Ellen Brown on Deficits Don't Matter

This is a pretty decent articleon the intricacies of public finance and made pretty easy to understand. Thereader needs to be able to get his perceptions turned upside down though. Whatis important is to understand that much as passes for financial wisdom or atleast self evident is wrong.

If it helps, it is enough toremember that a dollar bill is created by an act of government, sent forth as expenditurein a multiple of ways and it is then taxed back at sometime in the future.  This dynamic process produces the moneysupply.

The potential for messing this upout of ignorance and greed is breathtaking and wise management is obviouslyhard to come by.  Just how manypoliticians do you think actually get it?

There is plenty to fix in thepresent economy and done well the US economy is quite capable ofexpanding at a rate well in excess of four percent until full employment isachieved.  Right now we need a couple ofyears of eight percent growth to overcome the disaster visited on us two yearsago.

Cheney Was Right About One Thing: Deficits Don’t Matter

by Ellen Brown

Global Research, April 27, 2011

“Deficit terrorists” are gutting governments and forcing theprivatization of public assets, all in the name of “deficit reduction.”  But deficits aren’t actually a badthing.  In today’s monetary scheme, inwhich most money comes from debt, debt and deficits are actually necessary tohave a stable money supply.  The publicdebt is the people’s money.

Former Vice President Dick Cheney famously said, "Deficits don'tmatter."  A staunch Republican, hewas arguing against raising taxes on the rich; but today Republicans seem tohave forgotten this maxim.  They are benton stripping social programs, privatizing public assets, and gutting unions,all in the name of "deficit reduction." 

Worse, Standard & Poor’s has now taken up the hatchet.  Some bloggers are calling it blackmail.  This private, for-profit rating agency, witha dubious track record of its own, is dictating government policy, threateningto downgrade the government’s long-held triple AAA credit rating if Congressfails to deal with its deficit in sufficiently draconian fashion.  The threat is a real one, as we’ve seen withthe devastating effects of downgrades in Greece,Irelandand other struggling countries.  Loweredcredit ratings force up interest rates and cripple national budgets. 

The biggest threat to the dollar’s credit rating, however, may be thegame of chicken being played with the federal debt ceiling.  Nearly 70 percent of Americans are said to bein favor of a freeze on May 16, when the ceiling is due to be raised; and TeaParty-oriented politicians could go along with this scheme to please theirconstituents.

If they get what they wish for, the party could be over for the wholeeconomy.  The Chinese are dumping U.S.Treasuries, and the Fed is backing off from its “quantitative easing” program,in which it has been buying federal securities with money simply created on itsbooks.  When the Fed buys Treasuries, thegovernment gets the money nearly interest-free, since the Fed rebates itsprofits to the government after deducting its costs.  When the Chinese and the Fed quit buyingTreasuries, interest rates are liable to shoot up; and with a frozen debtceiling, the government would have to default, since any interest increase on a$14 trillion debt would be a major expenditure. Today the Treasury is paying a very low .25% on securities of 9 monthsor less, and interest on the whole debt is about 3% (a total of $414 billion ona debt of $14 trillion in 2010).  Greeceis paying 4.5% on its debt, and Venezuelais paying 18% -- six times the 3% we’re paying on ours.  Interest at 18% would add $2 trillion to ourtax bill.  That would mean paying threetimes what we’re paying now in personal income taxes (projected to be a totalof $956 billion in 2011), just to cover the interest. 

There are other alternatives. Congress could cut the military budget -- but it probably won’t, sincethis option is never even discussed.  Itcould raise taxes on the rich, but that probably won’t happen either.  A third option is to slash governmentservices.  But which services?  How about social security?  Do you really want to see Grandmapanhandling?  Congress can’t agree on abudget for good reason: there is no good place to cut. 

Fortunately, there is a more satisfactory solution.  We can sit back, relax, and concede thatCheney was right.  Deficits aren’tnecessarily a bad thing!  They don’tmatter, so long as they are at very low interest rates; and they can be kept atthese very low rates either by maintaining our triple A credit rating or byborrowing from the Fed essentially interest-free. 

The Yin and Yang of Money

Under our current monetary scheme, debt and deficits not only don’tmatter but are actually necessary in order to maintain a stable moneysupply.  The reason was explained byMarriner Eccles, Governor of the Federal Reserve Board, in hearings before theHouse Committee on Banking and Currency in 1941.  Wright Patman asked Eccles how the FederalReserve got the money to buy government bonds.

“We created it,” Eccles replied.

 “Out of what?”                                                                

 “Out of the right to issuecredit money.”

“And there is nothing behind it, is there, except our government’scredit?”

“That is what our money system is,” Eccles replied.  “If there were no debts in our money system,there wouldn’t be any money.”

That could explain why the U.S. debt hasn’t been paid offsince 1835.  It has just continued togrow, and the economy has grown and flourished along with it.  A debt that is never paid off isn’t really adebt.  Financial planner Mark Pash callsit a National Monetiztion Account. Government bonds (or debt) are “monetized” (or turned into money).  Government bonds and dollar bills are the yinand yang of the money supply, the negative and positive sides of the nationalbalance sheet.  To have a plus-1 on oneside of the balance sheet, a minus-1 needs to be created on the other.

Except for coins, all of the money in the U.S. money supply now gets intocirculation as a debt to a bank (including the Federal Reserve, the centralbank).  But private loans zero out whenthey are repaid.  In order to keep themoney supply fairly constant, some major player has to incur debt that nevergets paid back; and this role is played by the federal government. 

That explains the need for a federal debt, but what about the “deficit”(the amount the debt has to increase to meet the federal budget)?  Under the current monetary scheme, deficitsare also necessary to avoid recessions.

Here is why.  Private banksalways lend at interest, so more money is always owed back than was created inthe first place.  In fact investors ofall sorts expect more money back than they paid.  That means the debt needs to be not onlymaintained but expanded to keep the economy functioning.  When the Fed “takes away the punch bowl” bytightening credit, there is insufficient money to pay off debts; people andbusinesses go into default; and the economy spins into a recession ordepression.  

Maintaining a deficit is particularly important when the privatelending market collapses, as it did in 2008 and 2009.  Then debt drops off and so does the moneysupply.  Too little money is available tobuy the goods on the market, so businesses shut down and workers get laid off,further reducing demand, precipitating a recession.  To reverse this deflationary cycle, thegovernment needs to step in with additional public debt to fill thebreach. 

Debt and Productivity

The U.S.federal debt that is setting off alarm bells today is about 60% of GDP, but ithas been much higher than that.  It was120% of GDP during World War II, which turned out to be our most productiveperiod ever.  The U.S. built themachinery and infrastructure that set the nation up to lead the world inproductivity for the next half century. We, the children and grandchildren of that era, were not saddled with acrippling debt but lived quite well for the next half century.  The debt-to-GDP ratio got much lower afterthe war, not because people sacrificed to pay back the debt, but because thecountry got so productive that GDP rose to meet it.  (See charts.) 

That could explain the anomaly of Japan, the global leader today indeficit spending.  In a CIA Factbook listof debt to GDP ratios of 132 countries in 2010, Japan topped the list at 226%.  So how has it managed to retain its status asthe world’s third largest economy?  Itsdebt has not crippled its economy because:

(a) the debt is at very low interest rates;

(b) it is owed to the people themselves, not to the IMF or otherforeign creditors; and

(c) the money created by the debt has been used to produce goods andservices, allowing supply and demand to increase together and prices to remainstable. 

The Japanese economy has been called “stagnant,” but according to areview by Robert Locke, this is because the Japanese aren’t aiming forgrowth.  They are aiming forsustainability and a high standard of living. They have replaced quantity of goods with quality of life.  Locke wrote in 2004:

“Contrary to popular belief, Japan has been doing very welllately, despite the interests that wish to depict her as an economic mess.  The illusion of her failure is used byglobalists and other neoliberals to discourage Westerners, particularlyAmericans, from even caring about Japan’s economic policies, let alonelearning from them.  [And] it has beenencouraged by the Japanese government as a way to get foreigners to stoppressing for changes in its neo-mercantilist trade policies.” 

The Japanese economy was doing very well until 1988, when the Bank forInternational Settlements raised bank capital requirements.  The Japanese banks then tightened credit andlent only to the most creditworthy borrowers. Private debt fell off and so did the money supply, collapsing the stockmarket and the housing bubble.  TheJapanese government then started spending, and it got the money by borrowing;but it borrowed mainly from its own government-owned banks.  The largest holder of its federal debt isJapan Post Bank, a 100% government-owned commercial bank that is now thelargest depository bank in the world. The Bank of Japan,the nation’s government-owned central bank, also funds the government’sdebt.  Interest rates have been loweredto nearly zero, so the debt costs the government almost nothing and can berolled over indefinitely.

Japan’s economy remains viable although itsdebt-to-GDP ratio is nearly four times that of the United States, because the moneydoes not leave the country to pay off foreign creditors.  Rather, it is recycled into the Japaneseeconomy.  As economist Hazel Hendersonpoints out, Japan’sdebt is twice its GDP only because of an anomaly in how GDP is calculated: itomits government-provided services.  Ifthey were included, Japan’sGDP would be much higher and its debt to GDP ratio would be more in line withother countries.’  Investments ineducation, health care, and social security may not count as “sales,” but theyimprove both the standard of living of the people and national productivity.  Businesses that don’t have to pay for healthcare can be more profitable and competitive internationally.  Families that don’t have to save hundreds ofthousands of dollars to put their children through college can spend on betterhousing, more vacations, and other consumer items.  

Turning the National Debt into a Public Utility

Locke calls the Japanese model “a capitalist economy with socializedcapital markets.”  The national debt hasbeen “monetized” – turned into the national money supply.  The credit of the nation has been turned intoa public utility.   

Thomas Hoenig, President of the Kansas City Federal Reserve, maintainsthat the largest U.S.banks should be put in that category as well. At the National Association of Attorneys General conference on April 12,he said that the 2008 bank bailouts and other implicit guarantees effectivelymake the too-big-to-fail banks government-guaranteed enterprises, like mortgagefinance companies Fannie Mae and Freddie Mac. He said they should be restricted to commercial banking and barred frominvestment banking.

"You're a public utility, for crying out loud," he said.

The direct way for the government to fund its budget would have been tosimply print the money debt-free.  WrightPatman, chairman of the House Banking and Currency Committee in the 1960s,wrote:

“When our Federal Government, that has the exclusive power to createmoney, creates that money and then goes into the open market and borrows it andpays interest for the use of its own money, it occurs to me that that is goingtoo far. . . . [I]t is absolutely wrong for the Government to issueinterest-bearing obligations. . . . It is absolutely unnecessary.”

But that is the system that we have. Deficits don’t matter in this scheme, but the interest does.  If we want to keep the interest tab very low,we need to follow the Japanese and borrow the money from ourselves through ourown government-owned banks, essentially interest-free.  “The full faith and credit of the United States”needs to be recognized and dispensed as a public utility.

Ellen Brown developed her research skills as an attorney practicingcivil litigation in Los Angeles.In Web of Debt, her latest of eleven books, she turns those skills to ananalysis of the Federal Reserve and “the money trust.” She shows how thisprivate cartel has usurped the power to create money from the peoplethemselves, and how we the people can get it back. She is president of thePublic Banking Institute, http://PublicBankingInstitute.org, and has websitesat http://WebofDebt.com and http://EllenBrown.com.