Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part IV

By Dan Kervick, a PhD in Philosophy and an active independent scholar specializing in the philosophy of David Hume who also does research in decision theory and analytic metaphysics. Cross posted from New Economics Perspectives

I have set out a simplified model of a monetarily sovereign government. But near the end of the previous section, I began to suggest that the United States government is indeed a monetary sovereign by this kind. The reader might now suspect that I have yielded my rational mind over to a simplistic fiction of my own creation. And by this point, the reader is probably thinking that however interesting it might be to imagine this fictional entity, the so-called monetary sovereign, such fictions have nothing to do with the complexities of the real world, because actual governments maintain accounts that are indeed constrained by the amount of money in those accounts and by the external sources of funding to which they have access. After all, can’t a government default on its debt? What about the recent debt ceiling debate in the US? What about what is happening in Europe with the sovereign debt crisis? Also, if a government like the United States government was a monetary sovereign of the kind I have described, the consequences would seem to be enormous. Surely if a democratic government possessed this kind of power, we would make much more use of it than we do. In short, monetary sovereignty as described seems both too simple to be real and too good to be true.

These skeptical intuitions are reasonable, so they need to be addressed. First, let’s consider the question of whether monetary sovereignty is too simple to be real.

I will argue that the government of a country like the United States is much closer to the ideal of monetary sovereignty than the typical citizen recognizes. To theextent the model is overly simplified, that is due entirely to choices we have made about how our government should be organized internally. The financial and monetary operations that occur in our actual government are not carried out by a single operational center, but rather involve several parts of the executive branch, most prominently the Treasury department. Congress is involved as well, as is the Federal Reserve System. These branches of the government are subject to various legal restrictions and constraints. But these are all constraints that the country’s legislators have chosen to impose on the government’s financial operations. They are to that extent voluntary and could thereforebe altered.

Congress has chosen, for example, to make the US Treasury,and even Congress itself to some extent, function as a currency user rather than a currency issuer, and has attempted to assign to the Fed all primary responsibility for direct decisions over the increase and decrease of the money supply. Ultimate monetary authority obviously resides in Congress, but Congress has delegated much of that authority to the Fed, and has been reluctant to exercise the authority directly by engaging in direct monetary operations on behalf of the public it represents.

These restrictions have been implemented in several ways: The Treasury Department can only spend if there are sufficient points on its monetary scorecard – that is, if sufficient dollars are credited to its bank accounts. Its accounts are held at the Fed and administered by the Fed. It is forbidden from overdrawing its accounts at the Federal Reserve, and the Fed has no authorization to credit those accounts directly and unilaterally. So the Treasury can’t create money itself by a direct act, in the course of its ordinary operations, nor can the Fed create it directly for the Treasury. If Congress has authorized some spending by the Treasury Department, the Treasury can only carry out that spending if the combination of tax revenues and borrowed funds currently supplying Treasury accounts constitute sufficient funds for the spending. If tax revenues are insufficient, then in most cases the Treasury Department will sell bonds to theprivate sector, and raise funds in that way. However, Congress has also imposed a debt ceiling on Treasury borrowing, so the Treasury’s prerogative in issuing bonds is capped.

The Treasury Department does possess, through its operation of the US Mint and as a result of certain loopholes in existing authorizationsto mint coins, a potential source of direct control over monetary operations. But taking advantage of these loopholes would be highly unusual and politically controversial. And if Congress remained determined to keep delegated monetary authority with the Fed, then the loopholes would probably be closed quickly by legislation.

Also, the Treasury Department is forbidden from selling bonds directly to the Fed. So while the Fed is permitted to create money and use it for making loans to banks in the Federal Reserve System, or for the purchase of financial assets from private sector owners of those assets, it cannot purchase bonds directly from Treasury. And thus the Treasury cannot borrow directly from the Fed. The two departments must instead follow a more roundabout method. The Treasury can sell bonds to private sector dealers in an auction, as it ordinarily does. The Fed can then, at its discretion, purchase those bonds from the private dealers in separate auctions. Treasury ends up with some amount of borrowed funds, but also with a liability to pay the Fed the principle on the loan. Any interest payments on the bonds will be returned to the Treasury, since the Fed is not permitted to collect interest from the sale of Treasury bonds. So the Treasury ends up in a better position than if the bonds were still owned by the private sector dealer. But the Treasury still owes the Fed the principle. How these loan payments are funded is then ultimately up to Congress to decide.

Let’s conduct a thought experiment, and imagine how things might work if the Treasury could sell bonds directly to the Fed, and if Congress exercised more direct supervision over the Fed’s purchases of Treasury dept.

Suppose the Treasury Department were permitted to issue a special class of bonds – call them “M-bonds”. These bonds could not be sold to private sector purchasers on the open market, but could only be sold to the Fed directly. Suppose that the bonds carried no coupon payments and 0% interest, and matured in a year. In other words, if the Treasury sells a $1 billion M-bond to the Fed today, then the Treasury receives $1 billion from the Fed today, and next year they pay the Fed exactly $1 billion, with no interest payments in between.

Suppose also that the Fed were not permitted to refuse to buy M-bonds. Let’s imagine that Congress has passed a law mandating that, if Treasury issues an M-bond and offers it for sale to the Fed, the Fed has to buy it. But let’s also assume that Treasury is still not permitted any overdrafts on its account at the Fed. Congress continues to mandate that any Treasury spending must be cleared through its Fed account, and that the only ways of funding that account are though tax revenues, sales of ordinary Treasury bonds to the private sector and sales of M-bonds to the Fed.

Now, finally, let’s suppose that the Treasury Department has a standing policy of funding $100 billion of public sector spending each year through the sale of M-bonds. It also hasa policy of issuing new M-bonds each year to meet the full costs of servicing its outstanding M-bond debt. In other words, it always pays the debt it owes on its M-bonds just by selling more M-bonds. So, in Year One it sells the Fed $100 billion of M-bonds, and spends the proceeds. In Year Two, it sells $200 billion of M-bonds, spending $100 billion of the proceeds and using the other $100 billion to pay off the Year One debt. In Year Three, it borrows $300 billion, spends $100 billion and uses the remaining $200 billion to pay off the Year Two debt. Etc.

We can see that the portion of Federal debt attributable to M-bond issuance grows arithmetically by $100 billion each year. So the national debt continues to rise. But we can also see that that portion of the debt is relatively meaningless. And it wouldn’t matter if M-bonds were not sold at 0% interest, but carried some positive interest rate – say 10% or more. In the latter case, the debt due to M-bonds would not rise only arithmetically, but would rapidly compound. But it would be just as meaningless, since the whole quantity of the previous year’s M-bond debt would be borrowed from the Fed each year, and then paid back the next year with additional borrowings from the Fed. The Fed would be required to purchase this additional M-bond debt each year, so the rising debt places no rising burden on the US Treasury or the American taxpayer.

It should be clear at this point that the entire functional effect of all that borrowing and repayment with M-bonds could be accomplished by the following simpler alternative operation: Congress simply mandates that each year that the Fed must directly credit $100 billion to Treasury Department accounts at the Fed. No bonds. No borrowing. End of story. While this might appear to be an entirely different kind of operation, ultimately they are just too different mechanisms for accomplishing exactly the same effect. Thus, the rapid arithmetical rise in M-bond debt in our thought experiment is not functionally equivalent to a cycle of hyperinflationary runaway money printing. There is instead a fixed, modest annual amount of net money creation – $100 billion, which is just a fraction of annual US GDP – and the ballooning debt payments are just an artifact of the convoluted M-bond method Congress has hypothetically prescribed in our thought experiment to accomplish this money creation. The M-Bond debt owed by the government to the Fed – which is itself part of the government – has a fictional quality.

It is vital to recognize, then, that the third party private sector involvement in the current borrowing relationship between the Fed andthe Treasury is entirely voluntary on the part of the US government. Congress could remove it at any time, simply bypassing the appropriate legislation.

Congress could also, at any time, direct the Fed to credit Treasury Department’s accounts – their monetary scorecards – by any amount Congress seesfit. The recent debt ceiling crisis,therefore, is entirely the result of self-imposed, voluntary government constraints. The government can never runout of money unless it chooses to subject itself to various self-imposed constraints.

Congress has not provided itself with any institutionalized means for conducting monetary operations directly, and has imposed on both itself and the Executive Branch – the two political, elected branches of the government – a system that requires both branches to act as though they are the mere users of a currency that is controlled by the Fed. Congress has thus imposed a quotidian accounting constraint – to use a term introduced earlier – on the political branches of government. The Fed, on the other hand, is effectively permittedto spend without a scorecard. But its spending options are limited by law: It can buy government bonds and other bonds on the open market. It can also lend funds to banks at a rate ofits own choosing. But it can’t buy a battleship, or hire 100,000 people to spruce up the national parks or build ahighway or rail line, or simply send checks to selected American citizens. Or at least if it tried to do these things it would likely be challenged legally for conducting operations that appear to exceed its intended legal powers. Just what theactual limits of those powers are, and how much Congressional spending power has been delegated to the Fed, seems to be a matter of some controversy. But it is clear that the Constitutional intention is that the “power of the purse” is supposed to reside with Congress. And thus any move by the Fed to begin conducting fiscal policy byspending money on all matter of goods and services would be extremely controversial to say the least.

It sounds a little bit strange, of course, to say that Congress has imposed operational constraints or restrictions on itself in the area of monetarypolicy. After all, apart from thosesupreme laws that are embedded in the US Constitution, Congress makes the laws. So in what sense can Congress beconstrained by laws of which Congress itself is the author and master? We might think here of the ancient Greek hero Odysseus, who had himself bound to the mast of his own ship to prevent his ship’s ruin on the rocky island of the Sirens. But the important thing to remember in this area is that while the US Congress might be bound by laws that Congress itself has created, these laws can be changed at any time by the same Congress that enacted them. Congress can intervene in US monetary operations at any time, since US monetary power is constitutionally vested in Congress.

So the parts of the government that can actually accomplish a lot with their spending – Congress and the Executive Branch – are presently required by law to act as mere currency users that must draw on private sector funding sources to carry out that spending, while the part of the government that is permitted to act as a currency creator – the Fed – is subject to fairly strict limits on what it can accomplish and whom it can affect with that spending.

The whole system seems cumbersome and byzantine when viewed in this light. But perhaps the seself-imposed constraints have important policy justifications? Perhaps Congress in its wisdom has seen that monetary power is simply too dangerous for direct democratic governance, and that even Congress itself cannot be trusted to carry out monetary operations inconjunction with spending and taxing operations, in a democratically influencedfashion? We will return to this question later. But for now, let’s turn to the other instinctive reaction to the model we have developed of a monetarily sovereign government: that it is too good to be true.

If the monetary sovereign is not subject to any operational requirement either to tax or to borrow in order to spend, and if the monetary sovereign has the power to create money at will, then isn’t that the ultimate free lunch? Doesn’t that mean that a government of this kind can spend without limit either to purchase goods or services for the public sector or to effect direct transfers of monetary bonanzas to private sector accounts?

We all know something is wrong with this suggestion, if we interpret it in its most obvious sense. And where it goes wrong is in its loose use of the word “can”. Of course, in one sense the monetarilysovereign government can spend without limit. There is no operational constraint on this spending. The US Congress can authorize as much spending as it desires, and of almost any kind. It can, if it chooses, permit that expanded spending to go forward in the absence of any additional taxrevenues. It could remove the debt ceiling and authorize, or even direct, unlimited borrowing by the Treasury. Or it could direct the Fed to credit the Treasury Department account directly with some large amount of money. It could even eliminate the Treasury Department’s Fed account entirely, and simply direct the Fed to clear any check issued by the Treasury Department, and always make a payment directly to the account of whatever bank presents that Treasury check to the Fed.

In the purely operational sense of “can”, our government can do all of these things. But we all know that under many circumstances, such actions could have very bad effects. In addition to whatever operational constraints do or do not bind government actions, there are also what we have called policy constraints. A policy constraint on government actions is simply a policy choice the government has made that cannot be effectively carried out if the government does not act within that constraint. And if the policies are sensible ones, thepolicy constraints are sensible as well.

One such policy which most governments seek to implement isa price stability policy. For good reasons, governments seek to prevent prices on goods and services from rising or falling too much in a short period of time; or from rising or falling sharply and suddenly, or in an accelerating fashion; or from behaving in an erratic and unpredictable manner. Price instability of these kinds can have an inhibiting, recessionary effect on economic activity, as the participants in the economy struggle to predict the outcomes of their medium-term and long-term contracts and transactions. If a monetarily sovereign government suddenly authorizes the creation of excessively massive amounts of new money, and simply spends that money into the private sector directly to make public sector purchases, or transfers it to individuals who in turn spend it, the effect could be a sharp and sudden surge in the level of prices. High inflation and shortages of goods are the likely result.

And yet the risk of runaway inflation as a result of government money creation is frequently exaggerated. Some commentators seem to assume that the merecreation of new money will always have a corresponding inflationary effect, no matter how the new money is spent. Theyare constantly warning is that “hyperinflation” is just around the corner as aresult of government money creation. But this inference does not meet the test of either common sense or considered examination. Adding money to the economy only exerts pressure on prices if that money is in the marketplace, in the hands of customers, competing with other potential customers for goods and services to bid up the prices of those goods and services. If the money is inserted into the economy insuch a way that it mostly goes into savings or bank reserve buffers, it will not contribute to price pressure. Such appears to be the case with recent “quantitative easing” policies pursued bythe Fed.

But even if the money does accompany hungry customers straight into the marketplace in pursuit of goods and services, it still might not exert much pressure on prices. It really depends on how and where the money is inserted. Consider an economy like the one we are enduring currently, with double-digit real unemployment and substantial underutilized human and material resources. Many businesses are experiencing empty shelves, unused warehouse space, vacant office space, idle productive machinery and internal systems operating well short of their capacity. In response to a surge in demand from new customers with money to spend, such businesses can ramp up production rather quickly. They can hire workers from among the huge army of unemployed people hungry for jobs, put productive capacity back online, and fill up existing shelves or distribution facilities with very little additional cost per unit of output. In fact, with so much underutilized capacity, the cost per unit of output sometimes even falls with additional production, as current capacity is used more efficiently. So businesses would have little reason in these circumstances to raise prices on the basis of cost pressures alone. At the same time, any business that is even tempted to raise prices in response to the new demand would face intense pressure from their competitors, who have been starved for customers throughout the recession, and who will be only too happy to keep prices low and reap increased revenues from boosted sales alone, with the same unit production costs, and without attempting to frost the tasty new cake with an uncompetitive price increase.

So, inflation fears vented over proposals for more government deficit spending assisted by sovereign monetary power are often overblown. An economy in a deep recession like ours would likely benefit greatly from such a direct expansion of government spending.

In fact, not only is government spending in a recession likely to be beneficial, but the decision to throttle down government spending and reduce deficits – that is, the decision to practice austerity – is positively harmful in the same circumstances. That is because, in the absence of any change in a country’s current account status with respect to its trade abroad, any decrease in the government deficit corresponds to an aggregate worsening of private sector balance sheet positions. If the government insists on pushing its own balance sheet into a position of surplus, it will likely push the private sector into a deeper deficit, which is precisely the wrong thing todo as the private sector struggles to deleverage, and as household and business incomes fall. And in the context of a global recession, where virtually every country would like to increase exports significantly but few countries can do so because there are not enough foreign buyers for their goods, the clear present need is for expanded public sector spending.

But suppose our government chose to expand spending by making use of additional borrowing from the private sector? In that case, the additional deficit spending would drive up the national debt. Isn’t there great risk in these high debt levels? If the government’s debt goes to 100% ormore of our entire annual national product, isn’t that dangerous? Many pundits are warning these days about the allegedly calamitous level of debt and the threat of ruin or bankruptcy governments face as a result.

And private sector debtis certainly a big problem. As we have discussed, individuals, households and firms – unlike monetarily sovereign governments – are mere users of debt instruments and monetary instruments they don’t control, and operate under real and inviolable budget constraints. They can face insolvency if their debts gettoo large. And even if they are not in immediate danger of insolvency, high debt burdens place serious limits on the ability of private sector borrowers to spend their income on satisfying other wants and needs.

Politicians have recently drawn on these fears of private sector debt in the United States to elevate similar fears about the debts of the US government. We hear politicians and other national opinion leaders warn that the government faces “bankruptcy”. They say that it is “broke” or “out of money”. And they are exploiting these fears to pressure Americans to reduce the size of their public sector spending,and grant even more power to the private sector firms that helped steer us intoour current crisis. But the claims behind these warnings about government debt are often downright false. At best they are often wildly overblown, and based on significant misunderstandings about how our government’s monetary system operates, and how any monetarily sovereign government relates to the world ofprivate sector finance with which it interacts. Here are several facts to bear in my about federal government debt in the United States:

First, the US government, as a monetarily sovereign nationthat is the monopoly producer of the US dollar, can face no solvency risk otherthan a voluntary, self-imposed solvency risk. The US borrows in dollars, a currency that the US government itself controls and produces. The US government therefore simply cannot go bankrupt and fail to pay its debts unless the US Congress chooses to prohibit the Treasury Department from paying those debts, by choosing to prohibit the Treasury from making use of the inherent monetary power of the United States. Now this is in fact what the US Congress threatened to do in the summer of 2011. That is not because the government faced an externally imposed solvency crisis. It is because some members of Congress chose to manufacture a crisis by threatening a voluntary default, in order to blackmail American citizens and other members of Congress into reducing the size of public sector spending.

It is true that the Treasury Department is currently constrained by Congress to sell its bonds to private sector lenders. But that is again an arrangement that Congress has chosen. At any time Congress could enact legislation permitting direct borrowing from the Fed –effectively creating what I called “M-bonds” – or direct the Fed to credit the Treasury Department’s account by any amount Congress desires, including whatever amount might be necessary to pay any existing debt liabilities. So there is simply no risk of US government bankruptcy other than the risk that the US Congress might, somewhat recklessly and fanatically, choose to default on US government debt.

The only real constraint that needs to be born in mind in the area of government borrowing is the policy constraint of price stability. Once economic activity returns to full capacity, the need to preserve price stability will require that government debt liabilities to the private are met through processes that begin to remove compensating monetary assets from the non-governmental sector through taxation rather than processes that continually expand those monetary assets through more central bank purchases of debt. Most of that transition will occur automatically. As economic growth returns and incomes rise, tax revenues will automatically rise along with the incomes.

Some worry about the size of the debt we owe to foreign lenders, including foreign governments. The Chinese government, for example, currently possesses over 9% of US treasury debt. Politicians use this fact to portray the Chinese as a potentially oppressive creditor that could choose to “call in our loan” and drive us into insolvency or crisis. These fears are also overblown. When the Chinese or others purchase US treasury debt, they purchase it with dollars – dollars they already possess. There are only so money things you can do with a foreign government’s currency you possess. One of those things is to buy bonds from that foreign government (or save it with a financial institution that is itself buying government bonds). A bond issued by the Treasury Department functions as the equivalent of an interest bearing savings account for people with dollars to save. If the dollar holding foreign nation chooses not to put their dollars in “savings” by purchasingbonds either directly or indirectly, they will have to keep their dollars in “checking” by leaving them in bank accounts earning lower interest. Why would they do that?

Suppose the Chinese decided they no longer wanted to purchase US government debt. What would they do with their dollars? Their only real alternative would be to exchange those dollars for something else. That is, they could buy something with the dollars in markets where the dollar is accepted – primarily America. At that point, it is hard to imagine the media screaming, “Crisis! Chinese seeking to buy massive amounts of American goods!”

Under current arrangements, as we have seen, the Treasury Department is constrained to sell bonds on the private market. So the fear might be that even if the Fed is prepared to buy up as much Treasury debt as is needed in order to support Treasury spending operations, the Fed might not get that option if skittish private sector borrowers refuse to buy government debt at high prices. Again, the problem with this line of thinking is that the entire world that does business in dollars has no otheroptions but to save its dollars in savings vehicles that are in one way or another founded on government debt liabilities. The Fed exercises tremendous control overinterest rates through its open market operations. So realistically, there will always belenders ready to purchase bonds that the government issues, at the interest rates we desire, so long as the Fed stands ready to purchase as much government debt as needed to set the interest rates its desires to set. Borrowing costs for the US government remain extremely low, despite the warnings of those who fear federal government debt is too high. Nor do people in other countries seem any lessinclined to save and do business in dollars. The dollar is currently very strong on world currency markets, despite persistent warnings by the fear mongers that government money creation will lead to a hyperinflationary loss of value in the dollar.

Some of those who spread fear about dramatic inflation or hyperinflation resulting from government money creation point to the recent rounds of “quantitative easing”, in which the Fed purchased large quantities of financial assets on the private market. Since the Fed effectively creates the money on the spot that it needs topurchase those assets, some fear that this massive program of purchases has flooded the economic system with money, and the pressures from this deluge will eventually lead to a runaway rise in prices. But it is important to recognize that when the Fed buys financial assets, that purchase amounts to a removal of money from the economy over time as well as an insertion of money in the present.

Suppose that some private sector entity A possesses a bond issued by some other entity B, where B can be either the Treasury Department orsome private sector lender. Suppose that the bond commits B to the payment of $10,000 to A over the next five years, on some pre-determined schedule. Now suppose that the Fed offers to purchase this bond from A for $9000, and that A decides to sell the bond because A prefers the $9000 now to the delayed receipt of $10,000 over five years. It is true that when the Fed makes the purchase it inserts an additional $9000 into the economy. But remember that $10,000 was originally supposed to move from B to A over five years. Now the $10,000 will flow from B to the Fed rather than to A. In other words, the Fed has poured $9000 out of its infinite money well into the private sector today, but over the next five years B will pour $10,000 back down into that infinite money well. That amounts to a net removal of $1000 from the private sector. All the Fed has done with its bond purchase is swap out one financial asset- a bond – for a different asset – some money. It has adjusted the schedule of insertions and removals of money from the private sector without effecting a net increase in the amount of money inserted.

Finally, before moving on to a discussion of making the US monetary system more democratic, it will be worthwhile saying a few words about how the current European monetary system falls short of the kind of monetary sovereignty – or near monetary sovereignty – I have attributed to the system in the United States.

European governments are all part of a currency union – the Eurosystem. Each government issues its own bonds and each operates its own central bank. All of these transactions occur in Euros,the common currency of the Eurosystem. But those national central banks are subject to rigorous policy constraints set by the European Central Bank. The individual countries themselves do not set their own monetary policies, and they borrow in a currency they do not themselves control. In effect this makes each government acurrency user rather than a monetary sovereign. If we think of government bonds as the equivalent of bank savings accounts, then each of the governments is in effect the equivalent of a savings bank that competes with the other governments in the Eurosystem to offer attractive interest rates to savers. This gives holders of Euros tremendous bargaining power to drive up bond yields and interest on government debt, because they can always take their money elsewhere to other governments if they don’t get the yields they want. And since the individual governments do not control their own monetary policies, they cannot maintain spending during periods of low revenues by selling debt directly to their national central bank and drawing on the money-creating power of that national central bank. Only the European Central Bank can alter those monetary policies, but the ECB is prohibited by treatyfrom buying government debt directly. The ECB also lacks the capacity to carry out a fiscal policy of central bank financed spending operations in Europe.

In effect, then, the technocratically-managed ECB runs Europe’s private banking system and the private banking system runs Europe’s governments. The citizens of Europe have turned their capacity for economic self-determination over to an undemocratic, continent-wide banking conglomerate. This is the worst kind of nightmare in the long struggle between democracy and private wealth. It’s not as though the Europeans have surrendered their sovereignty to be part of a larger sovereign democratic government encompassing all of Europe. Rather, sovereign democratic governments have been transformed in this instance into something like mere business enterprises that are dependent on private wealth and financing for their operations. These governments now govern only at the pleasure of bankers.

This is Part Three of a six-part series. Part One is here Part Two is here and Part Three is here.

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71 comments

  1. jake chase

    This is all nicely put and appears technically correct. Now, can you please just explain how we can elect a responsible government concerned with the public interest, as opposed to lining its own pockets, getting perpetually reelected, retiring to a corporate sinecure or a private island? The whole idea of the Fed was to make money independent of popular politics. That works so long as banks are limited in size, strictly regulated with regard to permitted transactions, and allowed to fail when they screw up. Well, we let shysters get control of Congress. They allowed banks to mushroom out of control and operate casinos bankrolled by the Fed. Our elected clowns appointed shysters to run the Fed, created housing scams which produced a bubble, but you think everything will be hunky dory if we give Barney Frank and his pals direct control over money.

    Please pardon my scepticism.

  2. Gerard Pierce

    “At that point, it is hard to imagine the media screaming, “Crisis! Chinese seeking to buy massive amounts of American goods!”

    Since the United States has given up on producing any goods, what is the effect if the Chinese decide to buy General Motors and the Washington Monument?

  3. JKH

    “The Fed can then, at its discretion, purchase those bonds from the private dealers in separate auctions. Treasury ends up with some amount of borrowed funds, but also with a liability to pay the Fed the principle on the loan. Any interest payments on the bonds will be returned to the Treasury, since the Fed is not permitted to collect interest from the sale of Treasury bonds.”

    No. Suggest you consult Scott F. for revision.

    Interesting point on viewing Treasury as a currency user. Wish I’d thought of it.

    1. Dan Kervick

      Thanks JKH. Scott F. is always more than happy to correct me when I get things wrong, so I’ll see what he says.

  4. craazyman

    Is this an example of analytical metaphysics? Money is meta-physical. It is both a being and a nothingness. An imaginary construct that can materialize when two observers agree to form a bond of consciousness and cooperation and dissapear when cooperation reverts to conflict. I can see the invisble vaults of phenomenazation that form the basis of this exegisis.

    We are riding to liberate Spain from the intolerable oppression of the Grand Inqusitor, who enforces his tyranny through the subjugation of the people under his Godless rule of rationality, which is, to a man of wisdom, nothing but a carefully plotted deceit and obfuscation that debases their natural vitality and enslaves them to his fraudulent delusion, which we fear even he himself believes. We are familiar with such trickery and recognize it as a method of demonic influence by which the false god arraigns his power into a singularity and enslaves the people as through a hypnosis.

    Mr. Kervick, you are clearly a man of wisdom who could offer many contributions to our work. We will arrive in Spain when the temperatures rise above 50 degrees Fahrenheit and spend one year acquainting ouselves with the territory of La Mancha, with a particular interest in single women under 150 pounds and the prospect of inebriation during long afternoons visiting the vineyards of the territory. Then we will plot our journey of liberation, which we will undertake by mule with no concern for food or shelter.

    Mr. Mirowski has declined our offer to ride with us, but perhaps you will assent to participate in such a noble adventure. We cannot offer compensation, but if we are successful — and we have every reason to expect such an outcome — the people will remove the rule of the Inquistor from their necks and return to their natural condition, which is informed primarily by imagination unconstrained by logic and ponderous mathematical calculations. Upon such a liberation, we will arrange our financial affairs to ensure that the finest horses and saddles in Spain will be yours, as will any number of women of your choice. Perhaps we can begin by translating your essays into Spanish. These can form the basis of a series of lectures we will deliver in town squares across the region, as we seek adventure and romance (not with each other, of course, but with the women of Spain).

    1. evilrocks

      I need this comment explained to me in mind-numbing detail, please. I’d settle for a clear understanding of it’s clever implications.

      1. Schizo Stroller

        I believe it is an allusion to ’tilting at windmills’, an expression referring to Cervantes’ Don Quixote, a man so enthralled by his fantasies of chivalry that he ventured on to the plains of La Mancha on a mule and mistook the windmills he found there for foes. you could say he is suggesting Dan Kervick is being somewhat quixotic.

        (I can only speculate as to why, but if i did I may find craazyman’s comment itself to be a windmill)

  5. JTFaraday

    Really, whether or not monetary sovereignty is “scary” comes down to *what* the US government would do with its monetary sovereignty. And what it *is* doing with its monetary sovereignty *is* scary:

    First, and primarily, it bought up crap assets in order to bail out essentially criminal financial institutions that experienced market failure in order that persons from those same financial institutions could retain their vise-like totalitarian control over this same “monetarily sovereign” government. If there was ever any doubt about that, Bam cleared it up before he was even inaugurated.

    Secondly, but critically and strategically important, it prosecutes an essentially genocidal war against the Arab mid east while enriching and therefore further increasing the political powers of the war and security industries, which are also eager to expand their markets *within* the US.

    Yes, you’re right. US monetary sovereignty props up a criminal totalitarian regime and prosecutes a genocidal war against a background in which it uses– plainly implausible to everyone– claims about its alleged *immediate* (and long term) impoverishment as an excuse to ground down the domestic population that has the political power to put a stop to its actions.

    Once MMT advocates start to put their plainly ridiculous fixation on bureaucratic paper pushing into its proper political context, then we can start to talk about what’s really going on here with regard to the US’s “monetary sovereignty.”

    What is at stake is most certainly not just the need to get a domestic spending plan through Congress. In fact, it’s not at all crazy to suggest that the US is currently busy destroying the country with its “monetary sovereignty.”

    The concentration of power and the nature of that power is the only thing that’s “scary” about it–not the alleged “free lunch.” Americans are all about free lunch (so long as it’s their free lunch).

  6. F. Beard

    Doesn’t that mean that a government of this kind can spend without limit either to purchase goods or services for the public sector or to effect direct transfers of monetary bonanzas to private sector accounts? Dan Kervick

    Of course it does. And in the absence of genuine private currency alternatives, excessive government spending would rob the private sector via the “stealth inflation tax”.

    But with genuine private currency alternatives, only government and its payees would suffer if government overspent relative to taxation. That would give government itself (at the urging of its payees) the highest incentive to spend wisely.

    Monetary sovereignty is essential but the stealth inflation tax is not necessary and is dangerous to boot. Then why insist on it by forbidding private currencies?

    1. Dan Kervick

      Don’t you think that under current conditions of radically underutilized capacity, the government could expand spending significantly without creating any significant demand-pull inflation pressure?

      1. F. Beard

        Yes. In fact I think we should use monetary sovereignty to bailout the entire US population from all private debt (after first forbidding the banks from any more “credit” creation).

        But the long term solution should include the allowance of private currencies to insure optimum money creation rates both for government and private money supplies.

        Also, the allowance of genuine private currencies would fend off the threat of a gold-standard being forced on us. In effect we could say to the gold bugs, “Here. Go play with your shiny metal in the private sector and don’t bother the rest of us.”

          1. F. Beard

            Once the hope of gold as legal tender for government debts is crushed, the price of gold should drastically decline even if we have genuine liberty in private money creation. Why? Because gold is a primitive money form that could not honestly compete with more modern forms.

          2. JTFaraday

            I don’t know. Fedgov seems awfully eager to keep their silly metals on the pixelated virtual charts and out of ordinary circulation.

            If you want an actually competitive competitor to TehTreasuryBoyzFromGoldmanSachsBucks it’s probably not going to be time dollars that are money good in Poughkeepsie.

          3. F. Beard

            it’s probably not going to be time dollars that are money good in Poughkeepsie. JTFaraday

            Agreed. I figure once their source of counterfeit money, the banking cartel, is abolished that the corporations will be forced to spend their common stock as money especially after the population has been bailed out of all private debt and has less need for fiat.

          4. EconCCX

            Indeed, no entity is contractually obligated to provide any service in exchange for an Ithaca Hour. Transactions are all faith-based. Community hours, anyway, are inputs rather than outputs; and if the labor theory of value had any, a dry well would be worth as much as a productive one. (Stock shares, FB, are likewise faith-based.)

            But suppose I were to tell you that toll-takers on the George Washington Bridge can now take part of their pay in the form of resalable bridge crossings. (They can’t, to my knowledge.) These are worth $10 today, and constantly on the rise. Good deal or not? I believe bridge workers would be thrilled to get these inflation-protected parcels of value. That the operating authority would be thrilled to pay out with ’em. And that they could circulate among the public — probably globally — as debt-free, virtually inflation-free, and highly profitable public or private money. Service-backed money, i.e. digital barter. http://www.sbdm.org

            >>If you want an actually competitive competitor to TehTreasuryBoyzFromGoldmanSachsBucks it’s probably not going to be time dollars that are money good in Poughkeepsie.<<

          5. F. Beard

            (Stock shares, FB, are likewise faith-based.) EconCXX

            Imagine an amusement park where the staff was paid with common stock and that the common stock was accepted for rides. Wherein is the faith? The common stock would thus serve as a medium of exchange, a store of value and an employee incentive.

          6. EconCCX

            If the share of stock were denominated to be worth precisely one ride, then it’s the same concept. Amusement park rides would circulate very poorly as a medium of exchange, however; and the future value inherent in the stock price would not tie well to the transactional value for rides. I think most stocks would be a real gamble to accept in trade. But non-legal-tender competitive currencies are the key to full deployment of society’s energies, so of course I’d support their tax-neutrality.

            >>Imagine an amusement park where the staff was paid with common stock and that the common stock was accepted for rides. Wherein is the faith? <<

          7. Lidia

            EconCCX, I don’t know how thrilled I would be to have my pension based on the future of motoring. Tolls are going to be based on travel, which is going to be ever-declining.

          8. EconCCX

            Hi Lidia — Service-backed money would be used for everyday transactions, not particularly for pensions. I think the ability to get across a major river will always be in demand, irrespective of the mode of transport. But each form of SBDM would have a floating exchange rate, so its bearers would inevitably diversify. The authority backing the money would have every incentive to maintain its value with equivalent, evolving services, lest its money outstanding be rapidly redeemed.

            >>EconCCX, I don’t know how thrilled I would be to have my pension based on the future of motoring<<

        1. groo

          F.Beard,

          basically agree on all.

          re ‘private currency’ which I referred to with ‘Schwundgeld’ in the last part, I am afraid that government steps in, or whatever is behind it, if it gets too successful, e.g. 30% of total circulating money.
          Finally, this money has to be taxed, which it is not.
          Keep this as an interesting point.
          (Btw, the Greek currently try pc’s for survival purposes)

          re …forbidding the banks… .
          maybe I sound naive, but I cannot see anymore what use these middlemen have?
          DB-chief Ackermann said in 2007, that the banking sector provides high-tech lubricants for the real economy, and this can be seen that volatility went down.
          What he did not see, is, that that was the calm before the storm.
          Whether this was sheer stupidity or Kabuki, we probably never know.

          Anyway, he discredited his profession to the bones.
          Akin to ‘war is a tool for peace’. Pure nonsense.

          The whole banking sector (big banks) should be put under governmental control AND possession, because the risk is finally taken over by society anyhow.
          So why this split?: Privatize the reward, socialize the risk?
          This is an elite play.

          Btw, I am all for private enterprises, but under strict control, basically capping the capital gained at 1-5Million.
          everything above is taxed away 100%.

          See the wonderful Sam Pizzigati’s ‘Greed and Good’.

          1. F. Beard

            maybe I sound naive, but I cannot see anymore what use these middlemen have? groo

            That makes two of us. So-called “credit” is an unnecessary intermediary between owners of capital including one’s own labor. And aside from unnecessary, “credit” creation is inherently dishonest and unstable.

          2. groo

            F.Beard,
            somehow I like You, although I am an Agnostic, and have no use of the Bible whatsoever.

            So may it be.

            Getting rid of the middlemen was Jesus’ business.
            Right?
            ( Although I disagree on the ‘Give Caesar, what Caesar’s is…’. this division is probably one of the most problematic in the whole NT.)
            Anyway.

            In the current state of affairs the middlemen appear to pose themselves as sort of efficiency-enhancers, where ‘efficiency’ is a riddle.

            Efficiency w.r.t what?
            One can kill oneself ‘efficiently’, right?

            So efficiency is not a goal in itself, but is an attribute relating to some Unknown.

            Because ‘I’ do not know the goal, because it is unknown, ‘I’ keep ‘efficiency’ low-key.
            And ‘we’, as a collective, do even less know the ‘goal’.
            So efficiency w.r.t a diffuse goal is quite nonsensical.
            Eg Evolution is not ‘efficient’.

            So some diffusiveness, concerning a goal, which we do not know, should be some appropriate ingredient to the evaluation of the state of affairs.

            Agree?

      2. Lidia

        “radically under-utilized capacity” = you don’t know what the F you are talking about.

        Refusing to contemplate a system in which the growth pedal is NOT ALWAYS PRESSED TO THE METAL is going to be humanity’s downfall.

        1. Fiver

          You’ll find that argument (which is correct) has little traction here – I’ve tried numerous times to point this out, but have been entirely ignored. It appears that the concept of “growth” is inviolate, no matter how stupid that “growth” is.

  7. proximity1

    “The only real constraint that needs to be born in mind in the area of government borrowing is the policy constraint of price stability. Once economic activity returns to full capacity, the need to preserve price stability will require that government debt liabilities to the private are met through processes that begin to remove compensating monetary assets from the non-governmental sector through taxation rather than processes that continually expand those monetary assets through more central bank purchases of debt. Most of that transition will occur automatically. As economic growth returns and incomes rise, tax revenues will automatically rise along with the incomes.”

    Precisely where and how, then, do you, in this analysis, “bear in mind” this “real constraint” that you admit must be borne in mind?

    And, about that economic activity returning to full capacity, that would be assuming that it does “return” to “full capacity”, would it not? When do you estimate that the U.S. economy was last operating at full capacity?; when, expressed as a time-frame–and, most important, under what presumed conditions –do you (or others on whom your analysis depends) project this return to full capacity?

    One of the key insights of Keynes’ views of the macro-economy is that there is not necessarily any reason to assume full-capacity-operation of the economy as an equilibrium condition; in other words, an equilibrium could very well be found at any level of economic output, including levels that are far, far, from anything reasonably corresponding to some notion of full capacity.

    In short, then, I would like to know why, on what basis, we should confidently expect a return to full capacity in the lifetimes of those now living. In my view, a serious pessimistic case might be made for the view that such a return is far over the visible horizon and no one really knows, as far as I’m aware, how far off it lies. Is it less than five years away? Less than ten? Less than thirty, forty, fifty years away? And again, most essentially, what are the prerequisites to that eventual return? Could they include a default on U.S.-issued bonds in the meantime? You’ve asserted in so many words that, if ‘push’ comes to ‘shove,’ the U.S. government can ultimately simply use one or another of its tools to increase the money-supply–which, to be clear, we should understand not as forms of expendable credits actually in public circulation but, rather, as excess (that is, availble-but-not-necessarily-expended) lending capacity among commercial and consumer banks.

    Already, through its interventions, the Federal Reserve and Treasury have taken immense positions in formerly bank-held debt, including the below-mentioned 600 bn U.S.D. in mortgage-backed securities. In doing so, the government has taken upon the public the ill-considered debts foolishly (and I’d say fraudulently) trafficked in by the private lending industry which fuelled the housing bubble. This value of that debt is only gradually becoming evident. It may well be that when all is said and done it’s actual value is found to be pennies or fractions of pennies on the dollar. In that case, these are ultimate losses which, having been assumed by the public through the decisions of the federal government to largely hold banks harmless and indemnified in this financial debâcle, accrue to the general public–in other words, the government will have ratified and sealed the private banks’ determination to privatize their own truly obscene gains while “socializing” the no less obscene losses.

    “The US Federal Reserve held between $700 billion and $800 billion of Treasury notes on its balance sheet before the recession. In late November 2008, the Fed started buying $600 billion in Mortgage-backed securities (MBS).[40] By March 2009, it held $1.75 trillion of bank debt, MBS, and Treasury notes, and reached a peak of $2.1 trillion in June 2010. Further purchases were halted as the economy had started to improve, but resumed in August 2010 when the Fed decided the economy was not growing robustly. After the halt in June holdings started falling naturally as debt matured and were projected to fall to $1.7 trillion by 2012. The Fed’s revised goal became to keep holdings at the $2.054 trillion level. To maintain that level, the Fed bought $30 billion in 2–10 year Treasury notes a month. In November 2010, the Fed announced a second round of quantitative easing, or “QE2″, buying $600 billion of Treasury securities by the end of the second quarter of 2011.[41][42]”

    from Wikipedia’s page on “Quantitative Easing” :

    http://en.wikipedia.org/wiki/Quantitative_easing

    (note that treasury “notes” is apparently used above in a rather looser than stricter sense to refer to Treasury bonds, notes, and bills indifferently, though I’m not certain this is the case for the figures cited.)

    Further, with regard to your view that,

    “Some of those who spread fear about dramatic inflation or hyperinflation resulting from government money creation point to the recent rounds of “quantitative easing”, in which the Fed purchased large quantities of financial assets on the private market. Since the Fed effectively creates the money on the spot that it needs to purchase those assets, some fear that this massive program of purchases has flooded the economic system with money, and the pressures from this deluge will eventually lead to a runaway rise in prices. But it is important to recognize that when the Fed buys financial assets, that purchase amounts to a removal of money from the economy over time as well as an insertion of money in the present.”

    There is no necessary insertion of money taking place. What’s happened is that banks have been given an immense gift in the form of relaxed reserve requirements and allowed to in effect borrow from the Federal Reserve at near-zero or zero interest. That the banks actually lend out that fresh lending capacity is another matter entirely and, most important of all, a matter which depends very crucially on to which borrowing entities and what purposes (i.e. productive versus non-productive ) those eventual loans–even assuming they are executed–are made.

    It seems to me that the immense sums expended by private finance to buy, bribe and corrupt the U.S. government to do its bidding—at the expense of the general public below the level of the top 1/10th or 1/100th of 1% — that these expenditures have been very richly repaid.

    The many billions of dollars made available by the Fed and Treasury at virtually free interest to commercial and consumer banks to lend to their interest-paying customers are by no means certain to be actually disbursed by the banks as loans. They might, instead, use these increased reserves to free up other assets they hold and direct those assets to the purchase (the buying up) of weaker competitors, their own debt, or other attractive products at rare bargain prices.

    In short, a huge gift to the banks to profits scandalously from the very crises that these banks were so instrumental in creating in the first place.

    And, on that issue a related question:

    If matters can ultimately be settled by the U.S. government making in one form or another enough money to go around to meet interest payments, keep banks sovlent (despite their own abject malfeasance), etc. why then, by the same token, don’t the authorities dispense with the current and worsening home-mortgage catastrophe by directly backing individual home-owner’s liabilities for their full value until such time–again, as you posit–that the economy returns to full capacity? It seems very odd that somehow it is found both reasonable and good to indemnify scandalously irresponsible private banking powers while at the same time leaving millions of home-owners hanging out to dry in the process.

    Why doesn’t the government use the same powers you assert are at its diposal if it were a matter of saving its own solvency to save the solvency of home-owners now facing default on their home-loans or repossesion of their homes?

    Clearly, the short answer is that the private financial insterests which control the political powers don’t want that to be done. It could also happen that these same private interests find it not in their interests to ultimately take on the losses incurred if and when the U.S. government’s abiliity to meet its debt service obligations falls short. You assure us that this simply cannot happen–but, you don’t mention why the afore-mentioned “only real constraint that needs to be born in mind in the area of government borrowing” —namely, “the policy constraint of price stability” doesn’t somewhere, somehow, come into play and into actual effect here.

    1. Dan Kervick

      “One of the key insights of Keynes’ views of the macro-economy is that there is not necessarily any reason to assume full-capacity-operation of the economy as an equilibrium condition; in other words, an equilibrium could very well be found at any level of economic output, including levels that are far, far, from anything reasonably corresponding to some notion of full capacity.”

      I agree with that idea completely. We can thus only expect to get full employment with a permanent, ongoing governmental commitment to full employment, with the public sector providing the additional demand for employment that the private sector is unwilling to provide. We can’t simply “expect” an economy to move to full capacity on its own. And as you say, we have never actually been at full capacity, other than perhaps during the Second World War.

      Although my position is indeed that getting the economy up to full capacity requires the public sector to engage in deliberate money creation, in the form of spending more money into existence during the period in question than is extracted from the economy in revenues during the same period – that is, running a deficit financed by money creation – I do not adopt a monetarist, central-bank oriented approach to this problem. I don’t think it helps much for the central bank to try to increase the “money supply” by simply swapping one kind of financial asset, base money, for other financial assets such as treasury debt. Banks don’t lend their reserves; they seek additional reserves after creating the new deposits first through loans, and they create loans in response to the demand for credit that exists in the marketplace. And the latter depends on activity and demand in the real economy. I think we have to lead with the demand-side with fiscal activism, and give up on the failed monetarist supply-side approach.

      1. groo

        Dan,

        I hope that you consider a scenario of slow descent (John Michael Greer,) and the ‘discounting of the future’ (Stern et al) debate.

        See
        http://en.wikipedia.org/wiki/Stern_Review
        as an entry.

        Any conception of a future, which does not take this into consideration is doomed in the first place.

        And Keynes btw also, because he implicitly is an optimist.
        Deficit spending is a good thing, as long as the future is on average better that the past.

        As a student of philosophy, you should be aware of this possible future, where the upside is down,
        as e.g. Thomas Homer-Dixon argued (The upside of down).

      2. JTFaraday

        “We can thus only expect to get full employment with a permanent, ongoing governmental commitment to full employment, with the public sector providing the additional demand for employment that the private sector is unwilling to provide. We can’t simply “expect” an economy to move to full capacity on its own.”

        It is a basic policy error to assume that the only potential governmental response to unemployment is for the government to employ people directly in the public sector. It can, for example, alter its trade policies in ways that will definitively elevate private sector employment.

        This error is one that neoliberals have encouraged people to make, and is a major problem with the worldview that is being promoted by the MMT-ers, some of whom–Quelle surprise!– themselves manage money, and it’s clear that reduction in workforce in the private sector was a key factor driving corporate profits even before the recent crisis, when the process was accelerated.

        Talk about austerity measures in an already depressed economy!

        I do agree, however, that Keynesians have not adjusted their thinking for the increased globalized and post-industrial economy that we now face. In comparison to say, revving up Detroit and enjoying the knock-on effects, pouring money into education, let’s say, is more like dumping money in a vast hole and never digging it back up in your lifetime.

        That’s not to say “don’t do it,” that’s to say it’s not your Grandfather’s stimulus plan.

        1. JTFaraday

          “This error is one that neoliberals have encouraged people to make, and is a major problem with the worldview that is being promoted by the MMT-ers, some of whom–Quelle surprise!– themselves manage money, and it’s clear that reduction in workforce in the private sector was a key factor driving corporate profits even before the recent crisis, when the process was accelerated.”

          And, when you pair that with their federal workfare austerian minimum wage job guarantee, the mendacity of it all just puts me right over the edge.

          Although I guess it is true that George Bush never really made good on that “compassionate conservatism” thing.

          1. groo

            This ‘compassionate conservative’ thingy is one of those export-articles of the american mind-twisters.
            ( in addition to Hollywood, of course.)

            One of the major proponents of this silly export-article e.g. is the German FDP, which fell from 16% to 3% within 3years.

            Makes one hopeful.
            But on the other hand, American media presumably are so much more apt in confusing the issue, that it levels out, and has no effect at all.

            Plus, the one dollar-one-vote system plus other issues (gerrymandering) virtually makes it insurmountable, so that it takes nothing less than a revolution.

            If I were an Oligarch or Plutocrat or Billionaire or multi-million-Senator or Congressman, I would thank my god every evening, when going to bed, what a wonderful world this is, and thank my God for all the wonderful provisions he made, to make it as it is.

            Damn all those envious bastards.

            And god complies to his prayers, and everything is OK.

            Thank God, this is a good world.

            Arab uprisings?
            My goodness. Those poor chaps.
            We cheer them, because they exactly reach nothing.
            Reasons to be cheerful.

            Amen.

        2. groo

          JTFaraday,

          You touch some sensible points, which are known in the teutonic universe as saving the Humboldt-Ideal of education.
          1st)
          education is a goal in itself, and servers no immediately recognizable purpose.
          2nd)
          ist has to be free

          Now imagine, how far ‘we’ got away from that.
          Raising obedient functional wage-slaves.

          Dismantle society, where You can get a grip on.
          A true beacon of the world. Right?
          Shining city upon the hill. Right?

          Throw the bums out.
          Thank You!

  8. Susan the other

    If every state in the US had a State Bank of BlahBlah it would be similar to all the EU Nations having their own sovereign bank – except that State Banks would/will/do use dollars only. We all have a pact with the dollar. The Europeans have a political pact to uphold the EU for political-economic purposes. But they don’t have a money agreement! So they are now subject to a relentless banking market that forces favorable interest rates, i.e. extorts money from the poorer countries. Because they still do accounting in their own currency and the Euro? So the US does not face this extra layer of nonsense. But still, we are similar in that we are sitting ducks and the banks are out hunting for a windfall directly from the Fed. No mere fraction of a point will do for them anymore. They are predators. And every state in the US will be gamed by rating “agencies” looking at each state’s budget so the banks can play an unconscionable spread even if we try to do people’s banks. I like the idea of bypassing the big banks altogether by shuffling money from the Fed straight to the Treasury. This would be federalization?

    1. groo

      Susan,
      what I do not understand, is, what it means for a US-state to go bankrupt.

      EG California.

      Basically this seems to me to be comparable to a bankruptcy of a EU-Euro-State, say Italy.

      So what is the difference?

      Can anybody tell?

    2. Joe Firestone (LetsGetitDone)

      We can go from the Fed to the Treasury using Proof Platinum Coin Seigniorage (PPCS). That is, the Coin deposited at the Fed is legal tender, so the Fed has to credit the Mint’s account with electronic credit equivalent of its face value. So, the Fed ends up with a coin in its vault. But the Treasury ends up getting”real” electronic money from the Fed in its account.

  9. mully

    Interesting series of articles so far…one fatal error I see and maybe I’m wrong. The fed isnt part of the government, it is privately owned by the member banks. The gov has handed monetary authority to the fed. How can a nation be sovereign if it borrows its money from a private corporation?

    I agree that congress should take back the power to control the monetarty supply and end the fed and the IRS. If the gov can create money instead of delegating that to the fed then they have no need to tax the citizens.

    1. groo

      mully,
      agree,
      I think this is a taboo-issue in the ‘serious’ community, to touch on the legal state of the FED.
      If NC would seriously touch this issue, it would be classified as a conspiracy-nutcase-site, so it wo’nt .

      I myself as a foreigner am of course aware of the issue, but wo’nt touch it, because it is something the Americans should work out.

      In practice, it does not seem to make much of a difference, if You compare this e.g. to the European case, or the British, or the Japanese, the Swiss, Chinese or… other cases of so-called ‘central banking’.

      All in all this conglomerate of different structures is hooded by the BIS, which is a different animal altogether, like the IMF.

      You can work Yourself down until the Hades -or whatever- and never reach the ‘truth’.

      This seems to be the ‘system’.
      Astonishingly enough all those institutions produce ‘reports’, who seem to make make some sense, but overall add to the confusion.

      And this is one of the reasons why I am skeptical about the call for ‘democracy’.

      Which would mean, that heaven and hell do not have any doors in between them.
      Nice vision.
      Lamb and Lion.
      William Blake.

      Lets try.

      My first call is: TRANSPARENCY.
      Then I can make a decent theory, and all is well.

      Wo’nt happen.
      Because the system would stop to work.

      1. mully

        I think if anyone looks at the history of the fed it is kinda obvious that it is illegit. From Jekyll Island to today where it is bailing out banks in Europe. Its not conspiracy if its true.

        Ron Paul talks about this and the main reason he is considered unelectible is his foreign policy stuff. He is considered an expert amoung some in congress for his financial predictions.

        Transparency is crucial but you are right it wont happen without a fight because if it did the status quo comes crashing down. Just like the bank bailout scare tactics were bullshit. Yeah some banks would fail but only because they deserved to fail. And other better run banks would fill the void.

        The whole system of central banking is run in secrecy. Time to get people thinking about where does money come from. Tank God for the internetz.

        1. groo

          …Tank God for the internetz.

          haha.

          it is the enemy of the state –of affairs.

          Keep up the good fight.
          Rational-decisive-dedicated.

          Good luck to us all.

    2. Joe Firestone (LetsGetitDone)

      Mully, This statement from wikipedia on the Fed is pretty objective ( http://en.wikipedia.org/wiki/Federal_Reserve_System ):

      “The Federal Reserve System’s structure is composed of the presidentially appointed Board of Governors (or Federal Reserve Board), the Federal Open Market Committee (FOMC), twelve regional Federal Reserve Banks located in major cities throughout the nation, numerous privately owned U.S. member banks and various advisory councils.[8][9][10] The FOMC is the committee responsible for setting monetary policy and consists of all seven members of the Board of Governors and the twelve regional bank presidents, though only five bank presidents vote at any given time. The Federal Reserve System has both private and public components, and was designed to serve the interests of both the general public and private bankers. The result is a structure that is considered unique among central banks. It is also unusual in that an entity outside of the central bank, namely the United States Department of the Treasury, creates the currency used.[11]
      According to the Board of Governors, the Federal Reserve is independent within government in that “its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government.” Its authority is derived from statutes enacted by the U.S. Congress and the System is subject to congressional oversight. The members of the Board of Governors, including its chairman and vice-chairman, are chosen by the President and confirmed by the Senate. The government also exercises some control over the Federal Reserve by appointing and setting the salaries of the system’s highest-level employees. Thus the Federal Reserve has both private and public aspects.[12][13][14][15] The U.S. Government receives all of the system’s annual profits, after a statutory dividend of 6% on member banks’ capital investment is paid, and an account surplus is maintained. In 2010, the Federal Reserve made a profit of $82 billion and transferred $79 billion to the U.S. Treasury.[16]”

      So, the Board of Governors is a Government agency and it regulates the regional banks and the member banks. The Regional Banks, however have an ambiguous status:

      “The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies. The United States has an interest in the Federal Reserve Banks as tax-exempt federally-created instrumentalities whose profits belong to the federal government, but this interest is not proprietary.[81] In Lewis v. United States,[82] the United States Court of Appeals for the Ninth Circuit stated that: “The Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations.” The opinion went on to say, however, that: “The Reserve Banks have properly been held to be federal instrumentalities for some purposes.” Another relevant decision is Scott v. Federal Reserve Bank of Kansas City,[81] in which the distinction is made between Federal Reserve Banks, which are federally-created instrumentalities, and the Board of Governors, which is a federal agency.

      Regarding the structural relationship between the twelve Federal Reserve banks and the various commercial (member) banks:
      [ . . . ] the “ownership” of the Reserve Banks by the commercial banks is symbolic; they do not exercise the proprietary control associated with the concept of ownership nor share, beyond the statutory dividend, in Reserve Bank “profits.” [ . . .] Bank ownership and election at the base are therefore devoid of substantive significance, despite the superficial appearance of private bank control that the formal arrangement creates.[83]

      So, I think it’s fair to say that, on balance, the FRB is part of the Government in its functioning, and is charged with fulfilling public purpose, which in its case is facilitating full employment and price stability. It’s done a very lousy job of the first.

      1. EconCCX

        So Wikipedia is here assuring us that the FR Banks *are* in fact privately owned, but are not run avariciously. Congress could disband the Federal Reserve Board, but would then have no particular say in the operation of these banks.

        So when Dan suggests:
        “Congress simply mandates that each year that the Fed must directly credit $100 billion to Treasury Department accounts at the Fed. No bonds. No borrowing.”

        …he’s talking about a privately owned bank that isn’t answerable to Congress. Not the regulatory FR Board. Those “deposits” are a private bank’s IOUs.

        Something more authoritative that Wikipedia would be helpful to demonstrate that Congress has such power over a private bank’s book of accounts. I say Dan’s conflated the Board and the Banks.

        1. mully

          the fed has resisted any disclosure of its internal business for awhile now. The Frank-Dodd bullshit bill thanks to senator Bernie Sanders forced a partial review of feds loans and policies in the last crisis. Guess what…the fed because of the dollar is bailing out the world economy.

          Just because the gov has to appoint a candidate for the fed board doesnt mean they control it. The BIS controls more than the US gov does. World wide central banking and the IMF control more than most think.

          1. psychohistorian

            Now there is a story that needs to be written and widely distributed.

            It could be the penultimate economics article……grin

            It could have a tabloid title like “PUPPET MASTERS EXPOSED!!!”

            It certainly couldn’t hurt the effort to laugh the global inherited rich out of control of our society.

      2. Fiver

        JF,

        The banks own both:

        1) The Federal Reserve, and the bigger the bank, the greater the % of shares owned. Note when you try to research anything re the Fed that the first few pages are dominated by the Fed itself, other government agencies, or MSM hacks. There are hundreds and hundreds of independent attempts to put faces and numbers on this. Here’s one from 2009:

        http://seekingalpha.com/article/123381-who-owns-the-fed

        2) AND the political process which generates the Board of Governors and everything else. Here are Obama’s latest 2 attempts to appoint individuals with no interest whatever in serving the public rather than banks:

        http://www.businessweek.com/news/2011-12-28/obama-plans-nominations-of-powell-stein-for-fed-board.html

        Just ask where Jamie Dimon, CEO of the biggest of the Wall Street bankster empires sits, and how these scumballs “serve” the public interest:

        http://stopforeclosurefraud.com/2011/10/19/gao-finds-serious-conflicts-at-the-fed-jamie-dimon-was-on-the-board-of-the-ny-fed-while-his-bank-received-loans-from-the-fed-reserve/

        FYI – Wikipedia entries are notoriously loaded in favour of who has the most clout or most resources to expend demanding “edits” on any controversial subject where real money or power is involved – that’s whose version ends up posted as “official”.

  10. Joe Firestone (LetsGetitDone)

    I like this one too, though it seems more convoluted and less eloquent than Parts Two and Three were. Btw, there are many typos in this one. One serious one. At the bottom it says this is Part Three of a Six Part series. Of course, it’s Part Four.

    This:

    “The Treasury Department does possess, through its operation of the US Mint and as a result of certain loopholes in existing authorizations to mint coins, a potential source of direct control over monetary operations. But taking advantage of these loopholes would be highly unusual and politically controversial. And if Congress remained determined to keep delegated monetary authority with the Fed, then the loopholes would probably be closed quickly by legislation.”

    is right, of course. But it’s a bit more complicated than that, and, I believe, underestimates the potential for Treasury to exert direct control over monetary operations.

    First, if the Mint issued a $60 T or greater proof platinum coin, and the Treasury used the seigniorage from the Fed crediting the coin’s face value to fill the TGA with nearly $60 T, then the President would have the money to pay off the national debt completely as it comes due, and also to cover all Congressional deficit spending for at least as much as the next 20 years with no issuance of debt instruments at all. The move would also generate immense pressure on Congress to appropriate money for all sorts of much needed deficit spending that it feels no pressure about now because it can always say we can’t afford them.

    Second, Congress would need approval of both houses of Congress to restore the status quo ante and restrict the seigniorage power so that PPCS could not be used again. So what are the chances that the Ds would allow the Rs to pass legislation to close the PPCS loophole, after the President had used the power to allow him to pay off the national debt? Slim and none, I think. And even if some Ds voted with the Rs on this, would they be able to overcome a filibuster from 15 – 20 Ds who approved of the President’s coup? I don’t think so.

    Third, if, by some miracle, the Rs did get constraints on PPCS through Congress, then they’d still have to overcome a presidential veto, which would shortly be forthcoming from any President who actually used that power.

    And fourth, what if the Rs tried to restrain PPCS before the President used this power to issue a very big coin like the $60 T one? Then the President would still be able to issue that coin during the time between passage of the legislation and the time it takes for it to become effective. Since PPCs of an arbitrarily large amount takes about 24 hours to become effective, the President could end the constraints on the Treasury’s monetary sovereignty within that time, other than the constraint of Congressional appropriation of spending itself.

    1. Dan Kervick

      I have been skeptical of the platinum coin maneuver – at least if it were used before an effort was made to get public support for it, during which time Congress might act to prevent it. What you say would happen might happen. But my gut feeling is that there would be a tremendous and nearly hysterical outcry. People would scream the the President and Sec of Treasury had gone stark raving mad, and had blown up the Treasury with “funny money”. What Congress would do next, I don’t know.

      1. Joe Firestone (LetsGetitDone)

        Thanks, Dan. That certainly might happen. But it’s hard to tell how things will pay out. Did you see the “speech” I composed for the President here: http://bit.ly/mYHtuu If so, why don’t you think that would be effective, or that the President couldn’t win a political fight around it?

        He could pay $6.1 T of the debt within a few days after the maneuver. Very powerful optics.

        1. groo

          Joe,
          impressive site,

          To make a long story short:
          Reduce the message to three sentences.
          And all is OK.

          The rest goes into some footnotes.

          (My long comment would have cost me my head, so I beg your pardon for not doing so.I keep the chopping off of my head for some more important issues.)

          Amen.

  11. Nate

    Layout bullets for what will be the ideal Government, Citizen, of a Sovereign nation should be. And how they should interact. Government to Citizens, and Nation to Nations.

    Here are some basics:

    * strive for zero personal tax. Income, property, etc.
    * strive for zero required social insurance policy, all should be optional.
    * strive for zero inheritance. transfer of private wealth upon expiration of one’s life.

    * government should be made up of volunteers. receiving comps. for expenses only.

    * there should be many small, similar size sovereign nations cooperating as citizens. world don’t like to see arrogant nations throwing their weights around.

    * all intrinsic functionality and modality of relations should be modeled after mother nature. ( Nature can solve seemingly complex problem in the most simplest and profound way. Why don’t we humans learn from it. Nature is essence of proof that how everything that has withstood the test of time. Our time may be running out. If we don’t start to change from today.)

    1. groo

      Henry George,
      Thoreau,
      Veblen,
      Native American Indians,

      Whom else do we need exactly, to make sense of affairs?

      Aah, we are too many.

      Captain, we have a problem.

    2. American slave

      “* strive for zero personal tax. Income, property, etc.
      * strive for zero required social insurance policy, all should be optional.
      * strive for zero inheritance. transfer of private wealth upon expiration of one’s life.” From Nate

      One other way to achieve that would be for someone or the government to create a or many non profits like the salvation army or red cross except that they would make a profit and pay everyone’s taxes. Maybe they could be a utilities monopoly or something

  12. joebhed

    This posting has much more to do with the real dissonance relative to our national monetary sovereignty, between what is, and what things appear to be.

    Others have addressed Dan’s description of the role of the Fed in the government. It’s a private bank of private bankers, and it controls our monetary policy by usurping our monetary sovereignty. Why don’t we talk about that?

    I wish the articles were more oriented to the political economy than to the accounting architecture of the players in functional finance.

    But, I’ll jump straight to the point, as I try to do with MMT-presence these days. Here Dan begins the construct of legislative reforms needed to counter the ‘voluntary’ constraints that exist on true monetary sovereignty.

    If you were to put all of them in a Bill, it might enable accomplishing some of the worthy social and public policy goals of all well-meaning MMTers, with no criticism intended there.
    It would not restore monetary sovereignty.

    But there is a Bill now before the Congress that would both achieve the worthy goals being presented here and at the same time restore monetary sovereignty. With the key being that by ACTUALLY restoring monetary sovereignty, much more is possible.

    That Bill, H.R. 2990, as I have mentioned, was introduced by Congressman Dennis Kucinich this past September.

    http://kucinich.house.gov/UploadedFiles/NEED_ACT.pdf

    It represents the taking back of the money system from the private bankers at the Federal Reserve. It eliminates every one of the colloquially-described voluntary constraints that MMTers like to talk about.

    If there must be legislative reform to accomplish the objectives laid out here, then what is wrong with the Kucinich Bill? What MMT goal cannot be accomplished with the Kucinich Bill in place?

    Or,do we not want to talk about the POLITICS of money-creation and the national monetary system? The Kucinich Bill moves the political discussion about who controls our money system, how, and why, to front and center. Why not?

    Thanks.

    1. Joe Firestone (LetsGetitDone)

      “Others have addressed Dan’s description of the role of the Fed in the government. It’s a private bank of private bankers, and it controls our monetary policy by usurping our monetary sovereignty. Why don’t we talk about that?”

      Clearly, the Fed is not a private bank. It is a system of banks. As I pointed out above, http://www.nakedcapitalism.com/2011/12/public-money-for-public-purpose-toward-the-end-of-plutocracy-and-the-triumph-of-democracy-part-iv.html#comment-581777 The Board of Governors is a Federal Agency. The 12 Regional Banks are Federal Instrumentalities for functional purposes. The Fed system is therefore part of the Government.

      It claims independence, and in practice it gets far too much of that. But Congress does have oversight of the FRS, and the Executive does have the authority, under present law, should it choose to use it, to substantially regulate what the Fed does.

      In particular, the President, through the Mint and the Treasury, can under existing law fill the public purse by using PPCS to force the Fed to issue an arbitrary volume of electronic credits to the Mint’s Public Enterprise Fund (PEF). The Treasury can sweep the credit balance for all seigniorage profits whenever it wants to, thus filling the public purse with enough money to pay off the national debt fully, and avoid any further issuance of debt instruments.
      If Treasury were to do that it would result in an excess of reserves in the banking system forcing the natural overnight rate of interest to fall to zero. In turn, to maintain its target overnight interest rate, the Fed would then have to pay interest on reserves (IOR).

      Now, my question is, since the Executive has this authority, why do you believe that this falls short of full monetary sovereignty, under Dan’s “quotidian” Model?

      1. EconCCX

        >>Now, my question is, since the Executive has this authority, why do you believe that this falls short of full monetary sovereignty, under Dan’s “quotidian” Model?<<

        Because private banks can still create new money by lending it into existence. And thereby take control of real productive assets by digital book entries. MMT describes money as "points" the sovereign can't run out of, but financial institutions are player-umpires, and they own the securities that drive the money. Your valuable mortgage is signed to them, not Congress.

        Oh, and seigniorage is peanuts, given the number of times a dollar turns over. The money's in transaction fees, leverage, self-dealing and interest. To clear a cumulative debt by seigniorage is to destroy the currency, which we've been passing globally for products and services of real value.

        In short: the monetary sovereign…isn't. Not under a debt-based money system. To reestablish sovereignty, we must re-engineer the money, not tinker with the numbers.

        1. Joe Firestone (LetsGetitDone)

          “Because private banks can still create new money by lending it into existence. And thereby take control of real productive assets by digital book entries. MMT describes money as “points” the sovereign can’t run out of, but financial institutions are player-umpires, and they own the securities that drive the money. Your valuable mortgage is signed to them, not Congress.”

          Private banks create new money in the form of demand deposits when they lend. But while the borrowers then get an asset and a liability, the banks also get an asset, and a liability, because the money they create isn’t free to them, as is the money the Fed creates out of thins air.

          “Oh, and seigniorage is peanuts, given the number of times a dollar turns over. The money’s in transaction fees, leverage, self-dealing and interest. To clear a cumulative debt by seigniorage is to destroy the currency, which we’ve been passing globally for products and services of real value.

          The Government can generate whatever it needs through PPCS to pay off debt and cover future deficit spending and without ruining the currency. It can generate $60 T to fill the public purse without spending most of it, and that’s not peanuts. I don’t think you’ve thought this through. But we have.

          See: http://bit.ly/mYHtuu

          and:

          http://bit.ly/pBNT8K

          1. F. Beard

            Private banks create new money in the form of demand deposits when they lend. But while the borrowers then get an asset and a liability, the banks also get an asset, and a liability, because the money they create isn’t free to them, as is the money the Fed creates out of thins air. Joe Firestone (LetsGetitDone) [bold added]

            1) So banks are legal counterfeiters.

            2) But since they endanger themselves too, it’s OK?

      2. joebhed

        Sorry Joe

        It’s a private system of private banks – all of them.

        The federal role in the private Federal Reserve banking system, which consists of the Regionals and Member Banks, is limited to proforma confirmation of the Mother Board, with a banker-serving partisan political twist.
        That’s it.

        Yes, the regional banks perform what should be a public ‘function’, but only in the sense that we have functionally regionalized the private Fed banking system. That private system has usurped the governmental role of issuing the nation’s money.

        As to the hypothetical coining venture, of course I would favor that immediately, and yes that would be one exercise in sovereignty. Granting THAT authority to the President was itself an act of monetary sovereignty. But the Constitution conveys the sovereign authority of money creation to the Congress, and that sovereign authority has been usurped, with Congressional approval, by the private Fed banking system.

        And, shucks, I just read econCCX note that sovereignty, when we get it back, will not be shared with those private bankers that drove the bus off the cliff, either on purpose or by accident.

        The exercise of the monetary authority granted to the federal government by the Constitution is the basic purpose of the Kucinich Bill.

        My question is clear.
        What public purpose goal of the MMT community is not available with passage of the Kucinich Bill?

        And, what, pray tell, is wrong with taking back the money system. The private bankers had it for a hundred years, have gotten us here, and we want it back.

        For the Money System Common.
        The real public money system.
        Thanks.

        1. mully

          Thanks for realizing what is going on here. Central banks create money and have major power internationaly.

          Allow me to control the creation of money and I will control the world. One of the Rothchilds quotes.

        2. Joe Firestone (LetsGetitDone)

          Joe,

          “The federal role in the private Federal Reserve banking system, which consists of the Regionals and Member Banks, is limited to proforma confirmation of the Mother Board, with a banker-serving partisan political twist.
          That’s it.”

          Maybe so, Joe. But it seems to me that the Board of Governors has formal control, and that you’re talking about the oligarchy and its operation now and not about Fed legal arrangements. The Board of Governors and the Chairman can run things in the public interest if they want to. And, if they don’t, if they’re selling out to the banks, then the Attorney General can do something about that.

          My point is that we’re not talking about a “pro forma” Federal role in the Fed. What we’re talking about is corruption. We need the proper remedy for that. New people in Congress and the Executive and also law enforcement. Looking backward and not forward.

          “As to the hypothetical coining venture, of course I would favor that immediately, and yes that would be one exercise in sovereignty. Granting THAT authority to the President was itself an act of monetary sovereignty. But the Constitution conveys the sovereign authority of money creation to the Congress, and that sovereign authority has been usurped, with Congressional approval, by the private Fed banking system.”

          Right. I’m glad we agree that the Government is now sovereign and the exercise of its sovereignty is a matter of the President wanting to exercise something that Congress has already written into law. I hope you understand the full implications, namely that the President can control the Fed right now, by forcing its monetary policy, and by forcing it to use it money creation power in the service of Treasury. If Ben doesn’t like this he can just resign. So much for his “independence.”

          As for this:

          “My question is clear.
          What public purpose goal of the MMT community is not available with passage of the Kucinich Bill?”

          That’s easy. The Federal Job Guarantee providing both full employment and price stability.

          Other than that extremely important difference, I think the Kucinich bill is a big step forward.

          But since it requires legislative action, it seems to me clear that it’s easier to get a PPCS change and law enforcement action to re-establish sovereignty. Then, later after those measures have weakened the power of Wall Street, someting major like the Kucinich bill modified with the FJG could be passed.

          1. Fiver

            There is a vast literature re how the bankers originally forced creation of the Fed to protect their interests, including Woodrow Wilson’s infamous quote after the deed was done to the effect that he had “unwittingly destroyed the country”. It has NEVER been in the US national interest to have a privately owned Central Bank controlling the money supply/interest rates/pricing. The Fed, along with Wall Street, was handcuffed during the War, but was soon back at its old game. Corruption of the Fed is at the heart of this decades-in-the-making crisis. You are arguing that this can be changed with a change in Government – one interested in enforcing the law. Well, of COURSE that could theoretically happen, but in whose lifetime? As it stands, Bernanke can make or break Obama, not the other way around.

            And see below re JFK’s unfortunate experiment with having Treasury create its own money.

  13. docG

    “Suppose the Chinese decided they no longer wanted to purchase US government debt. What would they do with their dollars? Their only real alternative would be to exchange those dollars for something else. That is, they could buy something with the dollars in markets where the dollar is accepted – primarily America.”

    “Primarily America.” Right. This last sentence alone reveals the embarrassing amateurishness of this embarrassingly overlong and tedious “analysis.” Did it occur to you that the dollar is accepted ALL OVER THE WORLD? Did it occur to you that the Chinese could withdraw every cent from their Treasury stash to do something really creative, e.g., buy Europe?

    No, it hasn’t happened yet. So it won’t ever happen? Your reasoning resembles that of Mr. Skilling, who, I’m sure, to this day, insists he did nothing wrong. Grow up! Making money appear out of thin air is a trick one can get away with only once in a while. When you make a habit out of it you risk having to deal with that kid wondering why the Emporer has no clothes.

    1. Joe Firestone (LetsGetitDone)

      Th dollar isn’t accepted all over the world in lieu of local currencies for making tax payments. So there is a limit to its acceptability.

      If the Chinese were to divest themselves of USD too rapidly, then they would drive down the value of the dollar, as well as the renminbi which they’ve pegged to the dollar. If they get rid of the dollar peg, then the value of their currency goes up and they sell far fewer goods here, while still driving down the exchange value of the dollar. That’s OK with me. Many more jobs here.

      I really don’t think the Chinese will make any sudden moves. They’re conservative in their financial approach, and are much more likely to decrease the amount of financial integration with our country over 10 – 15 years time. That will help to even out trade balances without causing a crisis of any kind in the International system.

      1. Dan Kervick

        Suppose the Chinese did divest themselves of dollars by buying some kinds of assets in Europe in markets that accept dollars. What would the sellers of the assets do with the dollars?

    2. mully

      The fact that oil is priced in dollars is a pretty big deal. Almost a war type level deal. China can buy oil and other resourses that are priced in dollars and are doing so slowly as not to cause a panic in dumping dollars.

  14. Fiver

    1) It has never been a question as to whether Congress can do what Congress WANTS to do with respect to the existence, mandate, makeup, operations or anything else relating to the Fed and money. It’s whether Washington can ever be retrieved from the sewer, which means whether those who own the Fed and most everything else of importance will ALLOW IT. I rather think they won’t short of something resembling open revolt, which frankly hasn’t happened because everything in this system is built for people who have money – including being deemed as counting for something in a protest, and that quite sizable percentage of people with money these days just don’t care. However, they may get one they didn’t bargain for if they don’t stop laying the groundwork for the next, much worse crisis by continuing to fail to do anything whatever to address the real problems.

    2) Why bother collecting taxes under this regime? Why not just run 2 economies side by side, with the Government using its money to fund all its activities, and the private sector using its money in similar manner? To pay for anything provided by either sector, you have to use the sectoral currency, so there needs to be an exchange rate. Or do you need to toss in a third currency to mediate? But wouldn’t they trade at par? Money is just a digit, so who cares? The current holders of money maybe? Or future holders of…whatever? Sounds like one of those messy political problems, to me.

    Could keeping taxation have anything to do with preserving all the functions and information provided by taxation as one important regulator of the complex relationship between the relative size, scope, goals, effectiveness, outcomes, impacts, etc. of the share of total resources expended by Government vs those in the private sector? But if that information is vital, why not just collect the information? Why remove any of that money from the private economy? Why not be innovative and cut taxes by half and print the rest? Whose money is worth more to a foreign country, or investor? Why might that be? Maybe they won’t care. Or are there investors in the Government money required at all? Why not just say “Screw it. No more taxes actually paid by anyone, because money is independent of past production. And why that bothersome borrowing, we’ll just print what we need”

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