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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:
