Taxes, Public Debt Bonds or Currency?

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By FERNANDO NOGUEIRA DA COSTA*

Whoever received the commission or the task of representing the inhabitants of the country, acting on behalf of all, cannot hold the power to issue money in their hands without social control by the other political representatives.

An emergency situation like this pandemic is being compared to War Economy. This is a set of exceptional economic practices, applied during certain historical periods of extreme economic isolation. They are usually, but not always, linked to the occurrence of armed conflict. Such practices aim to maintain the economic activities indispensable to the country, self-sufficiency in terms of guaranteeing food production and the supply of basic items for consumption.

For the administration of a War Economy, in fact, when it is attacked by an external enemy, the State needs to exercise total control of the economy. During a pandemic, it is not the case of meeting military needs such as prioritizing self-sufficiency in terms of basic products and war material produced by the military industry, increasing production in heavy industry, such as steel, applying measures to reduce energy consumption, the use of low-cost female labor to fill jobs formerly occupied by men conscripted by the Armed Forces, the promotion of food-producing agriculture instead of export agriculture, and the administration of agricultural prices.

Measures to reduce private consumption also apply, including the rationing of imported products, both for industry and for families. Given the depletion of productive capacity, an extremely austere monetary policy is adopted, aiming to avoid “true inflation” processes, when monetized demand goes beyond the real possibility of supplying products – and prices skyrocket.

Two public debates are on the agenda. One concerns the monetary financing of the public deficit, caused by social spending necessary to pay emergency aid. another refers to turn this aid into permanent income, a kind of Universal Basic Income (UBI), foreseen as necessary, shortly, when technological unemployment due to automation and robotization resulting from the 4th. Industrial Revolution spread throughout the world economy.

The key question, easy to ask and complex to answer, not lightly, is addressed to economists: why is currency not issued to pay the RBU?

A frivolous person would answer with a “knock-and-go”: because it would cause inflation. Anyone who responds in a rush like that has no regard for the other. Levian is the one capable of expressing an opinion without being sure of having deeply reflected on it and, therefore, without having mastery of the subject.

The “equation of exchanges”, representative of the Quantitative Theory of Money (MV=PQ), being the speed of circulation of the currency V and the quantity Q given, in a temporal cut, is transformed from a accounting identity – currency in circulation equals the amount of nominal transactions carried out – in a causal function as the money supply M automatically determines an increase in prices P. It ignores a series of contrary axioms and, in particular, abstracts the stages of the economic cycle, that is, the degree of utilization of productive capacity.

It was clear to the interested public, in the public debate, that the State has the spending power to issue its own currency, whether printed or electronic. If it spent beyond the full utilization of productive capacity, it would cause inflationary pressure, but if it wanted to, before this stage, it would not need to go into debt in the official currency itself.

If this is true, why does the government always sell public debt securities when there is a public deficit? Why not issue currency without increasing the public debt?

Some economists answer part of the reason the conservative ideological habit. Under a gold standard, governments sold bonds so deficits wouldn't put the precious metal currency in the hands of people able to take it for spending in other countries.

Public debt replaced gold-convertible currency with non-convertible government bonds. States would have started to sell bonds to reduce the pressure on their gold reserves. The gold standard was the first international monetary system and was in effect from 1870 until 1914 with the outbreak of World War I. In 1944, under the terms of the Bretton Woods Accords, the gold standard (1870 – 1914) gave way to the gold dollar standard. It was in effect until August 15, 1971. From then on, countries adopted a flexible exchange rate regime with quotes between currencies without backing.

In fact, the use of gold as money dates back thousands of years. The first known gold coins were minted in the Greek city-state of Lydia in Asia Minor around 610 BC The first coins minted in China date back to 600 BC During the Middle Ages, gold coin Money of the Byzantine Empire, circulated through Europe and the Mediterranean.

Pay military, that is, foreign mercenaries, is at the origin of the public bond market. Its origins, in the XNUMXth and XNUMXth centuries, lie in its ability to finance wars. Medieval city-states warred with each other. Conquering territories was the means of increasing rural wealth.

Instead of paying property taxes to cover deficits caused by the war economy, wealthy citizens opted to lend money to the self-dominated government! In compensation for these loans, in a state of war, they received interest. For the operation not to be characterized as Wear, condemned by the Catholic Church, the payment of interest was reconciled with canon law as “compensation for the putative costs of compulsory investment”.

In addition to interest, wealthy citizens were also compensated with liquidity: such public debt securities could be sold to other citizens, if the investor needed immediate cash. Prior to the creation of this secondary market, most bond underwriting was carried out by a few wealthy individuals.

The reason the system worked so well was that the rich also controlled local government and thus public finances. This oligarchic power structure provided a solid political foundation for the “Zé com Zé” public bond market. Whoever issued and sold them was also a member of the purchasing authority.

Autarchy It means absolute power. It is the type of government when a group of people concentrate power over a Nation. In this way, the elite demanded to ensure that their interest was always paid, either through taxes or monetary issuance.

In the Modern Era, the fight against poverty, ignorance, disease and even internal and external insecurity came to justify the expansion of the public debt. But the government's taking of continuous loans, in rollover of the public debt, is volunteer. Sovereign bonds are a way to get rich by receiving interest from the government.

The interest rate paid on government bonds is a political option – by Central Bank technocrats – on how much to pay to holders of this financial wealth backed by public debt securities. Autarchy in a national economy would be for the State to obtain complete financial independence by being able to survive only on its own internal activities and monetary issues, without needing any external support.

However, the productive chains were globalized. Today, a limit to monetary issuance is also placed by the loss of confidence in the national fiat currency. The flight to foreign currency with a reserve of value leads to its transformation into a unit of account. Hence, with its price skyrocketing, it generates hyperinflation due to the need to convert it into the national currency to act as a means of payment.

These ideas contained in my new book, Imperfect markets and planners, propitiate transdisciplinary reflections. Perhaps the central will say about the relationship between the power of monetary issuance and the republican pact. Republic describes a form of government where the Head of State is elected by the citizens to exercise executive power in a controlled manner and for a certain period of time, with democratic alternation in periodic elections.

This function of President of the Republic must be exercised during a previously defined period. He has to be submitted to electoral scrutiny, after four years, to exercise a new mandate.

Therein lies the political danger. Just as there are the Legislative, Judiciary and Executive Powers, for mutual controls, the latter cannot resort to issuing currency without limit, controlled by an alleged unelected Fourth Power: that of the technocrats appointed to exercise the power of Monetary Authority. This economic-financial power, if unlimited, would distort the agent's ability to act for his own political benefit. It would only aim to captivate its voters for its re-election.

Whoever received the commission or the task of representing the inhabitants of the country, acting on behalf of all, cannot hold the power to issue money in their hands without social control by the other political representatives. Ultimately, subordination to the laws and the Constitution serves to regulate the political and economic life of the country, notably, in this case, the regulation of more liquid wealth: the money. Imagine if the right-wing populist president could buy votes at will, not only from the Centrão, but also from the poorest social strata dependent on emergency aid!

*Fernando Nogueira da Costa is Full Professor at IE-UNICAMP. Author, among other books, of Imperfect Markets and Planners.

Originally published on GGN newspaper.

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