We Need to End Money Creation by Private Banks – Urgently

After 18 years with the New Zealand Green Party, I will be voting for the Social Credit Party in our parliamentary elections in September. Founded in 1954, Social Credit was NZ’s official third party for many years, winning 20-30% of the vote in the 1970s. They have consistently campaigned around ending the ability of private banks to create money. Contrary to popular belief, 97% of the money circulating in the global economy is created (out of thin air) by private banks when they issue loans. (See 97% Owned)

Given the impending dual crisis we face (post-COVID19 economic collapse and catastrophic climate change), the need to regain public control over our money system is more urgent than ever. New Zealand, like the US has embarked on massive Quantitative Easing (QE).  Under QE, money created by central banks is handed over to private banks to buy back Treasury bonds.* This influx of new cash is supposed to inspire private banks to lend lots of money to businesses to create new jobs.

The US, UK, and EU tried QE following the 2008 global economic collapse. It didn’t work then and it won’t work now. Instead of using these funds to increase business lending, private banks used it to increase stock prices by buying back shares, to increase CEO salaries, and to speculate in the housing market (driving up house prices) and derivatives.

The result? A so-called jobless recovery in which stock prices soared with minimal new job creation.

What we needed then and what we need now is for the new money central banks (including the Federal Reserve) to be spent directly into the economy to fund the COVID19 recovery.

The movement to retake public control of money creating is a very old one, growing out of the US Greenback Party. Named after the Greenbacks Lincoln issued to fund the Civil War (rather than incurring massive debt to private banks). In 1892, the party was reborn as the Populist Party (aka the People’s Party). In 1892, the Populist candidate for president won 8.5% of the popular vote. (See The Populist Moment)

It was a Labour government that first used the Reserve Bank of New Zealand to fund state housing and the State Advances Corporation* in 1936. The US and Canada also used direct Reserve Bank funding to reduce joblessness during the Great Depression and to help pay for World War II. The US continued to use this so-called “overdraft facility” to cover deficits until 1981, Canada used theirs until the mid-seventies, and New Zealand theirs until 1987.

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*Treasury bonds are the financial instruments governments issue when they borrow money from financial institutions to fund their deficits.

**The State Advances Corporation was a government agency providing extremely low interest mortgages for first time home owners.

Below is a recent local radio interview I gave with New Plymouth’s Social Credit candidate.

Fed Chairman Yellen Breaks 50 Year Taboo on “Helicopter Money”

At a June 15 press conference, Federal Reserve Chairwoman Janet Yellen made the surprise announcement that the Fed “might legitimately consider” using “helicopter money” in an “all-out” effort to rescue the U.S. economy from a severe downturn.

“Helicopter money,” a term coined in 1969 by late economist Milton Friedman, is money government creates by spending it into the economy.

As economist Richard Murphy describes in The Joy of Tax, government has always played a role in creating money whenever private banks generate insufficient money (by issuing loans from money they create out of thin air) to maintain the smooth running of the economy. Following the 2008 recession, the Obama administration pursued a policy called “quantitative easing,” in which the US Treasury created $500 billion (out of thin air). Unlike “helicopter” money, quantitative easing provided these funds directly to private banks, hoping they would use them to generate more loans. This, in turn, was meant to stimulate business investment and job creation.

Although it probably prevented the US economy from collapsing, Obama’s quantitative easing did little to promote business investment and job creation. This was because the banks used most of these funds for purposes other than making new loans – ie buying back their stock (to increase stock prices) and paying obscene CEO bonuses.

In contrast, “helicopter money”, a policy that has been virtually taboo for fifty years, calls for a central bank to print money and spend it into the economy for social services, infrastructure development, or even a citizen’s dividend. The idea is to put the money directly into people’s hands – rather than using banks as an intermediary – as they are more likely to stimulate the economy by spending it.

As Murphy details in The Joy of Tax, libertarian corporatists obsessed with balanced budgets, government debt and austerity are largely responsible for the taboo against public money (aka sovereign money) that the government creates and spends into the economy. Their position is that only private banks should be allowed to create money – in most cases due to immense financial benefits (from interest payments) they derive from this type of money creation.

Ironically former Federal Reserve Chairman Ben Bernanke also raised the possibility of the US using “helicopter money” as a tool to stimulate a flagging economy in an April blog post.

And in a similar move , 18 Members of the European Parliament have written to European Central Bank (ECB) president Mario Draghi requesting that the ECB should revisit its opposition to using “helicopter money” to boost the EU’s deteriorating economy.

What They Won’t Tell Us About China’s Economy

China Rises: Getting Rich

New York Times Documentary (2013)

Film Review

“How China Backs Its Enormous Economic Success”

China Rises purports to uncover the secret of China’s phenomenal economic success. It traces the massive migration of rural peasants into scores of newly fabricated cities and industrial centers. Of the thousands of new factories springing up over the last thirty years, half are privately owned and half are state owned enterprises. Most manufacture consumer goods (clothes, electronic gadgets, shoes, textiles, heavy appliances, household goods, toys, watches) for export.

The filmmakers attribute China’s economic miracle to their newfound openness to private enterprise and their ridiculously low wages. At the time the documentary was made, the average Chinese wage was 60 cents an hour for a 12 hour day. By the end of last year, this had increased to $1.69 an hour Rising Chinese Wages

Most of the film focuses on the lavish lifestyles of China’s most famous self-made millionaires. There are also several interviews with rural peasants who have migrated to China’s designer cities to work. Most are extremely grateful for the opportunity to earn money to lift their families out of extreme poverty. Women, however, tend to be sad about being separated from their children – their earnings aren’t sufficient to bring them to the city, so they are cared for by grandparents in the rural villages.

The film also features segments about China’s emerging middle class learning to pamper themselves and China’s rampant knock-off industry, specializing in counterfeit luxury items, fake birth control pills, fake antibiotics and even fake milk powder. The latter caused 54,000 Chinese babies to be hospitalized (six died) in 2008.

Ignoring the Real Reason for China’s Stellar Growth

What I find most significant about this video is what it leaves out. In fact, it totally ignores the main impetus for China’s phenomenal growth – namely a monetary policy that doesn’t rely on borrowing money from private banks.

As of February 2014, China had only borrowed a total of $US 823 billion from foreign banks – about  9% of GDP. In contrast, the debt the US owes to private banks is 101.5% of GDP.

Unlike most western economies, 90% of the loans used to finance businesses and government services originate from China’s government-run central bank.* Bloomberg’s refers to it as “Chinese-style” quantitative easing, ie the Chinese government is creating the money out of thin air, rather than borrowing it from private banks (and paying them interest to create it out of thin air).

This differs from US-style quantitative easing in that the Chinese government spends the money they create directly into the economy instead of handing it over to private banks.

Despite Obama’s recent attacks on China for “weakening their currency,” neither the President nor the corporate effort make any effort to explain exactly how the Chinese are doing this. The explanation is actually fairly simple: pumping more yuan/renminbi into the Chinese economy causes inflation and weakens the currency’s value in relation to other global currencies.

The corporate media glosses over these details because they don’t really want Americans to understand where US dollars come from – that 97% of the dollars in circulation are created by banks out of thin air and loaned to us at interest. Or that depending on private banks to create and control our money supply is a big reason for our current economic crisis. See Stripping Banks of Their Power to Issue Money

They especially don’t want us to realize there’s an alternative – government-issued currency by a government owned central bank – nor that it’s working miracles for the Chinese economy.

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*Contrary to popular belief, the US central bank, aka the Federal Reserve, is a consortium of private banks overseen by a government appointed director (Janet Yellen).

Did Global Economic Growth End 15 Years Ago?

According to London Broker, Global Economy is Shrinking

The main premise of Life After Growth: How the Global Economy Really Works – and Why 200 Years of Growth are Over  is that global economic growth has ended. Western governments conceal this fact through debt creation, inflation and clever manipulation of statistical economic indicators. According to Tim Morgan, leading analyst at the London financial brokerage Tullett Prebon, economic growth ended in 2000 and the economy has been shrinking ever since.

Morgan attributes the end of global economic growth to the high cost of fossil fuels.* This is because the real economy (which many people confuse with the financial economy) is a direct function of surplus energy. In pre-agricultural times, there was no energy surplus: human beings derived exactly the same amount of energy from their food as they expended acquiring it. With the advent of farming, they managed to produce a small surplus of energy that enabled a small minority to engage in work other than food production.

In the 18th century the invention of the heat engine enabled surplus energy (and the real economy) to grow exponentially over the next 200 years. Now that the cheap fossil fuel has been used up, our energy surplus is declining. This, in turn, is reflected in the gradual shrinkage of the global economy.

Measuring Surplus Energy

Energy surplus is measured as EROEI (Energy Returned Over Energy Invested), the ratio between the energy produced and the energy consumed in the extraction or production process. 1930s oil fields had an EROEI of 100:1. Once the easily accessible oil was used up, the EROEI began to decline. It was 30:1 in 2000 and it declines by about 2% a year. In 2014 it stood at 14:1. Unconventional oil sources have an extremely low EROEI (eg tar sands and fracked shale oil have an EROEI of 3:1).**

Declining EROEI’s are always accompanied by a spike in oil prices. This translates into higher prices for everything, due to the energy required for food production and manufacturing. Owing to higher prices, people consume less and the economy slows.

Globalization Has Been Extremely Damaging

Morgan is highly critical of politicians who fail to distinguish between the real economy of goods and services and the shadow economy of money and finance. He also feels globalization and rampant consumerism have been extremely damaging to the real economy. The mistake western countries made with globalization was reducing their production without reducing consumption. Instead they increased consumption levels by increasing borrowing and debt. Globalization was extremely beneficial for banks, due to the voracious demand for their product (loans). Meanwhile the diversion of large sums from production to the finance sector – aggravated by consumerism and the rise of consumer debt – hastened the decline of the real economy.

This wholesale debt creation and the widening split between the real economy and the financial economy is largely reflected in inflation and the destruction of the value of money. The US dollar lost 87% of its purchasing power between 1962 and 2012, which the government systematically conceals through misreporting of key economic indicators.

All economies function best when the financial economy coincides with the real economy. At present the primary methods of debt destruction are quantitative easing*** and inflation (it’s always easier to repay debts with devalued money). Other methods in the wings are cuts in pensions and Social Security payments and eventually bank failures and government defaults. Morgan feels that resource poor countries like Japan and the UK are at highest risk for default.

How Governments Lie with Statistics

My favorite chapter details the decades of statistical manipulations that have made government indicators of inflation, growth, output, debt and unemployment totally meaningless. John Kennedy was the first to exclude “discouraged” workers (who weren’t actively seeking work) from the unemployment rate. Johnson was the first to conceal the size of the government deficit by including the Social Security surplus in the federal budget. Nixon was the first to exclude energy and food costs (which rise the fastest) from core inflation calculations.

I was most shocked to learn that 16% of GDP consists of “imputations” or dollars that don’t actually exist. The largest single imputation the US government adds is “owner equivalent” rent. This is an amount equivalent to the rent all rent homeowners would have to pay if they didn’t own their own home. In 2011, this added up to $1.2 billion (out of a total GDP of $12.7 trillion).

The second largest imputation involves non-cash benefits employers give their workers (medical insurance, meals, accommodation, etc) and free banking services.

The US Government is Technically Bankrupt

This over-reporting of GDP, combined with under-reporting of inflation, makes it appear that the US economy is growing when it’s not. .

Morgan estimates that as of 2011 true US debt (government, business and personal) was 449% of GDP. Technically this means the US is insolvent as collective liabilities far exceed any realistic prediction of future income.

Politicians Need to Stop Lying

Morgan maintains that industrialized societies urgently need to living with less surplus energy. Rather than continuing to delude themselves (and us), our political leaders must face up to the reality that our claims on future energy surpluses (aka debt) are totally unrealistic.

They need to end globalization and rampant consumerism and enact policies (support for renewable energy, public transport and strong local economies) that will help people adapt to the new economic reality.

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*Most analysts predict oil prices will return to $100+ a barrel in June 2015, once the US surplus is used up.
**Some other EROEI’s (for the sake of comparison):
• Coal 8:1
• Solar PVC panels 8:1
• Solar concentrating power: 17:1
• Large hydro generation: 22:1
• Small hydrogenation 32:1
• Landfill/sewage gas cogeneration 40:1
• Onshore wind 20:1
*** Quantitative easing (QE) is an unconventional form of monetary policy where a Central Bank creates new money electronically to buy financial assets, like government bonds. This differs from conventional money creation, in which private banks create money out of thin air as new loans (see An IMF Proposal to Ban Banks from Issuing Money).

Also published in Veterans Today

Economic Justice: the Rolling Stone Version

(This is the first in a series of posts about ending the right of private banks to create money.)

In January Jesse Myerson, writing in the Rolling Stone, called for five seemingly radical economic reforms in an article entitled Five Economic Reforms Millenials Should be Fighting For:  guaranteed jobs for everyone, Social Security for all (a guaranteed Universal Basic Income for all citizens), Land Value Tax (which I blog about in Progress and Poverty ), creation of a Sovereign Wealth Fund (enabling government to buy back and own public assets), and a state-owned bank (like the Bank of North Dakota) in every state.

Personally I found the article disappointing and a little sad. Myerson seems to deliberately overlook the most pernicious problem in our present economic system:  the power we give private banks to issue and control our money supply.

Contrary to popular opinion, the government doesn’t issue money, except for a limited amount of notes and coins. As the film below explains, 97% of the money supply is electronic and created by private banks when they issue loans.

A lot of people have the mistaken impression that banks use other depositors’ money when they loan us money to buy a house. What actually happens is that the bank creates the money out of thin air by entering numbers into a computer.

Another common erroneous belief is the the Federal Reserve, which serves as the US central bank, is a government agency. It’s not. It’s a consortium of private banks.

97% Owned (Positive Money 2012) makes the case that the only solution to the current economic recession is to ban private banks from issuing money. They argue for making money creation publicly accountable by restoring this function to government (ironically this is where most people mistakenly believe it lies). Until we make this happen, private banks will continue to use their control of the monetary system to undermine genuine economic and political reform.

An Australian Looks at the US Economy

How Private Banks (Not Government) Create Money

Australian economist Steve Keen (author of Debunking Economics) has an excellent 2009 article on his Debtwatch site explaining how Fractional Reserving Banking (FSB) supposedly works. The major premise of the article is that true FSB only exists in the minds of academic economists. Keen begins with a quote from Karl Marx (and a prominent photo) that was featured in a January 2009 article Investors Shortchanged  in the Sydney Morning Herald:  

“Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner— and this gang knows nothing about production and has nothing to do with it.” (Das Kapital, Volume 3, chapter 33).

Although Marx was totally off base in predicting the imminent downfall of capitalism, he sure got it right about banks.

 The Fiction of Fractional Reserve Banking

In the academic model of Fractional Reserve Banking, a retail bank establishes reserves (with depositors’ money and funds borrowed from the Federal Reserve). They then create $90 in new money for every $10 they hold in reserve. Only it never works this way in real life. The Reserve Bank of Australia totally eliminated the reserve requirement in the 1990s.The Federal Reserve has no reserve requirement for business loans and the 10% reserve requirement for personal loans is full of loopholes.

Keen’s article goes on to present M0/M1 and M2 data showing that what academic economists are calling Fractional Reserve Banking is actually a Pure Credit Monetary System. In other words, private banks are totally free to issue as much money, in the form of new loans, as they choose. They also have total control of both the money created by the commercial system and the money created by government.

M0 (sometimes called M1) refers to the Base Money or fiat money created by the Federal Reserve. M2 refers to M0 plus new money created by banks as loans. The ratio of M2/M0 is called the “money multiplier” ratio.

What his graphs show is that credit money (M2) is created first and M0 or fiat money (the reserves to cover it) is created up to a year later. In a true FRB system, M0 or Base Money would increase first, and M2 would follow as banks issue new money based on their reserves. The other major problem is that combined public and private debt greatly exceeds M2. Under a true FRB system, total debt could never exceed the amount of fiat and bank money created.

Why Quantitative Easing Won’t Work

Keen’s paper also includes an interesting prediction that the Federal Reserve’s quantitative easing (increasing M0 by electronically “printing” $85 billion in new fiat money every month) will be vastly insufficient to bring about economic recovery. He gives four reasons for this:

1. Instead of using the money the Fed loans them to lend to borrowers, private banks are allowing inactive reserves to rise.
2. Consumers are too far in debt to take out new loans.
3. Deflation will continue because retailers and wholesalers must deeply discount their products to keep from going bankrupt.
4. “Deleveraging” (paying off debt) is massively suppressing consumer demand.

Keen predicts that quantitative easing will have little effect unless Federal Reserve Chairman Ben Bernanke pumps enough money into the economy to make a dent in the $42 trillion US debt. Deducting compound interest, he reckons $20 trillion would reduce it by about a quarter.

Ironically such a massive increase in government-issued Base Money (M0 ) would effectively replace our bank-controlled credit money system with a publicly controlled fiat money system. In other words it effectively restores the ability of the federal government to issue money, as Lincoln did (see The Role of Foreign Banks in US History).

Makes you wonder if this is Obama’s and Bernanke’s true agenda with all the electronic money they’re printing – to quietly nationalize America’s monetary system through the backdoor.

For more background on how private banks create the vast majority of US dollars (out of thin air), check out the free video The Secret of Oz:

Photo credits:  youkaine via photopin cc and photo credit: wolfgangfoto via photopin cc