Richard C. Cook: Will Economic Stimulus Measures Stave Off Recession?


Richard Moore

Will Economic Stimulus Measures Stave Off Recession?

By Richard C. Cook

Global Research, January 20, 2008

It is not quite true that the U.S. economy is heading into a recession, even 
though President Bush and most other politicians seem to be discovering it for 
the first time. It¹s like the famous scene in Casablanca where Louis, the 
Prefect of Police, shuts down Rick¹s nightclub while pocketing his winnings for 
the night, because, ³I am shocked, shocked to learn that gambling is going on in
this establishment!²

Actually, as this writer and others have been saying for months, the producing 
economy‹you know, the one where men and women go to work every day to make 
things of value (not just push paper for financial ³services²)‹has been in 
decline for at least a year. This can be measured by the steady decrease of M1, 
the money available in cash and checking accounts for immediate purchases.

But if you dig a little deeper, it is easy to see that the U.S. never really got
out of the recession of 2000-2002 which followed the bursting of the 
bubble at the end of the Bill Clinton presidency. This event was marked by the 
stock market crash starting in December 2002 that cost Americans over a trillion
dollars in retirement savings and other forms of paper ³wealth² over a period of
a few months.

The U.S. producing economy never really came back from that debacle. Instead, 
the Federal Reserve, under ³Maestro² Alan Greenspan, facilitated the blowing of 
three financial bubbles, upon which the Bush/Cheney ship-of-state has sailed 
along merrily until recent weeks.

The first of these bubbles, of course, was the housing one, marked by 
officially-sanctioned fraudulent lending practices leading to the sub-prime 
mortgage collapse. By 2005, this bubble had been creating fifty percent of all 
economic growth in the U.S. But now that growth has reversed in a nationwide 
home price deflation.

The second was the explosion of leveraged debt in the areas of commercial real 
estate, mergers and buyouts by equity funds, and hedge/derivative fund 
speculation. This debt has also begun to unravel which is reflected in declining
equity values in the stock market.

The third bubble has been the less conspicuous trillion dollars in off-budget 
spending for the Afghanistan and Iraq Wars which has kept the 
military-industrial complex in clover. Meanwhile government tax revenues have 
plummeted due to the Bush tax cuts for the rich and the continued erosion of the
U.S. job base and our public and private infrastructures.

It is the bursting of these bubbles, combined with the absence in our economy of
an engine to replace the decade-long habit by homeowners of staying afloat by 
cashing in on their inflated housing equity, which is generating the crisis.

      Let¹s look at the solutions various parties are proposing:

President Bush and many in Congress want to mail all taxpayers a rebate check of
a few hundred dollars, cut business taxes, and possibly make the previous Bush 
tax cuts for the rich permanent.

An immediate infusion of purchasing power is a very good idea. Of course the 
amounts under consideration are a drop in the bucket and will do little good for
people threatened with unemployment or suffering from stagnant incomes, 
inflation of food and fuel prices, and out-of-control debt. Also, the stimulus 
would probably be offset by more inflation and decline in the dollar due to the 
additional federal borrowing required to finance the rebates.

The current Federal Reserve Chairman, ³Helicopter² Ben Bernanke, couldn¹t dream 
of topping the performance of Greenspan, the greatest bubble-blowing impresario 
in history, but seems to be willing to keep cutting interest rates toward the 
theoretical zero where they would barely keep abreast of inflation.

Trouble is, it¹s the massive speculative lending of the banking system which got
us in so much hot water in the first place. More bank lending, even using the 
cheapest possible credit, won¹t get us out of it, because this only amounts to 
rolling over existing debt, not investing money in new production.

Investment for production in the U.S. is flat, because, supply-siders aside, 
people can¹t afford to purchase the stuff that¹s made. That¹s why Walmart has 
become the world¹s largest corporation by selling cheap products from China. 
It¹s all most American consumers can afford!

Cutting interest rates the way Bernanke has started to do has obviously been 
tried before. But it¹s not a cure-all when conditions are really bad. For 
instance, interest rate cuts at the beginning of the Great Depression in the 
early 1930s failed, because no one could pay back loans of any kind.

Japan tried the same thing in the 1990s with ultra-cheap credit, but this too 
failed to solve the problem of the stagnant Japanese economy. This is why 
Bernanke, in his wisdom, has also warned against expecting too much of the 
Federal Reserve when the whole financial system is fatally over-leveraged and 
when the only question is how big a ³thud² the credit dirigible will make when 
it strikes earth.

What else? The Republican candidates for president all want more tax cuts along 
with reductions in federal spending. But the only sizeable expenditures left to 
cut, if the war machine and interest on the debt are sacrosanct, are Social 
Security, Medicare, and Medicaid. We¹ll see how that plays with the voters in 
November. The Republican candidates also rant against ³pork barrel² 
infrastructure expenditures, which is one of the few economic stimulus measures 
the government still has available. In reality, McCain, Romney, are 
playing their fiddles to brain-dead conservative melodies while Rome burns.

On the Democratic side, Hillary Clinton is every-more-obviously the pick of the 
elite establishment and the mainstream media as our next chief executive. Now 
that she, Bill, and their clones have succeeded in raising the racial alarms 
against Barak Obama, nothing stands in her way.

Hillary is calling for job stimulation and fiscal austerity, the same program 
Bill tried under circumstances not nearly as lethal as today¹s. Bill Clinton in 
the 1990s had some success in attracting heavy foreign investment to mend the 
damage done to the economy by the Reagan Revolution until the 
recession at the end of his term swept much of that ephemeral and overleveraged 
progress away.

If asked, do you think Hillary would be able to tell you where the investment 
capital would come from for job creation other than by selling more and more 
U.S. companies and assets to foreigners who have benefited from the run-up of 
oil prices and the U.S. trade deficit?

Maybe I¹m wrong, but continuing to sell our native land to the Chinese and 
Japanese and to the Middle Eastern oil sheikhs does not quite sound like good 
long-range policy for the land of the free and the home of the brave. Nor is it 
apt to improve ³homeland security.² Plus any new job creation program would have
to be massive to counter the layoffs that have already begun, paerticularly in 
the financial and construction industries.

John Edwards speaks of ³green infrastructure² investment in alternative energy 
sources. Not a bad idea, but again, where is the money going to come from? Plus 
Edwards¹ campaign may be dead after the Nevada caucuses where he got four 
percent of the vote.

Barak Obama, as far as I can tell, has no plan at all, except that everybody 
should be included in debating the solutions and that whatever is decided should
help working families.

Dennis Kucinich has spoken of a ³New Deal for the 21st Century,² but his 
campaign for president has gone nowhere.

Then there are the assorted libertarians, gold bugs, etc., who it sometimes 
seems would just as soon see everything crash as long as they have safe 
investment havens where they can park whatever of value they hope to salvage 
from the disaster.

      Not too promising, you might say, and you would be right.

Of course all these half-measures could be swept away if the crisis deepens into
a full-blown depression, which is a real possibility. And like the Great 
Depression of the 1930s, this one could manifest not due to any failure of the 
producing economy to be able to manufacture just about anything wanted or needed
for daily living, but because of a wholesale failure of what British economist 
John Maynard Keynes called ³aggregate demand.² That is, the money in the form of
purchasing power simply is not there to float a full-employment economy.

The trouble is, Keynes¹s solution‹government deficit spending‹is not available 
anymore. Deficit spending is just another form of debt. The use of debt today as
a stimulus goes way beyond federal borrowing. It¹s become a way of life for the 
entire economy. Today our total societal debt is not just the $9 trillion 
federal deficit but an additional $35-40 trillion for individuals, businesses, 
and state and local governments. Nixon had it right when he said, ³We are all 
Keynesians now.² But when he said this in the early 1970s, no one anticipated 
the catastrophic proportions that debt of all types would eventually assume 
under more than a generation of Federal Reserve monetarist policies.

The justification for debt, in the Keynesian view, is that it will result in 
enough economic growth to pay the debt off with some left over allowing us to 
live off the profits. A usually unspoken corollary is that inflation will erode 
the debt by allowing the government to pay it off with cheaper currency. But a 
slow-growth mature economy cannot outrun its debt, even at relatively low 
interest rates. And inflation eventually becomes a monster that simply eats 
everyone in the society alive.

That is where we are today, because the so-called business cycle is nothing but 
an inflation-deflation roller coaster. Since the 1970s, these cycles have become
more severe, leading to today¹s ³perfect storm.²

      So what should we do?

The first thing is to realize once and for all that the underlying cause of the 
looming disaster is the debt-based monetary system.

Under this system, credit is brought into existence as through bank lending and 
cancelled when the loans are repaid. The economic activity that results is 
³taxed² at an unsustainable level not only by the government but by the compound
interest accruing to the banks. This is why the banks are the most powerful 
institutions in the nation, by the way.

But it¹s a sick, rotten, unjust, and essentially medieval system, no different 
in principle from how the bankers of the old European cities drove their kings 
and princes into bankruptcy by financing their foolish wars. Eventually it¹s a 
system that results in the drastic shortage of purchasing power as today Bush, 
Congress, and the rest are waking up to the obvious solution of simply giving 
people more money to spend.

In reality, the government should give people much more money to spend than has 
been proposed or even conceived of‹but not through more government borrowing 
from the Federal Reserve.

As this writer has argued, the first thing that should be done‹today‹is to pay 
each individual in the nation an average stipend of $12,600 as a National 
Dividend, based on the overall appreciation of the economy due to harnessing the
forces of nature and technology.

This stipend should be tax-free and should be paid now, without further delay. 
It would not be inflationary, because it would be a credit against the actual 
productivity of the nation and our ability to produce goods and services at will
if people could afford to buy them.

Such a measure would immediately introduce almost four trillion dollars of 
purchasing power into the economy, an amount which would also reduce the 
quantity of debt people currently incur each year just to survive. The theory of
a National Dividend has been explained by the Social Credit movement which is 
active in the British Commonwealth, is fiscally sound, and has been examined in 
detail by this author in his series of 2007 monetary articles. To see how it 
might work, take a look at the Alaska Permanent Fund, where each resident 
receives almost $2,000 per year as a share in that state¹s natural resource 

Secondly, the government should embark on a program of infrastructure 
restoration at least equivalent to the New Deal‹but not for military industrial 
expenditures. This domestic spending should be financed not by taxation or 
government borrowing but by direct Treasury payments against a new national 
recovery account deriving from the use of credit as a public utility. Such a 
program is sanctioned by the provisions of the U.S. Constitution which give 
Congress the authority to manage the monetary supply of the nation.

Both the National Dividend and the infrastructure spending program would be 
based on direct spending of U.S. Treasury currency from credit accounts 
maintained in the Treasury Department, not the Federal Reserve System. 
Transitioning from the existing system of debt-based Federal Reserve notes to 
direct infusions of cash in the form of Treasury currency would be as simple as 
flipping a switch.

At the same time, the banking system should be reined in. Lending should be 
allowed only under the ³real bills² doctrine for the necessary support of daily 
commerce. Lending for any form of speculation or leveraged investment should be 
outlawed. Businesses should be unhampered in raising capital in the legitimate 
investment markets, but the takeover of business by Wall Street speculators that
began in earnest during the Reagan administration and which has contributed so 
strongly to the disaster we are now facing must end.

How likely is it that the politicians will take these steps? Well, let¹s see how
bad conditions get. Is there anything we could do to encourage them in this 
direction? Let¹s think about that for a moment. As far as I know, we are beyond 
the point socially where failure to pay off a loan is a crime. We don¹t have 
debtors¹ prison anymore. Yes, creditors can seize your assets, but how many 
assets do you really own in today¹s drastically inflated and debt-ridden 

So suppose everyone just stopped paying those debts that are owed to financial 
institutions which have created them ³out of thin air² through fractional 
reserve banking?

The first thing that would happen would be a massive infusion of debt-free money
into the economy. This is because a debt repaid is credit cancelled off a bank¹s
books. If that money is not repaid, it continues to circulate. It helps 
producers produce and consumers consume. Actually the worst thing a person can 
do economically to his neighbor is pay his bank-generated debts, because that 
money then is no longer available to fuel the economy.

Such a wholesale systemic declaration of bankruptcy at the grassroots level 
would actually be a patriotic act if people quit paying their loans for the 
reasons and under the conditions specified above.

Not that I¹m advocating such a course of action, of course, but wouldn¹t it be 
interesting? It would certainly get the attention of those in power who have 
created such a mess. And it may be what happens anyway as the Depression of 2008
picks up steam.

Richard C. Cook is a retired U.S. federal government analyst, whose career 
included service with the U.S. Civil Service Commission, the Food and Drug 
Administration, the Carter White House, and NASA, followed by twenty-one years 
with the U.S. Treasury Department. His articles on economics, politics, and 
space policy have appeared on numerous websites, and he is cited in the 
Wikipedia article on ³Economic Democracy² as one of the world¹s leading monetary
reformers. His book on monetary reform entitled We Hold These Truths is in 
preparation. He is also the author of Challenger Revealed: An Insider¹s Account 
of How the Reagan Administration Caused the Greatest Tragedy of the Space Age, 
called by one reviewer, ³the most important spaceflight book of the last twenty 
years.² His website is at

Disclaimer: The views expressed in this article are the sole responsibility of 
the author and do not necessarily reflect those of the Centre for Research on 

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