Wednesday, August 20, 2008


(Week 4 Wednesday Aug. 20)

In yesterday's column I said that there is no combination of taxing and spending priorities that will remedy the Federal "debt" problem. This statement is contrary to conventional economic wisdom, to put it mildly. To make my case I would direct the reader's attention to the private bank loan transaction by which our money comes into being.

We as a sovereign nation have the right, power and responsibility to issue our own money supply as a public good and an essential feature of the commons. The public body to whom this task naturally falls is the Federal government. Unfortunately the people who compose the Federal government have long since been pressured into abrogating that essential trust to private interests, and we the people have not held them accountable because, to a great extent, we too have been influenced in ways that are contrary to our true welfare.

Now if the nation needs a money supply with which to conduct its commerce, it cannot turn to its government, but is obliged to go to the banks. As private businesses, banks work for a profit. They are happy to "loan" to the nation its circulating medium, but on the condition that they get paid back more than they "loan." If a nation (as for a person) borrows at "interest" the money it needs to live on, it follows that it can only slide ever deeper into "debt."

It makes little difference to the banker whether the "borrowing" is done by persons from the private or the public sector. The overriding fact of life within our present system is that someone has to bite the bullet and take on more "debt." The struggle over who that will ultimately be is the hidden engine that drives the fractious nature of our political life. There are compelling factors that make it virtually certain that it will fall to the Federal government to do much of the borrowing. The taxing and spending policies of a President can affect this balance, but realistically only to a limited extent.

It should be noted that private banks within the Federal Reserve System are controlled by what is called a "fractional reserve formula." This is a pyramid scheme that is too complex to describe in detail in this short article, but one of its features is that the money borrowed into circulation by the Federal government and deposited in banks forms the "fractional reserve" base upon which the banking system can create new money. This means that there has to exist a Federal "debt" for the system, as it is designed, to even function.

It is not mandatory that the Federal government assume as large a share of the taking on of national "indebtedness" as it has done, but it remains a fact that the private and public sectors combined must take on more "debt" at a continuously increasing rate for the nation to avoid a contraction of the money supply, which can only lead to economic recession, and eventually depression.

The rate of Federal "debt" aggregation does in fact increase or decrease from time to time, as when deficit spending increased for theReagan/Bush/Bush years, and decreased during the Clinton presidency. It should be noted, however, that there were underlying social, monetary and political cycles that were driving the numbers associated with these periods, and the relative size of the Federal deficit had little to do with how quickly the country as a whole was sinking into "debt."

For complex reasons, during the Clinton administration the private sector took on "debt" at a rapid rate, and so the government did not have to. During the Reagan/Bush/Bush years, in contrast, private borrowing decreased and the government found itself in the position of having to step in as the borrower of last resort to keep the economy supplied with enough money.

None of these Presidents, as far as I can see, ever gave any indications that they understood the economic wave that they in their turn were riding. Instead, their spokespersons spent their energies manufacturing spin by which they attempted to take credit for whatever favorable numbers emerged, and explain away those that put them in a bad light.

In the meantime, the nation continued its uninterrupted combined private and public descent into "debt," and has arrived now at a point of reckoning where the situation can no longer be denied or papered over. This is what McCain and Obama need to be talking about.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites.