Debate on “Modern Monetary Theory” Misses the Mark

Artificial wealth comprises the things which of themselves satisfy no natural need, for example money, which is a human contrivance.

~  St. Thomas Aquinas

Buzzwords seem to rule public discussion of just about everything. Money is no exception. Now it’s “Modern Monetary Theory.” What’s that? Well, it depends on who you ask. In modern times, debates usually center on public debt and the government’s fiscal and monetary policies.

An article in Boomberg News argued that the supporters of The Green New Deal favor Modern Monetary Theory (MMT). Critics argue that the costs of universal health care, publicly funded higher education, infrastructure buildout, and conversion to 100% renewable energy production would require unsustainable public debt. MMT supposedly sets no limits on public debt. That is apparently not quite true, but within the U.S. monetary system and corporate political squeeze on public spending, the costs of the Green New Deal, if financed by public debt, would be quite high.

Of course, if we calculate the infrastructure damage of climate chaos even if we met the limits of the Paris Accords – never mind the costs in terms of human lives – the comparative costs of implementing the Green New Deal would be trivial. In that sense, costs are relative. The underlying question is: What does society want to achieve and is it willing to pay for achieving it?

The Debt Illusion

Money is a social construction. It exists by social convention, by consensual definition. Throughout history, money has taken diverse forms, as long as the forms taken could provide the security needed for money to be money. That is why gold worked so well as currency until the global economy grew so large that the supply of gold could not keep up with the need for more currency.

Scholars have written some very large books on the nature of money and debt. How money evolved is quite fascinating. David Graeber’s book, Debt: the First 5000 Years, is quite enlightening, particularly regarding the diverse forms money has taken in history.

Public debt is not necessary; instead, it is a convention devised by bankers to control the economy of nation states. In that, the banks have succeeded.

If a sovereign nation controlled its central bank, it would not need to borrow the currency it issues since it is the sole source of authority to create money. The creation of the U.S. Federal Reserve as a banking cartel in 1913 made that impossible.

The expanding Roman Empire paid its soldiers using gold and silver coins it minted from metals mined mostly in Spain and Portugal. It did not borrow its money from anyone. Among the many causes of the fall of the Empire, was the fact that when the mines played out, the Empire could no longer satisfy its need for more coins to pay an expanding army. The operations of the Empire were stifled because it could not pay its soldiers.

Money need not be based on public debt, but in the industrial economies of the modern era, it is. That political choice enriches the banks and the corporations they fund, and it impoverishes nations. Neither supporters nor critics of Modern Monetary Theory seem to get this.

Implementing a national project or sustaining an institution is not a matter of how much debt we can tolerate. Rather, it is a matter of political will. The lavish support for the military that sustains the global modern industrial-consumer economy demonstrates that.

Fearful Fantasies and Fiat Money

To work effectively, money has to be made of a material and in a form that has some unique irreplaceable quality that makes it impossible to replicate by just anybody. That is why rare metals worked so well until economies grew so large in the modern era that the money supply could not expand enough using gold and silver.

When paper money replaced gold, the idea of “fiat money” implied that paper money was not really “real money” like gold. Nevertheless, it worked because it is hard to counterfeit, making it unreproducible by anyone other than the sovereign (for the most part).

Unnecessary debt combined with the failure to tax corporate profits creates annual deficits, which add to the national debt. The central bank creates fiat money through the sleight of hand of issuing government debt in the form of bonds as the basis of “loaning” money created out of nothing, to the government. If the sovereign issued money without the mechanism of “borrowing” from the central bank (in the U.S., the Federal Reserve) it would not create debt by issuing money.

It’s crazy. But the banks that in practical terms own the Federal Reserve love it.

If a sovereign issued money solely on the basis of needing to fund worthy projects, to hire the workers and buy the materials to complete the projects, the money would, as a result, circulate among the population of the nation, providing the ‘buying power’ needed to generate the goods and services people need.

National debt is unnecessary. In stark contrast, something very much like the Green New Deal is as necessary as anything can be. It is a matter of survival.

Tax the Markets!

Today, the world faces multiple interacting crises, most of which now approach catastrophic proportions. With every new research report on climate disruption, species extinction, ecological destruction, or various population, economic, or political disturbances, it becomes clear that many are at or approaching a tipping point toward chaos.

Political authorities remain unable even to formulate, no less take effective countermeasures. Idealistic if inadequate targets set for pleasant outcomes become meaningless gestures. Meanwhile, kleptocratic oligarchy grows stronger.

Economic pundits – who mostly follow the lead of the financial elites that profit from driving the endless-growth economy toward the brink of collapse – offer feverish pitches to “stay the course.” The super-rich force their lackeys in Congress to pass extreme tax cuts for themselves, which benefit the millionaire/billionaire senators too. The national debt soars as a result and it appears that “nothing can be done” to stave off national, no less global disaster.

stock market chartBut wait, there’s more, so much more. As the plutocrats drive the nation toward bankruptcy, chaos, and collapse, giant corporations remain awash in both cash, much held overseas, and cheap debt as they exploit low-interest rates to finance their operations and excessive executive pay.

At the same time, “Recent research suggests that “60%–90% of daily equity trading is now performed by algorithmic trading, up from 25% in 2004.” These trades skim profits from slight moves in equity pricing over nanoseconds. They drive market moves more than human trading while making their rich institutional executives even richer. Is that what a stock market is for? Well, yes, if you are a rich institutional trader.

Markets are Not Magic

All markets are social phenomena, the complex sum of many transactions. They emerge and develop in the interaction of humans who seek to gain from their trading. Well, that’s fine and dandy. Modern developments, however, make it clear that no “invisible hand” guides trading algorithms to produce the best of all possible financial worlds for all, or even for many.

The promoters of free markets have always insisted that they are necessary to achieve the best economic outcome for all in society. How has that been working out for you? Markets are, in fact, social creations, designed to serve the interests of their members, not the rest of us. Today, oligarchy is replacing democracy as wealth concentrates and drives politics.

Now, here is where we get in trouble with the devotees of Ayn Rand who run the country as well as the markets. Rand’s pseudo-philosophy of “objectivism” assumes that government has no legitimate role in serving the general welfare of the citizenry of the nation states. Well, I beg to differ. Members of the financial elite use the “market forces” they control to line their own pockets at our expense. It’s the biggest scam ever.

Governing in the Public Interest

A major role of government should be precisely to protect the public from the excesses of capital markets and the speculative extractive projects it finances around the world. The federal government is supposed to regulate elements of the economy as needed in the public interest. Absent such supervision, the consequences of the “creative destruction” of the most powerful institutions of the industrial era have now reached catastrophic proportion. The people must now act in our own defense.

Consider the fact that if Congress were to impose a transaction tax of just a few pennies on each trade on the financial markets, the effect on profits would be negligible. Yet, due to the volume of transactions, a seriously large stream of revenue would flow to the U.S. Treasury. So, yes, we can afford to take definitive action to mitigate climate catastrophe, achieve social, economic, and climate justice, and, well, maybe even survive as a species. That will happen only when the U.S. federal government breaks free of its plutocratic overlords and begins to serve the Public Interest.

Boredom and Work

“Are we there yet?” “Why? Are you bored?”

Boredom. I never got that. How can any conscious being be bored? I think it is a matter of perception and attitude, maybe even choice. I recall hearing of people retiring from a job they had for most of their adult life, then dying within a few months, essentially because they had “nothing to do” and became despondent about their lives. They had so closely identified with and focused on their jobs that they had lost interest in the rest of the world. Separated from the source of their identity, they were lost.

Did they die of boredom? I don’t know. But I am sure that they had become unable to engage with the world beyond their job. Jobs, jobs, jobs. There are the “job creators” of corporate fiction; there are also the job destroyers of corporate outsourcing, moving capital to where the cheapest labor resides. Oh, but they are one and the same. Especially in today’s corporate dominated American culture, the growing power of the largest corporations and the wealthiest individuals results from the fact that the rest of us depend upon them for most of the shrinking number of well-paid jobs.

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Charlie Chaplin ~ Modern Times

As automated production and manufacturing are outsourced overseas to the poor nations with the lowest wages, the giant corporations, though flush with cash, keep demanding of their congressional lackeys lower taxes, even as they dodge most taxes anyway. They blame “government spending” and “entitlement” programs for the failings of a corporate economy that provides fewer and fewer jobs with a living wage. Senators and Congressmen openly admit that unless they pass “tax reform,” driving up the national debt, their donors will cut them off. And they probably will. But that’s another story.

What, exactly, is there in the world that is boring?  I thought I knew once when I was about 15 years old. It was 1955. My friends all had minimum-wage jobs, paying about 75

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1951 Ford 2 door sedan

cents per hour. Or they had none at all. I was quite excited. My father had gotten me a summer job with his friend, a general contractor. I was paid at union scale, at that time around $3.65 per hour, almost 5 times minimum wage. That first summer it was easy to save up the $300- I needed to buy a used 1951 Ford as soon as I got my drivers license. If we all chipped in a quarter for gas, 3 or 4 of us could cruise all night until curfew. Nothing boring about that!

I remember clearly one hot summer day; I was at the bottom of a ditch the foreman had assigned me to dig. I can still picture myself there. He left me all alone in the hot smoggy Southern California sun to complete the ditch, for some drainage line at a hillside suburban home while he got some other workers started on another job. That ditch must have been 8 feet deep; I could barely launch a shovel full of dirt over the edge.  I wondered how long I’d be stuck with this ‘boring’ work.

Then I came upon an idea; I wondered how evenly I could cut the edges of that ditch while digging it as ordered – an interesting challenge for a kid trapped in a ditch with nothing else to do and nowhere to go. The day went much quicker as I faced that inconsequential challenge and learned how to not be bored.

So many of today’s jobs are boring because all ability to apply talent or skill to them has been taken out by automated processes, reducing them to simple mechanical performance with even less potential for creativity than digging a ditch. They are mostly at or near minimum wage too. And, minimum wage today, at $7.50 or $10- per hour buys less than that 75 cents did in 1955. Then, a 10-cent cup of copy was a small fraction of the hourly minimum wage. Today, a Starbuck’s coffee can cost you the equivalent of an hour’s work. That is not boring; it is intolerable.

The “Jobs” Illusion(s) and the Work We Must Do

Politicians love to talk about “job creation.” They wallow in social illusion in order to appear to care about the economic future of the people and the nation. At the same time, they pander to the interests of job destruction, whether through automation, international outsourcing, or simply unlivable wages. At the same time, they facilitate the financialization of an empty uber-economy, producing vast sums of phantom wealth for their benefactors on Wall Street.

Political Economy of Job Loss

Many of the jobs lost in recent decades in the U.S. are due to mobile corporate capital seeking to exploit immobile pools of desperate labor in any country where wages are cheapest. The international trade agreements the pandering politicians promote, enable the mobility of corporate capital seeking to exploit cheap labor abroad. They override worker protections as well as restrictions on environmental pollution. Above all, they nullify national sovereignty over such matters of domestic policy by ceding authority to international corporate tribunals. As with other job losses due to automated production, we often hear that “those jobs are never coming back.”

One of the core values held by corporations has always been to reduce the costs of labor and materials in order to increase profits. Nobody should be surprised at that. It is an almost natural part of doing business. However, achieving business success does not require a corporation to refuse its employees a livable wage. Consider Walmart and Costco. Walmart grew to be one of the largest most profitable corporations in the world by squeezing the wages of its employees to the point where many are on food stamps. (Its purchasing power allows it to squeeze its suppliers with similar ruthlessness.) In effect, the American taxpayer is subsidizing Walmart’s profits. Costco, on the other hand, pays its employees a living wage with benefits. The difference in energy and cheerfulness between Walmart and Costco employees is obvious to anyone who visits both stores.

What Infrastructure?

Politicians also like to trumpet our need to “rebuild the nation’s infrastructure,” primarily its decaying roads and bridges. Trump emphasizes the need to modernize U.S. airports. I suppose he wants executive lounges at our international airports to emulate the decadent opulence of Trump Towers.

old-bridge

Old Infrastructure,  Paradigm Lost.

The hard-to-imagine “president elect” offers programs that would subsidize the construction industry work already ongoing, rather than directly fund new public infrastructure and infrastructure repair.

Rarely mentioned are dilapidated schools or poor teacher pay. Politicians love to characterize teachers as overpaid, lazy, and arrogant. Nevertheless, the education of America’s youth is one of the most important forms of infrastructure I can imagine. In other industrialized nations, especially in northern Europe, teachers are highly respected and well paid. Their focus is on the well being of students. Student learning consequently rises far above that common in the U.S. Should we be surprised? Education, if the heavy administrative overburden were eliminated, could be a relatively carbon neutral investment in the future.

Enter climate change. The heating of the earth’s atmosphere due to ever-growing emissions from two hundred years of burning fossil fuels continues producing now obvious catastrophic consequences. Yet political resistance and denial prevail. We ignore much of our own participation in the production of carbon emissions due to a number of complex social psychological forces.[1] The politics of short-term economic interests encourage denial and ignorance in attempting to continue on the path of fossil-fueled affluence. It follows from facing the hard facts of climate disruption that a new great transformation of the entire global economy is necessary. That is the most massive transformation of infrastructure imaginable. It is a leap into the relatively unknown. By comparison, the current talk of “rebuilding America’s infrastructure” seems as trivial as it is misguided. It seriously misses the mark when it comes to the infrastructure work that we must do.

The Climate Crisis and the Work We Must Do

Right off the bat, we might ask why such a benign sounding term as “climate change” has dominated any discussion. First, it was global warming. Then Senator Inhofe held up a snowball in Washington, D.C., as if that proved that global warming was a hoax. Gradually climate change became the dominant term. When I had used the term “climate disruption” a couple of years ago, a Sierra Club activist told that they too preferred “disruption” because “change” did not convey well the reality of climate impacts. I now prefer “climate destabilization,” which seems an even more accurate way to describe the effects of industrial civilization on climate systems. The new world of unstable climate systems requires a new paradigm. “Rebuilding the nation’s infrastructure” merely affirms the old paradigm.

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Wind Turbines in Holland, 2016

The science is undeniable, yet politicians routinely deny it in favor of providing political cover for the economic interests of their biggest donors. Those donors, of course, are the very corporations that extract and emit the carbon that warms the atmosphere and destabilizes global climate systems. The same politicians favor reducing corporate taxes and the taxes on the highest incomes, as if the income tax system were somehow abusing those powerful special interests.

The share of taxes paid by the largest corporations and the super-rich has steadily declined ever since the 1950s. Back then, taxes on corporations and the very rich were much higher, the economy was robust, and the national debt was small. In fact, the power elites get away with not paying anything near their “fair share,” as the nation’s infrastructure crumbles and the national debt grows.

Meanwhile, as politicians cling to their old paradigm and its corruption, the nation’s most urgent infrastructure need goes almost entirely unnoticed, rarely mentioned, and routinely denied. Yet, the facts require us to take action now to re-stabilize the climate systems upon which human life depends. We cannot afford not to take drastic action now. We must redirect the nation’s wealth to transform the economy from carbon excess to carbon neutral and to recapture carbon. We must be rapidly reduce net carbon emissions to less than zero by re-establishing ecological systems of carbon storage – tropical forests, for example – not by industrial illusions of “geo-engineering” symptom suppression while denying the root problem.

Deniers distort the uncertainty about the exact location of particular individual effects of global warming. They falsely claim that scientists do not really know whether climate change is real and/or “man-made.” The science of CO2 is long standing, never challenged until it became politically expedient to do so. The global climate system is extremely complex, making it far more difficult to predict an individual weather event than to document the overall trend of increasingly extreme weather, rising seas, and melting glaciers. They use variations in weather to deny the overall trend of increasingly severe droughts, floods, and storms that already disrupt climate cycles and agricultural production.

The short-term economic interests of the most powerful institutions and individuals in the nation prevail. In fact, we need institutional support to build out carbon neutral infrastructure rapidly. It has become extremely urgent, yet political decision makers largely ignore the issue. If ever a massive “jobs program” were possible, we could easily create it by executing a national economic policy of replacing all fossil-fuel based energy systems with new carbon-neutral systems of energy production and use.

Think of it. Stop production of all fossil-fuel burning cars. Build out a national network of electric vehicle charging stations while ramping up electric car production. Require all consumer products to be carbon-neutral, with temporary exceptions where life and health require them. Replace all coal and natural gas burning plants with solar and wind electricity generating systems, which are already more cost effective. Stop all natural gas and oil fracking operations; their total carbon pollution rivals that of coal.

Job losses? Well, they would be trivial in the oil industry compared to the job creation involved in the transformation to carbon neutral energy production and use. Yes, many people would have to change occupations, move to another location, and re-tool some skills. But that has always accompanied economic change. Are we not that resilient?

Continuing on our current path of carbon emissions will lead to a 4-degree Centigrade increase in average global temperatures above pre-industrial levels in the next several decades. That will be extremely catastrophic, resulting in societal collapse and may well also lead to human extinction. The UN agreements set a 2-degree limit, while acknowledging that 1.5 degrees is probably necessary. The actual “commitments” of the signing nations did not even reach the 2-degree Celsius target. The only conclusion I can reach from all this is that the people, where we live, must mobilize ourselves and begin the work that we must do. We must also pressure the institutions that are now obstacles to redirect their destructive policies toward the well being of people and planet. This is beginning to happen at places like Standing Rock, where the destructive forces of extractive capital directly threaten people. We must all find our own Standing Rock. Social movements create their own jobs. So little time, so much to do.

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[1] George, Marshall, Don’t Even Think About It: why our Brains are Wired to Ignore Climate Change (London: Bloomsbury, 2014) provides a wealth of information on the scientific basis for understanding the tendency to ignore or deny the overwhelming facts of climate disruption and its catastrophic consequences for the future of humanity.

The Upside-Down Economy

The idea that the financial markets are the essential force that drives economic growth and progress, has dominated political thinking for too long. The financial markets and their agents have dominated politics and the Congress over recent decades more than ever before. After all, it took several decades for the financial elite to accomplish the complete abandonment of the controls instituted to prohibit the financial market excesses that caused the Great Depression. We are at greater risk today of an even bigger crash than 1929.

The U.S. and world economies are stumbling on the precipice of part II of the “Great Recession” of 2008. The global integration of financial markets and institutions put the entire world at risk and none of it has any democratic foundation. It is all happening against the will of the people and in opposition to the public interest. The massive contraction of the middle class and the swelling of the ranks of the poor are now undeniable. The so called “recovery” has been all about the financial elites and the stock market. Corporations are awash in cash. Those who lost jobs that had a livable wage can now only find minimal-wage jobs and must work at least two to pay rent. The real economy falters and the financial markets are built on quicksand.

The Disappearing Real Economy

The economy is upside down because real economic activity – the production and exchange of goods and services needed by the people in their everyday lives – no longer drives the global economic system. The most powerful economic force in the world today consists of the actions of multinational corporations attempting to continually grow consumption by reducing the costs of growing production. International “free trade” is in effect the removal of production from the nation – outsourcing.

To minimize cost and maximize output, capital is moved to poor nations with the least labor costs and environmental controls. Economic “globalization” allows U.S. corporations to import cheap goods for our increasingly poor workers to buy at Wal-Mart with credit cards. That, of course, reduces the availability of production jobs here by exploiting the destitute elsewhere. While capital is easily mobile globally, labor is relatively immobile. The globalization of capital drives wages down so that U.S. citizens can only buy cheap imported goods.

Continuing down the ruinous path of the Wall Street financial elite is supported by a lot of political rationalization. The fact that work, pay, production, and consumption are what any real human economy is actually about, is simply ignored. On the one hand, we are told that capital must be free to find its “highest and best use.” That will enable the capitalists – falsely characterized as “the job creators” – to invest in new technology and production, thereby improving employment. Well, how has that worked out? The new technologies have mostly reduced the need for skilled labor in the U.S. The free international movement of capital – they call it “free trade” – has increased demand for unskilled cheap labor abroad. Who benefits? The wealthy investors in “globalization.” Who suffers? Workers everywhere suffer the loss of control over their lives and the inability to earn a living wage.

Feed the Rich, Starve the Poor

The myth that the super rich somehow need a tax break pervades the political discourse even though wealthy corporations and individuals pay less in taxes than ever. The delusion is that such public largess economically favoring the already rich would allow them to invest in the real economy. The “news” media – owned by the same mega-corporations that feed the super-rich – go along with that fiction even in the face of several decades of decline of American work, pay, production, and consumption.

All the while, the rich continue to get richer, paying less and less taxes, by controlling politics and indebting the nation. Both the U.S. Congress and the President are elected by having access to massive political funding by so-called “political action committees” (PACs). Legislation is actually written by the biggest financial lobbyists in the Congress – the lobbyists for the financial elite that is enriched by the “globalized” economy. Worldwide corporate theft, subsidized by the U.S. government, is a scam of unparalleled proportion.

Simply put, in a real economy it is income from employment that drives economic health. Employment provides individuals and families with incomes to buy the necessities and niceties of life. It is employment that produces goods and services people need. The income from employment allows consumption to drive production. Financial speculation among the super-rich has distorted the real economy by “financializing” it and ruined all that.

That is why the economy is so upside-down today. Financial speculation drives investment in cheap overseas production, leading to domestic poverty and declining ability to buy what is produced elsewhere. It is all driven by the greed of the financial elite, not by any national economic policy. Big investment banks’ speculating in abstract financial instruments – derivatives and the like – are allowed to create phantom money by depleting the real economy in the form of consumer and government debt.

In a real economy the Big Banks would be invested in actual productive activity. But because of outsourcing, underemployment, and low wages, workers cannot afford goods produced domestically as cheap goods from abroad flood the shelves of the big-box stores. At the same time, the propaganda of marketing and advertising encourage more and more consumption of less and less meaningful products. Low wages force reliance on consumer credit, increasing indebtedness to the corporations controlled by the financial elite. It is an upside-down economy.

Growing suppression of public education and critical thinking facilitates the manipulation of consumer behavior. People keep trying to buy whatever represents the imagery of the consumer culture that dominates their experience. “Affluenza” afflicts some of the few who experience new wealth. But the pervasive desire for the trappings of affluence – driven by pervasive marketing propaganda – drives consumer behavior, leaving little room for “free will” in economic behavior. Mass media images dominate consumer as well as political thought. Cultural images of “the good life” all involve increased unthinking consumption of corporate products.

Converging Crises and Catastrophic Collapse

In the present context, certain fundamental factors are at work. The vast accumulation of “phantom wealth” by the Big Banks via the “bailout” has encouraged further speculation and facilitated more economic concentration. The easy availability of cheap loans to corporations already awash in cash has not resulted in their investing in the domestic economy. All that cash and cheap credit is used for mergers and acquisitions, which further concentrate corporate wealth. A stock market booms while the main-street economy remains stagnant with vast numbers of workers unemployed or underemployed. Stock market growth is without foundation in the real economy. It has little basis in actual economic value, its growth is speculative, and is at increasing risk of collapse.

After the greatest financial heist of the public treasury ever, we must ask why such vast accumulated wealth has no benefit to the real economy. Overextended consumers can no longer rely on home equity and credit cards to make up for those decades of stagnant to regressive wages. It becomes clear that another few hundred million more dollars in the coffers of billionaires will not be invested in domestic production for the suppressed consumer demand for necessities that results from stagnant domestic employment and over-indebtedness.

It is not as if this is all happening in the abstract. Real world allocation of capital has planetary consequences. The distortions of mass production induced by extractive capital are global in scope. With a world population of over seven billion people and the drive to emulate Western patterns of consumption, the carrying capacity of the planet’s ecologies is already exceeded. Whatever one’s interpretation of the world’s economic system and imagined alternatives, the convergence of overproduction, consumer culture, overpopulation, looming crises of food production, resource wars, and climate chaos, all foreshadow a catastrophic collapse of existing economic and social systems. Only a massive human effort to reorganize the way we live on this planet can avoid human tragedy on a scale as yet mostly unimagined.

Borrowing Nothing from Nowhere: Phantom Money and Phantom Debt

Borrowing money is a tricky thing to talk about, even trickier than talking about money itself. We all seem to have a love-hate relationship with the stuff. Well, maybe ‘stuff’ is not the right word. People disagree about what money actually is. Some, who I’ll call “money realists,” believe that the essence of money is that it is a physical thing that has intrinsic value. For the money realist, only a fixed commodity – usually gold – is “real” money. So called “fiat money,” valued because a government declares it as “legal tender,” is not seen as “real.” Some others, the “money representationalists,” believe that money is an object that has value because it represents something else that is valued, also usually gold. That is what the “gold standard” was about, but money also represents the value of anything we value. Borrowing is a major reason money is so troubling.

Money represents the value of a credit or debt, enabling the exchange of anything of measurable value (in monetary units of quantity) for that thing. Finally, for most people money is an abstract symbol of value based on some metric or quantity that measures the value of anything. That is why money can be transferred, borrowed, and lent electronically – it is a symbol, whether represented in paper or binary code, of a measurable value. Despite that abstraction, we usually treat money as a real object to be exchanged for other real objects, or for real services, or even for promises to provide such things later. Most money today is “fiat” money, because it is declared by a sovereign government to have a relatively stable measurable value for any exchange. But what is value? Is value real or do we just imagine it so?

You can read Wikipedia’s entries on money to get an overview of the conventional definitions of money, currency, credit, and debt. But something is missing. What is increasingly important today is how money is being transformed. Critics complain that the government is “printing too much money.” However, most money today is brought into being by electronically “posting” it to a computerized accounting system in a bank. An electronic bookkeeping entry creates money as a debt to a bank, not as printed currency.

Borrowing Nothing

A bank that is a member of the Federal Reserve, lends money into existence electronically when a customer borrows it. That’s right; it didn’t exist before it was lent, but it creates debt for the borrower and an “asset” (credit) for the lending bank in the form of a note or bond. The note or bond held by the bank obligates the borrower to pay back the amount borrowed plus interest. That means that more money is always owed (to the banks) than is ever borrowed, which is a peculiar problem in itself with deep implications for the entire economy. Think Greece; same basic deal.

The Federal Reserve oversees this process, called the fractional reserve banking system. “Fractional reserve” means that the bank gets to loan out a certain percentage more than it holds “in reserve” as deposits. This whole process must be carefully regulated or things can get way out of hand. Just before the financial crisis of 2008, banks were allowed to loan many more multiples of their reserves than ever. Leverage always entails risk.

Banks may lend some of the money they create to mortgage lenders and “payday” lenders, as well as to corporations and individuals. Mortgage lenders – savings and loan institutions, regional banks, etc. – will borrow from the national bank, make a home loan, and then sell the mortgage to another bank. Without vigilant regulation of the conditions of loans, things can get quite messy. If enough bad loans are written and if enough loans default, the whole system becomes unstable. This is especially true when loans are bundled into “derivatives” and sold to unsuspecting investors looking for a steady income stream.

Making Phantom Money

The gradual deregulation of banking and finance, starting with Bill Clinton, Alan Greenspan, and Larry Summers, has released the most powerful financial elites from societal controls. The 2008 financial crisis resulted from several factors, including the lowering of reserve requirements for the Big Banks. Mortgage brokers and other primary retail lenders loosened the lending requirements for borrowers. Regulators looked the other way. The resulting risky mortgages were then purchase and packaging into “derivative” financial instruments by the Big Banks on Wall Street. They were then resold to pension funds and other institutional investors, putting many people at risk. Lots of money was “made” in the form of fees and profits. In the process the entire world economy was endangered. After all, the banking system of the U.S. and other major industrial nations had already been integrated and these financial manipulations had spread world-wide.

The advent of high-speed electronic data processing and communications has allowed the creation of new forms of financial manipulation of the money system. High-speed computers can skim “value” from stock markets by engaging in electronic “trading” so fast that tiny differences in bid-ask pricing can be exploited in the interim between offers by ordinary traders. So-called “derivatives,” financial instruments comprised of abstracted fragments of mortgages or other debts, can be marketed to the point of risking collapse of markets. The largest financial institutions have transformed money from a public medium of economic exchange into a method of economic plunder and political control of society. But these financial absurdities only exist because of the greatest absurdity of all. We are all forced to borrow nothing from nowhere and it is costing (almost) everyone dearly.

Phantom Federal Debt: Who Needs It?

It has been generally taken for granted that “fiat” money is issued by sovereign governments for the benefit of their national economies. Not exactly. Most currencies are valued on the basis of the solvency of the government, its international balance of payments, and the stability of its economy. International exchange rates are based on such factors. But since the early 20th century, for the most part such assumptions have been a fiction. In the U.S., despite the Constitution, which authorizes the Congress “To coin money, regulate the Value thereof, and of foreign Coin,” the government does not create money. Yes, it still stamps out pennies and quarters, but the private banks, which own the Federal reserve, create most money. In 1910, the major private banking interests conspired at their infamous meeting on Jekyll Island to control the national monetary system. In 1913, Congress passed the Federal Reserve Act, empowering the cartel of private investment banks to control the money and banking system and “loan” money created out of nothing and from nowhere to the U.S. Treasure. Hence, the national debt. What a windfall for the banks – and a permanent indebtedness for the nation – unless we reassert our national sovereignty.

It has worked out much better – for the mega-banks – having the government borrow money from the private banking cartel called The Fed so that the banks can control everything and the rest of us can take on all the resulting debt! If our government were actually sovereign (instead of subservient to the mega-banks), it could ISSUE money rather than borrow fake money from corrupt banks. What a different economy that would produce.

Making Money and Losing It

Ever wonder why you just can’t “get ahead”? Well, it’s all part of the larger scheme of things. Oh, I know, some folks do get ahead in one way or another and to one extent or another. But only the very few – the less than one percent – really make money and keep it or even accumulate enough wealth to leave a sizable inheritance to their children. The number of Americans literally living from hand to mouth has grown astoundingly high, especially since the ascendancy of the new financial elites with the deregulation of financial markets. To understand it all we have to step outside of our ordinary ways of thinking about money, value, and our lives.

In a moral economy, things would be different. But that’s not where we live. Our economic system has devolved from open competition of individual entrepreneurs in wide open environments, to a closed system of centralized economic growth in denial of limits. The perpetual-growth economy is controlled by giant investment banks and hedge funds and runs on debt-based money. That means money is created by debt itself.

On first thought that doesn’t make much sense; money is supposed to represent value, not debt. But that is not how it has been set up ever since the private central banks were given control, indeed ownership, of the creation of money. Instead, money is a product of the strange relationship between the nation and its private bankers. The Federal Reserve System was established as the “lender of last resort.” in 1913. This was meant in part to respond to fiscal crises such as the financial panic of 1907. The other part was a quiet takeover of the money system by the big private investment banks.

Making Money by Indebting a Nation
Some argue that the creation of the Fed as an independent agency was in fact a takeover of the function of a national central bank by the private bankers of the time. That view has significant historical validity. Though chartered by the U.S. Congress, the Federal Reserve System consists of twelve tax-exempt regional Federal Reserve Banks organized and operated as private corporations. Most importantly, the Fed was given control over the creation and lending of money.

Absurd as it sounds – and ever so costly –the national currency is not created by the Treasury. The Treasury only acts as a printing shop for the Fed. In effect, the Fed is a private banking cartel that lends to the government and to member banks the money it creates by generating public debt. So, to conduct its operations, the government has to “borrow” money from the Fed, which sells Federal Notes and Bonds to represent that debt. The U.S. Treasury can only offset that debt by collection of income taxes and other revenue. A lot of technicalities in this process obscure the basic fact that the right of the nation to produce its own money was high jacked by the biggest banks – “members” of the Fed – back in 1913. That has cost us all dearly ever since.

The Federal Reserve issues Federal Reserve Notes and Bonds. These draw interest for the buyer and charge the government, in whose name the Fed issues these debt instruments. So, the money the government ‘spends’ is owed to those institutions which ‘buy’ from the Fed the bonds and notes that signify the debt. One might say that the Fed is a “free rider” middleman. This process indebts the government – that is, the people – for all the currency, whether paper or electronic, that the Fed issues as part of its monetary policy.

Perpetuating Public and Personal Debt for Fun and Profit
The government becomes indebted in its turn to the ‘creditor’ institution or nation that bought the bond, for its face value plus any interest that accrues over time. The Fed is owned by its member private Big Banks, which have a sweet deal we’d all love to get a piece of but never will. The Fed issues credit to the Big Banks, say a billion dollars, and the Big Banks in turn loan out many multiples of the billions it ‘borrows’ from the Fed. Since the crash of 2008, the deal has been especially sweet, since the Fed charges a near zero interest rate. The Big Banks get to charge market rates for multiples of the funds borrowed for next to nothing. Huge profits beget huge bonuses for bank executives, not to reward some kind of executive performance, but for their just ‘being there.’

We should all be so lucky. But we are not. The average person, small business, or even not-so-well connected corporation has to borrow from the institutions run by the financial elite – the Big Banks – in order to initiate a major project of whatever kind. That borrowing had to be paid back with interest, so that whatever is done with the money has to “earn” more money than was borrowed in order to pay back the loan. That is often not easy. Just paying a mortgage seems to take forever. Even at a “reasonable” interest rate for a thirty year mortgage, most folks “pay back” more than double what we originally borrowed.

But in any case, what most people don’t understand is that the result of all this is that more money is always owed than is “out there.” If every loan requires repayment plus interest, where does the interest come from? Well, from “profit” or from wages, if the borrower is lucky. But that profit or wage comes from money already in circulation; that money in circulation was also created as debt. So, the only way for all money owed to be paid back is for more debt to be created, releasing more dollars into the money supply, paying off prior debt.

Reaching the End Game
Sound like a Ponzy scheme? If it does, that means you are paying attention. It is essentially no different than a Ponzy scheme. The whole house of cards stands on a perpetual expansion of debt that enables previous debt to be paid and the system to continue. That is only one of the reasons why the debt based economics of endless growth cannot ultimately be sustained. Debt cannot be expanded indefinitely.

There is another reason the debt-based growth economy cannot continue indefinitely. As with any exponential scheme of expansion, the limits of its environment eventually constrain it from continuing. That is where we are today with reference to “capitalism as we know it” and the material limits of the planet earth.

If you know anything about population growth, you recognize that a seemingly small percentage rate of growth after a few generations results in a very large number of people. From our current world population of around seven billion, growing at a moderate rate, we will soon have a population that by anyone’s measure cannot be sustained on one planet. One additional fact is important. A relatively small proportion of world population participates in the industrial growth economy but everyone else – of course – wants to. That is why more and more people everywhere find it increasingly difficult to “get ahead.” The game is almost over; it has reached its limits. Current world financial instabilities are symptoms. Economies with social purpose must replace mindless growth for the purpose of concentrating wealth in fewer and fewer hands.

Another way is possible and necessary. Money is inherently a public good. It is an inherent right of the nation itself to maintain sovereignty over its monetary system. The central banking system should be nationalized and subjected to public policy rather than be driven by private profit for financial elites in opposition to the public interest. Then, money could be based on credit, properly invested in the public interest, and thereby eliminate most of the false public debt it has caused by having been privatized.