[R-G] [BillTottenWeblog] Rescuing the Physical Economy ...

[Bill Totten]

... from more debt and a lack of circulating means of exchange.

by Benjamin Gisin & Michael Krajovic

Conscious Economics (January 2009)


Amidst attention to financial industry woes, the most significant aspect
of the crisis has remained unattended - saving the physical economy. The
bailout restored bank and investor losses and created needed liquidity.
The physical economy, on the other hand, continues to collapse due to an
insufficient circulating means of exchange and servicing crushing debt
loads.

Over the years, the physical economy has evolved to function primarily
on circulating money between producers and consumers. Evidence has
emerged that credit - money created by the financial industry - doesn't
fit the bill. (See Conscious Economics issues 1 and 2 which discuss how
credit is the only means of exchange out there.) Credit volume is
limited to finding enough qualified borrowers. Credit (money) is
continuously taken out of circulation to pay off underlying debts or end
up being concentrated - events that reduce and disfigure the larger economy.

The bailout retained a cadre of loan officers and investment bankers
(who haven't lost their jobs) with phones and desks to make new loans.
Can these over-worked bank employees (in the current landscape of more
debts than existing qualified borrowers) find enough new qualified
borrowers to create and distribute the credit needed to underpin the
physical economy? Since the bailout began, the Bureau of Labor
statistics reports 1.9 million (non-farm) jobs have been lost, pushing
unemployment to over ten million.

The flaw in using credit as money is the debt that stands behind it
grows faster than the economy. Twelve years ago (1997), the Gross
Domestic Product grew by $700 billion and the total debt in America grew
by $1,200 billion. For the first nine months of 2008, the Gross Domestic
Product grew by $600 billion and the debt grew by $3,000 billion (See
Chart 1). Chart 1 illustrates that not only does the debt grow faster
than the economy, but the rate at which the debt grows faster than the
economy is also increasing.

Historically, the financial industry, with the intervening hand of the
Federal Reserve, drove the physical economy by creating and distributing
credit (money). Becoming intoxicated with past debts, the financial
industry is less able to drive the economy. It is time someone else,
with a fundamentally different approach, take over the steering wheel.

Checking into the nation's capitol, the financial industry demanded
treatment from the US Government, the Federal Reserve Bank and the US
Treasury. The treatment was one of free infusions of capital and money -
but the physical economy was bypassed. Have we forgotten who feeds,
clothes and houses us?

The physical economy needs a circulating medium for employees and
business to have the option of working for a living as opposed to being
forced to live on welfare and defaulting on their obligations. The
inability of the money - credit created by the financial industry to
robustly circulate - is a broad social and economic failing whose
correction is at our doorsteps.


Discovering A Different Option

Does waiting for the financial industry to reinvigorate the economy with
more debt (the only approach the financial industry knows) make sense?

As of September 30 2008, the Federal Reserve reported $51.8 trillion of
debt sloshing through the US economy, that was used to facilitate
economic activity of the past. The debt grows faster than the economy
(See Chart 1). The prospects of the financial industry, adding trillions
of dollars of new debt to solve the present crisis and avoid future
crises is unlikely. It's one thing to keep existing borrowers employed
to pay existing loans. It is another thing to find millions of new
borrowers to fund the physical economy in an environment of rapidly
disappearing jobs.

On a positive note, the US Government believes it should temporarily
take over the steering wheel from a financial industry weakened from
creating more debt than can be repaid. The US Government is working on a
stimulus package of approximately $1 trillion to re-energize the
physical economy.

Within a financial system that only understands debt, the government has
become the debtor (borrower) of last resort. Does it make sense for the
government to stimulate the physical economy with more debt - an
approach the financial industry is proving doesn't work? Fortunately,
the government has other options.

The idea of creating money that is virtually debt and cost free is not
new to the US Government, the Federal Reserve and the Treasury. It is
something that has been practiced for decades while creating and
collateralizing currency (Federal Reserve Notes).

On December 31 2007, there was $792 billion of currency in circulation
of which $741 billion was collateralized by US Government Treasury
Securities (national debt). Holding these securities, the Fed collected
$40.3 billion in interest payments in 2007. For the privilege of issuing
currency, the Fed paid $34.6 billion of the interest money back to the
US Treasury. The net effect was the cost to the Treasury (and taxpayers)
of $741 billion - eight percent of the national debt - was only $5.7
billion or 0.7 percent. The US Treasuries held by the Fed are not owed
to private investors and simply renewed at maturity.

To get to the point, the US Treasury and the Fed can create money the
same way for a stimulus plan. The Treasury can sell thirty-year bonds to
the Fed at little to no cost. These long-term bonds can be renewed in
thirty years, making the whole process without the effects of debt - as
the government can dictate the terms to the Fed like it is doing with
the debt used to collateralize the currency.

To purchase the US bonds, the Fed credits the Treasury's account at the
Fed. The Treasury then issues checks (like your tax refund checks). When
you deposit a Treasury check into your bank account, the Fed lowers the
amount in the Treasury's account and increases the amount in your bank's
account at the Fed. This process puts spending money into the hands of
consumers while building the liquidity of the banking system.

By financing stimulus payments in this way, it provides a tremendous
boom to the equities (stock) market as consumers buy the goods, services
and recreation they need without incurring more debt.

In the absence of a fully functioning financial industry, rescuing the
physical economy would simply be a process of determining the amount of
money needed. We don't have to go to outside investors. The US
Government, the Treasury and the Federal Reserve can create and spend,
at constructive points in the economy, all the money needed to keep the
economy from collapsing.

Not including the millions of jobs that need to be re-created and
sustained, there is $51.8 trillion in debt to be serviced. The amount of
money needed to rebuild the nation's infrastructure (roads, bridges and
dams) exceeds $1.6 trillion. Well-placed stimulus payments of $3
trillion may barely be adequate.


What You Can Do

You can contact your US Congressman or Senator and suggest this simple
concept: The US Government should instruct the Federal Reserve to buy $3
trillion in US Government Treasury Bonds at a rate that only covers the
Fed's cost of administration and credit the US Treasury's account for
the same amount. In addition, require the US Treasury to spend this
money solely for citizen stimulus payments, infrastructure building,
building food stocks and education.

Does it all sound too good to be true? Yes, it is true. It is that
simple. And it is powerful. The financial sector will have to reconcile
that their services of creating and lending credit (money) have been
displaced by $3 trillion - a feat they may be incapable of doing anyway.
An infusion into the economy of $3 trillion would go a long way in
helping existing borrowers make good on their debts without further
government bailout. Investors and bankers would avoid bad press that
comes from receiving free capital infusions from the public and for not
disclosing how it was used. This simple action will actually help save
the financial industry.

Bankers and financial investors may well try to limit the amount of the
stimulus package, or, through fear of being more permanently displaced,
lobby against this plan.

The equities market, materially based in the physical economy, stands to
gain tremendously from this plan. As most goods and services are
provided by publicly traded companies, an economic stimulus of $3
trillion would fill their cash registers and attract new capital for
growth and expansion. In addition, the plan would spin off more tax
revenues making it easier for the government to balance its budget.


The Future

Funding a $3 trillion stimulation package with virtually no cost to the
taxpayer buys time for the nation. The nation is at a crossroads as to
whether it will continue down a path that only uses credit as money, or
takes a path that begins to include much greater options such as those
discussed in this edition of Conscious Economics.

After receiving hundreds of billions of dollars in public funding, there
is an obligation on the part of the financial industry to support and
lobby for sharing the privilege of creating and distributing money with
the US Government. It may well be what saves their industry, not to
mention saving the fiscal ability of the US Government to function.

America, the US Government and the world cannot wait any longer for the
financial industry to figure out how to facilitate the physical economy
with its one and only approach - more debt to support credit as money.
Waiting for the financial industry to work through its problem loans
before it can focus on new credit with volumes sufficient to picking up
the physical economy is not good for them, the public, or the US Government.

------------
Chart 1
------------

Growth of Debt versus Growth of Gross Domestic Product

Little known is that the debt in America grows much faster than the
economy. Even less known is that this debt is a function of what it is
we use as money - credit.

The more money (credit) we use, the deeper in debt the nation becomes in
all sectors. The idea that money somehow magically exists and is loaned
out is untrue.

Banks have no money, they don't make loans and there is nothing on
deposit. A Bank's credit (what they owe depositors) is the nation's
principal form of exchange. And banks will not extend their credit until
someone becomes indebted to them first.

Making a poor means of exchange, bank credit must be re-loaned in the
capital and other debt markets creating a pyramid of debt that grows
faster than the economy.

In 1997, the GDP (Gross Domestic Product) grew by $700 billion, but the
debt grew by $1,200 billion. In 2007, the GDP only grew by $600 billion,
but the debt grew by $4,300 billion. While the sub-prime lending crisis
contributed to bringing this situation of imbalance to a head, it was
not the underlying reason for the financial crisis and the resulting
externalization of the physical economy.

The mechanisms are in place, albeit unconventional, for the US
Government, Treasury and Federal Reserve to virtually move beyond credit
as money. A key to rescuing a frightening decline in the physical
economy that feeds, clothes and houses everyone.

The concept of punishing the physical economy, while the financial
system works through trillions of dollars of nonperforming loans, may
not be in anyone's best interests, including the financial system's.

The shrinking size of the GDP, relative to the volume of debt needed to
sustain it, should have even the financial institutions and financial
investors seeking fundamental change in what we use as a means of
exchange. Our retirement plans, our physical status as a 1st world
country and our childrens' future hang in balance.

_____

Author(s) Disclaimer:

The banking and financial system, around which all of our instruments of
exchange, retirements and investments hinge, are no doubt in trouble.
This newsletter is for educational purposes only and not a
recommendation to attack the financial system or encourage default of
debt obligations. Our recommendations are that changes be accomplished
through constructive legislative process. The author(s) take no
responsibility for the use of this information. Every effort has been
made to ensure accuracy. The author(s) assume no liability for errors or
omissions.

Gisin comes from a twenty-year banking career culminating as senior
agricultural approval officer for one of the nation's top ten
agricultural banks. Since 1997, he has been a consultant to agricultural
enterprises in negotiating some of the largest debt settlements between
farm borrowers and their creditors. Understanding the monetary system
from the ground up, his understanding of how the monetary system works
is highly sought after by monetary reformers. He is author of "Farmers
and Ranchers Guide to Credit" and hundreds of published articles on
banking and finance. Since 2005 he is the publisher of Touch the Soil
magazine and lectures nationally on both monetary and food security.

Mike Krajovic has over twenty years of professional experience in
community and economic development. He has served on the boards of
numerous agencies, and leads a group of non-profit agencies in
Pennsylvania. He has expertise in community planning and implementation
using comprehensive local and regional approaches. As a social
innovator, he has been involved in all aspects of improving the quality
of life in a community such as education, agriculture, economics, land
use, environment, infrastructure, work force development, government,
tourism and finance. He holds a Bachelor of Science in Engineering and
Masters degrees in Business Administration and Social Artistry.



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