Re: Chartalism as Alternative to Neo-liberalism

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

Alan Cibils wrote:

> At  1/13/2002, Henry C.K. Liu wrote:
> >Not quite.  If these economies adopt Chartalism, they will have all the
> >money they need for domestic recovery and development.
>
> Could you be more specific?

The State Theory of Money (Chartalism) assserts that the fundamental
function of taxation is to create on the part of the public a financial
obligation to the state through the levying of taxes which is payable with
the currency issued by the state.  Taxes are what give currency value.  The
fact that the state spends tax
revenue is merely to recycle the money supply.  Thus taxation is very much
part of monetary theory.  A
government that has no tax revenue (or insufficient) would have to support
its currency through other
means, such as a gold standard.  This is where Reagan missed the point when
he compared government
with a corporation. Corporation have no authority to impose taxes, although
many try through monopolies.

The Chartalist approach is of significance at this particular time in
history becuase of the total dependance of global trade on fiat currencies.
Globalization has elevated the importance of trade above its previous
status. Trade issues now dominates domestic monetary and fiscal policies of
all nations.  The global foreign exchange market now drives central bank
interest rate policies and currency valuations.  Argentina, along with
recurring financial crisis in Mexcio, Asia, Brazil, Russia and Turkey in the
last decade highlights this point.  The currency board, though still
arguable whether it was directly responsible for Argentina's financial and
economic problems, undeniably reduced the flexibility of the government to
call on all options to deal with the situation of recession, unemployment
and deficits.

I wrote in PKT on December 24, 2001: Argetntina should file for bankruptcy
under Argentina law and have all dollar debts discharged by Argentina
courts. Foreign banks will not lend to Argentina for a while, which is
precisely what Argentina needs: to avoid any new foreign debts.  Instead of
a currency board,
Argentina should proceed with a monetary regime based strictly on the State
Theory of Money.  All Argentina exports must be paid in new Argentina
currency, thus creating a global demand of its new
currency.  A job guarantee program can be financed with local currency
backed by future tax revenue. All dollar denominated commodities that
Argentina must import, such as oil, should be put on barter with Argentinan
exports. Full employment should be the starting point to revive the economy.

Argentina does not need more foreign credit, parrticularly if it aims at
repaying foreign debts already incurred. Before Argentina declares
bankruptcy and dischareges the $150 billion foreign debt, servicing which
was consuming 50% of government revenue before the political crisis, no
financial rescue was
possible.

Money takes on top importance in finance capitalism different from its role
of units of eschange in industrial capitalism.  And whether the Chartalist
approach to money is theoretically more valid than other approaches is now
only of academic concern, because all governments now practise it and the
entire
foreign exchange market operate on it.  Money is the creature of the State
over which the State has a monopoly on issuance. Taxes drive money in that
the public needs mony to pay taxes.  The government does not need the
publics money to spend.

The conservative tiresome whinning on taxes being the people's money is
based on a fundamental misunderstanding. The government can buy anything
money can buy merely by providing the money.  The function of a government
deficit is to make up for the penchant of the public to hold extra money.
The purpose of government bonds is not to finance the deficit, but to
provide interest bearing money to the use of the economy.  Thus the
Chartalist approach leads to monetary and fiscal policy alternatives, such
as full employment, the elimination of overcapacity through demand
management, not opened to other, particularly monetarists views of money.
Such policy alternatives are of particular importance in this era of
globlaized finance capitalism to moderate its structural contradictions.

Foreign exchange is necessary only when trade is conducted, and globalized
trade at that.  Bilateral trade has relatively simple foreign ecxchange
issues.  But bilateral trade now is merely a sub-unit of global trade, in
the sense that no product is anymore made in one or two single country. A
"Japanese" car has 60% of its parts and 90% of its raw material made ouside
of Japan or outside of  Japanese car assembly plants worldwide.  Similarly
with American and German cars.  Detroit is the main importer of foreign
steel, much to the unhappiness of US steel makers.  Thus when a car is sold
in New Jersey for dollars, the foreign exchange implication of that one
simple transaction is highly complex, as funds flow through multi-currency
conduits of varying interest rates and values.  Trade is no longer the
merely exchange of goods and services.  It has become the exchange of
obligations and claims.  Wages take on exaggerated importance in the trade
regime and have become the most significant determinant in plant location,
mostly because among all factors of production, the most immobile factor
remains the supply of workers, for political reasons, through immigration
laws (often racist). Energy, trransportation, technology, finance are all
mobile.  Container ports can be built faster than than changes in
immigration laws.  Thus unemployment, the most direct cause of social
unrest, can be tackled only two ways: 1) reduce wages or 2) upgrade labor
skill demand in the economy.  Item one can only be accomplished with a
floating exchange rate, because of  wage inelasticity in labor contracts.
With a currency board, that option is closed. The US has relied on item two,
by shifting its employment demand toward hightech.  And dollar hedgemony
permits a strong dollar to keep wages constant in dollar terms within the
US, but high in trade terms, exporting all low pay jobs overseas.  But most
other emerging economies do not enjoy a option of shifting labor demand to a
hightech economy, thus they are trapped with high unemployment, especially
middle level economies such as Argentina, which cannot complete with low
wage economies nor with
hightech economies.

The bottom line is: globalized labor movement must accompany globalized
trade and finance, or a new
anti-imperialism struggle will re-emerge to bring the system crashing down.
There is much to idea of
every economy sharing equally its share of high and low pay jobs to promote
world growth.

As the world economy shifted from industrial capitalism to finance
capitalism, the US, taking advantage of its political hegemony to denominate
in dollars trade in most critical commodities, was able to impose a "super
imperialism" (Michael Hudson) on the world trading regime through its
ability to print dollars that were no longer backed by gold, in other words,
a fiat currency issued at will by the Federal Reserve.  When Nixon took the
dollar off gold in 1971, trade only occurred among economies of the West.
Foreign aid still overshadowed foreign trade within both the Western Block
and the Eastern Block separately in a war to compete for the hearts and
minds of the people.  Global trade really did not exist.

Now, three decades later, globalization is a reality.  Trade has been
accepted as the sole path for growth.  Aid is considered by neo-liberal
ideology as moral harzard.  After a decade of unregulated global financial
markets conducted under the rules of dollar hegemony as set by the so-called
Washington Consensus, the fallacy of neo-liberal ideology is becoming clear
to many.  A move by nations from export driven growth, to demestic
development friven growth can be facilitated with a monetary policy based on
Chartalism.  Most national economies really do not need foreign credit or
foreing direct or indirect investment for domestic development.  They can
issue all the money that is needed, provided there is no corruption, or
waste.  Most FDI is directed not to the needs of the local economy, but the
needs of the global trading system.  Its time for each nation to decide when
and what to trade for their own national interest.  Chartlaism will give
them the option.

Henry C.K. Liu