The New Keynesians in charge of our public fisc are currently pursuing President Lincoln’s greenbacks policy with the utmost enthusiasm. Great amounts of liquidity are being created by Chairman Yellen’s purchase of treasury paper from Secretary Lew, while the U.S. Congress furiously puts this new money into circulation. The booking of this new sovereign debt is irrelevant to the fiat-money enthusiast’s case because the interest rate on this debt is essentially zero. (Moneyed elites are apparently quite happy to participate with these ‘investments’ in order to shelter their wealth from the financial markets’ current prospects.)

Yet the desired purchasing power does not materialize: markets remain sluggish while prices edge higher.

Fortunately for this discussion, monetary policy has exactly two directions in which it might be applied. Noting that increasing the amount of money in circulation has never relieved our current circumstance in the four score and seven years of its application, perhaps we might usefully contemplate the effect of decreasing the amount of money in circulation.

Let us begin by observing that purchasing power can be enhanced in either of two ways: 1) the public can somehow acquire more currency with which to make more purchases at current prices; or 2) prices can somehow be made to fall, enabling the public to purchase more with the money currently passing through its hands.

SFEcon emulators offer no support for the first of these policies because they produce none of the effects anticipated by monetary theory. This is because the the investment term is a variable of our theory that will absorb any monetary stimuli. Exogenous injections of fiat money into Model 0’s Model 0’s capital accounts induce no transients in the physical state variables; and only the monetary ‘transient’ is an instantaneous jump to higher prices with an increased investment term. Quantitative easing will not, therefore, increase purchases because, cet. par., this only further reduces money’s rate of circulation, while commodities’ prices increase with the quantity of money in the hands of those desiring to purchase those commodities.

The sovereign debt we currently have is an interesting financial aggregate because it is large and presumably under the popular control of those whose taxes service the debt. If (through some paroxysm of congressional rectitude) a portion of this debt were paid off, or (in an even less likely event) the state’s creditors forgave some of the accumulated sovereign debt, this would be represented by an injection into the savings of Model 0’s household sectors. Such stimuli are entirely absorbed by the investment term, which duly contracts and thereby increases the rate of monetary circulation.

This option is of course countenanced nowhere in reputable economic theory; and all the theoretical justification in the world would not diminish the laughter likely to greet its suggestion as a practical alternative. Ancient wisdom, however, counsels the periodic cancellation of debts as necessary to avoid widespread debt peonage and/or uprisings among populations that will not be enslaved. Solon of Athens was able to resolve one such conflict by imposing land reforms that were highly disadvantageous to his class. The Old Testament recounts several declarations of jubilee years in which enlightened sovereigns such as Nehemiah gave the creditor class just such a haircut in the face of these same social perils.

Late industrial capitalism arrived equipped with its natural facility for creating periodic jubilees to abort unsuportable financial obligations, viz.: its periodic collapsing of equity values. These processes, being inconvenient to those whose vocation it is to own equities, have become a preoccupation of the governing class; and they, with their central banks, have made it their function to stifle capitalism's natural means of righting itself when distressed.

Thus current wisdom (with its attendant police powers) would seem to favor a creditor class that will neither spend its wealth nor write it down, preferring instead to invest in ever-expanding sovereign debts, where it will be productive and safe until the social unrest it causes raises up yet another of the popular men of expedience to which our epoch is prone. The more civilized alternative is orderly default through an open, public process such as that recently forced on Iceland’s political class by its general population — a population having the world’s longest tradition of governance by consent of the governed.

Moral: Economic theory is most likely to serve the interests of those who can afford to pay for its propagation.