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ELLEN BROWN VICE EDITOR

Ellen Brown is Vice Editor in Chief and advisor of Global News Aruba. She has been a contributor and advisor to the Editor in Chief of Global News Aruba since Global News Aruba has been founded in September 3rd, 2007. She is also the founder of the Public Banking Institute and the author of a dozen books and hundreds of articles. She developed her research skills as an attorney practicing civil litigation in Los Angeles. In the best-selling Web of Debt (2007, 2012), she turned those skills to an analysis of the Federal Reserve and “the money trust,” showing how this private cartel has usurped the power to create money from the people themselves and how we the people can get it back.

In The Public Bank Solution (2013) she traces the evolution of two banking models that have competed historically, public and private; and explores contemporary public banking systems globally. She has presented these ideas at scores of conferences in the US and abroad, including in England, Ireland, Scotland, Wales, Canada, Iceland, Ireland, Switzerland, Sweden, the Netherlands, Germany, Croatia, Malaysia, Mexico and Venezuela.

Brown developed an interest in the developing world and its problems while living abroad for eleven years in Kenya, Honduras, Guatemala and Nicaragua. She returned to practicing law when she was asked to join the legal team of a popular Tijuana healer with an innovative cancer therapy, who was targeted by the chemotherapy industry in the 1990s. That experience produced her book Forbidden Medicine, which traces the suppression of natural health treatments to the same corrupting influences  that have captured the money system. She also co-authored the bestselling Nature’s Pharmacy, which has sold 285,000 copies.

Ellen ran for California State Treasurer in 2014 with the endorsement of the Green Party garnering a record number of votes for a Green Party candidate. Her 330+ blog articles are at http://EllenBrown.com. The Public Banking Institute is at http://PublicBankingInstitute.org. She can be heard biweekly on “It’s Our Money with Ellen Brown” on PRN.FM.


Contact Dr Juris Doctor Ellen Brown, Attorney at Law and Financial Expert at  : [email protected] 

 

The Fed Protects Gamblers at the Expense of the Economy

Posted on January 10, 2020 by Ellen Brown
GLOBAL NEWS ARUBA 2020

Although the repo market is little known to most people, it is a $1-trillion-a-day credit machine, in which not just banks but hedge funds and other “shadow banks” borrow to finance their trades. Under the Federal Reserve Act, the central bank’s lending window is open only to licensed depository banks; but the Fed is now pouring billions of dollars into the repo (repurchase agreements) market, in effect making risk-free loans to speculators at less than 2%.

This does not serve the real economy, in which products, services and jobs are created. However, the Fed is trapped into this speculative monetary expansion to avoid a cascade of defaults of the sort it was facing with the long-term capital management crisis in 1998 and the Lehman crisis in 2008. The repo market is a fragile house of cards waiting for a strong wind to blow it down, propped up by misguided monetary policies that have forced central banks to underwrite its highly risky ventures.

The Financial Economy Versus the Real Economy

The Fed’s dilemma was graphically illustrated in a Dec. 19 podcast by entrepreneur/investor George Gammon, who explained we actually have two economies – the “real” (productive) economy and the “financialized” economy. “Financialization” is defined at Wikipedia as “a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production.” Rather than producing things itself, financialization feeds on the profits of others who produce.

The financialized economy – including stocks, corporate bonds and real estate – is now booming. Meanwhile, the bulk of the population struggles to meet daily expenses. The world’s 500 richest people got $12 trillion richer in 2019, while 45% of Americans have no savings, and nearly 70% could not come up with $1,000 in an emergency without borrowing.

Gammon explains that central bank policies intended to boost the real economy have had the effect only of boosting the financial economy. The policies’ stated purpose is to increase spending by increasing lending by banks, which are supposed to be the vehicles for liquidity to flow from the financial to the real economy. But this transmission mechanism isn’t working, because consumers are tapped out. They can’t spend more unless their incomes go up, and the only way to increase incomes, says Gammon, is through increasing production (or with a good dose of “helicopter money,” but more on that later).

So why aren’t businesses putting money into more production? Because, says Gammon, the central banks have put a “put” on the financial market, meaning they won’t let it go down. Business owners say, “Why should I take the risk of more productivity, when I can just invest in the real estate, stock or corporate bond market and make risk-free money?” The result is less productivity and less spending in the real economy, while the “easy money” created by banks and central banks is used for short-term gain from unproductive financial investments.

Existing assets are bought just to sell them or rent them for more, skimming profits off the top. These unearned “rentier” profits rely on ready access to liquidity (the ability to buy and sell on demand) and on leverage (using borrowed money to increase returns), and both are ultimately underwritten by the central banks. As observed in a July 2019 article titled “Financialization Undermines the Real Economy”:

When large highly leveraged financial institutions in these markets collapse, e.g., Lehman Brothers in September 2008, central banks are forced to step in to salvage the financial system. Thus, many central banks have little choice but to become securities market makers of last resort, providing safety nets for financialized universal banks and shadow banks.

Repo Madness

That is what is happening now in the repo market. Repos work like a pawn shop: the lender takes an asset (usually a federal security) in exchange for cash, with an agreement to return the asset for the cash plus interest the next day unless the loan is rolled over. In September 2019, rates on repos should have been about 2%, in line with the fed funds rate (the rate at which banks borrow deposits from each other). However, repo rates shot up to 10% on Sept. 17. Yet banks were refusing to lend to each other, evidently passing up big profits to hold onto their cash. Since banks weren’t lending, the Federal Reserve Bank of New York jumped in, increasing its overnight repo operations to $75 billion. On Oct. 23, it upped the ante to $165 billion, evidently to plug a hole in the repo market created when JPMorgan Chase, the nation’s largest depository bank, pulled an equivalent sum out. (For details, see my earlier post here.)

By December, the total injected by the Fed was up to $323 billion. What was the perceived danger lurking behind this unprecedented action? An article in The Quarterly Review of the Bank for International Settlements (BIS) pointed to the hedge funds. As ZeroHedge summarized the BIS’ findings:

[C]ontrary to our initial take that banks were pulling from the repo market due to counterparty fears about other banks, they were instead spooked by overexposure by other hedge funds, who have become the dominant marginal – and completely unregulated – repo counterparty to liquidity lending banks; without said liquidity, massive hedge fund regulatory leverage such as that shown above would become effectively impossible.

Hedge funds have been blamed for the 2008 financial crisis, by adding too much risk to the banking system. They have destroyed companies by forcing stock buybacks, asset sales, layoffs and other measures that raise stock prices at the expense of the company’s long-term health and productivity. They have also been a major factor in the homelessness epidemic, by buying foreclosed properties at fire sale prices, then renting them out at inflated prices. Why did the Fed need to bail these parasitic institutions out? The BIS authors explained:

Repo markets redistribute liquidity between financial institutions: not only banks (as is the case with the federal funds market), but also insurance companies, asset managers, money market funds and other institutional investors. In so doing, they help other financial markets to function smoothly. Thus, any sustained disruption in this market, with daily turnover in the U.S. market of about $1 trillion, could quickly ripple through the financial system. The freezing-up of repo markets in late 2008 was one of the most damaging aspects of the Great Financial Crisis (GFC).

At $1 trillion daily, the repo market is much bigger and more global than the fed funds market that is the usual target of central bank policy. Repo trades are supposedly secured with “high-quality collateral” (usually U.S. Treasuries). But they are not risk-free, because of the practice of “re-hypothecation”: the short-term “owner” of the collateral can use it as collateral for another loan, creating leverage – loans upon loans. The IMF has estimated that the same collateral was reused 2.2 times in 2018, which means both the original owner and 2.2 subsequent re-users believed they owned the same collateral. This leveraging, which actually expands the money supply, is one of the reasons banks put their extra funds in the repo market rather than in the fed funds market. But it is also why the repo market and the U.S. Treasuries it uses as collateral are not risk-free. As Wall Street veteran Caitlin Long warns:

U.S. Treasuries are … the most rehypothecated asset in financial markets, and the big banks know this. … U.S. Treasuries are the core asset used by every financial institution to satisfy its capital and liquidity requirements – which means that no one really knows how big the hole is at a system-wide level.

This is the real reason why the repo market periodically seizes up. It’s akin to musical chairs – no one knows how many players will be without a chair until the music stops.

ZeroHedge cautions that hedge funds are the most heavily leveraged multi-strategy funds in the world, taking something like $20 billion to $30 billion in net assets under management and levering it up to $200 billion. According to The Financial Times, to fire up returns, “some hedge funds take the Treasury security they have just bought and use it to secure cash loans in the repo market. They then use this fresh cash to increase the size of the trade, repeating the process over and over and ratcheting up the potential returns.”

ZeroHedge concludes:

This … explains why the Fed panicked in response to the GC repo rate blowing out to 10% on Sept 16, and instantly implemented repos as well as rushed to launch QE 4: not only was Fed Chair Powell facing an LTCM [Long Term Capital Management] like situation, but because the repo-funded [arbitrage] was (ab)used by most multi-strat funds, the Federal Reserve was suddenly facing a constellation of multiple LTCM blow-ups that could have started an avalanche that would have resulted in trillions of assets being forcefully liquidated as a tsunami of margin calls hit the hedge funds world.

“Helicopter Money” – The Only Way Out?

The Fed has been forced by its own policies to create an avalanche of speculative liquidity that never makes it into the real economy. As Gammon explains, the central banks have created a wall that traps this liquidity in the financial markets, driving stocks, corporate bonds and real estate to all-time highs, creating an “everything bubble” that accomplishes only one thing – increased wealth inequality. Central bank quantitative easing won’t create hyperinflation, says Gammon, but “it will create a huge discrepancy between the haves and have nots that will totally wipe out the middle class, and that will bring on MMT or helicopter money. Why? Because it’s the only way that the Fed can get the liquidity from the financial economy, over this wall, around the banking system, and into the real economy. It’s the only solution they have.” Gammon does not think it’s the right solution, but he is not alone in predicting that helicopter money is coming.

Investopedia notes that “helicopter money” differs from quantitative easing (QE), the money-printing tool currently used by central banks. QE involves central bank-created money used to purchase assets from bank balance sheets. Helicopter money, on the other hand, involves a direct distribution of printed money to the public.

A direct drop of money on the people would certainly help to stimulate the economy, but it won’t get the parasite of financialization off our backs; and Gammon is probably right that the Fed lacks the tools to fix the underlying disease itself. Only Congress can change the Federal Reserve Act and the tax system. Congress could impose a 0.1% financial transactions tax, which would nip high-frequency speculative trading in the bud. Congress could turn the Federal Reserve into a public utility mandated to serve the productive economy. Commercial banks could also be regulated as public utilities, and public banks could be established that served the liquidity needs of local economies. For other possibilities, see Banking on the People here.

Solutions are available, but Congress itself has been captured by the financial markets, and it may take another economic collapse to motivate Congress to act. The current repo crisis could be the fuse that triggers that collapse.

_________________________________________

This article was first posted on Truthdig.com. Ellen Brown chairs the Public Banking Institute and has written thirteen books, including her latest, Banking on the People: Democratizing Money in the Digital Age.  She also co-hosts a radio program on PRN.FM called “It’s Our Money.”

" UNIVERSAL BASIC INCOME IS EASIER THAN IT LOOKS "
by Juris Doctor Ellen Brown
Adviser and Senior News Reporter 
Global News Aruba

Calls for a Universal Basic Income (UBI) have been increasing, most recently as part of the “Green New Deal” introduced by Rep. Alexandria Ocasio-Cortez, D-N.Y., and supported in the last month by at least 40 members of Congress. A UBI is a monthly payment to all adults with no strings attached, similar to Social Security. Critics say the Green New Deal asks too much of the rich and upper-middle-class taxpayers who will have to pay for it, but taxing the rich is not what the resolution proposes. It says funding would primarily come from the federal government, “using a combination of the Federal Reserve, a new public bank or system of regional and specialized public banks,” among other vehicles.

The Federal Reserve alone could do the job. It could buy “Green” federal bonds with money created on its balance sheet, just as the Fed funded the purchase of $3.7 trillion in bonds in its “quantitative easing” program to save the banks. The Treasury could also do it. The Treasury has the constitutional power to issue coins in any denomination, even trillion dollar coins. What prevents legislators from pursuing those options is the fear of hyperinflation from excess “demand” (spendable income) driving prices up. But in fact the consumer economy is chronically short of spendable income, due to the way money enters the consumer economy. We actually need regular injections of money to avoid a “balance sheet recession” and allow for growth, and a UBI is one way to do it.

The pros and cons of a UBI are hotly debated and have been discussed elsewhere. The point here is to show that it could actually be funded year after year without driving up taxes or prices. New money is continually being added to the money supply, but it is added as debt created privately by banks. (How banks, rather than the government, create most of the money supply today is explained on the Bank of England website here.) A UBI would replace money-created-as-debt with debt-free money—a “debt jubilee” for consumers—while leaving the money supply for the most part unchanged; and to the extent that new money was added, it could help create the demand needed to fill the gap between actual and potential productivity.

The Debt Overhang Crippling Economies

The “bank money” composing most of the money in circulation is created only when someone borrows, and today businesses and consumers are burdened with debts that are higher than ever before. In 2018, credit card debt alone exceeded $1 trillion, student debt exceeded $1.5 trillion, auto loan debt exceeded $1.1 trillion, and non-financial corporate debt hit $5.7 trillion. When businesses and individuals pay down old loans rather than taking out new loans, the money supply shrinks, causing a “balance sheet recession.” In that situation, the central bank, rather than removing money from the economy (as the Fed is doing now), needs to add money to fill the gap between debt and the spendable income available to repay it.

Debt always grows faster than the money available to repay it. One problem is the interest, which is not created along with the principal, so more money is always owed back than was created in the original loan. Beyond that, some of the money created as debt is held off the consumer market by “savers” and investors who place it elsewhere, making it unavailable to companies selling their wares and the wage-earners they employ. The result is a debt bubble that continues to grow until it is not sustainable and the system collapses, in the familiar death spiral euphemistically called the “business cycle.” As economist Michael Hudson shows in his 2018 book, “… and Forgive Them Their Debts,” this inevitable debt overhang was corrected historically with periodic “debt jubilees”—debt forgiveness—something he argues we need to do again today.

For governments, a debt jubilee could be effected by allowing the central bank to buy government securities and hold them on its books. For individuals, one way to do it fairly across the board would be with a UBI.

Why a UBI Need Not Be Inflationary

In a 2018 book called “The Road to Debt Bondage: How Banks Create Unpayable Debt,” political economist Derryl Hermanutz proposes a central-bank-issued UBI of $1,000 per month, credited directly to people’s bank accounts. Assuming this payment went to all U.S. residents over 18, or about 241 million people, the outlay would be about $3 trillion annually. For people with overdue debt, Hermanutz proposes that it automatically go to pay down those debts. Since money is created as loans and extinguished when they are repaid, that portion of a UBI disbursement would be extinguished along with the debt.

People who were current on their debts could choose whether or not to pay them down, but many would also no doubt go for that option. Hermanutz estimates that roughly half of a UBI payout could be extinguished in this way through mandatory and voluntary loan repayments. That money would not increase the money supply or demand. It would just allow debtors to spend on necessities with debt-free money rather than hocking their futures with unrepayable debt.

He estimates that another third of a UBI disbursement would go to “savers” who did not need the money for expenditures. This money, too, would not be likely to drive up consumer prices, since it would go into investment and savings vehicles rather than circulating in the consumer economy. That leaves only about one-sixth of payouts, or $500 billion, that would actually be competing for goods and services; and that sum could easily be absorbed by the “output gap” between actual and forecasted productivity.

According to a July 2017 paper from the Roosevelt Institute called “What Recovery? The Case for Continued Expansionary Policy at the Fed”: “GDP remains well below both the long-run trend and the level predicted by forecasters a decade ago. In 2016, real per capita GDP was 10% below the Congressional Budget Office’s (CBO) 2006 forecast, and shows no signs of returning to the predicted level.”

The report showed that the most likely explanation for this lackluster growth was inadequate demand. Wages have remained stagnant; and before producers will produce, they need customers knocking on their doors.

In 2017, the U.S. Gross Domestic Product was $19.4 trillion. If the economy is running at 10 percent below full capacity, $2 trillion could be injected into the economy every year without creating price inflation. It would just generate the demand needed to stimulate an additional $2 trillion in GDP. In fact a UBI might pay for itself, just as the G.I. Bill produced a sevenfold return from increased productivity after World War II.

The Evidence of China

That new money can be injected year after year without triggering price inflation is evident from a look at China. In the last 20 years, its M2 money supply has grown from just over 10 trillion yuan to 80 trillion yuan ($11.6T), a nearly 800 percent increase. Yet the inflation rate of its Consumer Price Index (CPI) remains a modest 2.2 percent.

Why has all that excess money not driven prices up? The answer is that China’s Gross Domestic Product has grown at the same fast clip as its money supply. When supply (GDP) and demand (money) increase together, prices remain stable.

Whether or not the Chinese government would approve of a UBI, it does recognize that to stimulate productivity, the money must get out there first; and since the government owns 80 percent of China’s banks, it is in a position to borrow money into existence as needed. For “self-funding” loans—those that generate income (fees for rail travel and electricity, rents for real estate)—repayment extinguishes the debt along with the money it created, leaving the net money supply unchanged. When loans are not repaid, the money they created is not extinguished; but if it goes to consumers and businesses that then buy goods and services with it, demand will still stimulate the production of supply, so that supply and demand rise together and prices remain stable.

Without demand, producers will not produce and workers will not get hired, leaving them without the funds to generate supply, in a vicious cycle that leads to recession and depression. And that cycle is what our own central bank is triggering now.

The Fed Tightens the Screws

Rather than stimulating the economy with new demand, the Fed has been engaging in “quantitative tightening.” On Dec. 19, 2018, it raised the Fed funds rate for the ninth time in three years, despite a “brutal” stock market in which the Dow Jones Industrial Average had already lost 3,000 points in 2 ½ months. The Fed is still struggling to reach even its modest 2 percent inflation target, and GDP growth is trending down, with estimates at only 2-2.7 percent for 2019. So why did it again raise rates, over the protests of commentators, including the president himself?

For its barometer, the Fed looks at whether the economy has hit “full employment,” which it considers to be 4.7 percent unemployment, taking into account the “natural rate of unemployment” of people between jobs or voluntarily out of work. At full employment, workers are expected to demand more wages, causing prices to rise. But unemployment is now officially at 3.7 percent—beyond technical full employment—and neither wages nor consumer prices have shot up. There is obviously something wrong with the theory, as is evident from a look at Japan, where prices have long refused to rise despite a serious lack of workers.

The official unemployment figures are actually misleading. Including short-term discouraged workers, the rate of U.S. unemployed or underemployed workers as of May 2018 was 7.6 percent, double the widely reported rate. When long-term discouraged workers are included, the real unemployment figure was 21.5 percent. Beyond that large untapped pool of workers, there is the seemingly endless supply of cheap labor from abroad and the expanding labor potential of robots, computers and machines. In fact, the economy’s ability to generate supply in response to demand is far from reaching full capacity today.

Our central bank is driving us into another recession based on bad economic theory. Adding money to the economy for productive, non-speculative purposes will not drive up prices so long as materials and workers (human or mechanical) are available to create the supply necessary to meet demand; and they are available now. There will always be price increases in particular markets when there are shortages, bottlenecks, monopolies or patents limiting competition, but these increases are not due to an economy awash with money. Housing, health care, education and gas have all gone up, but it is not because people have too much money to spend. In fact it is those necessary expenses that are driving people into unrepayable debt, and it is this massive debt overhang that is preventing economic growth.

Without some form of debt jubilee, the debt bubble will continue to grow until it can again no longer be sustained. A UBI can help correct that problem without fear of “overheating” the economy, so long as the new money is limited to filling the gap between real and potential productivity and goes into generating jobs, building infrastructure and providing for the needs of the people, rather than being diverted into the speculative, parasitic economy that feeds off them.


Copyright Reserved to Ellen Brown

Contact [email protected]

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