Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Canadian Cannabis Stocks CRASH as Canopy Growth Hits a Dead End - 14th Dec 19
Retail Sector Isn’t Dead, and These 6% Dividend Paying Stocks Prove It - 14th Dec 19
Top 5 Ways to Add Value to Your Home - 14th Dec 19
Beware Gold Stocks Downside - 13th Dec 19
Fed Says No Interest Rate Hikes In 2020. What About Gold? - 13th Dec 19
The ABC’s of Fiat Money - 13th Dec 19
Why Jo Swinson and the Lib Dems LOST Seats General Election 2019 - Sheffiled Hallam Result - 13th Dec 19
UK General Election 2019 BBC Exit Poll Forecast Accuracy Analysis - 12th Dec 19
Technical Analysis Update: Tadawul All Share Index (TASI) - Saudi Arabia ETF (KSA) - 12th Dec 19
Silver Miners Pinpoint the Precious Metals’ Outlook - 12th Dec 19
How Google Has Become the Worlds Biggest Travel Company - 12th Dec 19
UK Election Seats Forecasts - Tories 326, Labour 241, SNP 40, Lib Dems 17 - 12th Dec 19
UK General Election 2019 Final Seats Per Party Forecast - 12th Dec 19
What UK CPI, RPI INFLATION Forecasts for General Election Result 2019 - 11th Dec 19
Gold ETF Holdings Surge… But Do They Actually Hold Gold? - 11th Dec 19
Gold, Silver Reversals, Lower Prices and Our Precious Profits - 11th Dec 19
Opinion Pollsters, YouGov MRP General Election 2019 Result Seats Forecast - 11th Dec 19
UK General Election Tory and Labour Marginal Seats Analysis, Implied Forecast 2019 - 11th Dec 19
UK General Election 2019 - Tory Seats Forecast Based on GDP Growth - 11th Dec 19
YouGov's MRP Poll Final Tory Seats Forecast Revised Down From 359 to 338, Possibly Lower? - 10th Dec 19
What UK Economy (Average Earnings) Predicts for General Election Results 2019 - 10th Dec 19
Labour vs Tory Manifesto's UK General Election Parliamentary Seats Forecast 2019 - 10th Dec 19
Lumber is about to rally and how to play it with this ETF - 10th Dec 19
Social Mood and Leaders Impact on General Election Forecast 2019 - 9th Dec 19
Long-term Potential for Gold Remains Strong! - 9th Dec 19
Stock and Financial Markets Review - 9th Dec 19
Labour / Tory Manifesto's Impact on UK General Election Seats Forecast 2019 - 9th Dec 19
Tory Seats Forecast 2019 General Election Based on UK House Prices Momentum Analysis - 9th Dec 19
Top Tory Marginal Seats at Risk of Loss to Labour and Lib Dems - Election 2019 - 9th Dec 19
UK House Prices Momentum Tory Seats Forecast General Election 2019 - 8th Dec 19
Why Labour is Set to Lose Sheffield Seats at General Election 2019 - 8th Dec 19
Gold and Silver Opportunity Here Is As Good As It Gets - 8th Dec 19
High Yield Bond and Transports Signal Gold Buy Signal - 8th Dec 19
Gold & Silver Stocks Belie CoT Caution - 8th Dec 19
Will Labour Government Spending Bankrupt Britain? UK Debt and Deficits - 7th Dec 19
Lib Dem Fake Tory Election Leaflets - Sheffield Hallam General Election 2019 - 7th Dec 19
You Should Be Buying Gold Stocks Now - 6th Dec 19
The End of Apple Has Begun - 6th Dec 19
How Much Crude Oil Do You Unknowingly Eat? - 6th Dec 19
Labour vs Tory Manifesto Voter Bribes Impact on UK General Election Forecast - 6th Dec 19
Gold Price Forecast – Has the Recovery Finished? - 6th Dec 19
Precious Metals Ratio Charts - 6th Dec 19
Climate Emergency vs Labour Tree Felling Councils Reality - Sheffield General Election 2019 - 6th Dec 19
What Fake UK Unemployment Statistics Predict for General Election Result 2019 - 6th Dec 19

Market Oracle FREE Newsletter

UK General Election Forecast 2019

US Treasury Secretary Henry Paulson: The Coming Financial Crash Shows Need for Immediate Monetary Reform

Economics / Financial Crash Jul 23, 2007 - 11:24 PM GMT

By: Richard_C_Cook

Economics

US Treasury Secretary Henry M. Paulson, Jr., has joined the chorus of those in high places who are warning of a major worldwide economic downturn.

Paulson was quoted at length in a July 23, 2007, article in Fortune by Rik Kirkland entitled, “The Greatest Economic Boom Ever: Enjoy It While It Lasts.” Paulson's remarks came in the context of assessing the ability of the highly-leveraged equity, hedge, and derivative markets to withstand the shocks to come. He told Fortune in an interview:


“We haven't had a global financial shock since 1998. I believe that these large and dramatic increases in private pools of capital and in the credit derivatives markets since then have helped manage and disperse risk and make the economy more efficient. When we do have one—and it's when, not if; that's not me being negative, it's just that we're not going to defy economic gravity—we'll be seeing for the first time how some of these instruments perform under stress.”

The Fortune article notes that the fate of the global economy depends in large measure on the ability of the U.S. consumer to continue to buy what the rest of the world produces. But, as Fortune indicates, the economic fundamentals continue to move in the wrong direction.

The U.S. current account deficit, they point out, continues to plunge, heading toward the $900 billion mark, almost nine percent of GDP. U.S. household debt as a percentage of personal income has shot up almost thirty-five percent since 2000. While real income stagnates for the U.S. middle class, asset and commodity prices are surging, with gasoline prices leading the way and the Goldman Sachs Commodity Index doubling since 2001. Financing in the business world is increasingly shaky, with loans to companies with “junk” credit ratings soaring from under $50 billion a year in 2001 to over $200 billion in 2006.

What are the politicians saying? Both President George W. Bush and Vice President Richard Cheney, who may be hoping to escape in one piece after eight years of economic malpractice, are silent on the subject of a possible downturn. Also silent, unfortunately, are Republican and Democratic front-runners Rudy Giuliani and Hillary Clinton.

So obsessed with his image of having been in the vicinity of the Twin Towers on September 11, 2001, Giuliani seems blissfully unaware that there is such a thing as an economy.

Though Clinton speaks of the need for economic fairness, she has few concrete proposals for getting us there. She must also bear some degree of association with the failed policies of her husband's administration which brought us the strong dollar, the dot-com bubble, and NAFTA, all of which led to the bust of 2000-2002 and the outsourcing of huge numbers of U.S. manufacturing jobs.

The only Republican who speaks to broad economic issues is Ron Paul, who has called for the Federal Reserve to be abolished as a step toward financial sanity. We'll see how Dr. Paul, a long-shot to say the least, fares in the Republican primaries. Party kingmakers are terrified of his rising grassroots support.

On the Democratic side, John Edwards has established his credentials in speaking for the millions of Americans in poverty who have been left out and is broadening his message to include the middle class as well. At the end of a three-day poverty tour to Appalachia, Edwards said in a July 18 speech in Prestonburg, Kentucky, “This cause, this march we're on, is not just about the poor. Everybody's at risk. Everybody's vulnerable.”

Candidate Barak Obama has also discovered the anti-poverty theme, while Congressman Dennis Kucinich has consistently been emphasizing ideas of economic reform while proposing the creation of jobs through such proposals as a Federal Infrastructure Modernization Bank.

So there is hope that the 2008 presidential campaign may focus on real issues. In fact, as of this writing, it would seem that a Democratic ticket consisting of Edwards-Obama or Edwards-Kucinich could bring the urgency of change to the forefront, especially if the economy slips in a big way over the next several months.

How deeply any candidate will penetrate in his or her analysis is another question. The U.S. economy is groaning under a total societal debt load for individuals, households, businesses, and government of over $45 trillion. There is a gap between personal income and GDP of more than $3.5 trillion per year, with people having to run up ever-more household debt just for the necessities of life. With so many jobs outsourced, our population no longer even comes close to being able to purchase the amount of goods and services needed to sustain the economy.

The real answer is wholesale monetary reform.

Since the 1970s, the Federal Reserve, acting as an agent for the banking system, has been trying to manage affairs under the rubric of “monetarism.” This is the system whereby the Federal Reserve attempts to regulate the economy by raising and lowering interest rates.

We take this system for granted, even though, historically speaking, it is a fairly recent innovation and despite the fact that it has been a total failure. Monetarism replaced a production-based economy with a debt-based one. This has caused growth of the financial industry to outstrip all others, with profits exceeding $500 billion in 2006.

Also, interest rates, on average, have been generally higher under monetarism than in previous eras. The Federal Reserve's claim that higher interest rates stem inflation is contradicted by the fact that during the monetarist “reign of error,” inflation has eroded the value of the dollar by over 80 percent.

Also, since the Federal Reserve-induced recession of 1979-1983, every period of economic “growth” under the monetarist system has been a bank-created bubble.

We had the buyout-acquisition-merger bubble of the 1980s, ending in the 1987 stock market crash and the recession which lasted the entire term of President George H.W. Bush. Next we saw the dot-com bubble of the 1990s under President Bill Clinton, ending in the 2000-2002 recession.

Then, under George W. Bush, came the housing bubble, which is now deflating with the exposure of the fraud-infested subprime market. The current equity-asset bubble, with an overpriced stock market setting ever-new records, will likely be the next to pop.

Meanwhile, with the crumbling of our private and public infrastructures, there is no bona fide economic driver left in the U.S. economy, except the little plastic cards in consumers' wallets. The fact that expendable cash and checking accounts, measured by the Federal Reserve as M1, has been declining for the last year, shows that the consumer economy is already in a recession. 

It is past time for monetarism to be recognized as the flop it truly has been and thrown on the junk-heap of history where it belongs. It should be replaced by a mixed program of credit management reminiscent of the New Deal but with additional features suited to today's vastly changed reality.

A truly comprehensive program of monetary reform, as I have described in other articles, would provide purchasing power to consumers, businesses, and government at a rate that would match the incredible productivity brought into existence by modern science and technology. This injection of purchasing power, over and above earnings, should no longer be carried out through the unfair and outmoded methodology of bank-created debt.

In other words, there should be enough cash and credit in circulation to purchase what industry can produce, and for people to obtain what they need for a decent life, without our economy constantly having to go deeper and deeper into the red.

To accomplish this, the government can and should make direct cash allocations to individuals without recourse to taxation or borrowing. This infusion of purchasing power is needed because income from jobs cannot keep up with total production when a large portion of industrial earnings is withheld for future innovation, as must be done in today's technology-rich environment.

For a business entity to remain profitable, it must save and reinvest. These savings are recovered through prices that exceed purchasing power distributed through wages, salaries, and dividends. This leaves a “gap” which today is filled by bank-credit. But it's the wrong way to run an economy. The gap, which is a normal feature of industrial production, should instead be filled by free government-distributed credit through what has been called a National Dividend.

A National Dividend should not be tied to employment. It should be obvious that as fewer workers are needed to produce more and more goods and services, the benefits of rising productivity can only be realized if the government provides purchasing power to individuals and families whether they are working at the moment or not. Such allocations could be made without inflationary pressures as long as they did not exceed the economy's producing potential.

Similarly, the system of public finance whereby the banking system creates credit out of nothing in order to lend money back to the government has never made sense. As Thomas Edison and others in U.S. history have pointed out, the government can just as well create and spend interest-free money directly into circulation as was done successfully with the Greenbacks during the nineteenth century. 

A comprehensive system of reform measures suitable to today's conditions would include 1) cancellation of substantial portions of existing debt; 2) direct issuance by the government of a guaranteed basic income/National Dividend that would average at least $12,500 per person per year; 3) direct spending by government on infrastructure improvements; 4) a new system of low-cost credit for consumers and small businesses; 5) abolishment of the Federal Reserve as a bank of issue with its retention only as a financial transaction clearinghouse; and 6) elimination from the capital markets of all bank lending for financial speculation through return to the “real bills” doctrine of lending.

These provisions would acknowledge the awesome power of credit creation as a public utility as provided for by the U.S. Constitution in the section that grants Congress the authority to regulate the money supply. Such a program would also allow a significant reduction in taxation. Day-to-day responsibility should be vested in a Monetary Control Board reporting to the executive branch, as provided for in the model American Monetary Act drafted by the American Monetary Institute.

These may seem like radical measures, but they are ideas that have been discussed for years by monetary reformers worldwide. They would recognize the fact that the private banking system, acting through the Federal Reserve under the philosophy of monetarism, has totally failed. The system has not produced the economic democracy which the global economy makes possible and has brought us to the brink of a worldwide financial catastrophe.

As New Zealand monetary reformer William Hugh McGunnigle wrote recently on an internet discussion site, “Basically today we are attempting to run a 21st century economy using financial tools that are five centuries out of date. It is like trying to control a sophisticated modern jumbo jet using the control mechanisms appropriate to the machines of World War I. The whole system is unstable, and the larger it becomes the more likely it is that it will collapse, simply because those controlling it have no inclination to prevent that collapse. We have learned nothing from the financial disaster of 1929-1934.”

By Richard C. Cook
http:// www.richardccook.com

Copyright 2007 Richard C. Cook
Richard C. Cook is a former federal government analyst who was one of the key figures in the investigation of the space shuttle Challenger disaster. He is author of the book - Challenger Revealed: An Insider's Account of How the Reagan Administration Caused the Greatest Tragedy of the Space Age is Richard C. Cook's personal story of how he disrupted the cover-ups surrounding the Challenger disaster.

Richard C. Cook Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

christian
24 Jul 07, 10:06
Abolish the Federal Reserve?

you can try, but the liberal nobility and there friends will do what they did to the last two president who tried (lincoln and kennedy)

Good article, it will be intresting to see how these leveraged markets perform under stress.


A.B. Dada
24 Jul 07, 11:47
Abolishing the Fed?

We _must_ abolish the Fed. Immediately.

But the U.S. should not replace it with another government body. The Constitution authorizes Congress to COIN money, not PRINT it. States can only legally tender gold and silver.

A National Dividend is still a bad idea -- we'd still have inflation and asset-bubbles that follow. Inflation causes low savings rates; soft deflation instills savings and investments; and research before borrowing.


Non-US-Resident
24 Jul 07, 13:16
We are already sliding for 3rd year

American economy is in decline - and has been for 4 to 5 years now. USD exchange rate responds already. Assets have been shifting to expanding economies elsewhere to satisfy more basic need of a large group of new consumers buying their first tv-sets, first automobiles and refridgerators and such.

These are not really consumers as their consumption improves their productivity, saves their time and helps their children develop higher skills. They invest in TV, car and an extra room.

We spend. They don't. We waste, they produce. Not for us but themselves.


Alaister
31 Jul 07, 15:25
so called subprime fiasco

Regarding the mortgage defaults everyone seems to be blaming on so called subprime or unsavoury lenders,i would say interest rates going from a ridiculous low of one per cent to current rates could have something to do with the problem.

How many people could budget for such increases.

Interest rates have easily quadrupled.Now unless i have missed something i cant remember such an increase,thats like going from say 10% to 40%.

Maybe the central banks are the problem and not people who lent in good faith to people who could afford their payments at the time of agreement and cant now pay because of the massive increases.seems like someone is shifting the blame.

Regards

Alaister


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules