Currency debasement is kind of immoral, but not in the way you think
November 5, 2015 § 50 Comments
If you’ve followed along with my recent posts you now know that fiat currency (really any sovereign currency at all) is a kind of financial security issued by the government: a tax voucher which entitles the bearer to the settlement of tax liabilities. And since you understand what a financial security is, you grasp that the government has theoretically plenary power to issue fiat dollars against its balance sheet just as Google has theoretically plenary power to issue new shares of Google stock. This theoretically plenary power is in fact limited by practical and moral considerations though; and now that we have conceptually separated fiat currency from goldbug ravings and ignorant ‘hard currency’ rants and the like, it is possible to coherently discuss those moral limitations.
When the government spends fiat dollars it is ‘spending’ its own security that it issues itself. When it takes in fiat dollars it is acquiring some of its own securities from the open market and retiring them. This is not at all comparable to Google spending cash (a third-party security) and receiving cash: it is much more comparable to Google issuing new Google stock and buying back existing Google stock. Even when Google sells or gives out ‘existing shares’ that it is holding itself the ‘existing shares’ part is really just an illusion of accounting, from a financial perspective. Google qua company ‘owning’ a batch of its own shares financially nets to nothing: to Google holding a claim on its balance sheet against its own balance sheet. So every time Google itself gives out or sells shares of Google to a third party it is in effect actually issuing new shares, in every sense that matters here.
The same is true for a government “spending” its own sovereign currency. When the government “spends” it is issuing currency; when it “taxes” it is retiring currency. So to come to grips with the moral constraints on it doing so it can be helpful to think about the moral constraints on Google issuing new stock.
It is unhelpful and obscurantist to think about it as if taxing and spending were equivalent in any sense to a company receiving revenues and spending in the medium of a third party currency or security, despite the fact that this is how most people try to understand it. The moral constraints on Google ‘spending’ its own stock are not related to some amount of its own stock that Google is holding in a treasury or dragon hoard somewhere; and it is likewise not related to how much of its own stock Google has bought back from the open market in the past year or what have you. That kind of ‘budgeting’ is meaningless when the currency under consideration is Google’s own stock as opposed to third party securities. Capital stock isn’t a claim against some separate treasury or dragon hoard. Securities like stock and fiat currency are claims against the balance sheet of the issuing institution itself: the institution and its property and powers just are the treasury against which securities are issued.
Our discussion of usurious bank loans can perhaps help here. Securitizing something which is actually valuable, spending balance sheet capital on something which improves the financial state of the institution, is fair to the shareholders of the bank and external stakeholders. Securitizing wasteful nonsense or empty promises as if they were property is not.
If Google started issuing new stock (not Larry Page’s existing stock, which he holds himself and can generally spend as he pleases, but new stock issued by Google itself) willy-nilly to friends of Larry Page just so they could all have private jets, that would be a violation of fiduciary duty: an immoral consumption of Google resources. Doing so would dilute current shareholders and damage the balance sheet of the company for the sake of private consumption which does not protect or advance the interests of shareholders. This is, in a sense, ‘debasement’ of Google stock. As with many ‘line drawing’ problems it may be difficult as a third party observer to say where suboptimal competence stops and selfish cronyism begins; but the difficulty in drawing a precise line doesn’t imply that selfish cronyism is morally acceptable.
Likewise, when government officials “spend” fiat currency on things which are selfish or wasteful and do not advance the financial and other interests of the governed community that is also, every bit as much as securities fraud in private business, a violation of fiduciary duty.
One problem with the current situation is that we don’t have even the conceptual tools – from a financially realist perspective – to tell when the sovereign is damaging his balance sheet or whatever the equivalent ought to be for sovereign finance. And we will never develop those tools as long as we are caught between the Scylla of leftist desire not to understand the objective wastefulness of their initiatives and the Charybdis of willful anti-realist right-liberal ‘common sense’ financial ignorance.