by Kevin McCormick

A monetary system accomplishes three objectives: 1) the creation of money (a law designating the token), 2) the issuance of money (the political question of who gets the money first), and 3) the circulation of money (the economy that is mediated by money).

How these functions are accomplished is very important to the nature of society. The workings of the monetary system indirectly shape social and economic policies by making particular actions more or less feasible. Activities that are more easily funded will tend to exceed less easily funded activities and the nature of society is altered according to the monetary system design.

The Green Party monetary reform Greening the Dollar platform position makes Green Party policies such as environmental restoration, free or low tuition education, Medicare for all, and universal basic income much more feasible than under the present Federal Reserve system. By creating money without debt, the economic merits of programs will be determined by their systemic and social benefit and not by their ability to support interest payments and banking cartel profits. With the money system under the control of Congress it becomes a possibility to serve the public interest instead of the banking cartel agenda.

In contrast, the Federal Reserve System is designed around the agenda of the banking cartel. As noted, banks create money by creating debt and deposits. Banks issue money by deciding to whom and for what purpose they will make a loan. Circulation is partly accomplished by requiring repayment of the loan with interest and the resulting drive to acquire money to make those payments. Bank loans are made where there is collateral or to the wealthiest and government spending is required to circulate money to the lower economic classes.

The two quotes show the implications of the banking cartel debt-money system:

The banking cartel is perhaps the best organized special interest group in U.S. history. The nature of banking promotes organized and concerted actions. The “payment system” constantly coordinates bank accounts in all the banks in the system. Banks work together to promote economic activities that promote debt: mortgages, auto loans, credit cards, student loans, imperial warfare, etc. The banking cartel organization is so strong because its participants are paid with the very money the banking cartel creates. The corporations it finances provide career and investment opportunities, and supporters of the banking cartel agenda are rewarded with loans.

The privilege of creating loans funded by deposits which act as money is the central element of banking cartel power. I describe our society as the “banking cartel culture” because we are under the Federal Reserve Monetary System in which commercial banks create loans and deposits, with the deposits serving as the money supply. The banking cartel has created the consumer economy with planned obsolesce, excessive consumption of natural resources, pollution, and social inequality. To fully exploit this privilege the banking cartel structures its lending activities to create and sustain this constant fixation on money. Everything in the banking cartel culture is oriented around money. There is a constant emphasis on “economic growth,” continuous monetary inflation, and the monetary growth imperative. Everyone always needs more money. Since bank money (deposits) are created with debt there is always a shortage of money. This drives much of the behavior in our society.

It is not only the U.S. domestic society that is shaped by the banking cartel. The need for constant expansion likewise drives imperialism and the quest for dominance of resources around the world. The book Confessions of an Economic Hit Man by John Perkins details how the banking cartel creates an empire by usurping foreign governments and trapping them with debt. Alexander Hamilton also noted the critical link between a banking cartel monetary system and imperialism in his letter of September 3, 1780:

The invention of banks on the modern principle [creating loans and deposits] originated in Venice. There the public and a company of monied men are mutually concerned. The Bank of England unites public authority and faith with private credit; and hence we see what a vast fabric of paper credit is raised on a visionary basis. Had it not been for this, England would never have found sufficient funds to carry on her wars; but with the help of this she has done and is doing wonders. From Alexander Hamilton to James Duane

Just as the British empire was a project of the Bank of England and English financial royalty, the United States empire is a project of the Federal Reserve banking cartel and Wall Street corporations. An informative history is presented in the video series Origins of the US empire and deep state

It is important to realize that the nature of the monetary system is a foundational or fundamental political issue. The Green Party platform policies are quite unlikely to be achieved under the Federal Reserve monetary system. This is due to the Green Party platform policies being oriented to the overall wellbeing of society — people over profits and environmental restoration. It is quite difficult or impossible to imagine these policies in terms of loan collateral and income streams designed to support interest payments, which is required under the Federal Reserve system. Therefore, it is important for every advocate of Green Party platform policies to understand that the present Federal Reserve system is a major obstacle to progress on social and environmental issues.

The three basic elements of monetary reform are:

1. Nationalize the Federal Reserve System, by the government buying all shares of the twelve Federal Reserve Banks, from the private member commercial banks. This makes the Federal Reserve Banks part of our government, precisely what most of us mistakenly believe it is now.
2. End bank creation of money. Banks will only lend money that already exists, exactly what most people mistakenly believe happens now.
3. The federal government creates and spends money into the economy. This is the new US Money, issued without inflation or deflation for the needs of the nation and its people. Again, what many mistakenly think is now happening.

Modern societies require a monetary system to enable coordinated activities among people with different locations, skills, affiliations, etc. We need to advocate for reform of the monetary system to enable the transformation to a just and sustainable society.

Although the repo market is little known to most people, it is a $1-trillion-a-day credit machine, in which not just banks but hedge funds and other “shadow banks” borrow to finance their trades. Under the Federal Reserve Act, the central bank’s lending window is open only to licensed depository banks; but the Fed is now pouring billions of dollars into the repo (repurchase agreements) market, in effect making risk-free loans to speculators at less than 2%.

This does not serve the real economy, in which products, services and jobs are created. However, the Fed is trapped into this speculative monetary expansion to avoid a cascade of defaults of the sort it was facing with the long-term capital management crisis in 1998 and the Lehman crisis in 2008. The repo market is a fragile house of cards waiting for a strong wind to blow it down, propped up by misguided monetary policies that have forced central banks to underwrite its highly risky ventures.

The Financial Economy Versus the Real Economy

The Fed’s dilemma was graphically illustrated in a Dec. 19 podcast by entrepreneur/investor George Gammon, who explained we actually have two economies – the “real” (productive) economy and the “financialized” economy. “Financialization” is defined at Wikipedia as “a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production.” Rather than producing things itself, financialization feeds on the profits of others who produce.

The financialized economy – including stocks, corporate bonds and real estate – is now booming. Meanwhile, the bulk of the population struggles to meet daily expenses. The world’s 500 richest people got $12 trillion richer in 2019, while 45% of Americans have no savings, and nearly 70% could not come up with $1,000 in an emergency without borrowing.

Gammon explains that central bank policies intended to boost the real economy have had the effect only of boosting the financial economy. The policies’ stated purpose is to increase spending by increasing lending by banks, which are supposed to be the vehicles for liquidity to flow from the financial to the real economy. But this transmission mechanism isn’t working, because consumers are tapped out. They can’t spend more unless their incomes go up, and the only way to increase incomes, says Gammon, is through increasing production (or with a good dose of “helicopter money,” but more on that later).

So why aren’t businesses putting money into more production? Because, says Gammon, the central banks have put a “put” on the financial market, meaning they won’t let it go down. Business owners say, “Why should I take the risk of more productivity, when I can just invest in the real estate, stock or corporate bond market and make risk-free money?” The result is less productivity and less spending in the real economy, while the “easy money” created by banks and central banks is used for short-term gain from unproductive financial investments.

Existing assets are bought just to sell them or rent them for more, skimming profits off the top. These unearned “rentier” profits rely on ready access to liquidity (the ability to buy and sell on demand) and on leverage (using borrowed money to increase returns), and both are ultimately underwritten by the central banks. As observed in a July 2019 article titled “Financialization Undermines the Real Economy”:

When large highly leveraged financial institutions in these markets collapse, e.g., Lehman Brothers in September 2008, central banks are forced to step in to salvage the financial system. Thus, many central banks have little choice but to become securities market makers of last resort, providing safety nets for financialized universal banks and shadow banks.

Repo Madness

That is what is happening now in the repo market. Repos work like a pawn shop: the lender takes an asset (usually a federal security) in exchange for cash, with an agreement to return the asset for the cash plus interest the next day unless the loan is rolled over. In September 2019, rates on repos should have been about 2%, in line with the fed funds rate (the rate at which banks borrow deposits from each other). However, repo rates shot up to 10% on Sept. 17. Yet banks were refusing to lend to each other, evidently passing up big profits to hold onto their cash. Since banks weren’t lending, the Federal Reserve Bank of New York jumped in, increasing its overnight repo operations to $75 billion. On Oct. 23, it upped the ante to $165 billion, evidently to plug a hole in the repo market created when JPMorgan Chase, the nation’s largest depository bank, pulled an equivalent sum out. (For details, see my earlier post here.)

By December, the total injected by the Fed was up to $323 billion. What was the perceived danger lurking behind this unprecedented action? An article in The Quarterly Review of the Bank for International Settlements (BIS) pointed to the hedge funds. As ZeroHedge summarized the BIS’ findings:

Hedge funds have been blamed for the 2008 financial crisis, by adding too much risk to the banking system. They have destroyed companies by forcing stock buybacks, asset sales, layoffs and other measures that raise stock prices at the expense of the company’s long-term health and productivity. They have also been a major factor in the homelessness epidemic, by buying foreclosed properties at fire sale prices, then renting them out at inflated prices. Why did the Fed need to bail these parasitic institutions out? The BIS authors explained:

Repo markets redistribute liquidity between financial institutions: not only banks (as is the case with the federal funds market), but also insurance companies, asset managers, money market funds and other institutional investors. In so doing, they help other financial markets to function smoothly. Thus, any sustained disruption in this market, with daily turnover in the U.S. market of about $1 trillion, could quickly ripple through the financial system. The freezing-up of repo markets in late 2008 was one of the most damaging aspects of the Great Financial Crisis (GFC).

At $1 trillion daily, the repo market is much bigger and more global than the fed funds market that is the usual target of central bank policy. Repo trades are supposedly secured with “high-quality collateral” (usually U.S. Treasuries). But they are not risk-free, because of the practice of “re-hypothecation”: the short-term “owner” of the collateral can use it as collateral for another loan, creating leverage – loans upon loans. The IMF has estimated that the same collateral was reused 2.2 times in 2018, which means both the original owner and 2.2 subsequent re-users believed they owned the same collateral. This leveraging, which actually expands the money supply, is one of the reasons banks put their extra funds in the repo market rather than in the fed funds market. But it is also why the repo market and the U.S. 

Treasuries it uses as collateral are not risk-free. As Wall Street veteran Caitlin Long warns:

U.S. Treasuries are … the most rehypothecated asset in financial markets, and the big banks know this. … U.S. Treasuries are the core asset used by every financial institution to satisfy its capital and liquidity requirements – which means that no one really knows how big the hole is at a system-wide level.

This is the real reason why the repo market periodically seizes up. It’s akin to musical chairs – no one knows how many players will be without a chair until the music stops.

ZeroHedge cautions that hedge funds are the most heavily leveraged multi-strategy funds in the world, taking something like $20 billion to $30 billion in net assets under management and levering it up to $200 billion. According to The Financial Times, to fire up returns, “some hedge funds take the Treasury security they have just bought and use it to secure cash loans in the repo market. They then use this fresh cash to increase the size of the trade, repeating the process over and over and ratcheting up the potential returns.”

ZeroHedge concludes:

This … explains why the Fed panicked in response to the GC repo rate blowing out to 10% on Sept 16, and instantly implemented repos as well as rushed to launch QE 4: not only was Fed Chair Powell facing an LTCM [Long Term Capital Management] like situation, but because the repo-funded [arbitrage] was (ab)used by most multi-strat funds, the Federal Reserve was suddenly facing a constellation of multiple LTCM blow-ups that could have started an avalanche that would have resulted in trillions of assets being forcefully liquidated as a tsunami of margin calls hit the hedge funds world.

“Helicopter Money” – The Only Way Out?

The Fed has been forced by its own policies to create an avalanche of speculative liquidity that never makes it into the real economy. As Gammon explains, the central banks have created a wall that traps this liquidity in the financial markets, driving stocks, corporate bonds and real estate to all-time highs, creating an “everything bubble” that accomplishes only one thing – increased wealth inequality. Central bank quantitative easing won’t create hyperinflation, says Gammon, but “it will create a huge discrepancy between the haves and have nots that will totally wipe out the middle class, and that will bring on MMT or helicopter money. Why? Because it’s the only way that the Fed can get the liquidity from the financial economy, over this wall, around the banking system, and into the real economy. It’s the only solution they have.” Gammon does not think it’s the right solution, but he is not alone in predicting that helicopter money is coming.

Investopedia notes that “helicopter money” differs from quantitative easing (QE), the money-printing tool currently used by central banks. QE involves central bank-created money used to purchase assets from bank balance sheets. Helicopter money, on the other hand, involves a direct distribution of printed money to the public.

A direct drop of money on the people would certainly help to stimulate the economy, but it won’t get the parasite of financialization off our backs; and Gammon is probably right that the Fed lacks the tools to fix the underlying disease itself. Only Congress can change the Federal Reserve Act and the tax system. Congress could impose a 0.1% financial transactions tax, which would nip high-frequency speculative trading in the bud. Congress could turn the Federal Reserve into a public utility mandated to serve the productive economy. Commercial banks could also be regulated as public utilities, and public banks could be established that served the liquidity needs of local economies. For other possibilities, see Banking on the People here.

Solutions are available, but Congress itself has been captured by the financial markets, and it may take another economic collapse to motivate Congress to act. The current repo crisis could be the fuse that triggers that collapse.

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This article was first posted on Truthdig.com. Ellen Brown chairs the Public Banking Institute and has written thirteen books, including her latest, Banking on the People: Democratizing Money in the Digital Age.  She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

Former Federal Reserve Chairman Alan Greenspan called Paul Volcker “the most effective chairman in the history of the Federal Reserve.” But while Volcker, who passed away Dec. 8 at age 92, probably did have the greatest historical impact of any Fed chairman, his legacy is, at best, controversial.

“He restored credibility to the Federal Reserve at a time it had been greatly diminished,” wrote his biographer, William Silber. Volcker’s policies led to what was called “the New Keynesian revolution,” putting the Fed in charge of controlling the amount of money available to consumers and businesses by manipulating the federal funds rate (the interest rate at which banks borrow from each other). All this was because Volcker’s “shock therapy” of the early 1980s – raising the federal funds rate to an unheard of 20% – was credited with reversing the stagflation of the 1970s. But did it? Or was something else going on?

Less discussed was Volcker’s role at the behest of President Richard Nixon in taking the dollar off the gold standard, which he called “the single most important event of his career.” He evidently intended for another form of stable exchange system to replace the Bretton Woods system it destroyed, but that did not happen. Instead, freeing the dollar from gold unleashed an unaccountable central banking system that went wild printing money for the benefit of private Wall Street and London financial interests.

The power to create money can be a good and necessary tool in the hands of benevolent leaders working on behalf of the people and the economy. But like with the Sorcerer’s Apprentice in Disney’s “Fantasia,” if it falls in the wrong hands, it can wreak havoc on the world. Unfortunately for Volcker’s legacy and the well-being of the rest of us, his signature policies led to the devastation of the American working class in the 1980s and ultimately set the stage for the 2008 global financial crisis.

The Official Story and Where It Breaks Down

According to a Dec. 9 obituary in The Washington Post:

Mr. Volcker’s greatest historical mark was in eight years as Fed chairman. When he took the reins of the central bank, the nation was mired in a decade-long period of rapidly rising prices and weak economic growth. Mr. Volcker, overcoming the objections of many of his colleagues, raised interest rates to an unprecedented 20%, drastically reducing the supply of money and credit.

The Post acknowledges that the effect on the economy was devastating, triggering what was then the deepest economic downturn since the Depression of the 1930s, driving thousands of businesses and farms to bankruptcy and propelling the unemployment rate past 10%:

Mr. Volcker was pilloried by industry, labor unions and lawmakers of all ideological stripes. He took the abuse, convinced that this shock therapy would finally break Americans’ expectations that prices would forever rise rapidly and that the result would be a stronger economy over the longer run.

On this he was right, contends the author:

Soon after Mr. Volcker took his foot off the brake of the U.S. economy in 1981, and the Fed began lowering interest rates, the nation began a quarter century of low inflation, steady growth, and rare and mild recessions. Economists attribute that period, one of the sunniest in economic history, at least in part to the newfound credibility as an inflation-fighter that Mr. Volcker earned for the Fed.

That is the conventional version, but the stagflation of the 1970s and its sharp reversal in the early 1980s appears more likely to have been due to a correspondingly sharp rise and fall in the price of oil. There is evidence this oil shortage was intentionally engineered for the purpose of restoring the global dominance of the U.S. dollar, which had dropped precipitously in international markets after it was taken off the gold standard in 1971.

The Other Side of the Story

How the inflation rate directly followed the price of oil was tracked by Benjamin Studebaker in a 2012 article titled “Stagflation: What Really Happened in the 70’s”:

We see that the problem begins in 1973 with the ’73-’75 recession – that’s when growth first dives. In October of 1973, the Organisation of Petroleum Exporting Countries declared an oil embargo upon the supporters of Israel – western nations. The ’73-’75 recession begins in November of 1973, immediately after. During normal recessions, inflation does not rise – it shrinks, as people spend less and prices fall. So why does inflation rise from ’73-’75? Because this recession is not a normal recession – it is sparked by an oil shortage. The price of oil more than doubles in the space of a mere few months from ’73-’74. Oil is involved in the manufacturing of plastics, in gasoline, in sneakers, it’s everywhere. When the price of oil goes up, the price of most things go up. The spike in the oil price is so large that it drives up the costs of consumer goods throughout the rest of the economy so fast that wages fail to keep up with it. As a result, you get both inflation and a recession at once.

… Terrified by the double-digit inflation rate in 1974, the Federal Reserve switches gears and jacks the interest rate up to near 14%. … The economy slips back into the throws of the recession for another year or so, and the unemployment rate takes off, rising to around 9% by 1975. …

Then, in 1979, the economy gets another oil price shock (this time caused by the Revolution in Iran in January of that year) in which the price of oil again more than doubles. The result is a fall in growth and inflation knocked all the way up into the teens. The Federal Reserve tries to fight the oil-driven inflation by raising interest rates high into the teens, peaking out at 20% in 1980.

… [B]y 1983, the unemployment rate has peaked at nearly 11%. To fight this, the Federal Reserve knocks the interest rate back below 10%, and meanwhile, alongside all of this, Ronald Reagan spends lots of money and expands the state in ’82/83. … Why does inflation not respond by returning? Because oil prices are falling throughout this period, and by 1985 have collapsed utterly.

The federal funds rate was just below 10% in 1975 at the height of the early stagflation crisis. How could the same rate that was responsible for inflation in the 1970s drop the consumer price index to acceptable levels after 1983? And if the federal funds rate has that much effect on inflation, why is the extremely low 1.55% rate today not causing hyperinflation? What Fed Chairman Jerome Powell is now fighting instead is deflation, a lack of consumer demand causing stagnant growth in the real, producing economy.

Thus it looks as if oil, not the federal funds rate, was the critical factor in the rise and fall of consumer prices in the 1970s and 1980s. “Stagflation” was just a predictable result of the shortage of this essential commodity at a time when the country was not energy-independent. The following chart from Business Insider Australia shows the historical correlations:

The Plot Thickens

But there’s more. The subplot is detailed by William Engdahl in “The Gods of Money”(2009). To counter the falling dollar after it was taken off the gold standard, U.S. Secretary of State Henry Kissinger and President Nixon held a clandestine meeting in 1972 with the Shah of Iran. Then, in 1973, a group of powerful financiers and politicians met secretly in Sweden to discuss how the dollar might effectively be “backed” by oil. An arrangement was finalized in which the oil-producing countries of OPEC would sell their oil only in U.S. dollars, and the dollars would wind up in Wall Street and London banks, where they would fund the burgeoning U.S. debt.

For the OPEC countries, the quid pro quo was military protection, along with windfall profits from a dramatic boost in oil prices. In 1974, according to plan, an oil embargo caused the price of oil to quadruple, forcing countries without sufficient dollar reserves to borrow from Wall Street and London banks to buy the oil they needed. Increased costs then drove up prices worldwide.

The story is continued by Matthieu Auzanneau in “Oil, Power, and War: A Dark History”:

The panic caused by the Iranian Revolution raised a new tsunami of inflation that was violently unleashed on the world economy, whose consequences were even greater than what took place in 1973. Once again, the sharp, unexpected increase in the price of crude oil instantly affected transportation, construction, and agriculture – confirming oil’s ubiquity. … The time of draconian monetarist policies advocated by economist Milton Friedman, David Rockefeller’s protégé, had arrived. The Bank of England’s interest rate was around 16% in 1980. The impact on the economy was brutal. …

Appointed by President Carter in August 1979, Paul Volcker, the new chief of the Federal Reserve, administered the same shock treatment [drastically raising interest rates] to the American economy. Carter had initially offered the position to David Rockefeller; Chase Manhattan’s president politely declined the offer and “strongly” recommended that Carter appeal to Volcker (who had been a Chase vice president in the 1960s). To stop the spiral of inflation that endangered the profitability and stability of all banks, the Federal Reserve increased its benchmark rate to 20% in 1980 and 1981. The following year, 1982, the American economy experienced a 2% recession, much more severe than the recession of 1974.

In an article in American Opinion in 19179, Gary Allen, author of “None Dare Call It Conspiracy: The Rockefeller Files” (1971), observed that both Volcker and Henry Kissinger were David Rockefeller protégés. Volcker had worked for Rockefeller at Chase Manhattan Bank and was a member of the Trilateral Commission and the Council on Foreign Relations. In 1971, when he was Treasury undersecretary for monetary affairs, Volcker played an instrumental role in the top-secret Camp David meeting at which the president approved taking the dollar off the gold standard. Allen wrote that it was Volcker who “led the effort to demonetize gold in favor of bookkeeping entries as part of another international banking grab. His appointment now threatens an economic bust.”

Volcker’s Real Legacy

Allen went on:

How important is the post to which Paul Volcker has been appointed? The New York Times tells us: “As the nation’s central bank, the Federal Reserve System, which by law is independent of the Administration and Congress, has exclusive authority to control the amount of money available to consumers and businesses.” … This means that the Federal Reserve Board has life-and-death power over the economy.

And that is Paul Volcker’s true legacy. At a time when the Fed’s credibility was “greatly diminished,” he restored to it the life-and-death power over the economy that it continues to exercise today. His “shock therapy” of the early 1980s broke the backs of labor and the unions, bankrupted the savings and loans, and laid the groundwork for the “liberalization” of the banking laws that allowed securitization, derivatives, and the repo market to take center stage. As noted by Jeff Spross in The Week, Volcker’s chosen strategy essentially loaded all the pain onto the working class, an approach to monetary policy that has shaped Fed policy ever since.

In 2008-09, the Fed was an opaque accessory to the bank heist in which massive fraud was covered up and the banks were made whole despite their criminality. Taking the dollar off the gold standard allowed the Fed to engage in the “quantitative easing” that underwrote this heist. Bolstered by OPEC oil backing, uncoupling the dollar from gold also allowed it to maintain and expand its status as global reserve currency.

What was Volcker’s role in all this? He is described by those who knew him as a personable man who lived modestly and didn’t capitalize on his powerful position to accumulate personal wealth. He held a lifelong skepticism of financial elites and financial “innovation.” He proposed a key restriction on speculative activity by banks that would become known as the “Volcker Rule.” In the late 1960s, he opposed allowing global exchange rates to float freely, which he said would allow speculators to “pounce on a depreciating currency, pushing it even lower.” And he evidently regretted the calamity caused by his 1980s shock treatment, saying if he could do it over again, he would do it differently.

It could be said that Volcker was a good man, who spent his life trying to rectify that defining moment when he helped free the dollar from gold. Ultimately, eliminating the gold standard was a necessary step in allowing the money supply to expand to meet the needs of trade. The power to create money can be a useful tool in the right hands. It just needs to be recaptured and wielded in the public interest, following the lead of the American colonial governments that first demonstrated its very productive potential.

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This article was first posted on Truthdig.com. Ellen Brown chairs the Public Banking Institute and has written thirteen books, including her latest, Banking on the People: Democratizing Money in the Digital Age.  She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

Ellen Brown

http://EllenBrown.com

April 22, 2018

The Fed is aggressively raising interest rates, although inflation is contained, private debt is already at 150% of GDP, and rising variable rates could push borrowers into insolvency. So what is driving the Fed’s push to “tighten”?

On March 31^st the Federal Reserve raised its benchmark interest rate for the sixth time in 3 years and signaled its intention to raise rates twice more in 2018, aiming for a fed funds target of 3.5% by 2020. LIBOR (the London Interbank Offered Rate) has risen even faster than the fed funds rate, up to 2.3% from just 0.3% 2-1/2 years ago. LIBOR is set in London by private agreement of the biggest banks, and the interest on $3.5 trillion globally is linked to it, including $1.2 trillion in consumer mortgages.

Alarmed commentators warn that global debt levels have reached $233 trillion, more than three times global GDP; and that much of that debt is at variable rates pegged either to the Fed’s interbank lending rate or to LIBOR. Raising rates further could push governments, businesses and homeowners over the edge. In its Global Financial Stability report in April 2017, the International Monetary Fund warned that projected interest rises could throw 22% of US corporations into default.

Then there is the US federal debt, which has more than doubled since the 2008 financial crisis, shooting up from $9.4 trillion in mid-2008 to over $21 trillion in April 2018. Adding to that debt burden, the Fed has announced that it will be dumping its government bonds acquired through quantitative easing at the rate of $600 billion annually. It will sell $2.7 trillion in federal securities at the rate of $50 billion monthly beginning in October. Along with a government budget deficit of $1.2 trillion, that’s nearly $2 trillion in new government debt that will need financing annually.

If the Fed follows through with its plans, projections are that by 2027, US taxpayers will owe $1 trillion annually just in interest on the federal debt. That is enough to fund President Trump’s original trillion dollar infrastructure plan every year. And it is a direct transfer of wealth from the middle class to the wealthy investors holding most of the bonds. Where will this money come from? Even crippling taxes, wholesale privatization of public assets, and elimination of social services will not cover the bill.

With so much at stake, why is the Fed increasing interest rates and adding to government debt levels? Its proffered justifications don’t pass the smell test.

“Faith-Based” Monetary Policy

In setting interest rates, the Fed relies on a policy tool called the “Phillips curve,” which allegedly shows that as the economy nears full employment, prices rise. The presumption is that workers with good job prospects will demand higher wages, driving prices up. But the Phillips curve has proven virtually useless in predicting inflation, according to the Fed’s own data. Former Fed Chairman Janet Yellen has admitted that the data fails to support the thesis, and so has Fed Governor Lael Brainard. Minneapolis Fed President Neel Kashkari calls the continued reliance on the Phillips curve “faith-based” monetary policy. But the Federal Open Market Committee (FOMC), which sets monetary policy, is undeterred. 

“Full employment” is considered to be 4.7% unemployment. When unemployment drops below that, alarm bells sound and the Fed marches into action. The official unemployment figure ignores the great mass of discouraged unemployed who are no longer looking for work, and it includes people working part-time or well below capacity. But the Fed follows models and numbers, and as of April 2018, the official unemployment rate had dropped to 4.3%. Based on its Phillips curve projections, the FOMC is therefore taking steps to aggressively tighten the money supply.

The notion that shrinking the money supply will prevent inflation is based on another controversial model, the monetarist dictum that “inflation is always and everywhere a monetary phenomenon”: inflation is always caused by “too much money chasing too few goods.” That can happen, and it is called “demand-pull” inflation. But much more common historically is “cost-push” inflation: prices go up because producers’ costs go up. And a major producer cost is the cost of borrowing money. Merchants and manufacturers must borrow in order to pay wages before their products are sold, to build factories, buy equipment and expand. Rather than lowering price inflation, the predictable result of increased interest rates will be to drive consumer prices up, slowing markets and increasing unemployment – another Great Recession. Increasing interest rates is supposed to cool an “overheated” economy by slowing loan growth, but lending is not growing today. Economist Steve Keen has shown that at about 150% private debt to GDP, countries and their populations do not take on more debt. Rather, they pay down their debts, contracting the money supply; and that is where we are now.  

The Fed’s reliance on the Phillips curve does not withstand scrutiny. But rather than abandoning the model, the Fed cites “transitory factors” to explain away inconsistencies in the data. In a December 2017 article in The Hill, Tate Lacey observed that the Fed has been using this excuse ever since 2012, citing one “transitory factor” after another, from temporary movements in oil prices, to declining import prices and dollar strength, to falling energy prices, to changes in wireless plans and prescription drugs. The excuse is wearing thin.

The Fed also claims that the effects of its monetary policies lag behind the reported data, making the current rate hikes necessary to prevent problems in the future. But as Lacey observes, GDP is not a lagging indicator, and it shows that the Fed’s policy is failing. Over the last two years, leading up to and continuing through the Fed’s tightening cycle, nominal GDP growth averaged just over 3%; while in the two prior years, nominal GDP grew at more than 4%. Thus “the most reliable indicator of the stance of monetary policy, nominal GDP, is already showing the contractionary impact of the Fed’s policy decisions,” says Lacey, “signaling that its plan will result in further monetary tightening, or worse, even recession.”

Follow the Money

If the Phillips curve, the inflation rate and loan growth don’t explain the push for higher interest rates, what does? The answer was suggested in an April 12^th Bloomberg article by Yalman Onaran, titled “Surging LIBOR, Once a Red Flag, Is Now a Cash Machine for Banks.”  He wrote:

The largest U.S. lenders could each make at least $1 billion in additional pretax profit in 2018 from a jump in the London interbank offered rate for dollars, based on data disclosed by the companies. That’s because customers who take out loans are forced to pay more as Libor rises while the banks’ own cost of credit has mostly held steady.

During the 2008 crisis, high LIBOR rates meant capital markets were frozen, since the banks’ borrowing rates were too high for them to turn a profit. But US banks are not dependent on the short-term overseas markets the way they were a decade ago. They are funding much of their operations through deposits, and the average rate paid by the largest US banks on their deposits climbed only about 0.1% last year, despite a 0.75% rise in the fed funds rate. Most banks don’t reveal how much of their lending is at variable rates or is indexed to LIBOR, but Oneran comments:

JPMorgan Chase & Co., the biggest U.S. bank, said in its 2017 annual report that $122 billion of wholesale loans were at variable rates. Assuming those were all indexed to Libor, the 1.19 percentage-point increase in the rate in the past year would mean $1.45 billion in additional income.

Raising the fed funds rate can be the same sort of cash cow for US banks. According to a December 2016 Wall Street Journal article titled “Banks’ Interest-Rate Dreams Coming True”:

While struggling with ultralow interest rates, major banks have also been publishing regular updates on how well they would do if interest rates suddenly surged upward. . . . Bank of America . . . says a 1-percentage-point rise in short-term rates would add $3.29 billion. . . . [A] back-of-the-envelope calculation suggests an incremental $2.9 billion of extra pretax income in 2017, or 11.5% of the bank’s expected 2016 pretax profit . . . .

As observed in an April 12 article on Seeking Alpha:

About half of mortgages are . . . adjusting rate mortgages [ARMs] with trigger points that allow for automatic rate increases, often at much more than the official rate rise. . . .

One can see why the financial sector is keen for rate rises as they have mined the economy with exploding rate loans and need the consumer to get caught in the minefield.

Even a modest rise in interest rates will send large flows of money to the banking sector. This will be cost-push inflationary as finance is a part of almost everything we do, and the cost of business and living will rise because of it for no gain.

Cost-push inflation will drive up the Consumer Price Index, ostensibly justifying further increases in the interest rate, in a self-fulfilling prophecy in which the FOMC will say, “We tried – we just couldn’t keep up with the CPI.”

A Closer Look at the FOMC

The FOMC is composed of the Federal Reserve’s seven-member Board of Governors, the president of the New York Fed, and four presidents from the other 11 Federal Reserve Banks on a rotating basis. All 12 Federal Reserve Banks are corporations, the stock of which is 100% owned by the banks in their districts; and New York is the district of Wall Street. The Board of Governors currently has four vacancies, leaving the member banks in majority control of the FOMC. Wall Street calls the shots; and Wall Street stands to make a bundle off rising interest rates.

The Federal Reserve calls itself “independent,” but it is independent only of government. It marches to the drums of the banks that are its private owners. To prevent another Great Recession or Great Depression, Congress needs to amend the Federal Reserve Act, nationalize the Fed, and turn it into a public utility, one that is responsive to the needs of the public and the economy.

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This article was originally published on Truthdig.com. Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of twelve books including Web of Debt and The Public Bank Solution. Her 300+ blog articles are posted at EllenBrown.com.

As a society obsessed by money, we pay a gigantic price for not educating high school and college students about money and banking. The ways of the giant global banks – both commercial and investment operations – are as mysterious as they are damaging to the people. Big banks use the Federal Reserve to maximize their influence and profits. The federal Freedom of Information Act provides an exemption for matters that are “contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions.” This exemption allows financial institutions to wallow in secrecy. Financial institutions are so influential in Congress that Senator Durbin (D, IL) says “[The banks] frankly own this place.”