“Firstly, our currency was never “backed” by gold or any other commodity. It was once “limited” to an amount equal to our nation’s gold reserve,…”
Could you explain the difference?
In order to unify the nation’s economy under one currency (at one time we had over 150 state and local currencies) banks demanded the right to loan “credit” money via fractional reserve rules far in excess of what the Treasury held in gold. Congress set reserve requirements that varied from 5% to 25%, but the currency supply in circulation was never actually limited to anywhere near the gold supply.
The gold standard only applied to money created by Treasury/Congress and the Fed always supplied their member banks with sufficient dollars to cover any loan demanded. When one adds in the “out” for the Fed to create debt-free money for wars (all but 30yrs since our founding) the gold standard was reduced to an urban myth. Removing the restriction on our federal domestic spending in ’34 was necessary to recover from the great depression, which was largely caused by banks overextending borrowers and depending upon unrealistic constant growth to retire loans with new loans.
“the US can never “go broke” or fail to pay any obligation denominated in its currency”
I get that it has the capability of printing more money in order not to fail to pay the obligations but wouldn’t that mean a possible inflation increase up to the point of hyperinflation?
It could if carried to an extreme imbalance between spending and taxation that leaves too much money in the economy, but that has never been a problem. A fiat currency cannot “inflate” as long as the resources it is deployed to purchase exist, or potentially exist, and are priced in US dollars. The monopoly issuer of the currency will always be the price setter up to the limits of resource availability. The accepted indicator of this has always been the unemployment rate.
As long as there are workers who desire employment but cannot find it inflation from increasing the money supply is not a problem and is easily controlled with tax and monetary policy. We should immediately adopt a federally-funded nationwide job guarantee to moderate our economy. Such a program would set the floor for private sector employment and would be countercyclical to the business cycle.
Automatic stabilizers are critical in leveling the effects of the business cycle on the private sector and treating them as “welfare” is unique to America and at the root of most of our economic and social problems. Work and social skills degrade rapidly if not exercised and supply chains benefit from regular demand. Both would be solved by such a program that would make the federal government the employer of last resort.
“When Congress spends in excess of what it collects in taxes (deficit) the total money supply is increased, as is the debt.”
If I understand this correctly this means we increase the money supply and therefore debt increases. Once again my question comes back to the interest paid on the debt: If debt increases, interest increases. If interest increases, therefore, the money supply increases. Doesn’t this mean that interest paid on the debt will lead to continuing inflation? Where’s my error?
Interest implies “borrowing” at the federal level, which is an oxymoron for regular morons in a fiat currency regime. The government borrows money to “reduce” the money supply, not increase it, destroying it against the debt. It only pays interest on Treasury debt to entice investors, but the basic concept of “needing” to borrow what the government must first create (or there are no excess reserves available to borrow) is in error despite being widely assumed as a result of equating federal finance with other finances “not” involving the only authorized creator of the currency. The US dollar is a creature of law and is totally self-funding when it is created by Congress, regardless of revenue. Money creation “funds” bond purchases by creating excess reserves, not the other way around.
In a fiat regime, Treasury bonds are not a funding mechanism and only serve as welfare for banks, foreign trade partners, and very wealthy investors. Given their abuse as propaganda fodder to anti-federalists, we should eliminate them and set an interest rate to pay on excess reserves, or simply create money without debt beyond its accounting/tracking entry. This would place the onus to regulate the economy by taxing and creating currency “for the common welfare” back on Congress where it belongs (Article 1: Section 8).
We have allowed our Congresscritters to totally abdicate their Constitutional responsibility to provide for the people to banking and business interests, which is counter to the purpose defined in our founding documents. In doing so, we have re-created many of the conditions we so strongly objected to and that led to our separation from the crown’s authority. Any misery that exists in this economy that can be mitigated with increased spending is entirely a political decision not related to any economic reality. Austerity policies are torture and murder of the most vulnerable by proxy.
We also can’t claim the free market to be the most efficient price setter (which it is) while claiming that inflation is a product of the money supply. Using the economy (austerity) to balance a mostly irrelevant number that doesn’t even represent what most think it does instead of balancing the economy with the nation’s currency is not logical. It does, however, greatly benefit banking and rent-seeking by forcing the economy to seek interest-bearing funding outside the government. Japan has been trying to weaken its currency to bolster its trade balance for decades without success. Its national debt is now over 250% of its GDP and it still has under 2% inflation.
a) In all the life cycle of money that you pointed out, what part does interest on the debt play?
It provides inflation mitigating tax-free investment that allows business to pull in its commerce to maintain pressure downward on wages. It also offers propaganda fodder that is an easy sell because it plays into the people’s budget process as “users” of the currency that must “get” money before spending. Stifling productive commerce and government spending has been very very good for banking and rent-seeking. We should end all interest on government finance yesterday. Monetary policy as a control of the economy was proven failed long before the great recession drove the point home.
b) If money supply increases debt and debt means further need for a higher money supply, doesn’t this mean hyperinflation due to interest over the long-term?
The interest on the debt is no more difficult to pay than any other expense item and pales in comparison to the impact of private-sector debt and its interest burden. Given that it is simply a contribution to our national savings, not commodity costs, it has little inflationary impact but greatly contributes to wealth inequality. It is most often used in reference to federal spending on the safety net, which only adds to the already overwhelming irony of our economic policy.
