To: Scott Jenkins,
Subject: How to Balance the Budget
Date: Tue Apr 29 14:47:04 MDT 2014
In America economic austerity is being forced upon states because it is argued that there is "not enough money" in the budget to provide even the basic services necessary for the function of society. This has ranged from everything to infrastructure maintenance in the form of road and bridge repair to so-called entitlement programs such as food stamps and Medicaid. Fortunately there is a solution to this problem due to a quirk in our financial system that up until now has actually been a detriment to state budgets but if turned around and corrected it could bring prosperity to states.
The fact that states are broke is technically correct because states do not have the constitutional authority to print money. This however is not the same thing as the power to create money. With fractional reserve banking coupled with a fiat monetary system money itself is simply an I.O.U. of debt created when it is loaned out to a customer. Its existence in essence is limited to a number on a computer screen. Anybody with the power to lend therefore has the power to create wealth.
A Bank never has the physical money on hand to pay out all of its debts if too many of them are withdrawn simultaneously. (1) Sates do not have this luxury. States are effectively forced to go through banks for loans of this imaginary money in order to merely pay their bills. This is absurd given the fact that a bank never actually has the funds available to them in physical reserve to cover itself. If such a situation were to occur where there was a surge in withdraw demand from the bank’s customers and it does not have enough money on hand then it can simply have the funds made available to them by a loan from the Central Bank that is given on demand. This loan is eventually paid for by the money the bank will make down the road from future loans it makes. (2)
Such a process can only continue increase the money supply but with a surplus of debt leading to such a contradictory situation whereby everybody can owe money to everybody else because there is not enough physical money in the system to pay out all outstanding debts if too many of them are called in at the same time. The banks are never affected by this calling in of debt though because of the dynamics of being able to borrow from the Central Bank. There is NEVER a situation with our current system where a private bank will not be in debt to the Central Bank. This is why "paying down the debt" makes no economic sense whatsoever with a fiat monetary system because the deficit of our government as a whole is a small fraction of the debt that private banks owe the Central Bank at any given time. This debt by the banks however is never called in until it can make more loans to cover them. Our banking system is simply a shell game of continually increasing the debt that a private bank owes the Central Bank in the future. (3)
If the Federal Reserve were to call in all of its debt up front from private banks this would be more than enough money to balance the federal deficit overnight but this would unfortunately bring our financial industry into a tailspin because they could never have the physical capital on hand to do this. So everybody including states are basically held hostage by our current economic system because their debt is constantly being called in but a private bank's debt is not until it has the ability to pay it off by making more loans whose repayment is simply put off to the future. So the age old adage of "He who has the gold can make the rules" should be changed with our modern financial system to "He who has the power to lend and can borrow from the Federal Reserve along with F.D.I.C. backing, can make the rules". Contrary to popular belief states do have this power but they have not been using it. (4)
The solution to this problem is simple: cut out the middle-man. All states have to do is to open local state-owned banks that have the power to lend to citizens (including to its state agencies) with the ability to borrow from the Federal Reserve along with F.D.I.C. backing. This would solve a state's economic problems overnight and it is one-hundred percent legal. Balancing the budget really is this simple given our current economic system. While this of course would produce debt for future generations it would be nothing that would be above and beyond what is happening now anyway with our current system and in fact it would be less. It can be shown that states can offset some of this future debt burden by investing in "common-good infrastructure projects" as opposed to what they are doing now by getting loans through private banks just to keep the lights on. In this latter scenario debt is still being created for future generations but instead of this being offset with a return on their investment through infrastructure development it simply goes to private banks profits and the process simply repeats itself when the state needs more funds often with harsher loan terms than before in order to keep up with the money supply increase that happens through the course of time.
As mentioned above inflation is simply a fact of life with our current financial system but if a state were to open a public bank it would be ahead of this inflationary curve instead of being behind it and constantly being in debt and having to continually take out loans from private banks ad infinitum. With a public state-owned bank states would now be able to borrow directly from this bank and therefore indirectly from the Federal Reserve and have any loans from the Fed be paid back down the road from future loans that it makes to customers exactly as a private bank does. These types of banks can even be used to provide health insurance policies or anything else that needs a capital influx such as pension funds. This solution would not be cost neutral it would actually be cost positive meaning there would be a constant surplus in a state’s budget. The possibilities from such a system are endless and it is time that we start getting to work to fix the problems that we face in this country. This would be a major first step in that direction. THANK YOU
(1)- This is the case even with just its customer obligations let alone what it owes to the Central Bank.
(2)- And these loans that they make is with money they essentially never actually have and in some cases this repayment to the Central Bank can even include future loans that they take out from the Central Bank!
(3)- This is not to say that this is necessarily ethically objectionable. Such a system could be ethically sound so long as you have a return on this debt creation. This is what wealth creation is all about. All things being equal this is currently not happening but with a public bank that invested responsibly in public works as outlined in this paper it could be.
(4)- North Dakota does in fact have such a public bank but it is not used to its maximum potential. For example it is not F.D.I.C. insured.