Unboxing a fiat dollar, or, the financial nihilism of a ‘balanced budget’

October 2, 2016 § 40 Comments

I don’t watch many YouTube videos, because in general I find video to be a waste of time for anything other than entertainment.  I can absorb vastly more information in a much shorter time via text and pictures.  But two exceptions are occasional ‘how to’ videos which instruct in real time while fixing or assembling something (even there text and pictures are often better if available), and ‘unboxing’ videos for products when considering a purchase.  Unboxing a product can tell you quite a bit about it, even after you’ve read high level descriptions and reviews.

This is a blog post not a video, but in it we are going to unbox a fiat dollar. I’ve explained the nature of fiat dollars at a high level before; and I’ve given descriptions of what securities are more generally and how that relates to fiat dollars specifically.  So we know that the sovereign ‘owns’ (regulates, taxes, and defends) the marketplaces over which he is sovereign, and we know that fiat dollars are a security issued by the sovereign granting rights in his marketplaces: a kind of coupon which authorizes a transaction in those marketplaces[1].  For each taxable transaction, the parties transacting must surrender a certain number of fiat dollars to the government.

When the sovereign takes in fiat dollars, from a financial perspective he is simply retiring them he is not storing them away somewhere.  When the sovereign spends dollars, from a financial perspective he is simply issuing new ones.  Financially, securities held on the balance sheet of the very same institution which issues those securities cancel themselves out. Substantively there is no ‘treasury’ of Google stock at Google which represent claims against anything other than Google itself.

So the very idea of the sovereign who issues dollars ‘balancing the budget’ in dollars is malformed: it is like calling it a ‘balanced budget’ when Google issues and retires the same number of shares of capital stock in a given year. This is financially meaningless, and focusing on ‘balancing the budget’ in this way is if anything fiscally irresponsible, the prioritization of the meaningless: financial nihilism.

What I hadn’t given yet though, before prompting by commenter Alex in a previous thread, is a concrete picture of the relationship between tax law and the real value of a dollar.  This unboxing of a fiat dollar is worth elevation into an easily referenceable post, so here it is.

Part of the problem is that tax law is so complicated. But consider a simple fixed-percentage sales tax on just one particular product. A 5% sales tax on widgets doesn’t care how many dollars you charge for your widget. It just requires you to take 5% of the sale of the widget, convert it into fiat dollars, and surrender that number of fiat dollars to the government. So if a 5% tax on widgets were the only tax, fiat dollars would represent a government claim on 5% of the value of every transaction in widgets in sovereign marketplaces.

The percentage-of-widget paid to the sovereign for each (new or used) widget transaction is the sovereign’s economic claim. The sovereign ‘owns’ 5% of every widget transaction under this example tax law. When the sovereign ‘spends’ fiat dollars (say by paying employees), he is selling ‘5% of widget transaction’ vouchers.

Of course in reality tax law is horrendously complicated and pervasive. But conceptually you can think of the tax percentages levied against transactions (including payment of wages) and property as the price paid to the sovereign for transacting in sovereign marketplaces.

Now, I haven’t developed a system of accounting to track this specific area, let alone to track government finance more generally taking into consideration its undefined balance sheet (or equivalent) in a way that accurately reflects the structure of its wide variety of fiduciary duties. But a metaphysically realist partial accounting for the security we call ‘fiat dollars’ or ‘sovereign currency’ in particular does seem possible in principle.

[1] Property taxes are of a different character.  A property tax is not a tax on a particular transaction within sovereign markets: it is a tax on the mere existence of property, or its ‘ownership’ by an ostensible owner, within sovereign markets.  ‘Property’ which is subject to property tax is not really owned by its ostensible owners: it is owned by, and leased from, the sovereign.

§ 40 Responses to Unboxing a fiat dollar, or, the financial nihilism of a ‘balanced budget’

  • GJ says:

    This perspective is fascinating.

    Up to this point I’ve put off the close reading of your posts on usury and economics to a later date (together with the study of mainstream economics), but now I’ll have to rethink that decision.

  • Johannes says:

    “Balancing the budget.” I have typically thought of this as a good thing. The federal budget, that is. So, for the laity, please explain why “balancing a budget” is bad.

  • Zippy says:


    Ordinary people equate ‘balancing the budget’ to living within our financial means, and living within our financial means is in general a very good thing to do.

    To repeat: living within our means is a very good thing to do.

    When applied to the institution which issues a particular security, though, it makes literally no financial sense at all to talk of ‘balancing the budget’ for transactions denominated in those securities.

    There is literally no financial connection between the sovereign ‘living within his means’ and insisting that he issue and retire the same number of a particular financial security every year.

    To repeat: there is no financial connection between the ‘equal dollars in and out’ definition of a ‘balanced budget’ and the sovereign living within his means.

    The ‘national debt’ is similarly financially meaningless, by the way.

    We don’t actually have a definite concrete understanding of what it would mean for the sovereign to ‘live within his means’. We would need what is called a ‘balance sheet’ (and a few other accounting tools) in order to gain that understanding. These accounting tools don’t even exist conceptually: we don’t even know what they would look like, let alone have any actually proposed structures, let alone do we collect the data which would be required.

    And there is no political incentive to develop such a thing. Politically, an understanding of sovereign finance based in reality probably wouldn’t make any of the modernist idealogues happy; and politically, modernist idealogues run the whole show, to the point of dominating the thoughts even of the man in the street.

  • Johannes says:

    All right. That is a very helpful thing. Again, for us peons, the fact that we have to fork over a lot of money to the government–stuff that we have earned by hard labor–which we could otherwise use for food, fuel, charitable giving, education, etc. seems to be a big, big problem. Also, that the government can then tax us at our death and deny our progeny the fruits of our labor–big problem.

    Now the govt asks for more of what we earn to fund all kinds of stuff that benefits us or which benefits no one.

    I take it that you agree that this taking and taking is a big problem. I don’t know about the realism–let us just say that you are defining economic truth. Still, the practical problem besetting us now is a Leviathan untamed. There seems no bottom to the appetite of the government. This appears to most of us as the political problem needing redress–now–even if in the future the whole world wakes up to your realism. Surely that is not so unhinged of us?

  • Zippy says:


    Surely that is not so unhinged of us?

    Not at all. I am trying to do my little part to help folks understand actual reality better.

    You can’t kill something that you don’t understand, except by accident.

  • Mike T says:

    In principle, makes sense. I am not sure how much the US actually follows this plan based on how the DoTreasury and Federal Reserve operate.

    I’ve never truly done a deep dive into the specifics, but it seems like there are two official channels for emitting money into the economy, not one. There is the US Mint and the Federal Reserve. To what extent they operate independently and collaboratively I don’t know. Do you? The former is the source of actual real sovereign currency whereas the latter is just the backer of all banking in the US, but also backs the budget in many cases with loans to the treasury.

  • Zippy says:

    Mike T:
    It might help (if you understand how stock options work) to think of T-bills not as loans, but as options issued against fiat dollars.

    That different sub-departments or agents of the sovereign can issue fiat dollars or other options against the sovereign balance sheet doesn’t change the basic nature of things. But I’d have to do more due diligence on what is happening at the bank-sovereign interface to describe it in detail.

    Mind you, none of this means that all sorts of perverse decisions aren’t being made. In fact the lack of a metaphysically realist financial accounting virtually guarantees it.

  • A Portuguese man says:

    So, if it doesn’t mean balancing the budget what can “living within financial means” mean for the sovereign?

    For a person, or a household, my understanding is that, generally speaking, it means to spend less than you earn.

    Mr. Salazar, who, since many years ago onwards, had my country live well within its financial means (and, it seems, with a balanced budget or, rather, one which yielded a superavit – until modernity caught with us in 1974, since when we’ve had thoroughly unbalanced budgets in that we spend far more than we earn); Mr. Salazar used to say that administering a country was really not that different from administering a household by a housewife.

  • Zippy says:

    A Portuguese man:

    A succinct definition of living within one’s financial means might be “maintaining a strong balance sheet in the context of one’s fiduciary duties”.

    tl;dr version:

    ‘Living within our means’ means maintaining a strong balance sheet, whether for individuals, families, companies, or government. A balance sheet is basically an inventory of all of the property owned and the impairments or claims against that property.

    We have no idea how to tell if a modern superpower like the USA does or does not have a strong sovereign balance sheet. The kind of accounting required to know those sorts of things does not even exist conceptually. A ‘balanced budget’ in dollars is meaningless, because dollars are a security issued by the sovereign; the ‘national debt’ is similarly meaningless, because it represents ‘fiat dollar options’ issued by the very same institution which also issues fiat dollars. Beyond that, the various fiduciary duties of the sovereign are not well defined, nor even what kinds of things constitute his property.

    The longer version:

    Even for individuals and families this – maintaining a strong balance sheet in the context of fiduciary duties – does not necessarily mean ‘spending’ the same amount of cash that one earns every year (a ‘balanced budget’), in part because the term ‘spending’ can denote everything from buying a vacation to buying a business franchise or thousands of other possibilities. Buying mutual funds and buying pizza are both ‘spending’ in the most generic sense. Paying for a car is consumption in a different way from paying for cable TV. Taking a vacation may be just the thing that kept Dad from having a nervous breakdown and becoming unemployed.

    So the idea that ‘spending’ is just one kind of thing, or even that ‘consuming’ is just one kind of thing, is a reductive simplification in terms of the flourishing of human beings, human communities, and human institutions. You can’t operate a business without understanding all the different ways that capital is employed and consumed in that business.

    When your fiduciary duty is just to yourself, a strong balance sheet basically means that your personal net worth continues to grow at a reasonable rate, or shrinks at the slowest rate possible.

    But of course most of us have fiduciary duties that go beyond ourselves, and the material investments we make in the flourishing of our families are not all in terms of atomized individualism. When people ask my parents what their retirement plan was, they reply that their retirement plan was my siblings and I. If the communal balance sheet is not strong, a family falls into poverty. But sometimes fiduciary duty involves consuming resources on things like caring for the sick, etc.

    In for-profit business operation this is formalized on an accounting basis through three fundamental reports: profit and loss, cash flow, and balance sheet. (In reality we often have different sets of these reports built for tax purposes, operating/management purposes, and financial or shareholder purposes. The underlying data is the same but the headings, emphasis, and breakdown can be different based upon the purposes for which the reports are being used).

    These interact with each other, but at a very high level you can think of the balance sheet as an inventory of all of the property and the various claims against that property at a given moment.

    When it comes to the sovereign the same very high level principle would apply: living within his means implies maintaining a strong balance sheet. The problem though is that we actually have no idea – not even conceptually – what a metaphysically realist sovereign balance sheet would look like. It could not be reported in dollars, because the sovereign is the issuer of dollars; so we don’t even know what units of measure we should use.

    None of this has been intellectually developed into some concrete concepts and accounting standards that we could use to define the sovereign balance sheet, at which point we could start to collect the data to populate it. Unlike individuals, families, and corporations, where it is relatively straightforward (though not entirely without ambiguity) to do due diligence and determine financial health, it is not even possible to determine sovereign financial health.

    Sure, we sometimes see sovereign finances get sick and we sometimes see it die. But our ability to monitor, diagnose, and treat sovereign financial health is no better than the ability of a bronze age medicine man to monitor, diagnose, and treat bacterial infections.

  • A Portuguese man says:

    Thank you.

    So to what do we owe this conceptual lack of metaphysically-realist tools to account for the sovereign’s financial health then?

    Is it the nature of fiat currency? Is it ( militant (modern) anti-realism? Sovereignty itself?

    What you say resonates in some way, but I can’t grasp the essence of it. Probably doesn’t help that I know next to nothing of accounting.

    Let me put it another way: what is the purpose of the state budget (not sure what’s the american equivalent)?

  • Zippy says:

    A Portuguese man:

    You are asking a historical question, and so my answer should come with the caveat that I am no historian.

    My view though is that we owe the dominant anti-realism of modern economics and finance to the abandonment of the the traditional doctrine on usury. I don’t know if you’ve read it, but I published an on-line FAQ (also available as a free e-book) on the traditional usury doctrine and why abandoning it was not just morally ignorant but also financially ignorant.

    (It is also my view that the current wave of sexual anti-realism is a consequence of earlier economic anti-realism: that today’s modern liberal sexual anti-realism is a consequence of yesterday’s classical liberal economic anti-realism.)

    In general, modern thought is shot though with anti-realist materialism.

  • Zippy says:

    Oh, and on this:

    Let me put it another way: what is the purpose of the state budget (not sure what’s the american equivalent)?

    It has approximately the significance of a medicine man using leeches and herbs, and doing dances before the fire pit to invoke the gods. There is some connection to reality, in other words, but it is far more tenuous than most people suppose.

  • GeorgeCarlinlives says:

    What would happen if a sovereign choose one peaceful priority, such as The Public Health, and issued fiat dollars to pay for it directly, bypassing The Banking System?

  • A Portuguese man says:

    Yes, I read your FAQ. It’s great!

    It’s the only serious and cogent explanation of what usury actually is and is not, that I’ve ever seen.

    The distinction on the nature of contracts is perfectly understandable and I find it surprising that no one, and I’ve read quite a few books on this from the usual anti-capitalist suspects, has been able to put it simply like that.

    It really isn’t rocket science.

    Of course, I actually haven’t read the Church doctors, so I guess I’m to blame for that particular bit of ignorance.

    But it’s not easy for me to get Portuguese translations of them, even though Portugal is supposed to be Catholic to the core and I find English too cumbersome and clumsy to read the ancients. Also some progressive compatriot of mine years ago decided I and those of my generation didn’t need to learn Latin in high school like my parent’s generation did.

    Anyway, I hadn’t observed that you attributed modern anti-realism to abandonment of traditional doctrine on usury…

    Would abandonment of traditional doctrine on usury be a first symptom of the drive towards anti-realism? Though this might well be the chicken and egg story…

  • Zippy says:

    A Portugese man:

    Would abandonment of traditional doctrine on usury be a first symptom of the drive towards anti-realism? Though this might well be the chicken and egg story…

    Sure, that’s the way history works: mutually reinforcing ideas often ‘grow up together’, there isn’t necessarily a situation where one becomes fully established and then the other follows.

  • A Portuguese man says:

    Yes, I agree.

    Anyway, thanks for your time. I really appreciate the blog. I think you have a knack for explanation and I’m only disappointed sometimes by the brevity of those.

  • ignacy says:

    It might help (if you understand how stock options work) to think of T-bills not as loans, but as options issued against fiat dollars.

    Would you mind further elaborating on that? In particular, who issues that option (I presume that the sovereign)? What is the option premium and what is its strike? You see that I almost completely cannot grasp the comparison – for me, perhaps the only unproblematic part of it is the option maturity 🙂

  • Zippy says:


    Yes, the sovereign issues T-bills (which are claims for a certain number of fiat dollars) and also issues fiat dollars themselves — much as a company issues stock options and also the capital stock itself.

    A t-bill is basically a zero strike option for future fiat dollars. You pay for the whole thing now, and the sovereign agrees to issue you fiat dollars later on a set schedule. Because it is zero strike — you don’t have to pay a strike price to acquire those future fiat dollars — the “exercise” of the option against its schedule is automatic. So stock options and t-bills are structurally similar, though not identical.

    That is the point of the comparison: that t-bills are to fiat dollars as (zero strike) stock options are to shares. T-bills/stock options are securities issued by the institution against its balance sheet which represent a right to different (and more fundamental) securities issued by that same institution.

    The reason I say that a share of capital stock is ‘more fundamental’ — that might not be the best wording — is because capital stock represents a direct claim against the balance sheet whereas options represent a right to acquire capital stock. Similarly, fiat dollars represent a direct (but obviously with different structural rights from capital stock) claim against the sovereign balance sheet, whereas t-bills represent a right to acquire fiat dollars on a future schedule.

    I consider the whole business of government ‘debt’ denominated in its own securities to be smoke and mirrors. The sovereign really should just print (physically or virtually) dollars when he needs to spend, and retire dollars as he collects taxes.

    But that would probably make things intolerably transparent, from a political standpoint.

  • josh says:

    Any thoughts on SDR backed bonds or the Yuan’s inclusion in the the SDR basket?

  • Zippy says:


    I really can’t say much about that without doing a bunch more work. I’m a foundational bottom-up finance guy and generally find macroeconomics, monetary policy, and the like insufferably tedious. Especially given that once you peel away the top few layers there is just raving insanity underneath.

  • Purple Tortoise says:

    I don’t have stronger opinions on central banking vs. free banking and gold-based currency vs. fiat currency, but sometimes I wonder if our current system of “managing” the economy is hubris. Perhaps we would be better off without fiat money and the Federal Reserve on the reasoning that if your doctor has false ideas and likely harmful methods for curing disease, you’re better off staying at home and recovering on your own.

  • Zippy says:

    Purple Tortoise:

    I agree that a tremendous simplification and less delusion about comprehensively managing reality is needed.

    The sovereign does have to look after his property though: including the marketplaces he owns (regulates, defends, and taxes). Gardens left untended go to seed.

  • donnie says:

    Zippy – I just want to make sure I understand you correctly. If the common understanding of a federal budget is meaningless as you contend, is the sole purpose of taxation then simply to prevent hyperinflation?

    It would seem that the usual reasons people cite in defense of taxation (e.g. funding of government programs) do not actually apply.

  • Zippy says:


    … is the sole purpose of taxation then simply to prevent hyperinflation?

    No, the function of taxation is to lay economic claim to the sovereign’s share in transactions[*] in the marketplaces owned (regulated, defended, and taxed) by the sovereign. You could compare it to a royalty charged against every purchase/sale of product, service, or labor. The complexity of the tax law makes it hard to grasp the details.

    Taxation creates demand for dollars: you have to have dollars because you need them to pay tax. Because people have to have them to pay tax, they are valuable (like insulin is valuable to diabetics). Because they are valuable, and because taxable transactions must be measured relative to them, people barter with them.

    It isn’t that the sovereign takes in dollars because they are valuable. It is that dollars are valuable because those who engage in economic activity in sovereign territory need dollars – are required by the sovereign to use dollars – to pay taxes.

    Again think of a shopping center. Suppose the owner of the shopping center will only transact in his own coupons. He pays people in those coupons and requires them for payment to himself. Lots of individuals and businesses transact in his shopping center, including lots of private transactions in coupons.

    Q: What does the number of his own coupons he pays out compared to the number he takes in every year tell you about the value and operational health of the shopping center?

    A: Nothing.

    Q: Does it make sense to try to state the value and operational health of of the shopping center in terms of its own coupons?

    A: No.

    [*] Property taxes are an exception. Property taxes are a repeating tax on ownership, not a tax on transactions.

  • donnie says:

    So I take it then that if taxation is simply the sovereign’s share in transactions, it would be better for all if the sovereign simply taxed all transactions at a flat rate (e.g. flat sales tax, flat income tax, etc.) instead of the complexities (e.g. graduated income tax) that take place today in practice.

    It also wouldn’t particularly matter if the government ended up taking in far less of its own fiat dollars using this approach, since tax “revenue” is an erroneous concept.

  • Zippy says:

    It is actually impossible to say what sort of taxing and spending structure makes sense financially without a sovereign balance sheet which gives us at least some approximation of reality. And as I mentioned, we don’t even know what a sovereign balance sheet would look like. We don’t even know what units of measure we should use.

  • Zippy says:

    IOW there is objectively some financial reality there right now; but it is almost entirely opaque to us. So talking about what we ought and ought not do is like two cavemen talking about what they ought to do about sickness and health. “Learn the germ theory of disease and develop antibiotics” is the flip answer. We have a similar gulf in our understanding when it comes to the sovereign finances of a modern superpower.

    It is a knowledge base which could be developed, but I’m too tired to try to do it on my own and virtually everyone in accounting, economics, and finance is trapped in an anti-realist bubble.

    Heck, it is hard enough explaining usury, which is conceptually really very trivial, to a small receptive group of people. In order for even the right concepts to be developed a whole school of financial and economic realism would have to be developed. Once that was reasonably well developed, the special problem of sovereign finance could be attacked.

    But we are a very, very long way from that happening. The main thing of which we can be quite certain is that folks who claim to understand the situation well enough to confidently recommend policy are like a shaman predicting a bumper crop year by shaking the bones. It might in fact turn out to be a bumper crop year, but that is not because the shaman’s ‘knowledge’ conforms to the truth.

  • MMPeregrine says:

    Zippy you said – In order for even the right concepts to be developed a whole school of financial and economic realism would have to be developed. Once that was reasonably well developed, the special problem of sovereign finance could be attacked.

    Have you read John Mueller’s Redeeming Economics? Here’s a couple quick reviews:

    It was very helpful for me and essentially sparked my interest in Scholastic philosophy a couple years ago. I recently skimmed it for review and realized that he’s wrong on usury but only talks about it for a half page. Overall, an enormously helpful book for me and I’m wondering if you’ve read it?

    I also wanted to know if you’re read Brian McCall’s The Church and the Usurer’s: Unprofitable Lending for the Modern Economy?

    Thanks for what you do – your blog posts, especially on usury have been enormously helpful for me. I was extremely confused about the whole topic until reading and re-reading your FAQ. Your emphasis on person recourse vs. asset recourse brought the whole thing together for me.

  • ignacy says:

    It is a knowledge base which could be developed, but I’m too tired to try to do it on my own

    You have my sword 🙂

  • Zippy says:


    I have Brian McCall’s book, which is good and which I need to finish sometime. IIRC he clearly states that the realist position on usury is doctrinal, against the subjectivists, so he really gets it. I can’t give an overall opinion or review because I haven’t read the whole thing, and I really should because it would be nice to have something to recommend without a thousand caveats.

    I’m not familiar with Mueller’s work. Sounds very interesting, thanks for pointing it out. I certainly agree that Aquinas understood finance (distinguishing finance from economics in my own perhaps esoteric way) far better than most of his modern critics.

  • “You have my sword”
    …And my ax! 🙂

  • Zippy says:

    Hah! I appreciate it guys.

    Shovels might be more useful though.

  • […] are securities which impair the balance sheet of USG. But nobody knows what the balance sheet of USG ought to look like, not even in theory as a […]

  • e. a. gray says:

    Zippy – are you familiar with Moldbug’s series on fiat currency? It’s not really a coherent series but a repeating theme. Take for example http://unqualified-reservations.blogspot.com/2010/01/on-sovereign-financial-reconciliation.html

    He has a similar opinion regarding fiat dollars as you do – they are simply equity or shares “in” the sovereign itself. Or, really, shares in its profit, but ones which grant no dividend. With your example as a single-source-of-profit, you can see clearly that in that case, the state is merely a widget-sale-price optimizer (it wants as much velocity of widget sales at the highest price it can get it.)

    Lewis’ rational robber baron king would try to get his biggest share possible and be content with it. Anything else possible could be determined as a slice of the dividends from this profit, essentially, and would be constrained by it. This is what I would call “moldbuggian economics.” The odd thing that could happen of course, is that the robber-baron-king pays people to buy more widgets. But if he were rational he could see this would be a dumb thing, as for every dollar he pays his citizens to purchase widgets, he’s only getting 5% back, which means he is losing 95%. What seems to have confused, I suppose, the Keynesians, is that the Baron could claim he gained 5% extra revenue if he gave all of his profit away as a wdiget-purchasing grant. The businesses would see a spike — but as you can tell, this is getting into some weird loops and dishonesty.

    But the businesses would certainly have some loyalty to the Baron for that, which is really the purpose of state “charity” (if it can be so-called) – patronage.

  • […] got caught in King AI’s deplorable catcher.  This morning I retrieved this from Elspeth and this from e. a. […]

  • Zippy says:

    e.a. gray:

    Just retrieved your comment from SPAM.

    We ended up discussing Moldbug’s writing on the subject in this thread.

    Henry Ford’s workers were his best customers, goes the legend, so we do have to be careful about characterizing all feedback loops as inherently dishonest or even as financially detrimental.

  • […] fiat dollar is a security issued by the sovereign.  Like every other financial security issued by an […]

  • […] which poisons the finances of governments and the minds of economists. I’ve explained why fiat currency is more transparent and honest than gold standard currency any number of times. But of course many […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

What’s this?

You are currently reading Unboxing a fiat dollar, or, the financial nihilism of a ‘balanced budget’ at Zippy Catholic.