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.

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.