Tuesday, December 20, 2011

More Madness from Bill Still and His Sidekick

I really don't want to spend too much time on the thinking of Bill Still and Karl Denniger, but I am continuing to get a few emails from those who don't really understand how off course Still and Denninger are.

One emailer writes:
FYI - I've had a chat ()via email) with Karl and he pointed me to a more complete articulation of Bill Still's proposals (below). I agree with your assessment of the original video (on your website) but I would suggest that it may have been oversimplified deliberately.
"Monetary reform – I’ve heard some complaints that I want to consolidate the money power into the hands of Congress instead of letting the so-called “free market” make its choices. This is just wrong in several ways. First of all, the so-called “free market” has been COMPLETELY in charge of the quantity of American money since repeal of the Glass-Steagall Act in 1999 – 12 years ago. So how’s that free-market thing been working out for us? Not so well.
Any one that thinks we have had free market money since 1999, is really looking at the world in a much different way than I am. If I recall correctly, Federal Reserve notes were exchanged as money in 1999 and continue to be exchanged as money today in the U.S. And as far as I know, the only organization that can increase the size of the Federal Reserve note money supply (paper and electronic) is the Federal Reserve.

It really doesn't make sense to debate this any further with someone who will quote the Constitution, the Federal Reserve charter and so on, in ways that distort both the original meaning and current interpretation AND thinks we are operating under a free market money system and have been since 1999.

As for Still's sidekick Karl Denninger, he tells us in a post:
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.
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.)

What makes Denninger's non-inflationary proposal even more fascinating is that he plans to pay off 15 trillion dollars in US debt by using Federal Reserve notes (and retiring the notes as they are used to pay off a Treasury security) BUT the current money supply stands at only $9.6 trillion. So even assuming there is some way to pull off his madcap scheme, what does Derringer do when he has reached $9.6 trillion in Federal Reserve note payments and has retired them all, but still has $5.4 trillion in debt to pay off?

There are many twists and turns to the madcap theories and proposals of Still and Denninger, and, as I have said, I really don't want to spend time debunking them all (afterall I have Krugman to deal with also), so I have put Still and Denninger on Whopper Watch, unless they come out with real whoppers, such as the two comments above, I am going to leave them alone. But when they come out with the Whoppers, rest assured, I will be whale hunting.


  1. Yes, RW, please stick to elucidating AE and attacking Krugman's arguments.....it pays higher returns, just due to his higher profile and influence alone.

  2. Still's comment is odd. I've always thought that we free individuals would not need laws that make any one form of money legal tender, but rather all we would need is strict arbitration of contracts, regardless of the form of payment the parties chose to use.

    And what's with the quotes around the term "free market" (I just used them too)? Maybe he doesn't see the individuals that comprise it. The only thing stopping me from paying for things in silver and gold (or whatever) are the legal issues that stand in the way along with the absence of expectation on my part of receiving them back in a future transaction.

    Still makes interesting documentaries, but I don't understand how he can advocate what seems to be simply more central control of money and still call himself a libertarian, let alone pose as their candidate.

  3. If they could pay off the debt (which would be a massive influx of liquidity), what exactly would the holders do? Just sit on those notes? If I were them I would spend those (notes) as quickly as I could, before the next guy.

    Money is not wealth, it is a calculating unit. Interest is not usury, it coordinates time.

    It is one thing to be against the Fed (as I am), it is completely different to support purely fiat money.

  4. The "Peggy" Deninger National Debt Reduction plan:

    - Retire mature T-Bills in Fed Reserve Notes.
    - Sell Points to get enough Notes to retire the Bills.
    - Sell Treasury Coupons to retire the Points.
    - Sell Treasury Tokens to retire the Coupons.
    - Sell Treasury Credits to retire the Tokens.

    See? Brilliant!!

    The plan works because we can make up as many new securities as needed to retire the old securities!

    The brilliance is that we will have no new inflation because each new security will have a higher value than the ones they are retiring!

    They will have high value because, being new, they are strictly limited in supply!

    NOW I think I am starting to get what Still and Deninger are talking about.

    I call it the 'Peggy' Plan.


  5. I think these theories need to be debunked. Greenbackers and chartalists (MMT'ers) are starting to flourish on the internet, and many people seem to be taken by them, as if they were alchemists of old that managed to turn lead into gold.

    I am not saying that Still and Denninger are chartalists, but until they describe a specific method by which they deal with the 15 trillion dollars of newly created money, their ideas must be considered deficient.

  6. I haven't really gotten my question answered in the other thread so I'll give it a shot here.

    It seems to me that the Austrians are so busy attacking the Greenbackers in toto, that they are unwilling to concede that the Greenbackers do get something right.

    The Greenbackers make a distinction between fiat Treasury notes and Federal Reserve bank notes. The first is a fiat legal tender. The second is a debt instrument legal tender. This strikes me as an important conceptual and rhetorical point and not just a distinction without a difference. While fiat Treasury notes are still inflationary, at least every one doesn't grease the palms of the Banksters as they launder them into the system. If they are distinction without a difference then would Central Bankers be as happy with the former as the latter? I don’t think so. While problematic from an economic standpoint, the Greenbacker project seems to me to be an attempt to bypass (stick it to) the Banksters. Am I missing something? Is the Treasury note /Federal Reserve bank note not a legitimate distinction, regardless of the economic consequences of fiat Treasury notes?

  7. Bill Still, Ellen Brown, Denninger and the rest of the Greenbackers, Sovereign Money, Debt-Free Money crowd remaind me of all those French officials promising they had the most scientific money system ever invented and they called it the Assignat!

  8. @Red Phillips. You are right - there is a difference. Federal Reserve Notes are debts to be paid with interest whereas treasury money is interest free. The government could issue debt-free money instead of collecting taxes. I think the primary reason the Austrians and free market guys hate this idea just as much is because it is relying on government not to be tempted into buying votes via spending. So... treasury notes is the lesser of two evils in that it would stop the burden of interest repayment on debt. However, in an inflationary environment/event, wealth is being stolen/diluted regardless of whether it is coming from treasury money or banker money.

    I could write you a cheque (IOU) to be drawn against my time/production at a later date. You probably wouldn't accept it but it could be done and would serve perfectly well as currency, more so if I was widely known to be as good as my word. Legal tender laws force us to use a particular form of currency for the payment of debts and that is partially understandable because it would be difficult for a government to collect so many different forms of currency. However, it is the capital gains tax that really stops competition in currency. Without it you could have private issuance of currency and competition with floating exchange rates. When it comes time to pay your taxes etc, these private currencies could be exchanged for "legal tender". I personally think some form of tangible commodity-based money, read gold, is the answer because it fulfils every requirement and if competition was legalised, I reckon it would be favoured by the market again as it originally evolved to be.

    But regardless... the issue is one of restraint of the issuer, not the form of the issuance.

  9. You're right, Robert. The only possible way to have a currency is to lend it into existence at interest. There's simply no point to considering any alternatives.

  10. "Am I missing something?"

    Yes, that maybe gov't has no role in currency...even if the gov't(or constitution) says it does.

  11. You said: "And as far as I know, the only organization that can increase the size of the Federal Reserve note money supply (paper and electronic) is the Federal Reserve."

    Let's suppose the Treasury decides to send everyone who filed a 2010 tax return a check for $10k, and I deposit the check in my bank account. I then withdraw the cash, and use it as I see fit.

    Please explain to me how that does not increase the FRN money supply? Money is spent into existence.

  12. Bob, we always see a few kooks vying for the LP nomination. There's no need to give them any of your time. We certainly won't at the nominating convention.

  13. The problem is you guys are confusing and comingiling the Unit of Exchange and Store of Value! Having private parties issue debt based currency with FDIC backing of the only liabilty (deposits) at interest is legalized no risk skimming of the monetary system (see tarp). You do your transactions and taxes and payroll in currencies, but DO NOT SAVE in the same. Removing capital gains taxes and you can save in anything, even gold.

  14. You're right, Robert. The only possible way to have a currency is to lend it into existence at interest. There's simply no point to considering any alternatives.


  15. Red Phillips, after operating costs the Federal Reserve returns it's profits to the Federal Government. This means that interests that the Federal Reserve charges the government mostly comes back to the government. It doesn't grease the palms of the banksters.

    There is a scam aspect to the Federal Reserve, but it lies elsewhere, mostly in the way it provides information to, and bails out, insiders.

    In relation to a Federal Reserve Dollar and a US Dollar, when the dollars are spent it is functionally the same. However, at least with the Federal Reserve dollars it will be considered a debt owed by the government that must be paid back. That keeps some of the inflation in check. The government issuing a US treasury Dollar would not be considered a debt, would never have to be paid back, and would likely be followed by even more issuance.

  16. Matt, that is a good explanation.

    Certainly, Austrians do not support a central bank, which should be evidenced by just about every Austrian text ever written, but we also do not support fiat currency. However, when comparing two fiat currency systems, we do feel that a pure fiat system would be far more inflationary than a debt-based fiat system. In fact, Austrians would prefer that government get out of the money printing business altogether, whether it issued directly from the Treasury or whether it is issued by a government-backed monopoly.

    On this issue, most Austrians are far more concerned with the effects of money printing on the structure of production. Goods don't just appear overnight,there are many stages of production, each of which takes time. Market interest rates are what coordinate the time-structure of production with the demand of consumers. Further, prices coordinate the structure of production with regard to valuation and the best use of scarce resources.

    What concerns Austrians is that the arbitrary manipulation of interest rates and the supply of money entirely discoordinate both time and valuation in the structure of production, thus leading to malinvestement. In my mind both the Fed system and a Treasury system are horrible systems, but that a Treasury system is probably worse with regard to the structure of production (because it would be more apt to inflate).

  17. Hey Mr. WEASEL - his name is DENNINGER!

  18. "Yes, that maybe gov't has no role in currency...even if the gov't(or constitution) says it does."

    That's not my point. My point is that the Greenbackers at least have a point that some people seemed to be either missing or unwilling to concede. I think it is an important conceptual and rhetorical point regardless of the practical implications. If you point out to the guy who doesn't get all this that he is carrying around bank notes it intuitively seems wrong to him and opens the door to further discussion. You are going to lose the argument if you're not careful because most people don't get this stuff. Just beating up on Greenbackers seems counter-productive to me. It would make more sense to acknowledge their main point and then say "yes but."

    "Red Phillips, after operating costs the Federal Reserve returns it's profits to the Federal Government. This means that interests that the Federal Reserve charges the government mostly comes back to the government. It doesn't grease the palms of the banksters."

    Yes, but empowering the Fed with money creation has downstream effects such as bailouts that allows the corrupt system to operate.

  19. Joseph, don't forget the effects of debt service on the structure of production. Our economic recovery is constrained almost entirely by debt, as our previous growth spurt was defined by credit expansion.

    We have a monetary system that has allowed so much credit to be issued that it has literally outpaced our creditworthyness. All that credit has been inflationary. Defaulting on debt means that credit is never withdrawn, and the inflation it brough remains embedded. Servicing that debt is deflationary as far as money leaves our economy to pay foreign creditors.

    A greenback scheme for only paying off existing debt would not be inflationary, as the original credit already crested the inflation when spent into the economy. Greenbacks would simply relieve interest payments and free-up more credit. That is good for economic growth.

    Whether that new credit is utilized responsibly depends on whether interest rates are artificially low or allowed to float, and whether the Federal budget is ballance so to prohibit any future Federal borrowing.

  20. Hey "I hate idiots", mosey on back to ticker gulag. Your Stockholm syndrome is plainly apparent at this point.

  21. Anonymous 10:31,

    First, there is one thing that Greenbackers and Austro-libertarians do agree on, and that is that in our current system there will never be enough money to pay off the debt, because each unit of money is created by the issuing of principle and interest. This I think is the only point of agreement that leads both to disfavor central banking. So, there is no disagreement there.

    However, the statement that defaulting on debt will have inflation "remain embedded" is false, because under the current monetary system if a debt is defaulted on, then that money simply vanishes from existence, thus having a deflationary effect. You see this every time there is a recession where many investments are defaulted on. The money supply begins to shrink as these debts are written off. This then causes a greater demand to hold money thus shrinking demand for goods (though, this is temporary and only lasts until the market equilibrates). Obviously, the central bank and government will usually intervene with this process, but if they didn't you would see a dramatic decrease in prices as the credit contraction plays out.

    Next, on the issue of government debt, you must remember that not all of this debt is held by foreigners. So if the government began paying off its debts to domestic holders then this would obviously be inflationary as the new money would tend to be spent in accordance with diminishing marginal utility.

    With regard to foreign holders of debt it gets a little more complex. Usually when a foreign creditor lends the US government money, they will do so either in their own currency or using their dollar reserves. If they lend in dollars, then this obviously has inflation implications in the US, if they lend in their own currency it doesn't have inflationary implications. What about when we pay that debt back?

    If we were to pay all of our debts back in US Notes (as Greenbackers suggest) then this would increase the cash balances (denominated in US Notes) of the foreign creditors. What are they going to do with these funds? Just sit on them indefinitely? Heck no, the only purpose of having money is for what you can trade for it. So, eventually these US Notes must come back to the US in order to be sold for actual goods. Considering that this whole scheme of paying off the debt with US Notes would dramatically increase the supply of US Notes around the world, each note would tend to be valued less in accordance with diminishing marginal utility. The tendency of foreigners would be to get rid of the Notes before the next guy, so that you don't get burned.

    You can only export inflation for so long, eventually that money has to come back. Some may see this as great for exporting, but they forget the effects on the structure of production such an influx of money will create, as well as the domestic inflation that it would cause.

  22. I understand that using the banking system for money creation theoretically acts as a governor that fiat Treasury note creation wouldn't have. Treasury notes would only be limited by the good sense of politicians which isn't promising. But the former just seems like a racket, and I think it strikes the average guy on the street as a racket. I suspect a lot of guys on the street actually believe we are using Treasury notes now, hense the potential rhetorical power of this distinction.

    And here I'm not trying to argue. I trying to understand. Under the current system, the Fed buys Treasury bonds (debt) that it then uses as reserve on which to lend FRNs? Correct? This too I'm sure strikes the avaerage man on the street as inherently fraudulent. Does the Fed ever just hand wave money into existence without the fiction of buying bonds? When and how? So what I'm trying to understand is how you ever get out from under debt in this situation. This just seems unsustanable. Under the current system how would the government ever get new money into the system without incuring new debt?

    And please, I don't need a lecture on Austrian first principles which I am reasonably familiar with, nor do I need to be told both systems stink. I get that. I'm trying to understand the current system. The Greenbacker critique strikes me as reasonabaly sound. Their solution is the problem.

  23. Red Phillips, yes, the Federal Reserve is corrupt and gives insider information and bailouts to insiders. In the hands of the congress you can expect the same or even worse.

    Imagine what happens when spending becomes totally unrelated to tax revenue. The congress would print money for whatever special interests came knocking at the door. A few billion for bailouts here, a few billion for welfare there, a few billion more for our Israeli friends (since now our high inflation has shortchanged them of the 3 billion we already give them), a few billion for bridges to nowhere, and so on.

  24. Matt, I have already conceded the problem with fiat Treasury notes. In fact, I think that one of the ways Greenbackers would theoretically increase the money supply (theoretically when it was called for by economic growth) is by spending it into the economy by way of public works programs. I don't know if Still and Denninger say this, but it is part of the historical Greenbacker plan.

    Part of my issue is that Austrians have a very frustrating tendency to always resort to first principles and miss distinctions among anything that isn't Austrianism. This works when you are preaching to the choir on a blog. It doesn't when you are trying to sell your idea to economic illiterates. Hence why I say that the Greenbackers at least make an important "conceptual and rhetorical" (I have made that distinction repeatedly.) point that it would benefit Austrian monetary reform advocates to concede, even if it has practical limitations.

    Just for the sake of the argument, let’s say you had a benevolent dictator who was going to do his best to adjust the fiat money supply as called for by economic factors. Of course it would be imperfect, probably grossly so, but it is not face obvious a fraudulent scheme. (Now I know someone is going to react and say it's a fraudulent scheme because government ... force ... blah, blah, blah ... but I'm not interested in first principle lectures. Try to imagine you are talking to Joe 100 IQ on the street who is more interested in the football game this weekend than he is monetary reform until it starts to hurt him.)

    On the other hand you have a system where the Government in the form of the Fed (I know it is a complicated relationship, but for the sake of my illustration let's assume the Fed is a straightforward branch of the federal government.) buys Treasury bonds (debt) from itself and then uses that as reserve (assets) to lend (create money) out at a multiple of that. This, I believe, does strike people as face obviously fraudulent and unsustainable. The average person who this is explained to is likely to think facetiously something like “Dang! That sounds like a good gig if you can get it. I like to get in on a little of that action.” It is not an accident that the Greenbacker videos are so popular.

    Therefore, it is not an irrelevant conceptual and rhetorical distinction and what baffles me is that it is a distinction that could be easily conceded without violating or compromising any Austrian principles. In fact, it seems like a helpful distinction to make. Again, what am I missing?

  25. Red Phillips, greetings.

    I am not an Austrian economist, merely a student of that school, but I shall endeavor to answer you question.

    Taking up the fullness of your scenario, let me start with what the Federal Reserve is doing.

    You seem to be objecting to the Federal Reserve (hence called 'FR') in engaging in what is essentially the legal fiction of the FR using Treasury Bonds as assets to back up loans, despite the fact that the FR created the money to buy the Treasury Bonds in the first place.

    It sure looks like a fraudulent process, but it is not really an important difference. Let's say that the FR didn't do that, and just lent out the money without any Treasury Bonds to back it up - functionally it is exactly the same. Meaning that to you and me and everyone else out there, it doesn't matter what the FR claims is backing up their lending. It will affect us in exactly the same way. The only difference is semantic, not functional, and doesn't affect the economic sphere, I believe.

    On the benevolent dictator - let's say he is well meaning and not corrupt at all. He is still a human being though. He is going to look at 'economic factors' and then do exactly what free market actors refuse to do (because if it was viable, it would no doubt already be happening unless the benevolent dictator was also taxing people to death).

    The benevolent dictator decides that 500 billion dollars needs to be allocated to the building of energy plants, with a focus on green energy, to replace the reliance on middle eastern oil. There are other projects, few tens of billion here, and there, and so on. By this time the benevolent dictator has done quite a bit of money printing and inflation is starting to bite. The original cost of 500 billion for the new energy plants has blown out to 600 billion, not because of mismanagement or greed, but because it now costs 100 billion dollars more to build because of inflation. The benevolent dictator directs the central people's bank to make available a further 100 billion dollars available to the project. And so it goes with the predictable consequences.

    I think the greenbackers are kidding themselves if they think they can create money and use it to get sufficient increases in productive output enough to mitigate price inflation. I think that is their primary conceit and they are dead wrong about it. It sounds like some sort of economic perpetual motion machine. Were the greenbackers right, there would be no poor countries on the planet.