sources of obligation, sources of value

March 16, 2016 1:49 AM

an introduction to fiat money (pdf) by Steve Randy Waldman - "Self-reinforcing bootstrap dynamics hold as strongly for a king's token as it would for any other thing, but much more stably so, since the king can reinforce and assure the stability of his token so long as he retains the political capacity to coerce or persuade payment of tax." (via)

"The problem was that if the subsistence base was capable of supporting the population entirely, colonial subjects would not be compelled to offer their labor-power for sale. Colonial governments thus required alternative means for compelling the population to work for wages. The historical record is clear that one very important method for accomplishing this was to impose a tax and require that the tax obligation be settled in colonial currency. This method had the benefit of not only forcing people to work for wages, but also of creating a value for the colonial currency and monetizing the colony. In addition, this method could be used to force the population to produce cash crops for sale. What the population had to do to obtain the currency was entirely at the discretion of the colonial government, since it was the sole source of the colonial currency." —Matthew Forstater on monetizing colonial Africa from Taxation and Political Accumulation (pdf)

the role of the banking system

• Banks' incentives are to subsume all spheres of human activity into income-generating enterprises to which funds can be profitably advanced.
• It's an overstatement and a bit conspiratorial to say that banks are 'responsible' for the increasing colonization of all aspects of life by market management and control. But their incentives are certainly consistent with these developments.
• (Consider how higher education has changed in the course of a generation from a good that was supposed to be insulated from market forces to a certain degree to a debt-financed enterprise rationally undertaken only if it will yield a financial return. The need of educated graduates to service or repay student loans helps support the currency!)

fiat money is an activity, not a thing

• For the most part, real economic value cannot be stored, it must be produced and reproduced every day.
• Money as a store of value is a convenience, an easy, durable claim on future value. But it is only a claim. That future value will still need to be produced.
• Fiat fails when the sovereign that manages it fails.
• A healthy sovereign can do a lot of borrowing / printing if it wants to, and support the value of its currency with high interest rates or taxation.
• For 'debasement' to be fatal, an issuer must have reached limits, in terms of the real productive capacity of the economy, its ability to incentivize or mobilize use of that capacity, or its political capacity to tax to support the value of the currency.
• Fiat failure is never due to 'printing' alone. It represents an imbalance between printing and capacity, which usually reflects the desperation of a state already trapped by obligations it has no capacity to meet. Fiat failure is a symptom of a sovereign that is already in crisis. (Ex: Weimar, Zimbabwe, confederacy)
• The serious problems with fiat currency are ethical. Fiat currency management is an incredible lever for social control, and people at the center, in government or in the banking system, have many opportunities for corrupt self-dealing. Fiat value depends upon people falling into obligation, which carries with it an unpleasant whiff of bondage.
• Improving on fiat currencies, via cryptocurrencies or any other means, is a worthy project. But I hope you'll understand how fiat currencies work — and they do work — and focus on remedying their serious ethical deficiencies.

on that note...

• Social credit is the answer - "The solution is obvious: Social Credit. Adopt the policies of the Social Credit Party of Alberta in the 1930s. Adopt the policies of Upton Sinclair's campaign for Governor of California in the 1930s. Adopt the policies that are taken as a matter of course and are in the background of Robert A. Heinlein's 1947 novel Beyond This Horizon.

Central banks should, instead of taking all the revenue from seigniorage they create and transferring it all back to the Treasury, calculate each quarter how much of the seigniorage they hold should be distributed to citizens in the form of that quarter's helicopter drop. I am not certain about how the legal-institutional constraints bind the BoJ, and ECB, and the BoE. I believe that the Federal Reserve could start such a policy régime today:

1. Incorporate–for free–everybody with a Social Security number as a bank holding company.
2. Let everybody then have their personal bank holding company join–again for free–the Federal Reserve system as a member bank.
3. Offer every such personal bank holding company a permanent long-term open-ended infinite-duration zero-interest line-of-credit to draw on, up to some set maximum nominal amount.
4. Raise the amount of the line-of-credit maximum every quarter by that quarter's desired helicopter drop.

The same institutional forces that have, since the selection Paul Volcker, kept the Federal Reserve focused on avoiding an inflationary spiral would still bind. There would be no way to gimmick such a Social Credit system to turn it into a giveaway to the bankers. It would give the Federal Reserve the power to engage in the one policy that nearly all economists are confident will always have traction on nominal demand. Once the Federal Reserve was off and rolling, other central banks would, I think, quickly find mechanisms within their current institutional-legal competence to accomplish the same ends.

• Central banks beat Bitcoin at own game with rival supercurrency - "A central bank crypto-currency is coming soon, leap-frogging Bitcoin, and that spells big trouble for the finance industry."


• New Zealand plans to give everyone a 'citizen's wage' and scrap benefits - "We are keen to have that debate about whether the time has arrived for us to have a system that is seamless, easy to pass through, [with a] guaranteed basic income and [where] you can move in and out of work on a regular basis."

more from SRW...

• Perspectives on a Universal Basic Income (pdf) - "A sociotechnological dividend: There is no evidence that today's 'winners' work harder or need to work harder than the extraordinary innovators or businessmen of the past. The vast increase in wealth that comes from a relatively few getting an ever greater share of an ever larger pie is not 'economically efficient' (i.e. necessary to inspire production and growth), but simply a matter of happenstance. If this is right, then the economic case for changing our institutions to alter this happenstance, not-so-great outcome is strong. Giving everybody a 'property right' on an equal share of some portion of aggregate output is a facially fair way to change our institutions in a way that resonates and is consistent with our practice of modern capitalism. The dividend stream generated by such a universal shareholding would look identical to a universal basic income."
• MMT stabilization policy - "A government's solvency constraint ultimately lies in its political capacity to levy and enforce the payment of taxes [which] depends first and foremost on the quality of the real economy it superintends. The value that a government is capable of taxing if necessary to sustain the value of its obligations increases with the value produced overall. A government that wishes to be solvent should first and foremost interact with the polity in a manner that promotes productivity. Secondly, the political capacity to levy taxes depends upon either the legitimacy of or the coercive power of the state. A government that wishes to sustain the value of its obligations must either gain the consent of those it would tax or maintain an infrastructure of compulsion... I like to imagine excessively coercive regimes are inconsistent with overall productivity."
• Engineering Economic Security - "Steve Waldman speaks on decentralized mechanisms to provide economic security that could be implemented on Ethereum. He reviews how fraternal organizations, labor unions, and churches helped people in the past, and compares these organizations with traditional mechanisms."
• Cryptoasset Valuation for Designers (pdf) - "Steve Waldman speaks on valuation of cryptographic assets. He helps you think how to design assets whose values, which are likely to change over time, offer the valuations and exposures you desire."

also btw...

• Ordoliberalismus and Ordovolkismus - "While Austerian fear and suspicion of countercyclical monetary policy is rooted in the same Ordoliberal and Ordovolkist ideological fever swamps as objections to countercyclical fiscal policy, it is much weaker. It is much weaker because fundamentalist cries for an automatic monetary system—whether based on a gold standard, a k%/year percent growth rule, or John Taylor's interest-rate rule—have crashed and burned so spectacularly so many times that they lack even the barest surface plausibility... Thus one way around the Ordoliberal and Ordovolkist ideological blockages is to redefine a sufficient quantum of countercyclical fiscal policy as monetary policy. I call this 'social credit'. Others call it 'helicopter money'. Move the central bank's seigniorage revenue stream outside of the government's consolidated budget. Assign the disposition of this revenue stream to the central bank. It is not first-best. It may be good enough to do the job."
• The 'Strong Case' Against Central Bank Independence Critically Examined - "The deficit obsession that governments have shown since 2010 has helped produce a recovery that has been far too slow, even in the US. It would be nice if we could treat that obsession as some kind of aberration, never to be repeated, but unfortunately that looks way too optimistic. The Zero Lower Bound (ZLB) raises an acute problem for what I call the consensus assignment (leaving macroeconomic stabilisation to an independent, inflation targeting central bank), but add in austerity and you get major macroeconomic costs. ICBs appear to rule out the one policy (money financed fiscal expansion) that could combat both the ZLB and deficit obsession... does that mean we have to be satisfied with the workarounds? One possibility that a few economists like Miles Kimball have argued for is to effectively abolish paper money as we know it, so central banks can set negative interest rates. Another possibility is that the government (in its saner moments) gives ICBs the power to undertake helicopter money. Both are complete solutions to the ZLB problem rather than workarounds."
• Are Central Banks Really Out of Ammunition? - "[I]f our problem is inadequate nominal demand, there is one policy that will always work. If governments run larger fiscal deficits and finance this not with interest-bearing debt but with central-bank money... The option of so-called ‘helicopter money’ is therefore increasingly discussed. But the debate about it is riddled with confusions."
• Reflections on Macroeconomics Then and Now - "Does [Keynes' General Theory] remain relevant? Certainly. Just a week ago I took it off the bookshelf to read parts of chapter 23, 'Notes on Mercantilism, the Usury Laws, Stamped Money and Theories of Under-Consumption'. Today that chapter would be headed 'Protectionism, the Zero Lower Bound, and Secular Stagnation,' with the importance of usury laws having diminished since 1936."
• Confronting the Fiscal Bogeyman - "The solution is straightforward. It is to fix the problem of deficient demand not by attempting to further loosen monetary conditions, but by boosting public spending... in research, education, and infrastructure... Such investments cost little, given low interest rates. Productive public investment would also enhance the returns on private investment... Ideological and political prejudices deeply rooted in history will have to be overcome to end the current stagnation. If an extended period of depressed growth following a crisis isn't the right moment to challenge them, then when is?"
• The Politics of Anger - "Mainstream politicians will not regain lost ground until they, too, offer serious solutions that provide room for hope. They should no longer hide behind technology or unstoppable globalization, and they must be willing to be bold and entertain large-scale reforms in the way the domestic and global economy are run... It was the New Deal, the welfare state, and controlled globalization (under the Bretton Woods regime) that eventually gave market-oriented societies a new lease on life and produced the post-war boom. It was not tinkering and minor modification of existing policies that produced these achievements, but radical institutional engineering."
• FDR's New Deal was the antithesis of ideology - "FDR tried everything: Corporatism, Keynesianism, Agricultural subsidies, Antitrust, Social insurance, Unionism, and he reinforced what seemed to work. The New Deal policies that survived became an ideology, but they started out as the most ruthless pragmatism."

posted by kliuless (5 comments total)

Thanks Kliuless. Will have to dig into this.
posted by pharm at 3:02 AM on March 16, 2016

I'm no austerian or inflation hawk, but I do worry that current monetary stimulus is having a counter-productive effect.

The theory is that increasing the money supply by low interest rates, negative interest rates, and quantitative easing will boost growth. The mechanism is that people borrow money and either spend it as consumers, or invest it into their businesses. Either way economic activity takes place that would not otherwise have happened at this time: consumers goods are bought, industrial plant is bought, workers are hired.

What actually seems to be happening in the UK is that most of the new money seems to be going into the existing property market. That pushes up prices and rents. Consumers then have *less* money to spend as their salary is going into increased rents and mortgage payments. With spiralling property prices, investors have less incentive to put money into businesses since they can more lucratively put it into buying existing property.

If so, instead of boosting growth as the textbooks say, loose monetary policy may be retarding growth. But since countercyclical fiscal policy (Keynesian spending) is even more politically unacceptable, the policymakers is to keep the money taps on as high as they can. But what if the thing that is supposed to helping the problem is actually worsening the problem?

This would explain the below-average growth instead of catch-up growth, and the mysterious lack of inflation.

Unfortunately if so, there doesn't seem to be an easy way out. Keep the money taps open and growth will get slower and slower. Close the money taps and you risk deflation, recession, and wiping out mortgaged homeowners.
posted by TheophileEscargot at 3:33 AM on March 16, 2016 [1 favorite]

You could point the money taps elsewhere?

If instead of the current QE programme, you poured that new money into a government owned investment bank which funded large scale infrastructure projects and improvements?

If (and this is just a politically impossible example) you used your QE funded investment bank to fund maintenance and efficiency improvements in public transport (I'm talking mainly rail because I know the rail industry, but you could do similar things for housing, to potentially greater benefit) but applied a rule that said projects funded by this bank must use locally sourced materials (i.e. steel from UK steel plants, signals and rolling stock from UK based manufacturers etc.) and that any resultant new infrastructure be operated on a not for profit basis, then you would have money going to build up productive industries and going into the economy bottom up instead of top down. That money lowers transport costs for everyone (or, again, housing) and because it is basically a super generous loan from the government investment bank you can recoup it and destroy the money when you need to restrict the supply (which is one of the stated goals of the QE arrangement and an argument potentially against helicopter money).

It's politically impossible of course because the current government are busy trying to privatise everything (schools, houses, the NHS, the last remaining dregs of the railway) so a plan that requires public ownership is never gonna fly.

The alternative of course is to institute a parenthesis tax on me, which would probably knock out the national debt fairly swiftly.
posted by Just this guy, y'know at 3:45 AM on March 16, 2016 [1 favorite]

How the heck am I supposed to read all of this before commenting soon enough to get in on the conversation? It's like getting a week's homework, due tomorrow. ;-)
Metafilter is weird.
posted by MikeWarot at 4:40 AM on March 16, 2016

That, and the dozen or so unsupported question-begging points near the beginning, make it more of a "GYOFB" post than a Metafilter post.
posted by Pinback at 4:54 AM on March 16, 2016 [1 favorite]