Notes On Currency Excess …



Sandor asked an important question:

 

If the government issues greenbacks to pay off T-Bond holders, don’t the bond holders have freshly printed currency in their hands? I don’t see the currency as ‘extinguished’, only the debt. In this case, all the public debt is effectively monetized and a lot more currency enters the system. With greenbacks, the only restraint on government spending is the demand for the currency. It is easy to envision a scenario in which the government effectively creates greenbacks hyperinflation due to runaway spending. This doesn’t happen in the collateral constrained environment which we have today. What am I missing?

 

The way debt-money systems work is there are two kinds of money: circulating currency and credit. Both function identically as media of exchange but … currency is not term-limited. Credit carries time-associated costs that increase along with the credit surplus. One cost is vanishing currency: our crisis can to some degree be considered dollar (currency) preference (due to the overwhelming costs associated with increased credit). Currency is removed from circulation: it is hoarded or extinguished.

– What Bond-holders gain is replacement for currency that has been extinguished elsewhere.

– Government meets its own obligations with circulating currency which extinguishes both debt and currency. This is a minor — but marginally important — claim on currency. Because repayment of government debt with taxpayer funds annihilates circulating money, the idea is for government to issue currency to meet redemption demands rather than removing currency from circulation.

– The plutocracy is made up of debtor tycoons whose ‘wealth’ is the debts they take on. The public believes tycoons to be creditors, this is not so. They are debtors who borrow fortunes then compete with the public for circulating currency to exchange for these debts: they aim to turn debts into wealth.

The outcome of both dynamics is a shortage of circulating currency: this includes high prices for goods during periods of currency-driven deflation. High prices are the means by which tycoons force their customers to repay the tycoons’ vast debts.

To meet a shortage of currency the government borrows from finance. The government fills a hole by digging a deeper one.

When you lend to the government — by depositing $100k in Treasury Direct — you are lending circulating currency to the government. Circulating currency is all that the ordinary citizen has access to, he/she cannot simply ‘write a loan’ to the Treasury.

Wall Street simply writes its loans into existence, not creating currency but rather offering ‘fiat loans’. Wall Street expects to be repaid in circulating currency (from taxpayers: this is the purpose of taxation, BTW, to launder finance debts).

Wall Street lends the funds that become currency, then lends more funds to the government that must be repaid with currency. (Good deal for Wall Street!)

Currency must be given ‘value’ otherwise the Street would have no use for it or credit. It is public use of every kind of money which gives it worth: the need for citizens to labor or steal in order to gain it. That a worker will die to gain a dollar gives each dollar worth. The intention of finance and tycoons is for them to gain all the circulating currency for themselves while the debts (obligations) become the ‘property’ of the rest of us.

Too much of a good thing: there is excess of debt: wiping out the smallest part of it would eliminate currency altogether.

Individuals “don’t see the currency as extinguished” because it has been previously extinguished elsewhere. The extinguishing is the ‘why’ of our crisis: not enough ‘money’ (too much debt). Adding more ‘money’ adds to the debts, trying to manage debts = currency shortage. Here is how these transactions ‘work’:

– You lend the government $100k in circulating money (you earned/saved it)

– The govt. takes in $100k in circulating money (which flows toward Wall Street or is extinguished retiring another loan).

– You are repaid $100k in credit plus interest (onto your account @ Treasury Direct). You must either buy goods and services by way of your linked account @ Treasury Direct or buy circulating currency from your bank (which is repaid with credit from your Treasury Direct account).

– Wall Street lends to government $100k in fiat loans (entered into a computer database by a cretin with a nose-ring and Metallica tattoos).

– The govt. takes in $100k in credit (onto the firm’s account at the Treasury).

– The govt repays Wall Street $100k in circulating currency plus interest plus ‘convenience fees’.

– Ordinarily the government borrows more from Wall Street to repay Wall Street (those convenience fees add up). Eventually (now) the debt burden effects the credibility of the entire finance system. Borrowing to repay is counterproductive, the numbers take on a life of their own. Debt is ‘dead money’: new loans are taken on to retire and service existing loans and nothing else.

What to do?

– Default: loans are not repaid on schedule or in the form agreed to when the loan is issued. Ordinarily, defaulted loans are repaid over time, after ‘conditions have improved’ (and currency is depreciated making loans cheaper to repay in real terms). The US cannot default because the government can issue currency as necessary without the need to borrow.

– Jubilee By Keen offers central bank/finance loans to replace non-performing loans. Additional funds are borrowed to pay a ‘behave yourself’ bonus to bank depositors. Collateral for all lending is the same deposits. Any variation on the Jubilee By Keen shifts system liabilities to the depositors by way of central banks, with all obligations to the taxpayers/citizens who are guarantors of the central banks.

– Ordinary jubilee is repudiation by another name.

– An economy can continually take on more debt to retire maturing issues. Finance debts are too large to repay out of ordinary earnings (GDP), attempts to do so bankrupts the economy (Restating this: issuance of loans in the first place bankrupts the economy but not at once).

– Loans are retired over time when lender and borrower both migrate to the same balance sheet and the loan is effectively extinguished.

– Because the increase in borrowing is an increase in money supply, there is depreciation of ‘money’. This effective inflation has repayment/service in funds whose unit worth is less than those originally lent. Repayment cost in real terms is effected by the interest rate (aimed to compensate for loss of funds’ worth over time).

– Loans are repudiated: this is non-payment at any time including the distant future. Debts are not paid because they cannot be paid or because debtors refuse to make payments (class war).

Because Debt = Wealth: elimination of one = elimination of the other. The outcome is accelerating, self-amplifying debt-deflation with cascading failures of economic agents that cannot survive without earnings (which have been borrowed from others, which in turn have been borrowed from others, still).

Without a (solvent) lender of last resort there is little/nothing to keep the process from running to its conclusion which is loss of system credit/creditworthiness (Fisher). All loans become bad loans: currency worth expands to render loans impossible to retire, there is no credit to be had, nor currency. ‘Credit wealth’ evaporates.

The consequences of repudiation/non-payment are the reason why system managers do everything in their power to prevent it. What they try to do is expand credit/offer more loans.

 

Because government repayment with taxpayer funds annihilates circulating money, the idea is for government to issue currency to meet redemption demands rather than removing currency from circulation.

 

– The loans extended to the government are ‘fiat’ debts (ledger entries). The lender demands repayment in circulating currency (taxpayer funds).

– The loans would be repaid with pure fiat currency issued without liability by the Treasury for the explicit purpose of repaying particular debts owed by the government. The ‘fiat debt’ would be repaid by ‘fiat currency’ which would annihilate both. The lender would not like it (but the government can make an offer the lender cannot refuse).

– The loan is gone along with the accompanying obligation to remove currency from circulation (by the amount of the loan).

Make no mistake about it: this is a hostile act against Wall Street: the government repudiates its debts by forced exchange of fiat tokens in place of circulating currency. This is fair play because the loans are themselves are fiat loans. The problem today — as pointed out by Ms. Nicole so many times — is too many (fiat) claims against a too-small amount of real wealth. Currency (wealth) is created only the instant required to extinguish a small percentage of claims against it.

Governments can overdo currency issue and have done so in the past. However, debts are a claim on currency rather than an adjunct to it. Even if the government issued $10 trillion in currency at once: there are $55 trillion in outstanding debts (excluding non-funded obligations that are debt-analogues). At the end of the day there would be $45 trillion in debt and no currency. The only uncertainties would emerge around the added trillion$ flow throughout the economy.

Currency is a futures contracts on petroleum. Credit represents the unsupportable burdens of past consumption/waste. What currency represents is the future where petroleum has value rather than worth.

There are additional steps that can be … and should be taken: reforming margin- reserve lending, a borrowing moratorium (stop digging), the ‘hard currency Jubilee (thanks to Keen) and more.

11 thoughts on “Notes On Currency Excess …

  1. p01

    The way debt-money systems work is there are two kinds of money: circulating currency and credit

    Isn’t all of it credit? Except circulating currency is an IOU in a standard easily recognizable physical shape that is legally and socially accepted for any and all trades?

    1. steve from virginia Post author

      Credit has time constraints that require it to be renewed repeatedly.

      (In the US) currency has no expiration date (so far). It can be hoarded in ways that credit cannot.

      Both are universal but in slightly different ways: the private sector is credible issuer of credit (credit is the liability of the private sector), the government is the credible issuer of currency (currency is the obligation of taxpayers). In good times both are equally credible. Now? (Neither are.)

      1. p01

        This makes sense (as far as a circle-jerk upward spiraling multidimensional Ponzi can make any sense whatsoever).

        Anecdotal “end of the Pyramid” stories from my experience: friends start drinking heavier than I did when I first caught a glimpse of what lies ahead (Canada`s bubble has finally burst, after sucking in the last possible mirror-fogging credit-multiplying carbon-based-lifeform -and their children-), while relatives from the old continent start opting out of life. 🙁

  2. dolph

    As you know the question is…what are human beings capable of?

    Studying history we know that humans are capable of both beautiful and awful things, which sometimes coexist. Witness the great religious structures of the past…they are beautiful, but people who built them were basically serfs who were forced to build them.

    And those generations left a legacy that stands today.

    Will our skyscrapers and stadiums still be standing 500 years from now? What will people think…that these things are amazing but the people were basically crazy?

    On a shorter timescale, I don’t think humans are yet capable of these transformations in finance. Finance is our God.

  3. Reverse Engineer

    “– The plutocracy is made up of debtor tycoons whose ‘wealth’ is the debts they take on. The public believes tycoons to be creditors, this is not so. They are debtors who borrow fortunes then compete with the public for circulating currency to exchange for these debts: they aim to turn debts into wealth.”-Steve

    Far as I can tell, most Tycoons did not get there by taking on debts, they got rich the old fashioned way, they STEAL it. Or they inherit it from ancestors who stole it. Lloyd Blankfein didn’t get rich by borrowing, he got rich by paying himself $Million$ Bonuses while the Bank he runs borrows money. Suckerbug didn’t get rich on Facepalm by borrowing, he did it by selling worthless stock to investors at $40, collecting the cash while the Stock plummets to the $Teens$. This is not Borrowing Steve, its Fraud and Stealing.

    RE
    http://doomsteaddiner.org

  4. Professorlocknload

    “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” Thomas Jefferson.

    Damn, looking for something to add to that, I’m left speechless!

  5. Phlogiston Água de Beber

    The sobriquet James Joyce of Economics seems to have gone to his head. Now he writes like a god damned economist. 🙂

    I’m still not getting my head around everything he wrote. I’ve seen a lot of muddle around the subject of currency and money. I thought these wiki articles were helpful.

    Cash

    Cash and cash equivalents

    Somebody once said something like, the human mind is a wonderful thing, you can think about a lot more than you can get. Just because Steve Keen and Steve Ludlum can imagine it doesn’t mean the human race is ready to get it. We really need to get out more. All some bankster stooge would have to do is go in front of a camera, pronounce it socialism, and have the satisfaction of knowing the idea was dead before he had left the podium. It would be helpful to remember that we are talking here about the land that stands as justification for coinage of a new word, enstupidation. It also helps to remember that the White House occupant for the next quadrennium will be either Obummer or Mitt the Moocher.

    1. steve from virginia Post author

      Because the system is baroque it is hard to describe and I am not so good at it.

      Because the system is baroque it is easy for others to take advantage without others being aware.

      It’s actually much more complex but I wanted to try to answer Sandor’s question … big parts are left out.

      Given enough time (and practice) I should be more sensible (from Zero Hedge):

       

      People don’t understand what’s happening in Greece and elsewhere:

       

       – A central bank cannot offer unsecured/leveraged loans to anyone. It cannot ‘print money’. 

       

       – Should a central bank leverage itself (whether the proceeds are used to retire underwater private sector loans or not) there is then no lender of last resort.

       

       – When the private sector is insolvent due to leverage, the public sector becomes insolvent for the same reason, more so if the public sector takes on the private sector’s bad loans (due to discount window operations such as LTRO/QE).

       

       – By leveraging, the central bank does not fix the private sector banks, it poisons itself, instead.

       

       – A drowning man cannot rescue other drowning men, nor can drowning mens’ anchors be handed over to the man on a boat. The anchors (bad loans) will swamp the boat.

       

      – As the markets realize there is no effective lender of last resort the system-wide bank run will accelerate (as is underway in Europe right now and for this reason).

       

      What is true in Europe is also true in the United States: unsecured loans by the central bank = no lender of last resort, all marketplace participants equally insolvent with no guarantor for finance system assets.

       

       – Central banks cannot ‘fix’ our crisis which is a matter of thermondyanamics rather than money supply and credit.

       

      Also look up ‘impossible trinity’.

      1. Phlogiston Água de Beber

        Ah, much better!

        Steve, you have been for a long while the most readable and comprehendable economic writer on the web, IMHO. I recommend you stick with what got you here and avoid economista mumbo jumbo. It’s mumbo jumbo for a very good reason. You ain’t JJoE for nothing.

        I should say that I quite agree that the entire banking system has outrun its usefulness (such as it ever was) and the interdependent industrial system is also gasping for air. Even if we weren’t all out of cheap resources, I think industrialism would be in serious trouble. Given the resource problem, it will have to take a fork in the not too distant future. Just my humble opinion.

      2. Sandor

        Steve, much thanks for answering my questions. I very much appreciate it. I read your work before Hudson, Keen, and other ‘fringe’ economists because of your emphasis on the interplay between finance and the natural ecosystem from which we extract and create ‘wealth’ or ‘useful material’ vis a vis systemic flow constraints and their repercussions.

        If I think of the central banks’ balance sheets as a financial buffer, then I can envision natural limits to their expansion. Regardless of how many divisions are made between units of claims to existing capital, the capital itself remains unaffected. At its base, the crisis is one of the availability and flexibility of capital relative to its ‘tokenization’ (financialization). Very few have woken up to the crisis in capital and are instead focused on the money token volatility which is the symptom. That said, there is a role for CBs and govs to play in managing the ‘collapse’ aka the deterioration in the quality of capital (collateral). The collective mind calls this ‘kicking the can’ to ‘buy time’. Bernanke has recently hinted that there are effective limits to the amount of Treasuries and agency MBS that the Fed can hold on its balance sheet before market functions are impaired. I think he knows that we are nearing the exhaustion point at which the CBs activities will have zero to negative marginal downstream effects.

        The challenge for the next 12-24 year cycle is to ‘downcycle’ is the most stable way possible so as to minimize civil unrest, food shortages, blackouts, etc at least in the ‘developed’ economies. This is why I think the CBs will try to act in the least invasive ways available so as to avoid any ‘buffer overruns’ which would freeze the system by calling into question the reliability of future claims on existing capital. If they make the mistake of intervening excessively, the first time will probably be their last, as it would result in a new currency regime. It could even lead to the fiat currency model you propose.

        Whether or not the CBs succeed in managing the credibility of the wealth token side of the ‘long emergency’, this is the meaning of their central mandate of ‘price stability’. It will trump concerns of underemployment. As debt threatens to be repudiated or extinguished, I expect to see widespread debt-for-equity swaps as the only way to effectively stabilize the ‘pie sharing’ game by spreading risk out to as many stakeholders as possible in an attempt to keep as many going concerns running to prevent traumatic economic dislocations.

  6. Professorlocknload

    And the writers will write, as the “enstupidated” are flattened by the steam roller of the state/tptb, while the “enlightened” pick the low hanging fruit, and quietly fade into the back streets and boonies to live to fight another day. As I stated over at TAE comments, “Caveat Emptor.”

    Just don’t see human nature turning on any dimes, unless maybe the dimes have a smidgeon of silver content.

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