$10,000 Public Finance Challenge

Manitoba Party’s $10,000 Public Finance Challenge

The Prize – $10,000 in Canadian funds.

The Claim – That it makes no difference whether a community has its government borrow from or tax resident citizens to fund public expenditures.

The Challenge – Find the flaw that defeats the proof and refutes the claim.


In watching the video do note:

1. That Government does not fund Government.

2. That Government’s deficit is the whole of public expenditures, and not simply expenditures beyond tax revenues.

3. That taxpayers or resident citizens, and, specifically, the aggregate of their assets, property, incomes, and wealth, fund government or rather public expenditures.

4. That one must examine this aggregate of assets, property, and incomes of resident citizens, or what I term ‘that which funds government’, to arrive at proper and reasonable conclusions in Public Finance theory, and not the finances of an entity that has no such assets.

5. That such an examination reveals that creating or adding to a public debt, adding interest to public debt, and reducing public debt does not alter the aggregate of ‘That which funds government’, if government borrows solely from resident citizens.

6. That every premise of this argument follows reasonably and soundly if one accepts the first premise: “That Government does not fund Government.”


The Manitoba Party wishes to present a very interesting but obscure economics idea and proof in its inquiries into Public Finance Theory. Having been rather taken with this insightful proof and conclusion, we thought we should share it with fellow party members and visitors. Because of its profound implications the Manitoba Party offers CDN$10,000 to the person able to find the flaw in this startling discovery as all our efforts have failed. Perhaps, one of you shall have that elusive victory. Best of luck to all challengers.

One of the principals of the Manitoba Party has identified an errant premise in economics that has long marred its theories and practices, specifically those of Public Finance. He argues that modern Public Finance theory presumes that Government funds Government. Yet as we all must undoubtedly concede, the evidence confirms in abundance the very opposite: Government does not fund Government. Government does not provide the funds to pay its bills, does not settle its debts, and does not fund public investments. It never has and it never will. Government has not contributed 1 dime to its expenses since its inception. If one were to account the finances of Government, it would show full indebtedness to the Taxpayer for all funds expended and debts incurred from day 1.

The task of funding government has always fallen to the Taxpayer. So, in order to fully understand public finances, one must apply this long neglected fact. Given that a community of Taxpayers funds government, it is their finances: their combined assets, incomes, property, and money one must examine in order to answer basic questions about funding public expenditures.

In doing so, one easily discovers that it makes no difference whether a community taxes its citizens or borrows from its citizens to fund public expenditures.

To prove this contention we shall examine the question of a deficit. Some think the cure to a deficit, a shortfall in tax revenues over expenditures, is to have the government further squeeze this sum from beleaguered taxpayers and, thereby, dispel all financial troubles. This erroneous cause and solution will have only aggravate the problem.

The Government of Manitoba has approximately $13 billion in expenditures and tax revenues of about $12.5 billion. The figures may be more or less because governments love to fiddle. However, working with these numbers the deficit would be $500 million.

Let us say that the Manitoba Government requires $500 million to fund its deficit. It can tax or borrow the funds.

If it tax, $500 million leaves the bank accounts of Manitoba taxpayers and the deficit is funded.

If the government borrow, strictly from Manitobans, $500 million leaves the accounts of Manitoba resident lenders and the deficit is funded.

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The same $500 million leaves the bank accounts of Manitobans whether taxed or borrowed. However, there is a little extra paperwork with borrowing. A bond of $500 million is issued. This item counts as a public debt, liability, or claim against the combined property, assets, incomes of Manitobans. It equally counts as an asset among that combined property, that which funds government, because resident lenders now hold the bond or paper.

Aggregate Finances of Manitobans

Asset
     Liability
+ $500 million + $500 million

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So, with an equivalent increase in the size of Manitobans’ assets and liabilities of $500 million, have the aggregate finances of Manitobans changed? Not at all.

If one were to add interest into the mix say of $100 million, then the aggregate assets of Manitobans rise by $100 million as do their aggregate liabilities.

Aggregate Finances of Manitobans (Bond and interest)

    Asset     Liability
    $500 million     $500 million
+ $100 million + $100 million
    $600 million     $600 million

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So, have the aggregate finances of Manitobans changed? Not at all.

And if the Manitoba Government should decide to pay off the public debt of $600 million by taxing, $600 million is taken from the bank accounts of resident Manitoba taxpayers and moved to the bank accounts of resident Manitoba lenders. And the $600 million asset of bond and interest is extinguished simultaneously with the equivalent public liability.

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Aggregate Finances of Manitobans

     Asset     Liability
– $600 million – $600 million
   $0    $0

So, again, have the aggregate finances of Manitobans changed? Not at all. All this happens within the wealth of Manitobans. At the individual level there are changes, but not at the aggregate level.

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So, as long as we restrict Manitoba Government borrowing to Manitoba residents, creating a public debt, adding interest to it, and reducing that debt leaves the finances of Manitobans unchanged.

So, as demonstrated, a deficit for the wealth of Manitobans is not a problem.

There is an insight whereof its acknowledgement and insertion into present theory would completely alter the nature and practices of Public Finance and unleash an immediate and perpetual torrent of wealth for the citizens of a jurisdiction implementing it.

Do recall that government does not fund government. Thus, whether taxed or borrowed, all funds expended by government must be considered as financed by deficit. Therefore, the deficit of the Manitoba Government is not merely the negligible sum of $500 million, but rather the gargantuan sum of all its expenditures or $13 billion.

By repeating the foregoing example with the numbers altered to reflect the true deficit, the result remains the same. $13 billion dollars leaves the bank accounts of resident citizens, taxed or borrowed. And, in borrowing strictly from Manitoba residents, the act of creating a public debt of $13 billion, adding interest to that public debt, or subsequently reducing or eliminating that public debt does not alter the aggregate finances of Manitobans, or those assets which fund the Government of Manitoba.

However, by opting for full Borrowing of all public expenditures instead of Taxation, the Government of Manitoba would have to borrow funds instead of eagerly and obnoxiously confiscating them, daily entering the financial markets in pursuit of funds. By turning financial slaves into public bankers the people, the resident lenders, will become the arbiters of which public expenditures are worthy and deserving of funding, and which are unworthy and deserving of rejection.

With the public banker firmly in charge of public expenditures, the Manitoba Government would no longer operate upon the principle of expenditure. Thus, entire programs and departments would be scrutinized and assessed for value and adequacy of returns. The authorities would terminate all politically useful, but dubious, harmful, and barren programs and regulations. Favourable regulations, programs, protections, loans, and payments to politically influential and powerful industries, firms and individuals would be identified and eradicated. If malfeasance and mal-administration should occur or persist, the people will requite neglect and derelictions by depriving government of the means to operate until the agents of waste or corruption have been identified, removed, charged, punished, or imprisoned.

With the petulant and perpetual public banker now in charge, one would expect the costs of the Government of Manitoba to decline and drastically. Let us say they almost halve from $13 billion to $7.0 billion.

Thus, the residents of Manitoba will gain an asset of $13 billion consisting of $6.0 billion in cash and $7.0 billion in public bonds held. And Manitobans will incur a public liability of $7.0 billion in bonds issued.

 

                 Assets Gained              Liabilities Incurred     
+ $7.0 Billion public bonds held + $7.0 Billion public bonds issued
+ $6.0 Billion cash
    $13 Billion     $7.0 Billion

 

And do recall that the deterrent effect of Taxation would evaporate with its abolition. If the increases in productivity and growth from shedding deadweight costs of Taxation for citizens and firms are calculated and included, the wealth of the province would surge steeply. The return of absconding wealth, assets, able individuals, and productive corporations from formerly light climates of Taxation, the eradication of all constraints upon, impediments to, and distortions of investment, industry, and labour, the elimination of favoured relationships and monopolies that shamefully elevate prices and enhance profits for the select at the expense of the common, liberation from the expensive apparatus of tax preparation and advice, the elimination of onerous and unnecessary regulation, an end to surcharges and constraints upon consumption, an influx of external investors and investment, the end of disparities and inequities in payment of tax, and the erasure of many other unnecessary practices sired by this corrosive instrument should all yield a collective and immense largesse.

It is very conservatively reckoned that the abolition of Taxation, by diminishing costs and spurring profits, would enlarge the assets of the residents of Manitoba by at least a further $5 billion per year.

 

                   Assets Gained               Liabilities Incurred     
+ $7.0 Billion public bonds held + $7.0 Billion public bonds issued
+ $6.0 Billion cash
+ $5.0 Billion eliminated deterrent
   $18 Billion     $7.0 Billion

 

Hence, the aggregate assets of Manitobans shall rise to $18 billion and incurred liabilities remain at $7.0 billion, leaving the wealth of Manitobans greater by $11.0 billion. Dividing this figure by the population of the province leaves the increase in wealth of every Manitoban at approximately $10,000 for every man, woman and child, or on average $40,000 per household, in just one year.

If this is agreed, then it is easily conceded that Taxation, a penalty, and Borrowing, an inducement, possess little equivalence between them as a means of raising funds for public expenditures. Taxation bears immense costs in deterrence and government squander that disappear under Borrowing.

So why does a community tax with all its inherent and punishing costs to fund public expenditures when it can borrow, escaping these financial ills, and unleash great wealth for its citizens?

This is our $10,000 challenge: that it does not affect the combined assets, property, incomes of Manitobans, i.e. that which funds government, whether the province of Manitoba borrows from or taxes its citizens to fund government deficits. So submit the flaw in our reasoning and gain the prize.

If unable to discover the elusive flaw in our reasoning, perhaps the idea will be of some service in rendering the stagnant field of economics once again fertile.

26 Comments

  1. Monique on January 23, 2016 at 10:54 pm

    How will you conduct this borrowing from the citizenry of Manitoba? Where will you sell bonds? Will you sell bonds for specific projects? For instance will there be highway 256 extension bonds and Bishop Grandin resurfacing bonds or Street maintenance bonds or can you purchase a combination of any of these and more. How will you get consensus on expenditures? Do you have some direct loan and interest idea? Will it be fund raising? Will the government have to sell us on the expenditure before there is a loan or sale of bonds effected.
    Presently, we are suffering under the pressures from Mayor (photo-op) Bowman to fund a plethora of Aboriginal (woe) residential school remembrance and celebratory projects. I know these are city projects, but photo-op is very adept at getting the province to pay for city nonsense. For instance the province is funding a community project at $200,000 x 3 years = $600,000 which is using “workers already in the community” to implement. Seems to me there is already a program. Where is this money going. I haven’t approached the province to ask yet because I found this on the Wpg Police site and they won’t talk.
    Is the idea that, if a project is redundant or unnecessary, no one will buy bonds to fund it, so it will be discarded. Or is it that the province won’t even consider this in the first place because it cannot be supported by a viable business plan and therefore won’t be accepted by Manitobans. I want to be on the ground in decisions regarding big and small ticket expenditures. There are no drop-in-the-bucket expenditures as far as I’m concerned. All expenditures are important, they all cost, they all add-up.

    • economart on January 24, 2016 at 1:20 am

      Greetings,

      The Government of Manitoba shall sell bonds strictly to the people of Manitoba, to whomever wishes to lend money, by wading into the financial markets with the interest rate settled upon by the forces of supply and demand. The bonds probably will be sold for general purposes, though the Government may wish to sell bonds for some specific projects as a test of popularity. If financing is successful at an acceptable interest rate, the project goes ahead.

      The worth of a project should be decided by cost and benefit analysis, quite an alien concept in public expenditure today. There is no measure of a good government expenditure. One is never sure that the funds expended generate returns surpassing all costs. To divert large sums of money, labour and materials in order to dig holes in the morning and fill them up in the afternoon generates great costs without any return to the citizens of the jurisdiction. Using the same funds to train electrical engineers or plumbers will generate some return. So the Manitoba Party will endeavour to ensure that funds, diverted from otherwise productive purposes, shall generate returns exceeding all costs.

      Does that answer your question?

      Regards,
      The Manitoba Party

      • Chad on January 24, 2016 at 11:39 am

        The problem with “The worth of a project should be decided by cost and benefit analysis”, and therefore selling bonds for a specific project is, in the case of building a bridge (or underpass) to either improve traffic flow, or provide “flood proof access” to an isolated, or semi-isolated community, only going to go forward if there are enough people capable of paying for the entire cost of that project. In the example, if you want to fund a project to build an underpass on Waverly, there is direct benefit to a neighbourhood and surrounding area for say 200,000 people. The cost of the project is say $2 million, which equates to $10.00 per person, however building a bridge that would provide year-round access (or maintain access during high water events) to an otherwise isolated community of 2000 at a cost that would be similar, but even at only $1 million, would then be $500. SO, that means that projects benefiting big population centres would have a much greater chance of proceeding, or projects benefiting wealthier areas of the city would be funded over poorer areas.

        • economart on January 26, 2016 at 3:36 am

          Greetings Chad,

          I did read through your thoughtful email. Very good questions.

          It is cost and benefit analysis. The factors involved are many. One may build many different bridges to service communities. I would expect that the cost of a bridge to service a small community of 2000 in the north need not be as high as one servicing a community of 200,000. It depends upon the volume of traffic or goods coming across and the frequency of that traffic as well as the ground and weather conditions. In a smaller community, the value of the real estate or property in the community and the need to live in a remote area where supplies are intermittent and food scarce should also form part of the analysis. Why are they living so distant from good and reliable sources of supply? Are their alternatives routes of entry via water, rail, air, and land? Are their alternative methods of providing food and shelter? If its a remote mine that justifies the cost, then fine. But maybe the mine owner should build the bridge.

          If the local community has insufficient funds, then bonds could be issued by the Province of Manitoba at some rate of interest instead of by the municipality if the project is justified. There are many components in the decision to construct and erect a bridge as you say. The facts will determine what is done. Sorry to be so vague.

          It is not that projects would be more likely to proceed in wealthier areas. If a local wealthy community requires some facility, then that community is free to fund it, but those resident in other communities are not compelled to do so. And poorer areas are free to fund their desired projects. I would expect the populations of poorer communities to be of greater density than those in wealthier areas. And do not forget, people will lend for a return if the interest rate is enticing. A shortage of funds in one place could be remedied by enlarging the area of subscription and increasing the interest rate offered. It depends upon the nature of the project and its need, and each case will be different.

          You ask good questions, but without more information I cannot give definite answers.

          Regards,
          Gary Marshall

  2. Ian McDonald on April 8, 2016 at 6:04 pm

    The problem I see with this idea is that there would be a need to continuously borrow ever increasing amounts in order to repay previous investors. so, when your $7 billion in bonds mature (let’s call this term 1) after say 5 years at 3% apr, that’s (approx) 8.1 billion owed to investors (before any further projects may be funded).

    that being said a hybrid tax/bond can work long term, say a flat rate income tax with no refunds (eliminating waste in CRA…..)……

    • economart on April 10, 2016 at 12:51 am

      Hello Ian,

      Thank you for taking the time to write in.

      You are quite correct. The debts would rise over a period of time, actually indefinitely, along with the interest payable. But that is not the problem. It does not matter what one’s debts are, it matters what the value of the assets are that back the debts. If superior, then a creditor is satisfied that the loan is secure. If inferior, then security is not assured.

      If the $7 billion in debt created $18 billion in assets for a certain corporation, then none are anxious about the security of the loan. Interest allotted to bondholders is interest that counts among the assets of the corporation. The $7 billion in bonds and $1.1 billion interest counted as a public liability against that which funds government also counts as an equivalent asset in bond and interest among that which funds government. So there is no change in that which funds government or the aggregate assets, property and incomes of resident citizens.

      Now of the $18 billion in assets created, $11 billion will go on to generate all sorts of business investments, interest, and returns, money that was formerly squandered by government or financial opportunities that were ignored because of the punishing demands of Taxation.

      I hope that answers your question.

      Regards,
      Gary Marshall

  3. Danial Forster on September 14, 2016 at 9:42 am

    One problem is that we are assuming that everyone will be 100% behind this idea, without any backup information or test data to prove it.
    Assuming everyone is going to back it is a very rash thing to do, as much as assuming there is only one problem that one person is going to find and promise $10,000 as an award.
    You are assuming there is only 1 thing wrong with it, without trying it there could be 100 things wrong with it and you could end up owing $10,000X100.

    To test it 100% you would have to start a brand new country where this is the initial working of government funding and also restrict the amount of money people can spend so they can afford to invest in the projects of the government. Then you could use that data to convince enough people to pass legislation, but you still will have people against it and some will be concentrated in some areas that will say “No” to every project.

    People are fairly unpredictable and that’s what makes us individuals, and as the saying goes, “Assuming makes an ass of you and me”.

    P.s you may want to adjust your prize wording to maybe, “The first person”, instead of the open door it may save you some $’s haha.

    • economart on October 6, 2016 at 1:49 pm

      Hello Danial,

      I did receive your email. Thank you for taking the time to respond.

      So you do not dispute our claim that it makes no difference whether a community has its government raise funds for public expenditures by Borrowing or Taxation. That is good to hear.

      You do raise some questions about the operation of the idea. I have some idea of how things shall appear post Taxation, but it is uncertain how things shall end up definitively. Practice is everything. One need not start a new country to implement the idea. Starting with the abolition of Taxation in one province or municipality will suffice, and it should progress from there.

      There may be a number of objections, but having done this a very long time, there is probably only 1 devastating flaw. It will center upon the idea that government does not fund government. If true, and I think most are agreed upon it, then all I say naturally and logically follows. If false, then the opposite. As it is a certainty that government does not fund itself, as confirmed by the presence of Taxation, then I think the idea safe from attack. But we may say “Up to $10,000” as the prize to satisfy those who might argue your point.

      Regards,
      Gary Marshall

      • Danial Forster on December 14, 2016 at 11:44 pm

        The problem is that you can’t test it in a real-world situation, someone will taint the test and you will not be able to get the result you want. Individuality is a gift and a curse, a gift in the sense in that everyone can tackle a problem and solve it in many different ways, and a curse because it keeps us from being able to work together easily.

        To assume that this has not been tried out over the history of humanity is to be ignorant of how far we have come. Somewhere along the historical line, this was probably tried, and probably failed, and may not have been because of this specific governmental “tweak” but obviously it was not strong enough to make the cut to what we have now.
        Instead of concentrating on flipping our financial government project stimulus on its head, a person should look at the inefficiencies that plague our system today.

        If I were to run in this party, I would make it my primary concern, and then when we have the time and the budget to do so, then maybe we can start looking at experimenting new systems. Only then will you find THE problem with it, still curious why there might be only one?

        One more question I do have, who is paying the $10,000 and how?

        But when you get down to it, individuality is what makes us human, and amazing. If we were all the same, then we would be in a Brave New World.

  4. Alan Myers on September 14, 2016 at 2:57 pm

    CHALLENGE TO THE PUBLIC FINANCE THEORY

    You wrote –
    “Government does not fund Government. Government does not provide the funds to pay its bills, does not settle its debts, and does not fund public investments. It never has and it never will. Government has not contributed 1 dime to its expenses since its inception. If one were to account the finances of Government, it would show full indebtedness to the Taxpayer for all funds expended and debts incurred from day 1.”

    Response –
    Perhaps your position is valid for some countries, however, In the United States, this is not the case. The U.S. Mint, mints coins. These coins are transferred to the Federal Reserve System (FED) in exchange for the credits being added to a U.S. Treasury (UST) reserve account held at one of the 12 FED banks. To satisfy the costs of acquiring assets or satisfying expenses, the UST merely has some of its reserve account credits transferred to another bank in satisfaction of the required payment. Therefore, and though minimal, the UST does contribute more than a dime to satisfying the national expenses.

    You wrote –
    “The task of funding government has always fallen to the Taxpayer. So, in order to fully understand public finances, one must apply this long neglected fact. Given that a community of Taxpayers funds government, it is their finances: their combined assets, incomes, property, and money one must examine in order to answer basic questions about funding public expenditures. In doing so, one easily discovers that it makes no difference whether a community taxes its citizens or borrows from its citizens to fund public expenditures.”

    Response –
    Major funding for government comes from taxation and borrowing. Taxes are paid by citizens and businesses within the region covered by the government. Borrowed funds can come from the same internal sources and they can come from people, businesses and countries outside the region covered by the borrowing government. This is just one reason why it does matter whether a government or community taxes or borrows.

    What is not being discussed is who creates the money, how is it created, for whose benefit is the money created and who receives the benefit for how the supply of money is controlled.

    In the modern banking systems of the world, money is created by banks for their sole and ultimate benefit. When a bank makes a loan, it creates money. However, the amount of money created and added to the money supply is LESS than the debt and interest owed back to the bank. Therefore, the money supply, by design, is short. When money is repaid to a lending bank, the money is extinguished, which means the money goes out of existence. In this type of monetary system, someone somewhere must continue to borrow to keep sufficient money in the money supply. Otherwise, the monetary system will eventually collapse because the amount of money in the money supply is too small to keep the economy going. This is how we got the Great Depression. Don’t think so? Here is what some well informed people have said:

    a) What did Louis T. McFadden a former Chairman of the House Banking and Currency Committee say about the Great Depression? “The depression was not accidental. It was a carefully contrived occurrence ….The international bankers sought to bring about a condition of despair here so that they might emerge as rulers of us all.”

    b) What did Milton Friedman, a Nobel Laureate say about the FED? “The Federal Reserve definitely caused the Great Depression by contracting the amount of currency in circulation by one-third from 1929 – 1933.” The FED caused the Great Depression and maintained it.

    Anna Schwartz, an American economists that worked with Milton and in 1963 they wrote the book – A Monetary History of the United States, 1867–1960

    c) What did Dr. BB say in 2002 about what Milton said? Let me end my talk by abusing slightly my status as on official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

    We don’t need to decide whether a government borrows or taxes or both. What is needed is a completely different type of monetary system. We need a national monetary system that serves the people of the nation and not privately owned run-for-profit banks. The way this would be accomplished is to have money created for the benefit of the people and not the current creators of money, the banks.

    I propose that a nation have its own “national bank”, which would most definitely not be a central bank. This national bank would be the sole creator of money in the national monetary system. Regular banks would do all they are doing now except create money. Which means, when they make a loan they make it out of their own pocket.

    The national bank would create money and allow the national government to spend that money into circulation to pay for the goods and services its approved budget has allowed. Therefore, the national government would not have to tax or borrow to pay for what it needs and to provide its required services. This is how a national monetary system would work for the benefit of the people.

    The national bank would report directly to the people on regularly scheduled intervals in known methods. The national bank would be controlled by directors from each state or region within the nation. The national bank would control the amount of money in the money supply so as to not have any inflation.

    However, should a national government need to financially respond to a national crisis, the national bank would create, with the approval of the state directors, the additional money needed by the national government in order to meet the financial needs of the national crisis. To prevent inflation, after the crisis is over, a sales or consumption tax would be put in place, different rates for different areas, as needed, to reduce the amount of money in the money supply until the money supply was in balance with the overall economic activity of the nation. This would help prevent inflation.

    The Federal Reserve System targets a 2% inflation rate, which means, if successful, the purchasing power of the U.S. dollar decreases 2% every year. And this is considered a success?

    Keep in mind that taxation is profit taking and not profit making. Therefore, no governmental entity should be allowed to borrow because the entity has no ability to generate the profits needed to repay the debt. This was Bernie Madoff’s problem. The United States national government debt of more than $19 trillion is the world largest public Ponzi Investment Scheme. Like all Ponzi Schemes, it too will fail.

    Four fundamental questions must be answered in the positive to know if a monetary system is proper and beneficial to the people in the country that the system is intended to serve:
    a) Does the money creation process benefit the people? and
    b) Does the monetary system control the amount of money in the national money supply for the benefit of the people?
    c) Can the money supply be expanded in an emergency with proper approval?
    d) Does the monetary system prevent a government from creating Ponzi Investments?

    I believe I have outlined a much more proper and sustainable monetary system than your Public Finance Theory. Your PFT does not address any of the 4 fundamental questions. Therefore, I believe your PFT is flawed and that the monetary system I propose is superior, sustainable and will serve the best interests of the people of a nation. I therefore, make claim to your CDN $10,000.00 prize.

    Sincerely
    Alan Myers, CPA

    • economart on October 6, 2016 at 1:51 pm

      Hello Mr. Myers,

      Thanks for responding and so quickly. I did read through your email.

      You clearly possess a good deal more knowledge of monetary matters than most people, so I decided it best to take a little more time in forming a response.

      You are correct about the currency provision of the Fed. But I am not clear on how a government agent such as the Fed, awarded a monopoly on the provision of a certain good, currency in this case, contributes to the expenditures of government. Its like suggesting that a government agency or department, exploiting mineral rights ceased by force or legislation from property owners, contributes to government revenues. That is one way of looking at it. But making money derived from the property taken from others or a privilege granted to a sole entity is not what I would call enterprising.

      I do remember some years ago certain Canadian banks having issued their own currency or bills, until of course a monopoly provision arose in this country. Bereft of said monopoly provision what would be the contributions of the Central bank to public expenditures? That is a good question.

      On the issue of who pays taxes and subscribes to government bonds, you are correct. In the present system people and firms within and without a jurisdiction contribute to the taxes of that jurisdiction. Firms are owned by people and that asset forms part of their combined property. I am just using the idea that government borrow solely from withing its borders as a premise in a theoretical proof in order to make my point. How it shall work in practice may be different. Certainly people within Manitoba own bonds issued by other provinces, states, municipalities, and nations. And one could look at it as a balance. Its just that my proposed model simplifies the present understanding of public finance greatly as it does make prudently clear that a government should endeavor generally to sell its bonds to those persons within its borders and not beyond them.

      Now you make a number of assertions on money creation that I disagree with. Money is not created for the sole benefit of banks. Depositors also earn a return through the process of money creation. Not as much as the banker, but that is business and the reward of providing a service. Borrowers also benefit from the process as they receive funds immediately with which to invest or make purchases with superior returns rather than wait years to accumulate the funds on their own and perhaps squander the opportunity. No one forces any person to borrow. It is a voluntary transaction with benefits agreeable to both lender and borrower. Otherwise, why do it? So the benefit in borrowing generally outweighs the cost, leaving greater wealth. Your focus erroneously is on what money is, not on what money does and creates. So with increasing wealth and population there will always greater demands upon the banking system for the creation of more money with which to invest.

      There were many reasons one may attribute to the depression of the 30’s. To suggest that all powerful bankers sought out and devised their own destruction with the consequent contraction in the number of banks seems a little strange. Sometimes turns in markets can render the wisest and most agile among us penniless, idle and impotent.

      You may propose a different monetary system. Many others have. But I think they shall always run into the same problems that we presently have in varying degrees. A national bank is just another big government effort to deprive people of or erode the value of their money The old Soviet corpse had such a bank where the state pretended to pay people and the people pretended to work. We presently have a government that works just as your proposed bank. Mercenary representatives so riddled with the desires and pursuits of special interests that neglect their duties to the general public. And a national bank shall be different? It directors free from influence or financial persuasion that infect their political brethren, that shall always work in the interests of the people! In such a system how do you propose to stop government from becoming as large as it was in the Soviet Union or is in North Korea? How does the national bank prevent the government from dropping off its bonds and receiving the funds in its account? Tried and failed, numerous times. The private banks are usually very good at determining a good investment. Not so the public banks.

      I would also argue that the US Federal banking assets total about $13 trillion. US Government expenditures are $4 trillion annually. Adding $4 trillion in reserves to the banking system every year will leave the supply of funds perpetually elevated, depriving savers of the incentive to save. Japan has followed this course for about 26 years and greatly harmed its economy and people financially. With the supply of money so incredibly large given the moderate demand. there is a good reason they have negative interest rates.

      I prefer to work within the system we have and get rid of the nefarious influences and actors that ruin it for the rest of us. And the system of raising funds for public expenditures proposed puts power directly in the hands of the general public, in the hands of public bankers. The public will become the arbiters of what is funded and what is not. Violate that trust, and the government will find itself in difficult circumstances trying to borrow from those that will not lend. Corruption and special interests effectively disappear as does government squander. And deadweight costs of Taxation will disappear also. Government will be compelled by the public bankers to justify its expenditures. Cost and benefit analysis will become the tool that provides invariably a yea or nay on every such expenditure.

      The US Government has not paid one dime of the debts incurred since its inception. The US Government is the agent or representative body of its people or the citizens of the United States. Those debts will be settled by the property, assets and incomes of US resident citizens, not by an entity that has no such funds or property. Thus, the $19 trillions of debt are backed by the total assets of US resident citizens. I thought my video made that clear. It is not a ponzi scheme when assets exceed liabilities for any individual or corporation. When liabilities exceed assets, you are of course correct.

      So to answer your questions:

      A) Yes. But there are problems created by public entities within a system of Taxation or the forced seizure of wealth and property that are all to eager to serve special interests, to limit competition, to use the Reserve system for those special interests, politicians and big government included. These problems disappear or much reduce with the public bankers.

      B) Yes. But again there are many problems with forced seizure by government of the resources of a nation. These problems disappear with the public bankers.

      C) Yes. Especially with public bankers. Not so much when tax revenues dictate actions, which inevitably plunge in time of crisis.

      D) Not under Taxation where government need justify nothing when it must also borrow to cover shortfalls in its quest of ever expanding expenditures. But certainly with public bankers forcing justification of public expenditures.

      Your proposed system is worse than what we have now. It is a recipe for government control of the financial system. And government has rarely proven itself worthy of performing even the most limited of functions. And you wish to place it in the hands of representative bankers controlled by representative politicians! That is your answer.

      Do you still think your claim to the $10,000 worthy?

      Regards,
      Gary Marshall

  5. Darl Friesen on September 17, 2016 at 8:01 pm

    I don’t have a financial background (and that will become evident momentarily) but I can’t help but see this as those who have money will be the lenders and therefore have the decision/ influence and also reap the interest, and those who do not will have no voice. I’m all for making the government financially accountable, but somehow I get the sense that they would be accountable to the Chipmans, the Richardsons, the Aspers etc or to the lending institutions. What am I missing?

    • economart on October 6, 2016 at 1:53 pm

      Hello Ms. Friesen,

      I did receive your challenge, which I believe is more a criticism of the composition of the public banker.

      The biggest investors on the planet are pension funds, which is the pooled retirement money of so many working people throughout the world. They greatly influence the operations of corporations. In Manitoba, one will find the pension funds of public service unions and private corporations looking for any number of opportunities in which to enlarge those pools. Yes, there are a number of wealthy individuals doing the same, but compared with the financial clout of the pension funds, they are the minority. Anyone earning above $70,000 in this province is paying half their income in taxes and elevated prices for any number of goods supplied by or regulated by the government. With the take of government greatly diminished, those people will have far more money with which to save, invest, retire debt, and consume. They will have more money to put in safe securities such as public bonds for the time when they withdraw from their working lives.

      Corporations and banks will not be allowed to purchase those bonds, only resident individuals and the pension funds of resident workers. Of those, some may purchase a far greater share than others. Doctors, lawyers, etc. But in number they are fewer than the bulk of the populace engaged in the same activity. There will be a far greater amount of funds available to borrowers, especially public borrowers. It is highly doubtful that any one group may exert any corrupting influence over the government.

      What I propose is a theoretical construct. What the system would actually look like in practice is difficult to say. At this time, the special interests reign because they may sway the leaders of the government with a pittance compared to the great bulk of the money garnered through force, or by Taxation.

      With Taxation abolished, none is forced to lend. The special interests in seeking favour will have to supply the bulk of the money for public expenditures in return for what must be a slight return. They won’t do it. Financially, it would be disastrous.

      I hope that clears up things.

      Regards,
      Gary Marshall

  6. curious on October 6, 2016 at 9:55 am

    Your offer of $10,000 for a solution would be tempting if you could (1) specify who would be responsible for determining whether it has been satisfactorily answered, and (2) put the prize money into escrow so that the person who provides a solution could be assured of payment.

    If the answer to (1) is that you’ll be the judge of whether the solution is adequate, and (2) is that we have to count on you to part with the money… well, I have my guesses about why nobody has taken you up on this challenge.

    • economart on October 6, 2016 at 1:57 pm

      Hello Mr. Curious,

      I have had a number of people respond to the challenge, on the Party website and on my own website. The answers do become repetitive after a time, and I try to limit the posts to those that offer something different, a rarity these days. There were also a number, some of them eminent in the field of economics, that did not wish their challenge appear.

      The money will be paid out by a principle of the Manitoba Party, myself actually. With all the time I have invested in this idea over the years, it is a great bargain for me to say goodbye to the interminable pursuit for such a small cost.

      I would love to employ an impartial economist to judge of the contest. But the obvious problem is there are none. The unicorn may indeed exist, but one has never been found. But there is always hope. Until that day, we shall have to make do with economists driven more by ideology instead of science. And on such questions, they are all about as good as the next.

      But there really is no need to have some erudite person judge of the arguments against our position. Just as there is no need for a mathematician to judge of the result of adding 1 + 1. The answer is obvious to any person knowing what numbers are. There is no need for an authoritative opinion or some mysterious calculation. The answer is 2 because number theory dictates that it must be 2.

      Now, does Borrowing alter that which funds the government of some jurisdiction any more than Taxation does? The money sought, say $13 billion, leaves the bank accounts of the residents of that jurisdiction whether taxed or borrowed, never to return. With Borrowing there is a little extra paperwork. An asset of $13 billion, a public bond paying a certain amount of interest, is created and distributed among that which funds government, i.e. the assets of residents, specifically those who lend. A liability of the same amount and interest charge is simultaneously created and claimed against that which funds government, i.e. the assets of residents. The asset acquired matches the liability claimed, one nullifying the other. So no difference to that which funds government. So, in consequence, there is no difference between a community having its government tax or borrow to fund public expenditures. Simple reasoning, simple arithmetic. 1 + 1 is 2 and 1 – 1 is 0.

      You may certainly have some queries about repayment and growing debts, just as you may about an eager banker or enterprising corporation in search of lenders, but those concerns lie outside of the proof. I will just say that as long as the government serving the residents of its jurisdiction enhances the assets of those citizens beyond all incurred liabilities, none should worry. Just as a shareholder doesn’t mind that the assets of a corporation grow beyond incurred liabilities. And creating $20 billion in assets through an incurred liability of $7 billion will certainly allay any such concerns. In fact, shareholders would be ecstatic, wouldn’t they?

      By the way, the interest and debt someone cited in an earlier challenge may grow from $7 billion to $8.1 after 5 years. But so would the assets of those, i,e. resident lenders, holding the bonds and in receipt of said interest. So with the addition of interest and debt, have the collective assets of resident citizens or that which funds government changed in the aggregate? Clearly, no.

      Regards,
      Gary Marshall

      • curious on October 6, 2016 at 2:36 pm

        Your basic idea (it being more or less inconsequential whether deficits are financed by taxes or bonds) is not new, if I understand it right. Search for Robert Barro’s work (i.e., the Barro-Ricardo thesis), which makes much the same point.

        If you’re interested in someone taking up your challenge, I might specify formally what your core claims are, and what would have to be disproven to earn your money 🙂

        • economart on October 6, 2016 at 4:09 pm

          Hello Again Mr. Curious,

          My argument is very simple: That is makes no real difference to that which funds government: the property, assets, incomes of resident citizens, whether a community has its government tax or borrow to fund public expenditures. That is the proof given and that is what you must defeat.

          I shall just note that the Ricardian argument does not defeat the proof. It actually confirms it – to a point. The Ricardian Equivalence Theorem as proposed by Barro then takes a rather strange path to an even stranger conclusion.

          What the Ricardian Equivalence Theorem ignores is that there are huge costs in Taxation, in government squander and in its dead-weight costs, that disappear under Borrowing. Thus, a community of residents shall be far wealthier were its government to cease taxing and start borrowing to fund public expenditures.

          I discussed the Ricardian Equivalence Theorem with another fellow sometime back. As mentioned above, I have never understood why this Theorem, laden as it is with blunder after blunder, serves to overturn the argument for the abolition of all Taxation. I could see how one might use it to reject our argument impulsively. However, an examination of the Theorem and its poor assumptions and reckonings, or rather the variant below provided by an able researcher, should squelch this unreasoned impulse for good. This is not a difficult theorem to follow, so all should be able to get through it.

          In the challenger’s own words:

          Let me begin by formalizing the setup and the argument. I will keep it as simple as possible. But before I do this, let me highlight what, in this context, is the distinction between taxes and borrowing/lending (it’s obvious in “real life” but we need an actual formal distinction): taxes are coerced while lending is a choice made by citizens/individuals.

          Setup 1

          There is a government that needs to fund a public good. The cost of this good is ‘T’ and it will generate, let’s say, a flow of services ‘g’ to every member of the community in every period. Note that I am assuming that the government is providing a public good and, therefore, there is a need for a government to begin with (the whole argument is about how the funds from the community should fund the government). Because we are talking about Lending and Borrowing, we need more than one period. Let’s assume, without loss of generality, that there are 2 periods. There is a community that generates/receives income Yct in periods t = { 1,2 }. The argument proposed is the following:

          Scenario 1: Taxes

          The government taxes the community by amount, T, in the first period and produces the public good, g. Thus, the community receives Yc1 – T disposable income and g services in the first period, while it receives Yc2 disposable income and g services in the second period.

          Scenario 2: Borrowing

          The government borrows T from the community in the first period and produces the public good, g. Thus, the community receives Yc1 – SC or rather Yc1 – T disposable income (where SC are the communities savings which turn out to be lent to the government) and g services in the first period. The interest rate r is such that the community wants to lend an amount T to the government. The community would receive Yc2 + T (1 + r) disposable income and g services in the second period if the government actually had resources of its own. It doesn’t. So, to pay back the T (1 + r) to the community, the government needs to levy a tax of the same amount on the community itself. Therefore, disposable income in the second period is Yc2 + T (1 + r) – T (1 + r). Thus, the claim in the challenge that assets are equal to liabilities. This is all mediated by the proposed “key insight” that the community is the one that funds the government so it would need to pay itself the amount that it owes to itself.

          In summary, there are two scenarios covering two time periods. In the first scenario, in the first period the community warrants its government to tax in order to fund a public good, and in the second period the author examines the results as indicated by Disposable Income. In the second scenario, in the first period the community has its government borrow from its citizens to fund the same public good, and in the second period the author describes consequences and required actions.

          In Scenario 1: collective income for a community in period 1 is Y1 and T is the cost of public goods, g. The equation for collective Disposable Income in period 1 becomes Y1 – T.

          With the public investment made and flow of services, g, obtained, the equation for collective Disposable Income in the second time period consists solely of Y2.

          In Scenario 2, the government borrows rather than taxes. In the first period, the equation for collective Disposable Income then becomes Y1 – S where S is savings used to fund the government expenditure of T. So Y1 – S becomes Y1 – T. In the second period, collective Disposable Income becomes Y2 + S ( 1 + R ) where R is the interest rate and S ( 1 + R ) is the public IOU acquired by lenders in funding the government good, g. But, as the author notes, a community debt has also been created in the amount of S ( 1 + R ). So the equation becomes Y2 + S ( 1 + R ) – S ( 1 + R ).

          This equation, Y2 + S ( 1 + R ) – S ( 1 + R ), before taxing and termination of public debt, exactly coincides with the equation found in my proof and verifies the conclusion that it makes no difference whether a community taxes or borrows from its residents to fund public expenditures. An amount of money S or T, the cost of the public good, has left the accounts of community residents in the scenario of Taxation and in the scenario of Borrowing, never to return. In the Borrowing scenario, the community residents, specifically, its lenders, are enriched with an asset, S ( 1 + R ), and the community residents are burdened with an equivalent liability, S ( 1 + R ). The aggregate financial position of the community residents is unchanged before and after the transaction. Add interest to both the debt and asset and the aggregate financial position of the community residents is unchanged. Erase the debt and asset of community residents through Taxation and again the aggregate financial position of residents is unchanged.

          Thus, pure Ricardian Equivalence as advocated by David Ricardo in the early 19th century, not Barro’s recent and contrary Ricardian Equivalence Theorem, does exist theoretically and appears irrefutable. David Ricardo was right though he may have lacked the tools to explain why.

          Two Issues

          Firstly, the author of the variant does concede in the conclusion of the first setup that financial assets do equal financial liabilities at aggregate levels. Then he comments that ‘Regrettably such is not the case at the individual level.’

          Why this is a problem I cannot explain. When lenders offer funds, they do so because the sums held are superior to their needs. They wisely seek returns for idle money. If the interest rate obtained is satisfactory based upon considerations of risk and reward, then one is happy to lend. For those unwilling or unable to lend because of better returns elsewhere, of commitments to family or business, or because he subsists on limited wages and possesses no savings, then all the better that they are not forced to yield funds as they would under Taxation. There are options in Public Borrowing that are not available under Taxation. This alleviates or expels a vexatious harm, it does not create or encourage one. All residents shall lend according to their means. Some will lend greatly, others only marginally and a few not at all. The government is only interested in garnering the total funds needed for public expenditures. From whom and the means by which they arrive matter not at all.

          Secondly, the author claims that Government in absence of Taxation cannot borrow: “The type of lending proposed will not occur in the absence of a commitment of the government to tax.”

          I have never claimed that government is forbidden from employing the instrument of Taxation. I have only confirmed in the scenario above, that repayment of public debt, distinct from repayment of public lender, leaves the aggregate financial position of a community’s residents unchanged. The community through its government incurs a debt, and it also acquires an equivalent asset, leaving the community in no better or worse a position. The financial position of the community is unaltered with the transaction. One nullifies the other. When the community retires a debt, it also retires an asset, leaving the community no better or worse financially. Therefore, if the community demands its government retire a debt by employing Taxation, the transaction achieves nothing, whereas the costs to the community in the deadweight losses of Taxation and in government squander are great. A rational being would never perform an action that has great costs and no benefit. As demonstrated it is never in the interest of a community to have its government repay or reduce public debts by Taxation.

          The author claims that none would lend were they never to see those funds again. This is correct. But to claim that a borrower must reduce debts in order to repay his creditors is a different proposition and clearly erroneous. Governments, firms, banks, individuals for most of their lives, all carry debt. The debts or liabilities of almost every nation, firm, individual, bank, are invariably greater in the present than they were in the past, and shall be greater tomorrow than they are today. The public debts of Canada, the US, Britain, France have grown with time; the debts of the Royal Bank of Canada, Bank of America, JP Morgan have grown; the debts of IBM, Amazon, CN have grown; my personal debts and those of most other people have grown.

          How do so many needy entities satisfy the wishes of their creditors without reductions in aggregate debts? Simply, they exchange one lender for another. Banks, corporations, individuals, governments all act accordingly. If the cost of retiring a debt is immense and the benefit less or nil, why retire a debt? One would continue to service the debt, or if the lender requires return of funds, find another lender. This is standard bank practice. This is a practice that every corporation and nation employs and every individual for most of his life.

          And why do most creditors gladly retain the paper of enterprises whose liabilities grow daily? Because most, not all, manage to forge assets superior in value to their accruing liabilities. As long as the borrower adheres to this term, the creditors are happy. Violate that term, and creditors murmur. Violate it repeatedly, and creditors depart or remain only when returns reckon with new risks. It never matters what one’s debts are. It matters what one’s assets are. As long as the latter exceeds the former by some margin, lenders shall always be plentiful.

          Correcting the Mistakes

          The authors of the Ricardian Equivalence Theorem and those of its variants, have blundered badly, failing to see the poor and errant reasoning contained within the Theorem’s premises.

          Firstly, all have failed to note that a large disparity in Disposable Income would arise in the scenarios presented. Taxation is a penalty, a fine. Borrowing is an inducement. To imagine that conditions and factors in the provision of public goods and in the desire of the populace to work and profit would remain equal given these vastly different methods of raising funds is a gross miscalculation.

          Bereft of Taxation or the right to take the money of its citizens, financial slaves become public bankers and government may no longer do as it please. The novel circumstances will thrust Government into justifying every expenditure and action. Not only the costs of public investments, but more importantly the benefits shall be rigidly and truthfully assessed and accounted. If a public project fails to meet the standard of superior benefits, then it is discarded until more conducive circumstances arise. Ignore such analysis and a hostile public banker shall refuse to lend until reckless fiduciaries are discovered and punished. In the example above, the public good funded may not be worthy, or it may be so only at a much reduced cost.

          With the government facing its bankers daily, corruption and squander within the halls of administration and legislature shall decline to a shade of present size, and public expenditures shall decline precipitously. The large fraction of a community’s financial resources, labour, materials diverted by its governing body to the most worthless of ends shall be released to find employment in fruitful and profitable enterprise. By this measure, the community’s wealth shall grow to unprecedented heights.

          Disposable Income in the first period under Taxation would be as before at Y1 – T. Under Borrowing it would rise to Y1 – (x)T, where ‘x’ is the percentage of worthy public expenditures found within total public expenditures. Milton Friedman remarked that public expenditures in Britain at the height of its empire in the late 19th century were no more than 10% of GDP. The astounding implication is that with Government expenditures in Britain at near 50% of GDP, the value of x would be 10/50 = 1/5 or 0.2, which would see the aggregate disposable income of British citizens rise by 80%: Y1 – .2(.5GDP) = Y1 – .1GDP = .9GDP instead of .5GDP . Even with a fall to 40% of present public expenditures, disposable incomes still would rise by 60%.

          Secondly, the deadweight costs of Taxation, a penalty upon the productive, are immense and greatly curtail worthy economic activity. With crushing penalties lifted, those formerly reluctant to labour as much as they might with Taxation shall do so knowing they retain all wages. Companies forced elsewhere, or forced to limit or cease operations shall recommence domestic production knowing that its owners shall retain all profits.

          Therefore, under Borrowing, Disposable Income and the amounts saved by prospering residents should swell and broadly surpass the income and savings obtained under grievous penalties of Taxation. Suppose Deadweight Costs of Taxation are approximately 30% of GDP, more if taxes are punitive and less if moderate. Disposable Income in period 1 would rise to 1.3Y1 – (x)T or 1.3Y1 – .1GDP if public expenditures fall to 10% of GDP. If to 20%, then Disposable Income would become 1.3Y1 – .2 GDP. This represents an explosion in wealth over the previous Disposable Income in period 1 of Y1 – T or Y1 – .5GDP. I must reject the contention that disposable income shall remain equal or similar under both scenarios as detailed in Barro’s Ricardian Equivalence Theorem.

          The authors and advocates of the Ricardian Equivalence Theorem incur fundamental errors in their assessment of and conclusions about public borrowing. Government use of a nation’s productive resources shall decline sharply and the deadweight costs of Taxation disappear with full Borrowing for public expenditures. The wealth of a nation’s citizens shall rise without precedent.

          It has been said that the authors of the Ricardian Equivalence Theorem received Nobel Prizes for their efforts. I would suggest that those learned persons, lest the committee discover these errors, hide them.

  7. James N on October 9, 2016 at 3:32 pm

    1. This is nothing but an endless ponzi scheme, because at some point the borrowed money has to be repaid with tax money but in order to do that you have to borrow even more because of the incurred costs. Which has to eventually be paid back. So borrow even more……
    2. This essentially shifts liquid assets from the citizen to the govt, and the citizen receives in exchange a non-liquid (piece of paper/debt contract/bond) asset that he cannot spend. The effect of this is to shift the decision making ability of how to spend money away from the citizen to the hands of the govt – a terrible idea.
    3. The fantasy of funding only by resident citizens is ludicrous. No govt has successfully done this. Even if they did it would be a serious concentration of risk to the lenders; one that all knowledgeable lenders would avoid like the plague. Diversification of risk is essential to wealth preservation. Which brings us full circle to the reason why no govt has ever succeeded in selling all its bonds to citizens only.

    • economart on October 9, 2016 at 9:30 pm

      Hello James,

      Thank-you for taking the time to respond. I did read through your comment.

      I do not believe that you have supplied a flaw in the proof, so I am glad to see that we are agreed on that part.

      Point 1: You have made a statement that is dubious. We are agreed that lenders must receive their money, principle and interest. But you are claiming that an entity must reduce its debts in order to repay its lenders. That is clearly erroneous. As I stated previously:

      “The author claims that none would lend were they never to see those funds again. This is correct. But to claim that a borrower must reduce debts in order to repay their creditors is a different proposition and clearly erroneous. Governments, firms, banks, individuals for most of their lives, all carry debt. The debts or liabilities of almost every nation, firm, individual, bank, are invariably greater in the present than they were in the past, and shall be greater tomorrow than they are today. The public debts of Canada, the US, Britain, France have grown with time; the debts of the Royal Bank of Canada, Bank of America, JP Morgan have grown; the debts of IBM, Amazon, CN have grown; my personal debts and those of most other people have grown.

      So how do so many needy entities satisfy the wishes of their creditors without reductions in aggregate debts? Simply, they exchange one lender for another. Banks, corporations, individuals, governments all act accordingly. If the cost of retiring a debt is immense and the benefit less or nil, then why retire a debt? One would continue to service the debt, or if the lender requires return of funds, find another lender. This is standard bank practice. This is a practice that every corporation and nation employs and every individual for most of his life.

      And why do most creditors gladly retain the paper of enterprises whose liabilities grow daily? Because most, not all, but most manage to forge assets superior in value to their accruing liabilities. As long as the borrower adheres to this term, the creditors are happy. Violate that term, and creditors murmur. Violate it repeatedly, and creditors depart or remain only when returns reckon with new risks. It never matters what one’s debts are. It matters what one’s assets are. As long as the latter exceeds the former by some margin, lenders shall always be plentiful.”

      To create assets of $20 billion with liabilities of just $7 billion would make the entity one of the most profitable and productive corporations in the world. To do it repeatedly would be financially miraculous. There may be some debate about the figures, but clearly this is not a Ponzi scheme. Supposing the figures are correct, we can turn this around and say presently, under a regime of Taxation, the Government of Manitoba is expending $20 billion in order to generate assets of just $7 billion. Now that is a Ponzi scheme and it impoverishes us all.

      Do note that I have not said that the Government is prohibited from taxing its citizens to reduce debt. I have demonstrated in our video, however, that the Government would never do so because the cost is immense and the financial benefit nil. In the video, money transfers from one part of the property, wealth and incomes that fund government, i.e. that held by the taxpayers, to another part, that held by the lenders. And an asset, government bond held, is extinguished along with an equivalent liability, government bond issued. What was achieved in this costly exercise? Has that which funds government changed? Not at all. Thus, the benefit of repaying debt is nil and the costs in Taxation great. Who would ever repay such a sum under such conditions? No one!

      Point 2: You have remarked that Government issued bonds are not very liquid. This would come as a surprise to any banker, private or central. Government bonds are used all the time in transferring desired reserves to those corporate entities in need of them under REPOs and the like. Any lender freely would be able to shed some of his bond holdings in the markets should the need arise. There should be plenty of eager lenders, especially those lenders enriched by $13 billion and seeking a secure return or investment. Doesn’t sound like a plague to me.

      Now you argue that the decision making of government will transfer from citizen to government under this prescription. You have it exactly backwards. Presently under a Tax system, Government may freely take and spend what it pleases by force of law. There is little cost and benefit analysis in anything government does as we all know too well.

      I propose a system in which government much approach its banker perpetually. If funds are expended, they must be so under a cost and benefit examination of returns. If benefits to a community exceed costs, then the project is undertaken. If the opposite, then it is shelved until conditions permit. If funds are mishandled, public bankers will cease to lend until the culprits are discovered and penalized properly and overtly. If one detects fraudulent undertakings, then the culprits must be arrested, charged, tried, convicted, and jailed in order to restore confidence among the lenders. When one must turn to his banker daily for every dollar expended, it is a certainty that it is the banker that holds power over his borrower, and clearly not the reverse. Not a terrible idea at all, in fact it will be heaven on earth for the public lender, formerly the taxpayer, and a comparative hell for the borrower, formerly the tyrant.

      Point 3: I have been told the Italian city states engaged in such financial practices with success, so perhaps its not so novel an idea. But in the modern era it is definitely novel and untested. But experiment need not elicit disaster. Experiment is what Man must do in order to engineer and advance on his journey through this mysterious world that we arrived in. I have a good feeling for the reasons stated that it is all going to work out just fine.

      Regards,
      Gary Marshall

  8. Avner Offer on October 11, 2016 at 11:14 am

    Dear Mr Marshall,

    Thank you for your message. I haven’t considered this notion with a magnifying glass, but there seem to be at least two elements missing: One is that government does not trouser the money — it spends it, and thereby returns money to the taxpayers (and to non-taxpayers), and also provides them with services (usually services which not served well by markets). The second is that borrowing and taxation have considerable distributional implications, and that in general the effect of taxation is progressive, i.e. promotes equality, and the effect of borrowing is regressive, i.e. promotes inequality.

    There is also the issue of the nature of money. Canadian dollars are not embodied in gold coins, but electronically as keyboard money, i.e. credits in bank accounts. To the extent that governments borrow from commercial banks, these banks are able to create money by pressing a key (especially for a safe borrower like the government, which cannot default). So effectively the government is creating the money and paying seigniorage (minting fee) to the commercial banks. Nobody loses (unless the process is inflationary, which it doesn’t have to be), and the bankers gain.

    The ‘problem’ opens several cans of worms. All I can say is that the issue of money and credit, rather interestingly, remains unsettled in economics despite being the subject of research and discussion for almost three hundred year.

    Best wishes
    Yours truly
    Avner Offer
    Professor Emeritus of Economic History
    University of Oxford

    • economart on October 11, 2016 at 11:18 am

      Hello Mr. Avner,

      Amazing speed you have in responding.

      Government may spend as it has, though with more control exercised by the public served. This is more a revenue question: that it does not matter to that which funds government if a community has its government tax or borrow to fund public expenditures. The first half of the video is Ricardian Equivalence and the second half the conclusions that Barro should have drawn.

      Redistribution may occur on the expenditure side and need not occur on the revenue production side. Discouraging revenue production with the imposition of taxes or fines I would think actually diminishes revenues and, thus, hinders redistribution. The more money one has, the more he may redistribute.

      In my case, the government may only borrow from resident citizens. So the benefit of interest is shared among them and not the banks.

      I hope this helps.

      Regards,
      Gary Marshall

      • economart on October 11, 2016 at 11:20 am

        Dear Marshall,

        I think the proposal still has problems.

        Currently government only borrows to cover the deficit between expenditure and taxation. It borrows mostly from the banks. The mechanism is essentially to print money, either the government, in the form of cash and central bank reserves, or the commercial banks by the stroke of a pen. Not much is withdrawn from consumption. It is manageable because it is only a small fraction of GDP, and is also mildly inflationary, which is not necessarily bad (deflation is worse). There is even a view that government funds itself with the money it creates (where does money come from?), and taxes are only required to mop up liquidity. Just shows you how little we understand.

        Your assumption that only residents will provide the loans just abstracts from a complicated institutional and distributional reality. As I said, I haven’t read the proposal with a magnifying glass, but this is a major upheaval which would need to show some major benefits. At the moment the public mood is for shooting ourselves in the foot, not making things better.

        Under taxation there is a net transfer from the better off to the worse off, and from producers to dependents over the life cycle. Under a borrowing system, every producer would have to pay (presumably, to raise the revenue required), but the wealthy will lend more and will be paid more in interest.

        If your idea is that the government will compete with the private sector for credit, then you don’t sufficiently take into account that the function of government is to do the things that the private sector cannot do because the rate of return is too low (the business rate of return is not endogenous to technology, but an artifact of finance), or because business or contractual difficulties. I demonstrate all of this in two papers, here is a link (the previous one is cited there).

        http://www.economics.ox.ac.uk/Oxford-Economic-and-Social-History-Working-Papers/the-economy-of-obligation-incomplete-contracts-and-the-cost-of-the-welfare-state

        I won’t insist on my $10,000.

        Best wishes,
        Avner Offer

        • economart on October 11, 2016 at 11:21 am

          Hello Mr. Offer,

          I see that you are not disputing at this time the correctness of the proof. You are arguing the implications of that proof. The award is for the flaw in the proof, not its implications, so I am glad you are not insisting on the prize.

          I admit it is novel idea and there is much work to be done is settling a number of issues, banking being one of them. I realize that it may require thought and a little engineering, but the problems cited are not devastating.

          Government does borrow the now regular and growing sum expended beyond tax revenues; Practices established on present economic understanding and conventions. It is thought that there is a benefit to Taxation over borrowing. But the proof before you confirms that there is no financial benefit or advantage for that which funds government in taxing over borrowing. It makes no difference. But there are huge costs in Taxation, in government squander and in its dead-weight costs, that disappear with borrowing. So it is always best to borrow from rather than tax your citizens. If the proof stands, government should borrow every dime expended from its citizens. and we can devise new practices based upon this better understanding of economics.

          On re-distribution, I am only discussing a revenue question, how the government fills up its money bags, not an expenditure or distributional question. Distribution or re-distribution may go on as before, though I am certain the residents as public bankers can and shall demand far better results from the funds expended than perhaps the taxpayer, facing the daunting machine of special interests, ever could. So there will be changes, but re-distribution will exist. But is it not better to have a greater amount of money to re-distribute than less? Is not the enlargement of resources to handle the many problems of the day beneficial rather than detrimental to the cause? The benefits accruing from this major upheaval are clear as the video displays. One may argue that continuing WW2 after triumph by the allies should be considered given the disruption it would cause in converting the economy from military to civilian manufactures. A very bad argument. There is no benefit to a people of its government wasting large portions of the resources of a nation in pursuit of dubious goals or to avoid inconvenience.

          In a system of borrowing, pension funds, the pooled savings of regular working folk, may freely buy large portions of the government issued bonds depending upon calculations of risk and return. Those same pension funds already own or control large portions of the companies and equities in existence, and large fractions of government bonds. So to say that the wealthy shall buy most of these securities ignores pension funds and their weighty influence. I expect that some people will own more than others. But is this a bad thing? Some people who have little money are forced to pay large sums to the tax collector. Others with plenty pay little. Now everyone may decide for themselves based upon their circumstances and the returns offered how best to proceed. Sounds heavenly. There is no need to avoid the tax collector ever again.

          You bring up the issue of public goods and returns. Employees cost a business, but they are essential to its function. Through cost and benefit analysis one decides whether to retain them or let them go. One decides on whether to fix up an old home or machine or buy a new one. One decides whether to save or invest. Presently, there is little cost and benefit analysis in anything government does. We have some idea of the costs, constantly adjusted upwards, but no true estimation of benefits, save several enthusiastic professions of quality by a politician or bureaucrat. All that will change when government is forced to reckon with capital charges. This is where the big questions in public finance will come in search of answers. Good thing or a bad thing? I think the former, and I am sure the public banker will agree.

          Lastly, you mentioned banking and reserves. Banks or money lenders have existed since civilization began. Banks can ensure reserves and liquidity through a number of means. Government may play its part in ensuring the health of the banks through the central bank. Are government bonds required? Perhaps short term notes or special facilities, but generally I would think it best to leave banking to the bankers.

          Regards,
          Gary Marshall

  9. Darrell Rankin on October 15, 2016 at 10:01 am

    The flaw in this analysis is that it fails to comprehend the nature of a capitalist state, which is to protect the interests of the wealthiest and largest corporations and banks, not the smaller capitalists and the workers. Rather than conceiving society as comprised of ‘taxpayers’ and ‘government,’ society is actually divided into three large socio-economic classes – the big capitalists (monopoly-finance capital), smaller capitalists and the working class.
    If the capitalist state eliminated taxation, it would have to fund government from the pockets of the big capitalists who, the Manitoba Party expects, would be charitable enough to buy bonds to finance their state. But the rate of profit in the form of interest would be insufficient (compared to the rate of profit that prevails,elsewhere), and government would be bankrupt in a year.
    If the large capitalists could make money out of such a scheme, they would have acted on it already. The fact is, under capitalism the rate of profit is the only guiding principle for all economic decisions by the ruling class. That alone explains why the Manitoba Party’s proposal will never fly in the present economic climate.
    It might be implemented in a different climate, such as the one that prevails presently in Ukraine where the economy is in a tailspin and the only reliable refuge for the oligarchy is to find a seat in parliament, but even there the oligarchy is using their plutocracy to pay themselves and encumber workers and small business.
    in such a case, the oligarchs would have to do more than rely on charitable, voluntary buying of bonds, but ensure they are required by law to buy bonds on an equitable basis, as an act of self-taxation in order to save their state.
    The apologists and defenders of state-monopoly capitalism, of which Manitoba is a fine example, want and require the Manitoba government to impose taxes on workers and small business, since they do not want to impose such a burden on the wealthiest moneybags in our society.
    The cheque can be made out to the Communist Party of Canada-Manitoba, but that would be illegal.
    – D Rankin

    • economart on October 17, 2016 at 9:58 pm

      Hello Mr. Rankin,

      Thank you for taking the time to respond and challenge our idea.

      You did cover much territory.

      Most importantly, your challenge does not argue against the proof itself. You appear to concede our theoretical conclusion, that it does not matter whether a community has its government tax or borrow from resident citizens to fund public expenditures. You certainly have asserted in several ways why the idea may not transfer from a theoretical state to a practical state, but the proof stands. So you must understand that the Manitoba Party cannot grant your wish when the terms of the challenge remain unfulfilled.

      Your conception of the nature and composition of our system does not in general apply to the present state of our economy or our polity. I am not sure what you refer to when you cite “big capitalists” as being prominent and even dominant in the economy, but it is certainly not the case that a truly capitalist state, with a diversity of people and firms each pursuing their separate interests, heaps privilege upon an affluent coterie. Some of the biggest corporations in North America have only a recent history: Some of the wealthiest individuals also. Fortunes are enlarged and lost. Inventive and enterprising minds and the products and firms they create rise as comfortable titans fall. The weighty and abundant evidence of mobility among the classes afforded by the activity and outcomes of markets belies your contention.

      Certainly mobility may be rigid, but more through the stifling deeds of mercenary despots bound neither by law nor constitution. They eagerly dispense privilege and favour for gratuitous fee or deed. Such odious practices are common in many nations, wherein the very worst of men sadly rule their betters. It is in these nations that the conditions you describe flourish and prevail. In a comparatively capitalist society, one scarcely afflicted with the sordid and brutal devices of a dominant few, exchanges, fruitful and enriching, are commonplace. Perhaps a little research will confirm what we say. I can even suggest a book or two if you would like.

      Pension funds, the pooled earnings of regular working folk, often command large fractions of the equities and bonds of a nation. To say that participation in ownership of the productive resources or the issued public debt of a community or nation rests with a powerful and diminutive sliver of the populace does not comport with fact. Most everyone seeks a fat pension, and they surrender large sums annually in its pursuit. Instead of funds heavily tainted with state influence and control, the public will be free to purchase individually bonds providing adequate returns and issued by a debtor whose greatly enriched guarantors will satisfy all obligations with ease at the appointed time.

      The demand for securities nearly devoid of risk shall find many buyers – rich, comfortable and poor – each according to his circumstances and desired returns.

      Regards,
      Gary Marshall

  10. economart on December 29, 2016 at 1:32 am

    This came to us from a Professor of Economics Emeritus at the University of Manitoba. I believe it is the first endorsement from an Economics professor I have ever received regarding this idea. Let us hope the rest start to catch on.

    On Tue, Dec 13, 2016 at 11:49 AM, Jesse Vorst wrote:

    Greetings from Fort Richmond!

    Your dispatch is excellent. I graduated from the Netherlands School of Economics (now part of the Erasmus University in Rotterdam – my place of birth) and one of the most respectable institutions in that category. Had studied under phenomena like Jan Tinbergen (who shared the first economics Nobel Prize with his friend Ragnar Frisch) and Henri (Hans) Theil, building the foundation of modern economic analysis and policy.

    Keynesian economics, together with adequate monetary analysis, form a sound foundation for responsible policy. I taught the stuff for 4 decades and have never encountered reliable objections to it.

    Thank you and keep up the good work!

    Jesse Vorst
    University of Manitoba
    Winnipeg, Canada

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