Friday, October 2, 2009

Chartilist Monetary Theory Insanity

There is no doubt that operating under fiat currency introduces a new monetary theory that most people have not grasped, but the Chartilists have apparently jumped off the deep edge, as they have come up with a new theory of money that recommend larger government, zero interest rates, and expanding deficits.

Their basic argument appears to be that after the passing of the gold standard era in 1971, governments are no longer revenue-constrained, and thus, government money is free and goverment debt is just fine, better than fine, really, since government debt drives down interest rates and provides savings. To them, opposition to more government involvement and expanded deficits just boils down to "an ideological obsession that government is bad and private markets are good."

It seems we have run into another species of the modern Greenbackers, who believe that government money is now free, with the main difference being the Chartilists are based out of Australia. Frankly, these people are positively dangerous. I am tempted to attribute their lack of realistic thinking to the fact that they are leftists, and liberalism is defined as the substitution of fantasy for reality.

See, for example, this: "Imagine if the government saw through all the smokescreens and announced they were no longer issuing debt and would just continue to credit bank accounts as necessary to support full employment? The neo-liberals would scream inflation … but would soon run out of steam with that line of attack."

Also, this gem: "Why will inflation rise? With capacity utilisation rates so low around the world and spare labour capacity what will generate a widespread inflation? Perhaps oil prices? But that will be due to an olipolistic cartel (OPEC) and nothing to do with the deficits." (source quotes here: http://bilbo.economicoutlook.net/blog/?p=5219#more-5219)

The fundamental issue can be boiled down to the question: since fiat-currency issuing governments can print their own money, why collect taxes at all, why not just issue new money to pay for government expenditures? The proposition sounds simple and self-evident, but glosses over some very deep problems.

The most fundamental problem is this: a) money that is created without an accompanying creation of real wealth is inflationary and b) government action does not create wealth. Thus, governments that issue new money to cover current expenses quickly spiral off into an inflationary tailspin. Money created to fund a service is inflationary because once the service is performed, the money still remains and so we have an ever-expanding money supply.

Compare that with a pure credit clearing system, a la Thomas Greco, wherein mutual credit is spontaneously created and extinguished in a balanced fashion with every economic transaction. Such credit clearing is non-inflationary, since credit is created then extinguished. If money had to be created for each transaction instead of credit, the volume of money would quickly rise exponentially. This process accounts for such historical inflations as occured in colonial Canada when, in response to a coin shortage, playing cards became money (described here: http://www.micheloud.com/FXM/MH/canada.htm).

Thus, to balance government expenditures, taxes must be extracted in an equal amount. Any excess of government expenditure above the amount removed through taxation is, by definition, inflationary. That is the problem with government deficits. Deficit spending is inherently inflationary, as they introduce money into the system without the creation of wealth.

Now, some might object, government could theoretically introduce money to pay for wealth creation activities. That point is true, it could. But it doesn't. That is not that nature or function of modern government. We don't have a wing of government devoted to creating economic wealth, although the Chinese do, and it is working fantastically for them.

Our governments, like China's, could indeed create entire industries from scratch with fiat money, and produce no inflation. Such industries would be an economic positive if they competed with foreign industries, or created industries that otherwise did not exist at all. But the fact is, most of our government programs today fund only welfare programs, which are transfers of wealth, not wealth creating.

It is a standard Keynesian idea that in times of economic downturn, government ramp up spending to replace shrinking private spending. The idea makes perfect sense, and works wonderfully, when targetted on wealth-creating industry and not connected to the fact of high and increasing debt.

When stimulus money merely goes to filling budget gaps, while increasing the debt load, the treatment is worse than the disease, because the economic condition post-stimulus will be worse than it was pre-stimulus.

3 comments:

wraft said...

The Chartalists base their fiat money on taxes and public debts. The fiat money acquires value through its
acceptance by the government for taxes. Fiat money can also be used for private transactions.

The legal tender laws which make fiat legal tender for all private debts, however, subject the people to confiscatory inflation. If fiat could be rejected for private debts, then it would be less objectionable.

It would seem that expenditure for useful public works would not be inflationary because these expenditures would stoke the productive economy. Funding the government without taxes would be limited by the need to keep the fiat from inflating, so that it would not be possible to put everyone on the dole.

Justin said...

Great point, wraft. If fiat could be rejected for private debts, not only would it be less objectionable, there would be strong pressure on govt NOT to inflate it.

And I like your analysis: the tradeoff for no taxes is no welfare. It is another good formula for small government. Perhaps the Gold Standard people have never considered that option.

Ralph said...

I agree that some Chartalists are crazy: that’s the ones who think we can print money in limitless amounts with impunity.

On the other hand, given an economy which is expanding in real terms and which enjoys what is generally accepted as the optimum amount of inflation, i.e. around 2%, then government will have to print SOME extra money every year so as to keep the monetary base expanding in real terms and in line with the expansion (in real terms) of the economy.

I didn’t like this para of the above article:

“It is a standard Keynesian idea that in times of economic downturn, government ramp up spending to replace shrinking private spending. The idea makes perfect sense, and works wonderfully, when targetted on wealth-creating industry and not connected to the fact of high and increasing debt.”

1. The idea that politicians can target particular industry and bring beneficial results is very questionable. 99% of the time they make a hash of it when they try “targeting”. I suggest feed additional money to households and let them decide what extra products they want, and let businesses compete to produce those products.

2 Re “and not connected to the fact of high and increasing debt.” Standard Keynsian “borrow and spend” DOES involve extra government debt, which is one reason I’m against it. I prefer plain straight forward monetary base expansion. Monetary base is by tradition counted as part of the national debt, but this is pretty much of a nonsense. As Willem Buiter put it "These monetary base ‘liabilities’ of the central bank are not in any meaningful sense liabilities, because they are irredeemable." (Buiter is a former member of the Bank of England monetary policy committee.)