Tag Archives: inflation

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.

The emerging market mess and US manipulations

Anyone who wants to understand present-day geopolitical phenomena must pay attention to former Assistant Treasury Secretary, Dr. Paul Craig Roberts. Roberts is one of a handful of people who understands what is going on–and is willing to tell people about it. Explore his website http://www.paulcraigroberts.org/, and be sure to listen to his recent interview with Eric King, here.

In that interview, Roberts tells the story of how and why the US interferes in money and securities markets, and the effects those manipulations have on others around the world. He also predicts that the Federal Reserve will soon be faced with the choice of either saving the banks or saving the dollar, perhaps as early as the end of this year. But I suspect that the Fed may not quite yet have exhausted their bag of tricks. Because banking corporations dominate politics in most of the world, and because the dollar’s role as the global reserve currency has served the purpose of Western dominance, the Fed, in alliance with other central banks, will try to save both the banks and the dollar for as long as they can.

What is actually being protected is the global usury-based debt-money regime, that unholy alliance between politicians and top level banks that enables central governments to spend far in excess of their tax and other revenues, thereby thwarting democratic government and the popular will, while enabling banking institutions to privatize our collective credit and charge us interest (usury) to access it.

So what do the central banks have left in their bag of tricks as they taper off their massive amounts of  “quantitative easing” (currency inflation)? That’s the question to ponder. I think it’s obvious that they will (1) try to corral everyone’s savings and all surpluses into government securities and Wall Street equities (think, privatization of Social Security), and (2) outright confiscation of bank deposits via selective bank failures and assessments on depositors (ala the recent Cyprus trial balloon).

Still, those can only be, at best, delaying tactics, and not without serious social and political repercussions. The real solution will continue to be denied and delayed by the powers that be. Thus it must emerge from the bottom, from the creative instincts and talents of innovators in many fields who are bringing to market better ways of mediating the exchange of value and financing the creation of sustainable, Earth-friendly, and life-supporting products and services. –t.h.g.

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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 http://www.reinventingmoney.com/documents/bonafidePopp.pdf).

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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October Newsletter and Fall tour itinerary: Europe & UK

In this edition

Fall Tour Itinerary – Europe and the UK

The Wealth of the Commons now in print.

Recent posts

  • QE3
  • Riegel essays:
    • Right-wing Socialists
    • Breaking the English Tradition

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Fall Tour

My fall tour agenda has filled out nicely and includes an exciting assortment of presentations, workshops, and consultations.

On October 1, I will begin a five week tour that will take me to Switzerland, Greece, and the UK.

Here is a chronological list of events. If you wish to participate in any of them, please go to the indicated website or get in touch with appropriate contact person.

3-6 October. Geneva. Presentations and conferences with Community Forge. “CommunityForge is a non-profit association that designs, develops and provides complementary currency systems and tools.” (Use the “Contact” button on the website to connect with Tim Anderson). This stop will probably include a presentation at the UN Palais des Nations, Human Rights Social Forum, on October 3. My topic will be “Strategies for community empowerment and the creation of economic democracy.”

7-14 October. Crete, Greece.

On October 10 and 11, I will be a presenter at the International Sustainability Summit, to be held at the European Sustainability Academy (Sharon Jackson, Director ).

The segment on Strategic shifts in prevailing systems includes a 2 day workshop that will focus specifically upon Community Exchange Systems and Alternative currency systems for Sustainable Communities. On October 10, I will give a presentation on The Emerging Butterfly Society: Making the shift to a steady-state economy and a world that works for all. Details and registration materials can be found at: http://www.eurosustainability.org/en/esa_summit4.htm

15 October to approximately 21 October. Mainland Greece

During this time period, I will be traveling to Thessaloniki, Volos, and Athens. Specifics are still developing.

25 October. York, UK

I will be speaking at the York LETS Conference on the topic, “Why local exchanges and currencies fail to thrive, and what is required to take alternative exchange to scale.” Booking at, http://yorkaltcurrencies-efbevent.eventbrite.co.uk/ . Info at Facebook.

October 27-28. London. Events on Money and Alternative Currencies are being planned by Mary Fee of LETSlinkUK, http://www.letslinkuk.net/. Details will be posted here when available.

30 October. Ambleside (Lake District). Cumbria University, Presentation, Beyond Money, Banks, and the Left-Right Divide.

31 October. I will be delivering a free public lecture, A New Approach to Community Economic Development at Cumbria University in Lancaster, UK.

1 November. I will conduct a workshop titled, Complementary Exchange Systems: Design, Organization, and Implementation, at The University of Cumbria in Lancaster( Room AXB003) from 2pm to 5pm.

Details of both events at: http://www.localwealth.co.uk/tom-greco/

Register for either at http://www.localwealth.co.uk/booking-for-tom-greco-events-in-lancaster/ .

I will return to the U.S. from London on November 5.

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The Wealth of the Commons

Following my participation in the Commons Conference in Berlin two years ago, I was asked to contribute a chapter to an anthology titled, The Wealth of the Commons: A world beyond market & state. This book is a “new collection of 73 essays that describe the enormous potential of the commons in conceptualizing and building a better future.” At long last, the English edition has now been published and can be ordered from Leveller’s Press,

I think the chapter I wrote for this book is one of the most succinct and information-rich essays I’ve ever written, so I’ve posted it here on this site at Reclaiming the Credit Commons.

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QE ad infinitum (QE3)

“Quantitative Easing,” commonly referred to as “QE,” is a euphemistic expression for currency inflation, i.e., the creation of money on the basis of junk securities and empty promises. On September 14, Ben Bernanke announced that the FED would continue to inflate the dollar on an ongoing basis for “as long as it takes.” A week earlier, European Central Bank president Mario Draghi announced a similar plan to save the Euro by buying the bonds of euro-zone governments, notably Spain and Italy. “There will be no “ex ante limits on the size” of the purchases, said Draghi.” He sugar-coated the bitter pill by saying, “governments that want the ECB to buy its bonds must agree to a program of reforms and oversight by the bailout funds and possibly the International Monetary Fund.” We know what that means for the ordinary person. Two of my recent posts address these announcements (http://beyondmoney.net/2012/09/20/qe-ad-infinatum/, and http://beyondmoney.net/2012/09/21/et-tu-ecb-inflating-the-euro/).

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Recent posts

In recent weeks, I’ve been re-reading some of E. C. Riegel’s essays. I’ll be posting the more important ones from time to time. Here is one that, although written more than 60 years ago, seems especially timely: The Right-wing Socialists.

Another important Riegel essay is, Breaking the English Tradition, which years ago I embedded, with my comments in a post to my other website Reinventingmoney.com. That post titled, The Politics of Money, can be download at http://www.reinventingmoney.com/documents/BreakingEnglishTradition.pdf.

Hoping to see some of you along the way,

Thomas

QE ad infinitum

Last week, Ben Bernanke announced that the FED would continue to inflate the dollar on an ongoing basis for “as long as it takes.”

As I’ve said before, purchases of securities by the FED amounts to the injection of counterfeit money into the economy under color of law. It’s bad enough when FED purchases are limited to federal government securities. In that case, it is federal budget deficits that are enabled. Now, the FED is buying, at inflated prices, “junk” (securities of little worth) from banks, financial institutions, and speculators, enriching those who caused the bubble in the first place, and enabling more of the same.

This is just another move by the banking and financial elite to take ownership of the entire world.

A recent article in ZNet by Jack Rasmus concludes,

The significance of the Fed’s QE3 move therefore is there will continue to be free money in unlimited amounts to banks and investors to hoard or to speculate and play with, while it’s cuts in spending and disposable income for the rest of us. But ‘QEs for them’ and ‘Austerity for the rest of us’ will mean continued economic slowdown and recession, accelerating in Europe, more slowly coming in the US, and increasingly on the horizon for even Asia.

That continued economic slowdown—in the US and globally—will make the private banking system in turn even more unstable, regardless of how many FED QEs are introduced.  So why do governments continue with ‘austerity’ policies on the fiscal side that ultimately negate QE policies on the monetary side?  Because QEs are more profitable to bankers and investors. And those bankers and investors believe if they can just hold out in the short run—with the government and central bank making up for their short term losses with trillions of ‘free money’ injections, in the longer run the capitalist system will self-correct itself on its own. But that proposition—i.e. bail out investors and bankers and let the markets do the rest—is economic ‘ideology’ and not economic fact or science.

As governments, bankers, and financial elites continue to abuse the currency, the economy, and our political institutions, it becomes ever more urgent that people cooperate in organizing new structures of exchange and finance that empower them sufficiently to meet their basic needs and build “the Butterfly Society” to save the planet and provide a dignified life for everyone. — t.h.g.

Why All Governments are in Debt

Here is a concise and eloquent statement by Godfrey Bloom, a member of the European Parliament (MEP), describing the fraud that is being perpetrated on the people of every country by the politicians and bankers who collude to perpetuate to central banking regime.

The central banking regime enables parasitic drains on the economy in the form of unnecessary interest charges levied on the people’s use of their own credit, and chronic deficit spending by national governments that is enabled by putting counterfeit money into circulation under color of law.

Who’s Left, who’s Right, and who should issue money?

I have in my possession, a copy of a copy of an essay by E. C. Riegel, one of many that I gleaned from the files of Spencer MacCallum who had the foresight to rescue Riegel’s literary legacy from oblivion, and the good sense to make his insightful works on money and freedom generally available. The article titled, The Right Is Still To Come, is transcribed below. It bears no date, but I would guess that it was probably written sometime between 1945 and Riegel’s death in 1953.

In the very first paragraph, Riegel sets forth the essential target of his argument, saying, “The professed socialists and the professed anti-socialists are united as monetary socialists in the common superstition that money springs from the State.” I long ago took Riegel’s argument to heart and have taken up the cause of dispelling that superstition, most notably in Chapter 8, The Separation of Money and State, in my book, The End of Money and the Future of Civilization.

I personally try to avoid using imprecise terminology and political clichés that are emotionally charged and tend to get in the way of rational thinking. Riegel, on the other hand, can be forgiven for some slight indulgence in political rhetoric that seems to us perhaps judgmental and outdated.  Keep in mind that he lived in tumultuous times that were scarred by two world wars, the great depression, and the rise of totalitarian governments bearing the various labels of fascist, communist, or socialist (any critique of Capitalism in the west at that time was overwhelmed and suppressed in a number of ways). These are the terms that defined people’s loyalties, as nations contested violently with one another to decide how people should be governed. The reader should not be put off by Riegel’s framing his arguments in terms of left, right, socialist, capitalist, and collectivist. His writings clearly show that he was, after all, a champion of peace, freedom, and social justice.

The emphasis of particular sections in the following essay has been added by me to highlight major points.–t.h.g.

THE RIGHT IS STILL TO COME by E.C. Riegel

On the left stands the socialist, back of him stand a hundred capitalists.  All society is composed of conscious and unconscious socialists.  The professed socialists and the professed anti-socialists are united as monetary socialists in the common superstition that money springs from the State.  The birth of the Right awaits disillusionment from this all-confounding fallacy.

There are advocates of many different money reforms but none renounces the basic error of the socialization of the money system.  To none of the believers in free enterprise does it seem incongruous to leave the State in complete control of the medium whereby free enterprise must articulate.  The right to freely contract and the sanctity of contract is seen as cardinal to free enterprise.  Yet, to leave to the State the power to alter contracts by altering the meaning of the money unit in terms of which all contracts are expressed, does not seem to professed capitalists contradictory.  Thus the State exercises its most vicious interventionism by making itself a party to all contracts, an unbidden and perverting party.

Some would limit, by various devices, the amount of “money” the State should issue.  Others would limit the amount of “credit money” that business men should issue.  Still others would abolish the later entirely, counting only government issues as genuine money.  None would abolish so-called money issues by government, leaving the money issuing power to the only true issuers, the private enterprisers.

With monetary socialization accepted, the choice is confined to different methods of perversion.  There is no monetary Right and since free money is basic to a free economy, there is no philosophy of the Right.  To merely complain against the drift toward socialism does not make one a true anti-socialist.  To propose or support political money reforms does not make one’s surrender to socialization any less abject, nor betrayal of free enterprise less vicious.

The trend toward socialism was set when business men accepted the cry, better called superstition, that money issuance and control are functions of political government—the political money system.  That fallacy, until exploded, makes the progressive socialization of the entire economy inevitable.  The pace of this perversion is not determined by the amount of resistance offered by the alleged opponents of socialism, but by the degree that the State indulges its perversive power by emissions of false money into the blood stream of business.

The pace of this perversion is quickening all over the world; a huge flood of water-money threatens to inundate all.  Can we preclude disaster by bringing those who call themselves anti-socialists over from the Left to the yet unoccupied Right?  Can we induce businessmen to think and act in terms of the economic means rather than the political means?  Can we build an economic statesmanship?  In short, can we sell capitalism to capitalists?  If we can we will save private enterprise and the social order.  If not, the deluge.

Painful as it may be to change habits of thought, (if indeed, prevailing money ideas can be called the product of thought) the triumph of free enterprise over socialism and tyranny can be accomplished only by the renunciation of the fallacy of political money power and the assertion of exclusive power of private enterprise to control and issue money.  When we realize that the political money system has operated almost from the beginning of money, it may be seen what a break with tradition this proposal involves.

The long existence of the political money system does not, however, imply continuity of operation or vindication.  There have been countless instances of the breakdown of national money units through excessive dilution of the money stream by the State.  All money circulations have been a mixture of genuine money issued by private enterprisers and spurious issues by the State.  Following these breakdowns the State set up new money units and repudiated the old.  During the transition from the old to the new, exchange has been kept alive by resort to other national units that were still relatively stable.

What makes the present inflationary crisis unprecedented is the universality of the decline of political money units and that the U.S. dollar, the strongest unit, is being subjected to blood transfusion to sustain other units.  Thus the superstructure of the entire political money system is being bolstered by timbers taken from the foundation with the ultimate result that the whole structure will collapse together.  It is therefore imperative that we change superstitious money ideas for rational ones before it is too late to avoid worldwide chaos.

Why no State Can Issue Money

To understand money is to understand why it cannot spring from any government, national, state or city.

The purpose of money is to obviate the necessity for contemporary delivery of value by both parties to an exchange transaction and thus greatly expand exchange.

By means of money its issuer is enabled to purchase values from any supplier, who, in turn, is enabled to do likewise, the money ultimately reaching a supplier who has need of the issuer’s values and thus the reciprocating trader is found and exchange is completed and the money retired.  Account is balanced by passage of value both ways, the medium, money, having no value.

Money can be issued only by a buyer who later, as seller, redeems his issue.  He must, to stay in business, bid for money with value because that is his only way of gaining income. He must price his values competitively or he can make no sale.  Thus, by his circumstance of being a private enterpriser he is ideally suited to issue and redeem money.

Contrast the State’s situation.  It is not a trader; it does not sell.  It needs not bid for money; it merely requisitions it by taxation. Since it has no way of redeeming money by open competitive bidding, it cannot issue it and its professed money issues are inescapably spurious.

The power and need to issue money is inherent in private enterprisers and thus it operates under natural checks and balances, while to the State it is entirely unnecessary and unnatural and no amount of fixing can supply the requisites that it lacks, nor is there the slightest reason for undertaking such artificiality.  The State would never have gotten into its present unnatural position of its own necessities, for, it always had its taxing power, before the advent of money, to levy in kind and under money exchange to levy on money.  It was forced into its anomalous position by the ignorance of businessmen who, not understanding money resorted to the superstitious belief that it needed the State’s imprimatur.

In spite of all the abortiveness of the political money experience professed friends of private enterprise and self-styled anti-socialists continue their efforts to perpetuate it by added gadgets.  None has contributed in the slightest degree toward liberating private enterprise from it.  Private enterprisers do not even know that, as bank borrower they are money issuers.  They think that their participation in the money system is a secondary one and that even this depends upon a grant from the State.  The truth is that every money unit ever issued has come from private enterprisers and that no money has ever or ever can be issued by any state.  The only thing that makes it possible for the delusive political money system to operate at all is that the true money issued by businessmen serves as a host for the parasite issues of government to feed upon.  No government could build a money circulation of itself anymore than a farmer can produce watered milk from the pump alone.  In this metaphor government is the pump and private business is the cow.

How the political Money System Sabotages Private Enterprise

Every businessman knows that stock splits involve an increase in the number of shares without an increase in capital.  What he does not understand is that so-called money issues by government are but money splits involving merely an increase in the number of units without an increase in the money supply.  The analogy ends there.  In stock splits the corporation does not rob the stock holder.  In the process of money splits the government issues them by taking goods and services out of the market, thus robbing the economy, thereby depreciating the power of each money unit.  This is called inflation and inflation is in turn defined, naively, as “too much money chasing too few goods”, whereas it is but the same amount of real money mixed with spurious money with the economy robbed in the sum of the spurious money.

With the so-called capitalist world deluded into thinking that what government issues is money, the process of sabotaging the economy has open sesame.  It enables the State to practice paternalism and paternalism is the mother of socialism.

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Americas failed policies and destruction of the middle class

Paul Craig Roberts is a former Assistant Treasury Secretary. He is a knowledgeable and astute observer of geopolitics and the domestic and global economies. In the following article which appears in Counterpuch, he describes quite clearly, and I think accurately, the present situation and the prospects for America. It’s well worth reading in its entirety.–t.h.g.

American Freefall

by PAUL CRAIG ROBERTS

Washington has been at war since October, 2001. This war took a back seat when Bush concocted another excuse to order the invasion of Iraq in 2003, a war that went on without significant success for 8 years and has left Iraq in chaos with dozens more killed and wounded every day, a new strong man in place of the illegally executed former strongman, and the likelihood of the ongoing violence becoming civil war.

Upon his election, President Obama foolishly sent more troops to Afghanistan and renewed the intensity of that war, now in its eleventh year, to no successful effect.

These two wars have been expensive. According to estimates by Joseph Stiglitz and Linda Bilmes, when all costs are counted the Iraq invasion cost US taxpayers $3 trillion dollars. Ditto for the Afghan war. In other words, the two gratuitous wars doubled the US public debt. This is the reason there is no money for Social Security, Medicare, Medicaid, food stamps, the environment, and the social safety net.

Americans got nothing out of the wars, but as the war debt will never be paid off, US citizens and their descendants will have to pay interest on $6,000 billion of war debt in perpetuity.

Not content with these wars, the Bush/Obama regime is conducting military operations in violation of international law in Pakistan, Yemen, and Africa, organized the overthrow by armed conflict of the government in Libya, is currently working to overthrow the Syrian government, and continues to marshall military forces against Iran.

Finding the Muslim adversaries insufficient for its energies and budget, Washington has encircled Russia with military bases and has begun the encirclement of China. Washington has announced that the bulk of its naval forces will be shifted to the Pacific over the next few years, and Washington is working to reestablish its naval base in the Philippines, construct a new one on a South Korean island, acquire a naval base in Viet Nam, and air and troop bases elsewhere in Asia.

In Thailand Washington is attempting to purchase with the usual bribes an air base used in the Vietnam war. There is opposition as the country does not wish to be drawn into Washington’ s orchestrated conflict with China. Downplaying the real reason for the airbase, Washington, according to Thai newspapers, told the Thai government that the base was needed for “humanitarian missions.” This didn’t fly, so Washington had NASA ask for the air base in order to conduct “weather experiments.” Whether this ruse is sufficient cover remains to be seen.

US Marines have been sent to Australia and elsewhere in Asia. To corral China and Russia (and Iran) is a massive undertaking for a country that is financially busted. With wars and bankster bailouts, Bush and Obama have doubled the US national debt while failing to address the disintegration of the US economy and rising hardships of US citizens.

The annual US budget deficit is adding to the accumulated debt at about $1.5 trillion per year with no prospect of declining. The financial system is broken and requires ongoing bailouts. The economy is busted and has been unable to create high-paying jobs, indeed any jobs. Despite years of population growth, payroll employment as of mid-2012 is the same as in 2005 and substantially below 2008. Yet, the government and financial presstitute media tell us that we have a recovery.

According to the US Bureau of Labor Statistics, employment in 2011 was only 1 million more than in 2002. As it takes about 150,000 new jobs each month to stay even with population growth, that leaves a decade long job deficit of 15 million jobs.

The US unemployment and inflation rates are far higher than reported. In previous columns I have explained, based on statistician John Williams’ work (shadowstats.com), the reasons that the government’s headline numbers are serious understatements. The headline (U3) unemployment rate of 8.2% counts no discouraged workers who have given up on finding a job. The government has a second unemployment rate (U6), seldom reported, which includes short-term discouraged workers. That rate is 15%. When the long-term discouraged workers are added in, the current US unemployment rate is 22%, a number closer to the unemployment rate of the Great Depression than to the unemployment rates of postwar recessions.

Changes in the way inflation is measured have destroyed the Consumer Price Index (CPI) as a measure of the cost of living. The new methodology is substitution based. If the price of an item in the index rises, a lower priced alternative takes its place. In addition, some price rises are labeled quality improvements whether they are or not and thus do not show up in the CPI. People still have to pay the higher price, but it is not counted as inflation.

Currently, the substitution-based rate of inflation is about 2%. However, when inflation is measured as the actual cost of living, the rate of inflation is 5%.

The Misery Index is the sum of the inflation and unemployment rates. The level of the current Misery Index depends on whether the new rigged measures are used, which understate the misery, or the former methodology that accurately measures it. Prior to the November 1980 election, the Misery Index hit 22%, which was one reason for Reagan’s victory over President Carter. Today if we use previous methodology, the Misery Index stands at 27%. But if we use the new rigged methodology, the Misery Index is 10%.

The understatement of inflation serves to boost Gross Domestic Product (GDP). GDP is calculated in current dollars. To be able to determine whether GDP rose because of price rises or because of increases in real output, GDP is deflated by the CPI. The higher the inflation rate, the less the growth in real output and vice versa. When the substitution based methodology is used to measure inflation, the US economy experienced real growth in the 21st century except for the sharp dip during 2008-2010.

However, if the cost-of-living based methodology is used, except for a short period during 2004, the US economy has experienced no real growth since 2000. The lack of employment and real GDP growth go together with the decline in real household median income. The growth in consumer debt substituted for the lack of income growth and kept the economy going until consumers exhausted their ability to take on more debt. With the consumer dead in the water, the outlook for economic recovery is poor.

Politicians and the Federal Reserve are making the outlook even worse. At a time of high unemployment and debt-stressed households, politicians at local, state, and federal levels are cutting back on government provision of health care, pensions, food stamps, housing subsidies and every other element of the social safety net. These cutbacks, of course, further reduce aggregate demand and the ability of income stressed Americans to survive.

The Federal Reserve has interest rates so low that retirees and others living on their savings can earn nothing on their money. The interest rates paid on bank CDs and government and corporate bonds are lower than the rate of inflation. To live on interest income, a person has to purchase Greek, Spanish, or Italian bonds and run the risk of capital loss. The Federal Reserve’s policy of negative interest rates forces retirees to spend down their capital in order to live. In other words, the Fed’s policy is destroying personal savings as people are forced to spend their capital in order to cover living expenses.

In June the Federal Reserve announced that it was going to continue its policy of driving nominal interest rates even lower, this time focusing on long-term Treasury bonds. The Fed said it would be purchasing $400 billion of the Treasury’s 30-year bonds. Driving interest rates down means driving bond prices up. With 5-year Treasury bonds paying only seven-tenths of one percent and 10-year Treasuries paying only 1.6%, below even the official rate of inflation, Americans desperate for yield move into 30-year bonds currently paying 2.7%. However, the the high bond prices mean that the risk of capital loss is very high.

The Fed’s debt monetization, or a drop in the exchange value of the dollar as other countries move away from its use to settle their balance of payments, could set off inflation that would take interest rates out of the Fed’s control. As interest rates rise, bond prices fall.

In other words, bonds are now the bubble that real estate, stocks, and derivatives were. When this bubble pops, Americans will take another big hit to their remaining wealth.

It makes no sense to invest in long-term bonds at negative interest rates when the federal government is piling up debt that the Federal Reserve is monetizing and when other countries are moving away from the flood of dollars. The potential for a rising rate of inflation is high from debt monetization and from a drop in the dollar’s exchange value. Yet, bond fund portfolio managers have to follow the herd into longer term maturities or see their performance relative to their peers drop to the bottom of the rankings.

Some individual investors and foreign central banks, anticipating the dollar’s loss of value, are accumulating gold and silver bullion. Realizing the danger to the dollar and its policy from the rapid rise in the price of bullion during 2011, the Federal Reserve has arranged offsetting action. When the demand for physical bullion drives up the price, short sales of bullion in the paper market are used to drive the price back down. Similarly, when investors begin to flee Treasuries, thus causing interest rates to rise, J.P. Morgan and other dependencies of the Federal Reserve sell interest-rate swaps, thus offsetting the effect on interest rates of the bond sales. (Keep in mind that interest rates rise when bond prices fall and vice versa.)

The point of all this information is to establish that except for the 1 percent, the incomes and wealth of Americans are being cut back across the board. From 2002 through 2011 the economy lost 3.5 million manufacturing jobs. These jobs were replaced with lowerpaying waitress and bartender jobs (1,189,000), ambulatory health care service jobs (1,512,000) and social assistance jobs (578,000).

These replacement jobs in domestic services mean that on a net basis US consumer income was moved out of the country. Potential aggregate demand in the US dropped by the differences in pay in the job categories. Clearly and unambiguously, jobs offshoring lowered US disposable income and US GDP and, thereby, employment.

Despite the lack of an economic base, Washington’s hegemonic aspirations continue unabated. Other countries are amused at Washington’s unawareness. Russia, China, India, Brazil, and South Africa are forming an agreement to abandon the US dollar as the currency for international settlement between themselves.

On July 4 the China Daily reported: “Japanese politicians and prominent academics from China and Japan urged Tokyo on Tuesday to abandon its outdated foreign policy of leaning on the West and accept China as a key partner as important as the United States. The Tokyo Consensus, a joint statement issued at the end of the Beijing-Tokyo Forum, also called on both countries to expand trade and promote a free-trade agreement for China, Japan and South Korea. “

This means that Japan is in play.

The Chinese government, more intelligent than Washington, is responding to Washington’s military threats by enticing away Washington’s two key Asian allies. As the Chinese economy is now as large as the US and on far firmer footing, and as Japan now has more trade with China than with the US, the enticement is appealing.

Moreover, China is next door, and Washington is distant and drowning in its hubris. Washington, which flicked its middle finger to international law and to its own law and Constitution with its arrogance and gratuitous and illegal wars and with its assertion of the right to murder its own citizens and those of its allies, such as Pakistan, has made the United States a pariah state.

Washington still controls its bought-and-paid-for NATO puppets, but these puppet states are overwhelmed with derivative debt problems brought to them by Wall Street and by sovereign debt problems, some of which were covered up by Wall Street’s Goldman Sachs.

Europe is on the ropes and has no money with which to subsidize Washington’s wars of hegemony.

Washington is becoming an isolated and despised element of the world community. Washington has purchased Europe, Canada, Australia, the former Soviet state of Georgia (and almost Ukraine), and Columbia, and continues its effort to purchase the entire world, but sentiment is turning against the rising Gestapo state that has shown itself to be lawless, ruthless, and indifferent, even hostile, to human life and human rights.

A government, whose military was unable with the help of the UK to occupy Iraq after eight years and was forced to end the conflict by putting the “insurgents” on the US military payroll and to pay them to stop killing American troops, and a government whose military has been unable to subdue a few thousand lightly armed Taliban after 11 years, is over the top when it organizes war against Iran, Russia, and China.

The only prospect Washington has of prevailing in such an undertaking is first use of nuclear weapons, of catching its demonized opponents off guard by nuking them out of the blue. In other words, by the elimination of life on earth.

Is this Washington’s program revealed by the neoconservative warmonger, Bill Kristol, who had no shame to ask publicly: “What’s the good of nuclear weapons if you can’t use them?

PAUL CRAIG ROBERTS was an editor of the Wall Street Journal and an Assistant Secretary of the U.S. Treasury.  He is the author of HOW THE ECONOMY WAS LOST, published by CounterPunch/AK Press. Dr. Roberts’ latest book is Economies in Collapse: The Failure of Globalism, published in Europe, June, 2012.He can be reached through his website.

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Who buys US bonds when foreign countries and investors won’t?

Answer: The Federal Reserve

Question: Where does the Fed get the money to buy the bonds?

Answer: It creates it.

That’s right, the Fed has no money, but the Congress long ago empowered the Federal Reserve Bank to create money by buying government (and other) securities. This is known as “monetizing the debt,” which amounts to nothing more than “legalized” counterfeiting of dollars, and it has the same results as the injection of any other form of counterfeit money—the dilution of purchasing power of all the dollars already in circulation and the erosion of the value of all dollar-denominated assets.

Currency inflation must ultimately result in price inflation as those empty dollars (based on empty promises) work their way through the economy. Further, as those Fed-created dollars get deposited in banks, the banks are able to multiply their lending on the basis of these new “reserves.”

In an opinion article that appeared in the Wall Street Journal last Wednesday, a former Treasury official says that:

“The recently released Federal Reserve Flow of Funds report for all of 2011 reveals that Federal Reserve purchases of Treasury debt mask reduced demand for U.S. sovereign obligations. Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis.”

You might consider that to be a stealthy form of “quantitative easing.”

You can find out more about that, along with some pretty good analysis in an article that appears on the Money News website.

Another (more honest) take on the economy

In his recent article that appeared in Counterpunch, Paul Craig Roberts, tells the story of the American economy as it really is.–t.h.g.

February 01, 2012

The Emperor Has No Clothes.  Economics 101

by PAUL CRAIG ROBERTS

Last Friday (January 27) the US Bureau of Economic Analysis announced its advance estimate that in the last quarter of 2011 the economy grew at an annual rate of 2.8% in real inflation-adjusted terms, an increase from the annual rate of growth in the third quarter.

Good news, right?

Wrong.  If you want to know what is really happening, you must turn to John Williams at shadowstats.com.

What the presstitute media did not tell us is that almost the entire gain In GDP growth was due to “involuntary inventory build-up,” that is, more goods were produced than were sold.

Net of the unsold goods, the annualized real growth rate was eight-tenths of one percent.

And even that tiny growth rate is an exaggeration, because it is deflated with a measure of inflation that understates inflation. The US government’s measure of inflation no longer measures a constant standard of living.  Instead, the government’s inflation measure relies on substitution of cheaper goods for those that rise in price. In other words, the government holds the measure of inflation down by measuring a declining standard of living. This permits our rulers to divert cost-of-living-adjustments that should be paid to Social Security recipients to wars of aggression, police state, and banker bailouts.

When the methodology that measures a constant standard of living is used to deflate nominal GDP, the result is a shrinking US economy. It becomes clear that the US economy has had no recovery and has now been in deep recession for four years despite the proclamation by the National Bureau of Economic Research of a recovery based on the rigged official numbers.

A government can always produce the illusion of economic growth by underestimating the rate of inflation. There is no question that a substitution-based measure of inflation understates the inflation that people experience. More proof that there has been no economic recovery is available from those data series that are unaffected by inflation. If the economy were in fact recovering, these date series would be picking up. Instead, they are flat or declining, as John Williams demonstrates.

For example, according to the government’s own data, payroll employment in December 2011 is less than in 2001. Meanwhile, there has been a decade of population growth. The presstitute media calls the alleged economic recovery a “jobless recovery,” which is a contradiction in terms. There can be no recovery without a growth in employment and consumer income.

Real average weekly earnings (deflated by the government’s CPI-W) have never recovered their 1973 peak. Real median household income (deflated by the government’s CPI-U) has not recovered its 2001 peak and is below the 1969 level. If earnings were deflated by the original methodology instead of by the new substitution-based methodology, the picture would be bleaker.

Consumer confidence shows no recovery and is far below the level of a decade ago.

How does an economy recover without a recovery in consumer confidence?

Housing starts have remained flat since 2009 and are  below their previous peak.

Retail sales are  below the index level of January 2000.

Industrial production remains  below the index level of January 2000.

To repeat, the only indicator of economic recovery is the GDP deflated with an understated measure of inflation.

The US economy cannot recover, because the US economy depends on consumer expenditures for more than 70% of its activity. The offshoring of middle class jobs has stopped the rise in middle class income and caused a drop in consumer spending power.

The Federal Reserve under Alan Greenspan compensated for the absence of US consumer income growth with a policy of easy credit and a policy of driving up home prices with low interest rates. This policy allowed people to refinance their homes and to spend the inflated equity in their homes that Greenspan’s policy created.

In other words, an increase in consumer indebtedness and dissavings drove the economy in the place of the missing growth in consumer incomes.

Today, consumers are too indebted to borrow, and banks are too insolvent to lend. Therefore, there is no possibility of further debt expansion as a substitute for real income growth. An offshored economy is a dead and exhausted economy.

The consequences of a dead economy when the government is wasting trillions of dollars in wars of naked aggression and in bailouts of fraudulent financial institutions is a government budget that can only be financed by printing money.

The consequence of printing money when jobs have been moved offshore is an inflationary depression. This catastrophe could begin to unfold this year or in 2013. If Europe’s problems worsen, flight into dollars could delay sharp rises in US inflation until 2014.

The emperor has no clothes, and sooner or later this will be recognized.

PAUL CRAIG ROBERTS was an editor of the Wall Street Journal and an Assistant Secretary of the U.S. Treasury.  His latest book, HOW THE ECONOMY WAS LOST, has just been published by CounterPunch/AK Press. He can be reached through his website