The stock market has collapsed. Unemployment is soaring. State and local revenues are plummeting. Covid-19 cases are overloading the healthcare system. Government leaders have shut down non-essential segments of the economy while directing people to practice social distancing and to wash their hands a lot. Congress is injecting $2.2 trillion into the economy.
Leaders in the government and financial sector want us to believe the pandemic is the source of all of the difficulty. There is, however, evidence that the financial sector collapse began before the pandemic hit. Consider this:
On September 17, 2019, four months before the first death from the corona virus was reported in China,…the Fed began dumping hundreds of billions of dollars a week into Wall Street’s trading houses. That program, called ‘repo loans’ now tallies up to more than $9 trillion in cumulative loans made to Wall Street at super-cheap borrowing rates.
Why Wall Street banks needed to be bailed out at that time is open to speculation, but, somehow, they didn’t have enough money to be able to keep on lending. Wouldn’t it be nice if every business could simply turn to the Fed for cheap loans when they have cash flow problems?
The point is that there may have been a financial crash even without the virus – much like the crash of 2008. We were about due for one in the long-term boom/bust cyclical pattern that has characterized the economy for at least 100 years. The virus, however, has made everything worse! It has demonstrated that we don’t have a monetary system robust and resilient enough to meet challenges of various kinds without going into collapse. The banks run the system, and in times like these they get bailed out by the public Treasury. It gives credence to the quip, “Capitalism survives, only because it gets bailed out by socialism.”
Government leaders now know they have to bail out the system again. Some in Congress at least have realized that this time it is not enough to bail out banks and big corporations. So, there is relief in the $2.2 trillion CARES Act for individuals, including a one-time $1200 payment to those reporting adjusted gross incomes of less than $75,000 on their income tax returns. There are other benefits, including extended unemployment insurance, postponement of student loan repayments, and assistance for small businesses and the self-employed as long as funds last. But the bulk of the benefits of the bill go to corporate America, with little oversight, making it a replay of the 2008 bailouts. It is claimed by defenders of the bill that it at least didn’t do bank bailouts like TARP. Maybe the banks didn’t need it because of the $9 trillion the Fed has provided them since September.
The $2.2 trillion will not be enough and negotiations are currently underway for a follow-up bill.
It will be a lot of money. As much as $2000 per month per person until the pandemic passes may really be necessary, maybe over $7.2 trillion per year. When spending for social programs comes up, conservatives are typically the first to ask where the money will come from. No one is asking that this time. It just has to be done. The government will just spend and will borrow what it doesn’t take in from taxes. The federal debt will soar.
There are those who say that the debt doesn’t matter. The debt just gets rolled over anyway. It’s never paid back. And interest rates are low, so debt service payments will be manageable. Maybe we can even do the same thing in coming up with the additional trillions needed for infrastructure repair, universal health care, education, and maybe the Green New Deal too. While a few wealthy countries may be able to get away with this for a while, the global economy will tear itself apart.
And where will all this money come from? It doesn’t come from anywhere. It is simply created out of nothing. It has been that way ever since paper money came to replace the bulky gold and silver coins, and bank money on account came to replace paper money. There was a charade of “backing” up the paper and account money with gold and silver for a while. That was finally ended completely in 1971. Most money now is not even in paper; it exists only as numbers in accounts, created by keystrokes on computers.
The question is “Who creates it? And who gets to say where it goes and how it is used?” The problem with our current system is that all new money, except coins, is created by banks as interest-bearing debt. Some of the new money is lent to businesses to assist them in the production of goods and services we rely on. This amounts to about 15% of what the banks lend, according to an analysis in Britain. Small businesses are mainly left out because these loans require collateral, which small businesses often lack. Farmers are forced to borrow against their land and equipment in order for us to have food to eat. A significant portion of new money provides mortgages, which is an important service. Much of the mortgage money, however, goes to investors who simply flip houses as their values rise or use them as revenue sources, renting at rates that are often outrageous. Since the 1998 repeal of the 1933 Glass-Steagall Act provision that separated commercial and investment banks, much new money now goes into the speculative financial sector.
Historically governments have created money, known as sovereign money, but no longer (other than coins). Governments are left to tax, which is hard for politicians to endorse, at least in this country, or to borrow. This borrowing benefits the financial sector, which lends to the government at interest.
The financial sector profits from the money creation privilege which has been outsourced to it. The outsourcing has been gradual over the past 200 years; it was finalized in the US with passage of the Federal Reserve Act of 1913. In this system, banks have the legalized privilege to create the money we use. They issue the new money mostly by lending it. They also use it to buy securities, which is a form of lending. If it is a government security, such as a Treasury bond, they are lending to the government. Banks decide who gets to use new money.
The government is about to spend a lot of money. Why should the government have to borrow it when the Constitution gives Congress the authority to create money? Why should we as taxpayers have to pay interest on that money as it is created by the banking system? The government creates the demand for money; it doesn’t currently create money, itself. But with appropriate legislation it could. That legislation has been written and was introduced into Congress in 2011 as H.R. 2990. It should be reintroduced and given serious consideration. It would set up the machinery within the government to create money and spend it into circulation for the public good. It would also end creation of money by the private sector. It lays out how we can transition from the bank money-as-debt system we have now to the Just Money system we need—money as a public asset lubricating the exchange of goods and services we produce.
Are there shortcuts? What about the production by the mint of a $2 trillion dollar coin? In principle that could be done. Presumably the Fed would have to accept it as a deposit into the government’s account, like they do with other coins. Then the government could spend it. Maybe, if this were done, people would realize that the government’s funding itself in this way eliminates the need for government borrowing altogether. If there were an inflation problem, maybe it would be realized that the inflation is coming from lending by banks, not from government spending. Bank creation of money as banks lend could then be curtailed or abolished, and we would have sovereign money. It is a gimmicky approach, but it illustrates the power of sovereign money.
Is inflation a risk with all of this government spending? When the money supply is increased in parallel with the growth of the economy in terms of production of goods and services, overall inflation doesn’t occur. Witness the enormous expenditures the Chinese government has put into their infrastructure in recent decades. It has not caused serious inflation there.
Inflation is built into our current system of money creation as part of bank lending. That is because for every dollar created, interest is siphoned off into the financial sector. The financial sector produces no goods or services (except for the manipulation of money). In our current system the money supply has to rise at a faster rate than the real economy grows – in order to feed the financial sector. If newly created money were being spent into the economy, instead of being lent at interest into the economy, and if it were being spent on social and physical infrastructure essential for a vibrant economy, there would be little or no overall inflation.
Will the current government effort to bail out the economy be enough to avoid severe disruption by the virus? Probably not. Will $1200 to “many Americans” get to those who need it most? Will it be enough? Will $367 billion for small businesses going to our local restaurants and other businesses be enough? Will it come in time to save them? Will $500 billion “for industries, cities and states” be enough? Who really will get this? Will it make up for the fall in state and municipal income? Will states and counties be able to maintain their support for schools, public colleges and universities, and local communities as state revenues fall? It may be a good faith effort, but, if what the government does is not enough, we are in for another prolonged recession.
According to the Washington Post on April 9, 2020, Federal Reserve Chair Jerome H. Powell said the U.S. economy is in an emergency and is deteriorating “with alarming speed.” This was said just after the Fed announced over two trillion in new loans. Powell also stressed that the Fed is making loans to companies and states, not giving money outright. The Fed does expect to be repaid. What kind of an economic recovery can we imagine while we are trying to pay off an additional $2 trillion debt?
This is the heart of the debt money system. For those in debt, we will help you, it says, by putting you further in debt. It is what the IMF does in “aiding” developing countries. It is what the 0.1% in the financial sector does to the rest of us in America. Circumstances now require not loans, but debt forgiveness and then emergence from our current debt money system into a Just Money system, in which money enters circulation as a public asset by government spending, not by lending.
Are we just going to plug the holes again this time, as we did in 1933 and 2008, and pretend we can return to business as usual, letting the astronomic rise in wealth continue among the few while schools and local governments continue in austerity, unable to meet the needs of the people? How will society be sustained as technology displaces workers? What will happen to 90% of 3.5 million truck drivers in this country as self-driving trucks eliminate their jobs? Are we going to settle for stopgap measures in the face of this current crisis without changing the system that otherwise will destroy itself? How long can a system, which systematically robs the many to benefit the few, hold up? We have an opportunity for change. Let’s not squander it.
The pandemic would have crippled the economy regardless of the monetary system in place. But with a system in place that would have allowed government expenditures for anticipating a pandemic and responding quickly, as Bill Gates proposed back in 2015, the effects of the pandemic could have been blunted. And we could have the infrastructure into the future that is required for a competitive and sustainable economy, which could provide jobs that pay well.
Under the pressure of the moment imposed by the pandemic, while we deal local issues as best we can, let us not fail to keep up our efforts toward fundamental reform of the money system that will serve all of society. Let us use this enormous disruption as stimulus to build a just and prosperous society for all. For this purpose, the Alliance has recently launched a campaign around an adopted Resolution calling for a National Monetary Commission to look into the current dysfunctional system and consider possible alternatives like a sovereign monetary system as we discussed above. The Alliance has also initiated a Petition asking Congress to create the proposed National Monetary Commission. Read the Resolution and sign the Petition. Use the resources of the Alliance For Just Money and How We Pay for a Better World to keep telling our neighbors, friends, relatives, colleagues, media, and elected representatives at all levels that now is our time to make a real difference and to make the world safe for our children and theirs.
