241 Deficit Fear Mongering - Ellen Brown

Deficit Fear Mongering - Ellen Brown

(1) Anti-Stimulus campaigners warn of "Debt Hangover"
(2) Privateers who caused the Financial crisis warn of a "Global-debt-bomb explosion"
(3) Don't turn off the life support - Robert Skidelsky
(4) Pound faces a 'savage' reaction if deficit cut too aggressively, UBS warns
(5) Deficit Fear Mongering - Ellen Brown

(1) Anti-Stimulus campaigners warn of "Debt Hangover"

http://www.businessweek.com/magazine/content/10_04/b4164014458592.htm

 January 14, 2010, 5:00PM EST

After the Stimulus Binge, a Debt Hangover

Trillions of dollars have been spent keeping the global economy afloat. But now fears about the Great Recession are giving way to worries about something else: The Great Reckoning

By William Pesek

Government policymakers from Washington to Tokyo are tallying the bill for last year's stimulus binge, and the results won't be pretty for investors or elected officials. Since the collapse of Lehman Brothers in September 2008, the Group of 20 largest industrialized economies have spent more than $2.2 trillion—much of it borrowed—trying to restore growth.

This unprecedented public debt glut will complicate the global recovery. That's because the government debt entering the bond markets will make it harder for private companies to issue debt of their own, either to expand or simply ride out the lingering effects of the credit crisis.

This so-called crowding-out dynamic, together with rising borrowing costs, will depress job growth. The more that small- and medium-sized businesses are starved for credit, for example, the fewer new employees they will add. The crowding also could lift interest rates for consumers.

That's the downside of a stimulus binge: It pumps up growth initially, but the hangover can be painful across an economy for years to come.

Even assuming some budget trimming, the International Monetary Fund expects government debt in advanced G-20 economies to reach 118% of their combined gross domestic product by 2014, up from 78.2% in 2007, just before the economic crisis took hold. Getting to a more sustainable 60% level will involve raising taxes and cutting services.

President Barack Obama's dilemma is not unique: Raising taxes to reduce debt may delay a solid recovery, while trimming spending too much could erode the social safety net and damage competitiveness in the long run. Either way, he and other heads of state struggling with mounting debt burdens are likely to find economic growth over the next decade slower than in the last.

Japan is a poster child for the Great Reckoning. Asia's biggest economy has little to show for the 30 trillion yen ($329 billion) that the government has pumped into it since late 2008. Unemployment, already at a near-record 5.2%, is edging higher. Meanwhile, deflation is intensifying, wages are stagnant, and worried households are saving more and spending less. Worse, Japan's population is aging rapidly, reducing the tax base and raising social costs.

The most indebted among industrialized nations, with public debt approaching 200% of GDP, slow-growth Japan risks seeing a downgrade of its Aa2 credit rating this year. "Japan is the mega-risk problem. It's the next big thing that will hit credit markets," says Carl Weinberg, chief economist at High Frequency Economics.

Expect both credit-rating agencies and investors in 2010 to be sniffing around for other potential debt troubles, be they in China, Greece, Mexico, Vietnam, or even the U.S. Any move to downgrade credit ratings could shake global markets, boosting mortgage rates around the globe and hurting stock prices.

The unwinding process will keep central bankers like Federal Reserve Chairman Ben Bernanke busy as well. The Bank of Japan and the Fed are holding interest rates near zero, while the Bank of England and European Central Bank aren't far behind. All that liquidity is finding its way into stock and real estate markets from Mumbai to Shanghai to São Paulo, creating fresh bubbles and increasing the risk of inflation.

But the debt burden makes it harder to move rates back to more normal levels, since boosting borrowing costs will increase that even more.

Other nations will be set back in underappreciated ways. What economies like India, Indonesia and the Philippines have in common are young populations. Unless you create opportunities and well-paid jobs for them, these societies risk becoming breeding grounds for greater poverty and violence, the most unwelcome part of the Great Reckoning.

William Pesek is a Tokyo-based columnist for Bloomberg News, providing opinions and commentary on economics, business, markets, and politics throughout the region. His columns routinely appear in the International Herald Tribune, The Australian, The Straits Times, The Japan Times and many other publications around Asia and the globe. He writes a monthly column for Bloomberg Markets magazine and is a regular on Bloomberg Television. The opinions expressed are his own.

(2) Privateers who caused the Financial crisis warn of a "Global-debt-bomb explosion"

From: Paul de Burgh-Day <pdeburgh@harboursat.com.au> Date: 10.02.2010 01:54 AM

http://www.marketwatch.com/story/story/print?guid=C3A7C2B5-89BD-4D1D-B306-CB891C48FD74

Feb. 9, 2010, 12:01 a.m. EST

How to invest for a global-debt-bomb explosion

Prepare for an apocalyptic anarchy ending Wall Street's toxic capitalism

By Paul B. Farrell, MarketWatch

ARROYO GRANDE, Calif. (MarketWatch) -- Wake up investors. Are you prepared for the economic anarchy coming after a global-debt time bomb explodes? Are you thinking outside the box? Investing differently? Act now -- tomorrow will be too late.

Start by looking past the endless cable skirmishes between Rush, Glenn, Bill and Shawn versus Harry, Nancy, Ben and Barack. Look way past the insurgency bonding Sarah and her diehard Tea Party revolutionaries with Ron Paul's Neo-Reaganite ideologues, Fat-Cat Bankers and the Party of No, all planning a massive frontal assault on the 2010 elections, hell-bent on destroying the presidency. All that's the sideshow.

The Big One is coming soon, bigger than the 2000 dot-com crash and the 2008 subprime credit meltdown combined. A huge market blowout. And as Bloomberg-BusinessWeek predicts: "The results won't be pretty for investors or elected officials."

After the global-debt bomb explodes don't expect a typical bear correction followed by a new bull. Wall Street's toxic pseudo-capitalism is imploding. Be prepared for a massive meltdown. Yes, already the third major bubble-bust of the 21st century, triggered once again by Wall Street's out-of-control Fat Cat Bankers. And it's dead ahead.

Can your family survive in the anarchy after the debt bomb explodes?

America's already descending into economic anarchy. We're all trapped in a historic economic supercycle, a turning point that must bleed through a no-man's land of lawless self-destructive anarchy before a neo-capitalistic world can re-emerge. Investors tell me they "feel" it at a deep level, "know" it's happening. They keep asking: "What's the best investment strategy to prepare now?"

This is no joke, folks. Are you prepared? Or preparing? Will your family survive in a post-apocalyptic world, when anarchy is rampant in America? Look at Washington, Wall Street and Corporate America today. You know it's already begun.

You are witnessing a fundamental breakdown of the American dream, a systemic breakdown of our democracy and our capitalism, a breakdown driven by the blind insatiable greed of Wall Street: Dysfunctional government, insane markets, economy on the brink. Multiply that many times over and see a world in total disarray. Ignore it now, tomorrow will be too late.

Not a war about ideology, but an economic game-changer

This is a war to control 299 million American taxpayers. A war waged by the "Happy Conspiracy" Jack Bogle profiled in his 2004 "Battle for the Soul of Capitalism," a war machine of Fat Cat Bankers, CEOs, 42,000 mercenary lobbyists and a Congress held hostage to unlimited campaign donations. Their conspiracy has been waging this war against Americans for decades, long before the Supreme Court exposed their dirty secret.

Yes, your enemy is that "Happy Conspiracy:" It has degraded into a pseudo-capitalism with no conscience, no sense of the public good, hell-bent on controlling America's mind, your money and the global markets for its own selfish ends. And eventually it will trigger the game-changing global-debt bomb, the third global meltdown of the century that finally ignites the Great Depression II, plunging us into an era of anarchy.

Investors keep asking: "If it is coming, how do I invest? Buy gold? Commodities? Hedge? Short trading? TIPS? Hoard cash? Buy and hold? Lazy Portfolios?" What if the Dow sinks below 5,000? Maybe the worst-case scenario recently predicted by Bob Prechter: A deeper plunge to the 1,000 range? Imagine a global depression, a bear market dragging on for decades: "How do I protect my family? Can I ever retire? What do I invest in? How can anyone prepare?"

How America's two classes are preparing for a descent into anarchy

As America descends into anarchy your family's survival and your ability to retire will depend on which of America's two economic classes you belong to out of our total of roughly 300 million citizens:

1."Average Joe & Jane" Americans: You're one of 299 million Main Street Americans. Average income is $50,000, only 10% of the average bonuses paid to Wall Street's Fat-Cat Bankers. Or you're already one of America's 20% underemployed ... maybe on food stamps ... maybe among the 47 million with no medical insurance ... your retirement assets are about $50,000, a year's survival. And you are "mad-as-hell" you're not working "inside" the "Happy Conspiracy."

2."Happy Conspiracy" Insiders: You're one of the lucky million or so elite Insiders in the "Happy Conspiracy." You may work for a Fat-Cat Bank that American taxpayers bailed out last year so you pocketed a 2009 bonus gift of somewhere between $600,000 and $10 million. Maybe you're a Corporate American CEO. Maybe you're on the Forbes 400 list. Or you're a U.S. Senator.

Here's how these savvy Insiders are preparing: In his 2008 best-seller, "Wealth, War and Wisdom," hedge fund manager Barton Biggs, a highly respected Insider in the "Happy Conspiracy," advised rich insiders to expect the "possibility of a breakdown of the civilized infrastructure."

His advice: Make tons of money. Buy an isolated farm in the mountains. Protect family against the barbarians: "Your safe haven must be self-sufficient and capable of growing some kind of food ... It should be well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc. Think Swiss Family Robinson."

How Wall Street insiders will treat Main Street in 'The Anarchy'

And when the barbarians do come, firing "a few rounds over the approaching brigands' heads would probably be a compelling persuader that there are easier farms to pillage." Imagine a scene like Port-au-Prince after the quake. Biggs is no radical anarchist, he's an establishment Insider, a great guy. We both arrived at Morgan Stanley about the same time. Biggs remained 30 years, was Morgan's chief global strategist. Ten times Institutional Investor magazine put him on Wall Street's "All-America Research Team."

True, he did hedge his prediction of the coming anarchy. His odds: 1 in 10. But in an early 2009 Newsweek article, "A Generation of Destruction: Throwing money at the problem and propping up greedy banks is like trying to put out a fire by pouring gasoline on it," Biggs teased us with a bleak scenario: "Great cycles of wealth creation have usually lasted about two generations, or 60 years. Inevitably, unequal riches corrupt and create envy, and they are always followed by a generation of enormous wealth destruction."

Warning: By vastly understating the risks while his Insiders prepare for the coming anarchy, Biggs is quietly misleading and disarming the rest of America.

The truth is Insiders in the "Happy Conspiracy" elite will follow Biggs' ultra-simple investment strategy: Make massive amounts of money fast using short-term strategies, spout lip service about the "public good." But always act in your own self-interests first, preparing for when anarchy spreads worldwide in an economic pandemic.

How can America's 299 million 'second-class citizens' invest for anarchy?

So what can the average Joe and Jane, the other 299 million Americans do? Warning: In anarchy, nobody knows. Period. The only possible strategy: "Think Swiss Family Robinson." Stockpile like a "Happy Conspiracy Insider."

Many still challenge us about proven strategies like buy and hold, Modern Portfolio Theory, Lazy Portfolios. Unfortunately, they all need a real democracy driven by honest, transparent capitalism to function effectively. They can't function in anarchy.

And Wall Street's already lapsed into a toxic pseudo-capitalism, using it to manipulate Main Street America. Eventually that mindset will force Main Street Americans to misuse the same dark "Swiss Family Robinson" tactics as the Insiders in order to survive the coming anarchy.

What's our alternative? A new American Revolution

But wait, wait, I hear you asking loudly: There must be an alternative to this dark descent into anarchy, to the loss of everything that made America the greatest nation in history?

Yes there is an alternative. Out of the ashes of anarchy must come a Second American Revolution. But unfortunately nothing will happen until a great crisis awakens America ... shocks the conscience of the masses ... we are "asleep" ... only a seismic, systemic shock will trigger the necessary revolution.

The future of our economy and indeed our nation demands another political revolution. We must take back our democracy and capitalism from a government run by Wall Street and its "Happy Conspiracy" ... their toxic self-serving power hold must be broken and, if not, a rising new conspiracy of China, India, oil-sovereignties and asset-rich nations will replace our homegrown "Happy Conspiracy" as it eventually goes down in the flames of anarchy.

Sadly, that's the future many of us realists see ahead for America.

(3) Don't turn off the life support - Robert Skidelsky

Do not rush to switch off the life support

Robert Skidelsky

04 Mar 2010

http://www.ft.com/cms/s/0/1efe0634-2700-11df-8c08-00144feabdc0.html?nclick_check=1

The fragility of the British economy in face of the Great Recession demands a rethinking not just of macroeconomic policy, but of the balance between consumption and investment, between finance and industry. In response to this challenge, George Osborne, the shadow chancellor, set out a “new economic model” in the annual Mais lecture last week. But there is little evidence of new thinking. There is no reference, for example, to what one might learn from the experience of Japan, which faced a similar “balance sheet recession” in the 1990s. Mr Osborne harks back to the old view that government is the problem not the solution – a philosophy that led to widespread financial deregulation and the current crisis.

Leaving aside the party-political stock-in-trade, the intellectual issue raised by the lecture concerns the relationship between government finance and the economy, and how this should respond to “the slings and arrows of outrageous fortune”. Mr Osborne quotes from a Bank of International Settlements report that “persistently high levels of public debt will drive down capital accumulation, productivity growth and long-term growth potential”. This is true, provided the economy is running at or near full capacity. In such a situation, a high and persistent level of public debt would “crowd out” more profitable private investment. But this is not our situation.

Our public debt – unlike, perhaps, that of Greece – is not “persistently high”. It has gone up from a low of 36 per cent to 62 per cent in 2009 to cope with an unprecedented emergency. Moreover, when national output is 6 per cent – possibly more – below potential, as measured by prior trend, an increase in the public debt does not come at the expense of capital accumulation. It replaces the investment that is not taking place because the economy has shrunk. The government is spending so much because the private sector is investing so little: figures show that private investment has declined by a quarter since 2008.

Mr Osborne asks: why is private demand so weak? His answer is that private demand depends on “expectations and confidence”, and that immediate fiscal consolidation will be good for confidence. But an IMF paper last month warned that premature cuts in public spending could lead to a sterling crisis. The truth is that we do not know how the markets will assess the balance of risk between cutting off the life-support system and the government defaulting on its debt.

In any case, Mr Osborne is ignoring the pressure to rebuild private sector balance sheets, which has pushed the household savings ratio up from about 1 per cent at the start of 2008 to about 9 per cent in the third quarter of 2009. Experience of Japan’s recession of the 1990s will confirm that if the private sector is de-leveraging – reducing spending to reduce its debts – then public sector de-leveraging – cutting its deficit – will deepen, not lighten, recession. This is what Keynes dubbed the  ...

(4) Pound faces a 'savage' reaction if deficit cut too aggressively, UBS warns
From: geab@leap2020.eu <geab@leap2020.eu> Date: 25.02.2010 11:16 PM
Subject: Revue de presse NM/E2020 - Crise systemique globale

http://www.telegraph.co.uk/finance/currency/7307279/Pound-faces-a-savage-reaction-if-deficit-cut-too-aggressively-UBS-warns.html

Pound faces a 'savage' reaction if deficit cut too aggressively, UBS warns

There will be a run on the pound if the next Government tackles Britain's deficit too aggressively, one of the world's largest currency traders has warned.

Published: 2:04PM GMT 24 Feb 2010

Strategists at UBS reckon that policy mistakes could see the pound plunge  Photo: EPA

With the economy barely crawling out of recession, a rapid fiscal retrenchment would be treated to a "savage" reaction in foreign exchange markets, according to a new report by strategists at Swiss bank UBS.

Taking too sharp an axe to the deficit - projected to reach £178bn this year - would "endanger tax revenues, Britain's sovereign rating, the recovery of the banking sector and the UK labour market," the strongly-worded report argues.

Such a scenario would transform the pound's steady and welcome decline since the start of the financial crisis into something much more dangerous, the report's authors, George Magnus and Mansoor Mohi-uddin, claim, as scepticism about the ability of Britain to repay its debts would increase.

"The severe fall in sterling after such a policy mistake would reflect a crisis of confidence in Britain's policymaking," the report says.

With confidence in British policymaking gone, the pound would risk plunging to $1.05 against the dollar and slumping beyond parity for the first time against the euro. Sterling was trading at $1.54 against the dollar and 88p against the euro in early afternoon trading on Wednesday.

The report comes as a blow to the Conservatives who are staking their claim for economic competence on the argument that a failure to take immediate and aggressive action on the deficit will tip Britain back into recession. Gordon Brown is trying to win round voters with the opposite argument.

(5) Deficit Fear Mongering - Ellen Brown

From: Ellen Brown <ellenhbrown@gmail.com> Date: 04.03.2010 10:31 AM

I also did a video interview with Max Keiser on that subject, here
(second and third segments, Feb 26) --

http://maxkeiser.com/2010/02/26/ote43-on-the-edge-with-max-keiser/

THURSDAY 4 MARCH 2010

Deficit Fear Mongering

Wednesday 03 March 2010

by: Ellen Brown, t r u t h o u t | News Analysis

http://www.truthout.org/deficit-fear-mongering57346

IMF-Style Austerity Measures Come to America: What "Fiscal Responsibility" Means to You.

In addition to mandatory private health insurance premiums, we may soon be hit with a "mandatory savings" tax and other belt-tightening measures urged by the president's new budget task force. These radical austerity measures are not only unnecessary, but will actually make matters worse. The push for "fiscal responsibility" is based on bad economics.

When billionaires pledge a billion dollars to educate people to the evils of something, it is always good to peer closely at what they are up to. Hedge fund magnate Peter G. Peterson was formerly chairman of the Council on Foreign Relations and head of the New York Federal Reserve. He is now senior chairman of Blackstone Group, which is in charge of dispersing government funds in the controversial AIG bailout, widely criticized as a government giveaway to banks. Peterson is also founder of the Peter Peterson Foundation, which has adopted the cause of imposing "fiscal responsibility" on Congress. He hired David M. Walker, former head of the Government Accounting Office, to spearhead a massive campaign to reduce the runaway federal debt, which the Peterson/Walker team blames on reckless government and consumer spending. The Foundation funded the movie "I.O.USA." to amass popular support for their cause, which largely revolves around dismantling Social Security and Medicare benefits as a way to cut costs and return to "fiscal responsibility."

The Peterson-Pew Commission on Budget Reform has pushed heavily for action to stem the federal debt. Bills for a budget task force were sponsored in both houses of Congress. The Senate bill was narrowly defeated, and the House bill was tabled; but that was not the end of it. In Obama's State of the Union speech on January 27, he said he would be creating a presidential budget task force by executive order to address the federal government's deficit and debt crisis, and that the task force would be modeled on the bills Congress had failed to pass. If Congress would not impose "fiscal responsibility" on the nation, the president would. "It keeps me awake at night, looking at all that red ink," he said. The executive order was signed on February 17.

What the president seems to have missed is that all of our money except coins now comes into the world as "red ink," or debt. It is all created on the books of private banks and lent into the economy. If there is no debt, there is no money; and private debt has collapsed. This year to date, US lending has been contracting at the fastest rate in recorded history. A credit freeze has struck globally; and when credit shrinks, the money supply shrinks with it. That means there is insufficient money to buy goods, so workers get laid off and factories get shut down, perpetuating a vicious spiral of economic collapse and depression. To reverse that cycle, credit needs to be restored; and when the banks can't do it, the government needs to step in and start "monetizing" debt itself, or turning debt into dollars.

Although lending remains far below earlier levels, banks say they are making as many loans as they are allowed to make under existing banking rules. The real bottleneck is with the "shadow lenders" - those investors who, until late 2007, bought massive amounts of bank loans bundled up as "securities," taking those loans off the banks' books, making room for yet more loans to be originated out of the banks' capital and deposit bases. Because of the surging defaults on subprime mortgages, investors have now shied away from buying the loans, forcing banks and Wall Street firms to hold them on their books and take the losses. In the boom years, the shadow lending market was estimated at $10 trillion. That market has now collapsed, leaving a massive crater in the money supply. That hole needs to be filled and only the government is in a position to do it. Paying down the federal debt when money is already scarce just makes matters worse. When the deficit has been reduced historically, the money supply has been reduced along with it, throwing the economy into recession.

Another Look at the Budget Reform Agenda

That raises the question: are the advocates of "fiscal responsibility" merely misguided? Or are they up to something more devious? The president's executive order is vague about the sorts of budget decisions being entertained, but we can get a sense of what is on the table by looking at the earlier agenda of Peterson's Commission on Budget Reform. The Peterson/Walker plan would have slashed social security entitlements at a time when Wall Street has destroyed the home equity and private retirement accounts of potential retirees. Worse, it would have increased the Social Security tax, disguised as a "mandatory savings tax." This added tax would be automatically withdrawn from your paycheck and deposited to a "Guaranteed Retirement Account" managed by the Social Security Administration. Since the savings would be "mandatory," you could not withdraw your money without stiff penalties; and rather than enjoying an earlier retirement paid out of your increased savings, a later retirement date was being called for. In the meantime, your "mandatory savings" would just be fattening the investment pool of the Wall Street bankers managing the funds.

And that may be what really underlies the big push to educate the public to the dangers of the federal debt. Political analyst Jim Capo discusses a slide show presentation given by Walker after the "I.O.USA." premier, in which a mandatory savings plan was proposed that would be modeled on the Federal Thrift Savings Plan (FSP). Capo comments:

"The FSP, available for federal employees like congressional staff workers, has over $200 billion of assets (on paper anyway). About half these assets are in special non-negotiable US Treasury notes issued especially for the FSP scheme. The other half are invested in stocks, bonds and other securities.... The nearly $100 billion in [this] half of the plan is managed by Blackrock Financial. And, yes, shock, Blackrock Financial is a creation of Mr. Peterson's Blackstone Group. In fact, the FSP and Blackstone were birthed almost as a matched set. It's tough to fail when you form an investment management company at the same time you can gain the contract that directs a percentage of the Federal government payroll into your hands."

What "Fiscal Responsibility" Really Means

All of this puts "fiscal responsibility" in a different light. Rather than saving the future for our grandchildren, as the president himself seems to think it means, it appears to be a code word for delivering public monies into private hands and raising taxes on the already-squeezed middle class. In the parlance of the International Monetary Fund (IMF), these are called "austerity measures," and they are the sorts of things that people are taking to the streets in Greece, Iceland and Latvia to protest. Americans are not taking to the streets only because nobody has told us that is what is being planned.

We have been deluded into thinking that "fiscal responsibility" (read "austerity") is something for our benefit, something we actually need in order to save the country from bankruptcy. In the massive campaign to educate us to the perils of the federal debt, we have been repeatedly warned that the debt is disastrously large; that when foreign lenders decide to pull the plug on it, the US will have to declare bankruptcy; and that all this is the fault of the citizenry for borrowing and spending too much. We are admonished to tighten our belts and save more; and since we can't seem to impose that discipline on ourselves, the government will have to do it for us with a "mandatory savings" plan. The American people, who are already suffering massive unemployment and cutbacks in government services, will have to sacrifice more and pay the piper more, just as in those debt-strapped countries forced into austerity measures by the IMF.

Fortunately for us, however, there is a major difference between our debt and the debts of Greece, Latvia and Iceland. Our debt is owed in our own currency - US dollars. Our government has the power to fix its solvency problems itself, by simply issuing the money it needs to pay off or refinance its debt. That time-tested solution goes back to the colonial scrip of the American colonists and the "Greenbacks" issued by Abraham Lincoln to avoid paying 24-36 percent interest rates.

Economic Fear Mongering

What invariably kills any discussion of this sensible solution is another myth long perpetrated by the financial elite - that allowing the government to increase the money supply would lead to hyperinflation. Rather than exercising its sovereign right to create the liquidity the nation needs, the government is told that it must borrow from private lenders. And where does their money come from? Ultimately from banks, which create it on their books just as the government would have done. The difference is that when bankers create it, it comes with a hefty fee attached in the form of interest.

Meanwhile, the Federal Reserve has been trying to increase the money supply; and rather than producing hyperinflation, we continue to suffer from deflation. Frantically pushing money at the banks has not gotten money into the real economy. Rather than lending it to businesses and individuals, the larger banks have been speculating with it or buying up smaller banks, land, farms and productive capacity, while the credit freeze continues on Main Street. Only the government can reverse this vicious syndrome, by spending money directly on projects that will create jobs, provide services and stimulate productivity. Increasing the money supply is not inflationary if the money is used to increase goods and services. Inflation results when "demand" (money) exceeds "supply" (goods and services). When supply and demand increase together, prices remain stable.

The notion that the federal debt is too large to be repaid and that we are imposing that monster burden on our grandchildren is another red herring. The federal debt has not been paid off since the days of Andrew Jackson and it does not need to be paid off. It is just rolled over from year to year, providing the "full faith and credit" that alone backs the money supply of the nation. The only real danger posed by a growing federal debt is an exponentially growing interest burden; but so far, that danger has not materialized either. Interest on the federal debt has actually gone down since 2006 - from $406 billion to $383 billion - because interest rates have been lowered by the Fed to very low levels.

They can't be lowered much further, however, so the interest burden will increase if the federal debt continues to grow. But there is a solution to that too. The government can just mandate that the Federal Reserve buy the government's debt and that the Fed not sell the bonds to private lenders. The Federal Reserve states on its web site that it rebates its profits to the government after deducting its costs, making the money nearly interest-free.

All the fear mongering about the economy collapsing when the Chinese and other investors stop buying our debt is yet another red herring. The Fed can buy the debt itself - as it has been stealthily doing. That is actually a better alternative than selling the debt to foreigners, since it means we really will owe the debt only to ourselves, as Roosevelt was assured by his advisers when he agreed to the deficit approach in the 1930s; and this debt-turned-into-dollars will be nearly interest-free.

Better yet would be to either nationalize or abolish the Fed and fund the government directly with Greenbacks as President Lincoln did. What the Fed does the Treasury Department can do, for the cost of administration. There would be no shareholders or bondholders to siphon earnings, which could be recycled into public accounts to fund national, state and local budgets at zero or near-zero interest rates. Eliminating debt service payments would allow state and federal income taxes to be slashed; and the public managers of this money, rather than hiding behind a veil of secrecy, would be opening their books for all to see.

A final red herring is the threatened bankruptcy of Social Security. Social Security cannot actually go bankrupt, because it is a pay-as-you-go system. Today's social security taxes pay today's recipients; and if necessary, the tax can be raised. As Washington economist Dean Baker wrote when President Bush unleashed the campaign to privatize Social Security in 2005:

"The most recent projections show that the program, with no changes whatsoever, can pay all benefits through the year 2042. Even after 2042, Social Security would always be able to pay a higher benefit (adjusted for inflation) than what current retirees receive, although the payment would only be about 73 percent of scheduled benefits."

Today, incomes over $97,000 escape the tax, disproportionately imposing it on lower income brackets. Projections over the next 75 years show that just removing that cap could eliminate the forecasted deficit. When the Democratic presidential candidates were debating in the fall of 2007, Barack Obama and Joe Biden were the only candidates willing to seriously consider this reasonable alternative. President Obama just needs to follow through with the solutions he espoused when campaigning.

The Mass Education Campaign We Really Need

What is really going on behind the scenes may have been revealed by Prof. Carroll Quigley, Bill Clinton's mentor at Georgetown University. An insider groomed by the international bankers, Dr. Quigley wrote in Tragedy and Hope in 1966:

"[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences."

If that is indeed the plan, it is virtually complete. Unless we wake up to what is going on and take action, the "powers of financial capitalism" will have their way. Rather than taking to the streets, we need to take to the courts, bring voter initiatives and wake up our legislators to the urgent need to take the power to create money back from the private banking elite that has hijacked it from the American people. And that includes waking up the president, who has been losing sleep over the wrong threat

COMMENTS

... Dear Ellen Brown, You say
Thu, 03/04/2010 - 05:44 — Eli Dumitru (not verified)

Dear Ellen Brown,
You say that public debt never needs to be paid off. Does that mean that everyone who loans money to our government understands that they will never get their money back? Or are they all just dupes that keep lending our government money, not realizing they will never be paid back?
Please explain. Thanks

Good to have a thoughtful
Thu, 03/04/2010 - 06:47 — Ellen Brown (not verified)

Good to have a thoughtful response! If I could attach a graph I would, but it won't copy here. It shows that private debt has SHRUNK, shrinking the money supply. Public debt is just filling the gap. Default on the debt is not inevitable. We haven't defaulted for 200 years, and the debt has never been paid off, just continued to grow. Here's the simple solution, but you'll probably have to read my book to be convinced: the government just needs to pay the bonds when they come due (as it always does) without rolling them over into new bonds. Replace the bonds with dollars. Bonds ARE money; they trade around the world just like money. If you replace them with dollars, you just don't have to pay interest on them. They should have been dollars, not debt, in the first place. Funding a government through debt is a pre-1971 artifact. Time for new rules. Replacing bonds with dollars won't inflate the money supply; it will just reduce M3 and increase M1. It's late and I'm not at my most cogent, but thanks for your interest.