We are slouching toward a double dip, with all the human costs that implies. And we don't have to be doing that. That is the tragedy of our time.
The Problem Is Not Debt, But a Shrinking Money Supply and Too Few Jobs
The markets are not reacting to a "debt crisis." They are reacting to a jobs crisis and a "demand' crisis. They "look' at present indicators of jobs and sales, which have turned persistently negative. Problem is, most pundits and pols don't understand that jobs and sales are both dependent on "demand," which means getting money into the pockets of consumers, most of whom have been robbed blind by Wall Street, the banksters, and the failing economy.
In addition, the money supply today has shrunk. But we don't see this shrinkage because it is primarily in the "shadow banking system," the thing that collapsed in 2008.
The shadow banking system used to be reflected in M3 , but the Fed no longer reports it. In July 2010, however, the New York Fed posted on its website a staff report titled "Shadow Banking." It said that the shadow banking system had shrunk by $5 trillion since its peak in March 2008, when it was valued at about $20 trillion -- actually larger than the traditional banking system. In July 2010, the shadow system was down to about $15 trillion, compared to $13 trillion for the traditional banking system. (Click here for source article.)
Only about $2 trillion of this shrinkage has been replaced with the Fed's quantitative easing programs, leaving a $3 trillion monetary hole to be filled; and only the government is in a position to fill it.
In short, we have been sold the idea that there is a "debt crisis" when there is really a liquidity crisis. And paying down the federal debt when money is already scarce just makes matters worse. Historically, when the deficit has been reduced, the money supply has been reduced along with it, throwing the economy into recession. And likely that's exactly what the Republicans want, for no other reason than to increase the likelihood that Obama will be defeated by a Republican in 2012.
Most of our money now comes into the world as debt, which is created on the books of banks and lent into the economy. If there were no debt, there would be no money to run the economy; and today, indeed, banks are loaning out ever less. Encouraged by Fed policy, banks have tightened up lending and are essentially sitting on most of their money, thereby shrinking the circulating money supply and the economy right along with it.
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