“The point is to accomplish something.
After all, only the entire world is at stake.”
Derrick Jensen
For Panjalat “Noon” Pungpin
May we leave an Earth for you, my granddaughter, that you
are able to enjoy as much as we have.
Table of Contents
Introduction
In 1961, President John F. Kennedy challenged America to put a man on the moon within the decade, and return him safely to Earth. I was 6 when he vocalized his vision, and 14 when the dream came true. In barely 8 years, what initially seemed impossible had not only happened, but had transfixed the world with wonder and awe.
President Kennedy’s vision arose for many reasons. It was a grand undertaking of exploration, probing uncharted territory. It was a response to advances in space travel made by Russia that threatened the U.S. with military inferiority. Creating the technology it would require would undoubtedly fuel a burst of innovation that would move American culture ahead faster than if it was left to develop on its own. But most importantly, President Kennedy understood that by setting a goal that required Americans to reach beyond their comfort zone, to go outside the box of traditional patterns, to stretch for an ‘impossible’ goal, he would lead them into a new paradigm, a new Golden Age.
Today, in 2009, we face a perfect storm of problems, unprecedented in human history. The American economy is in shambles, attempting to recover from many problems caused by the poor economic decisions of multiple generations. This in turn, has rippled into a worldwide ‘recalibration’. People across the globe are dying from starvation, extreme poverty, a lack of clean water, preventable and curable disease, slavery and war. Climate change, and its destructive potential, is on the mind of anyone who has access to media. Any one of these problems could take a world’s resources to solve. Trying to resolve them all at once seems as impossible as putting the first man on the moon in just 8 years.
Apollo 11 clearly showed that by taking continual, carefully planned steps and accepting the risks involved, even accepting that some may have to sacrifice everything for the project, a wholly new paradigm can supplant the currently accepted worldview. Multiple paradigm shifts will be required if mankind is to overcome today’s problems.
Many people across the globe sense impending evolutionary growth in that most precious of all resources, human consciousness. Indeed, it seems as if our consciousness must evolve, in order to deal with the great issues of today. The obvious question everyone asks is, “What will life look like after we solve these problems?” 2020 Vision offers a few paradigm shifts that address our major issues. Time is short, and we must evaluate options we may never have considered before. Please think about these solutions with an open mind. We must seek solutions that are outside the box, solutions that may at first seem ‘impossible’ or even ‘un-American’. Think about what is presented here; discuss these ideas with your friends and family. Come upon your own ideas and begin to share them with others. The only future that is certain is that inaction will leave us on the path we see before us today. Most of us can agree; that path is not one we want to tread. Open your mind, your heart and your soul and discover new ways of relating to each other and the world around you. Affirm your values, act on your inner wisdom. Together, let’s begin to craft a future we love.
Challenge: Economics
America faces economic issues of unprecedented scope. Ever-increasing public and personal debt, corporations focused on short term profits at the expense of people, stagnant wages over decades, rising health care costs, loss of adequate retirement plans, the impending shortage of resources, the outsourcing of jobs that creates rising unemployment, the need to get off an oil-based economy are but some of the major hurdles we must overcome.
As we try to make some sense of the way forward, we also must cope with the realization that we cannot continue to tread our current path. Life can never ‘go back’ to the way it was when we were growing up. Talking about the loss of American preeminence in the world is taboo; to avoid facing this reality, fingers are pointed at the other political party to assign blame for economic problems and military setbacks. Even though we are but 4% of the world’s population, we consume 30% of its resources and contribute 25% of the CO2 that threatens to bring climatic calamity. Discussion rages about when we will (or did) reach ‘peak oil’. No politician can get elected on a platform that advocates raising taxes, or one that prescribes cutting Social Security or Medicare benefits; yet can either problem be solved without taxation as part of the remedy? If you live in America, your life expectancy ranks #23 among industrialized nations. In the three years 2001-2003, 82 of the Fortune 500 paid no income tax on over $100 billion in profits during one or more years; indeed, those companies also reaped over $12 billion in tax rebates at the same time. In one of many examples, GE made $12 billion in one year, tax-free. In 1986 there were 13 billionaires in the U.S., in 2006 487, yet during the same 25 years, the average income in America, in inflation-adjusted dollars, rose just $800. The poorest 10% in America earn 1.8% of the total income in a year, and this ranks #83 in the world. In Japan, ranked #1, the figure is 4.8%. In America, 21% of children live at or below the poverty line. In Germany the figure is 10.2%, in France 7.5% and in Denmark 2.4%. In spite of these figures, European nations also appear to value time spent with young children more than we do, mothers receive paid time off after childbirth, as much as two years, and fathers as much as six months.
If we look back on the nation’s response to the Great Depression, the last time we faced economic issues on this scale, we find that President Roosevelt forged the New Deal and set the country on a course that would be the foundation for the economic success we enjoyed in the 1940’s, 1950’s and 1960’s. Looking back on what he had accomplished during his State of the Union address in 1944, he noted,
“We have come to a clear realization of the fact that true individual freedom cannot exist without economic security and independence. People who are hungry and out of a job are the stuff out of which dictatorships are made. In our day these economic truths have become accepted as self-evident. We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all, regardless of station, race or creed.”
He delineated these rights, including:
The right to a useful and remunerative job
The right to earn enough to provide adequate food, clothing and recreation
Freedom from unfair competition and domination by monopolies
The right of every family to a decent home
The right to adequate medical care
The right to adequate protection from the economic fears of old age, sickness, accident and unemployment
The right to a good education
These are the dreams parents have for their children, that they may enjoy these benefits from life. No one is arguing that the government should provide these benefits automatically, only that the opportunity is available and that government blocks the people and corporations who work against these ‘rights’.
We seem to operate under many fallacies:
The world wants to be like Americans
U.S. economic power can’t be beat
U.S. capitalism, favoring capital over workers, is best
Material abundance will make us ‘free
Military superiority will make us ‘secure’
We are the richest country in the world
Focusing on short term profits leads to the best outcome for all
Events of the last few decades have shown that all of these statements are false to some degree. Our society is becoming more rude and polarized every day. The majority of workers make less than workers thirty years ago, and have seen their retirement plans disrupted by corporations who no longer offer pensions and stock market bubbles that burst and take more than a decade of growth away in a matter of days. More and more health care costs are being shifted off the corporate balance sheet, onto the family budget. While the stated unemployment rate in mid-2009 hovers just under 10%, that only reports the people actively receiving government benefits; the true number of unemployed people is double that figure. Buying more stuff doesn’t make us happy, we cherish time with our family more. Yet we work more hours per year than any industrialized nation, including Japan. And we borrow to buy, having adopted the model of refinancing the house every few years to clear the balance from the pocketful of credit cards, and fuel the next round of consumption. We need to face the facts: it is morally wrong to borrow to buy material goods. It is much more expensive to pay later. The harm from both pollution during the manufacturing process and the relegation of so much of the planet’s finite resources to landfills is indefensible, and the Earth cannot support other nations, China and India in particular, living an identical lifestyle. This puts us in the difficult role of trying to change our behavior while at the same time, telling others they can’t emulate us.
Between government debt and consumer debt, the American economy is a ‘dead man walking’. We must disconnect from the oil-based economy. When oil is $70 per barrel, we send $840 million dollars a day out of the country to buy oil. Some of this money goes to friends, some not. Burning coal and oil for power and transportation has pushed the environment to the brink of collapse, and we can’t even predict today if we can stop calamity in time. Yet we continue to argue over 17 mpg vs. 23 mpg, and differences between the auto efficiency mandated by federal and by state (primarily California) governments. We continue to define economic progress and health by growth, more spending next year than this year. We ignore that focusing solely on profit and growth is very destructive for some aspects of living a large, productive and happy life, such as:
Education
Water
Seeds
Health care
Food
Economists don’t even have a word for less spending; they refer to it as ‘negative growth’. There is no recognition that there may be a point of ‘enough’, beyond which more is not necessary. We allow huge trade deficits to send our capital overseas, and make ourselves beholden to other countries, China, Japan and the United Kingdom in particular. What must we do, what must we overlook, so that these nations will continue to lend to us?
In fact, even our monetary system, the very creation of our money, relies on debt.
Money Creation
The year 2008 will be remembered as the year the sub-prime mortgage crisis shook America, and consequently, the world. The memory that stands out for me occurred when Secretary of the Treasury Paulson issued a 3-page demand for US$700 billion in funds. The cynical voice inside screamed ‘the Republicans are looting the treasury on the way out the door!’ while the reasoned voice quietly, calmly said ‘there just might be a need for this after all.’ I, like most Americans, had a woeful understanding of basic economics. I knew it was important to save for retirement, because Social Security may not exist in 2020, when I qualify for it under current rules, at least in the form it does today. I knew it was never intended to be the sole source of income for retired people, it was meant to be the third leg of a three-legged stool: Pensions, Savings, and Social Security. I knew that owning a home was the American Dream, and that the appreciation in that home, which had begun to rise by tens of thousands of dollars every year in some parts of the country, was the best way I had to save for my Golden Years. Pensions, at least company-funded pensions as they existed when Social Security was created, have long been cast aside for most Americans.
I understood about the time value of money, that money saved would grow because of compound interest to become huge sums decades later. This fact also explained why, in my home mortgage paperwork, it was explained in a section that no one ever reads that my loan of $378,000 would actually cost me $969,880 when I had paid it back, assuming the adjustable interest rate did not rise to it’s maximum. In that event, “Unlikely” the mortgage brokers all said, I would pay back $1,686,895 instead, having seen my monthly mortgage payment nearly double after just 5 short years. Many Americans took on this kind of variable debt, never expecting the worst to happen. This was part of the problem that arose in 2008.
I understood that making just the minimum payments on the credit card balances I carried ensured I would never have them paid off. Yet more offers for credit arrived in my mailbox, and often it was an offer I just couldn’t refuse. I knew that taxes were taking over 45% of every paycheck, between federal and state income taxes, social security and Medicare taxes, disability tax, sales tax, the list goes on and on. And I heard on the news that all levels of government, despite this degree of taxation, were having difficulties balancing their own budgets.
I also know from the pundits on nightly television shows that the mortgage crisis became a worldwide concern due to new financial instruments only recently invented, hedge funds, mortgage backed securities and derivatives. These new products ensured the banks made money, but managed to spread the ‘risk’ and consequently huge economic failure, all around the globe.
Beyond these facts, however, my knowledge of how money works was limited by the lack of education I received attending U.S. public schools. Our education system does not teach children about money. I remember in fourth grade, in Milpitas, California, how Friday was ‘deposit day’. We would bring our few coins to class, fill out envelopes and include our savings account passbook, and turn the whole package in to our teacher. The following Monday, we would get our passbook back, with the entry made for our savings deposit for the week. This was one teacher’s attempt to instill children with the desire and ability to save for a rainy day. I changed schools before entering fifth grade, and never encountered financial education again.
Indeed, if your education was as sparse as mine, you will be surprised at what I’m about to share with you. Let me ask: where does our money come from? First, let’s look at coins. The U.S. government mints coins, because the Constitution grants the government to ability to ‘coin money’. Now let’s look at bills, the papers that say “Federal Reserve Note” across the top. Also, because of the Constitution, printed by U.S. government printing presses, right? Despite saying ‘Federal’, the paper bills we use are printed by the government, but purchased for the cost of printing by the Federal Reserve. Those bills are not put into circulation by the government. The Federal Reserve, commonly referred to as ‘the Fed’, loans money to the U.S. government, charging interest of course. Only about 3% of the money supply in the U.S. today is in coins or paper money, the other 97% is nothing but an electronic entry into a database. The government used to tell us how much money was in the system, but they announced a change in that policy in 2006. We no longer know how much money is circulating today. That last report showed there was less than $1 trillion in actual bills and coins. Some of that is held overseas, outside the country, and some in jars, possibly in your home. The Fed also loans money to other banks, charging them interest at the lowest available rate. This allows local banks to lend to you and I, and charge us more interest, thus generating their income.
But let’s look even deeper into the system. Where does the actual money come from that the Fed loans to the government and to other banks? Where is the source of the money you borrow from your local bank to buy a car, or your dream home? Our economic system today is referred to as a ‘fractional reserve’ system. This means that we copy the activities of goldsmiths from the 1700’s. In those days, in countries where gold was the standard currency, it became difficult to carry your gold with you when you wanted to make a purchase. It was hard to keep it safe from bandits. It was heavy. For these reasons and more, people began to leave their gold with the local goldsmith, often the owner of the only safe in town. In return, the goldsmith gave them a paper receipt. This receipt entitled the bearer to redeem the certificate for a certain amount of gold. In this way, I could give you value in trade without having the hassle of carrying and separating the appropriate amount of gold for our transaction. Goldsmiths soon realized, however, that people liked this system so much, they rarely came back for the gold itself. In fact, the goldsmith rarely handed out more than 20% of the gold he had on hand. Soon, they were giving out more receipts than they actually had in gold. They were holding gold for only a fraction of the receipts they were issuing, to cover for redemption requests.
Our current monetary system works in much the same way. Banks used the gold standard into the twentieth century, but in the last several decades, our money is no longer backed by anything tangible; not by gold or silver, for instance. I tend to think of money as a receipt for my labor, that allows me to trade my work for some product of someone else’s work. If only it were that simple!
A bank is required to have assets amounting to less than 10% of its loans. If you deposit $10,000 into a 6-month Certificate of Deposit with your bank, it can now loan $100,000 to someone. Also, money is created when a bank offers you a loan. Your promise to pay is the ‘asset’ that the bank credits to your account, so that you can pay for your purchase. For example, let’s say you want to buy a new car. You get a loan of $30,000 from your bank. The bank needs to have $3,000 in available assets to cover your loan, and they credit your bank account with the loan proceeds. You go to the dealer and write the check for the $30,000 purchase. The dealer takes that to his bank, and once he has deposited the check into his account, that bank now has $300,000 that can be lent to another borrower, someone buying a home, let’s say. Did the bank have $300,000 in deposits to loan the homebuyer? No. Yet that amount of money has been ‘created’ just by making some electronic transfers and journal entries. In other words, the bank ‘creates’ money just by adding an entry to an account, out of ‘thin air’. In 2008, the two largest banks in America maintained an asset reserve of less than 2.5%, loaning over $40 for every $1 in assets. This points to the source of the problems that surfaced in 2008: As property values fell, banks were required to recalculate the value of their assets, and if they fell below the reserve threshold, they had to find some way to gain assets in order to have the ability to lend or else stop lending. Thus, the government thought that by giving ‘bailout’ funds to banks, they would start lending again. Most banks, fearing that the value of their assets would continue to fall, held onto the new cash and refused to lend again until they could feel confident they would avoid the same trap. In some cases, they used the bailout funds to buy other banks, other assets, or regrettably to pay executive bonuses.
The biggest problem with this method of creating money is this: the money required to pay the interest on the loan has not been created. In order to get the money you need for interest, someone, at some time, must default on his or her loans, allowing the bank to foreclose the property and resell the asset to someone else (creating new money through debt) or the banks must find someone new who will take out a new loan. In the first case, someone defaulting, are you comfortable in a system that requires devastating financial loss on someone else so that you have the money you need for your own debt service? And in the second case, that is the classic definition of what is commonly called a ‘Ponzi scheme’.
You can see another side of this as you examine the government bailouts of 2007, 2008 and 2009. The U.S. government can only have money to spend in two ways, by collecting taxes or by borrowing it. If it borrows from the Federal Reserve, the Fed has the money printed or makes the journal entries, and the federal government adds the new loan to the national debt. The Fed receives a bond in exchange, which it can hold, collecting interest, or sell anywhere in the world. Today the national debt is almost as much as the annual economic output of the whole country for an entire year. Luckily, no one expects us to ever pay off the debt; we only have to pay the interest on the debt, since the money was borrowed from an entity outside the government. Sadly, soon just the interest on the national debt is going to be more than we can afford to pay, leading to either wholesale service cutbacks, the end of entitlement programs like Social Security and Medicare, or inflation spirally out of control. If it taxes businesses or people, well seriously, when was the last time you voted for a politician because he said he would raise your taxes? Look at the difficulties California has gone through with its recent budget shortfalls, and a minority party who held the line against tax increases. Even years ago, when George H. W. Bush used the popular ‘Read my lips: No new taxes’ campaign slogan, he was then roasted during his re-election campaign for his failure to hold to that promise. And lastly, if the government borrows from sources other than banks, China for instance, it finds itself suddenly beholden to that power, just as a tenant is dependent upon the landlord for his continuing shelter. The government may be forced to concede a position in negotiations that have nothing to do with money. Looking the other way as China abuses its citizens’ human rights and ignoring the impact China’s use coal for power generation has on the global climate are two examples. The EPA says that on some days, 25% of the smog in the air above Los Angeles comes from China, yet America can’t afford to upset its biggest lender by complaining.
It is difficult to pin down exactly how much has been borrowed by the U.S. government in the last two years. Between the bailouts of AIG, Detroit automakers, Wall Street brokerages and banks, the TARP (Troubled Asset Recovery Program, originally intended to help homeowners avoid foreclosure but now used for other expenditures instead) and the War in Iraq, that figure is more than two trillion dollars. Spent outside the normal budget process, and without raising any taxes that we can see, the interest on this endeavor is well over $100 billion a year. I’m old enough to remember when $100 billion was a lot of money, and now that amount has just been added to our spending burden, on top of all the other government programs we love so dearly. Hurricane Ike was estimated to have caused $29 billion in damage in 2008 in Texas. Those of us, who were there, thought there was a lot of damage. The government bailout makes $29 billion seem small in comparison.
There’s another aspect of this that troubles me greatly. That annual $100+ billion dollars in interest is going to a for-profit entity. Interest on the entire national debt is near $500 billion a year now. Typically, a capitalist would say, ‘Of course, in return for the use of their money, they are owed interest.” But as we have seen, the Fed didn’t have $2 trillion laying around in some low-interest earning passbook savings account; they created $2 trillion out of thin air. How is it that they are ‘entitled’ to anything? Recent United Nations statistics show that 1% of the world’s adult population, about 37 million people, own 40% of all global assets. In addition, 10% of the people own 85% of the global assets. As modern economics (short sales, lending, currency exchange, derivatives and yes, even slavery) has fed the greed of some of the rich, the gap between rich and poor has grown at rates higher than the rate of inflation. The majority of the world’s population has no interest in the concepts of this book, because they live on less than $2 a day in income and don’t know where their next meal is coming from. Their families, for generations, have always been below the poverty level, and they have no hope of ever rising above it.
A Plan for New Money
So how can we address this issue? Before I lay out a plan, I ask that you suspend you tendency to reject, out-of-hand, ideas that seem initially to be preposterous. I’m going to ask that for one simple reason, the plan has been tried and proven on numerous occasions throughout history and around the world, but our lack of sound financial education has prevented us from being aware of this fact.
In this first example, let’s step back into history, specifically to 1860, as Abraham Lincoln is elected to be the first Republican President of the United States. The Republican Party had been created a few years before, in Kansas, to prevent the importation of slavery into that state. The party platform included promising homesteads to farmers and emphasized improving education and fostering industry and railroads. It also proclaimed that free market labor was superior to slave labor. Lincoln faced issues far beyond the one of slavery he is most identified with today. Indeed, in his first days in office, the federal government hung on the brink of bankruptcy. Congress didn’t even have the funds to pay itself. Yet by the time he was assassinated in 1865, his administration had formed and equipped the largest army in the world at the time, freed 4 million slaves, and launched this nation as the greatest industrial giant the world had seen. A continent-spanning railroad was constructed, the Department of Agriculture and the Bureau of Mines were created, higher education developed with the founding of the Land Grant College System, the Homestead Act was passed, beginning the flood of colonization into the Western states, and worker productivity increased by more than 50%. How did he manage to take a bankrupt government to such heights of accomplishment?
He created a monetary system referred to as ‘Greenbacks’. This was a paper currency, issued by the government in much the same way as the Fed creates money today, just by printing it. It used man-hours rather than gold as its basis. A quote from Lincoln is insightful, “The wages of men should recognized as more important than the wages of money.” Using about $400 million in Greenbacks to pay the Northern soldiers fighting the Civil War, that money flowed into the economic system and circulated as a measure of the value of labor and goods. Because it was not borrowed from outside the federal government, there was no interest to pay, interest that would have totaled 10 times the borrowed amount, or $4 billion, by the time it could have been paid off. It also put these funds into play without taxing the population. Lincoln’s economic advisor, Henry Carey, understood well the lessons of the American Revolution, when the fledgling country used a fiat currency to fund its war of independence from the official banker of the Colonies, the King of England. Using the Greenback to fund government payrolls and other spending, Lincoln enjoyed the prosperity that capital generates when it moves throughout a system without having to generate profits for a few from the labor of many. No one was shorted or cheated by this, banks continued to loan money and collect deposits, they just didn’t loan to the government anymore.
In a famous editorial in the “Times of London” newspaper, note the blunt opinion concerning the creation of Greenbacks outside the U.S.:
“It [America] will pay off debts and be without debt. It will have all the money necessary to carry on its commerce. It will become prosperous without precedent in the history of the world. The brains, and wealth of all countries will go to North America. That country must be destroyed or it will destroy every monarchy on the globe.”
While some have questioned whether Lincoln’s policy of printing money without any tangible backing caused inflation, it is clear that during wartime, severe shortages occur and that is what drove up prices. Thomas Edison was quoted in an interview in 1921, “If the nation can issue a dollar bond, it can issue a dollar bill…. The difference between a bond and a bill is that the bond lets the money broker collect twice the amount of the bond and interest as well…. Currency pays nobody but those who contribute in some useful way. It is absurd to say our country can issue bonds but not currency. Both are promises to pay, but one fattens the usurer and the other helps the People.”
The Constitution grants the government the right “to coin money”. Long ago we delegated that right to the private Federal Reserve System, retaining only the task of minting coinage within the purview of the government itself. As we have seen, however, the modern banking system collects interest for the use of money that is created out of thin air. There are no shareholders, or owners, or even depositors who have let their reserves of cash be used by others and need to be compensated. It was simply an entry in the ledger that created the money. The banks have no claim to interest, and even less claim to interest charged at rates of 18%, 21% and in some cases, 36% per year.
But can this idea work today, in our modern world? It already is, within the economic system of China. Shortly after Congress agreed to the $700 billion bailout requested by Secretary Paulson, China announced its own, a nearly $600 billion bailout. There were two primary differences between these bailouts. First, China didn’t have to borrow the money, so $600 billion is the end of it, they won’t be paying interest for the rest of time because of this spending. Secondly, they issued over half of the funds in the form of certificates redeemable for Chinese-manufactured goods, especially home appliances. Imagine that suddenly there is $300 billion flooding into the retail market, earmarked for refrigerators, washers and dryers, air conditioners, at a time when less than half the population has these items? There is the initial sales increase, and then the wages paid to workers to manufacture the items, then the added spending those workers now undertake since they have better jobs, etc. The other half of the Chinese bailout is funding infrastructure improvements, much as the New Deal of President Roosevelt helped the U.S. following the Depression of the 1930’s. Again, however, Roosevelt borrowed the money and began what is now a national debt that far exceeds our ability to repay.
Before you discard this idea as fanciful, realize that to a small degree, it is already happening in the U.S. Note excerpts from an article in USA Today, 10 April 2009:
Workers with dwindling wages are paying for groceries, yoga classes and fuel with Detroit Cheers, Ithaca Hours in New York, Plenty in North Carolina or BerkShares in Massachusetts. About a dozen communities have local currencies, says Susan Witt, founder of BerkShares in the Berkshires region of western Massachusetts.
Under the BerkShares system, a buyer goes to one of 12 banks and pays $95 for $100 worth of BerkShares, which can be spent in 370 local businesses. Since its start in 2006, the system, the largest of its kind in the country, has circulated $2.3 million worth of BerkShares. In Detroit, three business owners are printing $4,500 worth of Detroit Cheers, which they are handing out to customers to spend in one of 12 shops.
During the Depression, local governments, businesses and individuals issued currency, known as scrip, to keep commerce flowing when bank closings led to a cash shortage.
How is this different from the U.S. government printing legal tender without resorting to borrowing? But for scale, it’s no different. And it works. However, it is really but a Band-Aid placed over a wound that requires innovative, cutting edge surgery.
“With computerization, robotics, advances in genetics and food growing, we have the potential to turn the planet into a sustainable ecosystem capable of supporting all. This is not a time to be saddled with an 18th century money system designed around the endless rape of the planet, or based on the robber baron mentality and flawed with Unrepayable Debt. A new monetary system with enough government control to ensure funding of vital issues could unlock the creative potential of the entire nation.”
Roger Langrick, Canadian money reform advocate
Actually, Mr. Langrick is wrong. Such a change in our monetary system could unlock the creative potential of the world. Let’s look in detail at how this might appear.
The proposal is this: that the Congress take back the right ‘to coin money’ as granted by the Constitution. The Federal Reserve can either be disbanded, or can be absorbed into the federal government structure, becoming a function of the Treasury Department. This is what most Americans believe is the case, mistakenly, already. An independent audit of all banks, including those that make up the Federal Reserve System (commonly referred to as ‘the Fed’), might find that the entire system is bankrupt anyway, due to the current state of the derivative market. Under the concept of ‘too big to fail’ and the coverage extended by the Federal Deposit Insurance Corporation (FDIC), banks would be placed into federal receivership if that were true.
There are several advantages to this approach. For one, it would actually increase the transparency and accountability of the economic engine. Today, people around the world wait with bated breath as the Fed convenes its regular meetings, and makes pronouncements bearing on the strength or weakness of the economy and what the Fed intends to do to manipulate the situation. It is always unclear, although the Fed expresses the desire to benefit the people, who actually sets the goals the Fed is striving to achieve when it adjusts interest rates, and who ultimately benefits. The Fed is a private, for-profit entity that profits from loaning the U.S. government money that it doesn’t have to begin with, money conjured out of thin air.
No one votes for the members of the Fed, although the President appoints the Chairman of the Fed. We have been taught to believe that there is an unavoidable ‘business cycle’ inherent in our system. Money becomes plentiful, lots of loans are made, the new money buys goods and services and life seems good. But eventually there is too much money in the system, and by raising interest rates and making new loans difficult, people experience problems, jobs are lost, loans go into default and foreclosure, homes revert to the banks that offered the loans originally (to be resold for profit by the bank) and the process begins again. If however, interest was a fixed (and not usurious) amount, and the creation of new money was constrained instead by other limits, no such business cycle is required to allow the economy to function. Everyone would know what limits are in place, what to expect, and we could plan our business and personal lives accordingly. The limits would be set by lawmakers in public debate as now occurs within our democracy. And ultimately, if we are unhappy with how the process is being administered, we can vote the rascals out!
Many people express the feeling that the government is not to be trusted. They feel the government is not responsive to the people, and usually have a valid reason for feeling this way. We will look at some ideas to help alleviate these misgivings shortly, but first, let’s look at them within this particular context. If we leave the system working as it does today, we allow big business (large, often multinational, corporations and monopolies) to:
buy competitors, the media and even the government itself. Corporate and political action committee (PAC) campaign contributions dwarf the contributions made by individuals to political candidates
lend money to consumers, often at high interest rates, and quickly foreclose on property when loan repayments are late. The consumer loses whatever payments have already been made, counts his or herself lucky if they can avoid paying an income tax on the cancelled debt, and the company or bank gains possession of an asset for free that it can now resell
control who can or cannot apply for loans
loan money to hedge funds, that manipulate all types of securities markets not only through tactics like short selling and volume trading, but by creating new products like derivatives, which few people understand or can adequately price
On the other hand, we trust the government to:
wage war
keep us safe
contribute to our general welfare through various public programs that range from building dams and roads to managing parks, Social Security and Medicare
Why won’t we allow government to control the money supply? The current system allows a for-profit enterprise to ‘print’ money at the people’s expense. That isn’t fair, it’s greed. What is wrong with our system today is not that there is borrowing and lending, but that there is interest that benefits for-profit banks that gave up nothing of their own to earn it. It only makes sense to allow the government to bring transparency and accountability to this process.
So what are the mechanics of how this new system could work? Let’s use the term ‘Greenbacks’, just because that is what was used before, during the Civil War, with such great success. For the purists among us, let’s first commission an independent audit of banks today. Again, as we have seen, many if not most are already bankrupt, and staying in business using smoke and mirrors. A few of the largest are so heavily invested in derivatives, that if that market collapses they will fall in a day. And just as a note of caution, since the collapse has not yet happened as this book is being written, the total derivatives market was valued at the end of 2007 at six hundred trillion dollars (Wikipedia), many, many times more than the entire money supply on Earth. There is no way that any bank will be bailed out if these bets fail.
Any bank that fails the audit should be handled according to our current system, and placed under the control of the government. Some people object to ‘nationalizing’ businesses, and the term ‘socialism’ is considered to be a slur in many circles. But if you actually parse what happened during the bailouts of 2008 and 2009, where the government gave banks and financial institutions (and automakers) money to stay solvent in return for some amount of stock and/or control, many businesses are at least partially nationalized today. In each case, the decision was deemed to be the most appropriate one to make at the time, either because the business was ‘too big to fail’ or because the political and economic ramifications of bankruptcy were expected to be huge.
If you are old enough, you may remember the U.S. Postal Savings Service (USPSS). From 1911 to 1967, the USPSS, an agency of the government, provided banking and savings services. It had been established to encourage immigrants to stop holding their money under the mattress or in jars at home, had a low ceiling on the amount an account could hold, and paid a minimal amount of interest. The idea of the government holding the money felt more ‘secure’ to many immigrants, who didn’t trust banks, either because of bad experiences with them in their homeland or because (especially in later years) of the difficulties with banks that occurred during the Great Depression. It was those issues in the 1930’s that led to the creation of the FDIC, among many other guarantees. The USPSS became unnecessary due to competition from banks, when banks raised interest above the rate being paid by USPSS, and people became confident that FDIC insurance would cover any losses resulting from a bank failure. This confidence has developed over time, as each year many (usually local) banks fail and FDIC makes all depositors whole. If the government were to take over banks that are insolvent, this would provide the infrastructure needed to revive the USPSS. Less than $1 trillion would buy the ‘book value’ of all U.S. banks today, the value of all their physical assets like land, buildings and office equipment, and less than $2 trillion would buy all bank stock. If the government were to just convert a few of the larger bank networks, there would be enough facilities to enable every citizen access to deposit, checking, savings and loan services.
Let’s look at another aspect of this concept: creating Greenbacks. Under the current system, the government issues bonds, basically IOUs, and the Federal Reserve buys them. The Fed prints paper money (Federal Reserve Notes) or makes an entry into a computerized accounting system, to allow the government to have constructive receipt of the proceeds of the sale. The bonds include a stated interest rate, to be made at regular intervals over the life of the bonds. The Fed may hold the bonds or sell them to others, including many governments around the world. China, Japan and the United Kingdom buy many of the bonds that are sold overseas, today nearly $1.7 trillion of our national debt is held by foreign entities.
The government, under the new system, would print the Greenbacks and begin to pay the interest and to redeem the bonds using the new currency. There would not need to be any adjustment in value, exchanges would be made dollar for dollar across the board. Interest would be paid in Greenbacks, and when the government needed to pay for goods or services, Greenbacks would be used. The government could redeem all bonds as they come due, or in a better scenario, could redeem all Greenbacks immediately, thereby ending the tyranny of paying interest (currently nearly $500 billion each year). There should be no problem with either method; bondholders know they run the risk that any bond may be called early. It certainly would be helpful to our economy if we could eliminate the debt service we now endure.
To put this in perspective, let’s look at 2005. That year, the total federal income tax collected was $927 billion. (Look at how that compares with the figures being tossed about in 2008 and 2009 during the bailout) The interest on federal debt in 2005 was $352 billion. The total assets in the form of bank credit equaled $7.4 trillion. Interest on that debt, paid by citizens and corporations (assuming 5% average interest rate, actually lower than it would be in reality) equals $370 billion dollars. If we eliminate the national debt and the need to pay that interest, let interest from all the bank loans flow to the government after the banks have been declared insolvent, and assign half that interest received to cover the costs of maintaining bank branches around the country, the taxes needed for that year’s federal spending would equal $390 billion. The total money supply in 2005 was $9.7 trillion. That means, if the government just printed the money needed instead of taxing individuals, the inflation rate would be 4%, less than the money supply grew in 2006! [Even though the M3 measure of the total money supply is no longer released by the Fed, economists compiling figures from various sources reported an unofficial result for 2006 that shows the supply increased 13%.]
Also in 2005, America’s Gross Domestic Product, the output of our economy, was $12.5 trillion, but 12% of the population was not working, either receiving unemployment benefits, long out of work, or under employed (working part time, not full time and not by choice). If we had enjoyed full employment the government could have spent $1.7 trillion in new money to pay the unemployed to work on new projects without increasing price inflation. Using government spending to ensure full employment means that more money is available to purchase goods and services. As long as new money creates demand, it does not create price inflation. Also, according to the UN, $80 billion would be enough to cut worldwide poverty and hunger in half, achieve universal primary school education, cut the under 5-year old death rate by 2/3, cut maternal death in childbirth by ¾, begin to reduce HIV/Aids and gain access to clean water for half the 1.2 billion who currently lack it. Wow. Add to that the concept, which the U.S. actually has been trying to act upon in recent years but can’t get agreement from the banks, of forgiving third World debt so that developing countries can spend their money on their own people instead of debt service, and we begin to rehabilitate the perception of America around the world. Imagine doing all of this and having no income tax at the same time! A 1997 UN report stated that if relieved of annual debt and interest repayments, the money freed up in Africa alone would save the lives of 21 million children and provide basic education to 90 million women and girls in the first 2 years. None of the Third World debt, totaling $2.2 trillion now, began life as real money owed to anyone. It was brought into existence out of thin air. No one loses anything by taking it off the books. Let the banks carry a permanent account in the amount of the debt forgiven, so that they don’t see their ‘assets’ reduced impacting their ability to lend new money to others. Or as we are offering in this paradigm shift, get the banks out of lending altogether.
Since some of the money could be spent in ways that generate income: credit that returns interest, housing projects that collect rent, purchasing existing adjustable rate mortgages that are set to adjust upward and freezing the rate at the initial low level and collecting the interest on behalf of the people, there would actually be more money available for the government to spend on new projects. There is a great need right now for the government to fund projects relating to the climate crisis, for example. Or the government might want to remove some money supply and lower inflation even further. If funds are used to put unemployed people to work in a ‘full-employment’ program that creates new products and services, inflation will not be a factor even if more money is ‘printed’ by the government. Demand increases as supply increases; therefore there is no inflation.
Now let’s go back to something mentioned in the example from 2005: government loans. If the government were to take over the banks, either through receivership of those that are insolvent, by buying up all their assets using Greenbacks, or by buying all their stock and becoming de facto owners, all loans would be taken over at the same time. Subsequently, the interest being paid on the loans would come into the Treasury, instead of the banks. Loans could all be adjusted so that the universal interest rate charged is 5%. Part of the issue surrounding for-profit banking is usury, charging excessive interest. Unfortunately, the very people who suffer the most from high interest rates, the poorer people of our country, are the very people who pay the highest interest rates. When interest rates are above 20%, and on many loans today this is the case, the borrower pays back the original loan amount several times over before the payment cycle is complete. Indeed, it is by charging interest rates that are exorbitant that some employers manage to keep slaves in debt bondage, never earning enough to overcome the compounded interest that accrues on what was originally, a very small loan.
The government has used Small Business Administration (SBA) to issue loans for years, allowing borrowers who would not otherwise qualify for loans from banks to obtain funding at below market interest rates. These SBA loans are also made to citizens who have lost homes or businesses during natural disasters, and often have temporarily become unemployed due to the event and therefore fail to qualify for a ‘normal’ loan. As we see the difference that is made in the lives of our neighbors from SBA loans, and on the poverty-busting success of micro-finance (small loans to poor people with minimal interest rates, especially to women in developing countries) we must explore this avenue to overcome the pockets of poverty and despair that exist today within our own nation.
There would still be a useful place for private banks, insurance companies, finance companies and broker/dealers that would be offering loans and making money by borrowing from the government at low rates, and lending that money out at higher rates. Many of us actually think this is how the system works already! The big difference under this new system is that we would be off of the ‘fractional reserve’ system, which allows banks to lend money they don’t have. After the switch to Greenbacks, only the government can lend and create new money. All private lenders would be subject to a 100% reserve requirement, meaning they had to be lending their own money. At last, the idea that interest is justified because of the risk of loss and the loss of use of money will be true.
If you are still concerned about the government taking over loan servicing, note that there is more money invested today in government bonds ($12 trillion) than has been borrowed through bank loans ($7.5 trillion). As the government bonds are redeemed, the investors will be looking for new ways to get that money earning interest, and banks could sell some of their loan portfolio to individual investors, rather than let the interest flow into the Treasury.
When the government is the lender, it would continue to service the loans once they have been funded. The practice that has been developed only in recent years of bundling just a fraction of many assorted home loans into a ‘mortgage-backed security’ will cease. In hindsight, many believe that this practice was a sly attempt to hide the many bad loans that were being issued. If the bank has issued a ‘no doc’ loan, one where very little is known about the borrower, and it tries to sell that loan in one piece to someone else (and avoid the risk of default) the buyer might ask hard questions about the borrower, questions the bank may be embarrassed or unable to answer. The ‘no doc’ loan, short for ‘no documentation’, is just another example of how banks have gotten used to the idea that the government, or in other words: the taxpayers, will always make sure they are free of the risk of bankruptcy if they make bad loan decisions. There are countless cases where borrowers making $35,000 a year, took out home loans of hundreds of thousands of dollars, just by signing an application that stated they made enough to handle the loan payments. I personally know of a loan made to someone who made $37,000 a year as an auto mechanic and the loan amount was $1.1 million. Borrowers justified this by assuming the price of the home would continue to rise, and their income would also rise, and after a few years they could refinance into a new loan with lower interest rates and smaller payments. No one expected that home prices would fall. Banks had discovered a way to move the risk of default off their own shoulders onto someone else’s, and used the creation of mortgage-backed securities as a way to prevent investors from being able to identify any particular loan. They happily collected their closing fees and doc fees and fees for originating the loans, and then fobbed the ‘toxic’ loans on investors worldwide. Thankfully, the new paradigm can be constructed to return us to lending sanity, to limit lending to those who qualify to accept the commitment of repayment, and to avoid the pitfalls and temptations that result from selling off loans to third parties.
When people think of the government running any project or performing any task, there is a fear that it will not be run well. Often, the state-run Department of Motor Vehicles (DMV) is thrown out as the prime example of government-controlled mayhem, at least in California. ‘Do you want your bank run like the DMV?’ one might ask.
Actually, no I don’t. At least not like my own experiences at the local office, with its long lines. But the people who I have worked with at the DMV office know what they are doing, are pleasant, and always very helpful. Really, it’s not that the DMV is trying to make my life difficult, they simply seem to be understaffed so that I have to wait some amount of time for service. The staff is only enforcing regulations, not making them up as they go along. If I have an issue with how a situation is being handled, I can complain; to my legislator if I think the law is wrong, and to the manager of the center if I feel a staff person has serviced me poorly. If enough people were available to help me without a long wait, I’d be perfectly happy. Herein lies the clue; government workers are just like you and I. They want to do a great job, but they don’t set the budget. I don’t want to learn everything about motor vehicle laws, so I depend on them to help me, and they do. If the government would approach the business of banking like any private bank would, and ensure that adequate attention is being paid to the front of the house, we will be unable to distinguish between a government-run bank and one that is privately operated. The IRS tried an experiment, allowing subcontractors to operate part of its collections work. It quickly found that the subcontractors were less efficient than the IRS’s own division, and canceled the contract. Perhaps because non-governmental entities are for profit it makes them less cost-effective. And we all know, in the case of franchise businesses for example, that one branch of a business can run efficiently and with great customer service, while another branch should be shut down. Just being a function of government does not mean it is inherently inefficient.
The government would also be able to manage the banking system more efficiently under this new system, as there would only need to be one clearinghouse for all transactions. The ability to ‘float’ a check would go away; meaning as you make a deposit into your account, there is no need to wait for the various banks involved to transfer money back and forth to settle accounts. Losing this level of complexity would save much of the expense of handling the basic banking services. Every transaction clears immediately, utilizing technology to increase efficiency while lowering expense.
As part of our overhaul of the financial system we must rescind Executive Order 12631, signed on March 18, 1988 by President Reagan. This order, not passed by Congress, created a team formally known as the Working Group on Financial Markets, commonly called the Plunge Protection Team (PPT). In part, it is charged with “recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence”. The actions of the PPT are taken in secret, and can only be deduced or pieced together in hindsight. Few statements verify the fact that the PPT exists, but chief among those are comments made by the former advisor to President Clinton, George Stephanopoulos. He told “Good Morning America” on Sept 17, 2001:
“There
are various efforts going on in public and behind the scenes by the
Fed and other government officials to guard against a free-fall in
the market, what is called the ‘Plunge Protection Team.’
The Federal Reserve, big major banks, representatives of the New
York Stock Exchange and the other exchanges have an informal
agreement to come in and start to buy stock if there appears to be a
problem. They acted more formally in 1998, during the Long Term
Capital crisis, and propped up the currency markets. And, they have
plans in place if the markets start to fall.”
The PPT is authorized to use U.S. Treasury funds to rig markets in order to ‘maintain investor confidence’, keeping up the appearance that all is well. Manipulation is also effected by a private fraternity of big New York banks and investment houses known as the Counterparty Risk Management Group (CPRMG), which was set up to bail its members out of financial difficulty by colluding to influence markets, again with the blessings of the government and to the detriment of the small investors on the other side of these orchestrated trades. Market observers often see the large investment houses, Goldman Sachs for example, stepping into the futures markets and making huge purchases that lead the overall market to swing in a different direction. In other cases, banks that have had short-term liquidity problems manage to borrow large sums of money ($12 billion in one example from several years ago) from anonymous lenders outside the normal channels banks use for their borrowing. I feel we would all prefer that our stock and commodities markets operate with transparency and fairness. Lately, more and more people have become disillusioned with investing in these markets, due to the large volatility generated in large part by the gambling, day-trader mentality that has become such a prominent force in driving pricing. We need the market to return to its original concept: that it allows individuals to buy a portion of a business that they believe will earn money over time by having a great product or service, not through speculation or manipulation.