Sunday, November 4, 2012

Three Assumptions for Addressing Fiscal Policy Intelligently


This in in response to a request from Frank Li, to reduce description of fiat currency operations to three basic assumptions. Frank rejected my suggested approach, so I'm posting them here.

(1) The business of a [good] government is to support short, medium AND long term success of small, middle AND large size business communities.
a. Business is for short term profits, PLUS positioning for medium-term profits, PLUS staying in business long enough to guarantee long-term profits.
b. Adaptive profit strategies guaranteeing short, medium & long term survival leads to constantly growing jobs for more people, thereby generating the options required for continued growth.

(2) In some ways, a country must be run like a business or a family, or it will go bankrupt, but we must be aware of the subtle differences in operational strategy that apply to the different levels of organization. In every example of hierarchical organization, the "parent" level of policy management runs a "real-goods" budget, while ISSUING, in unlimited amounts, a fiat accounting system purely for internal bookkeeping. The "child" USERS of that accounting or currency system can run entirely on a "currency" budget precisely because their parent ISSUERS currency allows USERS to use that currency as an accurate proxy for local real-goods budgets. National-level organizations that ISSUE currency can go bankrupt ONLY by running out of real, natural resources, including it's people. An issuer of fiat currency can always issue as much or little of it's currency to account for public organization, and so it cannot go bankrupt in the sense of running out of accounting units. For currency USERS, bankruptcy in currency units reduces to being identical to bankruptcy in real-goods units.

(3) It’s both true and not exactly true to argue that the USA is not like a business or family. The responsibility of USA policy staff - our elected government - is to spend into existence as much currency as the nation needs to operate, but neither too much nor too little. The purpose of fiscal policy is to pursue the public goals of a growing population and it's growing business communities, while avoiding both extremes of either inflation or deflation. An excessive currency supply can contribute to inflation, and an insufficient currency supply can contribute to deflation. In addition, wrong headed employment and tax policies can allow personal income and savings distributions to be unproductively skewed to the point where the unpredictably distributed capabilities of emerging citizens cannot be optimally sampled, developed or utilized.


In the end, the social purpose of inventing a currency system is to ensure that any and all productive transactions that citizens agree should occur, can always proceed without delay ... a concept called liquidity. The purpose of a national currency is to provide liquidity for all social inventions, so that their development can be judged, without unnecesary delay, solely upon the diverse social feedback which eventually allows selection of a national survival path.

6 comments:

Anonymous said...

The responsibility of USA policy staff - our elected government - is to spend into existence as much currency as the nation needs to operate, but neither too much nor too little. Rodger Erickson

Since this site occasionally quotes the Bible, I will too:

And He said to them, “Whose likeness and inscription is this?” They said to Him, “Caesar’s.” Then He said to them, “Then render to Caesar the things that are Caesar’s; and to God the things that are God’s.” Matthew 22:20-22 New American Standard Bible (NASB)

Government money should be legal tender (de jure and de facto) for government debts only*. That way, if a monetarily sovereign government overspent relative to taxation, then the private sector could escape the "stealth inflation tax" by using private monies for private debts (but only for private debts).

*After a universal bailout of the entire population, including non-debtors, with full legal tender fiat so as to force the banks to accept it.

Anonymous said...

Legal tender laws are not what is important. What is important is whether people actually accept some money in exchange. If people are willing to accent some currency issued by the government in exchange for things they sell to the government, then it doesn't matter whether or not the government also declares the currency to be legal tender. And if it prints too much of a generally accepted currency, then it can't release inflationary pressures simply by declaring that the money is not intended for private transactions.

Anonymous said...

And if it prints too much of a generally accepted currency, then it can't release inflationary pressures simply by declaring that the money is not intended for private transactions. DK

It wouldn't have to. People, given a choice, would shun the use of fiat for private debts if that fiat were debased by, say, using it to bail out the banking cartel.

Matt Franko said...

frlbane,

That scripture is the Lords response to Israel's question of whether He thought it appropriate for Israelites to pay the Roman poll tax... looks like He recommended that they pay it as the authority of civil government at that time was with Rome ... today our western representative govts are set under this same type of authority (whether the ones currently occupying positions within govt realize this or not, seems to me they do not).

As far as today, imo govt wouldnt have to bail out the banks if the govt were providing for sufficient flows of $NFA* in the first place thru proper fiscal policy, which much historic and scriptural evidence indicates the Roman govt knew how to do very well during the time of the Lord's earthly ministry ... rsp,

Ignacio said...

IDK why 'legal tender' laws seem to be so important, they are not. While 'morally' or legally you could argue these laws should be revoked and I would probably agree, in practice not much would change.

There a lot of countries in the world which do not oblige to use national state currency to settle private contracts and debts, and the effect in nil. In the end anyway, people ends using it, and most of the functioning of the economy is tied with the monetary-fiscal management of govs, whether libertarians like it or not, independently of how legal tender laws work or don't.

In fact, there are a lot of 'private currencies' and exchange schemes working around, and a lot of ways to work around any legal limitation when it comes to settlement of private debts.

Anonymous said...

There a lot of countries in the world which do not oblige to use national state currency to settle private contracts and debts, and the effect in nil. Ignacio

There doesn't have to be explicit legal tender laws for private debt when fiat and bank credit are privileged by other laws. The capital gains tax, for example, applies to potential private money alternatives such as common stock but not on fiat itself. And the banks, of course, are heavily privileged by government with deposit insurance and a lender of last resort.

Most people would choose to use fiat for all debts if it were properly managed by, say, not wasting it bailing out the banks.

But yes,