The credit crunch Paul Krugman and others have been warning us about for years is now upon us. The big question is: will it be a real game changer? Is our financial system about to change fundamentally?
As Congress began looking at Bush’s bailout plan, Nancy Pelosi was on the tube scolding unscrupulous Wall Street bankers, shouting “the game is over!” But maybe the game is over in a much larger sense than she thinks. The whole society, including government, has long been playing “borrow and spend”, and perhaps it is this bigger game that at last is over.
Robert Reich signed in with a NY Times article urging that fixing the current crisis would, like it or not, entail increased deficit spending. We will just have to lay off more debt on foreigners. He assumes the lenders will be there, as they have been till now. But suppose they’re not?
Total public and private debt per household in the US now equals about three years of household income, ten years when the (possibly exaggerated) “unfunded liabilities” of the federal government are added in.
Maybe we are at the end of the era where debt both public and private can always be increased.
After all, you can’t just increase debt forever without limit, raising it by ever more borrowing.
That has to stop eventually; a time will come when the lenders will balk.
Maybe that time is now .
Re all this, I happened across a two-year old video, which everyone should see:
Two viewings turned up a few flaws in its assertions, but the central thesis seems to hold water: our present fractional reserve banking system, whose very nature allows banks to create “money as debt”, is not sustainable in the long run, because under it, per capita debt must keep increasing as a perentage of annual per capita GDP. But this is impossible, so it must eventually end. Perhaps by seizing up in the very kind of credit crunch we are currently experiencing.
In searching for mainstream economist’s opinions about this notion, I came upon a site with the same thesis and an equally fascinating longer video: http://www.themoneymasters.com/
For the video, go here: http://video.google.com/videoplay?docid=-515319560256183936
This site, too, argues that fractional reserve banking is both inherently unsustainable and is also evil since it inevitably enriches the few at the expense of the many.
Any idea drawing high praise from both Milton Friedman and Elizabeth Kucinich, as this has done, deserves a careful look.
The video tells toward the end the fascinating story of the Federal Reserve System. Many think the Fed is part of the Federal government. It isn’t, as has long been pointed out by those calling for its elimination. Like most others, I have always dismissed these colorful folk as part of the paranoid fringe who also believe that black helicopters from the UN will soon descend to enslave us all.
The Money Masters site also advances the proposal, fascinating if true, that the solution to our national debt is easy: the government just issues enough fiat currency to buy up all outstanding government bonds. (I.e., it just prints the money.) Diluting the money supply like that would normally induce horrendous hyperinflation, but voila, the government offsets that inflationary effect by simultaneously cranking up bank reserve limits from 10% to 100%, replacing fractional reserve banking with full reserve banking and thereby eliminating all “debt money” created by the banks.
In their effects on our total money supply, these two actions supposedly balance out, so fiat money issued by the government simply replaces an equal amount of “debt money” created by the banks.
All in a year or two. Leaving us with no national debt and no inflation. And installing a truly sustainable money and banking system. And eliminating forever the $400+ billion per year we now pay for interest on the national debt.
Wow. Can this be possible?
What happens to the US bond holders currently receiving that interest income stream?
Won’t increasing bank reserve limits mean banks will have to call in almost all their loans, thereby inducing a credit contraction much worse than the current crisis?
The proposal may seem crazy only because I don’t understand it fully. For example, perhaps paid-off bondholders will perforce deposit their payouts in banks, preserving their interest income stream and, by increasing bank deposits, providing the needed continued backing for outstanding private bank loans. (On closer study of their Web site, I see they suggest exactly this would happen.)
In any case, here is a proposal that needs public airing. Certainly our present system needs fundamental change. Maybe those grumbling darkly about the Trilateral Commission and issuing dire paranoid warnings about the Federal Reserve have been right all along. Just because they are wrong about the black helicopters doesn't mean they can't be right about some things—perhaps more than we ever thought they could possibly be.