Re: Backed money/Mike Sproul

[Warren Mosler <mosler@xxxxxxxx>]

Mike,

I just started rereading your paper and much I had forgotten
immediately came back to me.  For example, I think I now
understand what you call 'backing' and I agree with its
importance concerning the price level.

In fact, I have always made the point myself that central bank
lending is always secured, and, if the CB lent unsecured in unlimited
quantities to member banks the currency would likely soon be
worthless.  Likewise, the CB controls the definition of bank capital
via its classification of bank assets, thereby regulating bank loans/deposit

money creation.  I now recognize this as what you call 'backing.'

It seems a lot like what I call 'exogenous pricing.'  I have
stated the price level is a function of what the govt. demands in
return for that which is necessary to pay taxes when it spends/lends.
I think we may be saying the same thing?  In your terms, there is no
market force that determines the 'backing.'  It is 'arbitrarily' determined
by the government as issuer of the currency.  The non government sector
needs the govt.'s spending/lending to comply with tax liabilities, and
the govt. 'sets' the terms of exchange via that provision of the needed
units
of the currency, whether it knows it or not.  If it does not 'back'
sufficient
quantities of the units of currency it or its agents (including banks)
provide by demanding collateral in exchange for spending/lending inflation
is likely to follow.  This applies both to govt spending and lending by its
banks whose deposits  can be used for tax payment.  Further, the govt.
'backs' its loans to member  banks via the collateral it demands in addition
to its bank capital requirements. I think your 'backed' is my
'collateralized?'

Given that, various non banks sell their liabilities such as commercial
paper, notes, and bonds and may lend unsecured or with less than
'100%' collateral.  In the short run, that could drive up the price level
and spending/lending could migrate away from the banking system.
But if the govt. 'sticks to its guns' and refuses to pay the higher prices
or alter the collateral it demands prices will eventually be 'forced' to
deflate to the point where the govt. is again spending/lending on its
terms.

And, to illustrate another point with a simple example, if the govt. had a
head tax of a total of 100 units, and gave away more than that, the currency
would have no value.  However, it could give away 99 and then demand
something
in exchange for that last unit which would determine the value of a unit
of that currency.

Warren