Re: Fw: Wealth, Money and Taxes

[William F Hummel <wfhummel@xxxxxxxxxxx>]

John Gelles wrote:
>
>The bumper sticker states the paradox:
>
>                  Paying Taxes Can Make Me Poor
>                  And  Not Enrich My Nation That
>                  Creates  All The Money  It Needs
>
>Central banks around the world supply the currency
>their nation needs. They vary the rate of interest they
>charge for this supply. They get the supply initially
>from a government mint they do not own.

The "government mint" that Gelles refers to is presumably a metaphor
for the ability of the central bank to write checks on itself, i.e. to
issue base money.  While the government can set the interest rate it
charges to borrow its base money, it cannot arbitrarily control the
interest rate on base money within the private sector.  That is a
function of the supply and demand for base money.
>
>If a government were to mint the money it spends we
>might call the currency Naked Fiat Money.  If, instead,
>government spent money it borrowed or received from
>fees and taxes, we might call the currency Fiat Money.

But where would the public acquire the Fiat Money to pay fees and
taxes to the government unless it came from the government itself?
Naked Fiat Money is not something distinct from Fiat Money.  Fiat
Money is simply inconvertible base money that the government issues,
and that applies whether the government recaptures the fiat money it
spends via taxes and bond sales, or allows it to grow without limit.
>
>There would be a difference. The quantity of FM in
>circulation would be expected to be less than the
>quantity of NFM.

Yes.  And the purchasing power of a dollar of NFM (as defined by
Gelles) would become ever less than a dollar of FM, assuming the
latter is recaptured by the government through taxes and bond sales.
Only if government spending were so small that the rate of increase of
base money was about equal to the growth rate of the economy would a
tax-free fiat money system make sense.  But that would imply a
several-fold decrease in government spending.
>
>Central banks can supply money to any spender at
>a zero rate of interest. This they can do for a nation
>itself.

>They can raise the rate of interest to slow the
>rate of spending. This they do to try to match the
>money in circulation to the things that money can
>buy.

A central bank (CB) can only control the interest rate in the private
sector through its control of banking system reserves.  It can set the
rate at which it will lend, but it cannot set the money market rate
arbitrarily.  With the one exception noted above, If the government
spends without taxing and/or borrowing, the CB would lose control of
the money market rate, and its currency would eventually become
worthless.
>
>The supply of the THINGS that people and nations
>need, not including money or evidence of ownership,
>is key to the satisfaction of economic wants.
>
>Yet the supply of money, and the system of assigning
>ownership, are crucial to the satisfaction of said
>economic wants.

But the supply of money that the private sector uses in commerce
arises almost entirely from bank loans.  It has little to do with the
fiat money issued by the government.  Aside from its use in retail
transactions, fiat money simply acts as the grease that allows the
banking system to function.  Those countries that impose no reserve
requirement on banks operate quite successfully on very little grease.

William F Hummel