Yesterday a diary brought up Rick Perry and some of the threats he and others have made about secession. I was actually thinking about writing a diary using a thought experiment about how a new country, breaking off from the US, would handle some very crucial questions about money. I think this could be quite illustrative of the kinds of issues one must consider regarding currency, what currency is and how it works and the advantages of a floating exchange rate fiat currency like we have. This thought experiment will not deal with all the issues surrounding issuing a new currency but I hope to highlight some of the questions that would need to be asked and unfortunately are likely assumed away by many of our right wing friends who so blithely talk about gold standards or strong currencies or deficits.
I dont know about you all, but Ive actually heard people discuss secession like its not only a reasonable alternative but like it wouldnt involve some very difficult questions that would likely expose to them the fallacy of their assumptions about what money is and how it works
Its really good to use thought experiments especially when some of the concepts one is dealing with aren't as cut and dried and simplistic as many people make them out to be. Talk about secession actually gives us a great opportunity to explore some very pertinent questions we are discussing (I use this term lightly because mostly we are yelling past each other) today like our deficits and debt.
In this thought experiment, Professor Galbraith from the University of Texas, is sitting down with Rick Perry and asking him how he thinks an "independent" Texas would work, from a monetary system perspective. My guess is I would have a reasonable facsimile of this discussion with more than half the conservatives I know.
Lets see a transcript of what the interview might sound like.
Professor Galbraith (PG) Rick Perry (DB (douchebag) )
PG- So Governor Perry , congratulations in advance of becoming president of your new country. It must be quite thrill !
DB- You betcha! (guess who his VP is)
PG- Well the first question I have for you sir, since I'm an economist, is what are you going to use for money in your country?
DB- Thats a stupid question, why I'll just use the dollar since me and my buddies have so many of them!!
PG- So you guys are just gonna pool your dollars together and use them to run the country? Kind of like running a business?
DB- EXACTLY!! Just like a business. You see that was the "Old Countries" problem, they didnt run it like a business.
PG- So what about when your business needs more money, its going to have to grow isnt it?
DB- GROW!!?? Hell yeah! Before long the whole gulf coast will be with us. We'll have 50 million more I bet.
Well we'll just get more investors like any sound business.
PG- And they're going to invest dollars, US$. ??
DB- Yep. Theyll have plenty of them. No welfare types in OUR country.
PG- OK, but wont your country errr business have to produce some returns for your investors if its going to be a like a business.?
DB- You betcha, Gawd I love that phrase! Our returns will be fantastic.
PG- So where will the money for the returns come from? You'll need more money eventually. Is it just going to come from new people coming to the country?
DB- Yeah, each new citizen will be an investor, It'll be great!
PG- Mr president, as an economist I've got to tell you that what you are describing is ................. a ponzi scheme.
DB- You mean like Social Security was?
PG- No no no, like Bernie Madoff was.
DB - Nawww
PG- Yes
DB- Nawww
PG- Yeeessss!!!
DB-..............well what do you suggest we do?
PG- You need to issue your own currency
DB- Well how do we do that? Why cant we just use dollars?
PG- You will run out of dollars eventually. You dont get to create them thats the US govt dollar, if you create them you'll be counterfeiting and you'll get invaded. I dont think you have a big enough army to fight them yet. Your just getting going.
DB- (scratching his head) ................hmmmmm.................wow!........hmmmmmmmmm.......gosh......ok....ok
....... so, I like your idea we'll go with a new currency and call it the............. Taller!! Yeah I like that everythings bigger in Texas!
PG- Good, so you have a name for your currency. How are you going to get people to use it instead of their $US?
DB- ...........................................................
PG- If they only use US$ you will eventually run out of them. Unless you can produce EVERYTHING every Texan will ever need RIGHT HERE! As you buy stuff from the old country your dollars will go away.
DB.............................................................
PG- You're going to need to make people want the Tallers by requiring them to pay a TAX with them.
DB-. NO NO NO!! IN TEXAS we keep the "E" BEFORE the "A"!!!
PG- But Mr president........oooooops, I'm sorry, Mr President, why would they want the Tallers? They have no value, they are worthless pieces of paper.
DB- Dont you say that about MY CURRENCY!!!
PG- But its true. How are you going to insure that the Tallers are the primary currency in circulation? What will stop folks form using US$ or anything else they want?
DB- They're good Texans and they will use it cuz I want them to.
PG- (siiiiiigh) Ok. Maybe for a while they will do that but eventually..... Alright lets move on now. What will people do with their dollars?
DB- I'll let them turn them in for Tallers.
PG- Good! At what rate?
DB-................. whaddya mean?
PG- What conversion rate....1:1 2:1 3:1.....?? It matters because they can still use their dollars to buy stuff from the US.... unless you are gonna stifle their freedom and not let them trade with the US.... but that sounds so .....un presidential of you.
DB- Oh NO NO NO. No freedoms will be stifled in Texas anymore. Thats why we left.
PG- And then what will YOU do with the Dollars??
DB-...............................................
PG- They will still have value in the old country. You will be able to import lots of stuff you can use here. Stuff you cant produce your self.
DB- Texans can produce ANYTHING!!
PG- Well, yes I'm sure they CAN but are they equipped to produce ALL their wants and needs right now? Your going to need to get stuff from someone else and your dollars are good for that. It can get you some REAL wealth not just pieces of paper. However what you get with those dollars better be shared amongst the people proportionally or theyre gonna be mad that they turned in dollars to you that they could have spent themselves.
DB- That sounds...... kinda ..............COMMUNIST!!
PG- Maybe so but how you handle your govt finances is crucial to building and maintaining the trust of your citizens. If you take their dollars and cant give them close to what they could have gotten for themselves with them, you better have a good reason.
DB- Awwwww hell. I GOT the trust of MY citizens. Not like thos Washington LIBRULS in the old country. I got 100% of the vote of these folks. They love me. They know I stand for freedom..... liberty........ and .................freedom again........ justice!!.........and ..................freedom............ OH..... and NO TAXES!!!!!!!!
PG-Alright then......... lets keep going. Once you've decide the exchange rate and everyone has no dollars, youll need to figure out how many Tallers you need to spend as the govt.
DB- Listen PROFFFFFFF! Did you not hear my acceptance speech? Their AINT gonna be no govt spending in THIS country. Its free. private. market. ALL. THE. WAY!! WHOOOOO HOOOOOO!!! You betcha!
PG- Arent you going to have a military
DB- The best and the strongest..... and the most constitutional TOOOOO!! But NOOO govt funding. We'll get a private army paid for voluntarily by the citizens. They'll line up for blocks to make their donations. They love this country.
PG- How bout a court system?
DB- Private. Anyone wanting to sue has to pay the judge and jury.
PG- But what about.....
DB- no... dont say it, I know what your going to ask "What about criminal cases?" Well there aint going to be no criminals here cuz we're all law abiding constitution loving citizens. If someone does screw up we'll just execute them.
PG-SO there wont be ANY costs to your govt? Salaries for you and your staff? Upkeep of the buildings your going to use? What about flying around and threatening foreign govts or ensuring your corporations get favorable treatment in their markets?
DB- We'll pass the hat from time to time but it wont be called a TAX!!!
PG- Ok but still your citizens will need to get these Tallers in their hands. How will that happen? After they've used up the ones they got from their dollars, they will need more eventually. They will continue working HARD and will need to be rewarded with some raises and bonuses.
DB......................................
PG-These Tallers wont grow on trees for them and if there arent enough of them , theyll start using something else as currency
DB.................................. They wouldnt! They love me and OUR country.
PG- Youre going to have to spend them first so they can have some to use!
DB-?????????????????????????
PG- Yep, you (the govt) needs to spend first so there are Tallers around to even begin buying stuff with. You cant borrow them from China or the US. They wont have any.
DB- How about if I get dollars form US first and then exchange them?
PG- Okay, you CAN do that but now you've pegged your currency to US$. Dont you want to be free from the old country??
DB- GAWDDAMNRIGHT!!
PG- Well then a peg is out.
DB- I'll just use gold!!
PG- How much do you have? Thats another "form" of peg. You'll need gold first. How will you get it?
DB -??????????????????????????????? I know ..... Me and my buddies have a lot saved up. We just knew the US was going to collapse.
PG- Ok but you still need to set an exchange rate. How many Tallers can you receive for an ounce of gold?
DB- ???????????????????????????? Cant the market determine that?
PG- Uhhhhh NO! You have to determine that. You are the authority. The market price for gold changes by the second. Do you want the value of your money changing by the second??
DB- Hell NO!! We have SOUND money here in TEXAS. WHOOOO HOOOOO!!
PG- Well your gonna have to make a call on that.
DB- That sounds kinda.... authoritarian..... I like that!!!
PG- Remember though, when you set that rate only people with gold will be able to come and get Tallers. Does everyone who came down here with you have enough gold to start their life? You may end up with a lot of poor people.
DB- Damn them, it serves them right for not seeing the future and buying gold when they could!! We dont run no welfare state here!!
PG- Oh my, looks like things could deteriorate rather quickly I'm afraid.
PG- Listen Mr President in my professional opinion you need to NOT back your currency with gold OR peg it to another currency. You need to float it and issue it yourself. Otherwise you are not truly free.
DB- Really??
PG- Fraid so
DB-???????????? Wow........ We need to be free................its all we care about down here. That ....and NO TAXES
..............and the death penalty!!! Ok we'll float it.
PG- So that means you are going to have to spend it first so people can have it
DB- ?????????????????????????????? I dont get it.
PG- It doesnt exist until YOU create it and circulate it!!
DB- ?????????...........Really?
PG-Until you spend it we dont have it
DB- That actually sounds kinda cool the more I think about it. That is something I could get used to.
PG- But hey, dont let it get to your head. If you dont spend it on something productive, all your going to get is high prices.
DB- ????????????? Hi prices...... not in Texas. We've got the lowest prices on everything cuz we do business right.
PG-Anyway, lets get to something very important. Keeping track of your spending.
DB- You betcha
PG- Whenever you spend you will be putting money out into the non govt sector. OK?
DB- yeahhhhh?
PG- And to keep track of it I suggest putting a negative sign in front of the amount you spend. If you spend 100,000 Tallers you would write in your book, you might want to use an Excel spreadsheet, -100,000 .
DB- Why minus
PG- It really doesnt matter but when you spend out the Tallers its convention in other places to put a NEG sign. This means there is a + sign in the non govt side. They have MORE Tallers than the had before. You dont really have less because you create them from thin air but since they have a + sign you get the" - "sign.
DB- Does the - sign mean I'm missing something?
PG- Not at all. Its like a scoreboard. You're keeping score and you dont care who wins, kind of like youth soccer.
PG- I do have some bad news for you though
DB-What?
PG- A lot of people are going to refer to the - sign as a DEFICIT.
DB- ????????? !!!!!!!!!! OHHHHHHH They better not!!!!!