Brown Web of Debt The Shocking Truth about our Money System (3rd ed)

Chapter 44 - The Quick Fix

No More Income Taxes!

Assume that the Federal Reserve had used its new Greenbackissuing power to buy back the entire outstanding federal debt, and that it had acquired enough bank branches (either by purchase or by FDIC takeover in receivership) to service the depository and credit needs of the public. What impact would those alterations have on the federal income tax burden? To explore the possibilities, we’ll use U.S. data for FY 2005 (the fiscal year ending September 2005), the last year for which M3 was reported:

yTotal individual income taxes in FY 2005 came to $927 billion.

yTaxpayers paid $352 billion in interest that year on the federal debt. If the debt had been paid off, this interest could have been cut from the national budget, reducing the tax burden by that sum.1

yTotal assets in the form of bank credit for all U.S. commercial banks in FY 2005 were reported at $7.4 trillion.2 Assuming an average collective interest rate on bank loans of about 5 percent, approximately 370 billion dollars were thus paid in interest that year. If roughly half this sum had gone to a newly-formed national banking system -- for loans made at the federal funds rate to private lending institutions, interest on credit card debt, loans to small businesses, and so forth -- the government could have earned around $185 billion in interest in FY 2005.

Adding these two adjustments together, the public tax bill might have been reduced by around $537 billion in FY 2005. Deducting this sum from $927 billion leaves $390 billion. This is the approximate sum the government would have had to generate in new Greenbacks to eliminate federal income taxes altogether in FY 2005.

What would adding $390 billion do to the money supply and consumer prices? In 2005, M3 was $9.7 trillion. Adding $390 billion would have expanded M3 by only 4 percent -- Milton Friedman’s modest target rate, and far less than the money supply actually grew in 2006. That was the year the Fed quit reporting M3, but the figures have been calculated privately by other sources. Economist John Williams has a website called “Shadow Government Statistics,” which exposes and analyzes the flaws in current U.S. government data and reporting. He states that in July 2006, the annual growth in M3 was over 9 percent.3 We’ve seen that this growth must have come from fiat money created as loans by the Federal Reserve and the banks.4 Thus if new debt-free Greenbacks had been issued by the Treasury instead,

426

Web of Debt

inflation of the money supply could actually have been reduced – from 9 percent to a modest 4 percent – without cutting government programs or adding to a burgeoning federal debt.

Horn of Plenty: Avoiding Inflation

by Increasing Supply and Demand Together

New Greenbacks in the sum of $390 billion dollars would have been enough to eliminate income taxes, but according to Keynes, the government could have issued quite a bit more than that without dangerously inflating prices. He said that if the funds were used to put the unemployed to work making new goods and services, new currency could safely be added up to the point of full employment without creating price inflation. The gross domestic product (GDP) would just increase by the value of the newly-made goods and services, keeping supply and demand in balance.

How much is the U.S. work force under-employed today? In the first half of 2006, the official unemployment rate was 4.6 percent; but critics said the figure was low, because it included only people applying for unemployment benefits. It did not include those who were no longer eligible for benefits, those who had given up, or those whose skills and education were under-utilized – people working part-time who wanted to work full-time, engineers working as taxi drivers, computer programmers working as store clerks, and so forth. According to Williams’ “Shadow Government Statistics” website, the real U.S. unemployment figure in early 2006 was a full 12 percent.5

The reported GDP in 2005 was $12.5 trillion. If Williams’ unemployment figure is correct, $12.5 trillion represented only 88 percent of the country’s productive capacity in 2005. Extrapolating upwards, 100 percent productive capacity would have generated a GDP of $14.2 trillion, or $1.7 trillion more than was actually produced in 2005. That means another $1.7 trillion in new Greenbacks could have been spent into the economy for productive purposes in 2005 without creating significant price inflation.

What could you do with $1.7 trillion ($1,700 billion)? According to a United Nations report, in 1995 a mere $80 billion added to existing resources would have been enough to cut world poverty and hunger in half, achieve universal primary education and gender equality, reduce under-five mortality by two-thirds and maternal mortality by three-quarters, reverse the spread of HIV/AIDS, and halve the proportion of people without access to safe water world-wide.6 For

427

Chapter 44 - The Quick Fix

comparative purposes, here are some typical U.S. government outlays: $76 billion went for education in FY 2005, $26.6 billion went for natural resources and the environment, and $69.1 billion went for veteran’s benefits. Under our projected scenario, these and other necessary services could have been expanded and many others could have been added, while at the same time eliminating federal income taxes and the federal debt, without creating dangerous inflation.

A Non-inflationary National Dividend

or Basic Income Guarantee?

Other theorists have gone further than Keynes. Richard Cook is a retired federal analyst who served at the U.S. Treasury Department and now writes and lectures on monetary policy. He notes that in 2006, the U.S. Gross Domestic Product came to $12.98 trillion, while the total national income came to only $10.23 trillion; and at least 10 percent of that income was reinvested rather than spent on goods and services. Total available purchasing power was thus only about $9.21 trillion, or $3.77 trillion less than the collective price of goods and services sold. Where did consumers get the extra $3.77 trillion? They had to borrow it, and they borrowed it from banks that created it with accounting entries. If the government were to replace this bankcreated money with debt-free Greenbacks, the total money supply would remain unchanged. That means a whopping $3.77 trillion in new government-issued money might be fed into the economy without increasing the inflation rate.7

This opens another rainbow-hued dimension of possibilities. What could the government do with $3.77 trillion? In a 1924 book called Social Credit, C. H. Douglas suggested that government-issued money could be used to pay a guaranteed basic income for all. Richard Cook proposes a national dividend of $10,000 per adult and $5,000 per dependent child annually.8 The U.S. population was about 303 million in 2007, of whom 27.4 percent were under age 20. That works out to $2,200 billion for adults and $415 billion for children, or $2,615 billion ($2.615 trillion) to provide a basic security blanket for everyone. If $3.77 trillion in Greenback dollars were issued to fill the gap between GDP and purchasing power, and $2.615 trillion of this money were distributed among the population, the government would still have $1.55 trillion left over -- ample to satisfy its budgetary needs.

The concept of a national dividend is interesting but controversial. On the one hand, the result could be a class of drones willing to live at subsistence level to avoid work. On the other hand, a national

428

Web of Debt

dividend would be a boon to artists and inventors willing to live frugally in order to explore their art. During the culturally rich Renaissance, art, literature and science were furthered by a leisure class favored by inheritance. A national dividend would give that birthright to all. Meanwhile, most people desire a lifestyle beyond mere subsistence and would no doubt be willing to pursue productive employment to acquire it.

Another proposal favored by a number of economists is a basic income guarantee, a sum of money sufficient to assure that no citizen’s income falls below some minimum level. The difference, says Cook, is that a national dividend would be tied to national production and consumption data and might vary from year to year. A guaranteed minimum income would be a fixed figure, paid without complicated paperwork or qualifying tests.

However Congress decides to spend the money, the important point here is that the government might be able to issue and spend as much as $3.77 trillion into the economy without creating hyperinflation -- perhaps not all at once, but at least over time. The money would merely make up for the shortfall between GDP and purchasing power, gradually replacing the debt-money created as loans by private banks. As unemployed and under-employed people acquired incomes they could live on, they would no longer need to take out loans at exorbitant interest rates to pay their bills. Home buyers with money to spare would pay down their mortgages, and fewer “sub-prime” borrowers would be induced to acquire new debt, since aggressive lending tactics would have disappeared along with the fractional reserve banking system that made them profitable. Meanwhile, a tax imposed on derivatives could put a brake on the exploding derivatives bubble and its accompanying debt burden; and if the big derivative banks were put into FDIC receivership, the derivative Ponzi scheme might be carefully unwound, liquidating large amounts of “virtual” debt with it. As these sources of debt-money shrank, there would be increasing room for expanding the money supply by funding public projects with newly-issued Greenbacks.

A Solution to the Housing Crisis?

Among other possible uses for this $3.77 trillion in new-found capital might be to salvage the distressed housing market. Estimates are that the current subprime debacle and ARM resets could throw mortgages valued at $1 trillion into default, either because the

429

Chapter 44 - The Quick Fix

borrowers can’t afford the payments or because they have no incentive to keep paying on homes worth less than is owed on them.9 One proposed solution is to slow foreclosures by imposing a freeze on interest rates, keeping ARM rates from going higher. But that would violate the “sanctity of contracts,” forcing unwary buyers of mortgagebacked securities to bear the loss on investments that had been stamped “triple-A” by bank-funded rating agencies. By rights, the banks devising these dubious investment vehicles to get loans off their books should be held liable; but the banks are already in serious financial trouble and would be hard-pressed to find an extra trillion to compensate the victims. If the securities holders sue the banks for restitution, even the hardiest banks could go bankrupt.10

Where, then, can a deep pocket be found to set things right? Today the world’s central banks are extending billions of dollars in computergenerated money to bail out their cronies, but these loans are just buying time, without restoring homeowners to their homes or preventing abandoned neighborhoods from deteriorating.11 So who is left to save the day? If Congress were to issue $3.77 trillion to fill the gap between purchasing power and GDP, it could use one quarter of this money to buy defaulting mortgages from MBS holders, and it would still have plenty left over to meet its budget without levying income taxes. Adding a potential $1.7 trillion or more from a tax on derivatives would provide ample money for other programs as well. After reimbursing the defrauded MBS holders, Congress could dispose of the distressed properties however it deemed fair. To avoid either giving defaulting homeowners a windfall or turning them out into the streets, one possibility might be to rent the homes to their current occupants at affordable prices, at least until some other equitable solution could be found. The rents could then be cycled back to the government, helping to drain excess liquidity from the money supply.

How to Keep the Economic Bathtub from Overflowing

That segues into another way of viewing the inflation problem: the government could create all the new money it needed or wanted, if it had ways to drain the economic bathtub by recycling the funds back to itself. Instead of issuing new money the next time around, it could just spend these recycled funds, keeping the money supply stable. The usual way to draw money back to the Treasury is through taxes. Indeed, it has been argued that governments must tax in order to siphon excess money out of the system. But the Pennsylvania

430

Web of Debt

experience showed that inflation would not result if the government lent new money into the economy, since the money would be drawn back out when the debt was repaid; and new money spent into the economy could be recycled back to the government in the form of interest due on loans and fees for other public services.

A more equitable and satisfying solution than taxing the people would be for the government to invest in productive industries that returned income to the public purse. Affordable public housing that generated rents would be one possibility. The development of sustainable energy solutions (wind, solar, ocean wave, geothermal) are other obvious examples. Unlike scarce oil resources that are nonrenewable and come from a plot of ground someone owns, these natural forces are inexhaustible and belong to everyone; and once the necessary infrastructure is set up, no further investment is necessary beyond maintenance to keep these energy generators going. They are perpetual motion machines, powered by the moon, the tides and the weather. Wind farms could be set up on publicly-owned lands across the country. Denmark, the leading wind power nation in the world, today satisfies 20 percent of its electricity needs with clean energy produced at Danish wind farms. Wave energy can average 65 megawatts per mile of coastline in favorable locations, and the West Coast of the United States is more than 1,000 miles long. The government could charge a reasonable fee to users for this harnessed energy.

Those are all possibilities for recycling excess liquidity out of the economy, but today the focus is on getting liquidity into the financial system. Major deflationary forces are now threatening to shrink the money supply into a major depression, unless the federal government turns on the liquidity spigots and pumps new money in. We’ve seen that the money supply could contract by $1.7 trillion or more just from the next correction in the housing market; and when the derivatives bubble collapses, substantially more debt-money will disappear. The Federal Reserve reports that the fastest-growing portion of the U.S. debt burden is in the “financial sector” (meaning mainly the banking sector), which was responsible in 2005 for $12.5 trillion in debt. This explosive growth is attributed largely to speculation in derivatives, which are highly leveraged. The buyer of a derivative might, for example, put up 5 percent while a bank loan provides the rest. The debt ratio of the financial sector zoomed from a mere 5 percent of the economy’s national income in 1957 to 126 percent in 2005, a growth rate 23 times greater than general economic growth.12 In 2006, only 5 major U.S. banks held 97 percent of derivatives, including the “zombie” banks that were already bankrupt and were being propped

431

Chapter 44 - The Quick Fix

up by manipulative market intervention. The whole edifice is built on sand; and when it collapses, the masses of debt-money it created will vanish with it in the waves, massively deflating the money supply, leaving plenty of room for the government to add money back in.

A Helping Hand to State and Local Governments

In the interest of preserving a single national currency, state and local governments would not be able to issue new Greenbacks to fund their programs (although they could issue other forms of credit, such as tax credits for fuel efficiency; see Chapter 36). However, the federal government could extend its largesse to state and local governments by offering them interest-free loans for worthy projects. That is what Jacob Coxey proposed when he took to the streets in the 1890s: “non- interest-bearing bonds” to fund local public projects, to be issued by the local government and pledged to the federal government in exchange for federally-issued Greenback dollars.

In the 1990s, citizen activist Ken Bohnsack took to the streets again, traveling the country for a decade recruiting scores of public bodies to pass resolutions asking Congress for “sovereignty loan” legislation that echoed Coxey’s plan. Under Bohnsack’s proposed bill, the government would use its sovereign right to create money to make interestfree loans to local governments for badly needed infrastructure projects. The legislation was not passed, but Bohnsack, unlike Coxey, at least got up the Capitol steps and in the door. In 1999, his proposal became the State and Local Government Empowerment Act, introduced by Representative Ray LaHood and co-sponsored by Dennis Kucinich and Barbara Lee among others.13

Similar proposals for using interest-free national credit to fund infrastructure and sustainable energy development are being urged by a variety of money reform groups around the world, including the New Zealand Democratic Party for Social Credit, the Canadian Action Party, the Bromsgrove Group in Scotland, the Forum for Stable Currencies in England, the London Global Table, and the American Monetary Institute.14 Reform advocates note that more money is often paid in interest for local projects than for labor and materials, making public projects unprofitable that might otherwise have paid for themselves. In The Modern Universal Paradigm, Rodney Shakespeare gives the example of the Humber Bridge, which was built in the UK at a cost of £98 million. Every year since the bridge opened in 1981, it

432

Web of Debt

has turned an operating profit; that is, its running costs (basically repair, maintenance and staff salaries) have been exceeded by the fees it receives from travelers crossing the River Humber. But by the time the bridge opened in 1981, interest charges had driven its cost up to £151 million; and by 1992, the debt had shot up to an alarming £439 million. The UK government was forced to intervene with sizeable grants and writeoffs to save the local residents from bearing the brunt of these costs. If the bridge had been financed with interestfree government-issued money, interest charges could have been avoided, and the bridge could have funded itself.15

State and local governments are good credit risks and do not need the prod of interest charges to encourage them to make timely payments on their loans. To discourage local officials from borrowing “free” money just to speculate with it, the “real bills” doctrine could be applied: expenditures could only be for real goods and services -- no speculative betting, no investing on margin, no shorting. (See Chapter 37.) A strict repayment schedule could also be imposed.

How would these loans be repaid? The money could come from taxes; but again, a more satisfying solution is for local governments to raise revenue through fee-generating enterprises of various types, turning local economies into the sort cooperative profit-generating endeavors implied in the term “Common Wealth.”

A National Dividend from Government Investments?

The government may be a profit-generating enterprise already. So says Walter Burien, an investment adviser and accountant who has spent many years peering into government books. He notes that the government is composed of 54,000 different state, county, and local government entities, including school districts, public authorities, and the like; and that all of them keep their financial assets in liquid investment funds, bond financing accounts and corporate stock portfolios. The only income that must be reported in government budgets is that from taxes, fines and fees; but the stock holdings of government entities can be found in official annual reports known as CAFRs (Comprehensive Annual Financial Reports) which must be filed with the federal government by local, county and state governments. According to Burien, these annual reports show that virtually every U.S. city, county, and state has vast amounts of money stashed away in surplus funds, with domestic and international stock

433

Chapter 44 - The Quick Fix

holdings collectively totaling trillions of dollars.16

Some of these stock holdings are pure surplus held as “slush funds” (funds raised for undesignated purposes). Others belong to city and county employees as their pension funds. Unlike the federal Social Security fund, which must be invested in U.S. government securities, the funds in state and local government pension programs can be invested in anything – common stock, bonds, real estate, derivatives, commodities. Where Social Security depends on taxing future generations, state and local retirement systems can invest in assets that are income-producing, making them self-sufficient. The slush funds that represent “pure surplus,” says Burien, have been kept concealed from taxpayers, even as taxes are being raised and citizens are being told to expect fewer government services. He maintains that with prudent government management, not only could taxes be abolished but citizens could start receiving dividend checks. This is already happening in Alaska, where oil investments have allowed the state to give rebates to taxpayers (around $2,000 per person in 2000).17

Burien’s thesis is controversial and would take some serious investigation to be substantiated, but combined with allegations by Catherine Austin Fitts and others that trillions of dollars have simply been “lost” to “black ops” programs, it raises tantalizing possibilities. The government may be far richer than we know. An honest government truly intent on providing for the general welfare might find the funds for all sorts of programs that are sorely needed but today are considered beyond the government’s budget, including improved education, environmental preservation, universal health coverage, restoration of infrastructure, independent medical research, and alternative energy development. Roger Langrick concludes:

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, [one] 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.18

434

Web of Debt

Chapter 45

GOVERNMENT WITH HEART: SOLVING THE PROBLEM OF THIRD WORLD DEBT

“Remember, my fine friend, a heart is not judged by how much you love, but by how much you are loved by others.”

– The Wizard of Oz to the Tin Woodman, MGM film

In the nineteenth century, the corporation was given the legal status of a “person” although it was a person without heart, incapable of love and charity. Its sole legal motive was to make money for its stockholders, ignoring such “external” costs as environmental destruction and human oppression. The U.S. government, by contrast, was designed to be a social organism with heart. The Founding Fathers stated as their guiding principles that all men are created equal; that they are endowed with certain inalienable rights, including life, liberty and the pursuit of happiness; and that the function of govern-

ment is to “provide for the general welfare.”

If the major corporate banking entities that are now in control of the nation’s money supply were made agencies of the U.S. government, they could incorporate some of these humanitarian standards into their business models; and one important humanitarian step these public banks would be empowered to take would be to forgive unfair and extortionate Third World debt. Most Third World debt today is held by U.S.-based international banks.1 If those banks were made federal agencies (either by purchasing their stock or by acquiring them in receivership), the U.S. government could declare a “Day of Jubilee” -- a day when oppressive Third World debts were forgiven across the board. The term comes from the Biblical Book of Leviticus, in which

435