United Liberty

Chances are that you’ve never heard of chartalism (unless you arrived here because you Googled the word). I’ve been reading an increasing number of articles which argue certain points which are central to the economic theory of chartalism. This theory is centrally focused on characteristics of a fiat currency regime. The basic assumptions and conclusions are sounds although I have not studied it enough to have a fully informed opinion. Further, I disagree on principle with some conclusions on the surface level.

So what is it all about? Basically, the chartalists suggest that the state issues fiat currency via government spending and recoups (destroys) the money via taxation. Thus, fiat issue is no more than printing money and, if the government did not do so, there would be no money for citizens. This extends to a conclusion that the private sector cannot save money unless the government runs a deficit. This is further shown by using simple algebra with the formula for GDP. This reinforces the argument of the adherents.

I see a few basic flaws in this theory. First, if there were no fiat money, that would not destroy economic activity. There would be, at a minimum, barter activity. Second, it seems to ignore debt (or at least under-appreciate its role like most all schools of economic thought). Since private banks issue credit, the state is not the only entity which can issue currency (depending on one’s definition).

I’ll admit that my vocabulary did not contain the word “trilemma” until a few weeks ago. It’s a natural extension of the commonplace “dilemma” where we have three options. Then, in a span of no more than days, I was exposed to two interesting trilemmas.

The first trilemma that I would like to introduce is the so-called “Impossible Trinity”. This hypothesis states that a national economy can only achieve two of the following three characteristics: a fixed exchange rate, free capital movement, independent monetary policy. A nation with a fixed exchange rate is able to maintain a stable currency as it relates to the rest of the global economy. China, for example, maintains a fixed exchange rate by pegging its currency to the U.S. Dollar. Nations with free capital movement allow goods and services to be (relatively) freely traded by private citizens across borders without significant taxes or other restrictions. This is a common feature of globalization. Finally, independent monetary policy implies that a nation’s banking system (usually via the central bank) can set interest rates and manage the supply of money without outside interference.

The President “did something unusual” today as he engaged the opposition at the Republican GOP House Issues Conference. I caught bits and pieces on the radio and television, and I plan to record and watch the event in its entirety over the weekend. I have to admit that I’m a bit impressed with Obama on what I’ve seen/heard thus far.

The House Republican Conference invited Obama for a Q&A today in Baltimore, MD, and the cameras were rolling. In what became an American version of Prime Minister’s Questions (of which I am a big fan), Obama took questions from GOP House members. A bit of political wrangling mixed with solid debate led to a few honest answers from Barack Obama which put his intelligence and oratory on display without a teleprompter.

From what I’ve been able to dissect thus far, both sides scored some points. But, to me, while Obama toed the line between playing politics and denouncing politics, he scored some big points tonight. This is the Obama that I favored over John McCain. This is the Obama I wished we would have seen more of in the last year.

Let’s be clear. I’m no huge fan of many of Obama’s policies. Admittedly, I’ve always had an open ear to his anti-Washington populist message. Let’s also be clear that I’m not so naive that I’d immediately assume that he has changed. However, his change of tone since the election of Scott Brown opens the door for a second chance.

The entire “balloon boy” spectacle was a bit of a waste of time in my opinion. Although, I do admit it was an interesting story. I didn’t know about it until a day later and found the family’s morning interviews to be a bit disturbing. In November, balloon boy father, Richard Heene, plead guilty to falsely influencing authorities (that’s an interesting charge) and began serving his 90-day jail sentence this week. You can read a recent story here from the LA Times.

This story now strikes me as interesting since Heene has come out saying that he only plead guilty to avoid putting his family through a trial and for fear that his wife could be deported. I don’t know all the ins and outs of this particular legal situation. If I tried to research it, I’d probably never get around to writing this. But, it just does not seem right. Heene might be innocent; he might be guilty. If he truly believes that he is not guilty and copped a plea out of convenience, then I think something is wrong with our justice system.

I recognize from the article that the prosecution could choose to go forward now that Heene has made this statement. It seems that they will not. I also heard it suggested that Heene also adopted this strategy to avoid the legal fees that he might incur if he were to fight the court battles for himself and his wife.

It is now long overdue. Treasury Secretary Timothy Geithner must resign his post. A story broke earlier this week on Bloomberg which details what appears to be an attempted cover-up by the Federal Reserve Bank of New York and AIG. Let’s take a quick trip in the time machine.

On September 15, 2008, Lehman Brothers filed for bankruptcy. This triggered a freeze in the credit markets, which, in turn, exacerbated a brewing crisis at insurance giant AIG. The Federal Reserve stepped in the next day with an $85M loan facility which effectively nationalized the company. This was not the end of the government’s largess. Additional credit lines were created by the Federal Reserve and TARP money was used to provide a capital infusion. Tim Geithner was President of the NY Fed during this time.

Two key controversies emerged over the following months. First, AIG awarded large bonuses to employees despite the massive failure of the firm. These retention bonuses were executed despite populist discontent and anti-bonus rhetoric from Obama. However, Geithner effectively shrugged his shoulders and said nothing could be done. Second, AIG settled credit default swap contracts at par (one hundred cents on the dollar). This was controversial since AIG was effectively bankrupt and the counter-parties would likely have received much less in either bankruptcy or any other rigorous renegotiation. Again, Geithner effectively shrugged it off.