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A Basic Lesson in Economics
Heinberg's analysis of the 2008 economic collapse starts with an introduction to classical economic theory, as outlined by Adam Smith, Ricardo, Malthus and Marx. He goes on to describe the "financialization" of the US economy that occurred in the 1980s, the various financial derivatives investment banks and brokers devised to entice investors, and the financial deregulation that led to a decade of worsening "debt" bubbles. Beginning with the dot com boom in 2000 (quickly followed by the real estate boom and the subprime/derivative boom), large amounts of borrowed money was speculated on supposed growth industries, which plunged the entire economy into recession when they collapsed.
Heinberg talks in detail about the TARP bailouts and the secret $12.5 bailouts Bernie Saunders exposed in December 2010. He stresses that have merely postponed total economic collapse. They are incapable of restoring economic expansion to pre-2007 levels.
The End of Growth in China
He then presents a painstaking analysis of why the China's current phenomenal growth rate (7-8% per year) and somewhat slower growth rates in India, Thailand, Malaysia and Vietnam also represent "bubbles" that will eventually pop and cause severe recession. As well as outlining the absolute limits resource scarcity will impose on Chinese growth, he argues that China is pursuing the same economic strategies that caused the Japanese economic miracle to collapse in the 1990s -- resulting in a two decade long recession.
Chinese economic growth is entirely dependent on cheap coal and electricity, and Heinberg lays out strong evidence that world coal production peaked earlier this year. This means coal will soon undergo the same steep rise in prices that oil did after oil production peaked in 2005-2006. He also shows how the current Chinese growth spurt is driven by same economic policies -- an export driven economy where Chinese consumers must sacrifice and save to protect export industries -- that drove Japan's post-war growth. The outcome of such policies is to crush consumer demand. This, in turn, results in rapid economic contraction when global demand for exports drops.
Heinberg concludes by describing China's current real estate bubble (which translates into hundreds of empty malls, factories and cities), which was created by two factors 1) a stimulus package the government enacted when the 2008 global collapse triggered a drop in Chinese exports 2) a preference the Chinese middle class show for real estate investments, owing to a notoriously unreliable (and unregulated) share market.
As China is one of New Zealand's trading partners, we're already seeing evidence that the Chinese growth rate has peaked and is beginning to decline. There has been a significant drop in Chinese demand for our dairy and lamb exports -- dairy exports and prices have declined by 10% and lamb by 20%.
Life in a Steady State Economy
Obviously the end of economic growth and continuing loss of wealth and jobs means that people in most industrialized countries will be forced to massively downsize their lifestyles. However, as Heinberg emphasizes, there are a number of ways government can intervene to make this transition less painful. He gives examples of countries (Japan, Sweden, Denmark, Japan, Norway) who openly acknowledge that they have Steady State economies and enact policies to ensure their populations are looked after as the global economy massively contracts. Sweden, for example, has transformed depressed industrial towns into "ecomunicpalities" by "dematerializing' their economies, making them fossil fuel-free with organic farming, public transportation and alternative energy projects -- while simultaneously fostering social equity.
Although Finland and Germany had modest GDP increases last year, they are adopting similar measures to protect their citizenry as global economic wealth continues to decline. In addition to preserving scarce natural resources and reducing carbon emissions, these measures also address the serious income inequality that is so harmful to the health of communities. They include, among others:
Taxing resource depletion, pollution, speculation and financial transactions instead of income
Legislating limits on income inequality
Government subsidies to help sustainable businesses become competitive with non-sustainable ones
Pigovian taxes on corporations equal to the negative, externalized costs they impose on society.
Defining property rights in a way that guarantee citizens rights to clean air and water
Breaking up investment banks, and eliminating of debt-based lending (to government, businesses and individuals) through the creation of national and state banks
Government support for cooperatives and local currencies
Downgrading the World Bank and IMF to clearing houses
Corporate law reform
Replacement of GDP with the Gross National Happiness Index
Publicly subsidized health care
Fairy Tale Economics
(November 24, 2011)
This is the first of three articles debunking the myths we are fed about the global economic crisis.
Unpacking the Lies About the Global Economic Crisis
The only way I know to make sense of the global economic crisis is to assume, until proven otherwise, that everything Obama, Wall Street and the corporate media tell us is a lie. The economy Obama, US Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke talk about is a fairy tale economy that bears no relation whatsoever to the real world. Obama, like most western leaders, makes out that the only way to "solve" the debt crisis is to tighten our belts and destroy the middle class via wage, benefit and social service cuts. Thanks to Occupy Wall Street, a new narrative about the global economic crisis is beginning to emerge. And guess what? Once people get a clear view of what's really happening, they come up with some fairly straightforward and painless solutions.
Debunking the Fairy Tale:
1. When is a recession not a recession? When it's really a deflationary spiral.
Obama, Geithner and Bernanke keep telling us the current economic crisis is a recession. It's not. It's really a deflationary spiral. Deflation occurs when the economy shrinks. The US economy is clearly shrinking, just as Japan's economy has been doing for the last two decades. The US economy lost 10-20% of its real wealth in 2008 and has been slowly shrinking ever since. Consumer buying power continues to decrease, as Americans deplete their savings and experience wage and benefit cuts. Because people have less money to purchase goods and services, many businesses have quit producing them. This, in turn, causes more workers to be laid off.
2. The $15 trillion debt taxpayers owe Goldman Sachs represents money that never existed.
Contrary to popular misconception, the government doesn't issue money. Nearly all new money is created by private banks when they generate new loans. On average, most banks have only 7% of a new loan on deposit. The rest is generated out of thin air. This system started in 1694 when the Bank of England was created.
The federal government came by most of the $15 trillion debt by assuming -- through bailouts and other means - the toxic debts of Goldman and other major investment banks that were technically bankrupt. They were bankrupt either because they created trillions of dollars of toxic debt (out of thin air) for subprime mortgages for over-valued real estate that could never be repaid or because they bought this toxic debt from other banks.
The other thing Obama doesn't tell us is that there are still billions of dollars of toxic debt (again created out of thin air) that have yet to be "written down" (i.e. "written off" and subtracted from banks' balance sheets). In 2008, trillions of dollars of toxic debt that wasn't transferred to government balance sheets was hidden by transferring it from weak banks to strong ones.
Any business other than a bank would be required to deduct these bad debts from their earnings in their annual report, when they declare their profits, dividends and CEO bonuses. Yet to protect the stock prices of bank prices, Obama colludes with Wall Street to keep this information secret.
3. The true unemployment figure.
Obama et al tell us the US unemployment rate is 9%. It's not. According to the Department of Labor's own numbers, it's really about 16% - or one out of every six Americans.
4. The US economy is in recovery -- NOT!
For more than a year Obama and the corporate media assured us we were in recovery. They seem to have backed away from that claim in the last few months. There has been no improvement whatsoever in the unemployment numbers, and bankruptcies and foreclosures continue to increase.
5. The difference between $700 billion and $12.5 trillion.
The figure we were giving for bank and corporate bail-outs was $700 billion. The true number, as Senator Bernie Saunders exposed last December, was $12.5 trillion. The Federal Reserve (using taxpayer money from the US Treasury) also issued billions of dollars in bail-out loans to foreign banks and car makers and individuals (including my New Zealand bank Westpac -- thanks for that). All this was done unconstitutionally without Congressional knowledge or approval. In fact, the Obama administration filed suit in federal court to prevent the release of these records and lost.
6. The US economy is shrinking, rather than growing.
Obama et al tell us that the US economy has started growing again, by a little under 1% per year. It hasn't. According to John Williams (at http://www.shadowstats.com) it actually shrank by 1% in 2010
7. It will be easy to repay global debt once growth returns to pre-2007 levels. Yeah right.
Repaying the $100 trillion debt (total of all government, household, bank and business debt) when total global wealth is $60 trillion is mathematically impossible, even with global growth levels of 3%.
Global growth (even with the help of China and India) will never return to pre-2007 levels because of fossil fuel scarcity and the skyrocketing cost of energy. The availability of cheap fossil fuels has allowed mankind a century of undreamed of scientific and technological innovation. All the cheap oil and natural gas is gone now. It's clear from Obama's energy policy, which promotes and supports risky high cost extraction techniques (deep sea oil drilling, fracking and tar sand extraction), that the President knows this. He just chooses not to share this information with the American public.
8. Guess who's printing money?
Obama et al tell us that "monetization," in which the federal government prints new money to generate new jobs and infrastructure programs, is out of the question because all "monetization" does is create hyperinflation. This is actually two lies rolled into one. Not only does "monetization" not create hyperinflation, but the Federal Reserve has been secretly "monetizing" the US debt since 2009. As of last week the Federal Reserve (using newly created US Treasury dollars), not China, is the largest holder of US debt. See http://cnsnews.com/news/article/fed-now-largest-owner-us-gov-t-debt-surpassing-china
Guess Who’s Printing Money?
(November 29, 2011)
This is the second of three articles debunking the myths we are fed about the debt crisis.
Ben Bernanke's Secret Monetization Scheme
The government finances its $15 trillion debt by selling US Treasury Bonds. As of November 2011, China is no longer the largest holder of US Treasury Bonds. The US taxpayer (via the Federal Reserve) is -- see http://cnsnews.com/news/article/fed-now-largest-owner-us-gov-t-debt-surpassing-china. Although the Federal Reserve is a consortium of private banks, they use US Treasury or taxpayer dollars for bailouts and to buy Treasury Bonds. As of their latest report, the Federal Reserve now owns (on behalf of US taxpayers) $1.665 trillion worth of US Treasury Bonds. China owns $1.1483 trillion of US Treasury bonds. The other $12.2 trillion of US Treasury Bonds are owned mainly by investment banks and pension funds.
Since the US government already runs at a deficit, it's unlikely the Fed used $1.665 trillion in cash to purchase these Treasury Bonds. More likely, the $1.665 trillion simply represents a number on a balance sheet, as when Goldman Sachs creates money out of thin air to generate a new loan. When the government creates money to cover its operating expenses (in this case to pay the interest on its $15 trillion debt), the technical term is monetization. It's derisively referred to as "printing money," even though the new money is created electronically through a balance sheet entry.
The US Treasury (which gave the money to the Federal Reserve) has simply added $1.665 trillion in new debt to its balance sheet to purchase $1.665 in Treasury Bonds. These funds, in turn, were used to make interest payments on the $15 US debt -- to investment banks, China, Saudi Arabia and other countries, pension funds, and a few individuals.
Borrowing from Goldman to Pay Off Goldman
This is ironic, given that the federal government came by most of this debt by assuming the toxic debts -- by bailouts and other means -- of investment banks that were technically bankrupt due to large numbers of subprime mortgages that can never be repaid. I try really hard to visualize this, but my mind boggles at the sheer insanity. In 2008 and 2009, the US Treasury and Federal Reserve borrowed money from Goldman Sachs and other investment banks, which the banks created out of thin air (*see below), by selling them Treasury Bonds. The government, in turn, used this borrowed money to bail them out with free (0%) loans. The US government now owes Goldman et al interest payments (of 3-5%) on the Treasury Bonds they sold them.
QE-1, QE-2 and QE-3: the New Wordspeak
Neither Bernanke nor Obama will admit that the US Treasury and Federal Reserve are monetizing the federal debt. This is due to a bipartisan taboo on monetization because it supposedly leads to hyperinflation. A year ago, Benanke announced QE-2 (QE-1 occurred during the bailouts), that the Federal Reserve would use government funds to purchase $700 of US debt (Treasury Bonds). However he used the term "quantitative easing (QE)," which supposedly doesn't cause hyperinflation, as opposed to monetization, which does. This is just wordspeak. It deflects attention from a major crisis in democracy. Obama and the Federal Reserve are monetizing the US debt by stealth, without the knowledge or consent of the lawmakers who supposedly represent us.
The truth is that the US Treasury and Federal Reserve have been monetizing the US debt since 2009, when billions of dollars of buyer-less Treasury Bond sales began appearing on Treasury balance sheets. When Bernanke announced in August 2011 that there would be no QE-3 -- that the Federal Reserve would "hold off" on any more quantitative easing -- he was fudging the truth. According to their own reports, the Federal Reserve's purchase of Treasury Bonds started in 2009 and never stopped.
Good and Bad Monetization
Ellen Brown and other non-corporate economists challenge the claim that monetization causes hyperinflation (see her book The Web of Debt http://www.webofdebt.com/articles/monetizethis.php). Inflation occurs when the amount of money in circulation If anything, debt creation with an interest burden injects more "money" into circulation and is more prone to cause inflation. Unfortunately Obama and the Federal Reserve seem to be engaged in the wrong kind of monetization, which creates new money to make payments to investment banks (we all know where that ends up). The Japanese government has been printing new money to bail their banks out for two decades, and their problems with debt and deflation just keep getting worse.
With the other, good kind, of monetization, government creates new money that it spends directly into the economy to create jobs and repair infrastructure. Owing to the Eurozone debt crisis (triggered in large part by anti-austerity and OWS protests), monetization as a debt reduction strategy is widely discussed in Europe and elsewhere. Similar discussions are rare in the US, despite the crisis in democracy that allows Obama and the Federal Reserve to engage in secret monetization without public or Congressional input.
Enter Occupy Wall Street
In New Zealand, the spotlight the Occupy movement has thrown on the global banking system has revived the monetization debate in a way that isn't happening in the US. Monetization is the term applied when government, rather than private banks, issues the money used by the public and by government itself. We have two minor parties in this country whose platforms center around ending our debt-based monetary system and restoring the right of government to issue and control money. I suspect most Americans would find the study of economics and economic systems quite a dull hobby. However New Zealand has suffered several brutal recessions over the past thirty years, along with the mass migration overseas of an entire generation (age 20-45). Both have led to a passionate desire among Kiwi intellectuals to understand and fix an extremely flawed economic system.
The largest of the two parties, Democrats for Social Credit, was founded in 1953. The model they extol is a brief period under President Andrew Jackson where the US government issued debt-free money, instead of borrowing it from investment banks. The Social Credit Party had their heyday in the 1981 election, when they received 21% of the popular vote.
The second party, the New Economics Party, was founded earlier this year by members of the charitable trust Living Economies (http://www.le.org.nz/), founded in 2002. Evolving out of New Zealand's local currency movement, Living Economies has several published writers among its members, including Deirdre Kent, author of the bestselling Healthy Money, Health Planet. The trust itself has just published a New Zealand edition of Fleeing Vesuvius. Originally published in Ireland, Fleeing Vesuvius is a collection of essays about confronting economic and environmental collapse.
The Link Between War and Hyperinflation
Both the Social Credit Party and the New Economics Party challenge the conventional wisdom that allowing the government to create "fiat" money (money not back by gold) creates hyperinflation. Global currency hasn't been redeemable for gold since 1971, when Nixon ended the trading of gold at the fixed price of $35 an ounce. However as Carroll Quigley points out in Tragedy and Hope (which I review at http://stuartbramhall.aegauthorblogs.com/2011/10/14/the-real-vampires-an-insiders-view-of-banks/), only a small fraction of the money issued by investment banks was ever backed by gold. Prior to 1971, the main function of large government gold reserves was to cover large trade deficits. When a country's imports exceeded their exports, other governments often forced them to make up the difference with gold transfers.
Why would hyperinflation occur when the government creates money out of thin air, but not when Goldman Sachs does it? No hyperinflation occurred when Andrew Jackson issued fiat money. Nor under Roosevelt, who also spent massive amounts of government money directly into the economy to address massive unemployment during the Great Depression. Historically hyperinflation occurs when governments have issue "fiat" the money they borrow from investment banks to finance wars (Lyndon Johnson's aggressive monetization during the Vietnam War is the most commonly cited example). Even classical economists agree that spending billions of dollars on bombs, jets and tanks is inherently inflationary. It injects millions of dollars into the economy in the absence of real products and services the public can purchase with these dollars.
Using Taxation to Control Deficits and Debt
As Ellen Brown, Steve Keen, Thomas Greco and other latter day economists argue, allowing the government to spend new debt-free money directly into the economy through high quality public expenditure has the ability to stimulate real economy activity, while simultaneously reducing income and wealth inequality. This is the good kind of monetization. The closest example we have is Roosevelt's massive jobs creation program under the New Deal. Technically this wasn't true monetization, as Roosevelt borrowed this money from investment banks. Given that Congress authorized him to have the US Treasury issue fiat money, this may have been his biggest mistake. Although the New Deal significantly improved jobless rates, most economists agree that it failed to produce full recovery. This only occurred with World War II and massive government expenditure for troop mobilization and armaments.
This contrasts with the other kind of monetization (that Obama and the Federal Reserve are secretly engaged in), in which the government creates new money pay off debt they owe investment banks. While theoretically this should enable banks to generate new loans, in practice it's used for obscenely large CEO bonuses and stockholder dividends.
Roosevelt's New Deal spending failed to create hyperinflation because Roosevelt refused to incur deficits and indebtedness (to investment banks) to finance it. He paid for his massive jobs and social welfare programs (which included Social Security and Aid to Families with Dependent Children) through substantial tax increases on the wealthy. Between 1936 and 1941 the upper tax rate (on people earning more than $5 million a year) went from 79 to 81 percent. After the war started, the upper income bracket covered everyone making $200,000 a year or more. The rate went up to 88% in 1942 and 94% in 1944.
At present the highest tax rate wealthy individuals and corporations pay in the US is 35% (reduced from 39% by the Bush administration).
*Contrary to popular misconception, the government doesn't issue money. Nearly all new money is created by private banks when they generate new loans. On average, most banks only have 7% of a new loan on deposit. The rest is generated out of thin air. This system started in 1694 when the Bank of England was created.
Paying the Piper
(December 2, 2011)
The Solution to the 100 Trillion Dollar Debt Crisis
This is the last of 3 articles exposing the myths we are told about the global economic crisis.
There seems to be broad agreement among both classical corporate economists and latter day non-corporate ones that the $100 trillion global debt is suffocating the world economy. The large amount of debt banks carry on their books severely restricts their ability to issue loans for the business creation and expansion needed to create jobs. At the same time consumers, who are losing jobs or taking wage cuts aren't spending money. Because of massive drop in consumer demand, corporations are finding other uses for their record profits (CEO bonuses, for example), rather than reinvesting them in new factories or retail outlets.
Where the two economic schools part ways concerns the solution. Externalizing costs (getting someone else to pay for your messes) is a basic pillar of classical, corporate economics. In the case of the global economic system, the investment bankers who crashed the system through greed, fraud and speculation want the middle class, youth and the poor to pay for their recklessness. Although mainstream economists like Ben Bernanke agree that debt reduction and austerity cuts aren't enough, they refuse to officially endorse "monetization" as part of the solution. This is why he calls it something else (QE1, QE2 and QE3 -- which are short for quantitative easing) and fudges on the true amount of monetization that is occurring.
Ending Debt-Based Money, Perpetual Growth and Ecosystem Destruction
On the other side, most latter day, non-corporate economists (for example Ellen Brown, Steve Keen, Deirdre Kent, Thomas Greco, among others) call for an end to our debt-based monetary system and perpetual economic growth, along with a "downsizing" of the economies of the industrialized north in line with dwindling resources and rapid ecosystem destruction. They make a strong case that the citizens of western society are living beyond their means and must drastically reduce consumption if we are to preserve the human species. The problem is figuring out how to get there without creating an intolerable level of human suffering for disadvantaged groups who already struggle to meet basic survival needs. It's much easier for mainstream corporate economists, who have already decided to reduce the global debt burden on the backs of the middle class and young people, dooming an entire generation to become a marginalized underclass. Instead of doing any belt tightening themselves, the richest 1% are using the economic crisis as an excuse to further increase their personal wealth.
Political Reform Must Accompany Economic Reform
Most latter day economists are committed to the principle that belt tightening is only tolerable if it's shared equally. Here is where a discussion of solutions becomes really hypothetical. There is no political commitment at present for the ruling elite and special interests to share in the belt tightening. Thus true economic reform is highly unlikely so long as corporations continue to dominate and control western democracy. It's possible that the economic and ecological crises that confront humankind can't be fixed without dismantling capitalism itself, a view shared by many in the Occupy movement. Others believe that channels can be created (through constitutional conventions or similar national gatherings) to establish direct participatory democracy and make corporations accountable to local, state and national authorities. It's only in this context that economic and monetary reform has any chance of being meaningful and effective.
Latter Day Economic Solutions to the Debt Crisis
Where there is political will to share the costs equally for fixing the financial crisis, there are a handful of straightforward policies which, if enacted together, could restore global economic stability within months. Monetization (the good kind, where new government money is spent directly into the economy) is a major one, but monetization alone is unlikely to be enough. As the Germans proved after World War I and the Japanese after their 1989 economic collapse, monetization on its own only makes things worse -- either by creating hyperinflation or increasing debt and deflation. To work, monetization must be enacted simultaneously with other basic debt reduction measures:
Western governments must require global investment banks to forgive the sovereign debt they have incurred by assuming their toxic assets (their valueless subprime mortgages). This extent of forgiveness (referred to as a "hair cut") must depend on the amount of toxic debt these banks still carry on their books and the extent to which they have insured themselves via Credit Default Swaps. Banks that become insolvent in this process need to be nationalized, rather than bailed out, to protect depositors and pension funds with major bank shareholdings.
World governments must agree to end the private-debt based monetary system and replace the Federal Reserve and other central banks with national government banks charged with creating and controlling the money supply.
These national banks must be allowed to create and spend new money directly into the economy to create jobs and repair infrastructure, make good on depositors savings and repay unforgiven debt. To avoid incurring new debt (i.e. borrowing from future generations), it may be necessary to temporarily increase taxes (above 39% in the US) for millionaires and billionaires.
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