|
21 December 2010
By Jeff
Gates
U.S.
stock markets rallied to recent highs on news that the
U.S. Federal Reserve planned to pump up to $900
billion more cash into the economy. Financial markets
reflect today's appraisal of tomorrow's cash flows.
More cash means more flows.
Fed
Chairman Ben Bernanke conceded early on in 2008 that
the Fed was "printing money." That candor proved
unsettling. This latest cash infusion instead is
"quantitative easing" or "QE2."
"QE1"
stabilized financial firms that cross-collateralized
massive layers of debt and derivatives in a creative
scheme that was destined to collapse without…more cash
flow.
Insurance
giant AIG booked profits by selling more than $440
billion in credit default swaps, a form of insurance,
without setting aside reserves. That's when the Fed
stepped in with QE1.
Voicing
his admiration for "financial creativity," former Fed
chair Alan Greenspan enabled this pyramiding of
debt-on-debt with low interest rates and lax oversight
during his 19-year tenure.
Greenspan
concedes his high regard for Russian philosopher Ayn
Rand (né Alisa Rosenbaum) who famously wore an
oversized dollar mark as a broach. Her philosophy:
grant money the freedom to work its will worldwide and
everything will work out just fine.
Reflecting on the debt-induced financial carnage he
helped create, Greenspan recently marveled that
financial markets were not, as he and Rand believed,
"self correcting." How could this True Believer have
been so mistaken? Why does his successor not yet see
the problem?
Answer:
both men share a mindset from which the problem cannot
be seen because that mindset is the filter through
which they do their seeing.
This
money-myopic perspective, imbedded in American
education over decades, first appeared in the U.S. as
the "Chicago model." The late University of Chicago
Professor Milton Friedman, a Noble laureate economist,
remains the patron saint of this "monetarist"
perspective.
As this
dollar-centric ideology was taken to global scale, it
became the "Washington consensus." Generally accepted
truths are seldom revisited even when, as now, a
reappraisal is long overdue.
Dollar Infatuation = Deflation or
Inflation
The Fed
is rightly worried that the economy is slipping into a
debt-induced deflation akin to Japan's "lost decade."
As the U.S. deleverages, it could face a similar fate.
QE2 is meant to counter deflation yet it could trigger
inflation. That's the risk when banks start printing
money.
WWII was
triggered by an onerous reparations burden imposed on
Germany at the Treaty of Versailles ending WWI.
British economist John Maynard Keynes left those
negotiations to publish a warning in 1919 titled
The Economic Consequences of the Peace.
The
resulting indignities of widespread poverty and
hyperinflation fueled a hyper-nationalism from which
emerged the fascist forces that ravaged Europe. The
U.S. emerged with an industrial base that ensured its
bonds would become the world's preferred gilt-edged
security.
Keynes
surfaced in the 1930s to advocate the debt-financed
stimulation of demand. The 1980s saw a debt-financed
"supply-side" successor—to stimulate investment. Both
boosted cash flows.
With
lower tax rates and faster depreciation, this
Reagan-era ideology was projected to reduce government
revenues by $872 billion over five years. With this
stimulus, the former actor catalyzed a three-decade
debt binge further enabled by the easy credit era of
Alan Greenspan.
When
Reagan was elected in 1980, securitized U.S. debt
totaled $900 billion. The total is now on track to top
$15.4 trillion. By 2020, annual interest payments
alone could top $1 trillion.
Monetization of What for Whom?
How long
before this cash infusion fuels inflation? That
depends on how these Fed-boosted bank reserves are
deployed. In the interim we'll see another massive
skimming of financial value from yet another
Fed-inflated equity market.
By
fixating on how debt-backed dollars can revive a
deflating economy, those who induced the U.S. to
embrace this mindset may yet induce a debilitating
inflation. The year 2013 is the 100th
anniversary of the Fed. The solution lies in a
willingness to view the problem anew.
Who
decreed debt the only way to catalyze demand? Who says
all purchasing power must be limited to
one-size-fits-all Federal Reserve notes? Why not
encourage complementary currencies attuned to the
needs of regions and communities?
Ecologically, are Americans expected to shop their way
to sustainable prosperity with debt-backed dollars?
Rather than debt, why not monetize the physical
capital required for a clean energy economy?
Americans
are witnessing record-breaking disparities in wealth
and income. Why continue on the same path that enabled
this fracturing of U.S. society? Why not monetize a
sustainable future with means that ensure a shared
prosperity?
To solve
this problem, first we must acknowledge how the U.S.
was induced to embrace a mindset that requires more
debt to create more purchasing power.
This
problem can only be solved "upstream" commencing with
a candid reappraisal of its origins in a shared
mindset.
Jeff
Gates is author of Guilt By Association—How Deception
and Self-Deceit Took
America
to War.
See www.criminalstate.com |
Add Comments