Vox Day Gets Caught in the Denninger Quicksand

Karl Denninger confusion can swallow up all kinds of people. Vox Popoli is caught in the quicksand hailing Denninger nonsense.

Vox Day at Vox Popoli writes in support of Denninger:

It should be obvious that credit is a form of money, for the obvious reason that you can exchange it for goods. I further note that it is presently of near-equal value with cash. (This is a reference to the zero-percent interest rate presently maintained by the Federal Reserve.)

The conventional response has been to claim that all credit does is shift demand forward... but that can only be true if the credit is repaid. A credit default is therefore the equivalent of burning paper currency. This is why I have often stated that the inflation/deflation question hangs on the matter of whether the governments can and/or will print faster than they default.

First off, credit is not money. Money in the United States at present is the dollar. The Federal Reserve can create more money by buying credit instruments, but they could buy anything.

As Murray Rothbard notes in The Mystery of Banking:

From the point of view of the money supply it doesn't make any difference what asset the Fed buys; the only thing that matters is the Fed's writing of a check, or someone writing the Fed a check.

It is also true that because of the fractional reserve system, banks create money in Fed orchestrated fashion by issuing credit, but again the banks could buy any asset, including, Salavdor Dali paintings or stock equity,  and expand the money supply. The key factor to understand is that it is not credit creation, but the money creation that is at the heart of an expanding money supply. If the Treasury borrowed money but it was bought by investors, without any involvement by the Fed, the money supply wouldn't expand at all.

Second, the interest rate maintained by the Fed is not "zero-percent...presently" and it never has been during the crisis. The current effective Fed Funds rate is 0.07%.

I have no idea where Denninger or Vox Popoli get the idea that credit "shifts demand forward".  Credit transfers money from one person to another. If someone invests, say, in a newly issued Treasury Bill, he is foregoing consumption but the money ends up with the government which then spends it. Money invested in a capital good creates future consumer goods, but that doesn't mean that there is no current demand. It merely means that the current demand is for the capital goods.

Finally, defaults, in and of themselves, have nothing to do with deflation/inflation in the system. If the Fed buys Treasury bills and creates money to do so, the money is out in the system. If the Treasury defaults on the Bills issued that doesn't mean the amount of money in the system shrinks. A credit default is thus not "the equivalent of burning paper currency."

Denninger nonsense, and apparently Vox Popoli's, is complex, but when pulled apart at any strand, it doesn't hold up. It has taken six paragraphs to refute two Vox Popoli confused paragraphs. Denninger and Vox Popoli make bold statements without the logic to back them up. It takes many statements to refute their bold ones because the foundation has to be  established.

As I said, I am not going to debate these characters on every point. They shift too much without consistency or substance, you could spend decades trying to refute them and they will simply come out with some new statement that doesn't reference their earlier points.

I will only refute them when I see major whoppers or new major characters spouting their nonsense. Just know that their arguments in general are disjointed, tend to ignore reality and tend to use technical terms and/or themes in a manner not used by anyone else on the planet---thus adding even more layers of  complexity and confusion to their arguments.

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.

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.
R

"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.

Tom Woods on the Constitution and Money

Tom Woods has made an important comment at a post in my debate with Denninger/Stills. It is about the meaning of the regulation of money and the Constitution. Given the insight it provides, I repost it here at the top:

Denninger...is dead wrong about the Constitution and money, as is Still, who thinks the power to "regulate" money means the power to increase its quantity. No, the power to regulate money was placed in the "weights and measures" clause because that's what "regulating" money meant. Silver dollar coins were the U.S. standard from the very beginning, and "regulating" the currency meant establishing a ratio between the silver dollar and other precious-metal coins that may circulate alongside it.

Denninger Attacks Wenzel

My comment about Bill Still monetary policy has resulted in his economic adviser Karl Denninger heading into battle station position to defend Still, who is seeking to be the presidential nominee of the Libertarian Party. Denninger sent me an email last night that said in part:

I'd be happy to engage you on this, if you'd care to before I rip you to shreds over at The Market Ticker for your commentary which you posted without (1) facts, and (2) understanding what Bill's actual position IS.

Happy to engage, if you do it before I decide to publicly excoriate you.

My response to Denninger was along the lines of I am really busy right now and headed out, maybe tomorrow.

Denninger couldn't wait and attacked me in a column late last night.

But before I get to the column, I want to make a point about what Denninger said in his email, when he wrote that I didn't have the facts and didn't understand Still's position.

My comments were based on Bill Still's press release announcing his bid for the Libertarian nomination! Indeed, I quote from the press release!!

Here's what was written in the release and the referenced video:

Pillar #1: End government borrowing. A sovereign nation does not have to borrow, in fact, being debt-free is the very definition of sovereignty. 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. 

Please see my short (3 min 54 sec) YouTube on this topic:

Sure looks and sounds like Still wants to print up money (or coins) to pay off the debt, and that is very inflationary, as I stated in my original post. As for coins versus paper currency (or paper money with red insignias) that is created by the government, it doesn't really matter. If there is more money out there (that is accepted by the public) it will be more money out there bidding up prices.

Bizarrely Still's economic adviser Denninger seems to understand the inflationary consequences and says so in his attack on me!! He writes:

So what if Congress just emitted raw currency, as it is entitled to do under The Constitution? Why then there would be immediate inflation, and the people would see the damage right up front. There would be no Ponzi to be blown, as the people would have the harm "in their face" and shortly would, I'd expect, vote those critters out of office. Heh, there goes the overspending!...

Denninger's plan seems different than Still's. Here's more from Denninger:

This, however, is a vision for the future -- in other words, it's an endpoint. For obvious reasons were we to simply pay off all the debt with issued money in one fell swoop the impact would be insanely disruptive. But we don't have to do that -- there's a better way.

Instead, the intent is to run a budgetary surplus, ending new borrowing immediately. This will mean taking the hard decisions now while we still can instead of pretending we will never have to and that they won't be imposed on us if we refuse to act on our own. It is without question that doing so will lead to a short-term economic contraction, and as such repairing our trade, tax, immigration and energy policies along with fixing our medical system must occur at the same time to both blunt the blow where we can and position our nation for the future.

The debt will, in short, be paid down over time from tax receipts. Until it is, Treasury will have the authority to roll over existing debt, but not issue new debt. In other words, the budget will run an actual surplus. To the extent the economy begins to grow once the base adjustment has been taken Treasury can (and will, under Congressional direction) use the privilege of seigniorage to issue currency (as US Notes) in the amount of the economic expansion less the productivity increase, if any. Some of this will be used to retire more debt while the rest will be used for general spending (above tax revenues), as directed by Congress exactly as the founders intended and authorized in The Constitution. Over time US Notes will replace Federal Reserve Notes in circulation and they will remain fungible through the transition.

In other words, Denninger is calling for some shrinkage of government debt (which in part will occur via tax receipts) but he calls for the simultaneous printing of "US notes" based on an equation (economic expansion less productivity increase). Some of this newly printed money will be used to pay down debt and some for "general spending" by the government.

Bottom line: There is nothing libertarian about the proposals of Still or Denninger. The government should be out of the money printing business, number one. Number two, what exactly is this expansion of "government spending" above tax receipts all about. Libertarianism is about cutting taxes to the bone. Further, what is this obsession with paying off the debt?

The debt was money borrowed by the government to fund banksters, the military-industrial complex and to buy the votes of the welfare block. This has nothing to do with the rest of us. The government should simply file bankruptcy and stiff those who funded the government extravaganza, if the assets held by the government after liquidation aren't enough to pay off the debt .

I don't follow the LP very closely, so I have no idea how much of a following Denninger and Still have in the Party, one would think not much, so I am not going to do much more commenting on their proposals. It is generally a waste of time. They speak in generalities, like "taxes" and don't mention whether they are discussing increases or decreases in taxes. It's sufficient to say that their programs are very unclear and where some detail is clear, such as on money printing, it is scary as hell.

If the LP embraces these two characters to any degree, it would be a deterioration of the LP beyond recognition.