Macro 101 - Rethinking fiscal policy in line with GPECS

In this post I talk through the major arguments used to refute many of the core foundational topics mention on this blog.

They tend to come in two general arguments.

1. The way in which many chartilists model the monetary system is not representative of how modern government processes work. Separation of fiscal and monetary policy control is an economic safe guard and these models do not work without this separation removed.
2. Chartlism is just about "printing money" which leads to Zimbabwe type hyperinflation. Printing money taxes cash holdings (capital) through dilution/inflation whereas balanced budgets tax income.

In terms of 1, I completely agree.  The current structure of hamstringing fiscal policy with concepts like "required balanced budgets" and the like, absolutely leads to the requirement of separation of authority. Secondly I agree that these are protections of the financial system from political stupidity. However I do not believe that these are legitimate excuses to get poor economic outcomes  when there are already other options available within the existing monetary system. In addition they are falsehoods based on a general misunderstanding of how the current monetary system actually works. And let's not pretend the current arrangements don't already lead to terrible politically driven outcomes.  I am sure to discuss this more on this blog over time.

In terms of 2. There is a longer answer as it is just wrong.

This blog was created to educate people on how the current monetary system works in a modern economy and explain the potential of the economic system that exists today. By firstly understanding, and secondly re-thinking,  the system we can provide better economic outcomes for all citizens. 

It is however obvious that the political class in all modern nations understand how their economy actually works, so we are currently bound by the constraints of classic economic thinking which is in fact completely disconnected from how the system actually functions.

This blog, among many other things, will hopefully help explain what “money” actually means in a modern FIAT currency economy with a floating exchange rate from a unique perspective, that of the monopolistic issuer.

These concepts that are completely foreign to most people, but once you understand them you can appreciate a very different perspective on economic topics. From this context money has no real value; it can be created or destroyed at any time , as it actually is in the real economy. 

Money is simply a tool to drive outcomes. The value of these outcomes I propose we measure in GPECS.

GPECS is gained by using policy to manipulate the supply of money to and from the private sector ( via the banks ) to ensure that resources are mobilised in such a way to create sustainable growth , productive gains, employment , social well-being and national self sustainability.

If you had this perspective on “money” then you would have a very different view of deficits, national debts and the supply of money. As a monopolistic currency issuer (MCI) can issue their own currency at anytime they can obviously spend money at will. Likewise, they can do the opposite, that is, raise taxes and simply destroy the money knowing full well they can create more, out of thin air, the  next time it is required.

So back to the question. "Isn't this just printing money that will lead to hyper-inflation?"

Yes... and No. 

The question as it is phrased relates to money from a private sector perspective and therefore whether the Federal Government should be running a balanced budget, which means attempting to equal out the amount that it spends and saves (taxes) over the long term. In terms of a private household budget this makes sense, but in terms of a MCI it is meaningless, and in some circumstances very dangerous.

As a MCI if you are mindlessly issuing money at a time when the economy does not require it to utilise resources then you will cause damage to the economy, by inflation , and most probably by creating speculative bubbles; in the same way that you will cause damage if mindlessly tax people (de-issue currency) when it is not required.

So the answer is No. The government should never “just” print money. But there are times when there is a need to utilise resources and/or change the way resources are used and in some cases this may require the MCI to add additional money to the system, knowing full well that it can remove it at a later date via taxation or other methods if required.

But let us re-iterate once again. The aim is GPECS, if you issuing new money into the economy which cannot absorb it productively or without the policy frameworks in place to ensure that that money will in some way increase productivity, productive capacity, employment, social calm or drive future self-sustainability then it is going to cause problems. Stimulus for stimulus sake is an utter disaster, and in most cases simply leads to non-productive asset speculation, and inflation.

The main part of the criticism is the difference in outcomes when money is the focus versus GPECS. A money centric government sees government debt as the primary issue, believing it is bound by its money; a MCI sees growing GPECS as the primary issue, believing it is bound by the available resources.

Let us give you an example to explain the difference. Let us imagine we have a country that has just had some form of economic shock; unemployment is rising and the economic output is falling, due to this the taxation intake is falling and the social security bill is rising. Like all countries in the world we can assume they have an array of businesses and companies that produce goods of some kind, and have barriers and costs of/to production. For simplicities sake let us assume they had balanced terms of trade and political and social stability at the time of the shock.

The “money” centric approach.

A “money” centric government would have the budget as the primary focus, they would see the rising budget deficit due to falling taxation, and assume that the only thing to do is cut government spending and raise taxes. This in turn causes greater unemployment as the cut in spending and raising of taxes slowly steals private wealth and forces people to take on debt in an attempt to maintain the same standard of living. In this case unemployment is used as the countermeasure to attempt to “rebalance” the budget, and the fail safe is falling wage demands.

In the long term this would work to re-adjust the economy, but in the meantime many people would have lost their livelihood, been de-moralised and overall the only thing that has been fixed in terms of barriers to production is costs of wages ( i.e the standard of living of the populace fell ) and given this and the length of time that the economy floundered you would most likely be left with a deficit anyway. But note, most importantly, after all of this work to “fix” the economy the overall state of the country is in a worse position than it began.

The “GPECS” centric approach

A MCI would have the resource utilisation as the primary focus, they would see the rising unemployment and view it as an opportunity to reutilise those resources in a way to lower the current barriers to production. Their fiscal position is meanlingless.

In order to support GPECS, they would be holding public economic forums with business leaders and would have an agreed prioritised list of barriers to production, which could be addressed when resources were available to do this work. The government would initiate a number of these programs, including adjustments in taxation policy to support private investment in these programs.

These programs provide employment to the newly unemployed, with the end game to lower the current production barriers the economy faces, and therefore lower production costs and improve economy efficiency.

In this case “money” is used as the countermeasure to attempt to “rebalance” unemployment, and the fail safe being increased production.

In the long term this would work to re-adjust the economy, as the higher productive capacity flows through the economy then the government would lessened its input to these programs and jobs would start to move back into the private sector, increasing the tax intake.

Conclusion

As you can see from a “money” perspective the outcomes are the same, in both cases you would expect the budgets to eventually be re-balanced (although in the case of a GPECS government it is irrelevent) but the outcomes for the populace and the future of economy are very different.