13 February 2011

Modern Monetary Theory Part II: Money and The Limits of Empire

The limit of the Fed's and Treasury's ability to create money is the value and acceptance of the dollar and the bond in market transactions.

The Weimar government never 'ran out of money.' Zimbabwe never 'ran out of money.' And if interest is paid 'in your currency money' you can never fail to service your debt either.

What they did run out of were people willing to take their paper at its intended value, from the outside in. Outside means those who are exterior to their compulsion of legal tender.

This is why the system breaks down unless you can extend an ever greater circle of coercion of paper valuation. Without the complicity of a few well placed allies like the Saudis, the dollar would already be done.

It really is that simple. That is what makes it a sophistry. "I can print money, therefore I can never go broke."

There is nothing modern about it. It is a just a ponzi scheme with a sovereign backstory. It is just the same old song with slightly different words of imperial hubris and overreach, back to the days when King Canute disproved the limits of the will to power to his advisors.

There are much more elegant defenses of this scheme, coming out of the friends of the Fed. But they generally obfuscate the tag lines more elaborately. Or they just skip the story and try to appeal to the authority of ridicule.

So again I thank Cullen for stating the case so simply and so straightforwardly.

The US dollar, which started out well, has become a ponzi scheme. There are those who can be forced to participate by the laws of legal tender, and their authoritarian regimes who are its allies. Value is what the Federal Reserve says it is, and however it chooses to distribute it.

A sound currency is both a medium of exchange and a store of value. It is not clear to me that the dollar has passed the point of no return. But it is obviously unstable, as much now a wealth transferral mechanism as a store of value, being the principle medium and bulwark of a corrupted system. And therefore it is making its holders understandably nervous. Without a serious reform of the financial system and the economy, the dollar will continue to decline and eventual reissue.

This is not to say that the Fed is evil. It is to say that it is merely human, requiring the restraint of law and oversight, audits and constraints. In their wisdom the framers of the Constitution required checks and balances, knowing full well the hard lessons of history and human nature. And in their error, some men have placed themselves above the law and such constraints, ironically in the name of 'independence.'

In general, the impulse to liberate the natural goodness of markets and institutions by dispensing with regulation and oversight merely knocks down the fences, giving free range for the rapacious wolves to do their worst. And this has been their objective from the first.

Every thing secret degenerates, even the administration of justice; nothing is safe that does not show how it can bear discussion and publicity...The danger is not that a particular class is unfit to govern. Every class is unfit to govern.”

Lord Acton