Backed Money/reply to Mike Sproul

[Warren Mosler <mosler@xxxxxxxx>]

MS: Not correct. If the treasury security is the Fed's asset then I have

no claim to it. Bank of America has a true "account" at the Fed, in the
form of reserves. It is just like B of A having a checking account at
the
 fed. B of A might have deposited a $100 T-bill at the fed and gotten a
$100 account at the fed, but the account is the account and the T-bill
is
 the T-bill, and it is the fed's asset.

>Legally of course you are correct.

Since neither of us seems to have budged an inch, let's see what we
agree on:
1. IF money is backed and convertible, then its value is determined
purely
by backing and convertibility. The quantity of both base money and
derivative money can rise and fall without affecting the value of money.

>That being said, let me complicate it a bit by introducing a tax
>liability that exceeds the available supply of the 'gold' or whatever
>the 'backing' is.  In this case tax liabilities, for all practical
purposes,
>due to finite supply in private sector hands, can not be met by
presenting the >'gold' to the Fed for that which is needed to pay
taxes.  I think you
>see what I am getting at?  Taxes denominated in the govt's 'unique'
creation
>are the ultimate in 'imperfect competition.'  For the govt to be able
>to buy what it wants it has to be able to offer something (like units
>of its currency) that is 'needed.'  By offering 'gold' it can
accomplish
>that to some extent, but that can be enhanced by a tax large enough
>to insure that the government will be able to buy more than just gold.


2. "Convertible" can mean "convertible now", "convertible in the
future",
or "convertible with a probability of less than 1", and the only change
in the argument would be that delays and uncertainty would reduce the
value of the money.

>As above.

3. Backing can be "negative" in nature. One piece of paper can have
value because it allows me to claim an ounce of gold. Another can have
value because if I give it to the tax man, he won't break my door down.
If my
door is worth an ounce of gold, and if breaking it down is all the tax
man can do, then that piece of paper will be worth one ounce. (By the
way,
if the tax man loses the ability to break down my door, the paper
becomes worthless.)

>yes to all the above.

As for disagreement:

1. You would say that the suspension of convertibility of the dollar
was a "termination". Isn't it more reasonable to call it a "reduction
in the probability of future convertibility"?
>ok


And if so, don't you have
to fall back on saying that backing matters?

>If you can find someone who holds $US in the hope that
>someday he will get an oz of gold for $35 again you are
>correct.  And as I'm sure in this country of 300 million
>and an even larger world population who may think the same
>there probably is at least one person accumulating $ for that reason.
>So that would make you technically correct.  I concede the point.

2. Since derivative dollars can be created costlessly and without limit,

and since the tax man accepts those derivative dollars, I don't see the
validity of your 'tax acceptability' argument. Also, if the tax man said

"give me an ounce of gold OR a dollar bill", then it's easy to see where

value arises. If he just says "Give me 30% of the dollar bills that you
 have", how does the dollar bill acquire value?

>Taxes paid with bank deposit money debit a bank's clearing account
>forcing it to sell something to the Fed or borrow and post collateral
>to the Fed.  So the Fed is always getting 'value' in return for payment

>of taxes.

>True, if the taxes were paid to an account the Fed kept at a commercial

>bank, this is not the case.  But I think I worked this through again
recently
>in a previous post?  You come out with pretty much the same answer.
>Yes, with the current system private sector agents have the option
>of paying taxes via collateralized borrowing.  But they soon become
>uncreditworthy and are forced to sell assets.  Prices go into a
downward
>spiral until the govt buys something and clears the net indebtedness.
>That could be happening now in the US economy.

Best,

Warren


Best regards,
Mike Sproul