Inequality and Economics - Odds and Ends (Money as an IOU)

 

As usual, there were a few bits that escaped logical inclusion into the series on inequality and money. I will try and include them here.

One item that came out that I would have liked to include was this piece on the history of coinage: The first coins – no ‘means of market exchange’ but ‘means of gift exchange’? (Real World Economics Review) The Greek kingdom of Lydia in Asia Minor appears to be the epicenter of all metal coinage as we know it today, under it's fabled king Croesus who has become a byword for wealth. Apparently Lydia had large reserves of silver and gold, and stamped the coins as proof of their value. The convenience of using these stamped bits of precious metal spread far and wide, and they circulated beyond the kingdom, giving birth to the idea of coinage. From here, the idea spread to the Roman Empire, and also to the Islamic States which succeeded the Eastern Roman Empire.

What's interesting is that even these coins were used as a sort of gift exchange, sort of like wedding rings, rather than currency as we know it today. It's also interesting to see how recent it is. For most of us, coins are still "real" money unlike the "worthless bits of monopoly money" we typically use, probably because coins are made of metal. But note that one small kingdom in Greece is the source of all coinage. There was an awful lot of history before then (coins were also independently 'invented' in ancient China, along with paper money).  It's another blow to the idea that before government came in and ruined everything, people' naturally" exchanged bits of gold and silver for eggs and shoes in spontaneously occurring self-regulating "free" markets.

Somewhat to my surprise, I find myself reading numismatic articles. Money existed before coins were invented. So, where and why were coins invented? According to Reid Goldsborough, in an nuanced article, it’s not unlikely that the first Lydian coins (about 600 BC) were not used for ‘market exchange’ – at first they might well have been used for ‘gift exchange’, somewhat like we exchange wedding rings. What’s not a ‘maybe’ or a ‘likely’ in the history of this innovation is the crucial role of the state.

The Lydian Lion is the one coin I’d personally call “The Coin.” It directly preceded ancient Greek coinage, which through Rome begot all Western coinage, and which through the Seleukids, Parthians, and Sassanians begot all Islamic coinage. Indian coinage has largely been a product of Greek, Roman, and Islamic influences. Chinese coinage, though it probably developed independently, was succeeded by Western-style coinage in the late nineteenth century. Other countries in Asia, in Africa, and elsewhere have adopted the Western approach to coinage as well. It’s not chauvinistic, and it’s only mildly hyperbolic, to suggest that virtually all coinage in use today is the progeny of the Lydian Lion, that it’s the Adam of coins…

The most fundamental debate involving these coins is whether the Lydian Lion is in fact the world’s first true coin. Much here depends on what definition you use for “coin.” I’m using a commonly held numismatic definition of what a coin is, which is spelled out well in Webster, Second Edition: “A piece of metal (or, rarely, of some other material) certified by a mark or marks upon it to be of a definite exchange value and issued by governmental authority to be used as money.” Key here are “mark or marks” and “certified … by government authority.”…

There’s no reason that fully typed coins couldn’t have been the first coins. Stone and clay seals with pictorial designs predated coins, and some scholars have argued, persuasively, that the idea of stamping coins with designs developed from the use of seals to designate ownership or authority…Even though coinage doesn’t appear to have initially served commerce or trade, it’s likely that the Lydians created coins as we know them because they were the first to recognize their profit-making potential...

It used to be thought that coins came into existence to facilitate commerce, preventing merchants from having to weigh bullion with each transaction. The weight of Lydian trites, in fact, is remarkably consistent, with most hovering very close to 4.7 grams. But one of the things we now know about the function of the first coins with any degree of assurance is that they weren’t used as coins were used later on in ancient times, and as coins are used today, that is, for everyday market transactions.

It’s clear that it took some time before ancient coins were used for commerce and trade. Even the smallest-denomination electrum coins, perhaps worth about a day’s subsistence, would have been too valuable for buying a loaf of bread. Electrum coins have been conspicuously absent from archeological finds in the marketplace in Sardis, capital of Lydia. Gold and silver bullion were likely still used for commerce in western Asia Minor, including Lydia, at the time that electrum coins were minted. The first coins to be used for retailing on a large-scale basis were likely small silver fractions minted by the Ionian Greeks in the late sixth century BC.

What’s more, evidence shows that Lydian Lions weren’t used in international trade, not showing up in substantial quantity in hoards outside of western Anatolia. That role would be served later on by silver coins, whose intrinsic value could be more easily determined than electrum coins, beginning en masse with Athenian Owls and to a lesser extent with the coins of Aegina, Corinth, and the Thraco-Macedonian tribes...

Instead of commerce and trade, these earliest coins were in all likelihood used for other purposes. What follows is a suggested scenario: Bullion had long been used as money. The Lydian king, Alyattes, a crafty and powerful figure who ruled for half a century, figured out that if he controlled the bullion market, or part of it, he’d further amass his wealth. So he deemed that only bullion with his mark, the roaring lion, could be used for official purposes — the state paying state workers and mercenaries and the people paying taxes and making religious donations. Other purposes that this first coinage were soon put to likely included gifts as part of treaty ceremonies, wedding presents, and hospitality offerings. Along with typical seigniorage profits that later minting authorities would enjoy, Alyattes further enriched himself by debasing naturally occurring electrum with silver and copper. To facilitate acceptance, he carefully controlled the weight of each piece of this new type of bullion. Merchandisers and traders continued to use regular bullion until the Greeks, clever traders that they were, took what the Lydians invented and went a step further. They figured out that silver coins, being more difficult to debase, would be more accepted in more places than electrum coins for retailing and trade while still earning them profits. Coinage, invented by the Lydians, was thus spread by the Greeks...

See also: The profitability of early coinage (Vox EU):

Research traces the beginning of coinage with increasing accuracy to around 630 BC in the Greek city-states in Ionia or in Lydia, or both, in the contemporary part of West Turkey east of the Aegean Sea. The earliest coins were made of electrum, a mix of gold and silver. The common view, even among knowledgeable scholars, is that early coinage was highly profitable, at least for the Lydian kings Alyattes and Croesus. It is “usually understood [that] the electrum coins were highly overvalued”, say the archaeologists Cahill and Kroll, by which they clearly mean highly profitable. In an influential book, Le Rider estimates a profit rate of about 15 to 20%. However, I argue that this position is very dubious.

Consider first the historical context in which coinage began. The innovation occurred in societies that belonged to a vast trading network where the use of the precious metals as money went back at least over 1,000 years to the East, where the Assyrian empire stood, and at least many centuries to the South, in the Levant, where the Phoenicians had been active as international traders since Homeric times (that is, centuries before Homer). The producers of traded goods, wholesalers and traders possessed accurate scales for weighing gold and silver, were expert at detecting fineness, and could use the touchstone for help. Their benefit from coins would depend entirely on their ability to dispense with weighing and assessing and simply count, based on trust, but the associated savings could hardly make much difference in a large transaction, while the early electrum coins, consisting very roughly half and half of gold and silver, were only useful for big-ticket items. According to the estimates, one of the largest coins (a stater) might buy an ox, and the very smallest coins (tiny) would be far too valuable to serve as small change.

In accordance with this line of reasoning, coinage took off very slowly outside of Ionia and Lydia, and it is arguable that its take-off was particularly slow where monetary habits with the precious metals were most deeply engrained. It took about 80 years before a few Greek city-states on the mainland and offshore started to coin, beginning in 550 BC. They did so in silver. Coinage subsequently spread widely in the Greek city-states over the next half-century or so, but almost nowhere else. After King Croesus fell to the Persian King Cyrus in 547 BC, the Persians imitated the coinage they found in conquered Lydia and encouraged its spread. The Persian coins were also in gold and silver following Croesus’ example (the latter had introduced separate coins in the two metals shortly before, in 550 BC). But the Persian coinage had most success in the western part of their (Achaemenid) empire and made little headway in the more sophisticated east. Quite significantly too, the Phoenicians who traded far and wide started to coin only in the middle of the 5th century and their Carthaginian outposts somewhat later at the end of the 5th century. Egypt, hardly a commercial backwater, did not begin to coin until the late 4th century BC. It was clearly the conquests of Alexander the Great in the last third of the 4th century BC and the subsequent political expansion of Rome in the next four centuries that led to the wide spread of coinage in the ancient world outside of China and India (where coinage had begun independently but much later than in Ionia and Lydia). North and central Italy and most of Europe also saw coinage arrive only under Roman influence. Rome itself started to coin late, around 300 BC, and coinage really only took off there with its military advances in the third century, that is, about two and a half centuries after coinage had covered most of Greece. This early history of slow progress is difficult to reconcile with the idea that the early coins were a source of exceptional profits.

Gift exchange is interesting. We do it today. It seems like "gift cards" have taken over the Christmas holiday market. They make no sense - why not just give money? If you give a gift card for, say, Target, you can only spend it at Target, unlike cash which can be spent everywhere. It's like converting your money into a special type of currency internal to Target. If you get a gift card for Chili's, you are committed to going to Chili's (yes, I've seen this card). And you could just as easily go to Chili's or Target yourself and spend your own money (or take your friend there). Gift cards are a pure form of symbolic gift exchange. Note also that they are given without expectation (and yet we feel an obligation to repay).

Another interesting item was this post: The Standard Definition of Money is in Error (Naked Capitalism) We're told that money is three things - a medium of exchange, a unit of account, and a store of value. But the "store of value" characteristic of money is simply not true. Money doesn't store any value at all. How could it? It is entirely dependent upon what is "out there'' in the real world to buy. That fluctuates over time. The money in your bank account constantly fluctuates every single day. All that money is is a token of demand for stuff in the real world.

Consider, during the financial crisis, Alan Greenspan could guarantee that the United States would always have enough money to meet its debt obligations, but what he could not guarantee was its purchasing power. The purchasing power of money relative to things it can buy is constantly in flux, and that is what we call inflation and deflation. Inflation means money buys less and less over time, which means that future money is worth less than present money. This actually helps debtors, because they are paying back loans with increasingly worthless dollars. It hurts savers, though.

Deflation means money can purchase more over time. This means that future money is worth more than today's money. Your dollar goes further. This is great for savers and people living on fixed incomes, but not so good for those in debt, since they are paying back their debts with increasingly valuable dollars over the period of the loan.

This dual nature of winners and losers means that there is constant debate between people who support either inflation or deflation. That's something to keep in mind whenever you hear debates about inflation and deflation. But what it also means is that money has no intrinsic value, whether credit or commodity money. Money does not, in any sense, "create" wealth. It is a social relation designed to mobilize resources. It is also a symbol of power.

We're told that the value of things can be calculated in money. A diamond is more valuable than water because it costs more. A CEO is more valuable than a schoolteacher because they "earn" more money.  But money has nothing to do with value, as this article points out, it's simply a store of potential demand:

The standard definition of money is given in terms of its three functions:

    1: Money is a medium of exchange.
    2: Money is a measure of value.
    3: Money is a store of value.

In the standard definition, Number 3 cannot possibly be true. Were Number 3 true, money would have value of itself. The value of money would be independent of what ever else an economy produced. But consider, the best monies are those instruments which have no intrinsic value whatever. How can any amount of something which has no value, be a store of value? Even where commodities have been used for money, (and this may be the origin of the error,) they have tended to be those commodities, precious metals, for instance, which, because of their properties, were of only limited economic use. The reason for this is known and simple: These commodities had to be more valuable as money than they were valuable as commodities. If they were more valuable as commodities, they would be consumed, and so their use as money would disappear. But this implies that the value of these commodities, as money, over their value as a commodity, is not intrinsic, but as with plain fiat money, purely a matter of other factors. That is, the value of the commodity as money is not based on any intrinsic value of the commodity to the economy. 

In other words, what we use as money has no intrinsic value, because otherwise we would be using it for that. This is just as true for gold as it is for paper. So the reason gold and silver are used for money is precisely because they have no practical use (most practical uses for them are due to modern technology). The same goes for diamonds and other valuable gems. If they had practical uses, they would be used for that instead. This is why we don't use oil for money - it makes more sense to put it in your engine. Gold and silver items were possessed by wealthy ancients as a sign of wealth rather than practicality. Thus, Egyptian rulers has gold (rather  than bronze) weapons in their tombs, and wealthy Romans ate from silver (rather than clay or glass) plates. Jewelry, a complete frivolity, is associated with gold, silver, and gemstones. This may ultimately stem from a fascination that certain animals such as corvids, rodents, and us primates have with shiny objects.

So fiat money has no intrinsic value, and therefore cannot be a store of value. If the economy produced only money, that money would have no value. It does not have value as, say, a refrigerator full of food has value, or a tank filled with gasoline. But, what the third function of money actually is is as a store of demand. If you have $100 in the bank, or in your pocket, you have a store of demand, which you can keep as long as you want, and when you choose to, you can spend it. You can demand something which is offered for sale, to the amount of $100. Then you can take your $100 of tokens of demand and you can go to the grocery store and with it buy $100 worth of food.

So money really is a demand token. It is a promise to exchange something for it. In other words, it is an IOU, as we'll see shortly.

Money is not a store of value. Can it reliably be a measure of value? Economically worthless things may be in much demand, and therefore command a price beyond their value. Yachts, for instance. Economically valuable things may be in little demand, or supplied at prices below their value. Water, for instance. With money, you have demand for these things, at the prices they are offered. But their prices do not reflect their economic value, only the amount of demand, the amount of money, which must be exchanged for them.

Prices don't measure value. So how can the Market God of Neoliberalism, who makes decisions based upon price, be all-wise? How can price alone coordinate all the activities of society, as some economists claim?

This counters the claim that the only value a thing has is that set and measured by the market: The toys of the wealthy are much in demand, but of little value. The goods needed by the poor are to them of great value, but it may be that those poor are only able to demand a meager portion of them. Markets only measure demand. They need not measure value. This is the primary inadequacy of markets. 

By mistaking demand for value, the standard definition of money thus implicitly fails to distinguish between the value of an object, and the demand for that object. In an informal sense, this results in the failure to distinguish between the needs of an economy, and its wants.To provide another example, the economy ‘needs’ streetlights in Highland Park, Mi. It ‘wants’ yachts in Newport, RI.

...because money is demand, or more exactly a token or instrument of demand, it serves as a ‘medium’ of exchange: Because money is not demand for any particular good or service, but is demand for any offered good or service, it may be exchanged for any offered good or service...The individual who exchanges his good or service for money then himself has equal demand on others for different goods or services. Money thus flows opposite to the flow of goods and services, not to the degree of the value of these goods and services, but according to the demand for these goods and services that are offered.

In other words, those "worthless pieces of paper" are meant to be worthless. A stock share is also a worthless piece of paper, but I'm guessing Ron Paul isn't campaigning to end the Stock Market. Indeed, nothing can be a proper store of value, because the laws of thermodynamics are constantly at work, as Frederick Soddy pointed out. Money can only be a symbolic representation of real goods and services on offer. Money cannot cause resources to exist where there are none. What it can do is mobilize those resources for the social good.

So,then, what is money? It's actually a representation of debt, specifically our debts to each other, our debts to government, and the bank's debt to you. In other words, money is an IOU.

It may be wondered in what sense government money is an IOU. What, in other words, is the government’s obligation or promise when it issues the currency? Among its obligations is the promise to accept its own money (IOU) back again in payment of taxes.

By way of analogy, suppose that your neighbor mows your lawn while you are away on holiday and you pay with a personal IOU. What you are doing is agreeing to accept back, in the future, your own IOU as payment for a service you will perform for your neighbor. .... So your promise, in issuing an IOU, is to accept it back at some later date in payment for services you agree to perform.

Similarly, the government pays for various services with its money (IOU). It uses its money to pay teachers, medical practitioners, police officers and many other types of workers for their labor services. .... The government undertakes to accept its own money (IOU) back from the community as payment for the provision of these goods and services.

It is the imposition and enforcement of the tax obligation that enables government to spend its money into the economy. Some people will be willing to work for the government in the public sector to obtain the currency. Businesses will be willing to supply goods and services to the government in exchange for the currency. Others with tax obligations will be willing to transact with public servants and businesses or work in the private sector to obtain the currency.

The tax obligation is far from the only reason that we are prepared to accept the national currency. But it is the basis of our need to obtain it. Once this basic need is created, even people who pay no taxes will be willing to accept the currency, because of the established demand for it. And, for convenience, we will use the currency for much more than just paying our taxes. Once a demand for the currency is established, it is safe and convenient for buying and selling as well as for saving.

Indeed, most people throughout history had no forms of "saving." The concept was entirely foreign. For most of history, title to land and to buildings was the only form of permanent wealth. Some in ancient times were able to hoard some precious metals, which may be where the idea that there is some magic form of permanent and unchanging wealth came from. But even then you needed to exchange it for some sort of actual good like food or shelter, and if no one was willing to accept it, it has no value.

Speaking of land, here is a snippet from the Michael Hudson interview about the role that the value of land played in ancient societies:

In America down to the time of the Revolution in the 18th century, ...in order to be a citizen and vote, you had to be a landowner. And all the way back in Rome and earlier times, Mesopotamia, Babylonia, Sumer, citizens had to have their own land. In Rome each citizen’s voting rights were defined by the land area he owned. I say “he” because only the males were citizens. It was a patriarchal society, with voting rights proportional to the size of one’s landholdings.

Much as today, debt was a major factor concentrating landholdings. Finance always has been the great lever to appropriate the land rent and interfere with widespread land ownership. If you owe money on a mortgage and you can’t pay, you can be evicted. That began to happen already around 2000 BC in Babylonia...One’s rank in the army down through Roman times was defined by how much land one had. If you had just a basic subsistence plot, you were in the infantry. If you had a lot of land, you were able to support yourself in leisure, have a horse and participate in the cavalry, practicing military training and buying your armour and weapons. You find much the same thing in Japan. All over the world, citizenship, landownership and one’s rank in the army were linked together.

Now, it is the poor who are driven via economic necessity into the army. But we may be crushing them too well: many of the poor are rejected because of ill mental and physical health. Perhaps that's behind the drive for military robots. Plus, robots don't disobey orders or turn on their masters. It's an oligarch's dream come true. The need for soldiers has driven the lot of the ordinary person throughout history - countries with citizen soldiers have typically been more equitable, as Ian Welsh points out: The Technology of Violence and its effect on prosperity and freedom (Ian Welsh.net)

People without land were most likely laborers, slaves, merchants and vagabonds. The reason people without land weren't in the army was because they had no real incentive to. Why, if they didn't own anything? There was no real concept such as "patriotism" or "nationalism." (although there was ethnic solidarity). Who cares if the new rulers took over; you might even get a better deal. Maybe they'll forgive the debts or give people some jobs working on their victory monuments. Maybe they'll redistribute land. So it was the landholders who had to fight, because land is what they were defending after all. That's very different from the post-French Revolution national armies of today motivated by notions of nationalism and patriotism.

It's interesting to note that as wealth consolidated in the hands of a few rich and more people became rootless urban proletariat and day laborers, the Roman Empire turned to mercenaries to police itself (sound familiar?). People used to our modern notions of fighting for "the love of one's country" are often surprised at hearing how the Roman army ended up being staffed by the very same Germanic peoples it was supposedly fighting against. But in those days, if you were a warrior, you fought for pay, not some nebulous idea of patriotism. The analogy here is professional athletes. No one on the Packers is playing for their deep, abiding love for the city of Green Bay (none of them are from there anyway). They are playing, often against former teammates, for money. In the past, warriors were professionals, just like today's athletes.

Back to the main article.

Banks also create their own money. This is in the form of deposits. A deposit is a bank’s IOU to convert bank money into currency (government money) at a deposit holder’s request, either on demand or after some duration of time. Most definitions of money include checking accounts, sometimes called demand deposits. These are bank deposits that can be converted into government money whenever the account holder demands it. When we use EFTPOS to direct a bank to transfer funds from our account to the account of a business in exchange for goods and services, we are making use of deposit money.

Banks are in a special relationship with government. They are required to convert deposits to government money in the form of hard currency (notes and coins) at par. In most countries, demand deposits are guaranteed through government provision of deposit insurance. It is possible for government to provide such a guarantee because of the central bank’s unlimited capacity to act as lender of last resort. Whenever banks find themselves short of currency, they can always borrow it from the central bank on terms specified by the central bank.

So a bank converts your savings into the government's currency at the current value. If it is short, it borrows that currency from the government's central bank. The interest rate at which it can borrow from the central bank is the Federal funds interest rate that we hear so much about. By keeping the rates low, the Federal Reserve stimulates money creation (monetarism). Those low rates mean more money, meaning more inflation, which is why the chairman of the Fed, who makes those decisions, is such a polarizing figure.

Thus, we see usury drives the system.

The requirement to convert at par in combination with the protection to account holders provided by deposit insurance ensures that $1 of deposit money is in most respects equivalent to $1 of government money. Since we have a need for government money, and bank money is “as good as currency”, we will readily accept bank money as well.

There is another important aspect of the relationship between commercial banks and government. Banks are required to hold accounts with the central bank (the government’s monetary agent). These accounts hold a special kind of government money called reserves. The accounts themselves are referred to as reserve accounts. The general public (referred to as the non-bank public) has no direct access to reserves. Only banks do. Banks can only use them for transactions among themselves and with the central bank.

Reserve balances play a key role in the monetary system because they are required for final settlement of transactions, including our transactions with government. Although we usually pay taxes and buy goods and services with bank money, final settlement only occurs once the central bank has adjusted reserve accounts to eliminate claims of banks on each other. At the end of any given day, some banks will owe others as a result of transactions occurring during the day. The central bank will need to delete reserves from the accounts of some banks and mark up the reserve accounts of other banks.

Since final settlement of transactions must occur in government money (reserves), banks must have access to sufficient reserve balances on our behalf. The banks need reserves for settlement purposes and we need the banks because the government gives them access to reserves.

Money Interpreted as an IOU (heteconomist)

An IOU is a form of debt. As soon as you engage in a financial transaction, that is, as soon as any economic activity takes place whatsoever, someone is in debt to some else. That debt is represented as money, and money circulates through the economy as symbolic of all our debts. That's why, as David Graeber pointed out, we cannot have an economy free of debt, because then there would be no money, and no economic activity would take place. Furthermore, as he also pointed out, the amount of money is not limited by some arbitrary standard such as a debt ceiling, bit by the amount of people who wish to borrow.

When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There's really no limit on how much banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What's more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing.

What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this ... So there's no question of public spending "crowding out" private investment. It's exactly the opposite.

Why did the Bank of England suddenly admit all this? Well, one reason is because it's obviously true...But politically, this is taking an enormous risk. Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it....

The truth is out: money is just an IOU, and the banks are rolling in it (Guardian)

So the "national debt" is money we owe to ourselves. The portion we owe to foreigners would never be called in because it would screw over their own economies:

The treasuries-as-financial-weapon-of-mass-destruction theory goes something like this: China currently holds more than $1 trillion worth of U.S. government bonds, equal to about 20 percent of all treasury debt owned by foreigners. If one day the Communist Party leadership felt like starting some havoc, or just simply lost confidence in Washington’s ability to or desire to repay its obligations, it could liquidate that stash, driving down treasury values and forcing the U.S. government to offer sky-high interest in order to borrow (as treasury prices go down, rates go up).

Now here's what's going on in the news: After accidentally terrifying investors this summer by slightly devaluing its currency without warning, China has been trying to prevent the yuan from collapsing even further against the dollar by, well, selling off treasuries. The way this works is simple. The country’s central bank unloads some its bond holdings for dollars, then it uses said dollars to buy yuan, thereby pushing down the value of the greenback and pushing up the redback. In August, it reportedly spent about $120 billion to $130 billion intervening this way. At first, there was some worry that all this selling might indeed end up sending U.S. interest rates higher, acting as a sort of reverse monetary stimulus. But the bond markets seem to have largely reacted with a big ¯\_(ツ)_/¯, largely because the treasury market is enormous, and with the global economy in a shaky spot, there are ample buyers out there looking to purchase American government debt as a relatively safe place to put their money.

All of this drives home a very simple point that people who worry about our debt to China tend to overlook: Buying and selling treasuries is how Beijing manages its delicate exchange rate, which is essential to keeping the country’s all-important exports flowing. And if it were to actually dump enough of its treasury holdings to cause trouble, the likely end result would be a less valuable U.S. dollar, which would mean fewer Americans buying goods made in China. That would especially be the case if the U.S. Federal Reserve responded by printing money to buy up whatever bonds China sold in order to keep interest rates from jumping, which in this extended hypothetical, is a pretty likely scenario. Beijing would be cutting off its nose to spite its face, which isn’t typically how one subjugates a geopolitical rival.

Beijing Is Showing Us Exactly Why America’s Debt to China Isn’t a Problem (Slate)

So we see that right wing economics coalesces around three fundamental canards. The first is that debt is bad and that government should be run "like a business" and carry zero debt, which is odd since I doubt there is any major business in the world that does not carry a significant amount of debt. Or, related, that the debt is perennially "out of control" and that our "grandchildren" will be in debt servitude paying it off. But as we've seen, out "grandchildren" are the creditors as well as the debtors, and debts due to ourselves can be renegotiated or eliminated. And that debt is our money - no debt, no money. Also, the government's going into surplus means that the private sector must be in debt by an equivalent amount thanks to sectoral balances. Government can't be run like a business because it is the sum total of all businesses in the country, which must balance out.

The idea that the government is "broke" is absurd, as the government is the source of our money. If the government were broke there would be no money and no economy. Also, the idea that we can be bankrupt is absurd--the U.S is a sovereign government, not a business. What would it even mean to be bankrupt? The U.S. can only default on its debt. The only time that we have come close to that is the Republicans' refusal to raise the artificial debt ceiling.

The government can mint coins debt-free. This was the idea of "creating" a trillion dollars of debt-free money by the government mining a trillion-dollar platinum coin and giving it to itself by crediting its account. But we shouldn't have to go through these shenanigans. Our financial system needs an overhaul.

The second is that going into debt is bad because we need to borrow from foreigners. But this is generally due to trade deficits. Foreigners selling more to us than we do to them means they have a surplus of dollars, and they use this to buy treasuries. Yet we're simultaneously told that free trade is good and protectionism is bad. These are contradictory. Since we cant all run trade surpluses at the same time (unless we export to Mars or something), there will always be some countries in deficit, and some in surplus. This leads to a net outflow of dollars. These extra dollars must be accounted for, and bonds are how we do that.  We also see that if foreigners sell their debt, it will mean their currency becomes more valuable and ours less so. This will decrease their exports (which is how they got the surplus in the first place), and increase our exports (which will mean more exports and less of an outflow of dollars). So this buying and selling of national debt is really a factor of trade that self-balances. Yet it's constantly used as a scare tactic.

The third is the gold standard, which is getting some attention since several Republican presidential candidates advocate its return. Ads to buy gold are a standard of right-wing websites, radio programs, and hucksters like Glenn Beck. They are all based on fomenting a distrust of government institutions, which is a key part of the well-funded right-wing playbook. But as we've seen, money is debt and credit, and has been since its inception. Commodity money is an accident of history. Gold is just as variable as currency and has no "set" value. Historically, countries with commodity money have been less prosperous and more in hock to the authorities than those without, as we've seen. This is because that commodity is typically owned by the rich and the state (e.g. Fort Knox). By contrast, credit money can be created by anyone willing to accept an IOU. Credit money eliminates the artificial scarcity imposed by commodity money.

...Bretton Woods gave multiple currencies fixed but adjustable rates. Nations now had precisely the freedom the gold standard denied them, to use monetary policy to regulate their economies. (The United States dollar had a nominal value in gold of $35 an ounce but the country was not obliged to set monetary policy according to how much gold it had.)

Mr. [Ted] Cruz correctly notes that the world economy enjoyed decades of prosperity under Bretton Woods, but that happened without a gold standard, not because of one. Why is a discredited policy now attractive to Republicans? The gold standard suits a political moment. Tying the dollar to an arbitrary quantity of shiny metal binds policy makers’ hands, robbing them of their discretion to act: The central bank can’t adjust the money supply to counteract crises or prevent them. These limits, for many Republicans, are good things. The gold standard is essentially the monetary equivalent of a government shutdown.

Why Republicans Love the Gold Standard (New York Times)

By creating an artificial constraint on the government's money spending, it allows the wealthy to have more control.

In the Peak Oil Doomosphere, the gold standard was all the rage a few years back. Why was this right-wing policy advocated by so many peak oilers? My guess is 1.) If the government was lying about oil, surely it must by lying about financial matters. It comes from a (justified) mistrust of government institutions. But I think the real key is this:

Gold as currency has obvious problems. First, there is relatively little of it while there are more people and goods all the time. So in the long term, the gold standard exerts a downward pressure on prices as money becomes relatively tighter and its value increases. If prices continue to decline, people are less likely to spend their money. After all, if you believe that the price of, say, shirts will continue to drop, you’ll delay splurging on haberdashery.

Peak Oilers are opposed to the massive overconsumption of the the earth's resources, and believe that the gold standard will constrain the printing of money and reduce economic expansion. They believe that "printing money" allows government to produce the inflation which feeds the consumerist economy, and the gold standard will put a stop to it. By contrast, if goods and services are worth less over time (deflation), people will spend less and save more, and this is more moral. They see the gold standard as ushering in a "'hairshirt economy," which will throttle the grotesque overconsumption of Americans. Furthermore, a gold standard is in line with a shrinking economy. If you believe the goods and services the economy produces will inevitably shrink due to peak oil, you know that printing more dollars is counterproductive and will cause inflation and must be stopped.

I get the sentiment. It stands in contrast into the idea that we must expand every year or else. But I think this view is misguided and simplistic. Public provision of resources is the key to eliminating useless overconsumption. Public provision of resources assumes the government does not have artificial constraints, particularly those imposed by the rich and powerful. Note that Europe, with its universal healthcare, government-provided housing, reliable public transportation and free education uses a tiny fraction of the energy used in the U.S. per capita, with a higher quality of life. That's not a coincidence. High consumption taxes are a better solution. Remember, taxes are not needed to fund the government, so we can tax what we want less of. How about 100% percent marginal tax rates over 50 million dollars (which would mean that no one would have more than 50 million dollars)? How about high taxes on shitty food like corn syrup? How about high taxes on people who pollute? How about a carbon tax? All of these are subsidies for what we do want (more equality, healthier food, non-carbon energy sources).

Taking back our institutions, not hamstringing them, is the key to successful degrowth. Otherwise you just create poverty and misery, which breeds right-wing sentiment, not environmental awareness. Hurting people vote for demagogues, as we're seeing right now in America and elsewhere. Believe me, the rich and powerful would not be supporting the gold standard unless they think it will make them wealthier (and you poorer and more desperate).

And finally, there is this good summary of financialization. It's a bit long, but it's a terrific summary of the transformation of the economy due to financialization:

Now, what is this financialization?...It’s a profound historical transformation that really began in the 1970s, and it’s now been running for about four decades.

So let me start with economic changes, the economic foundations of this transformation. I think there are three key root changes here...The first, funnily enough, doesn’t relate to finance itself, but it relates to industry and commerce...So what has happened to big business in particular?...First, big business has become increasingly capable of financing investment out of retained earnings. It retains its profits, and on a net basis it finances investment pretty much out of that. Of course, it still uses banks, but it doesn’t rely on banks on a net basis to finance investment. That gives it independence, a certain degree of independence from banks.

In addition to that, big business has made so much in retained profits–currently U.S. big business is sitting on piles of cash. It has made so much in retained profits that it can use those funds to play financial games, to engage in financial transactions and financial activities on its own account. So big business has financialized...Large enterprises have acquired some of the character of financial institutions, have become bank-like, and they engage in these transactions, and they change the structure of their own organization as they do that.

Second economic change, and very, very important, too, relates to banks. If big businesses is doing that, banks must do something else to make profit. Banks are profit-making institutions. So if big business becomes increasingly independent of banks, banks must do something else...They lend less to businesses for investment and so on, and they play more games in the financial markets. They become transactors in financial assets, and they make profits increasingly not from lending but from fees, commissions, and trading. They become traders in financial assets.

The third change has to do with households, workers, ordinary people...have become a very profitable activity of banks, a new activity...And what we see there in the last three to four decades is that ordinary people have been drawn into the former financial system like never before. Households have become financialized. Finance has become a fundamental part of household life...

Why is that? Partly because wages have been stagnant. And therefore–I mean, nowhere more stagnant than in this country. I mean, real wages have been absolutely flat in this country for decades. So partly because of that, people have turned to debt. But also people have got assets, financial assets...What is actually happening there, I think, is not simply that you borrow in order to consume. ... It’s a more complex story than that.

What is actually happening is people need access to health, education, housing, and a variety of other needs. Every country has systems of provision for these things. Each country differs from the next country, but pretty much there are similarities. These modes of provision have historically, traditionally, incorporated public provision, some methods of public provision, for everything–for housing, for health, for education, and so on. What we’ve witnessed the last three to four decades is a retreat of public provision. ...Private provision has taken its place. As this is happened, finance has emerged as the facilitator of that. So we turn to private provision to solve our housing needs, our health needs, our education needs, and finance makes profits out of that, basically, without having any skills in doing these things...

So non-financials have financialized, banks have changed, and households have been drawn into the financial system. These changes together have basically transformed the economy, transformed the foundations of the economy. This is a new type of capitalism.

At the same time, we’ve had changes in institutions and in ideology...We’ve had wave after wave of deregulation. Labor market has become more deregulated, and financial markets have become more deregulated.

And in addition to deregulation what we’ve had is the rise of the ideology of neoliberalism. Deregulation goes hand in hand with neoliberalism, the idea that the market is good, the state is bad. In this country, this is a very powerfully held idea, more powerfully here than anywhere else. Actually, it’s extraordinary how powerful this perception is and how a lot of social issues are understood in this way.

The point I want to make you is that neoliberalism is very, very powerful and sustains financialization, but neoliberalism is not really about asserting the merits of the market over the state. Actually, it’s more complex than that and it’s more crafty than that, because neoliberals are not the enemies of the state. Neoliberals want to take over the state. The actual content of neoliberal ideology is to take over the state and to use the state to protect the market, to make the market bigger, to effect market-favoring, market-conducive changes. So this has also been going on the last three to four decades. And that to me is the core of financialization.

So what have we got after four decades of this? These changes, seen very clearly in the United States, have created, firstly, a deeply unequal country, a deeply unequal society. Financialization is fundamentally about inequality. We see this inequality in terms of income, where the top 10 percent and the top 1 percent draw an extraordinary proportion of income annually. But we see it in terms of the functional distribution, the distribution of income between capital and labor, where labor has lost–and lost dramatically–during the last three to four decades in this country and in just about every other mature capitalist country that has financialized.

So this is a deeply unequal system. It generates inequality. Finance has acted as a key lever in increasing it inequality....And the rich in this country and elsewhere typically become rich through financial methods; the way in which you acquire great wealth and you cream off the surplus is basically through financial methods, through access to financial assets, privileged ways of trading financial assets, and privileged position in of the financial system that allows you to extract vast returns, which appear as salaries and wages, in other words, remuneration for labor. Come on. What kind of remuneration for labor is this allows someone to draw tens of millions of dollars annually? For what kind of labor? This isn’t labor. This is a kind of rent, this is a kind of surplus accruing because of power and position in the financial system or access to finance. And that is typical of financialization in this country and elsewhere.

The Financialization of Life (Naked Capitalism) The consequences of financialization were that indebtedness grew much faster than the ability to repay. The economy grew at 5 percent, wages went nowhere, and credit grew by fifteen percent! The same wages go less far because so much of it has to go to pay off debt.

Adair Turner: If you look back at the story of advanced economies over the 20 years before 2007, you see an interesting pattern. During that period, the total value of national income — what economists call “nominal GDP,” meaning income unadjusted for inflation —grew at about 5 percent per year in a reasonably steady fashion...Yet during all of that time, the value of all credit, unadjusted for inflation, grew at about 10 to 15 percent per year. At the time, it seemed like we needed that pace of credit growth, but when you think about it, if your credit is going to grow at 10-15 percent per year in order to get your 5 percent GDP growth per year, eventually you’re going to have a problem. This isn’t a stable system. In my view, one of the reasons that it seemed that credit had to grow faster than total income was rising inequality.

The richer people, when they get another $100,000, or another million, or 10 million, don’t tend to spend it as much as the poorer people would if they got another $100 or $1,000 or $5,000. All the empirical evidence suggests that the rich tend to consume a lower proportion of income than middle and lower-income people. So rising inequality can lead to a major problem with the demand for goods and services. The rich aren’t spending their additional money, so overall, more money gets taken out of the economy. Unless the richer people decide to invest their money, there would be a slowdown in the economy. This idea goes back to economists like John Maynard Keynes and Alvin Hansen.

But before 2007, we didn’t have a slowdown. Instead, the savings of the rich ended up going through the financial system and being lent to middle and lower-income people, who had 30 years of no real income increase whatsoever. The figures for the U.S. are really quite startling. If you look at the bottom 20 or 25 percent of the population, their real wages haven’t gone up for about 35 years! Meanwhile, the incomes of the top 1 percent have gone up 200 percent. This is a dramatic increase. The savings at the top have to go somewhere. At the bottom, there is a group of people who don’t feel that they’re participating in the growing prosperity, so they become very vulnerable to the delusion that if they borrow the money and buy a house, they’ll make up for their lack of real wages by house prices always going up.

To Fix Inequality and Steady the Economy, Think Radically (Naked Capitalism) David Graeber also points out that in order to grow the money supply, debt has to be psuehd onto those least able to afford it:

At the moment, Conservative policy is to create a housing bubble. Inflated housing prices create a boom in construction and that makes it look as if the economy is growing. But it can only be paid for by saddling homeowners with more and more mortgage debt...This takes us right back to exactly where we were right before the 2008 mortgage crisis. Do you really think the results will be any different?

But something along these lines has to happen when the government runs a surplus. Everyone will just keep pushing the debt on to those least able to pay it, until the whole thing collapses like a house of cards: just like it did in 2008.

Britain is heading for another 2008 crash: here’s why (Guardian)

So we see that the money from tax cuts gets plowed into financialization rather than innovation (which doesn't pay, because people are too poor to pay for innovative products). High marginal tax rates make it more likely for institutions to reinvest profits back in the company rather than engage in profit-taking, since money put back into the company is not taxed. Low taxes encourage looting. As I noted, companies rely on credit card debts to make profits, rather than providing high-quality goods and services at a fair price. This what capitalism is now.

And the lack of public provisioning means people turn to the banks. They turn to credit cards to fix their lack of wage increases. They turn to banks to fund their college debt because education is no longer free. They turn to auto loans because we don't have good, reliable public transportation. They turn to home loans because school funding is based on your local zip code. American companies don't need a prosperous middle class to buy from them anymore, so they don't care if it exists or not. They already have their hands in our pockets because we are permanently in debt. Or they control entire markets due to monopoly. We have no choice but to pay, or be locked up. Again, this is what capitalism is now.

Public provision is what they fear. That's why they are always claiming "the government can't create jobs" (er, the army is what, again?) and thing like Social Security and Medicare spending are "out of control" (but not military spending). That's why they decry "socialism." They want people poor and desperate so they have no alternatives but to take any jobs on offer, that is, it's a way of suppressing wages. They don't want the government bidding up wages by job creation, or providing welfare or unemployment insurance thus giving people a cushion to hold out for better opportunities.

Once you see which economic policies play into the hands of the one percent, and  which ones don't you see the economy in a different light. Our situation is not inevitable, like the economy, it is a social arrangement, and entirely a matter of choice. If we are suffering, it is because we choose to do so. The means to rectify this exist, if only we could implement them.