A new sovereign accounting
"The division between Treasury and the Fed is externally irrelevant."
As we slowly start to come to terms with the incredible conceptual difficulty of even imagining what it would mean to restructure the USG, some of the deepest issues are at the level of finance, economics, and even mere accounting.
The United States needs to be restructured in many senses—most of all, in a financial sense. “Restructuring,” in a financial sense, is a euphemism for bankruptcy. A national restructuring is a national bankruptcy.
Anyone can see that there is something deeply wrong with the amount of money that the United States chronically borrows. Anyone can connect this obviously unhealthy state of chronic national deficit with the general withering of our productive industry.
This excessive borrowing is not limited to the state—it exists across the private sector. It reveals a line between “public” and “private” nowhere near so clear as it should be. And wherever it exists, it seems to be funding consumption, not genuine investment. Why is our nominal capital base expanding rapidly, when our physical capital base is visibly falling apart? Whatever this is, it has been happening for at least fifty years.
The usual Republican green-eyeshade process of “cutting the deficit,” maybe by “eliminating waste, fraud and abuse,” simply does not cut it here. Even just at the economic level, America needs a level of structural change in economic praxis and theory which can only be compared to the fall of Marxist-Leninist central planning.
Think we have real capitalism? The essence of capitalism is capital; the essence of capital is interest. In real capitalism, free-market capitalism, interest rates—at both short and long terms—are set by free and transparent markets. TLDR: we’re not as different from the USSR as we thought.
What is this strange financial system we have? Let’s call it American boomer finance. In the process of winding it down, we will have to understand it. Any well-ordered bankruptcy has this dual nature. Analysis is the termination of mystery.
A quick overview of national bankruptcy
“National bankruptcy” sounds like some kind of spontaneous catastrophe in which the ATMs stop working, Greenwich Village reverts to cannibalism, etc, etc.
It is important to clarify that this cannot happen. The US Government cannot “go bankrupt,” like a company running out of money, for a simple reason—unlike a company running out of money, its liabilities are denominated in its own equity.
The Federal Reserve System (contrary to certain conspiracy theories) is part of the government. The government cannot run out of dollars (Federal Reserve Notes), any more than Google can run out of GOOG shares. Paper is not gold. Maybe we should be on the gold standard. I agree! Accounting is about what is, not about what should be.
The division between Treasury and the Fed is administrative and externally irrelevant. It does not appear in any meaningful sovereign accounting. Eliminating this falsity is the first step in any reasonable national bankruptcy process. Stop playing pretend.
A proper “bankruptcy” is just a restructuring—a rewriting of accounting systems. For instance, United Airlines was in bankruptcy for many years. The planes did not stop flying. The company was operating—just in a kind of financial limbo.
When America declares bankruptcy, the ATMs do not stop working. The number in your bank account or stock portfolio does not change. Stocks and bonds have been converted to cash. Even home equity has been cashed out—your old mortgage is your new rent. Incentives may change over time, but the numbers start out about the same. Maybe some people get a little richer.
Under this surface, everything has been flattened. The government owns all financial assets. All private savings are in cash. To complete the process, the assets (companies, real estate, etc) will be auctioned to the public. You get a discount if you buy your own house back—and asset prices will generally be lower, so you’d profit anyway.
These procedures allow the new regime to reset all financial asset prices without any incidental penalty on anyone. Your personal net worth in the old regime is measured from all its complex components. Your net worth in the new regime is just a number. All your bets are cashed out, and the number is what it was. If it changes, it changes upward, and not by much. So existing patterns of economic activity remain functional.
Principles of sovereign accounting
New sovereign accounting starts with three rules:
First, the government owns the country. The state is a firm. The nation is its property. The mission of every firm is to cultivate its property. The mission of the state is to cultivate the nation, by governing it well. Like what part do you disagree with lol.
Second, fiat currency is government equity. Dollars are shares in the US government. They are pieces of paper which have equal value and convey no other rights. Ergo, they are (at least one class of) shares in the government.
Third, securities are formal. Markets are stable when there are no informal securities. Formalization produces stable interest rates set by supply and demand at every term.
An informal security is a security that may or may not exist. One example is a promise that no one writes down, or is vague and can be interpreted in different ways. Such a promise may or may not be a contract guaranteed by law, that is, a security.
“Informal securities” may sound like a financial category that exists in the Third World. It does. It also exists in the First World. In fact (as we’ll see), if all informal securities were suddenly cancelled, First World finance would instantly implode.
This does not mean that informal securities are vitamins. They are not vitamins. They are more like addictive drugs. Getting off these drugs will be dangerous and difficult.
Winding down boomer finance
The central reform at the heart of any sovereign-accounting reform is simply to fix the number of dollars. This is far more difficult and dangerous than you might imagine.
Fixing the dollar supply is part of eliminating informal securities—now, there are no more dollars that might or might not exist. But don’t just pull the trigger on that, ok? Winding down boomer finance is like shutting down a nuclear reactor, except worse.