Monday, July 18, 2011

The war over the debt ceiling

The debt ceiling debate is simultaneously the most important and most absurd debate in memory.  On one hand, it is preposterous that a large and still important country should grind to a halt over what is a technicality that has passed through Congress virtually every session in my memory.  I particularly remember a ninth-grade social studies class where my teacher was explaining an article listing the accomplishments of the Senate, snorting "That's not much of an accomplishment!" when the list mentioned raising the debt limit.

Unfortunately, debt and the debates that surround it are anything BUT a mere technicality.  You don't have to be a right-wing Republican to hate debt.  The enslavement of being in debt even has the name "debt peonage" which when taken far enough, is as bad or worse than human slavery has ever been.  And countries can just as easily be as beholden to creditors as individuals.  Watching creditors trash the democracies of Greece or Ireland (or etc.) this spring has been particularly instructive of how little power sovereign governments have in the face of the demands of the bond-holding classes.

When an individual needs more money than he has at the moment, he can increase his income by taking on extra work or he can borrow.  Governments also have these two options but they also have another--they can create more money.  It is this third option that has caused so much debate over the years with monetary policy becoming the PRIME economic issue between the Producers and Predators.

If you are for private creditor-dominated "independent" central banks like the Federal Reserve, or the gold standard and high interest rates--you are most certainly a Predator!

If you are for democratic controls over money creation, paper money, and low interest rates--you are probably a Producer.  In Friday's post I included some of the best thinking on monetary policy from the Producer perspective.  I found especially interesting that Peter Cooper--perhaps USA's most important inventor when it came to steam power--was so passionate about the money issue he ran for President representing the Greenback Party (a Producer-Class organization if ever there was one.)
Peter Cooper (1791-1883) was one of America’s leading inventors and businessmen. He designed and built the first US locomotive in 1830, the “Tom Thumb.” Cooper was the first to introduce anthracite coal into iron production in 1845, resulting in the US’ first wrought iron beams for construction. In 1854, Cooper was a founder in the telegraph company that created the first trans-Atlantic cable. Peter Cooper was the Greenback Party candidate for President in 1876. 
At the core of the Producer argument is that the value of money is mostly tied to the economic value of whatever the Producer Classes are doing--money has value because of intelligent and hard work!  Therefore, we can increase our money supply as much as we are able to work hard and smart.

Instead of arguing that money is validated by Producer Energy, the few critics of the Federal Reserve these days, like Ron Paul, argue that modern economic problems all began when we went off the Gold Standard.  The big sin, according to Paul, is that now money is backed by "nothing."  He actually believes this shit and asks us to forget the economic devastation caused by folks who believe that money becomes valuable, not when it is backed by Producer Energy, but by being able to exchange it on demand with a soft and nearly worthless metal.  Going back on the Gold Standard is literally the only economic prescription guaranteed to make things worse than they already are.  It is NO surprise that Gold Bugs finance extreme right-wing lunatics like Glenn Beck.

“Dangerous Precedent” Being Set in Debt Ceiling Debate, Galbraith Says
By Stacy Curtin | Daily Ticker
After five meetings with President Barack Obama in five days, Congressional leaders have yet to hash out a debt ceiling deal that can garner enough Republican and Democrat support to pass a vote.
Time is running out fast. If no deal is reached by next Friday, July 22, there may not be enough time to write up any legislation and move it fast enough through the entire legislative process by August 2 -- the day the United States would breach its $14.3 trillion credit limit.
President Obama is set to address the nation again today at 11 a.m. to emphasize the urgency of the matter.
Treasury Secretary Timothy Geithner did just that yesterday after a meeting with Senate Democrats where he warned about the implications a worst-case scenario could have on the country.
The nation's credit rating would be downgraded within days, the government would be restricted from borrowing money, and the Treasury would not be able to meet its financial obligations at the end of the month, causing some agencies and programs to lose funding, reports Politico.
Professor James Galbraith of The University of Texas, says we've entered "a tragic moment" in history where our elected officials are more apt to put ideology before the good of the entire country. (See:"A Tragic Moment": D.C. Politicians "Totally Wrong" About Spending, Galbraith Says)
"This is not the way we should be perusing these issues," he tells Aaron in the accompanying interview. "We run the risk, first of all, of turning our government into a series of blackmail negotiations, where the full faith in credit of the United States government … becomes a kind of football for the various political agendas: the Republican agenda but also the President's agenda on a long term deficit deal."
Because these negotiations risk setting a "dangerous precedent", it is his view that there is only oneway forward from here and it is not one of the two main plans already on the table.
"The debt ceiling needs to be taken off the table. It needs to be recognized that this is not something you tinker with [and] that it is inappropriate to call into question the obligations of the United States government," he says. "We need a clean and substantial increase in the debt ceiling" with no strings attached. more
“A Tragic Moment”: D.C. Politicians “Totally Wrong” About Spending, Galbraith Says
By Aaron Task | Daily Ticker – Thu, Jul 14, 2011 
Ben Bernanke's pledge this week that the Fed is ready, willing and able to do more helped give stocks a lift and spurred a big rally into gold and silver.
But the financial markets are not the economy and James Galbraith, author and University of Texas Professor, is not convinced the Fed can really do more to stimulate the economy.
"The Fed reached the effective limits of what monetary policy can do quite a long time ago," he says. "These quantitative easing measures were always illusory in far as anyone thought they could actually be an effective source of economic recovery."
Rather than more monetary stimulus (a.k.a. QE3), Galbraith maintains a longstanding view that the U.S. economy needs more fiscal stimulus, i.e. more spending by Uncle Sam on infrastructure and green energy projects that create jobs today and have long-term benefits. (See: We Need a Second Stimulus Immediately, Says James Galbraith)
In addition, the professor recommends President Obama do something "bold" like lowering the retirement age, a seemingly radical plan Galbraith says will address the problems of both high unemployment among younger Americans and older Americans working longer and harder to make ends meet. (See: James Galbraith's Radical Plan to Create Jobs: LOWER the Retirement Age)
Of course, lowering the retirement age and increasing federal spending on just about anything runs afoul of the current political climate, where the debate is over how much spending should be cut and whether taxes should be raised or not.
But Washington politicians have it "totally wrong," according to Galbraith who believes austerity measures amount to "a wanton piece of cruelty" on lower income Americans. Furthermore, he argues America's long-term deficit problems are "completely disconnected" from current U.S. borrowing costs, which he notes remain relatively (and historically) low.
"My view is we're in a tragic moment where public policy is doing real harm on a pretense of accomplishing something that's absolutely not going to be accomplished," Galbraith says. more

1 comment:

  1. Jonathan, I think there is a solution to many of our state and national woes here in your many posts and get some infrastructure growth going--
    1--Change the way state and federal projects are funded, so as
    2--To no longer fund through bonds, rather via direct funding from the citizens--federal using the Edison/Ford Muscle Shoals 1921 (snippet and link below), and state could use a ND model for funding.

    Recall 1921 was a similarly misguided govt-special interest era, so in their inventive wisdom Edison/Ford were trying to head off the first major bubble-depression; where it seems to me, we now have lived the history (over and over) to have shown them to be correct.

    Now I am no expert, those so-called can hammer out workable details, but the goals are--
    1--to provide the 'capitalistic' correction to the unethical manner banks have treated citizens;
    2--to avoid as Edison says below--the creation of growth only via debt.
    3--to downsize the special interest lobbying strangehold banking has inflicted upon both political parties and thus state/federal govts.
    4--it is also to reduce bank predatory practices and for the first time acknowledge publicly the free money the banks have gleamed in ever growing percentages from public bonding, which is essentially risk-free guaranteed funding and as such should be handled interest-free for minimal administrative costs.

    Just trying to put 2+2=4 instead of this misguided current system of 2-2+3-2+3-2=4 (if we live long enough to see it finally come back to 4).

    Here is the 1921 Edison/Ford Muscle Shoals info--
    Here, the reporter is quoting Edison:
    "That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt."
    In December 1921, the American industrialist Henry Ford and the inventor Thomas Edison visited the Muscle Shoals nitrate (for fertilizer) and water power projects near Florence, Alabama. They used the opportunity to articulate at length upon their alternative money theories, which were published in 2 reports which appeared in The New York Times on December 4, 1921 and December 6, 1921. (A .pdf showing the original N.Y. Times newspaper article on this subject)

    Objecting to the fact that the Government planned, as usual, to raise the money by issuing bonds which would be bought by the banking and non-banking sector -- which would then have to be paid back with money raised from taxes, and with interest added -- they proposed instead that the Government simply create the currency it required and spend it into society through this public project.