Category Archives: Money supply

Will 130 Trillion Digital Dollars Save America?

Simply “printing” more money and adding more debt to the existing enormous debt load in the U.S. is not a solution. It is particularly irresponsible when it is done with no connection to social production and the working class. Non-fictitious value comes only from the labor-time of workers involved in the process of producing goods and services. Value cannot come from thin air. Capital does not magically produce value by itself.

Currently, the Federal Reserve’s balance sheet is approximately $7 trillion. The national debt is about $25 trillion. The federal debt-to-GDP ratio is 120%. The higher the ratio, the harder for a country to reliably pay back its debts. Many believe it is mathematically impossible to repay these historically unprecedented amounts. A massive black hole of debt has been rapidly created by the financial oligarchy.

Recently, Torsten Slok, Chief Economist at Deutsche Bank, estimated that if the U.S. Federal Reserve were to simply purchase everything (“monetize all assets”), it would total $130 trillion. Others have come up with similar estimates. The unthinkable may become thinkable.

It is important to appreciate that the state-sanctioned ability of the financial oligarchy to create counterfeit money serves only to further enrich the financial oligarchy while further reducing control over the economy by working people. Such unconscionable moves concentrate more money and power in even fewer hands and foster the illusion that real workers and real production are superfluous.

If anything, now is the time to demand a debt jubilee, also known as a moratorium on the debt—all kinds of debt. Economist Michael Hudson points out that throughout history large debts have been repeatedly cancelled for a range of reasons. And as Ellen Brown notes, we need a robust public banking system that actually serves the public interest. We do not need a private banking system or economic setup that ensure more tragedies for the people.

Cancelling all debts would bring enormous overdue relief to millions of Americans.

Crushing the States, Saving the Banks: The Fed’s Generous New Rules

Congress seems to be at war with the states. Only $150 billion of its nearly $3 trillion coronavirus relief package – a mere 5% – has been allocated to the 50 states; and they are not allowed to use it where they need it most, to plug the holes in their budgets caused by the mandatory shutdown. On April 22, Senate Majority Leader Mitch McConnell said he was opposed to additional federal aid to the states, and that his preference was to allow states to go bankrupt.

No such threat looms over the banks, which have made out extremely well in this crisis. The Federal Reserve has dropped interest rates to 0.25%, eliminated reserve requirements, and relaxed capital requirements. Banks can now borrow effectively for free, without restrictions on the money’s use. Following the playbook of the 2008-09 bailout, they can make the funds available to their Wall Street cronies to buy up distressed Main Street assets at fire sale prices, while continuing to lend to credit cardholders at 21%.

If there is a silver lining to all this, it is that the Fed’s relaxed liquidity rules have made it easier for state and local governments to set up their own publicly-owned banks, something they should do post haste to take advantage of the Fed’s very generous new accommodations for banks. These public banks can then lend to local businesses, municipal agencies, and local citizens at substantially reduced rates while replenishing the local government’s coffers, recharging the Main Street economy and the government’s revenue base.

The Covert War on the States

Payments going to state and local governments from the Coronavirus Relief Fund under the CARES Act may be used only for coronavirus-related expenses. They may not be used to cover expenses that were accounted for in their most recently approved budgets as of March 2020. The problem is that nearly everything local governments do is funded through their most recently approved budgets, and that funding will come up painfully short for all of the states due to increased costs and lost revenues forced by the coronavirus shutdown. Unlike the federal government, which can add a trillion dollars to the federal debt every year without fear of retribution, states and cities are required to balance their budgets. The Fed has opened a Municipal Liquidity Facility that may buy their municipal bonds, but this is still short-term debt, which must be repaid when due. Selling bonds will not fend off bankruptcy for states and cities that must balance their books.

States are not legally allowed to declare bankruptcy, but Sen. McConnell contended that “there’s no good reason for it not to be available.” He said, “we’ll certainly insist that anything we borrow to send down to the states is not spent on solving problems that they created for themselves over the years with their pension programs.” And that is evidently the real motive behind the bankruptcy push. McConnell wants states put through a bankruptcy reorganization to get rid of all those pesky pension agreements and the unions that negotiated them. But these are the safety nets against old age for which teachers, nurses, police and firefighters have worked for 30 or 40 years. It’s their money.

It has long been a goal of conservatives to privatize public pensions, forcing seniors into the riskier stock market. Lured in by market booms, their savings can then be raided by the periodic busts of the “business cycle,” while the more savvy insiders collect the spoils. Today political opportunists are using a crushing emergency that is devastating local economies to downsize the public sector and privatize everything.

Free Money for Banks: The Fed’s Very Liberal New Rules

Unlike the states, the banks were not facing bankruptcy from the economic shutdown; but their stocks were sinking fast. The Fed’s accommodations were said to be to encourage banks to “help meet demand for credit from households and businesses.” But while the banks’ own borrowing rates were dropped on March 15 from an already-low 1.5% to 0.25%, average credit card rates dropped in the following month only by 0.5% to 20.71%, still unconscionably high for out-of-work wage earners.

Although the Fed’s accommodations were allegedly to serve Main Street during the shutdown, Wall Street had a serious liquidity problem long before the pandemic hit. Troubles surfaced in September 2019, when repo market rates suddenly shot up to 10%. Before 2008, banks borrowed from each other in the fed funds market; but after 2008 they were afraid to lend to each other for fear the borrowing banks might be insolvent and might not pay the loans back. Instead the lenders turned to the repo market, where loans were supposedly secured with collateral. The problem was that the collateral could be “rehypothecated” or used for several loans at once; and by September 2019, the borrower side of the repo market had been taken over by hedge funds, which were notorious for risky rehypothecation. The lenders therefore again pulled out, forcing the Fed to step in to save the banks that are its true constituents. But that meant the Fed was backstopping the whole repo market, including the hedge funds, an untenable situation. So it flung the doors wide open to its discount window, where only banks could borrow.

The discount window is the Fed’s direct lending facility meant to help commercial banks manage short-term liquidity needs. In the past, banks have been reluctant to borrow there because its higher interest rate implied that the bank was on shaky ground and that no one else would lend to it. But the Fed has now eliminated that barrier. It said in a press release on March 15:

The Federal Reserve encourages depository institutions to turn to the discount window to help meet demands for credit from households and businesses at this time. In support of this goal, the Board today announced that it will lower the primary credit rate by 150 basis points to 0.25% …. To further enhance the role of the discount window as a tool for banks in addressing potential funding pressures, the Board also today announced that depository institutions may borrow from the discount window for periods as long as 90 days, prepayable and renewable by the borrower on a daily basis.

Banks can get virtually free loans from the discount window that can be rolled over from day to day as necessary. The press release said that the Fed had also eliminated the reserve requirement – the requirement that banks retain reserves equal to 10% of their deposits – and that it is “encouraging banks to use their capital and liquidity buffers as they lend to households and businesses who are affected by the coronavirus.” It seems that banks no longer need to worry about having deposits sufficient to back their loans. They can just borrow the needed liquidity at 0.25%, “renewable on a daily basis.” They don’t need to worry about “liquidity mismatches,” where they have borrowed short to lend long and the depositors have suddenly come for their money, leaving them without the funds to cover their loans. The Fed now has their backs, providing “primary credit” at its discount window to all banks in good standing on very easy terms. The Fed’s website states:

Generally, there are no restrictions on borrowers’ use of primary credit….Notably, eligible depository institutions may obtain primary credit without exhausting or even seeking funds from alternative sources. Minimal administration of and restrictions on the use of primary credit makes it a reliable funding source.

What State and Local Governments Can Do: Form Their Own Banks

On the positive side, these new easy terms make it much easier for local governments to own and operate their own banks, on the stellar model of the century-old Bank of North Dakota. To fast-track the process, a state could buy a bank that was for sale locally, which would already have FDIC insurance and a master account with the central bank (something needed to conduct business with other banks and the Fed). The state could then move its existing revenues and those it gets from the CARES Act Relief Fund into the bank as deposits. Since there is no longer a deposit requirement, it need not worry if these revenues get withdrawn and spent. Any shortfall can be covered by borrowing at 0.25% from the Fed’s discount window. The bank would need to make prudent loans to keep its books in balance, but if its capital base gets depleted from a few non-performing loans, that too apparently need not be a problem, since the Fed is “encouraging banks to use their capital and liquidity buffers.” The buffers were there for an emergency, said the Fed, and this is that emergency.

To cover startup costs and capitalization, the state might be able to use a portion of its CARES Relief Fund allotment. Its budget before March would not have included a public bank, which could serve as a critical source of funding for local businesses crushed by the shutdown and passed over by the bailout. Among the examples given of allowable uses for the relief funds are such things as “expenditures related to the provision of grants to small businesses to reimburse the costs of business interruption caused by required closures.” Providing below-market loans to small businesses would fall in that general category.

By using some of its CARES Act funds to capitalize a bank, the local government can leverage the money by 10 to 1. One hundred million dollars in equity can capitalize $1 billion in loans. With the state bank’s own borrowing costs effectively at 0%, its operating costs will be very low. It can make below-market loans to creditworthy local borrowers while still turning a profit, which can be used either to build up the bank’s capital base for more loans or to supplement the state’s revenues. The bank can also lend to its own government agencies that are short of funds due to the mandatory shutdown. The salubrious effect will be to jumpstart the local economy by putting new money into it. People can be put back to work, local infrastructure can be restored and expanded, and the local tax base can be replenished.

The coronavirus pandemic has demonstrated not only that the US needs to free itself from dependence on foreign markets by rebuilding its manufacturing base but that state and local governments need to free themselves from dependence on the federal government. Some state economies are larger than those of entire countries. Gov. Gavin Newsom, whose state ranks as the world’s fifth largest economy, has called California a “nation-state.” A sovereign nation-state needs its own bank.

A Universal Basic Income Is Essential and Will Work

A central bank-financed UBI can fill the debt gap, providing a vital safety net while preventing cyclical recessions.

According to an April 6 article on CNBC.com, Spain is slated to become the first country in Europe to introduce a universal basic income (UBI) on a long-term basis. Spain’s Minister for Economic Affairs has announced plans to roll out a UBI “as soon as possible,” with the goal of providing a nationwide basic wage that supports citizens “forever.” Guy Standing, a research professor at the University of London, told CNBC that there was no prospect of a global economic revival without a universal basic income. “It’s almost a no-brainer,” he said. “We are going to have some sort of basic income system sooner or later ….”

“Where will the government find the money?” is no longer a valid objection to providing an economic safety net for the people. The government can find the money in the same place it just found more than $5 trillion for Wall Street and Corporate America: the central bank can print it. In an April 9 post commenting on the $1.77 trillion handed to Wall Street under the CARES Act, Wolf Richter observed, “If the Fed had sent that $1.77 Trillion to the 130 million households in the US, each household would have received $13,600. But no, this was helicopter money exclusively for Wall Street and for asset holders.”

“Helicopter money” – money simply issued by the central bank and injected into the economy – could be used in many ways, including building infrastructure, capitalizing a national infrastructure and development bank, providing free state university tuition, or funding Medicare, social security, or a universal basic income. In the current crisis, in which a government-mandated shutdown has left households more vulnerable than at any time since the Great Depression, a UBI seems the most direct and efficient way to get money to everyone who needs it. But critics argue that it will just trigger inflation and collapse the dollar. As gold proponent Mike Maloney complained on an April 16 podcast:

Typing extra digits into computers does not make us wealthy. If this insane theory of printing money for almost everyone on a permanent basis takes hold, the value of the dollars in your purse or pocketbook will … just continue to erode …. I just want someone to explain to me how this is going to work.

Having done quite a bit of study on that, I thought I would take on the challenge. Here is how and why a central bank-financed UBI can work without eroding the dollar.

In a Debt-Based System, the Consumer Economy Is Chronically Short of Money

First, some basics of modern money. We do not have a fixed and stable money system. We have a credit system, in which money is created and destroyed by banks every day. Money is created as a deposit when the bank makes a loan and is extinguished when the loan is repaid, as explained in detail by the Bank of England here. When fewer loans are being created than are being repaid, the money supply shrinks, a phenomenon called “debt deflation.” Deflation then triggers recession and depression. The term “helicopter money” was coined to describe the cure for that much-feared syndrome. Economist Milton Friedman said it was easy to cure a deflation: just print money and rain it down from helicopters on the people.

Our money supply is in a chronic state of deflation, due to the way money comes into existence. Banks create the principal but not the interest needed to repay their loans, so more money is always owed back than was created in the original loans. Thus debt always grows faster than the money supply, as can be seen in this chart from WorkableEconomics.com:

When the debt burden grow so large that borrowers cannot take on more, they pay down old loans without taking out new ones and the money supply shrinks or deflates.

Critics of this “debt virus” theory say the gap between debt and the money available to repay can be filled through the “velocity of money.” Debts are repaid over time, and if the payments received collectively by the lenders are spent back into the economy, they are collectively available to the debtors to pay their next monthly balances. (See a fuller explanation here.) The flaw in this argument is that money created as a loan is extinguished on repayment and is not available to be spent back into the economy. Repayment zeros out the debit by which it was created, and the money just disappears.

Another problem with the “velocity of money” argument is that lenders don’t typically spend their profits back into the consumer economy. In fact, we have two economies – the consumer/producer economy where goods and services are produced and traded, and the financialized economy where money chases “yields” without producing new goods and services. The financialized economy is essentially a parasite on the real economy, and it now contains most of the money in the system. In an unwritten policy called the “Fed put“, the central bank routinely manipulates the money supply to prop up financial markets. That means corporate owners and investors can make more and faster money in the financialized economy than by investing in workers and equipment. Bankers, investors and other “savers” put their money in stocks and bonds, hide it in offshore tax havens, send it abroad, or just keep it in cash. At the end of 2018, US corporations were sitting on $1.7 trillion in cash, and 70% of $100 bills were held overseas.

Meanwhile the producer/consumer economy is left with insufficient investment and insufficient demand. 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 were stagnant; and before producers would produce, they needed customers knocking on their doors.

In ancient Mesopotamia, the gap between debt and the money available to repay it was corrected with periodic debt “jubilees” – forgiveness of loans that wiped the slate clean. But today the lenders are not kings and temples. They are private bankers who don’t engage in debt forgiveness because their mandate is to maximize shareholder profits, and because by doing so they would risk insolvency themselves. But there is another way to avoid the debt gap, and that is by filling it with regular injections of new debt-free money.

How Much Money Needs to Be Injected to Stabilize the Money Supply?

The mandated shutdown from the coronavirus has exacerbated the debt crisis, but the economy was suffering from an unprecedented buildup of debt well before that. A UBI would address the gap between consumer debt and the money available to repay it; but there are equivalent gaps for business debt, federal debt, and state and municipal debt, leaving room for quite a bit of helicopter money before debt deflation would turn into inflation.

Looking just at the consumer debt gap, in 2019 80% of US households had to borrow to meet expenses. See this chart provided by Lance Roberts in an April 2019 article on Seeking Alpha:

After the 2008 financial crisis, income and debt combined were not sufficient to fill the gap. By April 2019, about one-third of student loans and car loans were defaulting or had already defaulted. The predictable result was a growing wave of personal bankruptcies, bank bankruptcies, and debt deflation.

Roberts showed in a second chart that by 2019, the gap between annual real disposable income and the cost of living was over $15,000 per person, and the annual deficit that could not be filled even by borrowing was over $3,200:

Assume, then, a national dividend dropped directly into people’s bank accounts of $1,200 per month or $14,200 per year. This would come close to the average $15,000 needed to fill the gap between real disposable income and the cost of living. If the 80% of recipients needing to borrow to meet expenses used the money to repay their consumer debts (credit cards, student debt, medical bills, etc.), that money would void out debt and disappear. These loan repayments (or some of them) could be made mandatory and automatic. The other 20% of recipients, who don’t need to borrow to meet expenses, would not need their national dividends for that purpose either. Most would save it or invest it in non-consumer markets. And the money that was actually spent on consumer goods and services would help fill the 10% gap between real and potential GDP, allowing supply to rise with demand, keeping prices stable. The end result would be no net increase in the consumer price index.

The current economic shutdown will necessarily result in shortages, and the prices of those commodities can be expected to inflate; but it won’t be the result of “demand/pull” inflation triggered by helicopter money. It will be “cost/push” inflation from factory closures, supply disruptions, and increased business costs.

International Precedents

Critics of central bank money injections point to the notorious hyperinflations of history – in Weimar Germany, Zimbabwe, Venezuela, etc. These disasters, however, were not caused by government money-printing to stimulate the economy. According to Prof. Michael Hudson, who has studied the question extensively, “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.”

For contemporary examples of governments injecting new money to fund domestic growth, we can look to China and Japan. In the last two decades, China’s M2 money supply grew from 11 trillion yuan to 194 trillion yuan, a nearly 1,800% increase. Yet the average inflation rate of its Consumer Price Index hovered between 2% and 3% during that period. The flood of money injected into the economy did not trigger an inflationary crisis because China’s GDP grew at the same fast clip, allowing supply and demand to rise together. Another factor was the Chinese propensity to save. As incomes went up, the percent of income spent on goods and services went down.

In Japan, the massive stimulus programs called “Abenomics” have been funded through bond purchases by the Japanese central bank. The Bank of Japan has now “monetized” nearly half the government’s debt, injecting new money into the economy by purchasing government bonds with yen created on the bank’s books. If the US Fed did that, it would own $12 trillion in US government bonds, over three times the $3.6 trillion in Treasury debt it holds now. Yet Japan’s inflation rate remains stubbornly below the BOJ’s 2% target. Deflation continues to be a greater concern in Japan than inflation, despite unprecedented debt monetization by its central bank.

UBI and Fears of the “Nanny State”

Wary critics warn that a UBI is the road to totalitarianism, the “cashless society,” dependence on the “nanny state,” and mandatory digital IDs. But none of those outcomes need accompany a UBI. It does not make people dependent on the government, so long as they can work. It is just supplementary income, similar to the dividends investors get from their stocks. A UBI does not make people lazy, as numerous studies have shown. To the contrary, they become more productive than without it. And a UBI does not mean cash would be eliminated. Over 90% of the money supply is already digital. UBI payments can be distributed digitally without changing the system we have.

A UBI can serve the goals both of fiscal policy, providing a vital safety net for citizens in desperate times, and of monetary policy, by stabilizing the money supply. The consumer/producer economy actually needs regular injections of helicopter money to remain sustainable, stimulate economic productivity, and avoid deflationary recessions.

Was the Fed Just Nationalized?

Did Congress just nationalize the Fed? No. But the door to that result has been cracked open.

Mainstream politicians have long insisted that Medicare for all, a universal basic income, student debt relief and a slew of other much-needed public programs are off the table because the federal government cannot afford them. But that was before Wall Street and the stock market were driven onto life-support by a virus. Congress has now suddenly discovered the magic money tree. It took only a few days for Congress to unanimously pass the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which will be doling out $2.2 trillion in crisis relief, most of it going to Corporate America with few strings attached. Beyond that, the Federal Reserve is making over $4 trillion available to banks, hedge funds and other financial entities of all stripes; it has dropped the fed funds rate (the rate at which banks borrow from each other) effectively to zero; and it has made $1.5 trillion available to the repo market.

It is also the Federal Reserve that will be picking up the tab for this bonanza, at least to start. The US central bank has opened the sluice gates to unlimited quantitative easing, buying Treasury securities and mortgage-backed securities “in the amounts needed to support smooth market functions.” Last month, the Fed bought $650 billion worth of federal securities. At that rate, notes Wall Street on Parade, it will own the entire Treasury market in about 22 months. As Minneapolis Fed President Neel Kashkari acknowledged on 60 Minutes, “There is an infinite amount of cash at the Federal Reserve.”

In theory, quantitative easing is just a temporary measure, reversible by selling bonds back into the market when the economy gets back on its feet. But in practice, we have seen that QE is a one-way street. When central banks have tried to reverse it with “quantitative tightening,” economies have shrunk and stock markets have plunged. So the Fed is likely to just keep rolling over the bonds, which is what normally happens anyway with the federal debt. The debt is never actually paid off but is just rolled over from year to year. Only the interest must be paid, to the tune of $575 billion in 2019. The benefit of having the Fed rather than private bondholders hold the bonds is that the Fed rebates its profits to the Treasury after deducting its costs, making the loans virtually interest-free. Interest-free loans rolled over indefinitely are in effect free money. The Fed is “monetizing” the debt.

What will individuals, families, communities and state and local governments be getting out of this massive bailout? Not much. Qualifying individuals will get a very modest one-time payment of $1,200, and unemployment benefits have been extended for the next four months. For local governments, $150 billion has been allocated for crisis relief, and one of the Fed’s newly expanded Special Purpose Vehicles will buy municipal bonds. But there is no provision for reducing the interest rate on the bonds, which typically runs at 3 or 4 percent plus hefty bond dealer fees and foregone taxes on tax-free issues. Unlike the federal government, municipal governments will not be getting a rebate on the interest on their bonds.

The taxpayers have obviously been shortchanged in this deal. David Dayen calls it “a robbery in progress.” But there have been some promising developments that could be harnessed for the benefit of the people. The Fed has evidently abandoned its vaunted “independence” and is now working in partnership with the Treasury. In some sense, it has been nationalized. A true partnership, however, would make the printing press available for more than just buying toxic corporate assets. A central bank that was run as a public utility could fund programs designed to kick-start the economy, stimulate productivity and generally serve the public.

Harnessing the Central Bank

The reason the Fed is now working with the Treasury is that it needs the Treasury to help it bail out a financial industry burdened with an avalanche of dodgy assets that are fast losing value. The problem for the Fed is that it is only allowed to purchase or lend against securities with government guarantees, including Treasury securities, agency mortgage-backed securities, debt issued by Fannie Mae and Freddie Mac, and (arguably) municipal securities. To get around that wrinkle, as Wolf Richter explains:

[T]he Treasury will create (or resuscitate) a series of special-purpose vehicles (SPVs) to buy all manner of financial assets, backed by $425 billion in collateral conveniently supplied by the US taxpayer via the Exchange Stabilization Fund. The Fed will lend to SPVs against this collateral which, when leveraged, could fund $4-5 trillion in asset purchases.

That includes municipal bonds, non-agency mortgages, corporate bonds, commercial paper, and every variety of asset-backed security. The only things the government can’t (transparently, yet) buy are publicly-traded stocks and high-yield bonds.

Unlike in QE, in which the Fed moves assets onto its own balance sheet, the Treasury will now be buying assets and backstopping loans through SPVs that the Treasury will own and control. SPVs are a form of shadow bank, which like all banks create money by “monetizing” debt or turning it into something that can be spent in the marketplace. The SPV decides what assets to buy and borrows from the central bank to do it. The central bank then passively creates the funds, which are used to purchase the assets backing the loan. As Jim Bianco wrote on Bloomberg:

In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades. This scheme essentially merges the Fed and Treasury into one organization. …

In effect, the Fed is giving the Treasury access to its printing press. This means that, in the extreme, the administration would be free to use its control, not the Fed’s control, of these SPVs to instruct the Fed to print more money so it could buy securities and hand out loans in an effort to ramp financial markets higher going into the election.

Of the designated SPVs, none currently serves a public purpose beyond buoying the markets; but they could be designed for such purposes. The taxpayers are on the hook for replenishing the $425 billion in the Exchange Stabilization Fund, and they should be entitled to share in the benefits. Congress could designate a Special Purpose Vehicle to fund its infrastructure projects, and to fund those much-needed public services including Medicare for all, a universal basic income, student debt relief, and similar programs. It could also purchase a controlling interest in insolvent or profligate banks, pharmaceutical companies, oil companies and other offenders and regulate them in a way that serves the public interest.

Another possibility would be for Congress to fund these programs in the usual way by issuing government bonds, but to enter into a partnership agreement first by which the central bank would buy the bonds, roll them over indefinitely, and rebate the interest to the Treasury. That is how Japanese Prime Minister Shinzo Abe has funded his stimulus programs, with none of the predicted inflationary effects on consumer prices. In fact, the Japanese consumer price index is hovering at a very low 0.4%, well below even the central bank’s 2 percent target, although the Bank of Japan has monetized nearly half of the government’s debt. Half of the US debt would be over $11 trillion. Assuming $6 trillion for the current corporate bailouts, that means another $5 trillion could safely be monetized for programs benefiting individuals, families and local governments. (How to do this without driving up consumer prices will be the subject of another article.)

Relief for State and Local Governments

State and local governments, which are on the front lines for delivering emergency services, have for the most part been left out of the bailout bonanza. While we are waiting for action from Congress, the Fed could make cheap loans available to local governments using its existing powers under Federal Reserve Act Sec. 14(2)(b), which authorizes the Fed to purchase the bills, bonds, and notes of state and local governments having maturities of six months or less. Since local governments must balance their budgets, these loans would have to be repaid, but the loans could be extended by rolling them over for a reasonable period, as is done with repo loans and the federal debt; and the loans could be made at the same near-zero interest rate banks can borrow at now. State and local governments are at least as creditworthy as banks – they have a taxpayer base and massive assets. In fact, the private banking industry would have been insolvent long ago if it were not for the deep pocket of the central bank and the bailouts of the federal government, including the FDIC insurance scheme that rescued the banks from bankruptcy in the Great Depression.

There is a way state and local governments can take advantage of the near-zero interest rates available to banks even without federal action. They can set up their own publicly-owned banks. Besides giving them the ability to borrow much more cheaply, having their own banks would allow them to leverage their loan funds. A $100 million revolving fund issuing loans at 3% would gross the state $3 million per year. If that same $100 million were used to capitalize a bank, it could issue ten times that sum in loans, grossing $30 million per year. Costs would need to be deducted from those earnings, including the cost of funds; but the cost of funds is quite low for banks today. They can borrow to meet their liquidity needs from their own deposit pool, or at 0.25% in the fed funds market, or at about the same rate in the repo market, which is now backstopped by the central bank.

The blatant disparities in the congressional response to the current crisis have shone a bright light on how our financial system is rigged against the people in favor of a wealthy elite. Crisis is when change happens; this is the time for advocates to unite in demanding change on behalf of the people. As Greek economist Yanis Varoufakis admonished in a recent post:

[T]his new phase of the crisis is, at the very least, making it clear to us that anything goes – that everything is now possible.… Whether the epidemic helps deliver the good or the most evil society will depend … on whether progressives manage to band together. For if we do not, just like in 2008 we did not, the bankers, the spivs [petty criminals], the oligarchs and the neofascists will prove, again, that they are the ones who know how not to let a good crisis go to waste.

The Decade Of Transformation Is Here: Remaking The Economy For The People

The pandemic, economic collapse and the government’s response to them are going to not only determine the 2020 election but define the future for this decade and beyond. People are seeing the failure of the US healthcare nonsystem and the economy. The government was able to provide trillions for big business and Wall Street without asking the usual, “Where will we get the money?” However, the rescue bill recently passed by Congress provides a fraction of what most people need to get through this period. Once again, a pandemic will reshape the course of history.

Last week, we wrote about the failings of the healthcare system and the need for a universal, publicly-funded system. This week, we focus on the need to change the US economic system. The economic crisis in the United States is breaking all records. The class war that has existed for decades is being magnified and sharpened. The failings of financialized, neoliberal capitalism is being brought into focus at a time when people in the United States have greater support for socializing the economy than in recent times.

This Thursday, there was a record 3.3 million applications for unemployment, an increase of three million from the previous week, but on the same day, there was a record rise in the stock market. This contradiction shows the divide between the economic insecurity of the people and investors profiting from the crisis. The 11.4 percent increase in the stock market on Thursday was the largest increase since 1933 while the record rise in unemployment was 40 percent higher than ever recorded. Projections are for 30 percent unemployment this quarter, which is five percent higher than the worst of the Great Depression.

The response to the economic crisis reveals who the government represents. While people’s economic insecurity grew, the government acted to primarily benefit the wealthiest. This realization should spur an uprising like the United States has never seen before. Perhaps the most dangerous to the ruling class is their incompetence has been exposed. As Glen Ford writes, “The capitalist ‘crisis of legitimacy’ may have passed the point of no return, as the Corporate State proves daily that it cannot perform the basic function of protecting the lives of its citizens.”

Disaster Aid: Crumbs For The People, Trillions For The Wealthiest

Congress unanimously passed a $1.6 trillion coronavirus disaster aid bill this week. This is almost equal to the 2009 Recovery Act and the 2008 Wall Street rescue combined. Democrat’s votes were essential to passing the bill so they could have demanded whatever they wanted. This bill shows the bi-partisan priority for big business.

The bill is too little too late for people who have lost their jobs and for small businesses that have been forced to close. The law includes a one-time $1,200 payment to most people. This payment will arrive after rent and other debt payments are due for a US population with record debt. Congress does not understand the economic realities of people in the United States. Nobel Prize-winning economist Joseph Stiglitz explained what was needed saying, “The answer is we need no evictions, no foreclosures on all properties, and the government should guarantee pay.” In addition, credit card companies should also put “a stay on interest on all debt.”

When COVID-19 first began, we pointed out that the US healthcare system was not prepared to respond and showed the problems of putting profits before health. The COVID-19 rescue bill did not pay for coronavirus testing or treatment. Millions of people who lose their jobs will lose their health insurance, demonstrating why healthcare should not be tied to employment. Adding to health problems, the law did not increase the SNAP food program for the poor.

Roughly one-third of the funding goes to direct payments to people, unemployment insurance for four months, hospitals, veterans’ care, and public transit. Two-thirds go to government and corporations. Adam Levitin describes the law as “robbing taxpayers to bail out the rich.”

Congress allotted at least $454 billion to support big business in addition to $46 billion for specific industries, especially airlines. Some of these funds will also bail out the fossil fuel industry. According to the way the Federal Reserve operates, they will be allowed to spend ten times the amount Congress allocated to support big business, $4.5 trillion. Jack Rasmus writes that the Federal Reserve had already “allocated no less than $6.2 Trillion so far to bail out the banks and investors.” He summarizes the disparity: “Meanwhile Congress provides one-fourth that, and only one-third of that one fourth, for the Main St., workers, and middle-class families.”

Trump shows the disdain government has for the people and its favoritism for big business and investors as he objected to paying for 80,000 life-saving ventilators because they cost $1 billion while the government provides trillions to big business and investors. Governors and hospitals are issuing dire warnings of what is to come, but the federal government is not listening.

Economic Collapse Shows The Need For Transformational Change

The economic collapse is still unfolding. The US is already in a deep recession that is likely to be worse than the 2008 financial crisis and could develop into a greater depression if the COVID-19 economic shutdown lasts a long time.

Already, the crises, the government’s support for Wall Street and its failure to protect the 99% are creating louder demands for system change. We need to put forward a bold agenda and agitate around it to demand economic security for all. As Margaret Kimberly writes, we are entering a period of revolutionary change because we know returning to normal is “the opposite of what we need.” Or as Vijay Prashad says, “Normal was the problem.”

While the urgent health and economic crises dominate, the climate crisis also continues. The climate crisis already required replacing the fossil fuel era with a clean and sustainable energy economy and remaking multiple sectors of the economy such as construction, transportation, agriculture, and infrastructure. Now, out of these crises, a new sustainable economic democracy can be born where people control finance, inequality is minimized and workers are empowered, along with creating public programs that meet the necessities of the people and protect the planet.

The US Constitution gives the government the power to create money; Article I, Section 8 says: “The Congress shall have power … to coin money, regulate the value thereof, and of foreign coin.” Congress needs to take back that power so the government can create debt-free money. Currently, the Federal Reserve, which was created by Congress in 1913, is the privately-owned US central bank that produces money and sets interest rates. It puts the interests of the big banks first. The Fed can be altered, nationalized or even dismantled by Congress. Its functions could be put into the Department of the Treasury.

Monetary actions need to be transparent and designed to serve the necessities of the people and the planet. Money should be spent by the government into the economy to meet those needs while preventing inflation and deflation. In this way, the government would have the funds needed to transform to a green energy economy, rebuild infrastructure, provide education from pre-school through college without tuition, create the healthcare infrastructure we need for universal healthcare and more.  In addition, through a network of state and local public banks, people would be able to get cost-only mortgages and loans to meet their needs.

Moving money creation into the federal government would place it within the constitutional system of checks and balances where the people have a voice to ensure it works for the whole society, not only for the bankers and the privileged. This could end the parasitic private banking system and replace it with a democratic public system designed for the people’s needs as Mexico is doing.

Globalization must be reconsidered. Corporate globalization with trade agreements that favor corporate power is a root cause of this global pandemic. We need trade that puts people and the planet first and encourages local production of goods. This includes remaking agriculture to support smaller farms and urban farming using organic and regenerative techniques that increase the nutritional value of foods and sequester carbon.

What we need instead is popular globalization – developing solidarity and reciprocity between people around the world. We can learn from each other, collaborate and provide mutual aid in times of crisis as Cuba and other countries are doing now.

As businesses are bailed out by the government, they could be required to protect and empower workers. Workers’ rights have been shrinking since the 1950s as unions have become smaller and more allied with business interests. The right to collective bargaining needs to be included as a requirement for receiving government funds. For large public corporations, workers should be given a board seat, indeed the government should be given a board seat and an equity share in any corporation that is bailed out. For smaller businesses, as they reopen, it is an opportunity to restructure so worker ownership and workers sharing in the profits become the norm.

The US needs to build the economy from the bottom up. The era of trickle-down economics that has existed since the early 80s has failed most people in the United States. The government needs to create a full-employment economy with the government as the employer of last resort. The American Society of Civil Engineers gives US infrastructure a grade of D+ requiring a $2 trillion dollar investment that would create millions of jobs. The Green New Deal would create 30 million jobs over ten years according to the detailed plan put forward by the Green Party’s Howie Hawkins.

The coronavirus disaster aid includes a payment to every person in the US earning under $70,000. While the one-time $1,200 check is grossly insufficient, it demonstrates the possibility of a universal basic income. This would lift people out of poverty and protect them from the coming age of robots and artificial intelligence that will impact millions of existing jobs. The evidence is growing that a basic income works. A World Bank analysis of 19 studies found that cash transfers have been demonstrated to improve education and health outcomes and alleviate poverty

The United States economy is in a debt crisis that demands quantitative easing for the people. Personal, corporate and government debt is at a record high. While the economic collapse is being blamed on the coronavirus, the reality is that the pandemic was a trigger that led to a recession that was already coming. The US needs to correct those fundamentals — massive debt, a wealth divide, inadequate income, poverty — as part of restarting the economy. Just as the Fed has bought debts to relieve businesses of debt burden, it can do the same for the personal debts of people. We should start by ending the crisis of student debt, which is preventing two generations from participating in the economy. While we make post-high school vocational and college education tuition-free, we should not leave behind the generations suffering from high-priced education.

Rise-Up and Demand Change

To create change, people must demand it. Even before the coronavirus collapse, people were demanding an end to inequality, worker rights, climate justice, and improved Medicare for all, among other issues. In the last two years, the United States has seen record numbers of striking workers. The climate movement is blocking pipelines and infrastructure and shutting down cities. Protests against inequality and debt resistance have existed since the occupy movement.

Now, with the economic collapse, protests are increasing. It’s Going Down reports: “with millions of people now wondering how they are going to make ends meet and pay rent, let alone survive the current epidemic, a new wave of struggles is breaking out across the social terrain. Prisoners and detention center detainees are launching hunger strikes as those on the outside demand that they be released, tenants are currently pushing for a rent strike starting on April 1st, the houseless are taking over vacant homes in Los Angeles, and workers have launched a series of wildcat strikers, sick-outs, and job actions in response to being forced onto the front lines of the pandemic like lambs to the slaughter.”

Workers at the Fiat Chrysler Windsor Assembly Plant walked off the job over concerns about the spread of coronavirus. Pittsburgh garbage collectors refused to pick up trash because their health was not being protected. Chipotle employees walked off the job and publicly protested the company for allegedly penalizing workers who call in sick. Perdue employees in Georgia walked off their jobs on a production line over a wage dispute and management asked workers to put in extra hours without a pay increase during the pandemic. Some Whole Foods workers announced a collective action in the form of a “sick out,” with workers using their sick days in order to strike. In Italy, wildcat strikes erupted to demand that plants be closed for the duration of the virus. Postal workers in London took strike actions due to the risks of the virus.

The pandemic requires creativity in protest. Technology allows us to educate and organize online, as well as to protest, petition, email, and call. There have also been car marches, public transport drivers have refused to monitor tickets, collective messages have been sent from balconies and windows. People are showing they can be innovative to get our message across to decision-makers. We can also build community and strengthen bonds with mutual aid.

If the ownership class continues its call to re-open the economy despite the health risks, the potential of a general strike can become a reality. When Trump called for returning to work the hashtags #GeneralStrike and #GeneralStrike2020— calling on workers everywhere to walk off the job — began trending on Twitter. Rather than a strike against one corporation, people would strike across multiple businesses and could also include a rent and mortgage strike as well as a debt strike. The coronavirus has shown that essential workers are among the lowest-paid workers and that they make the economy function. We also understand that if people refuse to pay their debts or rent, the financial system will collapse. Understanding those realities gives a new understanding of the power of the people.

A general strike, as Rosa Luxembourg described it in 1906, is not ‘one isolated action” but a rallying call for a campaign of “class struggle lasting for years, perhaps for decades.” A general strike could take many forms, including a global day of action. Before the current crises, we saw the decade of the 2020s as a decade of potential transformational change because on multiple fronts movements were growing and demanding responses to an array of crises. Now, the triggers for the economic collapse could also be the trigger for transformational revolt.

We are all in this together. We are all connected and share a common humanity. If we act in solidarity during this time of crisis and in this decade of transformation, we can create the future we want to see for ourselves and future generations.

How to Crush a Bankers’ Dictatorship: A Lesson from 1933

Amidst the current hysteria of the covid-19 pandemic, talk of general chaos and economic collapse have taken the forefront of peoples’ minds.

Increasingly over recent months, western media has been hit with warnings of “financial Armageddon” and the need for a “global hegemonic synthetic currency” to replace the collapsing US dollar under a new system of green finance. These statements have been made by former and current Bank of England Governors Mark Carney and Mervyn King respectively and should not be ignored as the world sits atop the largest financial bubble in human history reminiscent of the 1929 bubble that was triggered on black Friday in the USA which unleashed a great depression across Europe and America.

While I’m not arguing that a systemic change is not vital to protect people from the effects of a general meltdown of the $1.2 trillion derivatives bubble sometimes called “the western banking system”, what such central bankers are proposing is a poison more deadly than the disease they promise to cure.

In principle, the world crisis is no different from the artificially manufactured crises which the world faced in 1923 when unpayable Versailles debts were heaved onto a beaten Germany, which I elaborated upon in my previous report. It is also no different from the nature of the folly that unleashed unbounded speculation during the “roaring 1920s” which led to the bank-run and general meltdown. Similarly, the solutions being proposed to put out the fire by those same arsonists who lit the matches today are identical to what the world faced in 1933 as a “central bankers” solution for the world depression.

How the 1929 Crash was Manufactured

While everyone knows that the 1929 market crash unleashed four years of hell in America which quickly spread across Europe under the great depression, not many people have realized that this was not inevitable, but rather a controlled blowout.

The bubbles of the 1920s were unleashed with the early death of President William Harding in 1923 and grew under the careful guidance of JP Morgan’s President Coolidge and financier Andrew Mellon (Treasury Secretary) who de-regulated the banks, imposed austerity onto the country, and cooked up a scheme for Broker loans allowing speculators to borrow 90% on their stock. Wall Street was deregulated, investments into the real economy were halted during the 1920s and insanity became the norm. In 1925 broker loans totalled $1.5 billion and grew to $2.6 billion in 1926 and hit $5.7 billion by the end of 1927. By 1928, the stock market was overvalued fourfold!

When the bubble was sufficiently inflated, a moment was decided upon to coordinate a mass “calling in” of the broker loans. Predictably, no one could pay them resulting in a collapse of the markets. Those “in the know” cleaned up with JP Morgan’s “preferred clients”, and other financial behemoths selling before the crash and then buying up the physical assets of America for pennies on the dollar. One notable person who made his fortune in this manner was Prescott Bush of Brown Brothers Harriman, who went on to bailout a bankrupt Nazi party in 1932. These financiers had a tight allegiance with the City of London and coordinated their operations through the private central banking system of America’s Federal Reserve and Bank of International Settlements.

The Living Hell that was the Great Depression

Throughout the Great depression, the population was pushed to its limits making America highly susceptible to fascism as unemployment skyrocketed to 25%, industrial capacity collapsed by 70%, and agricultural prices collapsed far below the cost of production accelerating foreclosures and suicide. Life savings were lost as 4000 banks failed.

This despair was replicated across Europe and Canada with eugenics-loving fascists gaining popularity across the board. England saw the rise of Sir Oswald Mosley’s British Union of Fascists in 1932, English Canada had its own fascist solution with the Rhodes Scholar “Fabian Society” League of Social Reconstruction (which later took over the Liberal Party) calling for the “scientific management of society”. Time magazine had featured Il Duce over 6 times by 1932 and people were being told  that corporate fascism was the economic solution to all of America’s economic woes.

In the midst of the crisis, the City of London removed itself from the gold standard in 1931 which was a crippling blow to the USA, as it resulted in a flight of gold from America causing a deeper contraction of the money supply and thus inability to respond to the depression. British goods simultaneously swamped the USA crushing what little production was left.

It was in this atmosphere that one of the least understood battles unfolded in 1933.

1932: A Bankers’ Dictatorship is Attempted

In Germany, a surprise victory of Gen. Kurt Schleicher caused the defeat of the London-directed Nazi party in December 1932 threatening to break Germany free of Central Bank tyranny. A few weeks before Schleicher’s victory, Franklin Roosevelt won the presidency in America threatening to regulate the private banks and assert national sovereignty over finance.

Seeing their plans for global fascism slipping away, the City of London announced that a new global system controlled by Central Banks had to be created post haste. Their objective was to use the economic crisis as an excuse to remove from nation states any power over monetary policy, while enhancing the power of Independent Central Banks as enforcers of “balanced global budgets”.

In December 1932, an economic conference “to stabilize the world economy” was organized by the League of Nations under the guidance of the Bank of International Settlements (BIS) and Bank of England. The BIS was set up as “the Central Bank of Central Banks” in 1930 in order to facilitate WWI debt repayments and was a vital instrument for funding Nazi Germany long after WWII began. The London Economic Conference brought together 64 nations of the world under a controlled environment chaired by the British Prime Minister and opened by the King himself.

A resolution passed by the Conference’s Monetary Committee stated:

The conference considers it to be essential, in order to provide an international gold standard with the necessary mechanism for satisfactory working, that independent Central Banks, with requisite powers and freedom to carry out an appropriate currency and credit policy, should be created in such developed countries as have not at present an adequate central banking institution” and that “the conference wish to reaffirm the great utility of close and continuous cooperation between Central Banks. The Bank of International Settlements should play an increasingly important part not only by improving contact, but also as an instrument for common action.

Echoing Carney’s current fixation with “mathematical equilibrium”, the resolutions stated that the new global gold standard controlled by central banks was needed “to maintain a fundamental equilibrium in the balance of payments” of countries. The idea was to deprive nation states of their power to generate and direct credit for their own development.

FDR Torpedoes the London Conference

Chancellor Schleicher’s resistance to a bankers’ dictatorship was resolved by a “soft coup” ousting the patriotic leader in favor of Adolph Hitler (under the control of a Bank of England toy named Hjalmar Schacht) in January 1933 with Schleicher assassinated the following year. In America, an assassination attempt on Roosevelt was thwarted on February 15, 1933 when a woman knocked the gun out of the hand of an anarchist-freemason in Miami resulting in the death of Chicago’s Mayor Cermak.1

Without FDR’s dead body, the London conference met an insurmountable barrier, as FDR refused to permit any American cooperation. Roosevelt recognized the necessity for a new international system, but he also knew that it had to be organized by sovereign nation states subservient to the general welfare of the people and not central banks dedicated to the welfare of the oligarchy. Before any international changes could occur, nation states castrated from the effects of the depression had to first recover economically in order to stay above the power of the financiers.

By May 1933, the London Conference crumbled when FDR complained that the conference’s inability to address the real issues of the crisis is “a catastrophe amounting to a world tragedy” and that fixation with short term stability were “old fetishes of so-called international bankers”. FDR continued “The United States seeks the kind of dollar which a generation hence will have the same purchasing and debt paying power as the dollar value we hope to attain in the near future. That objective means more to the good of other nations than a fixed ratio for a month or two. Exchange rate fixing is not the true answer.”

The British drafted an official statement saying “the American statement on stabilization rendered it entirely useless to continue the conference.”

FDR’s War on Wall Street

The new president laid down the gauntlet in his inaugural speech on March 4th saying:

The money-changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.

FDR declared a war on Wall Street on several levels, beginning with his support of the Pecorra Commission which sent thousands of bankers to prison, and exposed the criminal activities of the top tier of Wall Street’s power structure who manipulated the depression, buying political offices and pushing fascism. Ferdinand Pecorra, who ran the commission, called out the deep state when he said “this small group of highly placed financiers, controlling the very springs of economic activity, holds more real power than any similar group in the United States.”

Pecorra’s highly publicized success empowered FDR to impose sweeping regulation in the form of 1) Glass-Steagall bank separation, 2) bankruptcy re-organization and 3) the creation of the Security Exchange Commission to oversee Wall Street. Most importantly, FDR disempowered the London-controlled Federal Reserve by installing his own man as Chair (Industrialist Mariner Eccles) who forced it to obey national commands for the first time since 1913, while creating an “alternative” lending mechanism outside of Fed control called the Reconstruction Finance Corporation (RFC) which became the number one lender to infrastructure in America throughout the 1930s.

One of the most controversial policies for which FDR is demonized today was his abolishment of the gold standard. The gold standard itself constricted the money supply to a strict exchange of gold per paper dollar, thus preventing the construction of internal improvements needed to revive industrial capacity and put the millions of unemployed back to work for which no financial resources existed. Its manipulation by international financiers made it a weapon of destruction rather than creation at this time. Since commodity prices had fallen lower than the costs of production, it was vital to increase the price of goods under a form of “controlled inflation” so that factories and farms could become solvent and unfortunately the gold standard held that back. FDR imposed protective tariffs to favor agro-industrial recovery on all fronts ending years of rapacious free trade.

FDR stated his political-economic philosophy in 1934:

The old fallacious notion of the bankers on the one side and the government on the other side, as being more or less equal and independent units, has passed away. Government by the necessity of things must be the leader, must be the judge, of the conflicting interests of all groups in the community, including bankers.

The Real New Deal

Once liberated from the shackles of the central banks, FDR and his allies were able to start a genuine recovery by restoring confidence in banking. Within 31 days of his bank holiday, 75% of banks were operational and the FDIC was created to insure deposits. Four million people were given immediate work, and hundreds of libraries, schools and hospitals were built and staffed, all funded through the RFC. FDR’s first fireside chat was vital in rebuilding confidence in the government and banks, serving even today as a strong lesson in banking which central bankers don’t want you to learn about.

From 1933-1939, 45 000 infrastructure projects were built. The many “local” projects were governed, like China’s Belt and Road Initiative today, under a “grand design” which FDR termed the “Four Quarters” featuring zones of mega-projects such as the Tennessee Valley Authority area in the south east, the Columbia River Treaty zone on the northwest, the St Laurence Seaway zone on the North east, and Hoover Dam/Colorado zone on the Southwest. These projects were transformative in ways money could never measure as the Tennessee area’s literacy rose from 20% in 1932 to 80% in 1950, and racist backwater holes of the south became the bedrock for America’s aerospace industry due to the abundant and cheap hydropower.

Wall Street Sabotages the New Deal

Those who criticize the New Deal today ignore the fact that its failures have more to do with Wall Street sabotage than anything intrinsic to the program. For example, JP Morgan tool Lewis Douglass (U.S. Budget Director) forced the closure of the Civil Works Administration in 1934 resulting in the firing of all 4 million workers.

Wall Street did everything it could to choke the economy at every turn. In 1931, NY banks’ loans to the real economy amounted to $38.1 billion which dropped to only $20.3 billion by 1935. Where NY banks had 29% of their funds in US bonds and securities in 1929, this had risen to 58% which cut off the government from being able to issue productive credit to the real economy.

When, in 1937, FDR’s Treasury Secretary persuaded him to cancel public works to see if the economy “could stand on its own two feet”, Wall Street pulled credit out of the economy collapsing the Industrial production index from 110 to 85 erasing seven years’ worth of gain, while steel fell from 80% capacity back to depression levels of 19%. Two million jobs were lost and the Dow Jones lost 39% of its value. This was no different from kicking the crutches out from a patient in rehabilitation and it was not lost on anyone that those doing the kicking were openly supporting Fascism in Europe. Bush patriarch Prescott Bush, then representing Brown Brothers Harriman, was found guilty for trading with the enemy in 1942!

Coup Attempt in America Thwarted

The bankers didn’t limit themselves to financial sabotage during this time, but also attempted a fascist military coup which was exposed by Maj. Gen. Smedley Butler in his congressional testimony of November 20, 1934. Butler had testified that the plan was begun in the Summer of 1933 and organized by Wall Street financiers who tried to use him as a puppet dictator leading 500 000 American Legion members to storm the White House. As Butler spoke, those same financiers had just set up an anti-New Deal organization called the American Liberty League which fought to keep America out of the war in defense of an Anglo-Nazi fascist global government which they wished to partner with.

The American Liberty league only changed tune when it became evident that Hitler had become a disobedient Frankenstein monster who wasn’t content in a subservient position to Britain’s idea of a New World Order. In response to the Liberty League’s agenda, FDR said “some speak of a New World Order, but it is not new and it is not order”.

FDR’s Post-War Vision Destroyed

While FDR’s struggle did change the course of history, his early death during the first months of his fourth term resulted in a fascist perversion of his post-war vision.

Rather than see the IMF, World Bank or UN used as instruments for the internationalization of the New Deal principles to promote long term, low interest loans for the industrial development of former colonies, FDR’s allies were ousted from power over his dead body, and they were recaptured by the same forces who attempted to steer the world towards a Central Banking Dictatorship in 1933.

The American Liberty League spawned into various “patriotic” anti-communist organizations which took power with the FBI and McCarthyism under the fog of the Cold War. This is the structure that Eisenhower warned about when he called out “the Military Industrial Complex” in 1960 and which John Kennedy did battle with during his 900 days as president.

The New Silk Road as the 21st Century New Deal

This is the structure which is out to destroy President Donald Trump out of fear that a new FDR impulse is beginning to be revived in America which may align with the 21st Century international New Deal emerging from China’s Belt and Road Initiative and Eurasian alliance. French Finance Minister Bruno LeMaire and Marc Carney have stated their fear that if the Green New Deal isn’t imposed by the west, then the New Silk Road and yuan will become the basis for the new world system.

The Bank of England-authored Green New Deal and Synthetic Hegemonic Currency which promise to impose draconian constraints on humanity’s carrying capacity in defense of saving nature from humanity have nothing to do with Franklin Roosevelt’s New Deal and they have less to do with the Bretton Woods conference of 1944. These are merely central bankers’ wet dreams for depopulation and fascism “with a democratic face” which their 1933 conference failed to achieve and can only be imposed if people remain blind to their own recent history.

• First published at Strategic Culture Foundation

  1. Zingara was labeled a “lone gunman” and promptly executed before any proper investigation could be done.

We’re In A Recession, And It’s Likely To Get Worse

The coronavirus epidemic is creating an ongoing teachable moment that could be used to transform the US economy. COVID-19 and the oil war are triggers leading to a recession that has its roots in record corporate and personal debt, longterm low wages and an artificially-inflated stockmarket. The shortcomings of US economic policy, the healthcare system, and workers’ rights are being magnified by the current crisis.

Epidemiologists are reporting the coronavirus epidemic will last months, maybe more than a year. A survey of prominent academic economists released on Thursday found that a majority believe even if the outbreak proves to be limited, like the flu, it is likely to cause a “major recession.”

The teachable moment is an opportunity for people to understand more clearly why we need healthcare for all through national improved Medicare for all, why workers need paid sick and family leave so people can stay home from work and not infect others and why we need to end the extreme wealth divide so all people have the housing, food, healthcare, and income they need to thrive. Already, corporate media is reporting on “disaster socialism” and saying “everyone’s a socialist in a pandemic.” The failures of neoliberal capitalism are obvious. Tax breaks for corporations and the wealthy and trickle-down economics have failed.

People have significant power to demand change. Consumer spending accounts for approximately 70 percent of all economic growth. If consumers do not spend, there will be a recession. This translates into people power. If people go on a spending strike, they will impact the economy in ways the elites cannot ignore. It’s time to demand an economy that serves the people.

The Economic Collapse Has Just Begun

This week, we interviewed economist Jack Rasmus on the Clearing The FOG podcast (available Monday night). He wrote last Sunday that a financial collapse was underway pointing to the combination of the coronavirus and the oil war.  In the interview, he pointed to weaknesses in the economy that show the falsity of government officials who claim “the fundamentals are sound.” Problems include record consumer, corporate and government debt, stagnant wages, workers who have not recovered from the last economic collapse, and financial markets addicted to trillions from the Federal Reserve. Even before the current collapse, college debt, unaffordable healthcare, and inadequate retirement funds were among the problems creating economic insecurity for most people. Already 40 percent of people in the US can’t handle a $400 emergency and 60 percent could not handle a $1,000 surprise expense.

This weekend the Fed hit the panic button again, making an emergency announcement Sunday afternoon that it would be cutting interest rates to zero for the first time since the financial crisis. It also announced quantitative easing in the form of at least $700 billion of asset purchases. This will not change the course of the virus and it will not open supply lines from impacted countries or increase consumer spending. It shows that panic over the global recession is hitting very quickly.

Here are some aspects of the current financial crisis and what we can expect:

The Consumer Collapse: People in the United States are starting this recession in a weak financial situation. In December 2019, there was a record $4.19 trillion in personal debt breaking November’s record of $4.16 trillion. Student debt was already in crisis, totaling $1.6 trillion and impacting 45 million people with a delinquincy rate of more than 11 percent. Jack Rasmus reports that “only the US household consumer was holding up the US economy at year-end 2019.”

Now, the economy is in a virtual standstill. Conferences and concerts are canceled, colleges are switching to virtual classes, public schools are closing, Broadway is dark, and professional sports are on hold. Disneyland, which stayed open through the last recession, has closed. There is no precedent for the economy shutting down so quickly.

Each of these closings, combined with people staying home, is driving a collapse of the economy, which will worsen. People are losing their jobs or experiencing reduced incomes causing them to spend less.  This has a ripple effect, as the NY Times describes, “When restaurants close their doors, they no longer need tablecloths delivered by linen services or beer from local brewers. When people stop flying, they no longer need taxis to the airport or $5 bottles of water from the airport newsstand.” They report that Zip Recruiter job posting for restaurants was down 26 percent compared to a year ago, catering is down 39 percent and there’s been a 44 percent decline in aviation jobs.

The Corporate Collapse: Like people, corporations are holding record levels of debt. The corporate bond market will be shrinking and corporate credit will shut down. Already corporations are switching their credit lines to cash. This will lead to businesses being unable to refinance, which will be the prelude to mass defaults and bankruptcies. The collapse of corporations will lead to increasing unemployment, adding to the consumer collapse.

The first to be impacted will be the more than $2 trillion dollar US junk bond market, followed by the $3 trillion dollar BBB corporate debts. Rasmus explains these bonds are really also junk that has been improperly reclassified as BBB. That is $5 trillion at rapid risk for default including fossil fuel companies and retail stores, which will then spread to higher grade corporate debt.

US corporations have been propped up by the Federal Reserve as well as the Obama and Trump administrations. This has included free money from the Fed that has artificially escalated stock prices as companies used the money for stock buybacks. The bailouts of the Obama era, followed by Trump’s $4.5 trillion 10 year tax cuts created a windfall making up 23 percent of the 27 percent rise in corporate profits in 2018. The US corporate economy is very fragile.

The End Of the US Oil And Gas Boom: Last Friday, Russia and Saudi Arabia could not agree on continuing to prop-up the price of oil. An oil war began with plunging prices to gain a bigger share of the market. This led to the steepest drop in oil since prices since January 17, 1991, when Operation Desert Storm was launched. Hundreds of billions of value for the already troubled US shale oil and gas industry disappeared. Destroying US shale may have been the goal of Russia. Trump paused the drop on oil prices by ordering purchases for the strategic petroleum reserve, but that is a temporary pause.

Shale oil is at a disadvantage because Goldman Sachs projects it needs a price of $48 a barrel to repay its debts. Goldman warned that oil prices could fall as low as $20 a barrel. In contrast, Saudi Arabia’s production costs are said to be $2.80 a barrel.

The US fossil fuel market has never been financially secure with only 10 percent of companies showing a profit. It has been propped up by massive debt. DeSmog Blog reports that banks wrote off as much as $1 billion in shale loans in 2019. World Oil reported an additional $40 billion of shale debts are expected to come due in 2020, followed by over $160 billion in debts over the following three years.

The crash of the shale oil and gas industry could cause a major recession by itself. There will be many bankruptcies in shale industries and tens of thousands of layoffs over the next 12 months causing widespread collateral damage.

Trump and Obama’s policies created the expansion of the shale oil and gas but left the economy and energy security at risk of foreign nations. The fossil fuel collapse comes at a time when the cost of renewable energy has consistently lowered costs making wind and solar far more competitive than fossil fuels.

The combination of the drop in the price of oil, the tightening credit market for shale, the reduced demand for oil and gas as well as the realities of the climate crisis and reduced cost of clean energy tells investors to get out now rather than stranding their assets in a failing fossil fuel market.

The Stock Market Crash: On February 24, the World Health Organization (WHO) announced it was time to prepare for a global pandemic. The stock market plummeted. Over the following week, the Dow Jones dropped by more than 3500 points or 10%. On March 3, when the Federal Reserve tried to stop the drop by cutting the Feds fund rate from 1.5 percent to 1 percent, their first emergency cut and biggest one-time cut since the 2008 financial crisis, it fueled a panic.

On March 11, Trump gave an address to the Nation from the Oval Office in an attempt to stop the crash. It failed. Markets continued falling 1250 points again even before they reopened the next morning. On the 12th, the Dow fell 2352 points, the largest single-day stock market point crash in history. Last week saw the three worst point drops in Dow history, with Monday’s drop of 2013 points holding the record until Thursday, and Wednesday being the third-largest single-day stock market point crash in history. On a percentage basis, the Thursday collapse was the largest for the Dow since the crash of 1987.

As the market crashed, the Federal Reserve announced it would inject $1.5 trillion into short-term markets. This is twice as large as the original size of the 2008 bank bailout. WHO issued a plea for $675 million a month to fight the global coronavirus pandemic. The Fed’s Wall Street Bailout was over a thousand times larger than the emergency coronavirus funding WHO requested.

On Friday, Trump held a press conference where he surrounded himself with corporate executives to send a message to investors, the markets and big business. He declared a state of emergency that he claimed would free up $50 billion in federal dollars. Trump did not announce any new measures to stop COVID-19 or expand access to treatment but he made clear the pandemic was a profit opportunity for private industry, including testing companies, and retailers like Walmart, Target and CVS that are providing tests. Wall Street got the message and the Dow Jones Industrial Average increase 1400 points.

But this is not likely to last. First, the stock market’s expansion since the 2008 collapse has been artificially pumped up by tax and interest rate policies that led to record corporate stock buybacks, high executive pay, and high dividend payouts. This created an artificial stock market boom that is being erased by the virus and oil war.

Further, the CDC estimates that “between 160 million and 214 million people in the United States could be infected over the course of the epidemic,” and that “as many as 200,000 to 1.7 million people could die.” The New York Times estimates, “2.4 million to 21 million people in the United States could require hospitalization, potentially crushing the nation’s medical system, which has only about 925,000 staffed hospital beds.”

Real Changes are needed in both the short and long term to fix an economy that has been ailing for most people for multiple decades. Next week, we will write about what can be done to fix the economy and how people are organizing in their communities now to get through the epidemic and economic crisis.

The Fed’s Baffling Response to the Coronavirus Explained

When the World Health Organization announced on February 24th that it was time to prepare for a global pandemic, the stock market plummeted. Over the following week, the Dow Jones Industrial Average dropped by more than 3,500 points or over 10%. In an attempt to contain the damage, on March 3rd the Federal Reserve slashed the fed funds rate from 1.5% to 1.0%, in their first emergency rate move and biggest one-time cut since the 2008 financial crisis. But rather than reassuring investors, the move fueled another panic sell-off.

Exasperated commentators on CNBC wondered what the Fed was thinking. They said a half point rate cut would not stop the spread of the coronavirus or fix the broken Chinese supply chains that are driving US companies to the brink. A new report by corporate data analytics firm Dun & Bradstreet calculates that some 51,000 companies around the world have one or more direct suppliers in Wuhan, the epicenter of the virus. At least 5 million companies globally have one or more tier-two suppliers in the region, meaning their suppliers get their supplies there; and 938 of the Fortune 1000 companies have tier-one or tier-two suppliers there. Moreover, fully 80% of US pharmaceuticals are made in China. A break in the supply chain can grind businesses to a halt.

So what was the Fed’s reasoning in lowering the fed funds rate? According to some financial analysts, the fire it was trying to put out was actually in the repo market, where the Fed has lost control despite its emergency measures of the last six months. Repo market transactions come to $1 trillion to $2.2 trillion per day and keep our modern-day financial system afloat. But before getting into developments there, here is a recap of the repo action since 2008.

Repos and the Fed

Before the 2008 banking crisis, banks in need of liquidity borrowed excess reserves from each other in the fed funds market. But after 2008, banks were reluctant to lend in that unsecured market, because they did not trust their counterparties to have the money to pay up. Banks desperate for funds could borrow at the Fed’s discount window, but it carried a stigma. It signaled that the bank must be in distress, since other banks were not willing to lend to it at a reasonable rate. So banks turned instead to the private repo market, which is anonymous and is secured with collateral (Treasuries and other acceptable securities). Repo trades, although technically “sales and repurchases” of collateral, are in effect secured short-term loans, usually repayable the next day or in two weeks.

The risky element of these apparently-secure trades is that the collateral itself may not be reliable, since it may be subject to more than one claim. For example, it may have been acquired in a swap with another party for securitized auto loans or other shaky assets – a swap that will have to be reversed at maturity. As explained in an earlier article here, the private repo market has been invaded by hedge funds, which are highly leveraged and risky; so risk-averse money market funds and other institutional lenders have been withdrawing from that market.

When the normally low repo interest rate shot up to 10 percent in September, the Fed therefore felt compelled to step in. The action it took was to restart its former practice of injecting money short-term through its own repo agreements with its primary dealers, which then lent to banks and other players. On March 3rd, however, even that central bank facility was oversubscribed, with far more demand for loans than the subscription limit.

The Fed’s March 3rd emergency rate cut was in response to that crisis. Lowering the fed funds rate by half a percentage point was supposed to relieve the pressure on the central bank’s repo facility by encouraging banks to lend to each other. But the rate cut had virtually no effect, and the central bank’s repo facility continued to be oversubscribed the next day and the next. As observed in a March 5th article on Zero Hedge:

This continuing liquidity crunch is bizarre, as it means that not only did the rate cut not unlock additional funding, it actually made the problem worse, and now banks and dealers are telegraphing that they need not only more repo buffer but likely an expansion of QE…

The Collateral Problem

As financial analyst George Gammon explains, the crunch in the private repo market is not actually due to a shortage of liquidity. Banks still have $1.5 trillion in excess reserves in their accounts with the Fed, stockpiled after multiple rounds of quantitative easing. The problem is in the collateral, which lenders no longer trust. Lowering the fed funds rate did not relieve the pressure on the Fed’s repo facility for obvious reasons: banks that are not willing to take the risk of lending to each other unsecured at 1.5 percent in the fed funds market are going to be even less willing to lend at 1 percent. They can earn that much just by leaving their excess reserves at the safe, secure Fed, drawing on the Interest on Excess Reserves it has been doling out ever since the 2008 crisis.

But surely the Fed knew that. So why lower the fed funds rate? Perhaps because they had to do something to maintain the façade of being in control, and lowering the interest rate was the most acceptable tool they had. The alternative would be another round of quantitative easing, but the Fed has so far denied entertaining that controversial alternative. Those protests aside, QE is probably next on the agenda after the Fed’s orthodox tools fail, as the Zero Hedge author notes.

The central bank has become the only game in town, and its hammer keeps missing the nail. A recession caused by a massive disruption in supply chains cannot be fixed through central-bank monetary easing alone. Monetary policy is a tool designed to deal with “demand” – the amount of money competing for goods and services, driving prices up. To fix a supply-side problem, monetary policy needs to be combined with fiscal policy, which means Congress and the Fed need to work together. There are successful contemporary models for this, and the best are in China and Japan.

The Chinese Stock Market Has Held Its Ground

While US markets were crashing, the Chinese stock market actually went up by 10 percent in February. How could that be? China is the country hardest hit by the disruptive COVID-19 virus, yet investors are evidently confident that it will prevail against the virus and market threats.

In 2008, China beat the global financial crisis by pouring massive amounts of money into infrastructure, and that is apparently the policy it is pursuing now. Five hundred billion dollars in infrastructure projects have already been proposed for 2020 – nearly as much as was invested in the country’s huge stimulus program after 2008. The newly injected money will go into the pockets of laborers and suppliers, who will spend it on consumer goods, prompting producers to produce more goods and services, increasing productivity and jobs.

How will all this stimulus be funded? In the past China has simply borrowed from its own state-owned banks, which can create money as deposits on their books, just as all depository banks can today. (See here and here.) Most of the loans will be repaid with the profits from the infrastructure they create; and those that are not can be written off or carried on the books or moved off balance sheet. The Chinese government is the regulator of its banks, and rather than putting its insolvent banks and businesses into bankruptcy, its usual practice is to let non-performing loans just pile up on bank balance sheets. The newly-created money that was not repaid adds to the money supply, but no harm is done to the consumer economy, which actually needs regular injections of new money to fill the gap between debt and the money available to repay it. As in all systems in which banks create the principal but not the interest due on loans, this gap continually widens, requiring continual infusions of new money to fill the breach. (See my earlier article here.) In the last 20 years, China’s money supply has increased by 2,000 percent without driving up the consumer price index, which has averaged around 2 percent during those two decades. Supply has gone up with demand, keeping prices stable.

The Japanese Model

China’s experiences are instructive, but borrowing from the government’s own banks cannot be done in the US, since our banks have not been nationalized and our central bank is considered to be independent of government control. The Fed cannot pour money directly into infrastructure but is limited to buying bonds from its primary dealers on the open market.

At least, that is the Fed’s argument; but the Federal Reserve Act allows it to make three-month infrastructure loans to states, and these could be rolled over for extended periods thereafter. The repo market itself consists of short-term loans continually rolled over. If hedge funds can borrow at 1.5 percent in the private repo market, which is now backstopped by the Fed, states should get those low rates as well.

Alternatively, Congress could amend the Federal Reserve Act to allow it to work with the central bank in funding infrastructure and other national projects, following the path successfully blazed by Japan. Under Japanese banking law, the central bank must cooperate closely with the Ministry of Finance in setting policy. Unlike in the US, Japan’s prime minister can negotiate with the head of its central bank to buy the government’s bonds, ensuring that the bonds will be turned into new money that will stimulate domestic economic growth; and if the bonds are continually rolled over, this debt need never be repaid.

The Bank of Japan has already “monetized” nearly 50% of the government’s debt in this way, and it has pulled this feat off without driving up consumer prices. In fact Japan’s inflation rate remains stubbornly below the BOJ’s 2% target. Deflation continues to be a greater concern than inflation in Japan, despite unprecedented debt monetization by its central bank.     

 The “Independent” Federal Reserve Is Obsolete

 In the face of a recession caused by massive supply-chain disruption, the US central bank has shown itself to be impotent. Congress needs to take a lesson from Japan and modify US banking law to allow it to work with the central bank in getting the wheels of production turning again. The next time the country’s largest banks become insolvent, rather than bailing them out it should nationalize them. The banks could then be used to fund infrastructure and other government projects to stimulate the economy, following the model of China.

• This article was first posted on Truthdig.com

The Fed’s Baffling Response to the Coronavirus Explained

When the World Health Organization announced on February 24th that it was time to prepare for a global pandemic, the stock market plummeted. Over the following week, the Dow Jones Industrial Average dropped by more than 3,500 points or over 10%. In an attempt to contain the damage, on March 3rd the Federal Reserve slashed the fed funds rate from 1.5% to 1.0%, in their first emergency rate move and biggest one-time cut since the 2008 financial crisis. But rather than reassuring investors, the move fueled another panic sell-off.

Exasperated commentators on CNBC wondered what the Fed was thinking. They said a half point rate cut would not stop the spread of the coronavirus or fix the broken Chinese supply chains that are driving US companies to the brink. A new report by corporate data analytics firm Dun & Bradstreet calculates that some 51,000 companies around the world have one or more direct suppliers in Wuhan, the epicenter of the virus. At least 5 million companies globally have one or more tier-two suppliers in the region, meaning their suppliers get their supplies there; and 938 of the Fortune 1000 companies have tier-one or tier-two suppliers there. Moreover, fully 80% of US pharmaceuticals are made in China. A break in the supply chain can grind businesses to a halt.

So what was the Fed’s reasoning in lowering the fed funds rate? According to some financial analysts, the fire it was trying to put out was actually in the repo market, where the Fed has lost control despite its emergency measures of the last six months. Repo market transactions come to $1 trillion to $2.2 trillion per day and keep our modern-day financial system afloat. But before getting into developments there, here is a recap of the repo action since 2008.

Repos and the Fed

Before the 2008 banking crisis, banks in need of liquidity borrowed excess reserves from each other in the fed funds market. But after 2008, banks were reluctant to lend in that unsecured market, because they did not trust their counterparties to have the money to pay up. Banks desperate for funds could borrow at the Fed’s discount window, but it carried a stigma. It signaled that the bank must be in distress, since other banks were not willing to lend to it at a reasonable rate. So banks turned instead to the private repo market, which is anonymous and is secured with collateral (Treasuries and other acceptable securities). Repo trades, although technically “sales and repurchases” of collateral, are in effect secured short-term loans, usually repayable the next day or in two weeks.

The risky element of these apparently-secure trades is that the collateral itself may not be reliable, since it may be subject to more than one claim. For example, it may have been acquired in a swap with another party for securitized auto loans or other shaky assets – a swap that will have to be reversed at maturity. As explained in an earlier article here, the private repo market has been invaded by hedge funds, which are highly leveraged and risky; so risk-averse money market funds and other institutional lenders have been withdrawing from that market.

When the normally low repo interest rate shot up to 10 percent in September, the Fed therefore felt compelled to step in. The action it took was to restart its former practice of injecting money short-term through its own repo agreements with its primary dealers, which then lent to banks and other players. On March 3rd, however, even that central bank facility was oversubscribed, with far more demand for loans than the subscription limit.

The Fed’s March 3rd emergency rate cut was in response to that crisis. Lowering the fed funds rate by half a percentage point was supposed to relieve the pressure on the central bank’s repo facility by encouraging banks to lend to each other. But the rate cut had virtually no effect, and the central bank’s repo facility continued to be oversubscribed the next day and the next. As observed in a March 5th article on Zero Hedge:

This continuing liquidity crunch is bizarre, as it means that not only did the rate cut not unlock additional funding, it actually made the problem worse, and now banks and dealers are telegraphing that they need not only more repo buffer but likely an expansion of QE…

The Collateral Problem

As financial analyst George Gammon explains, the crunch in the private repo market is not actually due to a shortage of liquidity. Banks still have $1.5 trillion in excess reserves in their accounts with the Fed, stockpiled after multiple rounds of quantitative easing. The problem is in the collateral, which lenders no longer trust. Lowering the fed funds rate did not relieve the pressure on the Fed’s repo facility for obvious reasons: banks that are not willing to take the risk of lending to each other unsecured at 1.5 percent in the fed funds market are going to be even less willing to lend at 1 percent. They can earn that much just by leaving their excess reserves at the safe, secure Fed, drawing on the Interest on Excess Reserves it has been doling out ever since the 2008 crisis.

But surely the Fed knew that. So why lower the fed funds rate? Perhaps because they had to do something to maintain the façade of being in control, and lowering the interest rate was the most acceptable tool they had. The alternative would be another round of quantitative easing, but the Fed has so far denied entertaining that controversial alternative. Those protests aside, QE is probably next on the agenda after the Fed’s orthodox tools fail, as the Zero Hedge author notes.

The central bank has become the only game in town, and its hammer keeps missing the nail. A recession caused by a massive disruption in supply chains cannot be fixed through central-bank monetary easing alone. Monetary policy is a tool designed to deal with “demand” – the amount of money competing for goods and services, driving prices up. To fix a supply-side problem, monetary policy needs to be combined with fiscal policy, which means Congress and the Fed need to work together. There are successful contemporary models for this, and the best are in China and Japan.

The Chinese Stock Market Has Held Its Ground

While US markets were crashing, the Chinese stock market actually went up by 10 percent in February. How could that be? China is the country hardest hit by the disruptive COVID-19 virus, yet investors are evidently confident that it will prevail against the virus and market threats.

In 2008, China beat the global financial crisis by pouring massive amounts of money into infrastructure, and that is apparently the policy it is pursuing now. Five hundred billion dollars in infrastructure projects have already been proposed for 2020 – nearly as much as was invested in the country’s huge stimulus program after 2008. The newly injected money will go into the pockets of laborers and suppliers, who will spend it on consumer goods, prompting producers to produce more goods and services, increasing productivity and jobs.

How will all this stimulus be funded? In the past China has simply borrowed from its own state-owned banks, which can create money as deposits on their books, just as all depository banks can today. (See here and here.) Most of the loans will be repaid with the profits from the infrastructure they create; and those that are not can be written off or carried on the books or moved off balance sheet. The Chinese government is the regulator of its banks, and rather than putting its insolvent banks and businesses into bankruptcy, its usual practice is to let non-performing loans just pile up on bank balance sheets. The newly-created money that was not repaid adds to the money supply, but no harm is done to the consumer economy, which actually needs regular injections of new money to fill the gap between debt and the money available to repay it. As in all systems in which banks create the principal but not the interest due on loans, this gap continually widens, requiring continual infusions of new money to fill the breach. (See my earlier article here.) In the last 20 years, China’s money supply has increased by 2,000 percent without driving up the consumer price index, which has averaged around 2 percent during those two decades. Supply has gone up with demand, keeping prices stable.

The Japanese Model

China’s experiences are instructive, but borrowing from the government’s own banks cannot be done in the US, since our banks have not been nationalized and our central bank is considered to be independent of government control. The Fed cannot pour money directly into infrastructure but is limited to buying bonds from its primary dealers on the open market.

At least, that is the Fed’s argument; but the Federal Reserve Act allows it to make three-month infrastructure loans to states, and these could be rolled over for extended periods thereafter. The repo market itself consists of short-term loans continually rolled over. If hedge funds can borrow at 1.5 percent in the private repo market, which is now backstopped by the Fed, states should get those low rates as well.

Alternatively, Congress could amend the Federal Reserve Act to allow it to work with the central bank in funding infrastructure and other national projects, following the path successfully blazed by Japan. Under Japanese banking law, the central bank must cooperate closely with the Ministry of Finance in setting policy. Unlike in the US, Japan’s prime minister can negotiate with the head of its central bank to buy the government’s bonds, ensuring that the bonds will be turned into new money that will stimulate domestic economic growth; and if the bonds are continually rolled over, this debt need never be repaid.

The Bank of Japan has already “monetized” nearly 50% of the government’s debt in this way, and it has pulled this feat off without driving up consumer prices. In fact, Japan’s inflation rate remains stubbornly below the BOJ’s 2% target. Deflation continues to be a greater concern than inflation in Japan, despite unprecedented debt monetization by its central bank.     

 The “Independent” Federal Reserve Is Obsolete

 In the face of a recession caused by massive supply-chain disruption, the US central bank has shown itself to be impotent. Congress needs to take a lesson from Japan and modify US banking law to allow it to work with the central bank in getting the wheels of production turning again. The next time the country’s largest banks become insolvent, rather than bailing them out it should nationalize them. The banks could then be used to fund infrastructure and other government projects to stimulate the economy, following the model of China.

•  This article was first posted on Truthdig.com.

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

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

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

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

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

Why the Repo Market Is a Big Deal

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

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

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

Panic or Calculated Self-interest?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This article was first posted on Truthdig.com