While the tax payment has no further effect on the net worth of the private sector (dollars are paid while a tax liability is written off), it cancels a government’s claim (thus reducing the ‘government deficit’ for the period), and simultaneously reduces the net financial assets owned by the private sector.  If the government returned the tax paid (as it happens with a tax credit), the deficit will increase and the private sector net financial assets will increase dollar-by-dollar.

Therefore, for any change (increase or decrease) in the government deficit, there is an identical change in the net financial assets (or financial surplus) of the private sector.  On the other hand, the US private sector may decide to make some purchases from foreigners.  In this case, the US private sector’s financial surplus will fall, while foreigners’ financial surplus increases. Foreigners receive dollar payments in the form of bank account balances in the US system, so as long as they decide to store dollars they own an account in the US.

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Aiming at public purpose while reducing government discretionary power, increasing spending power, fixing the banking system, restoring states’ budgets, keeping inflation in check, achieving full employment, easing tensions in the mortgage market, and ensuring sufficient liquidity at all times.

1.  A full payroll tax holiday where the US Treasury makes all FICA payments for us.  The restored spending power allows households to make their mortgage payments, which ‘fixes the banks’ from the ‘bottom up.’  It also helps keep prices down as competitive pressures will cause many businesses to lower prices due to the tax savings even as sales increase.

2.  A $500 per capita Federal distribution to all the States to sustain employment in essential services, service debt, and reduce the need for State tax hikes.  This can be repeated at perhaps 6 month intervals until GDP surpasses previous high levels at which point state revenues that depend on GDP are restored.

3.  A Federally funded $8/hr job for anyone willing and able to work that includes healthcare.  The economy will improve rapidly with my first two proposals and the private sector far more readily hires people already working vs people idle and unemployed.  In 2001 Argentina, population 34 million, implemented this proposal, putting to work 2 million people who had never held a ‘real’ job.  Within 2 years 750,000 were employed by the private sector.

4.  Return banking to public purpose, by banning all banking activities that do not serve public purpose. Banks should no longer engage into secondary market transactions, proprietary trading, lending vs. financial assets, business activities beyond approved lending and providing banking accounts and related services, contracting in LIBOR (only fed funds), subsidiaries of any kind, offshore lending, contracting in credit default insurance.

5. Reorganize monetary policy by having the Fed lend in the fed funds market to all member banks to ensure permanent liquidity.  Demanding collateral from banks is disruptive and redundant, as the FDIC already regulates and supervises all bank assets.

6. Remodel the Treasury securities market, by having the Treasury issue nothing longer than 3 month bills.  Longer term securities serve to keep long term rates higher than otherwise.

7. Improve the FDIC by removing the $250,000 cap on deposit insurance (liquidity is no longer an issue when fed funds are available to solvent banks), and by not taxing the good banks for losses by bad banks (all that does is raise interest rates).

8. Adopt new practices in the mortgage market by having the Treasury directly funding the housing agencies to eliminate hedging needs and directly targeting mortgage rates at desired levels.  Likewise, homeowners being foreclosed should have the option to stay in their homes at fair market rents with ownership going to the government at the lower of the mortgage balance or fair market value of the home.

9.  Remove the ’self imposed constraints’ (relics from the Gold Standard) that are disruptive to operations and serve no public purpose by eliminating ceilings on US Treasury debt denominated in dollars, and by reinstating US Treasury ‘overdrafts’ at the Fed.

10. Increase Federal taxes only to cool down an overheating economy, and not to ‘pay for’ anything (as taxes function to regulate aggregate demand, not to raise revenue per se).