by Guest Contributor | Dec 10, 2012 | Opinion
By Gary Flomenhotf
Not everyone follows the actions of central banks, such as the private bank cartel called the US federal reserve (the fed), but you should know what the fed is up to lately: QE3[1] PLUS! See article here. You may know that QE3 is a fed program to purchase $40 Billion in mortgage bonds per month from banks, basically taking crap off their hands and making US citizens pay for it. The latest plan is to add $45 billion in Treasury bonds to that. These are open market operations where the Treasury bonds are bought from banks, thereby increasing the money supply and supposedly lowering interest rates further.
The US Treasury pays interest on Treasury bonds, and the fed supposedly returns most of it to the US government as profit. But the fed only owns a small fraction of the US debt, much of it is owned by foreigners and banks. The government doesn’t get that interest back, and it is the cause of sovereign debt crises, when interest on governments’ debts becomes unpayable.
Just to remind people where the fed’s money comes from, the fed prints it, or nowadays types it into a computer account as a bank balance. Since the US Treasury outsourced the creation of money in 1913, the fed has produced a small part of the money supply directly, and the rest is created through fractional reserves by private banks, about 95%. This is called variously seigniorage, money creation, or monetary supply, which is a sovereign privilege of the state given over to central banks and private commercial banks worldwide. Under 100% reserve requirements, the central bank would create the entire money supply and not commercial banks. The IMF recently published a surprising essay called “The Chicago Plan Revisited” discussing this idea, first promoted by major economists in the 1920’ and 30’s. A trial balloon perhaps?
The Treasury could also issue the entire money supply as interest-free US Notes or bank balances and do away with the central bank entirely. The US Treasury has issued these notes in the past starting with Greenbacks issued by President Lincoln to finance the US Civil War. 100% reserve requirements are essential to end the loss of money creation to banks and the resultant interest paid on every dollar of money in the economy. Banks opposed the Chicago Plan in the 1930’s because it takes away their privilege of collecting interest on money they create from nothing, when they make loans using fractional reserves.
The total of QE3 PLUS is $85 Billion per month. Doesn’t sound like much these days with debts in the trillions, and derivatives in the hundreds of trillions, but let’s figure it out. Take the US population of about 315 million and divide into $85 billion and you get $270 per month or $3240 per year. How would you like that or $12,960 per year for a family of four as a basic income?
The fed is not allowed to finance citizens, states, or municipalities, only banks and the Treasury. And remember that US states are forbidden from issuing “bills of credit” by the Constitution (Article 1, Section 10, Clause 1). For more on this see Vermont currency commons website. Now this reminds me of a joke I heard when Iraq was writing their new constitution after we invaded and instituted “regime change”. “Why don’t they take our constitution, we’re not using it.” Congress is supposed to coin the money supply, not banks, as stated in Article I, Section 8, Clause 5. I see no reason to follow this prohibition since the national government isn’t following the Constitution, but let’s leave it be. States can create public banks, and these banks can issue credit that is not considered an illegal state bill of credit. States could also issue warrants or other IOUs as California has done on two occasions. See currency commons article on California.
The problem in Europe is that countries have given up their sovereign monetary policy when they joined the Eurozone, as US states did when they ratified the Constitution and joined the union in 1789. Even EU countries that haven’t joined the Euro like England, Denmark, and Sweden still let banks issue most of the money with interest, so they are at the mercy of the banksters. I suspect even Iceland, which told the bondholders to take a hike, is still letting banks create all the money with interest. Old habits die hard…
Anyone traveling to the Eastern Caribbean, for example, will find transactions taking place in Eastern Caribbean Dollars, US dollars, and Euros side-by-side without much difficulty. So there is no practical reason for countries to give away their monetary policy to a central authority. It is the interest paid on private money creation that is the problem, not the sovereign monetary authority of individual countries. For more on this see Dr. Margrit Kennedy’s website.
So what would happen if central bank quantitative easing and open market operations were redirected to basic income payments to individuals rather than loans to banks? Let’s not forget that the fed has already issued QE1 and QE2 without much result. QE1 was $1.25 trillion and QE2 was $600 billion for a total of $1.85 trillion. That is $5873 for every person in the US given to banks, in a form of “trickle-down” theory that it will eventually benefit the economy. Don’t you think it would have been more effective to pay directly in a dividend check to citizens amounting to $23,492 for a family of four? A sovereign state or country could issue its own public credit money without interest, and get out of the bankster racket that pays interest on money they create out of thin air. Guernsey did it starting in 1822. Any country or state could do it, and even issue it as an interest-free basic income, trickle-up, not “tinkle-down.”
About the author:
Gary Flomenhoft is an International Post-Graduate (IPRS) and University of Queensland Centennial Scholar and PhD Candidate at Centre for Social Responsibility in Mining. His research area is the economic value of common wealth and governance of Sovereign Wealth Funds.
Prior to enrolling at SMI, Gary was a faculty member for 11 years in Community and International Development and Natural Resources at the University of Vermont (UVM), serving as a Lecturer in Applied Economics, Renewable Energy, International Development, and Public Policy. He conducted many development projects in The Commonwealth of Dominica, St. Lucia, and Belize with students and local partners. He also originated and coordinated the Green Building Design Program at UVM.
He had a secondary appointment as a Research Associate and Fellow at the Gund Institute for Ecological Economics under Director Robert Constanza. His primary research was in public finance for the state of Vermont including green/environmental taxes, common wealth and common assets, subsidy reform, and public banking. His 2013 report on Vermont public banking formed the basis of the “10% for Vermont” legislation passed in 2014, which allocated $35 million of state funds to local investment. He directed the grant funded Green Tax and Common Assets project at the Gund Institute for seven years, where he originated the Vermont Common Assets Trust Fund (VCAT) bill, which was submitted to the legislature twice. His chapter on Vermont Common Assets appeared in the book “Exporting the Alaska Model”, which promotes the Alaska Permanent Fund and Dividend as a model for basic income around the world using Sovereign Wealth Funds.
[1] QE means quantitative easing, a fed policy of purchasing bank securities in order to increase the money supply to encourage additional lending by banks, and lower interest rates
by Guest Contributor | Nov 5, 2012 | Opinion
What would you call a national leader who knows a simple policy that could be implemented at no additional cost that would end poverty, but who refuses to advocate for or even to support that policy? Willfully ignorant? Ideologically blind? A sociopath?
In a campaign speech in Cleveland, Ohio, on October 24, Paul Ryan, the Republican Party Nominee for Vice-President of the United States of America, criticized the Obama administration’s ideological approach to dealing with poverty, placing it within a half-century of liberal attempts to alleviate poverty, stretching back to at least Lyndon Johnson’s Great Society. Ryan stated that the war on poverty had been won by poverty. As specific proof of the failure of government intervention against poverty, Ryan stated, “Just last year, total federal and state spending on means-tested programs came in at more than one trillion dollars. How much is that in practical terms? For that amount of money, you could give every poor American a check for $22,000.”
The Republican ticket believes they can reduce taxes by 5 trillion dollars, increase military spending by 2 trillion dollars, keep Social Security and MediCare spending at current rates, and reduce the national debt all by closing tax loopholes and eliminating deductions. So their math should not be automatically assumed to be correct. But to be charitable, I will do so anyway.
According to the United States Department of Health and Human Services, the poverty rate for a single individual in the 48 contiguous states is $11,170 for 2012, and $23,050 for a family of four. And if sending every poor person a check for $22,000 were administered through the Internal Revenue Service in people’s federal income tax returns, it would be a lot simpler and cheaper than the IRS’s administration of the Earned Income Tax Credit, one of the many means-tested programs that would presumably be eliminated to pay for the $22,000 payment. Even if the extreme work disincentive of an all-or-nothing grant were nearly eliminated by reducing it to a mere $12,000 and making it universal but with a 50% take-back rate, it would still be much simpler than the EITC. So Paul Ryan just explained how the United States could literally end poverty by fiat without spending any more money than it already is and with a massive savings in bureaucratic spending. So is this what the Romney-Ryan ticket proposes to do for America?
No. This explanation for how to end poverty was used only to show the ineffectiveness of the current government approaches to poverty. But Ryan did not actually propose ending poverty via this method in his speech. Neither he nor Romney have ever proposed anything like the plan he described to end poverty. In fact, in this speech, the closest thing to an alternative vision Ryan offered for dealing with poverty was to suggest school vouchers. He claimed the way for people to escape poverty is through education, and noted that he and Romney supported educational “choice”. Data from the famous SIME-DIME basic income studies suggest that Ryan has the causal relationship between escaping poverty and improving educational achievement backwards. A basic income was shown to be a highly cost-effective means of increasing grades for children in the families studied.
Is Ryan really so sociopathic? A more charitable, and more likely, explanation is ideological blindness. Ryan may actually be bothered by poverty, but he likely views “income redistribution” as simply wrong. In this, his thinking would be similar to that of Thomas Jefferson, who understood intellectually that slavery was morally wrong, but who also believed it to be morally wrong for the state to take a person’s property. The mutual mistake made by Jefferson and Ryan is the belief that “property” exists as a moral imperative created prior to either mutual agreement or imposition by threat of force.
The convention of property is a very good idea that most often enhances both economic incentives and personal freedom. But a convention is all that it is, and when certain forms of property interfere with economic incentives or personal freedoms, those forms of property need to be eliminated or reformed. The nation of England has traditionally treated titles of nobility as forms of personal property, but when the United States was founded, we eliminated such forms of property from our existence. Nine decades later, we eliminated the form of property known as slavery from our existence. Current forms of government created property such as land titles, patents, and shares in government chartered corporations are probably still on balance good ideas and do not need to be eliminated entirely. But they still benefit the few who utilize them at the expense of the public who created them. Demanding that such forms of property be reformed to require full compensation to those who are displaced is not asking for handouts from the makers. It is asking for payment from the takers. It is demanding justice.
by Guest Contributor | Jul 16, 2012 | Opinion
In December of 2010, CBS aired a segment of 60 Minutes in which reporter Scott Pelley asked Chairman Ben Bernanke a question about the bailout money provided to banks during the 2008 fiasco: Pelley asked, “Is it tax money the Fed is spending?” Bernanke replied, “It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing.” “You’ve been printing money?” Pelley asked. “Well, effectively,” Bernanke said.
Did you get that? The Chairman just told us that money is created out of thin air or rather is created with digital entries. When I first learned of fiat currency, I remembered a question my mom used to ask: “do you think money grows on trees?” Now, I would answer, “they don’t even need the paper from trees!” Maybe, just maybe, we need to educate ourselves about the creation of money—otherwise, we become like a child who cannot count, staring uncertainly at the coins returned to us by a store clerk with no means to determine whether or not we are short-changed.
Warren Mosler, a former Wall Street investment banker, has a book available at no cost on line called Seven Deadly Innocent Frauds of Economic Policy. In that book, he describes how the system truly works—how fiat money is created to cover the needs of the U.S. government by the Federal Reserve by simply adding digits to accounts. Mosler points out that when the U.S. went off the gold standard in 1971, a new monetary system came into play, yet many of the old gold standard rules continued to operate. Some economists, mainly at the University of Missouri-Kansas City, subscribe to this theory, referring to it as Modern Monetary Theory. They have a web site called New Economic Perspectives with contributors such as Bill Black, author of The Best Way to Rob a Bank is to Own One.
If Mosler’s description of how our monetary system really works is correct, then the following holds:
- The United States is a sovereign money creator; it is not like the states within the United States or Greece or Spain, who are all currency users. This means that the United States can never run out of dollars, as it simply creates them when necessary. It can never default on a debt unless intentionally–as when the Republicans tried to make a point (when they held out on raising the debt ceiling and simply refused to pay). It will always have the ability to pay. (All the Chicken Littles were running around screaming that our credit rating would be downgraded, and it would cost more to borrow. Yet when Standard and Poors downgraded the U.S. from four stars to three, the cost of interest on treasuries went down).
- Since the U.S. is a currency creator, it does not need your tax dollars or mine (or money from the Chinese or our grandchildren) to fund anything. It needs tax dollars to cool off the economy. As Mosler says, think of deficit spending as the spigot in the bathtub—think of taxes as the drain. Taxes become a way to limit someone’s buying power so that the tub doesn’t overflow (inflation). The political question now becomes whose buying power shall we limit—not how can we make everyone pay “their fair share”—an absurdity under the current system.
- The debt? Well, it simply represents all the money created to date by the U.S., and that money actually resides in the bank accounts of the private sector. If you quench the debt, you have to call that money back, which will lead to a recession/depression.
Mosler calls for a payroll tax holiday. As he points out, the FICA tax is a highly regressive tax, and is totally unnecessary. Medicare and Social Security should be funded just as the wars and all other government expenditures are funded. Mosler says that the creators of the Social Security gave it the moniker “Trust Fund” as a “useful fiction.” They understood that how you get people to think of a thing makes a difference in whether or not they will accept it.
If the American people understood how our fiat system worked, they would no longer feel like it was their tax dollars supporting someone on the “dole.” They could see through false analogies such as comparing the U.S. government (currency creator) with the theoretical mom and pop around the kitchen table (currency users) struggling to pay their debts. They would be more inclined to reduce the buying power of those who actually have buying power, and more inclined to give buying power to those who do not now have it. In such an atmosphere, I think BIG would be more acceptable as the moral hurdles now thrown at it would be far less. Given the current lies and deceptions about the economy, it will be all we can do to keep Social Security and Medicare intact. Unless something is done to educate the American people as to the true nature of the economy, the “austerity” plans that Simpson/Bolles/Peterson/Ryan advocate will be implemented—bringing more unnecessary suffering and make any hopes for BIG a pipe dream.
For more on Modern Monetary Theory go to:
https://neweconomicperspectives.org/
-Phoenix
by Guest Contributor | Jul 2, 2012 | Opinion
At the North American Basic Income Guarantee Congress in Toronto, which I attended in May 2012, Charles Karelis, author of The Persistence of Poverty, demonstrated what is wrong with much thinking about poverty, using a simple analogy. Suppose you are stung by a bee, and you are offered enough salve to relieve the pain of that sting. Most people would consider that daub of salve to be worth quite a bit. Now suppose you have 7 other bee stings. Will you still value a daub of salve sufficient to relieve one sting as much as you did when you had only one sting? If you think about it, you will value that one daub less, because it will do nothing to relieve the 7 other stings that remain. Now suppose with these 8 stings that you are given salve for 7 stings. Now you have increased motivation to relieve the one sting that remains, because that additional daub will free you from pain. This simple example is an important exception to a widely accepted principle of economics, the principle of declining marginal utility (PDMU). According to the PDMU, the more you have of something, the less each additional unit is worth at the margin. For example, after you have had one piece of cake, the second is worth less to you than the first, and after two, a third is worth even less. PDMU applies well to what Karelis calls “pleasers,” like the dessert example. But it does not apply to what he calls “relievers,” like the sting salve. In the case of relievers, the more you have of something, the more an additional unit is worth at the margin. The utility of that last daub of salve is worth more to you, not less, than the first daub, because the last daub is the one that gets you out of misery.
Now it turns out that many of the goods that matter to poor people are relievers, not pleasers, or they are hybrids, functioning like relievers when one has less than enough, and like pleasers once one crosses a threshold of sufficiency. Transportation is an example of a hybrid. If you have a 20-mile journey to work, you are not apt to pay bus fare for the first mile of the journey, leaving 19 miles to go on foot. But you might well be willing to pay bus fare to relieve you of the last mile after having walked 19. And transportation beyond what you need declines in value.
Poverty means troubles, and like multiple bee stings, these troubles drown each other out. Relief from one problem will not necessarily be pursued by someone if she is left in other troubles. If we keep this in mind, Karelis argued, we can explain much of the behavior of poor people, not as due to some character defect, but rather as what any reasonable person would do in such circumstances. Consider low work effort. If money from work were a pleaser then the first dollar should be the most valuable, and a rational person should be eager for work, no matter how poorly paid. But if money from work is only a reliever, as it is for someone in poverty, then that first dollar won’t be worth much, like the first daub of salve, since it leaves one in a sea of troubles.
Or consider a failure to save. Saving makes sense as a means of deferring consumption, and as a way of insuring for unexpected shocks to one’s income from layoffs, illness, emergency home repairs, etc. But when one’s current consumption is taken up with basic needs, the value of deferred consumption is much less. And it may be more rational to address the ups and downs of income shocks than to try to smooth out these shocks through saving. Going back to the bee sting analogy, suppose you are getting two stings a day, but have only enough salve for, on average, one sting per day? Are you going to relieve only one sting every day, or relieve two stings, every other day? The latter makes more sense, but it is the opposite of the smoothing out strategy that saving makes possible. Yet it is more reasonable, given that one is dealing with relievers.
What are the policy implications of this analysis? Karelis argued that a guaranteed income would be counterproductive for people who are not poor, as it would undermine work motivation. However, a negative income tax, guaranteeing income up to the poverty line, would actually increase the incentives for a poor person to get out of poverty. It would supply the reliever goods up the point where the additional unit of income is worth more, and so in pursuing it one is stepping out of poverty, not remaining stuck in it. The poor are just like everyone else, except that they have less money. Once policy makers begin to understand this, we may begin to shift from our current counterproductive policies of punishing the poor and blaming them for their condition, to an effective strategy that will get people out of poverty.
For further reading, see Charles Karelis, The Persistence of Poverty (Yale University Press, 2007).
by Guest Contributor | Apr 2, 2012 | Opinion
Article by: Almaz Zelleke
The Cato Institute, a non-partisan Washington, D.C. think tank founded in 1977 to promote and disseminate libertarian views, is in danger. Due to a highly unusual and, in hindsight, highly unfortunate shareholder structure for a non-profit, it finds itself at risk of a hostile takeover by two of its co-founders, billionaire businessmen Charles and David Koch. Due to the death of one of the other two shareholders, the Kochs are poised to take control and shift Cato’s mission in a more partisan direction. Liberals and libertarians alike should rue the loss of Cato’s principled, non-partisan voice. Many of Cato’s free-market stands are certainly shared by Republicans, but it routinely ridicules Republican politicians who talk about cutting government spending while voting to increase it, opposes Republican warmongering, and is at odds with most of the party’s positions on social issues like abortion and same-sex marriage.
But the devolution of a libertarian think tank into one more concerned with protecting big business interests like the Kochs’ shouldn’t come as a surprise, despite the unusual circumstances in this case. Libertarianism has always had a latent conservatism due to its advocacy of absolute property rights. Absolute property rights inevitably concentrate economic power, which is why property rights in capitalist economies must be tempered by some redistributive force—welfare state institutions, redistributive taxes, or progressive resource dividends. Libertarians typically justify the inequalities generated by absolute property rights by the economic benefits they provide to all, including those without property. Even when this is demonstrably false—as it is today for the 46 million Americans who live in poverty in the richest country in the world—libertarians are at best grudging supporters of even market-friendly redistributive measures like a negative income tax or a basic income.
Liberalism emerged in the 18th century with the assertion of universal rights of sovereignty against absolute monarchs, but extensions of liberty beyond propertied men were only slowly and grudgingly granted. Liberal democracies granted full political rights to all only in the 20th century; full economic rights—always central to the liberal ideal—remain the privilege of the few. Libertarianism’s latent economic conservatism—conservative in the worst sense, in protecting existing privilege—has always lurked just below the surface. It’s no surprise that the Kochs, who were probably only millionaires when they co-founded Cato in the 1970s, should want their think tank to skew conservative now that they’re billionaires with a lot more to protect from free market competition.
