US is in a Depression - Steve Keen. Bernanke should print $s to pay Gov't debt - Ellen Brown
(1) US is in a Depression - Steve Keen
(2) QE has failed. Bernanke should print dollars to pay Gov't debt - Ellen Brown
(3) Steve Keen: aggregate demand equals GDP plus the change in debt
(4) More States May Create Public Banks
(1) US is in a Depression - Steve Keen
Back to the Future?
by Steve Keen
Published in September 5th, 2010
Things are looking grim indeed for the US economy. Unemployment is out of controlespecially if you consider the U-6 (16.7%, up 0.2% in the last month) and Shadowstats (22%, up 0.3%) measures, which are far more realistic than the effectively public relations U-3 number that passes for the "official" unemployment rate (9.6%, up 0.1%).
The US is in a Depression, and the sooner it acknowledges that rather than continuing to pretend otherwise the better. Government action has attenuated the rate of decline, but not reversed it: a huge fiscal and monetary stimulus has put the economy in limbo rather than restarting growth, and the Fed’s conventional monetary policy arsenal is all but depleted.
This prompted MIT professor of economics Ricardo Cabellero to suggest a more radical approach to monetary easing, in a piece re-published last Wednesday in Business Spectator (reproduced from Vox). Conventional "Quantitative Easing" involves the Treasury selling bonds to the Fed, and then using the money to fund expenditureso public debt increases, and it has to be serviced. We thus swap a private debt problem for a public one, and the boost to spending is reversed when the bonds are subsequently retired. Instead, Caballero proposes a fiscal expansion (e.g. a temporary and large cut of sales taxes) that does not raise public debt in equal amount. This can be done with a "helicopter drop" targeted at the Treasury. That is, a monetary gift from the Fed to the Treasury. (Ricardo Caballero) The government would thus spend without adding to debt, with the objective of causing inflation by having "more dollars chasing goods and services". This is preferable to the deflationary trap that has afflicted Japan for two decades, and now is increasingly likely in the US. So on the face of it, Cabellero’s plan appears sound: inflation will reduce the real value of financial assets, shift wealth from older to younger generations, and stimulate both supply and demand by making it more attractive to spend and invest than to leave dollars languishing, and losing real value, in the bank.
However, though this is indeed the right time to consider radical solutions, Cabellero’s proposal would do only half the required job. Focusing on the good bit, one reason we got into this predicament in the first place was because private sector, debt-based money swamped public sector, fiat money. Ultimately we need to return to the public-private money balance we had in the 1950s and early 1960s.
But if getting "Back to the Future" was all we needed to do, then our problems would already be over, because Ben’s Helicopter Drop of late 2008 has got us there already: the ratio of M0 to M2 is now almost 0.25, far higher than the 1960 level of 0.14, while the ratio to M3 is back where it was then (using Shadowstats data, which I can’t publish here since it’s proprietary).
So why aren’t we "Back To The Future" already? Why isn’t the economy booming once more, and why is inflation giving way to deflation?
Because, though the money supply is back to where it was in 1960, the debt to money ratio is utterly different. Even after Ben’s Helicopter Drop, the debt to base money ratio is almost twice what it was in 1960, and over 3 times what it was back in the Golden Days of the 1950s.
This points out the blind spot in the thinking of even progressive Neoclassicals like Cabellero, who are willing to consider unconventional policies: they don’t understand how money is created in our credit-driven economy. Because of that, they don’t appreciate how much of that credit has financed a glorified Ponzi Scheme rather than investment, nor do they comprehend the impact that private sector deleveraging is having on aggregate demand.
I’ve covered the first topic ad nauseam in my post "The Roving Cavaliers of Credit", so I won’t repeat myself here. Instead I’ll focus on the obvious message from the above chart: if the government simply pumps its money into the system without restraining the financial system from financing speculation on asset markets, the best we can hope for is a repeat of this crisis, on an even larger scale, some years down the track. To see that, all we have to do is look at what happened back in the 1980s.
The Debt to M0 ratio, which had risen sixfold since the 1950s, went into sudden reverse as the economy imploded when the Savings and Loans fiasco ended. The growth of debt collapsed, and the State tried to rescue the financial sector from its follies by fiscal policy and boosting the money supply. That rescue ultimately succeeded when the recession of the 1990s finally ended, but since finance was emboldened rather than reformed, it simply financed two further fiascos: the DotCom madness and then the Subprime scam.
The reason why the 1990s rescue isn’t working this time stands out more clearly when you look at the changes in debt and M0 in raw dollar terms (the scale of the change in M0 is 1/5th that for the change in debt in next two graphs). In the 1990s crisis, the rate of growth of private debt slowed by 2/3rds, but it didn’t actually fall; and a quadrupling of the rate of growth of M0 (starting half a year after debt growth slowed down) was enough, after several years, to let the Wall Street party resume.
This time, the change in debt has turned solidly negativehaving growth at up to $4 trillion p.a., it is now shrinking at over $2 trillion. Ben’s far larger quantitative easing (when compared to Alan’s back in 1990-94) simply hasn’t been enough to fight a private sector that is now seriously deleveraging.
QE2 could nonetheless work, if Cabellero’s plan was executed with gusto. But if all we do is effect a monetary rescue, and yet leave the finance sector untouched, then it will reborn once again as an even bigger Ponzi Scheme.
Do we really want to go through all that again?
I’ll explain two truly major financial reforms that could prevent another credit and asset bubble in a subsequent piece.
(2) QE has failed. Bernanke should print dollars to pay Gov't debt - Ellen Brown
From: Ellen Brown <email@example.com> Date: 09.09.2010 04:55 PM
Time for Helicopter Ben to Drop Some Money on Main Street
Wednesday 08 September 2010
by: Ellen Brown, t r u t h o u t
The Federal Reserve is proposing another round of "quantitative easing," although the first round failed to reverse deflation. It failed because the money went to banks, which failed to lend it on. To reverse deflation, the money needs to be funneled directly to state and local economies. The Fed may not be authorized to "monetize" state bonds, but it COULD buy bonds issued by state-owned banks.
In 2002, in a speech that earned him the nickname "Helicopter Ben," then- Federal Reserve Chairman Ben S. Bernanke famously said that the government could easily reverse a deflation, just by printing money and dropping it from helicopters. "The U.S. government has a technology, called a printing press (or, today, its electronic equivalent)," he said, "that allows it to produce as many U.S. dollars as it wishes at essentially no cost." Later in the speech he discussed "a money-financed tax cut," which he said was "essentially equivalent to Milton Friedman's famous 'helicopter drop' of money." You could cure a deflation, said Professor Friedman, simply by dropping money from helicopters.
It seems logical enough. If there is insufficient money in the money supply (deflation), the solution is to put more money into it. But if deflation is so easy to fix, then why has the Fed's massive attempts to date failed to do the job? At the Federal Reserve's Jackson Hole summit on August 27, Chairman Bernanke said he would fight deflation with his whole arsenal, including "quantitative easing" (QE) - purchasing long-term securities with money created on a computer. Yet, since 2008, the Fed has added more than $1.2 trillion to "base money" doing just that, and the economy is still in a serious deflationary spiral. In the first quarter of this year, the money supply actually shrank at a record annual rate of 9.6 percent.
Cullen Roche at The Pragmatic Capitalist has an answer to that puzzle. He says that as currently practiced, QE is not really a money drop. It is just an asset swap:
"[T]he Fed doesn't actually 'print' anything when it initiates its QE policy. The Fed simply electronically swaps an asset with the private sector. In most cases it swaps deposits with an interest bearing asset."
The Fed just swaps Federal Reserve notes (dollar bills) for other assets (promissory notes or debt) that can quickly be turned into money. The Fed is merely trading one form of liquidity for another, without raising the overall water level in the pool.
The mechanics of how QE works were revealed in a remarkable segment on National Public Radio on August 26, describing how a team of Fed employees bought $1.25 trillion in mortgage bonds beginning in late 2008. According to NPR:
"The Fed was able to spend so much money so quickly because it has a unique power: It can create money out of thin air, whenever it decides to do so. So ... the mortgage team would decide to buy a bond, they'd push a button on the computer - 'and voila, money is created.'
"The thing about bonds, of course, is that people pay them back. So that $1.25 trillion in mortgage bonds will shrink over time, as they get repaid. Earlier this month, the Fed announced that it will use the proceeds from the mortgage bonds to buy Treasury bonds - essentially keeping all that newly created money in circulation. The decision was a sign that the Fed thinks the economy still needs to be propped up with extraordinary measures."
"Extraordinary measures" was a reference to Section 13(3) of the Federal Reserve Act, which allows the Fed in "unusual and exigent circumstances" to buy "notes, drafts and bills of exchange" (debt instruments) from "any individual, partnership or corporation" satisfying its requirements. The Fed was supposedly engaging in these extraordinary measures to "reflate" the money supply and get credit flowing again. Yet, the money supply continued to shrink. The problem, as Roche explains, is that the dollars were merely being swapped for other highly liquid assets on bank balance sheets. That this sort of asset swap will not pump up a collapsed money supply has been shown not only by the Fed's failed experiments over the last two years, but by two decades of failed QE policy in Japan, an economy which remains in the deflationary doldrums. To reverse deflation, it seems, QE needs to be directed somewhere else besides the balance sheets of private banks. What we need is the sort of helicopter drop described by Bernanke in 2002 - one over the towns and cities of the real economy.
There is another interesting lesson suggested by two decades of failed QE: it might actually be possible for the government to "print" its way out of debt, without triggering the dreaded hyperinflation long warned of by pundits. Swapping dollars for debt hasn't inflated the circulating money supply to date because federal debt securities already serve as forms of "money" in the economy.
The Textbook Money Multiplier Model … and Why It Is Obsolete
Beginning with some definitions, QE is explained in Wikipedia like this:
"A central bank ... first credit[s] its own account with money it has created ex nihilo ('out of nothing'). It then purchases financial assets, including government bonds, mortgage-backed securities and corporate bonds, from banks and other financial institutions in a process referred to as open market operations. The purchases, by way of account deposits, give banks the excess reserves required for them to create new money, and thus a hopeful stimulation of the economy, by the process of deposit multiplication from increased lending in the fractional reserve banking system."
"Deposit multiplication" is the textbook explanation for how credit expands as it circulates through the economy. In the textbook model, banks must retain "reserves" equal to 10 percent of outstanding deposits (including deposits created as loans). With a 10 percent reserve requirement, a $100 deposit can support a $90 loan, which gets deposited in another bank, where it becomes an $81 loan, and so forth, until a $100 deposit becomes $1,000 in credit money.
The theory is that increasing the banks' reserves will stimulate this process, but both the Federal Reserve and the Bank for International Settlements (BIS) now concede that the process has not been working in the textbook way. (The BIS is "the central bankers' central bank" in Basel, Switzerland.) The futile effort to push more money into bloated bank reserve accounts has been compared to adding more apples to shelves that are already overstocked with apples. Adding more reserves to a banking system that already has more reserves than it can use has no net effect on the money supply.
The failure of QE either to increase bank lending or to inflate the money supply was confirmed in a March 24 paper by Federal Reserve Vice Chairman Donald L. Kohn, who wrote:
"The huge quantity of bank reserves that were created [by QE] has been seen largely as a byproduct of the purchases [of debt instruments] that would be unlikely to have a significant independent effect on financial markets and the economy. This view is not consistent with the simple models in many textbooks or the monetarist tradition in monetary policy, which emphasizes a line of causation from reserves to the money supply to economic activity and inflation."
The textbook model is obsolete because banks don't make lending decisions based on how many reserves they have. They can always get the reserves they need. If customers don't walk in the door with new deposits, the bank can borrow deposits from other banks, something they can now do at the very low Fed funds rate of .2 percent (one-fifth of 1 percent). And if those deposits are not available, the Federal Reserve itself will supply the reserves. This was confirmed in a BIS working paper called "Unconventional Monetary Policies: An Appraisal," which observed:
"[T]he level of reserves hardly figures in banks' lending decisions. The amount of credit outstanding is determined by banks' willingness to supply loans, based on perceived risk-return trade-offs, and by the demand for those loans. . . .
"The aggregate availability of bank reserves does not constrain the expansion [of credit] directly. The reason is simple: ... in order to avoid extreme volatility in the interest rate, central banks supply reserves as demanded by the system. From this perspective, a reserve requirement, depending on its remuneration, affects the cost ... of loans, but does not constrain credit expansion quantitatively. ... [A]n expansion of reserves in excess of any requirement does not give banks more resources to expand lending. It only changes the composition of liquid assets of the banking system. Given the very high substitutability between bank reserves and other government assets held for liquidity purposes, the impact can be marginal at best."
Again, one form of liquidity is just substituted for another, without changing the overall level in the pool.
If bank reserves do not constrain bank lending, what does? According to the BIS paper, "the main ... constraint on the expansion of credit is minimum capital requirements." These capital requirements, known as "Basel I" and "Basel II," were imposed by the BIS itself. It is interesting that the BIS knows that the main constraints on bank lending are its own capital requirements, yet it is talking about raising them, in an economic climate in which lending is already seriously impaired. Either the BIS is talking out of both sides of its mouth, or its writers don't read each other.
A Solution to the Federal Debt Crisis?
Another interesting aside arising from all this is the suggestion that the government could actually print its way out of debt - it could print dollars and buy back its bonds - without creating inflation. As Roche observes:
"[QE] in time of a balance sheet recession is not actually inflationary at all. With the government merely swapping assets they are not actually 'printing' any new money. In fact, the government is now essentially stealing interest bearing assets from the private sector and replacing them with deposits. ... [T]his policy response would in fact be deflationary not inflationary."
Roche concludes, "the inflationistas have been wrong and the USA defaultistas have been horribly wrong." The inflationistas are the pundits screaming that QE will end in hyperinflation, and the defaultistas are those insisting that the US must eventually default on its debt. Representing both camps, for example, is Richard Russell, who writes:
"In my opinion, the US MUST default on its debt. There are two ways to default. One is simply to renege on the debt.... The other way to default on the debt is to inflate it away. I'm absolutely convinced that this is the path that the US will take. If the US inflates enough, then over time (many years) the devalued dollar will tend to reduce the power of the debts."
The failed QE experiments in Japan and the US suggest, however, that there is a third alternative. Printing dollars to pay the debt (referred to by Russell as "inflating the debt away") might actually eliminate the debt without creating inflation. This is because federal bonds and Federal Reserve Notes are interchangeable forms of liquidity. Government securities trade around the world just as if they were money. A $100 bond represents a claim on $100 worth of goods and services, just as a $100 bill does. The difference, as Thomas Edison said nearly a century ago, is merely that "the bond lets money brokers collect twice the amount of the bond and an additional 20 percent, whereas the currency pays nobody but those who contribute directly in some useful way.... Both are promises to pay, but one promise fattens the usurers and the other helps the people."
The Fed's earlier attempts at QE involved swapping $1.25 trillion in mortgaged-backed securities (MBS) for dollars created on a computer screen. As noted in the NPR segment, many of those securities have come due and have gotten paid off, putting cash in the Fed's till. The Fed now proposes to use this money to buy long-term Treasury debt rather than MBS. That means the Fed will, in effect, be buying the government's debt with dollars created on a computer screen. The privately-owned Federal Reserve is not actually an arm of the federal government, but if it were, the government would thus be printing its way out of debt - just as Helicopter Ben proposed in 2002. Recall that he said, "the U.S. government has a technology, called a printing press" - the US government, not the central bank that has done all the QE to date.
Running the government's printing presses to pay its bills has not seriously been tried since the Civil War, when President Lincoln saved the North from a crippling war debt at usurious interest rates by printing greenbacks (US notes). Other countries, however, have tested and proven this model more recently. They include Germany, which pulled itself out of a massive financial collapse in the early 1930s by printing a form of currency called "MEFO bills"; and Australia, New Zealand and Canada, all of which successfully funded public works in the first half of the 20th century simply by advancing the credit of the nation. China, Malaysia, Guernsey, Jersey, India, Argentina, and other countries have also revived their economies at critical times by this means. The US government could do this, too. It could print dollars (or type them into electronic bank accounts) and spend the money on the sorts of local public projects that would put people back to work and get the economy rolling again.
How to Reverse a Deflation: Do a Helicopter Drop on the States
The government could pay its bills by issuing greenbacks as Lincoln did, but it probably won't, given the current deadlock in Congress. Today, only the Federal Reserve chairman seems to be in a position to act unilaterally, without asking anyone's permission. Chairman Bernanke could execute his own plan and generate the credit needed to get the economy churning again, by aiming his QE tool at the states. After all, if Wall Street (which got us into this mess) can borrow at 0.2 percent, underwritten by the Fed as "lender of last resort," then state and local governments should be able to as well. Chairman Bernanke could credit the Fed's account with money created ex nihilo (out of nothing) and swap it for state and municipal bonds at the Fed funds' rate.
A "state" might not qualify as an "individual, partnership or corporation" under Section 13(3) of the Federal Reserve Act, but a state-owned bank would. Bruce Cahan, an attorney and social entrepreneur in Silicon Valley, California, proposes that the Fed could diversify its role by buying long-term bonds in existing or newly-chartered, state-owned banks. These banks, which would have a mandate to serve state and local communities, would more quickly and accountably lend for in-state purposes than private banks do now. They could be required to use accepted transparency accounting standards to trace how the proceeds of their loans flowed into the economy. Local needs would thus determine how best to jumpstart and keep alive businesses and households that the "too big to fail" megabanks no longer want to fund on fair credit terms. Adding a state-owned bank would also bring competition to regional banking markets such as that of the San Francisco Bay area, which are now dominated by out-of-state megabanks. By funding state-owned banks, the Fed could inject "liquidity" where it is most needed, in local markets where workers are hired and real goods and services are sold.
(3) Steve Keen: aggregate demand equals GDP plus the change in debt
GDP plus Change in Debt - and the US Flow of Funds
by Steve Keen
Published in September 7th, 2010
My recent post "What Bernanke doesn’t understand about deflation" has hit a chord, with a number of sites around the world reproducing itincluding John Mauldin’s Outside the Box column. But it has raised a couple of queries in people’s minds too:
1.Does my definition that "aggregate demand equals GDP plus the change in debt" involve double-counting? ...
On the first point, since I consider that aggregate demand is spent on both goods & services (which are counted in GDP) and the net sum expended purchasing existing assets (which is not counted in GDP), then there is no double counting. A standard textbook aggregate demand figure is the sum spent buying goods and services (for the expenditure definition), which omits of course the sum spent buying existing assets as well. That would be all well and good if we lived in a world without asset sale which of course we don’t.
Another reason people see a potential error here is that they think that a loan simply represents the transfer of spending power from a saver to a borrower, so that overall there’s no change in spending power because of a loan: money is simply transferred from one group that will therefore spend less (creditors), to another that will therefore spend more (debtors). This is clearly the thinking that Bernanke applied when he, in common with most all neoclassical economists, dismissed Fisher’s "debt deflation" explanation for the Great Depression:
"Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects. " (Bernanke 2000, p. 24) This is not the case in the real world, for two reasons:
1.Credit Money is created by banks "out of nothing" by the act of giving a borrower purchasing power (a loan of money) in return for recording a liability by that borrower to the bank (a bank debt). This creates new spending power "ab initio" without removing it from other agents. For the mechanics of this process, see my " Roving Cavaliers of Credit" blog entry ( click here for the PDF).
2.As Schumpeter argues cogently, the endogenous creation of money by the banking sector lending to entrepreneurs is an essential reason that capitalism can grow, and it creates spending power that does not originate in the existing "circular flow of commodities":
"From this it follows, therefore, that in real life total credit must be greater than it could be if there were only fully covered credit. The credit structure projects not only beyond the existing gold basis, but also beyond the existing commodity basis." "[T]he entrepreneur needs credit … [T]his purchasing power does not flow towards him automatically, as to the producer in the circular flow, by the sale of what he produced in preceding periods. If he does not happen to possess it … he must borrow it… He can only become an entrepreneur by previously becoming a debtor… his becoming a debtor arises from the necessity of the case and is not something abnormal, an accidental event to be explained by particular circumstances. What he first wants is credit. Before he requires any goods whatever, he requires purchasing power. He is the typical debtor in capitalist society." (Schumpeter 1934, pp. 101-102) So there is no double-counting in "aggregate demand equals GDP plus the change in debt": the rise in debt adds new demand to that generated by the sale of commodities alone (and is a good thing here because it finances a large part of investment); and the increase in debt is spent financing part of investment and consumption (an overlap that could give rise to double-counting) and also on purchases of existing assets (where no overlap is possible).
Bernanke, B. S. (2000). Essays on the Great Depression. Princeton, Princeton University Press.
Schumpeter, J. A. (1934). The theory of economic development : an inquiry into profits, capital, credit, interest and the business cycle. Cambridge, Massachusetts, Harvard University Press.
(4) More States May Create Public Banks
by Ellen Brown
posted May 13, 2010
By 2011, only one state will have escaped the credit crunch that is pushing other states toward insolvency: North Dakota. North Dakota is also the only state that owns its own bank. The state has its own credit machine, making it independent of the Wall Street banking crisis that has infected the rest of the country.
Now, several states are either studying the prospects of a state-owned bank or are considering legislation to make one possible.
Five states have bills pending—Massachusetts, Washington, Illinois, Michigan, and Virginia. In April, documentary filmmaker and Virginia resident Bill Still showed his new award-winning documentary on the topic, The Secret of Oz, to the Missouri House of Representatives. Rep. Allen Icet, a candidate for state auditor, proposed using the Virginia proposal as part of a study on a state bank in Missouri and said he would hold committee hearings this summer.
Also in mid-April, the Hawai'i House approved a resolution asking the state to study the possibility of establishing a state-run bank there. State Rep. Marcus Oshiro, a Democrat who chairs the finance committee, called a state-run bank a "reasonable public option" to spur development and hold state funds.
Other state legislatures entertaining proposals for forming state-owned banks include New Mexico and Vermont. Candidates in eight states are running on a state-owned bank platform: three Democrats, two Greens, two Republicans, and one Independent.