Making Money: The Ultimate Illusion of a Debt-Driven Economy

How is money made? Well, in conventional terms we work for it. But where does it come from? We know that the economy needs a sufficient “money supply” so we can exchange “goods and services” every day. Of course, it’s not that simple. After the “Great Recession” of 2008, the Federal Reserve injected hundreds of billions of dollars into the Big Banks. The purpose was to keep them from going under as a result of their gambling with depositors’ money. So, where is all that money now?

The conventional wisdom is that the “the government prints our money.” Technically but only partially true, this image of overworked treasury printing presses is increasingly irrelevant. Most money today is created electronically when banks lend up to some multiple of the money held in their accounts. A bank’s solvency depends on the money it holds “in reserve” – does not lend – in accordance with banking rules. If the ratio of loans to reserves is too high, the bank risks not being able to cover losses if loans go bad.

Reserve requirements were reduced significantly in the years before the 2008 crash. But the “too big to fail” banks took it a step further. They packaged many risky mortgages into highly leveraged “derivatives,” re-sold them to investment clients and each other, and took exorbitant “fees” at each step. It all blew up when mortgages failed and the Big Banks couldn’t cover their losses. So, the Fed stepped in and kept them solvent by “lending” them billions upon billions of dollars.

With the lowering of reserve requirements and the elimination of the firewall between commercial and speculative investment banking, all hell broke loose. Lending practices and the bundling of debt took on the logic of gambling in a casino, but with more hubris. Reliance on complex mathematical models of “risk management” to justify reckless behavior became the biggest illusion of all.

Most critics of the federal “fractional reserve” banking system worry that our “paper money” or “fiat currency” is not “backed” by gold. They consider gold to be “real money,” not arbitrarily “created” money. Gold is an effective standard of value because it is scarce, not reproducible or easily faked, and is universally valued by humans. That’s great, as long as everyone believes in gold’s value.  After all, value is what we make it.  But any economy needs its money to circulate. If paper money had to be backed by gold, there would not be enough to circulate and the economy would stagnate. Yet, if too much paper (or electronic) money is put into circulation, borrowed and invested, then inflation can get out of hand.

There is some validity to the concern of producing an oversupply of money leading to inflation, as has happened in several historical cases. But the biggest problem of money creation lies in our debt-based banking system, created under the influence of the big bankers in 1913. That was when the Big Banks convinced the government to create the Federal Reserve banking system. The Fed is essentially a private banking cartel that “lends” money to the federal government – the nation. Where does the Fed get the money it lends to the government? It simply creates it out of nothing – other than the government’s authorization for it to do so! That sounds crazy because it is, unless you own the Big Banks. But if national banks were owned by the nation, then money creation would not produce national debt.

So, you can see that fundamentally the “national debt” is an illusion created when the government gave up its sovereignty over our currency. Without the privatization of currency creation, indebting the government, there would be little need for an income tax.

A debt-based monetary system is inherently unstable and succeeds only as long as economic growth continues. But as long as conservative reserve requirements held sway and investment banking was separated from commercial banking after the Great Depression, another crash was averted. The Glass–Steagall Banking Act of 1933 kept commercial banking separate from investment (speculative) banking after the Great Depression. And relatively strict reserve requirements limited the Big Banks tendency to engage in excessive speculation – until deregulation beginning in 1999 unleashed the Hounds of Wall Street.

For a hundred years, the government has become increasingly indebted to the Federal Reserve and buyers of treasury notes and bonds.  These instruments are the means by which  the Fed sells our government’s debt worldwide. Despite the increasing debt and interest payments, the economy could be managed as long as it kept growing – adding new money from new debt to pay old debt and interest. The Federal Reserve – the private central bank owned by its member big private banks – partially controlled inflation by controlling interest rates, some of the time.

But the illusion of endless growth and the phantom money it creates are rapidly coming to an end on our finite planet. The debt-based monetary system will be unsustainable in a steady-state economy aligned with real-world limitations – it must be replaced. We must move to a stable ecologically grounded economy.  We can no longer support an ever-growing debt-based money system. In an ecological economy, money will simply circulate as the means for exchanging real value – that is, actual goods and services.

How to Change the Economic Culture…and Save the Planet

It’s pretty clear that the corporate state is in control of the economic culture of the U.S. and that of most other nations as well. As environmentalists try to get enough attention to explain what is obvious about climate change, the scientific information is minimized, suppressed, or distorted.  We’re told that the best solutions to “potential” climate disruption is to apply established “free market” solutions of the “growth economy.” Never mind that imaginary “free” markets are tightly controlled by giant trans-national corporations whose congressional lackeys ignore the radical disruption of the complex climate systems upon which we depend for survival.

From local building ordinances to national economic policies and ruthless trade agreements, decisions are supported by an economic ideology that always makes “economic growth” the top political priority. It is an assumption so deeply ingrained in our culture that it remains unchallenged, even as we try to find ways to mitigate the economic causes of the climate chaos that is already upon us. The ideology of economic growth and the illusion of U.S. “energy independence” allow more CO2 and methane emissions from fracking for short term production increases. We might as well be lemmings.

The scientifically aware continue to argue with the Koch brothers’ agents provocateurs as if it was merely a matter truth prevailing in rational debate. We have to face the fact that culture does not change by rational discourse when the power structure dominates the flow of “information.” All you have to do is listen to the Sunday talk shows to see who defines the culture through the media. However, sociologists and behavioral psychologists have known for decades that the most powerful way to change behavior and influence opinion is to strategically exert peer pressure. Education can help a little, but will be too late. It is no match for pervasive mass media propaganda so prevalent today. Strategic behavior of “influentials” in a community is.

While mass media control the economic culture instilled in the general population, significant numbers of young people around the world, including the U.S., are aware of the nascent climate disaster and have begun to campaign for divestiture of fossil-fuel investments by university endowments. The response from Harvard’s president Drew Foust illuminates the “generation gap,” claiming that Harvard should not be a “political actor.”  See:  Well, investing in fossil-fuel is a political act. This is a classic case of the old established economic culture opposing the new ecological culture of sustainability.

Neither the civil rights movement nor the anti-apartheid movement succeeded by the relatively minor economic damage they inflicted – they won by exerting major political pressure. But as that battle continues – and it does have promise as one avenue to put political pressure on the fossil-fuel economy – we must find  ways to immediately divest our economic behavior from dependence on oil, gas, and coal. We face an urgent – time sensitive – crisis.

As a general principle of urgency, every effort possible is necessary. But we need a strategy that applies the facts of social science to maximize the broad adoption of innovations to drastically reduce carbon emissions. Behavioral change does not come fast by rational argument. Most people adjust their behavior when the judgment of others matters. That is what “politically correct” language is all about. When racist speech was no longer accepted in public, many Americans changed their public speech even though they did not purge their personal racism. They knew that they would be judged badly if, for example, they used “the N word” in public, even in their own segregated suburban neighborhoods. We all know folks who still harbor racist feelings but avoid expressing them in public settings.

The recent racist outbursts of L.A. Clippers owner Donald Sterling and Nevada rancher Cliven Bundy are the exceptions that prove the rule.* Initially oblivious to the offensiveness of their words, even they back-pedaled with media exposure. For the most part, overt racism is banished from public discourse. When we are able to elevate “sustainable living” behaviors, such as installing solar systems, to the level of politically correct actions, it will mean that peer pressure can be brought to bear on economic behavior that affects individuals’ self-perception in relation to those peers who are “influentials.” Open opposition will fade and support will blossom.

The “bulk Solar” strategy is an example of how this can be done. If a relatively small group of “early adopters” organizes to make bulk solar purchases, say 5 houses in a neighborhood, the installer can do the work cheaper and give a discount. The innovative “first adopters” are likely to be “influentials” who can have an impact on their neighbors. A tipping point can be reached where it becomes no longer an odd thing to ‘go solar,’ but the popular thing to do. It then becomes a new norm: to take that [personally and socially] rational step of reducing one’s carbon footprint.
* See “What Donald Sterling and Cliven Bundy can Teach Us about Racism in America”

Why a Return to Progressive Taxation is necessary…and Right

The accelerating concentration of income and wealth in the upper 1% of the upper 1% of the population and the failure of the “growth” economy to serve the population that supports it, are not only moral questions of fairness. The distribution of income and wealth are also important elements of the health of the economy itself. Between 30% and 75% of aggregate income in the past 30 years has gone to the top 10% and most of that has gone to the top 1%. After the “great recession” of 2008, almost all of new income went to the top of the top 1%. If this trend continues, the circulation of money and therefore the health of the economy will stagnate even further.

It is fortunate that French economist Thomas Piketty’s new book, Capital in the 21st Century, is making such an international splash. Piketty raises fundamental questions about the economy that most economists, in their pandering to the power elites, have avoided ever since crowning Adam Smith patron saint of mainstream economics.

What classical economics, as practiced throughout the industrial era, has ignored is the inherent tendency of capital to concentrate among the wealthiest individuals and corporations, unless mitigated by social policies that assure the broader circulation of money throughout the economy.  It’s really quite simple. The economic power of those who control the most wealth and income gives them advantages that enable them to accumulate wealth at increasing rates, to the disadvantage of everyone else in the economy.  Without economic regulations that dampen the special advantages of wealth, such as the progressive income tax that once benefited the economy, extreme disparities in income and wealth cause all sorts of problems.

The evidence of that destructive process is grossly obvious in the current economies of the industrial nations, especially in the United States. That is exactly what happened before the Great Depression of the 1930s, causing economic collapse due to excessive concentration of wealth among the richest class in America. Yes, class, that concept so long banned from discussion in the U.S. Forget the fancy academic analyses of socioeconomic class and status in social relations. It’s simply a matter of an inevitable distortion of the distribution of wealth and circulation of money when the tendency for concentration is not tempered by some kind of social policy designed to limit concentration by re-balancing the circulation of money in the economy. Such policies were enacted in the 1930s, but, under pressure from the most privileged, have been abandoned, allowing further distortion of income and wealth.

The concentration of wealth and income was moderated when we had a progressive income tax system. The simplest and most practical approach to staving off plutocracy (rule by the wealthiest members of society) and reducing damage to the economy that results from unfettered accumulation of wealth, is to return to a progressive system of taxation of income and the return of the tax on inheritance. There is simply no economic reason, let alone moral justification, for allowing the economy to spin out of control and fail to serve the public interest in order to allow the wealthiest members of society to become that much wealthier, simply because they already have excessive economic power.

At the same time, the obsession with reducing the federal debt by further cutting expenditures that support the general population, such as social security, medical insurance coverage, and public education, serves no earthly purpose other than to make the rich richer. The biggest con of all these days is the one that characterizes the ‘rentier’ class – those who merely make money on the value of the wealth they have already accumulated – is that their income and wealth ought to be protected from taxation because they are the “job creators.” They are no such thing, and their excessive income is of benefit to nobody, not even themselves – you can only spend so much before reaching absurd redundancy.  But the quest for power knows no bounds.

Restoring the progressive income tax would be fit medicine to help restore the health of an economy suffering from the cancerous growth of the ‘cells’ of the richest class of Americans and the corporations they control. The federal revenue gained thereby could be applied not only to the national debt, but to investing the desperately needed transformation of the fossil-fuel driven economy to a carbon neutral economy in order to minimize the damage of climate disruption. After all, it is the 1% and their fossil fuel related investments that have driven us to the brink of climate catastrophe.

Bottom line: an economy is not an economy of the whole society without consistently adequate circulation of money throughout the population.  It is both immoral and foolish to continue on the path of accelerating concentration of wealth to the detriment of the entire society. Privilege and wealth will not disappear with progressive taxation. Look at the post WW-II 1940s and 1950s, when the marginal tax rate on income above $200,000 — the tax rate on the part of income above the first $200,000 earned, and there were 23 brackets below that with progressively lower rates — was 91%; adjusted for inflation, that would be the rate for income above $2.41 million today. We should have such a healthy economy today!

Sunshine in Ketchikan: The Trouble Ahead

I’d wanted to go to Alaska for a long time. Finally we arranged for a small-craft inner coastal waterway trip on the “Wilderness Adventurer,” from Juneau to Ketchikan for 6 days, to be followed by a road trip from Anchorage to Homer to Denali and return. After 5 days of beautiful weather, kayaking and hiking amid eagles and bears along shorelines and adjacent rain forests of the inner passages, I began to wonder when the more typical rainy weather of the South East Alaskan fjords might commence. Everyone expected overcast skies and spring showers. Rain, wind, and heavy seas were repeatedly forecast but never materialized.

With about 60 educated middle class ‘adventurists’, quite ecologically aware it would seem, there was virtually no conversation about climate change. Surprisingly, one of the guides, in a talk about the micro-climates, flora and fauna of the area, proclaimed that it was company policy to simply describe the patterns observed in the area and that we “are all adults here and you can draw whatever conclusions you want from what you observe.” But it was clear that was not her personal attitude. Wow! Corporate censorship on questions of climate change even from the outfitters of an ecological adventure cruise! The Koch Brothers’ propaganda is feared even in the wilds of Alaska! Economic fear trumps scientific findings once again.

All five days so far have been sunny and in the mid 60s. Highly improbable under “normal” spring weather conditions in the coastal passages of South East Alaska. Look at a map. It’s a prime example of a temperate rain forest, a marine environment with many islands, channels, fjords, glaciers, and rivers, and the wildlife that thrives in such places. First bald eagle(s) I’ve ever seen in the wild, ubiquitous ravens, huge sea stars at low tide observed while kayaking along shorelines. Tropical rain forests have the greatest bio-diversity, but temperate rain forests such as those in South East Alaska have the greatest total bio-mass according to the eco-guides on board. That is due to the typical rainy weather and cold temperatures at this high latitude, unlike the pleasant warm sunny days we’re having here this week.

Everyone on board is so grateful for the weather we’re having, and seem to not connect it to the climate chaos it portends. Dinner conversations reflect quite liberal notions, including those generally related to climate change. Yet, I’ve heard no mention of a possible connection of our momentary personal good fortune to the more catastrophic changes in weather events the world is already experiencing. If this highly educated group can so easily isolate its understanding of climate disruption from everyday experience, then the idea that rational analysis of the now obvious wealth of data and models of accelerating climate disruption past the tipping point can be applied effectively to political decisions seems really far fetched. But we humans so often segment our realms of experience and knowledge.

Of course, we are cut off from Internet and cell phone services because we are far from any towns or cities until we reach Ketchikan in a couple more days. We did picked up wireless access briefly when we stopped at the fishing village of Wrangell for a couple of hours of shore time. But the whole point of the trip was to experience the wilderness in its isolated natural state, from the security of a 145 foot ship capable of navigating the smaller fjords right up to the glacier faces where the big cruise ships with their built-in casinos and gastronomic binges can’t go as they transit from one tourist port to the next. Juneau, where we began our voyage, is overrun by these giant floating hotels that look a little like prison blocks; the town’s streets, of course, are riddled with ‘diamond shops’ and other ‘tourist traps.’

So, maybe we should just enjoy the wilderness while we can. But it does disturb me that a company that conducts ‘eco-tours’ is afraid to even mention the idea of climate change and instructs its guides to be silent on the topic. That seems emblematic of the entire ‘cultural’ problem of the politics of climate change in the industrial nations, right when the most open and honest discussion of the greatest transformation of human behavior we can imagine, is desperately needed.

Postscript: Over the next two weeks, traveling from the Kanai peninsula to Denali, we experienced only two days of light rain. All the locals I asked remarked how unusual it was, and mentioned how exceptionally warm this spring had been. This little anecdote does not prove anything. It is merely consistent with the overwhelming evidence – accumulated by hundreds of scientific studies worldwide over the past two decades – which confirm the certainty of the accelerating increase of climate disruption events toward a catastrophic tipping point beyond which the grave consequences of political stupidity and corporate greed can neither be mitigated nor adapted to. NOAA forecasts rain for Wrangell this weekend.

Two Kinds of Development

When we think of “development,” it is usually about economic development of the so-called “developing nations,” that is, nations whose economies have not caught up with the “advanced” industrial nations of North America and Europe. Without question, the most advanced technology and its application to the full range of industrial processes, from extraction to product delivery is “Western” in that sense. Of course, some Asian nations are right up there in technology if not in its deployment into their own economies. Then there are the rest of the nations, trying to “catch up.” But if you look at the world with those Western rose-colored glasses removed, another picture emerges.

  • First, the assumptions of progress through economic growth are failing. Only the most complex, most powerful, biggest, and “nano” technologies are considered “advanced.” Simpler “appropriate technologies,” though increasingly necessary, are not even considered by the endless-growth model of development.
  • Second, the ‘view from the West’ is shaped by a Euro-centric perspective, the latest iteration of the racism of colonial and imperial times. Any people whose culture does not value the most complex technologies of growth economies and most powerful large-scale organizations is considered “backward.”
  • Third, the conventional framework of thinking about ‘development’ turns out to be unsustainable in context of what we now know about the relationship of humanity to the changing planet. Sure, the less industrially advanced nations are more and more caught up in the same mindset, but that will not make it viable any longer than if only westerners thought in these ways.
  • At the same time, growing elements of civil society around the world are recognizing that the onslaught of Western industrialization may very well not be the best solution for shaping their future, especially, for example, where the invasion of GMO seed and industrial fertilizer products not only destroy native seed stocks, but bankrupt indigenous farmers. The many other examples of destructive development could fill a book.

The kind of development of a nation’s economy driven by industrial capital rather than social need or necessity, was once envisioned as the wave of a bright future for mankind, but it cannot survive much longer. It will implode as it destroys its host. Yet, a core strategy used by international industrial capital to capture markets is to draw developing nations into relations of financial and trade dependency which require continued resource extraction/export and importing the products and “services” of the industrial nations.

The development of new forms of social-economic organization for civil society is as necessary as it is desirable for the future of humans on the planet. Creative indigenous ecologically sound development must replace destructive corporate development. To move along a path of creative self-determination requires first escaping from the traps set by the Monsantos of this world. It also requires recognition that following the old path of Western development has already become unworkable. India comes to mind as a major victim of this dilemma. Some of the most politically powerful corporations there are driving indigenous farmers off the land (with the military’s help) to establish giant industrial and extractive projects that cannot sustain the population but will make those corporations very rich in the short term of their ecological destruction.

Systems in place tend to stay in place until conditions or trends force them to change. Western efforts to “develop” the non-western nations have extracted great value for corporate predators, leaving death and destruction of indigenous peoples and ecologies in their wake. Scientific knowledge of the unsustainable future of such “development” has grown quite certain in recent years, but the forces of conventional development for the sake of economic system growth for corporate profit, not social development, are quite committed to their path.

Today, both changing environmental conditions and rapidly emerging requirements for human survival demand the kinds of change in the social order that have barely even been imagined until now. Many possibilities must be discussed that have yet to be tried at any significant scale.

The future survival of peoples around the world will more and more depend upon their ability to wean themselves off imperial dependencies and develop social and economic relations internally that reflect a viable bond to their local environments. Ironically, if they make such a break, their success will become a model for the peoples of the fading industrial nations. That is what human survival in the coming decades will be about.

The Liberal Conservative and the Conservative Liberal

Political labels along the supposed continuum from left to right have always been problematic for me. As a professor long ago explained to us naïve freshmen in an introductory political science class in college, if you move far enough to the left, you end up on the right and if you move far enough to the right, you end up on the left. Where does that leave the average American? Where, exactly is the middle?

Most people I know hold a mix of views on different issues, yet define themselves as firmly Liberal or Conservative. Yet, in the politicized corporate-controlled mass media, most “commentators” (pundits and propagandists) play the issues to stimulate fear of the Other, thus causing cultural conflict by appealing to whatever fear-driven image or stereotyped value or belief can be used to serve the interests of the corporate state. That usually involves exploiting social stressors such as race, immigration, gay marriage, unemployment, some caricature of “the undeserving poor,” or presumed threats of “terrorism,” crime, or some other source of fear, to gain political favor by portraying one candidate as more ‘righteous’ or likely to ‘protect’ us in some way.

But what are the real issues that concern Americans most? Independent scientific survey results often diverge from poll results funded by candidates. Conservative and liberal Americans agree on more than power elites want us to know.

What are the issues? Mostly human-scale concerns about fairness and getting by in a moderate reasonably way, and being left alone by the powers that be. Ralph Nader argues in his new book, Unstoppable: The Emerging Left-Right Alliance to Dismantle the Corporate State, that liberals and conservatives must unite against the corporate state to bring it down and establish a viable ecological economy and democratic society where people’s everyday concerns are addressed and the world is kept intact so we can live normal lives.

Social conservatives often decry undue corporate interference in government even as they argue for smaller government. Well, government certainly would be smaller without all that corporate pork, massive tax dodging, and subsidies. Liberals want social justice, mostly around issues of human rights, employment, healthcare, and environment. If various minorities and demonized Others were not scapegoated by the corporate media, then justice would be far more easily served. If we actually had a ‘free market’ among local small entrepreneurs and businesses oriented to local production of needed products instead of generating mass consumption of outsourced products in response to manufactured needs, and vast waste of resources on futile wars of empire, we could have lots of jobs and the economy could support health care for all, just like the Europeans and many others routinely afford.

As things stand, the American commonwealth is being rapidly drained of real wealth by the manipulation of the debt-based economy to generate phantom wealth among those who control the financial system. Both conservative and liberal citizens – I’m not talking about politicians here, just real people – do not like the centralization of everything, the unfettered ascendance of power elites, and the failure of government to respond to the people’s needs rather than the corporate oligarchy’s demands.

So, maybe Nader is right. It seems that the only way the American people can overcome the power of the corporate state to impose its own agenda while claiming it is enacting ours, is to unite behind our own values and needs and take down the forces that will, if allowed, destroy what is left of the republic and the biosphere upon which we all depend. Then we can go on and have our debates of left and right politics if we must.

But maybe conservatives would have to stop watching Fox News’ racist Obama-demonizing sniping sessions and liberals would have to stop watching MSNBC pundits defend every corporate-driven Obama policy as if it reflects the needs of the people instead of the demands of the oligarchs who fund the politics of both conservative and liberal politicians.

The politics of social division serves only the interests of corporate oligarchy. The interests of the American people will only be served by the people ourselves, if we can overcome the propagandists who seek to divide and conquer us.