[R-G] [BillTottenWeblog] Monetize This!

[Bill Totten]

A Better Way to Fund the Stimulus Package

by Ellen Brown

webofdebt.com (February 22 2009)


"Diseases desperate grown are by desperate appliances relieved, or not
at all".
--- Shakespeare, "Hamlet"


Moody's credit rating agency is warning that the US government's AAA
credit rating is at risk, because it has taken on so much debt that
there are few creditors left to underwrite it. Foreigners have bought as
much as two-thirds of US debt in recent years, but they could be doing
much less purchasing of US Treasury securities in the future, not so
much out of a desire to chastise America as simply because they won't
have the funds to do it. Oil prices have fallen off a cliff and the US
purchase of foreign exports has dried up, slashing the surpluses that
those countries previously recycled back into US Treasuries. And
domestic buyers of securities, to the extent that they can be found,
will no doubt demand substantially higher returns than the rock-bottom
interest rates at which Treasuries are available now. {1}

Who, then, is left to buy the government's debt and fund President
Obama's $900 billion stimulus package? The taxpayers are obviously
tapped out, so the money will have to be borrowed; but borrowed from
whom? The pool of available lenders is shrinking fast. Morever,
servicing the federal debt through private lenders imposes a crippling
interest burden on the US Treasury. The interest tab was $412 billion in
fiscal year 2008, or about one-third of the federal government's total
income from personal income taxes ($1,220 billion in 2008). The
taxpayers not only cannot afford the $900 billion; they cannot afford to
increase their interest payments. But what is the alternative?

How about turning to the lender of last resort, the Federal Reserve
itself? The advantage for the government of borrowing from its own
central bank is that this money is virtually free. This is because the
Federal Reserve rebates any interest it receives to the Treasury after
deducting its costs, and the federal debt is never actually paid off but
is just rolled over from year to year. Interest-free loans that are
never paid off are basically free money. In 2008, 85% of the interest
collected by the Federal Reserve (or "Fed") was returned to the
Treasury. The average interest rate on Treasury securities today is only
about three percent; fifteen percent of three percent is less than a
half percent - such a negligible interest as to make the money nearly free.

The Fed does not have to worry about interest, because it does not
actually have to acquire the money before lending it, and it knows the
government will not default. The Fed originates the money it lends,
either on a printing press or with accounting entries. It can purchase
Treasury debt simply by writing credits into the "reserve account" of
the seller's bank, which then credits the seller's account. The Fed's
ability to write numbers into an account is obviously unlimited; but it
has normally restricted its purchase of government securities to only so
much as is necessary to provide the liquidity needed for banks to cash
and clear checks. Funding the government's budget shortfall has usually
been left to private lenders; but those loans are drying up, and
servicing them is proving expensive. Both this interest burden and the
need to continually attract new lenders could be avoided by tapping into
the government's credit line at its own central bank.

But wouldn't that be dangerously inflationary? Not in today's economic
climate, as will be shown. And if the notion of funding the government
through its own central bank seems too radical and unprecedented to be
entertained, consider the radical moves the Fed has already been taking
in the last year. Without so much as a by-your-leave from Congress, the
Fed just "monetized" $1.2 trillion in private debt, turning commercial
loans into money. If private banks and private corporations now have
multi-billion dollar credit lines with the Federal Reserve, then
Congress should have one too. In fact Congress, which gave the Fed its
charter to create the national money supply, should have been the first
in line.


If the Fed Can "Monetize" Private Debt, It Can Monetize Public Debt.

The Fed has been a hotbed of radical, experimental activity in the past
year. Ben Gisin is a former banker who has long been tracking the Fed's
statistical releases. He says he has never seen anything like it. Assets
have been magically appearing on the Fed's balance sheet, and they are
not coming from any traditional source. {2}

In May 2007, the Fed reported assets of about $850 billion, and 92% of
them were the usual federal securities (government IOUs). A year later,
the Fed's stash of federal securities had dropped to $500 billion, but
its total assets remained substantially unchanged. The federal
securities had just been swapped for other forms of debt. In January of
2009, however, the Fed reported assets of $2.1 trillion, an increase of
$1.2 trillion from a year earlier. {3} Where did this new money come
from? The Fed's liabilities also went up by $1.2 trillion, indicating
that it was creating "credit" simply by double-entry bookkeeping. Loans
were being created by entering them as assets on one side of the Fed's
books and as corresponding liabilities on the other.

Creating money by double-entry bookkeeping is not actually unique to the
central bank. It is how all commercial banks come up with the money they
lend, as many authorities have attested. In a revealing booklet called
Modern Money Mechanics, the Chicago Federal Reserve explained how banks
expand the money supply (or create money) using double-entry
bookkeeping. The booklet stated:

"Of course, [banks] do not really pay out loans from the money they
receive as deposits. If they did this, no additional money would be
created. What they do when they make loans is to accept promissory notes
in exchange for credits to the borrowers' transaction accounts. Loans
(assets) and deposits (liabilities) both rise [by the same amount]." {4}

Congressman Jerry Voorhis, writing in 1973, explained how monetary
expansion is built on the ten percent reserve requirement imposed by the
Fed:

"[F]or every $1 or $1.50 which people - or the government - deposit in a
bank, the banking system can create out of thin air and by the stroke of
a pen some $10 of checkbook money or demand deposits. It can lend all
that $10 into circulation at interest just so long as it has the $1 or a
little more in reserve to back it up." {5}

That means that if the Federal Reserve were operating like a commercial
bank, it could take its $500 billion in US securities and fan them into
$5 trillion in loans; and that appears to be exactly what it has been
doing. What is extraordinary is that the money is being used to make
commercial loans. If the Fed can come up with $1.2 trillion to
"monetize" private promissory notes, argues Ben Gisin, there is no
reason it could not come up with $900 billion to monetize Obama's
stimulus package. In fact, Congress could mandate its captive central
bank to buy the bonds needed to fund the stimulus package.


The Advantage of Borrowing from the Federal Reserve

For the government, the difference between borrowing credit created with
accounting entries from a private bank and borrowing the same sort of
credit from the Federal Reserve is that borrowing from the Fed is nearly
interest-free. That is true today, but it has not always been true.
Congressman Wright Patman, Chairman of the House Banking and Currency
Committee, wrote in a 1964 treatise called A Primer on Money:

"The Federal Reserve Banks create money out of thin air to buy
Government Bonds from the US Treasury ... [creating] out of nothing a
... debt which the American people are obliged to pay with interest".

Patman was outraged at the inequity of this practice and boldly agitated
for Congress to nationalize the privately-owned Federal Reserve, a move
that would have allowed the government to issue the national money
supply directly. Needless to say, however, this proposal met with strong
opposition. Nationalization did not happen, but the Fed did have to
compromise. According to Jerry Voorhis:

"As a direct result of logical and relentless agitation by members of
Congress, led by Congressman Wright Patman as well as by other competent
monetary experts, the Federal Reserve began to pay to the US Treasury a
considerable part of its earnings from interest on government
securities. This was done without public notice and few people, even
today, know that it is being done. It was done, quite obviously, as
acknowledgment that the Federal Reserve Banks were acting on the one
hand as a national bank of issue, creating the nation's money, but on
the other hand charging the nation interest on its own credit - which no
true national bank of issue could conceivably, or with any show of
justice, dare to do."

Voorhis went on, "But this is only part of the story. And the less
discouraging part, at that. For where the commercial banks are
concerned, there is no such repayment of the people's money." Commercial
banks, he explained, do not rebate the interest, although they also
"'buy' the bonds with newly created demand deposit entries on their
books - nothing more" {6}.

Voorhis noted that the Constitution provides, "Congress shall have the
power to coin money [and] regulate the value thereof". Whether "to coin
money" means "to issue money" has been debated; but as President Andrew
Jackson observed, if anyone was given the power to issue money, it was
Congress, not a private banking elite. For a full century before the
American Revolution, the colonists funded a period of unprecedented
prosperity and productive enterprise with paper money issued directly by
their own local governments or government-owned banks. According to
Benjamin Franklin, it was chiefly to get that power back after King
George halted the practice that the colonists fought the Revolution {7}.
They won the war but lost the money-creating power to a private banking
cartel. We the people now have an opportunity to get that innovative
funding system back, and we can do it without having to convince a
faction-ridden Congress that they need to do anything so controversial
as nationalizing the Federal Reserve or even passing new legislation.
All that is required is a shift in emphasis, a shift the Federal Reserve
has been making lately itself. The Fed routinely turns government bonds
into dollars in order to expand the amount of currency in circulation;
it has now begun doing that with corporate debt; and Fed officials are
talking about doing it with long-term federal securities. According to a
January 28 2009 Associated Press report:

"With its key lending rate to banks already near zero, the Fed pledged
anew to use 'all available tools' to revive the economy. Specifically,
the Fed said it is 'prepared' to buy longer-term Treasury securities if
the circumstances warrant such action." {8}

Traditionally, government debt has been "monetized" by the Fed only to
provide the bank reserves necessary to cover check cashing and clearing.
This tool is now being recommended "to revive the economy". Obama's
stimulus package is also intended to revive the economy. Combine the two
and you have a package that stimulates the economy without adding to the
impossible burden of an exponentially-increasing debt.


But Wouldn't That Be Inflationary?

The usual objection to funding the government with credits drawn on its
own central bank is that the result would be inflationary. However, the
scenario most feared today is actually deflation - a lack of available
dollars to fuel the economy. Asset values have collapsed, and savings
have collapsed along with them. People with only half as much money in
their brokerage accounts have less to spend; people whose houses have
plummeted in value cannot take out consumer loans against equity as was
done in the boom years. Funding a "stimulus" package with existing money
that is merely recycled through the banking system as loans will not
stimulate the economy but will only add to the problem, by adding to the
collective burden to service debt. Money that should have gone into more
productive endeavors will wind up going into interest payments. To
bolster demand and stimulate production, recovery requires an infusion
of new dollars - dollars that can be used to pay wages and salaries,
which can then be used to buy goods and services.

In any case, adding new money to the money supply will not inflate
prices if the money is used in the production of new goods and services.
Price inflation results only when "demand" (dollars) exceeds "supply"
(goods and services). If the new dollars are used to create new goods
and services, demand and supply will rise together and prices will
remain stable. If the goods being produced are income-generating assets
- railroads, bridges, alternative energy sources, low-cost housing,
medical services - so much the better. The projects can be "monetized"
in the same way that banks monetize mortgages - by entering them as
assets on one side of their books and as liabilities on the other. The
funds received from the central bank can then be repaid to the central
bank from the income the assets produce, extinguishing the debt and
avoiding inflation. Ideally, the projects would actually turn a profit,
generating income for the government and reducing the tax burden on the
public.

The bottom line is that we cannot borrow our way out of debt. Only new
money will stimulate a debt-ridden economy - money that is interest-free
and does not have to be paid back. The direct road to that result would
have been to nationalize the Federal Reserve and return the power to
create money to Congress; but as Wright Patman found, that solution is
controversial and could be a difficult piece of legislation to get
passed. In the meantime, the same result can be achieved by tapping into
the government's nearly-interest-free credit line at the Federal
Reserve. Nearly-interest-free loans of accounting-entry money that never
has to be paid back are a source of debt-free liquidity that can be used
to fund projects that put people back to work, without increasing the
interest burden on the government or the tax burden on the public.

_____

Ellen Brown developed her research skills as an attorney practicing
civil litigation in Los Angeles. In Web of Debt (2007), her latest book,
she turns those skills to an analysis of the Federal Reserve and "the
money trust". She shows how this private cartel has usurped the power to
create money from the people themselves, and how we the people can get
it back. Her earlier books focused on the pharmaceutical cartel that
gets its power from "the money trust". Her eleven books include
Forbidden Medicine (2008), Nature's Pharmacy (1998), co-authored with Dr
Lynne Walker, and The Key to Ultimate Health (2000), co-authored with Dr
Richard Hansen) Her websites are www.webofdebt.com and www.ellenbrown.com.


Notes:

1. Aaron Task, "Another $3T of US Debt: Don't Count on Foreigners to Pay
for Our Bailouts" (citing John Ryding, chief economist of RDQ
Economics), Finance.Yahoo.com (February 13 2009).

2. Benjamin Gisin, Michael Krajovic, "Rescuing the Physical Economy",
Conscious Economics (January 2009).

3. Federal Reserve Board, "Annual Report 2007", "Statistical Tables, "No
9: Statement of Condition of Federal Reserve Banks", & "No 10: Income
and Expenses of the Federal Reserve Banks",
www.federalreserve.gov/boarddocs/rptcongress/default.htm; "Current
Release", www.federalreserve.gov/releases/h41.

4. Modern Money Mechanics: A Workbook on Bank Reserves and Deposit
Expansion (Federal Reserve Bank of Chicago, Public Information Service,
1992, available at
http://www.rayservers.com/images/ModernMoneyMechanics.pdf), page 6.

5. J Voorhis, The Strange Case of Richard Milhous Nixon (1973),
excerpted at
http://www.sonic.net/~doretk/ArchiveARCHIVE/ECONOMICSPOLITICS/FEDERAL%20RESERVE/Jerry%20VoorhisFedReserve.html.

6. Jerry Voorhis, op. cit.

7. Quoted by Congressman Charles Binderup in a 1941 speech, "How America
Created Its Own Money in 1750: How Benjamin Franklin Made New England
Prosperous", reprinted in Unrobing the Ghosts of Wall Street,
http://reactor-core.org/america-created-money.html.

8. Jeannine Aversa, "Fed Ready to Provide Fresh Aid to Revive Economy",
Associated Press (January 28 2009).

www.webofdebt.com/articles/monetizethis.php


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