Friday, July 29, 2011

Debt Ceiling Debate is Moot: USG Owes More Dollars than in Existence

Image by Images_of_Money
The current debate in Washington as to whether or not and under what conditions to raise the debt-ceiling has for the past week dominated global news coverage and the public mind.  Absent from the debate and mainstream coverage is a discussion of the debt limit in the context of the American monetary system, which creates a structural monetary deficit in the American economy and makes inevitable ever-increasing debts and deficits in the public and private sectors.  It is this system which has fostered the current situation, which is not so simply that the federal government has hit the debt limit imposed by congress, but that it owes more US dollars than there are in existence.  The failure to recognise the structural causes of public and private debt in the US brings the debate and politicking surrounding the federal debt into focus as grand political theatre and media circus, calling into question the education and/or motives of those involved in the decision making. 

That the US debt is unsustainable at more than $14trillion, is obvious.  At the current rate, the US is adding more than $1trillion to the debt each year through deficit spending.  For each dollar that the USG earns, it spends $1.63.  These facts are being thrown around as an argument for spending cuts by Republicans and tax hikes by Democrats.  The issue has created a platform for ideologues and interest groups to point fingers at one another and attack government programs and policies which don’t fit their ideology.  However, no plan yet put forward will in any remote way relieve the debt and deficit problem of the Federal Government, or problems of solvency in the wider economy.  No plan yet discussed will prevent the need to raise the debt-ceiling now, which will be the 73rd time it has been raised since 1962, or even a 74th within a couple more years. 

US Structural Monetary Deficit

Each week the Federal Reserve publishes statistics on the US money supply.  Currently, by the Fed’s largest measure, “m2,” there is roughly $9trillion in circulation, fully $5trillion less than the USG currently owes.  The situation appears even more fantastic and preposterous when one considers the total US debt, a number which includes the debts of households, private businesses, financial institutions, as well as state, local and federal government agencies.  This stands at over $54.9trillion dollars.  In other words, Total USD denominated debt in America is 6 times greater than the amount of USD available to pay it off.  

This imbalance is a direct result of the American money creation system and its ill-conceived and poorly regulated practice of fractional reserve banking.  It is a system which fundamentally and incontrovertibly REQUIRES and makes inevitable bankruptcies and asset foreclosures: a means of automatic self-correction which wipes out debts and re-balances the economy by narrowing the gap between the total amount of money in circulation and the total existing debt.  This gap has a major impact on the volume of money that is effectively available to the economy at any given time, and this unstable availability of money is what drives the business cycle:  A nauseating pattern of boom and bust typified by alternating periods of easy credit, leveraging and asset accumulation resulting in rising stock and commodity prices; followed by deleveraging, asset divestment, tight credit markets and cash hoarding­–as soon as it becomes obvious that markets are overbought and the economy and existing money supply are too out of balance to make lending and investment profitable or desirable for those able to do so. 

US Money Creation Scheme Guarantees Structural Monetary Deficit, Insolvency

For every US dollar created, an equal and interest bearing debt obligation is created, or more plainly, money in the US is created out of nothing by commercial banks and the Federal Reserve, and lent into the economy at interest.  For instance, when a home buyer gets a mortgage from a bank, the bank simply creates the principal out of thin air, which the mortgagee will have to pay back, plus interest.  Loans/debts are the genesis of all money in circulation.  Conversely, when a debt is repaid to a commercial lending institution, the principal sum is erased from existence.  If there was no USD denominated debt, there could be no USD in circulation.  Thus, for every dollar (principal) in circulation, there is a greater amount of debt (principal + interest) that is owed to banks.  It is, for most initially, an exercise in mental gymnastics to consider how such a system could be accepted and institutionalised.  One is left to wonder where the money to pay the interest will come from, when only the principal was created.  This is the source of America’s Structural Monetary Deficit. 

The macro-economic consequence of this policy is simple:  There is never enough money in the economy to allow all entities to meet all their obligations at once, thus bad loans, bankruptcy, and wealth transfer is inevitable.  On any given day, a number of people and institutions will have financial obligations to fulfill, such as monthly or balloon payments on car-loans, student-loans, business-loans, mortgages, etc.  Naturally, because more debt than money exists, not all entities that have loans coming due can possibly have the funds to pay it back at the same time.  Some must therefore seek refinancing in order to maintain their business, car or home ownership etc.  When lenders and commercial bank reserves become so leveraged that they can no longer lend safely or legally; or when lenders and banks lose confidence that borrowers as a group can pay debts back because–ironically–the economy is too indebted relative to the amount of money in circulation, they become less willing to renew or make new loans.  The result is debt defaults, lost businesses, asset seizures and foreclosed homes. 

Economic Losers

Within this paradigm, individuals; small businesses; large companies; governments and even banks themselves–regardless of solvency, intrinsic value or profitability­–are forced into asset foreclosures, bankruptcy and austerity, simply because they hold a share of the inevitable debt in the economy at the wrong time.  Like a game of musical-chairs, the music stops when credit markets tighten in reaction to cyclical circumstances endemic to the American economic system.  Everyone must compete to find a chair (lender) to park their debt with, and those that can’t, lose. 

In the wake of the housing bubble–which is more aptly described as a credit bubble–many analysts, media figures and pundits railed against US home-owners who were foreclosed on: that they should accept the blame for their own compromised circumstances and accept that they are economic “losers” for taking bad mortgage terms and causing the US housing crisis.  This is an extremely simplistic view.  While it is true that some home-owners did accept terms which they should not have and which they could never fulfill, and while it is also true that many institutional lenders committed crimes of mortgage fraud, predatory lending and asset stripping; it must be understood that regardless of the general level of intelligence, propriety, honesty, business acumen or caution exercised by the population, the system of money creation in the US and the resulting monetary deficit will perpetually create “losers”–whose homes, assets, and even the fruits of their future labours can be legally appropriated or garnished by those who are prepared and able to take advantage of their misfortune.   

The numbers describing the housing crisis are way out of whack with historical averages, and on their own point to a systemic problem, rather than just the imprudence of a few home owners.  Since the start of 2007, roughly 3.5 million homes have been repossessed in the US.  Many more are in default, and according to analyst Rick Sharga, 5 million more home-loans are seriously delinquent and likely to go into foreclosure.  Mr. Sharga expects 3 million of these homes to be repossessed by 2013 (0.4 million have already been repossessed since he made his statements at the beginning of 2011, leaving roughly 2.6 million to go)  According to the US census bureau, there are roughly 115 million households in the US, which translates to 1 out of every 30 homes in the US having been seized by banks since 2007.  If Sharga’s prediction is correct, the ratio will change to 1 out of 20 existing US homes, 6 million in total, being seized by banks by 2013.  Furthermore, these millions of families are not the only “losers” the US financial system has created.  There are millions more who have struggled immensely through job and income loss, business failures, etc., but have managed to stay in home ownership by downsizing their homes, selling off other real assets, such as cars or collectibles, and cashing in retirement savings and investments–all at reduced prices in depressed markets, to the benefit of those sitting on their cash waiting for such a “buying opportunity.” 

An Economic System Built to Fail?

The mind is naturally boggled by a system seemingly built to fail.  But while it fails some it works for others.  It is a system designed to allow private banks to create money from nothing and charge interest on it for private profit, with the side effect that debts are created in the economy–a proportion of which mathematically cannot be repaid except by forfeiture of real-asset collateral.  It creates a massive and consistent transfer of wealth, as commercial banks reap huge profits from the interest on loans of money they create out of thin air, and from the real assets they accumulate when debtors cannot repay.  It is rather an astounding thing to think of families being made homeless because of an inability to pay “back” to the bank money which the bank never had in the first place–money which was literally created at the time the mortgage agreement was signed.   The few benefactors of this system reap immensely thereof; while Americans at large are ever vulnerable to its whims. 

In fact, one could look at borrowers as unwitting agents of this ongoing transfer of wealth.  They are armed with money the bank conjured for them out of thin air, and sent out into the economy to harvest interest and collateral goods required in the loan contract.  Either the loan + interest is paid back to the bank, or the debtor defaults and the bank seizes the collateral.  In both cases, the principal is written out of existence, and in both cases, wealth and assets flow out of the broader economy and into the coffers of the bank, who took on very little risk by lending check-book money they created on a computer at the moment the loan was executed.  Thus an “up-trickle” is created:  a lawful redistribution of wealth in favour of banking corporations and their benefactors, driving the 40 year trend of widening income and wealth gaps in the US. 

The Tea-fault Party

Many Americans, especially Tea-Partiers, seem aware on some level that monetary policy, the Federal Reserve Act, and the deregulation of the financial sector in the 1990’s were policies written for bankers, by bankers.  They are rightly outraged, that in spite of these advantages that the banking industry has over all other individuals and industries, bankers still overstep themselves and compromise the viability (and deposits) of their own institutions, as well as the broader economy, only to be rewarded by those on the other side of the revolving door with multi-billion-dollar taxpayer-money bailouts.  It is not surprising that anyone finds reason to mistrust this system and its overseers.  However, in knee-jerk fashion, the Tea Party has reacted with mindless opposition to President Obama and his Wall-Street cabinet’s insistence that the debt ceiling must be raised.  The Republican congressmen the Tea Party elected are holding the economy hostage by refusing to allow the debt ceiling to rise, posturing for their Tea Party constituents, mindful of their future political careers.

The reality, however, is that the Tea Party movement, made up mostly of middle and working-class Americans, could not have picked a position more antithetical to their aims.  If they succeed in stopping the ceiling from being raised, either through default or cutting the budget by a third, they will have left the root cause–the system of US corporate welfare and monetary policy–intact, while the repercussions and write-downs resulting from the loss of value in US bonds after a default would seize credit markets, accelerating the process of private debt-defaults and appropriation of real-wealth from the greater economy by creditors.  Many Tea-Partiers in their own right would find themselves homeless and out of jobs.  Far better would be to accept the short-term need to raise the debt ceiling, address the true causes of the debt–monetary policy, corporate welfare and ceaseless war­–and campaign for broad reforms. 

By August 2nd, so the story goes, the US government must pass a law to raise the debt ceiling, so that it can continue to borrow the money it needs to operate on a day-to-day basis.  However, both congress and President Obama have the means to extend government resources and obligations beyond August 2nd, without raising the debt ceiling, which would forestall the potential default and allow more time for further (pointless?) debate.  Thus, a default on August 2nd would seem unlikely, and any default at all is not anticipated by many serious analysts.  However, as we have seen, not all is as it appears in the US financial system.  The US dollar is not solely a means of exchange, it is a means of creating unsustainable debt-loads and a system of wealth transfer.  It throws up the illusion of free-market-capitalism, while what exists is plutocratic-socialism.  It presents the facade of equal-opportunity, while certain people have the special right to create money out of nothing, and the rest of the economy must pay to use it.  There is a well known saying–that in a depression, wealth is never destroyed, merely transferred.  There are inevitably entities which would profit immensely, financially and materially, from a US default driven depression­­–the same creditors and investors who profit from the monetary deficit.  They, along with the Tea Party, have their representatives in Washington.  The world can for now only hope that this assemblage of interests prefer to keep the status-quo-gravy-train rolling, rather than gamble on a big score.  In a country where the government can be allowed to owe more of its money than exists, anything seems possible.  A spectre looms large.

Check out the US debt clock:

Read Rick Sharga's analysis of the housing market at Bloomberg:

Monday, July 4, 2011

Greek Sovereign Debt Crisis a Sovereignty Crisis

Greek Parliament, Syntagma Athens - by kouk
News outlets around the world have focused heavily on the so-called Greek Sovereign debt crisis this week.  The proposed solution–an IMF loan package requiring “austerity measures” and a fire-sale of public assets–has sparked massive unrest in the capital, where people from all walks of life are decrying a loss of democracy, sovereignty, economic means, public services- the viability of their futures and of Greece itself. 

Many have insisted that these “measures” are necessary.  If one is speaking about maintaining the share value of many European banks and institutional investors, such is true.  The IMF loan package to Greece, boiled down, is a global taxpayer bailout of European banks which have made poor investment decisions in purchasing Greek bonds. 

Even while the US debt has reached its ceiling, the US Senate has recently rejected a Republican measure attempting to restrict the IMF’s ability to dip directly into the US treasury to the tune of $100billion.  In the twisted game of hot potato that now typifies international finance, the IMF is making loans to Greece so that Greece can pay back its loans to the various private European banks and investors holding Greek bonds, while the member nations of the IMF, all of whom are similarly in debt to private banks, will have to seek more loans from private international banks (or China) in order to cover additional deficits that the IMF causes them as it takes their money and dumps it into the sieve that is the Greek economy.  Almost every tax-payer in the world will see a portion of their taxes swept into this bailout scheme for these investment institutions, which over many years have irresponsibly funded the institutionally corrupt Greek government.  More and more, the European Union–if not the globalised economy entirely–appears to be a supranational bank-controlled state-capitalism and less and less the free market as it is advertised.

Flush with this bailout of world taxpayer money channelled through the IMF–money which in a truly free market should have been lost as a consequence of the impropriety of lending to a state which everyone now seems ready to admit was rife with corruption–private European banks and investment firms will, like rapacious vultures, descend upon the carcass of the Greek economy.  The transportation and social service infrastructure of Greece will be bought up at fire-sale prices, as will small and mid-size local businesses that are struggling in an increasingly volatile economy and facing an extremely uncertain future.  As is their legal obligation to their shareholders, these foreign corporations will attempt to squeeze as much profit as possible from their Greek buyouts, through further rounds of asset-stripping and layoffs, the profits of which will be repatriated to investors outside Greece.  As Greeks lose their jobs and their businesses, as those lucky enough to keep their jobs lose income to pay cuts and higher taxes, as retirees lose income to pension cuts, as credit becomes scarce and money circulation becomes restricted, many will be forced into personal asset liquidations and home foreclosures in a depressed market paying pennies on the Euro.  This will come just as the people of Greece will desperately need reasonable access to the services being hawked by the Papandreou government and whatever remains of Greece’s gutted social security net.  

The whole enterprise reaches a higher level of absurdity in light of the fact that a similarly massive loan package last year failed to do anything but forestall the problem for a year.   Anyone who has juggled debt between two lines of credit knows that borrowing from one to pay the other leads to precisely nothing but a higher debt-load due to accumulating interest.  The only step in the right direction, and likely in any case inevitable, is a default by Greece on their debt, orderly or not.  Independent economists at the UN and elsewhere agree:  Austerity measures increase unemployment and reduce wages, thus lowering economic activity and tax revenues needed to repay national debts.  They do not work.

In this context, the governments and investment community of Europe–by their actions–seem keen to ensure that the Greek people are made destitute by having their collective assets stripped down and turned over to foreign interests before allowing a default.  That is what this is about.  Business and media have propagated the idea that the fault of the Greek debt crisis lies squarely with the Greek people, and this is the bitter pill they must now swallow.  However, those who pay the costs will not be the benefactors of Greece’s famously corrupt “culture” of bribes and patronage that everyone wants to blame.  Rather, it will be the middle and lower-classes who have all along suffered paying these bribes and corruption to have access to fundamental services.  These are the people now protesting in majority across Greece and in Syntagma square of Athens.  The police, who have lost all credibility as defenders of public security, have employed exemplary violence.  There are several videos posted to YouTube of police attacking restaurants bars and cafes near the protests, as well as the corralling and kettling people into sidestreets and subway stations, pelting them with tear gas and rocks, and beating them with shields and batons as they try to escape through police lines.  They have even been accused on Greek TV–with amateur video seeming to corroborate–of the deployment of agents-provocateurs among the protests: police posing as anarchists dressed in black, damaging property and threatening violence in order to give pretext for and initiate the police crackdowns.  While it will likely be impossible to verify these charges through police admission–as the Quebec Provincial police admitted to doing in Montebello, Canada in 2007–one might weigh the evidence and draw a parallel line:  if it is possible in Canada, it is possible in Greece. 

The schizophrenia of fiscal policy, or the flock of interests it serves, is evident when the situation in Greece is juxtaposed with the global financial crisis of a few years ago.  While it is demanded of Greece to sell off public assets and cut social spending, including gutting pensions and laying off civil servants–which is ostensibly supposed to restore the viability of and confidence in their economy- the US faced their crisis by going in the opposite direction:  Employing a Keynesian program of public spending to increase employment and economic activity.  Rather than allow critical industries to be gutted by private markets, companies such as GM were partly nationalised until they could recover, to prevent massive unemployment.  The recovery plan in the US was funded by “money creation,” when the US federal reserve wrote into existence billions of dollars to buy a new issue of US T-bills to fund the government.  While neither of these solutions is desirable, their “necessity” is rooted in the same problem.

Some time ago Greece, like most of the world, gave into the liberal economic idea that private banks should be allowed to create Greece’s money.  Evidently, under the yoke of the European Economic Community, Greece has now completely lost its sovereign right to create any of its own money at all.  They cannot repatriate their debt or use inflationary means to mitigate it.  Thus, Greece has lost its freedom and nationhood.  According to the words of Prime Minister of Canada William Lyon MacKenzie King, who in 1935 addressed the issue which is clearly at the root of the debt crises of not only Greece, but of Portugal, Spain, Ireland and the US, “Once a nation parts with the control of its currency and credit, it matters not who makes that nation's laws. Usury, once in control, will wreck any nation. Until the control of the issue of currency and credit is restored to government and recognized as its most conspicuous and sacred responsibility, all talk of the sovereignty of Parliament and of democracy is idle and futile.”

The videos below attest to the different tactics Police have used to break-up demonstrations and impose their will on the local community in Athens.
Watch Police attack a restaurant:

Watch club-wielding alleged Agents Provocateurs retreat behind Police lines:

 Watch Police corner and herd demonstrators into subway tunnel before gassing them:


Watch the above event from inside the subway tunnel:

Watch a Police line attack a peaceful march:

Watch Police move in to clear a demonstrator camp after tear gassing it:

Read more about the efficacy of "austerity" measures: