Mainstream Keynesian economics is facing its last hurrah. The global fiscal stimulus championed last year by the Obama administration is coming undone, repudiated by the same Group of 20 that endorsed it last year. Now, against a backdrop of a widening sovereign debt crisis, we need to abandon short-term thinking in favour of the long-term investments needed for sustained recovery.

Time to plan for post-Keynesian era

By Jeffrey Sachs

Published: June 7 2010 22:22 | Last updated: June 7 2010 22:22

“…

First, governments should work within a medium-term budget framework of five years, and within a decade-long strategy on economic transformation. Deficit cutting should start now, not later, to achieve manageable debt-to-GDP ratios before 2015.

Second, governments should explain, and the public should learn, that there is little that economic policy can do to create high-quality jobs in the short term. Good jobs result from good education, cutting-edge technology, reliable infrastructure and adequate outlays of private capital, and thus are the outcome of years of sustained public and private investments. Governments need actively to promote post-secondary education.

Third, governments must of course also ensure social safety nets: income support for the poor, universal access to basic healthcare and education, a scaling up of job training programmes and promotion of higher education.

Fourth, governments should steer their economies towards needed long-term structural transformation. External-deficit countries such as the US and UK will need to promote exports over the next few years, while all countries must promote clean energy and new transport infrastructure.

Fifth, governments and the public should insist that the rich pay more in income and wealth taxes – indeed, a lot more. The upward re-distribution of the past 25 years has made our economies into extravagant playgrounds for the super-wealthy. Politicians of both the mainstream left and right in the US and UK have fawned over those who pay their campaign bills in return for low taxation. Even playgrounds should collect tolls – when it is billionaires in the sandpit.

We need, in sum, to reset our macroeconomic timetables. There are no short-term miracles, only the threat of more bubbles if we pursue economic illusions. To rebuild our economies, the watchword must be investment rather than stimulus.

Tuesday, May 11, 2010
Euro-Bankers to Greece: The Wealthy Won’t Pay their Taxes, So Labor Must Do So

By Michael Hudson

The “Greek bailout” should have been called what it is: a TARP for German and other European bankers and global currency speculators. The money is being provided by other governments (mainly the German Treasury, cutting back its domestic spending) into a kind of escrow account for the Greek government to pay foreign bondholders who bought up these securities at plunging prices over the past few weeks. They will make a killing, as will buyers of hundreds of billions of dollars of credit-default swaps on the Greek government bonds, speculators in euro-swaps and other casino-capitalist gamblers. (Parties on the losing side of these swaps now will need to be bailed out as well, and so on ad infinitum.)

This windfall is to be paid by taxpayers – ultimately those of Greece (in effect labor, because the wealthy have been untaxed) – to reimburse Euro-governments, the IMF and even the U.S. Treasury for its commitment to predatory finance. The payment to bondholders is to be used as an excuse to slash Greek public services, pensions and other government spending. It will be a model for other countries to impose similar economic austerity as governments run up budget deficits in the face of falling tax collections from the financial sector being enriched by the translation of junk economics into international policy. So the bankers for their part will have little trouble meeting their bonus forecasts this year. And by the time the whole system collapses, they will have spent the money on hard assets of their own.  (link to full article)

Reforming Seigniorage the Key to a Sustainable Economy
By Eric Zencey

Eric Zencey is a novelist, essayist, and Visiting Associate Professor of Historical and Political Studies for Empire State College in Europe and New York. His writing in environmental history and political theory has been supported by grants from the Rockefeller, Guggenheim, and Bogliasco Foundations. This essay is from the forthcoming The Other Road to Serfdom: Essays in Sustainable Democracy (University Press of New England, Fall 2011).

Here is an excerpt..

Money that is created and spent into existence by the government does not create this equal-and-opposite burden of debt. At bottom, fractional reserve banking is a routinized, publicly funded machine for inflating speculative bubbles, based on the bizarre supposition that $100 of wealth can be made to support $1000 worth of claims upon it. It takes a lot of economic growth to produce $1000 worth of wealth in the future for every $100 worth that exists today.

One reason that economic growth can’t match the rate of debt creation is the ongoing decline in the energy-return-on-energy-invested, or EROI, of oil, our economy’s primary fuel. In 1920, one barrel of oil invested in drilling and production yielded 100 barrels of usable product—an astounding 10,000% return, large enough to disguise quite a few structural flaws in our system. But by the close of the twentieth century the EROI of oil had fallen, worldwide, to 20:1 (For newly discovered oil, it is even lower: 5:1, by some estimates). This decline is both an underappreciated root of our current economic downturn and a warning that we have to change our institutions–and the thinking that underlies them.

The decline in EROI is a portent that austerity in public spending is not a temporary passage from which recovery is possible, but something like the permanent condition of governance in the post-petroleum era. Oil’s 10,000% rate of return was magic. It created fortunes (think Rockefeller and Getty), fuelled philanthropy, and ultimately paid for a lot of public works: schools and bridges and roads, Medicare and Social Security, moon missions and foreign wars. Today, governments at every level are struggling to sustain their revenues and provide essential services, even as their tax bases decline as a result of the recession. Meanwhile, the disposable incomes of many Americans have tumbled, and Tea Partiers shout that they’ve been “Taxed Enough Already”—taxes being one sizable household expense which citizens of a democracy feel they ought to have some say over.

There’s room for hope in the fact that the best renewable energy technologies come close to matching today’s world-wide average EROI of oil. But no energy technology will ever again offer the heady returns of the early days of oil. As we enter a crowded, ecologically straitened, post-petroleum era, the need for sound, far-sighted public expenditure on infrastructure, including renewable energy infrastructure, has never been greater, while the resources to pay for it have never been more constrained. Capturing seigniorage is one way out of this conundrum, and phasing out fractional reserve banking is the best way to do that.

Think back to that unnamed goldsmith who first had the idea of making loans against money that belonged to someone else. Through one conceptual lens, the man was an innovator, a banking genius: the gold was just lying there, not being used, so why not issue additional notes against it? Through another lens, though, the man committed fraud: he treated as his own something that was not his to lend. The fact that we’ve had centuries of routine acceptance of that basic fraud doesn’t change the essential character of the act. And aside from the moral considerations that call into question the foundation of fractional reserve banking, there are also large practical reasons for changing our practice. The pyramiding of debt through fractional reserve banking is one strong driver of heedless economic growth, “growth for growth’s sake,” which has expanded our economy’s ecological footprint beyond sustainable limits. Returning seigniorage to its rightful owner is a strong step toward ecological, and civic, sanity.  (link to article)

Hat tip to James Robertson. This Act could be written instead for the ECB. It goes further that the NMT or Chartalist prescription by removing all of the right to create money from the private banking sector giving it, not to government but to an arms length entity. The outcome is broadly similar to that proposed by Auerbach and Mosler – governments get to spend money without borrowing.  Here is a snippet…

Preventing Banks Creating Money

Our first step then is to prevent banks from creating money each time they issue a loan. This step is actually remarkably simple – we just set a ‘universal rule’ that banks can only credit (put money into) an account if they simultaneously debit (take money out of) another account by the same amount. As is explained in this guide, this prevents money being created (or destroyed) within the banking system.

Creating a Public Source of New Money

However, up to now the banking sector has been increasing the money supply by an average of 8% each year. While this growth rate is almost certainly too high, a growing economy does still require an injection of new money each year, in the same way that a car requires the regular addition of oil to keep everything running smoothly.

Consequently, our second step is to give the Bank of England the power and responsibility to manage the money supply and create new money as and when the economy is judged to need it. We implement strict measures to separate control of the money supply from any political influence, and further strict measures that significantly reduce the risk of inflation, compared to the existing system.

With new money now being created debt-free by the state, we need to ensure that  this money is distributed into the most economically efficient and socially beneficial method possible. We recommend that the money is given to the government as a non-repayable grant, and used to reduce the overall tax burden, phase out the national debt and invest in public infrastructure. Phasing out the national debt has its own complications, and we have made recommendations to deal with these.

…In the 1930s, John Maynard Keynes’ friendly adversary, Sir Ralph Hawtrey, insisted that deficit finance would not normally be needed as a counter-cyclical weapon so long as the potentially unstable money supply was kept under firm control. However, in the event of poor control followed by an unusually severe depression like today, Hawtrey diagnosed what he called a “credit deadlock”, in which a collapse of confidence made banks fear to lend to the private sector and the private sector fear to borrow from the banks.

In such conditions he agreed that fiscal policy should come to the rescue to break the deadlock. But he also insisted that its effectiveness depended crucially on how the deficits were financed. If the private sector is frantically de-leveraging, as today, fiscal deficits lose much of their effectiveness if paid for by increased private saving.

Therefore what is needed is for government to expand the money supply (hence net monetary expenditures) by itself spending an adequate amount of newly issued money directly into circulation rather than borrowing from the existing (and declining) circulation. This borrowing from the private sector adds unnecessarily to the national debt.

Quantitative easing will not do the trick if the Bank of England’s net purchase of debt from the private sector largely ends up as increased bank reserves. That is why the money supply in circulation (this excludes bank reserves) has registered sluggish, sometimes negative, growth through our deep recession. And that is why recovery has been equally sluggish despite a soaring public debt...(link to article)

“People find it hard to get their heads around this concept, but we must…or else we will fail to understand the financial system.

Before western societies invented bank money and institutionalised banking systems – there were often shortages of money in the economy as a whole. This was because money was linked to a commodity – like gold – which was limited, and indeed was used as an anchor, precisely to limit the availability of money.

Then some geniuses (including one John Law) discovered that it was not necessary to have the same amount of ‘money’ or ‘credit’ in circulation, as there was gold in the bowels of the earth. One just needed to create enough money equal to the amount of economic activity in the economy.

If one created less money than the amount of economic activity, the result was depression and deflation. If one created more money than the amount of possible economic activity – the result was inflation… So central bank governors were given the task of carefully measuring economic activity and then supplying enough money to enable that activity to take place.
Money is not the thing for which we exchange goods and services.

Its the thing by which we exchange goods and services.

And bank money is not tangible. You cannot touch it or smell it. You cannot even see it – except perhaps as a statement on your monthly bank account. What you do touch and smell is cash – and these days only a tiny proportion of the money we use is issued as cash. The rest takes the form of cheques (declining in number now, and soon to be abolished in some stores in Britain); bank transfers; credit card and debit card payments. (Not so in many parts of Africa where they do not trust their banking system, where they may not have developed a system of bank money with credit and debit cards, and so, in some countries, carry cash around in large bags!)
Now intangible bank money is one of the most wonderful things humanity has ever invented. It enables us to engage in economic activity. That’s all. It’s effectively incidental to that activity – because without economic activity that money would be useless.

But it is potentially also one of the most dangerous of our inventions – which is why credit creation must be so carefully regulated.

Bank money comes into existence in the form of credit, issued by the central bank, and then distributed by the commercial banking system. Credit creates deposits, and in England it has done so since 1694 with the foundation of the Bank of England.

This is the very opposite of what most people think – that only once you have deposits can you obtain credit. No, credit creates deposits in the bank.

So when you are a youngster, fresh out of school, your employer has invariably obtained credit from the bank to finance her investment, and she uses part of that to pay you, and you promptly pay that into the bank as a deposit – using some of it as cash.

That credit has stimulated or generated the first month of your productive economic activity. The deposits that the young person places in her bank account are then exchanged and transferred as ‘bank money’ invisible and intangible – but very useful when she is shopping on Ebay, using her credit card, or paying by cheque.

Until recently, most people could not bring themselves to believe in something intangible and invisible called bank money. But now we have a new phenomenon to discuss over our dinner tables: quantitative easing, or ‘Queasing’ as we joke in English.

Last year on 13th March, 2009 the governor of the US Federal Reserve, Ben Bernanke gave an interview to CBS TV, in which he was asked: “where did you find $160 billion to bail out the insurance company AIG? Was that taxpayers money that the fed was spending?”. “That was not tax money” replied the Governer. He elaborated: “the banks have accounts with the Fed, much the same way that you have an account with a commercial bank. So to lend to a bank we simply use the computer to mark up the size of the account that they have with the Fed”. The Fed did what a commercial bank does when it provides you with a loan: they entered a number into a computer and charged it to AIG’s account (Watch CBS News Videos Online).

The fact is that the Federal Reserve did not even have to print 160 billion greenbacks – they simply entered a number into a computer.

And that is what the bank does when you apply for a mortgage, to buy a house for example. All the bank needs is a) your application for a loan b) the collateral of your property and c) your promise to repay at a certain rate of interest. Hey presto! The money is transferred – digitally – to your bank account and appears there as a deposit. You may spend 10% of that money on small purchases with cash (euros), but most of that will be paid by cheque or bank transfer.
Now the point of explaining this is as follows: the creation of credit is in fact an almost effortless activity. Different for example, from growing tomatoes. To grow tomatoes one has to depend on the weather, on the rain to fall; on the land and its fertility, and on labour, yours or that of another. All of these factors can disappoint or fail a farmer.

To create credit there is no need for our banking system to depend on the weather, on land, or even on labour. “Why then”, as John Maynard Keynes once argued in his ‘Treatise on Money’:
…if banks can create credit, should they refuse any reasonable request for it? And why should they charge a fee for what costs them little or nothing?
Keynes, 1930.

The ‘fee’ that Keynes is referring to here, is the rate of interest – the ‘price’ of a loan. And the point he is making is correct: the price of money should remain low – to enable people like entrepreneurs to borrow to invest; to enable governments to borrow to invest for example in de-carbonising the economy – something that requires major investment.

However, he also argued that while the rate of interest should be low – the creation of credit should be carefully regulated. In other words, bank money should be regulated so that it is lent to stimulate productive economic activity rather than speculative, inflationary activity.
We have just lived through three decades of financial de-regulation where economic policy makers have encouraged reckless, privatised credit creation. This in turn led to crazy speculation and gambling – in derivatives, collateralised debt obligations, and a range of other parcelled up, sliced-and-diced securities.

At the same time central bank governors and finance ministers succeeded very successfully in repressing the inflation of wages and prices – while allowing the prices of assets (property, race-horses, works of art, stocks and shares etc.) to rocket upward in an inflationary bubble.
However none of the economic gurus of the time – from US Federal Reserve Alan Greenspan, to European central bankers, to orthodox economists – while ferociously opposed to the inflation of prices and wages, ever complained about the inflation of assets.

Why? It is my belief that this is because it is the rich, on the whole, that own assets. The rest of us live by our wages, or by the prices we can obtain as farmers or small business women… The rich live on rent from their assets – be it property, stocks and shares or an number of assets. And orthodox economists allowed bankers and the rich to inflate the value of their assets with easy credit. This enabled the rich to enrich themselves over the period of financial liberalisation to an extent probably unknown in our history.  (link to full article)

While I was on tour in western Canada recently, I had occasion to meet Paul Grignon, creator of the excellent videos, Money as Debt I and II. Paul came to my presentation on Salt Spring Island and brought with him a new short video called The Essence of Money, a Medieval Tale. In less than eight minutes, this video explains as well as anything I’ve seen how simple and effective a community-created currency can be. Highly recommended! View it here.

IMS is one of the leading trade exchange operators in the United States. It’s a publicly traded company that has in about 24 years grown from one local trade exchange into a network of more than a dozen trade exchanges scattered around North America. The IMS website contains a five minute video that does a pretty good job of explaining how commercial trade exchanges work. View it here.

EU/IMF REVOLT: GREECE, ICELAND, LATVIA MAY LEAD THE WAY

Ellen Brown, December 7th, 2009

Europe’s small, debt-strapped countries could follow the lead of Argentina and simply walk away from their debts. That would shift the burden to the creditor countries, which could solve the problem merely by a change in accounting rules.

Total financial collapse, once a problem only for developing countries, has now come to Europe. The International Monetary Fund is imposing its “austerity measures” on the outer circle of the European Union, with Greece, Iceland and Latvia the hardest hit. But these are not your ordinary third world debtor supplicants. Historically, Iceland was settled by the Vikings, who successfully invaded Britain; Latvian tribes repulsed even the Vikings; and the Greeks conquered the whole Persian empire. If anyone can stand up to the IMF, these stalwart European warriors can. 

Note the prospect of wealth and asset grabs at the culmination of this IMF approved policy.

In November, the Latvian government adopted its harshest budget of recent years, with cuts of nearly 11%. The government had already raised taxes, slashed public spending and government wages, and shut dozens of schools and hospitals. As a result, the national bank forecasts a 17.5% decline in the economy this year, just when it needs a productive economy to get back on its feet. In Iceland, the economy contracted by 7.2% during the third quarter, the biggest fall on record. As in other countries squeezed by neo-liberal tourniquets on productivity, employment and output are being crippled, bringing these economies to their knees.

The cynical view is that that may have been the intent. Instead of helping post-Soviet nations develop self-reliant economies, writes Marshall Auerback, “the West has viewed them as economic oysters to be broken up to indebt them in order to extract interest charges and capital gains, leaving them empty shells.”

(link to full article)

The Poker Game as Debt-Based Monetary System
by Peter Young

The businessdictionary.com defines a monetary system as the “set of mechanisms by which a government provides money (cash) in a country’s economy. It usually consists of a mint, central bank, and commercial banks.”

The monetary system of a whole country like the US, or a whole planet, is a difficult concept to grasp. My accountant who is far brighter than I in mathematical matters, remembers briefly studying money creation in grad school, and being mystified by it.

In order to develop an informed opinion about how our monetary system is working, one must juggle a plethora of dizzying concepts like: money supply, money velocity, foreign exchange, interest rates, inflation/deflation, debt levels, and GDP. Economics is like the Cosmos; it has no fixed point from which to gauge our bearings; everything moves all of the time.

In the face of such mystery, it is human to poke at the subject in myth or metaphor. In that tradition, I present a gross oversimplification of a monetary system that I think pretty much anyone can understand:

Seven friends want to play poker; they have a deck of cards but they don’t have any chips.

They could create their own money system, with toothpicks or matches, perhaps. As long as they trusted each other not to bring in extra, unauthorized toothpicks (counterfeits), such a system would work perfectly well to keep track of who won what from whom. But before they think of this, an eighth man shows up with a large collection of poker chips; we’ll call him Bill.

Bill offers to lend each poker player 100 chips for a year, but he needs one percent interest in return. Thinking “where else could I find chips at 1%,” each one agrees.

The men play poker all year long with the borrowed chips; they keep track of innumerable transactions. At the end of the year, three guys have more than a hundred chips, three have fewer than 100 chips, and one breaks even. Four of the seven cannot pay back their loans. They are in default, and if they had pledged any collateral to get the chips in the first place, they lose that.

It is possible that only one player would come up short; if he had lost only six of the hundred chips over the year, and each other player had netted one chip, then there would only be one “default”. But note that there is no way that the seven players can all pay their debts at the end of the year, not even if they agree to become comrades and share their winnings and losings at the end of the year, because the men owe Bill 707 chips and there are only 700 in existence. If they cooperate on that level, they all default.

This is as stark an example as I can come up with for this precept that I encounter over and over in the monetary reform literature; in a debt-based money system (like ours), the banks only create the money for the amount of the principal on the loan, not the money to pay the interest on the loan.

Look at what our debt-based micro-economy has pointed out so far, as well as some questions that it suggests:

A) Bankruptcy is inevitable at the end of the year.

It seems to me like the seven poker players gave away a lot of power to Bill for something they could have created themselves. What value did Bill contribute to the activities at the poker table other than providing an accounting system?

B) In a debt-based money system, if all debts are paid off, there will be no money.

We hear about how “the Fed and the banks create money out of thin air and loan it into existence,” which is true. (By the way I know of no more effective statement to ignite righteous indignation in the novice, and most of the old timers I met at the Conference haven’t let it go either.) What we hear less often is that the Fed and the banks “extinguish” the money they created as principal when the loan is paid off.

Create money, extinguish money? This is a place where many people, myself included, can glaze over and feel like we’re not smart enough. But I can understand these concepts on the level of the poker game. It means there was no money until Bill created it and figured out how to get it into circulation, and there was none (extinguished, or 7 chips less than extinguished) available after the men paid off their debts.

C) It is useful to ponder here what gave the chips their value. They are not silver coins with their own intrinsic value; they’re just ordinary plastic poker chips. Defenders of the debt-money system would say that the chips derive their value from the players promises to pay the money back in the future. But anyone who has played poker or Monopoly or any game with play money knows that the money derives its value from an agreement among the players that that is the system they are going to use to keep track of all the transactions.

D) Labor and resources are available, as is the desire to trade. All they lacked was a way to keep track of who wins or loses how much, in other words–an accounting system, or–a monetary system.

E) There is no reason to call Bill a bad guy. He suggested an arrangement, and the players agreed.

Now let’s leave the poker game with its clearly dysfunctional monetary system behind and turn our attention to the monetary system that really matters: ours. Having been in place for almost a hundred years now, it has some staying power. It is different from the poker game in some obvious and fundamental ways.

For one thing, in the real world, we don’t pay off all of our loans at the same time. Money that was created as principal on a loan due next year can be used to pay interest on any loan due today.

Another significant difference in the poker economy is that Bill does not play cards. In the real economy, banks participate in the economy; they build buildings and pay employees so the money they collect in interest can go back out into the economy where it can be recycled many times, making many interest payments. (Money paid as interest on loans is not extinguished.)

But the biggest reason this monetary system is still around is that our total amount of debt grows every year. Granted, the national debt has declined several times in history, most recently in the late 90’s, but the total debt of our whole society ( Total Credit Market Debt which is government + consumer + corporate debt) goes up every year.

To conclude the poker analogy for now, though, I go back to the question: what are the advantages of borrowing poker chips from Bill over the players just providing their own?

The U.S. Constitution is clear about who has the power to create our money: saying in Article 1, Section 8 that “the Congress will have power to … coin money (and) regulate the value thereof.” To be sure, it doesn’t expressly prohibit Congress from giving this power to a private entity like the Fed, and then borrowing it back at interest. That’s why, in 1913, Congress could give away its/our right to create money to the Fed and private banks, from whom we have borrowed it back with interest ever since.

As the Total Credit Market Debt chart shows, since 1950 nominal debt has not only grown every year, but it has also grown faster than the economy every year (it graphs the debt/GDP ratio). Since the economy is the only place we can get the money to service the debt, the toll that these payments take on society rises each year. Because a greater percentage of the economy is going to service debt, a smaller percentage is available to produce and maintain the things that really contribute to our quality of life. And bridges start collapsing.

Are California’s IOUs about to become a proper currency?

The best account I’ve come across of the reasons that California is in a financial mess was an article in the New Scientist. (http://www.newscientist.com/article/mg20327166.100-california-no-longer-the-golden-state.html) which explained that a “surfeit of democracy” was at fault.

If a few hundred thousand voters sign up in support, motions called Propostions can be put to the voters and, if passed, get written into law. Apparently Propositions passed over the years have limited property taxes and Governor Schwarzeneggar has refused to raise income taxes, the other powerful fiscal tool,  to meet a $26 billion deficit. Instead, he wants $16 billion worth of cuts which the Democrat majority in the state Senate won’t accept.

As the Federal Government has refused to lend any more to California, the political deadlock has meant that the state has run out of money and is having to issue $3 billion in IOUs this month to stay afloat. It promises to honour these in October. At first, two or three banks cashed the IOUs but apparently they no longer do.

The interesting thing for us is whether the IOUs become a new money. Here’s a commentator who thinks they will.

Sunday, July 12, 2009

Schwarznegger to Obama: Watch and Learn

By Marshall Auerback

According to the San Diego Union-Tribune, Republicans and Democrats alike embraced legislation last Friday that would make California IOUs legal tender for all taxes, fees and other payments owed to the state.

Effectively, California is using its IOUs to create a currency. If this bill passes it would allow California to deficit spend just like the Federal Government and with the IOU’s acceptable as payment of state taxes, it instantly imparts value to them (see here and here). In effect, what you have is a state of the union creating a sovereign currency right under the noses of Treasury, Fed. They are stumbling their way into it, and as they do so, some of the true nature of contemporary money is being revealed. It will be viewed as a stop gap measure at first, and then could very well become entrenched as states realize they have a way to escape balanced budget requirements.

Contrary to most conventional economic thought, whereby people think we pay taxes to create revenue, in fact, it works the other way around under a fiat currency system. The government doesn’t need money to spend, but in fact uses tax to manipulate aggregate demand, not raise funds to “pay” for government. The tax is what gives the currency its value insofar as taxes function to create the demand for federal expenditures of fiat money, not to raise revenue per se. Value has been given to the money by requiring it to be used to fulfill a tax obligation, but the money is already in existence, not “created” by the revenue.

Most significantly, the Federal government retains this monopoly under our existing monetary arrangements. If California is successful here in allowing its IOUs to pay tax, it has profound constitutional ramifications. It certainly means considerably less muni bond issuance in the first instance, if the proposal passes constitutional muster.

It will be interesting to see what the exchange rate is between California IOU and US currency – the IOUs do offer a yield, so should be less than par by design. I wonder if NY is next.

This is like some sort of return to the 13 colonies with all kinds of ersatz currency floating about. It’s hard to believe the Rubinite wing of the Democrats will just let it be, given the threat it represents to Wall Street’s prevailing economic interests, but it is an understandable response to a federal government which continues to champion the interests of the rentier class above the vast majority of Americans by emphasizing “fiscal sustainability” and destroying aggregate demand in the process.

There are political benefits for Obama, as Mike Norman has noted, to rid himself of the shackles of conventional (and wrongheaded) economic thinking: If the Federal government allows this proposal of the state of California to go unchallenged, it would relieve the President of a major political quandary, which is, does he help California and then open himself to aid requests from other states? (Which his advisor, David Axelrod doesn’t want), or, does he let California go and lose 56 electoral votes in the next election?

By allowing them to “solve” their own problem in the manner proposed by the legislation he avoids the quandary. And given that, from a money paradigm at least, he and his team probably don’t know how destabilizing (to the current system) this is, they just might let them do it until the import is fully understood.
It is true that this legislation represents a profound break from all federal laws. It is almost bound to incur some sort of constitutional challenge, representing as it does, a profound threat to the Federal government’s currency monopoly powers. But this is another instance where Obama’s inattentiveness to the ramifications of the states’ respective fiscal crises has come back to haunt him. This situation would not have arisen had Obama embraced a simple revenue sharing plan with the states (so that the states’ respective fiscal policies would be working in harmony with his proposals, rather than mitigating the impact of the Federal fiscal stimulus), as recommended by any number of prominent economists, such as James K. Galbraith of the University of Texas.

It will be interesting to see how this plays out. As California goes, will the nation follow? Will we ultimately be confronted with the spectacle of “President Schwarzenegger” trying to legalize the drug output of the Emerald Triangle so he can tax it, thereby enabling us to shut the borders on the rest of this mess? Arnold always wanted to be President, but Constitution would need to be changed. Maybe this is his path to President of the 8th largest nation?
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