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

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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 73^rd time it has been raised since 1962, or even a 74^th 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 2^nd, 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 2^nd, without raising the debt ceiling, which would forestall the potential default and allow more time for further (pointless?) debate.  Thus, a default on August 2^nd 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:

http://www.usdebtclock.org/index.html 

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

http://www.bloomberg.com/news/2011-01-13/u-s-foreclosure-filings-may-jump-20-this-year-as-crisis-peaks.html

China: Fear of its Rise is Fear of Ourselves

A recent Economist article, The dangers of a rising China, leads a 14 page report loosely discussing the dangers posed to the world by China's eclipsing of the USA's international economic and military order.  The article attempts to draw parallels in the power-balance shift between Britain and Germany which led to the first World War, and that between the US and Britain, which is seen to have been peaceful.  Alternatively positive and negative outlooks are presented as The Economist offers its superficial analysis and weak solutions, but as to how to foster peace between the People's Republic of China and the West, the article does offer one shining and perhaps accidental insight.    

San Fran Olympic Torch Rally by tomnono

The parallels drawn between the hegemonic shifts of the 20th century at first appear credible.  Indeed, the competitive quest for empire and economic primacy on the European continent and elsewhere was the cause for the British-German arms race, ultimately which manifested in the orgiastic violence of the Great War which saw 16 million deaths and 21 million wounded, civilian and military.  This pessimistic view is countered with the absurd assertion that "Unlike the 19th-century European powers, it (China) is not looking to amass new colonies."  If colonialism was a method of expropriating the wealth of and creating markets in foreign lands, then China will surely remain at odds with the West on this basis, as both compete as Germany and Britain once did; in Asia, Africa and Latin America, employing trade agreements, capital and cooperation with corruption, as well as providing economic and military advisors to grease the wheels of neocolonialism; that which is the demonstrable policy of both the West and of China.

The Economist also looks hopefully to the main hegemonic shift of the 20th century, that from British to American.  This is ironic, since it was the devastating global conflagration of World War 2 which dismembered the British Empire and broke the British people's will to maintain it.  The British homeland itself was left in ruins, and thereby a hegemonic shift was a defacto result.  Thus it was war that ushered in the shift of global power, eventually in favor of the US.  However, the American global order was not immediately secured, but only itself born out of a further 40 years of global militaristic/economic expansion; major US wars in Korea and Vietnam; the Soviet war in Afghanistan; the littany of military actions across the third world; and a Nuclear standoff with Soviet Russia.  That this hegemonic shift "went well" as The Economist puts it, seems in the light of history preposterous.

What The Economist's hopeful bias will not permit in its report is a recognition that economic, technological and social structures are infinitely different than at any time in history, thus such a shift as it would happen today or in the future is without any useful precedent.  To start, the previous examples involve competing powers sharing in European heritage, culture and languages, and a similarity of social ethics, aspirations, and global outlook.  In the case of China, these are much different.  Not only are there vast differences in all these catergories between China and the West, but Chinese Nationalism is keenly aware of its recent history as a colonial subject of the West, and sees the economic and political elites in the US as the inheritors of that imperialist know-how and infrastructure.

Chinese Nationalism looks upon its long-time enemy Japan, perhaps correctly, as simultaneously a base for the projection of American military and economic power, and an unapologetic beligerrent whose political class still absolves and honors as heroes the Imperial Army Generals and Soldiers who committed the occupation of China and the rape of Nanking.  Offerings by Japanese Prime Ministers, most recently in 2009 by Taro Aso, at the Yasukuni Shrine and War Memorial where recognised war criminals are honored, have created tremendous popular backlashes in China.  China sees itself surrounded by the American military and its proxies in the pacific, with the US Navy sitting in South Korean and Taiwanese waters within shooting distance of the Chinese coast.  Such a situation could only be hypothetically balanced in size and proximity by China's occupying Cuba, the Bahamas and the Canadian Province of Nova Scotia with 70,000 troops and therein installing and equipping dozens of Naval, Air-Force, and Army bases to the tune of billions of dollars. This is to say nothing of the demonstrated willingness of the US to apply its military resources in China's neighborhood, such as in the Korean War and the holocaustal Vietnam War wherein millions died.  These both took place within living Chinese memory.  Taking place now: "The US Navy has begun to deploy more forces in the Pacific," The Economist reports.

A brief study into the history of China's relations with its neighbors and the West reveals fact after fact lending support to the attitude of indignation in China towards the US and Europe.  The Economist article asserts that a number of things will help to ease the transition.  These range from the briefly insightful to the absurd.  It suggests that "America and China need rules for disputes" and "America and China should try to work multilaterally (in Asia)"  But in the absence of demonstrated trust and mutual respect, rules and agreements will be broken, and multilateral discussions and organisations will be but another battlefield for diplomatic and economic clout.  The article comes close to the spirit of the answer to this terrifying question when it posits that "If America wants to bind China to the rules-based liberal order it promotes, it needs to stick to the rules itself."  This is a remarkable admission by the Economist of the US's hypocrisy.

Moreso, such is a tacit recognition that the current Empire must lead by example and act under the principles that it can only hope China will abide by once it overtakes the seat of global power.  The US must do much more to value economic equality, education and democracy at home, and respect the sovereignty and human rights of those abroad.  It must do more to promote freedom and peace for all nations; Not attempt to impose them as a pretext to military intervention in places such as Iraq and Afghanistan.  The US must make difficult decisions as to how to unwind the relationship between its military and its economy; these are understood in China and other quarters as so entwined that the US must perpetuate conflict and imperialism in order to survive.  China will never see in the US plutocracy a credible partner in any undertaking, but only a group of self-serving aristocrats guided by the ethics of capitalism, greed and consolidation.  It may be possible to avoid a conventional military conflict between China and the US during this great hegemonic shift if the US recognises China's military and economic clout and begins to bargain away its stack of chips in Taiwan, the South China Sea, Japan, Korea etc.  But such is likely to promote the further moulding of China into a militarist/imperialist economy whereby all of the fears of an opaque and unaccountable Chinese world leadership will be realised. Such will not lead to any type of greater peace.

The only chance for a true and peaceful resolution of the conflicting interests of China and the US to come about is by a change in those very interests:  Away from militaristic/economic dominion and global paternalism which sows discord, misery and disenfranchisement everywhere; toward finally abiding by the principles which the people of the West have always espoused: Peace, human rights and equality of opportunity for everyone everywhere.  Continued posturing by the US as the world's indomitable military and economic power requires China to assert itself globally through economic control of resources and military capability.  A graduation by the West to a higher moral ground; by a recognition of reality and a genuine redress of the ills of its own and society abroad, through education and democratic change; only these changes can compell lasting peace and inspire in China the changes it requires to be a more just and accountable world power. 


Read the Economist Article:
http://www.economist.com/node/17629709

Read more about it:
http://www.taipeitimes.com/News/editorials/archives/2010/09/27/2003483897
http://www.opendemocracy.net/democracy-china/nationalism_3456.jsp

Japanese Population Crash will be Political, not Economic Failure

There has been much discussion in the developed world over the last decades among economists and policy makers concerning their ageing populations.  Recent discussions on CBC Radio's 'The Current', as well as treatment of the issue by other news outlets as it concerns Japan are a striking demonstration of the fear of the unknown future.  Analysts are watching with a keen eye, as Japan may provide a litmus test as to how well modern democracies and economies are able to weather the demands of an ageing and shrinking population.

Compared to Western nations, Japan's immigration policy is non-existent, and Japan features near the bottom of the list in 'Total Fertility Rate' or TFR, regardless of whose doing the math.  Since 2005, deaths outnumber births in Japan.  Projections along these rates vary, some stating that by 2055 the population will have shrunk by 30% which represents more than 30 million people.  While the question of what Japanese society will look like in two or three generations as its population shrinks is fascinating, the fears stemming from this issue pertain mostly to the ageing of Japan's shrinking population, which is expected to continue. 

The implications of an ageing population are well understood:  Fewer working people paying less taxes to support more and more pensions and social services will certainly be the trigger for future attempts to reform pension, health and welfare systems, etc., which are already the point of heated debate in developed nations.  Witness recent rioting in France over pension reforms and the raising of the retirement age from 60 to 62, or G.W. Bush's failure to enact pension reforms in 2005 amid resistance from organised labour and the AARP.  Any shift in the status quo represents a shift in wealth, privilege, and the potential for both, and will be opposed doggedly by those groups seeing themselves as the losers in the trade.  The real question is, how can a democratic nation cope with growing divisions along the lines of age.  One may wryly consider that rollbacks in pensions and social programs will occur in democracies as soon as enough baby-boomers are dead or too senile to vote in their own interests.

Japan's is a special case however, and Western nations will take their cues from how Japan deals with its population problem at great risk.  Japan's is an export-based economy, making it dependent on foreign purchasing of their goods.  As their work force shrinks, so will drastically the total production and total income of their export sector, which props up household incomes, the tax base and social services, as well as the stock market and thus the private investments of its citizens.  Service economies, diversified and net importers of finished goods, such as the US, Canada and Europe, will not suffer in the same way.  These Western economies may suffer a lack of spending and conspicuous consumption in the retail sector, but they are not dependent on net inflows of currency in the same way that Japan is.

There is, however, reason to hope.  To allow the population to shrink as it ages may not be as bad as some predict.  GDP will certainly fall allong with a marked population decline, but it is less clear that per-capita-GDP would also fall.  The same can be said for almost any statistic, be it productivity v. productivity-per-capita, etc.  While Western nations invite immigration to counter low birth rates, their economies must grow to maintain, let alone improve, average living standards as population rises.  Recent economic hardships demonstrate that this is not always possible.  In a vacuum, if Japan's population were to shrink by a fifth, then the remaining four fifths would be left to split the fifth of the pie left behind, enjoying the resources which previously accommodated everyone.  With proper stewardship of Japan's available resources and economy, something along those lines may be possible.  While there may be less money around to buy things, there will be less demand on fixed assets such as land and real-estate, as well as on other domestic markets.  Incomes may increase as Japanese firms compete in a shrinking market of Japanese educated workers, technicians and specialists. 

To what degree will future Japanese generations be willing to honor the agreements and obligations of past governments?  Again, the question is, will democracy in such hugely populated jurisdictions allow for enlightened and sustainable policy?  The problem may not at all be the shrinking or ageing of a population, but the political structure's ability to handle the changing demography.  Japanese politicians are avoiding the issue for all the wrong reasons.  With so many vested interests, with so many people with so much to lose, a vocal minority may win the day, as they often do, to the detriment of sustainability, good governance, and people at large.

The truth is that there is no example in history of how a modern economy or modern democracy will react to a shrinking population.  There are sure to be "shrinking" pains, as pains, strife and unrest happen during any major demographic shift.  In the most pessimistic of predictions for Japan however, there is a lack of creative and inspired thinking. 

Read/ listen to stories about this issue:

http://www.cbc.ca/thecurrent/episode/2010/11/16/nov-1610---pt-2-japans-population-crash/

http://in.reuters.com/article/idINIndia-49967220100708

http://www.businessweek.com/lifestyle/content/aug2010/bw20100812_825983.htm