Submitted by Serban V.C. Enache…
It proves the fraud of mainstream economic theory [the fraud of conventional wisdom, including heterodox austrian economists], and it proves the stupidity of centrist establishments when it comes to managing a simple problem like sluggish demand. Conventional wisdom claims a number of things which violate double-entry bookkeeping and day to day operations. Let’s start off with exactly what hasn’t happened, but conventional wisdom says should have happened or should be happing. With record levels of state debt, we should be seeing high and higher interest rates – yet we’re seeing interest rates go negative. With record levels of state debt, we should be seeing fewer resources / inputs [both physical and financial] available for the private sector – yet precisely the opposite is the case. We should be seeing skyrocketing consumer price inflation, that hasn’t happened. Inflation is near zero. The main concern of business owners, big and small, across the board, is SALES [effective demand].
Conventional wisdom claims that a Government must tax and or borrow its own currency before it can spend it. If you try to work that out using a pencil and a piece of paper, you’ll find out that such a thing is irrational. The Government’s own currency is first and foremost a tax-credit. This tax-credit is a Government issued liability, but it’s a financial asset for the non-Government sector. We use money [in paper and electronic form] to extinguish Government money obligations on us, like Government taxes, fees, and fines. Applying elementary logic, we conclude that before the Government can tax its own currency and or pay interest on it, the Government first has to spend it into existence. The purpose of taxation is to create demand / acceptance for the currency. And taxing people in fiat is not the same as taxing in grain or cattleheads. The public seeks to sell its labor and output in Government currency, because they have to pay taxes, or incur the law’s penalty for not paying these taxes. Simplistically put, the logical sequence is the following… First, the Government announces a money obligation on the public, plus the penalties for those who don’t pay. Then the Government spends money, purchasing materials and labor from the private sector to provision itself [army, police, courts, roads, bridges etc]. And later on the Government taxes a part of what it has spent. Since the Government doesn’t want to employ all the labor in the country, it will take out less money via taxes than it put in via spending, allowing the private sector to net save in Government currency; the Government’s financial debt equalling the non-Government sector’s financial savings. And the private sector will issue private credit, and almost all of that privately created credit [legal contracts] will use the Government’s currency as the unit of account. The Government’s currency sits atop the money hierarchy in the respective society.
The Government spends net money into existence when it runs fiscal deficits. The part about matching bond issuance with the fiscal deficit dollar for dollar is actually part of monetary policy, and has nothing to do with “funding” the Government’s operations or programs. Bond issuance is about: a) mopping up liquidity resultant from the fiscal deficit; it’s a conversion of numbers from reserve accounts [liquid funds] into securities accounts [non-liquid funds] b) it’s a channel through which the Government pays interest [unearned income] to the bond holder.
The difference between a Treasury bond and a regular banknote you have in your wallet is that the former is a bond with a maturity date and interest yield attached to it, while the latter is a permanent bond with zero interest yield. Again applying elementary logic, we conclude that the interest on fiat money is whatever the currency monopolist decides. A positive interest rate is a subsidy, a negative interest rate is a tax. In our current situation, most countries in the world operate with a lot of excess idle capacity and unemployed labor [lots of people being kept in a state of involuntary unemployment]. Today’s situation is easy to fix, because the problem is a lack of demand; ditto for the GFC. The 2008 crisis was not a supply-side crisis. Factories and workers weren’t sucked up in another dimension. It was a negative demand shock, pure and simple, a crisis on paper. The factors which contributed to that negative demand shock are many and complex, and I won’t go into that now, since that’s not the point of this article.
Now let’s return to negative interest rate policy [NIRP]… Hack commentators like Max Keiser and others like to say “as night follows day [this can’t continue].” It’s pure rubbish. Yes, it can continue, it will continue for as long as central banks will maintain this policy. In other words, it’s not an issue of physics [laws of nature], it’s a political issue, it’s a political choice. The currency monopolist can’t run out of his own tax-credits, out of his own IOUs. He can operate with negative financial equity denominated in his own currency for as long as he wants. He can slap and keep a positive, neutral, or negative interest rate on his own currency for as long as he wants. And NIRP isn’t a neoliberal invention either, nor a recent discovery. Silvio Gesell [1862-1930] was a German merchant, economist, cosmopolitan libertarian socialist, and founder of Freiwirtschaft. Among other things, he supported demurrage, a policy of taxing cash, with the aim of discouraging hoarding and stimulating money to change hands [create economic activity by keeping money in circulation, rather than depress economic activity by allowing money to sit idle under a mattress]. The Islamic system of Zakat [giving alms], second in importance after prayer, is a form of demurrage. It applies to unutilized assets on a yearly basis, at a rate determined by asset type. For cash and gold it’s 2.5 percent per annum. A newer example is the Freicoin cryptocurrency, on which demurrage is levied at approximately 5 percent per year.
But of course, NIRP is not the same as demurrage. NIRP affects only bank reserves, which are checking accounts at the Central Bank. Banks use reserves for accounting and settlement purposes. The banks purchase cash with reserves in order to satisfy the public’s desire to hold physical notes. Cash notes escape NIRP. To implement NIRP in our current economic situation is another example of idiotic orthodox economists [the neoliberal establishment] using unusual policies to, ironically, further make the situation worse. They foolishly poured liquidity into the banking system after the GFC via Quantitative Easing [swap operations, not net money injections], thinking that more liquidity will make the banks lend more and thus get the economy back up – that didn’t happen. Now they think the banks are sitting on all this liquidity, refusing to lend these funds, so maybe taxing their reserves will get them to lend more. False. False. False. Banks do not lend out reserves to their customers when they approve loans. Banks are constrained in their lending by their capital [the spread between their assets and liabilities] and the actual demand for loans. Sales are a function of spending, not interest rates. Someone’s spending is another’s income. Poor sales are a result of lower spending levels. Poor sales translate into lower incomes, more layoffs, and reduced effective production levels. With households struggling to save, struggling to deleverage, relying on monetary policy to revive demand in the economy is an exercise in futility.
What’s needed is higher Government spending in net terms, preferably increased investment alongside tax cuts on labor. Reduction in fiscal drag, plus higher state investment in the real economy will trigger GDP growth, job creation, better wages and profits, and higher output. Personally I don’t favor NIRP and prefer ZIRP [zero interest rate policy] instead. But positive rates can work too. Goldbugs moaning about poor or negative returns on fiat money are hilarious, though. You’d think the price of gold would explode in this climate due to private sector desire to hedge against [almost non-existent] inflation; but the increased demand is coming from state actors, state actors who are blacklisted by the hegemon like Russia and China. And these countries aren’t running from some inexorable law of nature, they’re just trying to bypass a politically-created situation. As a side note, 2011 and 2012 gold peak prices were higher compared to 2019.
Conclusion
NIRP, ZIRP, and PIRP are political choices. None of them derive from any law of nature. Interest on fiat is not the same as interest on grain, metals, or cattle. Think of these policies like tools. We know that there’s nothing inherently good or evil about tools. But the way a tool is used and for what purpose, that’s what matters. NIRP in this environment is counter-productive. All of this shows that the independence of central banks with respect to monetary policy is a hollow fail-safe against “dumb, fickle politicians” meddling with the “system.” The politicians in charge of central banks, and make no mistake, they are politicians, are criminally incompetent and liars to boot. The executive branch should be in charge of monetary policy. The settlement payment system and lender of last resort mechanism should be handled by the Treasury – the department of the central bank should be absorbed by the Treasury. Oh, but we can’t have that. Populism is too dangerous. More people of all demographics might start to demand better treatment… It would blow up the whole mythology of the corrupt, rent-seeking, usurious, oligarchic establishment.
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