I don’t think you can talk about fiat currency without separating the currency from the property. By using fait apples as currency your currency is no longer fiat, but rather money on the apple standard, since the value of a fiat apple is set equal to one real apple. Let instead call the fiat apples dollars and have the following system.
The farmer and the builder decide that rather than carrying all of these apples and sculptures around its easier to negotiate the price of the apples and the price of the sculpture in dollars and trade those instead, and also since they are softies they also provide the Hippy with enough dollars to buy an apple every day.
Now the farmer raises 4 apples every day and the builder builds 1 sculpture a week, which takes one apple. They decide that an apple costs one dollar and a sculpture costs $17. Each week, the farmer sells seven apple to the hippy for $7, and Buys a sculpture from the builder for 14 apples and $3. So at the end of the week the farmer eats 9 apples and has $4 and a sculpture, and the builder eats 13 apples uses sculpts one apple and pockets $3.
After 9 weeks the farmer is sitting on $36 and the builder has $27.
Builder: You know what I’m hungry and tired, Farmer. here’s $26 give me 26 apples to eat this week and I’m not going to bother making you a sculpture!
Farmer: Oh yeah? Well for the next 3 weeks I’m only going to sell you 8 apples, but I expect my sculpture as usual. Here is $21 to cover the difference.
In order to resolve this conflict they negotiate that apples now cost $10 and sculptures cost $170, and that the Hippy will get $10 in fiat cash. 9 weeks later the farmer has now $396 and bulider has $297 so in order to avoid conflict apples now cost $100, and so on.
But this gets solved if they tax the builder and the Farmer $3.50/week each to pay for the Hippy.
If instead of purely fiat currency we used the apple standard, then the farmer gets screwed because unlike the builder he can’t raise his prices and doesn’t have anywhere to unload the fiat apples the Hippy gives him.
But it explains why it’s better to distribute the money first via government spending and then collect it back via taxation (which is the opposite way from how we usually think about it). The taxation creates the demand which is the reason it can be spent by the government.
If the government just took a share of money as it rolled off the presses at the mint, where would the demand come from? If there was no taxation why would people want to accept money?
Dollars represent goods at current price ratios, which reflect (among other things) current margins of production.
We don’t care intrinsically about the unit of measure. We could use dollars, or pounds, or yen, or magic space doubloons, to measure relative amounts of stuff – just as we can use kilometers or miles or feet or parsecs to measure relative distances. But the entire problem with using any unit of account whatever to measure relative levels of production is that the underlying geometry of marginal productivity is constantly changing. Using dollars to measure stuff is like using a ruler to measure the length, width, and height of a desk – where not only the length of the ruler is changing, but simultaneously the length, width, and height of the desk is changing, along with literally every other object that exists in space.
This is why inflation is such a tricky concept.
We get away with a unit of account when things change sufficiently slowly. Yes, the ruler is getting shorter while simultaneously the width of the desk is a little bigger, and the height and length a little shorter. It makes judging the volume tricky. But if the change happens slow enough, we can handle the relative relationships. Without looking it up: About much is a gallon of milk? A large flat screen TV? An automobile? A two bedroom house in your area? The national debt? You have an instinct for the relative magnitudes, even with very disparate kinds of stuff. That’s the advantage of using a single yardstick, even in a case in which not only the stick but also what it measures are changing.
I’m not quite following.
What can be done with the fiat apple?
It can’t be eaten, right? It can’t be sculpted? What is it used for exactly?
The problem with the idea is the plentiful evidence against it, at least in its strongest form. Cryptocurrencies are pretty much proof positive that government sponsorship, while definitely useful for establishing the value of a currency, is not strictly a necessary condition. No tax authority accepts crypto assets, and they are redeemable for no commodity on any fixed basis. Yet they are valuable. This is not unprecedented. The czarist ruble was said to have maintained its value after the revolution, even though it was no longer redeemable for gold. Their supply was stable, because there were no more czars issuing more, which apparently lent them value for at least some time even into the communist era.
This presumes a lot of things, not least of which is the existence of a multiplicative effect.
That was almost certainly true in 2008. It’s almost certainly not true today. And in the times when this multiplicative effect exists, without being unduly inflationary, there is really no need to tax by conventional means when the money can just be “printed”. Conventional taxation would actually be much less efficient.
No in my scenarios the magic apples really are apples.
I tried to make things really simple by forgetting about currency altogether and just talk in terms of goods. Just like fiat dollars are real dollars, I figured I’d think of fiat apples as real apples. Like what if we had the magical power to create things with value in the sense of, people want them? We do have that power (not magically) with fiat currency. In the scenarios, that power is found in the ability collectively to create apples.
(Why not just make magic apples all the time? They could, but I tried equating the idea of too many apples boring everyone with the idea of inflation. I tried. I tried. I had also written but deleted a thing speculating that in this world the three wouldn’t agree to just make free apples because every time they’d come to an agreement one party would say “actually no, I don’t agree anymore unless you give me one more free apple.”)
Chartalism: Rather than as a claim about what must necessarily happen for money to have value, can it be true as a claim about what in fact gives some actual currency their value, or gave it originally?
Gimme a sec, let me find a previous post from GQ about this during the American revolutionary period… Ah. Found it. Interesting topic about the early colonies issuing paper money to supplement the money supply given the relative dearth of specie, and allowing the paper to be used for tax payments to provide support for the value. It would work, when they didn’t print too much. (They often printed too much.)
I disagree. I think UBI should be at least partly discretionary, if not entirely.
It’s a popular image to imagine the lower classes just spending their money on booze and child porn, but in reality by and large people buy what they need.
If the regulatory process for approving who can sell what is strict then you may drive up the apparent price of essentials (versus just doling out cash) since you’re limiting the options by which a person can buy those things. If the process is loose, then the coupons become effectively fungible and people will be able to trade coupons for, say, cigarettes, through a middleman.
Also of course what if I want to start my own business; how can the UBI help me do that if it’s so constrained?
It’s very useful, e.g. to avoid inflation, that every entity’s books balance, i.e. that that entity’s earnings plus borrowings equal spendings plus lendings. By not creating fiat money, a government is simply playing by the same rules as other entities. Of course it could replace taxes with earnings, e.g. if it claimed title to the country’s mineral wealth. I’m not sure what OP’s plan is for destroying money to avoid inflation, but picking which money to destroy might be very similar to picking which assets or income to tax.
But when you get into details: It is important to distinguish debt markers from fiat money. A debt marker plays the role of “fiat money” only when the debtor is unlikely to repay his debt but someone is forcing you to accept the marker anyway.
Suppose I deposit $1000 at the Bank of America and the Bank lends $500 of that to you. M1 money, as that is defined, has increased by $500, but the “new” money is not fiat money: it’s the Bank of America’s debt marker. Similarly the money created by the Federal Reserve isn’t fiat money — the FRB’s books balance just the way Bank of America’s do. When you untangle the [del] paper trail[/del] the [del]block-chain[/del] the electron trail, the ultimate source of trillions in new money is U.S. Treasury borrowings.
So, given our actual monetary system, OP’s question reduces to: Why not keep cutting taxes? If the Fed doesn’t cooperate, we can just borrow that much more from countries like China.
Why not indeed? I dunno. The politicians who pretend to be most worried are the very ones striving hardest to increase the debt.
That’s not really any different from BitCoin or any other cyber currency. The only difference is that it’s too easy for other people to counterfeit Nemos,
Your cite doesn’t say the Fed doesn’t create money.
It says that most of the “broad” money supply of circulating stuff used by the public is created by private banks. Your cite is completely accurate on that.
It’s also completely accurate that the Fed creates money, too, specifically the monetary base, and it pretty much does so “by pushing buttons” as Frylock said.
That the books balance has nothing to do with anything. The Fed could issue liabilities without buying assets, rack up a bunch of negative equity, and the books would still balance in the fundamental sense that every debit in the ledgers would be matched by a credit. Changes in equity always balance the books, by definition. It’s an identity that cannot be false, when the books are accurately kept.
This simply isn’t true.
The Fed tends to buy Treasuries, but there is no law of the universe mandating that they have to. Plenty of other central banks don’t restrict themselves to their respective government’s debt, and even the Fed itself has not historically restricted its purchases only to US Treasuries. What it normally does is not a restriction on what it can do.
I think we are in agreement here. And all money was initially distributed by the government in the first place a long time ago.
My personal philosophy of tax and fiscal policy is to remove money where it is collecting, and move it to where it is scarce.
The massive instability of cryptocurrencies, the current bitcoin bubble and very probable crash are pretty much proof positive that while any arbitrary “thing” can be used as a unit of account, in order to be used in a stable economy, that “thing” needs to be backed by something real. In the case of govt currencies, it is backed by the faith and credit of the issuing govt. What is bitcoin backed by?
That was because in post revolution, the new govt hadn’t created a stable currency for the population to use, so they kept using the old unit of account, rather than switch to leaves or seashells. It was not because that was a good way of managing the economy. For instance, the rubble was absolutely worthless outside of russia.
This is true, but the existence of the multiplicative effect is not all that in doubt among actual economists. That spending money in the economy generates more money is kind of the basis for economic growth. The only controversial part that I’ve seen is where that money has the greatest effect.
Why is that? There is plenty of room for demand to increase, which would increase economic activity. People would buy more things if they had more money to buy them with. We are at pretty much full employment, but much of that is underemployment, where people are not making as much as they need to live, much less purchase extra goods and services to increase demand.
The lat 70’s early 80’s is the last time the multiplicative effect was not true.
There are times when the best way to inject money is to simply print it. Those times are when there is not much money for investment. Right now, there are trillions of dollars in excess reserves sitting in banks, looking for a place to be put to productive use. Investors are sitting on trillions more. The reason for the current stock market bubble is because investors are looking for any place at all to put their money. The govt can help to reallocate those funds to more productive use.
I am not one that subscribe to that notion, having spent most of my time hovering between the 4th and 5th quintile. I do however, realize that us lower classes do not always make the best financial decisions. Being issued a coupon that covers your basic necessities ensures that at least your financial errors will not lead you to homelessness and starvation.
It doesn’t need to be strict, and if people can find others who will give them money in return for coupons they themselves get, then that’s entrepeneurialship, I suppose, but I don’t see the demand for a coupon that every citizen gets to be all that high.
The point of a UBI is not to finance your business, it is to ensure that you have a safety net if it fails, allowing you to take that risk.
Anyway, the reason for coupons rather than cash is mostly to make it feasible to finance. Just as manufacturers and stores send you coupons rather than cash to buy their products. Not everyone will use the coupons, most don’t in fact. Sending coupons instead of cash ensures that only those who find it worth their time to use the coupons are receiving the assistance. A UBI needs to be sent to everyone, non-means tested, and couponing allows the consumer themselves to make that determination.
I am not against the idea of a direct financial payment as a part of a UBI as well, I just see that it would be much harder to pay for, and therefore, harder to make politically possible.
I’m honestly curious: both you and Frylock assume that I, the farmer (or the sculptor) am willing to pay for the hippy to mooch off me. Screw that. See the Aesop fable of The Grasshopper and the Ants. We’re not talking about someone who can’t work due to illness/injury/whatever, we’re talking someone (per the original example) someone too lazy to work.
Let him starve to death or let him decide that helping grow or sculpt more apples (or hell, start a new business making apple pies) is better than starving and the problem becomes substantially easier.
And then you get to the problem of, if someone’s labor is not needed in the economy in order for the economy to have enough surplus to support them, then why do they need to find a job in order to support themselves?
Pretty much by definition, if someone’s job is automated out of existence, then they could continue consuming the same as they were with a job, and the economy would be unchanged. The production of the economy did not get reduced when they left the job market.
If neither the farmer nor the sculptor needs the hippy’s help in order to produce what they are contributing to the economy, then what is the hippy to do?
All money- even gold and silver- is at bottom a promise: that if you accept this piece of paper (or shiny piece of metal, or lump of salt, etc.) in trade for something you gave up like food or clothing or medicine, someone else will accept that money in exchange for giving you something you need or want. Governments that naively think they can fund their expenses just by printing money discover that eventually the people will regard these promises as faithless. Taxation amounts to (no pun intended) putting your money where your mouth is- being willing to accept those same pieces of paper back as payment for debts owed the government.
What’s different about taxation of course is that it’s an obligatory transaction; you must “do business” with the government. And this gives taxation a unique role in modern economies. Taxation, along with a judicious amount of money printing, serves as a pump that helps prevent the sort of economic gridlock that happened during the Great Depression.