Monetary Reform to facilitate Transition to Steady State Economy

Good comment from Jason Dow on the Post Carbon Institute blog: "The issues as I see it is the macro economic model that the energy system supports is based on constant growth in consumption. It is the primary headwind slowing transition for this model to keep the lights on and to keep people employed must pay their bills from their revenues. So today we have technology capable of reducing consumption yet still not capable of completely taking over. This brings me to my point, when we look at the systemic factors blocking the transition one of the primary pillars is growth, and one of the primary drivers of growth is the way money comes into existence as debt so logically if we can transform money to debt free money,( the government creates credit and spends this into the economy) this has the potential to act as a pressure valve over time to absorb some of the rougher edges of transitioning off consumption based economics towards a steady state economic paradigm where progress is measured by a multitude of factors and not just the gross volume of money changes hands across the economy. So if we want this energy revolution, we will need to revolutionize how money comes into existence that will enable the policies to absorb as much of the shock of the transition as possible for people will not tolerate being thrown into poverty, or mass chaos, we will need a mechanism that allows us to transition from a consumptive based system to a cradle to cradle circular economic system and money will play a fundamental role."

Obama's Speech Introducing the $60 Trillion Dollar Coin

Ah, wishful thinking, I just can't get enough. Suddenly, I'm not just a fan of a One Trillion Dollar Coin, now I want a $60 Trillion Dollar Coin. Too greedy? Don't tell John Boehner, but I'll still settle for just a Trillion. Actually, given Obama's negotiating skills, we should ask for $60 Trillion. Well, my intended audience for this is a White House Staffer wondering what to do when the Trillion Dollar Coin petition hits 25K signatures, or when Jay Carney has his next press conference, or when the debt ceiling fight comes to a head. So I apologize for insulting your boss, please read this blog anyway. You can invite me to dinner at the White House too, if you want more info. I'm vegetarian. You can find the original, with additional commentary and background here. My Fellow Americans: 1) Until now the Treasury has been borrowing the money the Government created back from the private sector, in order to cover our deficit spending, so the national debt has been steadily growing. 2) That’s silly! According to the Constitution, this Government, of the people, by the people, and for the people, is the ultimate source of all US money. So why should we ever borrow US money back and pay interest on it, since we can create it any time by the authority of the Constitution and Congress? 3) Congress has also imposed a debt ceiling, so, if and when we reach it, we can’t borrow back our own money without Congressional approval, anyway, and lately Congress has been using the need to raise the debt ceiling as an excuse to extort cuts in safety net and discretionary programs that the majority of Americans support. 4) So, on my order, and in accordance with legislation passed by Congress in 1996, and with the US Code, the US Mint has issued $60 Trillion using a single 1 oz. platinum coin, and deposited it at the NY Fed. It’s legal tender, so the Fed credited the Mint’s Public Enterprise Fund (PEF) account with $60 Trillion in US Dollar credits using its unlimited authority from Congress to create them. 5) This is not inflationary because the Fed will put our coin into its vault, and keep it there permanently out of circulation, and the Treasury will use the $60 T in USD credits only to pay back the national debt and to spend what Congress has already approved, which is only a small fraction of these credits and far from the amount needed to cause inflation. 6) My action ends any possibility of a debt ceiling crisis in February or March, because we have no further need to borrow our own money back in the markets, and that’s why we don’t need the tea party or other Republicans, or even my fellow Democrats to agree to raise the debt ceiling any more. 7) Now the Treasury, has plenty of money, much more than we need, in fact, to pay for all appropriations Congress has already approved for 2013, and may approve in March, including all deficit spending and, again, we won’t have to borrow our own money back, either to repay debts or to implement future deficit spending. So, we will pay all Government debts which will come due in 2013 and 2014. Treasury securities and all other debts included. We will also pay back all debts held by other agencies of Government and the Federal Reserve. When we do this we will lower the national debt by about $12 T, reducing the “debt burden” by about 75% by the end of 2014, and creating an actual Social Security trust fund with 2.7 T in cash reserves in it; and again, to do this we don’t have to borrow any of our own money back, and we will also reduce our interest costs on the outstanding national debt all through the remainder of 2013, 2014, and beyond until it is all paid off. 9) None of the $60 T in new credits created by our actions is “money” in the private sector economy until the Treasury spends it. For now it is just capability to spend awaiting the appropriations of Congress to mandate deficit spending, should it need to compensate for the reduction in demand, probably close to 10% of GDP right now, caused by your own desire to save (which we want to do our best to facilitate), and your desire to import goods from foreign nations. 10) We have created $60 Trillion in new credits even though we probably needed less than that to cover anticipated deficit spending and debt repayment until at least 2028. The reason for this, is that I wanted to have enough capability created in the Treasury account, so that the national debt could be completely paid off (except for a small amount in very long-term Treasury debt still not mature by 2028), and all projected Federal deficits covered over the next 15 years, even extraordinary deficit spending needed to be performed without further borrowing over this period. 11) Of course, we can always make new coins if our projections about future deficits turn out to be wrong; but I thought it would be best to ensure that all $16.4 T plus of the “debt burden” can be completely eliminated from our political concerns; and also to provide enough funds in our spending account at the Fed, so that it would be very clear to Congress and all newly elected Representatives and Senators, that even though they, as required by the Constitution, continue to control the purse strings, the national purse is very, very full, and that we would be able to cover from the Treasury General Account whatever deficit spending for the public purpose, including for full employment, Medicare for All, infrastructure, education, and other things, that Congress, in its wisdom, chooses to appropriate now, before the next election, and for some elections to come. Good night, my fellow Americans! Rest well knowing that our beloved country won’t be defaulting on any of its debts when the debt ceiling is reached, and that I’ve prevented this without going over the legal debt ceiling, or borrowing any more, by providing money for spending mandated appropriations, in compliance with the laws authorizing Platinum Coin Seigniorage, while supporting the Constitution’s prohibition against our Government ever defaulting on its debts. I hope that, in the future, everyone in Congress will obey the 14th Amendment’s prohibition against questioning the validity of Federal Government debts, and think twice before they indulge themselves in loose talk about the possibility of the Federal Government defaulting on its obligations. America will always pay its debts in US Dollars according to the terms of the contracts it has concluded, and in line with the pension payments and other obligations that it owes. Neither you, nor the rest of the world need ever doubt that again! Nor need you ever think that our Government is running out of money for the things we must do. We can never run short of money unless Congress refuses voluntarily, to use its unlimited constitutional authority to make more of it. But as long as it delegates to me the authority to create high value platinum coins to cover our needs, you can be sure that running out of US money will never happen!

Trillion Dollar Coin Video

The Trillion Dollar Platinum Coin could be a big deal

What a great opportunity to have a mainstream discussion about monetary reform! Here are some links to recent articles about the Trillion Dollar Platinum Coin: My favorite one so far is from a Modern Monetary Theorist on how most bloggers are looking at these issues through a constrained lens only related to the debt ceiling: "small ball versus big issues." Mint the Coin says that the US Treasury Secretary has the power to have the U.S. Mint create a $1 trillion coin. Then he can walk it over to the Federal Reserve and deposit it in the Treasury’s account. Then the government can keep paying its bills, regardless of how Congress votes on the debt ceiling issue. Banks and lending institutions must be required to maintain some percentage of the value of loans they issue and brokers must be prevented from profiting from the losses of their clients. Pre-empting commenters: Comparisons to a business or family budget fundamentally fail to understand how the modern monetary system works. Some sarcastic commenters on other blogs ask not cancel all debts: a Global Jubilee as in Biblical Times...sounds like something to consider. (Jokes below attributed to comments on DailyKos and here) That coin is the change we can believe in. Pres Obama: "When I said there would be no negotiation on the debt ceiling, well I mint it." Suggestion to put President Andrew Jackson's face on the coin since he was the only President to have retired all U.S. debt. The coin is/could be a blow against the Fed's private monopoly on issuance of public debt.

Nationalizing the Banks and Greening the Monetary System

Could nationalizing the banks help fix two major problems with the monetary system? Economists and conservatives, recently including Alan Greenspan, are starting to talk about the need to nationalize U.S. banks in order to stabilize the financial system. At the least, it would prevent the banks from using bailout money for junkets. At best, it could provide an opportunity to fix some fundamental flaws in our monetary system.

The two most basic problems with our monetary system are that 1) money is backed by debt, and 2) compounded interest ensures that a certain percentage of people will go bankrupt. Rather than explain all of that here, I refer you to Richard Douthwaite’s Ecology of Money and an essay here.

When dollars are only backed by debt (money is loaned into existence), banks must keep lending in order to keep the money supply stable. Otherwise, when loans are paid back, or when companies are unable to pay back loans and go bankrupt, the money ceases to exist, it just disappears, which is the actual cause of a recession. In order to prevent this house of cards from collapsing, banks must always be creating new loans. But when the debt stops flowing, the money supply starts to contract, which is what happened after banks realized that the credit default swaps based on subprime loans were overvalued.

Money could be based on something real instead of just based on debt. The gold standard had its own problems. Douthwaite proposes an energy-backed-currency-unit (ebcu) that would help the world address climate change. The ebcu’s value would be backed by the limited number of emissions permits allowed under a global emission cap. In the future, greenhouse gas emissions might be more valuable than gold, and because they will get scarcer over time, they will become more valuable. The ebcu would reign in the inflationary fiat paper money system.

The debt basis of our money puts pressure on banks to keep making loans, but the positive interest rate makes those loans more and more expensive. Loans must be repaid with interest, but all money is loaned money, so where does the money to pay back the interest come from? The zero-sum answer: some people must go bankrupt to allow for others to repay their loans. A great source for more information on the interest rate is Margrit Kennedy’s book Interest and Inflation Free Money. Kennedy's book also points out how the growth rate of compound interest is totally unsustainable. One penny invested over time will eventually be worth more than the whole planet. The weird way that the interest rate affects economists estimates of future costs has profoundly affected the debate over the costs of averting climate change, resulting in some economists immorally arguing that it is too expensive to do anything, and it is more economically efficient to sit and fry. One of the few economists questioning this logic was the UK's Sir Nicholas Stern (google: Stern Review, discounting, interest rate, climate change). The interest rate also causes prices to become distorted, and makes capital projects look unaffordable. This is too bad because we need lots of capital projects to transform our energy and transportation infrastructure into low-carbon non-fossil-fuel systems. A steady-state economy will be impossible within the constraints of a debt-backed, positive-interest monetary system. One possible solution is to alter the monetary system to adopt an altered form of the interest rate more like the Swedish JAK Bank model.

So, in summary, the current banking crisis could provide the opportunity to improve our monetary system to fix two major flaws. A new currency that is not tied to debt could be backed by greenhouse gas emissions permits. And banks would be able to loan money without charging compounded interest that forces people into bankruptcy.

Of course, much of the public will not ever learn about the problems of the monetary system because the media will only publish stories that reinforce pre-existing ideologies by focusing on who to blame for the recession: either the private sector (greedy bankers and Bernie Madoff), or the public sector (government-backed loan programs and poor oversight from Christopher Cox's SEC). The Wall Street Journal and Fox News will conveniently forget about how Dubya wanted to privatize Social Security just a few years ago. I already saw one backlash blog posting calling to privatize Congress rather than nationalize the banks. But whether to privatize or nationalize is not the issue. Just like in the first few chapters of Peter Barnes' book Capitalism 3.0, the solution to the problem will not come from either government or corporations, it will come from changing the system. Hopefully, some commentators will recognize the role of debt-backed currency and compound interest play in the current economic downturn, and maybe there will be articles in the media about the monetary system. Booms and busts are not part of the regular business cycle; they are part of the debt/interest monetary system. If the banks need to be taken over by the government until things are sorted out, it may provide a good and rare opportunity to fix these two problems.

Maybe this teachable moment will help create a monetary reform movement in this country. The movement could be based on Richard Douthwaite's The Ecology of Money, and help us create a new monetary system that will reduce greenhouse gas emissions and green our economy.

Monetary Reform to address the Financial Crisis

Here are my recommendations to the President and Treasury Secretary for how to handle the financial crisis:

1. Government should bailout the people, not the corporations. Why give more money to Wall Street, when average people are struggling to pay their mortgages? Investment in green infrastructure jobs will build the economy. Stimulus checks unattached to anything are inflationary, but other types of payments should be implemented, including the Sky Trust, which would reward people for reducing their greenhouse gas emissions.

2. If government acts as the short-term investor of last resort, it must demand several things in return: a) stock that will be owned by the American taxpayers, held in trust, and that will pay dividends to all Americans equally on a per capita basis, similar to ESOPs and the ideas listed by Jeff Gates in his book "The Ownership Solution," b) enforceable pledges and action plans from companies to alter their business practices towards sustainability for the next 30-50 years, and their bailouts would be contingent on the companies' progress towards sustainability goals, especially for high-GHG-emitting companies like General Motors, c) demand that companies receiving bailouts reduce their ridiculous executive compensation back to normal levels and implement a common sense ratio between the lowest paid employee and the highest as advocated by Ben Cohen, d) oversight and prosection to limit the obvious corruption that follows any disbursement of hundreds of billions of dollars, e) when necessary, fire the executives who caused the problems and install new, more trustworthy leadership.

3. Convene a monetary reform group that would offer recommendations to change the following unsustainable parts of the monetary system: a) fractional reserve banking, b) debt as the only backing for our fiat currency, c) the positive compound interest rate that impoverishes people and causes poor people to pay rich people in order to rent the currency that should actually be a public utility.

4. Implement monetary reform with some of the following characteristics: a) create a local currency that circulates only at the regional level, supporting locally owned businesses and services, b) allow states to issue currency instead of just bonds that must be repaid with interest, c) alter the national currency so that it can be issued as a public service backed by something besides debt and without the positive compounding interest rate - some possibilities are the JAK banking model, d) initiate the creation of an energy-backed currency unit for foreign exchange transactions, based on the EBCU energy backed currency unit advocated by FEASTA.