Bill Totten's Weblog

Friday, May 22, 2009

A Debt Ode

Exerpts taken from "Money: the fundamentals"

by Stewart Sinclair

This link is an attempt to mentally arm core opposition groups with the basic ideas concerning debt and money supply so that they are not continually at the mercy of muddleheads and deliberate misleaders in the media, including the Internet.

What is Debt?

The common muddlehead diatribe against 'government spending' revolves around the horrors of the national debt.

So: what is debt? How important is it?

Click here for Debt to GDP Ratio chart:

Debt is not a stack of bills reaching to heaven's gate.

It is not a big pile of gold.

It is simply a few lines on a set of papers or more likely a series of data entries in a computer memory. (Computers are made for this, of course. They can be used to calculate pi to a million decimal places or the diameter of the universe to the nearest centimetre.)

But beyond those marks - it isn't anything.

It represents time spent in the past and things mostly in land fills but it is not in itself real: you can't feel touch taste or smell it.

To whom is this 'debt' owed?

It is not owed to Martians who may nuke the planet if it's not paid!

It's largely owed to these same bankers, financial gamblers, and fund managers who just blew the system up with their short-sighted greed.

Government debt is one of their primary sources of income and is certainly their most reliable source. So it's no wonder that they and their spinning muddleheads are very concerned about it.

Who gave the banks the ability to create the money that they used to buy the government's debt?


We did!

Bad move on our part.

We, the people did - through counterproductive (to say the least) legislation by our trusted elected representatives (whom the bankers seem to have corrupted).

How can we correct this? What can we have our government do?

The Bank of Canada (BoC) can put up cash (create the money) to buy back a large part of this debt from the banks and other corporate holders. If they did that, there would be no inflationary impact from this action because the government-created (BoC) money would be offset by the "destruction" of the bank-created money upon repayment of the bank debt through the repurchase of the bonds - no net impact on the money supply.

History does show that the Bank of Canada can be used in this way, as it was in financing the huge upsurge of the economy in Canada during World War Two.

Question: But could the BoC become a disastrous instrument if not used with restraint?

Answer: No more disastrous than allowing the private banks to create money without restraint!

This is in fact what has been happening and has led to the current meltdown (as was the case in 1929 and other financial crises).

Gambling with Our Money

Most of us didn't see much of the money that was created in the last twenty or thirty years because it went into the "paper economy" where high-stakes gamblers in the banking and financial system got to play with it.

The Bank of Canada just created a huge amount of money (nearly $200 billion) in term loans solely to get the banks out of their current mess by replacing some of the working capital that they just lost. Talk about rewarding the Perpetrators!

Now is a good opportunity ... With the private banks lending less and more expensively, the government and BoC can step in to more easily create the money that the banks are not creating and lending and direct it to public needs rather than the bankers' favourite projects - bonds, swaps, derivatives, oils sands plants, energy-wasting houses and cars and the like.

Bank Regulations and Statutory Reserves

But to consistently use the BoC or other government agencies to create money over the long run the banking regulations and regulatory regime that existed prior to 1967 have to be put back into operation.
This means primarily that the cash reserve system in the banking system must be restored. This was modified in 1967 by finance minister Mitchell Sharp and wiped out by Mulroney with Bill C-19 in 1991.

Prior to 1967 the Bank Act (not the Bank of Canada Act) required all chartered banks to keep between eight and twelve per cent (at the discretion of the Governor of the BoC) of outstanding liabilities in cash on deposit with the BoC. To control bank lending, the Governor could up the ratio - (as they do now in China. Last year the central bank of China required the banks to hold 12.6% of their liabilities in cash to cool a, then, over heating economy). Canada's banking cash reserves are legally zero per cent and most other major economies are less than one per cent. That allows the banks, theoretically, to lend forever out of nothing. Good deal, eh? Means you pay them back forever out of something!

The Bank for International Settlements (BIS): Muddlehead-Central Training

The BIS has tried to keep the party going by substituting Capital Requirements for cash reserves but capital is difficult to price accurately - particularly when banks are allowed to hold assets at historic cost rather than current market value.

The BIS also undermined suggested regulations by declaring the debt of OECD (Organization of Economic Cooperation and Development) countries to be "risk free" and thus not requiring any capital backing for holding this government debt. That means the banks can hold federal government debt at no cost and a pure profit!

Since they can generate this cash out of nothing to purchase government bonds, the Bank of Canada can do the same at almost no cost to the government and the people. The total quantity of money is what matters, not which body creates it. The difference is in the government (and hence the people) not having to pay interest on the BoC money.

Currency, Foreign Exchange Controls and a FTT

A return to a regulatory regime would almost certainly require currency and foreign exchange controls (China has maintained such controls for decades. We have often heard about the complaints by the US and other first world governments against these controls. But these are precisely some of the key reasons why China has moved from being a third world basket case to becoming an industrial power house) and the establishment of a Financial Transaction Tax (FTT) - in order to dampen down what Allen Greenspan once called the "irrational exuberance" of traders. To put it mildly.

... As To Inflation ...

As to the much-touted muddleheaded example of the Germain inflation of 1923, which is always trotted out, that had more to do with the fact that Germany (i) lost World War One, and (ii) was saddled with massive reparations payments as a result. That, along with (iii) one failed revolution and (iv) two failed counter-revolutions AND (v) the occupation of Germany's industrial heartland, the Ruhr valley, by the French army thus preventing the collection of taxes from the area - would pretty much cripple any government.

It should also be remembered that (vi) all the government had to do was fire the President of the Reich Bank, Rudolph Havenstien and replace him with a management that knew what it was doing under Haldmar Schacht at the end of 1923. Would WE could have the same 'regime change': from whirling muddleheads and neocon hobgoblins to real representation by and for 'we, the people'!

Regulating and Restricting the money supply will not cure the "cancer" of waste and stupid production in society. But the biggest "cancer" in society is the opportunistic consolidation of power and wealth by the financial elite - the alleged "brains" of society - "malignant tumour" would be more accurate, given what the results have been and are for us and for the Earth.

What is needed is new investment in green technologies, similar to the shift to the new government-directed investment in machine tools, synthetic rubber, et cetera which happened during World War Two.

How did we get into this mess?

As for the causes of the deregulation of finance, the restriction of the Bank of Canada, and the current social meltdown, the (domestic) bank lobby is primarily responsible - reinforced by US and offshore banks; they have a common interest and a more or less common strategy.

But we SUPPORT this mess by continuing to reward the perpetrators for their 'success' in destroying the Earth and Us!

The IMF is mentioned often, but it is (was) just an occasional excuse. The proof in the pudding is that the IMF seems to have almost no influence on China. I strongly suspect that this is because the government there controls the banks, not the other way around as we have here.


* Debt is simply a series of written entries or data entries typed into a computer.

* Beyond those marks - it isn't anything.

* Don't listen to the whirling muddleheads.

* Think about it. View our Bank of Canada tutorial:

* Email us:

* Blog us:

* Sign our petition:

Bill Totten


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