A few additional notes on the previous post.
One issue that always arises is that of “debt-free money.” I myself have raised this issue in the past. But, as we saw in the previous post, money is debt, therefore there can be no such a thing as debt free money. Money by definition is an IOU. As we saw, money is always a credit-debt relationship, recorded on government balance sheets. That’s simply a consequence our medieval double-entry bookkeeping system. If there were no debt, then there would be no money. Since money is debt, as we saw previously, it is even possible to say there is such a thing as debt free money?
Randall Wray, one of the leading economists working in this field, says “no way.” Debt-free money is an impossibility, like a one-sided coin. He writes: “…Money is always and everywhere else an IOU…All money… is debt. It is on the liability side of issuer and asset side of holder. You cannot change that through confusing semantics.”
Wray calls proponents of debt-free money “cranks” and wrote a series of posts last year pointing out the impossibility of debt-free money. I suppose proponents of debt-free money are just as misguided as those who claim that “the debt” will mean entire nations will all be living in abject poverty in the future due to paying off all their debts (to who, Martians?)
Randy Wray: Debt-Free Money and Banana Republics (Naked Capitalism)
Randy Wray: Debt-Free Money and Banana Republics, Part II (Naked Capitalism)
Randy Wray: The Value of Redemption (Debt Free Money, Part 3) (Naked Capitalism)
Randy Wray: American Colonial Currency (Debt Free Money, Part 4) (Naked Capitalism)
Some people wonder, can we not spend money into the economy without it being somehow recorded as a government debt?
The problem is simple – adding money into the economy under the current system adds to the “national debt” which as we saw, are only interest-bearing assets recorded by the Fed. Paying off the debt merely consists of exchanging securities for dollars by transferring between accounts. Nevertheless, “fiscal conservatives” can easily handicap any government measures by demagoguery over “the debt we’ll leave to our grandchildren!!!” It’s a powerful message to the average Joe Sixpack, and its hard to counter, especially with the eye-popping numbers used in the modern U.S. economy.
In other words, can the government spend on a bunch of stuff without it being a corresponding liability somewhere on the books that gets “fiscal conservatives” all hot and bothered?
The answer appears to be no.
Wray argues that we cannot suspend the rules of accounting, and have any validity to calling what would be issued under such a system “money.” He argues that redeemability is an essential feature of money. Issuing “stuff” as wealth with no corresponding relationship to pay it back, either as a loan or thorough taxes, is not issuing money. Sure, you can use a commodity, like gold or plastic or paper, but is is not money unless it is recorded on a balance sheet somewhere, and can be used to extinguish the tax liability. For example, if you hand your jacket to a coatroom clerk and receive a token in return, it is money. Why would you just get a coatroom token with a claim on nothing? That’s not money. What use is it? Wray argues that redeemability is a key feature of any money. If we did not record this debt against the government balance sheets, there would be no tax liability to “redeem” as money.
Imagine a cloakroom that issues “debt-free” cloakroom tokens. These look just like the normal token issued by a cloakroom, but they are not debts. You can return them to the cloakroom, but you don’t get a coat. The cloakroom attendant refuses to recognize the tokens as debt. They are your assets, but not cloakroom debts.
What is a “debt-free” cloakroom token? It is a piece of plastic, a piece of cardboard, a piece of paper. It is “wealth-based”, not “debt-based”. Its value is determined by the value of the plastic, cardboard, or paper.
Imagine a sovereign that issues “debt-free” coins. They look like normal coins, but when you take them back to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt—as a promise to redeem yourself in tax payment–but rather as a bit of base metal.
Why would you want the debt-free cloakroom token? Why would you want the debt-free coin? Only for its wealth-value (whatever that might be). It is not money.
As MMT says, “taxes drive money”. If you cannot use the sovereign’s token to pay your taxes, it is nothing but a piece of paper, hazelwood stick, or metal. If you cannot redeem the token for your coat, or for the taxes you owe, why would you want it?
A “debt-free money” would not be evidence of a debt. What would it be?
Wray goes on to argue that issuing a bunch of “stuff” with no credit-debt relationship is not money. They might just as well issue bananas:
…Maybe a banana? I like bananas. If the sovereign or cloakroom attendant offered me a token banana, I’d take it. I wouldn’t worry whether I could redeem it. I’d eat it. If I weren’t hungry, I might exchange it for a newspaper at the kiosk. Maybe the news agent is hungry for a banana.
But I don’t find it useful to call bananas money. Even if I can trade them for newspapers. Bananas are not “issued”. They are cultivated, harvested, transported, marketed. They’ve got value. But they are not money. Calling bananas money is a perversion of the language.
Instead of bananas, he might have better have used cacao beans as an example. Cacao beans were commonly used as money in the Aztec Empire. Potatoes are another great example. Stable and long-lasting, potatoes have been used as medium of exchange in peasant villages. One Russian farmer even tried to create potato-backed money.
None of these are likely to help us, though. I know in Life Inc., Douglas Rushkoff describes money being created by slips issued for grain delivered to a central repository and used as money. He argues against the idea of “centralized money.”
Towns that had been in shambles since the fall of the Roman Empire and had lived under strict feudalism were finally coming into their own. This all hinged on the use of local currencies — grain receipts — through which people transacted. They were what we would now call “demurrage” currencies that were earned into existence. Towns ended up creating more value than they knew what to do with! They started investing in their infrastructure and their windmills and their water wheels; and also in their future in the form of cathedrals and other tourist attractions…The Vatican and central Rome did NOT build the cathedrals. The funds came from local currency, which was very different than money as we use it now. It was based on grain, which lost value over time. The grain would slowly rot or get eaten by rats or cost money to store, so the money needed to be spent as quickly as possible before it became devalued. And when people spend and spend and spend a lot of money, you end up with an economy that grows very quickly.
Beyond Life Inc: Talking with Douglas Rushkoff (Reality Sandwich)
As much as I enjoy Rushkoff’s work, this is one area where I think he’s way off base.
I think people are still getting hung up on the “medium of exchange” aspect. They still see dollars as being like gold coins that we use to grease exchange operations and solve the famous “double coincidence of wants” problem. As such, they can be anything, including slips of paper. But as we’ve seen, money is more than that.
Imagine if we had a “super counterfeiting” machine. It somehow defeats all the checks put in place to verify the veracity of a dollar bill, from the inks to the serial numbers to the paper. We could then issue this “money” with no corresponding debt. We would, in effect, have “debt-free money.”
I think we can see why this is wrong. Sure, we can present this at a store, and the clerk might even take it, being none the wiser. But, by just being able to crank out this “debt free” money at will, we will almost certainly cause inflation, and if we run the “super counterfeiting” machine fast enough, we would probably cause a lot of inflation. All this new “money” would be floating around, but with no limit on its creation. There is no record of it on the books. That’s why it is illegal.
Imagine if some of these bills got back to the government. How would they account for all this new money? They would probably shred it. Or, if they were so impressed by the accuracy of our new machine that they decided our new money press was worth continuing to use (essentially turning us into a mint), they would record every dollar we printed on their spreadsheets, meaning we could use them to pay our taxes as well as pay for stuff. Thus, the system would be in balance again. But we would not have “debt-free” money.
So “debt free” money is sort of like counterfeiting as far as I can tell.
[The debt-free money cranks] argue that the irrational fear of government debt is what constrains our government spending; we cannot spend enough to get the economy growing because the outstanding stock of federal government debt prevents Congress from allocating more funding…Hence the conceit is that if we found another way—printing debt-free money—to finance spending without issuing more debt, Congress would jump at the chance to spend more.
And if government would spend more, then we wouldn’t need so much private debt to keep the economy afloat. While I’m somewhat sympathetic to this view of political realities (although I do not believe Congress would start up the printing presses), the operational realities are quite different from what is imagined.
Our debt-free money folks…believe that government first receives taxes, or asks banks for loans, and then it spends. They want to avoid sending government to banks to borrow bank money, for which banks charge interest. Government then supposedly spends the bank deposits created through the bank loans, and then has to either tax or borrow more bank money to pay the interest.
But that is not true. Government cannot spend “bank money”; it can only write checks on its deposit account at its central bank. What it spends is central bank reserves. Central bank reserves are the liability of the central bank—which is a branch of government.
When Treasury sells bonds to banks, it is not borrowing bank money. Again, it cannot spend bank money so there would be no purpose in borrowing it. Banks that buy bonds must use central bank reserves to purchase them; the central bank debits bank reserves and credits the Treasury’s deposit at the central bank. The Treasury spends central bank money, the liability of the central bank. As the central bank is a branch of government, it is the government’s own IOU that the Treasury is spending.
Indeed, the only way the Treasury can spend is by writing a check on its account at its central bank. All Treasury spending takes the form of spending central bank IOUs. It is always “debt-financed” spending, using government debt.
Telling the Treasury to stop selling bonds will not stop the government from going into debt…
Wray argues that what people are really upset about is having to pay interest to the bankers on the money we issue. He argues that since debt-free money is impossible, we just need to adopt a zero interest rate policy (ZIRP) forever to solve that problem:
Debt-free stimulus, or more generally a debt-free government finance spending proposal, actually requires interest payment on debt, unless the central bank adopts a permanent policy of ZIRP. Either the Fed or the Treasury must pay interest on debt to avoid ZIRP. We can have the Fed issue the debt rather than the Treasury, but it is still debt and it still pays interest. Or we have permanent ZIRP. This is why I made the claim that all debt-free money proposals reduce to permanent ZIRP.
My point is that we use double entry book-keeping, and if “money” (however defined) is someone’s financial asset then it is another’s liability. Call it a “credit” (from the point of the view of one holding it), or a “debit” from the other’s point of view; or a debt; or a liability. What debt-free monetary cranks insist is that the money they want the government to create will show up only on the holder’s balance sheet as an asset, with no liability on anyone’s balance sheet. That is what I object to. Some argue that the Treasury, itself, treats coins as “equity”, not “debt”. Fine. Equity is on the liability side of the balance sheet. Twist and mangle the language all you want. But at least do the balance sheets correctly.
Wray argues that a lot of the proposals about “debt free” money on the table rely upon a debt-for-equity swap at some point. The debt is merely relabeled as equity–voila, no more debt! After all, if we hold “equity” in something, that sounds a lot better than holding “debt.” Wray considers this as simply a matter of semantics, and not a serious “debt free” money proposal.
Changing the terminology from “debt money” to “liability money” is of course possible. By the same token we could instead invent a definition of “debt” that excludes Treasury liabilities, too. Treasury liabilities such as bills and bonds are much like the Fed’s liabilities: both are presumably backed by the full faith and credit of the Congress and both pay interest. We could invent a new term to cover all such liabilities, replacing the usual term, which is debt. I’m open to suggestions from our wordsmiths.
Yves Smith adds:
…any financial asset is someone’s else’s financial liability. This is ever and always true…Some readers sought to depict “equity” as a way to square the circle, that they could have an asset that is not a liability to some other party or entity.
The stock you hold (if you do [own] shares) is most assuredly a liability. Go look at any corporate balance sheet. It is not on the asset side of the ledger. Equity is a residual claim on a company’s assets and the cash flows they generate. They are the most junior. Equity is an extraordinarily ambiguous legal claim, to the degree that [entrepreneurship] expert, Professor Amar Bhide at Fletcher, has long argued that it is not appropriate to be traded on an anonymous basis…
Another issue, which seems to pervade discussions about “money” is that people want “money” to be a stable store of value over time. Na ga happen, ever. Any financial asset, and money is a financial asset, is subject to all sorts of vagaries. Physical assets are no safer. That prime [coastal] real estate may be under water in 20 years. Gold has been volatile (just look at its price chart in any currency from 2008 till now) and also has different values in different settings…The desire to have money be concrete seems to be linked in many cases to the enthusiasm for gold or gold-currencies. But gold’s value isn’t enduring or fixed in any way; it’s value depends on the structure of social relations…
Like anything else, “value” is what others are willing to pay for it. After 2008, that $500,000 house was now “worth” something more like $150,000. Where did that $350,000 go? And don’t forget entropy!
Another hang-up I always hear is that money can be created “out of nothing!” But as we see, money is not a “thing,” it is a social relation, and thus has always been created out of nothing, just like a new vocabulary word (“that word was created out of nothing!”), or points on a scoreboard. The U.S. government was created “out of nothing” too–essentially pieces of paper (the Declaration of Independence, the Constitution). The corporation was created “out of nothing” as well–it’s just a legal construct with an existence on paper.
If money were not created “out of nothing,” how else could it be created? Digging stuff out of the ground? It makes a bit more sense to index it to something like fossil fuels, which provide the energy that underpins our economy. The problem is, not everything in the economy is “stuff” made from energy; some of it is services, or ideas. If you pay me for busking on the subway or cutting your hair, we really didn’t use that much more energy. And if I invent a new type of engine, that knowledge is worth at least as much as the fuel poured into it. Just the name “Coca-Cola” and the recipe is worth more than all the bottling plants and office buildings of the company all over the world. The knowledge of how to build a fire is “worth” as much as the sticks or the kindling; the labor to build a house as valuable as the materials. We need enough money for the things we wish to transact with in money, not just for the amount of concrete durable goods we can produce. Don’t forget things like insurance and futures contracts.
Besides, the banks don’t create money out of nothing; they draw on their reserve accounts (checking accounts) at the Federal Reserve. Fractional reserve banking does create more money from deposits, on the idea that not everyone will want their deposits at once. The issue here, however, is what fraction can be lent out as deposits. It currently stands at 10%. If we were to up the reserve requirements, money creation would go down. Would that be a good thing?
The interest paid to the banks is the real issue. As we saw, we cannot spend money into the economy without creating debt. But is it necessary for students to go heavily into debt to fund their education, or homeowners to go broke paying for inflated real estate prices? Do borrowers have to pay usurious credit card rates to make up for their lost incomes? As Michael Hudson has argued, the interest money paid to the banks is a net loss from the productive economy, even though we register enormous bank profits as a net gain.
By the way, that’s another thing to consider the next time you hear about how the rich got there though “hard work.” As we saw, bondholders receive additional money for holding bonds through mere keystrokes. How are they getting rich through “superior talent and hard work?” In fact, financial instruments like this are the main way people get rich over time. Keep in mind that bonds can be passed own through generations tax-free.
Another issue might be actually offering negative interest rates. This would essentially be, as I understand it, demurrage currency as mentioned above–money that loses value over time unless it is spent. Demurrage currency was another popular proposal to deal with money shortages (the “Miracle of Wörgl”). Of course, this would apply only to money kept in bank accounts, not to pieces of paper, and such a proposal might invite hoarding. This is why it’s linked to ideas to get rid of cash entirely. But is seems to me that people would just flee to some commodity not controlled by government interest rates, such as gold and silver (where there really would be a huge spike in prices).
Fear of government is the hangup here. People don’t trust governments. No cash means a record of every transaction, and governments are now pushing this to make us “safer.”
A final issue involves the issuance of bonds. As I pointed out, future generations will not only be the debtors, but also the creditors, otherwise, who would we all the money to? But I conveniently glossed over the issue of who gets the money in the future. The redistributional effects are the real concern here, not the debt per se. Wikipedia has a good summary:
- For every dollar of debt held by the public, there is a government obligation (generally marketable Treasury securities) counted as an asset by investors. Future generations benefit to the extent these assets are passed on to them.
- As of 2010, approximately 72% of the financial assets were held by the wealthiest 5% of the population. This presents a wealth and income distribution question, as only a fraction of the people in future generations will receive principal or interest from investments related to the debt incurred today.
- To the extent the U.S. debt is owed to foreign investors (approximately half the “debt held by the public” during 2012), principal and interest are not directly received by U.S. heirs.
- Higher debt levels imply higher interest payments, which create costs for future taxpayers (e.g., higher taxes, lower government benefits, higher inflation, or increased risk of fiscal crisis).
- To the extent the borrowed funds are invested today to improve the long-term productivity of the economy and its workers, such as via useful infrastructure projects or education, future generations may benefit.
- For every dollar of intragovernmental debt, there is an obligation to specific program recipients, generally non-marketable securities such as those held in the Social Security Trust Fund. Adjustments that reduce future deficits in these programs may also apply costs to future generations, via higher taxes or lower program spending.
National Debt of the United States (Wikipedia)
Finally, we ought to wonder where the opposition to these ideas come from. After all, if the government injects more money into the economy, won’t most of that money end up in the pockets of wealthy people–the people who own all the companies and the businesses and so forth. Won’t they be the prime beneficiaries of increased private sector spending? Why are they so diametrically opposed to these ideas, then?
This is doubly disingenuous, since there can be no doubt that the wealthy have some conception about how the money system works, otherwise they would not be wealthy. Surely they know that government funds are unlimited, or that bonds are merely savings accounts at the Fed.
I think part of it is that fact that many businesspeople need to “balance their books,” so they naturally assume the government should too. This is especially true of small business owners who have to especially worry about servicing their debts. Trying to explain to them that the government does not operate under the same rules as they do is nearly impossible. From what I’ve seen, small business owners tend to fall into a distinct personality type. They don’t like to change their minds, are type-A workaholics, see themselves as martyrs and Atlases balancing the world on their backs, have chips on their shoulders, and are overwhelmingly Republican.
The other reason is simpler, and more cynical. They are willing to sacrifice the economic well-being of the country to achieve certain goals. What goals are those? Keeping workers in fear. Pushing down wages. Abusing workers and demanding more and and more from them for less pay. Keeping unemployment high to keep workers terrified of losing their jobs.
By claiming “the government can’t crate jobs,” and portraying government spending as “waste” and government-funded activities as somehow illegitimate, they increase their own power. If we realize that the government can buy and procure whatever it needs from the private sector on our behalf, so long as those resources are on offer, including unused labor, it reduces our dependence on the plutocrats. That’s why they fundamentally hate democracy:
I have often suggested here that a key characteristic of mainstream economics is its fundamental distaste for democracy. We read it in the way in which economics pours scorn on government – even democratic government – as an automatic and inevitable problem in the achievement of efficiency, whatever that is. The anti-social bias is palpable.
Why Trump? (Real World Economics Review)
Another reason is that they hate the social safety net. They hate Social Security, hate Medicare, hate welfare. They simply hate anything that makes the lives of working people a little bit less brutal and uncertain. Simply put, they are pure sociopaths.
So they are willing to suffer, so long as we suffer more! One is reminded of the old joke about the genie who promises his rescuer one wish, but with the caveat that his wish will be granted to his enemy twice over. He asks to be beaten half to death.
As I like to point out, the people who know how the money system operates have no qualms about using it for their own benefit. Want proof? Did anyone ask how we were going to pay for the Gulf War 2? Did anyone ask how we’re going to pay for the F-35 jet fighter? I didn’t hear that on the news. Yet they constantly proclaim that the government is “broke” and we need to raise the Social Security retirement age. Were there any qualms about using the power of money creation to make bankers and investors whole? That was deemed “necessary.” Yet making our crumbling and hurting communities whole leads to outcries of “we can’t afford it!!!”
Finally, why do the rich pay more in taxes if we do not need taxes to fund spending? This is simply because of the marginal worth of money. The wealthy will not notice the money removed from their accounts to the same extent people living closer to subsistence will.
In fact, much of their “wealth” is sitting idle and unproductive, doing nothing more than increasing the prices for housing and rare artwork. Recall that taxes are to remove purchasing power so that there is room for government spending. It makes sense to remove “unproductive” wealth. Salaries are almost all spent on necessities. On the other hand “unearned” wealth sits idle most of the time. Despite the propaganda that all of this money fuels investments that put us all to work, it is clear that this is not happening, and that there is far more money than is needed to invest in real productive activities. That’s should be removed as taxes to make room for government activity which really would invest in productive things, like a smart grid, new school buildings, or intercontinental high-speed rail.
Since we do not to tax to raise the funds we need, it is our choice what to tax. In our system, we tax earned wealth higher than unearned wealth! This is crazy!
Evidence from the social sciences demonstrates that beyond a certain income threshold, people’s sense of well-being depends much more on their relative purchasing power than on how much they spend in absolute terms. If top tax rates were a little higher, all homes would be a little smaller, all cars a little less expensive, all diamonds a little more modest and all celebrations a little less costly. The standards that define “special” would adjust accordingly, leaving most successful people quite satisfied.
Are You Successful? If So, You’ve Already Won the Lottery (New York Times)