaign against Haddad, via Whatsapp and other social media. This means sending out literally millions of tailor-made messages to potential groups of voters. That’s the way of the of OA’s algorithms.

According to RT, Haddad told a media conference in Rio:

We have identified a campaign of slander and defamation via WhatsApp and, given the mass of messages, we know that there was dirty money behind it, because it wasn’t registered with the Supreme Electoral Tribunal.

This, after the Folha de S.Paulo newspaper uncovered a suspected election fraud. The publication alleges that a group of entrepreneurs are backing a multi-million-dollar slander campaign that would use several popular social media apps to reach out to Haddad supporters and smear his name with ‘fake news’.

We can only hope that the discovery of this slander and fraud may not be too late to stop Bolsonaro’s end run and to inform voters. Leading to an indictment of Bolsonaro is hardly a realistic chance, as he is supported by the current corrupt and fascist-type Temer Government and all the high judges who have impeded Lula’s legitimate request for running for Presidency. Only voters’ consciousness may make a difference.

Imagine what happens if Bolsonaro is elected? It is hardly fathomable. Bolsonaro has already declared that if elected he will render full power to the military. “When I’m elected, those who will command are the (military) captains”. His word  in Portuguese.

He is a fascist no doubt. There were other fascist military governments in Brazil, like Getúlio Vargas, who reigned from 1930-1945 as a military dictator mostly by decree. He abrogated the 1891 Constitution and introduced a new one in 1934 which was overturned, when finally, in 1945 Vargas was deposed and a new democratization process began with a new Constitution being introduced in 1946. But that was not all for fascism and military dictatorship in Brazil. There was more to come in the decades preceding Lula.

Another brutal military government came to power in 1964 by a coup d’état by the Armed Forces. It ruled Brazil from 1 April 1964 to 15 March 1985 by President Joao Goulart. It came to an end when José Sarney took office on 15 March 1985. What’s important to know is that both the Vargas coup of 1930, as well as the 1964 military coup were supported by the US Embassy in Brazil and the State Department in Washington. Mr. Bolsonaro has already today – after the first election round – the full support of Washington. He was immediately congratulated by the Trump government after the October 7 election results were known.

If no miracle happens within the coming week, Brazil may be slanted to go back some 90 years, into a fierce military dictatorship. Worse, today with the neoliberal doctrine being the overarching last word on economic policies, also for the military. We are looking at full privatization of everything, of social services, water and health privatization has already begun; basic and profitable infrastructure, natural resources, and the IMF, World Bank, FED-Wall Street indebtment is already well under way and its future programmed, including a devastating austerity program which under unelected Mr. Corrupt Temer has already started.

In fact, economic disaster in terms of dependence on IMF, WB and the FED, may also loom under Haddad, who has already said he would work with the financial fiefdom of Washington. As Luiz Inacio Lula did, when he was elected in 2002. He was the “golden example boy” for the IMF, following strictly the rules he was taught would bring progress to his country.  Later he realized what was actually going on within the financial sector of Brazil. He corrected some of the aberrations, but many stayed in place throughout Dilma Rousseff’s Presidency.

Brazil could become South America’s Greece – just multiplied by a factor of 100.

Just imagine the political and economic impact this would have on the Latin American region. Brazil is by far the largest economy of Latin America with a GDP of about 2.1 trillion US-dollars in 2017, a population of 210 million and a landmass 8.516 million km2 – and with the world’s largest known fresh water reserves. Trade without Brazil is unthinkable for Latin America and the world. Plus, a Bolsonaro regime would have full ideological and military support from Washington. In fact, Brazil may soon become the second South American NATO country after Colombia.

How would Venezuela feel, surrounded by two fierce militarized NATO countries? Washington could just smile and watch, while Colombia and Brazil – and their NATO command – would do the rest. Or would they?  Venezuela is on the best way to detach herself from the dollar hegemony and ally with the East. And that is not only in trade, but also in huge investments from China and Russia. Invading Venezuela would not be easy, despite NATO from the east and from the west and with the empire just across the Caribbean.

Back to Bolsonaro. It will not be as easy to thrash this fascist military doctrine, of a President, hitherto hardly known to the outside world, down the average Brazilians’ throats. Their vote and mind may be manipulated, but once they wake up – the election may be past, and the Temer policies implemented by factors of ten – social suffering will increase, à la Greece – people may simply not take it.

They will realize that this entire propaganda farce serves only a few Brazilian oligarchs, but mostly the transnational corporations and banks. Will they take to the streets? Demand another government, fight for their rights? Brazilians are not (yet) the kind to double up and shut up, as the Greeks had to do, weakened by a Government of treason, by an absence of medical and other social services and by a low-low morale that is reflected in an exponentially rising suicide rate, according to the British Lancet. Brazilians may have learned a lesson.

Brazil and the BRICS. Already under Temer, Brazil’s role in the BRICS was merely anecdotal. It was clear that politically Brazil would and could no longer adhere to the principles that was behind the BRICS association, namely, economic independence from the debt masters IMF, World Bank and FED. What with Bolsonaro? It would behoove the BRICS expulsing Brazil; sending Brazilians a warning now, before the run-off elections, that no fascist government could be admitted within the ranks of the BRICS. Fascism is the absolute antidote to the new alliances of SCO, BRICS, EEU, and newly the Caspian Sea Alliance (Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan).

But – and this is highly important – let’s not let it get out of hand. Let not Bolsonaro be elected this coming Sunday. Make the right choice now. Regardless what you are being manipulated to believe. Stand up Brazilians, Women and men – say #NAO Bolsonaro!

Agents of Chaos: Trump, the Federal Reserve and Andrew Jackson

It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes.

— President Andrew Jackson, Washington, July 10, 1832

They are three players, all problematic in their own way.  They are the creatures of inconvenient chaos.  Donald Trump was born into the role, a misfit of misrule who found his baffling way to the White House on a grievance.  Wall Street, with its various agglomerations of vice and ambition constitute the spear of global instability while the US Federal Reserve, long seen as a gentlemanly symbol of stability, has done its fair share to avoid its remit to right unstable ships, a power in its own right.

The Federal Reserve, despite assuming the role of Apollonian stabiliser, remained blind and indifferent through the Clinton era under the stewardship of Alan Greenspan.  The creatures of Dionysus played, and Greenspan was happy to watch.  While he is credited with having contained the shock of the 1987 stock-market crash, he proceeded to push a period of manically low interest rates and minimal financial regulation through the hot growth of the 1990s and early 2000s. Rather than condemning “Ninja loans” and other such bank exotica, he celebrated them as creations of speculative genius.

The mood at the Fed these days might seems chastened.  They are the monkish wowsers and party poopers, those who lock down the bar and tell the merrily sauced to head home.  The sense there is that the market, boosted and inflated, needs correction after years of keeping interest rates at floor levels. Unemployment levels are at 3.7 percent; inflation levels are close to 2 percent.  “If the strong growth in income and jobs continues,” reasoned Federal Reserve chairman Jerome H. Powell in August, “further gradual increases in the target range for the federal funds rate will likely be appropriate.”

Cooling through an increase in interest rates was deemed necessary in light of a consumer binge induced by Trump’s tax cuts, and no one knows when it will stop.  “What’s not yet clear,” observes Timothy Moore, “is how far rates will have to rise to reach a level that the Fed considers neutral – where rates neither bolster nor restrain the pace of growth – because rates already have risen so much.”  To three rises in the federal-funds rate that have already taken place could be added another in December and in 2019.

Powell is now facing attacks by President Trump, a self-described “low interest rate person,” in a manner not unlike the assault on the Second Bank of the United States by President Andrew Jackson.  Trump’s adolescent indignation is akin to the person whose balloons have been pinched.  In July, he was “not thrilled” with that round of rate hikes and said as much.  “Because we go up and every time you go up they want to raise rates again.”  Markets, playing their side of the disruptive bargain, reacted, with the dollar, stocks and treasury yields falling.

This month, the same story repeated itself.  When the markets go up, Trump, invariably, sees his hand in it; when they go down, someone else foots the blame.  Now, according to the president, the Federal Reserve has “gone crazy” and “wild” in various measures.  “I’d like our Fed not to be so aggressive, because I think they’re making a big mistake.”  To Fox News’s Shannon Bream, Trump insisted that, “The Fed is going loco and there’s no reason for them to do it.”  White House chief economic advisor Larry Kudlow found himself defending his boss “as a successful businessman and investor” informed about such matters.

The history between the Fed and the White House has been punctuated by occasional bouts of surliness.  Paul Volcker’s time as chairman saw an irate, desperate James Baker, when President Ronald Reagan’s chief of staff, attempt to gain an assurance that interest rates would not rise.  He failed.  By and by, however, the Fed has remained something of a holy cow, a point Trump cares little about.

But it was Jackson’s loathing of banks that proved not only effectual but the stuff of legend.  He found much suspicion in the whole notion of credit. He had also previously suffered at the hands of a land transaction involving the use of valueless paper notes.  Only specie – silver and gold – deserved his commanding trust.

The very idea of a central bank running rough shod over state rights presented the hero of the Battle of New Orleans with a perfect target.  His vision of frontiersman expansionism was being foiled.  Such acrimony, according to Arthur Schlesinger Jr.’s The Age of Jackson, was a case of socio-economic falling out.  Elites were attempting to monopolise financial power; Jackson, if in somewhat exaggerated fashion (though less so than Trump), spoke of common-man values against big business.

John M. McFaul, on the other hand, sees it somewhat differently.  “Jacksonian banking policy was the result of neither an ideological timetable of entrepreneurial design nor radical hard-money purposes.”  Political expedience came first.  The truth lies tantalisingly in between: the ideologue and the opportunist sharing the same body of a man.

From 1823 to 1836, Nicholas Biddle served as president of the Second Bank.  While he was deemed within pro-banking advocates competent and assured, his values were those of a system that had entitled him.  He dispensed favours to his friends with aristocratic grace; he resisted regulatory efforts.  His move to limit credit and insist on calling in loans was intended to corner Jackson, forcing his hand to add more government funds to the bank deposits.

Jackson called his bluff, and his 1832 veto not to renew the bank’s charter remained, an effective freeze on supplying federal funds.  “Is there,” he rhetorically posed to the Senate in his veto message, “no danger to our liberty and independence in a bank that in its nature has so little to bind it to our country?”  Eventually, Congress was won over, leaving the Second Bank defunct on the expiry of its charter in 1836.  Jackson did his own bit of chaotic undermining by draining the bank coffers in a way that would subsequently be deemed an abuse of executive power.

The stock gurus and economic wizards are waving wands and gazing at crystal balls, but the markets are simply engaging in the usual frenetic activity that accompanies remarks made by figures of power.  Behind the scenes, the speculators get busy and anticipate the next flurry.  Creative — or perhaps not so creative — destruction is currently unfolding, much of it an illusion.  Trump’s America remains, much like Jackson’s discredited paper notes, of questionable value.  But unlike the Second Bank, the Federal Reserve is very much intact in the face of institutional mocking. Thankfully for its board and Powell, its charter is not coming up for renewal, nor is Powell going to prove to be another Biddle.

IMF, WB, and WTO: Scaremongering Threats on De-Globalization and Tariffs

As key representatives of the three chief villains of international finance and trade, the IMF, World Bank (WB) and the World Trade Organization (WTO) met on the lush resort island of Bali, Indonesia, they warned the world of dire consequences in terms of reduced international investments and decline of economic growth as a result of the ever-widening trade wars initiated and instigated by the Trump Administration. They criticized protectionism that might draw countries into decline of prosperity. The IMF cuts its global economic growth forecast for the current year and for 2019.

This is pure scaremongering based on nothing. In fact, economic growth of the past that claimed of having emanated from increased trade and investments has served a small minority and driven a widening wedge between rich and poor of both developing and industrialized countries. It’s interesting how nobody ever talks about the internal distribution of GDP growth that these handlers and instruments of empire and liars for the elite are boasting about; nobody ever seems to question the way these growth rates are calculated or perhaps just drawn out of hot air? Take the case of Peru, a resource-rich country that boasted in the past often an economic growth of 5% to 7%. On average, the distribution of this growth was such that 80% went to 5% of the population and 20% was to be distributed among 95% of the people. This doesn’t even address the fragmentation of the lower and higher tiers of the percentage breakdowns, but it surely creates more poverty, more inequality, more unemployment and more delinquency.

Or just look at the insane and totally unfounded IMF prediction of 1 million percent inflation of the Venezuelan new currency in 2018 and 2019?  What are they talking about? No substantiation whatsoever. The same with the prediction of dire consequences from reduced trade, when trade as we know it, has and is serving almost exclusively the corporate world of rich industrialized countries, leaving poorer developing countries behind with a burden of unfair deals and often a resulting debt trap.

Such manipulations of truth coming out of international financial and trade organizations, especially the IMF and the WB, are so flagrantly and scrupulously wrong that they cannot be backed with a shred of professionalism, yet they get away with it because of their apparent unfailable reputation, scaremongering government into doing what is against their and their peoples’ best interest, namely, caring for their own local, sovereign economy, without any foreign interference.

Time and again it has been proven that countries that need and want to recover from economic fallouts do best by concentrating on and promoting their own internal socioeconomic capacities, with as little as possible outside interference. One of the most prominent cases in point is China. After China emerged on 1 October 1949 from centuries of western colonization and oppression by Chairman Mao’s creation of the People’s Republic of China (PRC), Mao and the Chinese Communist party first had to put a devastated ‘house in order’, a country ruined by disease, lack of education, suffering from hopeless famine as a result of shameless exploitation by western colons. In order to do that China remained practically closed to the outside world until about the mid- 1980’s. Only then, when China had overcome the rampant diseases and famine, built a countrywide education system and became a net exporter of grains and other agricultural products, China, by now totally self-sufficient, gradually opened its borders for international investments and trade.  And look where China is today. Only 30 years later, China has not only become the world’s number one economy, but also a world super power that can no longer be overrun by western imperialism.

But you don’t need to look that far. North Dakota saved herself from the 2008 “crisis”, by using public banking addressing the ND State’s economic needs – not the shareholder’s greed – and planning production and service activities that guaranteed basically full employment, while the rest of the country’s unemployment skyrocketed. The State’s economy grew by close to 3% in 2008 and 2009, and is still today the State with the fastest growth rate in the country and with the lowest unemployment rate. This is mostly due to a state economic development policy that concentrates on local capacities and that banks on public banking. Today, North Dakota has still the only public bank in the country; but other States, like New Jersey, New Mexico, Arizona and others, as well as the city of Los Angeles are at the brink of creating pubic banking. The mainstream media, however, doesn’t propagate such examples, as they are not in the interest of the banking and corporate oligarchs.

Local economy with local investments for the benefit of the local population, is, of course, not what the ultra-capitalist system wants. It doesn’t fit the neoliberal economic doctrine – driving globalization forward, pushing its bitter medicine of austerity down poor governments throats, so to further exploit their people, creating more poverty, milking their social systems and steeling their natural resources.

Enough! Wake up! Whatever you may think of President Trump – and he is certainly no panacea for world peace and his abject policy of interference in foreign lands and fueling conflicts and wars in the Middle East and around the globe must be condemned – but his protectionist policies, the “tariff wars” are a welcome sword into the belly of globalization, of the very neoliberal doctrine that has for the last thirty years brought more misery to 99.99% of the planet’s population than any other economic doctrine since Adam Smith. Trump may or may not know what he is doing, but certainly his handlers and advisers, hidden or overt, know the purpose of their newly professed turn of international policy.

Its intention is to cut the political cohesion created by globalization, to divide again for the empire to conquer. Yes. The intention is not to promote local economies, per se, but rather to get countries ready for unguarded bilateral negotiations and agreements between Washington and the developing world, under which the latter have no protection, and with their mostly corrupt leaders, they buckle under facing the harsh conditions of the empire. So, the purpose is not to help, say, the Latin American US backyard to become sovereign again, to the contrary, with imposed bilateral deals – see Brazil, Argentina, Chile, Ecuador, Peru, Colombia – they are slated to become increasingly vulnerable to and dependent on the US and US-dollar hegemony.

The point is for self-conscious and alert governments with the desire to return to their sovereign national politics, this is a crucial moment of truth to take advantage of. The ship is turning. It is the moment to jump off the globalized bandwagon, the globalized trade, the open borders for indiscriminate foreign investments; it is time to sit down and reflect and return to autonomous local policies: local economies, for local markets, with local money and local public banking for the benefit of the local economy. Trade, of course, is part of a local economy; but trade should best be kept within the realm of friendly neighbors and nations that have similar interests and similar political convictions. Trade under de-globalized circumstances should and will return equal benefits for partners, a win-win situation for all trading partners – as it should be according to the original interpretation of trade. By contrast, modern trade as we know it has almost consistently benefited the rich countries to the detriment of the poorer ones.

A good example for fair and equal trade may be ALBA (Alianza Bolivariana para los Pueblos de Nuestra América) – an association of 11 Latin American and Caribbean countries (Antigua and Barbuda Bolivia, Cuba, Dominica, Grenada, Nicaragua, Saint Kitts and Nevis, Saint Lucia, Saint Vincent, Surinam, the Grenadines and Venezuela), initiated and created by Venezuela and Cuba. ALBA may be an excellent illustration on how trade should work between countries or groups of countries. Most people have never heard of ALBA, for the simple reason the international media are typically silent about it, because the neoliberal elite doesn’t want a case of equality to become an example for others to follow. There exist currently other similar, even lesser known cases of fair and equal trade throughout the world, that are equally silenced by the media.

Promoting fair and equal trade is not an agenda item of WTO, nor of the IMF or the World Bank. Their role is just the contrary, being facilitators for the west to further exploit the people of the South and to further deplete the workers’ accumulated funds of their social safety-net that are still available in many western industrialized countries, especially in the western EU. It’s the bedrock of social safety that can be privatized and sucked empty by the international corporate banking system, along with privatization of social infrastructure, such as water supply and sanitation, electricity, hospitals, airports, railways – and much more. All what has the air of profitability can and must be privatized under neoliberal economic doctrines.

Countries, nations and societies, beware from listening and adhering to and working with these nefarious globalizing organizations – IMF, WTO and WB. They are mere servants of western corporatism and debt enslaving financial systems driven by the US Federal Reserves (FED), as well as Wall Street and their European banking partners.

This is an appeal to all countries that are proud of regaining their political sovereignty and economic autonomy, to ignore scaremongering and fear imposing threats by the IMF, the World Bank and WTO. They are not representing the truth, but their nasty role is to belie reality in favor of manipulative invented statistics that are expected to being believed because they stem from these so-called well-reputed institutions. Again, the best example of the IMF’s nonsensical statements is their repeated denigration of Venezuela, accusing the country of fostering an economy that creates a one million percent inflation in 2018 and even higher, they say, in 2019. Can you imagine? That says it all. Be aware – their words, whether spoken in Bali, Washington or Geneva, are nothing more than fear- and threat mongering hot air.

A Global People’s Bailout for the Coming Crash

When the global financial crisis resurfaces, we the people will have to fill the vacuum in political leadership. It will call for a monumental mobilisation of citizens from below, focused on a single and unifying demand for a people’s bailout across the world.

*****

A full decade since the great crash of 2008, many progressive thinkers have recently reflected on the consequences of that fateful day when the investment bank Lehman Brothers collapsed, foreshadowing the worst international financial crisis of the post-war period. What seems obvious to everyone is that lessons have not been learnt, the financial sector is now larger and more dominant than ever, and an even greater crisis is set to happen anytime soon. But the real question is when it strikes, what are the chances of achieving a bailout for ordinary people and the planet this time?

In the aftermath of the last global financial meltdown, there was a constant stream of analysis about its proximate causes. This centred on the bursting of the US housing bubble, fuelled in large part by reckless sub-prime lending and an under-regulated shadow banking system. Media commentaries fixated on the implosion of collateralised debt obligations, credit default swaps and other financial innovations—all evidence of the speculative greed and lax government oversight which led to the housing and credit booms.

The term ‘financialisation’ has become a buzzword to explain the factors which precipitated these events, referring to the vastly expanded role of financial markets in the operation of domestic and global economies. It is not only about the growth of big banks and hedge funds, but the radical transformation of our entire society that has taken place as a result of the increasing dominance of the financial sector with its short-termist, profitmaking logic.

The origins of the problem are rooted in the early 1970s, when the US government decided to end the fixed convertibility of dollars into gold, formally ending the Bretton Woods monetary system. It marked the beginning of a new regime of floating exchange rates, free trade in goods and the free movement of capital across borders. The sweeping reforms brought in under the Thatcher and Reagan governments accelerated a wave of deregulation and privatisation, with minimum protective barriers against the ‘self-regulating market’.

The agenda was pushed aggressively by most national governments in the Global North, while being imposed on many Southern countries through the International Monetary Fund and World Bank’s infamous ‘structural adjustment programmes’. A legion of books have examined the disastrous consequences of this market-led approach to monetary and fiscal policy, derisorily labelled the neoliberal Washington Consensus. As governments increasingly focused on maintaining low inflation and removing regulations on capital and corporations, the world of finance boomed—and the foundations were laid for a dramatic dénouement in 2008.

Missed opportunities

What’s extraordinary to recall about the immediate aftermath of the great crash is the temporary reversal of those policies that had dominated the previous two decades. At the G20 summit in April 2009 hosted by British Prime Minister Gordon Brown, heads of state envisaged a return to Keynesian macroeconomic prescriptions, including a large-scale fiscal stimulus in both developed and developing countries. It appeared that the Washington Consensus had suddenly lost all legitimacy. The liberalised global financial system had clearly failed to provide for a net transfer of resources to the developing world, or prevent instability and recurrent crisis without effective state regulation and democratic public oversight.

Many civil society organisations saw the moment to call for fundamental reform of the Bretton Woods institutions, as well as a complete rethink of the role of the state in the economy. There was even talk of negotiating a new Bretton Woods agreement that re-regulates international capital flows, and supports policy diversity and multilateralism as a core principle (in direct contrast to the IMF’s discredited approach).

The United Nations played a staunch role in upholding such demands, particularly through a commission set up by the then-President of the UN General Assembly, Miguel d’Escoto Brockmann. Led by Nobel laureate Joseph Stiglitz, the ‘UN Conference on the World Financial and Economic Crisis and its Impact on Development’ proposed a number of sensible measures to protect the least privileged citizens from the effects of the crisis, while giving developing countries greater influence in reforming the global economy.

Around the same time, the UN Secretary-General endorsed a Global Green New Deal that could stimulate an economic recovery, combat poverty and avert dangerous climate change simultaneously. It envisioned a massive programme of direct public investments and other internationally-coordinated interventions, arguing that the time had come to transform the global economy for the greater benefit of people everywhere, including the millions living in poverty in developing and emerging industrial economies.

This wasn’t the first time that nations were called upon to enact a full-scale reordering of global priorities in response to financial turmoil. At the onset of the ‘third world’ debt crisis in 1980, an Independent Commission on International Development Issues convened by the former West German Chancellor, Willy Brandt, also proposed far-reaching emergency measures to reform the global economic system and effectively bail out the world’s poor.

Yet the Brandt Commission proposals were widely ignored by Western governments at the time, which marked the rise of the neoliberal counterrevolution in macroeconomic policy—and all the conditions that led to financial breakdown three decades later. Then once again, governments responded in precisely the opposite direction for bringing about a sustainable economic recovery based on principles of equity, justice, sharing and human rights.

A world falling apart

We are all familiar with the course of action taken from 2008-9: colossal bank bailouts enacted (without public consultation) that favoured creditors, not debtors, despite using taxpayer money. Quantitative easing (QE) programmes that have pumped trillions of dollars into the global financial system, unleashing a fresh wave of speculative investment and further widening income and wealth gaps. And the perceived blame for the crisis deflected towards excessive public spending, leading to fiscal austerity measures being rolled out across most countries—a ‘decade of adjustment’ that is projected to affect nearly 80 percent of the global population by 2020.

To be sure, the ensuing policy responses across Europe were often compared to structural adjustment programmes imposed on developing countries in the 1980s and 1990s, when repayments to creditors of commercial banks similarly took precedence over measures to ensure social and economic recovery. The same pattern has repeated in every crisis-hit region, where the poorest in society pay the price through extreme austerity and the privatisation of public assets and services, despite being the least to blame for causing the crisis in the first place.

After ten years of these policies a new billionaire is created every second day, banks are still paying out billions of dollars in bonuses each year, and the top 1% of the world population are far wealthier than before the crisis happened. At the same time, global income inequality has returned to 1820 levels, and indicators suggest progress is now reversing on the prevention of extreme poverty and multiple forms of malnutrition.

Indeed the United Nations continues to face the worst humanitarian situation since the second world war, in large part due to conflict-driven crises that are rooted in the economic fallout of the 2008 crash—most dramatically in Syria, Libya, and Yemen. Countries of both the Global North and South remain in the grip of a record upsurge of forced human displacement, to which governments are predictably failing to respond to in the direction of cooperative burden sharing through agreements and institutions at the international level.

Not to mention the rise of fascism and divisive populism that is escalating in almost every society, often as a misguided response to pervasive inequality and a widespread sense of unfairness among ordinary workers. It is surely reasonable to suggest that all these trends would not be deteriorating if the community of nations had seized the opportunity a decade ago, and acted in accordance with calls for a just transition to a more equitable world order.

The worst is yet to come

We now live in a strange era of political limbo. Neoclassical economics may have failed to predict the great crash or provide answers for a sustained recovery, yet it still retains its hold on conventional academic thought. Neoliberalism may also be discredited as the dominant political and economic paradigm, yet mainstream institutions like the IMF and OECD still embrace the fundamentals of free market orthodoxy and countenance no meaningful alternative. Consequently, the new regulatory initiatives agreed at the global level are largely voluntary and inadequate, and governments have done little to counter the power of oligopolistic banks or prevent reckless speculative behaviour.

Banks may be relatively safer and possess a bigger crisis toolkit, but the risk has moved to the largely unregulated shadow banking system which has massively increased in size, growing from $28 trillion in 2010 to $45 trillion in 2018. Even major banks like JP Morgan are forewarning an imminent crisis, which may be caused by a digital ‘flash crash’ in which high frequency investments (measuring trades in millionths of a second) lead to a sudden downfall of global stock markets.

Another probable cause is the precipitous rise in global debt, which has soared from $142 to $250 trillion since 2008, three times the combined income of every nation. Global markets are running on easy money and credit, leading to a debt build-up which economists from across the political spectrum agree cannot last indefinitely without catastrophic results. The problem is most acute in emerging and developing economies, where short-term capital flowed in response to low interest rates and QE policies in the West. As the US and other rich countries begin to steadily raise interest rates again, there is a risk of a mass exodus of capital from emerging markets that could trigger a renewed debt crisis in the world’s poorest countries.

Of most concern is China, however, whose credit-fuelled expansion in the post-crash years has led to massive over-investment and national debt. With an overheating real-estate sector, volatile stock market and uncontrolled shadow banking system, it is a prime candidate to be the site for the next financial implosion.

However it originates, all the evidence suggests that an economic collapse could be far worse this time around. The ‘too-big-to-fail’ problem remains critical, with the biggest US banks owning more deposits, assets and cash than ever before. And with interest rates at historic lows for many G-10 central banks while the QE taps are still turned on, both developed and developing countries have less policy and fiscal space to respond to another shock.

Above all, China and the US are not in a position to take the same decisive central bank action that helped avert a world depression in 2008. And then there are all the contemporary political factors that mitigate against a coordinated international response—the retreat from multilateralism, the disintegration of established geopolitical structures and relationships, the fragmentation and polarisation of political systems throughout the world.

After two years of a US presidency that recklessly scraps global agreements and instigates trade wars, it is hard to imagine a repeat of the G20 gathering in 2009 when assembled leaders pledged never to go down the road of protectionist tariff policies again, fearing a return to the dire economic conditions that led to a world war in the 1930s. The domestic policies of the Trump administration are also especially perturbing, considering its current push for greater deregulation of the financial sector—rolling back the Dodd-Frank and consumer protection acts, increasing the speed of the revolving door between Wall Street and Washington, D.C., and more.

Mobilising from below

None of this is a reason to despair or lose hope. The great crash has opened up a new awareness and energy for a better society that brings finance under popular control, as a servant to the public and no longer its master. Many different movements and campaigns have sprung up in the post-crash years that focus on addressing the problems wrought by financialisation, which more and more people realise is the underlying source of most of the world’s interlinking crises. All of these developments are hugely important, although the true test of this rising political consciousness will come when the next crash happens.

After the worldwide bank bailouts of 2008-9—estimated in excess of $29 trillion by the US Federal Reserve alone—it is no longer possible to argue that governments cannot afford to provide for the basic necessities of everyone. Just a fraction of that sum would be enough to end income poverty for the 10% of the global population who live on less than $1.90 a day. Not to mention the trillions of dollars, euros, pounds and yen that have been directly pumped into financial markets by central banks of the major developed economies, constituting a regressive form of distribution in favour of the already wealthy that could have been converted into some form of ‘quantitative easing for the people’.

A reversal of government priorities on this scale is clearly not going to be led by the political class. They have already missed the opportunity, and are largely beholden to vested interests that are unduly concerned with short-term profit maximisation, not the rebuilding of the public realm or the universal provision of essential goods and services. The great crash and its aftermath was a global phenomenon that called for a cooperative global response, yet the necessary vision from within the ranks of our governments was woefully lacking. If the financial crisis resurfaces in a different and severer manifestation, we the people will have to fill the vacuum in political leadership. It will call for a monumental mobilisation of citizens from below, focused on a single and unifying demand for a people’s bailout across the world.

Much inspiration can be drawn from the popular uprisings throughout 2011 and 2012, although the Arab Spring and Occupy movements were unable to sustain the momentum for change without a clear agenda that is truly international in scope, and attentive to the needs of the world’s majority poor. That is why we should coalesce our voices around Article 25 of the Universal Declaration of Human Rights, which proclaims the right of everyone to the minimal requirements for a dignified life—adequate food, housing, medical care, access to social services and financial security.

Through ceaseless demonstrations in all countries that continue day and night, a united call for implementing Article 25 worldwide may finally impel governments to cooperate at the highest level, and rewrite the rules of the international economic system on the basis of shared mutual interests. In the wake of a breakdown of the entire international financial and economic order, such a grassroots mobilisation of numberless people may be the last chance we have of resurrecting long-forgotten proposals in the UN archives, as notably embodied in the aforementioned Brandt Report or Stiglitz Commission.

The case of Iceland is widely remembered as an example of how a people’s bailout can be achieved, following the ‘Pots and Pans Revolution’ that swept the country in 2009—the largest protests in the country’s history to date. As a result of the public’s demands, a new coalition government was able to buck all trends by avoiding austerity measures, actively intervening in capital markets and strengthening social programs for the less privileged. The results were remarkable for Iceland’s economic recovery, which was achieved without forcing society as a whole to pay for the blunders of corrupt banks. But it still wasn’t enough to prevent the old establishment political parties from eventually returning to power, and resuming their support for the same neoliberal policies that generated the crisis.

So what must happen if another systemic banking collapse occurs of even greater magnitude, not only in Iceland but in every country of the world? That is the moment when we’ll need a global Pots and Pans Revolution that is replicated by citizens of all nationalities and political persuasions, on and on until the entire planet is engulfed in a wave of peaceful demonstrations with a common cause. It will require a huge resurgence of the goodwill and staying power that once animated Occupy encampments, although this time focused on a more inclusive and universal demand for implementing Article 25 and sharing the world’s resources.

It may seem far-fetched to presume such an unprecedented awakening of a disillusioned populace, as if we can expect a visionary leader of Christ-like stature to point out the path towards resurrecting the UN’s founding ideals of “better standards of life for everyone in the world”. Unfortunately, nothing less may suffice in this age of economic chaos and confusion, so let us all be prepared for the climactic events about to take place.