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OpEdNews Op Eds    H3'ed 12/24/21

The Real Antidote to Inflation

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Inflation
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The Federal Reserve is caught between a rock and a hard place. Inflation grew by 6.8% in November, the fastest in 40 years, a trend the Fed has now acknowledged is not "transitory." The conventional theory is that inflation is due to too much money chasing too few goods, so the Fed is under heavy pressure to "tighten" or shrink the money supply. Its conventional tools for this purpose are to reduce asset purchases and raise interest rates. But corporate debt has risen by $1.3 trillion just since early 2020; so if the Fed raises rates, a massive wave of defaults is likely to result. According to financial advisor Graham Summers in an article titled "The Fed Is About to Start Playing with Matches Next to a $30 Trillion Debt Bomb," the stock market could collapse by as much as 50%.

Even more at risk are the small and medium-sized enterprises (SMEs) that are the backbone of the productive economy, companies that need bank credit to survive. In 2020, 200,000 more U.S. businesses closed than in normal pre-pandemic years. SMEs targeted as "nonessential" were restricted in their ability to conduct business, while the large international corporations remained open. Raising interest rates on the surviving SMEs could be the final blow.

Cut Demand or Increase Supply?

The argument for raising interest rates is that it will reduce the demand for bank credit, which is now acknowledged to be the source of most of the new money in the money supply. In 2014, the Bank of England wrote in its first-quarter report that 97% of the UK money supply was created by banks when they made loans. In the U.S. the figure is not quite so high, but well over 90% of the U.S. money supply is also created by bank lending.

Left unanswered is whether raising interest rates will lower prices in an economy beset with supply problems. Oil and natural gas shortages, food shortages, and supply chain disruptions are major contributors to today's high prices. Raising interest rates will hurt, not help, the producers and distributors of those products, by raising their borrowing costs. As observed by Canadian senator and economist Diane Bellemare:

Raising interest rates may cool off demand, but today's high prices are tightly tied to supply issues - goods not coming through to manufacturers or retailers in a predictable way, and global markets not able to react quickly enough to changing tastes of consumers.

" A singular focus on inflation could lead to a ratcheting up of interest rates at a time when Canada [and the U.S.] should be increasing its ability to produce more goods, and supplying retailers and consumers alike with what they need.

Rather than a reduction in demand, we need more supply available locally; and to fund its production, credit-money needs to increase. When supply and demand increase together, prices remain stable, while GDP and incomes go up.

So argues UK Prof. Richard Werner, a German-born economist who invented the term "quantitative easing" (QE) when he was working in Japan in the 1990s. Japanese banks had pumped up demand for housing, driving up prices to unsustainable levels, until the market inevitably crashed and took the economy down with it. The QE that Werner prescribed was not the asset-inflating money creation we see today. Rather, he recommended increasing GDP by driving money into the real, productive economy; and that is what he recommends for today's economic crisis.

How to Fund Local Production

SMES make up around 97-99% of the private sector of almost every economy globally. Despite massive losses from the pandemic lockdowns, in the U.S. there were still 30.7 million small businesses reported in December 2020. Small companies account for 64 percent of new U.S. jobs; yet in most U.S. manufacturing sectors, productivity growth is substantially below the standards set by Germany, and many U.S. SMEs are not productive enough to compete with the cost advantages of Chinese and other low-wage competitors. Why?

Werner observes that Germany exports nearly as much as China does, although the German population is a mere 6% of China's. The Chinese also have low-wage advantages. How can German small firms compete when U.S. firms cannot? Werner credits Germany's 1,500 not-for-profit/community banks, the largest number in the world. Seventy percent of German deposits are with these local banks - 26.6% with cooperative banks and 42.9% with publicly-owned savings banks called Sparkassen, which are legally limited to lending in their own communities. Together these local banks do over 90% of SME lending. Germany has more than ten times as many banks engaged in SME lending as the UK, and German SMEs are world market leaders in many industries.

Small banks lend to small companies, while large banks lend to large companies - and to large-scale financial speculators. German community banks were not affected by the 2008 crisis, says Werner, so they were able to increase SME lending after 2008; and as a result, there was no German recession and no increase in unemployment.

China's success, too, Werner attributes to its large network of community banks. Under Mao, China had a single centralized national banking system. In 1982, guided by Deng Xiaoping, China reformed its money system and introduced thousands of commercial banks, including hundreds of cooperative banks. Decades of double-digit growth followed. "Window guidance" was also used: harmful bank credit creation for asset transactions and consumption were suppressed, while productive credit was encouraged.

Werner's recommendations for today's economic conditions are to reform the money system by: banning bank credit for transactions that don't contribute to GDP; creating a network of many small community banks lending for productive purposes, returning all gains to the community; and making bank behavior transparent, accountable and sustainable. He is chairman of the board of Hampshire Community Bank, launched just this year, which lays out the model. It includes no bonus payments to staff, only ordinary modest salaries; credit advanced mainly to SMEs and for housing construction (buy-to-build mortgages); and ownership by a local charity for the benefit of the people in the county, with half the votes in the hands of the local authorities and universities that are its investors.

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Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling WEB OF DEBT. In THE PUBLIC BANK SOLUTION, her latest book, she explores successful public banking models historically and (more...)
 

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molly cruz

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With Zip for excuse; I'm wondering if part of the problem, if there even is one or if the braying media is just looking for an excuse to bray; is that globalism is upon us whether we like it or even believe in it; like the weather, it's not our choice.

The economy of us as a global species is trying to wiggle out of the restraints put on it by our insistence that we're not one animal, but warring conflicting competing nations; the old model in other words. I'm thinking it's medieval mindsets that hamper a smooth transition to worldwide consciousness and a trouble free movement of wealth worldwide. We get a cut on our knee; we put a bandage on it. A nation falters for one reason or another, and we insult it and "lend" it aid, but still act as though it's not just a part of us.

Submitted on Saturday, Dec 25, 2021 at 7:50:04 AM

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Ellen Brown

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Thanks Molly, good points! and agreed. Season's greetings, Ellen

Submitted on Saturday, Dec 25, 2021 at 1:46:20 PM

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thanks, ellen, for greatly needed 'common sense'.

do ,please, enjoy pleasant holydays.

Submitted on Saturday, Dec 25, 2021 at 7:58:28 AM

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Ellen Brown

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Thanks Nelson! Season's greetings and best wishes for a good 2022.

Submitted on Saturday, Dec 25, 2021 at 1:48:08 PM

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David William Pear

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Very sound reasoning and advice, Ellen. Inevitably it will go unheeded.

The pandemic came just in time to bailout the big banks with trillion$ in "overnight" loans, QE and the $2.2 trillion CARES act, etc. but whose counting--- nobody. Not the liberal class. They have been too discombobulated with TDS, germophobia, and JANUARY 6TH! to notice that they have been snookered again by the banksters &c.

As you point out medical martial law wiped out 40% of small businesses, many of them built over several generations. It all went to the oligopolies. And it is amazing to see all the new "mom and pop" restaurants reopening, but now they are actually just fronts for big chains, and just look like mom 'n pops.

The tremendous transfer of wealth upwards at the expense of the middle class and poor was no accident. Thanks to the pandemic the liberal class has forgotten all about the forever wars too, but the MIC hasn't. Just the overt military budget is a record $768 Billion, and double or triple that for all related and covert war profiteering.

Somehow all that has to be paid for, and it ain't going to be the rich and famous. Inflation is the hidden tax that will be paid by the middle class and poor, as usual.

Now if I were a conspiracy theorist my guess would be that the powers that be will purposely crash the rest of the old economy with stagflation, just as they did in the 1970's. It was a purposely designed destruction and concentration of wealth and power then, and it will be so in the 2020s too. All of this will be masked (pun) with fighting the war on covid1984.

Like I said. Everything you said makes sense, just like M4A and the $15 minimum wage makes sense. But they just don't CARES. They always name their legislation for the opposite. Get out your old WIN buttons.

Submitted on Saturday, Dec 25, 2021 at 10:30:57 PM

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