Finance Sector Bilks the People

Memo to Congress: Show Us the M-O-N-E-Y! Part 3 of 3.

To examine the question posed in Part 2 (namely how can the Federal Reserve, as the nation’s designated monetary authority, balance the internal needs of the world’s largest economy with the inevitable impact that that economy has on the global economy, all through a monetary system precariously built on debt?) let’s begin at the beginning by describing quantitative easing as follows (underlining mine):

a monetary policy used by central banks to increase the supply of money by increasing the excess reserves of the banking system. This policy is usually invoked when the normal methods to control the money supply have failed, i.e the bank interest rate,discount rate and/or interbank interest rate are either at, or close to, zero.

A central bank implements QE by first crediting its own account with money it has created ex nihilo (“out of nothing”)… It then purchases financial assets, including government bonds, mortgage-backed securities and corporate bonds, from banks and other financial institutions in a process referred to as open market operations. The purchases, by way of account deposits, give banks the excess reserves required for them to create new money, and thus a hopeful stimulation of the economy, by the process of deposit multiplication from increased lending in the fractional reserve banking system… The Fed is simply electronically swapping assets with the private sector, mostly swapping deposits with an interest bearing asset.1

Yes It Is True: Bank Credit Is Not Money

In other words, the “money” that the Federal Reserve creates in order to purchase securities is really a form of credit that forms the reserves through which the banks “create new money.” How do the banks do this? By extending loans to businesses, local governments and ordinary people as well as investors, large corporations and financiers, using fractional reserve expansion.

This is why private debt outstrips federal debt by a factor of roughly five to one. Federal debt in turn is the justification used to allow foreign entities to buy up government debt and private debt is the method by which foreign entities, various investment funds and the wealthier of our citizens are able to purchase U.S. assets for a “dime on the dollar.”

It should be noted that paper currency, printed at the Treasury upon Fed request, represents only a tiny portion of our nation’s money supply, most of which is digitized as “checkbook” money. Moreover, paper currency so printed – together with digitized money – makes up the reserves through which the banking system creates new money (or more accurately credit serving as money) through the fractional reserve system. Thus credit is widely seen as the lifeblood of the economy.

In the strictest sense, the Fed does not “print” new money, although it does authorize the printing of new currency. The banking system in effect creates new money – most of which is “checkbook” or digitized money – once the Fed has initiated the money/credit creation chain through creation of reserves. Generally speaking it is the big commercial banks which soak up new reserves first, because it is in those banks where the sellers of securities always deposit their electronic checks from the Fed. Some reserves eventually can trickle down to mid-sized and small banks, often without their even knowing it – provided the big banks cooperate through credit creation for use within the national economy, and not for investments abroad, and provided consumers and businesses spend as well as borrow.

This tiered system not only enables the big banks to funnel massive amounts of “cheap” money toward the purchase of assets and debt of nations around the world but it also enables them to secure the lion’s share of fees associated with these various transactions. This in turn has enabled the big banks to acquire a “unique degree of leverage over government” through sheer financial clout coupled with a carefully nurtured “revolving door” employment policy that enables select individuals to move almost seamlessly from the financial sector to government and back again.2 As one measure of what is happening, six mega banks – Goldman Sachs, JP Morgan Chase, Bank of America, Morgan Stanley and Citigroup – have grown to the point where they now control assets totaling more than 60% of the national GDP. Meanwhile smaller banks are being squeezed out of business.3

This feature notwithstanding, and in order for new money (that is credit serving as money) to be created through reserve accounts, both banks and borrowers need to participate by creating new loans to serve as money. With some $1 trillion of the $1.7 trillion of QE1 still sloshing around in the reserve accounts of major banks, Fed Chair Bernancke is hoping that additional reserves from QE2 and beyond will eventually help some of these big bank reserves to trickle down to the smaller banks who should in turn provide much needed credit/money to local economies. There is at least some indication that this might be happening – but it may not be nearly enough to arrest the downward momentum of an economy in free-fall.

In addition to the propensity to create monopolies – and as correctly discerned by Thomas Jefferson – our monetary system is a mathematical impossibility because when “money” is created as loans there is no money created to pay the interest and all associated fees on those loans. In essence we are trying to make 2 + 2 = 5 instead of 4.

The ONLY way to pay the interest on our money-as-credit is for additional loans to be made, a phenomenon which not only encourages a culture of “waste, fraud and abuse” but sets in motion a money shortage as soon as we try to pay the interest and fees due on our money-as-credit. The shortage of money relative to debt is further exacerbated by the “extinguishment” process, whereby the “money-as-credit” supply is decreased as loan principals are paid down, or “extinguished.” It should be noted that this differs slightly in the case of Treasury bonds: when they mature the reserves they represent goes away, leading to “credit contraction” unless new Treasury debt replaces them.

This shortage of money relative to debt in turn breeds a climate of greed which becomes worse over time due to the universal law of exponential debt growth. Today, our debt outstrips our money supply by a factor of at least 4 to 1, due to this mathematical law. The debt-load so expanded becomes worse over time, making it increasingly difficult to pay even the interest on the debt thereby incrementally squeezing government, business and household budgets alike. Indeed, the credit-as-money squeeze is quite possibly a major motivating factor pushing governmental entities toward profit-driven financial structures that siphon money away from the local community and into the financial arena.

Periodic – and painful – corrections are required in order to maintain system stability, and that is what we are going through now. These downturns, or corrections, inevitably lead to wealth being redistributed upwards into fewer and fewer hands, as those who “have” buy up troubled assets for the proverbial dime on a dollar. In this way, excess debt is wrung out of the system. Without question, our debt-based fractional reserve system is the primary underlying reason for the kind of extreme income inequality and widespread unnecessary poverty that we see today – something foreseen by many of our founding fathers, including William McClay, John Taylor, James Madison and Thomas Jefferson.

Overall, market corrections – whether by sector, locality or generally – exacerbate the inherent money shortage caused by creating money-as-credit by forcing further reductions in the supply of credit (or bank credit serving as money) that is needed to pay wages, produce products and otherwise fuel the local and national economies. Moreover, the more debt that gets paid down or cancelled through default, the less money-as-credit is left in the economy – creating in effect an escalating money shortage which then leads to a deflationary spiral.

Since lending activity is below what it was in 2007, we know that insufficient money (as new loans) is being created by the banking system for use by those citizens, local businesses and local governmental entities most in need. This is why Bernanke was so worried about deflationary trends – the grim scenario for which is spelled out in this online definition:

Deflation: A decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy, opposite of inflation.

The Fed’s latest effort is clearly aimed at countering the deadly deflationary trend of falling prices and wages here at home. Moreover, as Bernancke himself details: “Even absent such risks [of deflation and stagnation] low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating…. Easier financial conditions will promote economic growth.” [Emphasis my own] That considerable spare capacity signifies a shortage of money which Mr. Bernancke hopes can be corrected through “easier financial conditions.”

That is the hope anyway, but banks are still deleveraging their way out of bad debts, borrowers are fewer and farther apart – and Congress is leaning heavily toward a healthy dose of what it calls “austerity” despite its recent hefty tax cut bill, which despite its presumed stimulative effects, represents yet another massive addition to the nation’s liability column.

Meanwhile highly credentialed economists are reading something slightly different into Bernancke’s plea for Congressional help in repairing a broken economy – setting off a renewed debate over calls for austerity as well as exactly what kind of stimulus can be considered cost effective. For example, Joe Stiglitz maintains that “anybody that says, ‘I’m going to only look at one side of the balance sheet, the liabilities; I’m not going to look at the other side, the assets,’ is really not understanding economics… if we spend the money on investments—investments in education, technology, infrastructure—you grow the economy in the short run from the stimulus, you grow the economy in the long term because of the returns that you get on these investments.”

Currency plays

In seeking to raise asset prices, the Fed is doing what it can to level out both sides of the nation’s balance sheet. This is to say, increased asset prices will help balance the liabilities that the Fed and the banking system together create through money/credit creation. This is important because the value of both our assets AND our liabilities are the two key features embedded within our monetary system, and hence the dollar.

The Fed is in effect helping us to inflate our way out of debt, irrespective of how that may affect the global economy or whether that endeavor may in effect force others to pay for our profligate ways. Although other factors serve as counterweights, the temptation to inflate away at least some of the debt is of course magnified by the fact that some 48% of public debt is held by foreigners. And so the unintended consequences begin.

For example, low interest rates – which are encouraged by QE measures as well as Fed Fund rates effectively held at zero – “cheapen” the dollar while excess reserves have the effect of weakening, or lowering the value of, the dollar because excess reserves have the potential to allow the creation of too much credit serving as money. A cheap dollar is a two-edged sword, punishing savers even as it provides strong incentives to engage in speculation. Those who have access to capital, whether stored in savings accounts or elsewhere, are able to leverage that capital into newly created, “cheap” dollars with which to venture forth into the world in search of speculative opportunities that promise big returns.

At the same time, a weakened dollar causes our exports to become cheaper and imports more expensive, reducing consumer demand for imports – arguably a good thing for the national GDP, not so good for importing countries who have depended on our purchases. In both cases, national economic indicators are emphasized; small, local producers across the globe fall farther down the totem pole where devalued, “cheap” dollars produce the harshest impact – albeit via different routes.

The Fed has made its choice clear, regardless of the extent to which “[t]he competitive devaluation orchestrated by the U.S. has consequences for all its trading partners. In essence, the U.S. is manipulating its own currency, while accusing China of doing the same…. The U.S. dollar is both the centre piece of the world financial system, and the national currency of a country with a stagnating economy, which is losing manufacturing capacity and well-paying jobs. One role gets in the way of the other. When faced with a choice between acting on its own behalf, or helping out the world financial system, the U.S. does not hesitate. It looks to itself.”

Those pessimistic about America’s future, and therefore the dollar, believe the day of reckoning is at hand due to what they say – not without some justification – is essentially unpayable U.S. debt. Because “both East and West now find themselves on the edge of a growing deflationary sinkhole created by the sequential collapse of two large US bubbles, the dot.com and US real estate bubbles” there appears to be no viable way left to borrow, spend and inflate our way out. Credit expansion has in other words been overtaken by debt deflation, and the inevitable result is collapse of the dollar.

Meanwhile some experts argue that U.S. debt levels are NOT unsustainable and that commonly used debt-to-GDP charts used to support doomsayers are “technically wrong and analytically meaningless.” Dollar “bulls” also see things a bit differently than the bears, going so far as to say that added debt via QE2 and beyond is bullish for the dollar and for America’s future. One analyst explains:

The Fed’s verbal commitment to support asset prices coupled with its ability to buy assets should provide support in the US financial markets. Moreover, while yields may move slightly higher due to inflationary expectations, the US stock market will remain relatively attractive as compared to bonds. Therefore, from an investor’s perspective, US assets become attractive. The “Goldilocks” environment the Fed is attempting to create could result in foreign investor interest in the US markets as relatively low rates and the Bernanke “put option” make the US a safer place to invest. This foreign investment interest would be supportive of the US dollar. Moreover, as other countries attempt to weaken their currency, the US dollar will strengthen, making US investments even more attractive.

Another “dollar bull” with a similarly positive outlook for America’s future poses the intriguing question of how it is that dollar bears can be so certain that this country is finished:

[S]omeone claiming the dollar is worth nothing clearly carries the burden of proof. The dollar is backed by a $14.59 trillion competitive and innovative economy. Yes, $13.4 trillion in US federal debt is quite far from ideal … [but] Debt/GDP was over 120% in 1940 [when] we accepted the accidental Keynesian spending that was required to fight WWII. Imagine if we ran up to 120% now but did it on infrastructure spending and alternative energy investment within the United States? Think the economy would recover dramatically and ultimately lower the only ratio that really matters: debt/GDP? Japan has a debt/GDP ratio of over 200% yet the yen has not collapsed to zero. In fact, the Japanese Central Bank recently intervened to halt the rally in the yen but to no avail as the yen/dollar is right back to highs in just under 3 weeks…

Currency plays aside, currencies are not stocks, as the afore-mentioned dollar bull later points out. To the extent that a country’s currency reflects the productive and consumptive capacities of its people, and to the extent that such a currency is supported by appropriate monetary policy, said currency can maintain stable value.

This was the main point around which the contentious debate between our founding fathers, most notably Thomas Jefferson and Alexander Hamilton, revolved. In other words, “We’ve been here before. The confrontation between financial power and democratically elected government is as old as the American Republic.”3

Despite Hamilton’s well-known affinity for financial power, it was in fact Hamilton as creator of modern financial policy, who confirmed that “It is immaterial what serves the purpose of money, whether paper or gold and silver; that the effect of both upon industry is the same; and that the intrinsic wealth of a nation is to be measured, not by the abundance of the precious metals contained in it, but by the quantity of the productions of its labor and industry.”4

Money, in other words, represents what people create. Its sole function is to facilitate the exchange of goods and services in such a way as to maintain relative balance between the creative and consumptive capacities of the people. The great sticking point between the Jeffersonians and Hamiltonians was how money was to be created, or brought into circulation. That division remains with us to this day.

To Jefferson’s great and everlasting consternation, Hamilton devised a plan by which bank credit would serve as money and be brought into circulation by the monied elite. Paying homage to gold advocates – and in direct contradiction to his own assertion about how a nation’s wealth should be measured – Hamilton’s credit/money system was nominally backed by gold and expanded through the fractional reserve system.

In an especially poignant letter written to George Washington on September 9, 1792 Jefferson writes that Hamilton’s

“system flowed from principles adverse to liberty, & was calculated to undermine and demolish the republic, by creating an influence of his department over the members of the legislature.

I saw this influence actually produced, & it’s first fruits to be the establishment of the great outlines of his project by the votes of the very persons who, having swallowed his bait were laying themselves out to profit by his plans: & that had these persons withdrawn, as those interested in a question ever should, the vote of the disinterested majority was clearly the reverse of what they made it. These were no longer the votes then of the representatives of the people, but of deserters from the rights & interests of the people: & it was impossible to consider their decisions, which had nothing in view but to enrich themselves…”

Jefferson not only correctly warned of the political threat posed by Hamilton’s financial plan, but he correctly foresaw that perpetually expanding debt would become a major national problem. Most importantly Jefferson knew that “a reliance on bank notes would create economic instability and a permanent creditor faction dependent on the taxpayer, while, in contrast, [properly managed] government paper money would prevent both evils.”5 Not only was government-issued currency that was paid into circulation far more stable and dependable than credit-as-money loaned into circulation but it was far more “democratic.”

The Hamilton contingent, though smaller, was better organized and incentivized than the Jefferson/Madison/yeoman farmer contingent. As soon as the ink was dry on the Constitution, the Hamilton contingent introduced the argument that implied powers allowed the new government to hand over its money power to what was essentially a private corporation. The argument was accepted, Hamilton’s plan won out and its essential elements continue to the present day.

Today the accuracy of Jefferson’s insights are in full view of any who cares to look. As he predicted, debt – together with corruption – has become a systemic problem, albeit far less bothersome for Wall Street and government than it is for savers and producers on Main Street, most of whom are being crushed under the weight of both government taxes and personal debt.

It’s high time to demand that Congress show we the people – and not the banks – the m-o-n-e-y by doing what it is instructed by the Constitution to do: “coin (as in create) Money and regulate the Value thereof.”6 ,7 ,8

  • Read Part 1 and 2.
    1. See also “Modern Money Mechanics,” a publication of the Federal Reserve. []
    2. The Quiet Coup” by Simon Johnson. []
    3. See 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson and James Kwak. Pantheon Books, New York, c2010. [] []
    4. Hamilton’s Works, published by order of the Joint Library Committee of Congress, ed by John C. Hamilton, author of The Life of Hamilton, vol 3, page 18. []
    5. “Bank Notes Will Be But as Oak Leaves” by Donald Swanson. The Virginia Magazine of History and Biography, Vol. 101, No. 1, “In the Modest Garb of Pure Republicanism”: Thomas Jefferson as Reformer and Architect (Jan., 1993), pp. 37-52 Published by: Virginia Historical Society. []
    6. A proposal prepared by The American Monetary Institute is along the lines of Jeffersonian thought because it takes the monetary authority away from private hands and places it in the hands of government, where it is created as money and not bank credit, similar to the manner in which the most successful of colonial money was created, particularly in Virginia, for which colony Jefferson served as governor. []
    7. In a scholarly article titled “Paper Money and the Original Understanding of the Coinage Clause” author Robert Natelson, a recognized expert on the framing and adoption of the United States Constitution, draws upon Founding Era jurisprudence and original source material to discuss in detail the origins of the “coinage clause” as it appears in the U.S. Constitution. Published in 31 Harvard J.L. & Pub. Policy 1017 (2008). []
    8. A new bill submitted by Congressman Dennis Kucinich last December 17 and to be reintroduced in the 112th Congress includes many important elements of monetary reform as defined and advocated by the American Monetary Institute. []
    Geraldine Perry is the co-author of The Two Faces of Money and author of Climate Change, Land Use and Monetary Policy: The New Trifecta. Read other articles by Geraldine, or visit Geraldine's website.

    7 comments on this article so far ...

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    1. Don Hawkins said on March 6th, 2011 at 11:59am #

      Before you can break out of prison, you must first realize you’re locked up. ~Author Unknown

    2. Don Hawkins said on March 6th, 2011 at 1:09pm #

      I guess above quote could be looked at in a different way by different groups so let’s put a clarifier in there just to make it interesting.

      There will be no end to the troubles of states, or of humanity itself, till philosophers become kings in this world, or till those we now call kings and rulers really and truly become philosophers, and political power and philosophy thus come into the same hands.

      – Plato

      Still more questions well if we wish to survive answers not more questions. Some questions that could have been answered 10 years ago. Go back further do we dare.

    3. Don Hawkins said on March 6th, 2011 at 1:54pm #

      Those we call Kings or Queens in this world or at least well payed for one reason or another.

      The world is likely to view any temporary extension of the income tax cuts for the top two percent as a prelude to a long-term or permanent extension, and that would hurt economic recovery as well by undermining confidence that we’re prepared to make a commitment today to bring down our future deficits.
      Timothy Geithner

      A changing environment will affect Alaska more than any other state, because of our location. I’m not one though who would attribute it to being man-made.
      Sarah Palin WHAT

      “The American people believe English should be the official language of
      the government….We should replace bilingual education with immersion
      in English so people learn the common language of the country and they
      learn the language of prosperity, not the language of living in a ghetto,”
      Newt Gingrich

      “O-L-I-G-A-R-H-Y.” –misspelling “oligarchy” on his chalk board while claiming he had deciphered a secret code that he said was proof President Obama was trying to create an “Oligarhy,” Aug. 27, 2009, Glenn Beck show on FOX News Channel

      Atlas Shrugged’ is a celebration of life and happiness. Justice is unrelenting. Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should. Greenspan NYT 1957

      “The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions …. Derivatives have permitted the unbundling of financial risks.” — May 2005 Greenspan

    4. Keith said on March 6th, 2011 at 3:21pm #

      This is an incredibly important topic. Unfortunately, it is a very difficult topic to fully comprehend because a very simple subject has been effectively camouflaged by multiple layers of ideological complexity. In other words, our financial system has been intentionally made nearly incomprehensible to hide the fact that money is power, economic power in fluid form, the primary instrument of social control. Money is the central nervous system of a modern, complex society. Directing the flow of money directs what gets done and what doesn’t. The purpose of the financial system should be to direct the activities of the real economy in a socially beneficial manner as determined by a democratic political system. Placing the financial system in private hands for private profit virtually guarantees a socially dysfunctional financial system. The financial system needs to be treated as a government run utility.

      Additionally, a purely debt based system of money creation is designed to benefit the bankers at the expense of society. Essentially, it means that to provide an adequate supply of money to enable the necessary transactions in the real economy, the real economy is, in effect, mortgaged to finance capital. All of those dollars, in aggregate, represent a lien on future earnings. The entire economy working to provide interest payments to capital. This, in turn, requires either a growing economy sufficient to provide the interest plus capital (which, being debt money, incurs future obligations), or a high rate of inflation to ameliorate the interest burden, or a system of progressive taxation on income and wealth to bring the compounding interest burden into equilibrium at the systemic level. None of these conditions currently exists, and a geometrically expanding economy is unsustainable in any event. The bottom line is that our current system is unsustainable and requires extensive modification. In the past, our financial system cleared out unsustainable debts via recessions and depressions, which served to further concentrate wealth and power. We appear to be headed towards a massive systemic collapse of the global financial system.

      What must be kept in mind is that our financial system was created by bankers primarily to benefit bankers, which it does very well. There is nothing intrinsically “right” about our system, no infallible workings of an omniscient market obeying some mysterious universal logic of how things should be. Essentially, money is rules and regulations designed to create a system to facilitate economic and other social interactions. It is the way it is because men of ambition fought hard to create a system which benefited them at the expense of others. It can, and should, be changed. Ownership of the means of production is a distraction, it’s the money. An additional comment is that the fiscal policies of the Fed have a huge global impact because a global system of financial domination (globalization) has been implemented whereby smaller countries are held hostage to global finance. That too needs to be changed.

    5. PatrickSMcNally said on March 6th, 2011 at 6:15pm #

      > Ownership of the means of production is a distraction, it’s the money.

      Actually, it’s the other way around. If you check some facts you should be able to find for yourself that the Bank of England was nationalized in 1946. It is wholly owned by the government, contrary to any Right-wing rumors which circulate about the Bank of England being somehow owned by the Rothschilds. Despite this fact of a national bank that is not at all privately owned, England remains under the dictatorship of the bourgeoisie. That is because the means of production are owned by the capitalist class.

      What made the difference between the US economy of the 1950s and the US economy of today was not any change in the hands of ownership within any of the member banks of the Federal Reserve System. It was rather the fact overproduction created a crisis of declining profits for capitalists. This caused many capitalist investors to shift there investments away from industrial manufacturing and service subsidies and over to financial speculations in the hopes of sustaning profits on investments. The types of economic tasks which need to be executed today would require very long-term social investment before any long-term social profit could be returned. That is not something which capitalist investors can be induced to place there assets into, not by any form of national banking system.

      The conundrum which faces people like Bernanke, and would face anyone who was acting as manager of a national banking system in an economy based ypon capitalist profit, is that only by creating inducements for private investors can he achieve anything. If private investors can not be persuaded that they stand to gain a profit by providing every homeless person on the streets with a shelter, then the system will not act to provide such people with a shelter. Bernanke does not possess power over the economy to alter that fact.

      All that he may do is attempt to either encourage or discourage such economic trends as are already in place in the economy. But those economic trends are determined by what is profitable, not by any administrative decree which Bernanke holds. To be able solve homelessness as a problem would require a government with the aithority to order the provision of homes for people who need them, and then tax the rich in order to pay the bill. Without this being done, no monetary policy followed by Bernanke or by any national bank would be able to address homelessness. And that’s only one of multiple issues for which the same rule holds.

    6. Don Hawkins said on March 7th, 2011 at 1:28am #

      And California’s economy is how big and just how many young and old are homeless and of course this is Worldwide the thinking on Wall Street the financial sector the little angles who as we all know don’t act on instinct but use reason had nothing to do with any of this no no no well if the truth be known all these different channels the media who seem to like to say things like in search of the truth or fair and balanced or Capitalism is the best path to prosperity probably more on the lines of the instinct channels to keep us right where we are in some sort of dreamland well welcome to the real World Neo.

      BRENT CRUDE FUTR (USD/bbl.)116.9500.GASOLINE RBOB FUT (USd/gal.)307.4002.WTI CRUDE FUTURE (USD/bbl.)106.0901.

      Try not. Do or do not, there is no try.

      Always in motion is the future.

      That doesn’t mean drill baby drill it means probably a very good idea to get your head wise one’s out of that very dark place and start listening to people who do have a mind and a little thing called a soul reason, knowledge not illusion and please lose the suit’s those day’s are over at least for an enormous effort that very sure slowing down a bit will be part of. Everything should be made as simple as possible but not simpler. Everything should be made as complex as possible and not simple well golly gee look how well it’s working as someone is getting bilked to say the least.

    7. Deadbeat said on March 7th, 2011 at 2:38am #

      There are a great deal of flaws in Ms. Perry analysis. For one she believes that public debt was created by the Fed policies. That is totally incorrect. The reason for the large public debt is due to 30 years of stagnate wages. The primary cause of Federal debt is the result of huge tax cuts to corporations and the wealthy. Fed’s policies are more the result of these fiscal policies. In addition the huge interest rates that led to the recession of the late 1970’s was due to the U.S. Middle East policies that favored Israel and the propping up of the Shah of Iran which lead to the oil embargo and the crises in the energy sectors.

      But here is a more complete critique I found by ajohnstone since I don’t have too much time to write up a complete critique of Ms. Perry’s article…

      ajohnstone said on November 1st, 2010 at 8:21am #

      Trouble with many contributors on this site is that they seek out solutions without understanding the causes. Marx wrote extensively on money and banking and credit yet how convenient it is to forget his conclusion that it is the entire capitalism system not simply individual aspects of its functioning that is the problem. There is no new clarity. Simply another economist’s cul de sac. Theorists seem to forget that the capitalist system remains, in all essentials, the same as it was when Marx studied in the British Museum. Lest we forget, the source of all Rent, Interest and Profit is the unpaid labour of the working class.

      Who are the people who find a difficulty in paying for the money they use? Not the working class in any sense of the word. Not the large capitalists, for they control the powers of government and have a currency suitable to their interests. There is left the small capitalist and shopkeeping section, who, fond of calling themselves the “middle” class, find themselves unable to hold their own positions against the giant production and “chain store” system of distribution that is crushing them out in all directions. Hence this howl for an extension of “credits” and the introduction of “cheap” money for the purpose of paying their debts. There is no chronic shortage of purchasing power. Sufficient to buy the product is generated as wages and profits in the course of production. Slumps are not caused by an absolute shortage of purchasing power but arise when, because of falling profit prospects, capitalist firms choose not to spend all their profits on fully renewing or on expanding production.

      Money! What is money? Money is a ticket that enables one to buy goods with, just as a railway ticket enables one to ride on the train goes the argument . The more tickets one has in one’s pockets, the more he can buy. These tickets are, therefore, merely media of circulation, purchasing power. They may be made of anything . The material is of no consequence. What is of consequence, though, is the quantity of money in circulation. The mortal sin of the banks is that they refuse to issue enough money, or credit, to enable the “common man” to procure the necessities of life. Therefore, the power to issue money and credit based on social wealth must be taken over by a state-owned . Money, it explains, causes commodities to circulate, but herein it is certainly deceived by appearances. In reality, the movement of money is simply the reflex of the circulation of commodities. Money only realises the prices of commodities. Given the velocity of money, among other things, the quantity of money required in a community is just the amount sufficient to realise the prices of the goods to be exchanged. More than this the system cannot and will not absorb. For money, in the sphere of circulation is an effect not a cause. Hence, there is nothing seriously wrong with money, as such. Consequently, to increase the quantity of money will not put more goods into the hands of the people. Such an increase, in place of causing a greater quantity of commodities to circulate, can only have the effect of cluttering up the machinery of exchange. To advance as an argument for such an increase that many people are suffering because they have not the money with which to buy the necessities of life is not an argument for the relief of distress. Many are deeply moved because many are scarcity amidst plenty. It is a condition the reason for which baffles them. They can see easily enough that the products of labour are not properly distributed. That does not require much brain work . But they do not have sufficient insight into the capitalist system to be able to understand that this condition arises from the fundamental contradiction of the system. This fundamental contradiction is that goods are socially produced, but individually appropriated by the private owners of the means of wealth production. The profit system, albeit appropriately modified, must be maintained at all costs. Hence, they want to retain the capitalist system, but at the time escape the inequalities and distress which it produces. So when they speak of changing the system, what they have in mind is an indefinite idea of correcting some of its faults. Yet those faults will only end when the means of production are brought into common ownership and democratic control so that they can be oriented towards directly satisfying people’s needs – when banks, money and all the rest of the buying and selling system will have become redundant.

      Commodities express the amount of labor time embodied in them and that is how Marx has defined money.