This article, authored by Bill Still, went in “The Marker” October 2, 2013. It is currently the most read article in today’s paper. “The Marker” is the Israeli equivalent of the “Wall Street Journal.” Bill Still is a former newspaper editor, best-selling author, and award-winning documentary film director. The headline reads:
“Death Spiral / Fix the Money System — before it would destroy Israel. Israel still suffers real estate bubble – but banks do not worry: they know that once the bubble shatters, taxpayers will rescue them as done in the U.S. – the profits are privatized but losses nationalized.”
A PRACTICAL FIX
By Bill Still
Israel has a reputation for using its precious resources wisely. Surprisingly, however, the Israeli government creates less than 10 percent of the nation’s money. Over 90% of the national money is created by commercial banks. The banks create new money every time they issue a new loan. It’s called “credit money” and it is simply electronic digits in a computer, but it spends just as well as any shekel note.
This system not only allows banks to decide how money is directed throughout the economy, it also lets them collect interest, and even foreclose on assets from loans they created out of nothing.
This is unjust and unwise. It does not provide all citizens with an equal chance. It does not promote an incentive-driven system, and it will bring ruin to the Israeli economy.
The problem with debt-based money is it gradually concentrates money into very few hands. As the lucky few acquire more and more assets, they tend to invest in real estate. In addition, banks are corporations and corporations are forced to compete for borrowers. So Israeli banks have been caught in the same trap as U.S. banks – offering loans to higher-risk borrowers through adjustable rate mortgages.
That’s why Israel is still in a real estate bubble. However, the bubble depends on never-ending expansion. That’s one of the reasons the Bank of Israel recently lowered interest rates to a record 1 percent — to try to keep the bubble expanding.
At some point, the invisible hand of the market will put an end to this, but banks are not worried; they now know that once the bubble collapses, the taxpayers will bail them out as they did in the U.S. — privatizing profits, but socializing losses – a win/win for banks, but a lose/lose for taxpayers.
WHY HAVEN’T WE HEARD ABOUT THIS BEFORE?
To disguise the root problem, the few who benefit from the current system try to keep the public confused by framing the discussion in terms of two diametrically opposed political camps; socialist versus capitalist theory. Neither works. Why?1. The Socialist model believes that more government spending will cure the imbalances. But more spending means more government borrowing; and that means more inflation, more interest payments, and therefore more control of the politicians by the lenders. At this point the government pays nearly a thousand shekels per second for interest on the national debt – a payment that is entirely unnecessary!
The Socialist model tries to cure a debt problem with more debt. It’s like trying to cure a drinking problem with more whiskey.
2. The Capitalist model pushes austerity – cutting government spending. This is politically popular with middle class voters who shoulder the increasing tax burdens, but less government spending means less money in the system, more unemployment, and less tax revenues — a deflationary spiral.
So the government is trapped in the ever-increasing debt spiral from which they cannot escape until they start thinking out of the box.
TROUBLE AHEAD
Signs are now pointing to danger. According to the Central Bureau of Statistics (CBS), Government spending jumped up by 15 percent in the second quarter of 2013 alone — a 7.4 ILS billion increase!More troubling, the national debt of Israel has soared to 641 ILS billion or 79.5 percent of the 2012 GDP. The BIS (the bank of central banks), located in Switzerland, says an 80 percent debt-to-GDP ratio actually begins to depress GDP, ensuring more bad news ahead.
The U.S. is far worse off. It has a 107 percent debt-to-GDP ratio. Its economy is now dependent on one-trillion dollars per year of raw money creation by the Federal Reserve, known as “quantitative easing.”
For comparison, Turkey’s new government seems determined to make their money system serve the public interest by curtailing all forms of debt. The result: a booming economy, 5%+ growth rate, and a debt-to-GDP ratio of only 36% and diminishing.HOW DO WE FIX IT
Israel needs to wake up before it is irrevocably drawn into this death spiral of debt that has engulfed the U.S. economy and the EU. The good news is it’s not difficult to fix – BUT – we need the politicians.The Israel Monetary Change Movement (http://mcm.org.il/) has put together a plan to extricate Israel. They would gradually change the ratio of bank-issued money to government-issued money. For example, in the first year, the Knesset could cap bank money at 85 percent and double government money up to 15 percent. Then, if metrics showed an improvement, the next year, they could boost the ratio again, to 70 percent bank money and 30% government money. This would provide a smooth transition for the economy.
This is a reasonable approach that the Knesset should consider. It gradually reduces the leverage that the debt-money system is based upon, and puts the Israeli economy on a more stable, sustainable system, operating in the public interest.
Norman Kurland, Center for Economic and Social Justice (www.cesj.org) comments:
1. I like your use of the term “credit money” in your first paragraph. All money is a form of credit and should be backed by something valuable to the holder, not just a promise that cannot be exchanged immediately or over time by something of value in the form (a) productive assets, (b) consumption goods and services or (c) government-provided services. Otherwise what is held out as “money” is no different from that manufactured by counterfeiters. See our definition on the first page of our paper “A New Look at Prices and Money.”
2. Capital Homesteading divides “credit money” into two sweeping categories:
(a) “Pure credit” or “productive credit,” a form of promise or contract that banks can create out of thin air, if there is collateral or capital credit insurance to cover the risk of default. Such “pure credit” can be created by commercial banks and backed by central banks to supply the “social lubricant” (credit for financing the creation of new income-producing assets or for the sale of existing income-producing assets) for all citizens to acquire income-producing assets in which such productive capital will pay for the costs of such assets out of the “future profits” or “future savings” distributed by the enterprise that sells the marketable goods and services produced by the capital assets acquired on credit. “Pure credit” would be allocated from the bottom-up to enable every citizen to gain an equal opportunity to become capital owners of all productive assets created or transferred in the future, without redistributing property rights of today’s owners over their existing accumulations of income-producing assets.
(b) The second form of credit money is non-productive consumption credit, which over-stimulates the demand side of the economic equation without automatically balancing demand to the supply side of a market economy. (I consider this a flaw in the logic of Keynesian economics.) Consumption credit neither advances the fundamental human right of equal ownership opportunity nor does it promote growth in ways that create new private sector jobs and increases in earnings among the poor and middle classes. Thus, most Americans are forced into welfare dependency on an ever-growing Federal government or high-interest consumer loans and mortgages to buy homes on credit that, unlike productive credit, does not pay for itself. To whatever extent already accumulated “past savings” (the bulk of which is held by the top 5% but even more highly concentrated in the top 0.1% of citizens) are used to supply collateral for credit extended by banks and central banks for financing labor-displacing new capital formation, no new owners are created, economic power becomes ever more concentrated and the earning power of the bottom 95% becomes increasingly vulnerable.
Bill, any critic of the existing credit system who seeks a more participatory, free and just market system over the inherently plutocratic monopoly capitalist system and unsustainable government deficits and public sector debt should, in my opinion, favor the asset-backed credit money system (a) over the debt-backed (b). I hope you see the relevance of this distinction on good versus bad forms of “credit money.”
