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

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

b) Repurchases

         Participants may use SDRs to make repurchases of the Fund's holdings of
their currency. Members wishing to acquire SDRs to discharge forthcoming
repurchases may seek Fund assistance in arranging such acquisitions in
transactions by agreement (see Section II.2). Except when a participant has
given
a standing authorization to debit its SDR account for repurchases or has
indicated a preference for using SDRs in making repurchases, the Fund
periodically asks participants if they wish to use SDRs or currency to discharge
repurchases in the forthcoming quarterly period. In such consultations with
members, the Fund takes into consideration the overall supply of SDRs available
for transactions by agreement and the volume of SDRs required by members to
discharge their repurchase obligations. A number of participants have given
standing authorizations to the Fund to debit their SDR accounts with
repurchases.
Suggested texts of an authorization to debit the SDR account for repurchases are
shown in Section V.3(c).

         (c) Use of SDRs in Quota Subscriptions and in Quota Increases

         Under the Eighth General Review of Quotas, participants were given the
option of paying 25 percent of their quota increases in SDRs or in a currency
specified by the Fund. The same option was provided for in the Ninth General
Review.
         New members were also authorized to use SDRs for payment of quota
subscriptions. In this connection, a facility for aiding members with
insufficient SDR holdings or a weak reserve position or both situations was
available whereby these members, with the Fund's assistance in finding
counterparties, borrowed SDRs from other members on the day of the former's
quota subscription payments. This facility is described in (e) below.

         (d) Other Transfers

         An annual assessment on members that serves to reimburse the Fund for
the operating expenses of the SDR Department and the interest on GRA holdings
comprises other transfers to the GRA.31

         (e) Arrangements for Same-Day Loans and Repayments in SDRs

         Fund members that participate in the SDR Department must pay the
reserve asset portion of the initial quota subscription and any subsequent
increase in quotas in SDRs, currencies of other members specified by the Fund,
or a combination of these assets. The balance of the quota increase or initial
quota subscription, expressed in SDRs, is payable in the member's own currency.

To assist members with insufficient reserves to make the reserve asset payments
for their initial quota subscriptions and for their quota increases under the
Eighth and Ninth General Reviews, the Fund established arrangements for a
same-day loan and repayment of SDRs. Under these arrangements, members that held
sufficient SDRs agreed with the Fund to lend SDRs without interest, fee, or
commission to other members who needed them for these purposes. A member with
insufficient reserves borrowed SDRs and used them to make the reserve asset
payment to the Fund. On the same day it drew in SDRs its newly established
reserve tranche position in the Fund, it used them to repay the borrowed SDRs.
The SDR loan, the quota payment, the drawing of the reserve tranche position,
and the repayment of the loan were all completed and recorded on the same value
date, thus allowing members with insufficient reserves to complete their quota
payments without cost or exchange risk while leaving the SDR position of lenders
unaffected.
http://www.imf.org/external/pubs/ft/usrgsdr/usersc03.htm#29

"J. Barkley Rosser, Jr." wrote:

> William,
>       Well, gold could be used to settle international
> accounts between countries, as happened during
> the 1960s when Charles de Gaulle demanded that
> the US pay France in gold for bop deficits.  So, some
> gold was moved in the basement of the New York
> Fed from one tray to another.
>       But, governments do not accumulate SDRs.
> There are no SDRs.  A loan made in SDRs by the
> IMF is merely valued in SDRs but the loan is actually
> made in national currencies.  Gold can be sold.
> SDRs cannot.  They don't exist except at the IMF
> in its computers.
> Barkley Rosser
> ----- Original Message -----
> From: "William F Hummel" <wfhummel@xxxxxxxxxxxx>
> To: <pkt@xxxxxxxxxxxxxxxx>
> Sent: Wednesday, January 02, 2002 6:28 PM
> Subject: Re: Taxes, 'reflux' and the value of the currency
>
> > Barkley Rosser 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?
> >
> > Was gold "money" during the Bretton Woods period"?  It was not
> > used to pay taxes to the government.  It didn't serve as a medium
> > of exchange for goods and services.  Rather it was stored away in
> > vaults while book entries kept track of ownership.  SDRs are the
> > contemporary version of gold in the international arena.
> >
> > William F Hummel
> >
> >
> >
> >
> > >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
> > >>
> > >>
> > >>
> > >>
> > >>
> >
> >