The Debt Crisis and Rising Inequality<br />John Bradford<br />
Inequality of Wealth and Income<br />Debt and Finance<br />Power and Monetary Power<br />Who owns the US Debt? (Ourselves)...
Wealth Concentration in the United States<br />Distribution of net worth and financial wealth<br />Source:  Domhoff 2011<b...
Financial Wealth in the United States<br />Source:  Domhoff 2011<br />
Financial Wealth Distribution 2007<br />Source:  Domhoff 2011<br />
Income earned by the top 1% (1970-2010)<br />Source:  Picketty and Saez<br />
Income earned by the top 1% (1913-2006)<br />
CEO and Worker Pay<br />CEOs' pay as a multiple of the average worker's pay, 1960-2007<br />Source:  Domhoff 2011<br />
Income Inequality in Select Countries<br />
Unemployment<br />
The inordinate Rise in DEBT<br />Taken from Monthly Review 2008: Sources: Flow of Funds Accounts of the United States,<br />
Financial Debt and Profits<br />
Financial Debt and Profits<br />
US Total Debt to GDP<br />
Household Debt to GDP<br />
Financial Debt to GDP<br />
Financial Borrowing<br />
France<br />
Germany<br />
Greece<br />
Iceland<br />
Ireland<br />
Portugal<br />
Explaining Debt<br />Remember:  borrowing implies a lender.   Financial profits rose faster than average, as did financial...
Leverage and Bank Growth<br />Banks can make more money in three ways:<br />Borrow at  lower interest rates;<br />Charge h...
Increasing Leverage<br />Recall that Banks have reserve requirements:  <br />In reality, all of this reserve does not have...
Increasing Leverage<br />2.  Nor does this reserve have to be owned by the bank!  It can be borrowed (i.e. part of the res...
Increasing Leverage:  Example<br />Leverage is calculated by the debt-to-equity ratio:  L = D/E.<br />Step 1:  L = 90/10 =...
Shadow Banking<br />The Basic Idea Behind ‘Shadow Banking’(aka securitized banking) is that IOUs (e.g. ‘securities’) are t...
Securitized Banking (selling and lending loans)<br />Debt is sold to larger banks.<br />These Banks then can either sell t...
Securitized Banking<br />Think of “securities” as IOUs that are in turn traded and passed along, as in a game of ‘hot pota...
Loan sales increased, but most were retained<br />
Repurchase and Sale Agreements<br />
Bank Runs Revisited<br />IOUs circulated around as money.  Banks that purchased these IOUs (e.g. MBSs) borrowed against th...
Bank Runs Revisited<br />When the value of these securities dropped, because people stopped making their mortgage payments...
Inequality and Debt:  a Link?<br />All money (i.e. Federal Reserve notes) is loaned into existence.<br />Monetary expansio...
Where does money come from?<br />Two Steps:<br />The ‘Fed’ creates new money as debt, from “thin air.”<br />Other private ...
The Federal Reserve lending to the US Treasury<br />IOUs (Bonds)<br />Money as Debt<br />Federal Reserve  prints money, fr...
Federal Reserve lending to the US Treasury<br />IOU <br />US Treasury ‘sells’ bonds.  (T-Bills)<br />In exchange for money...
Why doesn’t the Treasury just print the money?<br />"The study of money, above all other fields in economics, is one in wh...
Money as Debt<br />All new money is loaned into existence as debt.  <br />Because of the application of interest, total de...
Implications:  Growth or Die<br />1.  The current system functions like a pyramid scheme:  growth is a requirement for it ...
Power and Capitalism<br />Capitalism = stratified society in which accumulation of wealth fulfills 2 functions (Heilbroner...
Power and Money<br />Power = has to do with the ability to realize wishes, or reach goals …even in the face of opposition ...
The “Global Pool of Money”<br /><ul><li>This implies that the housing bubble was a result of China, and other countries, s...
Foreign holdings of” agency”  MBSs (those issued by Fannie Mae, Freddie Mac) = $250 billion (10%) by 2000; $1.5 trillion (...
2007, net US international debt = $2.5 trillion = combined GDP of Latin America and Africa
½ of this debt is held by developing countries</li></ul>Source:  http://www.treas.gov/tic/mfh.txt<br />
Percentage of Federal Securities owned by Federal Reserve<br />
Estimated Ownership of U.S. Treasury Securities<br />
Holders of US Treasury Securities 1996<br />
Holders of US Treasury Securities 2000<br />
Holders of US Treasury Securities 2005<br />
Holders of US Treasury Securities 2010<br />
Federal Reserve Purchases<br />
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  • In 1998 the total amount of financial borrowing exceeds the total possible.   This is because in that year, the Flow of Funds accounts records that the Federal Government had a surplus of $52.6 Billion.  This number is then deducted from the total, which equals $1005.5 Billion, compared to $1026.8 Billion in financial sector borrowing. 
  • In all major economies, the vast majority of money is created by private banks as debt through the fractional reserve system. In the US, all new money is created by private banks, as debt.
  • More specifically, money via payment confers the power of ownership, which is primarily a social relationship granting an owner the power to exclude everyone else from use of that which is owned. This power depends, in the last instance, on the acceptance or acquiescence of those excluded.
  • More specifically, money via payment confers the power of ownership, which is primarily a social relationship granting an owner the power to exclude everyone else from use of that which is owned. This power depends, in the last instance, on the acceptance or acquiescence of those excluded.
  • Note. – Public issues held by the Federal Reserve banks have been revised to exclude the following Government-Sponsored Enterprises: Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and the Federal Home Loan Bank System.
  • For the Federal Reserve (aka Monetary Authority) holdings, go to: http://www.federalreserve.gov/releases/z1/current/accessible/l108.htm
  • For the Federal Reserve (aka Monetary Authority) holdings, go to: http://www.federalreserve.gov/releases/z1/current/accessible/l108.htm
  • For the Federal Reserve (aka Monetary Authority) holdings, go to: http://www.federalreserve.gov/releases/z1/current/accessible/l108.htm
  • For the Federal Reserve (aka Monetary Authority) holdings, go to: http://www.federalreserve.gov/releases/z1/current/accessible/l108.htm
  • http://www.clevelandfed.org/research/data/credit_easing/index.cfm
  • Sss 2011 conference

    1. 1. The Debt Crisis and Rising Inequality<br />John Bradford<br />
    2. 2. Inequality of Wealth and Income<br />Debt and Finance<br />Power and Monetary Power<br />Who owns the US Debt? (Ourselves)<br />
    3. 3. Wealth Concentration in the United States<br />Distribution of net worth and financial wealth<br />Source: Domhoff 2011<br />
    4. 4. Financial Wealth in the United States<br />Source: Domhoff 2011<br />
    5. 5. Financial Wealth Distribution 2007<br />Source: Domhoff 2011<br />
    6. 6. Income earned by the top 1% (1970-2010)<br />Source: Picketty and Saez<br />
    7. 7. Income earned by the top 1% (1913-2006)<br />
    8. 8. CEO and Worker Pay<br />CEOs' pay as a multiple of the average worker's pay, 1960-2007<br />Source: Domhoff 2011<br />
    9. 9. Income Inequality in Select Countries<br />
    10. 10. Unemployment<br />
    11. 11.
    12. 12. The inordinate Rise in DEBT<br />Taken from Monthly Review 2008: Sources: Flow of Funds Accounts of the United States,<br />
    13. 13. Financial Debt and Profits<br />
    14. 14. Financial Debt and Profits<br />
    15. 15. US Total Debt to GDP<br />
    16. 16. Household Debt to GDP<br />
    17. 17. Financial Debt to GDP<br />
    18. 18. Financial Borrowing<br />
    19. 19. France<br />
    20. 20. Germany<br />
    21. 21. Greece<br />
    22. 22. Iceland<br />
    23. 23. Ireland<br />
    24. 24. Portugal<br />
    25. 25. Explaining Debt<br />Remember: borrowing implies a lender. Financial profits rose faster than average, as did financial debts.<br />Principle: To grow, banks must make more loans. Banks lend more money in order to make more money. To make more money, they ended up borrowing more money to lend, or lending borrowed money. <br />LEVERAGE = DEBT: Leverage measures the degree to which assets are funded by borrowed money.  <br />
    26. 26. Leverage and Bank Growth<br />Banks can make more money in three ways:<br />Borrow at  lower interest rates;<br />Charge higher interest rates;<br />Banks have little control over the first two. Competition between banks for funding enforces some uniformity of interest rates.<br />3. Make more Loans! (aka increase its “Leverage”)<br />
    27. 27. Increasing Leverage<br />Recall that Banks have reserve requirements: <br />In reality, all of this reserve does not have to be in the form of cash: it can also be in the form of any asset with a price (i.e. any commodity that can be traded)<br />
    28. 28. Increasing Leverage<br />2. Nor does this reserve have to be owned by the bank! It can be borrowed (i.e. part of the reserve requirement can come from debt, as opposed to equity)<br />
    29. 29. Increasing Leverage: Example<br />Leverage is calculated by the debt-to-equity ratio: L = D/E.<br />Step 1: L = 90/10 = 9<br />Step 2: L = 100/10 = 10.<br />Increasing “leverage” means borrowing more money.<br />
    30. 30. Shadow Banking<br />The Basic Idea Behind ‘Shadow Banking’(aka securitized banking) is that IOUs (e.g. ‘securities’) are traded as money, and banks borrow against IOUs, i.e. use IOUs as collateral.<br />IOU<br />Currency<br />
    31. 31. Securitized Banking (selling and lending loans)<br />Debt is sold to larger banks.<br />These Banks then can either sell these loans again, or they can borrow against them in ‘repurchase agreements’<br />
    32. 32. Securitized Banking<br />Think of “securities” as IOUs that are in turn traded and passed along, as in a game of ‘hot potato.’<br />
    33. 33. Loan sales increased, but most were retained<br />
    34. 34. Repurchase and Sale Agreements<br />
    35. 35. Bank Runs Revisited<br />IOUs circulated around as money. Banks that purchased these IOUs (e.g. MBSs) borrowed against them in short-term contracts, using them as collateral to borrow cash.<br />Like a mortgage, this is ‘securitized’ lending, because putting up collateral makes it less risky or more secure (contra the ‘Commercial Paper’ market). <br />
    36. 36. Bank Runs Revisited<br />When the value of these securities dropped, because people stopped making their mortgage payments, this (loan to value ratio) was not met. <br />Lenders demanded that they be paid back, or else be given more collateral, i.e. more securities.<br />This is basically a mass withdrawal on the debtors who had to find more securities or sell them to raise more money. The sale in turn caused the prices of these securities to decline even further! <br />The financial panic of 2007-8 was essentially a ‘bank run’ in this secondary ‘repo markets’<br />
    37. 37. Inequality and Debt: a Link?<br />All money (i.e. Federal Reserve notes) is loaned into existence.<br />Monetary expansion correlates with rising Debt.<br />Because the power to create money is concentrated in a few institutions, inequality will rise if the aggregate interest is not re-circulated in such a way that it can be earned by workers in the form of wages. <br />
    38. 38. Where does money come from?<br />Two Steps:<br />The ‘Fed’ creates new money as debt, from “thin air.”<br />Other private banks then take this new money and create 10x this amount through fractional reserve banking. This process is called the money multiplier process.<br />
    39. 39. The Federal Reserve lending to the US Treasury<br />IOUs (Bonds)<br />Money as Debt<br />Federal Reserve prints money, from nothing, and pays Treasury.<br />US Treasury<br />The Fed<br />
    40. 40. Federal Reserve lending to the US Treasury<br />IOU <br />US Treasury ‘sells’ bonds. (T-Bills)<br />In exchange for money now, Treasury gives IOU’s, to pay back this money, plus interest.<br />Treasury<br />Federal Reserve and other Private Banks<br />Cash<br />Whatever bonds the other banks do not purchase, the Federal Reserve purchases.<br />The Federal Reserve can exercise a power that the Treasury cannot: it can simply print the money from nothing! But it creates this money as debt.<br />
    41. 41. Why doesn’t the Treasury just print the money?<br />"The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.”<br />John K. Galbraith<br />(1908 – 2006)<br />
    42. 42. Money as Debt<br />All new money is loaned into existence as debt. <br />Because of the application of interest, total debt will always exceed the size of the existing money supply. <br />Total debt, can therefore only be repaid in full by issuing more debt to cover the interest payments. <br />P+I<br />New money created<br />= P<br /><<br />
    43. 43. Implications: Growth or Die<br />1. The current system functions like a pyramid scheme: growth is a requirement for it to function.<br />2. The trickle-down effect of the pyramid monetary system has not been sufficient to avoid exacerbating income inequality: interest payments have not recycled back into the general population as earned income.<br />
    44. 44. Power and Capitalism<br />Capitalism = stratified society in which accumulation of wealth fulfills 2 functions (Heilbroner): <br />Realization of prestige <br />(unconscious sexual and emotional needs; Veblen)<br />Expression of power <br />(e.g. what Marx means by ‘self-expanding value’; Nitzan and Bichler ‘Capital as Power’) <br />
    45. 45. Power and Money<br />Power = has to do with the ability to realize wishes, or reach goals …even in the face of opposition (Russell, 1938; Wrong, 1995). <br />Money measures and distributes the power of payment, and payments distribute the power of ownership, including the ownership of money.<br />
    46. 46.
    47. 47. The “Global Pool of Money”<br /><ul><li>This implies that the housing bubble was a result of China, and other countries, saving too much money, which they lend to US banks and financial institutions.
    48. 48. Foreign holdings of” agency” MBSs (those issued by Fannie Mae, Freddie Mac) = $250 billion (10%) by 2000; $1.5 trillion (23%) by 2008
    49. 49. 2007, net US international debt = $2.5 trillion = combined GDP of Latin America and Africa
    50. 50. ½ of this debt is held by developing countries</li></ul>Source: http://www.treas.gov/tic/mfh.txt<br />
    51. 51.
    52. 52. Percentage of Federal Securities owned by Federal Reserve<br />
    53. 53. Estimated Ownership of U.S. Treasury Securities<br />
    54. 54. Holders of US Treasury Securities 1996<br />
    55. 55. Holders of US Treasury Securities 2000<br />
    56. 56. Holders of US Treasury Securities 2005<br />
    57. 57. Holders of US Treasury Securities 2010<br />
    58. 58. Federal Reserve Purchases<br />
    59. 59.
    60. 60. Federal Reserve Custody Accounts<br />
    61. 61. ‘Narrow Banking’ and Basic Income<br />Whatever money the Treasury does not capture in tax revenue, it must borrow (it cannot simply ‘print money’- only the Fed and private banks have the power to do that.)<br />We owe “ourselves” (i.e. domestic bondholders). Therefore, much of the debt is illusory: the Treasury could simply spend debt-free money directly into circulation, rather than loaning it into circulation.<br />We do not have to borrow money.<br />
    62. 62. ‘Narrow Banking’ and Basic Income<br />One solution, proposed originally during FDR’s administration and supported by a majority of economists (including Irving Fisher) is 100% reserves, or ‘narrow banking’:<br />Nationalize the Federal Reserve (incorporate into the Treasury). Money creation will be a power delegated solely to the Federal Government.<br />Ban fractional reserve banking- banks will serve as depository institutions, as people think they do already. The function of credit and money creation will be separated.<br />

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