The myths of debt ceilings, fractional reserve, and tax and spend

[Ed Jewett]

A very secret agent
By Chris Cook

There is a charade playing out in Washington at the moment in respect of the completely meaningless "debt ceiling" which the US maintains as a relic from the days of the gold standard.

We are told that at the US Treasury's account at the Federal Reserve Bank there will soon be no more taxpayers' dollars, and therefore the Fed will soon be unable to make any more payments or issue any more cheques on behalf of the Treasury. The money has run out.

This is nonsense. It is a myth, and moreover it is a myth that Federal Reserve chairman Ben Bernanke exploded in his recent testimony to a US congressional committee.

Congressman Sean Duffy: We had talked about the QE2 with [congressman] Dr [Ron] Paul. When - when you buy assets, where does that money come from?
Ben Bernanke: We create reserves in the banking system which are just held with the Fed. It does not go out into the public.
Duff: Does it come from tax dollars, though, to buy those assets?
Bernanke: It does not.
Duffy: Are you basically printing money to buy those assets?
Bernanke: We're not printing money. We're creating reserves in the banking system.

But ask yourself the question: if paper money is not being printed, then what exactly is being created? What are these "reserves" to which Bernanke - and indeed the Federal Reserve Bank's very name - refers?

Bernanke is unwittingly exploding two foundational myths which underpin mainstream economics.

Myth 1: tax and spend
The tax and spend myth is that "tax-payers' money" is first collected by the Fed and then spent, or lent.

Bernanke blew that one away when he told the committee that taxpayers' money was not involved when the Fed was busy easing quantitatively. The Fed created 1.6 trillion somethings, which banks accepted, either for their own account or a customer's account, in exchange for the Treasury Bills they owned, and these somethings were, and still are, deposited with the Federal Reserve Bank as a custodian of ... "reserves".

Many US citizens will be old enough to remember "Greenbacks": paper promissory notes issued by the US Treasury for circulation as currency. These work exactly the same as the familiar Federal Reserve Bank notes that now constitute US notes in circulation - ie both may be presented in payment of taxes or of other debts. So Fed notes are in every sense Greenback "look-alikes".

Bernanke confirmed the staggeringly simple reality that not a single taxpayers' dollar is actually spent or lent when the Fed follows the Treasury's instructions to credit any account, anywhere, for anything. This is because the Fed is creating - as an agent on behalf of the Treasury - an exact "look-alike" of a Treasury IOU or promissory note. ie the Fed is simply pledging the Treasury's credit by creating tax credits.

So what happens when taxes are paid? When a dollar of tax is collected by the Federal Reserve Bank on behalf of the Treasury it does not become a deposit that adds a dollar to the Treasury's credit balance at the Fed. Instead, a Treasury credit for $1's worth of tax is canceled by the Fed as agent for the Treasury and the national debt shrinks by $1. It's exactly as though an obsolete $1 note is torn up or burnt. Or another way of looking at it is that it is what happens when a Frequent Flyer Mile is redeemed against a flight.

In other words, Bernanke's somethings are tax credits, and therefore a form of equity, not debt: they are for all the world equivalent to a $1.00 redeemable preference share issued by US Incorporated. When the Fed creates these tax credits on behalf of the Fed it creates an asset - not a liability - that it holds in reserve as custodian for the recipient banks as a "deposit".

The Fed owes nothing to anyone as a result: the creation of these dollars creates credit not debt - the Fed cancels them against payment of taxes, and transfers them between clearing bank accounts upon instruction.

Once this simple but fundamental point is realized - that the Fed is the agent of the Treasury, and not a banking counter-party as conventionally assumed - then there is a paradigm shift.

US dollar "fiat currency" is not a debt of the Fed: it is simply a tax credit that is created and spent by the Fed on Treasury instructions. "Taxpayers' money" has in truth never been anywhere near a tax-payer.

This myth of tax and spend arises out of credit creation by the central bank. The myth of fractional reserve banking arises out of credit creation by private banks.

Myth 2: fractional reserve banking
This myth is that banks receive deposits from customers and then lend them out again, retaining a fraction in reserve, which enables them to lend out a multiple of their reserves funded with money from the Fed.

The truth is that private banks do exactly what the Fed does: they create tax credits in the form of Treasury IOU "look-alikes", and these tax credits are then deposited in the banking system by the recipients. Banks create tax credits not only when they lend at interest, but also when they spend, by crediting the accounts of suppliers, staff, management, shareholders, and sellers of assets.
This private bank credit creation is not restricted by bank reserves as is the myth, but by the capital "cushion" they are obliged by banking regulators to retain in order to absorb defaults by borrowers.

Private banks create these tax credits, and then charge borrowers for the use of them. The key point is that the tax credits are not the loan: they are the things that are loaned, or the object of the loans. Deposits of privately created tax credits are simply accounting entries in the banking system, which are distinguishable from the tax credits created by the Fed only by the set of books in which they are recorded

A national equity
The US national debt is in truth - like all national debts - a complete and surreal fiction: it is a national equity, the greater part of which is interest-bearing either as claims over public or private revenues.

At least two-thirds of the quasi tax credits created by banks came into existence as mortgage loans, and are therefore backed by claims over the productive value of the US land and buildings which they fund. Much of the rest consists of claims over the value of US assets which fund the productive capacity of US corporations. The remainder - which provides the credit necessary to finance the circulation of goods and services in the US - is based upon the magnificent productive capacity of the US people.

Only by liquidating US Incorporated could this National Equity ever be redeemed.

The debt ceiling
The debt ceiling is a myth because there is no need to borrow to finance public expenditure and the creation of public assets. As Ron Paul points out, the Fed - which is ludicrously receiving interest from the Treasury in order to pay it right back again as profit - could actually waive or tear up the US$1.6 trillion Treasury debt it has bought through quantitative easing (QE), and it would make precisely no difference other than to reduce the National Debt at a stroke by that amount.

As the great US inventor Thomas Edison put it in 1921: "If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good."

A very secret agent
Once the truth of the hitherto secret - or at best, completely obscure - agency relationship between the Fed and the Treasury is understood, then the world view changes. The sun of the Treasury does not go around the Earth of the Fed: it is the other way around. The Fed is servant, not master.

There is no shortage of dollars because every dollar's worth of productive capacity - public or private; productive people or productive assets - in the US is the capacity to issue a dollar credit, which reflects the increase in the US national wealth which underpins the US national equity.

President Barack Obama and his government should get busy creating national equity by instructing the Fed to create and issue the necessary finance for the creation of a new generation of US infrastructure; the transition to a low carbon future which the US can, and should, be leading; and in increasing the capacity of the US people to do so.

Naturally, the financial process of putting the US back on its feet in this way should not be managed by the dead hand of the state, but by the entrepreneurial US private sector with a partnership stake in the outcome, and under the watchful eye of the people's representatives.

What is the president waiting for?



Chris Cook is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and commentator.


http://www.atimes.com/atimes/Global_Econ...7Dj02.html

[Ed Jewett]

Barack Obama and the Debt Crisis: a Successful Con Game Explained

Wed, 08/03/2011 - 12:19 Bruce A. Dixon



What just happened? Did Barack Obama just save the world, and us from a looming debt catastrophe? Or has he just played good cop to the Republican bad cop in an elaborate hoax staged to circumvent the will of the American people and deal mortal blows to Medicaid, Medicare and Social Security?

Barack Obama and the Debt Crisis: a Successful Con Game Explained
by BAR managing editor Bruce A. Dixon

The phony debt ceiling crisis was, from beginning to end, a con. It was an elaborate and successful hoax in which the nation's first black president, the Democratic and Republican parties, Wall Street and corporate media all played indispensable parts. The object of the supposed "crisis" was to short circuit public opinion, existing law, democratic process and traditions of public oversight, in order to deal fatal blows to Medicaid, Medicare, social security, job growth and public expenditures for the common good. It worked. We've been conned.

President Barack Obama as First Actor in the Con

The key actor in the con was and is Barack Obama, leader of the Democratic party and president of the United States. When the Bush and Obama administrations bailed out the banksters in 2008, 2009 and 2010 they didn't print new warehouses of greenbacks and send them over in a fleet of trucks. The Federal Reserve simply opened its spreadsheets, and wrote numbers with lots of zeroes crediting the banksters' accounts. It literally created the new money by giving it away, and next proceeded to borrow those funds back from the banksters at interest. The debt ceiling crisis was nothing but those same banksters twirling their mustaches and oinking "Well, we don't think you (the government that created the money by giving it to them) can really afford to repay all these loans you've been taking out... We might have to downgrade your credit rating..."

The whole notion of excessive government indebtedness, or that government might not be able, as the president threatened, to issue or cash social security checks was always a crock, a sham. There was never, ever a moment when Barack Obama didn't know that his homey analogies about government having to live within its means just like a family were just cynical fairy tales.

The president could have prevented this "crisis" by passing a debt ceiling when he had a 50 vote majority in Congress for all of 2009 and 2010. He could have avoided it again by allowing the Bush tax cuts to expire. Instead the president renewed the Bush tax cuts when he had a 50 vote majority in Congress. The president could have defused it in the last month by any of a number of means, including simply calling it fake. But giving away the game is not what actors in a con do.

The Second Actor: Corporate Media

The second key actor in the con was and is the corporate media establishment. Media is nothing less than the sum total of the public conversation. Our corporate media is owned by a tiny group of greedy billionaires and soulless corporations who get to decide what most of us see and hear, what gets in and what gets left out of that supposedly public conversation. So corporate media cynically repeated the bankster's doubts about getting their free money paid back.

Over the years, corporate media moguls had manufactured an entire Matrix-like world of fake "money experts" and economists who assured us in the 90s that tech stocks would never go down, and in the 2000s that real estate prices would never decrease, and always that lower taxes on the rich would trickle down to create jobs for the poor.

For these masters of alternative realities, rebranding the white nationalist wing of the Republican party as "the tea party" portraying it as a mass movement, and riffing on a new/old set of lies about the government going broke were par for the course. Corporate media set the limits of the political discourse inside a false reality --- one where the myths that the US government could and might go broke, and where trickle down economics unquestioned facts. It portrayed the only political choices available in that universe as the president's accommodation vs the "tea party's" extremism.

The Third Actors: Republicans and their tea party faction

Every Jeff needs a Mutt, every good cop needs a bad cop. This was the role played by Republicans. Throughout the Obama presidency their job has been to refuse the president's pre-emptive compromises to meet them fifty, seventy, ninety percent of the way, moving the goal ever rightwards. Along the way a secondary function is to gratuitously insult the president, sometimes in openly racist terms, thus enabling some of the president's backers to try to rally black and progressive support around him despite his utter abandonment of any progressive agenda.

The power of Republicans and their tea party subsidiary to dictate the course of events has always been exaggerated. During the first two years of the Obama presidency they had no legislative majorities anywhere and could not even call a committee meeting. Even with a majority in the House since the beginning of this year, Republican power to do damage is always limited by the combined power of the Democratic White House and a large Democratic minority in Congress. Despite the insistence of Republicans and the power of corporate medial the imaginary "debt crisis" would not have existed unless the White House and Congressional Democrats co-signed it into existence.

The Fourth Actors, Hand Wringing Democrats, Progressives, and the Black Establishment

Last week we decided that Barack Obama, far from being weak, vacillating, and too spineless to stand up for the tens of millions of working and poor people who elevated him to office, was simply smarter than they were. Barack knows what side he's on --- only Democrats and so-called "progressives" don't know, or pretend not to know.

Every abusive relationship has two parts. There's an abuser, who does what he does, and there's an enabling victim who forgives and makes excuses for the abuser. When Democrats and progressives waste ink and air on President Barack Obama trying to "make him do it" or discoursing on his "weakness" and lac k of progressive backbone, they are effectively enabling his serial abuse by ascribing it to curable causes open to democratic remedies rather than deliberate intent and the people-proof mechanisms of their own party and of US governance in general. They enable their abuser.

The most pitiful and sometimes the most unprincipled of these are members of the Black Misleadership Class who support President Obama. The only card they have left is to point to the daily stream of racist quips and quotes from Republicans and tea partyers or Glen Beck, or whoever they can find that day calling the president a White House porch monkey, or some other racist epithet, as the reason to circle the wagons, squelch examination of Obama policies and silence criticism of his many betrayals in office of the cause of peace and justice.

The Directors of the Skit: Wall Street and Corporate America

Was there every really any danger of the US going broke? The stock market didn't crash. The holders of US Treasury bonds didn't try to unload them with this horrific train wreck a mere 24 hours distant. That was because they knew the train and the tracks were imaginary, they knew it was a hoax. They knew that President Obama could have declared it a foolish stunt and ignored it. They knew they would get their money any damned way.

President Obama expects to raise more than 1 billion dollars in direct financing of his 2012 presidential campaign alone, most of it from corporate sources and from Wall Street. This doesn't count the money going to other Democrats in the House and Senate, or Democratic candidates for governor, for state and county level judges and other offices, for state legislatures and the like. Substantially the same contributors not only fund and own both parties, but also bankroll and dictate the policy positions of organizations like the Urban League, the National Council of LaRaza, and the NAACP.

If you don't think dependence on corporate money, as a politician, or say as the National Urban League, whose keynote address this weekend was delivered by billionaires Bill Gates, makes you subservient to a corporate agenda, you're living in some other world. All the actors in this drama live at the corporate trough. That's it, and that's all.

The Deal: Supercommittees, Automatic Cuts, and Default Governing By Budget Cutting

With all the players acting their parts, the rigged game produced its expected outcome. Contrived in the imaginary universe where trickle down economics are the accepted norm, The Deal contains no new taxes on corporations and the wealthy.

President Obama announced that he has averted a crisis with more than a trillion dollars in immediate spending cuts, a number much higher than the value of the stimulus package passed at the beginning of his administration. A bipartisan "super-committee" of perhaps only a dozen Senate and House members will earmark a further $3 trillion in near term budget cuts, which will be submitted to Congress as up-or-down no-amendment, take-it-or-leave-it votes. y. And should Congress reject them, a round of automatic budget cuts dictated by some unknown formula will ensue. Medicare, Medicaid, social security, environmental protection and much more will inevitably fall.

Thus on the strength of a single vote in Congress drummed up by this fake crisis, the will of the American people has been subverted. Medicare, Medicaid and social security, if put up for popular votes would all win. If Congress had to debate them under scrutiny and take votes in public on them, Wall Street and the corporations would lose and the people would win. But that's the purpose of a modern political "crisis:" to engineer the enactment of measures on behalf of elites that normal political processes would not allow.

Welcome to the future, where a black president has been the indispensable anchor player in the con game that ended the New Deal and Great Society.


Bruce Dixon is managing editor at Black Agenda Report, and based in Marietta GA where he is on the state committee of the Georgia Green Party. He can be reached at bruce.dixon(at)blackagendareport.com.

http://blackagendareport.com/content/bar...-explained

[Keith Millea]

Welcome to the future, where a black president has been the indispensable anchor player in the con game that ended the New Deal and Great Society.

Now that's a good line.....Let it sink in for a few seconds.

[Magda Hassan]

The myth of Obama's "blunders" and "weakness"
BY GLENN GREENWALD

AP Photo/Ron Edmonds, File
(updated below)

With the details of the pending debt deal now emerging (and for a very good explanation of the key terms, see this post by former Biden economic adviser Jared Bernstein), a consensus is solidifying that (1) this is a virtually full-scale victory for the GOP and defeat for the President (who all along insisted on a "balanced" approach that included tax increases), but (2) the President, as usual, was too weak in standing up to right-wing intransigence -- or simply had no options given their willingness to allow default -- and was thus forced into this deal against his will. This depiction of Obama as occupying a largely powerless, toothless office incapable of standing up to Congress -- or, at best, that the bad outcome happened because he's just a weak negotiator who "blundered" -- is the one that is invariably trotted out to explain away most of the bad things he does.

It appears to be true that the President wanted tax revenues to be part of this deal. But it is absolutely false that he did not want these brutal budget cuts and was simply forced -- either by his own strategic "blunders" or the "weakness" of his office -- into accepting them. The evidence is overwhelming that Obama has long wanted exactly what he got: these severe domestic budget cuts and even ones well beyond these, including Social Security and Medicare, which he is likely to get with the Super-Committee created by this bill (as Robert Reich described the bill: "No tax increases on rich yet almost certain cuts in Med[icare] and Social Security . . . . Ds can no longer campaign on R's desire to Medicare and Soc Security, now that O has agreed it").

Last night, John Cole -- along with several others -- promoted this weak-helpless-President narrative by asking what Obama could possibly have done to secure a better outcome. Early this morning, I answered him by email, but as I see that this is the claim being pervasively used to explain Obama's acceptance of this deal -- he was forced into it by the Tea Party hostage-takers -- I'm reprinting that email I wrote here. For those who believe this narrative, please confront the evidence there; how anyone can claim in the face of all that evidence that the President was "forced" into making these cuts -- as opposed to having eagerly sought them -- is mystifying indeed. And, as I set forth there, there were ample steps he could have taken had he actually wanted leverage against the GOP; the very idea that negotiating steps so obvious to every progressive pundit somehow eluded the President and his vast army of advisers is absurd on its face.

Here's The New Republic's Jonathan Cohn -- who, as he says, with some understatement, is usually "among [Obama's] staunchest defenders in situations like these" -- on what these guaranteed cuts mean (never mind the future cuts likely to come from the Super Committee):

As Robert Greenstein, of the Center on Budget and Policy Priorities, pointed out in a recent statement about a different proposal, there's just no way to enact spending reductions of this magnitude without imposing a lot of pain. And contrary to the common understanding in the Washington cocktail party circuit, "pain" does not simply mean offending certain political sensibilities. Pain means more people eating tainted food, more people breathing polluted air, more people pulling their kids out of college, and more people losing their homes -- in other words, the hardships people suffer when government can't do an adequate job of looking out for their interests.

As I wrote back in April when progressive pundits in D.C. were so deeply baffled by Obama's supposed "tactical mistake" in not insisting on a clean debt ceiling increase, Obama's so-called "bad negotiating" or "weakness" is actually "shrewd negotiation" because he's getting what he actually wants (which, shockingly, is not always the same as what he publicly says he wants). In this case, what he wants -- and has long wanted, as he's said repeatedly in public -- are drastic spending cuts. In other words, he's willing -- eager -- to impose the "pain" Cohn describes on those who can least afford to bear it so that he can run for re-election as a compromise-brokering, trans-partisan deficit cutter willing to "take considerable heat from his own party."



UPDATE: Scott Lemieux writes to partially disagree with my argument here, but -- except for his description of Obama as a "moderate Democrat" (I think Krugman's "moderate Conservative" is more accurate) -- I don't really disagree with anything Lemieux wrote. Of course the fact that Obama wanted spending cuts does not preclude his having also made negotiation mistakes along the way. But my point is a more general one: for a long time, the standard progressive narrative was that Obama wanted a clean debt-ceiling hike but was being forced (by the Tea Party and bad negotiating) into unwanted budget cuts. The evidence -- beginning with Obama's own repeated statements -- is that that's just not true: he affirmatively wanted these cuts and more as part of the debt ceiling hike.

On a different note, I am quite certain that VastLeft has captured, in cartoon form, exactly what the rhetorical strategy will be for dealing with liberal anger over this deal (click on image to enlarge):

(
Or, as Charles Davis put it in a different context: "Remember when Michele Bachmann killed all those innocent people in Afghanistan, Pakistan, Yemen, Iraq and Libya? Ugh. Hate her."
http://www.salon.com/news/opinion/glenn_...index.html

[Ed Jewett]

Update to the above article (my color emphasis):

UPDATE II: Matt Taibbi writes on whether Obama is actually a "weak negotiator":

Now, Barack Obama has surrendered control of the budget to the Tea Party. . . . Commentators everywhere are killing the president for his seemingly astonishing level of ball-less-ness. . . . The Democrats aren't failing to stand up to Republicans and failing to enact sensible reforms that benefit the middle class because they genuinely believe there's political hay to be made moving to the right. They're doing it because they do not represent any actual voters. I know I've said this before, but they are not a progressive political party, not even secretly, deep inside. They just play one on television. . . .

The Democrats, despite sitting in the White House, the most awesome repository of political power on the planet, didn't fight at all. . . . We probably need to start wondering why this keeps happening. Also, this: if the Democrats suck so bad at political combat, then how come they continue to be rewarded with such massive quantities of campaign contributions? When the final tally comes in for the 2012 presidential race, who among us wouldn't bet that Barack Obama is going to beat his Republican opponent in the fundraising column very handily? At the very least, he won't be out-funded, I can almost guarantee that.

And what does that mean? Who spends hundreds of millions of dollars for what looks, on the outside, like rank incompetence?

It strains the imagination to think that the country's smartest businessmen keep paying top dollar for such lousy performance. Is it possible that by "surrendering" at the 11th hour and signing off on a deal that presages deep cuts in spending for the middle class, but avoids tax increases for the rich, Obama is doing exactly what was expected of him?

A mere three years ago, huge numbers of people invested substantial time, attention, energy, emotion and "hope" in fighting to put Barack Obama in the White House. The very human incentives not to reach this conclusion are both obvious and overwhelming.