Category Archives: China

Response to Dem debate

Posted on by

I arrived in Connecticut to begin a ‘listening tour’ before making the decision to run in the Democratic primary for United States Senate. Tonight I listened carefully to the Democratic candidates as they put forth their agendas for restoring the US economy and both fell far short of the mark. Neither had a credible economic agenda, and what they did propose- tax increases- would only make matters worse.

Making sure that people working for a living are paid enough to be able to buy the goods and services they produce has long been a core economic value of the Democratic party. And what drives the lion’s share of business, both large and small, is the competition to attract the consumer’s dollars by producing the goods and services working people want. Unfortunately, the current situation is clearly one where people working for a living are not taking home enough money to buy what business is desperately trying to sell. Consequently, business has been contracting and laying people off, which makes matters even worse.

The Republican response has traditionally been to give tax cuts and other monetary incentives to business rather than to the people doing the work. That does not result in new hires for the businesses, as business only hire when orders and sales pick up. Instead, it results in higher profits with the hope that those profiting will hire more domestic help and more gardeners, and produce a few jobs that way, which is known as trickle-down economics.

So while, in addition to tax hikes, both Democratic candidates for US Senate proposed tax relief, it was for small businesses- the traditional Republican approach, and indeed, the approach of the Obama administration. Note that last week’s jobs bill featured a $5,000 payroll tax reduction for businesses, and not for employees. In contrast, I have long been proposing a full ‘payroll tax holiday’ where a couple earning a combined $100,000 per year would see their take home pay rise by over $650 per month. That would be enough to fix the economy as people could then make their mortgage payments and car payments, and even do a little shopping. This is the Democratic approach which also gives businesses what they really need- people with enough money to spend to buy their products. It’s people with money to spend that creates the backlog of orders which then quickly results in the millions of new jobs we need to restore our economy to full employment levels and prosperity. The payroll tax holiday also reduces costs for business. In a competitive environment this translates into a combination of both lower prices and better cash flow for business that can be used for the new investment the recession has long delayed.

The reason the Democrats don’t propose this kind of tax cut is because they can’t answer the question of ‘how are you to replace the lost revenues.’ And, in fact the Obama administration has currently put Medicare and social security cuts on the table to ‘pay for’ what they’ve already spent. What both Democratic candidates are displaying is a failure to understand the difference between the function of Federal taxation and State and local government taxation. I grew up on the money desk at Banker’s Trust on Wall St. in the 1970’s, ran my own investment funds and securities dealer for 15 years, currently own a small Florida bank, and visit the Fed (Federal Reserve Bank) regularly to discuss monetary policy and monetary operations. I know how the payment system works, as does the Fed’s operations staff.

What we all know is that when Federal taxes are paid, all the Fed does is change the numbers down in our bank accounts. For example, if you have $5,000 in your bank account, and you pay a Federal tax of $1,000, all the Fed does is change the 5 on your bank statement to a 4, so you then have only $4,000 in your account. With online banking you can watch exactly that happen on your computer screen. The Fed doesn’t ‘get’ anything. It just changes the numbers in your account. And when the Federal government spends, it just changes numbers up in our bank accounts. It doesn’t ‘use up’ anything. In fact, the Federal government (unlike State and local governments and the rest of us who do need money in our accounts to be able to spend) never has nor doesn’t have dollars. Think if it as the score keeper for the dollar. When a touchdown is scored and 6 points go up on the scoreboard, does anyone ask where he stadium got those 6 points? Can the stadium run out of points to post on the score board? Of course not!

So why then does the Federal government tax, when it doesn’t get actual revenue (it just changes numbers down in our accounts) and it does not use up anything when it spends (it just changes numbers up in our accounts)? The fact is, taxes function to regulate the economy by controlling our take home pay. If taxes are too low, the result is excessive spending and the strong upward pressure on prices we call inflation. If we are over taxed, as we are today, and the Federal government is taking too much out of our paychecks, the result is a drop off in sales by businesses, and rising unemployment. Federal taxes are like the thermostat. If the economy is too hot (something I have never seen in my 37 years in the financial markets), they can be raised to cool it down. And when the economy goes ice cold, like it is now, my full payroll tax holiday is in order. The Federal government’s job is to keep the economy just right by keeping taxes low enough so people working for a living can afford to buy the goods and services they are capable of producing.

That’s what fiscal responsibility is all about. But until our politicians understand the difference between State finances and Federal finances, the will continue to fail to make sure our take home pay is high enough to sustain the high levels of output and employment that are the hallmarks of American prosperity.

Let me conclude with a word about China. It was stated in the Democratic debates and not disputed that the US was borrowing $4 billion from China to pay for the war in Afghanistan. However, close examination of monetary operations shows this is not at all as it seems. China has what amounts to a checking account at the Federal Reserve Bank. China gets its dollars by selling goods and services to the US, and those dollars are paid into that checking account at the Fed. And US Treasury securities are nothing more than fancy names for savings accounts at the Fed. So when China buys US Treasury securities, all the Fed does is shift China’s dollars from its checking account at the Fed to a savings account at the Fed. And when those Treasury securities become due and payable, all the Fed does is shift the dollars in the savings accounts (plus interest) back to China’s checking account at the Fed. That’s it. Debt paid. And it happens exactly this way every week as billions of Treasury securities are purchased and mature. And this process has no connection to Federal government spending for the war or anything else. Spending is always nothing more than the Fed changing numbers up in people’s bank accounts, no matter what China might be doing with their Fed accounts. That’s why the ‘national debt,’ which is nothing more than dollars in savings accounts at the Fed, has never created a financial problem, and never will, either for us or for our children. Yet the administration, the media, and the two Democratic candidates for US Senate from Connecticut have the story completely wrong as well, which results in proposals which are bad for Connecticut and bad for America.

America is grossly overtaxed and needs a full payroll tax holiday NOW to stop the bleeding and restore the American dream. The only thing standing in the way of economic prosperity is a lack of understanding of our monetary system.

Sincerely,
Warren Mosler

Share

detail for book

Posted on by

The following, from a 2005 paper of mine, provides a good summary of the argument with quotations and bibliographic citations. Feel free to use for any project of Warren Mosler, as per his instructions. Also, please let me know if you have any further questions or I can provide any additional information. In addition to the information on Colonial Africa, I have added a brief section on Europe and Asia, where the same phenomenon can be found. Also, I refer to a 2006 paper of mine that provides evidence that many of the most famous names in the history of economics were well aware of the phenomenon. Also many political scientists, policy-makers, sociologists, historians, etc. Finally, I have also documented the “tax-driven cowrie shell” from both Africa and Asia, that is, contrary to what has previously been thought (by such economists as Milton Friedman), cowrie currency was not a so-called ‘primitive’ money, but was similarly tax-driven as colonial currency or today’s dollar. Let me know if you would like these references as well.

The economist “Rodney” Warren refers to is Walter Rodney, and his book is in the bibliography. I provide examples from many African colonies, such as Nigeria, German East Africa, French West Africa, British Central Africa, Upper Volta, Southern Rhodesia, and South Africa, but not specifically Ghana. If you need examples specifically from Ghana, let me know and I can provide them.

Once again, please do not hesitate to contact me directly anytime for further assistance. My contact info follows.

Sincerely,

Mathew Forstater

Professor of Economics

University of Missouri—Kansas City

From:

Mathew Forstater, 2005, “Taxation and Primitive Accumulation: The Case of Colonial Africa” in Research in Political Economy, Vol. 22, pp. 51-64.

Direct taxation [and the requirement that tax obligations be settled in colonial currency] was used to force Africans to work as wage laborers, to compel them to grow cash crops, to stimulate labor migration and control labor supply, and to monetize the African economies. Part of this latter was to further incorporate African economies into the larger emerging global capitalist system as purchasers of European goods. If Africans were working as wage laborers or growing cash crops instead of producing their own subsistence, they would be forced to purchase their means of subsistence, and that increasingly meant purchasing European goods, providing European capital with additional markets. It thus also promoted, in various ways, marketization and commoditization. [Direct taxation] appears to have been one of the most powerful policies in terms of both its wide variety of functions, its universality in the African colonial context, and its success in achieving its intended effects. Of course, taxation was not the sole determinant of primitive accumulation [note: “primitive accumulation” or similar terms such as primary accumulation or original accumulation, was a term used by the Classical economists, such as Adam Smith, David Ricardo, and Karl Marx to refer to the process by which subsistence workers became wage-laborers, and the process of early capitalist development in general]. But it has certainly been under-recognized in the literature on primitive accumulation. The history of direct taxation also has some wider theoretical implications. It shows, for example, “that ‘monetization’ did not spring forth from barter; nor did it require ‘trust’—as most stories about the origins of money claim” (Wray, 1998, p. 61). In the colonial context, money was clearly a “creature of the state”. In addition, this phenomenon was in no way unique to the African case. As will be seen following the section on Africa, the same process was also found in Europe, Asia, and elsewhere.

TAXATION AND PRIMITIVE ACCUMULATION IN COLONIAL AFRICA

Colonial administrators at first believed that market incentives and persuasion might result in a forthcoming supply of labor:

Initially the French imagined that if they would only create new needs for the Africans, the indigenous people would go out to work. When this did not happen, the French introduced taxes so as to make Africans earn wages. (Coquery-Vidrovitch, 1969, pp. 170-171)

From the first it was assumed that ample cheap labor was a major asset in Africa…Practical experience soon showed, however, that Africans did not, as a rule, approximate to Indian coolies. Few in sub-Saharan African had experience of working for pay or outside the traditional subsistence economy, and few had any real need to do so. In course of time monetary incentives might generate a voluntary labor force, but during the first decades after pacification neither governments nor private investors could afford to wait indefinitely for the market to work this revolution. (Fieldhouse, 1971, p. 620)

A number of methods were utilized to compel Africans to provide labor and cash crops. Among these were work requirements, pressure for ‘volunteers’, land policy squeezing Africans into ‘reserves’ destroying the subsistence economy, and ‘contracts’ with penal sanctions (Fieldhouse, 1971, pp. 620-621). But the most successful method turned out to be direct taxation.

Direct taxation was used throughout Africa to compel Africans to produce cash crops instead of subsistence crops and to force Africans to work as wage laborers on European farms and mines:

In those parts of Africa where land was still in African hands, colonial governments forced Africans to produce cash crops no matter how low the prices were. The favourite technique was taxation. Money taxes were introduced on numerous items—cattle, land, houses, and the people themselves. Money to pay taxes was got by growing cash crops or working on European farms or in their mines. (Rodney, 1972, p. 165, original emphasis)

The requirement that taxes be paid in colonial currency rather than in-kind was essential to producing the desired outcome, as well as to monetize the African communities, another part of colonial capitalist primitive accumulation and helping to create markets for the sale of European goods:

African economies were monetised by imposing taxes and insisting on payments of taxes with European currency. The experience with paying taxes was not new to Africa. What was new was the requirement that the taxes be paid in European currency. Compulsory payment of taxes in European currency was a critical measure in the monetization of African economies as well as the spread of wage labor. (Ake, 1981, pp. 333-334)

Colonial governors and other administrators were well aware of this ‘secret’ of colonial capitalist primitive accumulation, although they often justified the taxation on other grounds, some ideological and others demonstrating the multiple purposes of taxation from the colonial point of view. “One Governor, Sir Perry Girouard, is reported to say: ‘We consider that taxation is the only possible method of compelling the native to leave his reserve for the purpose of seeking work’” (Buell, 1928, p. 331). First Governor General of the Colony and Protectorate of Nigeria, Sir Frederick Lugard’s Political Memoranda and Political Testimonies are filled with evidence regarding direct taxation: “Experience seems to point to the conclusion that in a country so fertile as this, direct taxation is a moral benefit to the people by stimulating industry and production” (Lugard, 1965a, p. 118). Lugard’s belief that “Direct taxation may be said to be the corollary of the abolition, however, gradual, of forced labour and domestic slavery” (1965a, p. 118), acknowledges the role of direct taxation in forcing Africans to become wage-laborers. Lugard was also clear that the “tax must be collected in cash wherever possible…The tax thus promotes the circulation of currency with its attendant benefits to trade” (1965a, p. 132).

Lugard and other colonial administrators cited a number of other justifications for direct taxation:

Even though the collection of the small tribute from primitive tribes may at first seem to give more trouble than it is worth, it is in my view of great importance as an acknowledgement of British Suzerainty…It is, moreover, a matter of justice that all should pay their share alike, whether civilized or uncivilized, and those who pay are quick to resent the immunity of others. Finally, and in my judgment the most cogent reason, lies in the fact that the contact with officials, which the assessment and collection necessitates, brings these tribes into touch with civilizing influences, and promotes confidence and appreciation of the aims of Government, with the security it affords from slave raids and extortion.” (Lugard, 1965b, pp. 129-130)

The tax affords a means to creating and enforcing native authority, of curbing lawlessness, and assisting in tribal evolution, and hence it becomes a moral benefit, and is justified by the immunity from slave-raids which the people now enjoy.” (p. 173)

Taxation was also justified on grounds that it assisted in ‘civilizing’ African peoples: “For the native,” Ponty stated in 1911, “taxation, far from being the sign of a humiliating servitude, is seen rather as proof that he is beginning to rise on the ladder of humanity, that he has entered upon the path of civilization. To ask him to contribute to our common expenses is, so to speak, to elevate him in the social hierarchy” (Conklin, 1997, p. 144). Colonial tax policies were also introduced in the name of the ‘dignity’ of, and the obligation to, work, where contact with Europeans again was emphasized:

From this need for native labor, the theory of the dignity of labor has developed; this dignity has been chiefly noticeable in connection with labor in the alienated areas. The theory has also developed that it is preferable for the native to have direct contact with the white race so that his advance in civilization should be more rapid than if he remained in his tribal area attending to his own affairs. This is the “inter-penetration” theory in contrast to the “reserve” or “separation” theory. (Dilley, 1937, p. 214)

All of these functions of direct taxation may be seen in some sense as part of colonial capitalist primitive accumulation, whether as assisting in promoting marketization or serving ideological functions in the reproduction of the colonial capitalist mode.

Several points concerning the role of direct taxation in colonial capitalist primitive accumulation need to be made. First, direct taxation means that the tax cannot be, e.g., an income tax. An income tax cannot assure that a population that possesses the means of production to produce their own subsistence will enter wage labor or grow cash crops. If they simply continue to engage in subsistence production, they can avoid the cash economy and thus escape the income tax and any need for colonial currency. The tax must therefore be a direct tax, such as the poll tax, hut tax, head tax, wife tax, and land tax. Second, although taxation was often imposed in the name of securing revenue for the colonial coffers, and the tax was justified in the name of Africans bearing some of the financial burden of running the colonial state, in fact the colonial government did not need the colonial currency held by Africans. What they needed was for the African population to need the currency, and that was the purpose of the direct tax. The colonial government and European settlers must ultimately be the source of the currency, so they did not need it from the Africans. It was a means of compelling the African to sell goods and services, especially labor services for the currency. Despite the claims by the colonial officials that the taxes were a revenue source, there is indication that they understood the working of the system well. For example, often the tax was called a “labor tax” or “prestation.” Under this system, one was relieved of their tax obligation if one could show that one had worked for some stated length of time for Europeans in the previous year (see, e.g., Christopher, 1984, pp. 56-57; Crowder, 1968, p. 185; Davidson, 1974, pp. 256-257; Dilley, 1937, p. 214; Wieschoff, 1944, p. 37). It is clear in this case that the purpose of the tax was not to produce revenue.

To achieve its intended effects, it was also important that the direct tax be enforced, and numerous penalties existed for failing to meet one’s obligation. In German East Africa, “Sanctions against non-payment were severe—huts were burnt and cattle confiscated—so tax defaulters were not numerous” (Gann and Duignan, 1977, pp. 202-203). All kinds of harsh penalties for failing to pay taxes have been documented:

If a man refused to pay his taxes, the Mossi chief was permitted to sequester his goods and sell them. If the man had neither the taxes nor the goods, the chief had to send him and his wife (or wives) to the administrative post to be punished. Sometimes, a man and his wife would be made to look at the sun from sunrise to sunset while intoning the prayer Puennam co mam ligidi (“God, give me money”). Other times a man would be made to run around the administrative post with his wife on his back; if he had several wives, he had to take each one in turn. Then his wife or wives had to carry him around. (Skinner, 1970, p. 127)

Collective punishments were also used widely to enforce the tax. At the very least, failure to “pay could be met, and regularly was met, by visits from the colonial police and spells of ‘prison labour’.” (Davidson, 1974, pp. 256-257)

Another important element in assuring the smooth functioning of the direct tax system was keeping wages low, which had the additional benefit of keeping costs down for private employers. If wages were too high relative to the tax burden, Africans would only work enough to pay off their tax obligation and the labor supply would remain limited:

While taxation is high, wages are very low. It would not do to pay the Natives too much for they would not work a day more than it was absolutely necessary to get tax money. So employers pay the minimum in order to exploit their labourers as long as possible. (Padmore, 1936, p. 67)

Direct taxation was also used to promote and control migration of wage labor. If wage labor and money for cash crops was not available locally, Africans were forced to migrate to plantations and mines to find money wages (see, e.g., Greenberg, 1987; Groves, 1969; Onselan, 1976; although see also Manchulle, 1997, especially p. 8, for a critique).

TAXATION AND PRIMITIVE ACCUMULATION IN EUROPE AND ASIA

In arguing that taxation played an important role in primitive accumulation, this paper has focused on the case of Colonial Africa, but this should in no way imply that the process was limited to Africa. Evidence has already been mentioned in passing with reference to Russia and elsewhere. Vries, in a section entitled “Taxes, the Financial Revolution, War, Primitive Accumulation, and Empire” from his article “Governing Growth: A Comparative Analysis of the Role of the State in the Rise of the West” (Vries, 2002), argues that:

Praising Europe’s state-system and its mercantilist competition implies, whether one likes it or not, praising taxes. The increase of taxation we see in mercantilist countries may also have been a blessing in disguise. Paying them may have been an unpleasant experience, but it need not necessarily have been a bad thing from a macro-economic point of view. It is not farfetched to expect that ever-increasing taxes forced people to work harder and longer. Since the economy of large parts of early modern Europe was characterized by un(der)employment and under-utilization of the available means of production, there was plenty of room for increased production. Moreover, the fact that taxes were collected in money, led to increasing commercialization. Which in turn could increase government income via indirect taxes. (Vries, 2002, p. 75)

Despite Vries’ view of the process as a ‘blessing’, etc., it is clear that the description highlights the ways in which money taxes affected labor supply and monetization in early modern Europe, and even uses the term ‘primitive accumulation’. Later in the article, Vries reports that, in China, “one finds officials proclaiming that taxes ought to be raised to force the populace to work harder” (Vries, 2002, p. 95; for more on China, see Von Glahn, 1996). Vries goes on to report that this development took place throughout Europe and Asia:

When it comes to the way taxes were levied, monetization appears to be the tendency in the entire Eurasian continent. This process had progressed furthest in Europe. All governments preferred to get their income in money and to a very large extent managed to do so. In China an important grain levy continued to exist, but all other important government taxes had gradually been transformed into monetary payments. In India taxes for the central government had to be paid in cash. In the Ottoman Empire monetization made the least progress, but with the increasing weight of cizye, avariz, and tax farming, here too cash payments were on the rise. (Vries, p. 98)

Additional support for Europe and Western Asia is provided by Banaji (2001). Evidence for the notion that money taxes force pressures for increased market activity is provided by the reverse development, namely that a “decline in the exaction of money taxes brought about a decline in trade” (Hopkins, 1980, p. 116, quoted in Banaji, 2001, p. 16). Banaji goes on to report that:

the relentless pressure for taxation in money would also mean that despite the commercial decline which is supposed to have occurred in the Mediterranean of the seventh century, Egyptian landowners and rural communities were undoubtedly forced to meet their monetary obligations through increased production for the market (or participation in it as wage-labourers). (Banaji, 2001, p. 158)

Additional research is necessary to provide a more comprehensive and detailed documentation of the role of monetary taxation in monetization, marketization, and the creation of wage-labor and cash crop production in other regions and time periods, but it is clear that the historical process was in no way confined to Colonial Africa. The fact that various aspects of the phenomenon were recognized by economists as geographically, temporally, and theoretically diverse as Adam Smith, John Stuart Mill, Karl Marx, Fred M. Taylor, Philip Henry Wicksteed, W. Stanley Jevons, Karl Polanyi, and John Maynard Keynes supports the position that it existed with a great deal of generality (see Forstater, 2006).

BIBLIOGRAPHY

Ake, Claude, 1981, A Political Economy of Africa, Essex, England: Longman Press.

Amin, Samir, 1976, Unequal Development, New York: Monthly Review Press.

Banaji, Jairus, 2001, Agrarian Change in Late Antiquity, Oxford: Oxford University Press.

Buell, Raymond Leslie, 1928, The Native Problem in Africa, Vol. 1, New York: Macmillan.

Christopher, A. J., 1984, Colonial Africa, London: Croom Helm.

Conklin, Alice L., 1997, A Mission to Civilize: The Republican Idea of Empire in France and West Africa, 1895-1930, Stanford, CA: Stanford University Press.

Coquery-Vidrovitch, Catherine, 1969, “French Colonization in Africa to 1920: Administration and Economic Development,” in L. H. Gann and P. Duignan (eds.), Colonialism in Africa, 1870-1914, Volume 1: The History and Politics of Colonialism, 1870-1914, Cambridge: Cambridge University Press.

Coquery-Vidrovitch, Catherine, 1986, “French Black Africa,” in A. D. Roberts (ed.), The Cambridge History of Africa, Volume 7, from 1905 to 1940, Cambridge: Cambridge University Press.

Crowder Michael, 1968, West Africa Under Colonial Rule, Evanston, IL: Northwestern University Press.

Crowder, Michael, 1970, “The White Chiefs of Tropical Africa,” in L. H. Gann and P. Duignan (eds.), Colonialism in Africa, 1870-1960, Volume II: The History and Politics of Colonialism, 1914-1960, Cambridge: Cambridge University Press.

Davidson, Basil, 1974, Africa in History, new revised edition, New York: Collier.

Dilley, Marjorie Ruth, 1937, British Policy in Kenya, New York: Barnes and Noble.

Fieldhouse, David K., 1971, “The Economic Exploitation of Africa: Some British and French Comparisons,” in P. Gifford and W. R. Louis (eds.), France and Britain in Africa: Imperial Rivalry and Colonial Rule, New Haven, CT: Yale University Press.

Forstater, Mathew, 2006, “Tax-Driven Money: Additional Evidence from the History of Thought, Economic History, and Economic Policy,” in M. Setterfield, ed., Complexity, Endogenous Money, and Exogenous Interest Rates: Festschrift in Honor of Basil J. Moore, Cheltenham, U.K.: Edward Elgar.

Freund, Bill, 1984, The Making of Contemporary Africa, Bloomington, Indiana University Press.

Gann, L. H. and Peter Duignan, 1977, The Rulers of German Africa, 1884-1914, Stanford, CA: Stanford University Press.

Greenberg, Stanley B., 1987, Legitimating the Illegitimate: State, Markets, and Resistance in South Africa, Berkeley, CA: University of California Press.

Groves, Charles Pelham, 1969, “Missionary and Humanitarian Aspects of Imperialism from 1870 to 1914,” in L. H. Gann and P. Duignan (eds.), Colonialism in Africa, 1870-1914, Volume 1: The History and Politics of Colonialism, 1870-1914, Cambridge: Cambridge University Press.

Lugard, F. D., 1965a [1906, 1918], “Lugard’s Political Memoranda: Taxation, Memo No. 5” in A. H. M. Kirk-Greene (ed.), The Principles of Native Administration in Nigeria: Selected Documents, 1900-1947, London: Oxford University Press.

Lugard, F. D., 1965b [1922], “Lugard’s Political Testimony,” in A. H. M. Kirk-Greene (ed.), The Principles of Native Administration in Nigeria: Selected Documents, 1900-1947, London: Oxford University Press.

Manchulle, François, 1997, Willing Migrants: Soninke Labor Diasporas, 1848-1960, Athens, OH: Ohio University Press.

McCracken, John, 1986, “British Central Africa,” in A. D. Roberts (ed.), The Cambridge History of Africa, Volume 7, from 1905 to 1940, Cambridge: Cambridge University Press.

Onselan, Charles van, 1976, Chibaro: African Mine Labour in Southern Rhodesia, 1900-1933, London: Pluto Press.

Padmore, George, 1936, How Britain Rules Africa, New York: Negro Universities Press.

Rodney, Walter, 1972, How Europe Underdeveloped Africa, Washington, D. C.: Howard University Press.

Skinner, Elliott P., 1970, “French Colonialism and Transformation of Traditional Elites: Case of Upper Volta,” in W. Cartey and M. Kilson (eds.), The Africa Reader: Colonial Africa, New York: Random House.

Temu, A., and B. Swai, 1981, Historians and Africanist History: A Critique, London: Zed Books.

Thomas, Clive Y., 1984, The Rise of the Authoritarian State in Peripheral Societies, New York: Monthly Review Press.

Von Glahn, Richard, 1996, Fountain of Fortune, Berkeley: University of California Press.

Vries, P. H. H., 2002, ““Governing Growth: A Comparative Analysis of the Role of the State in the Rise of the West,” Journal of World History, Vol. 13, No. 1, pp. 67-138.

Wieschoff, H. A., 1944, Colonial Policies in Africa, Philadelphia: University of Pennsylvania Press.

Share

updates

Posted on by

Markets are getting closer to the idea that:

Interest rates don’t/won’t help
QE doesn’t/won’t help

With the larger point being coming to terms with the possibility the Fed can’t inflate, or do much of anything that actually matters for the real economy, except maybe fund zombie entities to keep them from failing.

So bonds are throwing in the inflation towel and yields are coming down.
The dollar is going up with miles to go before ppp is reached.
Gold is well off the highs and being held up probably by europeans running from the euro to dollars and a bit of gold.

(***Bernanke just again testified that a contango in futures prices is a reasonable forecast of higher prices down the road. So much for the credibility of their inflation forecast)

Meanwhile the eurozone is continuing it’s methodical implosion with no credible response in sight.
And the realization that all eurozone bank deposits are only insured by the national govts has yet to hit the headlines.

The Obama administration believes the US Treasury is ‘out of money’ and we have to borrow from China to spend and leave that for our children to pay back.
So any kind of meaningful US fiscal response seems off the table.

The American economy works best when people working for a living make enough to be able to one way or another buy their own output, and business competes for their dollars. It’s not happening.

We are grossly overtaxed for current circumstances with no meaningful relief in sight.

Lots of reasons to stay on the sidelines.

Share

China Commerce Ministry comments

Posted on by

Looking ugly.

And a trade deficit and FDI not profitable due to higher costs can weaken the currency as well.

25Feb10 RTRS-CHINA COMMERCE MINISTRY SEE NO CLEAR EXTERNAL DEMAND REBOUND -SPOKESMAN

25Feb10 RTRS-CHINA COMMERCE MINISTRY SAYS WILL TAKE TWO-THREE YEATS TO REGAIN EXPORT MOMENTUM

25Feb10 RTRS-CHINA COMMERCE MINISTRY SAYS CANNOT RULE OUT POSSIBLE TRADE DEFICIT WITHIN SEVERAL MONTHS

25Feb10 RTRS-CHINA TO KEEP STABLE YUAN A PRIORITY -COMMERCE MINISTRY

Share

Question for Mr. Mosler re US debt to China

Posted on by

Dear Mr. Mosler:

If the US debt with China is merely numbers on a “Reserve Account” at the Federal Reserve Bank,

China’s funds are either in a reserve account or in a securities account at the fed.

could China close its account at the Federal Reserve

The dollars exist only as entries on the Fed’s computer, and actual cash, which is the same data written on a piece of paper

or move its account from the Federal Reserve Bank to the Central Bank of China?

The central bank of China has a reserve account and a securities account at the Fed dollars can’t be anywhere else.

It could loan the dollars to someone else and hold their liability. And that loan transaction debiting China’s fed account and crediting the borrower’s Fed account

And if it did, what would the mechanics of such a move be and what would be the consequence of such a move?

Don’t see any of interest.

I hear news reports that China would like to replace the dollar as the international currency. Would this be the same as “closing” its account at the Federal Reserve Bank?

No, I’m not sure what it would mean. I don’t use those words, and when I ask others who do they don’t know either.

Thank you for your anticipated response. David DePasquale

thanks for your interest!

Share

From Scott Brown’s Facebook page

Posted on by


[Skip to the end]

>   
>   (email exchange)
>   
>   On Sun, Feb 7, 2010 at 8:45 AM, Seth wrote:
>   
>   scott brown was on TV this week saying we had to stop spending money we don’t have
>   and are borrowing from the Chinese-that 40% of obama’s budget will have to be
>   borrowed from Chinese and paid back by our children hopefully he is reading your stuff
>   

Yes, hope to put that to rest Thursday, assuming that’s what CNBC wants me to discuss.

Hope to definitively dismiss the entire line of thought.

1. Taxation serves to regulate aggregate demand, not to collect revenue per se.
  Govt doesn’t ever have or not have dollars- it’s the score keeper
  It taxes by changing numbers down in our accounts, and doesn’t ‘get’ anything
  It spends by changing numbers up in our accounts, and doesn’t ‘have less’ of anything.
  China is not involved in this process.
  There is no operational connection between taxing and spending.

2. China gets dollars by voluntarily selling things to us, presumably because they’d rather
  have the dollars than what they sold.
  Those dollars go into their ‘checking account’ at the Fed called a ‘reserve account.’
  Treasury securities are functionally nothing more than a ‘savings account’ at the Fed
  When China buys tsy securities to earn more interest the Fed debits their reserve account
  and credits their securities account.
  The $13 trillion of US debt is best thought of as the $13 billion held in savings accounts at
  the Fed.
  When China’s or anyone else’s tsy secs mature the Fed debits their securities account and
  credits their reserve account.
  That’s all.
  Debt paid.
  This is operationally unrelated to spending and taxing.

3. The issues of concern include ‘inflation,’ but not dependence on foreign ‘investors’ and
  not solvency nor funding issues.
  All we owe China is a bank statement.


[top]

Share

Dallas address

Posted on by


[Skip to the end]

This is the text of the address I gave at Dallas.

Will be repeating it in a northern Va meeting next weekend.

Still waiting for the video.

Feel free to distribute.

How tea party democrats can run successfully in the primaries

Honesty in government is a core value of the Tea Party movement and the most basic value in any representative democracy. Accordingly, my first proposal is that all candidates for public office be sworn in: ‘I solemnly swear to tell the truth, the whole truth, and nothing but the truth, so help me God.’ As a consequence, any subsequent lies are perjury, and punishable by law.

I am here to discuss how I believe Tea Party Democrats can win in upcoming Democratic primaries. The answer is to emulate and extend the success of the Tea Party movement by getting back to basics. The Democratic party is the party of Jefferson and Jackson. The founders believed that the public voice should be heard. They believed in limited government. And they never kowtowed to special interests or cowered before purveyors of the conventional wisdom. This means Tea Party Democrats should be running against the Obama administration’s policies which are counter to both traditional Democratic values and Tea Party values.

It is the Washington elite that have moved away from the ideals of Jefferson and Jackson with policies that are, at best, regressive, elitist, and destructive to our quality of life. For example, with unemployment rising, real wage growth falling, and GDP now growing at over 5%, who’s getting all that increase in real goods and services?

Not the millions who voted Democratic who are losing their jobs and their homes, and watching wages fall even as their cost of living goes up. All that real wealth being created is instead rising to the top, due to impossible trickle down policies that would have made even Reagan blush.

The large majority of Americans that elected this administration did not do so to enrich the bankers, insurance executives, drug companies, and union leaders at the expense of the rest of us, in a perversion of true core Democratic values. But it’s clearly happening as even a blind man can see. And all because they don’t understand the monetary system, how and why government spends and taxes, and why we don’t owe China anything more than a bank statement.

I will devote most of the rest of my time talking about the economy. In part, that is because it is my area of expertise, given that I have spent most of my adult life in financial markets. But the most important reason is it is in that arena that the Washington elite have failed us the most. The so-called economic experts have confused themselves and their political masters with contrived explanations for the way the economy works. Their limited vision has limited the range of policy choice. And the result has been a monumental economic disaster and human tragedy.

My first proposal for the economy encompasses both the Tea Party and traditional Democratic values of limited government, fiscal responsibility, and reliance on competitive markets. Working through the logic of this proposal will show both how this straightforward government policy can work, and how convoluted is the elite’s understanding of finance.

I believe that the surest engine for full economic recovery is a full payroll tax holiday. Payroll taxes take away over 15% of everyone’s paycheck, from the very first dollar earned. This is big money- about $1 trillion per year. Half comes from the employee and half from the employer. A payroll tax holiday does not give anyone anything. What it does is stop taking away $1 trillion a year from working people struggling to make their payments and stay in their homes, and businesses struggling to survive. A full payroll tax holiday means a husband and wife earning $50,000 a year each will see their combined take home pay go up by over $650 a month, so they can make their mortgage payments and their car payments and maybe even do a little shopping.

This fixes the banks and fixes the economy, from what I call the bottom up. It fixes the banks without giving them anything more than people who can afford to make their payments. That’s all they need to remain viable.

And what all businesses need most to expand output and employment is people with spending money who can buy their products. Without people to buy goods and services, nothing happens. The payroll tax holiday also means there is also a big reduction in expenses for business. With competitive markets this means lower prices, which also helps consumers, helps keep inflation down, helps businesses compete domestically and in world markets to help optimize our real terms of trade, and helps keep the currency stable as the dollar is ultimately worth what it can buy. So with the payroll tax holiday we get a dramatic increase in economic activity, rising employment in good jobs, and better prices. And we’ll see millions of new jobs, because, again, what business needs most is people with money to buy their products. Then they hire and expand.

What I don’t see is how any self respecting Democrat can allow this tax to stand for a single moment. It is the most regressive, punishing tax we’ve ever had. It starts from the first dollar earned with a cap at $106,800 per year. It’s an utter disgrace to the Democratic party. It should be immediately eliminated. Yet, instead, the Washington Democratic elite are actually discussing increasing it.

Let’s now back up and review how we got to where we are at this moment in time. Headline unemployment is unthinkably high at 10%, and if you count workers who have given up looking for a full time job, it’s over 17%. As you all know, it’s about the financial crisis. The banks got in trouble when their loans went bad. Well, what makes a loan go bad? Only one thing- people who can’t make their payments. If people make their payments, the loans are AAA. If people don’t make their payments the loans are junk and toxic waste. No matter what the security is- a loan, a cmo, cdo, clo, or whatever, it’s all the same. If people are making their loan payments there is no financial crisis. Unfortunately, instead of attacking the problem from the bottom up with a payroll tax holiday, we have an administration that thinks it first needs to fix the financial sector from the top down, before the real economy can improve. This is completely upside down. But the elites believe it, so that’s what they have done to us.

So starting with President Bush, and supported by both Senators McCain and Obama, they funded the financial sector with trillions, while they kept taking away trillions from people working for a living who couldn’t make their payments.

How does that help anyone make their payments, apart from a few bankers? It doesn’t.

What happened for the next year and a half? The banks muddled through, profits and bonuses returned, but unemployment skyrocketed and is still going up, loan delinquencies and defaults and foreclosures skyrocketed and are still going up, and millions of Americans still can’t make their payments and are losing their homes. And a lot of the money the banks are making on federal support is being drained by continuing loan losses. We are getting nowhere as tens of millions of lives are being destroyed by policy makers who simply don’t understand how the monetary system works.

This has been a trickle down policy where nothing has trickled down, because there is no connection between funding the banks, and the incomes of people trying to make their payments. The answer, of course, is instead of giving trillions to the banks, to simply stop taking away trillions from people still working for a living. The government doesn’t even have to give us anything, just stop taking away the trillion dollars a year of payroll taxes with a full payroll tax holiday.

But then there’s the nagging question of ‘how are we going to pay for it? Aren’t we just going to have to borrow more money from China and leave it for our children to pay back? And if it doesn’t work, then where are we, another trillion in debt with nothing to show for it?’
And, in fact the failure to understand that question of ‘how are you going to pay for it’ is exactly what has set the Democratic party, and the nation, on the current path of economic ruin. Therefore, to run successfully against the Democrats who support current policy it is critical you understand what I’m going to say next. This understanding is the basis for achieving our core values of limited government and lower taxes. And what I’m about to tell you is pure, undisputable fact, and not theory or philosophy.

So let me start by examining exactly how government spends at what’s called the operational level. In other words, exactly how does government spend? And this is for the federal government, not the State and local government, who are in much the same position as you and I are. Well, when the federal government spends, it simply changes numbers up in bank accounts. Last May Fed Chairman Bernanke answered Congressman Pelley’s question about where the money comes from that the banks are getting. Bernanke told him the banks have accounts at the Fed and the Fed simply ‘marks them up’- changes the numbers in their bank accounts.

• (PELLEY) Is that tax money that the Fed is spending?
• (BERNANKE) It’s not tax money. The banks have– accounts with the Fed, much the same way that you have an account in 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 Chairman is exactly right. All government spending is simply a matter of changing numbers upward in our bank accounts. It doesn’t come from anywhere. Just like when you kick a field goal and get 3 points. Where does the stadium get those points? Right, they don’t come from anywhere. It’s just scorekeeping. And that’s exactly how government actually pays for anything.

All it ever does, and ever can do when it spends, is mark up numbers in bank accounts, as the Fed Chairman told us. And with online banking you can actually watch it happen. When a government payment hits your account you can actually watch as the numbers change upward on your computer screen. And notice I’ve never mentioned China or anyone else in this spending process. They are simply not involved. Spending is done by changing numbers higher in our bank accounts. What China does or doesn’t do has nothing to do with this process. Again, this is not some theory or philosophy. It’s simply how it actually works. I’ve been there, I’ve seen it. I grew up on the money desk at Banker’s Trust on Wall St. in the 70’s, and I visit the Fed regularly and discuss monetary operations. I know exactly how it all works.

Now let’s look at how government taxes. And keep in mind what any Congressman will tell you- we have to get money from taxing or borrowing to be able to spend it.
Well, with modern on line banking you can watch what happens when a tax is paid. Suppose you have $5,000 in your bank account and you write a check to the government for $1,000 to pay your taxes. What happens? You can see it on your computer screen. The number 5,000 changes into the number 4,000. The number 5 changes to the number 4. All the government did is change the number in your bank account. They didn’t ‘get’ anything. No gold coins dropped into a box at the Fed. Yes, they account for it, which means they keep track of what they do, but they don’t actually get anything that they give to anyone. The man at the IRS simply changes numbers down in our bank accounts when he collects taxes. And, if you pay your taxes with actual cash, they give you a receipt, and then shred it. How does taking your cash and shredding it pay for anything? It doesn’t. Taxes don’t give the government anything to use to make payments.

So the absolute fact of the matter is, the government never has nor doesn’t have dollars. It taxes by changing numbers down, but doesn’t get anything. It spends by changing numbers up and doesn’t use up anything. Government can’t ‘run out of money’ like our President has repeated many times. There isn’t anything to run out of. It’s just data entry, it’s score keeping. And it has nothing to do with China, which I’ll get to shortly.

So why then does the government tax at all? To control our spending power, which economists call aggregate demand. If the government didn’t tax us at all and let us spend all the money we earn, and government spent all the money it wanted to spend, the result would be a lot of inflation, caused by more spending then there are real goods and services for sale. Too much spending power chasing too few goods and services is a sure way to drive up prices. So the purpose of taxes is to regulate the economy. If the economy is too hot, taxes can be raised to cool it down. If the economy is too cold, as it obviously is today, taxes should be cut to warm it up back to operating temperature.

Taxes are like the thermostat. When it gets too hot or too cold you adjust it. It’s not about collecting revenues, there is no such thing, government never has nor doesn’t have any dollars, it just changes numbers up and down in our bank accounts. It’s all about looking at the economy and deciding whether it’s too hot or too cold, and then making an adjustment.

So, given all this, just what does ‘fiscal responsibility’ mean?
Fiscal responsibility means not overtaxing us to the point we are at today with record unemployment. And Fiscal Responsibility means not spending so much or taxing so little that the economy ‘overheats’ and inflation becomes a problem. That’s what fiscal responsibility means. That’s all it means. The government is responsible for getting the economy right, and the monetary system, including taxation, is a tool for that job.
Taxation is a tool to get the economy right.

So where does China and borrowing come into the picture? To be a successful Tea Party Democrat you will have to understand this and be able to explain it.
So first, how does China get its dollars? It sells things to us and gets paid for them.

And where does China keep its dollars? In a bank account at the Federal Reserve Bank which they call a reserve account. It’s nothing more than a checking account with a fancy name. And why does China buy Treasury securities? To earn a bit more interest.

And what is a Treasury security? It is nothing more than a savings account at the Federal Reserve Bank with a fancy name. And just like any other savings account at any other bank, with a Treasury security you give the Federal Reserve Bank money, and you get it back plus interest. So when China buys a Treasury security, what happens? The Fed moves their funds- the money they earned from selling things to us- from their checking account at the Fed to their savings account at the Fed.

And what happens when those Treasury securities- savings accounts- come due? How do we pay off China? The Fed just moves the funds from China’s savings account at the Fed back to their checking account at the Fed, and makes the number a little higher to include the interest. That’s it. Debt paid. And our children will continue to do this just like our fathers did before us. None of this involves what we call government spending. When government spends to buy something or pay someone else, it just ‘marks up’- as Chairman Bernanke put it- numbers in bank accounts. China’s bank accounts at the Fed are not involved. So why is this administration kowtowing to China on everything from Korea to human rights? And why do we go over there, thinking they are our government’s bankers, worried about getting their money to spend on everything from health care to Afghanistan, when there is no such thing as the US government getting money to spend? Why? There is only one reason. This administration does not understand the monetary system. They reason the Democrats are against a payroll tax holiday is because they think they need those actual revenues to support their spending.

So yes, we are grossly overtaxed and that’s what’s causing the sky high unemployment and the failed economy, as well as the ongoing banking crisis. And fiscal responsibility means setting taxes at the right level to sustain our spending power- not to hot and not too cold, but just right for optimal output and employment and price stability, and a return to prosperity.

And this brings up the next question, which is how to determine the right size of government. First, tax revenues don’t tell us anything about that. Taxing is just changing numbers down. It doesn’t give us anything to spend. Spending is changing numbers up; there is no numerical limit to spending.

So how do we decide how much government we want if the money doesn’t tell us anything? We do it on a very practical level. For example, when it comes to the military we need to ask ourselves, how many soldiers do we need to defend ourselves? How many planes, boats, tanks, and missiles do we need? The more we need, the more people we take who could be in the private sector producing real private sector goods and services, including doctors and nurses, teachers and teaching assistants, scientists and engineers, etc. etc. The military also uses up real resources like oil and steel. That’s the real cost of the military- how many people and resources it takes away from productive private sector activity.

What is the right size for the legal system? That depends on how long you want to wait for a court date, or for a decision. If the process is too slow, we may need more people working there, or we may need better technology. And again, the more people in government, the fewer there are to work in the private sector.

Once we have decided on the ‘right size’ of government, and pay for it by changing numbers up in people’s bank accounts when government spends, we have to decide the right amount to tax to keep the economy not too hot and not too cold, but just right. My educated guess would be, in a normal economy, to start with taxes that are less then spending by about 5% of GDP, if history is any guide. If I’m wrong taxes can either be lowered or raised to get it right. And when government spends more than it taxes- when it changes numbers up more than it changes down- we call that difference the budget deficit.

And when government changes more numbers changed up than down, the economy has exactly that many more dollars in it, which adds exactly that much to the savings of the economy. In fact, in US National Income Accounting, as taught in economics 101, the government deficit equals the total savings of financial assets in the rest of the economy, to the penny. Yes, deficits add to our monetary savings, to the penny. And everyone I’ve talked to in the Congressional Budget Office knows it. And it’s just common sense as well that if government changes numbers up in our bank accounts more than it changes them down, we have exactly that many more dollars.

Let me add one more thing about the size of government. It makes no sense to me to grow the size of the government just because the economy is too cold, if we already have the right sized government. And if we don’t have the right sized government we should immediately get it right, and then adjust taxes if the economy is too hot or too cold.
With this grasp of the fundamentals of taxing, spending, and the size of government, a Tea Party Democrat is well armed to take on the Democratic establishment that’s overtaxing us, driving up unemployment to today’s record levels, destroying our economy and standard of living, and arbitrarily growing government as well.

Conclusions:

Tea Party Democrats have a unique opportunity to be a part of history and overturn the ideas the current administration is employing that are, at best, regressive, elitist, and destructive to our quality of life.

With unemployment rising, real wage growth falling, and GDP now growing at about 4%, who’s getting that increased GDP? Not the millions who voted Democratic who are losing their jobs and their homes, and watching their wages fall. That real wealth being created is instead rising to the top, due to the Obama administration’s impossible trickle down policies. This administration was not elected to enrich the bankers, insurance executives, drug companies, and union leaders at the expense of the rest of us, in a perversion of true core Democratic values. But it’s clearly happening, and all because they don’t understand the monetary system, the don’t understand how and why government spends and taxes, and the don’t understand why we don’t owe China anything more than a bank statement.

The door is wide open for an enlightened, populist Democrat to lead the way to a new era of unsurpassed national prosperity.


[top]

Share

CH News

Posted on by


[Skip to the end]

Thanks, this is what might be scaring the western educated kids who came home steeped in inflation expectations theory.

And the same kids of course believe in export led growth and want to continue to be the world’s slaves as they continue to fight our efforts to assume that position.

>   
>   On Tue, Feb 2, 2010 at 9:23 AM, Evelyn wrote:
>   

HIGHLIGHTS

Experts say CPI may grow 1.8% in Jan

MOC: US protectionism endangers trade ties


[top]

Share

Inflation in China?

Posted on by


[Skip to the end]

The circumstantial evidence builds that there’s already an inflation problem, politically, probably due to those up and coming kids with the western educations at the finest schools pestering their elders about it.

And, if so, when foreign direct investment loses its profitability due to rising domestic costs, the currency fundamentals could work to drive it lower, taking away the presumed option of reducing the cost of imports by letting it float higher.

An early warning might be a shrinking of the size of the premium in the currency forwards.

It seems possible that Chinese officials could allows their currency to strengthen in the first two weeks of Feb prior to the beginning of the Chinese New Year holidays. If there is one thing that Chinese officials fear the most it is inflation – inflation is the only thing that can touch everyone in China and continued low inflation is the best way to prevent social unrest. Clearly they are looking to any way they can to tighten financial conditions and stronger fx would be one component. It is interesting that recent press reports stated that Chinese officials wanted to call back January loans made to recent borrowers, possibly reducing the windfall speculative borrowers would get in a one time revaluation.


[top]

Share