The path to a new sovereign accounting

"As so often in bad finance, complexity exists to hide reality."

In the Financial Times, Gillian Tett reduces my financial ideas—which, so far as I know, literally no one in the admin actually cares about—to an odd, menacing, and completely unjustified, yet still somehow literally accurate caricature:

For better or for worse, these weird ideas are far beyond the ken of “Fed-watchers.” They are not wrong to fear, however. Since any kind of serious financial reform has to result in an interest-rate market where rates at every term, across the yield curve, are set by the supply and demand for lending and borrowing at that term—that is, a free market in interest rates, with matched maturities—any serious financial reform must result in a world where there are no “Fed-watchers.”

Well! Wal-Mart will always need greeters. Lol. Actually AI will take everyone else’s job too, so there will be UBI. Or cannibalism. Or something. It will certainly all work out. In any case, preserving any aspect of the present financial industry, public or private, is not a priority in any serious financial reform. So yeah, I guess, let the FT tremble—I mean as if I was anywhere near power. (Yes, Elon followed me. Then unfollowed me.)

I often introduce myself as America’s leading monarchist political-science blogger. While this is true, I think I have another distinction—I am the world’s only Austro-mercantilist economics blogger. While various economists agree with me on various things, I guess, no one agrees with me on everything. Worse, not only do I have zero education in economics, I also have no work experience in finance or accounting. Lol.

So why should we merge Treasury and the Fed? Um, because they are two arms of the same organization—the US Government? Because basic accounting identities?

Imagine if you got a bill from State Farm Auto Insurance, but later another one from State Farm Home Insurance. You’d be like: dog, State Farm, ain’t you be one thing? Maybe you could have one set of books? Maybe I really shouldn’t care if you have two sets of books, for weird obscure internal historical regulatory reasons of your own? Idk man I only see one logo. So like…

The USG can have policies and procedures that limit what it can do with the promises issued by this combined Fed-Treasury organ. Without using two sets of books, it can mimic every behavior of the old system. The “merger” is purely logical—to reform the financial system, as Confucius said, call all things by their true names. The only utility of the Fed-Treasury separation is to help obscure the true nature of this odd organism.

It is possible to make this accounting reform in a nominal way—trivially preserving existing systems, structures and (most of all prices). Any serious financial reform has to be price-neutral: no one’s portfolio should change (much) from the reform. Using the new tools to perceive the old economy is the easiest way to ensure this invariant.

The problem is: when you view the old economy through the new tools, the new tools show you very plainly that the old economy is retarded. This is why these Byzantine complexities exist. As so often in bad finance, complexity exists to hide reality.

Here is a very short, clear course in “Moldbug Monetary Theory,” followed by its natural corollary “Moldbug Mercantilist Theory.” Not only do these theories share a name with “Modern Monetary Theory”—they are actually the same thing. MMTers just understand their own theory imperfectly! But it is easy to get here from there.

In this model, we will do all the same things we do at present. No behavioral changes will occur. We will just call things by different names.

Here we consider the universe of money and what Ludwig von Mises called “money substitutes,” that is, goods held not for direct use but for transfer of value across time.

Natural currencies

Natural currencies are natural media of saving. Mises showed with his “regression theorem,” really an early game theory, that the free market can choose a standard currency. Mises assumed that a natural money has to start with intrinsic use-value. Bitcoin showed that speculative value alone can kickstart the monetization spiral.

The fundamental risk of the paper economy is that monetary restandardization will become the dominant financial force—ending in mass capital flight to Bitcoin or gold. While this situation does not exactly lead to dogs licking blood in the streets, like a hyperdeflationary collapse, it is also probably not a super fun process for most.

Real estate, being intrinsically limited in various ways, can also become monetized—and even without a monetized price, it will always be a substantial medium of saving.

Fiat currencies

Fiat currency is government equity. A dollar is a share of United States stock. Like a stock certificate, it does not entitle you to any right, except that all rights, dividends, etc, granted to any dollar are granted to every other dollar (so “equity,” from “equal”).

Bonds

When money is government equity, government bonds are restricted equity. A “bond” is not a promise of payment—it is government stock that will become valid in the future, like the RSUs (restricted stock units) used to pay Google employees.

The entire deficit is financed by issuing money—but issuing money at every maturity term, from the present to 30, 50, even 100 years. Of course, any new supply of 100-year money causes the price of 100-year money, in 0-year money, to go down, which is the same as saying 100-year interest rates go up. But we’ll all be dead anyway so who cares.

Note that actual finance uses this model, because actual finance sees Treasuries as “risk-free.” They are not resolved by any non-inevitable action. They inevitably vest. They are not debt! They are restricted equity. Enormous amounts of financial math are based on the assumption that there is no counterparty risk in Treasuries. There is no counterparty risk in vesting. Actual finance has already adopted MMT—and any attempt to break it, and introduce another variable (USG counterparty risk) into Wall Street’s formulas, is financial vandalism. MMT is calling the reality by its true name.

Since it’s crazy to be able to print money, we need rules to govern this rapper heaven. Obviously, one rule is that we don’t issue new shares, at any term, except to cover the deficit. If we don’t have this rule, budgeting doesn’t have any meaning.

Obviously it’s incredibly sketch for a corporation to cover continuous operating deficits by issuing new shares—yet such is the financial course on which the 20th century embarked us. Good times! “We are trapped in the belly of this horrible machine. And the machine is bleeding to death.”

“Dilute! Dilute! OK!” says the Dr. Bronner’s bottle. We are not borrowing money. We are diluting the money supply. Actually, the public budget deficit is a smaller aspect of the problem than the private budget deficit—the expansion of private debt and assets. What we call “inflation,” a rise in consumer prices, is a symptom of general dilution. Since price inflation is an effect rather than a cause, it is not as interesting to track.

In plain English: we are not just financing the government by diluting the money supply. We are financing our lives by diluting the money supply. Even when stocks and housing “go up”—since these assets are monetized, that is, used as a store of savings, we are diluting the money supply. Quantitatively, of course, this dilution tends to go to people who are already rich. Them’s the breaks, kid.

Did you notice how Covid happened, we all stopped working, and nothing happened? We were not financing our lives by working. We were financing our lives by diluting the money supply. The 401(k) is the real UBI. While the pandemic sucked, the real tragedy would have been if the stock market had gone down. Fortunately, the Fed wasn’t going to let that happen. The faithful lawmen of the financial frontier.

Banks

When you “put money in the bank,” you are lending it in a zero-term, continuously-renewed loan to the bank. That loan, like a Treasury, is 100% safe, because it is actually a loan plus two semi-formal options.