Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why US Fed Must Act Now to Get Money into the Hands of Ordinary Americans

Politics / US Federal Reserve Bank Sep 03, 2014 - 10:51 AM GMT

By: Ellen_Brown

Politics

When an article appears in Foreign Affairs, the mouthpiece of the policy-setting Council on Foreign Relations, recommending that the Federal Reserve do a money drop directly on the 99%, you know the central bank must be down to its last bullet.

The September/October issue of Foreign Affairs features an article by Mark Blyth and Eric Lonergan titled “Print Less But Transfer More: Why Central Banks Should Give Money Directly To The People.” It’s the sort of thing normally heard only from money reformers and Social Credit enthusiasts far from the mainstream. What’s going on?


The Fed, it seems, has finally run out of other ammo. It has to taper its quantitative easing program, which is eating up the Treasuries and mortgage-backed securities needed as collateral for the repo market that is the engine of the bankers’ shell game. The Fed’s Zero Interest Rate Policy (ZIRP) has also done serious collateral damage. The banks that get the money just put it in interest-bearing Federal Reserve accounts or buy foreign debt or speculate with it; and the profits go back to the 1%, who park it offshore to avoid taxes. Worse, any increase in the money supply from increased borrowing increases the overall debt burden and compounding finance costs, which are already a major constraint on economic growth.

Meanwhile, the economy continues to teeter on the edge of deflation. The Fed needs to pump up the money supply and stimulate demand in some other way. All else having failed, it is reduced to trying what money reformers have been advocating for decades — get money into the pockets of the people who actually spend it on goods and services.

A Helicopater Drop on Main Street

Blyth and Lonergan write:

[L]ow inflation . . . occurs when people and businesses are too hesitant to spend their money, which keeps unemployment high and wage growth low. In the eurozone, inflation has recently dropped perilously close to zero. . . . At best, the current policies are not working; at worst, they will lead to further instability and prolonged stagnation.

Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality. [Emphasis added.]

A money drop directly on consumers is not a new idea for the Fed. Ben Bernanke recommended it in his notorious 2002 helicopter speech to the Japanese who were caught in a similar deflation trap. But the Japanese ignored the advice. According to Blyth and Lonergan:

Bernanke argued that the Bank of Japan needed to act more aggressively and suggested it consider an unconventional approach: give Japanese households cash directly. Consumers could use the new windfalls to spend their way out of the recession, driving up demand and raising prices.

. . . The conservative economist Milton Friedman also saw the appeal of direct money transfers, which he likened to dropping cash out of a helicopter. Japan never tried using them, however, and the country’s economy has never fully recovered. Between 1993 and 2003, Japan’s annual growth rates averaged less than one percent.

Today most of the global economy is drowning in debt, and central banks have played all their other cards.  Blyth and Lonergan write:

It’s well past time, then, for U.S. policymakers — as well as their counterparts in other developed countries — to consider a version of Friedman’s helicopter drops. In the short term, such cash transfers could jump-start the economy. Over the long term, they could reduce dependence on the banking system for growth and reverse the trend of rising inequality. The transfers wouldn’t cause damaging inflation, and few doubt that they would work. The only real question is why no government has tried them.

The Hyperinflation Bugaboo

The main reason governments have not tried this approach, say the authors, is the widespread belief that it will trigger hyperinflation. But will it? In a Forbes article titled “Money Growth Does Not Cause Inflation!”, John Harvey argues that the rule as taught in economics class is based on some invalid assumptions. The formula is:

MV = Py

When the velocity of money (V) and the quantity of goods sold (y) are constant, adding money (M) must drive up prices (P). But, says Harvey, V and y are not constant. The more money people have to spend (M), the more money that will change hands (V), and the more goods and services that will get sold (y). Only when V and y reach their limits – only when demand is saturated and productivity is at full capacity – will consumer prices be driven up. And they are nowhere near their limits yet.

The US output gap – the difference between actual output (y) and potential output – is currently estimated at about $1 trillion annually. That means the money supply could be increased by at least $1 trillion without driving up prices.

As for V, the relevant figure for the lower 80% (the target population of Blyth and Lonergan) is the velocity of M1 –– coins, dollar bills, and checkbook money. Fully 76% of Americans now live paycheck to paycheck. When they get money, they spend it. They don’t trade in the forms of investment called “near money” and “near, near money” that make up the bulk of M2 and M3.

The velocity of M1 in 2012 was 7 (down from a high of 10 in 2007). That means M1 changed hands seven times during 2012 – from housewife to grocer to farmer, etc. Since each recipient owes taxes on this money, increasing GDP by one dollar increases the tax base by seven dollars.

Total tax revenue as a percentage of GDP in 2012 was 24.3%. Extrapolating from those figures, one dollar spent seven times over on goods and services could increase tax revenue to the government by 7 x 24.3% = $1.7. The government could actually get more back in taxes than it paid out! Even with some leakage in those figures, the entire dividend paid out by the Fed might be taxed back to the government, so that the money supply would not increase at all.

Assume a $1 trillion dividend issued in the form of debit cards that could be used only for goods and services. A back-of-the-envelope estimate is that if $1 trillion were shared by all US adults making under $35,000 annually, they could each get about $600 per month.  If the total dividend were $2 trillion, they could get $1,200 per month. And in either case it could, at least in theory, all come back in taxes to the government without any net increase in the money supply.

There are also other ways to get money back into the Treasury so that there is no net increase in the money supply. They include closing tax loopholes, taxing the $21 trillion or more hidden in offshore tax havens, raising tax rates on the rich to levels like those seen in the boom years after World War II, and setting up a system of public banks that would return the interest on loans to the government. If bank credit were made a public utility, nearly $1 trillion could be returned annually to the Treasury just in bank profits and savings on interest on the federal debt.  Interest collected by U.S. banks in 2011 was $507 billion (down from $725 billion in 2007), and total interest paid on the federal debt was $454 billion.

Thus there are many ways to return the money issued in a national dividend to the government. The same money could be spent and collected back year after year, without creating price inflation or hyperinflating the money supply.

Why It's the Job of the Fed

Why not just stimulate employment through the congressional funding of infrastructure projects, as politicians usually advocate? Blyth and Lonergan write:

The problem with these proposals is that infrastructure spending takes too long to revive an ailing economy. . . . Governments should . . . continue to invest in infrastructure and research, but when facing insufficient demand, they should tackle the spending problem quickly and directly.

Still, getting money into the pockets of the people sounds more like fiscal policy (the business of Congress) than monetary policy (the business of the Fed). But monetary policy means managing the money supply, and that is the point of a dividend. The antidote to deflation – a shrinking supply of money – is to add more. The Fed tried adding money to bank balance sheets through its quantitative easing program, but the result was simply to drive up the profits of the 1%. The alternative that hasn’t yet been tried is to bypass the profit-siphoning 1% and get the money directly to the consumers who create consumer demand.

There is another reason for handing the job to the Fed. Congress has been eviscerated by a political system that keeps legislators in open battle, deadlocked in inaction. The Fed, however, is “independent.” At least, it is independent of government. It marches to the drum of Wall Street, but it does not need to ask permission from voters or legislators before it acts. It is basically a dictatorship. The Fed did not ask permission before it advanced $85 billion to buy an 80% equity stake in an insurance company (AIG), or issued over $24 trillion in very-low-interest credit to bail out the banks, or issued trillions of dollars in those glorified “open market operations” called quantitative easing. As noted in an opinion piece in the Atlantic titled “How Dare the Fed Buy AIG”:

It’s probable that they don’t actually have the legal right to do anything like this.  Their authority is this:  who’s going to stop them?  No one wants to take on responsibility for this mess themselves.

There is a third reason for handing the job to the Fed. It is actually in the interest of the banks – the Fed’s real constituency – to issue a national dividend to the laboring masses. Interest and fees cannot be squeezed from people who are bankrupt. Creditor and debtor are in a symbiotic relationship. Like parasites and cancers, compound interest grows exponentially, doubling and doubling again until the host is consumed; and we are now at the end stage of that cycle. To keep the host alive, the creditors must restock their food source. Dropping money on Main Street is thus not only the Fed’s last bullet but is a critical play for keeping the game going.

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her earlier books focused on the pharmaceutical cartel that gets its power from “the money trust.” Her eleven books include Forbidden Medicine, Nature’s Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are www.webofdebt.com and www.ellenbrown.com and http://PublicBankingInstitute.org.   

© Copyright Ellen Brown 2014

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in