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There are fundamental faults with specie money. To begin with, specie money must be based on a commodity of limited supply. There was a time when new gold was discovered so abundantly in the New World that gold was the cause of inflation in Europe. Thus an effective specie money by nature cannot support optimum economic growth, because its function is to preserve the value of money. In a high growth economy, such as most modern economies aspire to be, the limited supply of gold cannot meet the necessary monetary expansion, thus gold backed money will be deflationary and counter growth. In real terms, if the dollar were to be gold backed today, it would have to be valued at $35,000 per once. Two things will immediately happen: the equity market will fall in price by 100 fold with the DOW at 80, and Russia and other gold producers will instantly emerged as new superpowers. Money is not a storer of value, it does not need to have any intrinsic value at all to be accepted. Gold coins circulated only in markets beyond the political influence of the currency issuer. Minsky is correct that money is created whenever credit is granted. Thus anyone can create money while legal tender can only be issued by government. Capitalism is a game for those who has capital. Under capitalism, money is a unit of account of capital. Before capitalism, taxes were paid with agricultural produce, livestock and textile under feudalism. Under capitalism, money is not the root of all evil, but the lack of it is. The challenge of the capitalist regime is to deliver money to as many of the population as possible without debasing the value of money or causing inflation. This logic was operative under industrial capitalism, because capital then performed a function of increasing the productivity of labor. But this function had a limited lifespan. Capital formation soon reduced labor's share of the wealth created by increased productivity to the point of retarding the growth of aggregate demand to keep abreast of productive capacity. Marx's insight of surplus value being the cancer of capitalism is based on this cause-effect. The purpose of government are two fold: 1: to prevent revolution (the overthrow of government) and
2: to institute policies that deliver money to the population
through employment in the non-government sector (not necessarily private). This
is done by granting credit (a form of money creation) to the economy through
government debt which in turn is serviced by taxes. When a government runs a
budget surplus, it is essentially draining credit from the economy, thus slowing
it down. When government desires a growth economy, it has no business running a
surplus. The tax rate is not a critical as long as tax revenue is not used to
reduce the national debt. A high tax rate, provided it is not confiscatory, will
lead to a more dynamic economy because capital cannot afford to be idle and
enjoy gain merely from passive investment. A government deficit is a way of
correcting market failure, by government spending on parts of the economy that
the market ignores, such as health, education, infrastructure, pollution control
and environmental protection, security and research with no short term profit.
Any government that incurs foreign currency sovereign debt should be impeached.
The IMF notion of austerity conditionality of increasing unemployment to service
foreign currency government debt is self defeatingly irrational. Full employment
with high wages strengthens sovereign credit rating through high demand in an
overproduction economy to generate needed tax revenue. There is no positive
policy effect in pursuing unemployment and tax reduction, the darlings of
supply-siders.
The Austrian School formulated their precepts during a very peculiar period of European history, the hyperinflation periods following the two World Wars. It preyed on US phobia against revolution by promoting a fear of hyperinflation. The Austrians propose sound money and free markets as a deterrent against revolution, but they want to achieve it by making money scarce and by shutting off all unprofitable economic activities. This creates widespread poverty which leads directly to revolution. Money is more valuable when more people have more of it, not the other way around. End of post. Government bonds are debts, because the selling of bonds soaks up money (sovereign credit) from circulation. Money is sovereign credit because it soaks up sovereign or private debt when used to buy bonds (debt) and inject credit into the financial system. Sovereign debt is never needed to finance domestic development, which can be financed with sovereign credit. Government issues sovereign credit so that a private debt market can work without specie money. Sovereign credit is the benchmark of all credit ratings. Swapping of bonds is a common practice in finance, particularly in structured finance where a bond can be stripped in many different ways to meet the varying requirements of different buyers. The technical term is unbundling. These unbundled bonds all have one thing in common with sovereign debts, i.e., they entitle the holder at maturity to receive payment in money directly or indirectly from the Treasury, retiring the debt with sovereign credit. When that happens, the retired bond disappears from the debt market. Repo contracts from the Fed are short-term borrowings from the central bank using government bonds as collateral. The Fed gives the repo borrowers money with an agreement for the borrower to repossess the bonds by paying off the short-term loan with money. The process generally can be rolled over with only an interest rate risk. Private repo contract between counterparties do not involve the Fed, but are subject to interest rates target set by the Fed. Repos do not cancel any collateralized bonds, they only monetize the bonds for the duration of the repo agreement. The monetized amounts then become bank deposits, which generate broad money through partial reserves. Government bonds when traded or use as loan collateral's between private or public entities beside the issuer can generate broad money creation, but not high power money creation. At the initial issuance of the government bond, the money supply is reduced by the discounted amount of the bonds, because money is withdrawn from the market. But if the Treasury deposits the proceeds from the bonds in banks, then the deposits will generate broad money through bank lending. Trading of debt does not turn debt into credit because the owner of a debt is the creditor, and the holder of a government bond is a creditor to the government. At maturity, the debt is payable in fiat money. But the holder of fiat money is only an agent of the government and not a creditor to the government, because the holder of fiat money is only entitled to replacement by government of the same money. Changing money for itself is not a financial transaction. Changing bonds into money at maturity is a financial transaction between government and bond holders, in which government-issued sovereign credit is exchanged for sovereign debt. A debt instrument, even a government debt instrument, can be used as a credit instrument by the creditor. In that case, the transaction is an assignment. The original buyer of the bond has paid money (a government credit in his possession) for the government bond (a government debt). The bond holder can trade away the government debt to another party by transferring or assigning the right to receive money from the government (government credit) at maturity of the bond. Nevertheless, the debt is canceled only at bond maturity, not sooner, regardless how many times it is traded and with whom. Although government-issued money is not a government debt, a government credit instrument can be used by market participants in the private sector either to issue credit or to assume debt. The payer of money for services not yet received is a creditor. The receiver of money for services not yet delivered is a debtor. Government, when issuing money, expects no goods and services other than the future payment of taxes in the form of money. Thus government-issued money is a credit instrument for taxes not yet received. When government buys good and services with money, it is spending its tax credit. The transaction does not make money a government debt. Fiat money is government credit and fiat money in the hands of a private entity makes the holder an agent of the government, the ultimate creditor. Holders of fiat money acts as an agent for government credit. The money holder earned the right to be a government credit agent by providing goods and service in exchange for the money, or becoming indebted to a bank who acts as an agent of government credit. Money paid for tax liability is government credit canceled. Money spent for goods and services is assignment of government credit to the money receiving party. Credit drives the economy, not debt. Debt is the mirror reflection of credit. Even the most accurate mirror does violence to the symmetry of its reflection. Why does a mirror turn an image right to left and not upside down as the lens of a camera does? The scientific answer is that a mirror image transforms front to back rather than left to right as commonly assumed. Yet we often accept this aberrant mirror distortion as uncolored truth and we unthinkingly consider the distorted reflection in the mirror as a perfect representation. Similarly, we reflexively accept as exact fidelity the encrypted labels assigned to our thoughts by the distorting mirror of language. Such habitual faulty acceptance is consequential because it is through language that ideas are transmitted and around language that culture develops. In the language of economics, credit and debt are opposites but not the same. In fact, credit and debt operate in reverse relations. Credit requires a positive net worth and debt does not. One can have good credit and no debt. High debt lowers credit rating. When one understands credit, one understands the main force behind the modern economy, which is driven by credit and stalled by debt. Behaviorally, debt distorts marginal utility calculations and rearranges disposable income. Thus debt turns more commodities into Giffen goods, whose consumption increases when their prices go up, and creates what US Federal Reserve Board Chairman Alan Greenspan calls "irrational exuberance," the economic man gone mad. |
