Category Archives: Inflation

Why Can’t Governments Balance Their Budgets?

This is a question I answered more than a quarter century ago in Part I of my book, Money and Debt: A Solution to the Global Crisis. It is a question that gets scant attention from politicians and economists who are willing to speak only about the need for perpetual economic growth and keeping the government debt at “manageable” levels, never asking why government debt is necessary or how it might be eliminated.

When I first undertook to answer this question, the debt crisis was already well underway and global in scope. Since then the situation has become more critical with debt levels reaching astronomical levels.USDebt&deficits

What I said in 1990 began with this:

The whole world today seems to be awash in a sea of debt which threatens to drown us all. Many Third World countries, despite their huge increases in production for export, are unable to pay even the interest due on their accumulated indebtedness to Western banks and governments. In the U. S., the levels of both public (government) and private debt are increasing at alarming rates. The Federal budget deficits of recent years far exceed anything thought possible just a decade ago. Why is this happening and why is it a problem? In order to understand that, one must first understand some financial facts of life.PublicDebt

Here are the essential points of my argument:

  1. Almost all of the money in every country is created by commercial banks when they make loans either to the private sector or to governments (by purchasing government bonds, notes, etc.),
  2. Money is extinguished when loan principal is repaid,
  3. The interest that banks charge on these loans causes the amount owed to grow as time passes,
  4. Causing the aggregate amount owed to banks to always exceed the supply of money in circulation,
  5. Requiring that banks make additional loans to keep the supply of money in circulation from falling behind the amounts needed for existing loans to be “serviced” (repayment of part of the principal plus the interest due) in order to avoid a cascade of defaults and economic depression,
  6. And that this “debt imperative” that is built into the global money system is the driver of the economic “growth imperative” that results in superfluous economic output and its attendant depletion of physical resources, despoliation of the environment, increasing disparities in income and wealth distribution, and many other problems that plague modern civilization.
  7. That physical limits to economic output on a finite planet make this money system unsustainable over the long term.
  8. That there are practical limits to the amount of debt that the private sector is able or willing to incur.
  9. That chronic government budget deficits are therefore a political expedient that is necessary to keep this flawed system from collapsing as governments assume the role of “borrower of last resort.”
  10. That politicians are quite willing that governments play this role since it gives them the power to take much more value out of the economy than the revenues available by means of overt taxation.
  11. That bankers, for their part, by monopolizing the allocation of credit in the economy and charging interest on it, are able to enrich themselves and exercise tremendous power over the political process making a sham of democratic government.

The empirical evidence strongly supports my analysis. You only need to look at charts showing the growth of debt over time to see it growing at an accelerating rate (geometrically), a pattern that reflects the compound interest function that is an inherent feature of our global political money system.

You can read my original 1989 exposition of these points at Money and Debt: a Solution to the Global Crisis, Part I, and their subsequent elaboration in my latest book, The End of Money and the Future of Civilization,

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Clearing away the fog–Paul Craig Roberts on geopolitics and the American economy

Here is another great interview of Dr. Paul Craig Roberts, former Assistant Secretary of the Treasury in the Reagan administration. I think even the interviewer, Greg Hunter had some scales removed from his eyes. Dr. Roberts is one of the few commentators today who see what is really going on and is willing to tell about it.

Bank of Japan announces plan for massive inflation of the Yen, as US Fed curtails dollar monetization (QE). What does it mean for you?

A recent article in the Guardian (UK) reports that the Japanese central bank has announced plans to “inject ¥80tn (£447bn) a year into the financial system, mainly through the purchase of government bonds, in a bid to ward off the threat of deflation.”

Thus, Japan takes over much of the burden of keeping a flawed global money system alive, as the US central bank (the Federal Reserve) ends its own program of dollar inflation.

Bloomberg provides a “quick take” on the FED policy saying, “It was the biggest emergency economic stimulus in history and now it’s over. The U.S. Federal Reserve’s once-in-a-lifetime program to buy immense piles of bonds, month after month, in an extraordinary effort to restart a recession-deadened economy came to an end in October after adding more than $3.5 trillion to the Fed’s balance sheet – an amount roughly equal to the size of the German economy. The bond-buying program, called quantitative easing or QE, had been controversial since its start in 2009, as had the Fed’s decision in 2013 to gradually reduce the monthly economic boost, a plan that became known as the taper. Whether the Fed tapered too soon, given global economic weakness, or too late, given signs of bubbles in some markets, was hotly debated. But even after the taper’s end the Fed continued to pump support into the economy the old-fashioned way, by holding its interest rates near zero.”

As I’ve pointed out before, “Quantitative easing” is simply a euphemism for inflation of the currency (mainly by central banks buying government bonds and other uncollectable debt). Other things being equal, currency inflation eventually leads to price inflation. But other things are not equal. The US has indeed seen significant inflation of prices in some sectors, especially food, but other prices are being kept down, primarily because of layoffs and underemployment, leaving consumers with lower incomes and reduced purchasing power. If income from wages and interest on savings are held down, people must either do without or borrow more money to maintain their levels of spending. The following table from the Federal Reserve shows the growth in consumer credit over the past few years.

Consumer Credit Outstanding ($ Billions)
2009 2010 2011 2012 2013 2014
As of 8/31
2,552.8 2,647.4 2,755.9 2,923.6 3,097.9 3,225.3

These figures cover most short- and intermediate-term credit extended to individuals, excluding loans secured by real estate.

Those figures show a more than a 26% increase in consumer credit just over the past four and one half years, much of it high-interest credit card debt. Although credit card debt has declined somewhat from its 2009 peak, according to, falling indebtedness is largely due to defaults rather than repayment.

The same site reports that, in total, American consumers owe:

  • $11.63 trillion in debt, an increase of 3.8% from last year
  • $880.5 billion in credit card debt
  • $8.07 trillion in mortgages
  • $1,120.3 billion in student loans, an increase of 11.5% from last year

Central banks find currency inflation necessary in order to offset the reductions in the money supply caused by charging interest on money that banks create when they make “loans.” There is never enough money in circulation to enable repayment of the aggregate of principal plus accrued interest of money created as bank “loans.” Thus the “natural” tendency of the usury-based debt-money system is toward deflation. Central governments then must become the borrowers of last resort and central banks become the lenders of last resort as bankers and politicians continue their absurd dance that is a death spiral of recurrent and ever more extreme financial crises.

The real solution to our monetary, financial, and economic problems is to end the usury-based debt-money system. But the bankers, the rulers of the world, will not stand for that. By control of the money creation process, they have extended their power to tightly control the political process, as well. Thus, the wealth and purchasing power of the vast majority of people will continue to decline as the system continues to pump up the wealth and power of the few who control the money system, and their minions.

According to the Fed, between 2010 and 2013, “mean (overall average) family income rose 4 percent in real terms, but median income fell 5 percent, consistent with increasing income concentration during this period.” And “Families at the bottom of the income distribution saw continued substantial declines in average real incomes between 2010 and 2013, continuing the trend observed between the 2007 and 2010 surveys.”

So, what can people and communities do to counter these trends and regain control of their economic fortunes and enhance their political power?

Considering the dynamics of power that prevail in the so-called democratic countries today, reliance on the political process to effect systemic reforms seems futile. So, while it is necessary to continue to protest the status quo and reframe the political dialog, it is even more important to take action to rebuild society from the bottom upward. We must reduce our dependence upon the very systems that are being used to disempower us, of which the political money system is foremost.

That is not so daunting as it might first appear, and conceptually it is not very complicated. It is what my work of the past quarter century as been all about. The biggest difficulties have had to do with dispelling erroneous myths about money and banking and helping people to see beyond the orthodox. This, and the lack of adequate tools have retarded the process of taking promising alternatives to scale, but that is quickly changing as new technologies that enable moneyless trading become available.

But don’t sit idly by waiting for things to happen “out there.” Start with your own personal development and empowerment, while working to strengthen your various communities and networks, your city, state, and region. Some tips to get you started can be found here. –t.h.g.

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Dollar decline accelerates as political alliances are being reshaped

Whether you’re a Democrat, Republican, Independent, Green, LaRouchite, or consider yourself apolitical, you need to pay attention to what is happening on the money and banking front, because that is the realm in which World War III is now being fought.

We can’t afford to tune out messengers that wear a different party label or with whom we might disagree on other issues. Listen carefully to what Ron Paul has to say in this Alex Jones interview and use your common sense to separate the “wheat from the chaff.”

How do central banks control interest rates?

Question: How do central banks control interest rates?

Answer: By creating counterfeit money.

Of course, they will never admit that. They see their “purchases” of debt instruments, mainly those of governments, as being legitimate. But such purchases violate sound monetary principles, and even their legality is questionable.

The obvious question that must be asked is “Where do central banks get the money with which to buy those debt instruments?” The answer is, they do not “get” the money, they create it–by fiat. This is  their celebrated “quantitative easing,” which is actually currency inflation. The new “high powered money” thus created puts new “reserves” into the banking system, which banks use to multiply their own purchases of government bonds and other assets.

Without this “monetization” of debts by the banking system, newly offered debt instruments, like government bonds, would have to offer higher rates of interest to attract buyers from the general public.

Interest rates on the ever-increasing amounts of sovereign debts can only be kept low by this sort of central bank intervention. As I put it, central banks are the “buyers of last resort” for bonds that cannot be sold at artificially low rates of interest. The chart below show just how desperate the situation has become since the financial crisis of 2008.

Interest Rate Elephant In The Room


Initially, however,  in the case of the Fed, the purchases were of “junk” that the banks had created during the real estate bubble. That was the bailout that saved the banks but put the squeeze on people through foreclosures, layoffs, and loss of income on their savings.

As shown in this chart and others I posted previously, all he major central banks are doing the same thing, so foreign exchange rates are not too adversely affected–yet. But keep your eye on Brazil, Russia, India, China, and other countries that show signs that they may not be willing to play along./ t.h.g.

Do Banks Create Money out of Nothing?

One of my correspondents recently referred me to an article and asked for my opinion about it. The article is Creating Money out of Nothing: The History of an Idea, by Mike King, dated April 2012 .

I read the abstract, the conclusions, and part of the body text, but could not bring myself to make a detailed read. “The history of an idea” is not relevant to my interests nor to the debt crisis that plagues civilization. Verbose and tedious, it seems to be an academic exercise that I doubt  will be of interest even to historians.

On the positive side, it did prompt me to write a few words of clarification on the question, words that I think are both pertinent and helpful to those who truly wish to understand the nature of money and the role of banks in today’s world.

The accusation that banks create money out of nothing has, according to King, been made by many famous economists, including Schumpeter, von Mises, and Keynes. I too must admit to having once or twice used that statement as a sort of shorthand criticism of the global money and banking system.

It is surely true that saying that banks make “money out of nothing” is an exaggeration that can be misleading to the uninitiated.

Bank actually create money out of something. The question is, what is that something, and what is wrong with it?

The short answer is that banks create money on the basis of the promises of their borrowers to repay.

Mr. King would have us believe that banks simply take in money from savers and lend it out to borrowers. That is clearly wrong. Even the Federal Reserve, in its own publications, says that,

The actual process of money creation takes place primarily in banks.(1) As noted earlier, checkable liabilities of banks are money. These liabilities are customers’ accounts. They increase when customers deposit currency and checks and when the proceeds of loans made by the banks are credited to borrowers’ accounts.

In the absence of legal reserve requirements, banks can build up deposits by increasing loans and investments so long as they keep enough currency on hand to redeem whatever amounts the holders of deposits want to convert into currency. This unique attribute of the banking business was discovered many centuries ago.–Modern Money Mechanics

As I’ve pointed out in all of my books, banks serve two primary functions. They act as both depositories, reallocating funds from savers to borrowers, and banks of issue that monetize the promises of their borrowers. I’ve explained that in detail in Chapter 1 of my book, Money: Understanding and Creating Alternatives to Legal Tender, and in Chapter 9 of my latest book, The End of Money and the Future of Civilization.

But not all promises provide a proper basis for creating money. As Edward Popp, describes it, banks create both bona-fide and non-bona-fide money. (See Money, Bona Fide or Non-Bona Fide at

The vast majority of the non-bona-fide money that banks create, is created on the basis of loans made to national governments (when banks buy government bonds). Further large amounts of non-bona-fide money are created when banks make loans to finance purchases of consumer goods and real estate (see my books for details). This is a violation of the principle that money should be created on the basis of goods and services on the market or soon to arrive there, which includes promises of established producers who are ready, willing and able to sell for money the things they ordinarily offer.

The bottom line remains: the present global, interest-based, debt-money system, is dysfunctional and destructive.

The creation of money on the basis of interest-bearing loans is the cause of the growth imperative, and the creation of non-bona-fide money is the cause of inflation.

If we are to achieve a sustainable society and assure the survival of civilization, we must transcend the present money and banking paradigm and reinvent the exchange process.  – t.h.g.

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Et tu ECB? Inflating the Euro

Te European Central Bank is following the lead of the Federal Reserve in planning to buy up the debts of euro-zone governments. By making that move, the ECB is overstepping its legal bounds, but, hey, whatever it takes to maintain the global plutocracy.

Here’s an excerpt from The Washington Post

The European Central Bank moved decisively Thursday in announcing that it would buy the bonds of struggling governments without limit, an initiative that could save the euro zone and blunt one of the main threats menacing the global economy.

The unprecedented step, meant to reassure fearful investors that euro-zone governments would not default, sparked a rally on world stock markets. U.S. stock indices posted their largest gains in weeks, with the S&P 500 soaring 2 percent and closing at a four-year high.


By agreeing to buy government bonds when investors balk, the ECB is moving much closer to becoming a “lender of last resort,” a role traditionally played by the U.S. Federal Reserve and other central banks. The ECB was created with a narrower mandate than the Fed or Bank of England, say, and is barred by European treaties from financing individual governments.

Draghi said the new program won near-unanimous support on the ECB board, with only a single dissenting vote. Jens Weidmann, head of Germany’s central bank, has been adamantly opposed to the idea, saying in a recent interview with the news magazine Der Spiegel that the bond-buying initiative would violate the ECB’s legal mandate and was “too close to state financing via the money press for me.”