Podcast: What They Don’t Tell You About The Fiat Money System

4 thoughts on “Podcast: What They Don’t Tell You About The Fiat Money System”

1. Hi, I found your blog from your conversation with Stefan. Very interesting, I’m reading some of your posts now, but one thing you say in the conversation didn’t sound right to my ears.

   You said that the reason the government issues bonds is to provide a way for people to make risk-free investments. Doesn’t this fly in the face of how we understand government, especially since you think money is a tool used by government to extract wealth from the governed? Why then would they allow what is effectively a transfer of wealth back to the people? Sense of charity? Guilt? I don’t see a plausible motive. Here are a couple other arguments that may hold up better. I am no economist (I did once cram for a Microeconomics CLEP exam), just to give some context.

   (1) The bonds serve as a way to increase government spending without increasing the monetary supply. During the war the government could have spent as much money into existence as necessary, but the resulting inflation would have been problematic. By issuing bonds, the government is saying “let’s transfer some wealth from private to public for now, with the promise that we will repay the private sector with interest once the economy has grown enough to absorb an expanded monetary supply.”

   In the case of WWII this worked out. The US economy boomed after the war, thanks to the huge capital investments in production and the added benefit of having carpet bombed a great deal of the foreign competition. If the economy had not grown this would have backfired. The government would have ultimately increased the monetary supply even more than it would have had it just spent the money into existence (because of the added interest) and would have made the inflation problem all the worse.

   (2) The decision to issue bonds is more political than monetary. For instance, we can imagine a typical Congressman and his constituency thinking from their context as currency users that the government must raise money for war, so bond programs are pushed. The monetary people either don’t have the politcal clout to push back, or perhaps don’t wish to educate the public on how arbitrary the money supply is. Bonds give the public reassurance that the money is sound.

   (3) The government wishes to drain the currency from the public. Issuing currency doesn’t create industrial output. If the government dropped money equally across the entire economy, nothing would change except some inflation. What the government really wants to do is increase the percentage of the monetary supply this is allocated towards government war-time activities. It can do this by increasing money in the war sector, but also by decreasing money in the non-war sectors. It could directly lower the bank balances (as you assert they can do) but not without stirring great dissent. They can tax the money away too, but with that comes with political resistance. Bonds are a mechanism for taking money away from the non-war sector in a way that people will happily volunteer to do.

2. Great ideas, I think all of those points you raised are probably valid. Another simple reason I would add is that the government is generally controlled by rich elites, and the existence of risk free options to supplant income mostly benefits people with deep pockets. As I mentioned, it’s basically effectively a government subsidy to a certain special interest group. It’s not like the government necessarily exists to represent the will of the ordinary people or overall economic growth.

3. I did some thinking on this and came to the conclusion that bond financing is necessary to give value to the liquid money supply, or the money supply that is in excess of the spending budget. (I’m not sure what the proper term for that is). All money must be back by some obligation to have value. That is the core tenet of MMT. Money the government spends into existence has value because it recollects that through taxation. Bank credit has value because someone will offers goods and services for it to repay their legal obligations to their lends. The excess money supply needs to be bond-financed or it will have no value.

   http://calmgullemergentsea.blogspot.com/2017/01/modern-money-theory-thought-exercises.html

4. Excess money supply is simply loaned out on the interbank lending market, driving the rate down toward zero, unless the Fed intervenes to drive the interbank rate up to the policy rate. Currently the window is 0.5 -.075 percent. The purpose of short term bond sales is to drive up the interbank lending rate to the desired level, if the Fed wants the rate to be above zero.

   There is no inherent need to do any of this to give the money value, since the money already has value: bank reserves are in demand to be used for tax settlements, and checking account markups are in demand because any private bank will accept a checking account markup in settlement of private debts.