The debt crisis drama continues to dominate the television airwaves. Obama is tweeting, the politicians are debating “Lord of the Rings,” and the Tea Party wants to let the whole system collapse. The fundamental problem in the case of the talking heads of news shows and the politicians in Washington is that they are looking for band-aids to continue a system that benefits those who pay them: Wall Street speculators and the heads of the big banking cartel.
The principle problem is not that we are so far in debt, or that we are about to default, it is that the system is designed to fail. With 14 trillion dollars of debt, money our leaders have already committed to pay and we don’t have, it is obvious that the institutions of government need complete reform. Yet all of it is merely a symptom, not the cause of our problems. The root of our system of currency and credit is not based on value, the thing money is supposed to represent, but on debt, its antithesis. Debt, however, is now a reality that neither Americans nor the rest of the world can simply escape or ignore. America has perhaps accrued the largest debt in the history of the world. Unfortunately, the problems are not so simple or limited to the debt ceiling or to the downgrading of our credit. And none of our lawmakers have evinced any will to embark on a policy that could help us, after much suffering and toil, to rebuild our economy on sure footing, and neither have others provided a solution. I hope to provide the ground work echoing what more intelligent people have said and combine it with the core principles of Distributism in order to offer a real bailout.
First, we need to look at the crisis, why it is getting worse, why the government claims of “recovery” are little more than platitudes (or at least incompetence), and what the current measures being enacted actually mean.
For three weeks the media ratcheted up rhetoric about the debt ceiling and the prospect that we might not be able to pay our debts. As Republicans claimed fiscal sanity, the Democrats and the White House insisted they were compounding the problem, that, as always, something “must be passed”. Indeed something was, but this did absolutely nothing for our debts. The truth is, the debts which we have been signed onto by both Bush and Obama (via TARP), three wars, and out of control spending are unpayable. Not only do they exceed the American GDP, they are also amounts beyond what Americans have the means to pay back. No amount of raising any debt ceiling will help us pay them. We have to remember that the multi-trillion dollar debt level is money we are promising to pay back tomorrow just to keep things going today, and this does not even begin to account for what we have to spend tomorrow to keep things running tomorrow.
No amount of spending cuts or balanced budget amendments will ever solve the problem, because the problem is not only congressional, it is with the Federal Reserve. Thanks to the producers of the “Money Masters” documentary and the End the Fed movement, more Americans are aware of the fact that the Federal Reserve is not an arm of the United States government. Rather, it is private bank with private investors, unelectable and unaccountable to any voter or government official including the President. Yet the Federal Reserve has a stranglehold over our currency and fiscal policy; the inability of the government to issue its own currency means that it is controlled by outsiders with no regard for our interests. From the smallest unit, the family, to the highest, the government, our money is not based on a modicum of value, but it is based solely on debt. Debt-based monetary policy will fail to produce a functioning system because the piper must be paid. We should take the power to issue currency away from the Federal Reserve. Until this happens, our prospects for solving our debt crisis are pessimistic.
Some may wonder, how can we print so much money and not go bust? Why are we not seeing the same effects in Greece, Iceland, Ireland, and soon, Italy? Because the United States is in a unique position as the only country in the world that can print U.S. dollars to pay its debts and because the dollar remains the world’s reserve currency. In other words, every government in the world shores up dollars and United States Treasury bonds. This is useful for them because oil, a commodity that every country needs, is priced in our currency.
We may finance things by printing more money as Alan Greenspan foolishly declared on Meet the Press recently, “The U.S. can never go bankrupt because it can always print more dollars to pay its debts.(!)”. To quote Kenneth Boulding, “Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.” Greenspan may know figures, charts and math very well, but his admission demonstrates his poor understanding of the real economy. The continual printing of our currency results in its diminishing value, so the savings of average Americans will go down. Worse still, the dollars held by other nations will increasingly become worthless.
Can it be that Greenspan has no idea that everyone in the world, not merely George Soros, is advocating for the abandonment of the dollar as the world reserve currency? The United States would no longer be able to print money to pay its debts because no one in the world would take them as payment. Our nation will have to buy commodities and then sell them for whatever currency or metal will be accepted to pay its debts. The effects of this would be even more catastrophic than in the former Yugoslavia, adjusting for scale and population. The Yugoslav government printed and printed, in a replay of the Wiemar Republic, but it did not have the advantage of being able to print money to pay its debts or buy commodities. To buy oil for instance, Yugoslavia had to buy U.S. dollars. As their currency increasingly declined, they could afford fewer and fewer U.S. dollars, which meant that it could pay fewer of its debts and commodities. The savings of Yugoslav citizens were wiped out almost overnight, the government was not able to pay for services, and people stood in line for hours bartering for a German Mark or U.S. Dollar. This could very well happen in the United States, although there are no nearby currencies, which offer any alternatives to our problems. Thus printing more money has its obvious historical pitfalls of the Wiemar Republic (which most people are familiar with), Yugoslavia (which almost no one is familiar with), and for that matter the late Roman Empire (which, again, most people are unfamiliar with).
There is yet one other issue. As American businesses began moving their production overseas by sheer greed, large corporations moved our production base overseas, flooding the market with the same goods at a fraction of the cost produced by hard-working Americans. This created the historic capitalist problem: as wages are pushed down the consumer base is also lost. The solution was easy credit, not just through credit cards but easy real estate loans that created real estate bubbles. We thought we could “make money” on our houses to fund the consumption of products we might not afford otherwise. This is how our economy became 70% “consumption” (i.e. unsustainable) and legal counterfeiting, since it is lent out at a fractional reserve ratio.
Less and less production reduces the means to pay our debts, with or without the Fed. Thus the recent debate over the “debt ceiling” created a perception that the solution to our debt was more debt. Bidding on Treasury bills to run the government isn’t the remedial course. You solve the debt crisis through production. You solve it by Americans working, making things, buying, and having sufficient income for the economy to float. That allows for a decrease in government services and a decrease in spending.
Then there is this consideration: the vast majority of the debt which the United States now “owes,” much as in the case of Greece and Ireland, or Latin American countries like Argentina and Ecuador, is not actually debt created by American citizens or the American government. While mortgages, credit cards and other loans signal large debt amongst American households, it is a tiny portion of what America “owes.” Debt created by the mega-banks, by government rescued cartels like Goldman and Sachs and AIG, is a consequence of the Securities and Exchange Commission’s (SEC) support for the Gramm-Leach-Bliley Act to repeal the 1933 Glass-Steagall Act, signed into law in 1999 by Bill Clinton. Glass-Steagall separated banking into risky commercial investment banks and consumer-oriented commercial banks. Federal insurance (FDIC) made available for low-risk commercial banks, made sense in conjunction with Glass-Steagall. It kept the prospect of taxpayer-funded insurance from risky and carefree investment institutions. This presented a firewall between the two, protecting the consumer from the risks of greedy investors who like to play with our money as opposed to their own. Bill Clinton’s Treasury Secretary Robert Rubin, a former Goldman and Sachs co-chair, advocated eliminating Glass-Steagall as early as 1995, and his protégé and successor Larry Summers continued the fight. With the elimination of Glass-Steagall, investment and securities firms like Goldman and Sachs could purchase healthy banking institutions and use customer assets to securitize their risky derivatives investments abroad. Bank of America could merge with Merrill Lynch, absorb its toxic assets, and then get $220 billion from the government (not to mention its customer’s hard-earned cash) to try to balance the books. All of the toxic assets infecting the banking system originated with the repeal of Glass-Steagall. That is to say, de-regulating this one small area of banking created the “too big to fail” scenario.
Then came TARP, the Troubled Asset Relief Program, thanks to Bush-Obama. TARP transferred of this toxic debt, created by banks and investment firms, from their books to the government (i.e. to us). This same process happens all around the world whenever a country needs to be “bailed out”. In fact, the Federal Reserve has been purchasing bad debt from Greece, Ireland, Iceland and Spain and sticking us with the bill. As I said, the majority of the debt we are now responsible for was not created by the American taxpayer, but by the banks, to finance their high living and gambling on our dole. This fits the pattern of how most banks have operated since the charter of the Bank of England in 1694: to suck capital out of the community rather than infuse it.
What do the executives of these firms receive for flushing their firms down the toilet? Bonuses and golden parachute retirement packages. What do we get? Austerity measures.
As the world moves to dumb the dollar as the world’s reserve currency, questions of raising the debt ceiling and printing more money should be shown to have absolutely no effect in solving our problems. The bill signed by President Obama, effectively raising the debt ceiling, will not make this nation solvent. Instead, it created a “board of governors” in the Congress, a panel of 12 (6 Democrats, and 6 Republicans) who will propose and vote for legislation without the full congressional body to influence, filibuster, or debate the particulars. In short, as Athens had the 30 tyrants after the Peloponnesian War, Venice had “the 10,” and we now have “the 12,” further eroding the American Constitution and cutting the voter out of the picture.
The solutions are simpler, far less likely given the state of affairs: (1) re-enact Glass-Steagall retroactively, (2) take away the power to issue currency from the Federal Reserve and give it to the government and, (3) penalize the workings of large banks while leaving no penalty at all for the transactions of small banks up to a certain level, making mergers between large and small banks illegal. The mega-banks are using TARP funds (i.e. your future) and purchasing bonds to reap interest and yields, and to purchase smaller, healthy banks in order to use their (your) assets to fund gambling and executive bonuses. (4) Allow and promote local currencies based on local assets, namely to have currency which is based on value and not on debt. The secret of money is that it has no metaphysical value. It is a symbol of wealth that can be attained. If someone has a “high” standard of living, it is not because he has lots of money, it is because money allows him to acquire wealth, which comes from forests, fields, fisheries and mines. Namely, money serves to buy capital like iron, oil, or food, turned into wealth by labor. (5) We need to re-establish local production. This goes hand in hand with breaking up large agribusiness and making land affordable and available to farmers. Re-establishing local production within communities at this stage can only come about either by government grants or by small healthy banks investing in their communities. We forget that the bank actually has a vocation in our communities, to put capital in, not take it out.
For all the flaws in the American system, and even the American Constitution, we still have one powerful asset: our local and state governments. According to the 1965 Coinage act, a private business does not have to accept U.S. dollars for the payment of debts. Your local gas station clerk could accept gold, silver, sea shells or tally sticks if he thought it was easier. Local and state governments can issue currency based on the value of the resources within their state, with the aid of local, consumer oriented banks. It would not be hard to make this currency used, as all state governments have to do is make it mandatory to pay your taxes in the new currency. This would allow our state governments to balance their books and to apply pressure to the Federal government to enact the necessary policies at the to help the country balance the books. Most importantly, this would circumvent the power of the Federal Reserve over the sole U.S. currency. If we re-establish the production base this country has lost wholesale, and got our millions of unemployed back to work, the Federal Reserve can still withdraw the currency from the system and cause a dearth of production. With no money to be earned, the means to buy goods disappears, much as it did in 1929. With local currencies foreign to Fed control, that possibility is averted outright.
It seems as though a complete collapse is necessary to build things back up again, but it does not have to be that way, given that a complete collapse will mean a huge number of innocent lives lost through unrest. One way or another the system must be built up again, and it can only be done based on value, not on debt.