Bill Totten's Weblog

Thursday, September 30, 2010

An Interview with Stephen Zarlenga

The following was recorded on the morning and early afternoon of Friday 5th October 2007, travelling in the car of James and Dorothy Gibb Stuart, from Glasgow to the Bromsgrove 2007 Conference. It has been transcribed

by Alistair McConnachie.

Prosperity (April 2008)

Personal Background

Stephen, you're the Director of the American Monetary Institute and author of the most comprehensive book on monetary history ever The Lost Science of Money (2002) and we're looking forward to your presentations and contributions at Bromsgrove 2007. Let's start, with your background and how you got into Money Reform. Where were you born?

I was born in 1941 in Chicago.

What is your family background?

My mother and father both immigrated, separately, from Italy in the 1930s, during the Great Depression, and they moved right to Chicago. In fact they met in Chicago, but they were from close-by villages in Italy. The area is the same area that Cicero came from, I'm proud to say [laughs], and they really did everything they could for their kids.

What was your father's job?

He worked on the railroad and really was a good man and helped instil certain values in us. My parents brought us up with a lot of love.

What was your education?

In Chicago we had a number of wonderful Universities. I went to the University of Chicago and studied several different subjects and finally graduated there in 1963. I visited Europe and like it a great deal. I was learning French. Really grew up, in a sense, in Europe, which was a wonderful experience. Europe has been through two world wars and the people of Europe have learned from that in ways that we in America have yet to learn.

What did you do for a living?

I worked in the financial area, with mutual funds and insurance and real estate in the investment world. I'd been associated with the investment world for decades, when I decided it was time to write the book on money. The thing that really brought that to a head was the first Gulf War. What happened there was that the American people were about eighty percent against that first Gulf War in 1990, even though the media was promoting it full steam. What I realised at that point, Alistair, was that as Americans, we had lost our country.

If the people were eighty percent against that war, and yet we are to go to war, and it became apparent that the Iraqis were nearly invited to attack Kuwait by our Ambassador - well, when this became known, I was just so disgusted with it.

I looked out my window one day, my apartment down in Battery Park - because I was working then in the World Trade Centre - in the commodity trading group there. I looked out the window, and looked down Liberty Street. It was like a canyon and it was all dark ... in the shadows of the tall buildings ... but at the end of Liberty Street, the sun was shining on one big white building ... the Federal Reserve Bank of New York. At that instant, without words, I immediately knew it was time to write the book! And that is when I began, that day! I had a camera handy and I took a picture of that sunshine on the Federal Reserve Bank and you can see it in the very beginning of the book.

Wow, that's a great story! Your interest in monetary reform must have been sparked prior to 1990. What was it that made you look into the system? Was it while you were working in the financial sector that you began to realise something was wrong, or did you have a family history - were your parents reformers?

No, they weren't, but you're right, there was more of a background. From 1970, I worked in America with a small mutual fund which was invested only in gold shares, and I introduced it to brokerage houses around the country. In order to do that, I had to understand more about the monetary system and began to realise some of the problems.

This was back in 1970, when the markets were going through terrible conditions. Inflation was rampant. People were being fired from their good paying jobs. This was the point in time when the International Monetary Fund, the IMF, surrendered to currency speculation. They had a choice in 1970, 71, 72. They had a choice!

They could have curbed currency speculation, which is destructive, uncalled-for and absolutely not what currencies are supposed to be used for. A currency system essentially is set up to facilitate production, trade of real goods, and as a means of paying for that process. To turn it into a speculative gambling house where vast amounts of currency get moved from country to country at the speed of light plus thirty seconds - electronic communications are moving at the speed of light, but it takes thirty seconds to put the phone call through - that ends up destroying the ability of currencies to carry out their true function in terms of facilitating the creation of values for living.

It turns them into engines for promoting the engines of death. That is what currency speculation has done and the IMF had a choice. It could have stopped it, but it didn't lift so much as a finger to stop it. Those decisions were made roughly in 1970-73. So, I was watching that, and understanding that the system was sick.

At the time, I thought that gold was a part of the answer. And that reflected an immaturity in the readings in the area. It's a normal thing. People in monetary reform go through a gold phase. Even Thomas Jefferson did that. He went through a period where he thought gold was important but came to understand that money is a fiat of the law. That took him about twenty years.

You have to look at the Jefferson quotes on money in their sequence and then you see their development. Otherwise you can get Jefferson saying anything at all. And this is a problem of using quotations as a method of investigation. They are always out of context and the final answer to quotations can be, "So what!"

When you started to examine the area, what monetary reform works did you study?

That's a very good question. Here's what happened. At that point in time, about 1975 I was very fortunate to read several works by Alexander Del Mar, and he turned out to be the greatest monetary historian of all time in America.

I read those books and Del Mar understood - he also went through a precious metals phase - but eventually through reading for thirty years, he came to understand the fiat nature of money and wrote that way. And as I was reading I realised that if Del Mar is right and all this stuff about gold is wrong then most of the monetary reformers in America are making a mistake.

I say "reformers", they were not really reformers, they were interested in it, but they are what we call "gold bugs", and who came to it, as I did initially, through investment ... you find that a lot of the gold bugs are connected with gold coin companies, or gold shares.

They are making a mistake. They are confusing an investment with money - something which is a good investment is no good for money because you want an investment to be going up. You don't want money to be going up. Everybody who is in debt, usually the producers, have great difficulty in paying off debts because it ends up that the debts keep increasing and they pay back more than they receive.

So I put Del Mar aside at that point, but the ideas kept operating in my mind and when I was ready to start the book I took the books by Del Mar out again and re-read them. I thought it would take about two years because I'd been involved in the area of finance and investments most of my career.

I thought I'd have to read about fifteen volumes to fill in the various gaps that I knew were there. Well, Del Mar led to about twenty other excellent sources, and each of those led to another twenty good sources, and so on. And about 800 source materials later and twelve years of reading and writing, the book was finally ready.

Had I known it would take that long, I would never have begun the project! But what happens is that when you are in it for two years, well, you keep going. When you've been in it for four or five years you have four or five years of research and work in it, and then you can't stop! You have to finish it. And that is what happened.

It took twelve years. I did it chronologically, which was the best way of keeping track of it in my mind. We started with the first period, then proceeded to the next and so on. Since I did the research that way, it is also the way the book is presented. It makes sense, much more readily that it would it you try to chop back and forth between modern period and ancient period.

At what stage of writing did you establish the AMI?

In 1996 we realised that since the research was going to continue, it would be a good idea to put it into an institutional format, which is tax exempt, so that people who would help us would be able to deduct that from their taxes. And so we set it up as a charitable trust. "We" being, myself and our co-founder, Dr Lucienne De Wulf.

The Question of Gold

When you started off, you were thinking that gold was part of the solution. When you finished, twelve years later, why had your ideas changed?

One of the wonderful things about doing this kind of research is what you learn, and I learned that gold was not a part of the answer. In the historical studies, you could see that gold was part of the problem that the banking establishment - we could call it the financial oligarchy, whatever form it was taking - was able to easily manipulate.

Aristotle gave us the science of money. Del Mar gave me the keys to rediscover it. That science was laid out by Aristotle when he summed it up in one sentence. He said, money "exists not by nature, but by law". So he is telling us that money is not something that comes out of a mine. It is something that comes out of society. It is a legal power of society, and that was quite different from where I had started.

What would you say to those "gold bugs" who say that gold is a good investment. For example, you hear them say "fifty years ago one bar of gold could buy a GBP 5,000 pound house. Today, that same bar of gold will buy the same house, even though the house is now worth GBP 50,000".

I would say to the gold people, "Look up the history of the price of gold because it is just not true!" What we find by looking at the gold prices is that gold is extremely volatile. I've published, in the book, what happens to gold during different periods. We have periods where gold and silver lost eighty percent of their value and never recovered, for example from 1500 to 1650, where gold was being stolen from the Central and South American Indians. Essentially the money supply of Europe rose about four times and the value of gold dropped eighty percent during that period.

Now some would say, "Oh that is going way back to the 16th and 17th centuries". Well, okay, lets go back to 1918 through 1926 and 1927. We had the value of gold dropping sixty percent in just a short period. So, that was a gold inflation in the modern times. So the gold bugs should understand that gold is volatile. It moves up fast, it moves down fast.

Even more recently, go to 1981. Gold was at $880 an ounce. It dropped down over a period of fifteen years to $232 an ounce. Gold is volatile. Now the gold bugs try to say, "Well, that is not really gold changing. That's the dollar changing". But that is crazy. The dollar didn't change that much. Gold is volatile - it's a fact.

What do these gold bugs want? Do they want the currency to be tied to gold?

They don't have a clear solution. They talk about "going back to a gold standard". But we never really had that! Even when they think there was a gold standard, it was always mixed with bank paper. And the reason for that is demonstrated eloquently by William Hixson in his 1993 book The Triumph of the Bankers, where he shows that the production of gold does not keep up with population growth. So if you are going to base the money system on gold, you have constant deflation, that is, constant increases in the value of money.

The problem the gold people have is that they are confusing money with wealth. Aristotle's definition separates money from wealth. If you don't separate money from wealth, if you define money as wealth, then the wealthy are going to control not only their own money, they are going to control the monetary system - which belongs under societal control. It should not be controlled by particular interest groups, or cliques or so- called elites.

So, the mistake is a psychological one. They are confusing their investments with money.

Now, to play devil's advocate. Say there was a breakdown in society - the "nuclear war" scenario. Paper money would become worthless. And all these gold coins which they've got buried in their back yards, and all these diamonds that they are hoarding would all become valuable, because they could be traded.

I guess you could say that, but you know what would be more valuable than gold? Sewing needles and practical things! But seriously, if we get that kind of situation, well, most of us are going to be so demoralised that we are not going to go forward. So we have to make sure that doesn't happen in the first place!

To gear one's thinking for disaster is not the way to proceed. First of all, you make the disaster more probable, and palatable to yourself and secondly, that is not what man is here for - to end up in a nuclear war which wipes out civilisation! That would make such a joke out of all human existence.

The availability of the things that people value would become almost non-existent. You are not going to have a car because there would be no gasoline. You are not going to live in the kind of houses that you live in today. We have to avoid this lifeboat type of planning. That doesn't mean you should not have a handful of gold and silver coins, just in case, but don't devote your life to that kind of thinking!

Some in the Muslim world want to support the idea of a Gold Dinar, as they see it as a way to combat the international globalist system. They see a sort of refuge in gold. If you were speaking to their leaders, what would you say to them?

That's a very interesting question. We've just written a paper on that and we speak about it in our book. Here's what we said to them: It is not a solution for Islam because it won't work! There is not enough gold! Firstly, it will create tension between Islamic countries as they struggle to grab more and more of the gold supply. That has been one of the causes of war between Western countries in the past.

There is another reason. The Prophet Muhammad himself instructed his followers that fiat copper coinage was to be valued as equally as gold or silver coinage when trading. We quote that in our book in the section on Islamic monetary developments. So, Islam's own traditions favour fiat money. There is also the problem that it might end up fomenting tension with the West. For these three reasons, we're against the idea.

To finish off talking about gold; what do you say to those who fear that fiat currency is a license for the government to inflate the currency?

There was the assumption that gold doesn't change, but as we've shown, the value of gold changes all the time - for example, with the supply of gold, and the supply of stuff that it purchases, and with the supply of labour, and with the population.

Money should be relatively stable, but it doesn't have to be absolutely stable over time, but it should maintain its value in general. Not in an absolute sense because the value of money can change as conditions in society change, as economics change. The present currency system has to be changed. It is unjust internationally, but also internally within nations, where it favours only the financial segment of society. There are ways of avoiding inflation.

The American Scene and The Federal Reserve

Regarding the American scene, are there any prominent politicians pointing in our direction, even in a small way?

The answer is yes, but not all of it is public. Senator Chris Dodd is Chairman of the powerful Senate Banking Committee. He understands the money system. He hasn't talked about it but I know he truly understands it. Another is Congressman Denis Kucinich who has made some monetary remarks in a recent debate indicating a desire for the government to be controlling its monetary system, and that is major progress [see Prosperity, October 2007 at 1] and a third who has gotten attention on the Republican side is Congressman Ron Paul. He is actually standing up to the Federal Reserve System. The interesting thing is that he is addressing the causes of so many of our problems, not just the consequences. We respect his standing up to the Fed, even though we don't agree with the solution he is proposing.

Is the Fed publicly or privately-owned?

Yes and no [laughs]! It is essentially privately-controlled. To say, it is "privately-owned", well, to the extent that there is any ownership, it is private. That is, the only part which has ownership is the twelve regional Federal Reserve Banks and they are owned by the member banks according to a formula of their size. They have to buy shares. The shares are not traded. The shares are very restricted, very limited. So it is a strange kind of ownership that is attributed to the owner banks. There is no other ownership.

Some people think there are shares of the Washington Board. There are not. Occasionally you see rumours, that the Fed is owned or controlled by "the Rothchilds", or "the Morgans", but that kind of statement really serves more to stop us examining carefully what the Fed does and how it operates. It detracts from a careful examination of the banking system. So, what people have to remember is that the Federal Reserve is not in the Executive branch, it is not in the Legislative branch, it is not in the Judicial branch of our government. Those are the only three branches of our government.

So it is also inaccurate to say the Fed is a "government owned" institution.

Yes, it would be inaccurate to say that. Granted there is an ambiguity involved - because the President appoints the Washington Board for fourteen-year periods. But once he appoints them they are out of his control for fourteen years. There is only one appointment for them. They don't get a second. And he appoints the Chairman for four-year periods. So there is that ambiguity. But you don't find a Ralph Nader being appointed to the Federal Reserve! It is essentially dominated and controlled by the banking fraternity.

The AMI Reforms

Can you explain your reforms please?

Our reforms are determined from historical example. Our methodology is to look at the facts in monetary matters which are found in history. It takes so long for a monetary system to function and make itself clear.

We have arrived at three major reforms. All have to be done. It is not a matter of doing one or two, but all three.

What they are:

The first reform is to bring the money creation process into the government. And that is done by nationalising the Federal Reserve Banks, all twelve of them, and then of course, the Washington Board. Only the US government would create money under that system.

We would not want to dismantle the Federal Reserve because it has a tremendous amount of knowledge which should be saved - knowledge of how much money should be in circulation at different times, even in different cities. We have paid for that knowledge, it belongs to our country, we don't want to destroy that knowledge or throw it away. That's the first part, nationalisation of the Federal Reserve. Now for all those characters who tell us the Fed is already a part of our government, well then fine, they shouldn't mind too much if it gets nationalised!

Secondly, the commercial banks - the private banks - will no longer be able to create money. People think that our money is created by the government. It is not! It is created by the banking system when it makes loans. We realise this money is in the form of credit that they put into our accounts. Whenever they loan credit into an account they are essentially creating what is money in our system. So in effect, the banking system is creating what we use for money.

Under the American Monetary Act, this is no longer allowed. Banks have to have a full reserve for their loans in the sense that if someone has a checking account the money has to be available there all the time. Now rather than phrasing this as a reserve requirement, we prefer to phrase this in the following way - Banks can lend money, but they cannot re-lend credit that is deposited with them.

These first two parts are drawn from what was called the Chicago Plan, which came out of the University of Chicago during the Great Depression - these were in its better days before the University went over to the dark side of monetarism and worship of free markets.

Henry Simons was the creator of the Chicago Plan and he devised an extremely elegant solution to moving the banking system from its present condition to a condition where all the money in the system was real money and not credit - not private bank-created credit but government-created money.

And the way to do it was this. Rather than telling the banks to get to full reserves by calling in their loans - which would be impossible because that would collapse the entire system - the government would loan newly created US money to banks, if necessary, to bring their reserves up to match 100% of their loans, so that they had loaned real money.

This is a truly elegant way to turn all the credit that the banks created and loaned out, into real government money and it renders the banking system as a mere intermediary in that process, where they get some compensation for their work but where they are not the creators of the money. Now, those first two parts come from the Chicago Plan and they were promoted and agreed upon by all the best economists in the land and it was expected that it would be enacted into law in the 1930s, but they did not understand the political process well enough to manage that.

The third part of the plan, we've added based on our experience in the past, based on our experience with the nationalisation of the Bank of England and other developments which have occurred. Since we have removed the power of the banking system to create money and since it is still necessary to have new money in society as population and business grow, the government would spend new money into circulation on infrastructure.

We would start with the 1.6 trillion dollars of infrastructure that the American Society of Civil Engineers says is needed to bring our infrastructure up to reasonable levels. That would take several years. The present rate of creation of money is about $800 billion a year in 2006 for example. In addition to the hardware infrastructure, we include both health care and education as part of the infrastructure, and that means a universal availability of education dictated more by the person's ability to learn and study than by their ability to pay. Universal health care, as offered by any industrialised country in the world at present!

Some people have misevaluated our plan because they don't read carefully enough to see what we are saying, and secondly they are trying to think of our plan in terms of today's situation - which will be different from the situation once our plan is enacted. Here's an example. Some people would say, "Oh, there won't be enough money if the banks aren't making these loans. How could money enter society?"

Well, here's how. Let's remember that the government is paying for infrastructure by creating new money - not credit, but money! They are spending it into circulation, with no interest charged.

A couple of months ago a major bridge collapsed in Minneapolis because the infrastructure of our country has deteriorated to a danger point - and it's not just bridges, but dams. 10,000 of our 80,000 dams are in danger of collapse according to the American Society of Civil Engineers.

So that bridge in Minneapolis needs to be reconstructed. How would it work? Contractors would bid for the job in exactly the same way that they do now. The job would go to the best contractor based on his experience, his price and the terms of the bid. As that programme continues, that contractor gets paid by the government, and the contractor has to pay his workers and suppliers, he has to pay for the concrete, the steel, all the machines and so on. What do these people do with the money? Well the workers pay their mortgages, they pay the shops, they pay their school bills - what do those people do with the money? Ultimately, the money created by government and spent on infrastructure, gets deposited into the banking system because that is what people do with their money, they put it in the banks.

The banks, under our system, would be in a position then, to loan that real money. They are not loaning credit anymore, they are loaning money. That's the difference, and the banks would have to attract deposits from people in order to make their loans, or they would have to attract investments from people in order to make their loans ... which would become available in large amounts, since under a part of our plan, as the national debt becomes due month by month, it gets paid in new government-created money - the bonds are not rolled over - and all of that capital that's paid out would be available to invest - but it would no longer be used as a method of creating new credit. It would shift the economy into reality, out of usury.

How do you define "usury"?

We define usury in the classical sense, meaning the classical scholastics from about 1100 to 1500, as the misuse of the monetary system, not simply the taking of interest, because the taking of interest, in itself, was not usury. Jeremy Bentham has mis-defined "usury" as taking more interest than is normal. Actually, in his work on it, he defined usury out of existence, which may have been his purpose.

But it is not just taking interest. Interest was always allowed on certain conditions according to the rules of the scholastics. It is an anti-social misuse of the monetary system.

The Green Movement

Let's talk about the green movement. What's your opinion on the trend towards localism, and while you're speaking on that can you also address the idea of community currencies.

I am happy to say that the Green Party in America is progressing towards monetary reform ideas. They invited me to speak at their National Convention at Reading, Pennsylvania, on July 12th, and my talk, called, "Greening the Dollar: Reclaiming Democratic Values Through Monetary Reform" - which I'll be summarising at Bromsgrove - went over really, really well there.

Regarding localism, I have mixed feelings and it depends upon what it is for. If it's localism to build community and get people away from their television sets and into local projects which are best done at the local level, then I'm all for it. The only caution I have is that when you have an issue which is necessarily a national issue, that whatever you can do at the local level is fine, but don't give up the national arena to the bad guys!

For example, in local currencies, and we talk to people trying to do local currencies, and we usually do it from a historical viewpoint - what we like about that is that they understand there is a problem with the national currency and they are trying to learn about it and do something about it and that's a terrific opportunity in terms of education and growing awareness of the nature of the problem and the solutions which exist.

The caution firstly is that it is very difficult to localise the currency - people can only point to "Ithaca Hours" and the "Berkshires". But none of these things, even if it is possible to get them to work and provide some assistance locally, will not and cannot stop the dispersal of injustice from the national level.

They don't in any way stop the ability of the private controllers of the national currency to go to war. They don't stop the misuse of the national currency. From that point of view, we need to be careful. In America, as in most countries, we are used to being able to trade with each other and that requires one currency for the country.

It really is a national issue. Now, I don't think any of us is thinking along the lines that there is not going to be a nation in our lifetimes and our children's lifetimes. So if there is going to be a nation, there is going to be a national currency, and so why not fix it when it's broken! It is broken and we know how to fix it! It takes a bit of effort to fix it, but probably less effort than attempting to set up local currencies!

That bridge in Minneapolis, for example, can't be rebuilt on local currencies. It requires a national contribution.

Also regarding localism. What worries me is the withdrawal of the thinking people from the national level, and even to an extent from the local level.

I watched all this begin in America. It began as I was graduating from the University of Chicago. We were all asked to write an essay, on, I paraphrase, "Yes, as graduates we should participate in political matters" or "No, as graduates we ought to stay above the fray". What I realise years later is that question should never have been asked.

Today, we have a situation, thanks to the "hatred" of government which has been built up and nurtured - which really came out of economics, and we detail that in our book The Lost Science of Money, how this attack on government was started by Adam Smith himself, father of economics - where some of the brightest and best are withdrawing from the national scene.

And I wonder, and this is a question, I am not putting this forward as a belief - is there some connection between some of the brightest and best going local and staying out of the national scene and the horrible things which are occurring from the various - you could even call it gangster elements - on the national scene?

Some greens may be opposed to spending money on infrastructure. They'll say, "Oh that is just damaging the environment".

Excellent point! That is a reason to have reform to our national currency, because we already have the knowledge to build 21st century infrastructure, which is sustainable, that is environmentally friendly, that gives us the kind of world we want, that helps us clean up the environment. We cannot do it with a 20th century monetary system. But we can do it with our monetary reforms!

Strategic Considerations

How do you respond to someone who might say your reforms "sound kinda socialist and we're not socialists in America".

Well, that is the word they might use. They think they can scare me with a word. I am not afraid of words like that. First of all, what do they mean by that? To these people it is just a smear word.

I don't support "socialism", or "capitalism", or any "ism". As soon as you have an "ism", you have good things mixed with bad things. What I try to do is focus on the good things. To try to support systems that embrace those good things.

Now, the fact is that human beings have a dual nature. We are individuals and we are social beings, and as such we have to recognise that and recognise that there are things that we have to do individually, and things that we have to do socially as a group.

The free marketers can sometimes seem to ignore the fact that there is a need for social activity, yet they are taking advantage of the fact that it exists! The profits they are getting can only be there so long as there is a functioning social system.

If you were making your case to Republicans how would you try to get through to them, bearing in mind that they would be coming from a generally free market position?

That's a good question. We want to be able to reach all people, and it is important to keep that as a goal. At the same time, where it is impossible, we don't want to waste our energy and time. In this case, one of the approaches that I'd use with them is to focus on methodology.

I would point out that theories are supposed to explain and conform to the facts - and this is a problem in the type of economics which most Republicans favour, for example, the Austrian School of Economics, where one of its leading members, Ludwig Von Mises, actually tells us, more than once, that his theories cannot be disproved by mere facts!

I would point out that this is ridiculous. I once gave a talk to a group of international philosophers from peace organisations and described some of the methodology that economists use. I had them laughing in the aisles. My point to them was that they have the standing - since philosophy is to determine how we know things - to decertify economics as a science pending improvements in definition and methodology.

In addition, we are not against the free market in the sense of the right meaning of the term, but what the Austrian school has done is to equate the free market with the removal of all governmental regulation and control and that is a huge and terrible error.

The truly great economists which we had in the United States from the early 1930s which included Henry Simons and others, from the University of Chicago, people who trained Milton Friedman, these people were strong supporters of a free market, but to them a free market meant that all the utilities would be government-owned. And they strongly favoured governmental regulation for the simple reason that the only way you can ensure free markets is under that type of regulation. Markets do not automatically monitor and guide their own freedom.

The reforms that we are advising, were actually favoured very strongly by one of the Republican icons in economics - Milton Friedman.

When this movement grows, do you think it risks being taken over by groups with a particular ideology who want to use it for their own political purposes, whatever those may be?

Good point, and I think the answer is that there is a danger of that and so we have to be careful. We've been careful on that from the beginning. As the AMI, we have everything coming at us one way or the other and while we can't mind-read, we look at the effects of what they are doing and we can see cases where what you have just described is happening. We are careful not to allow them into our thinking and our programme.

Also, we have a kind of built in protection here, and it is the following. What we have defined with our three-part American Monetary Act is the three minimum conditions necessary to put time on the side of justice, because once time is on the side of justice, things will happen in humanity's favour over time, rather than against us as at present, and we can operate in a much more relaxed manner.

So, since these are the minimum actions, it is not going to be easy for anyone to talk us out of them. The way we have formulated this is such that we are not trying to make all the changes which would be desirable and that will eventually occur once these three minimum actions take place. So by limiting ourselves in that way we also protect what we are trying to do.

One area that helps us keep this process clean and good is when we get funded. Funding is a key thing. It gives us time to examine things more closely. It gives us time to communicate better and it is the hardest part of what we do. In America, some people imagine that non-profits are well-funded. Well, some of them are, but some of the most important ones - and we are one of those - don't get handed a lot of funds.

We began the AMI without an endowment. We began it with a donation from one expert money reform thinker with 150 copies of his book. We continue so long as donations come in, so long as people are purchasing our books and research and making the effort to come to our Conferences.

Stephen, thank you! We're very privileged to have the benefit of your insightful knowledge. Thank you also for all the valuable work you're doing, and for writing the book. We wish you and the AMI all the very best for the future.

Thank you Alistair for this opportunity to express some of our positions. It is through this type of interview that people learn about us and it is deeply appreciated. Thank you!


The Lost Science of Money is a 724-page, profusely illustrated, fully referenced and indexed, high quality hardback. It is available for GBP 40 payable to Prosperity at the address below.

The fourth American Monetary Institute Conference will be held at Roosevelt University in Chicago, on Thursday 25th to Sunday 28th Sept 2008. Readers are encouraged to attend this exciting and mind-expanding event by contacting Stephen Zarlenga at: Post Office Box 601, Valatie, New York 12184, USA
Telephone: (USA) 518-392-5387,

See also our interview with Stephen Zarlenga in the June and July 2004 issues of Prosperity.

Bill Totten

It is Official: The US is a Police State

by Paul Craig Roberts (September 26 2010)

On September 24, Jason Ditz reported on that "the FBI is confirming that this morning they began a number of raids against the homes of antiwar activists in Illinois, Minneapolis, Michigan, and North Carolina, claiming that they are 'seeking evidence relating to activities concerning the material support of terrorism'".

Now we know what Homeland Security (sic) secretary Janet Napolitano meant when she said on September 10: "The old view that 'if we fight the terrorists abroad, we won't have to fight them here' is just that - the old view". The new view, Napolitano said, is "to counter violent extremism right here at home".

"Violent extremism" is one of those undefined police state terms that will mean whatever the government wants it to mean. In this morning's FBI's foray into the homes of American citizens of conscience, it means antiwar activists, whose activities are equated with "the material support of terrorism", just as conservatives equated Vietnam era anti-war protesters with giving material support to communism.

Anti-war activist Mick Kelly whose home was raided, sees the FBI raids as harassment to intimidate those who organize war protests. I wonder if Kelly is underestimating the threat. The FBI's own words clearly indicate that the federal police agency and the judges who signed the warrants do not regard antiwar protesters as Americans exercising their Constitutional rights, but as unpatriotic elements offering material support to terrorism.

"Material support" is another of those undefined police state terms. In this context the term means that Americans who fail to believe their government's lies and instead protest its policies, are supporting their government's declared enemies and, thus, are not exercising their civil liberties but committing treason.

As this initial FBI foray is a softening up move to get the public accustomed to the idea that the real terrorists are their fellow citizens here at home, Kelly will get off this time. But next time the FBI will find emails on his computer from a "terrorist group" set up by the CIA that will incriminate him. Under the practices put in place by the Bush and Obama regimes, and approved by corrupt federal judges, protesters who have been compromised by fake terrorist groups can be declared "enemy combatants" and sent off to Egypt, Poland, or some other corrupt American puppet state - Canada perhaps - to be tortured until confession is forthcoming that antiwar protesters and, indeed, every critic of the US government, are on Osama bin Laden's payroll.

Almost every Republican and conservative and, indeed, the majority of Americans will fall for this, only to find, later, that it is subversive to complain that their Social Security was cut in the interest of the war against Iran or some other demonized entity, or that they couldn't have a Medicare operation because the wars in Central Asia and South America required the money.

Americans are the most gullible people who ever existed. They tend to support the government instead of the Constitution, and almost every Republican and conservative regards civil liberty as a coddling device that encourages criminals and terrorists.

The US media, highly concentrated in violation of the American principle of a diverse and independent media, will lend its support to the witch hunts that will close down all protests and independent thought in the US over the next few years. As the Nazi leader Joseph Goebbels said, "think of the press as a great keyboard on which the Government can play".

An American Police State was inevitable once Americans let "their" government get away with 9/11. Americans are too gullible, too uneducated, and too jingoistic to remain a free people. As another Nazi leader Herman Goering said, "The people can always be brought to the bidding of the leaders. Tell them they are being attacked, and denounce the peace-makers for lack of patriotism and for exposing the country to danger."

This is precisely what the Bush and Obama regimes have done. America, as people of my generation knew it, no longer exists.


Paul Craig Roberts, a former Assistant Secretary of the US Treasury and former associate editor of the Wall Street Journal, has been reporting shocking cases of prosecutorial abuse for two decades. A new edition of his book, The Tyranny of Good Intentions (2000), co-authored with Lawrence Stratton, a documented account of how Americans lost the protection of law, has been released by Random House.

Copyright (c) 2010 Paul Craig Roberts

Bill Totten

Wednesday, September 29, 2010

Policy Proposal

Fund the Interest on the National Debt

Prosperity (February 2005)

by James Gibb Stuart

A famous American company, in its methods-training, adopts the slogan that "There has to be a better way", and believe me, once you have conditioned yourself to assume that this "better way" exists, it's amazing how often it emerges.

So let that be the answer to cynicism, or defeatism, or the dispirited conclusion that nothing can be done that has not been tried before - and anything that steps beyond the bounds of the accepted economic orthodoxy is crackpotted and doomed to disaster. The problem has a solution, and it is well within the capacity of the human brain to find it.

The problem? In an economic sense, agreeing what is both socially desirable and physically possible, and making sure that it is also financially possible. If we allow ourselves to be deflected from that ideal objective, we pose grave questions about the relationship between money and mankind - about which is the servant and which is the master.

If beneficial human activity - for which unused physical resources are clearly available - is seen to be curtailed by a lack of negotiable funding, then it is surely the financial system which needs critical examination, not the reasonable demands and aspirations of the species.

Prosperity makes certain proposals. Central to these is the concept that Government can, and must, retain or restore unto itself the ability to create money.

There are illustrious historical precedents for this. Abraham Lincoln during the American Civil War. Lloyd George when British Chancellor of the Exchequer at the beginning of the First World War. And the incomparable Dennison Miller with his Commonwealth Bank in Australia, which between 1911 and 1923 stood ready at all times to bridge the gap between the financially possible and the nationally desirable by issuing debt-free money into the economy, and thereby saving Australia from the worst rigours of the 1920s depression.

Of course, the power to create money is an awesome power, which must be used with discipline and restraint.

Here is a proposal which concentrates on that factor of the National Debt which increases from year to year because of the need to pay interest.

The fact is that we are borrowing at interest just to pay the interest on what has previously been borrowed!

It seems this is a phrase we must repeat 10,000 times before the absurdity of it will be appreciated by humanity at large. It is neither just nor necessary. It never was necessary. It has only been imposed upon the world by the machinations of powerful and influential people with a vested interest in the lending of money.

So in requesting that the Government look into its constitutional powers of money-creation, we focus initially upon one thing here: Stop borrowing money to pay the interest on the money we have already borrowed!

Let us fund the interest burden on the National Debt with publicly-created debt-free money.

This modest measure, once implemented, would allow Parliament to examine the advantages of judiciously using its powers in this direction, and pave the way for further debt reductions in the future, via publicly-created money.

The beauty of this idea is that no one can say it is "creating more money to cause inflation" because the total sum created debt-free to pay the interest to existing debt holders, will be the same as that which would have been created otherwise, as a debt. No more new money is being injected into the system.

But an important principle will have been established!

The legislation could be put through for one year only, but subject to annual renewal, and habit-forming once it gets going.

We should not be put off by technicalities or the objections of Treasury officials, who are by habit bound to the system they inherited, and will resist to the utmost any deviation from the norm.

Their established orthodoxy has nothing to offer us but more and more debt and they can, and should, be overruled by people of greater vision.

Let it be like the relationship between an architect and the technician who brings his ideas into being. Many skills are harnessed, in which he himself does not have competence, but provided he insists upon strict adherence to drawing, he will in the end have the structure he visualised, whether or not he understands the methodology involved.

The object of this article has been to offer some fresh thinking on matters in which too often the orthodox economist has been assumed to say it all.

They call his the dismal science, but it need not be, if our minds are attuned to finding that "better way".

Bill Totten

Five Surprising Facts about Spying in America

by (September 22 2010)

Here are five surprising facts about spying in America.

We understand if some of this sounds far-fetched. But take a look for yourself, and see if you can disprove these claims.

1. Cheney and Rumsfeld Pushed for Warrantless Wiretaps in the 1970s

Dick Cheney, Donald Rumseld and other government officials who held high positions in the George W Bush administration pushed for wiretaps without approval by a judge ... in the 1970s {1}.

2. Massive Spying on Americans Began Before 9/11

You know about the government's massive program of spying on Americans which has been justified as a necessary response to 9/11?

Whistleblowers from major telecommunications companies have testified that the program began before 9/11 {2}, confirmed at {3} and {4}.

3. US and Allied Intelligence Heard the 9/11 Hijackers Plans from Their Own Mouths

The 9/11 hijackers were largely unknown prior to that horrible event, right?

Actually, US and allied intelligence services heard a lot from the hijackers' own mouths prior to 9/11:

* An FBI informant hosted and rented a room to two hijackers in 2000. Specifically, investigators for the Congressional Joint Inquiry discovered {5} that an FBI informant had hosted and even rented a room to two hijackers in 2000 and that, when the Inquiry sought to interview the informant, the FBI refused outright, and then hid him in an unknown location, and that a high-level FBI official stated these blocking maneuvers were undertaken under orders from the White House. As the New York Times notes {6}:

Senator Bob Graham, the Florida Democrat who is a former chairman of the Senate Intelligence Committee, accused the White House on Tuesday of covering up evidence ...

The accusation stems from the Federal Bureau of Investigation's refusal to allow investigators for a Congressional inquiry and the independent September 11 commission to interview an informant, Abdussattar Shaikh, who had been the landlord in San Diego of two September 11 hijackers.

* According to Le Monde, the intelligence services of America's close ally France and of other governments had infiltrated the highest levels of Al-Qaeda's camps, and actually listened to the hijackers' debates about which airlines' planes should be hijacked, and allied intelligence services also intercepted phone conversations between Al-Qaeda members regarding the attacks {7}.

* According to journalist Christopher Ketcham, America's close ally Israel tracked the hijackers' every move prior to the attacks, and sent agents to film the attack on the World Trade Centers {8}.

* The National Security Agency {9} and the FBI {10} were each independently listening in on the phone calls between the supposed mastermind of the attacks and the lead hijacker. Indeed, the FBI built its own antenna in Madagascar specifically to listen in on the mastermind's phone calls .

* According to various sources, on the day before 9/11, the mastermind told {11} the lead hijacker "tomorrow is zero hour" and gave final approval for the attacks. The NSA intercepted the message that day and the FBI was likely also monitoring the mastermind's phone calls.

* Shortly before 9/11, the NSA also intercepted multiple phone calls to the United States from Bin Laden's chief of operations {12}.

* The CIA and the NSA had been intercepting phone calls by the hijackers for years {13}. See also {14}.

* According to the Sunday Herald, two days before 9/11, Bin Laden called his stepmother and told her "In two days, you're going to hear big news and you're not going to hear from me for a while" {15}. US officials later told CNN {16} that "in recent years they've been able to monitor some of bin Laden's telephone communications with his [step]mother. Bin Laden at the time was using a satellite telephone, and the signals were intercepted and sometimes recorded." Indeed, before 9/11, to impress important visitors, NSA analysts would occasionally play audio tapes of bin Laden talking to his stepmother.

* And according to CBS News {17}, at 9:53 am on 9/11, just fifteen minutes after the hijacked plane had hit the Pentagon, "the National Security Agency, which monitors communications worldwide, intercepted a phone call from one of Osama bin Laden's operatives in Afghanistan to a phone number in the former Soviet Republic of Georgia", and secretary of Defense Rumsfeld learned about the intercepted phone call in real-time (if the NSA monitored and transcribed phone calls in real-time on 9/11, that implies that it did so in the months leading up to 9/11 as well).

4. The Spying Program Has Not Been Narrowly Tailored to Keeping Americans Safe

We would all hope that the spying program has been tightly focused on protecting Americans from terrorists.

However, as I noted {18} in 2008:

* The NSA spied on UN diplomats in their deliberations on the Iraq war {19} (so that the US could figure out which countries were against the war and their reasons, to gain an advantage in twisting arms and selling the war).

* The government has been spying on journalists from the New York Times, the Washington Post, and other publications for years {20}

* Some eight million average Americans are now listed in government threat assessment databases as potentially suspect {21}.

As one writer puts it:

"If we know of illegal administration spying on journalists and other non-suspects, and we know of pre-9/11 surveillance, then we for all intents and purposes know that these are not programs designed to fight some foreign terrorists threat" {22}.

Indeed, the government and its contractors seem to have spent most of their time spying on antiwar protesters, environmentalists and other non-dangerous people. See {23} and {24}.

(Of course, the fact that the spying program began before 9/11, and that 9/11 wasn't stopped even though intelligence heard from the hijackers themselves, is also instructive. And see below).

5. The Spying Program isn't Just Used for Listening ... It Also is Used to Track Americans and Predict Behavior

As I noted {25} in 2008, it's not just spying, but also tracking and predicting what American citizens will do:

As a new article {26} by investigative reporter Christopher Ketcham reveals, a governmental unit operating in secret and with no oversight whatsoever is gathering massive amounts of data on every American and running artificial intelligence ("AI") software to predict each American's behavior, including "what the target will do, where the target will go, who it will turn to for help".

The same governmental unit is responsible for suspending the Constitution and implementing martial law in the event that anything is deemed by the White House in its sole discretion to constitute a threat to the United States {27}. (This is formally known as implementing "Continuity of Government" plans.)

As Ketcham's article makes clear, these same folks and their predecessors have been been busy dreaming up plans to imprison countless "trouble-making" Americans without trial in case of any real or imagined emergency. What kind of Americans? Ketcham describes it this way:

"dissidents and activists of various stripes, political and tax protestors, lawyers and professors, publishers and journalists, gun owners, illegal aliens, foreign nationals, and a great many other harmless, average people".

Do we want the same small group of folks who have the power to suspend the Constitution, implement martial law, and imprison normal citizens to also be gathering information on all Americans and running AI programs to be able to predict where American citizens will go for help and what they will do in case of an emergency? Don't we want the government to - um, I don't know - help us in case of an emergency?

Bear in mind that the Pentagon is also running an AI program to see how people will react to propaganda and to government-inflicted terror. The program is called Sentient World Simulation {28}:

US defense, intel and homeland security officials are constructing a parallel world, on a computer, which the agencies will use to test propaganda messages and military strategies.

Called the Sentient World Simulation, the program uses AI routines based upon the psychological theories of Marty Seligman, among others. (Seligman introduced the theory of 'learned helplessness' in the 1960s, after shocking beagles until they cowered, urinating, on the bottom of their cages.)

Yank a country's water supply. Stage a military coup. SWS will tell you what happens next.

The simulation will feature an AR avatar for each person in the real world, based upon data collected about us from government records and the internet.
The continuity of government folks' AI program and the Pentagon's AI program may or may not be linked, but they both indicate massive spying and artificial intelligence in order to manipulate the American public, to concentrate power, to take away the liberties and freedoms of average Americans, and - worst of all - to induce chaos in order to achieve these ends.

Google CEO Eric Schmidt recently said that web-based artificial intelligence can predict where people will go. See {29} and {30}.

ABC News Fast Company {31}, Gizmodo {32} and many other sources report that computer programs are being used to "predict" who will commit a crime.

Indeed, as noted by Boston University's Journal of Science and Technology Law {33}, Fox News {34}, the Daily Telegraph {35} and other sources, the Department of Homeland Security is developing an airport scanner to be able to read people's minds and predict terrorist behavior.

Neuroscientists at UCLA say {36} they can predict - using brain scanning - people's behavior better than the people themselves can. And Northwestern University announced in July that scientists can read people's brain waves to detect terrorism {37}. See also {38} and {39}.

I am all for stopping real terrorists. But given that protest is now considered "low-level terrorism", see {40, 41, 42, 43}, this could be used for very repressive purposes.

In other words, spying may gradually be morphing into the Orwellian concept of "pre-crime".













































Bill Totten

Tuesday, September 28, 2010

What Systemic Debt Means ...

... to You and Your Family

Prosperity (July 2006)

Putting debt-free money into circulation is the single basic reform capable of transforming the prospects of every person in this country, including yourself and your family.

People need money to produce goods and to trade everyday essentials. If that money is not being supplied as a public service, they must use whatever alternatives are available. For most people, that means bank credit: and bank credit comes at a very high cost in debt to all of us, not just the actual borrowers.

Economists often talk of 'consumer confidence' or 'investor confidence' as if this were simply a question of deciding whether or not to spend money previously saved. Yet increasingly this "confidence" depends on the willingness and ability of ordinary people and businesses to go into debt; for, unless they do, the banks are unable to create and circulate money.

Obviously not everyone has to go into the red to run their household or business. In fact, most people will do all they can to avoid borrowing.

But in an economy which is sustained almost entirely by systemic debt, a sufficient - and constantly increasing - number of people must take out loans, simply in order to provide the country with an adequate means of exchange.

The obligatory nature of debt under our present system can be highlighted by an extreme example. What would happen if all outstanding loans were paid back, without further borrowing taking place?

The answer is that everything would grind to a halt! There would be no money supply beyond cash, and almost no economic activity. We would be back to barter.

Clearly, as long as we cling to our present financial system, more and more of us must constantly be taking on new debt. Nobody wants to be the one to do it, but unless somebody does it, everybody will suffer because there will be no money circulating in society!

So, What Does This Mean for You and Your Family?

1. You Can Expect Prices to Keep Rising, Along with Debt

For most start-up businesses, the only option is a bank loan, and when interest rates are low, this is a tempting possibility. Even established businesses habitually borrow to invest, since the need to stay competitive under a system that, by its very nature, keeps money in short supply usually makes independent capital formation - the practice of putting aside profits for future investment - impossible. In contrast, banks can simply cream off interest charges on money which they have created out of nothing to finance themselves.

The need to service loans adds significantly to production costs, and must eventually force most firms to raise prices, even in today's cut-throat business environment.

Meanwhile, rising prices, plus the need to service the huge mortgages which now create the bulk of our money supply, put family budgets under strain, leading either to more borrowing or demands for wage increases, to meet the rising cost of living.

Systemic debt, therefore, is a major contributor to - some would say the fundamental cause of - the wage/price spiral which afflicts modern economies.

As the proportion of our money supply created as an interest-bearing debt has risen from sixty per cent to 97% of the whole, inflation has become endemic: a perennial threat to business success and to the family budget, and a built-in feature of economic life.

2. You Will Pay Through the Nose to Put a Roof Over Your Head

In the opening years of the 21st century, more people than ever have a mortgage. A mortgage is, traditionally, a very special kind of debt - a respectable debt, which is not associated with profligacy, and not thought to be risky or unduly expensive.

Not any more! Between 1960 and 1996 total UK mortgage borrowing rose from GBP 3,350 million to GBP 409,433 million. Since then, it has more than doubled, passing the GBP 1 trillion point in May 2006.

During this period, the rise in house prices has far outstripped inflation: but prices could never have risen so high if ample loans had not been made available by the lending institutions.

How were people induced to undertake the degree of debt necessary to bid property prices up so high, way beyond any increase in real value? How were we tempted into mortgage debt which frequently far exceeds what we can comfortably service and repay?

This level of debt was only made feasible by a considerable relaxation of the rules governing mortgage borrowing.

If minimal deposits and loans based on increasingly unrealistic multiples of two incomes had not come to be accepted as the norm, the amounts lent would have remained too low to permit excessive house-price rises.

So why did successive governments sit back and allow - even encourage - the increased borrowing which has now driven property prices up beyond the reach of most first-time buyers?

When we remember that mortgages provide the country with around sixty per cent of its money supply, it seems reasonable to assume that any loosening of the criteria for borrowing served a definite political and economic objective. Relaxation of the rules has certainly led to a massive expansion of the money supply by making it possible for people to take on previously unthinkable quantities of housing debt.

The result is that housing costs now absorb 17.5% of the average UK homeowner's income after tax. In 1960, the comparable figure was 9.5%, and remember, in those days 'household income' would usually refer to one full-time wage, whereas today it generally includes two.

For the banks, the property bubble is a huge money-creation bonanza. For the government, it is a valuable source of revenue, as stamp duty and capital gains tax roll in, and inheritance tax thresholds fail to keep up with grossly inflated house prices: not to mention the fact that all those debt-soaked property owers are obligingly taking on, at their own risk and expense, money-creation duties which should be shouldered by a public authority.

However, there has never yet been a bubble which didn't burst; and unless this one is the exception to the rule, the excessive borrowing assiduously fostered by bank and government policy may once more end in negative equity and widespread repossessions.

As long as governments rely on systemic debt to put money into circulation, it is in their interests to keep mortgage lending high: and you and your children will be the ones to suffer!

3. Family Life Will Come Under Increasing Strain

Financial worries are a major cause not only of ill-health, but of marital breakdown. Household budgets are becoming ever tighter as business and government debt drive up prices and taxes, and levels of mortgage borrowing further reduce disposable incomes.

Fifty years ago it was possible for a working man on an average income to provide for his family without any need for his wife to undertake full-time employment. Nowadays the one-wage-earner family is almost extinct. If one partner or the other is lucky enough to be employed in a high-salaried sector of the economy, that option may still exist; but most individual wage-packets often cannot hope to cover the monthly outgoings of today's average family, with its huge mortgage payments and inflated council tax and fuel bills.

But why, if the government can afford to pay couples a child-care allowance, can't it subsidise them to job-share or work part-time, or pay one or other partner to stay at home, at least until they begin school?

It all comes back to a question of choice.

The fact is that the government chooses to rely on systemic debt to put money into circulation, rather than creating and distributing an adequate means of exchange debt-free.

And as long as governments persist in this choice, fewer and fewer people will be able to put the necessary time and energy into evolving an emotionally supportive family unit, as both parents struggle to keep the home together while holding down two full-time jobs in order to service and repay their debts.

But why are governments apparently so determined to make every parent a wage-earner?

In an economy fuelled by systemic debt, it makes perfect sense to push as many people as possible into paid employment - whether or not the jobs they do are actually necessary.

Governments which refuse to create a debt-free money supply are always strapped for cash as they try to hold down the national debt: and the greater the number of people employed, the higher the tax revenues.

If one partner stays at home looking after the family and one goes out to work, there is only one wage packet available for Income Tax and National Insurance deductions.

If both parents work full-time, not only do they provide twice the opportunity for taxation - they also create little clients for a flourishing child-care industry, further boosting the number of jobs available, and the Chancellor's tax intake.

The bottom line is this: if levels of borrowing high enough to support our debt-based financial system are to be maintained, as many people as possible must be driven out to work, whether or not this makes the best use of their own particular talents, or fits in with their personal preferences or the needs of their partners and their children.

All too frequently, the need for both partners to undertake paid employment outside the home, with all the time-consuming commuting which this entails, contributes to the disintegration of home life and the rise in divorce levels.

Unless we abandon systemic debt, and find a sensible way of creating and widely distributing sufficient money to reflect the wealth and leisure made possible by a properly functioning high-tech economy, society is more likely to experience family breakdown.

4. You Will Leave Far Less for Your Children

The recent unprecedented inflation in house prices has been greeted with joy by homeowners, who feel they have become rich overnight.

Yet very little of this newly created "wealth" will be passed on to future generations, because it is being dissipated in current consumption.

Recent years have seen a massive drop in the level of savings in the UK. With true disposable incomes falling, as disproportionate increases in housing costs, council taxes, fares and fuel bills eat into the pay packet, it is becoming harder and harder to maintain standards of living while putting something aside for the future. Many people turned first to the illusory gains of the stock market and then, when that bubble burst, to the rising property market, to do the job for them.

However, these ersatz "savings", in the form of housing equity, have not remained untouched. With pensions failing to keep up with the cost of living, and the government raiding the funds of those who take the trouble to save for their old age, elderly people in particular are choosing to supplement their income with "equity release".

Fewer people nowadays actually hold the deeds of their houses. Mortgages are far bigger than they used to be; it takes longer to pay them off; and even after they are paid, remortgaging is becoming commonplace, perhaps to meet some pressing financial obligation, perhaps when parents help their children with a deposit, to get them onto the first rung of the housing ladder - a deposit which young couples would have been able to save up for themselves when wages went further, and the basic expenses of living were less crippling.

Since the great inflation of the 1970s, everybody knows that wage demands lead to higher prices; yet even dirt-cheap imports from low-wage economies do not compensate for the rising cost of unavoidable outgoings like housing, fares and council tax, with interest charges an inbuilt component of that cost.

The only alternatives to wage demands, when faced with the rising prices associated with systemic debt, is a drastic cut in standards of living; or increased borrowing, leading to even less disposable income; or, for those who own property, "equity release" - the equivalent of a visit to the pawn shop.

In an economy which borrows its money into existence, increasing numbers of people consider equity release the "least worst" option, and decide to exchange lasting value for short-term liquidity, just to keep up with the rising costs generated by the servicing and repayment of all that debt.

But when real wealth in the form of one's house, is exchanged for money, and used for current consumption - either voluntarily, to purchase goods which quickly lose their value, or of necessity, in the struggle to make ends meet - there is less and less to pass on to the next generation.

What is more, the "wealth" generated by rising house prices may well prove to be illusory. If the property bubble bursts, a lot of people will find themselves owing more than the banks consider their houses to be worth.

Nevertheless, under a financial system based upon systemic debt, more and more of us will be forced to tap into our highly questionable "equity", in the battle to meet rising costs; and more and more real wealth will be transferred to the lending institutions, both through mortgage equity release and, in the event of a property market collapse, repossessions.

The fact is, that unless the government grasps the money reform nettle, you will be very lucky to have any "equity" to pass on to your children in future years.

5. You will be Taxed "Until the Pips Squeak"

It was Denis Healey, when he was Chancellor of the Exchequer, who was said to have threatened to "tax the rich until the pips squeak".

Under our present regime of systemic debt, things are far worse: when every level of government is in hock to the banks, it's not just the rich who suffer. In order to service the debt - just service it, not pay it off - everybody must be taxed until the pips squeak!

Income tax, National Insurance tax (both employer's and employee's), council tax, company taxes, capital gains tax, inheritance tax, stamp duty, fuel tax, motor vehicle tax, VAT ... however poor you are, you can't escape.

When governments have interest charges to pay, they need to raise more in taxes.

Take the case of North Tyneside, where council tax goes up each year way beyond the official rate of inflation, much of it swallowed up unproductively in interest payments on past borrowing.

In 2004/5, for instance, North Tyneside's debt was GBP 139,250,786, and required interest payments of GBP 16,734,000 to service it - about 25% of total Council Tax revenues.

Look at the huge sum necessary to service the national debt! The March 2006 Budget projected GBP 27 billion for 2006-07, more than spending on transport (21 billion), and housing and environment (19 billion).

Imagine the difference to all of us, if there were no need for public authorities to pay the costs of borrowing!

Joseph Huber and James Robertson in their book, Creating New Money (New Economics Foundation, 2000) reckon that the decision to create our money supply as a debt owed to the banks, rather than issuing it debt-free as a public service, robs the country of around GBP 47 billion a year, ensuring poor services, miserly pensions and ill-maintained infrastructure.

This endemic lack of money also encourages the adoption of dubious Private Finiance Initiative (PFI) projects and the sale of public assets, in a vain struggle to make ends meet.

We are constantly told that we must choose between low taxation and good public services: but this is just not true. It is only in an economy based on systemic debt that we are forced to make this unnecessary choice.

But until we insist on reform of the present insane financial system, we will continue to be taxed "until the pips squeak"!

Bill Totten

The Debt Crisis in America

Businesses and Consumers are NOT Deleveraging ...

They Are Going On One Last Binge

by Washington's Blog
(September 18 2010)

Global Research (September 19 2010)

Everyone knows that the American consumer is deleveraging ... living more frugally, and paying down debt.


Well, actually, as CNBC's Diana Olick pointed out in April {1}, many consumers are stopping their mortgage payments, and then blowing the money they would usually pay towards their mortgage on luxuries:

I opened up a big can of debate Monday, when I repeated some chatter around that consumer spending might be juiced by all those folks not paying their mortgages {2}.

They have a little extra cash, so they're spending it at the mall.

Some of you thought the premise had some validity, others, as is often the case, told me I was an idiot.

Well after the blog went up Erin Burnett put the question to Economist Robert Shiller, of the S&P/Case Shiller Home Price Index, during an interview on Street Signs.

He didn't deny the possibility, and added:

In some sense there might be a silver lining in that.

Then I decided to ask Mark Zandi, of Moody's, who will often shoot down my more ridiculous theories.

I asked him if this was a crazy idea:

No, not crazy. With some six million homeowners not making mortgage payments (some loans are in trial mod programs and paying something but still in delinquency or default status), this is probably freeing up roughly $8 billion in cash each month. Assuming this cash is spent (not too bad an assumption), it amounts to nearly one percent of consumer spending. The saving rate is also much lower as a result. The impact on spending growth is less significant as that is a function of the change in the number of homeowners not making payments.

I'm not sure I would say this is juicing up spending, but resulting in more spending than would be the case otherwise.

Many of these stressed homeowners (due to unemployment) are reducing their spending, just not as much as they would have if they were still making their mortgage payment.

Okay, so six million American homeowners are not being super frugal about either paying their mortgages or saving the money for another investment.

But surely the hundreds of millions of other Americans are reducing debt and deleveraging, right?

In fact, as the Wall Street Journal notes today {3}, the overwhelming majority of debt reduction by consumers is not due to voluntary debt reduction, but due to defaulting on their debts and having them involuntarily written down by the banks:

The sharp decline in US household debt over the past couple years has conjured up images of people across the country tightening their belts in order to pay down their mortgages and credit-card balances. A closer look, though, suggests a different picture: Some are defaulting, while the rest aren't making much of a dent in their debts at all.

First, consider household debt. Over the two years ending June 2010, the total value of home-mortgage debt and consumer credit outstanding has fallen by about $610 billion, to $12.6 trillion, according to the Federal Reserve. That's an annualized decline of about 2.3%, which is pretty impressive given the fact that such debts grew at an annualized rate in excess of ten percent over the previous decade.

There are two ways, though, that the debts can decline: People can pay off existing loans, or they can renege on the loans, forcing the lender to charge them off. As it happens, the latter accounted for almost all the decline. Over the two years ending June 2010, banks and other lenders charged off a total of about $588 billion in mortgage and consumer loans, according to data from the Fed and the Federal Deposit Insurance Corp. That means consumers managed to shave off only $22 billion in debt through the kind of belt-tightening we typically envision. In other words, in the absence of defaults, they would have achieved an annualized decline of only 0.08%.

The Journal graphically {4} shows that virtually all debt reduction is due to loan charge offs.
Karl Denninger {5} notes:

From a peak in 2005 of $13.1 trillion in equity in residential real estate, that value has now diminished by approximately half to $6.67 trillion!

Yet outstanding household debt has in fact increased from $11.7 trillion to $13.5 trillion today.

Folks, those who claim that we have "de-levered" are lying.

Not only has the consumer not de-levered but business is actually gearing up - putting the lie to any claim that they have "record cash". Well, yes, but they also have record debt, and instead of decreasing leverage levels they're adding to them.

In short don't believe the BS about "de-leveraging has occurred and we're in good shape". We most certainly have not de-levered, we most certainly are not in good shape, and the Federal borrowing is what, for the time being, has prevented reality from sticking it's head under the corner of the tent.

Indeed, as I've pointed out repeatedly {6}, the government has done everything it can to prevent deleveraging by the financial companies, and to re-lever up the economy to dizzying levels.

As Jim Quinn wrote {7} last month:

You can't open a newspaper or watch a business news network without seeing or hearing that consumers and businesses have been de-leveraging. The storyline as portrayed by the mainstream media is that consumers and corporations have seen the light and are paying off debts and living within their means. Austerity has broken out across the land.


Below is a chart {8} that shows total credit market debt as a percentage of GDP. This chart captures all of the debt in the United States carried by households, corporations, and the government. The data can be found at {9}.

Total credit market debt peaked at $52.9 trillion in the 1st quarter of 2009. It is currently at $52.1 trillion. The GREAT DE-LEVERAGING of the United States has chopped our total debt by 1.5%. Move along. No more to see here. Time to go to the mall. Can anyone in their right mind look at this chart and think this financial crisis is over?

During the Great Depression of the 1930s Total Credit Market Debt as a percentage of GDP peaked at 260% of GDP. As of today, it stands at 360% of GDP. The Federal Government is adding $4 billion per day to the National Debt. GDP is stagnant and will likely not grow for the next year. The storyline about corporate America being flush with cash is another lie. Corporations have ADDED $482 billion of debt since 2007. Corporate America has the largest amount of debt on their books in history at $7.2 trillion.

Indeed, as this chart {10} courtesy of Zero Hedge {11} confirms, traditional banking liabilities are higher than ever.

Granted, the liabilities of the shadow banking system have fallen off of a cliff.

But Tyler Durden {12} argues:

The latest plunge in the shadow banking system is merely the most recent confirmation that the deleveraging in America is only just beginning.

So what does it all mean?

The government, big financial companies and the American consumer are all guilty of fighting deleveraging instead of voluntarily paying down their debt.

Like a junkie looking for "one last score", the entire country has sold out our future to try to keep the artificial high going a little longer.

As I pointed out {13} in July 2009:

Every independent economist has said that too much leverage was one of the main causes of the current economic crisis.

However ... the Federal Reserve and Treasury have, in fact, been encouraging massive leveraging.


Economists pushing voodoo theories justifying the tremendous increase in leverage were promoted and lionized, while those questioning such nonsense were ridiculed.

In other words, economists and financial advisors - in academia, government and elsewhere - have been subservient to the financial elites, and have trumpeted the safeness and soundness of cdos, credit default swaps, and all of the rest of the shadow economy which allowed leverage to get so out of hand that it brought the world economy to its knees.

This is no different from the promotion of sports doctors to become team doctor when they are willing to inject various painkillers and feel-good drugs into an injured football star so he can finish the game. If he is willing to justify the treatment as being safe, he is promoted. If not, he's out.

Economists have acted like team docs for the financial giants. When the football team doctor who gives the injured patient steroids and stimulants and tells him to get back in the game, it might be good for the team in the short-run, but the patient may end up severely injured for decades.

When economists have prescribed more leverage and told the banks to go trade like crazy to get the economy going again, it might be good for the banks in the short-run. But the consumer may end up being hurt for many years.

Using another analogy, this is like prescribing "hair of the dog" to the suffering alcoholic or heroin to the withdrawing junkie {14}.

And as I wrote {15} in August 2009:

In an essay {16} entitled "The risk of a double-dip recession is rising", Nouriel Roubini affirms two important points:

This is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialised and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest ...

The releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending.

In other words, Roubini is confirming what Anna Schwartz and many others have said: that the problem is insolvency, more than liquidity, that the government is fighting the last war and doing it all wrong, and that we should let the insolvent banks fail {17}.

Roubini is also confirming that incurring huge deficits in order to have the federal government itself act as a super-bank is causing a reduction in - and "crowding out" a recovery in - private sector spending. [Roubini also said {18} last year: "Deleveraging requires the writing down of debt as reflationary policies are not a free lunch and won't solve the debt overhang problem"].

As I have repeatedly pointed out, a recovery cannot occur until we move through the painful deleveraging process. But instead of allowing this to occur, the government is trying to increase leverage as a way to try to re-start the economy and save the insolvent banks. See {19}, {20}, and {21}.

Of course, all of the massive government spending might also be putting governments themselves at risk {22} ... but that is another story.
























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Bill Totten