How Congress Could Fix Its Budget Woes, Permanently with Ellen Brown

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Once again the wilderness speaksand perhaps someone will someday listen. I have injected several additional comments in the text.
I personally have become muchmore radical in my thinking vis a vis the economic system.  Micro finance informed us that the same toolscan be shipped downstream to the individual and the natural community.  A big part of my emerging paradigm securesthe definition of the natural community and its financial integrity independent of the greater State, butdirectly attached to the land.  I suspectthat this is very powerful and will rapidly dominate the global economy overthe next few generations.
The greater State remains important in such a paradigm but the people themselves are free to partake or not as their lives demand independent of the State. The organizing power of the state is applied to tasks for the greater human good supported by the people affected and the communities affected.  This is no small task and will create the whole future of human existence on Earth and among the Stars.
In the meantime, this article ison the right side of history.

How Congress Could Fix ItsBudget Woes, Permanently

Wednesday, 13 February 2013
Ellen Brown
http://www.truth-out.org/news/item/14513-how-congress-could-fix-its-budget-woes-permanently


As Congress struggles throughone budget crisis after another, it is becoming increasingly evident thatausterity doesn't work. We cannot possibly pay off a $16 trillion debt bytightening our belts, slashing public services, and raisingtaxes. Historically, when the deficit has been reduced, the money supplyhas been reduced along with it, throwing the economy into recession. Aftera thorough analysis of statistics from dozens of countries forced to applyausterity plans by the World Bank and IMF, former World Bankchief economist Joseph Stiglitz called austerity plans a"suicide pact."
Congress already has in itshands the power to solve the nation's budget challenges - today andpermanently. But it has been artificially constrained from using that power by misguided economic dogma, dogma generated by the interests it serves. We have bought into the idea that there is not enough money to feed and house our population, rebuild our roads and bridges, or fund our most important programs - that there is no alternative but to slash budgets and deficits if we are to survive. We have a mountain of critical work to do: improving our schools,rebuilding our infrastructure, pursuing our research goals and so forth. Andwith millions of unemployed and underemployed, the people are there to do it.What we don't have, we are told, is just the money to bring workers andresources together.
But we do have it - or wecould.
[ Everyone forgets that Hitler and Post war Germanyand Stalin’s Russiasolved their contractions by massive capital outlays in terms mostly ofextending credit to national interest organizations able to implement the necessarybuild out.  It is a total myth that itwas all done by War orders although that continued the policy at hyperspeed.  Present day China has donethe same thing.]
Money today is simply a legal agreement between parties. Nothing backs it but "the full faith and credit of the United States."The United States could issue its credit directly to fund its own budget, justas our forebears did in the American colonies and as Abraham Lincoln did in theCivil War.
Any serious discussion of thisalternative has long been taboo among economists and politicians. But in alandmark speech on February 6, 2013, Adair Turner, chairman of Britain'sFinancial Services Authority, broke the taboo with a historic speechrecommending that approach. According to a February 7 article in Reuters,Adair is one of the most influential financial policymakers in the world. Hisrecommendation was supported by a 75-page paper explaining why handing outnewly created money to citizens and governments could solve economic woes globallyand would not lead to hyperinflation.
Our Money Exists Only atthe Will and Pleasure of Banks
Government-issued money wouldwork because it addresses the problem at its source. Today, we have nopermanent money supply. People and governments are drowning in debtbecause our money comes into existence only as a debt to banks at interest. AsRobert Hemphill of the AtlantaFederal Reserve observed in the 1930s:
[ Since this is true central banks have now acknowledged the absoluteneed for a natural inflation rate of approximately two percent to allow thesupply of credit to actually increase and to avoid actual credit contractionswhich damages the economy by calling in loans too soon. ]
We are completely dependent onthe commercial banks. Someone has to borrow every dollar we have incirculation, cash or credit. If thebanks create ample synthetic money, we are prosperous; if not, we starve.
In the US monetarysystem, the only money that is not borrowed from banks is the "basemoney" or "monetary base" created by the Treasury and theFederal Reserve (the Fed). The Treasury creates only the tiny portionconsisting of coins. All of the rest is created by the Fed.
Despite its name, the Fed isat best only quasi-federal and most of the money it creates is electronicrather than paper. We the people have no access to this money, which is notturned over to the government or the people but goes directly into the reserveaccounts of private banks at the Fed.
It goes there and it staysthere. Except for the small amount of "vault cash" available forwithdrawal from commercial banks, bank reserves do not leave the doors of thecentral bank. According to Peter Stella, former head of the CentralBanking and Monetary and Foreign Exchange Operations Divisions at theInternational Monetary Fund:
[I]n a modern monetary system - fiat money, floating exchange rate world - there is absolutely no correlation between bank reserves and lending. . . . [B]anks do not lend "reserves". . . .
Whether commercial banks letthe reserves they have acquired through QE sit "idle" or lend themout in the internet bank market 10,000 times in one day among themselves, theaggregate reserves at the central bank at the end of that day will be the same.
Banks do not lend theirreserves to us, but they do lend them to each other. The reserves are what theyneed to clear checks between banks. Reserves move from one reserve account toanother, but the total money in bank reserve accounts remains unchanged, unlessthe Fed itself issues new money or extinguishes it.
The base money to which wehave no access includes that created on a computer screen throughquantitative easing (QE), which now exceeds $3 trillion. That explains whyQE has not driven the economy into hyperinflation, as the deficit hawks havelong predicted, and why it has not created jobs, as was its purported mission.The Fed's QE money simply does not get into the circulating money supply atall.
What we the people have in our bank accounts is a mere reflection of the base money that is the exclusive domain of the bankers' club. Banks borrow from the Fed and each other at near-zero rates, then lend this money to us at 4 percent or 8 percent or 30 percent, depending on what the market will bear. Like in a house of mirrors, the Fed's "base money" gets multiplied over and over whenever "bank credit" is deposited and relent; andthat illusory house of mirrors is what we call our money supply.
We Need Another Kind of"Quantitative Easing"
The quantitative easingengaged in by central banks today is not what UK Professor Richard Wernerintended when he invented the term. Werner advised the Japanese in the 1990s,when they were caught in a spiral of debt deflation like the one we arestruggling with now. What he had in mind was credit creation by the centralbank for productive purposes in the real, physical economy. But like centralbanks now, the Bank of Japan simply directed its QE firehose at the banks. Werner complains: "[A]ll QE is doing is to help banks increase the liquidity of their portfolios by getting rid of longer-dated and slightly less liquid assets and raising cash.... Reserve expansion is a standard monetarist policy and required no new label."
The QE he recommendedwas more along the lines of the money-printing engaged in by theAmerican settlers in colonial times and by Abraham Lincoln during the AmericanCivil War. The colonists' paper scrip and Lincoln's "greenbacks" consisted not of bank loans but of paper receipts from the government acknowledging goods and services delivered to thegovernment. The receipts circulated as money in the economy and in thecolonies, they were accepted in the payment of taxes.
[ New money must be supplied far down stream in the economy for it tohave any effect.  A better solution foran insolvent bank is to shift the assets to solvent banks and to destroy theshareholders as a matter of course.  Thisquickly breaks up the too big to fail fairytale ]
The best of these modelswas in Benjamin Franklin's colony of Pennsylvania, where government-issued money got into the economy by way of loans issued by a publicly owned bank. Except for an excise tax on liquor, the government was funded entirely without taxes, there was no government debt and price inflation did not result. In 1938,Dr. Richard A. Lester, an economist at Princeton University, wrote, "The price level duringthe 52 years prior to the American Revolution and while Pennsylvania was on a paper standard wasmore stable than the American price level has been during any succeeding fifty-yearperiod."
The Inflation Conundrum
The threat of price inflationis the excuse invariably used for discouraging this sort of"irresponsible" monetary policy today, based on the Milton Friedmandictum that "inflation is everywhere and always a monetaryphenomenon." When the quantity of money goes up, says the theory, moremoney will be chasing fewer goods, driving prices up.
What that theory overlooks is the supply side of the equation. As long as workers are sitting idle and materials are available, increased demand will put workers to work creating more supply. Supply will rise along with demand, and prices will remain stable. [ Yes Virginia – we have ample supply ]
True, today these additionalworkers might be in China,or they might be robots. But the principle still holds: if we want theincreased supply necessary to satisfy the needs of the people and the economy,more money must first be injected into the economy. Demand drives supply.People must have money in their pockets before they can shop, stimulatingincreased production. Production doesn't need as many human workers as it oncedid. To get enough money in the economy to drive the needed supply, it might betime to issue a national dividend divided equally among the people.
Increased demand will drive upprices only when the economy hits full productive capacity. It is at thatpoint, and not before, that taxes may need to be levied - not to fund thefederal budget, but to prevent "overheating" and keep prices stable.Overheating in the current economy could be a long time coming, however,since according to the Fed's figures, $4 trillion needs to be added intothe money supply just to get it back to where it was in 2008.
Taxes might be avoidedaltogether if excess funds were pulled out with fees charged for variousgovernment services. A good place to start might be with banking servicesrendered by publicly owned banks that returned their profits to thepublic.
Taking a Lesson from Iceland:Austerity Doesn't Work
The Federal Reserve haslavished over $13 trillion in computer-generated bailout money on the banks andstill the economy is flagging and the debt ceiling refuses to go away. If thismoney had been pumped into the real economy instead of into the black hole ofthe private banking system, we might have a thriving economy today.
We need to take a lesson from Iceland, whichturned its hopelessly insolvent economy around when other European countrieswere drowning in debt despite severe austerity measures. Iceland's president Olafur Grimsson was asked at the Davos conference in January 2013 why his country had survived where Europe had failed. He replied:
I think it surprises a lot ofpeople that a year ago we were accepted by the world as a failed financialsystem, but now we are back on recovery with economic growth and very littleunemployment, and I think the primary reason is that ... we didn't followthe traditional prevailing orthodoxies of the Western world in the last 30years. We introduced currency controls; we let the banks fail; we providedsupport for the poor; we didn't introduce austerity measures of the scaleyou are seeing here in Europe. And the endresult four years later is that Icelandis enjoying progress and recovery very different from the other countries thatsuffered from the financial crisis. [Emphasis added.]
He added:
[W]hy do [we] consider the banks to be the holy churches of the modern economy? ... The theory that you have to bail out banks is a theory about bankers enjoying for their own profit the success and then letting ordinary people bear the failure through taxes and austerity, and people in enlightened democracies are not going to accept that in the long run.
The Road to Prosperity
We are waking up from the longnight of our delusion. We do not need to follow the prevailing economicorthodoxies, which have consistently failed and are not corroborated byempirical data. We need a permanent money supply and the money must come fromsomewhere. It is the right and duty of government to provide a money supplythat is adequate and sustainable.
It is also the duty ofgovernment to provide the public services necessary for a secure and prosperouslife for its people. As Thomas Edison observed in the 1920s, if the governmentcan issue a dollar bond, it can issue a dollar bill. Both are backed by"the full faith and credit of the United States." The governmentcan pay for all the services its people need and eliminate budget crisespermanently, simply by issuing the dollars to pay for them, debt-free andinterest-free.
You can intervene in thenation's budget debate by watching a Roots Action video and writing yourCongressional representatives and the president here.