Local Currencies, Not Washington Post Platitudes, the Key to Economic Recovery

Steven Pearlstein, business columnist for the Washington Post, wrote a column on January 6 entitled, “Recession Over? Not Unless We Make a Major Shift.” The problem is that the “major shift” Pearlstein writes about won’t solve the problem even if it takes place.

So is the recession ending? The professional cheerleaders from Wall Street think so, now that the Dow-Jones has surged past 10,500. Fed Chairman Ben Bernanke is also cautiously optimistic as the Fed begins to dismantle some of the emergency bailout programs it had implemented to help save the financial system from total collapse after the meltdown of 2008.

How did the apparent turnaround come to pass? Pearlstein notes: “My best guess is that the current upswings in economic output, confidence and financial asset prices are largely a reflection of the extraordinary fiscal and monetary juice provided by Treasury and the Federal Reserve, along with the natural rebound that occurs after a collapse in consumer and business spending like that which occurred in the first half of 2009.”

There is in fact a consensus among commentators that it’s been government money that has made the difference. But the government money has all come from borrowing. It’s why the national debt rose from about $9.5 trillion to almost $12 trillion in a little more than a year. Interest on the debt now approaches $400 billion a year.

But the debt can’t continue growing at such a rate. President Barack Obama has already said that with the emergency behind us the federal deficit must start to come down. The reason Congress is about to pass such a terribly flawed health care bill is that the Congressional Budget Office estimates that it will reduce federal health care costs by forcing millions of uninsured people into the private insurance system, cutting back on Medicare, and imposing a five percent tax surcharge on the wealthy.

So what is the economic engine that will keep the economy on track? Pearlstein dismisses all four of the most likely possibilities.

He says that consumer spending, with unemployment staying high, will not come back, writing, “It’s hard to see how American consumers can again become the engines of the U.S. or global economies.”

On more government spending, he says, “that’s also hard to imagine. State and local governments, in fact, are still cutting back spending in response to falling tax revenue, and there’s no political consensus for running up bigger federal deficits than we are running now.”

Another possible source of growth is new investment, but the economy is already built to overcapacity in many sectors, “including excess hotel rooms, airplanes, office buildings, shopping malls, cargo ships, aluminum smelters and the like.” Regarding another housing boom, forget it. Pearlstein writes, “…with 5 million vacant apartments and another wave of home foreclosures on the horizon, don’t count on the housing sector to lead the way out of this recession.”

Finally, there is trade. But even though the U.S. trade deficit has come down, its persistence “reflects a fundamental reality not likely to change anytime soon: We no longer produce much of what we like to consume, and cannot make up the difference with exports because of trade barriers and an overvalued currency.”

So what is left?

Here Pearlstein returns to a focus on investment by noting that American consumers have started to save again and that during the downturn businesses saved money by living with aging production equipment, physical plant, and computer systems. He comes out in favor of tax breaks for business to encourage investment, along with new government expenditures for infrastructure such as “basic research, clean-energy development and expanded public higher education.” These things, he says, will create new jobs which in turn should lead to more consumer purchasing power.

The trouble is, Pearlstein already dismissed the investment and public expenditure alternatives earlier in his analysis as being insufficient. More government debt could also lead to high levels of inflation and further devaluation of the dollar. Inflation caused by government and central bank “printing of money” kills enterprise at every level.

Pearlstein fails even to mention the severe constriction of bank lending to businesses that has made conditions much worse for the small business sector where half of all start-ups already fail within a year. Business giants can take refuge in their cash reserves, but even they cannot grow if consumers can’t buy more of their products.

Pearlstein’s prescriptions are mainly platitudes. Let’s be frank: without small business and the revitalization of local and regional economies, a real recovery cannot take place, and an unemployment rate that has terrorized the middle class with loss of jobs, incomes, savings, and health care cannot be overcome.

What is the answer then? It’s one that Pearlstein and the Washington Post, being in the mainstream of economic commentary, dare not mention: it’s local currency systems that alone can fill the gap left by the collapse of public finance due to debt and the failure of the banking system to function at all levels of the economy and not just for the benefit of the super-rich global capitalists.

If the federal government announced that it would begin to accept local currencies in payment of taxes, and state and local governments did the same, we would see an economic miracle that would astound the world.

Richard C. Cook is the author of We Hold These Truths: The Hope of Monetary Reform, scheduled to appear by September 2007. A retired federal analyst, his career included service with the U.S. Civil Service Commission, the Food and Drug Administration, the Carter White House, and NASA, followed by twenty-one years with the U.S. Treasury Department. He is also author of Challenger Revealed: An Insider’s Account of How the Reagan AdministrationCaused the Greatest Tragedy of the Space Age. Read other articles by Richard, or visit Richard's website.

7 comments on this article so far ...

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  1. Danny Ray said on January 8th, 2010 at 11:01am #

    Please excuse my saying this but this post is among the most silly things I have ever read.

    Surely, a learned gentleman, such as the author would know that for the first hundred years of this country we had local currencies. It was an unmitigated disaster. Banks and cities would issue currency with no regard to how it was backed, if at all. One major plantation issued bills based on the worth of the farms slaves.

    We may as well go back to the barter system.

  2. Max Shields said on January 8th, 2010 at 12:41pm #

    Local currency is a viable alternative to the USD; particularly as a replacement for how money is issued – through banks loaning money (debt).

    Local currency has a proven track record. Remember national currency was (with the exception of its momentary emergence during the Civil War) came about aroun 1913, same year the Fed was created(!!).

    Local economics, the economics that built all the world’s cities and towns is perhaps the most sustainable approach one could take to transforming what we’ve got. Local currency figures into this because it keep currency local and by doing so provides an economic engine in cities and city-regions. The history of human economics has successfully followed this path – sorry if this is not a New New Deal. Problem is the old deal was a raw deal and we got suckered into it. Time for course correction.

    Now back to the issue of the fat cats who eat our lunch. That happens because, shamefully, people too frequently turn out to be patsies for the rich and famous.

    Let me just quote, no truer words than from Machiavelli’s The Prince:

    “…And it ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new. This coolness arises partly from fear of the opponents, who have the laws on their side, and partly from the incredulity of men, who do not readily believe in new things until they have had a long experience of them. Thus it happens that whenever those who are hostile have the opportunity to attack they do it like partisans, whilst the others defend lukewarmly, in such wise that the prince is endangered along with them.”

  3. Deadbeat said on January 8th, 2010 at 1:49pm #

    Local currencies as a silver bullet doesn’t address exactly the problem that Michael Dawson raises. Yet local currencies can resolve the issue of circulation that local economies needs as Max addresses. However I think lean more with Michael that local currencies will not address the structural problem in the economy — the maldistribution of wealth. Clearly on a local scale rich people can exercise more political influence. Take a look at how even on a state level how the wealthy pit states against each other. The same will hold true with rival currencies.

    Also there is no guarantee that local currencies will resolve the debt issue. Local currencies can be easily controlled by the banks and centralized especially since the FIRE sector are extremely influential at the local level.

    I disagree with Michael however regarding a “New New Deal’. That will not work. The only solution is replacing Capitalism. We need to eliminate the debt based monetary system and eliminate the current property relationships that people have been indoctrinated into accepting. If that is not address none of these ideas will succeed and current trends will only continue to manifest.

  4. Michael Dawson said on January 9th, 2010 at 3:54pm #

    A New New Deal would have to replace capitalism, Deadbeat. Nothing that leaves capitalism in place is going to work. But we have to start somewhere and set priorities. Aggressive ecological and urban reconstruction coupled with radically increased equality and economic democracy would be a great beginning.

    Meanwhile, Danny Ray is 100 percent right about the actual history of local currencies. None of that history fazes Mr. Cook, who thinks he has learned something and is simply going to perseverate about it until the cows come home, the facts be damned.

    Not quite sure why DV publishes it, but I suppose it’s about diversity and debate…

  5. Max Shields said on January 10th, 2010 at 11:05am #

    Michael Dawson could you please outline what your New New Deal would be. How do you envision it working? What the fundamental guiding principles?

    Capitalism, in your last post seems like a catchall for “bad” and that seems to beg the question.

    Local currency has a clear purpose. Is it the only way to eliminate debt-based monetary system? No. But it certainly has a premise, many successful working models over time.

    And your New New Deal?

  6. bozh said on January 10th, 2010 at 12:21pm #

    Let’s go back to 15, 20, 30 yrs ago. Or even 3k bc. Money was invented, i think, by hittites ca 1.5 bc.
    Probably by 10k yrs ago, classes arose in spite of the fact that money was not yet invented. A ruling class [probably shamans-priests] slowly developed.
    From that time all kinds of iniquities arose against the nonruling class. Continuing to this day in every land or empire where people r divided into a more valuable and less valuable groups.

    Please let us not bury our heads so that we cannot see that the structure of society has not changed an iota from those under rameses, mussolilni, jefferson, and now obama.

    This is THE cause of all evil on interpersonal and int’l level. U don’t change this structure to a structure with a human face, u achieve nothing!
    For one thing, however local currency may be of use or rightful-just, it wld be, a fortiori, destroyed by the evil class of people.
    Count for sure that the attempt wld be made to destroy any interdepedence on any local level.
    By now, surely, we shld know uncle sam. He never changes; does not waver hesitate, in his striving to amass lands. And wealth comes only from land [ok,sea,too].

    All of this suggests that uncle sam and aunt sarah must one day face uncle fred and aunt freda. Only then the real argument, debate, talk can commence and hopefully some change.
    It aint ever gonna come as a result of anybody’s brillint speeches and multitude of im- or explicit promises.
    I wld venture to say, knowing my wife, that possibly 95% of american and canadian pop r not onto tacit promises.
    EG, take the tacit promise of balloting. Voting tacitly promises that by changing one prez or pol for another prez or pol, situation wld improve or desirable changes be made.

    Clearly this clashes with the fact that uncle sam never changes. In fact, i’ve heard at least twice people tell me that “nothing changes, everything is predetermined; so why vote”.
    Others have noted that if voting mattered to a certain degree, voting wld not be even allowed or if permitted, then just rigged.
    Nader only got some -700k votes! Go figure! tnx

  7. Gary Corseri said on January 10th, 2010 at 7:55pm #

    I cast my vote with Cook and Shields on this one.

    Thanks, Richard Cook, for putting Pearlstein and the Washington Post exactly where they belong–with MAD MAGAZINE, WEIRD COMICS, and the READERS’ DIGEST. Not too much illumination from any of those trash bins.

    I do think Mr. Cook’s article needs expatiation … and I suspect he’ll be doing so in articles and books to come from his prolific keyboard.

    My sense is that a local currency is one of the surest ways to return to local autonomy; alert citizens in a municipality or district or county, or even a region, are much more likely to track and account for their money if they themselves are involved in the system of printing and circulating it. If they are electing their local treasurers, and depositing and withdrawing their local currency from their local banks! Lots of details to work out, no doubt, and the devil is in the details–but so is God!

    Big Government, Big Finance, Big Corporations and the various alliances between them–what Mussolini called Fascism!–have pretty much destroyed small-d democracy. Let’s be bold! Let’s flush this crappy Fed system down the drain–or at least let’s seriously give it a run for its money with a counter-system, a counter-balanced local currency. Time for a “New” New Deal? The old New Deal worked because of World War II. Frankly, I prefer not to; I’d rather bow out. Time for a New America I’d say; time for some house cleaning!