Wednesday, December 21, 2011

Denninger Serves Up a Monetary Policy Whopper

I said I would only respond to Karl Denninger and Bill Still, when they come out with real whoppers. Denninger is out with a whopper.

Apparently he likes to see his name in the headlines at EPJ, he has responded to my earlier post, where I wrote:
I have no idea how you pay down debt with newly created Treasury notes and then simultaneously destroy a Fed note (one for one).

The first question that comes to mind is whose Fed notes are going to be destroyed first? I nominate that they be the Fed notes of Still and Denniger and any other "libertarians" that follow them.(Remember the new US notes won't go to them but to the holder of the Treasury securities that will be retired as a result of the purchase with newly created US notes.)
I wrote this after I noted that Denninger said this:
So how can you pay down Treasuries with US Notes and not have inflation? That's simple -- right now there are credit Federal Reserve Notes that exist and were created to purchase those Treasuries (most of them electronic, not physical, incidentally.) Those go away and are exchanged. So for each emitted dollar of a US Note one debt-backed dollar disappears.

So long as the total amount of money and credit -- remember, they're fungible but not identical -- does not change in relationship to economic output there is no monetary inflation! It doesn't matter whether you withdraw a dollar of credit or one of money when you issue a dollar of US Notes, provided one of them is destroyed at the same time -- that is, provided it's an even exchange.
Keep in mind that Denninger-Still want to pay down the debt (or part of it)  with newly created "US notes". Here's Still, in his press release, announcing his candidacy for nomination as the Libertarian presidential candidate:
Pay off the existing bonds -- which is our National Debt -- as they come due, but pay them off with debt free U.S. Notes (or their electronic equivalents) instead of Federal Reserve Notes, which are all borrowed into existence.

Denninger replied to me:
If I withdraw a Federal Reserve Note (say, when you deposit it into your bank or when you spend it at a local store?) and when you get change or make a withdrawal you obtain a United States Note, over time circulation slowly dwindles on the FRNs to zero and is replaced.

So if you are paying off Treasury debt with US notes and simultaneously, as Denninger states would occur under their plan, exchange Federal reserve notes for US notes, you have serious inflation because of the US notes created to pay off the debt.

That's simple arithmetic. It screws the average Federal reserve note/US note holder for the benefit of US Treasury debt holders.

He also seems to want to use tax money to sop up some of the Federal Reserve notes:
Why the ones that are taxed away, silly. You aren't really going to suggest that Treasury has no authority to receive payment of a tax and then burn (literally or by pushing "delete") the money paid in, are you? Of course Congress has this right; how do you fix the value of something except by controlling the quantity of it?
Which is what I suspected, when I asked whose Federal Reserve notes were to be retired. His answer: yours via taxation.

Bottom line the Denninger-Still plan is a nutty combination of inflation and taxes (taxes not to be used for debt retirement, but to simply retire Fed notes). It's all pretty insane. And such a tax to retire notes shell game is as far from a libertarian position as you can get. It would boggle my mind if there are any votes for Bill Still as the Libertarian presidential candidate, beyond the votes of Still and Denninger. But the vote total for Still, beyond still and his sidekick Denninger, will be a good indication of how far off the deep end the Libertarian Party has travelled.


  1. I'm with Rothbard on this one. Repudiate. If the money was borrowed in pursuit of unconstitutional ends (and I don't care what the black-robed deities say, I can read the Constitution), then it's irrelevant that the 14th amendment says the debt should not be questioned.

  2. The only way for a Treasury money system to be able to tighten money supply is through taxation, which should give any libertarian reason for pause.

    I don't know a single libertarian that supports central banking. However, supporting a system that must use taxation as a means of implementing monetary policy, well that certainly isn't a position that is consistent with libertarianism.

    It is as if the 'End the Fed' crowd has been split between two factions. On the one side you have the Austro-libertarians (such as Wenzel) that wish to have a free market money with no monopoly issuer, while the other side is comprised of the Greenbackers who simply want to socialize the monetary system.

    The simple fact is that you cannot be a Greenbacker and a libertarian, because they are mutually exclusive.

  3. This just sounds like more pure MMT nonsense. The government just spends money into existence which isn't a problem at all because it then just taxes it away to cure inflation. Cantillon Effects simply do not exist. That'll work, right?

  4. If you want to make philosophical arguments about the Reconstruction amendments then one could easily argue they are null and void being that the South was forced to ratify them "literally" at the point of a gun. I wouldn't get your hopes up that that defense would work however for not paying down US debt.

  5. Inexplicably, Vox Day has taken Denninger's side on this one. I really don't get it.

  6. Bob Murphy has previously addressed Denninger here.

  7. Roddis,

    Interestingly, it is the more intelligent of the Greenbackers that support the MMT argument. I know that sounds paradoxical, but it is true.

    Most Greenbackers that I have talked to are actually under the impression that if the Treasury issues the money then there is no need to tax (just print money and the goods will flow). Obviously, they aren't familiar with Cantillon effects or malinvestment.

  8. These Neo-Quasi-Chartalists are coming out in force everywhere! They are supporters of the idea that The State can and does impart value and yet since their idea is to replace Federal Reserve Notes wth so-called "debt-free" United States Notes the we can assume that the new notes, being piggy-backed on the FRNs, will therefore, retain the same pitiful purchase value of the FRNs...a few cents at most! Strange, but I would think an asset valued money would be far better that yet another debased money substitute, especially one that is at parity with the existing notes in circulation?

  9. I get it; it's that "we'll just owe ourselves" nonsense, isn't it?

  10. So how can you pay down Treasuries with US Notes and not have inflation? That's simple -- right now there are credit Federal Reserve Notes that exist and were created to purchase those Treasuries (most of them electronic, not physical, incidentally.) Those go away and are exchanged. So for each emitted dollar of a US Note one debt-backed dollar disappears

    The US publicly held debt owed to the Federal Reserve (it is these that he refers to above) is 1.7 trillion dollars. While there is interest paid on this, the money comes back to the Federal Government anyway, under the laws governing the Federal Reserve. What Denninger proposes is a semantic trick that won't save the US government any money at all because the interest that the US government pays to the Federal Reserve is returned to the government anyway. 'Interest free' US notes in this instance will not save the US government a penny.

    On the other hand if he tries to pay off the rest of the debt owned by US citizens and foreigners with US notes, that would be incredibly inflationary. He also seems to share the views of the MMT'ers that money creation won't cause inflation if it is electronic, rather than a piece of paper. Bizarre.

  11. Am I missing something?

    Denninger's appears to be akin to the 'Peggy' plan in the popular Discover Card commercial.

    Let's see,

    Denninger wants to:
    - Retire 'Debt Backed' Federal Reserve Notes (FDN) with (backed) Treasury Notes (TN)

    (backed by....????)

    Of course, to buy or sell outside the US whatever the "backing" of the TNs is must ALSO be marketable... otherwise there is no reason for the foreigners to accept them. With fiat currencies this is done with Treasury Bonds traded with the central bank, Currency Swaps, etc...

    So, per Mr. Still's video here, , his envisioned backing is .... ?
    Well, the only thing of value in the TN or coin is the stuff it's made of. The paper TN is worth about the same as an equivalent size of toilet paper.

    Actually, less, the TN would chafe, not be absorbent, and tear when used for writing.

    So what is the value of the quarters he proposes?

    Per the website, and using today's market prices, a quarter is worth $0.0474590.

    But he says that reducing $.25 to $.047 is not inflationary. Presumably minting $15 Trillion in zinc and copper would drive prices of those commodities up a bit (Like 5 X ????).

    Presumably, because he says that "Nations can issue their own currency!" He means that it is also backed Government pixie dust that makes you feel really really good when take it in exchange for useful goods and services.

    Of course, if that doesn't work he could:

    - call in the Notes (TN's) and
    replace them with Coupons (Treasury Coupons - TC's)
    - convert the Coupons to Treasury Tokens (TT's)
    - change the Tokens to Treasury Credits (TCs)
    - exchange the Credits (TCs) for Treasury Points (TP)

    What was the value of the Treasury Note again? Squat and listen!

    I call it the 'Peggy' plan.

    You can learn all about it right here:

    That's all Denninger and Still have...

    The 'Peggy' Plan (PP).

    Am I the only one who thinks this plan stinks??

    While I don't want to piss anyone off and I hate to flush their dreams and aspirations, I have to dump some reality on the idea.

    Whether FRN or TN it has the same value as the TP in the PP.

    It's BS!

    What a load of !!! ... you get the idea.

  12. Joe Fetz:

    I think you are right. The MMTers are generally meticulous and anal about describing the minutiae of central bank and banking operations. They just don't understand economics and/or are "economics deniers" all the while insisting that their familiarity with the minutiae is a substitute for understanding economics.

  13. Something I never realized before: The Mike Norman who mocked Peter Schiff for predicting a collapse in housing prices in the famous 2006 video is the very same Mike Norman who runs “The number one MMT site on the web!”

  14. Amendment 14.4
    "4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void."

    If we accept the constitution as law - as a minarchist I do, Lysander Spooner's cogent objections notwithstanding - then the ability to repudiate debt depends on the constitutionality of the purpose for which it was contracted. In my opinion, properly read, the 14th Amendment above REQUIRES that illegal debts be repudiated.

    Article I Section 8 states in part:
    "The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;"

    Thus, you probably can't legally repudiate debts incurred for DoD. And it is probably not possible to repudiate debt entered in to provide for Federal pensions, as they are specifically authorized under the 14th Amendment. But you probably COULD repudiate debt for Medicare because it serves the welfare of one constituency, the old, while simultaneously HARMING the welfare of workers who are compelled to pay for it because the 'welfare' that program disburses is not 'general' but specific to a single group.

    Do not tell me medicare is a 'general' welfare because I will someday receive it. It is actuarily impossible for those of my age group to receive care in the future commisurate with that currently disbursed as Medicare.

    I realize older readers may take exception to this because they 'paid in' during their working years. But by the same token, those same current recipients SHOULD have known that Medicare and Social Security were a Ponzi-scheme with guaranteed insolvency. Even in my short life I can remember THREE ELECTIONS in which the insolvent structure of those programs was laid bare as an issue, 1980, 1992, 2002.

    The only question on the Medicare/Social Security issue, as well as on the Federal Reserve issue, as well as on the Global Debt contagion generally is this:

    Will those who chose foolishly be held to account for their errors?

    Or will those who are innocent of error be held to account for the error.

    Inflation is a way of holding the innocent to account. Central banks and monetary management are methods of holding the prudent or otherwise innocent to account for the choices of the guilty.

    The current world-wide descent into totalitarianism serves as proof that the innocent are beginning to understand they are being held accountable for the guilty, and the guilty understand themselves to be guilty and intend to expropriate the innocent anyway - by means of theft, brutality, and murder.