The Market Has Spoken: Austerity Is Bad for Business

Published on Global Research.ca, by Ellen Brown, August 6, 2011.

… The Problem Is Not Debt But a Shrinking Money Supply:

The markets are not reacting to a “debt crisis.”  They do not look at charts ten years out.  They look at present indicators of jobs and sales, which have turned persistently negative.  Jobs and sales are both dependent on “demand,” which means getting money into the pockets of consumers; and the money supply today has shrunk.  

We don’t see this shrinkage because it is primarily in the “shadow banking system,” the thing that collapsed in 2008.   The shadow banking system used to be reflected in M3, but the Fed no longer reports it.  In July 2010, however, the  New York Fed posted on its website a staff report titled “Shadow Banking.”  It said that the shadow banking system had shrunk by $5 trillion since its peak in March 2008, when it was valued at about $20 trillion – actually larger than the traditional banking system.  In July 2010, the shadow system was down to about $15 trillion, compared to $13 trillion for the traditional banking system.

Only about $2 trillion of this shrinkage has been replaced with the Fed’s quantitative easing programs, leaving a $3 trillion hole to be filled; and only the government is in a position to fill it.  We have been sold the idea that there is a “debt crisis” when there is really a liquidity crisis.  Paying down the federal debt when money is already scarce just makes matters worse.  Historically, when the deficit has been reduced, the money supply has been reduced along with it, throwing the economy into recession.

Most of our money now comes into the world as debt, which is created on the books of banks and lent into the economy. If there were no debt, there would be no money to run the economy; and today, private debt has collapsed.  Encouraged by Fed policy, banks have tightened up lending and are sitting on their money, shrinking the circulating money supply and the economy.

Creative Ways to Balance the Budget:

The federal debt has not been paid off since the days of Andrew Jackson, and it does not need to be paid off. It is just rolled over from year to year. The only real danger posed by a growing federal debt is the interest burden, but that has not been a problem yet.  The Congressional Budget Office reported in December 2010:

[A] sharp drop in interest rates has held down the amount of interest that the government pays on [the national] debt. In 2010, net interest outlays totaled $197 billion, or 1.4 percent of GDP–a smaller share of GDP than they accounted for during most of the past decade.

The interest burden will increase if the federal debt continues to grow, but that problem can be solved by mandating the Federal Reserve to buy the government’s debt.  The Fed rebates its profits to the government after deducting its costs, making the money nearly interest-free.  The Fed is already doing this with its quantitative easing programs and now holds nearly $1.7 trillion in federal securities.

If Congress must maintain its debt ceiling, there are other ways to balance the budget and avoid a growing debt.  Ron Paul has brought a creative bill that would eliminate the $1.7 trillion deficit simply by having the Fed tear up its federal securities.  No creditors would be harmed, since the money was generated with a computer keystroke in the first place. The government would just be canceling a debt to itself and saving the interest.

The Trillion Dollar Coin Alternative: … (full text).

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