Ellen Brown Wants To Imitate Dying Japan’s ZIRP System

As always, there is tremendous misunderstanding about the nature of a gold-based currency system, the nature of ‘What is credit?’ and misunderstanding the role ‘capital’ plays in not only economic systems but monetary disciplines.  Ellen Brown is immensely popular because she is peddling this snake oil idea that we can merely print our way out of our international debts.  And that infinite government debt is a good thing so long as it is ZIRP in nature, that is, costs nothing at all.  But the collapse of Japan shows us starkly the dangers of a ZIRP system.  Instead, Ellen thinks that Japan’s system is GOOD and is operative, not defective!  I am just gob-smacked by this delusion.

.

Before I go yet again into her paper money machine story, I want to bring up the other industrial giant that is against heavy government debt and lots of paper money, that is, Germany.  Here is this week’s news from that workahholic nation:  German Chancellor on the Offensive: Merkel Blasts Greece over Retirement Age, Vacation.  The PIIGS are nations that enjoy a good time.  Germans believe in working hard.  France takes long vacations and the Germans work.  The euro is based on all of Europe’s economies but the industrial engine of export power is in Germany more than any other single confederate nation in Europe.

.

The German mark was strong until Germany united.  The costs of rebuilding and reintegrating East Germany was tremendously expensive and right in the middle of doing this, Germans were barely persuaded to support the creation of the common currency.  France, in particular, wanted to prevent a reunited Germany from being an independent power.  So the EU was expanded via the euro and now Germans are very pissed off about repairing everyone’s credit while other countries continue to provide better benefits.

.

On top of this, the US continues to expand its imperial military system.  This is done to give us the illusion of power as all the Warsaw Pact countries eat up US resources trying to force us to protect them at our expense.  All of our ‘allies’ in Asia do this, too.  Naturally, since the President is visiting Europe, he is giving them taxpayer goodies we shouldn’t be handing out:  Obama to reassure Poland with air base deal.

.

We are going bankrupt because it is ridiculously easy to print more and more money and then have all our allies and trade partners buy up all our debts and of course, hide much of this excess money printing in FOREX holdings.  This process has allowed the US to overspend by about $5 trillion.  The plan is to continue doing this.  Now, the US talks about cutting Social Security and Medicare but do note at the same time, money flowing to Poland and Israel, for example, is rising, not falling.  The US is expanding the sea presence in Asia, not making it smaller.  The navy is growing, not shrinking, the air force is expanding and bombing more and more, not less and less.

.

Our ‘allies’ are demanding more military spending, not less.  They don’t use Social Security, they rely on our Pentagon Security to make money, invade countries, steal oil, etc.  This is why we are now using $20-50 million a day bombing Libya, for example.

.

The key to government overspending is often military.  The US is at war with a billion Muslims.  This is very expensive.  Money printing is out of control.  We seem to have no inflation only because our government refuses to count food and fuel in the inflation figures.  Meanwhile, Ellen Brown, like Krugman at the NYT, has a lot of happy believers who want to follow her down the paper money trail to utter happiness via tons of cheap debt.  The US has to cut spending this year as well as raising taxes but won’t do either except for the GOP wanting to eliminate social spending while expanding aid to Israel and military spending.  Anyway, here is an editorial by Ellen at Asia Times Online :Japan shows how to defuse debt time-bomb: Asian news and current affairs

.

A rerun of 1931?

The sort of chaos that could ensue was seen when Great Britain reneged on its deal to redeem pound sterling banknotes in gold in 1931. The result was the worst global depression in history. When the pound went off the gold standard, markets panicked. People rushed to exchange their paper money for gold, in any currencies in which that was still possible. The gold wound up hidden under mattresses and in safety deposit boxes, unspent; and the banks from which it was pulled, having no reserves to back their loans, quit lending or closed their doors. Credit froze; business ground to a halt.

.

As other countries ran short of gold, they too were forced to take their currencies off the gold standard. The last holdouts suffered the most, including the United States, which kept its gold window open until 1933.

.

Freed from the ‘Cross of Gold’ The transition off the gold standard was a painful one; but according to Beardsley Ruml, Chairman of the Federal Reserve Bank of New York, the country was the better for it. In a paper read before the American Bar Association in 1946, he said that going off the gold standard had finally allowed the country to be economically sovereign:

.

Final freedom from the domestic money market (Elaine: ie, infinite inflation) exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity.

..

Freed from the strictures of gold, (ELAINE: The gold standard continued to exist for settling US dollars used in world trade) Roosevelt was able to jump-start the economy with deficit spending. (Elaine: to pay for this, we had a 90% tax rate at the top) As Marshall Auerback details, the next four years constituted the biggest cyclical boom in US economic history. Real GDP grew at a 12% rate and nominal GDP grew at a 14% rate.

.

I hate these thumbnail sketches of history.  Great Britain had to drop the gold standard because Germany refused to pay reparations.  France also had to go off the gold standard due to WWI costs, too.  But both HELD GOLD IN RESERVES.  So, even if both wouldn’t let anyone get this gold, they still held it in reserve and other COUNTRIES such as the US COULD access these gold reserves due to money exchanges.  France and England simply wouldn’t let civilians do this, but governments continued to use the gold standard between central bankers.

.

Back then and even today, when a country couldn’t pay off foreign owned debts, they had to turn over something.  Normally, this was gold.  When the gold reserves ran out, then they had to hand over industries, regions, people, infrastructures, etc.  This continues to this day with the IMF seizing resources when countries default.  Any currency is ‘convertible to gold’ via buying gold.  And many still do this to protect their CAPITAL reserves from paper inflation.

.

Holding lots of paper is dangerous.  It can suddenly lose its value.  Big time.  Only when many countries work in tandem to hold a paper currency, can it be used in lieu of gold for resolving intra-central bank swaps.  The danger US paper dollars face is, if just one central bank decides to spend all of their paper US dollars on international markets, all US dollars will suddenly lose great value very suddenly.  The more central bankers hold US dollars, the more tempted one of them will be to suddenly buy up many natural commodity markets all at once and thus, convert US FOREX dollars into say, oil contracts.

.

This, in turn, will wipe out the value of everyone else’s dollar holdings.  It is a delicate matter.  Right now, no one wants to overly irritate OPEC by talking about dumping dollars since this would be used to move dollars into OPEC hands just as it loses much of its value.  So China is deep in negotiations with oil pumping nations over this very issue.  Now that Japan may be forced to disgorge its $2 trillion in FOREX holdings and US debt, the situation darkens greatly.

.

By the way, gold mining, like uranium mining, is hazardous to one’s health so Gold Companies May Face $100 Billion Liability for Ill South Africa Miners – Bloomberg.  Many people have died for eons, seeking gold.  The reason for this is simple: gold is ‘forever’ and is ‘unchanging’ it doesn’t rust or lose its luster.  So this makes it a good benchmark for ‘value’.  Remember: money is simply a way of tracking relative value between disparate items and over lengths of time.  Which is why inflation is so insidious: it changes the ranking of value a great deal and thus is quite troublesome especially when figuring out debt costs.

.

Back to Ellen:  Dealing with rising debt servicing costs

.

There is a potential time bomb in a growing federal debt, but it is one that can be defused.   (HAHAHA) The debt has risen from $10 trillion to $14 trillion just since the banking crisis of 2008, not from ”entitlements” but due to the Wall Street collapse and bailout. Just the interest on this growing debt could cripple the tax base if interest rates were at normal levels, so they have had to be pushed almost to zero. The result has been to create a dollar carry trade. This has facilitated speculation in commodities, a major cause of today’s commodity bubbles.

.

There is, however, a solution to this problem, and it was discovered by Japan. The government can spend, not by issuing bonds at interest to the public, but simply by creating an overdraft at the central bank, as Ruml recommended. The Bank of Japan now holds an amount of public debt equal to the country’s GDP! As noted by the Center for Economic and Policy Research:

.

Interest on [Japanese] debt held by the central bank is refunded back to the treasury, leaving no net cost to the government on this debt. . . . Japan continues to experience deflation, in spite of the fact that its central bank holds an amount of debt that is roughly equal to its GDP. This would be equivalent to the Fed holding $15 trillion in debt.

.

This is Ellen’s problem: she can be quite correct about several things and then drives off the cliff.  This is because she loves the idea of ‘free credit’ MINUS CAPITAL.  The US has capital, of course, it is our lands, our industries, our highways and ports, our infrastructure systems, etc.  This stuff is valuable and foreigners, as they hold more and more US debt, are swiftly buying up all of this.

.

Traditionally, the higher the debt load, the higher the interest rates.  This is natural: there has to be SOME CURB on borrowing!  The more debt, the more risk of default.  The US talks all the time about defaulting which is why people are lowering our credit rating.  Not too much for fear of spooking our creditors.  But they are getting spooked, anyways.

.

The very foolish lady here, Ellen, thinks it is WONDERFUL that Japan is so deep in ZIRP debt.   She thinks this is something we can do!  But Japan had until this spring, a positive trade surplus flow which meant, they were accumulating capital even as the export industries were not paying sufficient taxes to support the government.  Now, Japan’s internal government debt owed mostly to its central bank, is not 100% of GDP but over 210%, most likely, 250% of GDP.  A nasty development indeed.

.

China holds eight percent of US debt and Japan also holds 8% and this means just two major trade powers hold 16% of our national debt.  Both run trade surpluses with the US.  This is intolerable and is nothing like what Japan is doing.  The Japanese central bank can buy and hold non-performing debts (that is what ZIRP really is if the principal isn’t being paid off and there is no interest on the loans!) only by also supporting a collapse in the economic condition of the mass of workers in Japan.  Nearly half of all workers are now ‘part time’.

.

The poverty of the generations born since 1980 is tremendous to the point, the family system is collapsing and children are vanishing.  Many are forced to live with parents and grandparents and child abuse is rising even as the birthrate plummets.

.

Ellen doesn’t believe in giving out statistics when bloviating:  National debt: Whom does the US owe? – CSMonitor.com

.

Within this slice, the largest category is individuals – Treasury notes are good solid additions to any portfolio. US individuals hold 12 percent of the country’s debt. Next under the domestic category comes the Federal Reserve, which holds 9 percent of US debt, then pension and retirement funds, mutual funds, and state and local governments.

.

Foreigners hold about 47 percent of US public debt. And yes, the largest foreign holder here is China – but only by a hair. Chinese investors are owed 9.8 percent of US debt. Next comes Japan, at 9.6 percent, and the United Kingdom, at 5.1 percent.

.

Oil exporting nations as a group, including Saudi Arabia, Oman, the United Arab Emirates, etc., account for about 2.6 percent of US debt. Brazil has 1.8 percent. The rest is split among lots of other countries.

.

So, nearly half of our debt is held by aliens.  And only a handful of it is held by individual Americans.  As our national debt pays less and less in interest, as it descends towards ZIRP levels of Japan, as inflation eats up our savings, fewer and fewer people will buy it.  So Ellen says, let the central bank buy up all this ZIRP debt and let it blossom like in Japan.

.

So, is Japan growing or shrinking?  It is shrinking!  Are Japan’s people better off or worse off?  All statistics point to much worse off.  Can Japan fix the messes caused this spring by the tsunami and nuclear disaster?  The answer is obviously, no.  This is a final blow to Japan that may destroy Japan’s finances and even society if it continues in this way.  There is nothing to stop ZIRP debt accumulations except bankruptcy!

.

Japan’s government debt interest overhead costs should be around 5-8%, at least!  This should force the government to tax the rich there, not pile on endless debt.  Japan’s FOREX hoard doesn’t help the average Japanese who has to keep tightening their belts.  It does very emphatically help Japanese export corporate executives!

.

Here is a news story from this year illustrating the dangers of Japanese held US debt:  US debt at risk if Japanese bring money home.  Due to this, US external debt S&P downgrades US credit outlook for 2012, in April …back to Ellen:

.

Nothing to fear but fear itself

We have been frightened into believing that government debt is a bad thing, but nearly all money today originates as debt. As Marriner Eccles observed in the 1930s, ”That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.”

.

See how silly she is?  Nearly all money is NOT ‘debt’…it should be ‘capital’ but the US chose the Japanese route and is making it debt.  This is why, ever since we began running trade deficits, the value of the dollar collapsed.  It is worth less than 10% today what it was worth when Nixon cut the gold standard.  He didn’t cut it because of inflation, he cut it because he NEEDED inflation to pay for the Vietnam War and the OPEC boycott.

.

He then tried to stop inflation with wage/price freezes that only made things worse, not better.  Ellen leaves all of this history out, of course, because it interferes with her jolly good ‘let’s print money and not charge interest’ scam game.  It is a scam!  It is so exploitive yet so alluring.  It is a simple fix that leads to death of an economic system.  It takes no account for ‘capital’ and it certainly ignores the reality of who is a creditor!  The US is NOT a ‘creditor’ nation, we are a money printing nation.  China is a creditor nation and this is because China is accumulating and using capital which China gets via domestic development plus trade profits.

.

I find this very easy to understand.  And god help anyone who thinks imitating Japan’s worst economic choices is a good thing!  It is  not.

Email:

emeinel@fairpoint.net

MAILING ADDRESS:

EMS NEWS

P.O. BOX 483

BERLIN, NY 12022

Make checks out to ‘Elaine Supkis’

Click on the Pegasus icon on the right sidebar to donate via Paypal.