We have plenty of evidence that governments are afraid of bond markets. In the US, fears of the retaliation of the bond market have driven the fiscal policy of both parties. The Republicans want immediate cuts in spending, and their pet economists bray about an impending inflation that never comes. These intellectually dishonest hacks refuse to change their minds in the face of overwhelming evidence and increasingly sarcastic statements from people who got it right, like Paul Krugman, here, here, and here (among many). The Obama administration refused to see reason either. It adopted a policy of short-term stimulus, including tax cuts for the filthy rich, followed by drastic spending cuts on a time frame guaranteed to cause further economic distress. Which it did.
It’s worse in beleaguered Greece, Spain, and the Eurozone generally. Their troubles begin as the bond markets set higher and higher interest rates for new issues of sovereign debt, and eventually, the country is brought to its knees. Bond holders get paid and governments inflict pain and suffering on their citizens. These bond vigilantes have enough cash to crush the Greek government, and to shake the confidence of Spain, leading to adoption of policies that have produced economic disaster.
The term “bond market” in this context is misleading. When people talk about the bond market in this context, they really mean a small group of people who control tons of money. Where does all the money come from, and just who is trading it? There is plenty of money out there. The Tax Justice Network estimates a minimum of $21 trillion hidden offshore, plenty of money to crush most economies. That, of course, also has its insane defenders. From the Wall Street Journal blog Washington Wire
And Andrew Quinlan, president of the Center for Freedom and Prosperity, a group that promotes international tax competition and financial privacy, said, “Tax Justice Network and other opponents of tax competition assume that all earnings belong first to governments, which is why they seek to prevent even legal wealth management techniques if they result in less money for spend-happy politicians.”
I wonder how much Romney and his pirate crew contribute to the Center for Freedom and Prosperity.
Other massive piles of financial assets are held by Sovereign Wealth funds, pension plans, endowments and foundation. These things take on a life of their own. They don’t self-liquidate. They are buckets of money used to pay massive sums to their managers and sprinkle some money on causes their donors like.
But that isn’t all. Most of the hedge fund speculators are leveraged. They borrow money from Too Big To Fail banks that exist only because of government support. They get tax deductions for any interest they might pay. Currently, there is about $2 trillion in hedge funds. With an average leverage of 2.5, they control about $5 trillion.
Governments sell bonds regularly. In mid-May, Italy sold $5.25 billion of bonds. It expects to sell about $215 billion in 2012. Considering that a bunch of the bonds will just roll over into bonds from the new auction, the amount of money it takes to screw these countries isn’t that great, at least in the context of the money in the hands of speculators.
So who is doing the speculating? It’s a subset of that crowd of nameless faceless traders at giant megabanks, hedge funds and investment advisers around the world. These people cheat at every opportunity. Maybe it’s a few million in an insider trading scam, or maybe it’s gaming the California Electricity markets for a few tens of millions. Or maybe it’s billions, like JPMorgan Chase’s Bruno Iksil, or even trillions, like those “rogue traders” manipulating LIBOR. Their bosses can pretend not to see, so no one is responsible. They are, in short, the scum of the earth. And, of course, none of them ever go to jail, so there isn’t any reason for them to do anything but cheat and lie.
Governments around the world do the bidding of a group consisting largely of criminals, gambling with money they got from other criminals, including people evading taxation. Those traders get their power from the richest people in the world, people whose interests are inimical to the rest of us. This is the fist behind the velvet glove of campaign contributions, the power that keeps modern governments under the heel of the rich.
Too bad we can’t tax that money away from these thugs.




54 Comments

We can, by taxing wealth instead of income.
What I’d really like however is to stop doing business with them, i.e., stop covering our deficits with borrowed money.
The alternative is to cover deficits with freshly issued money. And, yes, whenever I suggest creating money out of thin air, people make the sign of the cross and sprinkle me with holy water. But, hey: whenever banks, including the Fed, make loans, which includes the purchase of bonds, they pay with freshly issued credit (deposit) in one of their accounts. That is not preexisting money from another account; rather, it’s newly created money that is balanced by a new asset, namely an IOU (e.g., a bond or a mortgage). Not only do banks issue fresh money to purchase bonds, but they also make loans to bond owners using the bond as collateral. It turns out that between 2007 and 2010, the Fed bought up 10% ($1.5T) of our national debt (Treasury bonds) with freshly issued money.
But, why do this through banks when, under existing law, the Secretary of Treasury can issue however much fresh money he/she pleases and pay the government’s authenticated expenses, thereby, avoiding the need for further borrowing. And, if authenticated, the Treasury could buy up the bonds held by the Fed thereby shrinking the debt subject to the debt limit by 10%. In fact, the Treasury could pay off the entire national debt.
There is no reason that the U.S. should be at the mercy of those thugs.
The story is different for users of the Euro. They are like our states; they don’t issue their own money. And, like our states, they are in desperate need of help from the issuer of the Euro, which IIRC is the European Central Bank, which should immediately make direct loans to its members in need.
The point of taxing them is to cut down the amount of money they have. It isn’t to balance the budget or anything else. It’s a matter of preserving democracy against Oligarchy.
Not that I object to your solution.
I do. Now is not the time for state capitalism.
Tweeted. Recommended.
The middle class must be crushed. “Shock & Awe” don’t ya know? Then, this bewildered, desperate people will become even more malleable to a New System of Governance that unsurprisingly will amount to the few controlling the lives of the many.
The Republicrats / paid minions of the Oligarchy are rigging the structure for implosion now.
Please connect the dots. The US was borrowing at around a 15% of GDP clip from the spring of 08 till early this year. Previously anything over 6% was considered extreme. We are talking $100 billion a month give or take.
Most governments in the world were borrowing a record levels during the same period.
How exactly do you borrow $100 billion a month, cash? Do you know how they do it? What are the mechanisms?
Market is a quaint term for how all this borrowing has been accomplished. Rather it is a system composed of the gigantic banks and central banks. It has some appearances of a market but the whole thing is a contrived machine. Government’s fear this ‘market’ because without it they could not borrow, in our case, still near 10% of GDB month after month at near zero rates. And the ‘market’ has two halves. The central banks and the giants and the giants are faltering. After all they are zombies kept alive by throwing out 400 years of accounting principals.
Somehow everyone seems to think you just decide to borrow trillions and then. presto, you do. The world doesn’t work like that. The banks participate and keep the governments alive but with a catch. That being the banks own the politicians.
If you want governments to borrow more they you want banks to own the place. Period. There is no second of third way.
‘These intellectually dishonest hacks refuse to change their minds in the face of overwhelming evidence and increasingly sarcastic statements from people who got it right, like Paul Krugman…”
What makes you think Krugman is not a hack? He went to the same schools with those other hacks and they all worship at the same altar.
Andrew Jackson had it right vs Nicholas Biddle almost 200 yrs. ago. Unfortunately, Biddle and his unnamed European backers had enough money to buy Congress een then.
I too would like to tax some of that extreme income. I would also like to see the estate tax increased to stop some of the hand me downs to future generations. You earn it, you spend it would be my motto for the most part. I would even tax the money stored up off shore. But hey, prolly never gonna happen. Still income inequality is tearing us apart since we are no longer all in the same boat.
I’d like to see a wealth tax. Do that long enough, and it will make a big difference.
Creating a lot of new cash leads to price inflation and the 99% feel it in food and fuel prices. And, you can’t pull that money back out of the system so easily. OTOH, what the Fed has done with QEs is put money out that can be pulled back if inflation begins in earnest.
except that climate can affect food prices and Saudi Arabia can do the same for fuel.
Perhaps there’s a reason $20 Federal Reserve note has a rather dashing and gallant portrait of the old Indian Killer:
“Burr wrote (Nov. 20, 1815) to his son-in-law, former South Carolina Governor Joseph Alston, that Monroe’s expected nomination by Jefferson’s party must be prevented; that Jefferson had taught a cabal of Virginians schemes to keep political control of the United States; and that ‘the moment is extremely auspicious for breaking down this degrading system.’ The remedy?
‘…There is a man in the United States of firmness and decision. It is your duty to hold him up to public view: that man is Andrew Jackson. Nothing is wanting but a respectable nomination, made before the proclamation of the Virginia caucus, and Jackson’s success is inevitable.’
In fact, Jackson’s supporters in Great Britain knew that the elimination of the Bank would deliver a body blow to the U.S. economy. The Bank would have to call in its loans, over the remaining years of its charter, tightening credit, as Sen. Daniel Webster pointed out in the Senate debate over overriding Jackson’s veto…Biddle tried to protect the charterless Bank by reining in credit. The Bank of England jumped on its chance, precipitously withdrawing credit from the United States, and paralyzing the Midwest in particular. The resulting catastrophic crash of the American economy began just after Van Buren succeeded to the Presidency in 1837. Unemployment and hunger ruled the cities [hence the nickname, "Van Ruin"]….
Soon after it was known in Europe that Van Buren had been elected President in 1836, the Rothschild bankers’ trainee and cousin August Belmont set out for America. Belmont landed in New York on May 14, 1837, a few days after the panic and bank runs began. He set up a Wall Street agency to supervise the American interests of the British and Austrian Rothschilds, buying up interests and properties drastically devalued by the Jackson-Van Buren depression.[2] Belmont took control of Van Buren’s Democratic Party, making it the center of treason and Southern secession.”
http://www.larouchepub.com/other/2012/3906jackson_fraud_hamilton.html
The first hint at a wealth tax is when the Fed doesn’t pay interest, but charges to hold bank reserves for the big banks. That would be ‘taxing’ capital. But, we need the big banks to have reserves. It’s the uber-wealthy whose wealth we should prefer to ‘tax’ in some way.
When it comes to the distribution of wealth inequity it’s very important to be precise in who is affected. That’s why printing cash isn’t to the point — it hits everyone, rather than just the richest.
It sounds like a good idea, but what kind of wealth tax? Won’t it provoke evasion such as underground caches of wealth hard for the gov’t to identify? Gold ducats, jewelry, etc., hidden here and there instead of, say, real estate.
Instead, how about a VAT? Or just a luxury tax levied on certain high cost purchases. Perhaps an annual Fed excise tax on vehicle value over a certain amount (same for real estate).
A very good idea. Note that the Fed sets the reserve requirements as well as the interest rate on reserves. I see no reason that rate couldn’t or shouldn’t be negative.
Dollars are dollars, and the dollars with which the Fed bought Treasuries on the open market (QE1 and QE2) spend just like any other dollars. And they did not cause inflation.
The point is that it seems to make no difference, whether the government pays for its deficit spending in dollars or in bonds. Whoever buys the bonds can pawn at the banks in exchange for dollars that get freshly created out of thin air by those banks.
Hell, the main reason Nick Clegg allied with the Tories over Labour was that BNP Paribas threatened to downgrade the UK’s AAA credit rating if he didn’t.
Per the Federal Reserve Bank of New York:
Oops! That first quote was supposed to read:
My apologies.
I don’t see that a VAT could redistribute wealth. It is a tax on purchases (can’t be otherwise), so those of us who spend more of our income get taxed proportionally harder. The point, IIUC, is to tax *wealth*, which is by definition, unspent.
However, I also don’t see that a tax on wealth would work for long. Jillionaires can easily find a regime that will let them just park their megabucks with no tax at all. Many foreign banks will be happy to hold on to it for them or to invest it. Multinat corporations can shuffle goods around, reselling to themselves to turn a loss in ‘expensive’ tax jurisdictions. It seems many already do, and that that is where GE, etc, get those big tax rebates.
Human jillionaires would simply leave the US and go somewhere else. I am not talking about hidden offshore accounts, I am talking physically moving and renouncing US citizenship, like Eduardo Savarin.
The wealthy are already parking their money outside the country. And, failure to report income is a criminal offense.
Only if you are a citizen of that country.
The key to taxing wealth is transparency about ownership of wealth. Remember, the rate is just a number. We force acknowledgement of ownership of financial assets in somewhat the same way we force acknowledgement of ownership of real property. If you want to keep it, you name the human who owns it.
One other thing. If the bazillionaires leave, they can’t spend money to elect people here. That accomplishes a major goal: kicking the oligarchs out of the system.
I don’t know where Sheldon Adelson actually lives, but apparently he has dual citizenship and has made it clear that his first loyalty is to Israel. Nevertheless, he appears to be one of the largest single contributor to the American political process.
Roughly the same is true of Democratic contributor Haim Saban: “I’m a single issue guy, and my issue is Israel.”
When you say taxing wealth, do you mean taxing people’s houses as well? and personal property? Stocks?
Most localities already tax houses. And inflation is a form of tax on dollar-based bank accounts, even if they are off shore. And supposedly we tax retained earnings of corporations with a one-time tax.
In their book Almost Everyone’s Guide to Economics, John Kenneth Galbraith and Nicole Salinger made an excellent case for a 100% inheritance tax.
That could be gamed, too, with bottomless and anonymous corporate donations to political PAC’s. Adelman is proposing to spend what, $400 million? He could donate himself or route it through a US corp, how could that be stopped? Barclay bankers donated to Mitt Romney. I thought you had to be a US citizen (or corp) to donate to US political candidates.
I also don’t get what happened to the campaign donation limits for individuals. Is that all gone now? (I am not in the US). I donated last election to some ActBlue candidates, although I couldn’t bring myself to give $$ to Obama (FISA vote). When I did, I had to swear that I am a US citizen (which I am), tell them a whole lot about me including my address and which economic sector I worked in. IIRC there was a limit to how much I could donate to any one candidate, and perhaps overall? Don’t recall. Did Citzens United change individual donation rules, too?
Yes, these are a form of wealth. Of course, there would be a big exemption, so the tax would only apply to large piles of capital.
Taxes on property are ostensibly for services provided by the municipality. Here in Canada a good way to get out of that is to live in a rural area that has few services and low taxes. But I think what is contemplated here is a tax on wealth at the federal level, which would include property such as houses and real estate, but to redistribute income.
Or perhaps you are thinking it should only be on liquid wealth, Massacio?
Yes, but you are talking about putting more taxes on houses and bank accounts? That won’t go over big IMO. do you think they actually tax retained earnings? How’d they get all those trillions stashed away?
Some of these things sound good but the implementation is a long ways away. Inheritance is about the best you can do but certainly not at a hundred percent. But hell, I’m not rich so have at it.
Huge corporate contributions will have to be fixed. I figure it’s about as likely as any other part of this whole thread.
Agree with that.
hey mas,our masters ‘ government has zero fear of of bond vigilantes,because that would mean they are afraid of themselves .Calpers has no political power and is virtually broke with its solvency based upon some 8% annual return fantasy .If China and other sovereigns want to settle accounts , our owners will monetize the debt ,just as circa 50% of our deficits are monetized to give themselves near-free money .I hope you don’t also believe they really fear deficits ,or that they are sincere about eliminating red ink with austerity.I think all smart people knew the stimulus was too small without guidance from Krugman or others ,cuz ,you know , they are smart
Hey mas@33 ,you nailed it Nice and succinct .
So if governments are afraid of bond markets then why do US liberals advocate more borrowing? DDayen is really hot on it — claiming that it’s essentially free money, considering present inflation and interest rates.
The government isn’t liberal. As I say in the post, it’s just slightly to the left of the nutcase right-wing.
Liberals, like Paul Krugman, Joseph Stiglitz, Brad DeLong and others, believe that now is the time to borrow.
I don’t disagree, but I think we should also enact a strong program of disarming and weakening the Oligarchy by taxing their wealth.
First, there’s a distinction between Governments issuing fiat, non-convertible currencies with floating exchange rates and no debts in foreign currencies and other governments. Most developing nation governments owe money in foreign currencies, and the nations of the Eurozone, of course, all use a foreign currency, the Euro, which they do not issue. Let’s call the first group of nations sovereign in their own currency. Let’s call the rest non-sovereign in their currencies.
Second, this distinction is salient because the non-sovereign currency nations do need to be afraid of the bond vigilantes. That’s because the vigilantes can drive up their bond interest rates by refusing to buy bonds. Since the supply of currency to these governments is limited to what they can tax or what they can borrow, refusals to buy by the vigilantes are credible threats that governments can only overcome by offering higher interest rates or by ceasing to borrow money, which in recessions means austerity, unless they can get some currency issuer to bail them out.
On the other hand, the situation is different for nations sovereign in their currencies. Examples of such nations are the US, the UK, Canada, Australia, New Zealand, Japan, Denmark, Norway, and Sweden. These nations have the capability to control their bond interest rates if they want to. For example, the US actually has control of bond interest rates in the precise sense that it can determine them whatever the vigilantes want to do.
Sure, the vigilantes can determine interest rates if the Government sits idly by and lets them drive the market. However, the Federal Reserve and the Treasury, can target bond interest rates and set these for the bond markets by manipulating bank reserves.
Specifically, one way to do this, is that the Treasury can cease issuing long-term bonds, and sell only three-month bonds. Three-month bond interest rates are generally controlled by overnight rates for bank reserves, and overnight rates can be driven down to near zero by flooding the banks with excess reserves. That’s basically how the Japanese keep their bond interest near zero, and that’s how we have done the same, in spite of the very large deficits we have run in 2009, 2010, and 2011.
Alternatively, another move we can make to remove the effects of the bond markets and the ratings agencies upon public finances, is for Congress to stop requiring new debt issuance in coordination with deficit spending, and for the Treasury to stop issuing debt. The Treasury can still deficit spend because it can generate credits using proof platinum coin seigniorage (PPCS) If we did this the credit rating agencies and the interest rates in the bond market would be irrelevant from that day forward.
In short, the bond markets and the ratings agencies aren’t in control of US public finances. They are not in a position to influence what our taxing or spending policies ought to be, or whether we will default on our obligations. In fact, at this point in our history, Congress is mandating that we have a national debt. It is forcing us to have one.
I have a fuller discussion of this here, with links to other posts.
Of course, my view of the vigilantes and what they can actually do, doesn’t mean that sovereign currency governments aren’t afraid of them, since those governments can certainly be mistaken about their actual power to control the vigilantes. It does raise the question, however, of whether governments understand the power they have and are simply choosing not to control them, or whether their failure to control them is just due to their not understanding what they can do. This may differ from government to government.
For example, the Japanese must know by now that the bond markets have no control over their interest rates, because the Japanese Central Bank has kept interest rates low for more than 20 years as their debt-to-GDP ratio has gone higher and higher. That rate is astronomical right now, but the vigilantes can’t drive the rates up in spite of long-standing dire predictions that those rates will reach a limit at some point. By now also the US monetary and fiscal decision decision makers must also realize that the bond markets can’t do anything to them. Last August S & P decided to downgrade the Us’s credit rating to AA. What followed? A flight to the dollar and even lower interest rates on US debt.
Anyway, It’s difficult to say just how many sovereign currency governments know that can control the bond vigilantes easily, if need be by not issuing debt for awhile and just printing, but it’s a reasonable speculation that operational people in Central banks may know how the system works since they manage the auctions selling bonds, and also know, as Ben Bernanke does, that central banks can create money out of thin air and thus flood the market with reserves, which, in turn, can make any non-zero interest rate attractive to the bond markets.
Btw, all of the above is standard MMT stuff. I invite all you to read more of it. It will dispel a lot of myths.
Oh, btw, I’m for taxing the hell out of the rich too. I know we don’t need their money, because we can always make more whenever we need some. However, I believe that extremes of wealth are incompatible with democracy, which we are already seeing. So, I want to get the money back they made through their various control frauds, and then I want to destroy it.
That would require a multifaceted approach:
These people understand that you don’t have to own the wealth, but merely to control it.
Once we start taxing their wealth, they’ll all start churches, e.g., The Church of the Savior Prophet (pun intended), and donate their wealth to it. And write off their mansion as a “parsonage.” It would take some very clever tax accountants to write a sufficiently tight set of laws. But it would be fun.
Does Congress really require that by law? I thought we decided that that was simply a current policy that the Treasury can side-step under existing law by issuing high value platinum proof coins and depositing them with the Fed.
I want to second that recommendation. It’s a bit tedious, but worth the effort.
Excellent summary !!!
We all seem in violent agreement. Tax the mothers until they bleed.
Everyone’s playing pretend ,right ? Obviously we have no power ,so all these proposals to spank our rulers is just a way to kill time until we die ? I’m pro-fantasy ,but some of these comments are so lengthy ,and well-written ,one could almost believe they had a purpose other than a bar-stool vent .
That’s right! But since the Executive Branch seems too stupid or evil to avail themselves of that 1996 legislation allowing PPCS, it would be better if Congress removed the requirement prohibiting the Fed from lending money to the Treasury. It is this part of the law that has had the following two consequences 1) the Fed prohibition that Treasury cannot run a negative balance in the Treasury General Account (TGA) and 2) the Treasury policy of issuing debt to enable deficit spending on a dollar for dollar basis.
Thanks.
It seems to me that quantitative easing is simply the Fed loaning money indirectly to the Treasury and would as good as loaning directly to the Treasure except for:
* the fees involved and
* the fact that treasuries owned by the Fed still count toward the debt limit.
Btw, for those freaked out by the large ‘debt’ numbers and our ability to pay our debts, please note that in the 10 months of this fiscal year to date (07/30/12) the Treasury has redeemed $55,215,020,000,000, or more than $55 T, which is just about 3.5 times the size of the “national debt” (the debt subject to the limit). Interest rates on Treasuries, of course, are at historical low points.
In other words, there is no problem repaying our debts as they fall due. There are, however, two problems with our debt. The first is political; the incessant and ignorant bleating of the debt hawks using the ignorance of most people about government finance to drive the conservative agenda of transferring wealth from the middle class to the 1%. And second, that debt issuance provides “welfare” to the rich and foreign nations in the form of interest on the debt. That ‘welfare” amounts to $200 B per year, while Congress says it can’t afford to provide food stamp assistance and unemployment payments to the long-term unemployed.
So, if we could use high-value PPCS, such as the $60 T platinum coin to fill the TGA account and then pay off the debt and not issue any more, we could stop that welfare and also change the background of political debate by removing the excuse of the staggering debt from people whose agenda is to oppose government programs that would increase the nominal wealth of most Americans.
Agreed.
Since 1836, has the U.S. has never paid its debt; we simply roll it over, i.e., sell new treasuries to make the payments on the old ones. So, for instance, the cost of WWII is still part (25%) of our current national debt.
For tactical reasons, I’ve stopped talking about coins; they’re shiny objects that distract people (literally making them giggle) from the key point that “Existing law (31USC5112(k)) authorizes the Secretary of Treasury to issue as much money as he/she pleases and pay appropriated government expenses with it, e.g. to buy back treasuries thus retiring the national debt.” There is no need for the U.S. government to borrow.
I found your post on the ‘LINKS’ page over at Naked Capitalism.
I don’t know how often thatr happens, but seems like an occasion for celebration to me!
Congratulations on the broadening readership!
Great post BTW, and recommended
“Since 1836, has the U.S. has never paid its debt; we simply roll it over, i.e., sell new treasuries to make the payments on the old ones.”
1836 is the year of the destruction of the Second National Bank.
I’m not trying to be the skunk at the picnic .and I believe MMT provides our plan-b to ensure the the forthcoming crisis gives us a great opportunity for a transformative agenga ,but the notion of debt diminution is delusion .The oligarchs entire agenda is based upon the debt humbug .Debt=austerity=privatization and hard-asset theft=rule of corporate monopolies via market extortion and police-state liberticide=hard fascism in the form of inverted totalitarianism .You guys are allproffering a solution to a faux-problem fabricated by Wall.St. .
Hey ,give me some push-back ,I’m not trying to be mean and you guys are very well-informed ,but if you operate with denial-based thinking retarded by institutional conformity ,the status-quo wins by default .
Today I heard a radio ad featuring some member of the legislative body in the Philippines [Hawaii has a large Filipino population] urging folks to vote for a candidate for the US House.
She happens to be a pretty good candidate, but it really pissed me off to have this “foreign intervention” in our election.
Masaccio, congrats on getting fanned & linked at Naked Capitalism.
Nationalize the financial sector and break up the conglomerates.