There doesn't have to be a national debt at all. Our officials and journalists are reporting as if it was a no-alternative law of nature that the Treasury has to get cash from the Fed in return for debt bonds whose principal and interest must be paid by taxpayers. That's debt slavery and false. The Constitution grants a power only to Congress to coin money. By amending the Federal Reserve Act (experimentally, temporarily, if you will) to put the Fed under the Treasury, it could be directed to create all the "greenback credit," loosely "government money," we need to spend into the economy for reflationary stimulus. Twice in our history, the government has done this (to fund the Revolutionary war army and the North's union-saving Civil War effort.) Maybe that wouldn't encumber future taxes, but wouldn't it "debauch the currency," grossly inflating it? Not necessarily. All our banks create credit (potential, not yet actual federal reserve "money") when they make loans. See the 10 minute YouTube Video "Zeitgeist Addendum: Modern Money Mechanics." It disappears when the loan is repaid. What's needed is only partial reflation of occupied homes that leaves them affordable, salable assets. Traditionally, Treasury sale of debt (bonds) gets Fed credit creation and thus encumbers future taxes. Mere spending by either Fed or Treasury wouldn't cause "too much money chasing too few goods" when it would be spent in stimulating ways that cause equal growth in supply of goods and services. Inflation is sometimes caused by real scarcity in all-out war, but other times by governments too cowardly to raise taxes to pay for wars they start. Read "The American Monetary Reform Act" on line or the books Web of Debt and The Lost Science of Money on monetizing the national debt. Consider: If you bought $50,000 of EE Bonds, face value $100,000, and the President signed a bill that monetized the national debt, authorized that Treasury debts are legal tender, you would have principal plus realized interest you could spend, save or invest. Would you have more "spending" money? No. You could spend it or save it in FDIC insured CD's or invest it. Repercussions of monetizing the debt? Yes, but less bad than further taxpayer debt slavery. See Note 1 at the end.
Are we there yet? - the bottom of market or job losses? According to a Mother Jones Article, there are 9,000 U.S. business journalists, all of whom missed the coming crash as the DOW drifted lower from Oct. of 2,007 to 2,008. Since they are not telling you about the alternative of monetizing the debt, don't expect them to perceive the bottom either. Bending over to accommodate big banks, Bush and Obama officials have been letting millions of Americans twist in the wind, losing jobs and homes and risking debt deflation panic. Debt and wages are sticky: you owe what you owe, and you get no raise, even when your assets and income decline. It's only a few very big banks that are unsound, and their problems were self-made, some; twice! Post - crash, JPMorgan Chase bought Washington Mutual andand Merrill Lynch, and Wells Fargo bought Wachovia. Like a B-movie remake, "I Married Two Zombies," failure to meet capital adequacy ratio is no excuse for refusal to lend bailout billions. Bear Stearns, Bank of America bought Countrywide
So what is to be done? Put the Federal Reserve under the Treasury, monetize as much of the national debt as needed for stimulus, and create greenback credit for federal government agencies to, bank-like, loan directly, but at no interest to people and businesses. College students might like long term, no interest loans right from the government? Cap private lending interest rates, stopping usury. Tell the courts, "You have the President and Congress's approval and legislative assistance, if necessary, to start writing down mortgages to allow people to stay in their homes." Tell the few big banks in deep trouble "We're suspending TARP and TALF. You have until December 31 to unwind your CDS's and write down your CDO's. If you are not solvent at that time, we are forcing you into bankruptcy reorganization. Your investment 'talent' may be hired to work at whatever salary and bonuses new owners or solvent banks will pay them."
According to Charles Kindleberger in Manias, Panics and Crashes, there have been about 40 such cycles since 1630. This bears out Hyman Minsky's Hypothesis that asset prices do not seek equilibrium of supply and demand like consumer prices. In Minsky's Financial Instability Model market participants perceive increasing value in some asset, usually real estate or some novel financial instrument. They buy it. The price goes up. Credit is extended to buy more. Credit extension is pro cyclical, raising the price far above reasonable. Eventually some shock (Note 2) occurs to slow, stop or drop the price. Selling, then panic and finally crash sets in as borrower-investors can't repay their debts. The rate of shock occurrence has accelerated during the 30 years of globalization.
Wealth concentrations like the F.I.R.E. sector (finance, insurance and real estate) are quite bipartisan in campaign contributions and lobbying. So they get favorable deregulation and lack of oversight whichever party, Republican or Democrat, is in the majority or holds the Presidency. That enables banksters to issue "insecurities" with increased leverage, decreased reserves and dead watchdogs like the SEC to refuse to stop a bankster like Bernie Madoff. Experts in all fields sometimes make catastrophic mistakes. But the guys at the top of the big banks have been criminally negligent in letting this occur. They've shown depraved indifference to the lives of poor and middle class people that sometimes have to hold begging benefits to get cash for expensive medical treatment. I found papers published in 2004 by Nomura Securities clearly showing to laymen the credit over-rating of CDO's and exceptional risks of synthetic CDO's. After doling out $billions, I've seen theatrical fussing over private jets and bonuses and a very reasonable proposal to unwind CDS's is to be found on line in a paper called "A Step by Step Resolution of the Subprime Crisis." But it would require some cooperative write down losses among the counterparties.
Stock brokers advise "Don't try to time the market. Buy and hold." But investors have so much portfolio inertia, we often hang on all the way to the bottom of a crash. The lesson of this is the old Socratic one--Really Know Thyself, thy real tolerance for risk, before deciding how to allocate savings. And do "time the market" somewhat. Don't be a day trader, but don't be so inert you lose more than a bear market 20%. Put trailing, resetting stops on your positions: 20% down over a year or less? Sell, fly to safety!
After a number of cycles nations develop central banks as lenders of last resort. Central banks function asymmetrically. They're OK for runs on banks and crash recovery. But they're poor at limiting manic credit expansion, curbing irrational enthusiasm. That's because expansions, whether sound or manic, ease both corporate and political governance. Everybody seems to begovernor on a machine. On a saw blade run by an engine, a governor senses variable loads like "blade free-spinning" versus "blade wood-cutting" and brakes or releases the drive shaft to keep the blade going at a nearly constant speed. A governor would diminish oscillations of credit contraction and expansion . (Note 3) doing a little better. Market systems need the analog of a
I hope two global agencies evolve. One would be a World Investment Advisory Council. It's purpose would be like a governor's sensor: to vet financial institutions and offerings. It could be financed by a financial transaction tax. It would hire and pay very well forensic accountants from many countries; employed in a merit-based system, independently of any country, with, e.g., Russians, Chinese, Arabs, and Latin Americans to vet American and E.U. institutions and securities, and vice versa. The second would be a World Ecosphere and Economies body. People are increasingly aware that GDP growth is destroying natural capital and depleting resources. This body would employ ecological economists to advise all nations what must be done to make market economies sustainable over-productive, so capacity utilization and employment are both down. Currently the U.S. capacity utilization index is 71%. While millions are out of jobs, 29% of American factory capacity is idle, no jobs being done in it. Overproductive waste is seen everywhere, e.g. the excess fat and sugar put in fast foods. Happiness surveys tend to show that beyond necessities and security, more stuff makes people debt slaves, but not happier. People who enter debt slavery needlessly buying large vehicles and over-sized houses are not, according to ecological economists, exercising "freedom" of consumer choice, but rather "license," "taking liberties," "licentiousness" in buying "luxury" products that make excessive use of natural capital. Advanced capitalist economies have become sluggish.
Fewer people are working, with forced overtime, while others are laid off. In the early 1950's UAW Ford Local 600 called for an example of a logical Redistributionist solution. Ford should pay its workers 40 hours pay for 30 hours work and rehire laid off workers. They would buy Ford cars. Ford didn't like the idea, and GM went on with Standard Oil, buying urban light rail public (trolley) systems, and tearing out the tracks so they could sell gas burners. Well, now American's real wages, after inflation, have been nearly stagnant for about 35 years. Families have had to get 2, 2.5, 3 jobs. Household debt has exploded and there's near zero net savings and negative household worth. Ecological economists maintain that we have to stop identifying success in attaining "full employment" at prevailing wages with growth in the Gross Domestic Product. Growth of excess capacity economies requires a rate of throughput of natural capital to waste that it is destroying natural capital and the earth's waste absorption capacity. It is no longer making a net contribution to increasing human welfare. We need to develop and implement concepts of sustainable living wages for shorter work weeks, or job and basic income guarantees for everyone. To avoid ecological disaster, over-productive economies must engage in redistributive job and income sharing.
The only nonviolent way Americans could start to get such more important redistribution, institution of ecological economics, a credit governor and international financial and ecosphere body, would be mass de-registration from the centrist Democratic and Republican parties, together with demanding that they institute complete public financing of elections and severe lobbying reforms. Meantime voters can find honest, intelligent independents, Libertarians and Greens to vote for.
1. Our international creditors, mainly China and Japan, would probably come shopping here, buying big stuff from us, rather than us endlessly buying little stuff from them. Maybe the dollar would lose its status as the only world reserve currency. Then oil prices would rise. But the real price of oil, including our military subsidy for occupying Iraq and supporting the Arab OPEC monarchies and environmental damage is very much higher than the pump price. I'd rather pay more, restrict consumption and prompt building a 21st century public non-oil railway system.
2. "Shocks" that produce manias or panics include the start or end of wars, discovery or restriction of a valuable commodity like gold or oil, bumper crops or harvest failures, government regulation or deregulation, new inventions that absorb a lot of capital or displace older technology like automobiles, television, computers, and the Internet. A credit expansion overshoot seems essential to the process. Currently we've had credit extension to weaker home buyers, over-payers for McMansions, the oil price spike and novel financial instruments of collateralized debt obligations. These cycles have become more frequent and severe globally over the last 30 years as a giant Tsunami of capital sloshes around the world expanding and then contracting economies of emerging markets in Russia, China, Asia, Latin America. International Monetary Fund conditions for crisis loans have forced changes from fixed to floating exchange rates or dollar repayment contributing to rapid de-valuation of indigenous currency.
3. The Bank of International Settlements sets an 8% capital adequacy ratio for noncentral private banks, but the real world lender of last resort, the International Monetary Fund, has a similarly asymmetrical double standard. For over 20 years of bailout loans, it has forbidden poor foreign country governments from "printing money" and required painful structural adjustments like raising interest rates, dropping basic subsidies, privatizing industry and firing workers. But it doesn't condemn U.S.-E.U. bank bailouts accompanied with just the reverse: government credit creation, lowered interest rates, food stamp increases, "nationalizing" of private banks, extension of unemployment benefits and stimulus job programs. IMF treatment is a main reason why people and leaders in many weaker countries around the world hate us. And there's strong continuity in economic advisement by Summers, Bernanke and Geithner.