Public Money (sources & sinks)

[SystemTheory]

I've been thinking America needs to reform our system of public finance. The current system uses debt-money to finance public goods through the bond markets and investment banks. Thus public goods are perpetually encumbered by debt rather than created debt-free.

Obviously it is possible to create private or public assets without creating debt-money. The practice of barn raising is one example, where a private asset is created through mutual credit of the local community, with no money or interest bearing debt having to issue. Thus an asset is created and there is no inflation, and no wealth transfer out of the community.

What if State or Federal governments would issue money for public asset projects, such as smart grid improvements, infrastructure maintenance, etc., and then after the asset is in place simply tax some of the money back, or let it circulate if there is no inflation threat?

I think such a system would be less harmful to taxpayers than the current system in which all money is created as debt via the fractional reserve central banking scheme. In the current scheme, the banks are sources of money in the form of debt, but for every source of money, to regulate the supply of money, there must be a sink (destruction event). I don't think taxpayers should be on the hook to bankers for the privilige of printing money since in theory the People own the Treasury power in our system of government, not the King nor the Bankers. I'd like to hear ideas, criticisms, etc.

 

[mgb_phys]

What if State or Federal governments would issue money for public asset projects

Erm that's exactly what does happen and that's what causes inflation.

 

[SystemTheory]

that's exactly what does happen (governments issue money) and that's what causes inflation.

According to monetary historian Andrew Gause, in The Secret World of Money, it was possible to create public assets without inflation throughout history! The idea is similar to my barn raising example, except for a public project you print money to pay workers to create the public asset, then if too much notes are circulating, the public treasurer does not recirculate the notes when paying government bills. Thus an asset can be created with a little inflation in the short run and controlled money supply in the long run.

The creation of money as debt under fractional reserve banking is a positive feedback system and is no solution to the inflation or public money problem, in my evaluation. I am merely asking if with modern accounting capacity (computers, models) it would be wise to take back some power from the ****ing bond traders, as President Clinton would say.

In terms of regulating a system from an engineering analysis there can be no worse design than fractional reserve banking! The sources of money are not really in anyone's control.

Private banking would exist alongside public sources of money in some form as I envision this concept.

 

[mgb_phys]

The reason barn raising isn't inflationary is that the farmer IS paying people - it's not the same thing as a public project. In the amish case the farmer is paying with his time to raise the next barn, it's just like the schemes were you service your accountant's car and he does your taxes with no money changing hands.

The public project is different. The government decides to spend a gazillion $ on a death star or a nationwide grid of wind turbines - depending on which side of the force.
Millions of workers get well paid government jobs and so buy houses, cars etc, the real estate market rises and car companies can charge more. Other employers have to raise their wages to compete with the government salaries and so raise their prices. = inflation.

 

[SystemTheory]

Millions of workers get well paid government jobs and so buy houses, cars etc, the real estate market rises and car companies can charge more. Other employers have to raise their wages to compete with the government salaries and so raise their prices. = inflation.

This also occurs under the current scheme in which money only originates as debt. The money needed to pay the interest payments (by society as a whole) is not created yet, so how the heck is society expected to pay down the debt? It is a perpetual accounting scheme ...

When the debt-money process saturates (the debtors can't repay all the debt created) then bankruptcy, recession, and even depression are merely the logical and natural results. States like New York and California then run cash poor while the Fed gives money to central bankers to rebuild their balance sheets?

One example is University education. According to the author of The Predator State one policy reason for student loan guarantees is to reduce the perceived unemployment rate since students are not counted among the unemployed. Since education loans are a high risk investment (there is no property to seize as security) the government reduces the risk of bankers, thereby shifting the risk of loss to taxpayers. Thus the bankers are given a lien on the student's future earnings to accomplish a public policy objective, in other words, the Predators are empowered by the State. The Treasury could issues student loans directly at zero interest and simply take back money on an income contingent repayment plan. Those who succeed rapidly would pay back their loans quickly, like paying a bit extra in labor tax, those who take public interest jobs and contribute in less lucrative (but often value added ways) would pay back more slowly. The predatory use of the State is now getting out of hand, in my observation, and there is not enough discussion of reasonable solutions.

 

[SystemTheory]

This also occurs under the current scheme in which money only originates as debt. The money needed to pay the interest payments (by society as a whole) is not created yet, so how the heck is society expected to pay down the debt? It is a perpetual accounting scheme ...

When the debt-money process saturates (the debtors can't repay all the debt created) then bankruptcy, recession, and even depression are merely the logical and natural results. States like New York and California then run cash poor while the Fed gives money to central bankers to rebuild their balance sheets?

I'm quoting myself just to introduce this paper I found today, from the Bank of England, promoting the "benefits" of the new monetary tool call Quantitative Easing.

http://www.bankofengland.co.uk/monetarypolicy/pdf/qe-pamphlet.pdf

Under this theory the banks first inflate asset prices by saturating the markets with debt, but then, rather than face a massive deflation of the asset price bubble, the Federal reserve or Central Bank will print money to let the bankers have cash on their balance sheets.

What does this accomplish? It keeps the inflation in the asset prices and keeps the inflation money out of circulation, so New York, California, taxpayers, unemployed workers face a cash pinch while the banks absorb the people's power to issue money through the central bank. This is all a natural consequence of issuing money via the accounting scam/scheme known as fractional reserve banking.

 

[rge270]

Andrew Gause sounds correct (haven't read his book yet). This is more well researched than readers seem to be aware of. Summary: simple bio-social systems operate via incidental affinity bonds. However, at some scale, an indirect "scorekeeping" accounting method is required given the volume of transactions, but a "currency" is still just numbers. Very little of national or group REAL WEALTH is denominated with currency.
For some current/past reads see:

[this 1st org is a bit whacked, but has useful references nonetheless - ignore the rhetoric]
http://www.monetary.org/briefusmonetaryhistory.htm

John Law - father of modern money, genius, but unfortunately dishonest
http://en.wikipedia.org/wiki/John_Law_(economist )

Benjamin Franklin's 1729 MODEST INQUIRY INTO THE NATURE AND NECESSITY OF A PAPER CURRENCY http://odur.let.rug.nl/~usa/D/1726-1750/franklin/paper.htm

Bishop George Berkeley's 1735 QUERIST http://www.ecn.bris.ac.uk/het/berkeley/index.htm

We Need a Bigger Budget "Deficit" by the Nobel Laureate William Vickrey, 1993
http://wfhummel.cnchost.com/vickrey.html

7 Deadly Innocent Frauds - Warren Mosler
http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/

Soft Currency Economics
http://www.moslereconomics.com/mandatory-readings/soft-currency-economics/

Common Sense and Monetary Policy http://cas.umkc.edu/econ/economics/...er1999/RobertEisnersCommonSenseCommitment.pdf
"The laws of double-entry bookkeeping dictate that the public sector’s deficit is always and everywhere equal to the private sector’s surplus. Thus, policies that aim to cut the RED INK in the public sector’s position are no different from policies that aim to cut BLACK INK from the private sector.

Currencies, Central Banks, Treasury Bonds, Floating Exchange rates, Full vs Un-employment, Trade Balances, Convertibility vs Non-Convertibility
http://search.barnesandnoble.com/Understanding-Modern-Money/L-Randall-Wray/e/9781845429416

Modern Money - http://en.wikipedia.org/wiki/Chartalism

Operational details of Reserve Accounting. Do taxes and bonds really finance public spending? Of course not! What does a national “budget deficit” mean, and what are the operating consequences? Math proof: http://ideas.repec.org/p/wpa/wuwpma/9808008.html

An informed electorate. How many policy advocates understand monetary operations?
How many citizens do? Without understanding operational details, do uninformed opinions matter? http://docs.google.com/viewer?a=v&q=cache:1MGL7euKl4UJ:e1.newcastle.edu.au/coffee/pubs/oped/2004/australian_options_august_2004.pdf+Full+Employment+Abandoned&hl=en&gl=us&sig=AHIEtbQI-XbBTDUb6hvCMiP_UB2SUhnKCQ

Real consequences of not understanding monetary operations, and not exercising "ownership" of a currency.
Functional Finance and Full Employment: http://www.levy.org/pubs/wp272.pdf
PBS Frontline video “The Warning”: http://www.pbs.org/wgbh/pages/frontline/warning/view/

 

[SystemTheory]

Thanks for these links, I'll be reading (most) of them.

 

[hamster143]

I think such a system would be less harmful to taxpayers than the current system in which all money is created as debt via the fractional reserve central banking scheme. In the current scheme, the banks are sources of money in the form of debt, but for every source of money, to regulate the supply of money, there must be a sink (destruction event). I don't think taxpayers should be on the hook to bankers for the privilige of printing money since in theory the People own the Treasury power in our system of government, not the King nor the Bankers. I'd like to hear ideas, criticisms, etc.

My #1 objection is that it can't work. The only way to kill fractional reserve money creation is to ban all forms of loans and to require banks to keep 100% of their deposits on hand. That is a huge reform with a myriad of unintended consequences. If banks can't loan away their deposits, they have to charge you for keeping your money. Not only do you not earn interest on your deposits, but your money actually shrinks over time. If companies and local governments are unable to borrow money to finance long-term projects, that creates all sorts of impediments in the economy.

Finally, any attempt to ban something that's desirable and naturally expected by the people is guaranteed to create a black market. The U.S. government learned this the hard way when they tried to ban alcohol and ended up with a huge, well financed black market in booze. The same will happen if you try to ban lending.

Erm that's exactly what does happen and that's what causes inflation.

Deficit spending does not cause inflation. State and federal governments don't really "create" money. They sell bonds and redirect money they get from private investors into their projects. Only the Federal Reserve can create money directly.

 

[SystemTheory]

I appreciate the feedback, and view your reply as the "prevailing wisdom."

My #1 objection is that it can't work. The only way to kill fractional reserve money creation is to ban all forms of loans and to require banks to keep 100% of their deposits on hand. That is a huge reform with a myriad of unintended consequences. If banks can't loan away their deposits, they have to charge you for keeping your money. Not only do you not earn interest on your deposits, but your money actually shrinks over time.

Edison was one of my idols growing up (not so much now that I know more about a few of his dubious business practices). He said, "What man's mind can create his character can control." Personally I pray we can ultimately control atomic bombs, atomic power plants, and electronic money schemes, but I'm skeptical based on the record of human history. The authors of For the Common Good say that in the history of the world "Probably more people have been run over and burned by out-of-control money than by out of control wheels and fires." Money is just a another social technology and it should be regulated as such. The bankers are taking interest and fees to tell us they can't control the "free market" for debt so it is in their personal interest to say it can't be done!

One expert on money, who helped organize the introduction of Euros, says a good trade currency should dissipate over time, not gain interest. This kind of currency exists in Switzerland since WWII, when tradesman extended credit to each other because money was scarce. Because industry uses this money in parallel with bank money this expert (sorry, forgot the reference) says recessions are less destructive because the trade currency takes up the slack in transactions that would not be funded at interest rates.

If companies and local governments are unable to borrow money to finance long-term projects, that creates all sorts of impediments in the economy.

When asked about the finanical crisis, Bill Gates said using short term money (demand deposits) to finance long term assets is no longer a stable social policy, and this is what banks do under the practice of fractional reserve banking! The concept of equity/debt is a legal one and all financial relationships depend on these ownership claims. It is entirely possible to change how humans think about ownership and finance however it would require massive education of the general population.

Since we grow up in a culture that prints money, burns oil, and fights oil wars, we idealize this role as necessary to sustain the Daddy-Warbucks-Economy. Since we are adapted to go to the banker to operate our lives, we feel dependent on these structures too. In reality there are the heavens, the earth, and the creatures who walk it. Ownership claims are legal artifacts and financial schemes are just accounting practices.

 

[SystemTheory]

rge270 provides a different link to this paper above:

Can Taxes and Bonds Finance Governement Spending?

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=115128

It's 28 pages and one of the more interesting papers I've read about fiscal and monetary policy in America. The conclusion is that collecting taxes and selling bonds constitute the destruction of money at Treasury, and therefore cannot be a source of funds. I sense this is correct and hope to investigate this concept further with informed scholars.

 

[rge270]

If you have to think it over for more than 5 minutes, you're thinking too hard on a simple problem. Try changing the perspective. Imagine auto-catalysis for some quarks, some protons, some electrons/nuclei, some atoms in a molecule, some molecules in a cell, some cells in a physiology, ... yada, yada, on up to some humans in a tribe.
None of these need "currency" to denominate transactions in aggregate or group auto-catalysis .. er, coordination. Now jump to the fact that a sovereign currency can never limit the initiative of the issuing group or nation. A subway corp can issue as many tokens as it wants, and a sovereign nation can issue as much currency as it's population needs to accomplish group actions. If NASA decides to go to the moon again, we'll just issue enough chits to make it easy for everyone to track all direct & support transactions necessary for everyone to do their required jobs. Everything else in this rabbit hole leads directly to either letting Fx (foreign exchange) rates float, or using citizen unemployment to manage Fx rates. The latter, of course, is always mal-adaptive class warfare.
There are always higher returns from total group coordination, or else social species, and aggregates in general would not have been so successful in 4 billion years of evolutionary history. If you cast aside presumptions, this is not in the realm of rocket science.

 

[CRGreathouse]

The bankers are taking interest and fees to tell us they can't control the "free market" for debt so it is in their personal interest to say it can't be done!

I suppose you have a better approach to loan prohibition?

 

[SystemTheory]

I suppose you have a better approach to loan prohibition?

I'm currently studying the ideas of William Hummel, a former control systems engineer with lots of experience, on his site Money. I need to first learn why the current system is so unstable and how it might be stabilized in the future. Here are his suggestions for a Fully Backed Depository System including a National Bank to clear payments and eliminate the moral hazard caused by deposit insurance:

http://wfhummel.cnchost.com/reformplan.html#4

Due to "house of cards" nature of money and debt, any money spent directly by a Federal or state government treasury would end up in deposit in a bank, therefore I must re-evaluate some of the practical problems with the themes stated above. I have no doubt there is a better system which is possible given the political will-power, and it is very likely to be the one proposed by William Hummel or something very close to that.

 

[CRGreathouse]

(That there are serious moral hazards with insurance (including deposit insurance) is well-known and universally accepted. But that has precious little to do with shuttering banks!)

Your link just suggests that loans be banned, not *how* to ban loans or what would happen if they were.

It's pretty obvious to me that if the US banned loans (except for "fully-backed loans", that is, hoarding bills) then there would be several major effects:

• The near-total collapse of the US economy;
• A substantial black market in loans;
• US capital moves elsewhere, largely to (1) Canada, (2) the EU, (3) China, and (4) Mexico.

I was looking for suggestions to avoid or ameliorate these effects. I would further be interested in just *how* you'd enact the prohibition. Fines? Imprisonment? Execution? And how would you monitor the system? And what would count as a loan, exactly? Can my brother lend me a few grand to build a garage? Can I sell stock in a garage holdings company, then buy back the shares over the next few years? Can I pay a company for a garage over several years?

The minor problems with the system, like a decrease in social mobility (rich stay rich and poor stay poor), would be peanuts next to the

 

[SystemTheory]

Please specify exactly where I, or William Hummel (at the link I posted above), advocate a ban of loans? My original question is about purchasing public goods (government spending) with loans, it does not say no one should be able to purchase private goods with loans. Also the Fully Backed System at the link discusses how FSCs, Financial Service Companies, would operate under his proposals. Since no one is trying to ban loans (only control the out-of-control parts of the system which transfer wealth from the real economy to risk-taking bankers), please rephrase your questions, if you wish.

All laws are enforced by the threat of police coercion. It is commonly known that the police, as the arm of the court, get a little favoritisim from judges, because to exercise jurisdiction over persons the courts need a local police force. What is not as well understood is that the banks also get a bit of favoritism from the government/judges, because to transfer property (money judgments) from one party to another, the banks are the best ally. Therefore bankers tend to want to play by the law, lest the police come against them, but judges tend to have respect for bankers, because the accounting scheme extends jurisdiction over money and property. I refer to this whole scheme as the "alliance of avaricious apes," a bit of hyperbole that helps me understand the psychology of society versus the realities of how other species live in the natural state. In a corrupt government you can't trust the avaricious officials who also engage in acts of displaced aggression under a cloak of police authority.