'The Confidence Trick of Fiat Currency'

from creditwritedowns...........


"In a world in which government is the creator of that currency and in which the currency has no tether to a physical product like gold, this promise has no tangible financial support other than the full faith and credit of the issuing government supported by its monopoly power to tax in its jurisdiction of control. Put more simply, there is nothing supporting fiat currency besides the coercive power of the state to impose tax and to entrench its obligations’ circulation as legal tender.

When thinking about the debt ceiling debate, the reality then is that the debt ceiling is a purely artificial constraint; Treasury notes or bonds are substantively the same as every other US government obligation. It is interesting that no other major developed economy has such a constraint. I would be interested in readers’ with knowledge of the debt ceiling history explaining why this is so.

In any event, some economists recognize that the US government obligations are all substantively identical promises to repay a specific amount of the currency unit of account backed by nothing but taxing authority. As a result, there has been a lot of chatter about ways of circumventing the debt ceiling by issuing other forms of US government obligations and swapping those with outstanding Treasuries to diminish the number of Treasuries outstanding. Some of these proposals are fairly inventive. See Scott Fullwiler’s here for instance.

I doubt Secretary Geithner would implement any of these schemes, of course. But the larger question I have goes to the reason the debt ceiling exists at all: all deficit spending must be accompanied by the issuance of an equivalent unit of currency amount of Treasuries. Mentally, this ties the deficit spending and the treasuries together so that the layman thinks the Treasuries ‘fund’ the deficit spending. But, I just told you that all government obligations are promises to repay the currency unit of account backed by nothing but taxing authority. It’s as if you go to the government with your paper IOU with $100 printed on it to claim your money and the government hands you another paper IOU with the exact same amount printed on it. That’s pretty much how fiat money works. So, Treasuries don’t ‘fund’ anything. The US government issues Treasuries only because it is forced to do so to create the artificial tie between Treasuries and deficits and the mental connection we make as a result"................READ MORE