The Most Revolutionary Act

(This is the last of four posts debunking the myths we are told about the global economic crisis.)

The Solution to the $100 Trillion Global Debt

There seems to be broad agreement among both classical corporate economists and latter day non-corporate ones that the $100 trillion global debt is suffocating the world economy. The large amount of debt banks carry on their books severely restricts their ability to issue loans for the business creation and expansion needed to create jobs. At the same time consumers, who are losing jobs or taking wage cuts aren’t spending money. Because of massive drop in consumer demand, corporations are finding other uses for their record profits (CEO bonuses, for example), rather than reinvesting them in new factories or retail outlets.

Where the two economic schools part ways concerns the solution. Externalizing costs (getting someone else to pay for your messes) is a basic pillar of classical, corporate economics. In the case of the global economic system, the investment bankers who crashed the system through greed, fraud and speculation want the middle class, youth and the poor to pay for their recklessness. Although mainstream economists like Ben Bernanke agree that debt reduction and austerity cuts aren’t enough, they refuse to officially endorse “monetization” as part of the solution. This is why he calls it something else (QE1, QE2 and QE3 – which are short for quantitative easing) and fudges on the true amount of monetization that is occurring.

Ending Debt-Based Money, Perpetual Growth and Ecosystem Destruction

On the other side, most latter day, non-corporate economists (for example Ellen Brown, Steve Keen, Deirdre Kent, Thomas Greco, among others) call for an end to our debt-based monetary system and perpetual economic growth, along with a “downsizing” of the economies of the industrialized north in line with dwindling resources and rapid ecosystem destruction. They make a strong case that the citizens of western society are living beyond their means and must drastically reduce consumption if we are to preserve the human species. The problem is figuring out how to get there without creating an intolerable level of human suffering for disadvantaged groups who already struggle to meet basic survival needs. It’s much easier for mainstream corporate economists, who have already decided to reduce the global debt burden on the backs of the middle class and young people, dooming an entire generation to becoming a marginalized underclass. Instead of doing any belt tightening themselves, the richest 1% are using the economic crisis as an excuse to further increase their personal wealth.

Political Reform Must Accompany Economic Reform

Most latter day economists are committed to the principle that belt tightening is only tolerable if it’s shared equally. Here is where a discussion of solutions becomes really hypothetical. There is no political commitment at present for the ruling elite and special interests to share in the belt tightening. Thus true economic reform is highly unlikely so long as corporations continue to dominate and control western democracy. It’s possible that the economic and ecological crises that confront humankind can’t be fixed without dismantling capitalism itself, a view shared by many in the Occupy movement. Others believe that channels can be created (through constitutional conventions or similar national gatherings) to establish direct participatory democracy and make corporations accountable to local, state and national authorities. It’s only in this context that economic and monetary reform has any chance of being meaningful and effective.

Latter Day Economic Solutions to the Debt Crisis

Where there is political will to share the costs equally for fixing the financial crisis, there are a handful of straightforward policies which, if enacted together, could restore global economic stability within months. Monetization (the good kind, where new government money is spent directly into the economy) is a major one, but monetization alone is unlikely to be enough. As the Germans proved after World War I and the Japanese after their 1989 economic collapse, monetization on its own only makes things worse – either by creating hyperinflation or increasing debt and deflation. To work, monetization must be enacted simultaneously with other basic debt reduction measures:

1. The world’s largest economy (the US) must end their deficit spending, not via austerity cuts, which will only worsen deflation, but by ending their deficit-financed wars in the Middle East, by repealing Bush’s tax cuts on upper income earners and by ending corporate tax avoidance.
2. Western governments must require global investment banks to forgive the sovereign debt they have incurred by assuming their toxic assets (their valueless subprime mortgages). This extent of forgiveness (referred to as a “hair cut”) must depend on the amount of toxic debt these banks still carry on their books and the extent to which they have insured themselves via Credit Default Swaps. Banks that become insolvent in this process need to be nationalized, rather than bailed out, to protect depositors and pension funds with major bank shareholdings.
3. World governments must agree to end the private debt-based monetary system and replace the Federal Reserve and other central banks with national government banks charged with creating and controlling the money supply.
4. These national banks must be allowed to create and spend new money directly into the economy to create jobs and repair infrastructure, make good on depositors savings and repay unforgiven debt. To avoid incurring new debt (i.e. borrowing from future generations), it may be necessary to temporarily increase taxes (above 39% in the US) for millionaires and billionaires.