Change is always scary but that’s no reason to fight it. It can also be very good.

The recent turmoil in the hitherto smoothly functioning US financial racket could prove very soon to be a great harbinger of change. In the process, innocent people are going to be hurt, though “hurt” is a relative term: no Canadian or American will have their home struck by an errant missile or bulldozed by an armoured D9. The only “pain” on the menu for the innocents in this affair is their conversion from home owners to home renters, plus the loss of some savings, though so few people in North America have savings (defined as all assets minus all debts) that even that pain is limited. The average North American has a negative savings position to the tune of about 7% more debts than assets, so a total collapse of the system would actually enhance their position.

Money is best understood as a utility, like hydro electricity or tap water. In the past, like hydro, it was created and distributed by a publicly-owned utility provider, the public mint. It functioned as a public utility by providing producers of different goods a handy way of exchanging those goods for anything else produced in the economy whether or not the guy you wanted things from directly needed what you produced.

Since every exchange, whether it involves shoes, potatoes or labour, generated a cut in the form of taxes for the state, the state took a big interest in seeing the number and value of all exchanges in the economy rise. Provided that the amount of the money pushed into an economy by the state was carefully calibrated to rise slowly in a controlled fashion, the amount and value of the total exchanges in that economy could rise in a slow and controlled fashion too, generating a slow and controlled rise in tax revenue for the state to achieve its always growing objectives.

In this view, “credit” is best understood as “privatized money.” Credit is to money as private hydro companies are to public hydro. Where a public hydro utility is not primarily intended to produce profit for the state owner, but is rather intended only to provide conditions helpful to the profit of others, a private hydro company is primarily intended to generate profit for their direct owners. The same is true of credit. Money is created by the state not to generate profit directly by it, but rather to produce economic conditions that allow companies and individuals to profit within that economy. Credit, or private money, on the other hand, is primarily intended to generate profit directly for the producers of it.

There is a big difference however. Where a private hydro company must invest first in the creation of electricity, a private money company—that is, a credit institution—doesn’t need to create or invest in anything to begin operations. The only limiting factor in the creation of credit for sale is the national central bank overnight lending rate. The new credit an institution creates in a day, minus whatever payments or deposits it has destroyed in that day, adds up to a balance on which it must pay a percentage to the central bank for that day, which in Canada’s case is currently about 0.013%. That is, if a bank created and sold to customers $1 million of new credit over and above what it received in deposits in any one day, it would be required to pay Canada’s central bank $130.

A nation’s central bank used to have near total control over the supply of all money in its economy and would print more or less money depending on what it perceived was required to lubricate to a sufficient degree all the exchanges taking place between companies and individuals in that economy. Now, however, the role of public money has been overshadowed by the rise of private money, that is, by credit, so that even most central banks now rely on private producers of money rather than on their own production of public money to fulfill that function. By slightly lowering the central bank’s overnight lending rate, the state induces banks and other producers of private money to create and sell more of it, and by slightly raising the overnight lending rate, it induces them to produce and sell less of it.

The process is very similar to the role of the public utilities commission that determines how much private producers of hydro or gas can charge for their energy products. By lowering the rate, the commission induces private producers of hydro or gas to produce and sell less of the stuff, and by raising the rate, the commission induces producers to create and sell more of it, according to what the commission thinks the economy needs.

Just as private producers of hydro, gas, and other formerly publicly-produced utilities have lobbied and argued for the state to get out of the practice of using regulated rates to induce producers to create more or less of the stuff they create, so too have producers of private money—credit institutions—have lobbied and argued for the state to get out of the practice of regulating rates through strict adherence to overnight lending rate mechanisms. The same reasoning was applied: the private market provides sufficient, and it was argued, even more accurate and desirable regulation on rates than a public body of rate-adjusters could because market forces react more quickly, more effectively, and more accurately to information that itself is more complete and accessible than anything the state regulators could learn.

The argument has merit in the case of utilities that require heavy doses of private investment. Private producers of electricity must think carefully about present and long-range market forces because a hydro production plant costs a lot of money to build and won’t start generating profits from sales for ten or more years after the breaking of ground for a new plant.

However, the argument does not hold for producers of private money. To produce private money, to create and sell credit, that is, requires no investment in a plant and involves no long delay between creation of a money utility and its generation of sales and profits. Where it could be argued that state regulation of other utilities like hydro and gas was redundant because market forces already imposed sufficient de facto regulation, in the money utility, there are no market forces imposing de facto regulation. When state regulation of the private money utility was removed as though it was also redundant, the result was that the private money utility, that is, credit, was let loose with no regulation whatsoever.

Thus it was possible for credit institutions to create and flood the market with far more money than was necessary to the smooth functioning of the economy. To move the hugely excessive amounts of newly created private money out the door, salesmen induced and pressured customers far and wide to buy the stuff. People earning $8 an hour in insecure jobs were offered mortgages worth $300,000. Even a used car salesman who would be reluctant to finance the minimum wage earner’s purchase of a used Toyota saw the bank across the street advance a whole house to the same guy. The difference was, the used car salesman had to spend a bit of money to buy the car himself first and so was more careful of who he sold it to, whereas the bank had to spend no money at all to create the credit it was offering for sale. Market forces regulate even the used car salesman’s behavior, forces that don’t exist for the bank in the absence of state regulation.

However, it would be wrong to blame credit institutions for the problem that has developed. The unlimited and unregulated creation and sale of private money serves US national strategic interests, and the effects were entirely known and deliberate. Those who own deeds to homes, even if they own no equity in them, become subject to municipal and state taxes in a more direct way than renters, and so they become more naturally inclined to favour lower taxing government proposals, that is, more conservative governments. To produce conservative results at elections, it served conservative governments to loosen regulation on private money to induce credit institutions to sell more credit to more people in the form of mortgages on houses.

In the case of the United States, a much more important result was produced. A great deal of private money, including that produced by the government itself in the form of Treasury Bills, was invented to exchange for US dollars sitting in national central banks in foreign capitals. US dollars have been accumulating in foreign central banks as a result of American consumers buying products of foreign producers, most especially cars made in Japan, oil produced in Saudi Arabia, and microwaves, et all, produced in China. Those foreign companies would collect payment from US customers in US dollars, then take them to their banks to exchange for the local currencies they need to meet their payroll and to pay their local suppliers. Those banks would then trade in the US dollars to their national central banks for local currencies, leaving the national central banks with all the US dollars. The only thing those foreign central banks could do with all the US dollars is trade them back to the US Treasury for Treasury Bills. Those US dollars, having returned to the United States, would then be flooded back out into the American economy, whereupon they would flow around again to WalMarts, for example, and thus eventually back to China, or Japan, or wherever.

The US government has produced more private money in this way with Treasury Bills than all the private banks in America combined. Today, those three country’s central banks alone, in Japan, Saudi Arabia, and China, hold in their vaults over $4 trillion worth of Treasury Bills. They are largely useless. They can never be redeemed for anything—America doesn’t produce anything these countries want, and trading them for another form of credit doesn’t achieve anything.

These countries however would be hard pressed to stop accepting useless and valueless Treasury Bills in exchange for the US dollars they accumulate. To do so would mean they would stop accepting US dollars from their local private banks, which would then have to stop accepting them from their corporate customers, which would then find no value in accepting them in exchange for cars, oil and microwaves, meaning their car plants, oil wells, and microwave factories would be idled, throwing people out of work and creating conditions ripe for discontent.

The chronic and growing balance of payments deficit in America—the difference between what the country produces for exports and what it buys in imports—swamps by orders of magnitude the problem of foreclosed subprime mortgages. The sea of credit the US federal government created to buy back the US dollars over and over again as they revolved through the US and global economies has created the same conditions of massive inflation that any central bank used to risk when it printed too much money too fast. In the same way that that would lead to units of money being worth less and less to the point where no one had enough faith to accept money for any good or service at all, the whole world has finally found the value of all US credit, produced both by its private credit facilities and the US government, to be close to zero because there has been too much of it created too rapidly.

Authorities have spoken of an environment of “frozen” credit, wherein they suggest that buyers and sellers of credit are too nervous to accept credit from one another because they don’t know if its infected with bundled-in nonperforming foreclosed subprime mortgages. But the actual problem is one of inflation of credit to the point where all credit—all private money, that is—has no value anymore. Producers of private money, lead especially by the US government itself, overproduced private money. The US government lead the way in hyperinflating private money to achieve political results: a more conservative voting public kept satiated with goods beyond what their own production could afford.

The cornerstone to that system is excessive US military spending, now pegged at more than the next eight national military budgets combined. Government spending on military equipment and soldiers differs from government spending in any other way by producing no productive assets and creating no extra industrial capacity—two typical ways in which government spending can lead to damaging inflation in the home economy. Producing tanks instead of lathes, for example, leads to no other production, whereas lathes, for example, may lead to more tools, flooding the market with too many tools and destroying the value of tools. Tanks produce nothing, and in fact are only good for destroying things. Same with soldiers: spending on workers building things, for example, leads to more things being built, whereas spending on soldiers leads to nothing being created. Soldiers don’t build anything and are only used for destroying things.

When the US government itself was flooded with US dollars returning to America in exchange for its Treasury Bills, the problem they confronted was how to float those dollars back through the US economy without creating excessive inflation of the currency. Military spending effectively moved those US dollars back through the economy in a way that did not create more industrial capacity or more productive workers.

The so-called “peace dividend” that was anticipated to benefit the US economy by negating the need to spend so much on the military in its confrontation with the Soviet Union, which ceased to exist in 1999, represented a dire threat to the US economic system by reducing the ability of the US government to push excessive US dollars accumulated at the US Treasury back through the economy without producing inflation. High military spending can only be justified to the public if there is a sufficient threat to which a large military is required to meet. Thus it was that Iraqi weapons of mass destruction, a sufficient threat if true, was invented to generate public acquiescence for renewed massive military spending. The War on Terror is a similar invention for the same purposes, buildings in New York and Virginia having been destroyed to make real that threat, at the loss of about 3,000 lives.

The militarization of the American economy and the subsequent militarization of the world, both in meeting the real threat emanating from America, and in foreign national governments mimicking the American method of credit inflation, has made the world a much more dangerous place. Wars, for example, are increasingly required to use up and to destroy excessive military equipment that would otherwise pile up at bases.

If the credit industry has inflated itself to the point where credit is no longer of any value, it would mean Treasury Bills would also lose their value, meaning much fewer US dollars would come back to America in exchange for them. Fewer US dollars at the US Treasury would mean a reduced US military budget, which would then reduce the need for the US to invent wars in which to dispose of excessive military equipment. Therefore, the “credit crunch,” as they call it, is good news: it could spell the end, or at least a temporary break, in US-created wars, and generally reduce the pace of militarization throughout the world.

Of course, it would also mean fewer sales by foreign companies to US consumers, and so less oil, microwaves and cars for Americans, and some layoffs for workers at car factories, microwave manufacturers and oil wells in foreign countries. But the rise of a middle class in China and India may well take up the slack for those producers in lieu of American consumers. Less consumption of oil and cars in America is also not a bad thing for the global environment. There will be enough wealth in the country to prevent any real hardship—the problem in America is not so much overall real wealth, but its distribution. There wouldn’t be much pain anywhere even for Americans with just a little tweaking of their tax system. Even less will there be any real pain in Canada.

The collapse of US credit institutions is therefore a very good thing for both Americans and for the world, including Canadians. For Canadian political leaders to fret about it and propose ways to help mitigate it is equivalent to celebrating and encouraging further US military adventurism and more unnecessary wars which are achieving nothing but the deaths of many innocents and the destruction of much foreign infrastructure capital. They should all stop it.