A military historian runs a quite popular and highly respected blog called "Fabius Maximus." While astute at interleaving quite a few factors building situation awareness for military and political realities, FM remains only superficially aware of the nuances of fiat currency, and the policy implications. His latest entry proves that emphatically.
I've corresponded with the author in the past, but to no avail so far, as he is disbelieving that so much "common knowledge" about currency could be so thoroughly wrong. The topic is apparently largely outside his reading area so far, which is, after all, the case for the vast majority of our electorate.
It's a highly professional set of authors and readers, so please help out by commenting directly at the site above, and help educate this part of the military community. Please be constructive and educational, and forgo anything rude, impatient or insulting. What follows is the comment that I left already. I'm including it only in case it is removed by the FM moderator.
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Oh my lord, Fab. If you claim to grasp the concept of situational awareness then you have to go back and ask yourself why you're ignoring the fundamental change in our currency situation since 1933, when we transitioned from a gold-std to a fiat-currency-std. 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/reassemble their personal weapon in the dark? Similarly, you shouldn't try to talk about currency operations without learning at least the simple rudiments of how they actually work.
On a fiat currency regime, there is no "national debt," there's no REAL function of "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, 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.
1) "Fiat" means there's no static metric that a unit of account (currency) is convertible to upon demand. Rather, the unit of account is backed purely and only by the [dynamic] initiative of the public issuing the currency.
2) [A fiat currency issuer doesn't obtain fiat currency from anyone], hence there's no one to "pay it back" to. The goal reduces to maintaining currency supply within tolerance limits, neither too much (contributing to EXCESS inflation) nor too little (contributing to EXCESS deflation, what we have rt now in the USA).
3) The concept of currency revenue is obsolete for a fiat currency ISSUER. In 1933, the entire function of taxes changed, from obtaining currency revenue from gold-hoarding plutocrats, to managing net aggregate demand and shaping it's profile (i.e., taxes as deterrents for specific transaction types).
http://www.curiousevidence.com/(S(cnekbxjj3y4xwimbw2sg12vj))/samples.aspx?id=21
4) You're completely conflating the concepts of foreign currency (Fx) reserves, Treasury bonds, and fiat-currency "deficits."
a) Countries who export to us are paid in $US, 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 the Fed. 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
http://www.newyorkfed.org/research/quarterly_review/1978v3/v3n2article7.pdf
c) A fiat-currency "deficit" is purely an accounting term, denoting the growth in net currency supply used by a growing nation. The fiat deficit is the difference between currency created by Treasury spending and that amount clawed back as federal taxes. The cumulative, so-called, "public debt" is also net private savings, to the penny. Given a monopoly currency issuer, a growing economy can only accumulate net savings (credits) if the issuer commits to net issuance (debits) - they're simply the accounting terms necessary to manage national currency supply.
If you want to at least learn the rudiments of fiat currency operations and reserve banking, here's a Dick&Jane level primer.
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
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
http://www.econ.utah.edu/activities/papers/2006_04.pdf
Marriner Eccles - HEARINGS BEFORE THE 1933 Senate COMMITTEE ON FINANCE
http://fraser.stlouisfed.org/docs/meltzer/ecctes33.pdf
DIRECT PURCHASES OF GOVERNMENT SECURITIES BY FEDERAL RESERVE BANKS - Marriner Eccles, 1947
http://fraser.stlouisfed.org/docs/historical/house/1947hr_directpurchgov.pdf
Can Taxes and Bonds Finance Government Spending? - Stephanie Kelton
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=115128
Excellent Roger! rsp,
ReplyDeleteI read the article earlier today, immediately thought to myself: "don't have to pay much attention to this guy anymore."
ReplyDeleteWent away with a little bit of a sick feeling, thought he was one of the folks that got it.
As Igor's brain (after being transplanted into the Frankenstein monster) famously said: "what good is a brain without eyes to see?"
You start off sounding a bit impatient but well done. I look forward to reading your links.
ReplyDeleteMike,
ReplyDeleteBad link for this:
Marriner S. Eccles and the Federal Reserve Policy, 1934-1951
http://www.econ.utah.edu/activities/papers/2006_04.pdf
@G. Uribe
ReplyDeleteThanks.
Here's an updated link.
http://www.academia.edu/887077/A_Hands-off_Central_Banker_Marriner_S._Eccles_and_the_Federal_Reserve_Policy_1934-1951
Matt, Paul,
ReplyDeletePlease do comment constructively at the FM site. Don't give up trying to educate people.
Military historians might want to reflect on how Nazi Germany financed its employment and rearmament program in the 1930s.
ReplyDeleteHere's a source:
http://www.scribd.com/doc/74667288/Preparata-HITLER%E2%80%99S-MONEY-The-Bills-of-Exchange-of-Schacht-and-Rearmament-in-the-Third-Reich
A bit confusing but if you look through the gobbledygook I think you can see MMT principles at work. Of course, they couldn't just say "we are going to print money" ... they had to set up complicated mechanisms to obfuscate what they were in fact doing.
Also the book: The Wages of Destruction ... The Making and Breaking of the Nazi Economy ... by Adam Toozehas some interesting stuff on this.
Ken,
ReplyDeleteAll governments which only deal in their own currencies basically finance their spending by "printing money". The only difference between printing a bond and getting someone to buy it, and printing a note and getting someone to hold it is detail, such as the interest paid on the bond/note and the maturity. A note is (normally) just a zero-interest zero-maturity bond.
How do you think the allies financed the war against the nazis?
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ReplyDeleteRoger,
ReplyDeleteI think you're slightly wrong to think (if indeed you do) that all 'sovereign currencies' are equally sovereign.
The US is basically the "global sovereign" - the economic top dog and military hegemon. As such the US currency is more 'sovereign' than others.
The US imposes the dollar as the global currency by ensuring that the world's most crucial commodity - oil - is sold in dollars. It does this by supporting oil-producing regimes (Saudi Arabia, Kuwait, etc) and threatening those that don't play along with destruction (Iraq, Iran, etc). It's allies support the US and the dollar in return for the US's support and protection.
Other countries may have their own currencies, but that doesn't mean they necessarily have the same range of options as the US. They can't necessarily run the same current account and budget deficits without facing the possibility of a balance of payments/currency crisis. Their "monetary sovereignty" is constrained by the need to acquire dollars - the true global 'sovereign currency'.
If countries can't exchange their currency for dollars then their currency (and their economy) is as good as dead.
y,
ReplyDeleteI would point out the previous posted article at our US NPR site where they had the Iranian guy lamenting that they had to buy their dairy products in USDs.
Again I would think that this is not military hegemony that is fomenting dairy products in Iran being sold in USDs.
This seems like the Iranians are screwing their own people if their dairy industry is domestic...
look at this spreadsheet and you can see all the countries that have all the USD NFAs:
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
Most of the NFAs are with Japan and China and I dont see these nations as under US "hegemony".
rsp,
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ReplyDeleteMatt,
ReplyDeleteChina is clearly the US' major rival now on the world stage, hopefully they'll continue to cooperate.
"Hegemon" might be too dramatic a term. How about no.1 global military superpower?
Japan has been pretty much under the US' thumb, dependent on its protection, and a US ally since the end of the second world war.
"Again I would think that this is not military hegemony that is fomenting dairy products in Iran being sold in USDs"
The Iranian currency is currently collapsing because of US-led international sanctions aimed at crushing the Iranian economy and toppling the regime.
"I think you're slightly wrong to think (if indeed you do) that all 'sovereign currencies' are equally sovereign."
ReplyDeleteSeems irrelevant? Any sovereign freedoms sum to freedom to explore national options. How vigorous, clever or successful a populous is in exploring it's options is a multi-faceted. The key point here is that managing a sovereign, fiat currency supply is never the overwhelming obstacle that so many make it out to be.
We're not in the business of excuses, only the business of net outcomes.
here's my last attempt to close the baffling exchange ( http://fabiusmaximus.com/2012/10/10/america-debt-43894/#comment-53693 ) with Fabius Maximus;
ReplyDeletedon't be surprised if he moderates this out of the comments list
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Verdicts? God? Fab, your behavior here is bristly and baffling.
You started out with a verdict stating that fiat accounting deficits were foolish. I responded with the most concise statement that I could manage, summarizing the evidence from multiple economists, bankers, non-economists and even former Federal Reserve Chiefs, that your verdict was operationally unfounded - and I provided the relevant references.
Since then you've repeatedly stated that any dissent is a claim that "all economists" are wrong, despite the supplied references showing that a steady stream of economists were always in dissent to what you claim "everyone knows."
We have the testimony from Julius Caesar that "creating is better than learning" and that "doing" things that matter is better than "being" noted as a learned expert.
http://www.brainyquote.com/quotes/quotes/j/juliuscaes156552.html
Yet you as the modern channel of Fabius Maximus are now stating that creative options can only be explored after we wait for permission from learned experts! John Boyd must be turning over in his grave.
Shot down in flames Roger!!!!
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteRoger, I agree with what you're saying.
ReplyDeleteHowever...
MMT describes the monetary system as being hierarchical, where the highest level represents the widest range of available monetary 'options'.
What holds true within a closed national economy (or multinational economy in the case of the EU) also holds true within the global economy - where different countries hold different positions within a global monetary hierarchy.
In the current system the US holds the top spot. Other countries' range of monetary options decreases as you go down the hierarchy, until you reach countries such as Zimbabwe right at the bottom.
The question is why different countries occupy different positions in this global hierarchy, and why the US sits at the top.
MMT claims that the top spot in monetary system is reserved for the organisation which can unilaterally impose debts on the rest of the system and specify in which form those debts are to be paid - i.e. the government.
By imposing the dollar as the currency in which the world's most crucial commodity - oil - is sold, the US effectively imposes debts on the rest of the world. That is, it demands that the rest of the world acquire its currency in order to purchase oil, without which no country can currently operate. In effect the US taxes the rest of the world.
Just as the government's ability to impose debts derives from its imposed monopoly of force (within its borders), so the US' ability to 'tax' the rest of the world derives from its military dominance.
However, just as a democratically elected government combines coercion with popular consent, so the US combines military dominance with the consent of its allies and client states.
Now the US may be one of the most productive and creative countries on the planet, with extraordinary natural resources, and as such will always have a preeminent position in the global hierarchy. However without its ability to enforce the 'dollar tax', its range of available monetary options would be greatly reduced.
In a national sovereign currency system (the kind described by MMT), if your liabilities can't be converted into the sovereign's liabilities (currency) then they are basically worthless outside of your particular organisation/community/clan/gang/family/circle of friends.
ReplyDeleteSimilarly, within the global monetary system, if a nation's currency/liabilities/debt can't be converted into the "global sovereign's" currency then they are are basically worthless outside of that nation's borders. And their value within those borders will be strictly limited by the government's ability to tax the domestic population and the domestic population's desire or need to save in that currency.
and by "global sovereign currency" I mean the dollar.
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteSo you could say that the only truly "nonconvertible" currency is the dollar.
ReplyDeleteEven then, its position is contingent on the US' continuing ability to impose its authority upon the rest of the world.