Saturday, December 18, 2010

Ellen Brown on Quantitative Easing




This is a short piece by Ellen Brown explaining what is happening in the currency world.

In the run up to the 2008 collapse the USA helped create a credit bubble approaching 15 trillion dollars.  This is now evaporating in the form of loan losses and asset write downs.

Little has been done to reconstitute the internal credit system as has been done in Canada.

Far too many Americans have million dollar loans on half million dollar homes if you could find a buyer.  This has not been reset at all.

What is been done is that the fed is absorbing all the losses with low interest paper and as this makes clear, the process has barely begun.

We are going through the greatest contraction of the money supply in history.

We are doing it this way because you will not stand to have your wages reduced a small fraction nor are you going to accept selling assets for ten cents on the dollar and been made uncreditworthy for a decade.  The depression proved the folly of that approach.

To expand the economy, we need to rewrite the mortgage laws to cleanse the system and to empower the middle class.  That is the simplest way.  Add in a major national electrification rebuild and we look good.



The U.S. Is   Not Zimbabwe

Even if Zimbabwe’s hyperinflation was the result of currency manipulation rather than exploitation by corrupt politicians, couldn’t the same thing happen to the U.S. dollar? 

The answer is, not likely.  The U.S. does not owe debts in a foreign currency over which it has no control. It can issue bonds payable in its own currency. 

Today that currency is issued by the Federal Reserve, which is privately owned by a consortium of banks; but the Fed has been at least semi-captive ever since the 1960s, disgorging its profits to the Treasury. Its website states, “Federal Reserve Banks are not . . . operated for a profit, and each year they return to the U.S. Treasury all earnings in excess of Federal Reserve operating and other expenses.”  The Federal Reserve Act provides that it can be modified or rescinded at any time, so Congress retains ultimate control.

Randall Wray, Professor of Economics at the University of Missouri-Kansas City, writes that “involuntary default is, literally, impossible for a sovereign government.” 
The U.S. does not have to rely on foreign investors even to buy its bonds.  If the investors are not interested, the central bank can buy the bonds.  That is, in fact, what the Fed’s second round of quantitative easing is all about: issuing $600 billion for the purchase of long-term government bonds. 
Unlike Zimbabwe, which had to have U.S. dollars to pay its debt to the IMF, the U.S. can easily get the currency it needs without being beholden to anyone.  It can print the dollars, or borrow from the Fed which prints them. 

But wouldn’t that dilute the value of the currency? 

No, says Cullen Roche, because swapping dollars for bonds does not change the size of the money supply.  A dollar bill and a dollar bond are essentially the same thing.  One bears interest and is a little less liquid than the other, but both are obligations good for a dollar’s worth of goods or services in the economy.  If the bondholders had wanted cash, they could have cashed out the bonds themselves.  They don’t have any more money to spend, or any more incentive to spend it, when they’ve been cashed out by the government than when they were holding bonds.     

Moreover, adding money to the money supply cannot hurt the economy when the money supply is shrinkingas it is now.  Most money today consists simply of bank credit, and bank credit is shrinking because banks are deleveraging.  Bad debts are wiping out capital, which wipes out lending capacity. QE2 is just an attempt to fill the empty liquidity pitcher back up -- and a rather feeble attempt at that. Financial commentator Charles Hugh Smith estimates that the economy now faces $15 trillion in writedowns in collateral and credit, based on projections from the latest Fed Flow of Funds (September 17, 2010).   Based on his projections, it might be argued that the Fed could print enough money to refinance the entire federal debt without creating price inflation.  (The current inflation in commodity prices is due to other factors, as was discussed in an earlier article, here.) 

Dean Bakerco-director of the Center for Economic and Policy Research in Washington, wrote recently concerning the federal deficit:
There is no reason that the Fed can’t just buy this debt (as it is largely doing) and hold it indefinitely. If the Fed holds the debt, there is no interest burden for future taxpayers. The Fed refunds its interest earnings to the Treasury every year. Last year the Fed refunded almost $80 billion in interest to the Treasury, nearly 40 percent of the country’s net interest burden. And the Fed has other tools to ensure that the expansion of the monetary base required to purchase the debt does not lead to inflation.

This means that the country really has no near-term or even mid-term deficit problem. The current deficit is a positive. In fact, if it were larger we would have more jobs and growth. Furthermore, there is no reason that the debt being accumulated at present should pose any interest burden on future generations. In this vein, it is worth noting that Japan’s central bank holds debt amounting to almost 100 percent of that country’s GDP. As a result, Japan’s interest burden is considerably smaller than the United States’s, even though Japan’s debt is almost four times as large relative to the size of its economy.  [Emphasis added.]  

Although Japan’s relative debt is almost four times as large as ours and its central bank holds enough to equal nearly 100% of its GDP, investors are not fleeing the yen or driving the economy into hyperinflation.  In fact Japan still can’t pull itself out of DEFLATION, despite massive quantitative easing.  The country still has willing trading partners and is still the third largest economy in the world, an impressive feat for a small island. 

If the Fed were to follow the lead of Japan and hold federal debt equal to the country’s gross domestic product, the Fed would be holding $14.75 trillion in federal securities, enough to refinance the ENTIRE U.S. federal debt of $13.8 trillion virtually interest-free. 
The federal debt hasn’t been paid off since the 1830s under President Andrew Jackson.  It is just rolled over from year to year.  An interest-free debt rolled over indefinitely is the functional equivalent of the government issuing money itself. 

Andrew Jackson would have said the government SHOULD be issuing the money itself, rather than borrowing from banks that issue it.  If Congress gave itself the right under the Constitution to issue money, he said, “it was conferred to be exercised by themselves, and not to be transferred to a corporation.”  
Indeed, that may be why the U.S. dollar has been going UP since QE2 was initiated, while the Euro has been going DOWN.  EU governments are doing what the inflation hawks want them to do: cut back on services, privatize their pension money, and otherwise engage in austerity measures to balance their budgets.  The effect has been to depress their economies and throw them deeper and deeper into debt, with nowhere to get the extra cash needed to pay the expanding debt and interest burden. 
The U.S. and Japan are exploring another model: allowing their currencies to expand to meet the needs of their economies.  This was, in fact, the original money system of the American colonists.  It was revived by Abraham Lincoln to avoid a crippling war debt, after which it was dubbed the “Greenback solution.”
Ellen Brown is an attorney and the author of eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free.  Her websites are webofdebt.com,ellenbrown.com, and public-banking.com.]

1 comment:

Jim said...

You conveniently are silent on the adequate pricing of debt via real interest rates and the rise of gold in silver.

I would be interested if you could indicate the aftermath of similar examples over 3000 years of history of what happens to a global currency when that country consumes in excess of what it produces via limitless fiat money and mispriced risk (low interest rates via gov't purchases of debt).

As long as we can trade paper money for real goods, we don't have a problem. Over human history, when risk is mispriced, the amount of PAPER money to acquire real goods increases exponentially until it is worthless.

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