Trumping the Federal Debt Without Playing the
Default Card
By Ellen Brown
“The United States can pay any debt it has
because we can always print money to do that. So there is zero
probability of default.” — Former Fed Chairman
Alan Greenspan on Meet
the Press, August 2011
In a post on “Sovereign Man” dated August 14th,
Simon Black argued that Donald Trump may be the right man for
the presidency:
[T]here’s one thing that really sets him
apart, that, in my opinion, makes him the most qualified person
for the job:
Donald Trump is an expert at declaring
bankruptcy.
When the going gets tough, Trump stiffs his
creditors. He’s done it four times!
Candidly, this is precisely what the Land of
the Free needs right now: someone who can stop beating around
the bush and just get on with it already.
Black says the country is officially bankrupt,
with the government’s financial statements showing a negative net
worth of $17.7 trillion:
Nations that pass the economic point of no
return can’t rebuild until they hit rock bottom. And the US is
way past that point. So let’s get on with it already and hit the
reset button.
Black recommends doing this by defaulting,
preferably on Social Security and Medicare. But that is unlikely to
suit this leading Republican candidate.
As Trump said on Meet the Press on August 16:
I want people to be taken care of from a
healthcare standpoint.… I want to save Social Security without
cuts. I want … a strong country with very little debt.
How can the country remain strong with very little
debt, without defaulting on Social Security, Medicare, or the
federal debt itself?
There is a way. The government can reduce the debt
by buying it – and ripping it up. The debt can be bought either with
debt-free US Notes of the sort issued during the Civil War, or with
US dollars issued by the Federal Reserve in the form of
“quantitative easing.”
The vast majority of the money supply today is
created by banks when they make loans, as
the Bank of England recently acknowledged. Banks create money by
“monetizing” debt, turning loans into the digital deposits that make
up most of the circulating money supply. The government could push
the reset button by monetizing its own debt, turning it into what it
should have been all along – debt-free, interest-free dollars. As
Thomas Edison observed in 1921:
If the Nation can issue a dollar bond it can
issue a dollar bill. The element that makes the bond good makes
the bill good also. . . . It is absurd to say our Country can
issue bonds and cannot issue currency. Both are promises to pay,
but one fattens the usurer and the other helps the People.
That is not just a quaint idea from the 1920s.
Credible authorities are making that argument today. In November
2010,
Dean Baker, co-director of the Center for Economic and Policy
Research in Washington, wrote in response to the debt ceiling
crisis:
There is no reason that the Fed can’t just buy
this debt (as it is largely doing) and hold it indefinitely. If
the Fed holds the debt, there is no interest burden for future
taxpayers. The Fed refunds its interest earnings to the Treasury
every year. Last year the Fed refunded almost $80 billion in
interest to the Treasury, nearly 40 percent of the country’s net
interest burden. And the Fed has other tools to ensure that the
expansion of the monetary base required to purchase the debt
does not lead to inflation.
In 2011, Republican presidential candidate Ron
Paul proposed dealing with the debt ceiling by simply voiding out
the $1.7 trillion in federal securities then held by the Fed. As
Stephen Gandel explained Paul’s
solution in Time Magazine, the Treasury pays interest on the
securities to the Fed, which returns 90% of these payments to the
Treasury. Despite this shell game of payments, the $1.7 trillion in
US bonds owned by the Fed is still counted toward the debt ceiling.
Paul’s plan:
Get the Fed and the Treasury to rip up that
debt. It’s fake debt anyway. And the Fed is legally allowed to
return the debt to the Treasury to be destroyed.
Congressman Alan Grayson, a Democrat,
also endorsed this proposal.
In February 2015, financial author
Richard Duncan made a strong case for going further than
monetizing existing debt. He argued that under current market
conditions, the US could rebuild its collapsing infrastructure with
quantitative easing without causing price inflation. Prices go up
when demand (money) exceeds supply (goods and services); and with
automation and the availability of cheap labor in vast global
markets today, supply (productivity) can keep up with demand for
decades to come. Duncan observed:
Quantitative Easing has only been possible
because it has occurred at a time when Globalization is driving
down the price of labor and industrial goods. The combination of
fiat money and Globalization creates a unique moment in history
where the governments of the developed economies can print money
on an aggressive scale without causing inflation.
They should take advantage of this
once-in-history opportunity to borrow more in order to invest in
new industries and technologies, to restructure their economies
and to retrain and educate their workforce at the post-graduate
level. If they do, they could not only end the global economic
crisis, but also ensure that the standard of living in the
developed world continues to improve, rather than sinking down
to third world levels.
Abraham Lincoln revived the colonial system of
government-issued money when he endorsed the printing of $450
million in US Notes or “greenbacks” during the Civil War. The
greenbacks not only helped the Union win the war but triggered a
period of robust national growth and saved the taxpayers about $14
billion in interest payments (figuring an average of $300 million in
outstanding US Notes over 150 years, at an average real interest
rate of 2.6% compounded annually). The US federal debt has been
growing ever since 1835, when President Andrew Jackson last paid it
off and closed down the Second US Bank. If judicious use of US Notes
had continued to the present, there might now be no federal debt at
all.
The Inflation
Snag
In short, the sovereign debt crisis can be solved
by issuing sovereign money. But is there really such a thing as a
free lunch? Wouldn’t buying up the debt with newly-issued money lead
to a hyperinflationary disaster?That was the fear when the Federal
Reserve began its QE program in 2008. But the Fed has now monetized
$4.5 trillion in QE ($2.7 trillion of which consisted of buying
back federal securities, and these fears have not materialized. The
stock market has gone up, but
not apparently from an increased money supply. More likely it is
from very low interest rates, making bonds unattractive and
facilitating stock buybacks and borrowing to invest. The cost of
produce has gone up, but it is largely because of drought in
California, which supplies nearly half the country’s fruits,
vegetables and nuts; and because speculators have moved into
foodstuffs. Despite all that, the overall inflation rate remains at
manageable levels.
Why didn’t $4.5 trillion in QE drive prices into
the stratosphere? As financial writer Matthew Kerkhoff explained in
a November 2013 article, quantitative easing is just an asset swap:
When the Fed creates $85 billion, it uses this
money to buy bonds . . . . When the Fed creates and gives $85
billion in reserves to its member banks, it removes $85 billion
worth of assets (bonds) from the balance sheets of those same
member banks. The result is that no new net financial
assets enter the economy. . . .
It’s much more accurate to think of the Fed’s
QE program as an asset swap. In fact it’s even more accurate to
think of it as a liquidity swap. . . . In this
context liquidity refers to the ease with which money can be
used.
Bonds are more cumbersome to spend than cash, but
they still represent purchasing power. Government securities that
can be quickly converted into cash or that are near maturity are
considered a form of “near money.” When the Fed buys the bonds,
it is simply converting this less-liquid money back into more-liquid
money. As Warren Mosler and John Carney explain on CNBC.com:
Quantitative easing is about the Fed buying
Treasury securities. When you (voluntarily) sell them to the
Fed, at current market prices, the Fed just shifts your dollars
from your securities account to your bank’s reserve account, all
at the Fed. So why should that do anything to the economy? You
have the same amount of dollars, and you could have shifted them
in the same market place any time you wanted in any case.
The QE liquidity swap does not increase the
circulating money supply. The money supply increased when the bonds
were issued – when the debt was incurred and the government spent
the funds.
Adding to the federal debt beyond its
current level (i.e. by funding infrastructure with new QE that is
not repaid with taxes) would increase the money competing
for goods and services. But the economy actually needs that
increased “demand” in order to promote full employment (one of the
Fed’s mandates). Demand (money) precedes supply (goods and
services). The money has to be out there searching for goods and
services before employers will add more workers to create this
increased supply. Money can be added to the point of full productive
capacity (full use of workers, supplies and machines) before adding
more will drive up prices. And as Richard Duncan observes, we are a
long way from full productive capacity now.
Whether full productive capacity would exhaust the
earth’s resources is another question, but there are many ways to
put people to work that either don’t use physical resources (e.g.
education, art, social service, environmental cleanup) or that
actually make resource use more efficient (investment in improved
infrastructure, sustainable energy, research and development).
Time to Reset
Back to Donald Trump. Besides his experience with
bankruptcy, Trump, along with Bernie Sanders on the left, is unique
in not being beholden to big money. Sanders does not take it, and
Trump does not need it. If either candidate makes it to the White
House, he will be in a position to stand up to Wall Street and do
what is right for the country. And that includes restoring the power
to issue the national money supply to the people of the nation
through their representative government.
Ellen Brown is an attorney, founder of the Public
Banking Institute, and author of twelve books including the
best-selling Web of Debt. Her
latest book, The Public
Bank Solution, explores successful public banking models
historically and globally. Her 300+ blog articles are at EllenBrown.com.
Listen to “It’s Our Money
with Ellen Brown” on PRN.FM.
