In yesterday’s Wall Street Journal there was a
relatively small item that, no doubt, many people missed. On the surface, of course, there is no
particular reason why anyone should pay attention to it . . . and that might be
the biggest problem of all.
On page A7, there
was an article, “Italy Vows to Defy EU Rules.”
Most people would have read no further than that, assuming that there
was some regulation about internal trade, immigration, or something else that
was of no interest outside Europe, and not even very much of Europe.
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| An economic Catch-22. |
No, the problem
is the restriction on the amount of debt the government of Italy is allowed to
issue. This is a big problem, because
Italy’s GDP is falling, and there is a serious lack of financing for new
capital projects.
That is to say,
this is a big problem if you assume that the money supply, and thus the source
of financing for new capital projects, can only be backed by government
debt. That, in effect, creates a Catch-22 situation. You can’t have growth unless you burden
yourself with debt that you are already unable to repay. If you grow economically, you assume more
debt you can’t repay, and if you repay debt (or try to) you won’t be able to
grow to finance the debt repayment.
And people wonder
why we reject the principles of Keynesian economics!
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| Is this the fault of the banks, or of Keynes? |
The fact of the
matter is that Italy’s problem can be solved with ease, and in a way that not
only doesn’t require additional government debt, it can lead to paying down the
debt that is already outstanding. The
only thing that absolutely must be done is to start using the banking system —
the commercial banks backed up with the central bank — the way it was intended
to be used: to finance private sector development, not to monetize government
deficits.
It comes as a
stunning surprise to many people that central banks were not invented to
finance government operations, nor are commercial banks engaged in a criminal
conspiracy against the people by creating money that only government has the
right to create. The fact is that
government doesn’t actually have a natural right to create money.
Okay, strictly
speaking, a government has no natural rights at all. Only natural persons have natural rights, and
a government is an artificial person, a “legal fiction” created by human beings
who are natural persons. When we say a
government has no natural right to create money, we mean that the nature of
government is such that it does not as one of its natural functions create
money.
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| John Locke: taxes a fee for government |
That is not the
same as saying that government does not have the right by nature to regulate
the currency and enforce contracts.
Money derives from production, however, and government by its nature is
not a producer of marketable goods and services that require money to be
exchanged. Government is a service for
which the citizens pay a fee called “taxes” in order to receive the services. Allowing government to create money means
that it is not accountable to that degree to the citizens — which means the
government is in charge, not the citizens.
So what Italy
could do, and in fact should be doing, along with everybody else, is turning
the value of existing inventories of goods into money for trade and commerce
and turning the value of future capital into money for new capital
formation. That is what commercial banks
were invented to do in the first place, with central banks coming along to make
it easier. All government has to do is
set the value of the currency, and make certain all contracts are kept.
That is the short
term solution. It gets Italy out of the
hole its in with respect to the presumed scarcity of money. The long term solution is to get everybody on
board with the program by making it possible for everybody to purchase part of
the new capital formation that would be financed. They can do this by purchasing newly issued
shares that finance the new capital, making dividends tax deductible at the
corporate level, paying out all earnings as dividends, and repaying the credit
extended to purchase shares out of the dividends on a tax-deferred basis.
Afterwards, the
dividends can be taxed as personal income to the recipient and the balance used
for consumption purposes. This would
take a great burden off the government and increase tax revenues at the same
time, allowing repayment of the outstanding debt without imposing austerity
measures that only cripple growth.
Such a program is
described in CESJ’s Capital Homesteading proposal. It’s something to think about.
#30#