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IMF's epic plan to conjure away debt and dethrone bankers
So there is a magic wand after all. A revolutionary paper by the International Monetary Fund claims that one could eliminate the net public debt of the US at a stroke, and by implication do the same for Britain, Germany, Italy, or Japan.
One could slash private debt by 100pc of GDP, boost growth, stabilize prices, and dethrone bankers all at the same time. It could be done cleanly and painlessly, by legislative command, far more quickly than anybody imagined.
The conjuring trick is to replace our system of private bank-created money -- roughly 97pc of the money supply -- with state-created money. We return to the historical norm, before Charles II placed control of the money supply in private hands with the English Free Coinage Act of 1666.
Specifically, it means an assault on "fractional reserve banking". If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.
The nation regains sovereign control over the money supply. There are no more banks runs, and fewer boom-bust credit cycles. Accounting legerdemain will do the rest. That at least is the argument.
Source and full piece: Ambrose Evans Pritchard, The Telegraph, 21 Oct 2012
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Re: IMF's epic plan to conjure away debt and dethrone bankers
As interesting as the piece itself are the comments from the clueless idiots who think that leaving the power to create money in the hands of a select few is a great idea, while giving back the power to create money to the nation state would be a "disaster".
Re: IMF's epic plan to conjure away debt and dethrone bankers
Yes, I read some of the reader comments. Total stupidity. I only skimmed the article itself, but I will chew on it thoroughly, and comment on it.
That said, Tom, did you know that control of the U.S. money supply is not in private hands after all?
Yes, the Fed is privately owned, but the purpose of the Fed is to control monetary inflation (which is not the same as price inflation) by controlling interest rates, and to oversee the weekly auctioning of T-Bills. Of course, the government could just issue the money directly by crediting the bank accounts of recipients. However the Fed’s auctioning of T-bills, plus the Fed’s manipulation of interest rates, sustains the perceived “scarcity” of the fiat currency. This perceived “scarcity” maintains the perceived “value” of dollars, which maintains “demand” for dollars, which maintains faith in the "value" of the infinite fiat currency. If that faith is lost, then we have hyperinflation and the collapse of society.
Now ask yourself, how do money and credit actually get into the economy? Credit gets into the economy by bank lending. Money gets into the economy by government “spending,” which is merely accounting entries. “Spending” means government issuance, or government crediting of bank accounts. (You and I as individuals actually spend, in the sense that money leaves our hands. However the federal government does not actually "spend" anything. It just plays with numbers in computers.)
The point is that federal “spending” is under control of the Congress (and sometimes the President), which orders the U.S. Treasury to “issue money" (i.e. credit the bank accounts of recipients). So if the congress wants $100 billion for a war, it orders the Treasury to credit the accounts of various weapons makers, military suppliers, soldiers, etc etc by an aggregate total of $100 billion. Again, this is not “spending.” It is merely playing with numbers in computers.
Since fiat money is infinite, its issuance is not a zero-sum game. Therefore the Congress does not get that $100 billion by having the Fed auction T-bills. That is, the U.S. government does not get any money from the Fed. Instead, the Congress tells the Treasury to credit the bank accounts of recipients. No dollars ever come from anywhere, or go anywhere. It’s all done by computer. (Actually dollars do not even exist. There are only computerized accounting entries. The currency bill in your hand represents an accounting entry. When you get a checque from the government, it is merely an instruction to a bank to credit your account by that amount, or else issue bits of paper to you. No one has ever seen a "dollar." You can't carry an actual "dollar" in your hand, anymore than you can carry the number "one." What you carry is a note that represents a "dollar" in the accounting computers.)
The money the Fed raises by auctioning T-bills is a side show, designed to maintain faith in the currency, and therefore faith in society. The money the Fed raises in those auctions is as useless to the government as is federal tax revenue. Both are destroyed upon receipt.
Thus, for a monetarily sovereign U.S. government, the creation and issuance of money is ultimately a public process.
I hope this make sense to you. If it doesn't, then challenge my comments here, so that I can go further into depth on the points you dispute.
Meanwhile I will thoroughly study the above article.
Re: IMF's epic plan to conjure away debt and dethrone bankers
My understanding is different. The Government may issue as many bonds as it wishes, but these are little more than IOUs with interest attached. The Federal Open Market Committee, a committee of the privately-run Federal Reserve System, is responsible for deciding how many government bonds are to be purchased and from which sellers. The Federal Reserve then pays the seller in the form of electronic credits to the seller's bank account. Where the seller is the US Treasury, these credits can then be used to issue notes up to the same amount as the credits. Where the seller is a bank, these credits are included in the the bank's total reserves and can be used to create new credit money.
There are two noteable aspects of this process. The first is that the bonds attract interest. This means that the total amount issued in bonds is always going to be less than the total amount owed, that is, the amount of the bonds plus interest. Depending on the amount by which the bonds have been discounted, this disparity can be significant. The second is that it is the Federal Open Market Committee that makes the decisions on how many bonds are purchased and from whom. This effectively puts them in charge of the money supply.
Re: IMF's epic plan to conjure away debt and dethrone bankers
Tom, you make some good points, but I think you might be missing something, which I will note at bottom. (Or maybe it’s me who is missing something.)
Yes, but the interest is irrelevant, since the Fed and the government can always create more bonds or more money. Hence the “deficit” is meaningless, and there is no “debt crisis.” Since all money is debt, the “national debt” simply reflects the amount of T-Bills out there, plus the money supply. There was no “debt crisis” when the “national debt” was $1 trillion, $5 trillion, $10 trillion, and now moving toward $20 trillion as the economy expanded over the years.
What do you mean by “notes”? Currency notes? Currency is printed by the Bureau of Printing and Engraving, which is part of the US Treasury, as is the US Mint. The Treasury decides how much currency to print and coin. Please clarify.
This is where I disagree. Where does the US federal government gets its money from? Tax revenue? No. From the selling of bonds? No. The government creates it out of nothing by crediting accounts, with no actual money changing hands. It's all done by computer. Therefore, of what use is the money raised by auctioning T-bills to investors? The way I see it, the auctioning is a show, done to sustain “demand” for the US currency (i.e. faith in the currency), thus warding off monetary inflation.
I do not yet understand the whole picture, but I am grateful that you take the time to respond. Even if I disagree with you, I learn from you. Your comments create questions in my mind. I must research this matter further.
Re: IMF's epic plan to conjure away debt and dethrone bankers
The government can create more bonds. The Fed can create more money if and only if the FOMC decides to purchase those bonds. The interest isn't really that irrelevant, as it means that the total amount owed back to the Fed is always going to be greater than the total amount in circulation. The word "bond" is signficant too. If there is a bond, then something must be pledged as surety for what is in effect a loan. What is that something? A significant slice of the future labour of all working Americans and who knows what else? Public lands and buildings? State parks? Land people wrongly believe is their private property?
By notes I mean bank notes or currency. They may be printed by the Bureau of Printing and Engraving, but the Treasury can only issue currency up to the amount transferred to it electronically by the Fed as a result of bond purchases.
Re: IMF's epic plan to conjure away debt and dethrone bankers
Thanks for your correspondence Tom.
The economy runs on money and credit. The Fed creates credit by auctioning bonds. Banks create credit by issuing loans. However it is the federal government that creates and issues what we think of as “money” (although both money and bonds are negotiable.) The government creates money by “spending,” i.e. changing the numbers in computerized accounts.
The Fed system generates credit, but it is not the source of U.S. government money. Once the government creates money, that money is in the banking system, which is controlled by the Fed. A U.S. currency bill is called a “Federal Reserve Note,” meaning that the currency bill is part of the banking system overseen by the Fed. It is a claim to a digital value in a banking computer, just as the “note” (or deed) on a piece of land is a claim to ownership of the land. Same with a car title. The note is not the money, just as the title is not the land.
The “amount owed back to the Fed” is between the Fed and investors. It too is simply digital numbers in computers. The Treasury could retire the “national debt” with the touch of a computer button by simply crediting the accounts of anyone who holds a T-bill. Again, money is nothing more than numbers in computers. A bond or a currency bill is a claim to some digital value.
No. Since federal bonds are not physical money (but are instead claims to ownership of a digital “value” in computers), what backs them up is society itself. What is pledged as surety is the “full faith and credit of the United States government.”
“Faith” means society’s trust in the bond or the currency. “Credit” means that the item (e.g. a bond or a currency bill) is fully and unconditionally honored by the U.S. government, or by any institution in the national banking and financial system. Thus it is honored by society.
But wait: if the Treasury creates and issues money by changing the numbers in computer systems, doesn’t the Fed do the same thing with quantitative easing? Doesn’t the Fed exchange money for garbage (e.g. fraudulent securities)? No, because this is not negotiable “money.” The Fed changes the reserve accounts of banks, but the resulting value cannot be spent or negotiated. It must “sit in the bank” (although it is not physical). The reserve is used to backstop the bank’s lending, speculation, and fraud.
Therefore, who creates money? The US government. Who creates credit? Banks and financial institutions (e.g. shadow banks) overseen by the Fed, and governed by Fed laws, state laws, and federal laws. Who controls the banking system once the government creates money? The Fed.
Consider the so-called “fiscal cliff.” Who created it? The Fed? No, the Congress did, by mandating tax increases and spending cuts (i.e. austerity). The Fed had nothing to do with it. Tax revenue goes not to the Fed, but to the Internal Revenue Service, which is part of the Treasury. It is destroyed upon receipt. That is, when I send a check to the IRS, the IRS changes my bank account by the value of the check. Where did the money go? Nowhere. If I change a “1” to a “2” in the computer, then where did the “1” go? Nowhere.
Since the US government can create limitless money for any purpose, the “debt crisis” is a lie. And since tax revenue is destroyed upon receipt, the “deficit” is a lie. The government has no need or use for tax revenue. Therefore it is meaningless to say “the government cannot spend more than it takes in.” Federal taxes should all be abolished. And of course there is absolutely no need for austerity.
No. Again the misconception is that the US government gets its money from the Fed. The US government gets its money from nowhere. The Fed is the all-powerful lord of the banking system, but the government creates its own money.
Do banks create money? Yes, in the sense that credit is negotiable. That is, the money system consists of both money and credit. Ultimately they are the same thing. All fiat money is debt (i.e. a claim on a digital value). And since debt is synonymous with credit, all money is also credit. A dollar bill means you have a digital credit of one dollar. But when the government “spends,” the money comes from nowhere.
So where does all this take us? Simply this: if we want to look for villains, we must not only look at the Fed, but at politicians. Likewise in the euro-zone countries, the bastards that keep crushing the people with austerity are both the bankers (e.g. the ECB) and the politicians.
Did that clear anything up, or is it all even muddier than before?
Re: IMF's epic plan to conjure away debt and dethrone bankers
From what I can tell it is the US Treasury that auctions the bonds. It is the Fed that buys them.
If we can separate the concept of money from its physical representation. The Fed buys bonds at US Treasury auctions and pays for those bonds using newly-created digital money, i.e. it credits the Treasury's account. The Treasury can then print new bills up the amount of the newly-created money. It can not, under the current system, decide to fire up the printing presses and issue money that is not backed by previously sold bonds.
Yes, bonds are negotiable, between bond traders. However, if you or I were to attempt to use bonds as part of a transaction, we'd find ourselves in jail pretty quick. Roughly 50% of the current $8.68+ trillion debt is in the form of Treasury bonds.
Would you have any sources to back up this? I'm curious because all the sources I have read indicate the opposite.
Re: IMF's epic plan to conjure away debt and dethrone bankers
Let me do some digging and get back to you on this. I'm still fuzzy about some things, and I have put a question to a friend of mine who knows far more about it that I do. I want to see what he says. If he does not answer, then I will do my own digging. Hopefully we can straighten this out.
Re: IMF's epic plan to conjure away debt and dethrone bankers
Tom, thank you for your correspondence on this smatter. My knowledgeable friend wrote back and affirmed that I am correct. The US government does not get its money from the Fed. Nor does it ask permission of the Fed to create money. The creation of money has nothing to do with the Fed.
The government creates its money from nowhere, by changing numbers in bank accounts. The Fed can lend to banks, but the loan money comes from T-bill sales. The Fed also credits the government (i.e. Treasury) with the Fed’s profits. And the Fed can use some of its profit dollars to buy T-securities. But none of that is connected with the government's creation of money.
So why do people think that the U.S. government gets its money from the Fed? The misunderstanding is a consequence of an obsolete law that was written before the USA went off the gold standard on 15 Aug 1971. The law says that if the government (Treasury) wishes to spend (create money from nothing) then it must sell bonds to equal the spending, not because the government uses the money from bond sales (it doesn’t), but because there must be an accounting equivalence between spending and T-securities. Like I said, the law is obsolete.
The law says the total of T-securities issued each year must equal each year’s total federal deficit. Not that there is any functional relationship between the deficit and T-security accounts (There isn’t.) It’s just that by law the two numbers must be equal. So if the federal government spends $10 million and receives only $3 million in taxes, it runs a $7 million deficit, and is required by law to issue $7 million worth of T-securities, though T-securities have no relationship to deficits. Again, the government does not use the money from the sale of T-securities. (More about that in a moment.)
Most T-bonds are not sold to the Fed, but to foreign and domestic investors. The Fed’s primary role in this process is as a bank. It maintains the T-security accounts, just as your bank maintains your savings account. Maintaining is not creating. The Fed was never invented to create dollars. The Fed is only 100 years old, and the USA is 236 years old. The Treasury was creating dollars long before there was a Fed. The Fed could disappear tomorrow, and the Treasury could continue creating dollars (i.e. “spending”) forever.
Now consider this…
When you deposit dollars in your bank account, you lend to your bank. Your bank owes you those dollars, and is obligated to give them back if you want them. By depositing dollars into your bank account, you have forced your bank into debt. All bank deposits are bank debts. Banks love to be in debt. It’s their mission life. It’s what they do. They solicit debts (deposits). The more debt (deposits) they have, the stronger they are. Bank debts (deposits) are not “unsustainable,” nor do they cause bankruptcies. If a bank becomes insolvent, the fault is not deposits, but poor business practices. No bank ever went bankrupt because its debts (deposits) were too large.
Federal debt is identical, since the Fed is essentially a bank. When you buy a T-bill, you “lend” dollars to the Federal Reserve Bank. You deposit dollars into your T-bill account at the Fed. You are a creditor to the Fed. The more debt (deposits), the stronger the Fed, and the stronger the nation. All federal debt is just the total of T-security deposits (T-bills, T-notes, T-bonds) in Fed accounts. At this moment the total Fed debt (i.e. the total amount of deposits) is 11.3 trillion dollars from investors, plus in 4.8 trillion from government trust funds, revolving funds and special funds. Thus the Fed, being a bank, can literally boast, “We have 16.1 trillion on deposit!” The more debt (deposits) the Fed bank has, the better.
Your T-security account at the Fed bank is identical with your account at your local bank. You put dollars in (credit); you take dollars out (debit), and meanwhile you earn a bit of interest.
What if all investors (including China, Japan, European nations et al) suddenly wanted their dollars back? No problem. The Fed or the Treasury would simply change numbers in computers, debiting all their T-security accounts, and crediting all their checking accounts. Voila: all federal debt would instantly disappear.
When a bank boasts that it has a billion dollars on deposit, it is boasting that it has a million dollars in debt. That is a good thing. Likewise, a 16 trillion dollar national debt is a sign of strength, not weakness. The 16 trillion is the amount on deposit with the Fed. Most of those deposits stay right there with the Fed computer, just as most of the the deposits in a regular bank sit right there in the bank computer. All of the reserve deposits remain in the bank. They cannot be spent. Instead, they are used to issue fractional reserve loans. So it is with the Fed. That $16 trillion is a reserve account. It cannot be spent. That's why it's called the Federal Reserve Bank.
This has nothing to do with the amount of money available to the government. That amount is infinite, since it comes from nowhere. The Fed is concerned with issuing credit, not money. The U.S. economy runs on money and credit. The U.S. government runs on money alone.
Therefore the Fed is just like a regular bank. It does not create money, but it solicits deposits, and it can issue credit (loans).
Another reason why people wrongly think the US government gets its money from the Fed is cynicism. When we do not understand how money works, we feel confused and powerless. Our complaining locks us into defeatism and despair. This becomes a habit, even an addiction. We only want to hear what justifies our complaining. So if I say that the US government gets no money from the Fed, the reaction is, “I know you’re wrong, because I know the Fed is all-powerful, and it is evil.”
However, when we truly understand how money works at the national level, we cannot change the situation, and we cannot wake up others (since others do not want to hear) but at least we can sleep soundly, knowing that
(1) The “deficit” is meaningless
(2) The “debt crisis” is laughable. The national debt is a good thing, since the debt is merely deposits. The more national debt, the better.
(3) If all creditors (i.e. depositors, i.e. buyers of T-bills) suddenly wanted their money back, this would be no problem at all.
(4) The USA can never run out of money or “go broke.” Nor can Social Security, Medicare, etc.
(5) No federal spending (i.e. creation of money from nothing) is “wasted.” Even spending on wars is not a “waste,” unless we say that the money could be devoted to more constructive things. Federal government “spending” is how money gets into the economy. (The Fed and the banks is how credit gets into the economy.)
(6) The US Congress has equal power with the Fed. In some respects the Congress is more powerful, since Congress determines how much money to create, and who shall receive it.
By the way, I just looked at what wikipedia says about all this, and wikipedia is flat wrong. Here is one of countless wikipedia whoppers: “Intra-governmental debt is incurred when the government borrows from federal trust funds to help fund current operations.”
WTF? The government does not borrow to fund current operations!!! The government creates money from nothing, simply by changing the numbers in bank accounts. If the government wants to give $10 billion to Boeing to make a missile, then the government changes the numbers in Boeing’s bank account to show a $10 billion credit. No borrowing is involved. The Fed is not involved. The national debt is not involved. The $10 billion does not increase the national debt by one penny.
CONCLUSION
In started this thread by saying, “Did you know that control of the U.S. money supply is not in private hands after all?”
That’s confusing. I meant to say that the US government creates its own money. Then publicly created money enters the banking system, overseen by the private Fed. The Fed is very powerful, but it is not all-powerful. In many ways, Congress is more powerful. It decides how much money to create, and where to send it.
If the US government got its money from the Fed, then military contractors would lobby the Fed, not the Congress.