Thursday, January 10, 2013

Retired Judge Reveals the Surprising Rationale for America's Extremist Drug Laws

By Frederic Block - Alternet - January 9, 2013


What follows is an excerpt from Disrobed: An Inside Look at the Life and Work of a Federal Trial Judge (Thomson Reuters Westlaw 2012), a book where the author tries to explain life on the bench and the unknown parts of our legal system.

The first anti-drug law in our country was a local law in San Francisco passed in 1875. It outlawed the smoking of opium and was directed at the Chinese because opium smoking was a peculiarly Chinese habit. It was believed that Chinese men were luring white women to have sex in opium dens. In 1909 Congress made opium smoking a federal offense by enacting the Anti-Opium Act. It reinforced Chinese racism by carving out an exception for drinking and injecting tinctures of opiates that were popular among whites.

Cocaine regulations also were triggered by racial prejudice. Cocaine use was associated with blacks just as opium use was associated with the Chinese. Newspaper articles bore racially charged headlines linking cocaine with violent, anti-social behavior by blacks. A 1914 New York Times article proclaimed: "Negro Cocaine 'Fiends' Are a New Southern Menace: Murder and Insanity Increasing Among Lower Class Blacks Because They Have Taken to 'Sniffing.'" A Literary Digest article from the same year claimed that "most of the attacks upon women in the South are the direct result of the cocaine-crazed Negro brain." It comes as no surprise that 1914 was also the year Congress passed the Harrison Tax Act, effectively outlawing opium and cocaine.

Marijuana prohibition also had racist underpinnings. This time it was the Mexicans. Just as cocaine was associated with black violence and irrational behavior, in the southwest border towns marijuana was viewed -- beginning in the early 1920s -- as a cause of Mexican lawlessness. A Texas police captain suggested that marijuana gave Mexicans superhuman strength to commit acts of violence:
Under marijuana Mexicans [become] very violent, especially when they become angry and will attack an officer even if a gun is drawn on him. They seem to have no fear. I have also noted that under the influence of this weed they have enormous strength and it will take several men to handle one man while, under ordinary circumstances, one man could handle him with ease.
The American Coalition -- an anti-immigrant group -- claimed as recently as 1980 [5]: "Marihuana, perhaps now the most insidious of narcotics, is a direct byproduct of unrestricted Mexican immigration."

The racial fallout from our drug laws has persevered. In her article, The Discrimination Inherent in America's Drug War  Kathleen R. Sandy reported in 2003 that black Americans then constituted approximately 12 percent of our country's population and 13 percent of drug users. Nevertheless, they accounted for 33 percent of all drug-related arrests, 62 percent of drug-related convictions and 70 percent of drug-related incarcerations.

The country's concerted crackdown on drugs -- and the imposition of increasingly harsh punishment for illicit usage, importation, and distribution -- probably owes its genesis to the appointment in 1930 of Harry Anslinger as the commissioner of the newly created United States Narcotics Bureau. He started a media campaign to classify marijuana as a dangerous drug. For example, he wrote a major article titled "Marihuana, the Assassin of Youth [7]." It was rife with accusations that marijuana was responsible for encouraging murder, suicide, and insanity. Anslinger's campaign was wildly successful. Before he took office only four states had enacted prohibitions against non medical usage of marijuana--California (1915), Texas (1919), Louisiana (1924), and New York (1927) -- but by 1937 46 of the nation's then 48 states had banned marijuana.

Since then Congress has enacted a spate of comprehensive anti-drug laws with strict penalties. For example, today one can be sentenced to life for distributing one kilogram of heroin; 40 years for distributing 100 grams, and 20 years for distributing any quantity at all. Nevertheless, this has not stemmed the country's appetite for illicit drugs in spite of every administration's continued "war on drugs" since President Nixon established the Drug Enforcement Agency in 1972, which has grown through the years to a staff of almost 10,000 employees and a budget of $2 billion.

According to data from the 2010 National Household Survey on Drug Use and Health, almost 120 million Americans 12 or older -- roughly 47 percent of that population -- reported illicit drug use at least once in their lifetime; 15.3 percent admitted to using an illegal drug in the prior year; and 8.9 percent -- roughly 23 million people -- did it within the prior month. The New York Times recently reported that one out of every 15 high school students smokes marijuana on a near daily basis.

When it comes to sentencing, the main culprit is drugs. About half of the roughly 220,000 criminals in the federal prisons have either brought them into our country, have distributed them here, or have otherwise associated themselves with this illicit activity. This means that probably half of the $6.8 billion of the Bureau of Prisons budget is eaten up by incarcerating the criminal druggies. Half of the prison population is there because of drugs, costing us billions of dollars a year to keep them in jail.

Tuesday, January 8, 2013

Rapists Infographic


Washington’s Hegemonic Ambitions Are Not in Sync With Its Faltering Economy

January 7, 2013 | Paul Craig Roberts

In November the largest chunk of new jobs came from retail and wholesale trade. Businesses gearing up for Christmas sales added 65,700 jobs or 45% of November’s 146,000 jobs gain. With December sales a disappointment, these jobs are likely to reverse when the January payroll jobs report comes out in February. Family Dollar Stores CEO Howard Levine told analysts that his company’s customers were unable to afford toys this holiday season and focused instead on basic needs such as food. Levine said that his customers “clearly don’t have as much for discretionary purchases as they once did.”

For December’s new jobs we return to the old standbys: health care and social assistance and waitresses and bartenders. These four classifications accounted for 93,000 of December’s new jobs, 60% of the 155,000 jobs.

Obviously, the economy is not going anywhere except down.

It takes approximately 150,000 new jobs each month to stay even with population growth and new entrants into the work force.  

Few of the jobs that are being created pay well, and the constant, consistent demand for more poorly paid waitresses, bartenders and hospital orderlies is difficult to believe. If Americans cannot afford toys for their kid’s Christmas, how can they afford to eat and drink out?

Media spin seeks to create a recovery out of thin air, but these graphs from John Williams (shadowstats.com) show the reality:




Keep in mind that the 7.8% unemployment rate (U.3) that is headlined by the financial media does not include discouraged workers who have ceased to look for jobs. The government’s U.6 rate includes workers who have been too discouraged to seek work for less than a year. This rate of unemployment is 14.4%, almost twice the U.3 rate that the media prefers to report.

In 1994 the US government defined out of existence unemployed Americans who have been discouraged from finding work for more than a year. John Williams estimates the long term discouraged workers. When his estimate is added to the U.6 measure, the US unemployment rate stands at 23%, three times the reported rate.

The rate of unemployment is so high because millions of US jobs have been offshored and given to Chinese, Indian, and other workers and because remaining businesses have been concentrated in few hands in violation of the anti-trust laws. (Go to this URL to see the concentration of the media: http://frugaldad.com/2011/11/22/media-consolidation-infographic/ )

We need to be concerned about a financial media and economics profession that believes a recovery is underway when the unemployment rate is so high and the real median income is so low. It is a mystery how any set of policymakers could possibly have believed that a country whose economy is driven by consumer expenditures can continue to expand when the jobs that produce the incomes that drive the economy are given to foreigners in foreign lands.

Essentially, Americans were told a packet of lies designed to win their gullible acceptance to an economy that produces high returns for Wall Street, shareholders, and corporate executives at the expense of everyone else in the country. The wage savings from the use of overseas labor means large rewards for the one percent and Family Dollar customers who cannot afford to buy toys for their children at Christmas.

America's Deceptive Fiscal Cliff

How Today’s Fiscal Austerity is Reminiscent of World War I’s Economic Misunderstandings
by MICHAEL HUDSON

When World War I broke out in August 1914, economists on both sides forecast that hostilities could not last more than about six months. Wars had grown so expensive that governments quickly would run out of money. It seemed that if Germany could not defeat France by springtime, the Allied and Central Powers would run out of savings and reach what today is called a fiscal cliff and be forced to negotiate a peace agreement.

But the Great War dragged on for four destructive years. European governments did what the United States had done after the Civil War broke out in 1861 when the Treasury printed greenbacks. They paid for more fighting simply by printing their own money. Their economies did not buckle and there was no major inflation. That would happen only after the war ended, as a result of Germany trying to pay reparations in foreign currency. This is what caused its exchange rate to plunge, raising import prices and hence domestic prices. The culprit was not government spending on the war itself (much less on social programs).

But history is written by the victors, and the past generation has seen the banks and financial sector emerge victorious. Holding the bottom 99% in debt, the top 1% are now in the process of subsidizing a deceptive economic theory to persuade voters to pursue policies that benefit the financial sector at the expense of labor, industry, and democratic government as we know it.

Wall Street lobbyists blame unemployment and the loss of industrial competitiveness on government spending and budget deficits – especially on social programs – and labor’s demand to share in the economy’s rising productivity. The myth (perhaps we should call it junk economics) is that (1) governments should not run deficits (at least, not by printing their own money), because (2) public money creation and high taxes (at lest on the wealthy) cause prices to rise. The cure for economic malaise (which they themselves have caused), is said to be less public spending, along with more tax cuts for the wealthy, who euphemize themselves as “job creators.” Demanding budget surpluses, bank lobbyists promise that banks can provide the economy with enough purchasing power to grow. Then, when this ends in crisis, they insist that austerity can squeeze out enough income to enable private-sector debts to be paid.

The reality is that when banks load the economy down with debt, this leaves less to spend on domestic goods and services while driving up housing prices (and hence the cost of living) with reckless credit creation on looser lending terms. Yet on top of this debt deflation, bank lobbyists urge fiscal deflation: budget surpluses rather than pump-priming deficits. The effect is to further reduce private-sector market demand, shrinking markets and employment. Governments fall deeper into distress, and are told to sell off land and natural resources, public enterprises, and other assets. This creates a lucrative market for bank loans to finance privatization on credit. This explains why financial lobbyists back the new buyers’ right to raise the prices they charge for basic needs, creating a united front to endorse rent extraction. The effect is to enrich the financial sector owned by the 1% in ways that indebt and privatize the economy at large – individuals, business and the government itself.

This policy was exposed as destructive in the late 1920s and early 1930s when John Maynard Keynes, Harold Moulton and a few others countered the claims of Jacques Rueff and Bertil Ohlin that debts of any magnitude could be paid if governments would impose deep enough austerity and suffering. This is the doctrine adopted by the International Monetary

Fund to impose on Third World debtors since the 1960s, and by European neoliberals defending creditors imposing austerity on Ireland, Greece, Spain and Portugal.

This pro-austerity mythology aims to distract the public from asking why peacetime governments can’t simply print the money they need. Given the option of printing money instead of levying taxes, why do politicians only create new spending power for the purpose of waging war and destroying property, not to build or repair bridges, roads and other public infrastructure? Why should the government tax employees for future retirement payouts, but not Wall Street for similar user fees and financial insurance to build up a fund to pay for future bank over-lending crises? For that matter, why doesn’t the U.S. Government print the money to pay for Social Security and medical care, just as it created new debt for the $13 trillion post-2008 bank bailout? (I will return to this question below.)

The answer to these questions has little to do with markets, or with monetary and tax theory. Bankers claim that if they have to pay more user fees to pre-fund future bad-loan claims and deposit insurance to save the Treasury or taxpayers from being stuck with the bill, they will have to charge customers more – despite their current record profits, which seem to grab everything they can get. But they support a double standard when it comes to taxing labor.

Shifting the tax burden onto labor and industry is achieved most easily by cutting back public spending on the 99%. That is the root of the December 2012 showdown over whether to impose the anti-deficit policies proposed by the Bowles-Simpson commission of budget cutters whom President Obama appointed in 2010. Shedding crocodile tears over the government’s failure to balance the budget, banks insist that today’s 15.3% FICA wage withholding be raised – as if this will not raise the break-even cost of living and drain the consumer economy of purchasing power. Employers and their work force are told to save in advance for Social Security or other public programs. This is a disguised income tax on the bottom 99%, whose proceeds are used to reduce the budget deficit so that taxes can be cut on finance and the 1%. To paraphrase Leona Helmsley’s quip that “Only the little people pay taxes,” the post-2008 motto is that only the 99% have to suffer losses, not the 1% as debt deflation plunges real estate and stock market prices to inaugurate a Negative Equity economy while unemployment rates soar.

There is no more need to save in advance for Social Security than there is to save in advance to pay for war. Selling Treasury bonds to pay for retirees has the identical monetary and fiscal effect of selling newly printed securities. It is a charade – to shift the tax burden onto labor and industry. Governments need to provide the economy with money and credit to expand markets and employment. They do this by running budget deficits, and this can be done by creating their own money. That is what banks oppose, accusing it of leading to hyperinflation rather than help economies grow.

Their motivation for this wrong accusation is self-serving and their logic is deceptive. Bankers always have fought to block government from creating its own money – at least under normal peacetime conditions. For many centuries, government bonds were the largest and most secure investment for the financial elites that hold most savings. Investment bankers and brokers monopolized public finance, at substantial underwriting commissions. The market for stocks and corporate bonds was rife with fraud, dominated by insiders for the railroads and great trusts being organized by Wall Street, and the canal ventures organized by French and British stockbrokers.

However, there was little alternative to governments creating their own money when the costs of waging an international war far exceeded the volume of national savings or tax revenue available. This obvious need quieted the usual opposition mounted by bankers to limit the public monetary option. It shows that governments can do more under force majeur emergencies than under normal conditions. And the September 2008 financial crisis provided an opportunity for the U.S. and European governments to create new debt for bank bailouts. This turned out to be as expensive as waging a war. It was indeed a financial war. Banks already had captured the regulatory agencies to engage in reckless lending and a wave of fraud and corruption not seen since the 1920s. And now they were holding economies hostage to a break in the chain of payments if they were not bailed out for their speculative gambles, junk mortgages and fraudulent loan packaging.

Their first victory was to disable the ability – or at least the willingness – of the Treasury, Federal Reserve and Comptroller of the Currency to regulate the financial sector. Goldman Sachs, Citicorp and their fellow Wall Street giants hold veto power the appointment of key administrators at these agencies. They used this beachhead to weed out nominees who might not favor their interests, preferring ideological deregulators in the stripe of Alan Greenspan and Tim Geithner. As John Kenneth Galbraith quipped, a precondition for obtaining a central bank post is tunnel vision when it comes to understanding that governments can create their credit as readily as banks can. What is necessary is for one’s political loyalties to lie with the banks.

In the post-2008 financial wreckage it took only a series of computer keystrokes for the U.S. Government to create $13 trillion in debt to save banks from suffering losses on their reckless real estate loans (which computer models pretended would make banks so rich that they could pay their managers enormous salaries, bonuses and stock options), insurance bets gone bad (underpricing risk to win business to pay their managers enormous salaries and bonuses), arbitrage gambles and outright fraud (to give the illusion of earnings justifying enormous salaries, bonuses and stock options). The $800 billion Troubled Asset Relief Program (TARP) and $2 trillion of Federal Reserve “cash for trash” swaps enabled the banks to continue their remuneration of executives and bondholders with hardly a hiccup – while incomes and wealth plunged for the remaining 99% of Americans.

A new term, Casino Capitalism, was coined to describe the transformation that finance capitalism was undergoing in the post-1980 era of deregulation that opened the gates for banks to do what governments hitherto did in time of war: create money and new public debt simply by “printing it” – in this case, electronically on their computer keyboards.

Taking the insolvent Fannie Mae and Freddie Mac mortgage financing agencies onto the public balance sheet for $5.2 trillion accounted for over a third of the $13 trillion bailout. This saved their bondholders from having to suffer losses from the fraudulent appraisals on the junk mortgages with which Countrywide, Bank of America, Citibank and other “too big to fail” banks had stuck them. This enormous debt increase was done without raising taxes. In fact, the Bush administration cut taxes, giving the largest cuts to the highest income and wealth brackets who were its major campaign contributors. Special tax privileges were given to banks so that they could “earn their way out of debt” (and indeed, out of negative equity).[1] The Federal Reserve gave a free line of credit (Quantitative Easing) to the banking system at only 0.25% annual interest by 2011 – that is, one quarter of a percentage point, with no questions asked about the quality of the junk mortgages and other securities pledged as collateral at their full face value, which was far above market price.

This $13 trillion debt creation to save banks from having to suffer a loss was not accused of threatening economic stability. It enabled them to resume paying exorbitant salaries and bonuses, dividends to bondholders and also to pay counterparties on casino-capitalist arbitrage bets. These payments have helped the 1% receive a reported 93% of the gains in income since 2008. The bailout thus polarized the economy, giving the financial sector more power over labor and consumers, industry and the government than has been the case since the late 19th-century Gilded Age.

All this makes today’s financial war much like the aftermath of World War I and countless earlier wars. The effect is to impoverish the losers, appropriate hitherto public assets for the victors, and impose debt service and taxes much like levying tribute. “The financial crisis has been as economically devastating as a world war and may still be a burden on ‘our grandchildren,’” Bank of England official Andrew Haldane recently observed. “‘In terms of the loss of incomes and outputs, this is as bad as a world war.’ he said. The rise in government debt has prompted calls for austerity – on the part of those who did not receive the giveaway. ‘It would be astonishing if people weren’t asking big questions about where finance has gone wrong.’”[2]

But as long as the financial sector is winning its war against the economy at large, it prefers that people believe that There Is No Alternative. Having captured mainstream economics as well as government policy, finance seeks to deter students, voters and the media from questioning whether the financial system really needs to be organized in the way it is. Once such a line of questioning is pursued, people may realize that banking, pension and Social Security systems and public deficit financing do not have to be organized in the way they are. There are better alternatives to today’s road to austerity and debt peonage.


The Financial War Against the Economy at Large

Today’s economic warfare is not the kind waged a century ago between labor and its industrial employers. Finance has moved to capture the economy at large, industry and mining, public infrastructure (via privatization) and now even the educational system. (At over $1 trillion, U.S. student loan debt came to exceed credit-card debt in 2012.) The weapon in this financial warfare is no longer military force. The tactic is to load economies (governments, companies and families) with debt, siphon off their income as debt service and then foreclose when debtors lack the means to pay. Indebting government gives creditors a lever to pry away land, public infrastructure and other property in the public domain. Indebting companies enables creditors to seize employee pension savings. And Indebting labor means that it no longer is necessary to hire strikebreakers to attack union organizers and strikers.

Workers have become so deeply indebted on their home mortgages, credit cards and other bank debt that they fear to strike or even to complain about working conditions. Losing work means missing payments on their monthly bills, enabling banks to jack up interest rates to levels that used to be deemed usurious. So debt peonage and unemployment loom on top of the wage slavery that was the main focus of class warfare a century ago. And to cap matters, credit-card bank lobbyists have rewritten the bankruptcy laws to curtail debtor rights, and the referees appointed to adjudicate disputes brought by debtors and consumers are subject to veto from the banks and businesses that are mainly responsible for inflicting injury.

The aim of financial warfare is not merely to acquire land, natural resources and key infrastructure rents as in military warfare; it is to centralize creditor control over society. In contrast to the promise of democratic reform nurturing a middle class a century ago, we are witnessing a regression to a world of special privilege in which one must inherit wealth in order to avoid debt and job dependency.

The emerging financial oligarchy seeks to shift taxes off banks and their major customers (real estate, natural resources and monopolies) onto labor. Given the need to win voter acquiescence, this aim is best achieved by rolling back everyone’s taxes. The easiest way to do this is to shrink government spending, headed by Social Security, Medicare and Medicaid. Yet these are the programs that enjoy the strongest voter support. This fact has inspired what may be called the Big Lie of our epoch: the pretense that governments can only create money to pay the financial sector, and that the beneficiaries of social programs should be entirely responsible for paying for Social Security, Medicare and Medicaid, not the wealthy. This Big Lie is used to reverse the concept of progressive taxation, turning the tax system into a ploy of the financial sector to levy tribute on the economy at large.

Financial lobbyists quickly discovered that the easiest ploy to shift the cost of social programs onto labor is to conceal new taxes as user fees, using the proceeds to cut taxes for the elite 1%. This fiscal sleight-of-hand was the aim of the 1983 Greenspan Commission. It confused people into thinking that government budgets are like family budgets, concealing the fact that governments can finance their spending by creating their own money. They do not have to borrow, or even to tax (at least, not tax mainly the 99%).

The Greenspan tax shift played on the fact that most people see the need to save for their own retirement. The carefully crafted and well-subsidized deception at work is that Social Security requires a similar pre-funding – by raising wage withholding. The trick is to convince wage earners it is fair to tax them more to pay for government social spending, yet not also to ask the banking sector to pay similar a user fee to pre-save for the next time it itself will need bailouts to cover its losses. Also asymmetrical is the fact that nobody suggests that the government set up a fund to pay for future wars, so that future adventures such as Iraq or Afghanistan will not “run a deficit” to burden the budget. So the first deception is to treat only Social Security and medical care as user fees. The second is to aggravate matters by insisting that such fees be paid long in advance, by pre-saving.

There is no inherent need to single out any particular area of public spending as causing a budget deficit if it is not pre-funded. It is a travesty of progressive tax policy to only oblige workers whose wages are less than (at present) $105,000 to pay this FICA wage withholding, exempting higher earnings, capital gains, rental income and profits. The raison d’ĂȘtre for taxing the 99% for Social Security and Medicare is simply to avoid taxing wealth, by falling on low wage income at a much higher rate than that of the wealthy. This is not how the original U.S. income tax was created at its inception in 1913. During its early years only the wealthiest 1% of the population had to file a return. There were few loopholes, and capital gains were taxed at the same rate as earned income.

The government’s seashore insurance program, for instance, recently incurred a $1 trillion liability to rebuild the private beaches and homes that Hurricane Sandy washed out. Why should this insurance subsidy at below-commercial rates for the wealthy minority who live in this scenic high-risk property be treated as normal spending, but not Social Security? Why save in advance by a special wage tax to pay for these programs that benefit the general population, but not levy a similar “user fee” tax to pay for flood insurance for beachfront homes or war? And while we are at it, why not save another $13 trillion in advance to pay for the next bailout of Wall Street when debt deflation causes another crisis to drain the budget?

But on whom should we levy these taxes? To impose user fees for the beachfront reconstruction would require a tax falling mainly on the wealthy owners of such properties. Their dominant role in funding the election campaigns of the Congressmen and Senators who draw up the tax code suggests why they are able to avoid prepaying for the cost of rebuilding their seashore property. Such taxation is only for wage earners on their retirement income, not the 1% on their own vacation and retirement homes.

By not raising taxes on the wealthy or using the central bank to monetize spending on anything except bailing out the banks and subsidizing the financial sector, the government follows a pro-creditor policy. Tax favoritism for the wealthy deepens the budget deficit, forcing governments to borrow more. Paying interest on this debt diverts revenue from being spent on goods and services. This fiscal austerity shrinks markets, reducing tax revenue to the brink of default. This enables bondholders to treat the government in the same way that banks treat a bankrupt family, forcing the debtor to sell off assets – in this case the public domain as if it were the family silver, as Britain’s Prime Minister Harold MacMillan characterized Margaret Thatcher’s privatization sell-offs.

In an Orwellian doublethink twist this privatization is done in the name of free markets, despite being imposed by global financial institutions whose administrators are not democratically elected. The International Monetary Fund (IMF), European Central Bank (ECB) and EU bureaucracy treat governments like banks treat homeowners unable to pay their mortgage: by foreclosing. Greece, for example, has been told to start selling off prime tourist sites, ports, islands, offshore gas rights, water and sewer systems, roads and other property.

Sovereign governments are, in principle, free of such pressure. That is what makes them sovereign. They are not obliged to settle public debts and budget deficits by asset selloffs. They do not need to borrow more domestic currency; they can create it. This self-financing keeps the national patrimony in public hands rather than turning assets over to private buyers, or having to borrow from banks and bondholders.



Why the Fiscal Squeeze Imposes Needless Austerity

The financial sector promises that privatizing roads and ports, water and sewer systems, bus and railroad lines (on credit, of course) is more efficient and will lower the prices charged for their services. The reality is that the new buyers put up rent-extracting tollbooths on the infrastructure being sold. Their break-even costs include the high salaries and bonuses they pay themselves, as well as interest and dividends to their creditors and backers, spending on stock buy-backs and political lobbying.

Public borrowing creates a dependency that shifts economic planning to Wall Street and other financial centers. When voters resist, it is time to replace democracy with oligarchy. “Technocratic” rule replaces that of elected officials. In Europe the IMF, ECB and EU troika insists that all debts must be paid, even at the cost of austerity, depression, unemployment, emigration and bankruptcy. This is to be done without violence where possible, but with police-state practices when grabbers find it necessary to quell popular opposition.

Financializing the economy is depicted as a natural way to gain wealth – by taking on more debt. Yet it is hard to think of a more highly politicized policy, shaped as it is by tax rules that favor bankers. It also is self-terminating, because when public debt grows to the point where investors (“the market”) no longer believe that it can be repaid, creditors mount a raid (the military analogy is appropriate) by “going on strike” and not rolling over existing bonds as they fall due. Bond prices fall, yielding higher interest rates, until governments agree to balance the budget by voluntary pre-bankruptcy privatizations.

Selling Saved-up Treasury Bonds to Fund Public Programs is Like New Deficit Borrowing

If the aim of America’s military spending around the world is to prepare for future warfare, why not aim at saving up a fund of $10 trillion or even $30 trillion in advance, as with Social Security, so that we will have the money to pay for it?

The answer is that selling saved-up Treasury bills to finance Social Security, military spending or any other program has the same monetary and price effect as issuing new Treasury bills. The impact on financial markets – and on the private sector’s holding of government debt – by paying Social Security out of past savings – that is, by selling the Treasury securities in which Social Security funds are invested – is much like borrowing by selling new securities. It makes little difference whether the Treasury sells newly printed IOUs, or sells bonds that it has been accumulating in a special fund. The effect is to increase public debt owed to the financial sector.

If the savings are to be invested in Treasury bonds (as is the case with Social Security), will this pay for tax cuts elsewhere in the budget? If so, will these cuts be for the wealthy 1% or the 99%? Or, will the savings be invested in infrastructure, or turned over to states and cities to help balance their budget shortfalls and underfunded pension plans?

Another problem concerns who should pay for this pre-saving. The taxes needed to pre-fund a savings build-up siphon off income from somewhere in the economy. How much will the economy shrink by diverting income from being spent on goods and services? And whose income will taxed? These questions illustrate how politically self-interested it is to single out taxing wages to save for Social Security in contrast to war-making and beach-house rebuilding.

Government budgets usually are designed to be in balance under normal peacetime conditions, so most public debt has been brought into being by war (prior to today’s financial war of slashing taxes on the wealthy). Adam Smith’s Wealth of Nations (Book V) traced how each new British bond issue to raise funds for a military action had a dedicated tax to pay its interest charges. The accumulation of such war debts thus raised the cost of living and hence the break-even price of labor. To prevent this from undercutting of British competitiveness, Smith urged that wars be waged on a pay-as-you-go basis – by full taxation rather than by borrowing and entailing interest payments and taxes (as the debt itself rarely was amortized). Smith thought that populations should feel the cost of war directly and immediately, presumably leading them to be vigilant in checking grandiose projects of empire.

The United States issued fiat greenback currency to pay for much of its Civil War, but also issued bonds. In analyzing this war finance the Canadian-American astronomer and monetary theorist Simon Newcomb pointed out that all wars must be paid for in the form of tangible material and lives by the generation that fights them. Paying for the war by borrowing from bondholders, he explained, involved levying taxes to pay the interest. The effect was to transfer income from the Western states (taxpayers) to bondholders in the East.

In the case of Social Security today the beneficiary of government debt is still the financial sector. The economy must provide the housing, food, health care, transportation and clothing to enable retirees to live normal lives. This economic surplus can be paid for either out of taxation, new money creation or borrowing. But instead of “the West,” the major payers of the Social Security tax are wage earners across the nation. Taxing labor shrinks markets and forces the economy into austerity.

Quantitative Easing as Free Money Creation – To Subsidize the Big Banks

The Federal Reserve’s three waves of Quantitative Easing since 2008 show how easy it is to create free money. Yet this has been provided only to the largest banks, not to strapped homeowners or industry. An immediate $2 trillion in “cash for trash” took the form of the Fed creating new bank-reserve credit in exchange for mortgage-backed securities valued far above market prices. QE2 provided another $800 billion in 2011-12. The banks used this injection of credit for interest rate arbitrage and exchange rate speculation on the currencies of Brazil, Australia and other high-interest-rate economies. So nearly all the Fed’s new money went abroad rather than being lent out for investment or employment at home.

U.S. Government debt was run up mainly to re-inflate prices for packaged bank mortgages, and hence real estate prices. Instead of alleviating private-sector debt by writing down mortgages in line with the homeowners’ ability to pay, the Federal Reserve and Treasury created money to support property prices – to push the banking system’s balance sheets back above negative net worth. The Fed’s QE3 program in 2012-13 created money to buy mortgage-backed securities each month, to provide banks with money to lend to new property buyers.

For the economy at large, the debts were left in place. Yet commentators focused only on government debt. In a double standard, they accused budget deficits of inflating wages and consumer prices, yet the explicit aim of quantitative easing was to support asset prices. Inflating asset prices on credit is deemed to be good for the economy, despite loading it down with debt. But public spending into the “real” economy, raising employment levels and sustaining consumer spending, is deemed bad – except when this is financed by personal borrowing from the banks. So in each case, increasing bank profits is the standard by which fiscal policy is to be judged!

The result is a policy asymmetry that is opposite from what most epochs have deemed fair or helpful to economic growth. Bankers and bondholders insist that the public sector borrow from them, blocking the government’s power to self-finance its operations – with one glaring exception. That exception occurs when the banks themselves need free money creation. The Fed provided nearly free credit to the banks under QE2, and Chairman Ben Bernanke promised to continue this policy until such time as the unemployment rate drops to 6.5%. The pretense is that low interest rates spur employment, but the most pressing aim is to provide easy credit to revive borrowing and bid asset prices back up.

Fiscal Deflation on Top of Debt Deflation

The main financial problem with funding war occurs after the return to normalcy, when creditors press for budget surpluses to roll back the public debt that has been run up. This imposes fiscal austerity, reducing wages and commodity prices relative to the debts that are owed. Consumer spending shrinks and prices decline as governments spend less, while higher taxes withdraw revenue. This is what is occurring in today’s financial war, much as it has in past military postwar returns to peace.

Governments have the power to resist this deflationary policy. Like commercial banks, they can create money on their computer keyboards. Indeed, since 2008 the government has created debt to support the Finance, Insurance and Real Estate (FIRE) sector more than the “real” production and consumption economy.

In contrast to public spending for goods and services (or social programs that increase market demand), most of the bank credit that led to the 2008 financial collapse was created to finance the purchase property already in place, stocks and bonds already issued, or companies already in existence. The effect has been to load down the economy with mortgages, bonds and bank debt whose carrying charges eat into spending on current output. The $13 trillion bank subsidy since 2008 (to enable banks to earn their way out of negative equity) brings us back to the question of why taxes should be levied on the 99% to pre-save for Social Security and Medicare, but not for the bank bailout.

Current tax policy encourages financial and rent extraction that has become the major economic problem of our epoch. Industrial productivity continues to rise, but debt is growing even more inexorably. Instead of fueling economic growth, this of credit/debt threatens to absorb the economic surplus, plunging the economy into austerity, debt deflation and negative equity.

So despite the fact that the financial system is broken, it has gained control over public policy to sustain and even obtain tax favoritism for a dysfunctional overgrowth of bank credit. Unlike the progress of science and technology, this debt is not part of nature. It is a social construct. The financial sector has politicized it by pressing to privatize economic rent rather than collect it as the tax base. This financialization of rent-extracting opportunities does not reflect a natural or inevitable evolution of “the market.” It is a capture of market structures and fiscal policy. Bank lobbyists have campaigned to shift the economic arena to the political sphere of lawmaking and tax policy, with side battlegrounds in the mass media and universities to capture the hearts and minds of voters to believe that the quickest and most efficient way to build up wealth is by bank credit and debt leverage.

Budget Deficits as an Antidote to Austerity

Public debts everywhere are growing, as taxes only cover part of public spending. The least costly way to finance this expenditure is to issue money – the paper currency and coins we carry in our pockets. Holders of this currency technically are creditors to the government – and to society, which accepts this money in payment. Yet despite being nominally a form of public debt, this money serves as public capital inasmuch as it is not normally expected to be repaid. This government money does not bear interest, and may be thought of as “equity capital” or “equity money,” and hence part of the economy’s net worth.

If taxes did fully cover government spending, there would be no budget deficit – or new public money creation. Government budget deficits pump money into the economy. Conversely, running a budget surplus retires the public debt or currency outstanding. This deflationary effect occurred in the late 19th-century, causing monetary deflation that plunged the U.S. economy into depression. Likewise when President Bill Clinton ran a budget surplus late in his administration, the economy relied on commercial banks to supply credit to use as the means of payment, charging interest for this service. As Stephanie Kelton summarizes this historical experience:

The federal government has achieved fiscal balance (even surpluses) in just seven periods since 1776, bringing in enough revenue to cover all of its spending during 1817-21, 1823-36, 1852-57, 1867-73, 1880-93, 1920-30 and 1998-2001. We have also experienced six depressions. They began in 1819, 1837, 1857, 1873, 1893 and 1929.

Do you see the correlation? The one exception to this pattern occurred in the late 1990s and early 2000s, when the dot-com and housing bubbles fueled a consumption binge that delayed the harmful effects of the Clinton surpluses until the Great Recession of 2007-09.

When taxpayers pay more to the government than the economy receives in public spending, the effect is like paying banks more than they provide in new credit. The debt volume is reduced (increasing the reported savings rate). The resulting austerity is favorable to the financial sector but harmful to the rest of the economy.

Most people think of money as a pure asset (like a coin or a $10 dollar bill), not as being simultaneously a public debt. But to an accountant, a balance sheet always balances: Assets = Liabilities + Net Worth. This liability-side ambivalence is confusing to most people. It takes some time to think in terms of offsetting assets and liabilities as mirror images of each other. Much as cosmologists assume that the universe is symmetrical – with positively charged matter having an anti-matter counterpart somewhere at the other end – so accountants view the money in our pocket as being created by the government’s deficit spending. Holders of the Federal Reserve’s paper currency technically can redeem it, but they will simply get paid in other denominations of the same currency.

The word “redeem” comes from settling debts. This was the purpose for which money first came into being. Governments redeem money by accepting it for tax payment. In addition to issuing paper currency, the Federal Reserve injects money into the economy by writing checks electronically. The recipients (usually banks selling Treasury bonds or, more recently, packages of mortgage loans) gain a deposit at the central bank. This is the kind of deposit that was created by the above-mentioned $13 trillion in new debt that the government turned over to Wall Street after the September 2008 crisis. The price impact was felt in financial asset markets, not in prices for goods and services or labor’s wages.

This Federal Reserve and Treasury credit was not counted as part of the government’s operating deficit. Yet it increased public debt, without being spent on “real” GDP. The banks used this money mainly to gamble on foreign exchange and interest-rate arbitrage as noted above, to buy smaller banks (helping make themselves Too Big To Fail), and to keep paying their managers high salaries and bonuses.

This monetization of debt shows how different government budgets are from family budgets. Individuals must save to pay for retirement or other spending. They cannot print their own money, or tax others. But governments do not need to “save” (or tax) to pay for their spending. Their ability to create money means that they do not need to save in advance to pay for wars, Social Security or other needs.

Keynesian Deficit Spending vs. Bailing out Wall Street to Keep the Debt Overhead in Place

There are two kinds of markets: hiring labor to produce goods and services in the “real” economy, and transactions in financial assets and property claims in the FIRE sector. Governments can run budget deficits by financing either of these two spheres. Since President Franklin Roosevelt’s WPA programs in the 1930s, along with his public infrastructure investment in roads, dams and other construction – and military arms spending after World War II broke out – “Keynesian” spending on goods and services has been used to hire labor or pay for social programs. This pumps money into the economy via the GDP-type transactions that appear in the National Income and Product Accounts. It is not inflationary when unemployment exists.

However, the debt that characterized the Paulson-Geithner bailout of Wall Street was created not to spend on goods and services, but to buy (or take liability for) mortgages and bank loans, insurance default bets and arbitrage gambles. The aim was to subsidize financial losses while keeping the debt overhead in place, so that banks and other financial institutions could “earn their way” out of negative net worth, at the economy’s expense. The idea was that they could start lending again to prevent real estate prices from falling further, saving them from having to write down their debt claims to bring levels back down within the ability to be paid.
The Ideological Crisis Underlying Today’s Tax and Financial Policy

From antiquity and for thousands of years, land, natural resources and monopolies, seaports and roads were kept in the public domain. In more recent times railroads, subway lines, airlines, and gas and electric utilities were made public. The aim was to provide their basic services at cost or at subsidized prices rather than letting them be privatized into rent-extracting opportunities. The Progressive Era capped this transition to a more equitable economy by enacting progressive income and wealth taxes.

Economies were liberating themselves from the special privileges that European feudalism and colonialism had granted to favored insiders. The aim of ending these privileges – or taxing away economic rent where it occurs naturally, as in the land’s site value and natural resource rent – was to lower the costs of living and doing business. This was expected to make progressive economies more competitive, obliging other countries to follow suit or be rendered obsolete. The era of what was considered to be socialism in one form or another seemed to be at hand – rising role of the public sector as part and parcel of the evolution of technology and prosperity.

But the landowning and financial classes fought back, seeking to expunge the central policy conclusion of classical economics: the doctrine that free-lunch economic rent should serve as the tax base for economies seeking to be most efficient and fair. Imbued with academic legitimacy by the University of Chicago (which Upton Sinclair aptly named the University of Standard Oil) the new post-classical economics has adopted Milton Friedman’s motto: “There Is No Such Thing As A Free Lunch” (TINSTAAFL). If it is not seen, it has less likelihood of being taxed.

The political problem faced by rentiers – the “idle rich” siphoning off most of the economy’s gains for themselves – is to convince voters to agree that labor and consumers should be taxed rather than the financial gains of the wealthiest 1%. How long can they defer people from seeing that making interest tax-exempt pushes the government’s budget further into deficit? To free financial wealth and asset-price gains from taxes – while blocking the government from financing its deficits by its own public option for money creation – the academics sponsored by financial lobbyists hijacked monetary theory, fiscal policy and economic theory in general. On seeming grounds of efficiency they claimed that government no longer should regulate Wall Street and its corporate clients. Instead of criticizing rent seeking as in earlier centuries, they depicted government as an oppressive Leviathan for using its power to protect markets from monopolies, crooked drug companies, health insurance companies and predatory finance.

This idea that a “free market” is one free for Wall Street to act without regulation can be popularized only by censoring the history of economic thought. It would not do for people to read what Adam Smith and subsequent economists actually taught about rent, taxes and the need for regulation or public ownership. Academic economics is turned into an Orwellian exercise in doublethink, designed to convince the population that the bottom 99% should pay taxes rather than the 1% that obtain most interest, dividends and capital gains. By denying that a free lunch exists, and by confusing the relationship between money and taxes, they have turned the economics discipline and much political discourse into a lobbying effort for the 1%.

Lobbyists for the 1% frame the fiscal question in terms of “How can we make the 99% pay for their own social programs?” The implicit follow-up is, “so that we (the 1%) don’t have to pay?” This is how the Social Security system came to be “funded” and then “underfunded.” The most regressive tax of all is the FICA payroll tax at 15.3% of wages up to about $105,000. Above that, the rich don’t have to contribute. This payroll tax exceeds the income tax paid by many blue-collar families. The pretense is that not taxing these free lunchers will make economies more competitive and pull them out of depression. The reality is the opposite: Instead of taxing the wealthy on their free lunch, the tax burden raises the cost of living and doing business. This is a major reason why the U.S. economy is being de-industrialized today.

The key question is what the 1% do with their revenue “freed” from taxes. The answer is that they lend it out to indebt the 99%. This polarizes the economy between creditors and debtors. Over the past generation the wealthiest 1% have rewritten the tax laws to a point where they now receive an estimated 66% – two thirds – of all returns to wealth (interest, dividends, rents and capital gains), and a reported 93% of all income gains since the Wall Street bailout of September 2008.

They have used this money to finance the election campaigns of politicians committed to shifting taxes onto the 99%. They also have bought control of the major news media that shape peoples’ understanding of what is happening. And as Thorstein Veblen described nearly a century ago, businessmen have become the heads most universities and directed their curriculum along “business friendly” lines.

The clearest way to analyze any financial system is to ask Who/Whom. That is because financial systems are basically a set of debts owed to creditors. In today’s neo-rentier economy the bottom 99% (labor and consumers) owe the 1% (bondholders, stockholders and property owners). Corporate business and government bodies also are indebted to this 1%. The degree of financial polarization has sharply accelerated as the 1% are making their move to indebt the 99% – along with industry, state, local and federal government – to the point where the entire economic surplus is owed as debt service. The aim is to monopolize the economy, above all the money-creating privilege of supplying the credit that the economy needs to grow and transact business, enabling them to extract interest and other fees for this privilege.

The top 1% have nearly succeeded in siphoning off the entire surplus for themselves, receiving 93% of U.S. income growth since September 2008. Their control over the political process has enabled them to use each new financial crisis to strengthen their position by forcing companies, states and localities to relinquish property to creditors and financial investors. So after monopolizing the economic surplus, they now are seeking to transfer to themselves the economic infrastructure, land and natural resources, and any other asset on which a rent-extracting tollbooth can be placed.

The situation is akin to that of medieval Europe in the wake of the Nordic invasions. The supra-national force of Rome in feudal times is now situated in Washington, with Christianity replaced by the Washington Consensus wielded via the IMF, World Bank, WTO and its satellite institutions such as the European Central Bank, backed by the moral and ideological role academic economists rather than the Church. And on the new financial battlefield, Wall Street underwriters have used the crisis as an opportunity to press for privatization. Chicago’s strong Democratic political machine sold rights to install parking meters on its sidewalks, and has tried to turn its public roads into privatized toll roads. And the city’s Mayor Rahm Emanuel has used privatization of its airport services to break labor unionization, Thatcher-style. The class war is back in business, with financial tactics playing a leading role barely anticipated a century ago.

This monopolization of property is what Europe’s medieval military conquests sought to achieve, and what its colonization of foreign continents replicated. But whereas it achieved this originally by military conquest of the land, today’s 1% do it l by financializing the economy (although the military arm of force is not absent, to be sure, as the world saw in Chile after 1973).

The financial quandary confronting us

The economy’s debt overhead has grown so large that not everyone can be paid. Rising default rates pose the question age-old question of Who/Whom. The answer almost always is that big fish eat little fish. Big banks (too big to fail) are eating little banks, while the 1% try to take the lion’s share for themselves by annulling public and corporate debts owed to the 99%. Their plan is to downgrade Social Security and Medicare savings to “entitlements,” as if it is a matter of sound fiscal choice not to pay low-income payers whilerentiers at the top re-christen themselves “job creators,” as if they have made their gains by helping wage-earners rather than waging war against them.

The problem is not Social Security, which can be paid out of normal tax revenue, as in Germany’s pay-as-you-go system. This fiscal problem – untaxing real estate, oil and gas, natural resources, monopolies and the banks – has been depicted as financial – as if one needs to save in advance by a special tax to lend to the government to cut taxes on the 99%.

The real pension cliff is with corporate, state and local pension plans, which are being underfunded and looted by financial managers. The shortfall is getting worse as the downturn reduces local tax revenues, leaving states and cities unable to fund their programs, to invest in new public infrastructure, or even to maintain and repair existing investments. Public transportation in particular is suffering, raising user fees to riders in order to pay bondholders. But it is mainly retirees who are being told to sacrifice. (The sanctimonious verb is “share” in the sacrifice, although this evidently does not apply to the 1%.)

The bank lobby would like the economy to keep trying to borrow its way out of debt and thus dig itself deeper into a financial hole that puts yet more private and public property at risk of default and foreclosure. The idea is for the government to “stabilize” the financial system by bailing out the banks – that is, doing for them what it has not been willing to do for recipients of Social Security and Medicare, or for states and localities no longer receiving revenue sharing, or for homeowners in negative equity suffering from exploding interest rates even while bank borrowing costs from the Fed have plunged. The dream is that the happy Greenspan financial bubble can be recovered, making everyone rich again, if only they will debt-leverage to bid up real estate, stock and bond prices and create new capital gains.

Realizing this dream is the only way that pension funds can pay retirees. They will be insolvent if they cannot make their scheduled 8+%, giving new meaning to the term “fictitious capital.” And in the real estate market, prices will not soar again until speculators jump back in as they did prior to 2008. If student loans are not annulled, graduates face a lifetime of indentured servitude. But that is how much of colonial America was settled, after all – working off the price of their liberty, only to be plunged into the cauldron of vast real estate speculations and fortunes-by-theft on which the Republic was founded (or at least the greatest American fortunes). It was imagined that such bondage belonged only to a bygone era, not to the future of the West. But we may now look back to that era for a snapshot of our future.

The financial plan is for the government is to supply nearly free credit to the banks, so that they can to lend debtors enough – at the widest interest-rate markups in recent memory (what banks charge borrowers and credit-card users over their less-than-1% borrowing costs) – to pay down the debts that were run up before 2008.

This is not a program to increase market demand for the products of labor. It is not the kind of circular flow that economists have described as the essence of industrial capitalism. It is a financial rake-off of a magnitude such as has not existed since medieval European times, and the last stifling days of the oligarchic Roman Empire two thousand years ago.

Imagining that an economy can be grounded on these policies will further destabilize the economy rather than alleviate today’s debt deflation. But if the economy is saved, the banks cannot be. This is why the Obama Administration has chosen to save the banks, not the economy. The Fed’s prime directive is to keep interest rates low – to revive lending not to finance new business investment to produce more, but simply to inflate the asset prices that back the bank loans that constitute bank reserves. It is the convoluted dream of a new Bubble Economy – or more accurately a new Great Giveaway.

Here’s the quandary: If the Fed keeps interest rates low, how are corporate, state and local pension plans to make the 8+% returns needed to pay their scheduled pensions? Are they to gamble more with hedge funds playing Casino Capitalism?

On the other hand, if interest rates rise, this will reduce the capitalization multiple at which banks lend against current rental income and profits. Higher interest rates will lower prices for real estate, corporate stocks and bonds, pushing the banks (and pension funds) even deeper into negative equity.

So something has to give. Either way, the financial system cannot continue along its present path. Only debt write-offs will “free” markets to resume spending on goods and services. And only a shift of taxes onto rent-yielding property and tollbooths, finance and monopolies will save prices from being loaded down with extractive overhead charges and refocus lending to finance production and employment. Unless this is done, there is no way the U.S. economy can become competitive in international markets, except of course for military hardware and intellectual property rights for escapist cultural artifacts.

The solution for Social Security, Medicare and Medicaid is to de-financialize them. Treat them like government programs for military spending, beachfront rebuilding and bank subsidies, and pay their costs out of current tax revenue and new money creation by central banks doing what they were founded to do.

Politicians shy away from confronting this solution mainly because the financial sector has sponsored a tunnel vision that ignores the role of debt, money, and the phenomena of economic rent, debt leverage and asset-price inflation that have become the defining characteristics of today’s financial crisis. Government policy has been captured to try and save – or at least subsidize – a financial system that cannot be saved more than temporarily. It is being kept on life support at the cost of shrinking the economy – while true medical spending for real life support is being cut back for much of the population.

The economy is dying from a financial respiratory disease, or what the Physiocrats would have called a circulatory disorder. Instead of freeing the economy from debt, income is being diverted to pay credit card debt and mortgage debts. Students without jobs remain burdened with over $1 trillion of student debt, with the time-honored safety valve of bankruptcy closed off to them. Many graduates must live with their parents as marriage rates and family formation (and hence, new house-buying) decline. The economy is dying. That is what neoliberalism does.

Now that the debt build-up has run its course, the banking sector has put its hope in gambling on mathematical probabilities via hedge fund capitalism. This Casino Capitalist has become the stage of finance capitalism following Pension Fund capitalism – and preceding the insolvency stage of austerity and property seizures.

The open question now is whether neofeudalism will be the end stage. Austerity deepens rather than cures public budget deficits. Unlike past centuries, these deficits are not being incurred to wage war, but to pay a financial system that has become predatory on the “real” economy of production and consumption. The collapse of this system is what caused today’s budget deficit. Instead of recognizing this, the Obama Administration is trying to make labor pay. Pushing wage-earners over the “fiscal cliff” to make them pay for Wall Street’s financial bailout (sanctimoniously calling their taxes “user fees”) can only shrink of market more, pushing the economy into a fatal combination of tax-ridden and debt-ridden fiscal and financial austerity.

The whistling in the intellectual dark that central bankers call by the technocratic term “deleveraging” (paying off the debts that have been run up) means diverting yet more income to pay the financial sector. This is antithetical to resuming economic growth and restoring employment levels. The recent lesson of European experience is that despite austerity, debt has risen from 381% of GDP in mid-2007 to 417% in mid—2012. That is what happens when economies shrink: debts mount up at arrears (and with stiff financial penalties).

But even as economies shrink, the financial sector enriches itself by turning its debt claims – what 19th-century economists called “fictitious capital” before it was called finance capital – into a property grab. This makes an unrealistic debt overhead – unrealistic because there is no way that it can be paid under existing property relations and income distribution – into a living nightmare. That is what is happening in Europe, and it is the aim of Obama Administration of Tim Geithner, Ben Bernanke, Erik Holder et al. They would make America look like Europe, wracked by rising unemployment, falling markets and the related syndrome of adverse social and political consequences of the financial warfare waged against labor, industry and government together. The alternative to the road to serfdom – governments strong enough to protect populations against predatory finance – turns out to be a detour along the road to debt peonage and neofeudalism.

So we are experiencing the end of a myth, or at least the end of an Orwellian rhetorical patter talk about what free markets really are. They are not free if they are to pay rent-extractors rather than producers to cover the actual costs of production. Financial markets are not free if fraudsters are not punished for writing fictitious junk mortgages and paying ratings agencies to sell “opinions” that their clients’ predatory finance is sound wealth creation. A free market needs to be regulated from fraud and from rent seeking.

The other myth is that it is inflationary for central banks to monetize public spending. What increases prices is building interest and debt service, economic rent and financial charges into the cost of living and doing business. Debt-leveraging the price of housing, education and health care to make wage-earners pay over two-thirds of their income to the FIRE sector, FICA wage withholding and other taxes falling on labor are responsible for de-industrializing the economy and making it uncompetitive.

Central bank money creation is not inflationary if it funds new production and employment. But that is not what is happening today. Monetary policy has been hijacked to inflate asset prices, or at least to stem their decline, or simply to give to the banks to gamble. “The economy” is less and less the sphere of production, consumption and employment; it is more and more a sphere of credit creation to buy assets, turning profits and income into interest payments until the entire economic surplus and repertory of property is pledged for debt service.

To celebrate this as a “postindustrial society” as if it is a new kind of universe in which everyone can get rich on debt leveraging is a deception. The road leading into this trap has been baited with billions of dollars of subsidized junk economics to entice voters to act against their interests. The post-classical pro-rentier financial narrative is false – intentionally so. The purpose of its economic model is to make people see the world and act (or invest their money) in a way so that its backers can make money off the people who follow the illusion being subsidized. It remains the task of a new economics to revive the classical distinction between wealth and overhead, earned and unearned income, profit and rentier income – and ultimately between capitalism and feudalism.

Notes.
[1] No such benefits were given to homeowners whose real estate fell into negative equity. For the few who received debt write-downs to current market value, the credit was treated as normal income and taxed!

[2] Philip Aldrick, “Loss of income caused by banks as bad as a ‘world war’, says BoE’s Andrew Haldane,” The Telegraph, December 3, 2012. Mr. Haldane is the Bank’s executive director for financial stability.

The Bi-Partisan Fiscal Scam

Obama Gave It All Away
by JILL STEIN


As daylight begins to shine on the fiscal cliff deal just passed by Congress, it’s clear the expected bipartisan betrayal has occurred. And even worse, it lays the groundwork for much more to come.

In brief, the deal protects wealthy households earning up to $450,000 annually from tax increases, as it makes Bush tax cuts permanent for 98.5% of Americans. With this provision, Obama broke his promise to raise taxes on those earning over $250,000 per year.

The deal also ended the payroll tax holiday, hitting vulnerable working and middle class families with significant tax increases likely to take further steam out of the economy. This increased tax burden – of about $1000 for a family earning $50,000 per year- should have been replaced by another tax break for working families to prevent a reduction in demand that’s likely to further stall the ailing economy.

The deal also ushered in an additional $205 billion in wasteful corporate tax favors. New racetracks will get tens of millions, Goldman Sachs gets $1.6 billion in tax-free financing for its new massive headquarters, banks get a $9 billion dollar loophole for offshore financing, and U.S. multinationals are allowed to dodge taxes on income earned by foreign subsidiaries – giving them all the more reason to move jobs offshore.

Taking care of ill family members at home was dealt a set-back with a provision in the Affordable Care Act designed to let millions of elderly and disabled people get help at home rather than be placed in institutional care being repealed.

The deal included an urgent renewal of unemployment insurance, though many observers considered this virtually a given. It also deferred the self-inflicted devastation of the ‘sequester’, which would impose $110 billion in across the board domestic and military cuts, but only for two months.

In supporting the bill, President Obama gave away the one bargaining chip – the expiring Bush tax cuts – that he could have used in the upcoming negotiations on spending cuts and the debt ceiling. Not only did Obama get little of substance in return for his only bargaining chip. He actually ceded nearly half the $1 trillion in new revenue that John Boehner agreed to, (getting only $600 billion in tax increases on the wealthy over the next decade).

This lays groundwork for a disaster. Obama has already agreed to 4 trillion in deficit reduction. The revenue side of the deal he just signed generates little more than $600 billion. That means we can expect bipartisan collaboration on more than $3 trillion in cuts going in to the next round of brinksmanship over the debt ceiling. Obama has already indicated his willingness to cut Social Security, Medicare and other health programs. Now, thanks to his early capitulation, the Republicans have all the cards in their hands.

Stay tuned. Our voices are needed more than ever to continue the fight for strong Medicare, Social Security and Medicaid – and for an economy that works for all of us. Once again we’re seeing that real solutions will not be coming from the corporate sponsored political establishment. You can be prouder than ever of your vote against the continued bipartisan sell out. More than ever, we – the people – are the ones we’ve been waiting for.

Big Banks and Drug Money

Apologize Then Call it a Day
by HELEN REDMOND


The illicit drug trade relies heavily on money laundering because it is almost exclusively a cash business. Drug interdiction, while an essential component of attacking the illicit drug trade cannot, standing alone, reverse the tide of illicit drugs. Combating money laundering, combined with strong interdiction efforts, offers a more effective law enforcement response.
- Money Laundering in Florida: Report of the Legislative Task Force, 1999

Stuart Gulliver, the Chief Executive of the London-based international banking giant HSBC said: “We accept responsibility for our past mistakes. We have said we are profoundly sorry for them and we do so again… What happened in Mexico and the US is shameful, it’s embarrassing, it’s very painful for all of us in the firm…The HSBC of today is a fundamentally different organization from the one that made those mistakes.”

What was Mr. Gulliver apologizing for and was he sincere? His bank got caught laundering tons of cash for drug cartels and alleged terrorists. That is a crime.

Lanny Breuer, the Assistant Attorney General for the Department of Justice (DOJ) explained at a press conference, “HSBC is being held accountable for stunning failures of oversight – and worse – that led the bank to permit narcotics traffickers and others to launder hundreds of millions of dollars through HSBC subsidiaries… The record of dysfunction that prevailed at HSBC for many years was astonishing.”

U.S. Attorney Loretta Lynch added, “HSBC’s blatant failure to implement proper anti-money laundering controls facilitated the laundering of at least $881 million in drug proceeds through the U.S. financial system…”

As punishment, HSBC was assessed a fine of 1.9 billion — about four weeks’ worth of its pre-tax profits. No bank officials who were caught red-handed will be prosecuted or imprisoned.

Take responsibility, apologize, pay a fine for your drug crimes and then call it a day. Go home to family who will forgive you for doing business with so-called “narco-terrorists.” Prison time? Felony record? Asset forfeiture? No. Not for drug trafficking executives of laundromat/banks that are “too big to fail” or jail.

It is not so for those individuals and organizations that provide other, equally vital services to the $400 billion illicit drug trade. From the heads of Afghan drug cartels, to drug couriers like the Panamanian woman who had cocaine implanted in her breasts, to injection drug users in America’s needle parks, they will be demonized as purveyors of poison and death then punished severely. They won’t go home for a very long time, if ever.

The U.S. justice system will mete out life sentences without the possibility of parole or mandatory minimum sentences of decades to drug kingpins, mules and the drug addicted. Drug law offender’s lives behind bars will become a dystopia that the profits of the privatized correctional industries depend on.

The convicted will be disappeared in to twenty-first century concentration camps in remote, rural towns. Some prisoners will end up in solitary confinement and be driven mad. Their children will be orphaned and their families destroyed by shame, lack of visitation and communication.

Everything will be legally stolen from drug law violators. Cars, jewelry, family heirlooms, clothes, cash, homes and property will be seized and put up for sale to benefit various branches of law enforcement.

Check out the Asset Forfeiture Program at the DOJ website. You can bid on Rita A. Crundwell’s farmland in Dixon, Illinois. If you prefer a warmer climate, there is beachfront property for sale in the Dominican Republic.

Admitting guilt, apologizing, promising “fundamental” change and paying a financial penalty will not suffice for the poor, low hanging fruit convicted of drug crimes. They have to be taught a “tough love” lesson in zero tolerance, and this: “You do the crime, you do the time.”

This stripping the person of everything that connects them to society and to other human beings and locking them up in spaces smaller than a bathroom has to happen because as the Mission Statement of the Drug Enforcement Administration (DEA) asserts, those involved in the drug trade are criminals who “…perpetrate violence in our communities and terrorize citizens through fear and intimidation.” The DEA and the DOJ’s unapologetic modus operandi in the forty-year long War on Drugs is, Lock ‘em up and throw away the key!

Except when the criminals are rich, well-connected bankers who wash drug trafficker’s dirty Benjamin Franklin’s clean. Tough on crime and the rule of law doesn’t apply to them.

DOJ attorneys argued that aggressively prosecuting HSBC could destabilize the entire international banking system. Breuer said in an interview with the Washington Post, “If you prosecute one of the largest banks in the world, do you risk that people will lose jobs, other financial institutions and other parties will leave the bank, and there will be some kind of event in the world economy?” In other words, banks that break the law by laundering money for drug cartels and rogue states are immune from criminal prosecution because a global financial meltdown could be triggered.

But that didn’t happen twenty-five years ago when the Bank of Credit and Commerce International Bank (BCCI) was prosecuted for laundering drug profits. Like HSBC, BCCI did business with an international cast of unsavory drug dealers and dictators. BCCI helped former Panamanian dictator Manuel Noriega and the Columbian Medellin cocaine cartel convert millions of dollars into pesos. An aggressive investigation led by Senator John Kerry and New York District Attorney Robert Morgenthau concluded that BCCI was “one of the biggest criminal enterprises in world history.”

BCCI was indicted for money laundering, grand larceny and bribery. Bank branches were shut down in seven countries and restricted in dozens more. The criminals at BCCI were punished and effectively put out of business. They got drug war tough love and the world banking system didn’t crash.

The convictions almost didn’t happen. The Bush Administration only wanted a slap on the wrist for BCCI, but Kerry was apoplectic. He went on national television slamming the hypocrisy: “We send drug people to jail for the rest of their life, and these guys who are bankers in the corporate world seem to just walk away, and it’s business as usual…When banks engage knowingly in the laundering of money, they should be shut down. It’s that simple, it really is.”

That was in 1999. Where is Senator Kerry and the rest of Congress’s outrage for the career drug criminals at HSBC that facilitated the illegal deposit of millions of dollars packed into specially designed boxes that would fit through the bank’s teller windows in Mexico?

Why isn’t the Senate Permanent Subcommittee on Investigations that accused HSBC of exposing the United States “financial system to money laundering and terrorist financing risks” and for violating the Trading With the Enemy Act screaming hysterically that those who fund “narco-terrorism” must be punished to keep America safe?

The most Congress could muster was a letter written by Rep. Barney Frank to Attorney General Eric Holder asking him to reconsider the agreement with HSBC. A letter. Wow! That’s tough on crime?

How come the nation’s top drug warrior Michelle Leonhart, Administrator of the DEA, isn’t demanding that HSBC officials pay for their crimes? According to an investigation by Immigration and Customs Enforcement (ICE), from 2006 to 2010 the bank laundered millions in profits for the Sinaloa drug cartel in Mexico and the Norte Del Valle cartel in Columbia through the Black Market Peso Exchange (BMPE.)

And why isn’t Leonhart extraditing Gulliver and other senior bank executives to the United States to face drug trafficking and narco-terrorism charges?

The DEA and the DOJ gloat in their ability to extradite or simply seize alleged drug kingpins from all over the world and bring them to the United States to stand trial – especially suspects from Afghanistan and Latin America. They’re not concerned about the impact that these extraditions will have on the international drug trade. The consequence is often an uptick in violence and murder as internecine fighting erupts to reconfigure drug markets.

The case of Haji Bagcho, a 70-year-old Afghan man convicted of drug trafficking and narco-terrorism reveals the double standard of the DEA and the DOJ when it comes to who they chose to criminally prosecute for drug crimes. Afghan drug traffickers are shown no leniency, are never offered sweetheart deals and are prosecuted to the full extent of the law.

Both Breuer and Leonhart expressed outrage and contempt for Bagcho’s alleged crimes. Breuer said, “Haji Bagcho led a massive drug production and trafficking operation that supplied heroin in more than 20 countries, including the United States. In 2006 alone, he conducted heroin transactions worth more than $250 million. Today’s life sentence is an appropriate punishment for one of the most notorious heroin traffickers in the world.”

Leonhart added with her usual bravado, “This is DEA at its finest, working in close collaboration with our Afghan partners to end the long reign of this Afghan drug lord whose drug proceeds financed terror. One of the world’s most prolific drug traffickers who helped fund the Taliban will spend his remaining days behind bars in a U.S. prison…”

Now imagine those words being hurled at Mr. Gulliver and his “massive” operation (HSBC has branches in 85 countries) “whose drug proceeds financed terror.” Imagine “notorious,” high-level HSBC officials spending their “remaining days behind bars in a U.S. prison.” Hard to imagine isn’t it?

But not for Afghans like Haji Bagcho or Haji Bashar who was also given a life sentence even though he cooperated with the DEA and the DOJ. And there’s Haji Juma Khan. He’s been held in solitary confinement awaiting trial since he was extradited to the United States in 2008. Incarcerating Bagcho, Bashar and Khan hasn’t weakened the Taliban or made a dent in the Afghan drug trade. Afghanistan retains its premier position as the number one grower of poppy and exporter of heroin to Central Asia and Europe. Moreover, Afghans are involved in the illicit drug trade out of economic necessity as are Mexicans, because the legal economies in both countries are in shambles. British bankers have no such reason – their motive is pure greed.

It is a mathematical certainty that as long as drugs are illegal, banks will continue to launder drug trafficker’s money. Superprofits are guaranteed and the financial penalties aren’t a deterrent.

The HSBC scandal shows how the illicit drug trade is completely integrated into the world financial system. I In the face of the enormous economic power of the global banking industry to circumvent anti-laundering regulations, winning the war on drugs is utterly futile.

The only solution is to legalize and regulate the sale of all drugs. It is an inescapable reality that heroin, cocaine, methamphetamine and marijuana are global commodities that cross all borders. Millions of people buy drugs and making them illegal has never stopped the use or abuse of them.

Ending the war on drugs would not only save human lives and billions of dollars, it would free up law enforcement agencies to investigate and prosecute banks whose real crimes are far worse than laundering drug money.

Take Your Hands Off Social Security

It's Irrelevant to the Deficit
by DEAN BAKER


Millions of people are rightly outraged to hear that Social Security is in the gun-sights of both Speaker Boehner and President Obama in their budget negotiations. There is no reason that our political leaders should be discussing cuts to the country’s most successful social program.

While the promotion of budget hysteria is one of the largest industries in Washington, the most important and widely ignored fact about the budget situation is that we have large deficits today because the collapse of the housing bubble sank the economy. This is not a debatable point.

The budget deficit was just 1.2 percent of gross domestic product in 2007. Before the collapse of the housing bubble the deficit was projected to remain low for the next decade and the debt-to-GDP ratio was actually falling. This would have been the case even if the Bush tax cuts were allowed to continue.

When the bubble burst and the economy plummeted, tax collections fell. We also spent more on unemployment insurance and other benefits for unemployed workers. And we had further tax cuts and stimulus spending to try to boost the economy. The automatic and deliberate steps taken to counter the downturn fully explain the large deficits we have seen the last five years.

Record low interest rates on government bonds demonstrate that the current deficits are not a real problem. But even if they were, it is difficult to see how cutting Social Security could to be part of the solution. Under the law Social Security is not supposed to be part of the budget. It is an entirely separate program financed on its own.

This is not just a rhetorical point. We can talk about Social Security facing a financing shortfall in the future precisely because it is solely financed by its own revenue stream. One of the most widely discussed proposals to avert that shortfall is a revision in the cost-of-living calculation that would be the equivalent of a 3 percent cut in benefits over a typical retiree’s lifetime. (Perversely, the impact will be largest for the oldest and poorest retirees, since people who live the longest will accumulate the largest reduction in benefits.)

An overwhelming majority of the country strongly supports Social Security and does not want to see any benefit cuts. But because of the nature of this budget negotiation process, Americans are supposed to accept the cuts with no revenue increase whatsoever to shore up the program’s long-term financial position.

It is understandable that people who want to cut back or dismantle Social Security would argue for this position. It is difficult to see why anyone else would.

GMO Food Fight

Round Two
by RONNIE CUMMINS


On November 6, in the wake of one of the most expensive and scurrilous smear campaigns in history, six million voters scared the hell out of Monsanto the devil and Big Food Inc. by coming within a razor’s edge of passing the first statewide mandatory labeling law for genetically modified organisms (GMOs).
Prop 37, a citizens’ ballot initiative that would have required the mandatory labeling of billions of dollars of genetically engineered (GE) foods and put an end to the routine industry practice of fraudulently marketing GE-tainted foods as “natural” or “all natural,” lost by a narrow margin of 48.6% to 51.4%. Opponents couldn’t claim anything close to a landslide, even though they outspent the pro-labeling campaign almost six to one.

The Grocery Manufacturers Association (GMA) immediately put a happy face on the narrow victory, repeating its tired old propaganda in a public statement: “Proposition 37 was a deeply flawed measure that would have resulted in higher food costs, frivolous lawsuits and increased state bureaucracies. This is a big win for California consumers, taxpayers, business and farmers.”

But Jennifer Hatcher, senior vice president of government and public affairs for the Food Marketing Institute, came closer to expressing the real sentiments of the big guns who opposed Prop 37, a measure she had previously said “scared us to death,” in her official statement:
“This gives us hope that you can, with a well-funded, well-organized, well-executed campaign, defeat a ballot initiative and go directly to the voters. We hope we don’t have too many of them, because you can’t keep doing that over and over again . . .”.

Maybe they can’t. But we can. Unlike the Food Marketing Institute and its friends at the GMA, consumers can – and will – “keep doing that over and over again.” We can – and will – propose state laws and state ballot initiatives as often as we need, in as many states as we must, until we have what 61 other countries have: truth and transparency in the form of mandatory GMO labeling laws. Far from giving up, the alternative food and farming movement that was narrowly defeated in California has evolved into a battle-savvy, seasoned national movement, bigger and stronger than ever.

As Zuri Allen, California Field Organizer of the Organic Consumers Association put it, “We may have lost this first major battle in California, but millions of angry and energized consumers across the country are now joining together in a nationwide right to know campaign which will ultimately drive genetically engineered crops and foods off the market.”

That clearly has Big Biotech and Big Food worried. And well it should. We’ve barely rung in the new year, and already GMO labeling battles are heating up in Washington State, Vermont and Connecticut. Other states aren’t far behind.

On Jan. 4, activists in Washington State delivered approximately 300,000 signatures to the state legislature to guarantee that a mandatory GMO labeling Initiative, I-522, will be on the ballot in November. Initial polling shows that Washington state voters will likely pass this Ballot Initiative, no matter how much money the biotech industry and large food corporations put into an anti-labeling campaign.

On the other side of the country, Vermont is picking up where it left off last year after the governor caved in to Monsanto’s threats to sue the state if it passed a GMO labeling law. Undaunted, and buoyed by 90% support from consumers, legislators will reintroduce a GMO labeling bill in early January. Vermont’s pro-organic, anti-GMO proponents fully expect to pass a labeling bill by May. Connecticut is right behind them, with plans to introduce a similarly popular GMO labeling bill early this year.

Why a win is just around the corner.

Giant biotech and junk food corporations, joined by major food processors and supermarket chains, poured more than $46 million dollars into a vicious dirty tricks campaign to defeat GMO labeling in California. Their tactics included a relentless barrage of TV and radio ads falsely claiming GE food labels would raise grocery prices, hurt family farmers, and enrich trial lawyers. They unleashed “scientific” testimonials manufactured by phony front groups, and they mailed counterfeit voter guides. They may even have engaged in “vote-flipping” by pre-programming electronic voting tabulators.

A statewide pre-election eve poll conducted by Lake Research found that the Biotech Behemoth’s “No on 37” propaganda campaign successfully confused many Californians. As of Nov. 5, the day before the election, the majority of Californians stated that they still supported mandatory labeling of GE foods. But a critical mass, especially the 40% who voted early by absentee ballot, said they were willing to give up their right to know what was in their food if mandatory GE labels might increase food costs, expand the size and power of state bureaucrats, harm family farmers or unfairly benefit trial lawyers and other “special interests.”

That changed once the YES on 37 campaign launched its own modest $3-million ad campaign on October 27. Once the pro-labeling ads rolled out, several million undecided voters saw through the biotech and junk-food industry propaganda and voted Yes on 37. In fact, Prop 37 won the election-day vote. But it was too little, too late. The campaign couldn’t recover from its losses in early voting.

That was California. Washington State promises to tell a different story.

Looking at the logistics and outcome of the Prop 37 campaign in California in 2012 and comparing these to the upcoming I-522 battle in Washington, there are several major differences that will likely prove to be decisive:

Size and campaign costs. California is an enormous state, both geographically and in terms of population. Its TV and radio ad markets are also among the priciest in the country. Tough for a grassroots campaign with a small budget to reach California voters far and wide, on the ground and through the media. Even tougher to compete with an opposition willing and able to spend $46 million to win. Compare that scenario with Washington State, which has one-fifth the population of California, and where $1 spent on TV ads equals $8 in California. Factor in that Washington’s population is highly concentrated in the health and environmentally-conscious Seattle metropolitan area, and it’s easy to see that internet, in-person contact, and radio and TV advertising will cost less and be easier to execute in Washington than it was in California. Experts estimate that Monsanto and its allies will be able to spend only $20 million in Washington on advertising. That’s enough to saturate the state’s airwaves. But it’s not too much for the Yes on I-522 campaign to overcome as long as it can raise and spend $4-$5 million – about half of what the California labeling campaign raised.

Timing. In California, Yes on 37 forces didn’t get on the ballot until May. That left only six months for public education and fundraising. In Washington, I-522 proponents have a full nine months before people begin their voting (which is by mail).

Support from farmers and rural communities. In California, Prop 37 was supported mostly by consumers and organic farmers. In Washington State, wheat farmers, whether organic or not, apple farmers and fishing communities also vocally support mandatory GMO labeling. That’s because GMO labeling is arguably in the best economic interests of a state where unlabeled GMO wheat, apples and salmon spilling into the market would severely damage state agricultural exports to countries that either forbid GMO imports or require GMO labeling.

Progressive elected officials and electorate. California’s Governor Brown refused to take a stand on Prop 37. But Washington’s new elected Governor, Jay Inslee, is a long-time supporter and former Congressional advocate of GMO labeling. Washington voters recently reminded us that they are proud progressives, by approving the legalization of marijuana via a November ballot Initiative. California voters defeated a similar measure in 2010.

The Frankenfish controversy. Despite enormous public opposition and warnings by scientists that genetically engineered salmon pose unacceptable health and environmental risks, the Obama administration’s FDA announced in late December that it would nonetheless allow unlabeled genetically engineered salmon to be commercialized. Polls show that Washington voters are adamantly opposed to this fast-growing, likely allergenic mutant salmon – part fish, part eel – entering the market. Fishermen/fisherwomen, chefs and restaurants are already raising their voices in opposition. Meanwhile in Alaska, GMO salmon will have to be labeled because of a state law passed in 2005. The biotech industry is going to have a difficult time explaining why Frankenfish have to be labeled in Alaska, but not in Washington or other states.

Divisions between Big Food and Big Biotech. As the comments by the Food Marketing Institute executive suggest, big food companies are starting to worry about their image. They’re worried about having to fight costly, high-profile battles against GMO labeling in numerous states, possibly even simultaneously. A number of large food companies that dumped big money into defeating Prop 37 – companies like Kellogg’s, General Mills, Unilever, Coca-Cola, Pepsi, Kraft and Dean Foods, own “natural” or organic brands. Those brands, including Kashi, Muir Glen, Cascadian Farm, Ben and Jerry’s, White Wave, Horizon and others, are starting to feel the heat from angry consumers who have joined the Traitor Boycott.” How long will the nation’s food manufacturers and supermarket chains carry the water and do the dirty work for Monsanto the devil and biotech industry?

It’s only a matter of time before we pass GMO legislation. Once we do, it will mark the beginning of the end for GMO food and farming, just as it did in Europe. But to ensure that this happens, sooner rather than later, state GMO right-to-know campaigns in Washington, Vermont, Connecticut and other states need money, technical assistance volunteers, and endorsements. You can help by donating to the Washington state ballot initiative, I-522, and other state GMO labeling efforts.