Category Archives: Banking

Fasten your seat belts…

1/30/1981 President Reagan and David Stockman meeting on the economy in the Oval Office

In his current subscription pitch and announcement for his new book, PEAK TRUMP: The Undrainable Swamp And The Fantasy Of MAGA, David Stockman lays out some startling facts, provides a cogent analysis, and makes some dire predictions. As President Ronald Reagan’s Budget Director and long-time political insider, Stockman should be heeded. Here are some excerpts:

“We are in a whole new ball game. The Deep State, the House Dems, the Mueller hit squad and the mainstream media are all going in for the kill.

“They are determined to take the Donald down and preserve the rule of the bipartisan establishment in favor of Empire abroad and Big Government, massive debt and Fed-fueled Bubble Finance at home.

“At the same time, the Donald is now practically handing them his political head on a platter. That’s because he has bombastically embraced the “big, fat, ugly bubble” that he so accurately harpooned during the campaign.

“But that bubble has now reached a fatal triple-top and is fixing to implode, and to take the American economy and Trump’s presidency down with it.”

Stockman says, “We are heading for the double whammy of a political/constitutional crisis and a thundering financial breakdown at the same time.” He argues that it was the failure of “the Washington/Wall Street consensus” that led to Trump’s victory in 2016, and that actions of the Federal Reserve have caused a massive asset bubble along with huge disparities of incomes and wealth.

He goes on to say that “just because Donald Trump targeted the symptoms correctly [during his campaign] that doesn’t mean he had a plan to fix the American economy or the skills and know-how to move the turgid, essentially paralyzed machinery of the Federal government.” Stockman  characterizes Trump as “a political flyweight, megalomaniacal incompetent and bile-ridden bully who stumbled into the Oval Office against all odds.” He decries the massive growth of government debt over the past four decades and boldly asserts that recession will hit the US economy before November 2020, and that “Wall Street, the US economy and the Donald’s fantasy of MAGA will come tumbling down with it.” Whether or not his timing is correct, it is clear that a political and economic shipwreck is just ahead.

Stockman decries the “bipartisan ruling class” which is “in favor of permanent war, unchained entitlements, fiscal incontinence, unsustainable debt-fueled household spending, rampant corporate financial engineering and Keynesian monetary repression and “wealth effects” based central banking that lies at the roots of our current economic malaise,” and referring to the Mueller Russiagate investigation and subsequent impeachment hearings, Stockman says, “the Donald’s fluke elevation to the Oval Office has finally caused the Deep State to come out of hiding and bare its fangs against American democracy itself.”

Stockman criticizes the Fed for “dithering” and delaying “normalization,” by which he presumably means raising interest rates and ending Fed purchases of government bonds. He also calls for “fiscal rectitude” (balanced budgets) on the part of the government, something that even his beloved Ronald Reagan was unable to pull off.

But what Stockman (and everyone else) fails to realize is that, under the interest-based debt-money regime that has prevailed throughout the modern era, it is impossible for national governments to consistently balance their budgets. Here’s why. Since money is created when banks make loans, and since interest is charged on those loans, aggregate debt increases simply with the passage of time. If growth in the money supply does not keep up with debt growth, many debtors will default and the economy will sink into recession. Thus, the banking system must find ways to keep people and corporation borrowing ever greater amounts of money. Over my lifetime I’ve seen banks roll out a succession of creative schemes. Starting with the liberalization of consumer credit following World War II (“Buy now; pay later”), then the widespread issuance of credit cards, then the introduction of “student loans,” then the easing of requirements for people to buy real estate, banks have gotten people to borrow more and more.

Then, when the private sector is all “loaned up” and cannot take on additional debt, the government must step in as “borrower of last resort.” By deficit spending, financed through the issuance of bonds, the national government, with the help of banks that buy those bonds, the money supply is expanded. (When banks buy government bonds they are making a loan to the government). And when all available funds have been sucked up, the Fed must step in as “lender of last resort” to itself buy up additional government bonds while keeping interest rates at acceptable levels. That approach, called “quantitative easing,” is what saved the global system of money and banking from total collapse in 2008 after the housing bubble burst. Thus, the government and the banking establishment are locked together in a deadly embrace and “dance of death” that is spiraling out of control.

It may very well end with a major decline and long drawn out recovery, as Stockman is predicting, but unless a new interest-free money system is implemented after the wreckage is cleared, the ultimate outcome may simply be another round of ever more extreme boom-bust cycles and political chaos.

The good news is that there are credit money innovations waiting in the wings, and now emerging, that can be rolled out, replicated, and networked together to usher in a “Butterfly Economy” and new world order of peace, justice, and human unity. For details about what the Butterfly Economy might look like, and how we might get there, see my video, The Butterfly Economy: How Communities are Building a New World From the Bottom Up, and my article, Reclaiming the Credit Commons: Towards a Butterfly Society. — t.h.g.

My latest interview on Ellen Brown’s podcast, It’s Our Money

In Ellen’s October 10 podcast, on which I was the featured guest, I argue that our best hope for escaping the tyranny of the global banking cartel lies in creating a decentralized network of exchange in which credit is locally controlled and allocated based on personal relationships and the productive capacity of community economies (starting at 27:25). This episode begins with a report by David Jette of the California Public Banking Alliance on the landmark public banking legislation that was recently passed into law in California. David describes what this act enables and the long and arduous process of getting it passed.

https://www.podbean.com/eu/pb-tuza2-c2cf19

I was right about “quantitative tightening”

I was right about “quantitative tightening”
by Thomas H. Greco, Jr.

Just about two years ago, someone sent me a link to an article titled, Why America’s Federal Reserve might make money disappear, that appeared in The Economist on April 17, 2017. The gist of the article was the predicted move by the Fed to unwind quantitative easing, that is, to sell off some of the securities that it bought in the wake of the 2008 financial crisis. The expansion of Fed holdings from the $850 billion it held just prior to the crisis, to the $4.5 trillion it held at the time the Economist article was written, was a desperate move that was taken to keep a flawed financial system from crashing down.

After I read that article, this is what I wrote to my correspondent on April 25, 2017:

Dear…,
Thanks for alerting me to that article in the Economist. Interesting.
The sub-head reads, “The Fed has signalled that it will soon reduce the size of its balance-sheet,” yet the article says nothing about how it signalled that move. It seems to be the author’s own speculation based on the Fed’s recent small interest rate increase. To wit, “Today, however, the Fed, now led by Janet Yellen (pictured), is raising short-term rates, as it tries to keep a lid on inflation. So—the logic goes—it should also shrink its balance-sheet, to push up long-term rates.”

You need to ask, why did the Fed load up on government bonds to begin with?

I am reminded of a story about a man who wanted to invest in the stock market. He opened an account with a broker who immediately steered him into some penny stock.

The dialog went something like this:
Broker: Welcome aboard. I can get you in on the ground floor of this new company. Their stock is really hot right now and it’s only four dollars a share.
Customer: Fine, buy me 1000 shares.

The next day the broker calls and says,
Broker: Hey, that stock is now up to eight dollars a share.
Customer: Wow, that’s great, buy me 2000 more shares.

A couple days later, the broker calls again and says,
Broker: Amazing, that stock is now up to 12 dollars a share.
Customer: Fantastic, sell all my shares.
Broker: To whom??

In other words, the Fed is locked in to their position, it’s a one way street and there’s no going back.

The answer is that there was not nearly enough available capital in private hands to fund the government budget deficits, at least not at interest rates that would not make the deficits even more gigantic than they have been.

As I’ve written in my books, there is a collusive arrangement between bankers and politicians that goes back more than 300 years. Governments get to spend more than their revenues, while banks get to lend money into circulation by making interest bearing loans. Yes, open market operations by the central banks do distort financial markets as QE critics claim, but that is the fundamental role of central banks, to manipulate financial markets. It’s the biggest scam in history. The central bank is the lender of last resort, and the government is the borrower of last resort to keep the money supply pumped up as bankers suck interest earnings into their capital account.

The Fed will be lucky to get away with small interest rate increases, but unloading their holdings of government bonds will not happen.

The entire article seems disingenuous, suggesting the possibility of actions that cannot be taken without severely unbalancing government budgets and contracting the money supply which will send the economy back into recession.

Real inflation rates are much greater than government figures indicate.  See the Chapwood index, http://www.chapwoodindex.com/, and Shadow Stats, http://www.shadowstats.com/alternate_data/inflation-charts.

Also, follow Chris Martenson, https://www.peakprosperity.com/.
This interview is particularly pertinent, Oil, Gold, & The Collapse of Central Banking ~ Interview with Chris Martenson.

Regards,
Thomas

Now, on March 20, 2019, this Bloomberg article, Powell Signals Prolonged Fed Pause as Inflation Lags, Risks Loom, acknowledged that the Fed has thrown in the towel on tightening, saying, “Federal Reserve Chairman Jerome Powell said interest rates could be on hold for “some time” as global risks weigh on the economic outlook and inflation remains muted. … Officials also decided to slow the drawdown of the U.S. central bank’s bond holdings starting in May, then end them in September. Together, the moves complete the Fed’s 2019 pivot away from policy tightening and toward a markedly cautious stance.”

Surprise, surprise!

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Why Central Banks?

I have long argued that the interest-based, debt-money, central banking regime is both dysfunctional and destructive, and advocated for the decentralization of control over credit and the creation of exchange alternatives that use privately issued currencies and direct clearing of accounts among buyers and sellers.

There is a considerable body of literature that makes the case for free money and free banking, most of which has been ignored. These ideas have been overwhelmed by the economic and financial orthodoxy which stands in support of the political status quo which centralizes power and concentrates wealth.

For governments, central banks serve as “lenders of last resort,” enabling deficit spending through their purchase of government bonds and manipulation of interest rates, while for the banking cartel, government serves as “borrower of last resort,” sustaining their privilege of lending money into circulation and charging interest on it. Whenever this unsustainable system threatens to implode (as it did in the crisis of 2008), the government steps in to take bad (private) debts off the bankers’ hands and place them on the shoulders of the citizens (“bail-outs”). When the next bubble reaches its climax, we will likely see another round of “quantitative easing,” but when that proves to be inadequate, we will likely see some combination of inflation and outright asset confiscation known as “bail-ins” (partial seizure of bank balances).

In his recent review, Leonidas Zelmanovitz, highlights the main points in Vera Smith’s book, The Rationale of Central Banking and the Free Banking Alternative, which was published in 1936. Paraphrasing Smith, Zelmanovitz concludes that [Keynsian policies are] “not necessary to solve the problems they are purported to solve; most likely, they are part of the cause of the problem. Furthermore, there is an alternative, and that alternative is free banking,.” and, ” You can have good money without central banking and central banking does not guarantee good money.” You can read the entire review on the EconLib website.

Another classic source on free banking is Henry Meulen‘s, Free Banking (London: Macmillan, 1934). Free download available here. I will provide some excerpts from that source in a future post.


Central Bank Interventions and the Looming Catastrophe

In this recent interview below, Dr. Paul Craig Roberts describes the “house of cards” that is today’s global regime of money, banking and finance. Since the financial crisis of 2008, the major central banks around the world—the Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan—have all been active in the securities markets, buying huge amounts of government and corporate bonds and shares of private companies, a process that is euphemistically called “quantitative easing.”

As Roberts points out, these actions are being taken to support the big banks. I agree, but it goes much deeper than that. The underlying objective is to preserve the global interest-based debt-money system which requires continual expansion if debt, an inherent systemic flaw which I call the “debt growth imperative.” The result of these market manipulations, of course, has been the inflation of market bubbles in bonds, stocks, and real estate, and the massive transfer of wealth into the hands of a small segment of the population.

Roberts does not mention it, but the recurrent waves of tax cuts for the rich likewise seem to be designed to keep these market bubbles pumped up. The wealthy class, for the most part, does not spend these windfall gains, they invest them in, you guessed it, bonds, stocks and real estate. If tax cuts were to go mainly to the lower and middle classes, what would they do with the money? They would surely spend much of it, which would stimulate consumption of consumer goods and restore the real economy, but much of it would go toward reducing the massive amounts of debt that these people carry and make it unnecessary for them to borrow even more. A system that requires perpetual expansion of debt cannot tolerate that.
Now, do you understand?

 

Thomas Greco’s Latest Interview–March 3, 2017

Here is my latest interview on Primo Nutmeg. Discussion topics include alternative currencies, credit, central banks, the Federal Reserve, Austrian economics, the gold standard, bitcoin, geopolitics, and the relationship between U.S. foreign policy and the global system of money and finance.

Roberts says raise taxes on corporations’ offshore profits; the FED manipulates all markets, may crash the economy.

Here is another excellent interview of Dr. Paul Craig Roberts in which he outlines the political situation in the U.S, some of the prospects for the Trump administration, limits to Presidential power,  and what would need to be done to rebuild the American economy.