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rather than debt. Like with the
inflated values of prized works
of art, stock prices would go up
due to increased demand; and
as long as the demand remained
strong, the stocks would
maintain their value.
Stock market bubbles are bad
only when they burst, and they
burst because they have been
S&P 500 Index
1969-2006 Weekly artificially pumped up in a way
that cannot be sustained. The
market crash of 1929 resulted because investors were buying stock
largely on credit, thinking the market would continue to go up and
they could pay off the balance from profits. The stock market became
a speculative pyramid scheme, in which most of the money invested
in it did not really exist.11 The bubble burst when reserve requirements
were raised, making money much harder to borrow. In the scenario
considered here, the market would not be pumped up with borrowed
money but would be infused with cold hard cash, the permanent
money received by bondholders for their government bonds. The
market would go up and stay up. At some point, investors would
realize that their shares were overpriced relative to the company™s
assets and would find something else to invest in; but that correction
would be a normal one, not the sudden collapse of a bubble built on
credit with no “real” money in it. There would still be the problem of
speculative manipulation by big banks and hedge funds, but that
problem too can be addressed -- and it will be, in Chapter 43.
As for the real estate market, cashing out the federal debt would
probably have little effect on it. Foreign central banks, Social Security
and other trust funds do not buy real estate; and individual investors
would not be likely to make that leap either, since cashing out their
bonds would give them no more money than they had before. Their
ability to buy a house would therefore not have changed. People
generally hold short-term T-bills as a convenient way to “bank” money
at a modest interest while keeping it liquid. They hold longer-term
Treasury notes and bonds, on the other hand, for a safe and reliable
income stream that is hassle-free. Neither purpose would be served
by jumping into real estate, which is a very illiquid investment that

Chapter 39 - Liquidating the Federal Debt

does not return profits until the property is sold, except through the
laborious process of trying to keep it rented. People wanting to keep
their funds liquid would probably just move the cash into bank savings
or checking accounts; while people wanting a hassle-free income
stream would move it into corporate bonds, certificates of deposit and
the like. Another profit-generating possibility for these funds is explored
in Chapter 41.
That just leaves the corporate bond market, which would hardly
be hurt by an influx of new money either. Fresh young companies
would have easier access to startup capital; promising inventions could
be developed; new products would burst onto the market; jobs would
be created; markets would be stimulated. New capital could only be
good for productivity.
A final objection that has been raised to paying off the federal debt
with newly-issued fiat money is that foreign lenders would be
discouraged from purchasing U.S. government bonds in the future.
The Wizard™s response to that argument would probably be, “So
what?” Once the government reclaims the power to create money
from the banks, it will no longer need to sell its bonds to investors. It
will not even need to levy income taxes. It will be able to exercise its
sovereign right to issue its own money, debt-free. That is what British
monarchs did until the end of the seventeenth century, what the
American colonists did in the eighteenth century, and what Abraham
Lincoln did in the nineteenth century. It has also been proposed in
the twenty-first century, not just by “cranks and crackpots” in the
money reform camp but by none other than Federal Reserve Chairman
Ben Bernanke himself. At least, that is what he appears to have
proposed. The suggestion was made several years before he became
Chairman of the Federal Reserve, in a speech that earned him the
nickname “Helicopter Ben”. . . .

Web of Debt

Chapter 40

“[I]t will be no trouble to make the balloon. But in all this country
there is no gas to fill the balloon with, to make it float.”
“If it won™t float,” remarked Dorothy, “it will be of no use to us.”
“True,” answered Oz. “But there is another way to make it float,
which is to fill it with hot air.”
“ The Wonderful Wizard of Oz,
“How the Balloon Was Launched”

B alloon imagery is popular today for describing the perilous
state of the economy. Richard Russell wrote in The Dow Theory
Letter in August 2006, “The US has become a giant credit, debt and
deficit balloon. Can the giant debt-balloon be kept afloat? That™s
what we™re going to find out in the coming months.” Russell warned
that we have reached the point where pumping more debt into the
balloon is unsustainable, and that the solution of outgoing Fed
Chairman Alan Greenspan was no solution at all. He merely concealed
the M-3 statistics. “If you can™t kill the messenger, at least hide him.”1
The solution of Greenspan™s successor Ben Bernanke is not entirely
clear, since like his predecessors he has been playing his cards close to
the chest. Being tight-lipped actually appears to be part of the job
description. When he tried to be transparent, he was roundly criticized
for spooking the market. But in a speech he delivered when he had to
be less cautious about his utterances, Dr. Bernanke advocated what
appeared to be a modern-day version of Lincoln™s Greenback solution:
instead of filling the balloon with more debt, it could be filled with
money issued debt-free by the government.
Chapter 40 - Helicopter Money

The speech was made in Washington in 2002 and was titled
“Deflation: Making Sure ˜It™ Doesn™t Happen Here.” Dr. Bernanke
stated that the Fed would not be “out of ammunition” to counteract
deflation just because the federal funds rate had fallen to 0 percent.
Lowering interest rates was not the only way to get new money into
the economy. He said, “the U.S. government has a technology, called a
printing press (or, today, its electronic equivalent), that allows it to produce
as many U.S. dollars as it wishes at essentially no cost.”
He added, “One important concern in practice is that calibrating
the economic effects of nonstandard means of injecting money may
be difficult, given our relative lack of experience with such policies.”2 If
the government was inexperienced with the policies, they were not
the usual “open market operations,” in which the government prints
bonds, the Fed prints dollars, and they swap stacks, leaving the gov-
ernment in debt for money created by the Fed. Dr. Bernanke said that
the government could print money, and that it could do this at essen-
tially no cost. The implication was that the government could create
money without paying interest, and without having to pay it back to
the Fed or the banks.
Later in the speech he said, “A money-financed tax cut is essen-
tially equivalent to Milton Friedman™s famous ˜helicopter drop™ of
money.” Dropping money from helicopters was Professor Friedman™s
hypothetical cure for deflation. The “money-financed tax cut” rec-
ommended by Dr. Bernanke was evidently one in which taxes would
be replaced with money that was simply printed up by the government and
spent into the economy. He added, “[I]n lieu of tax cuts, the govern-
ment could increase spending on current goods and services or even
acquire existing real or financial assets.” The government could reflate
the economy by printing money and buying hard assets with it “ as-
sets such as real estate and corporate stock! That is what the earlier
Populists had proposed: the government could buy whole industries
and operate them at a profit. The Populists proposed nationalizing
essential industries that had been monopolized by giant private car-
tels, including the railroads, steel -- and the banks. The profits gener-
ated by these industries would return to the government, to be used in
place of taxes.

Web of Debt

The Japanese Experiment

Dr. Bernanke went further than merely suggesting the “helicopter-
money” solution. He evidently carried it out, and on a massive scale.
More accurately, the Japanese carried it out at his behest. During a
visit to Japan in May 2003, he said in a speech to the Japanese:
My thesis here is that cooperation between the monetary and
fiscal authorities in Japan [the central bank and the government]
could help solve the problems that each policymaker faces on its
own. Consider for example a tax cut for households and
businesses that is explicitly coupled with incremental BOJ [Bank
of Japan] purchases of government debt “ so that the tax cut is in
effect financed by money creation.3
Dr. Bernanke was advising the Japanese government that it could
finance a tax cut by creating money! (Note that this is easier to do in
Japan than in the United States, since the Japanese government actu-
ally owns its central bank, the Bank of Japan.4) The same month, the
Japanese embarked on what British economist Richard Duncan called
“the most aggressive experiment in monetary policy ever conducted.”5
In a May 2005 article titled “How Japan Financed Global Reflation,”
Duncan wrote:
In 2003 and the first quarter of 2004, Japan carried out a
remarkable experiment in monetary policy “ remarkable in the
impact it had on the global economy and equally remarkable in
that it went almost entirely unnoticed in the financial press. Over
those 15 months, monetary authorities in Japan created ¥35
trillion . . . approximately 1% of the world™s annual economic
output. ¥35 trillion . . . would amount to $50 per person if
distributed equally among the entire population of the planet.
In short, it was money creation on a scale never before attempted
during peacetime.
Why did this occur? There is no shortage of yen in Japan
. . . . Japanese banks have far more deposits than there is demand
for loans . . . . So, what motivated the Bank of Japan to print so
much more money when the country is already flooded with
excess liquidity?6
Duncan explained that the shortage of money was not actually in
Japan. It was in the United States, where the threat of deflation had appeared
for the first time since the Great Depression. The technology bubble of

Chapter 40 - Helicopter Money

the late 1990s had popped in 2000, leading to a serious global economic
slowdown in 2001. Before that, the Fed had been bent on curbing
inflation; but now it had suddenly switched gears and was focusing
on reflation “ the intentional reversal of deflation through government
intervention. Duncan wrote:
Deflation is a central bank™s worst nightmare. When prices begin
to fall, interest rates follow them down. Once interest rates fall
to zero, as is the case in Japan at present, central banks become
powerless to provide any further stimulus to the economy
through conventional means and monetary policy becomes
powerless. The extent of the US Federal Reserve™s concern over
the threat of deflation is demonstrated in Fed staff research papers
and the speeches delivered by Fed governors at that time. For
example, in June 2002, the Board of Governors of the Federal
Reserve System published a Discussion Paper entitled,
“Preventing Deflation: Lessons from Japan™s Experience in the
1990s.” The abstract of that paper concluded “. . . we draw the
general lesson from Japan™s experience that when inflation and
interest rates have fallen close to zero, and the risk of deflation is
high, stimulus “ both monetary and fiscal “ should go beyond
the levels conventionally implied by baseline forecasts of future
inflation and economic activity.”
Just how far beyond the conventional the Federal Reserve was
prepared to go was demonstrated in the Japanese experiment, in which
the Bank of Japan created 35 trillion yen over the course of the follow-
ing year. The yen were then traded with the government™s Ministry
of Finance (MOF) for Japanese government securities, which paid vir-
tually no interest. The MOF used the yen to buy approximately $320
billion in U.S. dollars from private parties, which were then used to
buy U.S. government bonds.
Duncan wrote, “It is not certain how much of the $320 billion the
MOF did invest into US Treasury bonds, but judging by their past
behavior it is fair to assume that it was the vast majority of that
amount.” Assuming all the dollars were so used, the funds were suf-
ficient to float 77 percent of the U.S. budget deficit in the fiscal year
ending September 30, 2004. The effect of this unprecedented experi-
ment, said Duncan, was to finance a broad-based tax cut in the United
States with newly-created money. The tax cuts were made in America,
but the money was made in Japan. Three large tax cuts took the U.S.
budget from a surplus of $127 billion in 2001 to a deficit of $413 billion

Web of Debt

in 2004. The difference was a deficit of $540 billion, and it was largely
“monetized” by the Japanese.
Duncan asked rhetorically, “Was the BOJ/MOF conducting Gov-
ernor Bernanke™s Unorthodox Monetary Policy on behalf of the Fed?
. . . Was the BOJ simply serving as a branch of the Fed, as the Federal
Reserve Bank of Tokyo, if you will?” If so, Duncan said, “it worked
The Bush tax cuts and the BOJ money creation that helped
finance them at very low interest rates were the two most im-
portant elements driving the strong global economic expansion
during 2003 and 2004. Combined, they produced a very global
reflation. . . . US tax cuts and low interest rates fuelled consump-
tion in the United States. In turn, growing US consumption
shifted Asia™s export-oriented economies into overdrive. China
played a very important part in that process. . . . China used its
large trade surpluses with the US to pay for its large trade defi-
cits with most of its Asian neighbors, including Japan. The recy-
cling of China™s US Dollar export earnings explains the incred-


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