When billionaires pledge a billion dollars to educate people to the evils of something, it is always good to peer closely at what they are up to. Hedge fund magnate Peter G. Peterson was formerly Chairman of the Council on Foreign Relations and head of the New York Federal Reserve. He
is now senior chairman of Blackstone Group, which is in charge of
dispersing government funds in the controversial AIG bailout, widely
criticized as a government giveaway to banks. Peterson
is also founder of the Peter Peterson Foundation, which has adopted the
cause of imposing “fiscal responsibility” on Congress. He
hired David M. Walker, former head of the Government Accounting Office,
to spearhead a massive campaign to reduce the runaway federal debt,
which the Peterson/Walker team blames on reckless government and
consumer spending. The Foundation funded the movie “I.O.U.S.A.”
to amass popular support for their cause, which largely revolves around
dismantling Social Security and Medicare benefits as a way to cut costs
and return to “fiscal responsibility.”

The Peterson-Pew Commission on Budget Reform has pushed heavily for action to stem the federal debt. Bills for a budget task force were sponsored in both houses of Congress. The Senate bill was narrowly defeated, and the House bill was tabled; but that was not the end of it. In Obama’s State of the Union speech on January 27, he said he would be creating a presidential budget task force by executive order to address
the federal government’s deficit and debt crisis, and that the task
force would be modeled on the bills Congress had failed to pass. If Congress would not impose “fiscal responsibility” on the nation, the President would. “It keeps me awake at night, looking at all that red ink,” he said. The Executive Order was signed on February 17.

What the President seems to have missed is that all of our money except coins now comes into the world as “red ink,” or debt. It is all created on the books of private banks and lent into the economy. If there is no debt, there is no money; and private debt has collapsed. This year to date, U.S. lending has been contracting at the fastest rate in recorded history. A credit freeze has struck globally; and when credit shrinks, the money supply shrinks with it. That means there is insufficient money to buy
goods, so workers get laid off and factories get shut down,
perpetuating a vicious spiral of economic collapse and depression. To
reverse that cycle, credit needs to be restored; and when the banks
can’t do it, the government needs to step in and start “monetizing”
debt itself, or turning debt into dollars.

Although lending remains far below earlier levels, banks say they are making as many loans as they are allowed to make under existing banking rules. The real bottleneck is with the “shadow lenders”
– those investors who, until late 2007, bought massive amounts of bank
loans bundled up as “securities,” taking those loans off the banks’
books, making room for yet more loans to be originated out of the
banks’ capital and deposit bases. Because of the surging defaults on
subprime mortgages, investors have now shied away from buying the
loans, forcing banks and Wall Street firms to hold them on their books
and take the losses. In the boom years, the shadow lending market was estimated at $10 trillion. That market has now collapsed, leaving a massive crater in the money supply. That hole needs to be filled, and only the government is in a position to do it. Paying down the federal debt when money is already scarce just makes matters worse. When the deficit has been reduced historically, the money supply has been reduced along with it, throwing the economy into recession.

Another Look at the Budget Reform Agenda

That raises the question, are the advocates of “fiscal responsibility” merely misguided? Or are they up to something more devious? The President’s Executive Order is vague about the sorts of budget decisions being entertained, but we can get a sense of what is on the table by looking at the earlier
agenda of Peterson’s Commission on Budget Reform. The Peterson/Walker plan would have slashed social security entitlements, at a time when Wall Street has destroyed the home equity and private retirement accounts of potential retirees. Worse, it would have increased the social security tax, disguised as a “mandatory savings tax.” This
added tax would be automatically withdrawn from your paycheck and
deposited to a “Guaranteed Retirement Account” managed by the Social
Security Administration. Since the savings would
be “mandatory,” you could not withdraw your money without stiff
penalties; and rather than enjoying an earlier retirement paid out of
your increased savings, a later retirement date was being called for. In
the meantime, your “mandatory savings” would just be fattening the
investment pool of the Wall Street bankers managing the funds.

And that may be what really underlies the big push to educate the public to the dangers of the federal debt. Political analyst Jim Capo discusses a slide show presentation given by David M. Walker after the “I.O.U.S.A.” premier, in which a mandatory savings plan was proposed
that would be modeled on the Federal Thrift Savings Plan (FSP). Capo comments:

“The FSP, available for federal employees like congressional staff workers, has over $200 billion of assets (on paper anyway). About half these
assets are in special non-negotiable US Treasury notes issued
especially for the FSP scheme. The other half are invested in stocks,
bonds and other securities. . . . The nearly $100 billion in [this]
half of the plan is managed by Blackrock Financial. And, yes, shock, Blackrock Financial
is a creation of Mr. Peterson's Blackstone Group. In fact, the FSP and
Blackstone were birthed almost as a matched set. It's tough to fail
when you form an investment management company at the same time you can
gain the contract that directs a percentage of the Federal government payroll into your hands.”

What “Fiscal Responsibility” Really Means

All of this puts “fiscal responsibility” in a different light. Rather than saving the future for our grandchildren, as the President himself seems to think it means, it appears to be a code word for delivering
public monies into private hands and raising taxes on the
already-squeezed middle class. In the parlance
of the International Monetary Fund (IMF), these are called “austerity
measures,” and they are the sorts of things that people are taking to
the streets in Greece, Iceland and Latvia to protest. Americans are not taking to the streets only because nobody has told us that is what is being planned.

We have been deluded into thinking that “fiscal responsibility” (read “austerity”) is something for our benefit, something we actually need
in order to save the country from bankruptcy. In
the massive campaign to educate us to the perils of the federal debt,
we have been repeatedly warned that the debt is disastrously large;
that when foreign lenders decide to pull the plug on it, the U.S. will
have to declare bankruptcy; and that all this is the fault of the
citizenry for borrowing and spending too much. We
are admonished to tighten our belts and save more; and since we can’t
seem to impose that discipline on ourselves, the government will have
to do it for us with a “mandatory savings” plan. The
American people, who are already suffering massive unemployment and
cutbacks in government services, will have to sacrifice more and pay
the piper more, just as in those debt-strapped countries forced into
austerity measures by the IMF.

Fortunately for us, however, there is a major difference between our debt and the debts of Greece, Latvia and Iceland. Our debt is owed in our own currency – U.S. dollars. Our government has the power to fix its solvency problems itself, by simply issuing the money it needs to pay off or refinance its debt. That
time-tested solution goes back to the colonial scrip of the American
colonists and the “Greenbacks” issued by Abraham Lincoln to avoid
paying 24-36% interest rates.

Economic Fearmongering

What invariably kills any discussion of this sensible solution is another myth long perpetrated by the financial elite -- that allowing the
government to increase the money supply would lead to hyperinflation. Rather than exercising its sovereign right to create the liquidity the nation needs, the government is told that it must borrow. Borrow from whom? From the bankers, of course. And where do bankers get the money they lend? They create it on their books, just as the government would have done. The difference is that when bankers create it, it comes with a hefty fee attached in the form of interest.

Meanwhile, the Federal Reserve has been trying to increase the money supply; and rather than producing hyperinflation, we continue to suffer from
deflation. Frantically pushing money at the banks has not gotten money into the real economy. Rather
than lending it to businesses and individuals, the larger banks have
been speculating with it or buying up smaller banks, land, farms, and
productive capacity, while the credit freeze continues on Main Street. Only
the government can reverse this vicious syndrome, by spending money
directly on projects that will create jobs, provide services, and
stimulate productivity. Increasing the money supply is not inflationary if the money is used to increase goods and services. Inflation results when “demand” (money) exceeds “supply” (goods and services). When supply and demand increase together, prices remain stable.

The notion that the federal debt is too large to be repaid and that we are imposing that monster burden on our grandchildren is another red
herring. The federal debt has not been paid off since the days of Andrew Jackson, and it does not need to be paid off. It is just rolled over from year to year, providing the “full faith and credit” that alone backs the money supply of the nation. The
only real danger posed by a growing federal debt is an exponentially
growing interest burden; but so far, that danger has not materialized
either. Interest on the federal debt has
actually gone down since 2006 -- from $406 billion to $383 billion --
because interest rates have been lowered by the Fed to very low levels.

They can’t be lowered much further, however, so the interest burden will increase if the federal debt continues to grow. But there is a solution to that too. The government can just mandate that the Federal Reserve buy the government’s debt, and that the Fed not sell the bonds to private
lenders. The Federal Reserve states on its website that it rebates its profits to the government after deducting its costs, making the money nearly interest-free.

All the fear-mongering about the economy collapsing when the Chinese and other investors stop buying our debt is yet another red herring. The Fed can buy the debt itself – as it has been stealthily doing. That
is actually a better alternative than selling the debt to foreigners,
since it means we really will owe the debt only to ourselves, as
Roosevelt was assured by his advisors when he agreed to the deficit
approach in the 1930s; and this debt-turned-into-dollars will be nearly
interest-free.

Better yet would be to either nationalize or abolish the Fed and fund the government directly with Greenbacks as President Lincoln did. What the Fed does the Treasury Department can do, for the cost of administration. There
would be no shareholders or bondholders to siphon earnings, which could
be recycled into public accounts to fund national, state and local
budgets at zero or near-zero interest rates. Eliminating
debt service payments would allow state and federal income taxes to be
slashed; and the public managers of this money, rather than hiding
behind a veil of secrecy, would be opening their books for all to see.

A final red herring is the threatened bankruptcy of Social Security. Social Security cannot actually go bankrupt, because it is a pay-as-you-go system. Today’s social security taxes pay today’s recipients; and if necessary, the tax can be raised. As Washington economist Dean Baker wrote when President Bush unleashed the campaign to privatize Social Security in 2005:

“The most recent projections show that the program, with no changes whatsoever, can pay all benefits through the year 2042. Even after 2042,
Social Security would always be able to pay a higher benefit (adjusted
for inflation) than what current retirees receive, although the payment
would only be about 73 percent of scheduled benefits.”

Today incomes over $97,000 escape the tax, disproportionately imposing it on lower income brackets. Projections over the next 75 years show that just removing that cap could eliminate the forecasted deficit. When the Democratic presidential candidates were debating in the fall of 2007, Barack Obama and Joe Biden were the only candidates willing to seriously consider this reasonable alternative. President Obama just needs to follow through with the solutions he espoused when campaigning.

The Mass Education Campaign We Really Need

What is really going on behind the scenes may have been revealed by Prof. Carroll Quigley, Bill Clinton’s mentor at Georgetown University. An insider groomed by the international bankers, Dr. Quigley wrote in Tragedy and Hope in 1966:

“[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private
hands able to dominate the political system of each country and the
economy of the world as a whole. This system was to be controlled in a
feudalist fashion by the central banks of the world acting in concert,
by secret agreements arrived at in frequent private meetings and
conferences.”

If that is indeed the plan, it is virtually complete. Unless we wake up to what is going on and take action, the “powers of financial capitalism” will have their way. Rather than taking to the streets, we need to take to the courts, bring voter initiatives, and wake up our legislators to the urgent need to take the
power to create money back from the private banking elite that has
hijacked it from the American people. And that includes waking up the President, who has been losing sleep over the wrong threat.

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns
those skills to an analysis of the Federal Reserve and “the money
trust.” Her eleven books include Forbidden Medicine, Nature’s Pharmacy
(co-authored with Dr. Lynne Walker), and The Key to Ultimate Health
(co-authored with Dr. Richard Hansen). Her websites are webofdebt.com, ellenbrown.com, and public-banking.com.