I don’t think the loss of government jobs is a problem and the clue is contained in part of what you said: “a very large number of government jobs are unproductive”. I would suggest that if these jobs are unproductive perhaps they shouldn’t be doing them in the first place. Paying people to waste time and resources might be worse than paying them to do nothing (unemployment benefit) in my view.

Further, I would argue that the only true tax cut is a cut in government expenditure since all government expenditure is ultimately financed by taxes, hidden or otherwise. I would suggest that the government providing jobs may on the surface appear to be a good thing but what is not seen are the jobs that would have been created by the private sector in the absence of these government jobs! This is because the government bids up the price of the factors (materials and labour) that the private sector would have used for productive processes and uses them for unproductive purposes instead. Ultimately, this would lead to a greater loss of jobs in the private sector than are gained in the public sector.

In that case why is ABCT a problem?

The question is whether prices are transmitted quickly across the economy. If they are then not only would there be no secondary recessions there would be no ABCT booms and busts. Because, as new money is created that money would bid up prices in asset markets, the higher-order goods, which would spread quickly through the economy raising the price of consumer goods, the low order goods.

To be consistent there must be stickiness in both upward and downward directions. Not necessarily similar stickiness, but stickiness all the same. I don’t think it’s plausible to say that prices are sticky upwards but very flexible downwards.

> Money creation in a FRFB world is always counterfeit if issued
> over and above the physical thing that backs it.

If a bank’s customers agree to accept fiduciary media that is a debt then that’s something that they can do, there is no dishonesty in it. The dishonesty only comes into play if the bank don’t disclose that situation, if the bank pretends that the contract is a bailment.

If there were Free banking and consumers decided to use 100% reserve bailment accounts and notes then the FRFB side would not complain. It’s up to the two parties who make a contract to decide how much they trust each other. But, we think that it’s overwhelmingly likely that if there were Free banking then consumers would choose fractional reserve banking, that’s what’s happened in the past.

> Gold backed money can’t be destroyed, so we can’t worry
> ourselves with a money deflation in a FB world.

It can be melted down and turned into other gold products. If that happens then it ceases to be money.

Money creation in a FRFB world is always counterfeit if issued over and above the physical thing that backs it. Therefore I propose no money accomodation and just let the market do what it does best: allocate resources.

Gold backed money can’t be destroyed, so we can’t worry ourselves with a money deflation in a FB world.

I agree with monetary expansion in recessions as an “ideal policy” assuming the right institutional conditions, such as free banking. My last paragraph is about our situation now with what we have in practice. I think central banks can’t be trusted with quantitative easing.

> Identities are useful. 2+2=4 is useful. The problem is that some
> people think they can get more out of the tautology / identity
> than the sum of its parts. That is the subject of my article.

I agree with you to some extent about that. The real issue is the theories that are applied to the equation of exchange are confused with properties of the equation itself. But, that doesn’t mean that we should abandon the equation which is useful for discussion.

> I will add, in a down turn, the only thing that will correct the
> down turn, yes when money demand has risen, is not to mess about
> with the supply base of money, but let the businessmen adjust costs
> down in a greater amount than the fall in transactions, the inverse
> of the money demand going up. This readjusting of the cost base and
> a protection of profits, is the only way to give people that
> comfort to readjust that money demand back again. No messing about
> by the state can fix this. This will lead to more account
> falisifications , end of story.

Monetary expansion can be useful, if its done by the state it’s likely not to be but as a general principle it can be useful.

I’ll give a toy example… Let’s suppose that we have a economy using a 100% gold standard. Suppose that at the beginning there are 30lbs of gold in circulation as money. For some external reason there is a shock and some people raise their demand for money. If there is no change in the supply of money then the only way that this can be achieved is by prices adjusting downwards. However, though prices adjust they cannot adjust quickly. This results in the problems of deflation. Just as with a monetary injection the effects of an increase in holding will spread outward from those people who decrease spending. As it does so demand falls in various markets and because prices aren’t perfectly and instantly flexible they don’t adjust downwards quickly enough to keep output and employment from falling. During this process account falsification occurs in the negative direction. Profits reported are lower than actual profits and losses are heavier than actual losses. This is the corollary of the opposite effect that occurs when there is an injection of money. Eventually prices do adjust and as that happens there is a return to normality. However, if the original shock was only temporary and the demand for money it created subsides later then prices will rise and the problems of inflation will occur.

That’s the situation with no money creation. Suppose alternatively that there is a large quantity of gold jewellery in the economy and the means to work it cheaply. In that case once the purchasing power of money rose beyond a particular threshold it would be profitable for people to coin their jewellery into money. Doing that stabilises the purchasing power of money to some degree and prevents economic calculation from being impaired. Then if the demand for money falls later then it will become profitable to melt the extra coins down again and turn them into jewellery again. If the gold market can do this faster than prices can change then they can prevent the adjustment costs of deflation. (The jewellery market probably can’t act that fast I only use this example to illustrate that the general principle).

In another reply you write:
> Any level of money will suffice to have a functioning economy.
…
> We only create wealth when entrepreneurs use factors of production
> better to make goods and services more in demand and supplied at
> better prices and served up in better ways for the customer.
>
> No amount of new money units from whoever can make this happen.

It’s important not to confuse the long run with the short run. I agree that all this is true in the long run. Any amount of money suffices in the long run, but in the short run changes it the amount cause real effects.

Creation of new money, and destruction of money too in other circumstances can avert the adjustment costs that would be associated with fluctuations in purchasing power.

No one should create money.

Any level of money will suffice to have a functioning economy. Increases in productivity (the aim of all capitalists), all things being equal means more goods and services and thus more wealth. The purchasing power of money goes up. Prices go down.

We only create wealth when entrepreneurs use factors of production better to make goods and services more in demand and supplied at better prices and served up in better ways for the customer.

No amount of new money units from whoever can make this happen.

Less of the state feeding off the tax payer will allow more money to be kept by entrepreneurs in their business to do just what they set out to do, create more wealth.

Government needs to get out the way end of.

The government with its private sectors mints , aka the banking system needs to be totally returned from whence it came : the private sector.

Just as I do not trust the government to set the price of apples or heating, I do not trust it with government, but I do trust the free unhampered interplay of 60 million people trading peacefully together to work out what they do and do not need.

Thank you for your comments.

People employed by the government don’t really pay tax. They are net beneficiaries of confiscated wealth. Even with our overly generous benefits system, paying redundant government employees benefits would almost certainly be cheaper than paying them to do useless jobs.

As for the reduced spending power of these ex public sector workers, and the possible impact on the wider economy, always remember that whenever the government spends or borrows, it does so at the expense of the private sector (which could otherwise be doing the spending or borrowing). To the extent that the private sector spends less freely than government, it is probably wise to do so.

It is true that some areas will suffer more than others from cuts to government, but that is simply because some areas have disproportionately benefited from government largesse. The readjustment may be painful, but it is necessary.

Unfortunately, cutting government expenditure means cutting jobs and even though a very large number of government jobs are unproductive and some are clearly a hindrance to the private sector, the loss of these jobs would raise the level of unemployment. Any increase in unemployment changes people paying taxes into people drawing unemployment benefit. Higher unemployment also reduces demand for goods and services which further increases unemployment in the private sector.

Raising tax levels also reduces demand for goods and services which causes a drop in private sector employment, but does not directly cause a loss of government jobs.

You might conclude that raising taxes is less harmful than cutting government expenditure but higher taxes are very damaging to private sector business and it is only the private sector that really supports the whole economy.

If only the government understood that if private banks were prevented from creating new money the State could create it instead. In 2007, the last year before the banking system imploded it created (forged) about £177 Billion of new money as deposits and considerably more as loans. A lot of this new money went towards raising house prices and even more unproductive speculative activities, but if the private creation of new money was stopped a large part of it could be replaced by government created money.

The amount of new money the government could create in the next year without causing overheating would be at least equal to the £200 Billion created by the Bank of England as “Quantitative Easing” in 2009, but would not be used simply for buying existing gilt edged securities, it should be used to maximise the growth of private industry by making low interest loans and for spending on infrastructure. The best way of increasing demand would be to raise the basic income tax allowance to about £20,000 a year.

All of this completely depends on stopping the private banks from lending more money than they take in as deposits. The method used for preventing the private banks from doing this is open to debate but it is surely possible and the benefits that would flow from it are enormous.

You put forward an argument for money pumping in a down turn as prices are sticky going down. You then refute it yourself in your last para.

I suggest you bin your ideas on this.

Identities are useful. 2+2=4 is useful. The problem is that some people think they can get more out of the tautology / identity than the sum of its parts. That is the subject of my article.