A New Money Machine?

By Benjamin Gisin

Over the course of the last 12 months, a historic division has emerged in the value of money. For financial investors, money’s value has reached an all-time low. For the majority of Americans — the nation’s work force and business owners — money’s value has reached an all-time high.

Investors have accepted next-to-zero interest rates when temporarily loaning money to the U.S. government. The volume of money seeking investment returns is larger than the pool of debtors capable of providing a return. Financial investors simply cannot find enough qualified borrowers. Lenders and borrowers, by virtue of how they invoke debt when creating and distributing money, have saturated the national economy with what the Fed reported on 3/12/09 was $52.6 trillion of debt.

The working sector of the economy is experiencing a dramatic rise in the value of money. With 5.1 million jobs lost during this economic downturn, people are willing to work — if they can find work — for far less. Small businesses are failing by the thousands. Money’s value is so great, people go through humiliating acrobatics just to work. Money’s power, due to its lack of presence in the physical economy, is giving greater incentives to employ crime as a way to obtain money.

The physical economy is like a deep sea diver whose volume of oxygen (money) is cut back. The oxygen suppliers, i.e. banks and investors, cannot qualify the diver for more money (oxygen).

All the while, fingers are being pointed at personalities as the cause of the problem instead of simply recognizing a systemic flaw in our means of exchange. Without a robustly circulating medium or other universal process of exchange, jobs, governments and economies erode.

The old money machines (banks and financial investors) are unable to get a sufficient amount of money, backed by debt, into a physical economy. This creates tremendous pressure for another money machine to emerge. Federal Reserve Bank chairman Ben Bernanke and the Secretary of Treasury Timothy Geithner are being forced to stoke up another money machine — the Federal Reserve Bank itself.

Over the last 12 months, the Fed created $1 trillion in new money to buy debt and assets from investors and others. This $1 trillion ended up in bank checking accounts and in the Treasury’s account at the Fed. Recently the Fed announced it will buy up to $750 billion in agency mortgage-backed securities and buy $300 billion in U.S. government debt. The Fed buys these assets by creating new reserves for banks which ultimately translates into more checkbook money.

While the Fed’s money machine is precipitating criticism for its potential to cause inflation, why is that criticism not leveled against banks and investors who operate in a similar way? At the same time, the need for a means of exchange by the nation’s working sector and stock markets are insufficiently met. If the physical economy and government are without sufficient means of exchange, what choice does it leave society?

Little known is the Fed’s money machine has levers that can be switched to supply money to the physical economy without debt — a better form of oxygen. Money can be withdrawn through taxation to avoid inflation. There is a public desire to pass-on a world without debt to our future generations. The Fed’s money machine is capable of allowing the first step. It only needs a public mandate that emerges as law.

While the financial system is in financial crisis, the nation and its economy is in a means-of-exchange crisis. One of the problems with the current financial system is its inability to facilitate a robustly circulating medium in the physical economy.

At the risk of sounding democratic, the nation is at a crossroads of choosing a new means-of-exchange path. A path that suggests public exploration and consensus as to what our future means or processes of exchange will be. There is little question other options abound if it is recognized a change is needed.

For more information and discovering what options are emerging, subscribe to Peaceful Economics newsletter. Annual subscription $21.95, for 6 issues. Phone (208) 523-2717, or send check to PO Box 3662, Idaho Falls, Idaho 83403.

For speaking engagements, radio interviews or comments phone (208) 523-2717, or e-mail editor@touchthesoil.com

Benjamin Gisin is a veteran banker and former senior agricultural approval officer for one of the nation’s largest agricultural banks. Since 1998, he consults businesses and agricultural producers facing credit challenges. He writes and lectures extensively on the evolution of money, economics and food security.

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