View topic - Doomsday is coming... :: Free Dominion - Principled Conservative - Party and Canadian Politics

Posted: 07/ 29/ 03 1:33 pm Post subject:

Ipburg it is not imaginary...It is a fact...

Money is debt created out of thin air by banks with compound interest attached at the request of consumers...

The prices you pay when you spend money or circulate debt are set by the amount of debt creation...

Consumer debt inflation which is the effect of creating new debt in greater quantities then old debt leads to price inflation...

Consumer debt deflation which is the effect of creating new debt in smaller quantities then old debt leads to price deflation...

In a society that uses a debt backed system as a money supply previously created debt is the operating expense and new debt is the profit

Or Previously created debt is current income and newly created debt is future income...

The ability for consumers to create new debt is based on current income...

Debt backing debt but under such a system the consumer will consume their ability to consume...

You can only use a certian % of your current income which is previously created debt to service the cost of new debt creation which is future income...

Once the consumers have reached their maximum potential to service greater amounts of new debt in relation to previously created debt then their future income has to drop or interest rates have to drop...

Once Intrest rates drop to near zero there is no way to expand the debt supply in greater quantities so income has to drop...a self feeding death spiral...

What the US is in the process of doing... rates have been systematically dropped in the US for 23 years to prevent a hyperdeflationary implosion...

On average rates have dropped 83 basis points/year to expand the money supply which is debt...there are 100 basis points left...

The game is almost over... Rates can't drop past zero. prime and mortgage rates can not go low enough to produce the required volume of consumer debt consumption to "sustain" exponential debt inflation which is the fuel that powers economic growth in the US...

The key word is "sustain" the current "recovery" talk is just slick marketing...It can't be sustained for more than a few months...

interest rates must keep dropping significantly to sustain it... Mortgage rates are rising in the US and are having a serious impact on the refinancing industry... which was in blow off mode since around March...

Soon the massive amounts of liquidity (Debt) which was being created will start drying up... just another nail in the coffin...

Posted: 07/ 29/ 03 2:04 pm Post subject:

How Banks Create Money; Why We Can Never Get Out of Debt - Selections by Peter Myers. Date June 15, 2003; update July 28, 2003. My comments are shown {thus}.

You are at http://users.cyberone.com.au/myers/money.html.

(1) Financing Sustainable Development, by John H. Hotson (2) Banana Republic? No, Banana Colony, by Dr H. C. Coombs (3) How money is created in Australia, by David Kidd (4) Bankers compared to counterfeiters (5) A town that issues its own currency: Ithaca, New York

"the basic financial problem is a disproportionate growth of debt and interest on debt. This problem is caused by our fractional reserve banking system which creates almost all of "our" money supply as interest bearing debt to private banks. Once the problem is clearly stated the solution is also clear. We must create a larger fraction-perhaps all--of our money supply debt and interest free. Only by so doing will it be possible to end and then reverse the disproportionate growth of debt and interest.

"... Money does not have to be a debt, nor does interest need to be paid to keep it in circulation. The commodity monies of old--gold, silver, wine--were not debts. Government or central bank currency is only nominally a debt--a promise to pay with an identical piece of paper.

"... Governments can spend, lend, or transfer money into circulation. They can lend at zero interest, or near zero interest. By wise use of these powers governments and the international community can end the debt slavery which is crippling the world economy."

- John Hotson (p. 16 in the following paper).

"Is there anything more crazy than that between 1797 and 1817, for example, the Bank of England [a private bank until 1947], whose notes only had credit thanks to the state, then got paid by the state, i.e., by the public, in the form of interest on government loans, for the power the state gave to it to transform those very notes from paper into money and then lend it to the state?"

- Karl Marx, quoted on p. 17 in the following paper.

John Hotson was Professor of Economics at the University of Waterloo, in Toronto. I was privileged to hear him deliver the following paper at the TOES summit in Sydney, about 1993. He is the author of The COMER Papers.

The underlining in this article is Dr Hotson's; the bold emphasis has been added.

(1) Financing Sustainable Development, by John H. Hotson

{p. 1} INTRODUCTION

As every environmentalist knows, over the last few centuries we humans have created an ecologically unsustainable industrial economy. Unless we radically reform our way of doing things and create a sustainable economic system we are doomed to suffer drastic changes. What most environmentalists--and indeed most economists--do not know is that over the last few centuries we humans have also created an economically unsustainable financial system. Unless we radically reform this financial system it will recurringly break down and thwart our efforts to heal the planet.

Our current financial system diverts us from our real problems to ask, "Where is the money going to come from?" This should be the least of our worries. As long as we have vast unmet human needs and idle human and nonhuman resources, and resources which can be diverted from wasteful activities such as the military, finance should never be allowed to stand in the way of doing what must be done. Could anything be more insane than for the human race to die out because we "couldn't afford" to save ourselves?

Agenda 21 {footnote 1}, prepared for last year's Earth Summit, or UNCED, by acknowledged U.N. experts on environment and development, concludes that the world community must spend about $625 billion a year over the next eight years if the Third World is to develop without destroying the environment. The Report states:

"A continution of present policies will lead to ... a worsening of poverty, hunger, ill health, illiteracy ... and growing threats to life on Earth."

The Report calls for increased aid flows of $125 billion a year from the developed countries, while the bulk of the effort, the remaining $500 billion a year, must come from the Third World's own resources. These numbers seem huge until we consider that $625 billion is only 4% of the Gross Planetary Product of some $16 trillion, and that it is less than 2/3 of the amount that the world still spends each year on armaments--even though the east block has collapsed and the "cold war" is over.

These numbers are also dwarfed by estimates that the United States alone is wasting $700 billion a year in unproduced output in the present depression--resources which could instead have been employed to clean up its own infrastructure, both public and private, both environmental and economic, while increasing its foreign aid toward the long agreed on goal of 0.7% of GNP. Finally, these numbers fade into insignificance when we consider what is at stake, which is

1. Agenda 21 & The UNCED Proceedings, N. A. Robinson, ed., Oceana, New York, 1992. The US $125 billion and S500 billion figures are given in Volume 2, p. 678.

{p. 2} nothing less than the long term survival of the human race.

Despite these widely acknowledged facts the response of the governments of the world-both of the rich and of the poor--have fallen far, far short of what Agenda 21 warns us we must do. Tragically, the world has "celebrated" the end, or at least the lessening, of the threat of nuclear war, by slipping into a Second Great Depression instead of getting to work on the great unfinished and pressing business of the human species--protecting the health, education, growth, and development of all the world's children, healing the wounded environment, rebuilding our cities and transportation systems and promoting the sustainable development of the world's forests, fisheries, farms, and industries.

Indeed, instead of the rich one-third of the world acting as a source of finance, an "engine for development" to the struggling two-thirds of the planet, the rich world has for more than a decade been a net financial drain on the "wretched of the earth." As UNICEF shows in The State of the World's Children 1992, Summary, our protectionism costs the Third World some $55 billion a year in lost exports, which is more than the total aid they receive. Declining terms of trade also cost the developing nations about $16 billion a year.

"But it is, above all, the weight of past debts which threatens future progress ... the developing world owes approximately $1,300 billion to the governments and banks of the industrialized nations and to international financial institutions. Each year, the repayment of capital and interest amounts to approximately $150 billion - roughly three times as much as the developing world receives in aid. As it is impossible to meet these interest charges in full, the amount unpaid is added to the total debt owed ... When all transactions are taken into account - the net effect is that the developing world is now transferring $40 to $50 billion a year to the industrialized world.

..."Debt is the new slavery that has shackled the African continent. Sub-Saharan Africa owes approximately $150 billion. Each year, it struggles to pay about one third of the interest which falls due; the rest is simply added to the rising mountain of debt under which the hopes of the subcontinent lie buried.

"The total inhumanity of what is now happening is reflected in the single fact that even the small proportion of the interest which Africa does manage to pay is absorbing a quarter of all its export earnings and costing the continent, each year, more than its total spending on the health and education of its people.

"Ten years of prevarication over this problem has already damaged not only the Africa of today but the Africa of tomorrow. While more than $10 billion a year in interest repayments is being sluiced out of that desperately poor continent, tens of millions of children are losing their one opportunity to grow normally, to go to school and become literate, and to acquire the skills necessary for their own and their countries' development in the years to come.

{p. 3} "As a gesture of repartion for exploittion in the past and prepration for new partnership in the future, Africa should now be absolved of most of its debts." {footnote 2}

Not only must most of Africa's debt be forgiven, but much of Latin America and East Asia's debt must be written down, and written off, if the "war to save the planet," and to provide the poor 2/3rds of the world population with a life of minimum health and decency, is to be won.

Much has been written concerning the "hot money capital flight" from the poor world by which the local elites have left the people of these countries with "odious debts" for loans from which they received no benefit. Creditors must be empowered to go after these "hot" funds to seek repayment and "disempowered" to hold up development by demanding repayment from the victimized residents of the Third World. Recognizing that the interest rates the rich have been demanding of the poor since the late 1970s are extortionately high, we should apply the excessive interest already paid to reduction of principal.

But even if the whole existing Third World debt were written off, this would not solve the financial crisis more than temporarily. For, as stated, we have an economically unsustainable financial system. The present world financial system is a fractional reserve, or "debt money" system in which nearly all money is borrowed into existence from private banks and only remains in existence as long as someone is willing and able to pay interest on it.

OUR UNSUSTAINABLE FINANCIAL SYSTEM

Why is the fractional reserve/debt money system unsustainable? With present institutions, prosperity, growth and ecological viability are not sustainable in the long run because of the excessive growth of debt and interest on debt relative to income with which to repay. Throughout recent centuries the following pattern has manifested itself: real output only grows in years in which aggregate demand grows, demand only grows when the money supply grows, the money supply only grows when debt grows. The longer output, demand, money supply, and debt grow the higher the rate of interest becomes and the more excessive the growth of interest and debt. This pattern presents itself internationally as well as nationally, as unpayable Third World interest must either be added to unpayable Third World debt in ever greater resort to "Ponzi finance," (borrowing to pay interest) or the leading banks of the world must be declared insolvent.

If, in the attempt to arrest the price inflation resulting from the excessive rate of debt formation, the monetary authorities raise the rate of interest still higher the result is a financial panic. The panic, or potential panic, then requires monetary authorities to reverse themselves to bail the system out through greatly increased bank reserves, while governments are required to increase the public debt. The resulting inflation and deficits have too often been seen as "the" problem for decision makers to focus upon, rather than upon the far greater challenges of

2. UNICEF, The State of the World's Children 1991. Summary, pp. 8-11

{p. 4} ecological breakdown, and the major changes humanity as a whole must make to achieve sustainable development.

A world in which "all money is debt, but not all debt is money" is unsustainable, as debt and interest on debt grows faster than income and money with which to pay debt. When a bank makes a loan to an individual, business, or government, the principal of the loan is created and added to the borrower's bank balance. However, the borrower has promised to repay the loan plus interest and no money was created with which to pay the interest. Therefore unless indebtedness continually grows it becomes impossible for all loans to be repaid as they come due.

Furthermore, during the life of a loan some of the money will be saved and relent by savings banks, insurance companies etc. These loans do not create money (chequing accounts) but they do create debt. Thus we use only one mechanism to create money (bank loans) but several mechanisms to create debt, making it inevitable that debt will grow faster than money with which to pay debt. This leads inevitably crash and debt repudiation depressions. The world is in such a depression at present, and has been since about 1980.

CHARACTERISTICS OF A SUSTAINABLE FINANCIAL SYSTEM

The shortcomings of our present debt money system can best be seen by setting forth the characteristics of a sustainable financial system and then contrasting these with the characteristics of our present system. Only after this is done will we be ready to consider alternatives.

A sustainable financial system is simply one which enables the real economy to be maintained decade after decade and century after century at its full employment potential without recurring inflation/over-indebtedness crises.

It is desirable, though not central to sustainability, that the system tend toward price stability rather than inflation. A tendency toward deflation is much more adverse to sustainability, as we shall see, than one toward inflation.

If an economy is to grow sustainably at its full employment potential it is necessary:

that demand grow as rapidly as supply.
that debt grow no more rapidly than does income.
that the price level not fall.
that the money supply grow about as rapidly as income.
that interest, as well as profit and wage income grow no more rapidly than does total income.
that the degree of inequality in the income distribution not cause the "rich to get richer and the poor to get poorer."that the mean interest rate equal the growth rate of per capita income.

{p. 5} Indeed, if we maintain that sustainability also implies price stability not inflation, the requirements are even more restrictive.

For a sustainable, stable price level system we must see to it that interest, profit and wage income grow no more rapidly than does real income.

Furthermore, in the long run, growth of human numbers and materials using output itself is unsustainable in a finite world. In a steady state world, full employment requires that either all savings be directly invested through equity, or that a positive interest rate be forbidden. Saving must be strictly limited to making good depreciation plus whatever capital "deepening" is possible.

Let us briefly illustrate each point in turn.

If an economy is to grow sustainably at its full employment potential it is necessary that demand row as rapidly as supply.

This is self evident. What is not self evident, however, is how this will occur in the "real world" where neither Say's Law, nor Walras' Law are operative. Nor is it sufficient for all "full employment savings" to be invested to make it occur. At most, the investment of full employment savings will enable real supply to grow, but since demand will grow less than proportionately; by Keynes' marginal propensity to consume of less than 1 or by Kalecki's markup pricing, output will stagnate and unemployment will rise unless demand is exogenously increased by new money creation. The growth of investment must be financed with new money, which was never anyone's income and thus never saved. {footnote 3} In our world banks create this new money as they make loans, much as "steel mills make steel," as Graham Towers, first Governor of the Bank of Canada, expressed it.

If an economy is to grow sustainably at its full employment potential it is necessary that debt grow no more rapidly than does income.

For debt to grow faster than income and wealth, and thus collateral to secure debt, is a formula for eventual breakdown at the individual or societal level. Particular difficulty occurs when income is falling in a cyclical downturn so that the debt/income ratio grows rapidly.

If an economy is to grow sustainably at its full employment potential it is necessary that the price level not fall.

If debt grows more slowly than does income it would be possible for an economy ultimately to achieve a debt free state. However, such an economy would also have a constantly

3. On this see Mario Seccreccia, "The Role of Saving and Finncial Acquisition in the Process of Capital Formation Under Policies of Austerity: The Case of Canada." Economies et Societies, Vol. 19 no. 8, August 1985.

{p. 6} falling money supply if it depended upon the banking system for its money. A system with a constantly falling ratio of money to real output would only be sustainable if the price level continually falls as well. Although economists love to write about, and even advocate, such an economy, such a state of affairs has probably never existed, nor could exist, without massive unemployment.

There are at least two reasons why falling prices and prosperity are incompatible.

1) As Marx showed long ago with his M - C - M' formulation, the very reason for being of every capitalist enterprise is to transform a given amount of money capital (M) into commodities (C) which can be sold for a larger amount of money (M'). The typical firm can only accomplish this feat if the price level is stable or rising. A firm which borrows a million dollars and transforms raw materials and manhours into commodities which must be sold for nine hundred thousand dollars, will not be in business very long, whatever is happening to its "productivity gains".

2. A falling price level cuts the share remaining for profit by raising the real rate of interest and the "rentier" share causing a fall in investment and a halt to the growth of income and employment.

If an economy is to grow sustainably at its full employment potential it is necessary that the money supply grow about as rapidly as income.

Much that was said above is applicable, but need not be repeated.

If an economy is to grow sustainably at its full emplovment potential it is necessary that interest, as well as profit and wage, income must grow no more rapidly than does total income.

For a few years, or even a few decades, interest, profit, and wages can grow disproportionately to each other. However, even the small interest share cannot grow more rapidly than does GNP for very long without "gobbling up" everything else and becoming equal to GNP itself. Most discussions of monetary and interest rate policy ignore the explosive implications of exponential growth of interest at a higher rate than income is growing, when it is our duty as social scientists to focus our attention here. More on this presently.

If an economy is to grow sustainably at its full employment potential it is necessary that the degree of inequality in the income distribution not cause the "rich to get richer and the poor to get poorer."

Clearly, an economy cannot grow sustainably unless the great bulk of the population share in the rise in per capita income. Otherwise effective demand for consumer goods will prove insufficient to justify further investment. Moreover, the political consensus necessary for social harmony will break down if economic gains go only to the few.

{p. 7} If an economy is to grow sustainably at its full emplovment potential it is necessary that mean interest rates equal the growth rate of per capita income.

This proposition follows from the requirements stated above of a constant debt/$GNP, and constnt interest income/$GNP ratio.

Provided that debt and real income grow at the same rate, i.e. a constant price level, a constant "rentier" share constrains the rate of interest to equal the gain in total factor productivity. Thus, if a country is able to keep real output per capita growing at 3 per cent per annum, the "natural" or sustainable, or constant shares, at constant prices, interest rate is also 3 per cent. {footnote 4} The natural rate can exceed the productivity gain only to the extent that debt grows more slowly than real output, while if debt grows faster than output, the natural rate must be less than the productivity gain. I believe we must rule out this last case as unrealistic and never to be observed in the "real world."

What happens when "market" rates of interest exceed "natural" rates depends greatly upon the rules governing the creation of money. In the ancient world of metallic monies and zero productivity gains, positive market rates quickly led to debt slavery of most debtors. This in turn led to social polarization and either revolution or government sanctioned forgiveness of debts. This is why all the ancient books of wisdom - the Bible, Koran, etc., denounced usury in a world with a zero natural rate.

In our present world of bank, or debt, money a tendency for the market rate of interest to rise above the natural rate can lead for a considerable time to an inflationary boom. The function of the inflation is to slow the growth of the rentier share by boosting the rate of increase of profit and wage incomes. The inflation will accelerate, however, if the money supply is wholly endogenous and uncontrolled, as each rise in wages and prices leads to a further rise in interest rates and money creation.

However, if for whatever reason, the rate of money creation is slowed so that the real rate of interest becomes insupportable, the economy will crash into debt liquidation depression. The cycle will tend to repeat itself as, after the liquidation stage, debts and interest rates will be much reduced.

For a sustainable, stable price level svstem we must see to it that interest, profit and wage income grow no more rapidly than does real income.

This conclusion is a mathematical necessity, an expansion of the definition of real income. Although for short periods of time, wages may increase faster (slower) than productivity gains and prices not rise, if interest, profits, or taxes are falling (rising). However, such share changes

4. See Luigi Psinetti, "The Rate of Interest and the Distribution of Income in Pure Labor Economy," Journal of Post Keynesian Economics, Winter 1980-1, III-2 pp. 170-82, for the development of this "natural rate" concept. See further his Structural Change and Economic Growth, (Cmhridge University Press, Cambridge, 1981).

{p. 8} cannot go very far without the economic system degenerating into a competitive struggle which will prove inflationary if "losing" income groups succeed even partially in restoring their share, and deeply depressionary if they cannot. Actually the wage share changes only slowly in advanced economies--a fact which has been much documented but inadequately explained.

The fact that growth must eventually cease in a finite world also means that debts must cease to grow: i.e. that annual repayments must equal new debts. The world must eventually cease using interest bearing debt as the means by which society's "savings" are transformed into "investment"--and/or replaced or supplemented by debt money created by banks. Debt finance of a portion of total spending in a world of zero growth necessarily entails growing debt which, in turn will cause debt repudiation and depression.

CHARACTERISTICS OF OUR UNSUSTAINABLE FINANCIAL SYSTEM

Our economy does not grow sustainbly at its full employment potential becuse demand does not grow as rapidly as supply.

Central to the Keynesian Revolution in macroeconomic theory is the thought that economic history can best be understood through the realization that Aggregate Demand is usually less than Aggregate Supply at full employment, so that full employment is seldom chieved, nor long maintained. Deficient demand is caused by the incentives to save, that is to refrain from spending on consumption, exceeding the incentives to add to the capital stock through investment and this, in turn, is becuse of high liquidity preference. Keynes maintained that "for decades or even centuries at a time" the rate of interest is too high to allow full employment. {footnote 5}

Keynes also recognized that a depressed economy could not resume growth, even if the propensity to invest should increase, or the propensity to save decreased [or increased], unless the money supply increased. He wrote:

"... if there is no change in the liquidity position, the public can save ex-ante and ex-post and ex-anything-else until they are blue in the face, without alleviating the problem in the least - unless, indeed, the result of their efforts is to lower the scale of activity... The banks hold the key position in the transition from a lower to a higher scale of activity. If they refuse to relax [i.e., provide new money] the growing congestion of the short-term loan market or the new issues market ... will inhibit the improvement, no matter how thrifty the public purpose to be out of their future income." {footnote 6}

5. J. M. Keynes, The General Theory, pp. 242, 324-5, 336, 340.

6. J, M. Keynes, "The Ex-Ante Theory of the Rate of Interest," Economic Journal, 47, 1937 pp 668-9.

{p. 9} Only in years when private demand is boosted by extraordinary public demands and rapid money supply growth, as happened in World War Two and its aftermath, Korea, and Vietnam have most of the world's economies run at their full potential, and even in the "peacetime" years since WWII demand has been much sustained by "military Keynesianism" or "Hitleromics", perhaps never so much as the late 1980s, with world military spending exceeding $1 trillion dollars. Now that the end of the cold war has led to some cutbacks in military spending, the result is spreading unemployment, rather than a smooth transition to sustainable development.

The central irrationality of the Great Depression years has reappeared in our times. In a depressed world of inadequate aggregate demand, each firm, industry, and nation attempts to save itself by competitive deflation. Some can "win" in this struggle by cutting their costs and boosting their efficiency the most. However, the more the winners win, the more the losers lose as this is a negative sum game. The world depression grows deeper and unemployment grows worse. The individualist philosophy undergirding neoclassical economics misunderstands and denies the existence of demand failures--thus causing the failure to persist.

Our economy does not grow sustainably at its full employment potential because debt tends to grow more rapidly than does income.

As our economy is presently constituted, the money supply can only grow as persons, businesses, and govemments increase their debts to the banks. Never in the 20th century, therefore, has the real output of the U.S. economy increased in which debts have not increased. The available statistics do not indicate a marked tendency for all debts public and private to increase more rapidly than does money, or current dollar, GNP until the 1980s as Figure 1 makes evident.

From 1918 to 1980, Outstanding Debt of U. S. NonFinancial Borrowers increased from about 100% of GNP to about 144% of GNP. The overall near stability of the ratio of total debt to total income, except for the Great Depression, and to a lesser extent, the World War Two era, was the net result of widely divergent growth trends of public and private debts. In all prosperous peacetime years private debts (households + non-financial business) increase far more rapidly than does real output, or even money value of output, while government debts grew more slowly than GNP until the 1980's waves of mergers with "junk bond" finance and Reaganomics caused both private and govemment debt to grow relative to GNP, and thus unsustainably, reaching 197% of GNP by 1992 {footnote 7}.

The "conservative" ideology maintains that the govemment should never borrow money in peacetime. It may be that the origin of this ideology lies in the subconscious realization that since the private sector in all normal years increases debt faster than it does income, the only hope for a constant Total Debt/GNP ratio lies in a constant fall in the public debt as a fraction

7. Economic Report of the President, various years 1970 to 1993. The Report no longer publishes a breakdown of the important debt series for Households and Business.

{p. 10} of GNP. But this ideology prolonged the Great Depression by postponing the "Keynesian" rescue until World War Two.

In the years of the Great Depression income fell, further boosting the private debt to GNP ratio, while the government debt grew relative to GNP. Finally, in World War Two private, and State and Local Government, debts shrank relative to GNP while Federal Government debt increased more rapidly than did GNP.

At the end of WWII Australia, Canada, the U.S., and indeed, all allied countries enjoyed, in Hyman Minsky's terminology a "robust" financial system. {footnote 8} This is because the private sector ended the war with unusually "clean" balance sheets, i.e. little debt and that at low interest rates, while as assets they held large, ultra safe, claims on the national government. The result, together with the pent up demand from the depression and war time decade and a half, was the longest boom in the history of Capitalism.

As time wore on, however, private debts continued to increase relative to income, and at ever higher interest rates, so that little by little the "robust" financial environment was transformed into the ever more "fragile" financial environment more typical of Capitalism. As the financial system became more and more fragile more and more borrowers were driven from "hedge" finance--where both principal and interest are paid off over the life of the loan, to "speculative" finance--where interest is paid, but the debt is renewed or "rolled over" at its due date, and finally to "Ponzi" finance--where unpaid and unpayable interest is added to the unpaid principal. Ponzi finance always ends in bankruptcy and debt repudiation, unless indulged in only very temporarily, as the borrower is acquiring no new assets with which to pay. It is just such a collapse which increasingly threatens the world system in the 1990s.

The tendency for debt to increase more rapidly than income and money with which to pay debt can also be seen in the Canadian statistics for the 1962 to 1992 period. (It is symptomatic of economists' neglect of this important matter that a longer series is not available.) From 1962 through 1992; real income (real GDP in 1986 dollars) in Canada grew from $190 billion to $574 billion, or from an index of 1 to 3, or 2 fold. Money GDP grew from $44 billion to $687 billion, or from an index of 1 to 16 as prices rose from 1 to 4.65. (What cost $1 in 1962 cost $4.65 in 1992.) However, total debt over the same period grew from $99.5 billion to $2.14 trillion, or about 21 fold (Thus for every $1 Canadians owed each other in 1962, they owe, or are owed $21 in 1992).

In contrast money with which to pay debt (Ml) grew only from $3.4 billion in 1962 to $44.4 billion in 1992, or from 1 to 13. However, M3 grew from $17 to $375.1 billion, or from 1 to 22, or about as fast as did total debt as Canadians increasingly financed with less liquid "near monies". Moreover, Canadians are considerably more in debt relative to their incomes than

8. Hymnan Minsky, Can 'It" Happen Again? Essays On Instability and Finance, Armonk, New York: M. E. Shrpe, 1982.

{p. 11} are their U.S. cousins. As Figure 1 shows {p. 21: john-hotson.jpg}, non-financial debt was less than 150% of U.S. GNP in 1962 and 197% of of GNP in 1992. Non financial debt in Canada was 232% of GNP in 1962 and 324% in 1992 {footnote 9}. Over the same 31 years interest on private debt (Interest and miscellaneous investment income) rose from $1.4 billion to $53 billion, or from 1 to 38, while intrest on public debts rose from $1.3 to $66 billion, or from 1 to 50. Clearly, such divergent trends cannot continue for much longer. Indeed, should interest continue to increse relaive to money GDP for another 30 years as it has for the past 30 years, by about the year 2020 it would become equal to GDP, an obviously impossible result.

Unfortunately, I lack a really long series on the same data for Australia. However, thanks to the labours of Dr. John Hermann, of the Economics Review Association, we have the following figures for the most rent period. From 1980 to 1992; real GDP (real GDP in 1985 dollars) increase from $186 billion to $243 billion or from an index of 1 to 1.3. Money GDP grew from $123 billion to $384 billion or from an index of 1 to 3.1, or 2.1 fold as prices rose from 1 to 2.4. (What cost $1.00 in 1980 cost $2.40 in 1992). However, total debt over the same period grew from $121 billion to $820 billion, or about 6.8 to 1 (Thus for every $l Australians owed each other and foreigners in 1980, they owed, or were owed, $6.87 in 1992.)

Moreover, as every informed Australian knnws, Australia's foreign debt exploded in the most recent years: from a net foreign debt of only $7 billion to $150 billion in 1992, from an index of 1 to 24.3 in little more than decade. Moreover, it is esimated that Austtalia's forceign debt reached $172 billion by June 1993 and my well top $180 billion by the end of 1993. It cannot be overstated that this is a matter of the gravest concern. Foreign debts, denominated in foreign monies, are a much greater danger than domestically held debts denominated in Ausralian dollars for the simple reason that your central bank cannot create foreign rnoney with which to pay.

Turning to the growth of money with which to pay debt, we see a somewhat more fvourable situation here than in the U.S. and Canada in that narrow money in Australia (currency plus demand deposits) grew more rapidly than broad money (which adds vanous time deposit "near monies"). Thus, "narrow" money grew from $49 billion in 1980 to $214 billion in l992, or from an index of 1 to 4.3; while "broad" nxney grew from $123 billion to $270 billion, or from to 1 to 3.5. International comparisons show that countries which maintin a high narrow money/GDP ratio enjoy consitently lower interest rates than counries which allow this ratio to sag.

However, the unsustainable pattern of debt growing faster than money with which to pay debt is also to be seen in the Australian figures. Thus total debt, as we have seen above grew from an index of 1 to 6.8, while narrow money was growing from 1 to 4.3 and broad money

9. GNP, Real GNP, Money and Price statistics from Bank of Canada Review, various months; Debt statistics from The National Balance Sheet Accounts, 1961-1984, and subsequent issues.

{p. 12} from 1 to 3.5. Assuming the figures are comparable, Australia's Debt/GDP ratio now lies between the U.S. and Canadian figures cited obove. Hoever, Austrlia's debt sitution was more favorable than either in 1980 being only .98 vs. 2.13 in 1992. As just stated, the most unfavorable aspect of Australia's sitution is the explosion of foreign borrowinq and debt.

In the 19th century the U.S. economy achieved growth, although not always with full employment, even in some years of falling prices {footnote 10}. However, in no year of this century in which the price level has fallen has U.S. real output grown significantly. In Canada the 2Oth century exceptions are 1927 and 1928, when prices fell and output increased. Thus economist who argue that "the economy would have righted itself" in the 1930's if only wages and prices were "fully flexible downward" because of the "real balance effect" could not be more wrong concerning our "debt money" economy.

To his credit, Irving Fisher saw more clearly. In his much neglected book, 100% Money, he showed that as prices fall real debt (nominal debt/relevant price index) increases even as the money supply shrinks. This can only lead to further distress and bankruptcy. He wrote:

"the very effort of individuals to lessen their burden of debt increases it, because of the mass effect (...) in swelling each dollar owed. Then we have the great paradox which seems to me to be the chief secret of ... great depressions: The more the debtors pay, the more they still owe in terms of real commodities. The more the econcmic boat tips the more it tends to tip. It is not tending to right itselt. It has tipped so far that it is capsizing." {footnote 11} (Emphasis his)

Indeed, the evidnence of the 1930s is that the economy responds to price level changes not according to the "Keynes" and "Pigou" effects taught in the textbooks, but in a "perverse" or "Senyek-Uogip" manner. Thus, from 1929 to l933, while the price level was falling, "IS" and "LM" functions were shifting to the 1eft and upward, while from 1933 to 1939, while prices were generally rising, these functions were shifting to the right and downward, or jus the opposite of what eonomists teach students. These "peverse" shifts still remain after allowance

10. The unusual situation of the United States in the late 19th century: the post Civil War deflation with a return to the gold standard, rapid industrialization together with massive immigration from low wage countries, etc., led to an important exception to this general rule. As Willim F. Hixson shows, "During a very intersting three decade period (1870-1900) the money supply of the USA was more than quadrupled... But prices did not quadruple. They declined to something like 7/lOths of the original level. For the 1870-1900 period the compound per annum growth rate oF the M2 money supply was 5.43 percent. Real output in the country grew at an annual rate only a little less. The civilian labor force increased from 12,930,000 to 29,070,000 without any really significant increase in the rate of unemployment. Yet, the general price level ... declined 1.10 percent per annum." Willim F. Hixson, "Noninflticary Money Supply Growth," Economic Reform, Vol. 5, 6, June 1993, p. 8.

10 {should be 11}. Fisher, 100% Money, Adelphi, New York, 1935, p. 111.

{p. 13} is made for changes in the money supply, and are readily accounted for by the real interest rate effect of changing price levels.

Our economy does not grow sustainably at its full employment potential except in years when the money supply grows about as rapidly as income.

Never in the 20th century has the real output of the U.S. economy grown significantly except in years in which the money supply grew. But there are a number of years in which the money supply and real output grew in which the price level did not increase. So a "quantity of money theory of real output" is more true than familiar "quantity of money theory of the price level." Thus should not economists drop the "neutral money" or "classical dichotomy" that "money does not matter for real things" as a relic from the past?

Our economy does not grow sustainably at its full employment potential because interest income tends to grow more rapidly than does total income.

Interest income fluctuates violently as a percentage of GNP whether measured as gross "Monetary Interest Paid" (MIP), Personal Interest Income (PII), or Net Interest (NI). M I P measures the gross interest payments made by the non-financial sector - ordinary business, households and government, to the financial sector, together with certain interest payments made within the non-financial, and within the financial, sectors. This series is not available in Canada. In the U.S. MIP rose from 11% of GNP in 1929 to more than 16% in 1932 as income fell faster than interest and debts, then fell to around 7% of GNP during the World War Two and early postwar years. Since then MIP has increased greatly relative to GNP, surpassing its 1932 percentage by the early 1970s, reaching an all time peak of 32% of GNP in 1981, then fluctuating between 30% and 32% of GNP in subsequent years. MIP in 1984 exceeded $1 trillion dollars for the first time and reached $1.792 trillion in 1991.

In recent decades PII has averaged less than one-half of MIP - the remainder of MIP appearing in GNP as wages and profits of the lending entities, or in the case of interest on government debt, being excluded as a "transfer payment." Interest paid by government and received by persons is included in PII but excluded from Net Interest (NI).

Net Interest fell drastically as a percentage of GNP during the depression and war period, from a peak of 8% in 1932 to less than 1% in the immediate postwar years. Since then it has increased again and hovers in the 6% to 8% of GNP range.

Should interest, however measured, have continued for another 40 years, to increase its share of GNP as it did from 1945 through about 1985 it would have become 100% of GNP--an obviously impossible result. Instead, some sort of "natural limit" seems to have been reached by the early 1980s. However, the increasing "stagflation" of the U.S. since the early 1970s suggest that economy cannot run smoothly with MIP much in excess of 15% of GNP, PII in excess of 6% of GNP, and NI above 4%.

{p. 14} As we have seen above, Keynes argued in The General Theory that the natural equilibrium of the economy as not at full employment, a la Say's Law, because "for decades or even centuries at a time" the rate of interest is too high to allow full employment. By extension we may posit that, with a fractional reserve banking system and a central bank which favours rentier interests over all others, it is "natural" for the rentier share to rise too high for full employment, or even stability - thus leading to collapse and depression. {footnote 12}

What the ten fold rise in the net interest share, from 0.8 percent of GNP in 1946 to 8.6 percent in 1982, coupled with the rise in the wage share from 56.3 percent to 60.2 percent over the same period, did was to squeeze the profits out of U.S. capitalism. In 1946 "Enterprise Income" - the sum of corporate profits, farm and non farm unincorporated income - was 25.2 percent of GNP, but only 10.3 percent of GNP in 1982. Most of this decline is from the collapse of the share of unincorporated business, with farm proprietors' income falling from 7.0 percent of GP in 1946 to a mere 0.8 percent in 1982; and non-farm proprietors' income falling from 10.1 to 4.8 percent. However, corporate profits fell from 8.1 percent of GNP in 1946 to 4.7 percent in 1982 before recovering to 6.2 percent in 1983, 7.1 percent in 1984, 6.9 in 1985, 7.1 in 1986 and 6.1 in 1991.{footnote 13}

Our economy does not grow sustainably at its full employment potential because interest rates are not held roughly constant at the productivity gain.

Much that is relevant here has been stated above. Interest rates above the natural rate lead to inflation as well as unemployment. The conventional explanation that "High inflation causes high interest rates," is superficial and reverses causality. Fundamentally, high interest rates cause inflation by requiring the money supply to grow faster than goods can be produced if disaster is to be, at least, postponed. Further, as we shall see, if the supply of official money is limited by central bank action to restrict reserves, financial innovations can all too readily press high interest rate and therefore all the more inflationary "money substitutes" into service.

It is the nature of exponential growth that what at first seems unimportant, unalarming, and wholly sustainable eventually explodes. By the time we recognize the peril it may be too late. Indeed, Albert A. Bartlett, a professor of physics at the University of Colorado, maintains that, "The greatest shortcoming of the human race is man's inability to understand the exponential function." This failing leads us to construct institutions, such as fractional reserve banking with compound interest, or government borrowing from private banks, which set up wholly unsustainable patterns of growth. Paul Volcker did not understand the exponential implications when he tripled interest rates in 1979 until too late, as he later in part conceded.

12. This is then another way of making some of the points about over-indebtedness leding to debt liquidtion depression made by Fisher in Booms and Depressions, (Adelphi, New York, 1932); see also his, "The Debt-Defaltion Theory of Great Depressions," Econometrica, Vol. 1, No. 4, October, 1933.

13. Economic Report of the President, February 1970, 1993.

{p. 15} Michael J. Boskin, Chairman of the Council of Economic Advisors under President Bush recognized the peril of U.S. financial arrangements. He wrote:

Let D represent the debt-to-GNP ratio, d the deficit-(net of interest)-to GNP ratio, r the real interest rate, g growth of real GNP. Then, by definition,

Dt = dt + (rt - gt)dt

for a fiscal program with consltant d, and constant r and g, D will evolve toward an equilibrium D, (if g>r) of Dt = d/(g - r). The ratio of the federal government debt to GNP evolves through time depending upon this primary deficit and the relation between the real rate of interest and the growth rate. For example, if we start out with a positive national debt, and the real rate of interest paid on the national debt exceeds the growth rate, then the interest payments will grow more rapidly than the GNP, and if nothing else has changed, eventually the interest payments will consume all the budget, then all of GNP, then all of national wealth in an explosive pattern. {footnote 14}

Though Boskin applies his analysis merely to the U.S. federal debt, now some $4 trillion, his model applies to all debts in the U.S., now some $12 trillion. As we see in Figure 1, it is the private debts which have been growing "in an explosive pattern," the public debt growing relatively to GNP only since about 1978.

Our economy does not grow sustainablv at its full employment potential because the deree of inequality in the income distribution causes the "rich to get richer and the poor to get poorer."

It has been well documented that the average U.S. and Canadian worker has a lower real income now than in 1970, while at the same time the percentage of total income received by the top 10% has grown greatly. Indeed, by one calculation, three quarters of the total increase in GNP in the U.S. in the Reagan-Bush years was received by the top 1%--a mere 600,000 families. Only so long as the savings of the rich can be channelled into real investment, and these savings be sufficiently supplemented by new money borrowed into existence by the rich and the poor can full employment be achieved. The longer a "boom" continues, and the more the gains are received by the already well to do, the harder it becomes to find profitable outlets for further investment. Increased speculation in existing assets, and junk bond financed hostile take overs mark the final stage before a general depression.

14. Michel J. Boskin, "Concepts and Measures of Federal Deficits and Debt and Their Impact on Economic Activity," in The Economics of Public Debt, Kenneth J. Arrow and Michel J. Boskin, Eds, London, Mcmillan, 1988 pp. 80-2.

{p. 16} WHAT MUST BE DONE?

The public, private, and international debt crisis cannot be solved by raising taxes or cutting expenditures, or by any combination of these two, (although doubtless funds freed by the "peace dividend" need to be shifted to meeting real economic needs, and the fairness of the tax code can be much improved) because these contractionary moves will make the depression worse, perhaps even increasing the deficit and the rate at which debts grow. The solution involves a drastic cut in interest rates, an end to government borrowing from private money creators--i.e. private banks, and an expansionary monetary-fiscal-incomes progran to end the depression, resume growth, particularly in the third world, and clean up our environment.

It is essential to recognize that the basic financial problem is a disproportionate growth of debt and interest on debt. This problem is caused by our fractional reserve banking system which creates almost all of "our" money supply as interest bearing debt to private banks. Once the problem is clearly stated the solution is also clear. We must create a larger fraction-perhaps all--of our money supply debt an interest free. Only by so doing will it be possible to end and then reverse the disproportionate growth of debt and interest.

Money does not have to be a debt, nor does interest need to be paid to keep it in circulation. The commodity monies of old--gold, silver, wine--were not debts. Government or central bank currency is only nominally a debt--a promise to pay with an identical piece of paper.

Some "interest and debt free" money is circulating today. When a Federal Reserve Bank or the Bank of Canada decides it needs a new building it spends the necessary money into circulation. Also, most of the interest private banks receive on their loans is spent back into circulation interest and debt free as they pay their workers, phone bill, taxes, profits and so on. This mitigtes that familiar complaint of monetary reformers that when money is created by loan the principal is created but not the money necessary to pay the interest. Indeed, without this mitigation the "debt money system" would have failed completely long ago.

Banks can only lend money into circulation or spend it back into circulation as they pay their climaints. Governments can spend, lend, or transfer money into circulation. They can lend at zero interest, or near zero interest. By wise use of these powers governments and the international community can end the debt slavery which is crippling the world economy. By unwise use of these powers governments can, and have, caused much inflation and economic disruption. However, it is difficult to conceive of a system more unwise than our present one-where govemments have largely given over to private interests the public function of money creation--and then borrow the money back at perpetual interest!

{p. 17} Regarding this "quaint and curious custom" the great "leftist" economist Karl Marx once wrote:

"Is there anything more crazy than that between 1797 and 1817, for example, the Bank of England [a private bank until 1947], whose notes only had credit thanks to the state, then got paid by the state, i.e., by the public, in the form of interest on government loans, for the power the state gave to it to transform those very notes from paper into money and then lend it to the state?" {footnote 15}

The answer to Marx' question has to be, "Yes, there is something crazier--the fact that the world still uses pretty much the same system, even though it periodically breaks down. Indeed, under the Maastrcht treaty the EC countries are giving over their remaining sovereignty regarding money to an 'independent' central bank, which will clearly represent the interests of the private banks. Nor is that all: it is proposed by Harvard economist Richard D. Cooper that all nations subordinate themselves to a "World Bank of Issue."

Cooper advocates:

"..a radical alterative scheme for the next century: the creation of a common currency for all the industrial democracies, with a common monetary policy and a joint Bank of Issue to determine that monetary policy. Individual countries would be free to determine their fiscal policy actions, but those would be constrained by the need to borrow in the international capital market." {footnote 16}

The emphasis above is Professor Cooper's. However, I would have emphasized the last sentence of the quote, as it proposes nothing less that sovereign nations turn over creation of their own money supply to international bankers that they do not even control. The Bank of Issue would be ruled by a governing board,

"made up of representatives of national governments, whose votes would be weighted according to the share of the national GNP in the total gross product of the community of participating nations. The weighting could be altered at five-year intervals to allow for differences in growth rates. {footnote 17}

Unless great care is taken to provide democratic control, Cooper's proposed bank would merely perpetuate the domination of our world by bankers, rather than cure the irrationality of the debt money system. A system still so irrational, despite all the reforms since the Great Depression, as still to be the greatest peril to the economic system.

15 Karl Marx, Capital, Vol. III [1894] New York: Vintage-Random House 1981 pp. 675-6

16 Richard N. Cooper, "A Monetary System For The Future," Foreign Affairs, Vol 63, N. 1., Fall 1984, pp. 166-84.

17 Cooper p. 178.

{p. 18} As Henry C. Simons put it in 1948:

"If... capitalism and democracy are soon to be swept away... then commercial to banking will belong the uncertain glory of having precipitated the transition... Capitalism... can hardly survive the political rigors of another depression... [but] banking... seems certain to give us both bigger and better recessions hereafter.. .Given release from a preposterous financial structure, capitalism might endure indefinitely its other afflictions. {footnote 18}

Always remembering that the best of rules and institutions can be subverted and that it is particularly difficult to prevent that subversion in the case of money, I suggest the following rules as guides to financing sustainable development:

1. No sovereign government should ever, under any circumstances, borrow any money from any private bank.

Governments should target to balance their budgets at "full employment" or run small deficits which are financed by government money creation. If a slump occurs governments should finance all deficits at the central bank--or by issuing Treasury Money, such as the United States Note, and the Dominion Notes which were once Canada's main currency. If extraordinary expenditures must be made--say for a "war to save the planet," taxes should be supplemented by borrowing from the non bank public--who lend existing money--while the banks create new money every time they lend.

Private enterprise should borrow money from private banks at interest rates kept low by usury laws. Public enterprise should borrow money into existence from publicly owned banks. Ideally, the government should create all the money--as was advocated by Irving Fisher, Henry C Simons, and until recently by Milton Friedman. The private banks would obtain money to lend from savings accounts with penalties for early withdrawal. However, all sorts of compromises are possible. A great increase in the sustainability of the financial system would be achieved if the government created, say, half of the new money annually, rather than 2% to 5% as is presently the case in many countries. If the combination of private and public money creation results in "overheating," the private creation should be curbed by increased reserve requirements and credit controls to rein in speculative "bubbles."

2. No national or local government should borrow foreign money to finance domestic spending when there is excessive unemployment in the country. Foreign borrowing by the private sector should only be allowed to finance capital goods which cannot be produced efficiently locally, and when there is a good prospect that the loans can be repaid through increased exports.

18. Henry C. Simons, Economic Policy For A Free Society, Chicago, University of Chicago Press, 1948, pp. 56, 80.

{p. 19} Any country with excessive unemployment is attempting to "save" too much relative to its spending out of its potential full employment income. The cure is not foreign borrowing, but very low interest rates, central bank money creation and expansion of public and private spending. Such policies will result in some decline in the country's foreign exchange rate with consequent increase in employment and exports. If the increased domestic income causes imports to expand faster than exports (despite the increased cost of foreign goods) the solution lies in some import controls. This may prove necessary if the rest of the world remains depressed.

3. Governments, like businesses, should distinguish between "capital" and "current" expenditures, and when it is prudent to do so, finance capital improvements with money the government has created for itself.

Junior governments, which are denied the privilege of money creation, should have their capital expenditures financed by loans from the central bank or treasury at zero, or near zero, interest rates. The "Sovereignty Loan" movement now gaining support in the U.S., Canada, New Zealand, Australia and elsewhere is just such a plan.

4. Taxation and government regulations should be modified to favour equity finance over debt finance of private enterprise and to curb speculation.

One possible reform would be to put interest and dividend income on a "level playing field" by repealing the corporate profits tax, or even by giving more favourable tax treatment to equity financed companies. Governments should actively suppress speculative "bubbles" by preventing the creation of new money for this purpose and by taxing heavily those who frequently turn over their holdings of stocks, bonds, commodities, and currencies. Perhaps the "west" has something to learn from the "Islamic banking" movement by which all depositors become part owners of their banks and the banks, in turn, make equity investments in businesses.

5. Current, wholly inadequate, donor nation foreign aid programs must be replaced by an internationally administered "Marshall Plan" financed by money creation adequate to end the worst spects of world hunger and absolute poverty within a relatively few years, while healing the global environment.

We must reform the IMF and the World Bank, or replace them with more wisely constructed institutions which are empowered to grant the Third World the $125 billion a year in international money that Aenda 21 calls for, interest and debt free. This sum, with Financing appropriate safe guards to assure that it is spent wisely, should be allocated to Third World governments on the basis of their development plans and needs for imports, not according to their present wealth. These funds would not be "foreign aid" of any particular country, but rather a boost to the "effective demand" of the Third World for the First (Second and Third) World's goods. Countries would compete to earn this new international money exactly as they do to earn debt money today. The new money would enable indebted countries to pay off their international

{p. 20} bank debt--without the Ponzi Finance game by which interest on old debts is paid only by acquiring still larger new debts.

We moderns like to think we are more civilized than the ancient Romans who's most popular entertainment was to watch men kill each other in the arena, or Aztec priests who cut out the hearts of 20,000 captives one day "to improve the weather," or 19th century apologists for slavery. It is not so. For as UNICEF has shown, every year in which we fail to solve the debt crtsis causes the deaths of 500,000 young children--in a world that grows more food than it knows what to do with. Future ages will have as much trouble understanding why it took us so long to end the horror of debt slavery, as we have today in understanding why it took us so long to end the horror of debt slavery, as we have today in understanding why it took "four score and seven years" for the United States, "conceived in liberty and dedicated to the proposition that all men are created equal" to end the horror of American slavery.

Suggestions for Further Reading

On Financing Sustinable Development

Agenda 21 & The UNCED Proceedings, N. A. Robinson, ed., (Oceana, New York, 1992) Hrold Chorney, John Hotson and Mario Seccareccia, The Deficit Made Me Do It!, (Canadian Centre for Policy Alternatives, Ottawa, 1992)

On Third World Debt:

Patricia Adams, Odious Debts: Loose Lending, Corruption and the Third World's Environmental Legacy, (Energy Probe, Toronto, 1991) Susan George, A Fate Worse Than Debt: The World Financial Crisis & the Poor, (Crove Weidenfeld, New York 1990) UNICEF, The State of The World's Children, (UN, New York). All recent annual issues focus attention on the human costs of the debt crisis.

On Capital Flight and Hot Money flows:

R. T. Nylor, Hot Money, (McClennan & Stewart, Toronto, 1987)

On Monetry Reform:

Willim F. Hixson, A Matter of Interest: Reeamining Money, Debt, and Real Economic Growth, (Praeger, New York, 1991) James Gibb Sturt, Economics of the Green Renaissance, (Ossian, Glascow, 1992) Margret Thoren, Figuring Out The Fed: Answers to the most frequently asked questions about the Federal Reserve System, (Truth In Money, Inc., Chagrin Falls, Ohio, 1985) The COMER Papers, Vol 1. (University of Waterloo, 1987) Vol. 2, (UW 1992) Vol. 3, (UW 1993)

{p. 21} Figure 1

Outstanding Debt of U.S. NonFinancial Borrowers as a percentage of Gross National Product: john-hotson.jpg

{end}

(2) Banana Republic? No, Banana Colony, by Dr H. C. Coombs

During the 1950s and 60s, Dr Coombs was Governor of Australia's central bank (which is publicly-owned). Later, he was Chancellor of the Australian National University (ANU) in Canberra. The major complex of buildings in the research part of the university is named "the Coombs Building" after him.

Aboriginal people named him "Short Father" because of his efforts to help them get some control over their own destiny.

Paul Keating (Labor) was the deregulating and privatising Treasurer, later Prime Minister, known as "the lizard of Oz".

Banana Republic? No, Banana Colony, by Dr H. C. Coombs

The former Governor of the Reserve Bank Dr H. C. Coombs, who has been described as the Australian of the century, argues that Australia 's crisis will not go away until we regain our economic independence.

Australian Business Monthly, March, 1992

It is a pity that Paul Keating, in announcing the success of his challenge for the prime ministership, repudiated his earlier judgment that "this was a recession we had to have."

Like the utterances of all oracles, this statement was cryptic and its meaning obscure. But it at least conveyed the suggestion that the recession could be a consequence of what had gone before - that it derived from perhaps unwarranted assumptions and misguided judgments which, at least in part, underlay our government's earlier policies. It therefore could have been interpreted as expressing a willingness to think again.

Such an interpretation would have afforded more closely with Keating's earlier one-liner, that he feared Australia was on its way to becoming a "banana republic"; in other words, that he feared the Australian economy was becoming so burdened with debt to the outside world that it had lost the ownership and control of its own resources and industries and had beeome simply an instrument of the capital, the enterprise and the technology of its dominant imperial power. There was wisdom in that judgment.

{Keating used it to justify the deregulation and privatisation which brought this result about. The public's worry over foreign debt was used as an excuse to further sell off Australian assets}

Unfortunately, Keating identified the destructive debt only as that arising from the government's borrowing. To his credit he acted forcefully to redirect fiscal policy to the reduction of that debt. But he ignored the need to reduce the greater burden on the economy imposed by payments abroad to which the private sector was increasingly committed.

Enterprises taken over by, or merged into, overseas interests are now committed to remit interest and dividends; to hire technological property from their principals; and to employ expensive consultants, accountants and others providing professional services from firms associated with those principals or with their Australian branches or subsidiaries. These commitments, like those of governments to overseas creditors, have to be met from the proceeds of the Australian economy's production or, increasingly, from the sale of the nation's assets.

Had the government acted as promptly to see that these commitments were repatriated and the relevant services provided by our own knowledge and skills and financed from our own savings as it had to bring government indebtedness under control, the dilemna now facing the economy would be less absolute.

That dilemma is classical. At present we are impaled on the horn of unemployment, flagging expenditure and investment. But if the government is too enthusiastic in its attempts to blunt that horn or to enable the economy to evade it, we may swing to face the horn of even greater deficits in the balance of our international payments, of increasing losses of our national assets and of rising levels of inflation.

But that is not all.

So far the businessmen, union and community leaders with whom the Prime Minister has chosen to consult seem to be interpreting the recession as just another minor hiccup in the flood of expen

Posted: 07/ 29/ 03 2:10 pm Post subject:

Posted: 07/ 29/ 03 2:51 pm Post subject:

Hypertiger, your premise is flawed. Debt is not money but the absence of money. Low lending rates are permitting American consumers to take on more new debt like you say, but they also permit existing debt-holders with variable rates to pay off the debt sooner to whoever they owe it to. I envision not an implosion of the economy in the next 12 months but some progress among millions of debt-holders in paying down part or all of the principle on their debts.
Hurray

_________________
Alberta is prosperous, the population is growing and the government is debt-free. I have no doubt that Liberals, NDPers, Red Tories, Kyoto Treaty bureaucrats, and other provinces will try to make Alberta into Canada's ATM machine.

Posted: 07/ 29/ 03 9:22 pm Post subject:

Hotson is an idiot.....................

He's probably a friend of David Anderson...................... Very Happy

_________________
To admit to being Liberal is to repudiate Rule of Law, to being CPC is to condone mediocrity.

Posted: 07/ 29/ 03 9:41 pm Post subject:

Hypertiger - - I didn't have time to read every response to your post, so maybe someone has already said this: But your graphs yanked my memory back to the 1930s and the latter 1940s when Technocracy was in full bloom in Canada.

(It was outlawed during the war)

Their economic doomsday graphs were much like yours.

And you know what?

I know whereof I speak.

I was director of education for the Vancouver BC Section of Technocracy Incorporated.

I was actively instrumental in raising the funds that allowed us to purchase our own HQ building on West Georgia Street in Vancouver.

It took me about a year to smarten up.

How many months do you still have to go?

Well - - Technocracy met its doom alright.

But the free market economy is still zooming along - - hindered only somewhat by the new generation of doom-sayers and their interventionist cohorts.

Cheers.

Ol' Tom Humble.
_________________
http://www.freedominion.ca/humble/index.html

Posted: 07/ 31/ 03 12:23 am Post subject:

You are clueless Tom...It took me 10 years to smarten up...

the system from 45-71 was called the Bretton Woods Gold backed fractional reserve banking system and when the US ran out of gold to back the system they decided to switch to a debt backed system called The Floating exchange rate debt backed by debt fractional reserve system.

The system that you people thought was going to collapse doesn't exist anymore because it was replaced before it could cause a devestating collapse...But the current system which you know nothing about and refuse to want to know anything about...Is in the collapse phase right now and there is no new system that can be put in place to prevent the ugly realities which you think can not happen from happening...

Gut wrenching reality is coming whether you think so or not... You can't escape but you can prepare but if you don't, then too bad I guess?

Posted: 07/ 31/ 03 12:55 am Post subject:

Hype you sure have a lot of information but it is all disjointed and has a large dollup of paranoia inserted. Yes we live in a fiat money world. Currency is issued as a debt to be repaid by productivity....it is the capability of a nation's productivity that valuates the currency it issues.
The system works well as long as the productivity is sustainable and expands. The place where this falls down is in nations with limited productivity.....like small overpopulated islands with depleated natural resources that must rely on external materials and markets for a volitile manufacturing productivity base.....say like Japan who's yen/bank crashed.

It is impractical to issue precious metals as currency now as it would devalue its own worth by covering the needed money in circulation. Productivity is the only rational commodity of value to which we can back the amout of currency needed by end users.

US and other industrial economic markets are going through a long term deflationary period due to productivity lags which will be picked up by emerging capital development markets. Like all other things dooms sayers of the US economy pace the pavement with other lone paranoids

If the currency collapsed tomorrow, your potential for productivity does not vanish so value is retained....all that is needed is a repalcement barter system to fill the holes left by loss of faith in scriped currency.
_________________
Of all tyrannies a tyranny sincerely exercised for the good of its victims may be the most oppressive; those who torment us for our own good will torment us without end, for they do so with the approval of their own conscience. - C.S. Lewis, In Freedom .

Celebrate Hard Likker and Handgun week here at the Shadowy GroupTM

Posted: 08/ 01/ 03 3:35 am Post subject:

Don't worry you'll see how wrong you are...

Deflation would destroy the US...it is destroying the US...

The only way to maintain a stable or expanding money supply which is debt is with debt inflation...consumers signing on the dotted line...

You have all been fooled your entire lives...no amount of positive thinking are denial will save you from whitnessing a not seen in living memory event... Not a human alive on the planet has seen such an event or is able to comprehend it... A run of the mill hyperdeflationary implosion of debt which vaporizes a debt backed by debt system...

I've studied the Floating exchange rate debt backed by debt fractional reserve system for 10 years... It wasn't until last year that I fully comprehended how the system worked to be able to back up my claims.

The above mentioned system is the cause and when you open your eyes in the morning that is the effect...

At what point in your education did you hear the words Fractional reserve banking?

It is the system that provides you with the current fantasy which you have mistaken for reality...

paranoia? You are the one that is paranoid because if what I am saying is true (It is unfortunately) then the very foundation of your just think positive religion is about to blow away in the wind...

None of you prople can even begin to comprehend what I'm talking about...

6-10 months max left in the good old days, maybe less...

Don't worry you don't have a hope in hell of countering my arguments...

It has taken decades to get to this point of weakness it will take decades to get back here again...

I know more than bankers and economists... because they know how the system works...I comprehend how it works...

I have a supreme understanding of the subject...

Well Hyper why don't make money from your knowledge?

The system needs a mass of ignorant victims to function...

If "they" taught the basic system mechanics in school no sane person would submit to such a system...

As soon as you comprend how the system works, and I've laid it out numerous times in my posts but you just don't seem to get it...

The basic mechanics...once again

Fractional reserve banking has 3 stages

Stage 1 inflation of debt and the destruction of savings
Stage 2 deflation of debt and the destruction of equity
Stage 3 Bankruptcy of the banks and collapse of the economy

We are at the tail end of stage 1 in the last gasp of the system...

Stage 2 should begin to be evident in the next 6-10 months...

All social political and economic realities are fueled by consumer debt creation... and unfortunatly consumers have a finite ability to consume debt... the system has reached maxout...

Don't worry, unless you die real soon you have a front row seat...to the greatest financial collapse in modern history, maybe history itself.

It will make the Great Depression look like a joke...

Hard to believe... better start clicking those ruby slippers together double time...because your time is running out...big time.

Posted: 08/ 01/ 03 10:31 am Post subject:

Hypertiger

I am not weighing in on this argument because I don't have the education in economics and this is pretty esoteric stuff.

However, you have given us a timeline of 6-10 months. Lets see if you will put your money where your mouth is. I have a 1996 Saturn that I am willing to put up in exchange for an item of equivalent value. According to your predictions, a cash bet wouldn't be worth the paper it was printed on if your predictions come true so put up something of equivalent value (let's say $4000 as of Aug 15th).

What do you say?

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