Re: Incomes and Exchange rates; part 2

["John B. O'Donnell" <jackodonnell@xxxxxxxx>]

Maria Laura Segura wrote:
>
> John,
>
> Here are some comments:
>
> > Any taxation, not just that of "incomes" [A concept
> > peculiarly defined by U.S. courts that is part of the
> > government practice of obfuscation
> > that confirms the tendency to mistrust government.]
> > can establish value of a fiat currency. Other methods
> > can also  establish value for a currency, but one is
> > enough. And, even with a method of giving currency
> > value, there is still a need for a method to give it
> > a particular value.
> >
> > In logical perception, taxation is sufficient but not
> > necessary to make a currency valuable. It is not
> > sufficient [It lacks the ability to respond sufficiently
> > quickly to changes in value.] to maintain a reasonably
> > constant value of the currency.
>
> I meant that only when taxation represents something to
> society it can give value to fiat money. No matter what
> you tax, if people don't pay taxes and the government
> spends in such a way that people feel paying taxes is not
> worthy money won't maintain its value. Especially once
> government starts financing its expenditure via
> inflationary tax.

My comments were to separate two functions:

1) Giving value to money; and,

2) Controlling the amount of value it has.

The ability to force the payment of taxes by tendering a specified
currency is all that is needed to give that currency value. It does not
matter how wasteful the government is with its revenue to accomplish
this end.

Controlling the amount of value the monetary unit represents is affected
by the proportion of the issue of that currency relative to its
application to all uses, including tax payments, other government
transactions and whatever private transactions find the currency
acceptable.

As Warren Mosler may point out somewhere along this discussion, so long
as the currency has value of any amount, the government does not need
taxes or borrowing to pay its bills. It needs these activities only to
maintain the currency at a respectable level of value. [i.e. - To
prevent unacceptable inflation.]

> > There are fools everywhere who trust government but we
> > can be grateful the sentiment is not universal. The only
> > reliable external insurance to constrain the misbehavior
> > of government is the power of the mob when the mob is
> > willing and able to exercise that power. [We can hope
> > that the threat is sufficient and governments do respect
> > that possibility, but they also push the frontier as far
> > as they can without inciting rebellion.]

> When you say mob, are you talking about something like Maffia.

No. I am speaking only of an angered populace like those who deposed
Ceaucescu [Sp?] and the marching mothers of Argentina who aroused enough
sympathy to get action. [They did, didn't they?]

> If that's the case,

It's not so <<SNIP>>

> > There are many other procedures [Gold standard, etc.] that
> > may appear to be "insurance" against the misbehavior of
> > governments, but since governments can and have throughout
> > history engaged in one form or another of coin clipping,
> > these other methods only appear to be insurance. We may all
> > wish it were simpler but the price of freedom and security
> > is still vigilance.

> I agree with you that the backing is a virtual insurance, it's
> just a promise of well behaviour and only if the governments acts
> correspondence with its promise the mechanism will work. You said
> that vigilance is necessary and having a fixed exchange rate and
> a fixed convertion rate makes the vigilance easier.

Yes. My preference for a measure like the CPI as the standard has the
same "virtuality" as a gold standard, but it has the advantages of:

1) It consists of enough variety to prevent the government from creating
an appearance of a stable currency without an actuality of same. With
gold as the standard a government can set the price high enough to be
certain that at least some of the supply is surrendered to the
government to be held in idle storage rather than meeting some other
demand. Inflation can then rage on until it reaches a point of
insufficient supply at the "official" price to leave a respectable
quantity in government vaults. Then the government either devalues the
currency or [as Nixon did in the U.S.] close the gold window and let the
currency float.

2) It most nearly reflects the actual value in use for exchanges.

3) It is [At least in the U.S.] the measure most used for contract
adjustments that are of sufficient duration for inflation to be of
concern.


			-- jbod
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