By Jeff Gates
Since 1913, debt has been the only way that we in the U.S. have known to create money. Choking on debt yet short on money, Americans are reeling from too much monetary theory and too little commonsense.
Those who sold us the theory also ensured recurring recessions. Each debt-induced cycle features rich-get-richer booms followed by debilitating busts. We designed our way into this mess. We can design our way out.
As yet, there’s no sign that policy-makers know a way out. Nor do their advisers. Over the past century, every economist has been educated the same. They are unable to see the real problem because the theory they were taught is the source of the problem.
The U.S. Federal Reserve model of central banking was one of America’s key exports. Every nation now “monetizes” pretty much the same way—with debt.
Good news is on the horizon from major exporting nations. Many of them are Islamic and flush with money. Much of that money originated as debt in industrialized nations.
Those nations are staggering under immense debt. Much of that debt is owed to nations where they must buy oil and gas to fuel their economies and generate funds to…repay debt.
Yet the creditors too are in a bind. Where can they prudently invest their vast pools of debt-backed money? Do they buy more U.S. government debt? Euro bonds? Do they hold their reserves in dollars, euros or pounds sterling—all debt-based?
Invest instead in commodities and they just bid up the price. That may be good news for speculators but it is not a sensible risk management strategy. So what to do? When all else fails, commonsense may yet find its way into this debate.
Tomorrow’s Commodity Today
The safest commodity is one you can control. Look at China’s control over rare earth metals. However control of that sort is a beggar-thy-neighbor approach, akin to investing in precious metals like gold or silver. Such investments miss the point—and the opportunity.
The commodity hedge for the foreseeable future is clean energy, particularly solar power due to its abundance and ease of collection. Clean energy is also what must be monetized—not debt but electrons captured by solar panels and converted to useable energy.
Monetization comes with an implied promise. To maintain value, currencies must be backed by productivity—the capacity to generate real goods and services. Productivity is what makes a financial security truly secure.
Those who designed America’s central banking system assured us that debt-based “monetization” would be backed by real productivity. That thin tether to reality was severed in 1971 when backing for the U.S. dollar shifted from precious metals to a candid slogan now stamped on U.S. currency: “In God We Trust.”
Federal Reserve Chief Alan Greenspan not only trusted Wall Street’s “financial creativity,” he also enabled it with cheap credit. Layer upon layer of cross-collateralized debt produced little more than more money for financial sophisticates. Meanwhile real people living in real communities witnessed the dismantling of the U.S. economy.
Ask around. Would those with commonsense prefer their money secured with debt or with clean energy? Which is more secure?
Those who propose we reform central banking miss the point. Why reform it when, by design, it can gradually be displaced?
Instead of relying solely on debt-backed money, why not also issue asset-backed currencies? Why not complement centralized money with decentralized monies? Instead of one-size-fits-all money, why not tailor currencies to the diverse needs of communities?
Rather than trust in God, why not put your faith in money secured by clean energy?
Total assets in sovereign wealth funds now exceed $8.1 trillion. China has reserves approaching $2.4 trillion. Oil exporters have considerably more including $1 trillion held by the United Arab Emirates and $510 billion by Norway.
As an energy exporter with large currency reserves, Russia is revisiting the wisdom of investing in other countries those funds generated by the sale of its natural resources.
With increasing frequency, political leaders are looking at the global financial crisis as an opportunity to reconsider what they monetize—and for whom. That suggests commonsense may yet find a way.
An alternative is known, available and viable with energy-backed “complementary currencies” designed to operate parallel with national currencies.
Do not expect leadership from the U.S. Those who sold us the current system retain too much control—for now. Their interest lies in more money secured by more debt. Or backed by nothing at all.
Look for this overdue innovation to emerge from cultures long wary of those who collect fixed interest regardless of the debtor’s condition. The Quran forbids it as “riba.” The Bible forbids it as “the pound of flesh.”
The source of this common malady is now coming sharply into focus—as is the cure.
A Vietnam veteran, is a widely acclaimed author, attorney, investment banker, educator and consultant to government, corporate and union leaders worldwide. He served for seven years as counsel to the U.S. Senate Committee on Finance. He is widely published in the trade, popular and academic press. His latest book is Guilt by Association: How Deception and Self-Deceit Took America to War. His previous books include Democracy at Risk: Rescuing Main Street From Wall Street and The Ownership Solution: Toward a Shared Capitalism for the 21st Century. Topical commentaries appear on the Criminal State website. Jeff is a regular contributor to Opinion Maker