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2019-09-21 07:00 by Karl Denninger
in Monetary , 219 references
[Comments enabled]  

We need to cut the crap on China folks.

It is not possible, as the Chinese monetary system currently exists and is controlled by the PLA, to fix the trade problems with China.

IT CANNOT BE DONE.

Leaving aside the problems with the so-called "Chinese Miracle" -- an abject fraud predicated on intellectual property theft, slave labor (including children), environmental destruction and forced technology transfer -- is the fact that China is unique among nations with their own currency systems and central banks.

All open markets and nations with their own currencies maintain one currency.  That is, a Euro is a Euro, a Canadian Dollar is a Canadian Dollar, a Pound is a Pound, a Yen is a Yen and a Swiss Franc is a Swiss Franc.  If I possess Euros I can spend them in Euro nations and their value is inextricably tied to the actions of the government in that set of nations and their economies.

China is alone in this regard; there are in fact two currencies and only one is connected to what China does inside China.  That one, however, is not convertible -- it has no market price as it's worthless both outside China proper and for trade outside of China.

The second is the EXTERNAL currency.

The problem with this is that the PBOC -- the Central Bank -- has absolute control over the interchange.  The external amount of currency available (to do anything outside of China) is extraordinarily small.  This is why the PBOC and Chinese Communist Party can run a ~300+% Debt:GDP ratio with it growing at 10% a year for close to a decade now and not have their currency collapse on world markets from the rampant monetary inflation they have shoved into their "economy" and its extraordinarily unfunded ratio of leverage.

This also means that whenever someone imports something to China from outside the country they get screwed and when China exports something to the US they subsidize it.  They can only get away with this because they can control the interchange between offshore and onshore funds; if the same currency was freely usable both inside and outside China that would never happen as arbitrage would instantly cancel it out; what would be beneficial one way would be detrimental the other in exactly the same proportion.

Finally it is the means by which the Chinese can prevent their citizens from freely exchanging their rapidly-devaluing internal currency for something else, because there is no way to do that other than through the official PBOC channels and the amount of available external currency to do so with and who's allowed to do it under what terms and for what purposes is under strict Communist Party control.

You cannot have a market economy or free and fair trade when one side is preventing free exchange and preventing their own internal perversions from being reflected in the currency beyond their own borders.

You can call that "currency manipulation" if you wish but in fact it's an outright blockade when it comes to trade with the amount of said exchange and its purposes being strictly controlled by the government at all times as to both purpose and amount.  There is no way around it as an external entity and as a Chinese citizen if you try to get around it and get caught you risk prison.

Contrast this with the United States dollar -- if you wish to buy Yen with it, British Pounds, Euros or Mexican Pesos you can.  In fact you can do so at currency exchange counters in most of the international airports in the country -- entirely freely!  When I went to Canada a couple of years ago I could perform that exchange at places near the border in the United States or in Canada, and the market rate fluctuated with the conditions of both nations.  Neither nation gave a wet crap if I wanted to spend $500 US Dollars in Canada; whatever the exchange was as determined by the relative economic strengths of both nations at the instant in time when I did so was the exchange rate; I handed over US dollars and got Canadian ones, which I could then spend in Canada.  Businesses near the border would take US dollars, although as might be expected it was to your advantage (since their "holding time" involved risk) most of the time to go to a bank and do the exchange there, then pay in Canadian money.

The same is true damn near everywhere.

The exception is China.

The United States should embargo China until and unless they drop the dual currency nonsense and allow their currency to float.  They won't do it because were they to do so the value of their currency on the International Market would instantly collapse, and they know it.

Don't fall for the bull**** folks.

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Oh my.

My last article, as expected, was indeed a stick in the hornet's nest.

The idea of shooting the bastards isn't popular, you know.  But in point of fact the thought of doing it should be very popular, as should be the implied threat.  After all that we threatened exactly that, then did it when the implied threat was not taken seriously is why this nation exists.

And I remind you: We did it because the British came for the people's ammunition.  Not the guns, the ball and powder.  That was enough; we shot them.

Concord wasn't the first insult; it was simply the last in a long line of them.  The British were warned, repeatedly, and ignored those warnings.  There were little skirmishes here and there, and occasionally someone got shot -- including colonists.  Indeed, the Boston Massacre in 1770 could have conceivably led to an immediate shooting war -- but didn't.  In a particular note of irony John Adams -- yes, that John Adams, future President of the United States -- defended the British at their trial for murdering Crispus Attucks.

But let's look at more-modern times.

Specifically, this ridiculous act of incitement that came out yesterday:

NEW YORK (Reuters) - U.S. stocks moved higher on Thursday after a slow start as comments from New York Fed President John Williams helped cement expectations for an interest rate cut from the U.S. central bank at the end of the month.

Williams actually said that the "neutral" rate was, in his opinion,. 0.5%.

This sort of garbage should result in an immediate firing of said Fed Governor, and if it's not forthcoming the people should rise and demand he leave his seat under whatever penalty is necessary to make that happen.

Why?

Simple: There can never be a rate of interest anywhere on the curve that is less than the federal deficit as a percentage of the economy or you are stealing from the publicOver the last 12 months the deficit has been $781 billion.  GDP as of Q1 2019 according to the BEA was $21,060 billion.  This means the federal deficit was 3.7% of the economy.

Therefore there can be no interest rate in the curve that is less than 3.7%.  In fact it has to be higher -- even if only by a little bit, because time has value and therefore to borrow money, even for a day, must have a cost in real terms.

This understates the reality of credit creation (by quite a lot) but this particular metric is irrefutable.  We can have a lively debate about credit card and student loan debt, for example; the latter is part of the public debt now since the federal government backs it all but the former is not; commercial banks literally create it with zero collateral behind it.

Nonetheless there's no argument on the federal deficit; every bit of it is inflation.

If the rate of interest is below the rate of inflation then you are losing real value.  Period, end of discussion, full stop.

To do this on purpose is to steal the rest of the value from the American people -- each and every year.  Specifically, right now Fed Funds is trading at 2.41%.  Since the deficit is 3.7% the fact is that 1.29% of $21 trillion dollars is stolen from every person in this country on an annual basis at present rates.

This is $271 billion dollars a year or about $821 per person, per year in the United States.

If Williams got his way (and the Fed Funds rate was 0.5%) then it would not be $821 it would be $672 billion or about $2,036 per person, per year.

There is this trope that when it comes to war it's all about energy.

Well, no.  Yes, it is true that borrowing below the Federal Deficit rate means you're paid to borrow.  This means you can frack, drill, etc -- and get paid to borrow the money to do it.  However, if you think the $1/gal gasoline price difference is "free" it most-certainly is not; where do you think the $821 per person goes?  Right into the oil company's pocket, in part.

It is true that war ends up -- most of the time -- being about resources.  But energy is available in nearly all cases in some form or fashion; the Germans, for example, figured out Fischer-Tropsch and thus were able to turn carbon (coal) into synfuel. Indeed, you can do that from CO2 in the atmosphere if you want to; it is therefore about money, that is, the cost-per-unit of energy and when you abuse monetary and fiscal policy you're not only setting up for war you virtually guarantee it.

The problem with this sort of monetary policy is that it is never enough once you start.  Once the market gets "used" to this idea -- that borrowing should be something you're paid to do instead of something you pay to do then people, companies and governments will do much more of it.  The result is buybacks, stock prices skyrocket and similar all over the economy.

But none of this actually helps you; it in fact screws you because that $821 is real, it's extracted every year and it falls on everyone, whether they do anything or not.  You cannot outrun this by buying stocks or anything else for that matter -- not gold, not property, nothing.  The reason is simple -- your entire personal economy is impacted by the inflation but you can only invest your surplus, that is, whatever you make minus what you need to consume.  Therefore you are always behind unless you either can take risk or use leverage that isn't yours if the bet turns out badly, much as the banks did before 2008.

Therefore if you can invest even 50% of what you make you can only "get back" half of the destruction served upon you since the other half has to be consumed for you to live.  The only way to evade that is to play with other people's money and skim off the top of it (which is theft) or con the government into covering the losses when the bets go bad.

If this was always just $821 and never got worse it would be bad, but tolerable.  The sad reality is that it never is, because once you start down this road you are no longer acting to make a profit; they're acting to steal from others.  But that theft is a fixed amount, which means your EPS -- that is, your alleged "profit" -- never goes up.

What's a company worth that can't increase it's profit?  Nearly nothing, ultimately -- it is incapable of getting any bigger, better, or making more money.  It therefore has no stock price that matters.

Therefore this path once it begins requires the government always increase its deficits as a percentage of GDP and The Fed, or whichever Central Bank is involved in whatever nation, always must increase the "spread" between said deficit and rates in the negative direction.

In other words the theft must always get larger, every year, or the scheme collapses and so does the market.

But trees do not grow to the sky and ever-increasing exponential scams cannot be continually maintained.  This is mathematics, not politics.  These schemes will always eventually collapse under their own weight and when they do huge numbers of people are ruined.  If it goes on long enough not just individual people but entire nations are ruined.

That's the problem and why such an event as policy must never be permitted.  It is why the people must rise and tell the government this must stop, now, and if it doesn't we will do whatever we have to in order to make it stop, up to and including reprising 1776.

Contemplate this folks: There has never been a nation that has entertained a below deficit interest rate policy in other than emergency circumstances such as an actual shooting war and managed to exit that policy successfully.  In most cases the result has been either civil and monetary collapse or war. People cite the US post-WWII; the Fed during that time did repress interest rates but we had just blown up everyone else's capability to produce things all over the world!  The instances in which disaster did not happen were all a consequence of similar circumstances.

Japan is the notable exception to that thus far but despite their repeated claims that they could exit said policy over the last two decades they have failed to do so and there is exactly zero evidence they ever will be able to do so.  At the same time their economy has been decimated; they were once the pre-eminent source of high-tech goods.  Not any more.  Their much-vaunted car manufacturing has been moved in no small part to the US and other nations.  Yes, the firms are centered in Japan but most of the cars are not built there anymore nor do they employ Japanese labor.  Why?  Because the theft there consumed all of the saved capital of the nation and that is always the source of innovation and, ultimately, business formation.

Let's take Germany.  After WWI the Treaty of Versailles not only demanded reparations it also demanded the confiscation of guns from the civilian population.  The German Government did so.  They then tried to run fiscal deficits in order to maintain the appearance of everything being ok.  Exponents are a BITCH, however, and the problem quickly spiraled out of control.  The people did not shoot the government, which they should have done immediately.

Why?

Because not doing so ultimately led to the collapse of the Deutsche Mark, the collapse of the Weimar Republic and the rise of Adolf Hitler along with the death of somewhere between 70-85 million people in WWII.

Had the people of Germany risen and shot the government, as we did in 1776, some of them would have died.  Maybe quite a few of them.  But there would have been 100 times less death than what happened instead.

For sitting on their hands and burning Marks -- literally burning currency for heat -- the people of Germany tolerated the fiscal and monetary authorities undertaking an action that was mathematically certain to ruin them and the only way out that the government ultimately saw from this policy was war.

America is not blameless in this.  In fact we're one of the worst offenders in this sordid episode.  By what right did we try to impose the disarmament of the civilian population in Germany?  Do we not have a Second Amendment?  Is the Second Amendment not there for the explicit purpose of an ultimate check and balance against a government and monetary authority that undertakes a policy which is mathematically certain to ruin the nation?

It sure as hell is; in fact that's the entire point of the Second Amendment!  Should the government undertake a set of policies that the people determine are destined to ruin the nation the people have the right and the ability to put a stop to it by whatever means are necessary, including, if it comes to it, shooting the tyrants.  We denied the German people that unalienable human right, we arrogated to ourselves the ability to deny that right to them and the result was EIGHTY FIVE MILLION DEAD PEOPLE including six million Jews.

WE DID THAT.  WE TOOK THE TOOLS OUT OF THE GERMAN CITIZEN'S HANDS TO STOP IT.

Not some magical fairy, America.

Yeah, that was stupid and we paid for it with a half-million of our citizen's lives in the ensuing war.

By the way, the Soviets paid for our arrogance with some twenty four million of their citizens.  You think Putin ought to be impressed with us when we screwed his nation with a casualty rate fifty times ours?

Now granted, basically all of the people who did that are dead.  Fine.  No reparations for you sir!

But if we don't learn from that grievous mistake we're going to repeat it.  We are in fact doing it right now.  Japan has a debt-to-GDP ratio of about 250%.  China has a 300% debt-to-GDP ratio.  We're running fiscal policy and pressuring The Fed to run rates below our fiscal deficit instead of the opposite.  We should put into place a demand for the opposite and that law ought to be enforceable, by hanging if necessary as it was formerly in America under The Coinage Act of 1792 which proscribed a penalty of death for the debasement of the nation's money, an act that is taking place right now and both The Fed and Congress are equally guilty.  We The People in fact must demand restoration of that clause and penalty and then enforce it -- today.

I remind you that within the next six years at present rates we will hit one of the many walls via this policy, and it's a big one.  Specifically, Medicare will go broke and be forced to either not pay or to steal the required additional funds.  This is not small-ball; Medicare and Medicaid in fact consume over a trillion dollars a year at the present time.

Trump, our President, is in fact cheering this on.  "The Squad" wants even more deficit spending than does Trump, as do the rest of the crazies on the left.

This path leads to social collapse or war.

It is cheaper to stop it now by demand, backed up with the willingness to do whatever it takes, even if that demand has to be enforced the hard way, by a factor of hundreds, than to let this garbage continue.  Many of the nations that are engaged with us in this path have nuclear weapons.  We will not kill people one at a time, or 100 at a time.  One bomb or missile will kill a million at a time.  85 million dead from WWII will be a tenth or less of the body count if it comes to that -- and it will if we do not stop walking the path we're on.

I repeat: THERE IS A 100% RECORD ON THE OUTCOME OF THE CURRENT PATH OF ACTION BY OUR GOVERNMENT AND THE FEDERAL RESERVE AMONG NATIONS OF THE WORLD.  THERE IS ABSOLUTELY NO REASON TO BELIEVE WE WILL OBTAIN ANY DIFFERENT RESULT THAN HAS OCCURRED EVERY SINGLE TIME A GOVERNMENT AND CENTRAL BANK HAS TRIED THIS.  IT HAS NEVER WORKED.  IT HAS ALWAYS LED TO STAGNATION AT BEST AND WITH ONE EXCEPTION THUS FAR, JAPAN, IT TYPICALLY LEADS TO ECONOMIC COLLAPSE OR WORSE, WAR.

WAR, TODAY, AMONG NUCLEAR NATIONS, MEANS THE DEATH OF TENS OR HUNDREDS OF MILLIONS OF PEOPLE.

You choose America -- but choose wisely and soon, because as I pointed out in my Lily Pad essay, by the time you see the pond 50% covered -- and you think you've still got plenty of time you are literally one day away from being dead -- every single one of you.

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2018-10-07 07:00 by Karl Denninger
in Monetary , 475 references
[Comments enabled]  

Oh Bill Still!  Oh former Libertarian candidate for President who proclaimed this on stage:

"Crashes are caused by just one thing, and that's bubbles.  Bubbles are caused by just one thing and that's banks being in complete and total control of the quantity of the american monetary system in complete and total contradiction of the American Constitution."

But now, Mr. Still has found his #MAGA hat and his wife is worse, shilling his videos all over the Internet supporting outright monetary fraud and, in addition, shilling for herself with MLM "dietary supplements"!

Principles?  What are those?  Gee, did you forget what you actually said Mr. Still?

Well, let me remind you what the facts are from the US Treasury's own web site:

DatePublic DebtSoc. Sec./MedicareTotal
9/28/201815,761,154,524,132.405,754,903,659,047.7821,516,058,183,180.20

9/29/2017

14,673,428,663,140.905,571,471,352,912.5720,244,900,016,053.50
Difference1,087,725,860,991.50183,432,306,135.211,271,158,167,126.70

Now the GDP of the nation stands, as of last read, at $20,411,900,000,000.

Four quarters ago it stood at $19,588,100,000,000, a difference over the last year of $823,800,000,000.

In other words GDP is actually negative because the expansion of federal debt is greater than the expansion in GDP in dollars.

This is a matter of arithmetic -- not politics.

The problem is that in real terms you need to earn at least 6.23% to break even on a government (or any other) bond.  At any rate of return under 6.23% you are losing money in real terms if you buy such a security.  Of course right now Treasuries are all earning less than this (a lot less!) yet the above is a mathematical fact.

That is, in actual monetary terms the real inflation rate is 6.23%, not 2%.  The Fed can lie and the BLS and BEA can lie with their CPI tables but arithmetic does not lie and each dollar of monetary expansion by the federal government is a dollar of inflation -- period.

This sort of misdirection can be gotten away with for a while.  It was in the 2000s, and in the 1990s.  But it cannot be gotten away with forever because the damage in purchasing power done to everyone by this behavior is both real and immediate and it is this very behavior by governments and private banks that cause both bubbles and the resulting crashes.

Trump knows this and does not care.  He believes he will be out of office before it all blows up in his face.  Bush believed that too, and he was wrong.  Obama ran the same crap after the 2008 crash and got away with it for the eight years he was in office.

Trump will not get away with it.  We are running a 6.23% fiscal deficit during an expansion in the economy.  That's outrageously large and in fact belies the truth -- there is no expansion at all; the economy is in fact contracting and yet the false signals being sent to employers and others leads them to do uneconomic things like borrow money to buy back stock.

It is this very uneconomic behavior that in fact leads to crashes because it causes the valuation of assets to be falsely priced far above their actual value due to the perception that this insanity can and will go on forever, and thus whenever you wish to sell you will be able to at a higher price.

When reality comes calling prices do not "correct" they crash because there is utterly no underpinning for the valuation metric that you have been using and due to the effects of compounding actual valuations are half or less of where prices are trending!

It is stupid to continue to prance around and call this sort of economic distortion "good", but that's what I expect from our lying, fake-news media and serial liars and bubble blowers such as Larry Kudlow.

But the true test of whether someone is actually nothing more than 2-bit ***** or believes what they say comes when someone who has made public speeches on the insanity of such behavior and in fact ran a campaign for the highest office in America on this very basis turns on a dime and supports the people doing it now.

**** you Mr. President and Congress both -- you're setting up the worst collapse and crash since the 1930s.  Double-**** you, however, to those who have claimed in the past to be supporters of monetary and fiscal truth but have discarded same due to a putrid and fraudulent infestation in Washington DC that happens to be buttering one's bread via Youslob horsecrap and MLM schemes.

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2018-08-24 10:10 by Karl Denninger
in Monetary , 177 references
[Comments enabled]  

There's a rather nasty little secret in the "crypto" world -- a coin called Tether that is, as the name implies, allegedly "tethered" to the dollar.  In other words for each Tether there is an actual, hard reserve of one US dollar.

You would think with all the cryptocoins out there, from Bitcoin to the rest, that this one wouldn't matter much.  You'd be wrong, because an utterly enormous amount of transport, transaction volume and interchange takes place on "non-regulated" exchanges -- where there is no actual, documentary connection to the "mainstream" financial system.

As such there's no reference; you can't say a Bitcoin is worth $6,000 each unless you have an actual transaction made in dollars at that price.  Or can you?

Sure - provided you have a transaction in something else that has a hard reference to dollars, then it's fine.

Enter Tether.

Tether is the "glue" that binds all current crypto "valuations" to a real-world, government-issued reference -- the dollar, and by extension there (since dollars trade in the FX market against other government currencies) every other currency too, such as Euros and Yen.

But what if there are no actual dollars behind Tethers?

Then the entirety of the alleged pricing behind all of the other cryptos is at risk of being an immediate zero.

Note that Tether was allegedly supposed to produce a public audit (under GAAP) on a regular basis to ascertain that in fact its assertion of being 100% reserved with actual dollars has been met.  

In response, Tether Limited published a memo from an accounting firm affirming that it was fully backed. But the document fell suspiciously short of an official audit, and doubts only increased. On January 27, 2018, Tether parted ways with the auditor. Then, three days later, Bloomberg’s Matthew Leising reported that Tether Limited and its associated exchange had been subpoenaed by the Commodity Futures Trading Commission in another attempt to determine whether Tether is in fact backed by dollars. (To date, no charges have been filed.)

But wait -- they also issued $600 million worth of new Tethers on the same day they fired their auditor.

Where's the $600 million that had to be deposited and reserved, earning no interest, to back that?

It's not disclosed.

Where are the regular, public audits?  It sounds like the answer is "there aren't any."

The bigger problem is that there's no apparent justification for its business model in the first place.  There's no speculative interest in it since it is linked inextricably to the dollar, at least allegedly, it earns no rate of return and you can buy other crypto assets without going through it, so there is no reason to take the cost of the transaction either.

Unless.... the entire point was to at some point issue it unbacked, con people into thinking it is backed, and then convert it to dollars before anyone figures out you scammed them.

How did a "coin" that has no appreciation and is allegedly 100% backed, yet has no fundamental and necessary part of the crypto system go from $25 million in issued coins in early 2017 to more than $3 billion now without a single scintilla of appreciation?  Let me remind you that you cannot issue Tether, at least not legitimately, in exchange for anything other than actual dollars.

Where's the $3 billion on deposit and can you explain to me why instead of actual, regular audits under GAAP Tether issued instead a report from a law firm that had a caveat in it that it is not an accounting firm, did not conform to GAAP standards, and cannot attest to the sufficiency of the information the company supplied to it?

And finally, how did Tether's company intend to pay for said regular audits when the coin doesn't appreciate and it has a 100% reserve requirement?  If there is no discount rate on the coin who is paying the operating costs of the organization, including these alleged "audits" that have never happened, and how are they covering routine operating expenses since there appears to be no method to generate cash flow......

Further, if there really is nearly $3 billion sitting somewhere where did it come from and what motivation would the people who bought it have to have done so?  Remember that no transaction is ever without cost and it is not necessary to use this path; you can simply buy Bitcoin or whatever through Coinbase using dollars.

There is of course one very real possibility that comes to mind on fund sourcing, although that doesn't explain how the operating costs are being covered: The "investors" are all engaged in highly-illegal activity, such as pumping fentanyl and meth into the United States and elsewhere or running human trafficking (slavery, especially sexual slavery) organizations.

Is that the anchor of all cryptocurrencies today?

That's a pretty good question because if so it's all subject to seizure and "Tether" becomes, well, untethered.  Rapidly.

Then there's the other possibility -- there are no dollars and it's a scam.

Whatever it is, if the provenance of this thing doesn't prove up and confidence is lost, well, the entire crypto space will crash to its intrinsic value more-or-less all at once.

That would be zero, by the way.

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There are few more self-destructive things a human can undertake than denying provable facts.

Only a few things qualify as "provable facts", and it is important to separate out hypothesistheory and opinion from fact.  Mathematics and physics are two areas of discipline that have massive amounts of their subject matter within the realm of provable facts.

Honest people call the parts of these disciplines that are within the ability to prove laws. Unlike laws made by men that are often ignored these are simply inviolate -- period.  The laws of thermodynamics prohibit a "free lunch", basically; they state that while energy may be transformed from one type to another, and other parts of physics make clear that matter and energy can also be transformed you never get out everything you put in; there is always loss to the environment that you can neither use or avoid.  Newton's laws of motion tell us how momentum, mass, force and velocity interact; how energy, in short, is carried and dissipated in an object that moves or is contacted by one that is moving.

Likewise the laws of mathematics tell us that 2 + 2 = 4, that 2(x + 3) = 2x + 6, that the square root of 9 is 3 and more. These are called laws because every single time the same result will be obtained -- here, there, on Mars or somewhere in Interstellar space.

Here's the reality of money:

Money is only valuable because it is, in relative terms, scarce.  Money is really nothing more than a unit of accounting that's convenient in the physical world.

We could (and perhaps should) account for production in the physical world, and its value, in some invariant physical unit.  I happen to like BTUs (or Joules) of energy required to produce a thing or contained within a thing, because it is an invariant and therefore not subject to tampering.  Accounting for it under production rather than the recoverable (e.g. "stored") energy in a good or service means that improvements in productivity (e.g. discovery of a new, "cheaper" way to make gasoline, for example) makes the value of each unit (a gallon, for example) less and accessibility greater.  This is what productivity improvement is supposed to do -- it advances the common benefit to everyone because it makes useful goods and services more accessible to everyone.

So let us assume that among everything in the economy there is 100,000 Joules of energy represented in a given period of time.  Yes, I know this is a ridiculously small number, but adding more zeros doesn't change anything other than scale, and 100,000 is a nice convenient number.

We will also assume that there is $100,000 -- that is, one hundred thousand dollars, in said economy.

It would be reasonable to assume that the average cost of transacting for one Joule of represented production of a good or service would be one dollar.  There would be items in the economy that are of relatively more value in terms of dollars-per-Joule, and some with less, but on average that would be the expected clearing price.

Now let's remember that money is fungible (that is, exchangeable) with credit (which is just another word for "debt"); that is, a promise to make something tomorrow.  They both are accepted in the economy as exactly the same thing, even though they demonstrably are not.

Now here's the problem: Bill and some others (e.g. the MMT charlatans) assert that the government can simply create money.

But that's not true.  The "creation" he refers to is in fact credit because the government did not first produce anything.

Consider what happens if you double the amount of "money" in the system from $100,000 to $200,000, given that 100,000 Joules of production takes place.

The average clearing price of a good or service produced with those Joules will double from $1 to $2. It cannot be otherwise because equations always balance; this is what the laws of mathematics tell us.

Now does it matter whether you borrow or "create" in this regard?  Only in one respect: The prospect of having to repay (potentially with interest) is a check and balance on borrowing that is utterly absent if you "create."

But in terms of the economic impact today, at the point in which you put the new "money" into the system the two acts are exactly identical. 

Both do immediate violence to the purchasing power of every unit of currency or credit that exists in the system at that instant in time.

It cannot be otherwise because the laws of mathematics, which state that equations always balance, are not suggestions!

As a consequence there is no possible way for the government to spend more than it takes in via taxes without distorting the economy and destroying the purchasing power of the people.

"Creating" is exactly the same thing as shaving coins -- it is counterfeiting and is economically indistinguishable at the moment of the act from borrowing by emitting unbacked credit.

Borrowing, in point of fact, other than the interest, actually has a benefit in that when the amount borrowed unbacked is repaid it is destroyed and thus the inflationary impact is reversed.  Of course in today's world we don't repay government debt ever and so that reversal never takes place, but that someone cheats doesn't mean that the underlying premise is wrong -- it just means you cheated.

Further, when rates are near zero there is no difference economically between "creating" and "borrowing"; it is only when rates rise that the difference shows up.  For this reason if "creating" would work we'd already have proof since we've "created" more than $8 trillion by the Federal Government alone since 2008 and yet there has been no strong, positive economic recovery impact.

The mathematical facts are that the only way to stop the destruction of purchasing power and thus economic damage is for the government at all levels to stop spending more than it takes in -- period.

Denying the laws of mathematics makes you either a fool or a charlatan.

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