LESSONS FROM THE JAPANESE: TIME TO STOP BORROWING MONEY AND START PRINTING IT
Ellen Brown, November 23rd, 2009
...Most people think money is issued by the government, but the only money the government creates are coins, which compose less than one ten-thousandth of the money supply – about $1 billion out of $13.8 trillion (M3). Dollar bills are issued by the Federal Reserve, a privately-owned banking corporation, and lent to the government and to other banks. And coins and dollar bills together make up only about 7% of the money supply. All of the rest is simply written into accounts on computer screens by bankers when they make loans.
Contrary to popular belief, banks do not lend their own money or their depositors’ money. Every time a bank makes a loan, it is brand new money, simply written into the account of the borrower. As explained on Wikipedia:
“The different forms of money in government money supply statistics arise from the practice of fractional-reserve banking. Whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of money is created. This new type of money is what makes up the non-M0 components in the M1-M3 statistics. In short, there are two types of money in a fractional-reserve banking system: (1) central bank money (physical currency, government money); and (2) commercial bank money (money created through loans) - sometimes referred to as private money, or checkbook money. In the money supply statistics, central bank money is M0 while the commercial bank money is divided up into the M1-M3 components.”
If there were no banks, we would have no money except pennies, nickels, dimes and quarters. Money created as bank loans does not stick around, since loans eventually get paid back. When old loans get paid off and new ones aren’t taken out to replace them, the money supply shrinks; and lately, new loans have fallen off dramatically.
Why? Banks insist that they are lending as much as they are prudently allowed to. The problem is that they have reached the lending limits imposed by the capital requirements set by the Bank for International Settlements. In the years of the credit boom, banks were able to leverage their capital into far more loans than are being created now. This was because loans were taken off the banks’ books by investors, allowing the same capital to be used many times over to generate new loans. These investors, called “shadow lenders,” have now exited the market, and they are not expected to return any time soon. They left after it became clear that the credit default swaps allegedly protecting their investments were only as good as the solvency of the counterparties (typically AIG or hedge funds), which had a bad habit of going bankrupt rather than paying up. An estimated $10 trillion disappeared from the money supply along with the shadow lenders, and the Fed has managed to get only a few trillion back into the market as replacement money...
Although the Federal Reserve cannot create money and simply spend it into the economy, Congress can. The Constitution authorizes Congress “to coin money [and] regulate the value thereof.” A former chairman of the House Coinage Subcommittee once observed that Congress could solve its financial problems just by minting some very large-denomination coins and paying off its debts. This solution is invariably rejected as dangerously inflationary; but when the “shadow money” is factored in, it actually wouldn’t be. Government bonds already serve as a medium of exchange, trading in massive quantities around the world just as if they were money. Paying off government bonds with newly-printed dollars and then ripping up the bonds (or voiding them out on a computer screen) would not significantly affect the size of the overall money supply, since “shadow money” would just be replaced with dollar bills (paper or electronic). In the chart above, green money (public shadow money) would become blue money (dollar bills and checkbook money), leaving the total money stock unchanged.
It might be argued that the money borrowed by the government has already been spent into the economy, and that if the bonds are now turned into dollars, the money will be out there twice. And that is true; but on the shadow-money model, the inflation has already occurred and cannot now be reversed. It occurred when the government printed the bonds. The bonds are already out there serving as money. Whether the money stock takes the form of dollars or bonds, it will be used as a medium of exchange in the real economy.
Another argument often raised is that the money created as government securities and Federal Reserve loans has been “sterilized” by lodging it with central banks and commercial banks. When this money hits Main Street as dollars competing for goods and services, the floodgates will open and hyperinflation will be upon us. That is the alleged justification for keeping the stimulus money in the banks instead of in the marketplace. But then what was the point of the stimulus? If the money is only stimulating the banks, it is not doing anything for the real economy. We want money out there in the marketplace generating demand for products, which generates jobs. Price inflation results only when “demand” (money) exceeds “supply” (goods and services). If the money is used to create goods and services, prices will remain stable. We have workers out of work and factories sitting idle. They need some “demand” (money) stimulating them to create supply, in order to make the economy productive again.
Other critics point to gold’s recent rise as an indicator of inflation already being upon us. But the more likely explanation for gold’s rise is that foreign central banks are looking for something besides U.S. government bonds in which to park their money. They no longer want our bonds, so fine. We should tell them that no more are for sale. We will in the future sell our bonds to our own central bank, which will rebate the interest to the government after deducting its costs, making its credit the best deal in town. And we will use the money, not to feed a parasitic private banking empire by building up bank reserves, but for direct expenditures on infrastructure and other public projects that will put people back to work, add to the productive economy, and increase the collective well-being of the American people...more...LINK