Keith Evans
Aug 25, 2017 · 4 min read

Excellent analysis. However, it begins with a misconception that will cause either BIG or GJ to fail, and that is finding revenue to pay for them. Such thinking is completely understandable as it is arrived at via everything we know about our personal finances and the fact that few nations have yet transitioned their economies away from the rules of economics of a commodity backed currency, ie: gold standard. When taking on such large and impactful changes to an economy as is presented by either BIG or GJ it will be critically important to do so from a functionally correct knowledge of how the currency is created and how fiscal policy is funded.

With the gold standard the currency was a representation of a finite commodity held in reserve, so its mathematical relationship to the total value of the commodity “backing” it determined its value. Increasing the currency supply without increasing the commodity reserve affected the value of all of the currency in circulation, ie: inflation. Conversely, fluctuation in the value of the reserve commodity influenced the value of the currency as well and could cause deflation/inflation.

While having a baseline value against which various currencies can be measured is convenient in international trade the limitations imposed on domestic economies and the value of their currencies make it unsuitable for growth and investment in the domestic economy. One of those limitations is that it greatly favors exporting economies over importing economies as imports drain the commodity reserves. With a commodity backed currency an economy that outgrows its domestic supply of important resources, such as oil, finds its ability to tax severely limited and important government services must be cut to avoid further inflation of the currency.

This means that infrastructure investment and other basic support of the economy is also curtailed and this can lead to a circling of the drain as the United States is currently experiencing, even though it no longer has a commodity backed currency. The management of the currency and fiscal policy has as much, if not more, impact than the actual supply of the currency if the critical differences aren’t acknowledged and used when implementing policies. Managing any system by the rules and assumptions associated with another system is all but a guarantee of failure, no matter how attractive or politically expedient it might be.

The government, as the issuer of the sovereign fiat currency, is not constrained by revenue, nor can it involuntarily run out of the currency it issues or fail to pay any obligation denominated in that currency. Without a commodity to act as the baseline giving the currency value the role of inflation in the economy is determined by the availability of goods and services to purchase and productivity, not solely the amount of currency in circulation. Inflation occurs when scarce production output is bid upward by the demand created by abundant currency and this relationship is better balanced by investment in production capacity than by curtailing the currency supply because demand without sufficient currency leverages private sector debt that is then subject to the whims of the business cycle, as we saw in ‘07-‘08.

AI is going to effectively disconnect income from the standard definition of work, and this can lead us into a new era of prosperity and positively change the dynamics of how people relate to the economy, or it can disrupt a self protective status quo that will respond reflexively to the detriment of markets and business. The latter is currently trending in government as it has mostly abandoned its primary function of protection of its citizens in its policy and rhetoric. This has resulted, at least in the US, in resource wars thinly veiled in the label of countering terrorism, and a general decline in prosperity while the overall economic gains set new records. Obviously, this can’t continue in the face of even more disruption as AI gains influence in production.

Government is going to have to adjust its fiscal policy to the reality of the sovereign fiat currency and realize that paying for either BIG or GJ is best done by simply paying for it. While I believe that the best route forward is a combination of both, neither works if its funding must come from taxation. This is especially true when one assumes such tax policy would be heavily influenced by those who benefit most from the status quo and their wealth would be disproportionately sheltered.

Taxation will, going forward, serve a purpose, especially as it is applied to private sector investment that potentially drives up pricing of rents and commodities, but it never will be, or has been, a revenue source for spending. In fact, tax in the US “cancels” currency and there is no function of the Treasury that applies it to spending appropriations that are entirely funded by new currency. Spending into the private sector “creates” currency and taxation “cancels” currency. End of story.

The “debt” that is currently used as a political club/tool to garner support for austerity policies is nothing more than an accurate accounting of the “savings” of the nation, albeit horribly distributed, that hasn’t been canceled by taxation, and represented in Treasury instruments. As such, it is all but meaningless as a motivation for spending policy, but the application of household budget type thinking and its misleading labeling has driven poor fiscal policy for a half century.

The US also suffers from a general mistrust of the federal government that is unwarranted in a democratic system of governance. This mistrust has enabled most of the misconceptions surrounding the currency and the misapplication of the responsibility of government to govern in the best interests of the citizens, although that has been mostly a chicken/egg issue resulting from the corruption of government that is only enabled by the mistrust. Either way, there is no way to implement BIG or JG without expanding the role of the federal government as the monopoly issuer of the currency and that isn’t likely to happen without the collapse of the current methodology and the general economy, again. Blaming the canaries for dying in the coal mine while pushing deeper underground has been too successful as political strategy to expect it to be reversed by any realization of reality.

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    Keith Evans

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    Meandering to a different drummer.