Today, I’m going to discuss what a currency peg is, which will prepare you to understand my discussion on the Job Guarantee, the reason why a standalone basic income guarantee is all the rage as “the” solution, and why the Job Guarantee is dismissed by politicians around the world. Much of what I discuss with you today will be a review, but we need to add a little bit more to your knowledge and understanding of the concept of a peg, and what its purpose is.
There is a very good reason why politicians around the world are pushing for a basic income and ignoring the Job Guarantee.
The reason for it is not what you think it is.
Nonsense arguments about automation making labor meaningless; about the JG being big government socialism; about the JG being “workfare”, make-work ditch-digging jobs – all of these arguments are talking points handed down to basic income advocates. They mask the real reason why politicians and Very Important Persons oppose the Job Guarantee and why they are pushing a basic income as “the” solution.
Today, we will use gold as our peg example. First, very briefly, let’s define reality.
What is a Monetary Economy?
When you take a step outside of your door and look around at all of the activity going on, you are looking at a monetary economy in operation. When you step back inside your home, you are still looking at a monetary economy. Your house was obtained with money, your utility bills are paid with money, your furnishings were obtained with money. We do not barter. The world does not operate on barter. In other words, your house was not obtained by trading ten heads of cattle for it, your utility bills are paid with mangos, and your couch was not obtained by trading three bowling balls, one goat, and a box of chocolates for it. Cattle, mangos, bowling balls, goats, chocolates, and, yes, gold are not “money”. I do not care what Ron Paul tells you about gold. Ron Paul is a medical doctor. Ron Paul can tell you what the human kidney is and how it works. That’s his profession. My profession is economics; specifically, macroeconomics, but we won’t get into that here. So, I am telling you that when it comes to what monetary instruments are, how they function, and what a monetary economy is, Ron Paul doesn’t know what the hell he’s talking about. No, just because he decided to become a Congressperson, does not mean that he knows, nor does it mean that he is now “qualified” to know. Ron Paul is about as qualified to tell you what a monetary instrument is and how the macroeconomy works, as Senator James “Snowball of Stupid” Inhofe is qualified to teach a class on climate science. Put simply, when it comes to monetary theory and macroeconomics, Ron Paul is a quack. Briefly, let me side track for a second to explain something critical.
Many people think that macroeconomics is nothing but political opinion, so everyone, plumber, businessman, or gas station cashier can join in on the debate with their ideas. You can thank idiotic politicians for that nonsense. Furthermore, because of the absolute failure of orthodoxy; that is “mainstream economics”, people think all economists are idiots and do not know what they’re talking about. Let me boil things down for you. You need to understand something very quickly here – There are two distinct types of economists: Orthodox and Heterodox. Some in the heterodox community are just as delusional as their mainstream counterparts are. Then there is Post-Keynesian MMT. This particular group of people, whether through education or actual work experience, actually do know what the hell they are talking about, and to the public’s detriment, they have gone ignored until now. Why? Precisely because mainstream economists control the profession and they want you to believe only what they “approve” for you to believe. Post-Keynesian MMT economists are “anti-economists” as Steve Keen would put it, because mainstream religious mystics have made a laughing stock out of the profession of economics. It is not a “my team, your team” thing here. What I am telling you is reality; certain economists who are in the minority deal only with how things really are, but the vast majority of economists (Krugman, Wren-Lewis, etc.) deal exclusively in market-based fantasy. In other words, they sit on the floor and build LEGO cities. Then, they play with the LEGO people, pretending it is real. They take their OPINION of how economies SHOULD work; how they WANT them to work; not how they ACTUALLY work, and then manipulate the LEGO people into behaving how they’d PREFER them to behave. Afterward, they tell YOU this is HOW the economy works. You believe them, because they went to college, they are “qualified professionals”, and they advise important people like Barack Obama and George W. Bush. The public thinks that, clearly, they’d never be allowed to advise such important people if they weren’t “qualified”.
Yeah, well, you’ve been duped – accept it. And you struggle financially because you’ve been duped by mainstream so-called “economists” – accept it. If mainstream economists actually knew what they were talking about, they’d never be allowed to advise people like Barack Obama and George Bush, because what they’d have to say would be “offensive” to Obama’s wealthy donors.
Returning to the point at hand, let’s explore what a monetary instrument is.
What a Monetary Instrument Is
Consider the US Dollar. At its very essence, the US Dollar is just a number, and numbers, as we know, are infinite. A Dollar exists only in one of three forms:
1.) Numbers in a reserve account at the Federal Reserve
2.) Numbers in a security account, also at the Federal Reserve
3.) Cash – Federal Reserve notes and coins
A US Dollar is not just paper and metal coin. In fact, when it comes to federal spending, paper dollars have nothing to do with the subject. The federal government doesn’t print cash to fund its spending. Cash is but a physical manifestation of a certain number (1, 5, 10, 20, 50, 100) that was issued by the US Government. Today, paper US currency is issued to meet bank customers demand for cash. In other words, first the US Government spends by crediting bank accounts with numbers (1, 5, 10, 20, 50, 100). Those numbers sit on an electronic spreadsheet called a “reserve account”, and they move back and forth between reserve accounts held at the Federal Reserve, ensuring that payments clear. Bank customers demand cash, so the US Government (The Bureau of Engraving and Printing) prints paper dollars. When a bank like Chase requests $2 million in cash, the Federal Reserve deletes the number 2,000,000 from Chase’s reserve account and then ships $2 million in cash to Chase. Chase then sticks the $2 million in cash in its vaults and then hands the paper dollars to customers when they ask for cash. Put simply, the US Government converts numbers in reserve accounts into pieces of paper which enables bank customers to carry around that number and buy things.
The US Dollar is a monetary instrument. Gold, itself, is not a monetary instrument, because certain things are absolutely required for something to be a monetary instrument. One, you need an issuer. Two, you need the issuer to declare a face value. Three, you need the issuer to accept back what it issues as payment for something. Gold comes from the Earth, but the Earth does not declare a face value to gold, nor will the Earth accept gold back as payment for something. Man, however, can make a monetary instrument made of gold. He can strike gold coins, stamp a face value of $50 and the issuer’s identity, “The United States Government” on the coin, but the gold in the coin is not the money thing, the coin itself is the money thing. When the US Government taxes (accept back what it issues as payment for taxes), the object of the taxation is the $50, not the gold. So, a US $50 gold coin is a monetary instrument, but the gold contained in the coin is not the monetary instrument.
When discussing the gold standard, some will ask what the purpose of the gold peg is. I’ve talked about the intent many times. Firstly, people will tell you that it provides “intrinsic value” to the dollar. Yada, yada, yada. Nice story, tell it to Reader’s Digest. The “intrinsic value” argument is the “Gold Bug” public relations gimmick to gull the public into thinking that a fiat dollar is inherently dangerous. Secondly, people will tell you that pegging the dollar to gold is ideal because it gives the dollar stability, reducing the likelihood of recessions.
Gimmie an “L”! Gimmie an “O”! Gimmie an “L”! What’s that spell?
A gold peg actually introduces a recessionary bias. When the US Government pegs the dollar to gold, it fixes the dollar to equal a certain amount of gold, and then must agree to convert dollars to gold on demand at that fixed exchange rate. This act necessitates two things:
1.) Keeping a supply of gold on hand to facilitate the exchange
2.) Keeping the amount of US Dollars in circulation consistent with the supply of gold on hand
If there is never enough gold on hand necessary to expand the currency in circulation to address domestic unemployment, then the gold peg introduces a recessionary bias. The only way out of the bias is to literally dig up more gold, or obtain more gold through international trade settlements. As to the latter, The US would have to export its production, rather than consume it itself, and other nations would have to buy more US goods and then ship gold to the US to settle the transactions. This, then, would reduce the gold supplies of the foreign nations, reducing the amount of their domestic currencies in circulation, thus introducing a recessionary bias in those nations. That’s the very definition of madness, not stability.
The Function of a Currency Peg
The purpose then for a peg is to act as an anchor for the currency. With a gold peg, or indeed any peg to a currency, there are intended purposes, and then there are also secondary unintended purposes that are a direct result of the former, which I will discuss presently.
Right now, at this moment, the US Dollar is not pegged to anything. It is fiat. Federal tax drives the demand for the US Dollar. That being said, you can peg the US Dollar to anything you’d like – it could be gold, silver, copper, diamonds, Picasso paintings, or even labor. For today’s discussion, we will consider a peg to labor.
There are a few similarities between a gold and labor peg, but there are also some stark differences as well. Unlike with gold, when you peg the currency to labor, there is no fixed exchange rate and so, the US Government does not stand ready to exchange US Dollars for human beings on demand. In other words, the US Treasury will not give you a bunch of human beings in exchange for your US Dollars. Furthermore, you do not ship a great swath of your labor force overseas to settle international trade payments. Rather than board aircraft and ships bound for an exciting life working in various foreign nations to support those currencies, the workers get to stay put. However, just like a gold peg, with a labor peg, the amount of US Dollars in circulation must remain consistent with the labor supply. Any federal deficit spending that is persistently beyond the labor supply can become inflationary, because once all available labor is employed, federal deficit spending can no longer result in increased output unless the US Government relaxes immigration standards, allowing more workers to flow into the United States. This means, quite clearly, that when you peg the dollar to something, that something must always be fully employed.
What is Employment?
Most people think of employment in terms of a person who has a job. And that would be correct. But there is another sense to the meaning of the word that we must understand. In terms of a currency peg, when we say “employment”, what we mean is “to be used”. For example, gold doesn’t clock in at Walmart, stock some shelves and then receive a paycheck. See what I mean here? When you peg the US Dollar to gold, you are employing gold as a currency anchor. Therefore, any and all gold that the US Government can get its hands on is 100% guaranteed to be put to use. Let’s clarify this realty using what we’ve discussed so far.
As we’ve mentioned, when you peg the US Dollar to gold, you need a supply of gold on hand at all times. You also must keep the amount of US Dollars in circulation consistent with the gold supply on hand at the fixed exchange rate. If the amount of gold on hand drops, then the amount of currency in circulation must also drop. If the amount of gold on hand increases, then you can increase the amount of currency in circulation. In other words, by pegging to gold, you automatically create a must-have situation for gold. Every ounce of gold that can be found must be put to use (employed), because it is the anchor for the currency that drives the monetary economy. Hence:
Pegging the US Dollar to gold means full employment for gold.
Pegging the US Dollar to British Pounds means full employment for the British Pound in the US.
Pegging the US Dollar to silver means full employment for silver.
Pegging the US Dollar to hamsters means full employment for hamsters.
Pegging the US Dollar to Kalamata olives means full employment for Kalamata olives.
And pegging the US Dollar to labor means full employment for humans.
A Universal Basic Income, or a simple Basic Income Guarantee do not peg the US Dollar to anything. Essentially, they work to increase aggregate demand. They contain no inflation anchor, real or nominal. A Job Guarantee, on the other hand, actually pegs the US Dollar to labor. Human labor becomes the anchor for the currency, and as we now understand, should the US Government initiate a federal Job Guarantee, it would be pegging the US Dollar to labor, effectively forcing a situation of full employment in the United States. Now then, let us ask:
What’s one thing that corporate America, the 1% and Wall Street love more than anything?
What’s one thing that corporate America, the 1% and Wall Street have a profound hatred for?
What’s one thing that corporate America, the 1% and Wall Street simply will not tolerate?
Say it with me: A situation of indefinite full employment.
Do you understand me?
When you demand a federal Job Guarantee, you are threating to peg something that they absolutely adore (US Dollars) to something that they absolutely despise (labor), and they are going to demand that the politicians on their payroll reject the Job Guarantee in favor of another scheme. In this case, that other scheme, which is far more palatable to corporate America, the 1% and Wall Street is the Basic Income Guarantee.
Just like the political talking points concerning Social Security, Medicare, and the national debt that are handed down from think tanks, to the media and into the mind of the public, so are the talking points in support of a Basic Income Guarantee.
Think Tank: “Automation means that labor is no longer necessary.”
Media: “Is automation making human labor no longer a necessity? Experts say, yes.”
The Public: “Automation eliminates the need for people to work.”
Think Tank: “With Automation reducing the need for human labor, it is time that we consider a Basic Income Guarantee.”
Media: “Has the time for a Basic Income Guarantee come? Experts say, yes.”
The Public: “The solution is a Basic Income Guarantee.”
When the subject of a Job Guarantee comes up, we suddenly see a rash of virulent opposition, pushing the Basic Income Guarantee as “the” solution for the modern day.
Economist/Basic Income Proponent: “Automation has eliminated the need for people to work”, “A Job Guarantee is ‘make-work’, ditch-digging, useless production”, “Infrastructure work can operate countercyclically, you know”, “These people will not be engaged in useful, market-based production like food, or manufacturing, so why attach a work requirement? What’s the point? Just hand people the money”, “The US Government providing jobs is socialism”, “Look, the private sector is the innovator. Government jobs are waste”, and so on and so forth.
When we write lengthy rebuttals to these papers from standalone basic income proponents who oppose a Job Guarantee, we are arguing against a bunch of nonsensical talking points that are intentionally designed to smear the Job Guarantee proposal because it pegs the US Dollar to labor. At the root of the issue, corporate America, the 1% and Wall Street simply do not want the US Dollar anchored to labor, because they would be forced to accept a return of sustained full employment. Put simply, if the US Dollar is anchored to labor and you try to cut funding for the Job Guarantee in a political effort to end full employment, you then destabilize the US economy, and everyone will know exactly who is to blame. On the other hand, a Basic Income Guarantee is quite doable, and hell, if one day we raise it to a living wage and the Basic Income Guarantee does become inflationary, that’s even better – Corporate America, the 1% and Wall Street can blame the evils of federal spending.
A standalone Basic Income Guarantee without a Job Guarantee as “the” solution, is a steaming hot plate of status quo served with a side of status quo. There is simply nothing progressive about the Basic Income Guarantee when it is used in this manner. There is nothing intrinsically wrong with a Basic Income Guarantee at all. The initiative can easily be combined with a Job Guarantee, but politicians refuse the proposal, because the Job Guarantee pegs the currency to labor.
That is why the Basic Income Guarantee is all the rage, promoted as “the” silver bullet solution, while the Job Guarantee proposal goes ignored by national governments.
It’s the peg.