Saturday, November 10, 2012
A Very Condensed Introduction to Currency Operations, for Erskine Bowles
If you claim to grasp the concept of situational awareness then you have to go back and ask about the fundamental change in our currency situation that occurred in 1933, when we transitioned from a gold-standard to a fiat-currency-standard. It’s quite a fundamental change, with trivially obvious consequences. Anyone not at least looking into that situational change is doing their country a grave disservice.
Would a military deploy soldiers who were not able to fully disassemble and reassemble their personal weapons in the dark? Similarly, no citizen should try to discuss fiat currency operations or fiscal policy without learning at least the simple rudiments of how they actually work.
What follows is a very condensed summary of much of the content found at Mosler's Mandatory Readings and from follow-on references where noted.
1) On a "fiat" currency regime, there is no such thing a “national debt,” there is no REAL purpose for “balanced fiat,” and it’s plain ignorant to directly compare the budget of currency users (e.g., Greece or, say, Nebraska) to currency issuers (e.g,. USA, UK, Sweden, or even the ECB [european central bank]). Countries using the “euro” are not sovereign masters of their own currency. Comparing them to sovereign currency issuers like the USA is worse than comparing apples & oranges, it’s more like comparing predators & prey.
2) “Fiat” means there’s no static asset metric that a unit of account (currency) is convertible to upon demand. Rather, the unit of account is backed purely and only by the initiative of the public issuing the currency - and it's conversion rate to static assets must float, by definition. Simple network dynamics dictate that to make liquidity co-scale with expanding options, a growing population and economy must steadily increase fiat incomes and fiat-currency-savings, NOT maintain buying power of the unit of account. If population & economic options are increasing, then price stability must float, although hopefully within variance tolerance limits allowing continuously smooth transitions instead of wasteful gyrations.
3) Fiat currency isn’t obtained by the issuer from anyone, hence there’s no one to “pay it back” to. The fiscal goal for a nation using fiat currency reduces to maintaining adequately distributed currency supply within tolerance limits, neither too much (contributing to EXCESS inflation) nor too little (contributing to EXCESS deflation, what is we have had in the USA from 2008-2013).
4) The concept of currency revenue is obsolete for a fiat currency ISSUER. In 1933, the entire function of taxes was changed, from getting revenue from a net currency supply dictated by gold-hoarding plutocrats, to managing net aggregate demand and shaping it’s profile (i.e., taxes as deterrents for specific transaction types).
5) Do not conflate the concepts of foreign currency (Fx) reserves, Treasury bonds, and fiat-currency budget “deficits.”
a) Countries who export to the USA are paid in $US, and THEY HAVE ALREADY BEEN PAID IN FULL! Their payments are sitting in accounts at the US Federal Reserve bank – as Fx Reserves. We DO NOT BORROW OUR OWN FIAT CURRENCY FROM ANYONE ELSE! It’s actually impossible, since the US Treasury is the monopoly issuer of $US.
b) As part of the double-entry accounting process for acknowledging currency creation (i.e., an accounting entry w/o a corresponding debit), we use TTL Accounts & T-bonds to drain banking-reserve notation from the accounts of private banks at our Central Bank, the Fed (Federal Reserve Bank). T-bonds are just a habit left over from the gold-std days. They’re simply a policy decision to spend more fiat, not to borrow fiat.
“The Treasury tax and loan account system was designed as a mechanism for minimizing the dislocations on bank reserves and the money market arising out of the sizable and irregular transfers between the Government and the public.”
Treasury tax and loan accounts and Federal Reserve open market operations
c) For countries using a fiat-currency-standard, a fiscal “deficit” is purely an accounting term, denoting the growth in net currency supply used by a growing nation. The fiat deficit is the yearly difference between currency created by Treasury spending and that amount clawed back as federal taxes. The cumulative, so-called, “public debt” is therefore equal to net private currency-savings, to the penny. Given a monopoly currency issuer and tax authority, a growing economy can only accumulate net currency-savings (credits) if the issuer commits to net issuance (debits). So fiscal "deficits" and "debts" are simply the accounting terms necessary to manage national currency supply. When the same words have different meanings in different contexts, it's YOUR responsibility to use them properly. That reality is part of what we call semantics. For efficiency, every existing language maintains the right to assign context-specific meanings to words. That makes language an efficient, agile tool, yet the utility of every tool depends upon intelligent use.
If you want to at least learn the rudiments of fiat currency operations and reserve banking, here’s a Dick&Jane level primer.
After that, please read up on Marriner Eccles, the Fed chief who oversaw our transition from the gold std to our existing fiat currency.
Marriner S. Eccles and the Federal Reserve Policy, 1934-1951
Marriner Eccles – HEARINGS BEFORE THE 1933 Senate COMMITTEE ON FINANCE
DIRECT PURCHASES OF GOVERNMENT SECURITIES BY FEDERAL RESERVE BANKSMarriner Eccles, 1947
For those already steeped in financial semantics, these topics are tediously reviewd in full by Stephanie Kelton.
Can Taxes and Bonds Finance Government Spending?
Can anyone get Erskine Bowles to read this? If so, can you also determine whether he knows the linguistic definition of semantics?