Billmon: The Eurosystem's (Monetary) Control of Europe's Politics
Note: This post was composed from a Twitteressay by Billmon.
J.W. Mason lists some Lessons from the Greek Crisis:
Before the crisis no one even knew that national central banks still existed — I certainly didn’t. But now it’s clear that the creditors’ unchallenged control of this commanding high ground was decisive to the outcome in Greece. Next time an elected government challenges the EU authorities, their first order of business must be getting control or cooperation of their national central bank.
The quote says "control or cooperation," but I can guarantee the latter is never going to happen.
It is nearly impossible to exaggerate the degree to which the campaign for central bank "independence" has made them the enemies within for any left governments.
The central bankers waged a 50-60 year political war to wrest back the monetary flexibility that the break down of Bretton Woods gave to national governments. Having won that war across most of the developed world in the 70s and 80s, they extended the battlefield to the emerging markets in '90s and '00s.
The autonomy of central banks (meaning the political allegiance to Wall Street/London City/Frankfurt etc.) was maybe the biggest neoliberal victory of all. If rightwing political victories (Reagan, Thatcher et. al.) were the beachheads of the Great Counterattack on social democracy then "independent" central banks became the citadels of the occupation forces: Neoliberalism's "Republican Guard."
Ironically, the ECB was originally conceived - or at least was sold to the European left - as a way for governments to regain monetary flexibility at a higher level. As a way to a) escape US dollar hegemony and to b) outflank the Bundesbank by formalizing the joint political control of European monetary policy. I do not know if the hack establishment Social Democrats who sold that vision ever believed it, but if so, more fool them. Because what the European Monetary Union became, obvious now, was a way to turn the vision on its head: formalize joint MONETARY control of Europe's politics.
The "Eurosystem", the network of national central banks governed by the European Central Bank, gives central bankers unprecedented ability to squeeze and manipulate national governments in a coordinated way. It is as if every government in the Eurozone ALREADY has a colonial entity watching it like the Troika's agents are supposed to watch Syriza in Athens. And, since the ECB Governing Council (like other EU institutions) tries to operate by a non-transparent "consensus" (i.e. the votes are not revealed), the degree to which national central bank heads are representing the ECB in their countries, rather than the other way around, is often not clear.
As long as the cozy comprador system tied peripheral governments to the core (i.e. Berlin), the role of the ECB and the Eurosystem could be obscured. Peripheral governments appointed "made guys" (i.e. banksters and/or their technicians) to national central bank boards and pretended to govern. Core politicians and their local comprador politicians let the Eurosystem technicians in Frankfurt tell them what "structural reforms" they should push to make the EMU "work."
But the moment an outsider government like Syriza came to power, the role of the Eurosystem and the national central banks in it could no longer be hidden. The fact that the Greek National Bank was an instrument of the ECB in Frankfurt, not of the Greek government in Athens, became obvious to everybody. The ECB's role as the muscle behind the Eurogroup's (Berlin's) diktats put the Greek National Bank in the position of helping to choke its own banks and terrorize its own citizens. And under the rules of EMU the Greek government was completely powerless to do anything about it. A defining moment.
The inescapable conclusion is that the allegedly "independent" Eurosystem now operates not as a network of central banks but as a parallel government.
The role of the Eurosystem within the half-hidden political order of the eurozone really is comparable to the Soviet or Chinese Communist Party. Like the Communist Party, the Eurosystem is now the "leading organ" of the neoliberal order, operating at all levels of the EU structure and providing "guidance" to elected political structures which are not formally under its legal control, but in reality are dominated by it. And behind the administrative apparatus of the party (Eurosystem) is the Central Committee (Eurogroup) and the Politburo (the key creditor government officials). And behind THEM is the real locus of the party's centralized power: the General Secretary (Germany/Merkel).
So J.W. Mason is quite right: it is impossible for any left government to attack the dictatorship of finance unless it controls its national central bank. But while control of the national central bank is necessary, it is hardly sufficient. As long as the EMU exit is off the table, verboten, so to speak, control of the national central banks only eliminates the "near enemy."
Ultimately it comes down to political will, which in parliamentary democracies, comes down to public support. As long as the majority (of all voters or of propertied influentials, depending on the system) is more loyal to the Euro than to national sovereignty an effective challenge to the dictatorship of finance is impossible - no matter how many national central banks the left controls.
Posted by b on July 16, 2015 at 10:57 UTC | Permalink
« previous page | next page »jfl @96,
You'll notice that I didn't even consider the interest the bank earns on those loaned funds over time. So the entire transactional process is more complicated than I presented.
I was only interested in presenting a concept.
In fact, what the Federal Reserve system did was take the onus off banks loaning out customers' deposits--putting the general public's money at risk to a banker who could be inept--and placing the onus on a government agency (the central bank) to supply the reserves to the small banks across the country under a regulated system. Granted, at the time the Federal Reserve was created, the nation was under the gold standard, but the risk was transferred to the government where the nation's payment system could be highly regulated.
I'm currently reading Golden Fetters The Gold Standard and the Great Depression, 1919–1939 by Barry Eichengreen
Barry Eichengreen wrote what is acknowledged as one of the best explanations of how the gold standard in the interwar period led to the Great Depression. The presumed resiliency of gold lost its lustre and strength as a result of WWI. From his intro:
The gold standard is conventionally portrayed as synonymous with financial stability, and its downfall, starting in 1929, is implicated in the global financial crisis and the worldwide depression. A central message of this book is that precisely the opposite was true: far from being synonymous with stability, the gold standard itself was the principal threat to financial stability and economic prosperity between the World Wars I and II. To understand why, it is necessary first to appreciate why the interwar gold standard worked so poorly when its prewar predecessor had worked so well, next, to identify the connections between the gold standard and the Great Depression, and finally, to show that the removal of the gold standard in the 1930s established the preconditions for recovery from the Depression.
People like Ron Paul and all the other goldbugs HAVE NO CLUE WHAT THEY ARE TALKING ABOUT.
Incidentally, there was a marvelous post about how the fiat banking system works on dailypaul.com years ago: How Banking Actually Works In Fiat World This guy understood it. Original link unavailable. Can find here, but ignore the comments because the writers are confused.
http://australianpropertyforum.com/topic/9849701/1/
Posted by: MRW | Jul 19 2015 21:00 utc | 102
jfl @96,
Monetary economics theory, as defined, is a shell game. A very profitable one, but it suits no one's interests but the banksters'.This is not the right way to think about it.
As Paul Meli has pointed out, there are two broad general parts to the US monetary system.
1. The US federal government that CREATES the currency. (It’s a closed system worldwide. Only our govt can legally make a USD.)
2. The non-US federal government sector that USES the currency.
That’s it.
You have to start there. At the beginning. Memorize it.
You either create the currency, or you use the currency.
(Stay with me here.)
If you’re religious, think of it this way: the US federal government is the CREATOR, everyone else is not.
So who is in the non-US federal government sector?
State and local governments (can’t make currency!)
Businesses
Banks
Households
Foreign governments
Foreign businesses, banks, and households
This is the list of groups that USE the USD.
Notice that banks are USERS of the currency
In the US, however, banks are regulated by the Federal Reserve and banking laws. Forget for a minute that Fed chairmen like Alan Greenspan deregulated aspects of the Federal Reserve in the 1990s and so created loopholes for his Wall Street buddies. Congress should have nailed his toes to the floor for doing it, and the president should have fired him. But because, again as Paul Meli pointed out above, ordinary citizens don’t know how the monetary system works, no one rang the 10-alarm fire bell when banking laws were being dismantled during Clinton’s admin, and mortgage banks popped up all over. Mortgage banks are NOT regulated under the federal bank charter laws. Only the Federal Reserve can regulate them, and it failed to do that, even after the FBI in Sept 2004 told Congress in open testimony that there was an “epidemic of mortgage fraud,” that 90% of the mortgages were fraudulent.
You need to get the right foundational image in your head
Understanding how the monetary system works ain’t, as the cliché goes, brain surgery.
Once you sincerely grasp that there are two categories of actors in the US monetary system, you can begin to peel away the detritus of your own beliefs and what idiots tell you on TV.
So think of it as a teeter-totter.
On one side is the federal government. On the other side is the non-federal government.
(As simple as that, because when the economy is in the tank you'll be able to understand that it's Congress failing to do its job.)
When the federal government is up, or in surplus, the non-federal government is down, or in deficit.
When the federal government is down (on our teeter-totter), or in deficit, the non-federal government is up, or in surplus.
(In our US federal monetary system, we further divide the non-federal government into two sectors: the domestic non-government sector, and the foreign sector.)
This is why we don’t want the federal government to run a surplus or ‘balance the federal budget'
it means, automatically and without fail, that the private sector—the domestic non-government sector—will be in deficit. (The foreign sector, we know, has been, in surplus for them, or deficit for us (trade deficit) for decades.)
If you can etch this simple teeter-totter into your brain, you can begin to get a handle on the foundational structure.
There have been seven times in the 238-year history of the US when the federal government was either in surplus or balanced its budget. And each time was followed by a depression.
Same thing applies to Canada. They’re going into a recession and they can’t figure out why. They ran a deficit in August 2008 (that their finance minister foolishly apologized for) and Canada escaped the brunt of the Great Financial Crisis (GFC) of 2008. Starting in 2013, they worked on balancing the budget and look where they are now. In the tank. I’m adding this for james.
Posted by: MRW | Jul 19 2015 22:09 utc | 104
Re: @104,
Should have added: it doesn't matter if the federal government is in deficit. IT CREATES THE CURRENCY. Can't go broke. Impossible. It's not a household, or a business. Doesn't need to "tighten its belt."
Posted by: MRW | Jul 19 2015 22:13 utc | 105
JFL @96
The federal government HAS GOT TO RUN A DEFICIT to keep the people from being forced into debt by borrowing from lecherous banks.
BTW, there's no debt to children or grandchildren when the federal government spends. None. Nunque. Zip. Zero.
That's what happened in the late 90s when wages weren't keeping up with expenses. Greenspan went on television and told the public to take out second equity loans on their houses to make up the shortfall. Motherfucker. It drove the prices of houses up and created the housing bubble. And it delayed the recession/depression that Clinton's surplus caused.
Posted by: MRW | Jul 19 2015 22:34 utc | 106
MRW@104
I think you may have cause and effect reversed, the economic situation that caused the government surplus such as the dotcom bubble in the '90s was what collapsed and caused the recession that followed. Government deficit spending can smooth out these boom-bust cycles but surplus doesn't cause them.
Posted by: Wayoutwest | Jul 19 2015 22:34 utc | 107
@104 The Canadian government has been too dependent on oil revenues IMO. Oil and gas are in the tank.
Posted by: dh | Jul 19 2015 22:40 utc | 108
Wayoutwest @107,
The dotcom bubble came first. That was in March 2000. It was a minor recession that started the tumble. But the big one was the 'subprime crisis', or housing bubble that broke over 2007-2009. Both related to Clinton's late 90s surplus. As Bloomberg crowed at the time, the last time there was a surplus was in 1926-1929. Sound familiar? (Bloomberg got it wrong. The surplus ran from 1921 to 1930. See Table 1.1 on https://www.whitehouse.gov/omb/budget/Historicals/
Federal government surpluses cause depressions or great recessions.
There is no reason on the planet for a federal government that creates its own currency to be in surplus. None. For what reason? It only means it's taking more money out of the private sector.
Posted by: MRW | Jul 19 2015 22:42 utc | 109
MRW@109
The USG was running a large deficit in '07 when the Housing Bubble broke so this surplus/recession correlation fails.
I also think you are confusing currency with the money supply which are somewhat independent. Currency represents only a fraction of the debt created money in circulation.
Posted by: Wayoutwest | Jul 19 2015 23:00 utc | 110
Wayoutwest @107,
See Think big deficits cause recessions? Think again! By Dr. Frederick Thayer, which he wrote before the GFC of 2008 hit.
http://www.epicoalition.org/docs/thayer.htm
Posted by: MRW | Jul 19 2015 23:07 utc | 111
dh @ 108
"The Canadian government has been too dependent on oil revenues IMO"
Yep. The prevailing groupthink under neoliberalism is that countries must obtain their surpluses from foreign entities to prosper rather than spend ('print') their own currencies to buy their own production. False propaganda (that has been working marvelously).
This 'conventional wisdom' (another term for groupthink) is that we have to resort to trade for our money supply expansion.
These kinds of policies (again, neoliberal) make lot's of money for transnational corporations at the expense of a countries own citizens, because exports are driven at least partly by the relative index of a countries currency…when the Canadian dollar goes down relative to other currencies it makes Canadian products more attractive to import markets. In order to do this a country has to lower the wages of it's own citizens (see Greece).
If we buy into this nonsense we undermine our own well-being. It doesn't take a rocket scientist to see that NAFTA has been bad for the vast majority of citizens.
Foreign workers do not buy domestic products unless country has a trade surplus.
Prices can't go down faster than wages…if wages went to zero prices would still be above zero…but those with zero wages would have no buying power.
Reducing wages makes prices lower for everyone but this whose wages were cut, but…anyone downstream of those whose wages are cut also have lower income, and in the end lower wages reduce national income.
Posted by: paulmeli | Jul 19 2015 23:10 utc | 112
dh @108,
Oil and gas are in the tank.
To be replaced by what, currently? You can't run a generator in the far north with a windmill. Ships and tankers can't run on renewables, neither can jets. What do we have right now to replace oil and gas? Each renewable energy system on a public grid must be backed by by a full "fossil fuel" system for the times solar and windmills don't work. And that is the majority of the time in countries that don't have deserts or enough wind.
I'm getting pretty pissed off with newspaper and activist sites that fail to publish significant papers, findings, and data that show the climate issue to be more complicated than a 0.04% of the atmosphere. I'm no different than anyone else: if we're going to fry, I want to know it. But my seven-year research into this issue is showing massive collusion by monied sources seeking to impoverish vast numbers of the global population and because these monied people DO understand how fiat currency really works, they know they can get unlimited amounts of money from sovereign currency governments as long as their citizens are behind it. They're not going after 'global governance' in Paris Dec 2015 for nothing. A global currency is next, and then every country in the world will be Greece.
For example, did you hear about this six or seven months ago? Bet you didn't.
Renewable energy 'simply WON'T WORK': Top Google engineers
Windmills, solar, tidal - all a 'false hope', say Stanford PhDs
Page 1
http://www.theregister.co.uk/2014/11/21/renewable_energy_simply_wont_work_google_renewables_engineers/
Page 2
http://www.theregister.co.uk/2014/11/21/renewable_energy_simply_wont_work_google_renewables_engineers/?page=2
Also: The original article in the IEEE Spectrum by the two Google scientists who said renewables won’t work:
What It Would Really Take to Reverse Climate Change — Today’s renewable energy technologies won’t save us. So what will?
By Ross Koningstein & David Fork
http://spectrum.ieee.org/energy/renewables/what-it-would-really-take-to-reverse-climate-change
Posted by: MRW | Jul 19 2015 23:22 utc | 113
Wayoutwest @ 110
"The USG was running a large deficit in '07 when the Housing Bubble broke so this surplus/recession correlation fails."
Define a large deficit. Express it as a percentage of GDP. Remember, we're dealing with a growing system here, so just comparing absolute numbers is a meaningless exercise. Does this chart support your claim?
The grey bars are recessions. Every surplus (above the line) is followed immediately by a recession. Insufficient deficits are also followed by a recession. The pattern is consistent.
At any rate, the deficit at the time wasn't large enough, i.e. Federal spending wasn't large enough…to generate enough income to pay the debt service on an economy that was expanding largely because banks were lending money to millions of people that had no realistic chance of making the payments.
No deficit is going to be big enough to satisfy that requirement. Banks are evil and can never be trusted (the worst ones, which unfortunately when big enough define the industry).
Posted by: paulmeli | Jul 19 2015 23:24 utc | 114
@112 Wasn't it Pierre Trudeau who said something about 'sleeping with an elephant'? The whole point of NAFTA was to open the market for US goods. Canada gained access for resources like oil in return. That was great until the US started fracking and upset the Saudis.
Posted by: dh | Jul 19 2015 23:25 utc | 115
Paul Meli, here's a 2009 article on Marriner Eccles you might be interested in:
http://www.latimes.com/opinion/la-oe-nelson2-2009mar02-story.html
Posted by: MRW | Jul 19 2015 23:29 utc | 116
Wayoutwest @110
The USG was running a large deficit in '07 when the Housing Bubble broke so this surplus/recession correlation fails.
So what? The damage was done in 1998, 1999, and 2000 when people had to take out second mortgages to survive.
Your statement is proof that the deficit still wasn't large enough to jumpstart the economy in 2009.
Posted by: MRW | Jul 19 2015 23:41 utc | 117
dh @ 115
Sure. The U.S. wants to define the terms of trade to it's benefit. Anyone should be skeptical of someone offering something that looks too good to be true. NAFTA has been a disaster for everyone except the top .01%. NAFTA was supposed to be great for Mexico but for them to it's been a disaster. Now we have the TPP…NAFTA on steroids.
Trade should be a system where countries that have a particular resource that other countries don't have and vice-versa can exchange said production to mutual benefit.
The problem arises when a country adopts a mercantilist policy (Germany), i.e. running a persistent trade surplus, which can only be achieved by forcing at least one other country to run a trade deficit (Greece for one).
Germany see's it as 'immoral' to be expected to recycle their surpluses…they think it's OK to suck the life's-blood out of another country's citizens for it's own gain.
How dare those profligate Greeks (just the beginning) expect some kind of support for providing Germans (elites) their income. Again, little thought as to what happens when all of Germany's customers are broke.
The irony is that German workers have been taking it in the shorts as well (low wages, poor working conditions, multiple mini-jobs) to enable these policies yet look at the Greeks as their enemies, when in fact they are all getting screwed to make a handful of elites super-rich. They have been conned into believing their life sucks because of lazy Greeks rather than the parasites leading them.
Posted by: paulmeli | Jul 19 2015 23:44 utc | 118
@118 Disaster? I hate to sound like an advocate for NAFTA but Mexico has actually done pretty well out of it. They gained lots of jobs especially in the auto and apparel sectors. Not as much as China maybe but not too shabby.
Posted by: dh | Jul 19 2015 23:52 utc | 119
dh @115,
The whole point of NAFTA was to open the market for US goods.
It was to lower tariffs among the three North American countries. But Mexico's hourly rate ($2.22) was drastically lower than Canada's or the US's. Still, the Clinton admin pushed it through. In fact, Rahm Emmanuel credits himself for "pushing it over the goal post," according to John Nichols's great article in The Nation in 2003.
Then Emmanuel peppered the WSJ Op-ed page for an entire year almost weekly from his perch at a Wall Street firm begging for Most Favored Nation Status for China. The moment that happened, all the US firms left Mexico abruptly--after devastating the mom and pops there--and hightailed it to China for its $0.60/hour wages. That started the exodus north to feed themselves and their families.
Canada gained access for resources like oil in return.BS. We've been receiving over 20% of our oil from Canada for over 40 years. The benefit was to us. We didn't have to touch our oil supply, which became a national security directive after the 1973 oil embargo: use up everybody else's oil.
There's been a lot of sneakiness and subterfuge going on in anti-fossil fuel business recently, IMO in anticipation of Paris 2015. There was an oil spill from a pipeline in Alberta this Wednesday. Five million litres of a bitumen-water-sand emulsion were found to have leaked from a Nexen Energy (majority owned China) pipeline south of Fort McMurray, Alta. I've been listening to local Alberta radio stations to get the scoop. The pipeline was brand-new and double-walled, and it had sensors on it for leaks. The sensors were cut, and it was only discovered accidentally by someone walking past it. Luckily, the local report said, when warm bitumen hits the ground, it hardens and doesn't seep into the ground.
Posted by: MRW | Jul 20 2015 0:00 utc | 120
PS to 118
"when all of Germany's customers are broke"
Broke in the sense that they cannot acquire Euro's in sufficient quantity to grow their economies. These countries can always print their own currencies and buy their own workers production to grow their economies, but some countries (like Greece, unlike Russia) don't have all of the resources they need (like oil) and so are forced to import some items. They are thus in this sense beholden to the exporters credit terms. Drachmas may not buy much.
And the elites of the various countries can't get rich enough sucking the life out of their own citizens, so they create trans-national corporations so they can suck the life out of everyone.
Greece will have to nationalize the assets held by it's oligarchs to make this work…the oligarchs are rich because they suck much of the oxygen out of the room and give nothing back, i.e.taxes, which could be recycled to drive Greece's economy.
As long as Greece is in the Euro it cannot afford to be a net importer…but it has little chance of being a net exporter…tough position to be in.
Then there is the apparent Greek's poor self-image, wherein they believe they are not sufficiently European if they don't stay in the Euro.
We've seen the enemy and he is us.
Posted by: paulmeli | Jul 20 2015 0:01 utc | 121
@117
I sympathize with your desire for stimulus to the real economy but the PTB will never use deficit or surplus spending to improve the lives of the huddled masses. We have reached the state of advanced Capitalism where it would not have much effect beyond the stimulus period anyway because all productivity gains go to the top, wages are stagnant and the masses are loaded with unsustainable debt.
The surpluses of the '90s were soon converted into tax cuts for the wealthy and now the deficits and debt are used as a bludgeon to institute an austerity regime that guarantees lower living standards for most people but security for the elites.
Posted by: Wayoutwest | Jul 20 2015 0:02 utc | 122
dh @ 119
Mexico gained in a couple of sectors but lost in the net, which is what matters. Mexico's food production went in the toilet (too expensive if you can believe that) and now much of their food is imported.
This put farmers out of work (wonder where they went?) and the last thing you want to have to import is your food.
Posted by: paulmeli | Jul 20 2015 0:05 utc | 123
Wayoutwest @ 122
Your concerns are all political in nature and no one has made an argument against them. If you accept the politics and policy as intractable then you have already given up and should stop complaining, because that won't help.
There is no alternative to deficit spending. A different TINA but this one happens to be closer to the truth.
The elites are counting on your helplessness, as they always have.
Move to another country where there may be some hope, or give up hope completely and resign yourself to an Orwellian World in the good old USA.
Or, try to become a part of the solution. All you have to do is convince one person.
This thread has been hopelessly devoid of solutions.
Posted by: paulmeli | Jul 20 2015 0:14 utc | 124
Wayoutwest @122,
I sympathize with your desire for stimulus to the real economy but the PTB will never use deficit or surplus spending to improve the lives of the huddled masses.
One of the reasons I spend endless time online explaining this wherever I go is because once the general public understands how their monetary system works, congressmen are threatened. I've reshaped a couple of public understandings about public issues online in the last 15 years by my insistent typing.
It is absolutely criminal that a student leaves higher education with a $30,000+ debt. CRIMINAL. The federal government could, and should as it did in the past, transfer money to the states to pay for public university education. No debt to children or grandchildren. Furhter, I think our university students should get a stipend to go to school, provided they make the grade. Ditto for good technical schools for those who don't want to go to university but want to learn a trade.
I think health care should be a single-payer system at extremely low cost for everyone in the country. It is CRIMINAL that a nation allows its citizens to suffer poor health when it would cost the federal government nothing to subsidize it.
Posted by: MRW | Jul 20 2015 0:19 utc | 125
@120 'Canada gained access for resources like oil in return.'
BS. We've been receiving over 20% of our oil from Canada for over 40 years. The benefit was to us. We didn't have to touch our oil supply, which became a national security directive after the 1973 oil embargo: use up everybody else's oil.
I guess I should have said Canada gained guaranteed access. Of course when oil went above $100 barrel the fracking started. That's what screwed the market up. Probably for years.
Posted by: dh | Jul 20 2015 0:43 utc | 126
This is a good discussion. I have to add that human emotions are a primary driver of the economy. Being an old fart I wish it was back to the way it was when there was regulated capitalism and the rule of law for everyone including financiers. I have to add a caveat. The government can run a deficit as long as it has peoples’ confidence. If not then money becomes worthless. Actually; oligarch enrichment, flushing democratic government down the drain and austerity are highly destabilizing. Greece and Ukraine are the results. Government can spend as much money as it wants as long it is for jobs, infrastructure and cleanup. Taxing the rich helps if nothing more than improve our morale and as proof that bankers are not masters of the universe.
Posted by: VietnamVet | Jul 20 2015 2:17 utc | 127
@MRW
Well you're still champion of the Wall of Words. But it is obvious to me that banks create money and that they loan it into existence. That's the origin of Ponzi Scheme whether it's called monetary theory or finance. It needn't be that way. A national bank can reclaim our right to seigniorage, we can eliminate the 'miracle of compound interest' that the banksters have shimmed in at the bottom of our system and used it to enrich themselves and poison the rest of us.
It's not unlike the Greeks making up their minds to leave the euro. What's required is the confidence and will to move forward in the face of the Wall of Words emanating from those who are 'enjoying' the 'zero-day' bug - the create-money-with-interest shim - in the present system. Do please read Creating New Money, if you really do fail to recognize this basic fact of life in our present economic system.
Posted by: jfl | Jul 20 2015 2:22 utc | 128
@127 VietnamVet
Absolutely agree with your clear vision. Economics - politics - ain't rocket science. It only becomes that way once its been subverted to benefit the few at the expense of the many ... when baffle them with bullshit becomes the 'economist'/politicians essential MO.
Posted by: jfl | Jul 20 2015 2:30 utc | 129
jfl @128,
I did read Creating New Money. It's a reform proposal that is completely impossible under the US Constitution. Under the US system, only Congress can create new money. The concept of a central bank creating new money and giving it to the government to spend, as they propose, is exactly what the New York bankers under the House Glass bill proposed in June 1913 as the basis of the new Federal Reserve, which Owen's Senate bill shot down.
We opted to have the government control the creation of USD, and more specifically Congress, the representatives of the people.
Posted by: MRW | Jul 20 2015 4:54 utc | 130
VietnamVet @127
The government can run a deficit as long as it has peoples’ confidence. If not then money becomes worthless.
Nope.
Since you're an "old fart," you can read a consolidated checkbook, right? ;-)
Okee dokee. This is the government's checkbook for Sept 30, 2014, the last day of fiscal year 2014. It's two pages. Not complicated. Open it up. (Note that all numbers are in millions)
https://www.fms.treas.gov/fmsweb/viewDTSFiles?dir=a&fname=14093000.pdf
Go to page 2.
See TABLE III-A - Public Debt Transactions? It has two sides: Issues and Redemptions
On the Issues side under the column "Fiscal Year to Date," you can see that the US Treasury created $69,813,829 million in 2014. That's $69.8 trillion.
On the Redemptions side under the column "Fiscal Year to Date," you can see that the US Treasury redeemed $68,727,941 million in 2014. That's $68.7 trillion.
Then there's a number in the last line on the Redemptions side that says "Net Change in Public Debt Outstanding." That amount is $1,085,888 million, or $1 trillion, for 2014.
Bottom Line
In 2014, the US Treasury created--issued--$69.8 trillion in new USD, and retired $68.7 trillion in USD. (They do it all via treasury securities of various sorts.)
The amount left over is what the US Treasury allows the American people to keep in their bank accounts, the "Public Debt Outstanding." That $1 trillion was added to the $18 trillion National Debt--"Public Debt Outstanding--as the national equity, or national wealth. The National Debt is what we own, not what we owe.
Now look at the federal government's receipts
Scroll down page 2 to TABLE IV - Federal Tax Deposits
The total taxes collected in 2014--all kinds of taxes--was $2.59 trillion.
$2.59 trillion does not pay for $69.8 trillion in new USD!
Bottom line #2
Under no circumstances do taxes pay for anything in this country. The United States federal government can pay for anything in its own currency. They created nearly $70 trillion in 2014 alone!
It has nothing to do with people’s confidence. Hell, most people know nothing about this; now you do.
You’re a Vet. You were promised X, Y, and Z when you went into the service. Bet you aren’t getting it. The USG has ABSOLUTELY no reason why it shouldn’t be giving it to you. And this checkbook statement proves it. If Vets could get Congress to pass a law that the USG must honor its promises to Vets, payment would be automatic (because it’s mandated by law) and you would be part of TABLE 111-A.
Posted by: MRW | Jul 20 2015 4:57 utc | 131
VietnamVet @127
Here’s how the deficit works. From the top. I’ll be brief. You want to know more, let me know.
1. Congress “appropriates,” spends. Let’s say $100 billion.
2. The US Treasury gets the congressional approval and notifies its banker, the Federal Reserve, to mark up its General Account at the Fed by the amount of the spending.
3. The Federal Reserve marks up the US Treasury’s General Account by $100 billion.
4. The US Treasury tells the Fed to pay the vendors that Congress specifically authorized.
5. The Federal Reserve sends the $100 billion to these vendors’ commercial bank checking accounts at the Fed for onward forwarding by the commerical bank to the individual vendor’s bank account. (Fedwire, anybody?)
6. Now there is $100 billion added to the real economy, a $100 billion increase in the money supply.
7. That means there’s $100 billion in new money swirling around the real economy.
-------------------------
There’s always the possibility that you could have regional inflation if the majority of that money went to one spot—think Boeing or Lockheed--because there would be too much money chasing too few goods in that region. Enter the treasury security.
————————————
8. Then, and only then, does the US Treasury issue $100 billion in treasury securities to mop up the new $100 billion and restore the money supply to balance. (The amount of treasury securities equal the amount of the spending. But the spending comes first.)
9. The money is still in the vendor’s hands but now it’s like a CD and earning interest, and completely risk-free, especially if a vendor got more from the government than the commercial bank FDIC-protected limit of $250,000.
10. The US Treasury sells these treasury securities at auction. Anybody in the world can buy them except the Federal Reserve. They are usually sold in nanoseconds. Everyone wants them. Foreign government, banks, US businesses, trusts, university endowments, pension funds, grandma’s retirement account.
11. These auctions are the source of the famous phrase: “The government borrows . . . .” The government “borrows" boo-fuck-all, but that’s the phrase they use.
That’s how the government spends
It’s always new money. It is always ‘appropriated', or authorized by Congress. [The TABLE III-A Issues in my previous post were authorized by previous Congresses, and once they’re law, no one has to redo them every year. They’re mandated. Out of sight, out of mind.]
So, what’s the deficit?
Simply the difference between what Congress authorized in new spending this year and what the US Treasury collected in taxes this year. That’s all. One has nothing to do with the other.
It’s a valuable indicator, however, if the economy is white-hot and Congress is spending too much. Ditto if the economy is too cold: Congress has to increase the deficit, i.e. spend more.
Oh, and BTW, here’s how they deal with interest on those treasury securities
Once a year, in late August, the US Treasury asks the Federal Reserve how much it needs to pay in upcoming interest payments on all the outstanding treasury securities for the coming fiscal year.
So the US Treasury issues more treasury securities in that amount and sells them at auction too.
No taxpayer money involved. No. Debt. To. Children. Or. Grandchildren, involved.
Posted by: MRW | Jul 20 2015 5:04 utc | 132
@130
You seem to be being purposefully obtuse.
'We opted to have the government control the creation of USD, and more specifically Congress, the representatives of the people.'
You must be playing a semantic trick : what is a USD? Is it green and paper and if the wind blows will it fly out the window?
Creating New Money Foreword iii
The rules of the money system have shifted. The majority of money that now changes hands does so electronically. As a result, far more than ever before, new money is not issued by the state but by banks.Ninety seven pounds in every one hundred circulating in the economy will now have been issued by banks (in the form of sight deposits, printed into customers’ accounts as interest-bearing debts).
Only three pounds are cash, issued by the state (in the form of banknotes and coins, issued at no interest).
The cost to the state of issuing new money is only the cost of producing banknotes and coins.
The cost to the banks of issuing new money is virtually zero.
The state receives public revenues from issuing cash, but banks make private profits.
The benefits of the money system are therefore being captured by the financial services industry rather than shared democratically.
The differences between the US and the UK notwithstanding the banksters do the same thing here, there, and everywhere.
It may be that you have read the book with no benefit ... I recommend it to others less obtuse who I'm sure will benefit by reading it.
Posted by: jfl | Jul 20 2015 6:44 utc | 133
jfl @133,
new money is not issued by the state but by banks
No. NEW money is issued by the state in the US. Credit money is issued by banks. BIG difference.
Posted by: MRW | Jul 20 2015 8:22 utc | 134
NEW money is issued by the state in the US.Meaning NEW money is issued by the US federal government.
Banks can no more issue new money than can businesses, households, state or local governments.
Posted by: MRW | Jul 20 2015 8:27 utc | 135
jfl @ 133
"what is a USD? Is it green and paper and if the wind blows will it fly out the window?"
A dollar is a token that is a measure of how much demand you have earned/saved.
A dollar is not a piece of paper…that is the physical representation of a dollar, not actually the dollar. A dollar is a number on a balance sheet.
It seems that jfl is showing his true character…he seems to believe that fiat currency is a ponzi scheme, which shows he doesn't know what a ponzi scheme of fiat means.
Posted by: paulmeli | Jul 20 2015 12:08 utc | 136
"Ninety seven pounds in every one hundred circulating in the economy will now have been issued by banks (in the form of sight deposits, printed into customers’ accounts as interest-bearing debts)."
This is untrue. In fact, it is so far from the truth it is ridiculous.
For credit, total spending over history is equal to the outstanding balance…we only increase our spending when we increase the balance (borrow more). When we pay off a loan money is destroyed (amortized) and when we refinance the only new spending comes from the increase.
To find the level of cash in the system one would sum all of the deficits over history and subtract FYGFDPUN…which would lead to a level of cash of less than $2T (I'm too lazy to sum the deficits right now). Plus, I'm not including the expansion of the Feds balance sheet by about $3.5T as a result of the QE's, which have removed securities from the system in exchange for dollars…not changing the level but the composition of financial assets in the non-government. The Fed may have bought private securities (corporate bonds, etc.) I'm not sure.
This leads to the 'conclusion' that about 95% of our 'money' comes from banks (46-2/46). The problem with this? It’s nonsense, because it ignores the main source of new money.
If we include credit as ‘money’ (in the net credit equals zero so we will just look at the asset side) , and look at the source of 'dollars' in the system, as coming from the two possible sources (government and borrowing) , then:
over history the government has spent a total of $76T, while credit has provided $46T (along with $46T in liabilities).
The sources perspective tells the story. It isn’t possible for a government to tax only income from government spending, but that is how it does the accounting.
As an accounting convention, income taxes have only (officially) accrued against government spending. It defies logic to do so for anything other than convenience or misdirection.
Thus, it should be obvious that way more of the dollars in ‘circulation’ (more about ‘circulation’ later) come from government spending than credit, and remains so after government takes out taxes. You decide.
Posted by: paulmeli | Jul 20 2015 12:31 utc | 137
Vietnam Vet @ 127
• The government can run a deficit as long as it has peoples’ confidence. If not then money becomes worthless.
Confidence has less to do with it than the fact that the currency of issue is required for the payment of taxes. If one is to have income one must also acquire the currency of issue. This a very important characteristic of a fiat currency.
What would make money worthless? When has that ever happened in history except for a couple of events (hyperinflations) for which the proximate cause had nothing to do with money printing but instead was the result of a sudden collapse in production. Hyperinflation was the effect, not the cause.
• Actually; oligarch enrichment, flushing democratic government down the drain and austerity are highly destabilizing. Greece and Ukraine are the results.
This should be understood by everyone with 100% certainty. Unfortunately the World is full of people that are either hateful of their fellow man or believe a system can be grown without growing the money supply and don't mind hurting their fellow systems while this 'experiment' takes place. The problem is, this experiment has been run many times over history and every time it has failed.
• Government can spend as much money as it wants as long it is for jobs, infrastructure and cleanup.
Not strictly true but it makes sense to spend on things that benefit the people…investment in the commons.
We can always afford to buy what is available for sale. We can never buy more (which is impossible)…trying to do so would lead to inflation. By not spending enough, governments are leaving a substantial level of production unsold…we can never reclaim that lost production…it's gone forever along with the associated income.
Taxing the rich helps if nothing more than improve our morale and as proof that bankers are not masters of the universe. For those that hate deficits, taxing the rich tends to lower it, because that removes savings from the system (excess wealth) more so than income. Teddy Roosevelt was on to something when he implemented the progressive income tax.
Posted by: paulmeli | Jul 20 2015 12:58 utc | 138
Lost in this discussion is the fact that credit is an option. Banks can't force us to borrow, we do that to ourselves and doing so has it's costs. So far the costs have been in the trillions.
Debt is a reverse discount…by taking on debt we are paying a surplus (more than retail) for our consumption. Unless one absolutely has to have something (or die) credit is a bad option for consumption. Even then It may be so. For housing and maybe transportation, debt has become a necessity, but that is because the banks (with the cooperation of the government) have set themselves up to prey on us through these necessities. Official government policy has been to increase private debt, knowing full well that it is not in our best interests.
Housing and transportation are a public good, and no one should make huge profits from them. This should be true of all essential services.
Debt reduces our future income, transferring it to someone else. At the end of the chain we have the banking system hoovering up the interest, enriching themselves at our expense. It's a trap that everyone should be taught from birth to avoid.
Debt can only make you better off if you can leverage it for future gains. The gains are paper gains unless you cash out, and very few actually succeed in making net income in this situation. Maybe one in 100. How many winners do we have here?
Posted by: paulmeli | Jul 20 2015 13:14 utc | 139
mrw and paulmeli..
obviously you guys are interested in financial issues and policy.. i have been working the past few days and have been unable to keep up to the conversation here.. that said my interest is not with just how the usa financial system works, but how the world financial system works and why a country like greece gets fucked over while the usa doesn't. as has already been pointed out, if you borrow in a currency other then your own - you can't print your way out of debt...
in spite of what i could learn about the federal reserve system - i still see the planet as one big giant ponzi scheme which presently favours the us$, and to a lesser extent a few other 'chosen' currencies over others... lets call them the 'chosen' ones! i note the same situation with the voting rights at the imf..
these financial mechanisms and institutions benefit some at the expense of others.. obviously greed is an ongoing problem with humanity.. knowing how the fed works, isn't the same as knowing how gs, citibank, boa and whatever other bank works, or leans on, and guns the system to work for itself.. as i said before - i don't see the fed as goody two shoes in any of this, but if it can present itself as some sort of legitimate clearly house for us$ - it still doesn't change how the world financial system via democracies around the world has helped place the us$ at the centre of what will at some point in time be the perfect storm.. having some leech off others ain't cool.. that is how i see the world financial system working at present.. the us$ is a complete leech on the world system at present.. studying the fed reserve isn't going to provide the answers and unfortunately i haven't gotten any from you guys either in spite of all your good intentions.. now, that said - maybe i missed something as i haven't read all the posts! just seems like a talk on how the fed reserve works and not much more.. definitely no deeper philosophical questions have been answered in any of it for me personally.. thanks for your posts regardless..
Posted by: james | Jul 20 2015 17:36 utc | 140
james @140,
You should read @104. It applies to the Canada as well, as I noted at the end to you.
Posted by: MRW | Jul 20 2015 18:20 utc | 141
james @140,
that said my interest is not with just how the usa financial system works, but how the world financial system works and why a country like greece gets fucked over while the usa doesn't.
Because Greece went from being a country like the United States or Canada to being a US state or province when it joined the EU. It lost its ability to chart its own course.
What do I mean by that?
If at the time when Greece and Spain and all the other countries gave up their currency for the Euro and "joined" the EU, they had also created a United States of Europe at the same time, then they wouldn't be in this mess.
Sure, there's a "European Parliament," but it's a sham as a federated government. There's no permanent Head of State. The people of Europe aren't taxed as one country. It has no teeth over the European Central Bank (ECB), meaning it cannot institute fiscal policy.
Fiscal policies are the political decisions that a federated government makes about the economy, ostensibly for the good of all, on a year-by-year basis depending on how the economy is going. Economy too hot? Raise taxes, reduce spending. Economy too cold? Increase spending, reduce taxes. That's fiscal policy. And "public purpose."
Having a United States of Europe would have given Greece someone to appeal to. And having a United States of Europe would have made the ECB, as the central bank, subservient to the directives of the United States of Europe. And it wouldn't take a change to the Maastricht Treaty to give Greece relief. (The ECB/Maastricht Treaty said that a country's debt can't be more than 3% of GDP. Fucking nutz.)
A comparison to Canada
You live in Canada. Imagine if there were no federal government, no Governor-General, no Queen as head of state. Just the 10 provinces and the Bank of Canada. The Canadian Union. The CU...with the premiers of each province taking turns being head of it, like it's a country club. And the unelected top guys of the Bank of Canada make the money, control the money, and make the rules. And fuck you if you don't like it. "Quebec, you're spending too much on social services. Reduce them or we're not giving you anymore of the money that we can create for free. We don't give a shit what your population size is."
And don't say that Quebec can and should collect the taxes it needs, because the hoi polloi don't have jobs, and the rich people have already taken their money out. Since Quebec is part of the CU, Quebecers are free to bank in Vancouver or Calgary.
That's the problem Greece faces as a result of buying into the fascist EU.
Posted by: MRW | Jul 20 2015 19:16 utc | 142
@141/142 mrw.. thanks.. i do understand why greece is where it is by giving away it's financial independence... we went over this before and i do understand that.. i still don't believe we are getting at a much different focal point that i am wishing to address which is world finance and why it is in the sorry ass state it is in at present.. i think it was warren buffett who referred to derivatives as financial weapons of mass destruction.. the financial world has changed a lot in the last 20/30 or even 60 years with numerous treaties, 'so called' world financial institutions like the imf, bis and etc and passages of laws such as the one's highlighting the fate of greece and other lesser european countries including france which might eventually find itself in a similar situation..
i don't want to talk about just the euro countries of the usa either.. many here are old enough to have seen the financial sanctions game played to know some on the world stage are in a position to threaten others on the basis of this.. it seems it is the usa's prime weapon of choice prior to it's making war on the same country that it starts off with financially sanctioning... if this was an equitable world - the usa wouldn't be in a position to financially bully it's way around the globe with pissy little sad countries like canada going along with it out of fear of standing apart from it's neighbour or bully next door.. the fact we have a financial system in the world today that is like this tells me all i need to know that we are headed for much bigger problems then what is happening to greece, or whether everything is kosher with the way the federal reserve was set up.. the fed reserve is a part of the ponzi scheme, as are derivatives and as are many of these so called world financial institutions that represent the private banks more then they do democracy or little peope like me.. this is what i would like to see addressed.. until that happens, we are headed for a drop off another cliff and a repeated cycle of boom, bust which keeps this neo-liberal nightmare going.. more and more raping of the planet environmentally for making more money - economics.. great system we have going - NOT!
Posted by: james | Jul 20 2015 20:09 utc | 143
james @ 140
"i still see the planet as one big giant ponzi scheme which presently favours the us$, and to a lesser extent a few other 'chosen' currencies over others"
If you have the time please read this timely article by Paul Craig Roberts at a Counterpunch. it may answer some of your questions:
The best analogy I can think of is doing business with the U.S or the Eurozone, or any hegemon is equivalent to doing business with the Godfather.
Modern capitalism is run from a playbook that is very similar to that of organized crime.
There isn't anything wrong with the systems already in place…they are simple systems that have been in use for centuries…the problem is with the management.
We have to figure out how to effectively oversee the people that are managing these systems. We had good legislation in place that did this and everyone's buddy Bill Clinton along with the Rubinite Crime Family™ (Bob Rubin and his Wall Street cronies) repealed an effective regulatory framework and put the foxes in charge of the hen house.
Posted by: paulmeli | Jul 20 2015 22:03 utc | 144
paulmeli @144, james @143
There isn't anything wrong with the systems already in place…they are simple systems that have been in use for centuries…the problem is with the management.We have to figure out how to effectively oversee the people that are managing these systems. We had good legislation in place that did this and everyone's buddy Bill Clinton along with the Rubinite Crime Family™ (Bob Rubin and his Wall Street cronies) repealed an effective regulatory framework and put the foxes in charge of the hen house.
Amen.
Posted by: MRW | Jul 20 2015 23:17 utc | 145
We have to figure out how to effectively oversee the people that are managing these systems.That requires knowing how they work operationally.
Posted by: MRW | Jul 20 2015 23:36 utc | 146
I meant that requires knowing how the systems operationally.
Posted by: MRW | Jul 20 2015 23:38 utc | 147
"That requires knowing how they [systems] work operationally."
Exactly. And it isn't that complicated, unless your mind is filled with myths and superstitions that you aren't willing to consider may be lies, just like so many things that we have been taught.
If one understands their checkbook (in abstract, not rote memorization) they have the basis for understanding monetary economics. If we could just kill the inflation zombie…
I don't drink the kool-aid anymore.
Posted by: paulmeli | Jul 21 2015 0:24 utc | 148
Greek Islands are in high demand!
http://gulfnews.com/business/property/warren-buffett-johnny-depp-buy-greek-islands-1.1553276
Posted by: aaaaa | Jul 21 2015 4:04 utc | 149
@144 paulmeli.. thanks for the article. i enjoyed it and think it captures some of what is at work at present..
as for "the problem is with the management" ( over the present world financial institutions ? ) - maybe.. if their is a position of power, is it shared, or do certain countries have more power then other countries? why? presently the world financial institutions - imf, world bank, bis and etc aren't operating in an equitable or fair way.. as you say paulmeli - "modern capitalism is run very similar to organized crime." i agree! i include the running or management of these institutions as an important part of this..
Posted by: james | Jul 21 2015 4:17 utc | 150
Hey, james, did you ever read "Confessions of an Economic Hit Man?"
Posted by: MRW | Jul 21 2015 5:09 utc | 151
james @ 150
Another book, that I believe captures the essence of how the World works wrt to the people in power, is Tragedy and Hope by Carroll Quigley
The book is a monster, 1311 pages and dense, meaning there is so much detail packed into it it can be difficult to read. My son read it several times, I haven't made it all the way through, but I got the picture.
Briefly, Quigley was a historian, a professor at Georgetown University, who was allowed into the inner circle of the movers and shakers of the World. You will recognize many of the names and organizations. Quigley was allowed to observe but was never really 'one of them'. He seems to have believed in their goals in the beginning, but later I think began to see that what they wanted to do was evil.
Tragedy and Hope was written over a 20-year period, and when it was released, TPTB (apparently) didn't realize that it was exposing them for who they really were. After selling very briskly initially the book was suddenly taken out of print and Quigley was never able to get another publisher to sell it. After that the only publishers were 'pirates', and Quigley could never find out who they were. Here is a link to a very interesting interview with Quigley on youtube:
Rare Carroll Quigley Interview
Here is a link to a free online version of the book, crude, scanned in but readable and searchable:
http://www.carrollquigley.net/pdf/Tragedy_and_Hope.pdf or, a cleaned-up version:
http://www.wanttoknow.info/war/tragedy_and_hope_quigley_full1090pg.pdf (this appears to be an abridged copy)
An excerpt…seems to be aligned with your concerns:
"The powers of financial capitalism had [a] far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert by secret agreements arrived at in frequent private meetings and conferences."
-- Quote from Caroll Quigley's Tragedy and Hope, Chapter 20
This was written over 50 years ago…sound familiar?
I also have to add… if you read the book you will see that Quigley believed many of the myths about money as a scarce resource, how it was created and how it related to the greater economy.
Quigley got the system of control part right, at least exposed it's true goals and how the managers achieve their power.
Is it a conspiracy or a plan? Either way its killing us.
Posted by: paulmeli | Jul 21 2015 12:44 utc | 152
James @ 150
The reason we have to keep the money system separate from the institutions that control it is that if we try to limit their power by cutting off their money supply at the source (printing and spending less) we kill ourselves in the process.
If we don't print money there is no economy, or at least it would be an order of magnitude smaller (and they will still be rich…richer in relative terms), because the reality is people are biased not to spend their savings, (we save for 40 years before we retire) and when we do spend it is only a fraction of total savings and the new money being saved is a fraction of the money being extracted from us through capitalism (profits as retained earnings…their savings). Capitalism is a one-way valve to the rich.
Money, by arithmetic can only flow to the top, just as electricity only flows in one direction, from a position of higher potential to one of lower potential, where it collects. The money we earn as income has a high propensity to be spent (we have to to survive) while for rich people their money (the excess) has very low propensity to the spent…so it piles up and earns interest, extracting even more from us. Compound interest requires compound spending. That is the tyranny of the arithmetic, i.e. it is unarguable.
The only objects of extraction are the people…the rich can't get richer by taking wealth from each other, that only moves the wealth around amongst the group. They have to acquire it from us. (I'm talking about financial wealth here but that leads to overall (real) wealth.
TPTB get their money through us and we get (most of) it by far from government spending …it doesn't help them to borrow money from the banking system (to invest) if they can't then extract the debt service and the profits from us.
Although with finance becoming such a big part of the economy (their economy only, racking up big GDP numbers, which are meaningless to us) and through direct subsidies (they get their money up front) the Top Side of Town™ needs us less and less.
If we don't assert control over the essential institutions the people have no chance of winning this game.
Posted by: paulmeli | Jul 21 2015 13:20 utc | 153
james @ 150
"is it shared, or do certain countries have more power then other countries? why?"
The US dollar is the World's dominant reserve currency by far…
That means much foreign investment and wealth holdings are in US dollars…
Those investments are mainly held in US banks…
Even if they are not the US can freeze them out of the payments system (the US controls it) and damage or crush their economies…
The US can at any moment for whatever reason (make an offer they can't refuse) demand something of those actors, and confiscate or freeze their assets if they refuse (see Iran, Russia, France, etc.) …
The US has proven it can destabilize governments at will (Iraq, Libya, Ukraine) …
The US has a huge military and is not afraid to use it…
The US is (currently) the Godfather.
Germany (Eurocrats) are subordinates in this crime family.
In this game the only way to win is not to play…which is what Russia and China (BRICS) are trying to do.
The trouble with this is that the BRICS are hostage to the same neoliberal ideas. They believe the myths…that money is scarce and a country can only prosper through exports (the US exports its money…much more devious) so there is little chance they will succeed in making things any better for us.
If the US was to lose it's reserve currency status it would make the elites less powerful and dangerous, but it shouldn't mean much to the rest of us…reserve currency hegemony doesn't help the working class. It is a system of control and dominance by the elites for the elites.
I've seen studies that conclude that 80% of the World's wealth is controlled by 185 people.
Groupthink has taken control of the World that acts against it's own interest. There's only a handful of us arguing against it, and we don't have any power or influence. We try to get others on the team but have little success.
Unless this changes we are all screwed. I'm old so it doesn't affect me so much. I have no debt. I worry about future generations.
Posted by: paulmeli | Jul 21 2015 13:55 utc | 154
aaaaa @ 149
Greek Islands are in high demand!
Rich people that aren't evil should buy the islands and donate them back to Greece.
Posted by: paulmeli | Jul 21 2015 13:57 utc | 155
So Putin would not support Greece's return to drachmas...
Posted by: aaaaa | Jul 21 2015 19:11 utc | 157
@151 mrw.. i have never read it... what do you think of the book? i read an overview on the controversy around it on wikipedia..
@152 paulmeli.. thanks for the links.. i am into the quigley interview for about 13 minutes so far.. interesting storyline up to 13 minutes.. thanks for the excerpt from the book... your quote "Is it a conspiracy or a plan? Either way its killing us." i agree.. i am not sure what we can do about any of it either...
@153 pm quote "If we don't assert control over the essential institutions the people have no chance of winning this game." and how will this happen?
@154 pm... i agree with your comments. i relate to your last comment.. i am in my late 50's - debt free as well.. one wonders how the next generations can survive on a planet that is economically driving the environment into such a catastrophe..
@155 pm.. one of the main problems with this capitalist system that seems all pervasive is the idea that anything can be bought for a price.. if we could get beyond that type of thinking and world - we would be much further along..
@157 aaaaa... do you have a link to go with your comment, or is that just a free standing comment of yours alone?
Posted by: james | Jul 22 2015 1:06 utc | 158
...
The US has a huge military and is not afraid to use it…
...
Posted by: paulmeli | Jul 21, 2015 9:55:12 AM | 154
Sorry, but I can't let that go unchallenged.
The US military is Petrified of getting into a conflict which would see it sustaining losses of equal or greater magnitude than those sustained by its opponents. There are already alliances with the potential to punish any uppity-ness by the Yankees. ALL of the US's post WWII (fake) wars have been against demonised phantom threats perceived by the US to be military pushovers. And most, but not all, were.
Ironically, the ones which kicked Yankee Ass the hardest were the ones perceived as the most "primitive".
Posted by: Hoarsewhisperer | Jul 22 2015 2:36 utc | 159
To MRW
I very much admire and respect your most astute analysis of the financial system. The one problem I have with your analysis concerns the focus you have on bank lending, which you demonstrate as a contribution to the money supply; as well as your assertion that “only” the federal government can create money (through government fiscal spending). Given that banks are limited in what they can lend by virtue of the “reserves” they have on hand, which come to them by way of money/credit in the system routed from (the supply of money) originating from government spending, what role is played by “artificial money” in the form of derivatives, credit default swaps and other (financial weapons of mass destruction) when these monies creep into a bank’s asset-base? Are not these financial instruments, which constitute a bank’s assets, become part of the bank’s required reserves, that now allow it to lend well beyond the limits it might otherwise be constrained by the (government spending/money creation closed loop) system?
In other words, to what extent do these financial creatures distort the (post)modern banking system?
I sincerely hope this question makes sense.
Posted by: bjmaclac | Jul 22 2015 7:07 utc | 160
Hoarsewhisperer @ 159
I agree with your comment, but the US military you describe has still done a lot of damage and is likely to do a lot more. Maybe I should have written "…is not afraid to threaten to use it."
The threats are credible…see Iran, Russia and all of the saber-rattling going on in those instances, plus the games going on with China in the South China Sea.
No other country in the World does this. Over my lifetime no country has bullied the World as the US has.
The point I was making did not hinge on that one sentence or how it might be interpreted.
Posted by: paulmeli | Jul 22 2015 13:05 utc | 161
bjmaclac @ 160
"assets [derivatives, etc.] become part of the bank’s required reserves, that now allow it to lend well beyond the limits it might otherwise be constrained by"
I'll barge in since I'm here and anyone should be able to answer this…
Banks can always lend to any qualified borrower that walks through their doors whether they have the required reserves or not.
The idea that banks are constrained by their reserves is a myth for which I provided proof (with a link) earlier in this thread.
Having a bunch of derivative's etc (which are currently valued way below par anyway) doesn't increase a banks ability to make loans one iota.
Reserves can always be obtained later if necessary through the interbank lending system or directly from the Fed through the discount window, albeit at a higher cost, so banks avoid this if possible.
Loans create deposits, which increases a bank's assets.
The only real constraint to lending is from the borrowers side…borrowers have to be willing and able to obtain a loan. The able part relates to underwriting…a very important part. Banks cannot force money into the system, unlike the federal government.
Hopefully MRW drops by and explains the relationship of derivatives, etc. in the financial system, as he is much more knowledgeable than I am in that area.
Posted by: paulmeli | Jul 22 2015 13:32 utc | 162
@162 paulmeli quote "borrowers have to be willing and able to obtain a loan. The able part relates to underwriting…a very important part. Banks cannot force money into the system, unlike the federal government." as we saw in 2008, banks were willing to lend money for buying a house/condo to basically any cat or dog on the street.. the reason was it was all being backstopped by fannie mae and freddie mac - the gse's... we saw how fnm and fre ( nyse ticker symbols) lost a lot of their value after the whole ponzi scheme caved while the banks were bailed instead of the people that were held responsible for paying back the loans.. my brief history has holes in it, but for anyone who watched what happened - my short history catches a good part of it.. indeed borrowers have to be willing and able to obtain a loan.. if you have a banking system that will give out a loan to anyone based on the belief they are going to be bailed if the loan fails - well - that is the system that was in place in 2008 in the usa..
Posted by: james | Jul 22 2015 16:33 utc | 163
james @ 163
"as we saw in 2008, banks were willing to lend money for buying a house/condo to basically any cat or dog on the street."
This was in direct violation of the bank's contract with the government and by extension, the people. I don't think it had much if anything to do with backstopping…the 'managers' engaged in criminal behavior, i.e. increasing their own gain at the people's expense in violation of the public trust.
Banks were given the power to create State money with the condition they did so prudently, i.e.. make loans only to those that had a reasonable expectation of making the payments. Do prudent underwriting. The delinquency ratio is expected to be less than 5%.
If the rule of law meant anything the banks that became insolvent would have been wound down, absorbed into the banking system as the parts with value were sold off to member banks…like we did in the S&L crisis, which had the same cause as the GFC…accounting fraud at the highest levels of management.
The offending banks should have ceased to exist. Instead they were made richer.
We should nationalize the banking system in my view. Until then little will change unless anyone thinks we can change human nature.
Posted by: paulmeli | Jul 24 2015 15:11 utc | 164
@64
' Banks were given the power to create State money ... '
But, but ... weren't you adamant that the banks did not create money? I know MRW was.
' We should nationalize the banking system in my view. '
Yeah. And recapture our sovereignty (pdf). Leave the casinos open for the gamblers, but don't call them banks or let them break the law, and let them crash and burn when they fail ... remember when that was chapter and verse of the 'free market', neoliberal-capitalist bullshitters' creed?
Posted by: jfl | Jul 24 2015 18:00 utc | 165
@64
' accounting fraud at the highest levels of management. '
Posted by: guest77 | Jul 17, 2015 12:52:57 AM | 37 has a link to a very enlightening article from ETH Zurich on just who and how few those fraudsters actually are.
Posted by: jfl | Jul 24 2015 18:17 utc | 166
jfl @ 165
"But, but ... weren't you adamant that the banks did not create money? I know MRW was."
No. I have to believe you aren't really this obtuse, because your other comments at this site are not ridiculous…or maybe you're just trolling.
MRW if I recall made a distinction between credit money and non-credit money, that credit nets to zero in the system, while government deficits do not. Deficits add net dollars to the system, and are the only source of our net savings. Substitute other sovereign currencies for dollars as desired, as this is true regardless of which currency we are talking about, provided it is a currency the sovereign has control over (can create as needed).
Banks create both money and offsetting liabilities, so obviously the net is zero. Worse, debt accrues interest over time and doesn't create the funds necessary to extinguish itself.
Where do the funds necessary to generate income and retire our debts come from?
The trouble arises because borrowers get stuck with the liabilities after they've spent the money, while the asset becomes apart of someone else's savings.
In the net people do not spend their savings. Do you? I'm living partly on Social Security and I'm still saving money. The crux of this reality is that the money we have…our savings…never gets spent, so 'circulation' is a non-starter. There is no 'circulation' per se.
The money we have does not add materially to GDP, at least our (the 99%) GDP. If it did, we would see a net transfer of financial wealth from the rich to the non-rich. We don't.
Economies run almost entirely on newly created money or through mercantilism, which is running an economy on someone else's newly-created money.
I agree completely with the last paragraph of your comment which leads me to believe you are just being a Devil's advocate.
Posted by: paulmeli | Jul 24 2015 21:36 utc | 167
@164 paulmeli.. simple question.. do you know the history on fannie mae and freddie mac and the role they played in the 2008 financial dynamic of the time?
let me quote from wikipedia.. the banks used fannie and freddie to get away with the ''loans to anyone''' approach..
"On July 11, 2008, the New York Times reported that U.S. government officials were considering a plan for the U.S. government to take over Fannie Mae and/or Freddie Mac should their financial situations worsen due to the U.S. housing crisis.[35] Fannie Mae and smaller Freddie Mac owned or guaranteed a massive proportion of all home loans in the United States and so were especially hard hit by the slump. The government officials also stated that the government had also considered calling for explicit government guarantee through legislation of $5 trillion on debt owned or guaranteed by the two companies."
So is this thread open now? Was the problem because of the typepad problem b was referring to?
I wrote a long response to bjmaclac @160. I'll have to find it to drop in here. bjmaclac, you still here?
Posted by: MRW | Jul 25 2015 8:38 utc | 170
james @ 64
Yes, I do.
What point are you trying to make?
Posted by: paulmeli | Jul 25 2015 13:06 utc | 171
jfl @ 168
No. Banks create or extend credit.
Would you accept credit (debt) as payment of wages from your employer?
Posted by: paulmeli | Jul 25 2015 13:08 utc | 172
Both MRW and paulmeli
Superb marshalling of the facts. Trying to make up for the deficit in public education is now an never-ending task, profound ignorance is overwhelming, not only about economic factors, but concerning historical (T. Roosevelt had nothing to do with progressive income tax) knowledge, civics, even numeracy are in parallel in their deficiency as evidenced by most of the commentators on this thread, evidenced in telltale ponzi scheme descriptive, 'evil' bankers, etc., etc., sure signs ignorance is the operative condition. In the same manner software drives the hardware, in economics mushware now drives economic policy. Mushware being the neoliberal theology installed by default into the minions populating political, legal and financial management classes, a transnational orthodoxy unparalleled in modern history, funded by monopolistic wealth to protect monopolistic interests - you are not members of that club as G. Carlin 'splained so well. Financial drive is to capture and control income streams, nothing else matters. Return on investment is the reigning doG who's command is to be obeyed. Tsipras found that out when he abandoned support for Varoufakis to follow the political demands he knew rather than the unproven economic heterodox path of his finance minister's proposals, politics being following the arts of the pragmatic as opposed to the intelligence of the possible. Not evil, only to be expected from human nature (for those who actually know something of human nature - all others rely on morality for their measure). Either path, tears are guaranteed, though the outcome will be vastly different. Part of the blessings of living in interesting times.
Posted by: Formerly T-Bear | Jul 25 2015 13:14 utc | 173
Formerly T-Bear @ 173
"T. Roosevelt had nothing to do with progressive income tax"
Touche'
Posted by: paulmeli | Jul 25 2015 13:30 utc | 174
@ paulmeli #174
It is so very easy to misspeak, think of those unfortunate Europeans with 10,000 years of history (and pre-history) to recall.
Posted by: Formerly T-Bear | Jul 25 2015 14:28 utc | 175
@171 paulmeli.. my point is there will always be a creative way to get around any law or structure in place on banking that is supposed to limit or prevent the next bail out from happening.. bottom line is private banks win while the little people are always screwed.. the idea of democracy is a joke.. when politicians allow or condone what happens, you know they have been bought and paid for as well..
james @ 176
Yes James that reality is not in dispute. I think that for 50 or 60 years or so the balance was more in favor of effective regulation and banks were not able to subvert the system as easily. The most important event in my view was the repeal of Glass-Stegall.
Somehow we have to regain some semblance of control or as Formerly T-Bear said "tears are guaranteed". I suppose tears are guaranteed no matter what.
Formerly T-Bear @176
I've mispoken more than a few times in this thread alone…' Banks were given the power to create State money ... ' where I should have written create credit denominated in state money, but that was a mouthful so I took a short cut for which I am now paying.
…will have to be more careful.
Posted by: paulmeli | Jul 25 2015 16:42 utc | 177
@177 paulmeli.. thanks - i think you are right about the importance of the repeal of glass stegall and the ongoing attack on oversight as witnessed by gbla... the derivative markets have also played a huge role in the world of finance much like the discovery and use of plutonium for nuclear power where it appears there is no turning back.. the genie is out of the bottle and can't be put back in..
here is an example of the use of credit default swaps gone wrong.. the company is called american international group, or aig.. gov't bailed them out!!! who whudda thunk it? the fact this shit is allowed to happen tells me their is no oversight until after the fact.. this kinda shit will continue to happen..i am waiting for the next shoe to drop which seems to happen more frequently then not now.. thanks an unregulated derivative market it is only a matter of time.. i guess the federal reserve just couldn't have seen any of this coming, or - a more dark view - they could give a rats ass as they knew taxpayers would be on the hook... it is funny when folks talk about welfare and how people need to be working instead of collecting welfare.. financial welfare on a grand scale such as this makes all other forms of welfare pale in comparison..
james @ 179
Yep. I'm sure you're familiar with the Brooksley Born story. None other than Larry Summers (with Bob Rubin and Alan Greenspan) torpedoed her ideas and concerns and now we have the situation you describe. I mentioned the Bob Rubin connection earlier in the thread.
I'm unsure of the fallout that would happen unwinding the derivatives market because a lot of the risk is circular and would cancel itself out. I don't care how much money rich people lose to each other.
No doubt a lot of innocent bystanders would get caught short though and probably even some countries. I worry about my 401K and I'm currently in the process of turning it into cash…CD's or something. I don't care if it gets much bigger but I can't afford for it to get smaller (again). I lost nearly 50% in the GFC and it's only recently gotten above the 2008 level.
Posted by: paulmeli | Jul 25 2015 19:13 utc | 180
bjmaclac @160
The one problem I have with your analysis concerns the focus you have on bank lending, which you demonstrate as a contribution to the money supply.Then, I obviously didn’t explain myself well at all. I apologize.
Let me try this.
Draw a big " + " on a blank sheet of paper. Literally. Take up the whole page.
The horizontal bar contains all the banks and financial institutions here and globally, businesses and households, state and local and foreign governments, and foreign banks & individuals that use the USD. One part of the Federal Reserve manages this huge system both domestically and globally. Note: these are the users of the currency, even though banks create “credit money” or bank money.
Everything, ultimately, on this horizontal line nets to zero. Even if a bank creates new credit (bank) money for a mortgage, it’s still offset by the value of the house. Ditto huge commercial developments, etc. One man’s asset is another man’s liability.
The vertical bar is the federal government, and the other part of the Federal Reserve that handles its finances for it, via the US Treasury. The federal government is the creator, or issuer of the currency. (There are technical terms for all this, “base money”, etc., but forget all that.)
Did you draw that cross on a blank sheet of paper like I asked you to? ;-)
Draw some curved arrows raining down from the top of the vertical bar to the horizontal bar.
That’s the federal government spending. More specifically, and accurately, this is Congress spending NEW INTEREST-FREE dollars into the real economy—buying or paying for goods and services that the public and the federal government needs--adding new net financial assets to the economy and ultimate increasing the wealth of its citizens. This money never has to be paid back. There is no collateral required for this spending. There is no repayment schedule. There is no interest sought by the federal government in return for this largesse.
And guess what they call this largesse? Government debt. The word “debt” is a contronym. A contronym is one word with two entirely different meanings. Like the word “bolt.” Bolt can mean lock something up tight, or bolt can mean running away suddenly. Or the word “cleave.” Cleave can mean hold something to your chest tightly, or it can mean chopping something up with a butcher’s knife.Government debt is government money, equity, what we as a people own. It is not the same kind of debt that exists on the horizontal line, which does have to be paid back, requires collateral, has a repayment schedule, and demands interest.
Now, money supply
Money supply means bank deposits. How much money is swilling around in the real economy. Forget that there are designations of the money supply: M1, M2. They are used as economic indicators.
The horizontal line increases USD bank deposits (money supply) every time a bank makes a loan, but these are offset by an equivalent asset.
The vertical line increases USD bank deposits (money supply) every time that Congress spends. What the government spends goes into the bank accounts of the businesses and ordinary citizens it is purchasing from. But. But. But. The US Treasury does something unique. Because it can, because it’s the creator of the currency, because it is sovereign, and because it doesn’t want the new money it has deposited into vendors accounts to run the risk of temporarily increasing prices and raising inflation, the US Treasury issues treasury securities in the amount of the spending to mop up the excess dollars.
There are two reasons for this.One: Commercial banks only insure bank accounts to $250,000. That’s FDIC insurance. That’s the limit right now. Big companies like Lockheed and Boeing get monster contracts from the govt. They need something safer than an FDIC-insured commercial bank account to protect themselves over the time of the contract. Ditto pension funds, university trusts, and commercial banks, etc.
Two, and more importantly: treasury securities restore the money supply to balance on the federal end, the vertical line. All this happens before the private sector is even involved. The US Treasury auctions the treasury securities to the public. The Fed may handle it for them, but the Fed can’t buy treasury securities at auction, only the after-market. The purpose of the auction of treasury securities is to offer a safe, absolutely risk-free place to park your money. The federal government even offers interest on these treasury securities. It pays people to exchange their cash in commercial bank accounts for US federal government bills, notes, and bonds! A hold-over from the gold-standard days (another discussion).
In Federal Reserve parlance, number Two above is called “reserve add before reserve drain.” The ‘reserve add’ is when congress spends. The ‘reserve drain’ is when the US Treasury issues treasury securities.
The last thing is the “interest on the debt” that everyone worries about. Another shibboleth. In late August of every year, the US Treasury asks its banker, the Federal Reserve, how much interest it will owe on all outstanding treasury securities for the coming fiscal year only, whether one-year old or 30 years old. Then, the US Treasury creates brand-new treasury securities in that amount and auctions them off to the public to pay the interest. No children, no grandchildren, no taxpayers involved.
Does this make better sense? I’ll discuss derivatives in a separate post.
And oh, btw, the “Debt Ceiling” is the second shibboleth. It’s an antique from the gold-standard days—1917 to be exact—when Congress wanted a way to put a belt and pair of suspenders on protecting the gold supply. Completely outmoded. Absolutely out-of-date. The Depression and WWII intervened and congress never bothered to take it off the books when we went off the gold standard.
___________________________
BTW, paulmeli is right about the reserves. Banks can’t loan them out. The Federal Reserve supplies reserves to banks. It’s what the Federal Reserve Act of 1913 set out to do: protect the public from the danger of banks loaning out its customers' deposits precipitously; hence, the rules and regs. Banks borrow among themselves to meet their reserves requirement at the overnight interest rate that the Federal Reserve controls, but if a bank can’t borrow from another bank, it can go to the Fed’s Discount Window to borrow at a rate that is more punitive than the overnight rate (Fed Funds Rate). Those reserves are kept in the banks’ checking account at the Fed, technically called a “Reserve account.” A bank’s savings account is called a “Securities account.” And as you can guess, that’s where treasury securities are parked, no different than a CD at your local bank.
Posted by: MRW | Jul 25 2015 20:51 utc | 181
James,
You live in Canada. A perfect example of what I am talking about.
Canada had a $3.4 billion surplus in April and May. And it's economy is in the tank. No wonder! The federal government RAN AN EFFING SURPLUS.
Canada has a sovereign currency. It cannot go broke. It creates its own currency. (Just like GB, Australia, Japan, and the US)
All the talk about balancing the budget is going to impoverish your countrymen.
If you will go back and look, Jim Flagherty, the Finance Minister at the time, apologized to the Canadian people in August 2008 for running a deficit. That deficit saved Canada's ass during the GFC.
Joe Oliver's talk of balancing the budget or getting it back to a surplus is criminal. Justin Trudeau is even more ignorant. He is so out to lunch economically, he thinks the federal government can't afford those kid grants parents get every month. A complete fool. Has zero understanding of the monetary system he claims he can run.
Posted by: MRW | Jul 25 2015 21:03 utc | 182
@bjmaclac @160
Derivatives made easy
You, Freddie, buy $100 of Ford stock. You want to preserve your investment so you go to someone at the Goldman Sachs' desk who will insure it for you.
Goldman Sachs says “Sure, I’ll insure it for you. Ford is a good stock. How about $2.00/year?”
You say “Dandy.” And tell your friend Marty about it.
Marty, unbeknownst to Freddie, goes to the Goldman Sachs desk and says, “Hey, I want to insure Freddie’s Ford stock too. I’ll pay $2.00/year.” GS says OK.
Marty tells his cousin Sue about insuring Freddie’s Ford stock.
Sue, unbeknownst to Marty, goes to Goldman Sachs and gets the same $2.00 insurance deal on Freddie’s stock.
Sue tells her beauty parlor friends about it. All ten of them go to Goldman Sachs’s derivatives desk and insure Freddie’s stock for $2.00/year.
Pretty soon, the guy at Goldman Sachs’ desk realizes that 100 people have insured Freddie’s Ford stock, and if anything happens to the stock, he could be out $10,000.
So the guy at the Goldman Sachs derivatives desk goes to his buddy at the JP Morgan Chase’s derivatives desk, and takes out $100/year insurance to hedge against his $10,000 exposure. (The Goldman Sachs guy makes 100 X $2.00 or $200/year from his people, so he nets $100.)
The JP Morgan Chase guy, unbeknownst to the Goldman Sachs guy, takes out $100/year insurance on the Goldman Sachs guy’s exposure and tells all his buddies at the bar about it. They, too, pile on, and pretty soon the JP Morgan Chase guy realizes he’s got a $1,000,000 exposure. So he goes to AIG, and gets insurance for $5,000/ year. He makes a $5,000 profit from the 100 people paying him $100/year.
And so on…and on and on, a pyramid scheme, or in james’ parlance, a ponzi scheme.
History
Back in 1990 or thereabouts, farmers and other people affected by the weather or gas prices could hedge their investments on Wall Street. They could take out insurance in case the price of gas skyrocketed and their fleets of taxis could be out of business, or they could insure against the weather (cold, heat) wiping out their crops. Whatever the threat to the business over time. But the insurance was just for that one person alone.
Somewhere in the 90s, that all changed.
People started taking insurance out on other people’s insured items or properties, with or without them knowing about it. It was insurance derived on someone else's asset; hence, derivatives. You could also short the insurance. You could bet on it (the commodity, stock, bond, whatever) falling.
Who is allowed to participate in this derivatives market
Anyone who has got $5 million to start with. That was the initial rule—don’t know what it is now—which was how these players got away with it. They convinced the regulators that they didn’t need regulating because they were all “sophisticated investors” who understood the risks and the price of entry was high enough not to involve the hoi polloi.
This was what Brooksley Born warned about
Brooksley Born was chairman of the Commodities Futures Trading Commission. When she tried to warn Congress about this unregulated insurance scam and its potential to blow up the global financial system, she received death threats and Alan Greenspan, Larry Summers, and Robert Rubin went after her with a vengeance, getting her denigrated in the press, sneering at her ability as a woman, the works. Born graduated top of her class at Stanford Law.
These three with Arthur Leavitt (Head of the SEC and former chair of Merrill Lynch) went in to see Clinton in the Oval Office in 1996 to assure him the derivatives market didn’t need regulating. Alan Greenspan, Larry Summers, and Robert Rubin told Clinton that derivatives were so complicated—did you have trouble following the above? doubt it—that only highly sophisticated investors used them, and that the market for them was so rarified that only the extremely rich and investment-savvy with a lot to lose engaged in them so they were careful with their risk and money. (After the Sept 2008 crash, I heard Leavitt almost in tears on public radio describe this meeting, and apologizing for what he had done. Only one to do it.)
Then on December 15, 2000, the last day of the Clinton admin, someone slipped in a 262-page addendum to the 11,000-page budget that said it was against the law to regulate derivatives. And by regulating, they even meant publishing the names of all the other people who held insurance for the same stock, bond, or commodity, so that an investor could protect himself.
A great one-hour radio show about this is Episode 365 of This American Life that aired October 3, 2008. Called “Another Frightening Show About the Economy.” If you want to understand how the above works, it was brilliant in reducing it down so that you could understand it. Best I’ve ever heard.
Posted by: MRW | Jul 25 2015 22:22 utc | 183
@181 MRW ...
The vertical bar is the federal government, and the other part of the Federal Reserve that handles its finances for it, via the US Treasury. ... That’s the federal government spending. More specifically, and accurately, this is Congress spending NEW INTEREST-FREE dollars into the real economy ... There is no interest sought by the federal government in return for this largesse.
Ah, but the people who bought the T-bonds and T-bills want their interest... don't they, but no problem ...
The last thing is the “interest on the debt” that everyone worries about. Another shibboleth. In late August of every year, the US Treasury asks its banker, the Federal Reserve, how much interest it will owe on all outstanding treasury securities for the coming fiscal year only, whether one-year old or 30 years old. Then, the US Treasury creates brand-new treasury securities in that amount and auctions them off to the public to pay the interest.
Financing interest on debt with new debt ... Oh, but that depends - as Billy Boy says - on what the meaning of 'is', or in this case 'debt' is : debt is what you pay interest on.
The banksters are happy as pigs in shit. Loans that are never paid off - just 'serviced' forever - their holy grail! Well, not really forever, but, you know, IBGYBG.
Meanwhile they are the rentiers of money.
@183 thanks for the sordid tale of the pigs in chief : Alan Greenspan, Larry Summers, Robert Rubin, and Arthur Leavit, and Billy Boy Clinton.
The opposite side off the stirring tale of the one honest person in Washington DC at the time : Brooksley Born.
Of course now even she is long gone.
Posted by: jfl | Jul 26 2015 1:59 utc | 186
JFL @186,
I don't understand your point.
Financing interest on debt with new debt
versus this
The banksters are happy as pigs in shit. Loans that are never paid off - just 'serviced' forever - their holy grail! Well, not really forever, but, you know, IBGYBG.
1. You're mixing vertical and horizontal.
2. What does IBGYBG mean?
Posted by: MRW | Jul 26 2015 2:34 utc | 187
jfl @186,
Paying interest on treasury securities by the federal government was an incentive of long-standing. As JP Morgan said in the late 1800s, "Government bonds are better than gold."
Why?
Gold doesn't pay interest. Government bonds do. Offering interest on treasury securities (whether t-bills, which mature within one year; t-notes, which mature between 2-10 years; or t-bonds, which mature between 10-30 years) was the incentive that the federal government came up with to get people to buy treasury securities.
The federal government didn't want people to turn their dollar bills (which were convertible at the time to gold) to turn them in for gold and hoard the gold in their mattresses.
The federal government needed that gold for international payments. That's why they invented all sorts of verkaktah slogans like 'help pay for the war' and other patriotic drivel, even if the economics was bullshit.
The federal government needed to retain control over its gold supply.
Posted by: MRW | Jul 26 2015 2:47 utc | 188
jfl, did you read my @181 post and draw the "+" on a black sheet of paper?
Posted by: MRW | Jul 26 2015 2:49 utc | 189
@187
I saw the term IBGYBG at b's link on the Greek debacle : "I'll be gone, you'll be gone".
It's what one bankster says to another after they've just sold another financial death sentence to someone in desperate straits whom they've baffled with their bullshit or who is an active part of the scam played on a third party, like the Greek political class vis a via the citizens of Greece. It's the updated, 'hip' version of 'in the long run we're all dead'.
Of course the children and grandchildren of their victims aren't dead, just sentenced to a life of malnutrition along every social axis due to the fraud played out by this generation of banksters' on their parents' and grandparents' generation.
One generation of banksters will be gone, and so will have escaped prosecution, but their children and grandchildren - having inherited the spoils of the scam - will be carrying on the family traditions, defrauding new generations of their victims.
Posted by: jfl | Jul 26 2015 12:14 utc | 191
MRW @ 185
That is one of the options I've considered, the one I prefer, my financial advisor is against it.
Financial advisors are a lot like Architects, who design a house for you that they want, rather than the house that you want. We don't know anything, and they don't want us to know what they know.
Posted by: paulmeli | Jul 26 2015 12:40 utc | 192
No matter what anyone writes to the contrary, jfl repeats the myths like a mantra. He's already given up.
Posted by: paulmeli | Jul 26 2015 12:42 utc | 193
@180 paulmeli.. thanks.. i am unfamiliar with the example you gave, but i do believe the derivative market is an important part of the whole ponzi scheme.. if it was to end, aside from all the moneyed folks dealing with the jig being up, the little people like you and i would too.. it would be like having to rebuild a house after an earthquake.. i figure it has to happen, not that i wish mayhem on others, but this shit can't go on endlessly.. perfect storm will happen, and these various 2008, or 1998 financial crisis's are just precursors to the big one yet to hit..
@182 mrw... i don't know what the conservatives are doing other trying there very best to sell canada to the highest bid.. if harper could make canada a 51st state, he would... we might print our own money, but why do we have to pay interest on it by borrowing from private banks? why can't we offer the money to pay for the infrastructures needed? so much of the debt is for interest collected by these same private banks.. the pbs have a great thing going and no country seems to want to address this.. instead they are happy to keep it going..
Posted by: james | Jul 26 2015 19:05 utc | 194
james, my friend, @194
we might print our own money, but why do we have to pay interest on it by borrowing from private banks? why can't we offer the money to pay for the infrastructures needed? so much of the debt is for interest collected by these same private banks.
Canada is no different than the US. Canada DOES NOT BORROW MONEY from private Canadian banks. [They use that term—“borrowing”--because it’s an accounting artifact. I’ve explained it here before; not up to doing it again.]
james, stop and think: where did those private Canadian banks get Canadian dollars to begin with? Who issued them? Who has the legal right to create them? [That’s like people down here always saying we borrow from China, to which I respond, “Name the factory in downtown China where they are counterfeiting US dollars that we then 'borrow’."]
CIBC, the TD Bank, and the Royal Bank can’t issue Canadian dollars. They’re not allowed to print them. Only the Canadian Mint, a federal government agency can do it. The $CAN dollar bills come from the federal government.
What you’re talking about are treasury securities, whatever it is they’re called up there, government bonds? OK, just looked it up. You have Government of Canada marketable bonds, Government of Canada real return bonds, and Government of Canada Treasury bills.
The Canadian Mint, just like the US Bureau of Printing and Engraving, also “prints up out of thin air” the treasury securities that it offers its citizens. These are 100% money equivalents that your federal government prints on demand. Furthermore, the government of Canada pays interest on those treasury securities just like the US! Your federal government, just like ours, actually pays their people to park their hard-earned cash in the safest, risk-free financial instrument available in your country . . . instead of risking it in a commercial bank or the stock market. And it pays for that interest by issuing more treasury securities.
This is what advanced civilizations do for their people. They protect their people economically.
The Bank of Canada Act was written in 1934 when Canada was still on the gold standard, so, item #(j) in the Bank Of Canada Act has the same force as the 1917 US Debt Ceiling: it was how the federal government protected the gold supply back then by adding a belt and set of suspenders on the gold supply via legislation. Like the US Debt Ceiling, this is idiotic in 2015:
http://laws-lois.justice.gc.ca/eng/acts/B-2/page-7.html?texthighlight=currencies#s-18.
By the way, this is a Canadian blog you need to familiarize yourself with. The guy understands his shit. And since he is familiar with the vagaries of the Canadian monetary system, this would be a good guy to pester, and I meant that without guile and generously.
http://fictionalbarking.blogspot.ca/2011/05/right-way-to-balance-budget-target.html
Posted by: MRW | Jul 26 2015 21:53 utc | 195
james @194,
why can't we offer the money to pay for the infrastructures needed?Because your sonsabitches parliament and your idiotic govt and press don't understand how the MONETARY system works. All your parliament has to do is legislate the jobs into existence.
Anytime you hear a political cretin say we gotta' balance the FEDERAL government--whether Canadian, American, British, Japanese, or Australian--know that you are dealing with a financial idiot.
[Provinces, US states, and the EU countries have to balance their budgets because they must earn income to survive. The federal governments of Canada, the US., Great Britain, Japan, and Australia don't have that problem. They issue their own currency.]
Posted by: MRW | Jul 26 2015 21:58 utc | 196
James, here's another article to read about Canada, although it might be a little too much inside-baseball, if you catch my drift.
"The Bank of Canada Governor is Wrong on Too Big To Fail and Wrong on Canada’s Banking System"
http://neweconomicperspectives.org/2012/11/mark-carney-vs-andy-haldane-the-bank-of-canada-governor-is-wrong-on-too-big-to-fail-and-wrong-on-canadas-banking-system.html#more-3807
Posted by: MRW | Jul 26 2015 23:05 utc | 197
@195 mrw, thanks for the overview and walking me thru it all and thank you for the link..
i realize the private banks aren't allowed to print canadian $.. what i don't realize is why our gov't owes interest on money borrowed.. maybe you can explain that to me.. if we can print the shit up, why is it we are paying interest to service the debt? that part i don't get.. maybe the fellow at the link on the bottom of your post can help explain it to me..
@196 mrw - thanks...i get what you are saying, but my question remains - do we owe money to private banks in something other then c$ and if so why? and, why do we have to service the interest on that money owed.. i clearly don't get it and will be the first to admit it.. the way i figure it - private banks would do their utmost to get the canadian gov't to borrow off of them, when in fact the canuck gov't could avoid the private banking sector all together by issuing and paying for the infrastructure, jobs and etc themselves.. so, indeed there is something i am still not getting in all this..
!197 mrw - thanks for the link.. i will read it right now..
Posted by: james | Jul 27 2015 2:32 utc | 198
some good quotes from your link @197..
"The reality, which politicians and now (it appears) regulators like Mr. Carney, like to assume away, is that most of this money will come from public funds. As long as banks are allowed to be so large that their failure can cause a crisis they will be bailed out."
the fact a regulator comes from the private banking sector seems like getting a fox to guard the chicken house to me.. that is what mark carney is.. "...began his career at Goldman Sachs and the Canadian Department of Finance."Carney spent thirteen years with Goldman Sachs in its London, Tokyo, New York and Toronto offices. His progressively more senior positions included co-head of sovereign risk; executive director, emerging debt capital markets; and managing director, investment banking. He worked on South Africa's post-apartheid venture into international bond markets, and was involved in Goldman's work with the 1998 Russian financial crisis."
"In contrast to the suggestions of Mr. Carney (and other Canadian politicians, such as Prime Minister Stephen Harper and his Finance Minister, Jim Flaherty), the Canadian banking system is not as sound as they would have you believe. In fact, both the Canadian banking system and the economy as a whole display many of the pathologies of the US economy, in terms of its increasingly financialised character and the corresponding evolution of its banking system."
the usa had the gse's to help offer the guarantee of a backstop for any crazy loan issued.. canada has cmhc - https://en.wikipedia.org/wiki/Canada_Mortgage_and_Housing_Corporation
further down in the article - it goes right into my comment on cmhc -
" “This was so largely because of the lobbying effort of American International Group (AIG) that recruited the support of some former officials of the federally-owned Canada Mortgage and Housing Corporation (CMHC) who finally succeeded in persuading the federal cabinet to open Canada’s mortgage insurance sector to greater foreign competition. Hence, in 2007 and early 2008, subprime mortgages were rising precipitously in Canada, despite the growing problems south of the border and despite even the formal opposition of the Governor of the Bank of Canada at the time, who feared possible inflationary consequences of this type of credit expansion in the hot Canadian housing market that could then spread to the overall product market, thereby possibly frustrating the Bank of Canada’s own low inflation targeting policy. In a sense, it was the U.S. financial collapse itself in 2008 that actually aborted the process, thereby preventing a home grown subprime problem in Canada. The fact that the federal government offered $125 billion through CMHC to buy up mortgage assets would suggest that there was, indeed, a significant number of such high risk mortgages in the banking sector that have slowly been absorbed by CMHC, a public institution, in 2009, much as Fannie Mae and Freddie Mac in the U.S.”
that was a good article MRW.. thanks! it reconfirms my ongoing position that the west including canada will see another financial meltdown at some point in time.. not a case of if, but when..
Posted by: james | Jul 27 2015 2:54 utc | 199
if we can print the shit up, why is it we are paying interest to service the debt? that part i don't get"
I don't know about Canada but for the US Congress passed the law that Congress had to pay interest on deficits $-for-$ around 1918.
It was a voluntary act.
It was believed at the time that issuing bonds to 'mop up' excess liquidity in the system was less inflationary than direct printing (no bonds).
This has not proven to be the case. Bonds are no less inflationary than no-bonds, and inflation is a natural byproduct of growth. There has not been a period of zero inflation in our lifetimes.
The interest we pay on public debt is of no consequence so why worry about it? In the US the Fed controls interest rates. Is the Fed going to undermine the economy by raising rates to a punitive level? That would go against it's mandate.
If one looks at a long-term chart of 10-year Treasuries the answer is no. Rates have been on an inexorable decline towards zero for 35 years. A view of Japan's rates would likely look similar. Japan's bonds yield less than 1% last time I checked.
Zero interest is functionally equivalent to direct printing isn't it?
If I read nothing else wrt these issues I would read Bill Mitchell's blog:
Posted by: paulmeli | Jul 27 2015 13:15 utc | 200
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VietnamVet @ 99
Thanks and your summary is on the mark. TPTB are daring us to revolt.
Posted by: paulmeli | Jul 19 2015 20:38 utc | 101