There is a fatal mismatch between our value-adding real economy and the zero sum money system it has been shackled with. Monetary reformers seek to unbind the positive sum real economy from its zero sum monetary straightjacket, by adding positive sum money into the economy.

::::::::

The Great Unbinding Part 3.1

Macroeconomics is emerging from a long fog and rediscovering the basic features of economic reality. We buy and sell stuff for money in a money economy; we do not trade stuff for other stuff in a barter economy. The real productive economy does not produce its own money. Commercial banks operate the private monopoly that creates all the credit/debt that functions as "the money" in our money economies.

The real economy is a value-adding enterprise that produces all the real stuff. Credit-debt is a zero sum accounting equation that exists on banking system balance sheets.

There is a fatal mismatch between our value-adding real economy and the zero sum money system it has been shackled with. Monetary reformers seek to unbind the positive sum real economy from its zero sum monetary straightjacket, by adding positive sum money into the economy.

The complex money economy that keeps us alive trundles along a claptrap financial bridge made of uncollectable credit suspended over a yawing chasm of unpayable debt. "Moderate" monetary system reformers seek to salvage the collapse-prone bridge by using Positive Money to reduce the unbearable weight of debt.

In Part 2 we looked at "radical" monetary system reform: total change of the kind of money we use. At present we use commercial bank-issued credit/debt as money. Radical reformers in the Irving Fisher - Milton Friedman - Benes/Kumhof tradition advocate wholesale conversion from bank issued debt-money to government issued positive money. From using zero sum bank credit as money, to using expandable sum government money as money.

Radical reform would replace the bridge-over-chasm credit/debt system with a road-over-solid-ground positive money system. But the bridge operators (bankers) have a swell racket going -- controlling economic traffic and charging tolls for using their credit bridge -- and they vigorously resist reform that would cut them out of the action. When some nation (like Libya) tries to build their own money-road to bypass the bankers' credit-bridge, the bankers blow up the road.

Radical monetary reform is opposed by the most deeply entrenched unenlightened self-interest.

This political problem cannot be blithely ignored by monetary reformers as they design their "ideal" reformations. A workable solution must be politically do-able. It must accommodate the interests of all parties. Even if some parties think (as they in fact do think) that other parties' interests are perverse or illegitimate.

The default condition -- present reality -- is the bankers credit/debt monopoly. This system crashed in 2008 at The Astonishment. Uncollectable credit met unpayable debt and ran screaming in mindless horror at the specter. Now the nations' captive economies are paralyzed by financial seizure.

The kinds of 'solutions' proposed are irrational, emotional, moralistic, punitive, arithmetically illiterate. Monetary reform offers a coolly rational solution that is clearly visible from outside the mental straightjacket of the bankers' credit-debt monopoly.

Creditors want to get paid. Debtors want to get out of debt. Everybody wants the economy to "get back to normal". This is doable. But only by adding money sourced from outside the commercial banking system's credit-debt balance sheet. Central banks can add the needed positive money to resolve the present creditors vs debtors paralysis.

In Part 3 we will look at less radical reform that would leave the credit/debt system in place, but would judiciously add money to fill in the expanding credit/debt-gaps that periodically cause the bridge to collapse.

Ongoing operation of the commercial bank monetary monopoly produces credit-debt imbalances that inevitably Crash the system: Boom - Collapse - Depression; followed by World War or other extreme measures to pull the system out of its collapsed state.

In the collapsed eurozone, financial repression (dangling debtor nations over the chasm and threatening to drop them if they don't agree to pay up) has been adopted as the solution du jour. This is a somewhat less than 'satisfactory' solution for financially repressed debtors like Greece. But it's not much better for the creditors.

Debtors 'promising' to pay up -- a promise that creditors feel is more believable if debtors submit to financial repression (austerity) -- allows creditors to extend additional credits and pretend debtors will somehow -- some day over the rainbow -- be able to repay their arithmetically unpayable debts. Debtors use the newly borrowed credits to make payments on their old debts to the creditors. This forestalls the booking of losses on uncollectable credits; losses that would render the creditors insolvent. Bankrupt. Kaput.

Commercial banks are, after all, in the for-profit credit-lending "business". The downside of profit is loss. When a commercial bank makes too many risky loans and bond purchases, and the borrowers can't repay the loans, the bank loses its owners' and its depositors' money and goes "out" of the banking business. Meanwhile, a failed bank can't pay back its depositors' money, so either governments (taxpayers) fund 100% deposit insurance payouts, or depositors take a haircut.

We are talking about failed banks in creditor nations -- the Germanies -- and bail-ins of Germans' bank deposits. It is the German commercial banks who made loans of bank-issued credit-money to the Greek debtors. Greek debtors used the credits to pay for German-made trains and cars. Greeks now have trains and cars. German workers and corporations (who were paid the credits by the Greek buyers) now have the credits, as deposits in their German bank accounts.

Greeks "paid" all the borrowed credits to German exporters; and the exporter companies paid those credits to their German workers. With no "money" left, Greek debtors can't pay their debts to German banks. The creditor-banks suffer fatal losses. The banks can't pay their creditors -- their depositors. So the 'solution' to systemic bank failure is German bank deposits get bailed in to bail out their failed banks. But they're not talking about that, yet. They're still pretending Greece will pay up.

There are millions of depositors and about the same number of taxpayers. Germans worked hard to build all those trains and cars that Greeks bought with German bank loans. Now German banks fail because Greeks have no money to repay the loans, and the savings of German workers are threatened. It's not fair. Bailouts and haircuts are political problems.

Creditors demand to be paid by debtors, even though debtors are busted flat in Baton Rouge waiting for a money train to whisk them off on a magical mystery tour out past Broke Burg bound for Fat Money Flats. But the train never arrives. The trains were made in Germany by Siemens. But Greece has no money to operate the railroad.

Starry-eyed debtors "shouldn't have" borrowed so much credit to buy Siemens trains and Porsche Cayennes. Greedy creditors "shouldn't have" loaned so much credit to tourist island deadbeats who can't afford German manufactures. But the time for moralizing was before the creditors loaned and the debtors borrowed; before all those trains and Cayennes were sold to and bought by people who could not afford to buy them with their earned incomes.

The credits made the sales and purchases "possible". Greeks enjoyed riding high tech trains and driving superbly engineered luxury cars; and Siemens and Porsche earned lots of sales revenues and profits, while the Ponzi financing scheme lasted. Now everybody is crying because "we shouldn't have".

Creditors have more political power than debtors. So, "It's all the Greeks' fault", and Greeks must pay all the costs of our Ponzi financed irrational exuberance. So now it's financial repression for Greek debtors until they have repaid the last euro. Which they can't, because their economy is depressed and repressed and Greeks have no way to earn enough euros to pay the interest, let alone repay the loan principal.

Outgoing Greek negotiator Yanis Varoufakis calls this the new Treaty of Versailles. But modern Germany's historical memory was reborn in virgin innocence after 1953, the year one half of Germany's Versailles and WWII debt was forgiven. Written off. To allow Germany to once again participate in the game of "let's have an international money economy".

The credit-bridge operators are failed financial businesses who made bad loans that brought their depositors and national taxpayers down with them; all of whom refuse to accept their free market fate.

Which they shouldn't, because we live in a political economy where we have to solve our own problems with human intelligence. We don't live in a "self-regulating" free market system that is optimally managed by a magical hand. Or by the blind application of banker arithmetic.

The economy's life depends on ongoing operation of some kind of money system. The banking system operates the money payments system. So the commercial banking system cannot be allowed to fail because there is no "backup" system in place to replace it. The backup system is peasant agriculture supplemented by hunting and gathering.

And whenever any nation threatens to replace the collapsible credit bridge with a non-collapsible money road, the bankers threaten to blow up the bridge that the economy is standing on. Like they just did to Greece. Reintroduce the drachma and we will destroy its fx value in minutes. No more food or energy imports for you. Agree to our demands or we shut off your banks. Try running a money economy without "money".

Play along with extend and pretend, or off the bridge you go.

Macroeconomics is about the money system, not the real economy that is activated by the money system. When the money system fails, the real economy stops working due to failure of the bank-operated money payments system.

Money is the master system, the real economy is the slave system, not vice versa as orthodox (mainstream) macroeconomics has historically assumed. Without monetary information flows energizing its nervous system, the economic body sits there ready but unmoving. Without buyers offering to pay money to workers/producers/sellers, the economy does not "work". Money comes first as cause; work comes next as effect. Money causes the economy. The economy does not cause money.

You cannot solve a money problem with "more economic production"; or with "more efficient economic production". That might give you a temporary comparative advantage in the game of money mercantilism, where winners earn positive sums by capturing credits spent by losers. But that "assumes spendable credits" in the hands of losers, and only shifts the credit-deficit (the debt) onto a different player. A global solution requires the addition of net positive money into the currency system (dollar, euro, yen, etc) to build a solid bridge across the system's credit-debt gaps.

Arithmetically literate macroeconomists understand the numerical nature of credit (temporary positive numbers), debt (temporary negative numbers) and money (permanent positive numbers); and understand the macro economy in terms of balance sheet accounting between different "financial units".

Within the commercial bank credit-debt system, one financial unit cannot earn and save credits unless a different unit borrows and spends the credits and owes repayment as debt to the bank. One financial unit cannot sell stuff and earn credits, unless a different unit buys the stuff and pays the credits. One nation cannot enjoy a trade surplus (sell more than they buy) unless the rest of the world suffers a trade deficit (buy more than they sell).

Producers produce stuff to sell to consumers. Commercial banks issue all of the 'buy money' as linked pairs of credits and debts. Producers export stuff and earn credits. Consumers import stuff and owe debts.

"Growth" -- within this system -- means an expansion of total credits AND total debts. You cannot grow your way out of a balance sheet accounting equation. Growth just makes all the positive and negative numbers equally bigger. And makes the credit-debt imbalances wider, not narrower.

After a few rounds, powerhouse producers like Germany gain all the credits, and consumers like Greece owe all the debts. Exporters begin wondering how importers will ever repay them, and trade ceases. The "balanced trade" solution requires that Germany stops selling stuff to Greece and becomes a net importer of Greek exports. Greece "pays" for its imports by selling exports to Germany. But Germany likes being a net exporter and won't accept this solution, even if Greece could (it can't) produce enough stuff that Germans want. So the trade game stalls with this irresolvable imbalance of uncollectable credits and unpayable debts.

The game can never be restarted as long as commercial bank-issued credit/debt money remains the monopoly source of the game's "money supply". Within the commercial bank balance sheet, the only way to pay down total debt is by using the winners' credits to cancel out the losers' debts: which leaves less credit-money and less debt. Subtracting positive sums held by savers and using them to cancel out negative sums owed by debtors.

First you give Greeks trains and cars that they can't pay for so you lend them the buy money. Then you give Greeks your money so they can pay their debts to you. Ain't gonna happen.

The workable solution requires adding additional new money into the game; money that is sourced from outside of the commercial banking system's credit-debt balance sheet.

Before 2008 these simple balance sheet accounting identities were buried under heavy veils of deep delusions: "Economic production causes money. Everybody should produce more and be a net exporter like Germany, and produce their way out of debt". But producing goods earns the net exporter no money, unless some other financial unit (net importer) is going deeper in debt to get new bank-issued credits to buy the goods.

A good old fashioned monetary system collapse pulls the veils down with it, and people catch a never before seen glimpse of bankers issuing (uncollectable) credits and charging (unpayable) debts.

Central banks can/should/do operate as publicly owned monetary institutions that can "add money" into the credit-debt gaps and resolve the collapsed financial bridge. But instead of QE-for-banks that gives money directly to creditors to make the banks whole while leaving the governments and their economies dangling; the QE money should be given to the indebted governments and/or households so the debtors can use the money to pay their otherwise unpayable debts. Or -- to overcome legitimate objections of unfairness -- the QE money should be given "to everybody" in equal amounts, so that the debtors who are the actual target of the program are included in "everybody".

Giving new money to creditors makes them richer. No problem there.

Giving money to debtors makes the creditors whole by making the debtors whole. Greece gets out of (unpayable) bond debt. Germany cashes in its (uncollectable) credits for money.

Germans, whose wages have been repressed to maintain cost competitiveness, could be given a national bonus. They could go on a spending spree, holidaying in Greece, putting all those unemployed Greeks to work selling stuff to cashed-up German consumers. Some Greeks might earn enough euros to actually "afford" to buy Porsche Cayennes paid for with earned incomes, not with debt.

Everybody gets the same amount of new central bank positive money. Greece gets out of debt. Germany gets cashed up. Nobody gains at the expense of anybody else. Win-win. Which is what "moderate" monetary reformers advocate.

I cite Friedman because he understood the credit-debt problem and the money solution; and because he is a hero of monetary and fiscal conservatives everywhere; and because this macroeconomically literate "arch-conservative" advocated monetary revolution. The most radical socialist (public money) subversion against the existing (privately owned) monetary order: operating money as a socially and economically beneficial public utility rather than as the private property of commercial bankers.

But I don't agree that radical monetary system reform can work as a realistic solution. Attempts to put an end to the bankers' swell racket induce a lot of pushing off and blowing up of bridges, but so far have yielded no actual monetary reforms. I think we should shoot for a more limited reform: a tweak, collapse-proofing the bridge. I am not alone.

In Part 3.2 we'll look at Adair Turner's proposals for implementing politically realistic monetary 'tweaks' that can solve the credit-debt imbalances to "get us out of this mess".

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.