Re: Taxes, 'reflux' and the value of the currency

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

In 1969 the IMF created the SDR, an artificial currency unit defined as a basket
of national currencies. The SDR is used as an international reserve asset, to
supplement members' existing reserve assets (official holdings of gold, foreign
exchange, and reserve positions in the IMF). The SDR is the IMF's unit of
account: IMF voting shares and loans are all denominated in SDRs. The SDR serves
as the unit of account  for a number of other international organizations,
including the WB. Four countries maintain a currency peg against the  SDR. Some
private financial instruments are also denominated in SDRs.
http://www.imf.org/external/pubs/ft/usrgsdr/USERCON.htm


"J. Barkley Rosser, Jr." wrote:

>      So, what is the SDR?  It is not a physical
> entity that serves as a medium of exchange.
> It is not used by anybody to pay taxes to any
> government in the world.  It is a pure unit of
> account used by the IMF.  It may be the highest
> or most universal standard of value in the world.
> But, is it money?
> Barkley Rosser
> ----- Original Message -----
> From: "Per Gunnar Berglund" <pgberglund@xxxxxxxxxxx>
> To: "PKT" <pkt@xxxxxxxxxxxxxxxx>
> Sent: Wednesday, January 02, 2002 1:31 PM
> Subject: Taxes, 'reflux' and the value of the currency
>
> > A couple of general notes on the conceptual apparatus and the role of
> > taxation in the Chartalist approach to monetary theory:
> >
> > As Warren Mosler and I recently discussed on this list, the term
> 'currency'
> > denotes a name (such as the dollar, the euro, the yen or the pound) but
> also
> > objects corresponding to that name. The latter should in principle be
> > quantifiable so that we can estimate the total value of the outstanding
> > stock of currency at any point in time.
> >
> > The nominal amount of any financial stock will change by two mechanisms:
> > transactions and valuation changes. If we (temporarily) disregard the
> > latter, we will need to identify the types of transactions which bring
> about
> > a change in the quantity of currency.
> >
> > I had proposed two basic concepts, which I called MA and MB, respectively.
> > MA is defined by its being injected only by government spending and
> > withdrawn only by taxation (including fees, etc.); MB is characterised by
> > being spent or lent into existence and taxed and borrowed out of
> existence.
> > So the difference between the two concepts is that MA excludes the lending
> > and borrowing channel, while MB includes it.
> >
> > Depending on which definition we use, the resulting amounts of 'currency'
> > will be vastly different. MA will correspond roughly to the public debt;
> MB
> > will correspond to 'high-powered money'. In practice the amount of MA will
> > be an order of magnitude bigger than the amount of MB.
> >
> > MA will consist of many different types of instruments, e.g. T-bills,
> bonds,
> > time deposits, et hoc genus omne. Owing to fluctuations in yield rates,
> the
> > market value of these instruments will be liable to change even in the
> > absence of the spending and taxation transactions which impact the
> quantity
> > of government debt or MA. These valuation changes will figure in as
> 'holding
> > gains' (to use the official System of National Accounts term) and close
> the
> > gap between opening and closing balances of the stock. All this is fine
> and
> > well.
> >
> > A troubling feature of MA is that the value of the stock of 'currency' in
> > this sense can change *in terms of the same currency unit* without any
> > transactions taking place. It would seem more satisfactory to define
> > 'currency' such that its per-unit value in terms of the same currency unit
> > remains constant. MB satisfies that criterion since it is made up of
> > homogeneous 'stuff' the constituent parts of which stands in a constant
> > exchange ratio of 1:1 to one another. Moreover, MB has the advantage of
> > corresponding closely to ordinary usage, indeed if we were to exclude
> > reserve deposits from MB, it would be tantamount to what is generally
> > recognised as 'circulating currency'.
> >
> > Now, the chief role of taxes and more broadly 'reflux' in the theory of
> > money seems to me to be to limit the quantity of currency in existence. If
> > we were to work on the basis of the MA concept, we would find that
> taxation
> > is the sole channel of reflux, and that limiting the size of the
> government
> > debt inevitably involves taxation. I take it Mosler's chief point, which
> he
> > expresses in a rather peculiar way, is that taxation serves to limit the
> > government debt. If the debt is too small there will be depression and
> > unemployment; if it grows too large there will be inflation, eroding the
> > value of the currency. The mechanism involves expectations as well: even
> if
> > the stock is limited now, the expectation of a future surge would tend to
> > cause a flight from the currency now. So taxation plays a role in that
> > respect as well.
> >
> > But if we work on the basis of the MB concept, we find that taxation is
> > merely one reflux channel; there is also borrowing. The State can limit
> the
> > stock of MB by offering bonds and bills on the market. As Basil Moore,
> > William Hummel and many other fellow 'horizontalists' keep pointing out,
> it
> > will be difficult if not impossible for the State to fine-tune the stock
> of
> > MB without wreaking havoc on the interbank market. For this reason, the
> > alternatives to cash will be offered at reasonably stable yield rates, and
> > the stock of MB will be allowed to fluctuate from day to day in accordance
> > with the demand for it.
> >
> > From a policy point of view it makes a world of difference if the 'value
> of
> > the currency' can be secured only by taxation or if it can be equally
> > protected by simply 'sterilising' any excess currency by issuing
> > interest-bearing securities. The latter view would correspond pretty
> closely
> > to the ordinary Wicksellian notion embraced by many central banks that a
> > combination of adjustments of interest rates and government deficits will
> be
> > required to secure sufficient reflux and thus prevent the quantity of
> > currency to grow so as to cause inflationary pressures.
> >
> > An important contention in either case is that the Chartalist approach to
> > money as hitherto developed does not seem to add much to the understanding
> > of inflationary processes and to the formulation of appropriate policies
> to
> > deal with the problem. It all boils down to the standard prescriptions of
> > limiting the growth of government debt (which is the 'Keynesian' MA
> > approach) in order to prevent a build-up of excess demand pressures or
> > limiting the growth of the stock of high-powered money (a 'Monetarist' MB
> > approach) to prevent excess supply of it.
> >
> > If we are to break new ground, I think we will need to look into the
> > 'functional' aspects of financial relations along the lines suggested by
> > Circuitist theorists (a theme which Gunnar Tomasson has brought into this
> > discussion), see how it may be integrated with the Chartalist notions. The
> > core point in this respect, it seems to me, is to recognise that
> businesses
> > and households are 'functionally opposite' in the economic scheme, in that
> > the former are always (net) debtor while the latter sector taken as a
> whole
> > must be a net creditor providing businesses with their financial means. We
> > should make a distinction between the State's financial relations with
> > businesses on the one hand, and its financial relations with households on
> > the other. I am confident that building up a conceptual apparatus along
> > these lines will prove worthwhile and useful for a more complete
> > understanding of the functioning of a monetary economy.
> >
> > Per
> >
> > _____________________________________________
> > Per Gunnar Berglund
> > CEPA    80 Fifth Avenue, 5th floor    New York, NY 10011
> > Tel: (212)229-5901, ext.327    Fax: (212)229-5903
> >
> >
> >
> >
> >