My Interest Drain explanation of cyclical downturns – during loan deposit expansion and the inflationary spiral the interest burden – both real and nominal — becomes very big due to rising aggregated demand and rising inflationary expectations and thus rising rates of interest (lenders adding an inflationary premium to compensate the loss of the dollar’s real purchasing power in inflation.) These high interest rates result in a very large outflow of purchasing power in the form of interest drain. (Remember our money is loan deposits and that every new injection of a loan is followed by the drain of both principal repayment and compound interest. The higher the interest rate the bigger and faster the drain of purchasing power from the domestic “real economy” loop.
Here is my explanation of the business cycle and explanation of depressions. (Note that this explanation discredits the theories of depressions and cycles called “over-investment”, “mal-investment,” “overproduction,” and “bubbles.”)
Letter to Dan Breeden:
Dan, you ask me where the cause of depressions, of cycles of economic boom and bust lay. Here is the answer. Our system of using loan deposits and their transfer from buy to seller as our monetary system, not only causes booms and busts, but intensified each when the system should be pulling against these fluctuations.
When the inflow of investment loans is eventual caught up with by the outflow of principal repayment plus compound interest charges, inflation turns to deflation so that revenues being to fall, hiring falls, layoffs begin, demand falls, orders for new inventory stop. This is a time of a shortage of purchasing power. The remedy is to reflate the economy. But how does current economic system respond to this downturn in business caused by deflation of money circulation. Rather than inject more new money, which is needed, it instead cuts its lending – because times are turning bad, it may even call in its loans, fearing the beginning of a cycle — in fact a self-fulfilling prophecy.
So instead of responding to the onset of a deflationary depression by putting more money in peoples hands so they can keep up their payments and maintain the current general level of production, they instead cut the money supply. Instead of working against the deflation that has begun they add to it “to protect themselves.” They cut loans. They call in loans. They encourage everyone to engage in austerity so that they can pay their debts — but austerity is exactly what is not needed. The people are being given poison instead of medicine, because if people ever did pay off all their debts in this system there would be no loan-based money left in circulation to employ anybody, to buy anything, to make any payment.
That is how the debt-money system causes cycles and then intensifies them.
Eventually most of the loans have collapsed. Millions have defaulted and been foreclosed or sold out at distress sale prices. The creditors take possession of all that collateral. The bust has run out of fuel. The people have no more equity to mortgage.
And so with new assets in their possession the banks begin lending again to make them prosperous. The new lending usually is in one or other special growth industry — dot.com or housing or war supplies — and the new loans begin to pick up business revenues. Now there is an inflationary spiral — the exact opposite of the deflationary spiral. The banks are anxious to lend to anyone. The interest rates go up because with increased demand for goods the entrepreneurs see new opportunities to make profit and take out loans so they can realize their plans. But the loans keep coming. Prices are increasing — is it inflation or is it real demand? At first it is more real demand than inflation, but after all idle production and building capacity has been taken up, the loans keep coming and instead of taking up the slack of unemployed resources they merely start bidding resources away from each other. On top of this demand pull and cost push inflation working together, interest rates climb — in part because of increased demand for loanable funds by entrepreneurs, but also and more and more because of the expectation of inflation which causes lenders to add more to the interest as an “inflation premium” — to compensate them for the fact that they expect to be payed back in the future with dollars that buy less. These high interest rates (carrying the inflation premium) start taking their toll on the economy in the form of interest drain. Understand this part of the story, because it is very important: The inflation demands higher interest rates and these higher interest rates mean bigger interest payments, more dollar drain to the financial sector and away from the business and household sectors. This is the mechanism of a downturn. It is not a bubble bursting, it is a growing economy being swallowed by the gigantic interest burden that is created by loans carrying high “inflation-premium” interest rates. This is the analysis that the hired economists are missing – this is what they are not allowed to see. Downturns and depressions begin because of interest drain. And then there deflationary spiral happens again.
I have told you the story of booms and busts, except for one issue. The issue is whether the act is one of a flawed system or one of a conspiracy to run the economy this way. The answer is that it is both. They system will run this way automatically — but at the same time the bankers, lenders and speculators are more adept in economics than the economists speaking to the public through the colleges, the news media and business journalism. The fact is that the Money Power positions itself to profit from these cycles. They short the markets before the downturn. They can even create the downturn my simply calling in loans — as in 1929 the bankers issued margin calls which collapsed the stock market and contracted money in circulation by one third. Right now they have positioned their investment for the collapse of the economy — the deflationary depression following through to the end of the cycle — and they are determined that no populist is going to change the outcome they are positioned to profit from. Our ruin is their gain, and so they are preventing any reform to avert our ruin.
The answer to all this of course is to end they system of loan-created new money — and to issue a money supply that stays in the economy. Social credit gives to each person money which they circulate. They receive the money free and clear. So there is not debt drain and no loan excess which together cause the cycles.
Letter to Cathal Spelman — only debt free national fiduciary money distributed in steady disbursements exclusively through social credit can end the business cycle. The current system involving central banks manipulating discount rates and conducting open market operations and of a banking system that provides most a very large majority of the nations money in the form of loan-created demand deposits must, by its structure, result in pro-cyclical (boom and bust intensifying) disequilibration. Only when the source of all new money is constant will cycles be eliminated. This requires 100 percent reserve requirements in banks and the end of international lending to finance government. (Eastman is for 100 percent tax financing in an economy where money enters from the household sector’s social credit dividend.)
Social credit is money that the government simply makes up and hands out to everybody in equal amounts so they don’t have to borrow from international bankers to have a supply of money to spend.
Ordinary people in this country are dying from want of purchasing power. We had land, and people willing to work – but there was no money in peoples hands to keep our businesses going, to keep our people employed.
There is no government printing press printing money and spending it on voters for their votes. Not at all.
The only money going around keeping people hired is money put in circulation by people who have taken out second mortgages on their homes — because they can’t pay their debts unless they do so. So they borrow on their equity (on the part of their house that they have paid for) so they can pay off some of their bills in exchange for a slightly lower interest rate.
But that is no good – because every dollar added to the economy as new money in that way has to be given back — all of it plus interest. The people get right back in debt again, debt they can’t pay.
The American Populist combines Abraham Lincoln’s idea for Greenback money that the government creates rather than borrowing from Rothschild with another idea that is called the social credit dividend. The social credit dividend is free money, created out of thin air (not borrowed from Rothschild, Rockefeller or any other banker.) This money is not spent by Congress on the bad boys who got their fraternity member elected — but rather it is distributed in even amounts to each citizen on a regular basis — monthly or quarterly. This money comes free and clear — you don’t have to pay interest on it and you don’t have to return the principal. Instead you spend it on what you want to spend it on – with no strings attached. This money is thus Lincoln greenbacks put into existence by you spending them into existence — and they do not have to be paid back to any creditor — although people can save them if they want to.
Now understand this: Recessions, depressions, economic bad times, busts, downturns and bursting economic bubbles are all caused by the financial system taking back more principal and interest than it is putting in loans for investment or home construction.
Under the American Populist version of Greenback-Social-Credit (I am just making up descriptive names for what I am proposing — don’t go looking for it on google — that work has yet to be done ) — as I was saying, under the Greenback & Social Credit Reform Plan the money stays in circulation, giving people continuing and persistent purchasing power, hiring power, investing power and debt paying power. With money in circulation that stays in circulation — that Rothschild cannot pull out of circulation — there is enough demand for businesses to make real profit — so they can expand from their profits, from their success, without having to get bank loans. Yes, there will still be banks — but these banks will not have the power to expand and contract the amount of money in circulation like the Rothschild owned central bank and member banks now do when they lend money up to a mere fraction of the savings deposits they have in their vaults.
After we get Greenback Social Credit — we will get rid of the central bank and “fractional reserve banking.” Banks will only be able to lend money that people have deposited in those banks with time-savings deposit agreement — so that the bank pays savers an interest rate and lends out those savings to businessmen at a slightly higher interest rate — so the bank makes its money from the spread between what it pays savers for their savings deposits and what it pays local businesses for business loans. That is all banks will be permitted to do. Banks will not be speculators. They will not be the source of new money.
The new money that comes into circulation only through the Household Dividend check (remember: Lincoln money distributed exclusively through a household social credit dividend) will stay in the economy — being used for buying consumer goods and investment in production and public goods.
Government will not borrow money any more. It will get all of its money through taxation of its own citizens. The ties between government and international lenders will be cut forever. This will end the rule of foreign policy by war profiteers and by Zionist bankers who lend money contingent on US support for Israel’s genocide of Moslems etc. Instead we will not be involved with foreign nations except by trade. Trade will be balanced. Our economy will have demand enough to raise up our productivity so that we can again be self sufficient — but we will allow all the trade people want — as long as we pay for them with exports. We will have balanced trade — not “favorable trade”. There will be no more trade deficit. No buying from foreigners and no getting loans from foreigners. We will sell our resources to foreigners who will buy them.
OF course once this system is devised the US will not need “good credit” among the international bankers. They are owed trillions upon trillions of dollars because they imposed a rigged game on us. That game is over. We will repudiate the national debt. We will not pay on debts to people who cheated us. The principle is valid that “fraud vitiates all contracts.” In other words if you are at a gaming table and lose big-time but discover that the game you were playing was rigged — then you simply repudiate the debt — all bets are off!
IMF considers Irving Fisher to erase debt and end money creation by the banking system