debt-based capitalism

Role of debt in a fool's paradise

The world graph shows Australian private debt to be proportionately higher than that in the US, Financial sector debt to be significant and Govt debt to be relatively small. Why then is so-called excessive Government debt ALL we ever hear about from the media and the growls emanating from the political bear-pit? Are they just stupid or are they trying to hide or completely deny something?

Also of morbid interest is that the UK is an economic meltdown waiting to happen. Financial debt is running at 1000% of GDP. How can that astronomical amount possibly be bailed out when it implodes? Greece and Spain are flecks of dust compared to that one.

These give a snapshot of the extremity of the national and global debt situation. Very evidently it is the biggest elephant in the global lounge-room at the moment and will only get stinkier and more broadly destructive the longer that its overwhelming presence is ignored.

Australian debt related to housing

Australian debt related to housing represents a huge part of the costs of doing business and of living. The opposition has a lot to say about the cost of a carbon tax, but that cost would be imperceptible if governments and the growth lobby stopped pushing up land and housing costs by importing whole towns worth of people into this country.

We are looking at long-term loss of spending capacity

There is a pressing need for governance to recognise the game-changing transition that is now irreversibly underway so that the best outcomes can be drawn within the very unfamiliar and difficult economic rules of this new game. We have now moved from a long build-up period of enormous credit spending and debt accumulation into a long period of debt de-leveraging and consequent loss of spending capacity. The loss will hit Individuals and thus the retail economy, and hit all levels of government and thus the entire public spending program. Public debt and Government financial capacity will be hit even harder if governments continue to bail-out wealthy financial institutions for their speculative losses.

Unfortunately a number of reasons make such bail-outs likely to occur, and particularly so if the ordinary person remains unaware of the nature of this big structural change that is underway. Its impacts will reach deeply across our entire socio-economic framework. It effectively destroys the growth model that has been employed since World War Two.

Local councillors need to educate themselves beyond State ideological feed

Local Councillors need to become aware of this so that they can pull back from a futile reliance upon property development and associated tourism to drive Shire economy. I know most do not have the mental faculty or will to do so, however some might if the material is presented in the right way. This need is especially urgent in the context of the impending construction a new Strategic Town Plan.

Greg Wood is a leader in the fight to stop inappropriate development at Rainbow Beach Queensland in a World Heritage area.http://www.inskip.org/index.html

The ESM is a permanent rescue facility slated to replace the temporary European Financial Stability Facility and European Financial Stabilization Mechanism as soon as Member States representing 90% of the capital commitments have ratified it, something that is expected to happen in July 2012. A December 2011 youtube video titled “The shocking truth of the pending EU collapse!”, originally posted in German, gives such a revealing look at the ESM that it is worth quoting here at length. It states:
[Article 30]: “Governors, alternate Governors, Directors, alternate Directors, the Managing Director and staff members shall be immune from legal process with respect to acts performed by them . . . and shall enjoy inviolability in respect of their official papers and documents.” First published by Global Research April 19, 2012.

by Ellen Brown

The ESM is a permanent rescue facility slated to replace the temporary European Financial Stability Facility and European Financial Stabilization Mechanism as soon as Member States representing 90% of the capital commitments have ratified it, something that is expected to happen in July 2012. A December 2011 youtube video titled “The shocking truth of the pending EU collapse!”, originally posted in German, gives such a revealing look at the ESM that it is worth quoting here at length. It states:
[Article 30]: “Governors, alternate Governors, Directors, alternate Directors, the Managing Director and staff members shall be immune from legal process with respect to acts performed by them . . . and shall enjoy inviolability in respect of their official papers and documents.” First published by Global Research April 19, 2012.

The Goldman Sachs coup that failed in America has nearly succeeded in Europe—a permanent, irrevocable, unchallengeable bailout for the banks underwritten by the taxpayers. 

In September 2008, Henry Paulson, former CEO of Goldman Sachs, managed to extort a $700 billion bank bailout from Congress.  But to pull it off, he had to fall on his knees and threaten the collapse of the entire global financial system and the imposition of martial law; and the bailout was a one-time affair.  Paulson’s plea for a permanent bailout fund—the Troubled Asset Relief Program or TARP—was opposed by Congress and ultimately rejected.

By December 2011, European Central Bank president Mario Draghi, former vice president of Goldman Sachs Europe, was able to approve a 500 billion Euro bailout for European banks without asking anyone’s permission.  And in January 2012, a permanent rescue funding program called the European Stability Mechanism (ESM) was passed in the dead of night with barely even a mention in the press.  The ESM imposes an open-ended debt on EU member governments, putting taxpayers  on the hook for whatever the ESM’s Eurocrat overseers demand.

The bankers’ coup has triumphed in Europe seemingly without a fight.  The ESM is cheered by Eurozone governments, their creditors, and “the market” alike, because it means investors will keep buying sovereign debt.  All is sacrificed to the demands of the creditors, because where else can the money be had to float the crippling debts of the Eurozone governments?

There is another alternative to debt slavery to the banks.  But first, a closer look at the nefarious underbelly of the ESM and Goldman’s silent takeover of the ECB . . . .

The Dark Side of the ESM

The ESM is a permanent rescue facility slated to replace the temporary European Financial Stability Facility and European Financial Stabilization Mechanism as soon as Member States representing 90% of the capital commitments have ratified it, something that is expected to happen in July 2012.  A December 2011 youtube video titled “The shocking truth of the pending EU collapse!”, originally posted in German, gives such a revealing look at the ESM that it is worth quoting here at length.  It states:

The EU is planning a new treaty called the European Stability Mechanism, or ESM:  a treaty of debt. . . . The authorized capital stock shall be 700 billion euros.  Question: why 700 billion?  [Probable answer: it simply mimicked the $700 billion the U.S. Congress bought into in 2008.] . . . .

[Article 9]: “. . . ESM Members hereby irrevocably and unconditionally undertake to pay on demand any capital call made on them . . . within seven days of receipt of such demand.”  . . . If the ESM needs money, we have seven days to pay. . . . But what does “irrevocably and unconditionally” mean?  What if we have a new parliament, one that does not want to transfer money to the ESM?  . . . .

[Article 10]: “The Board of Governors may decide to change the authorized capital and amend Article 8 . . . accordingly.”  Question:  . . . 700 billion is just the beginning?  The ESM can stock up the fund as much as it wants to, any time it wants to?  And we would then be required under Article 9 to irrevocably and unconditionally pay up?

[Article 27, lines 2-3]: “The ESM, its property, funding, and assets . . . shall enjoy immunity from every form of judicial process . . . .”  Question:  So the ESM program can sue us, but we can’t challenge it in court?

[Article 27, line 4]: “The property, funding and assets of the ESM shall . . . be immune from search, requisition, confiscation, expropriation, or any other form of seizure, taking or foreclosure by executive, judicial, administrative or legislative action.”  Question: . . . [T]his means that neither our governments, nor our legislatures, nor any of our democratic laws have any effect on the ESM organization?  That’s a pretty powerful treaty!

[Article 30]:  “Governors, alternate Governors, Directors, alternate Directors, the Managing Director and staff members shall be immune from legal process with respect to acts performed by them . . . and shall enjoy inviolability in respect of their official papers and documents.”   Question:  So anyone involved in the ESM is off the hook?  They can’t be held accountable for anything? . . . The treaty establishes a new intergovernmental organization to which we are required to transfer unlimited assets within seven days if it so requests, an organization that can sue us but is immune from all forms of prosecution and whose managers enjoy the same immunity.  There are no independent reviewers and no existing laws apply?  Governments cannot take action against it?  Europe’s national budgets in the hands of one single unelected intergovernmental organization?  Is that the future of Europe?  Is that the new EU – a Europe devoid of sovereign democracies?

The Goldman Squid Captures the ECB

Last November, without fanfare and barely noticed in the press, former Goldman exec Mario Draghi replaced Jean-Claude Trichet as head of the ECB.  Draghi wasted no time doing for the banks what the ECB has refused to do for its member governments—lavish money on them at very cheap rates.  French blogger Simon Thorpe reports:

On the 21st of December, the ECB “lent” 489 billion euros to European Banks at the extremely generous rate of just 1% over 3 years.  I say “lent”, but in reality, they just ran the printing presses. The ECB doesn’t have the money to lend. It’s Quantitative Easing again.

The money was gobbled up virtually instantaneously by a total of 523 banks. It’s complete madness. The ECB hopes that the banks will do something useful with it – like lending the money to the Greeks, who are currently paying 18% to the bond markets to get money. But there are absolutely no strings attached. If the banks decide to pay bonuses with the money, that’s fine. Or they might just shift all the money to tax havens.

At 18% interest, debt doubles in just four years.  It is this onerous interest burden, not the debt itself, that is crippling Greece and other debtor nations.  Thorpe proposes the obvious solution:

Why not lend the money to the Greek government directly? Or to the Portuguese government, currently having to borrow money at 11.9%? Or the Hungarian government, currently paying 8.53%. Or the Irish government, currently paying 8.51%? Or the Italian government, who are having to pay 7.06%?

The stock objection to that alternative is that Article 123 of the Lisbon Treaty prevents the ECB from lending to governments.  But Thorpe reasons:

My understanding is that Article 123 is there to prevent elected governments from abusing Central Banks by ordering them to print money to finance excessive spending. That, we are told, is why the ECB has to be independent from governments. OK. But what we have now is a million times worse. The ECB is now completely in the hands of the banking sector. “We want half a billion of really cheap money!!” they say.  OK, no problem. Mario is here to fix that. And no need to consult anyone. By the time the ECB makes the announcement, the money has already disappeared.

At least if the ECB was working under the supervision of elected governments, we would have some influence when we elect those governments. But the bunch that now has their grubby hands on the instruments of power are now totally out of control.

Goldman Sachs and the financial technocrats have taken over the European ship.  Democracy has gone out the window, all in the name of keeping the central bank independent from the “abuses” of government.  Yet the government is the people—or it should be.  A democratically elected government represents the people.  Europeans are being hoodwinked into relinquishing their cherished democracy to a rogue band of financial pirates, and the rest of the world is not far behind.

Rather than ratifying the draconian ESM treaty, Europeans would be better advised to reverse article 123 of the Lisbon treaty.  Then the ECB could issue credit directly to its member governments.  Alternatively, Eurozone governments could re-establish their economic sovereignty by reviving their publicly-owned central banks and using them to issue the credit of the nation for the benefit of the nation, effectively interest-free.  This is not a new idea but has been used historically to very good effect, e.g. in Australia through the Commonwealth Bank of Australia and in Canada through the Bank of Canada.

Today the issuance of money and credit has become the private right of vampire rentiers, who are using it to squeeze the lifeblood out of economies.  This right needs to be returned to sovereign governments.  Credit should be a public utility, dispensed and managed for the benefit of the people.

To add your signature to a letter to parliamentarians blocking ratification of the ESM, click here. 

Ellen Brown is an attorney and president of the Public Banking Institute, http://PublicBankingInstitute.org.  In Web of Debt, her latest of eleven books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are http://WebofDebt.com and http://EllenBrown.com. 

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and the corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered." Thomas Jefferson

Lesson number one, Economics 101:

Credit institutions make a living by charging interest on the money they lend you. It is not a gift---they lend it. And they want it back one day. But in the meantime you must pay a sum of money to rent it. How do you keep up your interest payments and pay back your balance-owing? By earning income. You get income from working for it, or you let your assets do your working for you and use the interest or rent they earn to pay off your loan.

How do you work for that income? You have a job, and jobs are less secure in a shrinking economy, as is rental, pension or other investment income. The return on stocks, bonds and other investment instruments require the same economic momentum that banks require to see their loans repaid. The vast majority of us are all, to one degree or another, “hooked” on growth. The growth-economy is like a dog forever chasing its tail, and with so many caught in the cycle, the growth lobby will always be irresistible. How many politicians will dare to retract the economy in the name of resource limits or ecological barriers that their advisors, the high priests of classic economics, will not acknowledge? No wonder the medieval church identified usury as a cardinal sin, the agent that could unravel a stable society where even merchants did not venture much beyond their accorded place.

Economic growth relies on debt to push all the players in a market economy toward behaviour that encourages growth. Debt after all, is essentially a claim made against future economic growth. No debt, no growth, and no income or durable assets to generate the income to service that debt. But is most important, the greater the debt, the greater the pressure to stimulate more growth. That being the case, you are invited to review a snapshot of the US economy, as it stood on Saturday, October 10th, 2009, almost a year go, at approximately 3:15 PM PDT. The figures were as they appeared on the “Debt Clock”, and in the instant the numbers were recorded, greater numbers replaced them with terrifying rapidity. A glance at the Debt Clock a day or even an hour after you last looked at it would make the data look quite dated.

Take a look at this:

GDP per person $34, 764
Debt per person $38,802

GDP per worker $ 76,792
Debt per taxpayer $118,000 (changing too quickly to record)

Private debt per person $54,247
Personal savings per adult $ 1, 996

Liabilities per citizen $349,180
Assets per citizen $237,178

In round numbers, these were the expenditures in 2008-9:

Military $618 billion
Social Security $499 billion
Subsidies $ 51 billion
Medicare/Medicaid $643 billion
Interest on the debt $369 billion
Sub-total appox. $ 2.5 trillion

Government bailouts $11.5 trillion

Little more than 11 months later, the Debt Clock has climbed about $2 trillion to $13.39 trillion at the end of August, and about $5 trillion more than it was five years ago. At this pace, the federal government will require $2 trillion in 2020 just to pay the interest. Since September 28, 2007 the national debt has grown by an average of $4.11 billion per day, and the per capita share of this debt has risen by $5330 from October 10th of 2009 to $43,332.28 as of August 31st, 2010. To this add $8100 of consumer debt per person, exclusive of debt secured by falling real estate assets, while credit card charges average $11,300 per cardholder. Some 13% of disposable income in America is now being spent on servicing mortgage obligations and consumer debt. No wonder one in four children rely on food stamps to survive.

Of course, debt burdens can be measured in several different ways, and the promise of continuing growth can be recruited to assuage undue concern. But debt to GDP ratios of greater than 90% or total external debt to GDP ratios over 60% can be cause for alarm.
When the world’s supreme economy cannot generate enough income to cover its debt obligations, it will be like a vortex that sucks the global economy down with it. The trillions thrown at consumers to ‘fix’ a system that is not broken but fatally flawed will not suffice in the long run to rescue it from the body-blow of rising fuel prices. And the kind of money needed to shift to renewable energy solutions dwarfs what has been spent or can ever be spent in the coming decade. The US government has shot its bolt, thrown most of the chips on the table. Expanding the money supply will be the last fatal gambit. It is through hyperinflation that interest on debt payments can be diminished when growth hits the brick wall of resource shortages. Expect foreign debt holders, currently clutching about $4 trillion in IOUs, to one day pull the plug completely, and then the real free-fall will begin in earnest. In retrospect, the current “downturn” will look like a peak, and the hope riding on this fake recovery will be likened to the brief relief Titanic passengers felt when the ship broke in two and for a short while leveled off.

Whatever fiscal rabbits they pull out of the hat, the brutal fact remains. Ours is an economy predicated on growth, but growth ultimately does not rely on imaginary wealth, but upon the supply of cheap energy, productive soil, accessible and abundant water and a resilient natural environment. Our economic system is locked into a fatal contradiction. While money grows remorselessly and exponentially by the rule of compound interest, the physical economy does not. As Dr. M. King Hubbert observed, “A reasonable co-existence between the monetary and physical systems is possible when both are growing at approximately the same rate. (That) has been happening since the industrial revolution but it is soon going to end because the amount the matter-energy system can grow is limited while money’s growth is not.” Real growth cannot keep pace with phantom growth because it will eventually collide with geologically imposed limits. Even liberals and socialists can’t win an argument with the laws of physics, so neither Keynesian prime-pumping nor a radical reversal of the Republican legacy of socialism for the rich will spare us of this fatal reckoning. If class barriers on the Titanic had been eliminated there still would have been a shortage of lifeboats.

This is not a liquidity crisis that can be avoided by printing more money or keeping interest rates on the floor, because real wealth does not come out of a printing press. Instead it must ultimately derive from the use of energy to transform physical objects subject to the laws of entropy. Nate Hagens, the editor of “Oil Drum” put it plainly, “If you go from using a 20-1 energy return fuel down to a 3-1 fuel, economic collapse is guaranteed.”

As the Romans discovered in the last century of their crumbling empire, money is a fiction, not an elixir. People will stop believing in it when they come face to face with a reality that can’t be fooled by confidence tricks and greenwash. When that realization hits, my hope is that they will look for scapegoats, and find them in the financial industry, the universities, the think tanks, the journalism schools, parliament, the media, and last but not least, the offices of environmental NGOs who have accepted donations from banks in return for their accommodation to growth. The promotion of debt must be regarded as a white collar crime of epic proportions which flourishes by custom and want of scrutiny. While Jefferson was right about banks being more dangerous to our liberties than standing armies, their silent partners and witnesses must be held equally accountable. Let them be hung from the lamp-posts as Mussolini was, like a slab of meat on a hook in an abattoir, as befits liars and collaborators. With apologies to Diderot, I would not rest content until the last politician or banker is strangled by the entrails of the last environmentalist on the take---too busy sucking on corporate tits to alert us to the perils ahead, trying to “manage” growth rather than stop it.

Tim Murray
September 2, 2010