Ellen Brown on Quantitative Easing

This is a short piece by Ellen Brown explaining what ishappening in the currency world.

In the run up to the 2008 collapse the USA helpedcreate a credit bubble approaching 15 trillion dollars.  This is now evaporating in the form of loanlosses and asset write downs.

Little has been done to reconstitute the internal creditsystem as has been done in Canada.

Far too many Americans have million dollar loans on halfmillion dollar homes if you could find a buyer. This has not been reset at all.

What is been done is that the fed is absorbing all thelosses with low interest paper and as this makes clear, the process has barelybegun.

We are going through the greatest contraction of themoney supply in history.

We are doing it this way because you will not stand tohave your wages reduced a small fraction nor are you going to accept sellingassets for ten cents on the dollar and been made uncreditworthy for adecade.  The depression proved the follyof that approach.

To expand the economy, we need to rewrite the mortgagelaws to cleanse the system and to empower the middle class.  That is the simplest way.  Add in a major national electrificationrebuild and we look good.

The U.S. Is   Not Zimbabwe

Even if Zimbabwe’shyperinflation was the result of currency manipulation rather than exploitationby corrupt politicians, couldn’t the same thing happen to the U.S.dollar? 

The answer is, not likely.  The U.S. does not owe debts in aforeign currency over which it has no control. It can issue bonds payablein its own currency. 

Today that currency is issued by the Federal Reserve, which isprivately owned by a consortium of banks; but the Fed has been at leastsemi-captive ever since the 1960s, disgorging its profits to theTreasury. Its website states, “Federal Reserve Banks are not . . .operated for a profit, and each year they return to the U.S. Treasuryall earnings in excess of Federal Reserve operating and otherexpenses.”  The Federal Reserve Act provides that it can be modifiedor rescinded at any time, so Congress retains ultimate control.

Randall Wray, Professor of Economics at the University ofMissouri-Kansas City, writes that “involuntary default is, literally,impossible for a sovereign government.” 

The U.S. does not have to rely onforeign investors even to buy its bonds.  If the investors are notinterested, the central bank can buy the bonds.  That is, in fact,what the Fed’s second round of quantitative easing is all about: issuing $600billion for the purchase of long-term government bonds. 

Unlike Zimbabwe,which had to have U.S. dollars to pay its debt to the IMF, the U.S. can easilyget the currency it needs without being beholden to anyone.  It canprint the dollars, or borrow from the Fed which prints them. 

But wouldn’t that dilute the value of the currency? 

No, says Cullen Roche, because swapping dollars for bonds does notchange the size of the money supply.  A dollar bill and a dollar bondare essentially the same thing.  One bears interest and is a littleless liquid than the other, but both are obligations good for a dollar’s worthof goods or services in the economy.  If the bondholders had wantedcash, they could have cashed out the bonds themselves.  They don’thave any more money to spend, or any more incentive to spend it, when they’vebeen cashed out by the government than when they were holdingbonds.     

Moreover, adding money to the money supply cannot hurt the economy whenthe money supply is shrinking, as it is now.  Most money today consistssimply of bank credit, and bank credit is shrinking because banks aredeleveraging.  Bad debts are wiping out capital, which wipes outlending capacity. QE2 is just an attempt to fill the empty liquiditypitcher back up -- and a rather feeble attempt at that. Financialcommentator Charles Hugh Smith estimates that the economy nowfaces $15 trillion in writedowns in collateral and credit, based on projectionsfrom the latest Fed Flow of Funds (September 17,2010).   Based on his projections, it might be argued that theFed could print enough money to refinance the entire federal debt without creating priceinflation.  (The current inflation in commodity prices is due toother factors, as was discussed in an earlier article, here.) 

Dean Baker, co-directorof the Center for Economic and Policy Research in Washington, wrote recentlyconcerning the federal deficit:

There is no reason that the Fed can’t just buythis debt (as it is largely doing) and hold it indefinitely. If the Fed holdsthe debt, there is no interest burden for future taxpayers. The Fed refunds itsinterest earnings to the Treasury every year. Last year the Fed refunded almost$80 billion in interest to the Treasury, nearly 40 percent of the country’s netinterest burden. And the Fed has other tools to ensure that the expansion ofthe monetary base required to purchase the debt does not lead to inflation.

This means that the country really has nonear-term or even mid-term deficit problem. The current deficit is a positive.In fact, if it were larger we would have more jobs and growth. Furthermore,there is no reason that the debt being accumulated at present should pose anyinterest burden on future generations. In this vein, it is worth notingthat Japan’s central bank holds debt amounting toalmost 100 percent of that country’s GDP. As a result, Japan’s interest burden is considerably smallerthan the United States’s,even though Japan’sdebt is almost four times as large relative to the size of itseconomy.  [Emphasis added.]  

Although Japan’srelative debt is almost four times as large as ours and its central bank holdsenough to equal nearly 100% of its GDP, investors are not fleeing the yen ordriving the economy into hyperinflation.  In fact Japan stillcan’t pull itself out of DEFLATION, despite massive quantitativeeasing.  The country still has willing trading partners and is stillthe third largest economy in the world, an impressive feat for a smallisland. 

If the Fed were to follow the lead of Japanand hold federal debt equal to the country’s gross domestic product, the Fedwould be holding $14.75 trillion in federal securities, enough to refinance theENTIRE U.S. federal debt of $13.8 trillion virtually interest-free. 

The federal debt hasn’t been paid off sincethe 1830s under President Andrew Jackson.  It is just rolled overfrom year to year.  An interest-free debt rolled over indefinitely isthe functional equivalent of the government issuing money itself. 

Andrew Jackson would have said the governmentSHOULD be issuing the money itself, rather than borrowing from banks that issueit.  If Congress gave itself theright under the Constitution to issue money, he said, “it was conferred to be exercised by themselves,and not to be transferred to a corporation.”  

Indeed, that may be why the U.S. dollar hasbeen going UP since QE2 was initiated, while the Euro has been goingDOWN.  EU governments are doing what the inflation hawks want them todo: cut back on services, privatize their pension money, and otherwise engagein austerity measures to balance their budgets.  The effect has beento depress their economies and throw them deeper and deeper into debt, withnowhere to get the extra cash needed to pay the expanding debt and interestburden. 

The U.S.and Japanare exploring another model: allowing their currencies to expand to meet theneeds of their economies.  This was, in fact, the original moneysystem of the American colonists.  It was revived by Abraham Lincolnto avoid a crippling war debt, after which it was dubbed the “Greenbacksolution.”

Ellen Brown is an attorney and theauthor of eleven books, including Web of Debt: TheShocking Truth About Our Money System and How We Can Break Free.  Her websites are webofdebt.com,ellenbrown.com, and public-banking.com.]