The current ongoing crisis is a wholly predictable consequence of the structure of our monetary system, where private banks issue all of our money (except coins) as debt at interest. The political battle over government deficits and needed fiscal stimulus is based on a fundamental disagreement between progressives and Republicans about how our money system "should" operate.

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In a Sept.24 OpEdNews article by Robert Reich titled, "When Will Wall Street Call for More Federal Spending?"   http://www.opednews.com/articles/When-Will-Wall-Street-Call-by-Robert-Reich-110924-414.html , Robert wrote,

"If this keeps up, we'll have a showdown between establishment Republicans who understand what must be done -- and who will support substantially more federal spending in the short term in order to goose the economy -- and Tea Party zealots who refuse to face reality."

Some of the "Tea Party zealots" actually do see reality, but they evaluate it differently due to their Austrian School monetary perspective. Austrians believe gold is the only "real" money, the only "natural" (and thus inevitable) form of money. They think the creation of credit money based on a "fractional reserve" of gold bullion is scandalous, and the pure fiat dollar that we've had since 1971 is an unmitigated abomination.

In the Austrian worldview the money supply should be a fixed sum, growing only as fast as miners can dig up new gold. If the real economy also grows about as fast as the increase of gold/money, then overall there should be price stability.  Money would retain its purchasing power over time rather than being diluted by money supply "inflation".  

Austrians want to hold the value of money fixed, and the real economy must revolve doggedly around this moneycentric system for the benefit of the 5% of the population who have lots of money. Proponents of modern money theory (MMT), on the other hand, see the real economy as central, with an adjustable supply "fiat" money system being used to keep the economy functioning for the benefit of all of us 95% who do not already have a lifetime supply of money and who depend on working in a functioning economy to earn ongoing incomes.

In a zero sum money system like the Austrians' idealized gold bullion money, one person's monetary "profit" can only come at the expense of another person's monetary "loss".  There is by definition a "fixed supply" of bullion, and for one person to get more of it somebody else has to have less. Yet everyone agrees that we all need to "profit" from our work.  If a caveman "spends" 3000 calories per day hunting food, and only "earns" 2500 calories for his work, that "unprofitable" entrepreneur/worker is going to starve to death. We "need" to profit from our work.

Austrians, like classical economists before them and like neoclassical economists today, circumvent this zero sum arithmetic problem by conflating "goods values" with "money". The tailor converts $10 "worth of" cloth into $100 "worth of" coats, which "adds value" into the economic system. Then, ignoring the logical gap between an immaterial idea like "value", and a physical commodity like gold bullion, the classicals and Austrians assume that somehow the tailor is manufacturing not only "worth of" coats but is also somehow creating "money" to "buy" that added value.

Which is magical thinking, because in a gold money system ONLY miners and refiners and coin minters actually "produce" money. Everybody else produces other economic goods and services, but they produce exactly zero money. How the money is to get into the hands of buyers and sellers in the non money-producing sectors of the economy is always glossed over and never explained coherently by Austrians and neoclassicals, for the very good reason that such a system CANNOT be made to work in an economy that does all of its "trading" via the medium of "money".  

In fact we do not "trade".  We do not "exchange goods values".   We buy and sell. That is the critical difference between an imaginary barter economy and real world money economies.

As long as money is merely a "representation" of goods values in a barter economy, as Adam Smith invited us to imagine, then arithmetic impossibility is not a binding constraint within our imaginary barter economy.  As is the wont of economists always and everywhere, we can simply "assume" the money to make our economic model 'work'.  But as soon as money is recognized as "real", then arithmetic reality kicks into play, and a fixed supply money system is seen to impose an absolute barrier to economic "growth", as well as making monetary "profit" impossible.

When the entire system contains a total fixed sum of 100 golden marbles, then you can redistribute possession of marbles so some get more while others have less, but "the economy" can never get "richer" in money, because by definition you have fixed the total supply of money at 100 golden marbles.  The economy could get richer "in economic goods" if people convert resources to economically useful goods and services. But the economy cannot get richer "in money".  That critical point is lost on the entire Austrian and neoclassical Schools of economics in their assumptions about money.

If the economy's capitalists possess all 100 marbles, and they "invest" their marble-money by hiring workers and buying supplies to produce economic goods and services, those capitalists "spend" 100 marbles into the economy, which becomes the economy's "earned income".  One person's "spending" of money becomes another person's "income".   Those 100 marbles are the "cost price" of all the productive output, and they are also the economy's total income.  

Now the capitalists want to sell all the stuff they produced at "profitable" prices, so they mark up the sale prices to 10% above cost.  It is clear that at 10% markup, there are now 10 more marbles of "prices" in the economy than there are actual "marbles".  Even if the economy spends all 100 of its earned marbles buying the output, the capitalists will find they have merely recovered their costs and have not earned any profits at all.  

They now once again have ALL the economy's money, and they have unsold goods still on their shelves. Neither the capitalists nor anyone else has any need of 10000 excess Ford Taurus door handles, so it's not as if the capitalists in our highly specialized economy can take their profits "in kind" rather than "in money".   Unsold goods are effectively 'worthless', if nobody who wants them has money to buy them.

But it gets worse.  In the real world some earners save a marble or two rather than spend it, so there are now only 90 marbles available for purchasing and consuming the output, which means the capitalists cannot even recover their costs let alone "make money" on their investments. There are only 90 marbles of "demand money" in this economy, but there are 110 marbles of "supply prices".  

Not only are all prices "denominated in" money as Austrians and classicals recognize; all buying is in fact accomplished by "spending" actual money.  And there CANNOT be enough income money generated by this system for all producers to sell all their outputs at profitable prices.  Only a fool would 'invest' his money into such a surefire loser equation, but a fool and his money are soon parted so it would be possible for some producers to profit if others lost enough. Nevertheless, you would rapidly run out of fools with money so this economic game would be short lived.

This arithmetic of investing, saving and spending, and profit and loss, in a fixed supply "sound money" system is very clear and simple when "marbles" are used as money. But put a $ sign in front of the same set of equations and, magically, the arithmetic changes so that "supply creates its own demand".  Contrary to the clear arithmetic impossibility, Austrians believe a fixed supply zero sum sound money system is compatible with a profit seeking capitalist economy.

The only saving grace is that no real economy ever binds itself to a fixed money supply, as Austrians bemoan the coin clippers and other "currency debasers" of historical reality.   Ways are always found to add "money numbers" into the equations so the money system more closely matches the positive sum value adding economic system. In our system, where money is created as loans by bankers, it is the constant spending of newly borrowed, newly created money into the economy that keeps the Ponzi arithmetic functioning.   "Debt" provides the additional money that makes profits and economic growth possible.

This "money creation" is an overt violation of Austrian ideological purity.  Tea Party Austrians believe the destruction of all the abominable fiat credit money is a prerequisite to any truly "sound" economic recovery; and that government spending even more borrowed money to "stimulate" this dying beast of an economy is necromancy of the lowest order. They see the economic depression and real devastation that accompanies credit destruction as a necessary and acceptable cost for restoring "sound money", even though a sound money economy is as mythical as the Biblical garden of Eden.  

The real effect of debt-deflation depression is to destroy so much credit-money that all prices collapse. Then whoever still has money can buy up the economy and the country for pennies on the dollar, and we can "restore" the good old days of feudalism where you were either a rich owner or a propertyless serf. None of this uppity "middle class" nonsense, or 'democracy'.

In their defense, most Tea Party Austrians have been duped and would not actually favor a return to feudalism, even though that would be the outcome of the "fiscal consolidation" policies they advocate. Their anger and dismay at the financial and economic crisis and corruption at the highest levels of finance and government has been directed toward the government and away from the plutocrats and corporatists who are equally if not more directly responsible for the problems.

They believe, because it has been preached to them ceaselessly, that "government" is responsible for inflating the money supply, but under the 1913 monetary legislation only the privately owned banking system is allowed to create US dollar money (except coins, which remain a government power). The banking system creates all the economy's money as debt at interest. The interest is the banks' "profits", and the loan principal is their "costs".  The banks' costs become the economy's money, just like capitalists' costs become the economy's earned incomes. The money to pay bank interest does not exist, any more than additional marbles to provide capitalist profits in a fixed supply golden marble system.   The arithmetic is dead simple:

Business Costs = the economy's earned income; C = I

Costs + Profits = Prices; and Prices is a number greater than Costs

Therefore Prices is a number greater than Incomes

C = I; P > I

A profit seeking economy generates greater total prices than it distributes earned incomes to pay those prices.   Unless consumers have some source of money other than their incomes, producers cannot earn profits and the economy cannot "afford" to buy all the goods and services it produces.   Our source of additional money is "consumer debt", but consumers can NEVER both spend their incomes buying current outputs, and spend their incomes paying down debt from buying past outputs.   Debt must grow to infinity and beyond.   The universe will grow old and expire and be reborn, in debt.   This is a STUPID money system.

Banks create money as loan principal, but they create repayment obligations ("debt") as principal + interest.   The loan principal that is spent into the economy by borrowers becomes the economy's "money supply".   So loan principal = money supply, and money supply <   debt.   Our system systematically generates more debt than it creates money to pay that debt.   This is a STUPID money system.

Our privately owned system of issuing all the economy's money as debt at interest is a pure Ponzi, because it requires the constant addition of new borrowers spending additional new money to keep up the appearance that this system 'works'. Simple arithmetic shows it CANNOT work, and the fact that our money system is arithmetically defective explains the current global debt crisis, as proponents of modern money theory (MMT) never tire of showing all whose ears are open to listen and whose eyes are open to see.

Our profit seeking economic system systematically generates more prices than it generates incomes to pay those prices.   Our bank-debt money system systematically generates more debt than it creates money to pay that debt.   We all need to "profit" so it is error to try to alter that fact of reality by various 'socialist' anti-profit schemes.   We must accommodate our economic reality by modifying our money system so that it becomes positive sum like our economic system.   Somebody needs to add non-debt money into the spending-cum-income equation, so that income earners have enough money to buy all the economy's outputs at prices that are profitable to producers.  

Clearly, the bankers in our private for-profit money system are not going to start giving money to people.   Bankers are in the business of "lending" money at interest, for the sake of getting back more money than they put out.   Only a government with the power to create debt-free money is able to perform the financially necessary function of adding non-debt money to make our money system positive sum.

As Jamie Galbraith explains in his 2008 book, "The Predator State", the Chinese are doing this in a clever way that seems to be working.   Unlike virtually the entire hopeless world whose nations have surrendered their monetary sovereignty to the private bankers, the Chinese government has retained ownership of its money and banking system.   The government tells the banks to lend to producers, and the producers use the money to hire workers and produce stuff.   This puts incomes into the hands of the workers and the entrepreneurs, who then have money to buy stuff.   But like us, they can't buy "all" the stuff at profitable prices, so excess stuff is hauled to discounters who sell it to happy Chinese consumers at a fraction of its cost price.  

In our system the unprofitable producers would soon be bankrupt, but in China the bankers simply extend new 'loans' to the producers so they keep the economy working happily.   Periodically the government sets up a "bad bank" to buy all the nonperforming loans off the "good" banks, and the system rolls merrily along.   The Chinese are using their sovereign ownership of their own money to keep their people employed and their economy working.   Austrians might call the Chinese system delusory because it is not 'really' profitable; but the Chinese would ask how is your system working for you so far?

China operates an economy-centric system, where the money system serves the economic system.   Money is just numbers in banking system computers, and these numbers can be adjusted by keystrokes.   We operate a money-centric system where the economy serves the money system.   Factories are not in business to "make shoes" or "make cars".   We are all in business to "make money", so we can repay our bank debts.   In our system only bankers are allowed to actually "make" money, so it is illegal for the rest of us, including our governments, to "make money".   We have to "borrow" money that is created out of nothing by banker keystrokes.   And our negative sum debt-money system chokes and depresses our real economy.   Which system is really delusory?

We are not going to adopt the Chinese monetary model so we need alternate means of making our system positive sum.   One way or another, our governments have to create their own debt-free money and spend or otherwise distribute it into our economies where it becomes incomes in the hands of recipients.   Robert Reich advocates renewed fiscal stimulus funded by more deficit spending.   But Republicans will not continue to raise the debt ceiling, and it is stupid for the government to continue "borrowing" money that it has the Constitutional authority to create for itself debt-free.  

In 1996 Congress passed legislation authorizing the government to issue proof platinum coins of "arbitrary" face value, which means the face value is not related to the metal content of the coins.   The government could issue a $2 trillion coin (for example), deposit that coin in its account at the Federal Reserve, and the Fed would credit the government's account with a $2 trillion deposit of "money".  

That is how our banks create our money, by creating "deposits".   We sign a promissory note saying we will repay the loan principal + interest, and the bank creates the loan by adding a deposit to our bank account in the amount of the loan principal.   Our promissory notes are our "debts", but to the banks those same notes are their "assets".   Banks, including the Fed, are authorized to "purchase assets" with newly created deposit money.   That's how the primary dealer banks buy Treasury debt.   The government signs a promissory note, a "bond", and the bank who buys it creates a deposit in Treasury's account at that bank.   A $2 trillion platinum coin is an "asset", and the Fed is authorized to buy such assets by creating deposits.   Except the coin is not "debt" to the government, whereas selling Treasuries to the banks is debt, which adds to the debt ceiling, which Republicans will not allow.

So the government already has a legal mechanism in place to create all the money it needs debt free.   Joe Firestone makes the case that this is exactly what should be done.   I heartily agree.

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Authors Bio:

I spent my working life as an independent small business owner/operator. My academic background is in philosophy and political economy. I began studying monetary systems and monetary history after the 1982 banking crash that was precipitated by the Mexican default and rendered 7 of America's 8 biggest banks, and 4 of Canada's Big 5, technically insolvent. They were quietly bailed out then as they are being loudly bailed out now. After the 2008 banking crash I started blogging about monetary system reform, in the tradition of Irving Fisher and CH Douglas who were prominent voices for reform during our last systemic collapse in the 1930s.

I also write about the wide divergence between perception and reality in matters of public opinion, and the central role of mass media propaganda in moulding perception and manufacturing consent, a role identified by Walter Lippman and perfected by Edward Bernays and Madison Avenue. Financial, industrial, and military-industrial corporatism is increasingly usurping the functions of government in America, Europe and elsewhere, replacing elected republican and democratic forms of government with unaccountable plutocracies mascarading as "free enterprise". Plutocracy is a neofeudal tyranny of lawless power, serving the interests of wealth rather than democratic justice. Responsible government with the power to legislate and enforce laws and control its own monetary system is our only bulwark against concentrated corporate power, which is why plutocrats are intent on destroying the credibility and power of elected governments leaving the new feudal masters free to abuse and plunder the masses of serfs at their leisure. The money issuing function is a most fundamental feature of government sovereignty, and America's government transferred that power to private bankers in 1913, placing the effective government of the nation in the hands of the money power. It may not be possible for the people to take back control of their government from the plutocrats. But it is some consolation to be able to read and write about the truth of what is currently happening to our once free countries.