Unfulfilled Potential

A monetarily sovereign government is one that issues its own currency and is the currency’s sole issuer. Ideally, it allows the currency’s value to float in relation to other currencies in foreign exchange markets, meaning its currency is not convertible at a fixed rate into either another currency or a commodity (other than possibly the commodity labor-power through the provision of a job guarantee). Although this ideal maximizes policy space, a government that promises convertibility can renege at a later date, and so, strictly speaking, does not relinquish its monetary sovereignty so long as it retains the authority to issue its own currency. A monetarily sovereign government that operates a flexible exchange rate faces no revenue constraint provided it refrains from borrowing in a foreign currency and so avoids exchange-rate risk on its debt.

A monetarily sovereign society might be said to be a society that has endowed its government with the authority to issue the currency on its behalf and holds its government to democratic account. If accountability is lacking, then although government might be sovereign, the society itself will not be. The possibilities open to a monetarily sovereign society are immense. But this potential can only be realized through the exertion of considerable grassroots pressure on government. Without this, the prospect is tyranny rather than liberation, and social and economic exclusion rather than inclusion.

This danger is not due to a government’s monetary sovereignty. The same dangers confront any society that is unable, unwilling or uninterested in holding its government to account, whether that government is monetarily sovereign or non-sovereign. If anything, the dangers would seem to be worse under a monetarily non-sovereign government, because then society is placed at the whim of a currency issuer without even a semblance of democratic accountability.

The source of the danger, then, is not monetary sovereignty. Rather, a government’s monetary sovereignty creates a potential for meaningful social progress. But it is only a potential, and can only be fulfilled through genuine democracy conducted by an informed citizenry.

Right now, it is perhaps fair to say that an informed citizenry and, as a consequence, genuine democracy, are almost entirely lacking in the specific area of macroeconomics.

At minimum, an informed citizenry would understand that, due to monetary sovereignty:

If we can do it, we can afford it.

For a society to allow its government to pretend otherwise would seem to reflect a state of almost collective hallucination.

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4 thoughts on “Unfulfilled Potential

  1. Your article reminds me of the Lucas Paradox.

    Economics teaches us that where capital is scarce, it earns a higher return. As such, we would expect capital to flow from developed economies where capital is abundant to developing economies where capital is scarce.

    But we see the opposite happening, capital flowing in the other direction, hence the paradox. But the paradox is easily resolved when we note that capital returns are lower in developing economies on a risk-adjusted basis, i.e., once we adjust for risk.

    And because capital is a factor of production, countries that act irresponsibly will not attract capital, nor will they retain the capital they generate internally, which in turn leads to low production and poverty.

    Lucas Paradox: https://en.wikipedia.org/wiki/Lucas_paradox

  2. And because capital is a factor of production, countries that act irresponsibly will not attract capital, nor will they retain the capital they generate internally, which in turn leads to low production and poverty.

    Development economists observe that more important than the downside of indicated by “risk” and “irresponsibility,” capitalism depends on the institutions of capitalism, and emerging nations generally are “emerging” because they are at various stages of implementing these institutions. First, it is complicated and cannot be done by a hand wave. Secondly, there is a lot of cultural resistance to do this. The process is further complicated by the powerful inserting themselves into the process and diverting resources to their class.

    Development economics is a work in progress that no one has yet figured out how to implement quickly and seamless to get from here to there. Development involves not only economic challenges but also social and political obstacles.

    It’s a mine field.

  3. “This danger is not due to a government’s monetary sovereignty. The same dangers confront any society that is unable, unwilling or uninterested in holding its government to account, whether that government is monetarily sovereign or non-sovereign. If anything, the dangers would seem to be worse under a monetarily non-sovereign government, because then society is placed at the whim of a currency issuer without even a semblance of democratic accountability.”

    Peter, I’m sure you are aware of the 2014 debate in the British Parliament, regarding ‘money creation’ where it was shown that 70% did not know how money was created, and it took the Bank of England to demonstrate it.

    What started out as a ‘debate’, was quickly changed to evidence and no longer capable of ‘debate’ (unless of course one wishes to suggest the BOE deliberately lied).

    I guess this shows that potentially a lot of our politicians are ignorant of a lot of things other than what is necessary for them to make policies (i.e. the technical side of it).

  4. You’re probably right about politicians, Dean. Being drawn from the general public, there’s probably no reason to expect that they would be any less susceptible to confusion than the rest of us.

    Central bankers (as your example attests) and treasury officials are much more likely to know how things work.

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