Some might argue that governments would have more to operate with if they reduce waste, fraud, and abuse, or if they tax more, or if they simply provide fewer services.
This displays a total lack of understanding of what money is, and that understanding will be the most vital component of combatting climate change. Most modern nations use fiat currencies with free-floating exchange rates, which means that their money supply is infinite as long as they don’t accept debt denominated in any foreign currency they can’t control (Euro?).
Every single one of those actions will only serve to reduce the available money supply in the private sector of any such economy without increasing the ability of the currency-issuing governments to spend/invest one iota. We simply can’t get the job done if we insist on applying gold standard logic to a fiat currency, whether it be in the US or anywhere else.
There are legitimate concerns that a mismanaged money supply increase will cause speculative stock market players to drive stock prices up. However, those concerns can be easily addressed by a slow money supply increase and strong government regulation of Wall Street. Some will also suggest that the quantity theory of money guarantees that there will be an increase in inflation. This merits some discussion.
The quantity theory died the day Nixon removed us from the Bretton-Woods agreement and the gold standard it imposed. Some would say it actually died in ’34 when FDR ended the convertibility of US dollars to gold domestically. With any sovereign fiat currency, the value of that currency is entirely dependent upon the availability of the commodity/resource the currency is deployed to purchase. A shortage of one commodity will create upward price pressure on that commodity without effecting any other commodity’s price. This means that the total quantity of money is irrelevant to inflation.
Obviously, if the government continued to spend into the private sector without removing any of its currency via taxation or selling of debt the money supply would overwhelm the availability of commodities and labor eventually. This is why governments levy taxes that are only payable in the currencies they create, but those taxes (and borrowing) should never be conflated with “revenue” for those governments that enable them to spend.
A sovereign currency-issuing government without a commodity or fixed exchange rate pinning its currency is never revenue restrained. It can always “afford” anything that exists and can be purchased priced in that government’s currency regardless of its revenue or past spending. If it is functioning in a free market environment it is also the price setter for any transactions it makes in the private sector.
However, there are several forces that drive prices up and down, and there are other levers governments can use to manipulate price levels, including reserve requirements, interest rates, regulations, subsidies, and purchasing power. The goal of the Federal Reserve is to keep the inflation rate low.
This statement is mostly true, with only a couple of exceptions.
Reserve requirements are no longer a thing. Banks no longer loan from reserves and now only serve to qualify borrowers. They use the borrower’s loan contract as an offsetting asset, not deposit reserves, and the Fed creates credit money to facilitate interbank transfers of the loan proceeds. This is why QE had little effect on increasing bank lending. Credit money is a liability to the lending bank, so it will always limit it to the principal of the loans it holds to avoid paying excess interest. That interest is determined by the Fed’s overnight rate which the Fed controls by purchasing and selling Treasury bonds on the secondary market.
Secondly; inflation control is only one of the purposes of the Fed, and not even its primary purpose. Inflation is mostly a responsibility of Congress and is best controlled by the tax code, not interest. While higher interest rates discourage some private sector investments they also inject more newly created currency into the private sector to service the debt. This is compounded by increased federal spending via automatic stabilizers that mitigate the damage of business cycle downturns to labor. Some pretty sharp economists believe this is a washout for inflationary pressure.
Given that taxes create unemployment, which is just a result of the government taxing too much or spending too little, full employment should be the primary objective of the Fed and interest rates should be maintained at zero whenever it isn’t achieved. Using the working class as a means of holding down inflation via involuntary unemployment is cruel and entirely undemocratic use of the Fed’s authority. It is also a waste of potential productivity and quickly becomes a source of social division as it exposes the natural “first fired/last hired” tendency of any labor market.
While big banks are uniquely capable of handling large quantities of money, there are other more altruistic players that could handle money supply injections for the purposes of addressing climate change.
Local and state governments, as well as, large philanthropic endowments and charities are more ideal candidates for facilitating the use of money to address climate change
A good place to start such a large scale effort would be to establish a federally funded guaranteed job program that would be best administered by state and local governments. The program could replace traditional unemployment with re-training and re-employment in the new green economy that will likely redefine employment and productivity.
Beyond the needs of the war against climate change, the program could offer much-needed labor for local communities to provide social services and quality of life improvements while paying a livable wage and benefits to set a floor for private-sector employers. Being countercyclical to the business cycle, the program would also inject newly created federal money into the private sector, acting as a price stabilizer and preserving critical supply chains.
While the Federal Reserve could simply increase the money supply, the money would take longer to have the desired effect if it wasn’t tagged for a specific purpose upon entry into the economy.
The only entity Constitutionally empowered to increase the money supply is Congress. The bank reserves created by the Fed above Congressional appropriations are always balanced by private debt that must be repaid from that money supply. While those reserves spend like public money and add to GDP, they cannot net retire the debt that created them or be net saved. Simple spreadsheet accounting and logic would show that the real money supply is always in balance with the national debt.
While the word debt and the fact that it is represented by Treasury bonds provoke knee-jerk assumptions it is nothing more than an accounting entity representing money created by Congress but not yet canceled by taxation since our nation’s founding. The federal government neither needs nor uses “revenue” to spend and any revenue it takes in only reduces the money in circulation.
There should also be legislative champions in Congress advocating for the reinstitution and modernization of the Humphrey-Hawkins Act.
Additional legislation is not necessary to increase the money supply. We simply need a Congress that is aware of the reality of our monetary system and willing to do what is right for the country and the planet. We must recognize the fundamental differences between ourselves as currency “users” and the federal government as the monopoly currency “issuer”. In almost every instance those functions and purposes are exactly the opposite and forcing our household budget logic on the currency issuer is literally killing many of us.
The red ink of our federal government is the only source of black ink we have in the private sector and it is going to take a lot of it to reverse climate change. Luckily, the supply is infinite.
