Keith Evans
Aug 28, 2017 · 3 min read

As I see there are two ways to expand the economy (IE create economic growth) .. 1. sell more treasuries to increase the money supply (creates debt) .. or 2. Increase money velocity (increases activity without debt, even increasing tax revenues).

This is somewhat accurate with a couple of important caveats.

  1. Congress is the only entity that can authorize Treasury to sell bonds and it does so in co-ordination with the Fed via budget appropriations to fund its fiscal policy. The sale of bonds doesn’t create currency, as existing currency is required to purchase them. Currency is only created when the bonds are paid at maturity with “new” currency appropriated as debt service. (Interest payments are made semi-annually) Until bonds mature they remove currency from the economy, like taxes except temporary (30 yrs) and with a small amount of interest. The bonds being paid today with new currency represent money the government spent 30 yrs ago. After accounting for trade deficits and wealth creation, not much of that spending has benefited the economy, and I don’t believe that’s going out on a limb at all.
  2. Taxes were never a “revenue” for government. Prior to leaving the gold standard taxes simply gave Congress policy room to provision itself without inflating the currency in relation to the gold reserve. Treasury reported the balance with the category called “debt/surplus” so that Congress could see which way it needed to act. If the currency supply exceeded the value of the reserve it needed to levy taxes before it could spend without inflationary pressure. If the currency supply was less than the reserve value Congress could either spend more or reduce taxes as the economic/political conditions warranted.
    There is literally no function that allows Treasury to move collected taxes to a reserve account from which it spends. “ALL” spending is appropriated with new bonds and taxes are “canceled” currency. This makes it impossible to “redirect” money via taxation. One can’t redirect canceled currency.

As money velocity decreases debt increases because you have to grow thru treasury sales which adds to debt.

Taxation, following WWII, was a method of directing investments in the private sector. Top marginal rates were punitive (90+%) but exemptions and deductions were freely available for productive investments. This motivated investors to take their profits as shareholder equity in industry instead of buying paper shuffling financial instruments. Along with the New Deal, this created the greatest peacetime economy in history as industry was funded to expand into the global markets created by the destruction of foreign manufacturing during the war.

RayGun’s tax cuts, and all those that followed for the investment class, served to starve industry of funding as much as they promoted the financial sector. When given a choice between protecting wealth and making more wealth the big investors will choose wealth protection every time. They already have more wealth than the next ten generations of their spawn can squander if they can just keep it from eroding. Financial instruments, which were 7% of GDP in ’84, are now over 20% of our GDP, severely hampering efforts to create velocity of the currency and the middle class workers are having to leverage their own debt to compensate, creating even more attraction of investment in financials. The all but non-existent interest on bonds from the Fed’s monetary policy even further exaggerated the effect of Congress refusing to use fiscal policy to inject currency, only making it somewhat cheaper to go bankrupt.

Without the ability to effectively direct investments with tax policy the choices for creating velocity of currency in the economy are either to use fiscal spending policy and spend into the economy at as low a level as possible, or to allow it to become anemic of actual currency and utilize private debt to compensate for economic drains of trade and wealth. The latter, obviously, was the choice over the last few decades and that fueled asset bubbles, especially in real estate, that were fragile and popped with the slightest dip in the business cycle. As this erodes the working middle class more of the budget is forced into automatic stabilizers, such as unemployment, WIC, SNAP, etc and things that could shore up the economy in the future, such as infrastructure, education, health care, etc have to be cut. From the viewpoint of any but the most rabid supply side economists we are being destroyed from within by economic idiots pandering to other economic idiots for their votes.

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    Keith Evans

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    Meandering to a different drummer.

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