Lack of Imagination …



Unknown Artist ‘Fantastic Four’

 

After watching the Greek theater last week there is the ironic possibility that the mighty Triple-A-rated, hyper-power United States of America might default on its debt before the hapless Greeks!

A resolution to extend the nation’s debt ceiling above the current $14+ trillion must be passed by Congress and signed by the president before the ongoing USA borrowing binge can continue. Right now, members of Congress are ‘Doing the Paulson’ and demanding bailouts or else. Some of the bailouts are for US millionaires who don’t want to pay taxes, just like their friends, the millionaires in Greece.

It’s very important that America close the Greek ‘tax evasion gap’!

The Treasury faces a mountain of maturing debt in August. It must redeem this by ‘rolling over’: issuing new debt — borrowing — and using the proceeds to pay off old lenders. This is from the Bipartisan Policy Center published @ Zero Hedge a few days ago:

 

 

$467 billion is a lot of money to have to come up with in a hurry! No problema, the money is there. What matters is the ‘net cost’ of that money. The interest on $467 billion is a large sum, almost $30 billion. Currently, Mr Geithner isn’t permitted to ‘borrow’ that additional $30 bil from the bond market (the Fed).

Treasury ‘borrows’ from US government employee retirement accounts, instead. Geithner takes cash out and leaves IOU’s. The retirement cupboard will be bare when these redemptions materialize. The $29 billion for interest is high-lighted below in red: net expense is what the Feds spend less- tax receipts: (Click for big)

 

 

The ongoing expenses aren’t exactly a bagatelle: the net $140 billion is new money the Treasury has to pull out of a hat. Without a resolution the Treasury cannot ‘legally’ gin up cash from the ‘markets’ which means a lot of the spending on the list stops. The Treasury can roll over debt but cannot pay soldiers … or Social Security beneficiaries. This is that ‘technical default’ that may or may not wreak havoc on the credit markets.

The real ‘inner game’ is the monetizing: the Treasury continually borrowing to pay accumulating interest. Borrowing takes place to service each preceding round of borrowing. With the complicity of the Federal Reserve, the government essentially borrows from/lends to itself. It can do this endlessly: everything proceeds without a hitch until the numbers become absurdly huge and the government loses all credibility.

That political types are croaking about mere trillion$ indicates absurdity lies right around the corner. The US can have a quadrillion- dollar economy when there are flying cars and robots that can battle super-human adversaries … while cleaning the house and speaking French. Since none of these things are likely to happen, a quadrillion- dollar US economy is either a hyper-inflated paper fraud or absolutely idiotic or both.

There is no real immediate cost to a government borrowing in its own currency. As James Galbraith puts it, a sovereign borrowing in its own currency is like bowling: the alley never runs out of ‘points’. Instead, the costs instantly accumulate when the government stops borrowing. When a government borrows it credits ‘Mr. Lender Dude’s Account’ at the same instant plus some interest. It’s a great game: the illusion of free money, something for nothing: a perpetual motion machine.

As long as a government keeps keeps the wheel turning the interest cost of this money is extremely low, since the lending/borrowing continually adds funds to be invested. The added funds means an ongoing surplus chasing ‘investments’, the best of which just happen to be government debt!

When the wheel stops as it is doing now, interest costs rise and the private surplus shrinks. Since all the dollar lending rates are interconnected across finance, a rise in Treasury rates would ricochet though the entire finance universe. The question would become, ‘what level of interest expense triggers a recession greater than the version the country is mired in now?’ The answer is, ‘not much’. A two or three percent rise in borrowing costs would bankrupt the Federal government; it would be unable to service the debt out of tax receipts which it is able to do now. Monetizing by additional borrowing would become very costly.

The euro- bound Greeks cannot do use the fiscal perpetual motion machine. Like all the other EU nations, it must borrow euros outside the country from ‘nobody in particular’: a cabal of unaccountable banks that are the substitute for Europe’s fiscal system. The banks have imposed breaking rates on Greek government borrowing. Greece is stuck: it cannot afford to borrow any more and it cannot afford to go out of business, either. To do so and abandon the euro would leave a Greece unable to afford imported fuel for its beloved automobiles.

Meanwhile, the Japanese can borrow/lend endlessly to themselves in their own currency at infinitesimally small interest cost. Japan can do so … as long as she keeps doing so. Once begun in earnest sovereign self- borrowing/lending becomes a trap, like ‘Hotel California’.

“You can check out any time you like but you can never leave.”

“Insanity is repeating the same experiment over and over and expecting different results.”  Albert Einstein

That the US Treasury and others can borrow/lend endlessly to/from itself is a poorly understood aspect of ‘modern monetary economics’. This is the plank that Congress is stumbling over. The US Treasury can never ‘go broke’, the US can — and should — run an unbalanced budget … and do so from now until the cows come home. Basically, any government deficit is a surplus in private hands. The opposite is also true. Running the US government like a business means other businesses elsewhere in the country must fail.

It is ironic that the most extreme pro- business interests in Congress are dead- set on doing what is certain to derail business activity! This is ‘conservation by other means’: the ‘fail’ dynamic is taking place because the ‘energy surplus’ belongs to oil producers overseas and mercantilists which are parasitising their neighbors and clients.

The government cannot print oil or lend it into existence — it can only gift a small amount to consumers as a gesture. Governments have been issuing debt as a substitute. Nothing wrong with this per- se, but the debt is taken on to expand consumption. This is a fatal error. The debt is needed to create a husbandry economy instead of the faltering consumption version, but doing so requires a form imagination that the consumption economy cannot provide.

The theater taking place in Washington, DC has the US Treasury asking permission to borrow/lend from Congress. The childish parties play chicken with each other as if nothing but short- term political advantage matters. This is absurd: an administration that engages in three wars overseas without permission from Congress can ignore sanctions against borrowing/lending and do as it pleases.

If this Administration had any imagination it would introduce its own currency rather than borrow from finance by way of the Federal Reserve. The president could ask Treasury Secretary Warren to use the Treasury gold hoard @ Fort Knox — 50 ounces or so it has left — to back the issue of a fixed amount of currency necessary to continue the functions of government. We can call this currency ‘United States Notes’ or ‘US Silver Notes’ as opposed to the current toilet paper ‘Federal Reserve Notes’. The Treasury could imply limited convertibility of notes to gold/silver.

The Treasury would lie … as it ‘implied’ full faith and credit toward mortgage- backed securities offered by Fannie Mae and Freddie Mac. Nobody would risk calling the Treasury on its lie or otherwise rock the boat. There would be no reason for anyone doing business with the government to do so. The government would run a paper- gold ponzi scheme the same way the bullion banks do now!

The Treasury could also swap a few of its new notes for all the gold and silver held on the Fed’s account @ the New York Fed to make a lie the truth. Unlike the bullion banks and the Fed, the Treasury possesses the tools of eminent domain and a public service mandate.

A hard US dollar would be a reverse- or negative ‘anti-default’. How amusing!

Would the good drive out the bad for once and unmake Gresham’s Law? It would be interesting to find out. The issue of gold- backed ‘Treasury dollars’ would instantly end Federal Reserve/finance monetary monopoly and give the government the liquidity advantage that it ceded to the Fed after the Second World War. The Treasury would gain instant, immense leverage/ bargaining power over its own debt which it could service or retire at its pleasure. Issuance of a hard dollar would be a sort of ‘Mini- Plaza Accord’ that would allow dollar-for-dollar and dollar-for-debt arbitrage opportunities that the Treasury could ‘broker’ at a (stupendous) profit. In the casino economy, the Treasury would become the ‘house’. It could create its own rules such as whether the ‘new’ dollars would exchange for ‘old’ ones where and at what rate. At a stroke, the dead hand of baronial finance would be loosened from the public interest. The Fed currency ‘Reserve Notes’ would become the ‘hippie scrip alternative’ that could be printed or not at Mr. Bernanke’s pleasure with diminishing effect on the rest of the economy.

Just like now, but more-so.

Treasury Secretary Warren could take the next step and compel the Fed to treat its Reserve Notes as ‘demurrage money’. This kind of money requires the holder to pay a fee to the issuer to hold onto it. An entity would have to increase his holding’s value by a fixed amount on a regular schedule per year.

Imagine this strategy applied to the trillion$ in excess reserves or in corporate vaults? Rather than holding money, the rational entity would spend it instead, hoping to push the demurrage cost onto another. The increased spending would stimulate business activity. Without the addition of a single penny of currency created, the economic effect of inflation would be produced without there being actual inflation. Demurrage money is a strange form of inflationary/non-inflationary money. To hold money you have to be actually earn more money by way of economic activity so as to afford the fee which usually amounts to 1.0- 1.5% per year. Since the money becomes that much more valuable with time, the incentive to ration liquidity by hoarding — becoming super rich — vanishes.

The Greeks could issue demurrage money as drachmas to stimulate their euro- starved economy and get people off the streets and out of Syntagma Square. The ‘New Drachmas’ would only be acceptable in Greece yet freely convertible to euros. The counter- productive IMF- ‘austerity diktat’ would be bypassed. Economic activity would increase while anarchy and disorder would decrease.

Folks from the rest of Europe would feel comfortable again going to Greece to enjoy the unspoiled countryside and delicious food and wine. The visitors would spend euros. The Greeks could earn something that could be used to retire some the currently oppressive debt.

US demurrage dollars would do the same thing. Right now, Americans are sitting in front of televisions, collecting food stamps and hating life. The unemployed have given up on getting jobs. There is little for the policy makers to lose.

Without an attitude adjustment, the current Capital stalemate is likely to end with a ‘technical’ default. The last US default took place when the Treasury closed the gold window in August, 1971 and abandoned the Bretton Woods currency accord. The initial cost of default to the US economy was low. Most folks didn’t realize when it happened. American defaults have not been dramatic. The default previous was in 1933-34 when Roosevelt took gold specie out of circulation and Congress ended the gold clause in contracts. Most Americans only knew the economy improved but not by much. In 1971 there was dollar volatility on foreign exchange markets as traders stumbled to discover the proper value of US money relative to other currencies. Americans was experiencing inflation but the country was not in a recession.

The US was a net energy importer and the cost of default emerged at the gas pump. Prices doubled and doubled again in the six months after the OPEC oil embargo instituted in October, 1973. There were gas shortages and lines at service stations. There was a severe recession that ultimately cost millions of high- paying American manufacturing jobs.

A default now would effect energy imports as overseas producers would not know what any given dollar was worth. The producers/exporters might demand more dollars for each barrel of oil or dollars might vanish from circulation as a credit freeze vacuums liquidity out of finance. The US economy is a ponzi scheme with claims exchangeable for dollars not sheaves of wheat. Either increased dollar costs or increased dollar value will take a percentage of motorists off the road. This ‘percentage taking’ demand destruction along with interest rate volatility will trigger the double- dip recession that the Establishment is in such a panic to avoid.

Congressional Follies viewed through an energy prism becomes a choice for each individual: to drive a car or have a functioning government? Add this to all the other ‘drive a car’ choices: to drive a car or have a job, to drive a car or have something to eat, to drive a car or have a future world your grandchildren can live in without having to wear lead suits.

Silvio Gesell invented demurrage money which has been used in all parts of the world as an ‘alternative’ currency, usually alongside an official version. It has worked well when attempted. Since it threatens the finance- centric establishment it has been barely tolerated and usually outlawed. An excellent article about Gesell and demurrage money can be found at Brad DeLong’s web site.

Keep in mind, there is no currency solution to an energy constraint problem, imaginative currency regimes are useful tools.

16 thoughts on “Lack of Imagination …

  1. Professorlock'n'load

    Not to be “Hanging Crepe”, but………….

    Perpetual motion machine? Yes, as long as the Fed owns the printing press, the courts, the cops/military and the jails. It is “their” currency, not ours. This is printed on the notes themselves. It is whatever they want it to be. Some are mired in what used to be, such as property rights, enforcement of contracts, equal representation etc. We now exist in a centrally planned Corporatocracy, complete with it’s own “Rules of Engagement,” and that is the reality. Their first priority is to accumulate the spoils of society voluntarily. When that ultimately fails, mandatory will become the word of the day. Wishing otherwise seems a waste of time.

    Could this help clarify the present “State of Affairs?” http://www.zerohedge.com/article/banks-commence-wholesale-unsolicited-mortgage-forgiveness And could it be that taxpayers are the ultimate “Enablers” of this 2012 campaign gesture, through their generous contributions (bailouts) of these FDIC ensured, Federally backed banker philanthropists?

    And on the energy front, rest assured, the “Essential Personnel” will see to it they are allocated necessary quantities of scarce oil to maintain “The Peace,” divvying out “complementary” samples to their direct supporters. Is it really as bad as all this? You be the judge.

  2. Fourier2020

    Why limit such currencies to national governments? You could have Texas Bootscript, redeemable in oil. Maybe California Techscript, redeemable in iPhones. How about Illinois Blaggoscript, redeemable in lies and tax increases? Well, some states would obviously do better than others …

    Incidentally Steve, I’m curious why you chose Virginia when you moved? I’m getting the heck out of Illinois, and I need to figure out where to go.

  3. Josh

    “With the complicity of the Federal Reserve, the government essentially borrows from/lends to itself. It can do this endlessly: everything proceeds without a hitch until the numbers become absurdly huge and the government loses all credibility. ”

    That time has come. Catching Osama helped a little, but then again the major stock market indexes are still below their May 2nd post-execution highs. Selling off on good news is indicative of a bear market mentality. If this recovery bull were still intact we would have hit 13,000 as soon as the story crossed the wires. Instead we drifted lower to below 12,000. Panic ensued in the options market as put buying spiked. The sharks smelled blood in the water and ate the shorts all the way back up to where we are today @ 12,582. Now what?

    Next week I believe we will see the formation of a right shoulder as prices roll over back to the 12K level and the twin Federal/municipal deficit dilemmas take center stage. Then 12,000 will fail to act as support, and Greenspan’s dictum that the stock market is the economy will be proven once again as the last remaining green shoots wither and die with each successive 100 point loss on the DJIA.

    http://i51.tinypic.com/15yx2mt.jpg

    http://i54.tinypic.com/2d27h21.jpg

  4. Reverse Engineer

    Not to throw a wet blanket over Da Goobermint issuing some new Greebacks ostensibly backed by the Gold in Fort Knox, but exactly how pray tell would they distribute them out to everybody? If you have say $100K in the bank right now, would you be able to withdraw it all as New Gold Backed Greenbacks? How about the people with $1M or $1B in their bank accounts? Can they all also withdraw the money in the New Greenbacks?

    If you then drop a demmurage onto the money, why would people hold onto it and not take said savings over to Fort Knox and get the equivalent in Gold, whatever that is determined to be?

    What are all the Mortgages and CDOs worth in the New Greenbacks? Do the TBTF Banks get to exchange all their CDOs for freshly printed Greenbacks from the new printing press in the Treasury building, after moving it over from the Federal Reserve?

    What happens when folks start redeeming their Gold backed currency over in Fort Knox and the shelves there go Empty of Ingots? What are the Greenbacks in circulation worth then?

    Anyhow, I have zero doubt that at the 11th Hour another Debt Ceiling Hike will be undertaken, just like the Greeks get their 11th Hour Bailouts every few months, soon to be every 24 Hours of course. Far as this costing credibility, there is very little of that left in ANY currency floating around out there right now, but so long as they are all dog shit you don’t get a rapid hyperinflation, just the cost of commodities spiral upward and gradually price the poorest people of the world who are not inside the FSofA and eligible for a SNAP card out of the market.

    If/When we start printing some new currency besides the FRNs, its not likely to be Da Federal Goobermint that will be doing it, but rather done Regionaly or even by State. Our Goobermint IS the Dollar, and when the Dollar goes bye bye, which it would if they don’t hike the debt ceiling, our Goobermint goes bye bye. Mad Max ensues in short order.

    RE

    1. Loveandlight

      Yes, I suspect Cantor et. al. are trying to “make it look good” in order to placate the enraged know-nothings who propelled the current Republican majority in the HR into power.

  5. Josh

    When government bond investors are willing to accept negative yields in exchange for perceived safety, you know confidence in risk assets is about to crumble. According to the WSJ:

    “So much for worries about the debt ceiling and all that. People are so hungry for safety they’re willing to lend the US government for basically nothing.

    Update: Kelly Evans just flagged a Reuters report that 1- and 3-month T-bills actually went negative very briefly today, meaning people were paying the government for the chance to lend it money.”

    http://blogs.wsj.com/marketbeat/2011/06/23/t-bill-yields-plunge-toward-zero/

    Thirty years ago when we actually had a real manufacturing economy the 3-month T-bill yielded 15%. Today it yields 0.01%. That’s a 99.999% loss of yield.

    Four years ago the DJIA topped out at 14,000. Use the T-bill chart as a template to project where the Dow is going to be in twenty six years.

    http://i51.tinypic.com/28h03sz.jpg

    http://i56.tinypic.com/10cq3hf.jpg

  6. Daniel

    Well don’t worry about interest rates going to high any time soon. the good news in that the FED has that under control, the bad news is that its fraud

    http://www.youtube.com/watch?v=ZnZnkaq8Nf8

    Eric has also done some interesting work looking at the ESF(Exchange Stabilization Fund) which according to his research is running the NY Fed, thanks to the Gold Reserve Act of 1934 (https://secure.wikimedia.org/wikipedia/en/wiki/Gold_Reserve_Act) which took all the Fed powers and gave them to the Treasury.

    http://www.youtube.com/watch?v=2ssrcD5GdPQ

    Made me wonder if Bankers are just been setup as the fall guys so the gov has someone to blame. as you point out there is not currency solution for a energy problem, however in the public mind there is no energy problem, its a finance problem and the bankers are to blame for everything.

  7. Loveandlight

    Okay, so what you’re saying is that they can use the money from tax revenues to roll over the old debt, but then there won’t be any money left without the borrowed money for funding the normal activities of government or for servicing existing debt. Do I have that right?

    1. steve from virginia Post author

      Right now, the tax receipts pay interest and a bit more besides. After August 1, it becomes ‘Who doesn’t get paid?’

  8. steve from virginia Post author


    The Treasury emitting money would make the government ‘default proof’. The gov is already default proof: only the gross incompetence of the administrators indicates otherwise.

    ‘Debt money’ creates liabilities that must be shifted … somewhere. ‘How to shift’ is the discussion taking place across economies: who gets stuck with the liability hot potato? Pure fiat or greenbacks do not have that liability. To stifle hyperinflation fears you have limited convertibility. What is ‘limited convertibility?’ A commodity value that is set at the margins, like everything else. Consider lotteries: these have value even though the vast majority of participants are payees w/ only the smallest handful of beneficiaries. Nobody considers the liability of the lottery when buying a lottery ticket b/c a small part of that liability is expressed as the ‘Grand Prize’.

    ‘Some’ sellers of Treasury debt would be able to exchange the money received for gold at a fixed rate. Will this be you? Not if you don’t ‘play’/buy and sell Treasury debt! See what I mean about the Treasury becoming the ‘house’ in a casino where it can write whatever rules it likes. Keep in mind, everyone who lends to the US Treasury is a gambler in the finance casino.

    The Treasury would not have to swap all $14 trillion of outstanding debt for hard currency, only the most minuscule amount @ the margin. The ‘idea’ of US default is an arbitrary and false ‘either/or’ dichotomy. My guess is the Treasury simply announcing such a program would instantly end the debt ceiling/default nonsense on Cap Hill. (The reactionaries would have their asses handed to them instantly!)

    Keep in mind, the majority of govt lenders currently accept a minuscule amount of yield. They roll over their loans and they will continue to do so as they have since the beginning of time. How much is that yield worth in gold- backed currency? Hmmm …. (Bernanke goes to bathroom and vomits into toilet.)

    Uncle Sam emitting convertible money to buy maturing US debt would eliminate the foolish controversy taking place on Capital Hill right now. The default threat would vanish. The administration would in this way out flank and outwit its adversaries at very low cost, rather than smash them at very high cost. The gov would also break finance’s debt stranglehold on the economy.

    The vast majority of Americans would not care whether their money is ‘this’ or ‘that’. I like the idea of having money available for productive effort. That is not happening because culture sez the only ‘production’ that counts is auto related manufacturing and industrialized waste. Money sez little people’s efforts are valueless and that all rewards flow from the gatekeepers and financiers rather than to them as is the fact.

    Fourier, I grew up in Northern Virginia and big chunk of my family lived here for many years. My father worked for the Federal government for his entire career. If he had had his way I too … would have worked for the Feds my entire career.

    I did live in New York City for 15 years. I like NY, I’d go back but the city is too expensive now, and not so much lively: the dead hand of money afflicts NY.

    Northern Virginia/DC/suburban Maryland is the belly of the worldwide Carmageddon beast. The entire area is completely auto- saturated at every possible level. It’s interesting to see how the entire policy galaxy spins around the automotive: manufacturers, bailouts, parking, roads, fuel, military, finance, etc. I am looking to leave here and find some place less auto dependent as soon as the family business is done.

    1. Reverse Engineer

      “‘Some’ sellers of Treasury debt would be able to exchange the money received for gold at a fixed rate. Will this be you? Not if you don’t ‘play’/buy and sell Treasury debt!”

      OK, so apparently only the TBTF banks get to convert the new Greenbacks for Gold, do I have that right?

      Besides that, there is no more market for Goobermint Debt at the Federal Level at all, since Da Goobermint never needs to borrow, it just prints as it needs funds for anything at all.

      The Greenbacks here don’t seem to be backed by Gold at all really, since unless you bought Treasury Debt you can’t convert them to Gold, and Treasury will be selling no more debt since they don’t need to anymore.

      Beyond this, it only seems to address some problems in the Sovereign debt equation, but does nothing about the massive debt accrued by States and Munis, along with J6P.

      Besides this, I have a very hard time grasping just why the Saudis would exchange Oil for these new Greenbacks, which are neither backed by interest paying Bonds or have any real convertibility to Gold. You are then just taking a piece of paper which in fact you also suggest has a demurrage on it so its constantly losing value the moment you accept it in payment for something.

      Finally, you haven’t explained how these new Greenbacks are going to be distributed to J6P, only really to the marginal holders of FSofA debt, mainly the TBTF Banks. In order for that money to escape from their reserves, they would need to loan it out at a still higher rate than the demmurage on the money, and who exactly is a worthy credit risk to loan it out to who could afford such interest rates?

      I agree the Treasury cannot in principle go broke if they issue Non-Debt money, but without true convertibility to something with real value or an interest charge which allows savers to get some rate of return on recirculating the money through investment, the money really has no definable value to it.

      I sure know if I was a Saudi Sheik I wouldn’t take one of these Greenbacks for a Barrel of Oil, except of course at the Point of a Gun.

      RE

      1. steve from virginia Post author

        I understand your questions and thanks for asking them. Some of what you are asking I don’t have short answers to and some would ‘come out in the wash’.

        One way to look at this ‘scheme’ is to have money for ‘saving’ and money for ‘spending’, two different kinds of money. Right now there is debt and … debt. Not much of a choice.

        The way I understand gold ‘issue’ is that it is a ‘short’ on the system. If the system worked as it should there would be less investment interest in gold. My Dad owned gold for years and all he did was beatch about it. A well-functioning economy has little use for gold as an investment.

        Any ‘saving’ type money is a hard currency: the act of saving makes any currency hard, that is what a hard currency is, whether a saved currency is convertible or not in the end does not matter very much. People are saving now the ‘toilet paper’ fiat dollars a-la Bernanke. Enough people saving dollars and they become as hard as specie.

        Think in terms of making the establishment’s incompetence into a ‘security’ that can be swapped for another kind of security!

        Making ‘saved’ money convertible is gilding the lily, but it is useful in the mind of the holder of Treasury debt. The idea is to offer lenders something ‘more’ than repositioned Federal Reserve debt, that way the debt can be discounted @ redemption. Keep in mind this is a scam.

        What every economist knows is that the Treasury can simply write checks to retire debt as it matures. It an do this tomorrow with impunity. I’m not making this up, it’s Econ 101.

        Some might call this a default as the resulting fiat has no liability attached to it (the liability is self- liquidating, when the payment is made for the security). Treasury- issued fiat is hyperinflationary on its face! If it is made convertible to some degree the inflation issue recedes. As for who can convert and under what terms: in the beginning anyone who owned US debt and wanted to sell it could have the option of obtaining Treasury Greenback and also have the right to convert to bullion … at a price.

        What the price is, what the terms are and limitations would create opportunities for nimble investors, which might include (lumbering, graft-centric) big banks but would probably not. Treasury- issued fiat cuts finance out of the cycle. The idea is to have debt holders pay a premium for the fiat. A premium of cash to debt discounts the debt.

        Obviously, this would be is a ‘stealth default’ or reverse default as discounted gov debt would be swapped for (paper) gold. Nobody would know or care (except me, who invented the trade and you, who keep asking questions …)

        :>)

        With ‘Fed’ money, adding more into circulation or reserves (QE) is not necessary if the current float is made into demurrage money. This kind of money is non- inflationary as the fee (demurrage) is added to the initial amount. If you have $1000 in the savings bank, you must add 1% per month on a schedule — second Friday of the month — to this sum. At the end of the year your $1000 is worth $1120. You have to bring money by means of outside activity in the economy to gain that $120 … or simply spend the $1000 before the schedule says you must add the 1%. Most people would spend the money and have someone else pay the demurrage and have the goods/services.

        Bernanke would not need to add liquidity as velocity would have the same effect, meanwhile economic activity would increase. Over the longer term? I cannot say. Can this be gamed? Can Treasury fiat? Of course. But … that’s why we’re having this conversation!

        thanks, steve

      2. Reverse Engineer

        I’m going to try to play along with this as a thought experiment.

        First question I have in my head is given the distributed liabilities of Da Federal Gooberment, in terms of taking care of those liabilities, to which ones do they distribute Greenbacks first?

        You have to exchange FRNs for Greenbacks here over a course of time. You could use the new Greenbacks on a simple level to say pay Social Security recepients, while you collect in tax receipts FRNs. SS fund immediately goes net positive with respect to FRNs in this scenario. You can then use the net receipts of FRNs to retire some old Treasury Debt based on the FRNs, no need for gold convertibility or demurrage either in this scenario.

        Internally, so long as its LAW, merchants would have to accept FRNs or Greenbacks interchangeably at parity. SS recipients getting Greenbacks would tend to circulate them into the commerce system. However, you are in fact here running a dual currency system for as long as you still have FRNs floating, be they paper or digital. Reminds me a bit of the Cuban system where they have some internal currency and then some currency convertible on the international market.

        As long as you continue to use the old FRNs internationally retiring debt at par value, and use said FRNs to buy Oil internationally, the old valuations would seem to hold up here, at least for a while.

        The problem would be here I think is that the BIS would recognize the shuffle, and you would get commensurate relative devaluation of the FRN (internationally traded currency) to anything else being traded internationally. What is essentially occurring here is that you use one spigot to fill a pool of local water which gives you a surplus to use in international water.

        Until somebody else comes up with a more viable currency, which is unlikely in the near future, OPEC is still trapped by its connection to the Dollar, be it FRN or Greenback issued. They are also trapped by their dependence on the Big Ass Military to keep the Oil flowing and the commerce going. No commerce, the Oil they still have left under the ground is worth jack shit.

        Overall in the very short term I could see this working to do two things. First off it prevents the FSofA from going mathematically BK, that becomes impossible. Second, it probably keeps bond spreads in USTs from going completely ballistic, since they would continue to be paid off long as enough tax receipts are flowing in denominated in FRNs. You probably have to make a stipulation taxes can only be satisfied in FRNs, not in Greenbacks, and tag the money digitally with identification as one or the other. They could spend the same in local commerce, but they would not be created Equal far as Taxes were concerned.

        The problems that are not considered here are of course still immense. Numero Uno is how this plays out in the derivatives market. You simply could not pay off counterparty obligations in derivatives with Greenbacks, that is just SUPER HYPERINFLATIONARY. Second is WTF you do about state and muni debt, and their payment obligations in terms of debt service, pensions and payroll. I don’t think you could use Greenbacks to meet those obligations either without hyperinflation ensuing. Third is, I think the ensuing chaos would collapse the TBTF banks, and pretty much lock up liquidity across the world, putting a kibosh on international trade, letters of credit, etc.

        Nevertheless, its probably a Kick the Can that will keep something moving here for longer than a straight up UST default.

        BTW Steve, you should join me over on my Yahoo Group. Your insights would be appreciated

        http://tech.groups.yahoo.com/group/reverseengineering/

        RE

      3. steve from virginia Post author

        Sorry I haven’t gotten back earlier, too much ‘other crap’ … blogs are really for retired people who have the time. Unfortunately, those who are retired lack the energy to blog. Vicious cycle …

        I saw this over @ FOFOA site, this blogger is a free-gold Austrian but he has a wealth of information, like Murray Rothbard has a wealth of information:

        Following the Gold Reserve Act of 1934, the Treasury gained title to the entirety of the US monetary gold (including $3.5 billion which was currently being held by the Federal Reserve banks). From that point on, the Fed has received [from Treasury] private issues of new-fangled gold certificates in $100, $1,000, $10,000 & $100,000 denominations — not to be paid out and not for circulation.

        So the Treasury took 175 million ounces of gold from the Fed, paid the Fed in DOLLAR-DENOMINATED certificates for this gold at $20 per ounce, then revalued gold to $35 per ounce. So if the Fed had even been able to redeem those certificates for gold in 1935, it would have only gotten back 100 million ounces. The windfall of 75 million ounces of gold ($2.6 billion), in this case, went entirely to the US Treasury and not the Fed.

        The entire Treasury windfall was $2.8 billion and was the reason and the funding for the establishment of the ESF, the Exchange Stabilization Fund in 1934. So following the Gold Reserve Act of 1934 100 million ounces of gold were already automatically monetized. The rest of the US gold was eventually monetized through the Fed. The way this happens is the US Treasury issues fancy new non-negotiable, dollar-denominated gold certificates to the Fed and the Fed credits the Treasury account with dollars.

        Today, all of the US gold has been “spent” in this way, but only at the price of $42.22 per ounce. That’s 261,511,132 ounces of gold monetized at roughly $11 billion, money that was spent long ago.

        So you see, the Fed cannot mark the US gold to market. It cannot even revalue the US gold. Only Congress can. And even if Congress DID revalue the gold, it would not change the Fed balance sheet by one penny. The Fed only holds dollar-denominated certificates worth $11 billion, payable in gold, but not really. It’s kind of like Aramco in 1945 who owed the Saudis $3 million, payable in gold.

        If Congress DID decide to mark the US stockpile of gold to market today it would find it had a new stream of revenue. At today’s price of $1,328 per ounce, the US gold would be worth $347 billion. Subtract the $11 billion already on the Fed balance sheet and Congress could immediately ask the Fed to credit the US Treasury with $336 billion new dollars to be spent.

        Learn somthing new every day: the Treasury wouldn’t have to take any extraordinary action to monetize Fed gold reserves it turns out it already possesses, it only has to revalue these reserves to market.

        There is more, blah blah blah, doesn’t get into what to DO with this ‘new’ money, but being a non- inflationary gold- backed form of ‘money’ it would have a lot of horsepower @ the margins of the Great American Debt Machine.

        None of this has to do with the ongoing issues of unfundable liabilities or living beyond means, generally.

        FOFOA also has another (extraordinarily long and repetitive) article about dollars and oil trade back in the early 1970’s.

  9. Josh

    Just as I suspected, the total number of goods-producing employees correlates closely with the yield of the T-bill. When we had a lot of workers making stuff as Obama would say rates rose to compensate for real inflation. Now that we don’t make a goddamned thing except movies and debt rates have collapsed to zero because the system is deflating.

    http://i56.tinypic.com/p6gb4.jpg

    And as the number of employees in the private sector continues to drop so will everything else.

    http://i53.tinypic.com/28jw138.jpg

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