Wall Street Aristocracy Got $1.2 Trillion in Loans from Fed

August 22, 2011

Bloomberg
August 22, 2011

Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.

By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.

Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

“These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.”

(View the Bloomberg interactive graphic to chart the Fed’s financial bailout.)

Foreign Borrowers

It wasn’t just American finance. Almost half of the Fed’s top 30 borrowers, measured by peak balances, were European firms. They included Edinburgh-based Royal Bank of Scotland Plc, which took $84.5 billion, the most of any non-U.S. lender, and Zurich-based UBS AG (UBSN), which got $77.2 billion. Germany’s Hypo Real Estate Holding AG borrowed $28.7 billion, an average of $21 million for each of its 1,366 employees.

The largest borrowers also included Dexia SA (DEXB), Belgium’s biggest bank by assets, and Societe Generale SA, based in Paris, whose bond-insurance prices have surged in the past month as investors speculated that the spreading sovereign debt crisis in Europe might increase their chances of default.

The $1.2 trillion peak on Dec. 5, 2008 — the combined outstanding balance under the seven programs tallied by Bloomberg — was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010, according to data compiled by Bloomberg.

Peak Balance

The balance was more than 25 times the Fed’s pre-crisis lending peak of $46 billion on Sept. 12, 2001, the day after terrorists attacked the World Trade Center in New York and the Pentagon. Denominated in $1 bills, the $1.2 trillion would fill 539 Olympic-size swimming pools.

The Fed has said it had “no credit losses” on any of the emergency programs, and a report by Federal Reserve Bank of New York staffers in February said the central bank netted $13 billion in interest and fee income from the programs from August 2007 through December 2009.

“We designed our broad-based emergency programs to both effectively stem the crisis and minimize the financial risks to the U.S. taxpayer,” said James Clouse, deputy director of the Fed’s division of monetary affairs in Washington. “Nearly all of our emergency-lending programs have been closed. We have incurred no losses and expect no losses.”

While the 18-month U.S. recession that ended in June 2009 after a 5.1 percent contraction in gross domestic product was nowhere near the four-year, 27 percent decline between August 1929 and March 1933, banks and the economy remain stressed.

Odds of Recession

The odds of another recession have climbed during the past six months, according to five of nine economists on the Business Cycle Dating Committee of the National Bureau of Economic Research, an academic panel that dates recessions.

Bank of America’s bond-insurance prices last week surged to a rate of $342,040 a year for coverage on $10 million of debt, above where Lehman Brothers Holdings Inc. (LEHMQ)’s bond insurance was priced at the start of the week before the firm collapsed. Citigroup’s shares are trading below the split-adjusted price of $28 that they hit on the day the bank’s Fed loans peaked in January 2009. The U.S. unemployment rate was at 9.1 percent in July, compared with 4.7 percent in November 2007, before the recession began.

Homeowners are more than 30 days past due on their mortgage payments on 4.38 million properties in the U.S., and 2.16 million more properties are in foreclosure, representing a combined $1.27 trillion of unpaid principal, estimates Jacksonville, Florida-based Lender Processing Services Inc.

Liquidity Requirements

“Why in hell does the Federal Reserve seem to be able to find the way to help these entities that are gigantic?” U.S. Representative Walter B. Jones, a Republican from North Carolina, said at a June 1 congressional hearing in Washington on Fed lending disclosure. “They get help when the average businessperson down in eastern North Carolina, and probably across America, they can’t even go to a bank they’ve been banking with for 15 or 20 years and get a loan.”

The sheer size of the Fed loans bolsters the case for minimum liquidity requirements that global regulators last year agreed to impose on banks for the first time, said Litan, now a vice president at the Kansas City, Missouri-based Kauffman Foundation, which supports entrepreneurship research. Liquidity refers to the daily funds a bank needs to operate, including cash to cover depositor withdrawals.

The rules, which mandate that banks keep enough cash and easily liquidated assets on hand to survive a 30-day crisis, don’t take effect until 2015. Another proposed requirement for lenders to keep “stable funding” for a one-year horizon was postponed until at least 2018 after banks showed they’d have to raise as much as $6 trillion in new long-term debt to comply.

‘Stark Illustration’

Regulators are “not going to go far enough to prevent this from happening again,” said Kenneth Rogoff, a former chief economist at the International Monetary Fund and now an economics professor at Harvard University.

Reforms undertaken since the crisis might not insulate U.S. markets and financial institutions from the sovereign budget and debt crises facing Greece, Ireland and Portugal, according to the U.S. Financial Stability Oversight Council, a 10-member body created by the Dodd-Frank Act and led by Treasury Secretary Timothy Geithner.

“The recent financial crisis provides a stark illustration of how quickly confidence can erode and financial contagion can spread,” the council said in its July 26 report.

21,000 Transactions

Any new rescues by the U.S. central bank would be governed by transparency laws adopted in 2010 that require the Fed to disclose borrowers after two years.

Fed officials argued for more than two years that releasing the identities of borrowers and the terms of their loans would stigmatize banks, damaging stock prices or leading to depositor runs. A group of the biggest commercial banks last year asked the U.S. Supreme Court to keep at least some Fed borrowings secret. In March, the high court declined to hear that appeal, and the central bank made an unprecedented release of records.

Data gleaned from 29,346 pages of documents obtained under the Freedom of Information Act and from other Fed databases of more than 21,000 transactions make clear for the first time how deeply the world’s largest banks depended on the U.S. central bank to stave off cash shortfalls. Even as the firms asserted in news releases or earnings calls that they had ample cash, they drew Fed funding in secret, avoiding the stigma of weakness.

Morgan Stanley Borrowing

Two weeks after Lehman’s bankruptcy in September 2008, Morgan Stanley countered concerns that it might be next to go by announcing it had “strong capital and liquidity positions.” The statement, in a Sept. 29, 2008, press release about a $9 billion investment from Tokyo-based Mitsubishi UFJ Financial Group Inc., said nothing about Morgan Stanley’s Fed loans.

That was the same day as the firm’s $107.3 billion peak in borrowing from the central bank, which was the source of almost all of Morgan Stanley’s available cash, according to the lending data and documents released more than two years later by the Financial Crisis Inquiry Commission. The amount was almost three times the company’s total profits over the past decade, data compiled by Bloomberg show.

Mark Lake, a spokesman for New York-based Morgan Stanley, said the crisis caused the industry to “fundamentally re- evaluate” the way it manages its cash.

“We have taken the lessons we learned from that period and applied them to our liquidity-management program to protect both our franchise and our clients going forward,” Lake said. He declined to say what changes the bank had made.

Acceptable Collateral

In most cases, the Fed demanded collateral for its loans — Treasuries or corporate bonds and mortgage bonds that could be seized and sold if the money wasn’t repaid. That meant the central bank’s main risk was that collateral pledged by banks that collapsed would be worth less than the amount borrowed.

As the crisis deepened, the Fed relaxed its standards for acceptable collateral. Typically, the central bank accepts only bonds with the highest credit grades, such as U.S. Treasuries. By late 2008, it was accepting “junk” bonds, those rated below investment grade. It even took stocks, which are first to get wiped out in a liquidation.

Morgan Stanley borrowed $61.3 billion from one Fed program in September 2008, pledging a total of $66.5 billion of collateral, according to Fed documents. Securities pledged included $21.5 billion of stocks, $6.68 billion of bonds with a junk credit rating and $19.5 billion of assets with an “unknown rating,” according to the documents. About 25 percent of the collateral was foreign-denominated.

‘Willingness to Lend’

“What you’re looking at is a willingness to lend against just about anything,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta and now chief monetary economist in Atlanta for Sarasota, Florida-based Cumberland Advisors Inc.

The lack of private-market alternatives for lending shows how skeptical trading partners and depositors were about the value of the banks’ capital and collateral, Eisenbeis said.

“The markets were just plain shut,” said Tanya Azarchs, former head of bank research at Standard & Poor’s and now an independent consultant in Briarcliff Manor, New York. “If you needed liquidity, there was only one place to go.”

Even banks that survived the crisis without government capital injections tapped the Fed through programs that promised confidentiality. London-based Barclays Plc (BARC) borrowed $64.9 billion and Frankfurt-based Deutsche Bank AG (DBK) got $66 billion. Sarah MacDonald, a spokeswoman for Barclays, and John Gallagher, a spokesman for Deutsche Bank, declined to comment.

Below-Market Rates

While the Fed’s last-resort lending programs generally charge above-market interest rates to deter routine borrowing, that practice sometimes flipped during the crisis. On Oct. 20, 2008, for example, the central bank agreed to make $113.3 billion of 28-day loans through its Term Auction Facility at a rate of 1.1 percent, according to a press release at the time.

The rate was less than a third of the 3.8 percent that banks were charging each other to make one-month loans on that day. Bank of America and Wachovia Corp. each got $15 billion of the 1.1 percent TAF loans, followed by Royal Bank of Scotland’s RBS Citizens NA unit with $10 billion, Fed data show.

JPMorgan Chase & Co. (JPM), the New York-based lender that touted its “fortress balance sheet” at least 16 times in press releases and conference calls from October 2007 through February 2010, took as much as $48 billion in February 2009 from TAF. The facility, set up in December 2007, was a temporary alternative to the discount window, the central bank’s 97-year-old primary lending program to help banks in a cash squeeze.

‘Larger Than TARP’

Goldman Sachs Group Inc. (GS), which in 2007 was the most profitable securities firm in Wall Street history, borrowed $69 billion from the Fed on Dec. 31, 2008. Among the programs New York-based Goldman Sachs tapped after the Lehman bankruptcy was the Primary Dealer Credit Facility, or PDCF, designed to lend money to brokerage firms ineligible for the Fed’s bank-lending programs.

Michael Duvally, a spokesman for Goldman Sachs, declined to comment.

The Fed’s liquidity lifelines may increase the chances that banks engage in excessive risk-taking with borrowed money, Rogoff said. Such a phenomenon, known as moral hazard, occurs if banks assume the Fed will be there when they need it, he said. The size of bank borrowings “certainly shows the Fed bailout was in many ways much larger than TARP,” Rogoff said.

TARP is the Treasury Department’s Troubled Asset Relief Program, a $700 billion bank-bailout fund that provided capital injections of $45 billion each to Citigroup and Bank of America, and $10 billion to Morgan Stanley. Because most of the Treasury’s investments were made in the form of preferred stock, they were considered riskier than the Fed’s loans, a type of senior debt.

Dodd-Frank Requirement

In December, in response to the Dodd-Frank Act, the Fed released 18 databases detailing its temporary emergency-lending programs.

Congress required the disclosure after the Fed rejected requests in 2008 from the late Bloomberg News reporter Mark Pittman and other media companies that sought details of its loans under the Freedom of Information Act. After fighting to keep the data secret, the central bank released unprecedented information about its discount window and other programs under court order in March 2011.

Bloomberg News combined Fed databases made available in December and July with the discount-window records released in March to produce daily totals for banks across all the programs, including the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, Commercial Paper Funding Facility, discount window, PDCF, TAF, Term Securities Lending Facility and single-tranche open market operations. The programs supplied loans from August 2007 through April 2010.

Rolling Crisis

The result is a timeline illustrating how the credit crisis rolled from one bank to another as financial contagion spread.

Fed borrowings by Societe Generale (GLE), France’s second-biggest bank, peaked at $17.4 billion in May 2008, four months after the Paris-based lender announced a record 4.9 billion-euro ($7.2 billion) loss on unauthorized stock-index futures bets by former trader Jerome Kerviel.

Morgan Stanley’s top borrowing came four months later, after Lehman’s bankruptcy. Citigroup crested in January 2009, as did 43 other banks, the largest number of peak borrowings for any month during the crisis. Bank of America’s heaviest borrowings came two months after that.

Sixteen banks, including Plano, Texas-based Beal Financial Corp. and Jacksonville, Florida-based EverBank Financial Corp., didn’t hit their peaks until February or March 2010.

Using Subsidiaries

“At no point was there a material risk to the Fed or the taxpayer, as the loan required collateralization,” said Reshma Fernandes, a spokeswoman for EverBank, which borrowed as much as $250 million.

Banks maximized their borrowings by using subsidiaries to tap Fed programs at the same time. In March 2009, Charlotte, North Carolina-based Bank of America drew $78 billion from one facility through two banking units and $11.8 billion more from two other programs through its broker-dealer, Bank of America Securities LLC.

Banks also shifted balances among Fed programs. Many preferred the TAF because it carried less of the stigma associated with the discount window, often seen as the last resort for lenders in distress, according to a January 2011 paper by researchers at the New York Fed.

After the Lehman bankruptcy, hedge funds began pulling their cash out of Morgan Stanley, fearing it might be the next to collapse, the Financial Crisis Inquiry Commission said in a January report, citing interviews with former Chief Executive Officer John Mack and then-Treasurer David Wong.

Borrowings Surge

Morgan Stanley’s borrowings from the PDCF surged to $61.3 billion on Sept. 29 from zero on Sept. 14. At the same time, its loans from the Term Securities Lending Facility, or TSLF, rose to $36 billion from $3.5 billion. Morgan Stanley treasury reports released by the FCIC show the firm had $99.8 billion of liquidity on Sept. 29, a figure that included Fed borrowings.

“The cash flow was all drying up,” said Roger Lister, a former Fed economist who’s now head of financial-institutions coverage at credit-rating firm DBRS Inc. in New York. “Did they have enough resources to cope with it? The answer would be yes, but they needed the Fed.”

While Morgan Stanley’s Fed demands were the most acute, Citigroup was the most chronic borrower among the largest U.S. banks. The New York-based company borrowed $10 million from the TAF on the program’s first day in December 2007 and had more than $25 billion outstanding under all programs by May 2008, according to Bloomberg data.

Tapping Six Programs

By Nov. 21, when Citigroup began talks with the government to get a $20 billion capital injection on top of the $25 billion received a month earlier, its Fed borrowings had doubled to about $50 billion.

Over the next two months the amount almost doubled again. On Jan. 20, as the stock sank below $3 for the first time in 16 years amid investor concerns that the lender’s capital cushion might be inadequate, Citigroup was tapping six Fed programs at once. Its total borrowings amounted to more than twice the federal Department of Education’s 2011 budget.

Citigroup was in debt to the Fed on seven out of every 10 days from August 2007 through April 2010, the most frequent U.S. borrower among the 100 biggest publicly traded firms by pre- crisis market valuation. On average, the bank had a daily balance at the Fed of almost $20 billion.

‘Help Motivate Others’

“Citibank basically was sustained by the Fed for a very long time,” said Richard Herring, a finance professor at the University of Pennsylvania in Philadelphia who has studied financial crises.

Jon Diat, a Citigroup spokesman, said the bank made use of programs that “achieved the goal of instilling confidence in the markets.”

JPMorgan CEO Jamie Dimon said in a letter to shareholders last year that his bank avoided many government programs. It did use TAF, Dimon said in the letter, “but this was done at the request of the Federal Reserve to help motivate others to use the system.”

The bank, the second-largest in the U.S. by assets, first tapped the TAF in May 2008, six months after the program debuted, and then zeroed out its borrowings in September 2008. The next month, it started using TAF again.

On Feb. 26, 2009, more than a year after TAF’s creation, JPMorgan’s borrowings under the program climbed to $48 billion. On that day, the overall TAF balance for all banks hit its peak, $493.2 billion. Two weeks later, the figure began declining.

“Our prior comment is accurate,” said Howard Opinsky, a spokesman for JPMorgan.

‘The Cheapest Source’

Herring, the University of Pennsylvania professor, said some banks may have used the program to maximize profits by borrowing “from the cheapest source, because this was supposed to be secret and never revealed.”

Whether banks needed the Fed’s money for survival or used it because it offered advantageous rates, the central bank’s lender-of-last-resort role amounts to a free insurance policy for banks guaranteeing the arrival of funds in a disaster, Herring said.

An IMF report last October said regulators should consider charging banks for the right to access central bank funds.

“The extent of official intervention is clear evidence that systemic liquidity risks were under-recognized and mispriced by both the private and public sectors,” the IMF said in a separate report in April.

Access to Fed backup support “leads you to subject yourself to greater risks,” Herring said. “If it’s not there, you’re not going to take the risks that would put you in trouble and require you to have access to that kind of funding.”

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G20: Banks must hold on to Cash for coming Crisis

June 29, 2010 2 Comments

The International Crime Syndicate, better known as the G20, determined at its last meeting that the collapse and consolidation of the global economy will begin around 2012 and finish in 2016 with the liquidation of all countries who are in debt with the IMF and the World Bank.

By Luis Miranda
The Real Agenda
June 29, 2010

Bankers and G20 members have direct and indirect ways to speak to the public. At the end of the latest G20 meeting in Toronto, both

From right to left: Canadian Prime Minister Stephen Harper, UK Prime Minister David Cameron and U.S. President Barack Hussein Obama.

groups spoke very clearly about what they have in mind for the foreseeable future. First, they are all in the run to help the process of global consolidation. Second, they will extend the current depression by slowly cutting the available cash for lending. Third, they will continue their austerity programs in a country by country basis to slowly kill their economies and consolidate each nation. Fourth, now that they have robbed the people’s taxes through their rescue packages, they plan to rob shareholders by putting the burden of future rescues on them when the next crisis comes. Fifth, they are disingenuous or irresponsible by thinking that putting aside 130 billion pounds will create any security for the economy, given that only the derivative schemed debt ascends into the quadrillion of dollars. And lastly, they intend to seed and water the final implosion, which according to their communique, can come as soon as 2012.

If all these sounds confusing, please let me explain.

Let’s start by remembering that the G20, and mainly the G8 were the ones who caused the current financial crisis. They did it through their front companies e.g. banks, which implemented a series of corrupt schemes to bankrupt economies and whole countries through investment and betting into risky and sometimes nonexistent financial products e.g. derivatives. These schemes were allowed to exist given the fact that for the past two decades most of the regulations put in place to stop financial fraud were eliminated as an excuse to enable “free markets”. What deregulation effectively permitted was the creation of bogus investing plans which the banks later offered to countries, states and municipalities -often times through governments- and used them to acquire all their infrastructure and cash through the issuance of debt or fraudulent investment.

It has become clear that the G8 and the bankers are not interested in improving current economic conditions. They simply want to extend the crisis as long as they need to, in order to execute their final plan of global implosion. That is what emerges from the idea of cutting lending money and asking banks to hoard the cash for the next crisis, as the G20 communique says. Although 130 billion pounds is peanuts in comparison with the debt most G8 countries hold today, the action of keeping the cash in reserve paints a clear picture of what the ‘leaders’ have in mind. What they want is a slowly and painfully grind down the economies in order to cause the greatest damage. Such policy will assure them the consolidation of more resources before the final blow to the global economy is given.

One of the most important tools the bankers have used along the last 100 years is to create an artificial bubble of money abundance -Fiat money- in order to get the countries and the public to trust them. This is what many describe as economic booms. But given the fact that the global economy is based on debt and fractional reserve banking, the only goal the money bubbles had was to hook up the greatest amount of debt on consumers to then pull the cash off the markets. By doing this, the bankers accelerate their consolidation process. Along with the reduction in lending, G8 nations agreed to continue the austerity plans in each individual country. Austerity will be implanted on the working class by cutting services such as police, hospitals, school funding, and social programs. This will in turn cause civil unrest, which is what the bankers want in order to officially freely unleash their military and technological control grid. A preview of what this grid would look like was seen on the streets of Toronto during the last G20 meeting. It was also seen during Argentina’s collapse in 2001.

The infamous rescue packages glorified by the IMF and the World Bank as the best way to avoid a complete collapse of the global economy -which as explained before was caused by the bankers themselves- were the biggest transfer of money and resources in the history of the world. Only the United States gave the bankers around $25 trillion in tax payer money so Goldman Sachs, Iberia Bank, JP Morgan Chase, Bank of America and others could pay their shareholders their chunk of the loot. See a complete list of what banks got the cash here. But those $25 trillion were not enough, of course. Germany for example, voted to give 66% of its annual revenue to the banks. Going by the G20′s communique it is clear they are planning another big collapse, possibly the last one. It is also clear they will have to rob someone else this time and that is what the bankers and the ‘leaders’ have said. They will stick the next rescue package to the banks’ shareholders -not to the big ones, though-. So if you have investments in any bank, it is advised to rescue yourself out of it before the new banking package comes along. Shamelessly, they will obligate the banks to hold billions so when the next crisis comes, taxpayers will not be burdened as if we don’t know those billions are the same they stole last 2009. Now that they consolidated and stabilized their fraudulent financial system, it won’t matter if other banks fail, because they are all covered.

The idea that 130 billion pounds is a safety net for a future crisis, or double dip recession as they like to call it, is preposterous. Derivative-produced debt is, depending who you ask, between $600 trillion and $1 quadrillion. According to Robert Chapman, from the theinternationalforecaster.com, buying derivatives is not investing.  It is gambling, insurance and high stakes bookmaking.  Derivatives create nothing.” According to the Bank of International Settlements, the derivative bubble has grown exponentially to a point where the amounts negotiated under this scheme has long surpassed the world’s GDP. “Derivative trades have grown exponentially, until now they are larger than the entire global economy.”Credit default swaps (CDS) is the most common form of derivatives. CDS are bets between two parties on whether or not a company will default on its bonds. They are indeed illegal insurance policies, with no requirement to hold any asset. CDS are used to increase profits by gambling on market changes.

The WEB of DEBT in which the current economy was built throughout the past 100 years was the tool used in a process to reverse everything humans achieved. It was not unintended however, as this was the mechanism the globalist bankers planned on using from the beginning. Every time the world experienced a financial crisis like in 1929-1933, the grip of control tightened more and more. The measures to avoid a total collapse, as we were told, were not such. They were simply ways to postpone the imminent collapse.  But the measures the bankers implemented cannot be used forever. Sooner rather than later something will give in. The step by step, ad hoc and non-holistic approach of Fed and Treasury to crisis management has been a failure. . . . [P]lugging and filling one hole at [a] time is useless when the entire system of levies is collapsing in the perfect financial storm of the century. A much more radical, holistic and systemic approach to crisis management is now necessary,” says professor Nouriel Roubini. founder of Roubini Global Economics.

After turning the global economy into a service-based system, where no quality products are manufactured; after driving developing countries into massive debt while collapsing the economies of the western world, the bankers are ready for their last move: a one last crisis. According to the G20 communique, its members must cut their deficits by 2013, a process that already started. This process is supposed to end in 2016, when the nations should have stabilized their deficits. Cutting and then stabilizing deficits means that debtor countries will have to find a way to pay their debts in full to the IMF and World Bank according to the conditions imposed by those entities. Every country that does not pay in full will be liquidated and their resources will be automatically transferred to the globalist bankers. Imagine what happened to Argentina, Greece and Iceland in the last decade, but instead of being those countries, the debtors will be the United States, Spain, Portugal, England and Germany.

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Some Big Lies of Science

June 16, 2010 1 Comment

Global Research

“[T]he majority of politicians, on the evidence available to us, are interested not in truth but in power and in the maintenance of that power. To maintain that power it is essential that people remain in ignorance, that they live in ignorance of the truth, even the truth of their own lives. What surrounds us therefore is a vast tapestry of lies, upon which we feed.”– Harold Pinter, Nobel Lecture (Literature), 2005

The maintenance of the hierarchical structures that control our lives depends on Pinter’s “vast tapestry of lies upon which we feed.”

Modern science as modern medicine have been used to subdue the global population.

Therefore, the main institutions that embed us into the hierarchy, such as schools, universities, and mass media and entertainment corporations, have a primary function to create and maintain this tapestry. This includes establishment scientists and all service intellectuals in charge of “interpreting” reality.

In fact, the scientists and “experts” define reality in order to bring it into conformity  with the always-adapting dominant mental tapestry of the moment. They also invent and build new branches of the tapestry that serve specific power groups by providing new avenues of exploitation. These high priests are rewarded with high class status.

The Money Lie

The economists are a most significant example. It is probably not an accident that in the United States at the end of the nineteenth century the economists were the first professional analysts to be “broken in,” in a battle that defined the limits of academic freedom in universities. The academic system would from that point on impose a strict operational separation between inquiry and theorizing as acceptable and social reform as unacceptable [1].

Any academic wishing to preserve her position understood what this meant. As a side product, academics became virtuosos at nurturing a self-image of importance despite this fatal limitation on their societal relevance, with verbiage such as: The truth is our most powerful weapon, the pen is mightier than the sword, a good idea can change the world, reason will take us out of darkness, etc.

So the enterprise of economics became devoted to masking the lie about money. Bad lending practice, price fixing and monopolistic controls were the main threats to the natural justice of a free market, and occurred only as errors in a mostly self-regulating system that could be moderated via adjustments of interest rates and other “safeguards.”

Debt

A debt-based economy to enslave the people was established after the appearance of fractional reserve banking.

Meanwhile no mainstream economic theory makes any mention of the fact that money itself is created wholesale in a fractional reserve banking system owned by secret private interests given a licence to fabricate and deliver debt that must be paid back (with interest) from the real economy, thereby continuously concentrating ownership and power over all local and regional economies.

The rest of us have to earn money rather than simply fabricate it and we never own more when we die. The middle class either pays rent or a mortgage. Wage slavery is perpetuated and degraded in stable areas and installed in its most vicious varieties in all newly conquered territories.

It is quite remarkable that the largest exploitation scam (private money creation as debt) ever enacted and applied to the entire planet does not figure in economic theories.

Economists are so busy modeling the ups and downs of profits, returns, employment figures, stock values, and the benefits of mergers for mid-level exploiters that they don’t notice their avoidance of the foundational elements. They model the construction schedule while refusing to acknowledge that the terrain is an earthquake zone with vultures circling overhead.

Meanwhile the financiers write and re-write the rules themselves and again this process does not figure in macroeconomic theories. The only human element that economists consider in their “predictive” mathematical models is low-level consumer behaviour, not high-level system manipulation. Corruption is the norm yet it does not figure. The economies, cultures and infrastructures of nations are wilfully destroyed in order to enslave via new and larger national debts for generations into the future while economists forecast alleged catastrophic consequences of defaulting on these debts…

Management tools for the bosses and smoke and mirrors for the rest of us – thank you expert economists.

The Medicine is Health Lie

We’ve all heard some MD (medical doctor) interviewed on the radio gratuitously make the bold proposal that life expectancy has increased thanks to modern medicine. Nothing could be further from the truth.

Life expectancy has increased in First World countries thanks to a historical absence of civil and territorial wars, better and more accessible food, less work and non-work accidents, and better overall living and working conditions. The single strongest indicator of personal health within and between countries is economy status, irrespective of access to medical technology and pharmaceuticals.

It’s worse than that because medicine actually has a negative impact on health. Medical errors (not counting misattributed deaths

Modern medicine forgot about the power of natural cures and decided to create artificial toxic alternatives.

from correctly administered “treatments”) are the third leading cause of death in the US, after heart disease and cancer, and there is a large gap between this conservative underestimate in the number of medical error deaths and the fourth leading cause of death [2]. Since medicine can do little for heart disease and cancer and since medicine has only a small statistical positive impact in the area of trauma interventions, we conclude that public health would increase if all MDs simply disappeared. And think of all the time loss and stress that sick people would save…

One of the most dangerous places in society is the hospital. Medical errors include misdiagnoses, bad prescriptions, prescriptions of medications that should not be combined, unnecessary surgery, unnecessary or badly administered treatments including chemotherapy, radiation treatment, and corrective surgeries.

The lie extends to the myth that MDs anywhere near understand the human body. And this well guarded lie encourages us to put our faith in doctors, thereby opening the door to a well orchestrated profit bonanza for big pharma.

The first thing that Doctors Without Borders (MSF) volunteers need to do in order to contribute significantly in disaster zones is to “forget their medical training” and get to work on the priority tasks at hand: water, food, shelter, and disease propagation prevention; not vaccinating, or operating, or prescribing medication… Public health comes from safety, stability, social justice, and economic buying power, not MRI (magnetic resonance imaging) units and prescription drugs.

These bone heads routinely apply unproven “recommended treatments” and prescribe dangerous drugs for everything from high blood pressure from a sedentary lifestyle and bad nutrition, to apathy at school, to anxiety in public places, to post-adolescence erectile function, to non-conventional sleep patterns, and to all the side effects from the latter drugs.

In professional yet nonetheless remarkable reversals of logic, doctors prescribe drugs to remove symptoms that are risk indicators rather than address the causes of the risks, thereby only adding to the assault on the body.

It’s unbelievable the number that medicine has done on us: Just one more way to keep us stupid (ignorant about our own bodies) and artificially dependent on the control hierarchy. Economically disadvantaged people don’t die from not having access to medical “care” – They die from the life constraints and liabilities directly resulting from poverty. How many MDs have stated this obvious truth on the radio?

Environmental Science Lies

Exploitation via resource extraction, land use expropriation, and wage slavery creation and maintenance are devastating to indigenous populations and to the environment on continental scales. It is therefore vital to cover up the crimes under a veil of expert analysis and policy development diversion. A valued class of service intellectuals here is composed of the environmental scientists and consultants.

Environmental scientists naively and knowingly work hand in hand with finance-corporate shysters, mainstream media, politicians, and state and international bureaucrats to mask real problems and to create profit opportunities for select power elites. Here are notable examples of specific cases.

Freon and Ozone

Do you know of anyone who has been killed by the ozone hole?

The 1987 Montreal Protocol banning chlorofluorocarbons (CFCs) is considered a textbook case where science and responsible governance lead to a landmark treaty for the benefit of the Earth and all its inhabitants. How often does that happen?

At about the time that the DuPont patent on Freon(TM), the most widely used CFC refrigerant in the world, was expiring the mainstream media picked up on otherwise arcane scientific observations and hypotheses about ozone concentration in the upper atmosphere near the poles.

There resulted an international mobilization to criminalize CFCs and DuPont developed and patented a replacement refrigerant that was promptly certified for use.

A Nobel Prize in chemistry was awarded in 1995 for a laboratory demonstration that CFCs could deplete ozone in simulated atmospheric conditions. In 2007 it was shown that the latter work may have been seriously flawed by overestimating the depletion rate by an order of magnitude, thereby invalidating the proposed mechanism for CFC-driven ozone depletion [3]. Not to mention that any laboratory experiment is somewhat different from the actual upper atmosphere… Is the Nobel tainted by media and special interest lobbying?

It gets better. It turns out that the Dupont replacement refrigerant is, not surprisingly, not as inert as was Freon. As a result it corrodes refrigerator cycle components at a much faster rate. Where home refrigerators and freezers lasted forever, they now burn out in eight years or so. This has caused catastrophic increases in major appliance contributions to land fill sites across North America; spurred on by the green propaganda for obscenely efficient electrical consumptions of the new appliances under closed door (zero use) conditions.

Sun over-exposure as well as artificial tanning are dangerous, not sun exposure.

In addition, we have been frenzied into avoiding the sun, the UV index keeps our fear of cancer and our dependence on the medical establishment alive, and a new sun block industry a la vampire protection league has been spawned. And of course star university chemists are looking for that perfect sun block molecule that can be patented by big pharma. And as soon as it is, I predict a surge in media interviews with skin cancer experts…

Acid Rain on the Boreal Forest

In the seventies it was acid rain. Thousands of scientists from around the world (Northern Hemisphere) studied this “most pressing environmental problem on the planet.” The boreal forest is the largest ecosystem on Earth and its millions of lakes were reportedly being killed by acid from the sky.

Coal burning plants spewed out sulphides into the atmosphere causing the rain to be acidic. The acid rain was postulated to acidify the soils and lakes in the boreal forest but the acidification was virtually impossible to detect. Pristine lakes in the hearts of national parks had to be studied for decades in attempts to detect a statistically significant acidification.

Meanwhile the lakes and their watersheds were being destroyed by the cottage industry, agriculture, forestry, mining, over fishing and tourism. None of the local and regional destruction was studied or exposed. Instead, scientists turned their gaze to distant coal burning plants, atmospheric distribution, and postulated chemical reactions occurring in rain droplets. One study found that the spawning in aquarium of one fish species was extremely sensitive to acidity (pH). Long treatises about cation charge balance and transport were written and attention was diverted away from the destruction on the ground towards a sanitized problem of atmospheric chemistry that was the result of industrialization and progress rather than being caused by identifiable exploiters.

As a physicist and Earth scientist turned environmental scientist, I personally read virtually every single scientific paper written about acid rain and could not find an example of a demonstrated negative impact on lakes or forests from acid rain. In my opinion, contrary to the repeated claims of the scientist authors, the research on acid rain demonstrates that acid rain could not possibly have been the problem.

This model of elite-forces-coordinated exploiter whitewashing was to play itself out on an even grander scale only decades later with global warming.

Global Warming as a Threat to Humankind

In 2005 and 2006, several years before the November 2009 Climategate scandal burst the media bubble that buoyed public opinion towards acceptance of carbon credits, cap and trade, and the associated trillion dollar finance bonanza that may still come to pass, I exposed the global warming cooptation scam in an essay that Alexander Cockburn writing in The Nation called “one of the best essays on greenhouse myth-making from a left perspective” [4][5][6].

My essay prompted David F. Noble to research the question and write The Corporate Climate Coup to expose how the media embrace followed the finance sector’s realization of the unprecedented potential for revenues that going green could represent [7].

Introductory paragraphs from Global Warming: Truth or Dare? are as follows [4]:

“I also advance that there are strong societal, institutional, and psychological motivations for having constructed and for continuing to maintain the myth of a global warming dominant threat (global warming myth, for short). I describe these motivations in terms of the workings of the scientific profession and of the global corporate and finance network and its government shadows.”

“I argue that by far the most destructive force on the planet is power-driven financiers and profit-driven corporations and their cartels backed by military might; and that the global warming myth is a red herring that contributes to hiding this truth. In my opinion, activists who, using any justification, feed the global warming myth have effectively been co-opted, or at best neutralized.”

Other passages read this way [4]:

“Environmental scientists and government agencies get funding to study and monitor problems that do not threaten corporate and financial interests. It is therefore no surprise that they would attack continental-scale devastation from resource extraction via the CO2 back door. The main drawback with this strategy is that you cannot control a hungry monster by asking it not to shit as much.”

“Global warming is strictly an imaginary problem of the First World middle class. Nobody else cares about global warming. Exploited factory workers in the Third World don’t care about global warming. Depleted uranium genetically mutilated children in Iraq don’t care about global warming. Devastated aboriginal populations the world over also can’t relate to global warming, except maybe as representing the only solidarity that we might volunteer.”

“It’s not about limited resources. [“The amount of money spent on pet food in the US and Europe each year equals the additional amount needed to provide basic food and health care for all the people in poor countries, with a sizeable amount left over.” (UN Human Development Report, 1999)] It’s about exploitation, oppression, racism, power, and greed. Economic, human, and animal justice brings economic sustainability which in turn is always based on renewable practices. Recognizing the basic rights of native people automatically moderates resource extraction and preserves natural habitats. Not permitting imperialist wars and interventions automatically quenches nation-scale exploitation. True democratic control over monetary policy goes a long way in removing debt-based extortion. Etc.”

And there is a thorough critique of the science as band wagon trumpeting and interested self-deception [4]. Climategate only confirms what should be obvious to any practicing scientist: That science is a mafia when it’s not simply a sleeping pill.

Conclusion

It just goes on and on. What is not a lie?

Look at the recent H1N1 scam – another textbook example. It’s farcical how far these circuses go: Antiseptic gels in every doorway at the blink of an eye; high school students getting high from drinking the alcohol in the gels; out datedness of the viral strain before the pre-paid vaccine can be mass produced; unproven effectiveness; no requirement to prove effectiveness; government guarantees to corporate manufacturers against client lawsuits; university safety officers teaching students how to cough; etc.

Pure madness. Has something triggered our genetically ingrained First World stupidity reflex? Is this part of our march towards fascism [8]?

Here is another one. Educators promote the lie that we learn because we are taught. This lie of education is squarely denounced by radical educators [9][10].

University professors design curricula as though the students actually learn every element that is delivered whereas the truth is that students don’t learn the delivered material and everyone only learns what they learn. One could dramatically change the order in which courses are delivered and it would make no measurable difference in how much students learn. Students deliver nonsense and professors don’t care. Obedience and indoctrination are all that matter so the only required skill is bluffing. Students know this and those that don’t don’t know what they know, don’t know themselves [8][9][10].

Pick any expert opinion or dominant paradigm: It’s part of a racket.

We can’t know the truth because the truth is brutal.

Denis G. Rancourt was a tenured and full professor at the University of Ottawa in Canada. He was trained as a physicist and practiced physics, Earth sciences, and environmental science, areas in which he was funded by a national agency and ran an internationally recognized laboratory. He published over 100 articles in leading scientific journals. He developed popular activism courses and was an outspoken critic of the university administration and a defender of Palestinian rights. He was fired for his dissidence in 2009. [See www.academicfreedom.ca]

Notes

[1] “No Ivory Tower – book” by Ellen W. Schrecker.
[2] Radio interview with Dr. Barbara Starfield: CHUO 89.1 FM, Ottawa; January 21, 2010.
[3] Nature 449, 382-383 (2007).
[4] “Global Warming: Truth or Dare? – essay” by Denis G. Rancourt.
[5] “Questioning Climate Politics – Denis Rancourt says the ‘global warming myth’ is part of the problem”; April 11, 2007, interview in The Dominion.
[6] Climate Guy blog.
[7] “The Corporate Climate Coup – essay” by David F. Noble.
[8] “Canadian Education as an Impetus towards Fascism – essay” by Denis G. Rancourt.
[9] “Pedagogy of the Oppressed – book” by Paulo Freire.
[10] “The Ignorant Schoolmaster – book” by Jacques Rancière.

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The Cycle of Debt Deflation

June 4, 2010

Before It’s News

One of the most famous quotations of Austrian economist Ludwig von Mises is that “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.” In fact, the US economy is in a downward spiral of debt deflation despite the bold actions of the federal government and of the US Federal Reserve taken in response to the financial crisis that began in 2008 and the associated recession. Although the vicious circle of debt deflation is not widely recognized, precisely what von Mises described is happening before our eyes.

A variety of positive economic data has been reported in recent months. Retail sales rose 0.4% in April 2010 as consumer spending rose and the US gross domestic product (GDP) grew at a rate of 3%.  In May 2010, home sales rose to a five-month high and consumer confidence rose 17% (from 57.7 to 63.3). Industrial production rose 0.8% and durable goods orders rose 2.9%, more than had been forecast. However, the modest gains reported represent the continuing adaptation of economic activity at dramatically lower levels compared to the pre-recession period and most of the reported gains have been substantially manufactured by massive government deficit spending.

Despite the widely reported green shoots, in May, the unemployment rate rose to 9.9% while paychecks in the private sector shrank to historic lows as a percentage of personal income, and personal bankruptcies rose. Roughly 14% of US mortgages are delinquent or in foreclosure, credit card defaults are rising and consumer spending hit 7 month lows. To make matters worse, the reported increase in consumer credit, in fact, points to a further deterioration because consumers appear to be borrowing to service existing debt. Outside of the federal government, which is borrowing at record levels and expanding as a percentage of GDP, and outside of the bailed out financial sector, debt deflation has continued unabated since 2008.

Money Supply vs. Debt Service

A contraction of the broad money supply is taking place because the influx of money into the US economy, i.e., lending to consumers and non financial businesses, has fallen below the rate at which money is flowing out of general circulation as a function of debt service (interest and principle payments on existing debt), thus a net drain of money from the broad US economy is taking place. As a result, additional borrowing, as consumer spending falls, appears to be servicing existing debt in a pattern that is clearly unsustainable and that signals a further rise in debt defaults in coming months.
M3
Chart courtesy of Shadow Government Statistics
The estimate of the broad money supply (the Federal Reserve’s M3 monetary aggregate) is crashing and the Federal Reserve’s M1 Money Multiplier, a measure of how much new money is created through lending activity, fell off of a cliff in 2008, and remains practically flat-lined.
MULT
Chart courtesy of the Federal Reserve Bank of St. Louis
The contraction of the broad money supply points to a potential slowing of economic activity and indicates that consumers and non financial businesses will be less able to service existing debt. Despite easing somewhat in March 2010, credit card losses are expected to remain near 10% over the next year and mortgage delinquencies, are currently at a record highs, and these dismal predictions implicitly assume a stable or growing money supply.

A tsunami of eventual mortgage defaults seems to be building and loan modifications have been a failure thus far. There have been only a small number of permanent loan modifications (295,348) under the Home Affordable Modification Program (HAMP) in 2009, out of 3.3 million eligible (60 days delinquent) loans and more than half of modified loans default.

Mortgage Delinquencies and Foreclosures
Chart courtesy of Calculated Risk
Although it has been reported that American consumers are saving at a rate of 3.4%, the contraction of the broad money supply suggests savings liquidation. Given a contracting money supply, ongoing debt defaults and declining consumer spending, the increase in non-mortgage consumer loans indicates that consumers are borrowing where possible to consolidate debts, cover debt service, or borrowing to continue operating financially as their total debt grows, thus as they approach insolvency.
CONSUMER
Chart courtesy of the Federal Reserve Bank of St. Louis
The increase in non-mortgage consumer loans has not prevented an overall decline in total household debt attributed to ongoing deleveraging by consumers. While deleveraging (paying down debt) has been interpreted as caution on the part of consumers, or as low consumer confidence, the decline in outstanding credit reflects a reduced ability to borrow, i.e., to service additional debt. This suggests that the recovery of the US economy may be illusory and that the economy is likely to contract further in coming months.
CMDEBT
Chart courtesy of the Federal Reserve Bank of St. Louis
Commercial borrowing has declined more sharply than household debt suggesting that the nominal return to growth estimated at 3% has not been matched by debt financed expansion in the private sector.
BUSLOANS
Chart courtesy of the Federal Reserve Bank of St. Louis
The broad US money supply is no longer being maintained or expanded by normal lending activity. If federal government deficit spending ($1.5 trillion annually), debt monetization and emergency actions by the Federal Reserve (totaling an estimated $1.5 trillion since 2008) to recapitalize banks are considered separately, there remains a net drain effect on the broad money supply. The scarcity of money hampers economic activity, i.e., money is less available for investment, and directly exacerbates debt defaults as consumers and businesses experience cash shortfalls, while at the same time being less able to borrow. Since unemployment is a key indicator of recession, then if the US economy were contracting, it would be evident in unemployment statistics.

Structural Unemployment

Unemployment and labor force data suggest that the US labor market is in a structural decline, i.e., millions of jobs have been and are being permanently eliminated, perhaps as a long term consequence of off-shoring, outsourcing to other countries and the ongoing de-industrialization of the United States. However, the immediate meaning of the term “structural” has to with the fact that jobs created or sustained during the unprecedented expansion of debt leading to the financial crisis that began in 2008, e.g., a substantial portion of service sector jobs created in the past two decades now appear not to be viable outside of a credit expansion.

Officially, the US unemployment rate rose to 9.9% in April 2010, which represents the percentage of workers claiming unemployment benefits. However, the total number of unemployed or underemployed persons, including so-called “discouraged workers” (Bureau of Labor Statistics U-6), rose to 17.1%. Using the same methods that the BLS had used prior to the Clinton administration, U-6 would be approximately 22%, rather than the official 17.1% statistic.

U-6 Unemployment
Chart courtesy of Shadow Government Statistics
With official U-6 unemployment of 17.1% and a workforce of 154.1 million there are roughly 26,197,000 people officially out of work. Using the pre-Clinton U-6 unemployment calculation of approximately 22%, there would be 33.9 million unemployed. If the average US household consists of 2.6 persons and if 33% of the unemployed are sole wage earners, then 55.5 million US citizens currently have no means of financial support (17.9% of the population).
Unemployment by Duration
Chart courtesy of Calculated Risk
While it has been reported that the labor force is shrinking, the characterization of workers permanently exiting the workforce by choice may be inaccurate. While a shrinking workforce could reflect demographic changes, the rate of change suggests that tens of millions of Americans are simply unemployed.
EMRATIO
Chart courtesy of the Federal Reserve Bank of St. Louis
Setting aside the question of whether or not those “not in the workforce” are, in fact, permanently unemployed, the workforce, as a percentage of the total US population, is currently at 1970s levels. Since many more households today depend on two incomes to meet their obligations, compared to the 1970s, a marked drop in the percentage of the population in the workforce points to a decline in the labor market more significant than official unemployment statistics suggest. What is more important, however, is that structural unemployment suggests structural government deficits, e.g., unemployment benefits, welfare, food stamps, etc. Since more than 2/3 of US GDP (roughly 70%) consists of consumer spending, a sustainable recovery from recession seems improbable if unemployment is worsening or if the labor force is in a structural decline, since that would imply unsustainable government deficits, whether or not they are masked by nominal GDP gains thanks to economic stimulus measures.

Government and GDP Growth

The US federal government is a growing portion of GDP, thus reported GDP growth is largely a byproduct of government deficit spending and stimulus measures, i.e., reported GDP growth is unsustainable. Total government spending at the local, state and federal levels accounts for as much as 45% of GDP, thus nominal gains would be expected when government deficit spending increases. According to some measures, reported gains in GDP are a byproduct of relatively new statistical methods and, using earlier methods of calculation, GDP remains negative.
GDP
Chart courtesy of Shadow Government Statistics
Government borrowing and spending may have offset declines in the private sector but only to a degree and only temporarily. The resulting growth in US public debt has an eventual mathematical limit: insolvency. Of course, the actual limit to US borrowing remains unknown. The continuing solvency of the US depends on the ability and willingness of governments, banks and investors around the world to lend to the US, which in turn depends on the tolerance of lenders for the US government’s profligacy and money printing by the Federal Reserve, e.g., quantitative easing and exchanging new cash for worthless bank assets. US Treasury bond auctions will fail if lenders conclude that a sufficiently large portion of their investment will be diluted into oblivion by proverbial money printing. In that event, the US dollar will surely plummet, despite deflationary pressures within the domestic US economy, and the cost of foreign goods, e.g., oil, will rise causing high inflation or triggering hyperinflation.
GFDEBTN
Chart courtesy of the Federal Reserve Bank of St. Louis
According to the Bank for International Settlements (BIS), the federal budget deficit increased from 3.1% of GDP in 2007 to 9.2% in 2010.  Rather than being the result of one-time expenses, such as temporary stimulus measures, much of the deficit represents permanent increases in government spending, e.g., due to the growing number of federal employees. If increased government spending is removed, GDP appears to be declining significantly.
GDP Minus Government Deficit Spending
Chart courtesy of Karl Denninger
Of course, sustainability has more to do with total debt than with deficit spending because a deficit assumes that there is an underlying capacity to service additional debt.

Unsustainable Debt

While asset prices have declined, e.g., real estate and equities, debt levels have remained high due to the federal government’s policy of preserving bank balance sheets, which had ballooned prior to the financial crisis to the point that overall debt in the US economy reached unsustainable levels.
Total Debt to GDP
Chart courtesy of Karl Denninger
The absolute debt to GDP ratio of the US economy peaked in 2007 when debt levels exceeded the ability of the economy to service debt from income based on production, even at low interest rates. Although US GDP began to decline prior to the advent of the global financial crisis, debt coverage had been in decline approximately since the 1970s, coincidentally, around the time that the US dollar was decoupled from gold.
Declining Debt Coverage from 1971 on
Chart courtesy of Karl Denninger
Government deficit spending cannot correct the situation because, for every dollar of new borrowing, the gain in GDP is negligible and some have argued that the US economy has passed the point of “debt saturation.”
Debt Saturation
Chart courtesy of Nathan A. Martin
In a growing economy, additional debt can result in a net gain in GDP because the money supply grows and economic activity is stimulated by transactions that flow through the economy as a result. The debt saturation hypothesis is that, as debt levels rise, additional debt has less impact on GDP until a point is reached where new debt causes GDP to decline, i.e., the capacity of the economy to service debt has been exceeded and, not only is it impossible for the economy to grow at a rate sufficient to service existing debt (since interest compounds), but economic activity actually declines further as a function of additional debt.

A Downward Spiral

The process of debt deflation is straightforward. New lending at levels that would maintain or expand the broad money supply is impossible for two reasons: (1) asset values and incomes have fallen and millions remain unemployed; and (2) debt levels remain excessive compared to GDP, i.e., real economic activity (outside of the government and financial services industry) cannot service additional debt. The inability to lend, actually the result of prior excess lending, results in a net drain of money from the economy. The drain effect, in turn, leads to further defaults as cash strapped consumers and businesses fail to service existing debt, and as debt defaults impact bank balance sheets, putting a damper on new lending and completing the cycle of debt deflation.

Keynesian economic policies, i.e., government deficit spending, are irrelevant vis-à-vis excessive debt levels in the economy and bailing out banks is not a solution since it cannot stop the deterioration of their balance sheets. The process is self-perpetuating and cannot be stopped by any government or monetary policy because it is not a matter of policy, but rather one of mathematics.

Since the presence of excess debt (beyond what can be supported by a stable GDP, or by sustainable GDP growth) impacts the broad money supply, efforts to preserve bank balance sheets, i.e., to keep otherwise bad loans on the books of banks at full value, will ultimately cause bank balance sheets to deteriorate more than they would have otherwise. The fact that US banks issued trillions in bad loans cannot be corrected by changing accounting rules, nor can the consequences be avoided by government deficit spending or by unlimited bailouts, and the problem cannot be papered over by dropping freshly printed money from helicopters flying over Wall Street. The major problems facing the US economy today—a tsunami or debt defaults, structural unemployment, massive government budget deficits, a contraction of the broad money supply outside of the federal government and the financial system, and a lack of sustainable growth—cannot be addressed as long as excess debt levels are maintained. As von Mises clearly understood, sound economic conditions cannot be restored unless and until the excess debt, which resulted from a boom brought about by credit expansion, is purged from the system. The alternative, and the current policy of the United States, is a downward spiral into a bottomless economic abyss.

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