The promise of fiscal money :

The promise of fiscal money :

Context

The authority and responsibility of drafting and implementing monetary policies lies solely in the hands of the Central Banks. Thus, there exists independence of central banks from elected governments. But the concern is – it actually possible for central bank to be independent of the government?

What is the rationale behind the independence of Central Banks in forming monetary policies?

  • The rationale for entrusting monetary policy fully to central banks is well understood: politicians, overly tempted during the electoral cycle to create more money, pose a threat to economic stability.
  • Central bank independence is predicated on an economic axiom: that money and debt are strictly separable.
  • Debt can be traded domestically
  • Money, on the other hand, cannot default and is a means, rather than an object, of exchange.

Does this axiom of independence holds?

  • Clearly, in today’s world, this axiom does not hold.
  • With the rise of financialization, commercial banks have become reliant on one another for short-term loans, mostly backed by government bonds, to finance their daily operations.
  • The liquidity requirement that is needed to back daily operations, has acquired the properties of money: it used as a means of exchange and also as a store of value.
  • Now, as banks issue more inter-bank money, the financial system requires more government bonds to back the increase.
  • The growing inter-bank money supply fuels demand for government debt

Why is the independence of Central Banks continuously diminishing?

  • In this new financial world, central banks’ independence is becoming meaningless, because the money they create represents a shrinking share of the total money supply
  • With the rise of inter-bank money, backed mostly by government debt, fiscal policy has become an essential factor in determining the quantity of actual money that backs capitalism.
  • In fact, the more independent a central bank, the greater the role of fiscal policy.
  • For example, in the eurozone, Germany’s tight fiscal policy is creating a shortage of bunds (German government bonds), which is limiting both the European Central Bank’s (ECB) capacity to implement its quantitative easing policy and commercial banks’ ability to produce more inter-bank money.

What should be role of governments in framing monetary policies?

  • Central banks can and should remain unchallenged with regard to its position.
  • But governments should be given a greater say in domestic money creation and greater independence from the central banks, by establishing a parallel payments system based on fiscal money or, more precisely, money backed by future taxes.

How would fiscal money work?

  • Fiscal money would be solely based on the tax authority’s digital platform, using the existing tax file numbers of individuals and companies
  • Anyone with a tax file number (TFN) receives a free account linked to their TFN.
  • Individuals and firms will be able to add credit to their TFN-linked account by transferring money from their bank account, in the same way that they do to pay taxes.
  • In practice, once, say, €1,000 has been transferred to one’s TFN-linked account, a personal identification number (the familiar PIN) is issued, which can be used either to transfer the €1,000 credit to someone else’s TFN-linked account or to pay taxes in the future.
  • These time-stamped future tax money, or fiscal money, can be held until maturity or be used to make payments to other taxpayers.
  • As fiscal money approaches maturity, taxpayers not in possession of the fiscal money will raise the demand for it.
  • The Treasury would control the total supply of fiscal money, using the effective interest rate to guarantee that the nominal value of the total supply never exceeds a percentage of national income, or of aggregate taxes, agreed to by the legislature.

How beneficial fiscal money is?

  • Fiscal money would provide a source of liquidity for governments, bypassing the bond markets.
  • It would limit the extent to which government borrowing fuels inter-bank money creation.
  • And by competing with the banks’ payment system, it would reduce the cost of fees customers currently pay
  • Fiscal money constitutes a transparent, transaction-cost-free, public payment system monitored by every citizen (and non-citizen) who participates in it.
  • Fiscal money is politically attractive as well. Governments could use any slack in money supply to top up the FTN-linked accounts of families in need, or to pay for public works, making it appealing to progressives.

 

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