Bernanke Warns of ‘Unsustainable’ Debt

New York Times, June 9, 2010

WASHINGTON — When it comes to the deficit, Ben S. Bernanke has a story, and he’s sticking to it. Mr. Bernanke, the Federal Reserve chairman, warned on Wednesday that “the federal budget appears to be on an unsustainable path,” but also recognized that an “exceptional increase” in the deficit had been necessary to ease the pain of recession. In nearly two hours of questioning by the House Budget Committee, however, Mr. Bernanke gave potential succor to members of both parties, while refusing to side with either of them. To Republicans, he offered warnings about the fiscal perils of an aging population and the potential threat of soaring long-term interest rates. To Democrats, he made it clear that persistently high unemployment was a drag on growth and said that additional short-term stimulus spending might be needed. All the while, Mr. Bernanke refused to endorse any particular spending cuts or tax increases, or even specify the balance between the two. And he was not subtle about his strategy. “I’m trying to avoid taking sides on this because it’s really up to Congress to make those decisions,” he told Representative Michael K. Simpson, Republican of Idaho. “But we need your expertise on it,” Mr. Simpson pressed. “Well, no,” Mr. Bernanke replied. “Plenty of people have that kind of expertise, including the Congressional Budget Office and others.” With inflation well below the Fed’s unofficial target of about 2 percent, attention has turned to the other side of the central bank’s mandate: maximizing employment. At the same time, the debt crisis roiling Europe has made deficit-cutting a potent topic. Mr. Bernanke suggested that the United States had a while longer — but not much — before it would have to pull in the reins. “This very moment is not the time to radically reduce our spending or raise our taxes, because the economy is still in a recovery mode and needs that support,” Mr. Bernanke told Representative Bob Etheridge, Democrat of North Carolina. In the next breath, however, he added that continuing deficits risked a “potential loss of confidence in the markets.” Representative Paul Ryan of Wisconsin, the top Republican on the committee, focused his opening statement on Europe. “What we are watching in real time is the rough justice of the marketplace and the severe economic turmoil that can be inflicted on profligate countries mired in debt,” he said. But if Mr. Ryan had hoped for similarly dire pronouncements from Mr. Bernanke, he was disappointed. “If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest,” Mr. Bernanke testified. “Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages, as well as lower prices for oil and some other globally traded commodities.” Representative Jeb Hensarling, Republican of Texas, cited the research of the economist Carmen M. Reinhart, who has found that growth tends to stall in countries where the national debt reaches 90 percent of gross domestic product. The United States is at just about that threshold. “I don’t think there’s anything magic about 90 percent,” Mr. Bernanke said, while noting that in the worst-case projections by the Congressional Budget Office, “debt and interest payments are going to get explosive in 10 or 15 years.” When Representative Jim Jordan, Republican of Ohio, asked Mr. Bernanke to “talk to me about those tax increases that we know are going to happen,” Mr. Bernanke replied: “We have a recovery under way now. So in the very near term, increased taxes, cuts in spending, that are too large would be a negative, would be a drag on the recovery.” But he reiterated that “I’m not going to try to adjudicate for Congress” between tax and spending measures. Mr. Bernanke’s nimbleness in navigating deficit politics reflects his position as the most visible bridge between two administrations, having been appointed by President George W. Bush in 2006 and then reappointed by Mr. Obama to a second four-year term.
Mr. Bernanke has seemed more optimistic, or at least confident, since the crisis peaked in 2008. “As long as we have the confidence of the markets that we will be able to exit from this situation with a sustainable fiscal program, then I think we’ll be O.K.,” he told Mr. Simpson of Idaho.
How long that confidence will last, Mr. Bernanke did not say. Only after several rounds of back-and-forth did he agree with Representative Chet Edwards, Democrat of Texas, that tax cuts do not entirely pay for themselves. And he danced around with Representative Gerald E. Connolly, a Virginia Democrat, on whether the Obama administration’s $787 billion stimulus package last year was “necessary.” Mr. Bernanke would only say it was “useful.” “It must be nice to be an economist,” Mr. Connolly replied.

Dollar's Slide Gives Rise to Calls for New Reserve

By Frank Ahrens
Washington Post
Wednesday, October 7, 2009
The U.S. dollar continued its six-month slide Tuesday amid a growing international chorus that wants the dollar replaced -- or at least supplemented -- as the world's reserve currency, a move that would end the greenback's six decades of global dominance. The dollar has come under attack from abroad as the economic crisis has played out, thanks to the Federal Reserve's decision to flood a seized-up financial system with liquidity last fall. The central bank's moves likely staved off deflation, but the massive influx of new dollars has devalued existing ones. Foreign nations are worried that the massive U.S. national debt and rising deficits are not being addressed. And though inflation is not yet a concern in the United States, a prolonged slide in the dollar's value could lead to higher prices for consumers. Further, large emerging economies -- such as China, Russia, Brazil and India -- are tired of kow-towing to the American buck, and sense an opportunity to knock a weakened dollar off its imperial perch. "The U.S. dollar is headed for also-ran status, and it will continue to lose its value against many other currencies and assets," Miller Tabak equity strategist Peter Boockvar said. "The rest of the world wants the U.S. dollar to lose influence, but no one wants it to be abrupt, as it's in no one's interest. An evolutionary process is what is wanted." The question is: When will that happen? "In the next two to three years, it is highly unlikely to see the dollar replaced," said Eswar Prasad, an economics professor at Cornell University and a senior fellow at the Brookings Institution in Washington. "Over the next decade, though, we would expect to see other currencies play a much more significant role." The dollar fell to nearly its lowest point of the year against the yen and euro on Tuesday, which sent the price of gold surging to a record intraday high above $1,045 per ounce, as investors sought a hedge against inflation and foreign nations continued to stockpile the precious metal. For the American consumer, a falling dollar means U.S. exports sell better overseas, which can lead to more jobs here. But it also means imports costs more, which means higher prices at U.S. stores. "For the average Joe, the implications of a crisis of confidence in the dollar could end up in higher borrowing costs, lower government expenditures -- so that means reduced services -- and higher taxes," Prasad said. "Most likely, some combination of all of the above." Stocks, which typically move opposite of the dollar, staged a strong rally on Tuesday, continuing their fast Monday start. The Dow Jones industrial average and the broader Standard & Poor's 500-stock index both gained 1.4 percent, while the tech-heavy Nasdaq surged 1.7 percent. The U.S. dollar has been the world's reserve currency since World War II. Central banks and financial institutions in other nations hold dollars to pay off foreign obligations, or to influence their currency's exchange rate. Commodities, such as oil, are priced in dollars, which spreads the dollar's influence around the world. But the dollar's dominance is being challenged, thanks to the crisis. China was the first major power to attack the greenback, calling in March for the dollar to be replaced as the world's reserve currency. China holds more U.S. debt than any other country -- about $800 billion -- and the further the dollar drops, the less the value of the U.S. debt owed to China.
Other nations have followed China's criticism. In March, Kazakhstan criticized the dollar and called for the creation of a new currency it calls the "acmetal" (a coinage combining "acme" and "capital"). Last month, Iran shifted its reserve currency from the dollar to the euro, a move that is likely more political than economic and a response to harsh U.S. criticism of Iran's nuclear moves. But major powers have spoken against the dollar, as well. In September, Russia said it remains satisfied with the dollar as a reserve currency but said others are also needed. At an international investment summit last month, Russian Prime Minister Vladimir Putin criticized the United States -- and implicitly, Federal Reserve Chairman Ben S. Bernanke, who controls the money supply -- for "uncontrolled issue of dollars." Both China and Russia have called for a new "global supercurrency," similar but larger in scale to the euro, that would replace the dollar. Even the world's big financial institutions are piling on. "The United States would be mistaken to take for granted the dollar's place as the world's predominant reserve currency," World Bank President Robert Zoellick said in a speech last week.

The demise of the dollar

In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

By Robert Fisk
Tuesday, 6 October 2009

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar. Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars. The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years. The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security." This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region's conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves. The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states. Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East. China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq – blocked by the US until this year – and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures. Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China's growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China's reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro. Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America's trading partners have been left to cope with the impact of Washington's control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency. The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. "The Russians will eventually bring in the rouble to the basket of currencies," a prominent Hong Kong broker told The Independent. "The Brits are stuck in the middle and will come into the euro. They have no choice because they won't be able to use the US dollar." Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years' time. The current deadline for the currency transition is 2018. The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets. "These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate." Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

Gold hits record high on 'plan' to ditch dollar

LONDON (AFP) – The price of gold struck an all-time high at 1,038.65 dollars an ounce here on Tuesday as the dollar fell on a reported plan by Gulf states to stop using the greenback for oil trading. Gold reached the level in late afternoon trade on the London Bullion Market, beating the previous record high of 1,032.70 dollars an ounce struck in March, 2008. "Gold prices hit an all-time high as the dollar weakens," said Barclays Capital precious metals analyst Suki Cooper. "The dollar weakness appears to be related to ... (reported) secret talks about oil being priced in a basket of currencies including gold rather than the dollar, which has added to concerns about the future role of the dollar in international financial markets." The dollar's future as the world's top currency was thrown into doubt on Tuesday as a report said Arab states had launched secret moves with China and Russia to stop using the greenback for oil trading. Arab states have launched steps with China, Russia, Japan and France to stop using the dollar for oil trades, British daily The Independent reported on Tuesday, but the report was denied by Kuwait and Qatar and reportedly by other nations. The United Nations meanwhile on Tuesday called for a new global reserve currency to end dollar supremacy, which has allowed the United States the "privilege" of building a huge trade deficit. The Independent's Middle East correspondent Robert Fisk wrote in his paper: "In the most profound financial change in recent Middle East history, Gulf Arabs are planning -- along with China, Russia, Japan and France -- to end dollar dealings for oil." They would instead switch "to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council (GCC), including Saudi Arabia, Abu Dhabi, Kuwait and Qatar," added Fisk. Gold, viewed as a safe-haven investment, has won back favour in recent months as the global economy struggles out of its worst slump in decades. The run-up in gold has been largely driven by weakness in the dollar, which makes dollar-priced commodities cheaper for holders of stronger currencies, boosting demand. Gold also wins support from fears about higher inflation because the metal is widely regarded by investors as a safe store of value. Precious metals consultancy GFMS last month warned that the current upward trend in gold may not be sustainable should global stimulus packages fail to boost flagging demand in the battered world economy and inflation fall as a result. The Group of 20 leaders of emerging and developed nations recently agreed at a summit in Pittsburgh not to roll back massive stimulus measures that helped contain a severe global recession.

Why Bernanke is right to be worried

By Mohamed El-Erian
Financial Times
June 3 2009

Fed chairman Ben Bernanke’s congressional testimony on Wednesday warrants careful attention by market participants – this at a time when policy measures play an unusually large role in determining both absolute and relative values in many markets. In his prepared written remarks, Mr Bernanke correctly points to the ongoing healing in critical elements of the financial markets, including inter-bank and commercial paper transactions. He also notes the improved functioning of the corporate credit market which has enabled many companies to raise needed and precautionary capital. Yet, the most interesting aspects of his testimony are elsewhere. They relate to his more nuanced outlook about the economy and his attempt to place fiscal issues in their proper place. Mr Bernanke acknowledges that, despite the ”green shoots”, there are still question mark over which components of demand will kick into gear once the cyclical inventory pick-up runs its course, as it will inevitably do so over the next few months. Indeed, the chairman notes that ”businesses remain very cautious and continue to reduce their workforces and capital investments.”

Concerns about a sustainable recovery are not limited to the dynamics of the immediate cyclical recovery. Mr Bernanke also notes that ”even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilisation will increase further.” Yet he stops short of addressing what, increasingly, will be on many people’s minds going forward. Specifically, the longer-term question goes well beyond the notion of a prolonged period of below-potential growth. The level of potential growth itself is likely to decline. Indeed, this is a central element of what we, at Pimco, call the ”new normal”. When it comes to fiscal issues, the chairman is not timid about worrying about longer-term questions – and rightly so. He is explicit about the need for greater clarity on how fiscal sustainability will be restored after this period of emergency policy actions. Mr Bernanke states that ”even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs.”

He does not stop here. He goes on to warn that ”near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.” These are strong words, and appropriately so given the worrisome fiscal outlook facing the US. By necessity, Mr Bernanke will increasingly be in the business of countering monetisation and inflation concerns. Indeed, the markets have already fired a couple of clear warning shots in the last couple of weeks, as illustrated by recent moves in US bonds and the dollar. The chairman’s challenges on this count are neither easy nor amenable to quick solutions. Moreover, as markets increasingly look into the underlying factors, as inevitably they will, they will recognise the difficulty that the government faces in credibly committing to the needed primary fiscal adjustment in the absence of high economic growth. The bottom line is that we should come away from Mr Bernanke’s testimony with at least two conclusions: the chairman seems more cautious about the growth outlook when compared with other recent public statements; and he wants to push fiscal sustainability issues clearly away from the Fed’s domain and back where they belong, with Congress and the administration. He is correct on both counts. He would have been justified on Wednesday in being even more forceful; and he mostly probably will be in the next few months.

The writer is chief executive and co-chief investment officer of Pimco. His book ‘When Markets Collide: Investment Strategies for the Age of Global Economic Change’ won the 2008 FT/Goldman Sachs Business Book of the Year

Bernanke Warns Deficits Threaten Financial Stability

By Craig Torres and Brian Faler

June 3 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall. “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke said in testimony to lawmakers today. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.” Bernanke’s comments signal that the central bank sees risks of a relapse into financial turmoil even as credit markets show signs of stability. He said the Fed won’t finance government spending over the long term, while warning that the financial industry remains under stress and the credit crunch continues to limit spending. The Fed chief said in his remarks to the House Budget Committee that deficit concerns are already influencing the prices of long-term Treasuries. Yields on 10-year notes have climbed about 1 percentage point since the Fed announced plans in March to buy $300 billion of long-term government bonds. The notes yielded 3.54 percent at 5 p.m. in New York, down from 3.61 percent late yesterday, as Bernanke’s warnings on the need to reduce the deficit supported the market.

Rise in Yields

“In recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen,” Bernanke said. “These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows and technical factors related to the hedging of mortgage holdings.” The budget deficit this year is projected to reach $1.85 trillion, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office. “Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation,” Bernanke said in response to a question. “The Federal Reserve will not monetize the debt.” Bernanke also addressed banks’ efforts to bolster common equity in the aftermath of regulators’ stress tests on the 19 largest U.S. lenders. He said the 10 firms that were found to have a total capital shortfall of $75 billion have now sold or announced plans to boost common equity by $48 billion.

Bank Plans

“We expect further announcements shortly” as the banks submit plans due by June 8, Bernanke said. This year’s projected budget deficit, four times the size of last year’s shortfall, has been driven up mostly by costs associated with the financial crisis. “Bernanke knows that fiscal financing problems are already complicating monetary policy and are in danger of undermining Fed credibility,” said Alan Ruskin, chief international strategist at RBS Securities Inc. in Stamford, Connecticut. “He knows that there is only so much quantitative-easing financing that can be done.” A fiscal stimulus of almost $800 billion, the government’s financial rescue effort, takeovers of Fannie Mae and Freddie Mac and increased costs of running safety-net programs such as unemployment insurance have added billions to spending. President Barack Obama has pledged to halve the deficit by the end of his term. Even if successful, his administration anticipates the government will still run what would be, by historical standards, large deficits for the foreseeable future. Bernanke said the debt-to-gross domestic product ratio is set to reach the highest since the 1950s.

‘Hard Slog’

“It is fine to have this budget deficit now,” said Alan Blinder, a Princeton University economics professor and former Fed vice chairman. “It will also be a long hard slog to get the budget deficit down to a manageable level.” House Majority Leader Steny Hoyer told reporters that Bernanke “is absolutely right, we need to be very concerned about incurring additional indebtedness.” The House plans to pass legislation before its July 4 recess to cut spending in one category before increasing it in another, he said. In addition, “we need to address entitlements.” Treasury Secretary Timothy Geithner, in an interview with Bloomberg Television May 21, said the administration’s goal is to cut the budget shortfall to 3 percent of GDP or smaller. Rising government spending, forecasts for a record fiscal deficit and an unprecedented expansion of central bank credit have also fueled investor concerns that inflation will rise. Bernanke said inflation “will remain low” as the economy operates with slack resource use.

‘Dangerous’ Mix

Wisconsin Representative Paul Ryan, the ranking Republican on the committee, said in opening remarks that the Treasury’s debt issuance and the Fed’s monetary stimulus, including purchases of government bonds, “can be a dangerous policy mix” and risks “runaway inflation” in the longer term. Ryan said he’s concerned about “substantial” political pressure on the Fed to delay plans to tighten credit should unemployment remain high. “The Fed’s political independence is critical and essential for safeguarding its commitment to price stability,” Ryan said. “We policy makers should realize that our most challenging policy period is going to be ahead of us.” In Europe, German Chancellor Angela Merkel said yesterday she views “with great skepticism what authority the Fed has and the leeway the Bank of England has created for itself,” to purchase a range of assets in their efforts to end the crisis. She urged central banks to return to a “policy of reason.” Asked by a lawmaker about Merkel’s comments, Bernanke said, “I respectfully disagree with her views.”

‘Inflationary Consequences’

“I am comfortable with the policy actions that the Federal Reserve has taken,” he said. “We are comfortable that we can exit from those policies at the appropriate time without inflationary consequences.” The central bank is buying as much as $1.75 trillion of housing debt and Treasuries this year to lower borrowing costs across the economy after reducing the benchmark interest rate almost to zero in December. Fed officials hold their next policy meeting June 23-24 in Washington. Bernanke said during the hearing he wouldn’t support any measure that would have the Fed’s 12 regional Fed bank presidents nominated by the White House and confirmed by the Senate. Fed bank presidents are currently appointed by the regional bank boards with the approval of the Board of Governors.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Brian Faler in Washington at bfaler@bloomberg.net

More information about emerging local currencies...

The Traverse City, Michigan "Bay Bucks".

Local Detroit cash keeps hometown humming

Monday, March 23, 2009

Nation's economic crisis prompts group to jump-start

local economy with own bills.

Louis Aguilar
The Detroit News

During the Great Depression eight decades ago, confidence in the national economy was so shattered, and people's ability to earn cash so limited, that thousands of communities created local currencies to save hometown commerce. Provincial dollars allowed businesses and their customers to exchange goods and services with currency that had regional worth. A Detroit trio of small-business owners are reviving the idea, following an emerging national trend. The businesses are creating a currency called Detroit Cheers, and more than a dozen city merchants have already agreed to accept it as real money. "The world is just now reeling from economic chaos; in Detroit, that's how we always roll," said Jerry Belanger, 49, a backer of the currency, as he watched the initial run of Cheers bills roll off the presses last week. In Detroit, the jobless rate is 22.2 percent. The median sale price of a home is cheaper than a Chevrolet Aveo. Two of Detroit's Big Three automakers are surviving on federal loans amid the global recession. "That doesn't mean you can't do business in Detroit -- you can. But, man, you have to support one another or you will die," said Belanger, who owns the Park Bar and Bucharest Grill and the building that houses the Cliff Bells jazz club near the Fox Theatre and Comerica Park. Detroit Cheers joins an estimated 75 local currency systems that have sprung up recently in the U.S., said Michael Shuman, author of "The Small-Mart Revolution: How Local Businesses Are Beating the Global Competition." That includes Traverse City, where more than a 100 businesses and institutions accept "Bay Bucks" as currency. Local money is a direct response to the national economic crisis, Shuman said. "The federal government is desperately trying to restore consumer confidence. This is a community doing the same thing, only in miniature. They are trying to pump up local demand and revive their community's health." Legal scholars say local currency is permitted as long as it doesn't resemble federally issued money. Belanger's partners in the Detroit experiment are John Linardos, owner of Motor City Brewing Works, and Tim Tharp, owner of Grand Trunk Pub, formerly Foran's Irish Pub. The three are backing the Cheers money -- which will come in $3 denominations -- with 3,000 U.S. dollars, and they put the federal money in an escrow account. Those who have agreed to accept the Detroit money include a building and furniture design firm called Dormouse, the Canine to Five dog day care center, a graphics designer, a carpenter, a nonprofit and several restaurants and bars. And this is just through word-of-mouth: The three Cheers backers have not formally begun to pitch the idea to others, to see just how much it can grow. The goal is to keep business flowing in their hometown and not have it be ferried off to suburbia or some corporate headquarters in Arkansas or Tokyo. The business owners intend to give the Detroit currency to businesses and individuals they know will spend it at participating businesses. If anyone wants to cash in the Cheers bills for U.S. dollars, one of the founders of the Detroit currency will give the person the real thing. "There's no question in my mind this has real value," said Billy West, a co-owner of Dormouse. With the currency, he said, "I can get a good meal, I can get a beer, I can help another Detroit business. That is money to me. To keep commerce in Detroit, I totally support that goal." Traverse City's Bay Bucks program started four years ago. Today, there's more than $13,000 worth of the currency circulating in the community, said Stephanie Mills, one of the creators of the program. Beyond restaurants and bars, a local grocery store accepts the Bay Bucks; so do a bed and breakfast inn, a winery, a physician, an attorney, an accountant and tarot card readers, Mills said. Among the largest of local currencies is BerkShares, launched three years ago in the rural Berkshires area of southern Massachusetts. Nearly $2 million worth of local currency is circulating among businesses and private individuals, said Susan Witt, who sits on the board of the BerkShares program. "It reformed the way many business owners and residents think about their local economy and helped educate the community on why shopping locally matters," she said. "The current national economy has only increased the use of BerkShares."

Communities print their own currency to keep cash flowing

By Marisol Bello, USA TODAY

A small but growing number of cash-strapped communities are printing their own money.
Borrowing from a Depression-era idea, they are aiming to help consumers make ends meet and support struggling local businesses. The systems generally work like this: Businesses and individuals form a network to print currency. Shoppers buy it at a discount — say, 95 cents for $1 value — and spend the full value at stores that accept the currency. Workers with dwindling wages are paying for groceries, yoga classes and fuel with Detroit Cheers, Ithaca Hours in New York, Plenty in North Carolina or BerkShares in Massachusetts. Ed Collom, a University of Southern Maine sociologist who has studied local currencies, says they encourage people to buy locally. Merchants, hurting because customers have cut back on spending, benefit as consumers spend the local cash. "We wanted to make new options available," says Jackie Smith of South Bend, Ind., who is working to launch a local currency. "It reinforces the message that having more control of the economy in local hands can help you cushion yourself from the blows of the marketplace."

About a dozen communities have local currencies, says Susan Witt, founder of BerkShares in the Berkshires region of western Massachusetts. She expects more to do it. Under the BerkShares system, a buyer goes to one of 12 banks and pays $95 for $100 worth of BerkShares, which can be spent in 370 local businesses. Since its start in 2006, the system, the largest of its kind in the country, has circulated $2.3 million worth of BerkShares. In Detroit, three business owners are printing $4,500 worth of Detroit Cheers, which they are handing out to customers to spend in one of 12 shops. During the Depression, local governments, businesses and individuals issued currency, known as scrip, to keep commerce flowing when bank closings led to a cash shortage.
By law, local money may not resemble federal bills or be promoted as legal tender of the United States, says Claudia Dickens of the Bureau of Engraving and Printing. "We print the real thing," she says. The IRS gets its share. When someone pays for goods or services with local money, the income to the business is taxable, says Tom Ochsenschlager of the American Institute of Certified Public Accountants. "It's not a way to avoid income taxes, or we'd all be paying in Detroit dollars," he says. Pittsboro, N.C., is reviving the Plenty, a defunct local currency created in 2002. It is being printed in denominations of $1, $5, $20 and $50. A local bank will exchange $9 for $10 worth of Plenty. "We're a wiped-out small town in America," says Lyle Estill, president of Piedmont Biofuels, which accepts the Plenty. "This will strengthen the local economy. ... The nice thing about the Plenty is that it can't leave here."

E.F Schumacher Society: Small is beautiful...

More about local currencies here. And here's a list of communities that have developed their own currencies:

Ithaca, N.Y.
Traverse City
Berkshires area, Mass.
Eureka, Calif.
Portland, Ore.
Burlington, Vt.

Local currencies: Communities print own money to keep cash flowing

USA Today reports on the growing number of communities that are printing their own currencies to encourage local spending. A small but growing number of cash-strapped communities are printing their own money. Borrowing from a Depression-era idea, they are aiming to help consumers make ends meet and support struggling local businesses.The Detroit News expands on the movement, with an article on its local currency, "Detroit Cheers," which was re-born from the Depression era push to create currencies. A Detroit trio of small-business owners are reviving the idea, following an emerging national trend. The businesses are creating a currency called Detroit Cheers, and more than a dozen city merchants have already agreed to accept it as real money. "The world is just now reeling from economic chaos; in Detroit, that's how we always roll," said Jerry Belanger, 49, a backer of the currency, as he watched the initial run of Cheers bills roll off the presses last week.... Detroit Cheers joins an estimated 75 local currency systems that have sprung up recently in the U.S., said Michael Shuman, author of "The Small-Mart Revolution: How Local Businesses Are Beating the Global Competition."



If you want to know more about how a local currency works, check out the fact sheet on BerkShares, a currency that is now being used in Massachusetts. Below is an excerpt on how the money helps the economy there:

How do BerkShares benefit the local economy?Everyone benefits from using BerkShares. Consumers benefit from receving a 10% discount on purchases. Businesses benefit from increased patronage. Local non-profit organizations can also benefit by purchasing BerkShares at the 5% discount rate and selling them at full face value to their supporters.
It will take citizens working in their own communities, region by region, to create the kind of systemic change that will lead to sustainable economic practices--practices that foster ecologically responsible production of goods and a more equitable distribution of wealth. Local currencies are a tool to bring about such change. BerkShares are about building community while building the local economy.