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Negative Interest Rates proves Two Things…

Conventional wisdom claims that a Government must tax and or borrow its own currency before it can spend it. If you try to work that out using a pencil and a piece of paper, you’ll find out that such a thing is irrational.

Submitted by Serban V.C. Enache…

It proves the fraud of mainstream economic theory [the fraud of conventional wisdom, including heterodox austrian economists], and it proves the stupidity of centrist establishments when it comes to managing a simple problem like sluggish demand. Conventional wisdom claims a number of things which violate double-entry bookkeeping and day to day operations. Let’s start off with exactly what hasn’t happened, but conventional wisdom says should have happened or should be happing. With record levels of state debt, we should be seeing high and higher interest rates – yet we’re seeing interest rates go negative. With record levels of state debt, we should be seeing fewer resources / inputs [both physical and financial] available for the private sector – yet precisely the opposite is the case. We should be seeing skyrocketing consumer price inflation, that hasn’t happened. Inflation is near zero. The main concern of business owners, big and small, across the board, is SALES [effective demand].

Conventional wisdom claims that a Government must tax and or borrow its own currency before it can spend it. If you try to work that out using a pencil and a piece of paper, you’ll find out that such a thing is irrational. The Government’s own currency is first and foremost a tax-credit. This tax-credit is a Government issued liability, but it’s a financial asset for the non-Government sector. We use money [in paper and electronic form] to extinguish Government money obligations on us, like Government taxes, fees, and fines. Applying elementary logic, we conclude that before the Government can tax its own currency and or pay interest on it, the Government first has to spend it into existence. The purpose of taxation is to create demand / acceptance for the currency. And taxing people in fiat is not the same as taxing in grain or cattleheads. The public seeks to sell its labor and output in Government currency, because they have to pay taxes, or incur the law’s penalty for not paying these taxes. Simplistically put, the logical sequence is the following… First, the Government announces a money obligation on the public, plus the penalties for those who don’t pay. Then the Government spends money, purchasing materials and labor from the private sector to provision itself [army, police, courts, roads, bridges etc]. And later on the Government taxes a part of what it has spent. Since the Government doesn’t want to employ all the labor in the country, it will take out less money via taxes than it put in via spending, allowing the private sector to net save in Government currency; the Government’s financial debt equalling the non-Government sector’s financial savings. And the private sector will issue private credit, and almost all of that privately created credit [legal contracts] will use the Government’s currency as the unit of account. The Government’s currency sits atop the money hierarchy in the respective society.

The Government spends net money into existence when it runs fiscal deficits. The part about matching bond issuance with the fiscal deficit dollar for dollar is actually part of monetary policy, and has nothing to do with “funding” the Government’s operations or programs. Bond issuance is about: a) mopping up liquidity resultant from the fiscal deficit; it’s a conversion of numbers from reserve accounts [liquid funds] into securities accounts [non-liquid funds] b) it’s a channel through which the Government pays interest [unearned income] to the bond holder.

The difference between a Treasury bond and a regular banknote you have in your wallet is that the former is a bond with a maturity date and interest yield attached to it, while the latter is a permanent bond with zero interest yield. Again applying elementary logic, we conclude that the interest on fiat money is whatever the currency monopolist decides. A positive interest rate is a subsidy, a negative interest rate is a tax. In our current situation, most countries in the world operate with a lot of excess idle capacity and unemployed labor [lots of people being kept in a state of involuntary unemployment]. Today’s situation is easy to fix, because the problem is a lack of demand; ditto for the GFC. The 2008 crisis was not a supply-side crisis. Factories and workers weren’t sucked up in another dimension. It was a negative demand shock, pure and simple, a crisis on paper. The factors which contributed to that negative demand shock are many and complex, and I won’t go into that now, since that’s not the point of this article.

Now let’s return to negative interest rate policy [NIRP]… Hack commentators like Max Keiser and others like to say “as night follows day [this can’t continue].” It’s pure rubbish. Yes, it can continue, it will continue for as long as central banks will maintain this policy. In other words, it’s not an issue of physics [laws of nature], it’s a political issue, it’s a political choice. The currency monopolist can’t run out of his own tax-credits, out of his own IOUs. He can operate with negative financial equity denominated in his own currency for as long as he wants. He can slap and keep a positive, neutral, or negative interest rate on his own currency for as long as he wants. And NIRP isn’t a neoliberal invention either, nor a recent discovery. Silvio Gesell [1862-1930] was a German merchant, economist, cosmopolitan libertarian socialist, and founder of Freiwirtschaft. Among other things, he supported demurrage, a policy of taxing cash, with the aim of discouraging hoarding and stimulating money to change hands [create economic activity by keeping money in circulation, rather than depress economic activity by allowing money to sit idle under a mattress]. The Islamic system of Zakat [giving alms], second in importance after prayer, is a form of demurrage. It applies to unutilized assets on a yearly basis, at a rate determined by asset type. For cash and gold it’s 2.5 percent per annum. A newer example is the Freicoin cryptocurrency, on which demurrage is levied at approximately 5 percent per year.

But of course, NIRP is not the same as demurrage. NIRP affects only bank reserves, which are checking accounts at the Central Bank. Banks use reserves for accounting and settlement purposes. The banks purchase cash with reserves in order to satisfy the public’s desire to hold physical notes. Cash notes escape NIRP. To implement NIRP in our current economic situation is another example of idiotic orthodox economists [the neoliberal establishment] using unusual policies to, ironically, further make the situation worse. They foolishly poured liquidity into the banking system after the GFC via Quantitative Easing [swap operations, not net money injections], thinking that more liquidity will make the banks lend more and thus get the economy back up – that didn’t happen. Now they think the banks are sitting on all this liquidity, refusing to lend these funds, so maybe taxing their reserves will get them to lend more. False. False. False. Banks do not lend out reserves to their customers when they approve loans. Banks are constrained in their lending by their capital [the spread between their assets and liabilities] and the actual demand for loans. Sales are a function of spending, not interest rates. Someone’s spending is another’s income. Poor sales are a result of lower spending levels. Poor sales translate into lower incomes, more layoffs, and reduced effective production levels. With households struggling to save, struggling to deleverage, relying on monetary policy to revive demand in the economy is an exercise in futility.

What’s needed is higher Government spending in net terms, preferably increased investment alongside tax cuts on labor. Reduction in fiscal drag, plus higher state investment in the real economy will trigger GDP growth, job creation, better wages and profits, and higher output. Personally I don’t favor NIRP and prefer ZIRP [zero interest rate policy] instead. But positive rates can work too. Goldbugs moaning about poor or negative returns on fiat money are hilarious, though. You’d think the price of gold would explode in this climate due to private sector desire to hedge against [almost non-existent] inflation; but the increased demand is coming from state actors, state actors who are blacklisted by the hegemon like Russia and China. And these countries aren’t running from some inexorable law of nature, they’re just trying to bypass a politically-created situation. As a side note, 2011 and 2012 gold peak prices were higher compared to 2019.

Conclusion

NIRP, ZIRP, and PIRP are political choices. None of them derive from any law of nature. Interest on fiat is not the same as interest on grain, metals, or cattle. Think of these policies like tools. We know that there’s nothing inherently good or evil about tools. But the way a tool is used and for what purpose, that’s what matters. NIRP in this environment is counter-productive. All of this shows that the independence of central banks with respect to monetary policy is a hollow fail-safe against “dumb, fickle politicians” meddling with the “system.” The politicians in charge of central banks, and make no mistake, they are politicians, are criminally incompetent and liars to boot. The executive branch should be in charge of monetary policy. The settlement payment system and lender of last resort mechanism should be handled by the Treasury – the department of the central bank should be absorbed by the Treasury. Oh, but we can’t have that. Populism is too dangerous. More people of all demographics might start to demand better treatment… It would blow up the whole mythology of the corrupt, rent-seeking, usurious, oligarchic establishment.

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montoyaM4A MMTM4A MTMJohn maynardM4A MMT Recent comment authors
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John Lockett
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John Lockett

The Central Banks should belong to the country or Government of the country and not a Banker or a group of Bankers, such the Federal Reserve or the Bank of England. Really all the Central Banks of all the countries in the world are in private hands , except IRAN and not sure about China. A question about Economics: About decoupling the USA economy from the Chinese one. My reasoning is that if at the moment, a supposition, if the minimum wage in China is USA$1.00 and in the USA is USA$15.00, in a ratio of 1:15. Therefore if drill… Read more »

M4A MMT
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M4A MMT

The biggest myth out there is that central banks are privately owned. That’s not true. Central banks were created by the legislative. A central bank is just a computer with a massive spread sheet. A central bank is never in a position to have or not have money. The problem is that rarely are they held accountable. That said, the root demand of fiat is Gov money taxation. If states decide to tax in a different currency, the value of the previous currency evaporates, and if the central bank isn’t incorporated into the financial scheme, they close their offices. The… Read more »

ian seed
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ian seed

The Federal Reserve is NOT state owned. Period.

M4A MMT
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M4A MMT

The BoE was nationalized in the first half of the 20th century.
The BoE turns over any profit it makes to the UK treasury.
The FED turns over 90% of any profit it makes to the US treasury, and 10% to its member state banks.

John maynard
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John maynard

No that is not true, the Fed turns over less than 1% of its ‘profit’ and by law it is not supposed to turn a ‘profit’. Why all the disinfo, Mosler ? wtf is your game.

John maynard
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John maynard

No that is not true, the Fed turns over less than 1% of its ‘profit’ when Desk trading volume overall is considered. And by law the Fed is prohibited from making a ‘profit’. Why all the disinfo, MMT ? wtf is your game? Central banks are not supposed to “make profits” they are supposed to manufacture MMT’s favourite stuff: digital derivative monetary illusions. And the Federal Reserve banks ARE flipping privately owned, son. The Bank of New York Mellon is publicly owned??

M4A MMT
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M4A MMT

Read the official data and figures. Federal Reserve Board announces Reserve Bank income and expense data and transfers to the Treasury for 2018, published 2019. The Federal Reserve Board on Thursday announced preliminary results indicating that the Reserve Banks provided for payments of approximately $65.4 billion of their estimated 2018 net income to the U.S. Treasury. The payments include two lump-sum payments totaling approximately $3.2 billion, necessary to reduce aggregate Reserve Bank capital surplus to $6.825 billion as required by the Bipartisan Budget Act of 2018 (Budget Act) and the Economic Growth, Regulatory Relief, and Consumer Protection Act (Economic Growth… Read more »

montoya
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montoya

how many billoins go to DB lol

montoya
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montoya

fed res is for sure good at doing bail outs!

John maynard
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John maynard

Notice how MMT did not reply to Ian about the Fed being privately owned. So is the Fed private or public? The answer is both. While the Board of Governors is an independent government agency, the Federal Reserve Banks are set up (as) private corporations. Member banks hold stock in the Federal Reserve Banks and earn dividends. Now riddle me that, MMT.

M4A MTM
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M4A MTM

The quasi private/state description is just there to put dust in people’s eyes, and make it appear as the Federal government is just like any other household or business, which it is not. It’s the rules setter. Only 10% of member banks get dividends, the rest of the 90% goes to the treasury. That’s the law. The stock which these banks hold in the fed is not like regular stock one has in a company. Also, the Fed doesn’t even print money. The Bureau of Engraving does that. And coins come from the US mint. Both of which are under… Read more »

montoya
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montoya

what a load of crap. Take any cash bill out of your pocket it say fed res note on it. and the federal reserve does NOT operate like all other central banks since the dollar is world reserve. When the dollar is toast M4A is toast.

ian seed
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ian seed

“Central banks were created by the legislative.”

Is that your evidence that they are state owned? Or do you base your assessment on what it says on the BoE website?

M4A MMT
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M4A MMT

BoE was privately owned by stockholders from its foundation in 1694 until it was nationalized in 1946. The Bank became an independent public organisation in 1998, wholly owned by the Treasury Solicitor on behalf of the government, but with independence in setting monetary policy.
https://en.wikipedia.org/wiki/Bank_of_England
You pathetic gold bugs are still stuck in the mythical gold standard epoch.

John maynard
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John maynard

But Mosler is the pathetic paper pusher here.

John maynard
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John maynard

Warren is so totally misled and pumps his propaganda everywhere, you have to wonder what his agenda is. “fiat is God ” says warren. Then he says no, you have to understand his “monetary theory”. Now that’s funny. And for some reason he is always here posting. Why?

M4A MMT
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M4A MMT

I’m not Mosler, you moron. MMT doesn’t claim fiat is god.
All you posts contain nothing but strawman after strawman.
And I’m not going to feeding you, troll, anymore.

montoya
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montoya

M4A so typical of all libtards.

montoya
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montoya

Banksters certainly hope so… that is why big US corporates manufacture in China and export the products back to the US and then call it US economic output! M4A just loves China resources! 🙂

Elwood Anderson
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Elwood Anderson

There’s a lot of information and detail in the post about how taxpayers are constrained (conventional wisdom) vs how governments that issue the money are constrained (modern monetary theory, MMT). Let me take crack at saying it in a little simpler way. Conventional wisdom says the government has to borrow or tax it’s people before it can spend the money it issues. MMT says the government has to issue its money before it can impose taxes on its people, because it demands that taxes be paid in the money it issues. If the former, how do the people pay their… Read more »

ian seed
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ian seed

This is the shittest article I have ever read on The Duran.

John maynard
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John maynard

“The settlement payment system and lender of last resort mechanism should be handled by the Treasury – the department of the central bank should be absorbed by the Treasury.” Ah, but MMT Mosler and wall street goons and hedge fund managers can *never* allow the debt of the US to be owned by the people. To revert profits from debt back to the citizeny via the Treasury where it belongs is anathema to MMT and the Evil Empire.

M4A MMT
Guest
M4A MMT

Again, strawmen and character attacks.
No MMTer I know would be opposed to this. In fact, MMTers advise sovereign nations to cease interest-bond issuance and to cease paying interest on reserves, to cease fattening bankers with interest.

montoya
Guest
montoya

But THAT IS the whole point… that M4A’s very existence is useless. No corrupt criminal fat cat incorporated bloated banker will ever do what M4A and MMTr’s want banksters to do, even when the system crashes again as one day it must. Meanwhile the federal reserve says its goals are employment and stable prices…. just like MMT says.

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