How about “Suppose its central bank had reserves and currency on the liability side, with goods/services of the economy as assets on the asset side.”?

They should be financed with savings.

And, “Investment in the production of durable goods like cars from profits would be impossible without the profits, and car companies would have very little profit if all of a sudden no external finance was available to customers.”

The customers need to be more profitable so they can save up to buy a vehicle.

Marshall Auerback riffs again on the Mosler proposal:

http://www.nakedcapitalism.com/2011/09/marshall-auerback-the-ecb-v-germany.html

His description of the proposal leaves the inherent concept of negative equity as an unarticulated (but unavoidable) subliminal feature (as seems usual with this particular proposal) that results from using the ECB balance sheet as the conduit.

The crediting of NCB accounts at the ECB would eventually result in the release of the same amount of bank reserves, and in that form act as alternative funding for cumulative EZ deficits. What is interesting about this, relative to our earlier discussion above, is that such a transfer formalizes the negative equity measure associated with that portion of cumulative deficit funding. That’s because capital (and in this case negative equity) is a formal entry on the ECB balance sheet, where it is not EZ treasury balance sheets. Yet the substance of such funding is essentially the same on either balance sheet.

Ironically, Auerback interprets such a marginal expansion of reserves as an equity rights issue. The effect is to reverse-transform your concrete proposal for an equity security on the left hand side of the ECB balance sheet to an abstract idea for equity on the right hand side of the ECB balance sheet. Unfortunately, ECB institutional book keeping will force the opposite result. Because the EZ treasury(s) deposits and the associated reserves ultimately created are missing a matching asset (e.g. the equity securities of your proposal), they will force the capital position of the ECB to be negative. So it goes, one way or the other, when you use the ECB balance sheet as the medium for EZ funding transformation and deal with the inevitable requirement for institutional accounting reconciliation.

Quite apart from our abstract and somewhat academic discussion around the concept of “negative equity”, your proposal is superior in my view because it deals head on and realistically with the real world requirement for coherent institutional (ECB) accounting of some sort. Such accounting is absolutely necessary, functionally, as well in order to recognize and measure the true risk and cost/return sharing dimensions for EZ members of associated institutional arrangements.

These types of proposals would also benefit from at least some back of the envelope calculations on the potential ECB and EZ treasury(s) operations interest margin consequences and the associated presumed cost of capital benefits of risk sharing. It’s exactly the same type of analysis that is easily done in the case of the Fed’s balance sheet with respect to the risk of potential future interest margin compression coming out of QE. The Mosler version of the proposal for the ECB makes this type of analysis even more advisable because there is no corresponding and at least partially offsetting interest revenue stream coming in on the asset side of the balance sheet.

A few points:

1) There are differences between the schemes you describe and the equity proposal here, and a core difference regarding how we come to the question of “fairness”. In particular, in the equity proposal, each state has the option to exactly the same per-capita cash flows. The lost seigniorage income lost by the ECB is not used to fund only Greece, but to fund all takers. Individual states make a choice of how much of that funding they wish to accept, which has domestic price level implications. If all states accept their full allotment of ECB equity purchases, nominal cash flows are equalized, and the foregone seigniorage loss is shared on a per capita basis. If the ECB chooses to increase reserve requirements as one tool by which it manages the price level, there is a tax, but the incidence of that tax, to the degree it can be described, would be better characterized in terms of class than country. That is, financial asset holders in aggregate (potentially borrowers, though I doubt it, and also potentially banks) are taxed. Perhaps that taxes Germany disproportionately since it is “rich”, but you’d have to look deeply into the meaning of rich, the distribution of wealth and character of assets held to say that. If all countries choose to accept their full equity allotment, you really have to stretch to find nation-to-nation nominal transfers. There is an EU-wide assetholder to general public transfer.

2) If, however, some countries opt not to accept their full allotment in order to manage the domestic price level, looking at the period of equity issuance, there would be the sort of country to country transfers you describe. But you describe a kind of nationalistic worst case, where only Greece borrows, and it borrows fairly indefinitely, financed either by Eurobonds or foregone ECB seigniorage. In that case, yes, if you follow the per-period cash flows, you will find continuing net cash flows from the rest of the Eurozone to the indefinite borrower, and it is financially irrelevant whether those cash flows are laundered through the ECB or financed via Eurobonds.

3) However, my proposal is not intended for the “worst case” you describe, and I think that here is the core of our disagreement. Meaning, while looking backwards I think Greece’s creditors have a weak case and deserve whatever haircuts can be imposed on them, going forward I don’t think anyone should be lending to Greece, whether via Eurobonds or laundered through the ECB, until Greece demonstrates its capacity to repay loans as agreed. This proposal is not intended to obscure perpetual transfers. It is intended to reorganize past indebtedness in a fashion that creates space for maximizing future welfare with as little taint as possible from past error. “Sovereign equity” is not intended as a means of arranging transfers at all. While unbalanced cash flows do occur at the time of equity issuance, those “transfers” are to be reversed, in real terms, at some point in the indefinite future. Whether or not you wish to account for the extremely below-market-rate finance, the foregone potential profits, as a transfer is a judgment call. On the one hand, the non-equity-accepting countries (the net purchasers of equity) could have driven a harder bargain, and by not doing so, they are making a transfer relative to nominal Euro maximizing baseline. On the other hand, the risks to all Eurozone countries and the continuing value of the Eurozone itself might render accepting a low return optimal for all parties, and so there might in fact be no opportunity cost. If there is a net opportunity cost, it may be borne by some countries more than others (depending on domestic choices about whether to accept equity), it may be borne by assetholders or by taxpayers (depending on very complex questions regarding the distribution of costs and benefits associated with reserve requirements, interest on reserves, taxation, inflation, etc., and policymakers’ choices going forward). But over all, the only subsidy this proposal would provide any party is the opportunity cost borne by net purchasers of the equity, as long as it is true that over an arbitrary long horizon the equity will be redeemed.

Rereading our exchange, I think that much of our disagreement is a matter of talking past one another. What I am trying to accomplish and what you would like to accomplish are two very different things. A political union that includes widely accepted, preagreed transfers and widely shared insurance schemes that necessarily compel transfers ex post might indeed be a very wonderful thing. You are certainly right that there are many transfers, some of which are persistently attached to geography, that are widely accepted and agreed within the US, for example. There are already such transfers in Europe, too. Germany already does pay, via the common agriculture policy and EU infrastructure, green energy, and cultural grants, more than it receives as part of the union, like California. That remains (mostly) uncontroversial, and is a good thing.

The EU’s problem now results from historical cash flows that were made formally as debt. I am with the mean Germans in that I react with outrage at the notion that because some preagreed intra-Europe transfers are wonderful and advisable that debt imbalances should be resolved ex post with transfers. Within the US, we do lots of transferring, but if California’s fiscal problems go pear-shaped, the necessary resolution process here will be unpleasant as well, and it should be. Mostly, it should be unpleasant for creditors (as it should be in Europe too). But if, as is likely, we find we cannot accept creditors bearing their own losses, the outcome of the policy process should not be a shrug and a transfer, because after all we are part of a transfers union and California has overpaid in the past. The normative context in which cash flows are made matters, and if that context cannot, as a practical matter, be respected, then we have to find a credible and sustainable set of norms and arrangements going forward.

It is uncontroversial that FDIC has transferred lots of money to California and Nevada and Florida and Arizona in the aftermath of their unbalanced current accounts, because we had agreed and prearranged an insurance program that compelled those flows. It is uncontroversial if, as a matter of stimulus or crisis management, we agree as a polity make grants to states to address their fiscal crises. But it is and certainly should be controversial if some few states’ domestic affairs are arranged in a manner that compels transfers under duress. And though ultimately we might and probably would be forced to intervene in such a case, the right response to that situation isn’t necessarily to say “there should have been more transfers agreed in the first place, so the problem wouldn’t have arisen”. Bad debt can coexist with any level of transfers or income (and often does). The right response is to come up with a set of norms and institutions and incentives in which the transfers that are necessary are preagreed and there are sufficient incentives in place to prevent transfers that are not preagreed from being compelled.

I don’t necessarily disagree with you on the desirability of more ongoing and agreed transfers within the European Union. But I think it’s toxic to mix that discussion with the question of how to resolve the existing crisis. We should recognize, of course, that current account imbalance may exist because transfers are necessary but have not been agreed. But current account imbalance can also exist because of mercantilistic creditors and and a kleptocratic debtor state. My proposal is not intended to allow continual borrowing: it would be attended by current account austerity, made easier by the fact that no near-term debt service would be required. Going forward, Greece should absolutely be forced to live within its means. What those means should be, given the realities of a political union and productivity differences, definitely deserves discussion, and you may be right that a wise polity will accept that persistent productivity differentials imply persistent transfers at a level higher than previously obtained.

But that is a conversation for the future, and excuses neither creditors nor debtors of their past misjudgments.

I think we may disagree a bit less than it seems on the long-term picture. But I am focused here narrowly on the question of reorganizing the past burden in a manner that is as fair and as respectful of the normative environment as possible without impairing the ability of states to grow forward.

In the longer term, it would be great if the EU, with the support of its publics, were to agree on deeper integration and whatever transfers that entails. I’m sure you are right that successful industrial economies inevitably require such transfers. Reasonable people can argue over the level and terms of such transfers (and even whether they are “transfers” at all once the option value associated with “nonproductive” people and geographies is taken into account). If arranged well, transfers will help prevent debt crisis by substituting income for borrowing, and that is a practice we all need a great deal more of. But, repeating myself repeating myself, a debt crisis that has created wide disagreement along national/tribal lines is probably a bad time to have that conversation.

I enjoy the discussion. Let me try to insert your proposal into a different paradigm — one that doesn’t depend the technicalities of reserve accounting or differences between equity and debt.

The EMU holds interest bearing assets. The ECB member states supply capital to the ECB and earn a pro rata share of the ECB’s net interest income.

We also agree that governments are not firms, so that the decision as to which member state receives how much seignorage income is not a profit-maximizing investment decision but a political decision. But it is not a bureaucratic decision. The member governments need to sign off on the arrangement.

Now consider two proposals.

In the first proposal, all the EMU governments jointly guarantee and issue “euro-bonds”, using the proceeds to directly lend to Greece. Greece uses the proceeds to retire its outstanding debt and for future financing needs. It redeems the obligations at par whenever it wants, while the other nations continue to service the debt to the private sector. The ECB announces that euro-bonds are acceptable risk-free assets for purposes of determining capital requirements, repo-lending, and bank-lending.

In the second proposal, the ECB lends to Greece on the same terms, and sterilizes the operation by selling off some of its interest bearing marketable assets. The assets that it sells off are acceptable collateral for purposes of determining risk-weighted capital requirements, and repo lending, etc. They yield the euro bond rate.

In the first proposal, whenever Greece uses its right to defer a payment to the member states, that is a loss of interest income for them, as they must make the payment instead. In the second proposal, whenever Greece defers a payment, that is an identical loss of income, this time for the ECB, and this results in an equivalent loss of seignorage income by the member states (assuming ECB expenses remain the same).

In both cases, the same transfers are occurring, to the penny. In both cases, Greece is re-financed at the same rate.

Let’s push this further.

Suppose that we are in the first case and the financing needs of Greece are proportionally larger than the financing needs of the other states.

What ensures that the eurobonds earn a low interest rate? The ECB can guarantee this by setting a nominal rate for the bonds, but there is a risk of inflation and the ECB is mandated to control inflation. As more euro-bonds are sold, the member governments will need to drain assets from the private sector so that the ECB does not see a need to raise interest rates. Ultimately the member states are taxing their domestic populations and transferring the proceeds to Greece.

Suppose now that there is excess asset demand so that Greece’s debt offering does not crowd out the debt offerings of member states. Then it is still the case that the member states are excessively taxing their own populations and this is what allows Greece to run deficits (even though the motivations for excess taxation may have nothing to do with Greece). Again there is a direct trade-off between the EMU wide-tax level and the deficits of Greece.

The Maastricht treaty was introduced to avoid the free riding problem of these trade-offs, and I believe that the one size fits all nature of this treaty is why we are in trouble. California historically pays a dollar in federal taxes for every 70 cents of federal spending, while for poorer states the situation is reversed. It must be so. It has been this way for decades. The equivalent Maastricht rules would require Germany to run a surplus and Greece would be allowed to run a large deficit, with transfers from one to the other.

Back to the two proposals, suppose now that we are in the second case:

Greece may require more in loans than the size of the ECB’s balance sheet, in which case the ECB will need to raise reserve requirements. We agree that this is effectively a tax on the financial sector. Irrespective of the incidence of this tax, it is still a EMU-wide tax, the proceeds of which are sent to Greece. Again, same thing. It doesn’t matter how you do the accounting, or whether you like to classify one obligation as equity or debt. It is all tax and transfer, and the political opposition is due to the tax and transfers, not due to accounting classifications.

This, I believe, is the real source of the proposal. I.e. the second tax and transfer operation is believed to be more politically acceptable than the first, even though in both cases, we are talking about equivalent tax and transfers.

Operationally, the ECB does not have this discretion — the payout ratios and asset requirements are constrained by ECB policy which must be approved by a board of national representatives whose votes are weighed in proportion to their capital subscription — a combination of GDP and population. Nevertheless there is an assumption that the national representatives governing the ECB are more likely to voluntarily donate income streams to Greece than their elected colleagues.

Which is why I call the proposal ugly:

There is no reason that income transfers need to be routed via the central bank, which is a non-elected body, does not have the necessary expertise, and contains conflicts of interest that prevent it from levying the appropriate taxes on its core constituency in order to insure that Greek social spending is not reduced.

But I see how you it might be considered clever if it would really work.

In any case, I hope we can agree that operationally, the first model is superior to the second. There is no reason why the EU banking sector reserve demand should constrain Greek debt, when the non-financial sector’s asset demand should be the constraining factor. There is no reason to use only a dedicated funding source — e.g. seignorage income — to pay for transfers that arise out of industrial and institutional imbalances between member states.

In terms of whether these transfers are necessary, I think they are. There are increasing return to scale industries that lead to agglomeration effects. Productive enterprises require a social eco-system of human capital, well functioning institutions, and credit relationships. By agreeing to join a currency and trade union, nations are risking the survival of these eco-systems as the most productive ones swallow the less productive ones.

In the future, Greece may be the birthplace of some new industry — e.g. the Nokia phenomena — but until then, if Greece is to share in a currency union with Germany, then it will for the most part de-industrialize and lose its increasing return industries to Germany. This will be accompanied by gains due to industry concentration and larger market sizes within the EU as a whole, provided that appropriate transfers are put in place. These transfers should tax the Germans for the productivity gains due to larger market sizes and they should subsidize the Greeks for the resulting loss of capital (and productivity) to Germany.

The ideal form of taxation is via an EU-wide system of income taxation and social benefit payments, not bank reserve taxes and state-to-state transfers. But the net effect of these transfers will be to tax high productivity areas and subsidize lower productivity areas.

Just as within Germany, the wealthy industrialized south subsidizes the less productive north, or within Italy, the more productive north subsidizes the south. We cannot all work for increasing-return manufacturing firms, some of us need to work as haircutters and waiters. If the increasing-return firms concentrate in one area — and they will do so — then either there will be ongoing transfers or the economy as whole will experience recurring internal payment crises and it will shrink. I believe that an industrial economy needs these transfers as a pre-requisite for economic stability. I understand that this is not a mainstream view.

I hope we can all agree it is ugly.

Nope. I wouldn’t have proposed it if I thought so. I think this is actually the correct, and a very elegant, solution given what Europe is and the mixed democratic legitimacy of the European project.

It is not true, even in an integrated country like the US, that persistent transfers from some groups to others are openly tolerated despite perceived illegitimate use of the proceeds. It is certainly true that, in the US, populous states persistently make transfers to less populous states. But that is not “the persistently rich” subsidizing “the persistently poor”. It is a recognition that there are fixed costs associated with governing geography, and that if we collectively wish to “own” our scarce geographies, we have to pay those costs. Subsidies from urban to rural exist in Europe and are not broadly controversial there (though they are controversial elsewhere) in Europe’s common agricultural policy. The US does reliably offer transfers ex post to internal current account debtors, primarily via FDIC, and in the more recent era of megabanks, TBTF support. Florida, Nevada, and Arizona, were terrible current account deficit states prior to the crisis. State reimbursed defaults are our means of transfer. The United States does much countenance what are obviously persistent welfare transfers from rich to poor across state lines. Unemployment insurance is a state-by-state affair, supported by state-level taxation for the most part. The Federal government provides only catastrophic unemployment insurance with in the US, offering extended benefits in severe downturns. That is, the Federal government is kind of a reinsurer of states that pays up during nationwide shocks and no-fault “disaster area” emergencies. Its role as even catastrophic reinsurer is enormously controversial. (Republican politicians seem to hate it, and I presume they represent some substantial fraction of the polity in doing so.)

Human beings are moral animals (and thank goodness that they are). Undoubtedly, in every political arrangement there are opaque transfers, and some of those go from rich to poor (though most of those flow uphill I suspect). No transfer union is sustainable, in the US or in Europe, which compels open and apparently permanent transfers from one group to another group without some justification for why the transfers are deserved. Greece’s enthusiasm for tax avoidance and Italy’s cultural exuberance will not fly as a justification for persistent transfers. Transfers from urban to rural are widely justifiable under existing cultural norms in Europe and America, but very few other current transfers are.

It’s important to remember that a few years ago, several of today’s beggar countries looked like European tigers. Ireland and Spain were doing great, to those foolish enough to believe market efficiency obviated concerns about capital flow imbalance. There is no reason why Spain and Ireland, or even Greece or Southern Italy, should expect permanent poverty, and no reason why Germans and Finns(!) should sign up for permanent transfers to them. They require transfers now because of a specific historical circumstance (caused primarily by foolish lending and tacit regulatory guarantees thereof).

I can’t think of any material difference between this proposal and the euro-bond proposal, which will also fail to do what is needed. The difference, in terms of hitting the German bottom line, is more in terms of misdirection.

This will come back to an issue that we’ve squabbled over before, which is you don’t see a very big difference between debt and equity, whereas I am certain that, although they lie along a common continuum, the distinction ultimately represents something important and categorical.

Yes, both debt and equity represent outlays of funds that are intended to be repaid, and yes, private sector equityholders demand compensation for the risk of nonpayment as surely or perhaps more surely than creditors, in the form of a stochastically expected cost of capital. Equity can be hard to raise.

But once equity is raised, its effect on the financed entity is entirely different than the effect of debt finance. Debt-finance, absent perfect refinancing markets, implies that there are states of the world in which an enterprise may be forced to sacrifice long-term performance in order to satisfy the claims of creditors. Equity claims impose no such constraints. (This lack of constraint can arguably be a bad thing too — there’s a whole literature on leveraged cap structures as a means of managing agency costs — but let’s put that aside for the moment.)

This proposal, if it would work, would do so via two basic mechanisms. The first represents a very ordinary kind of subsidy: I’m proposing that the ECB offer to refinance e.g. Greece’s debt in perpetuity at a rate of return vastly below what private market participants would demand to hold a similar security. I am suggesting that the ECB also offer e.g. Germany’s debt on precisely the same terms, but obviously the net effect of those two refinancings is a subsidy of Greece’s interest payments by Germany, as the spread between market-and ECB- terms offered to Germany is far less than the spread between market- and ECB- terms offered to Greece.

The second mechanism, however, serves to justify this subsidy in part. I believe (and I think that the European Union should act as though believes as well) that, given time and a discontinuation of the bad capital-flow hygiene that brought Greece it where it is, there is no question that Greece can grow at a rate that will render its current indebtedness manageable, if the return demanded on that indebtedness is modest. That is, I think that a long-term, patient and unconstrained, investor should be willing to offer even Greece financing on extremely generous terms. European institutions especially should be willing to do so, because it represents a kind of Pascal’s wager for them. If, over say an 80 year time horizon, Europe’s circumstances remain so tumultuous and uninspiring that Greece’s current real debt remains burdensome, the European project is toast anyway. There is very little incremental cost to European institutions in making a long-term wager that Greece will grow in real terms over the decades, once the current unpleasantness has passed. All I’m asking is that European institutions invest in their member states as though they are long-term low risk, and on terms that are distributionally fair. That strikes me as a very justifiable sort of investment for European institutions to make.

Your comments suggest that this proposal is intended as a form of smoke-and-mirrors, that it’s all about using the money veil to enforce transfers. But that is not at all my intent. Some things that can be thought of as monetary transfers are intended: the expected differential effect on the domestic purchasing power in Germany and in Greece, for example. But reequilibrating real exchange rates is prerequisite to the continuance of European integration. The “transfers” involved are multidimensional (Germans become wealthier when purchasing Greek goods, and poorer when purchasing German goods), and can be thought of as undoing earlier fluctuations in relative value caused by foolish capital flows.

But overall, I do not intend this proposal to “hide” any sort of hole. People talk about “insolvency” as though that is ever a fact that must either be acknowledged or faked. The solvency of an enterprise is never a factual question (only illiquidity can be factual). Solvency or insolvency is always a conjecture, and policy can tilt that conjecture one way or another. We may wish sometimes arrange policy to tilt towards insolvency. In fact, we often wish to do so in the service of “creative destruction”, to keep incentives sharp, to avoid “zombie firms”. I think we ought to arrange policy so that Citibank’s insolvency becomes a social fact, for example. But I acknowledge that we can arrange policy in such a manner that it has a tacit asset of state support that will render it solvent for an arbitrary period. The question isn’t whether Citi is or is not insolvent. The question is whether it serves our long-term interests to provide an environment in which it suffers an overt insolvency, given different future scenarios and legitimacy concerns under the rules of the game ex ante. For Citi, I want to see an overt insolvency, for both tacit and moral/normative reasons. But I see little upside in Europe’s sovereign debt crisis to manufacturing overt insolvencies. The technocratic challenge can be met by managing preventing unbalanced intra-European debt flows going forward. That me be politically difficult, but as a technical matter it’s trivial.

On a moral/normative level, nations don’t disappear and reconstitute as smoothly as capitalist firms. The humiliated employees of Arthur Anderson are doing fine at PwC, and though they may look back unfondly to the trauma of their uprooting, I suspect that very few harbor a generational grudge against Washington. But humiliated “bankrupt” Greeks will still be Greeks, and given the rigidities of European labor markets, most of them won’t smoothly be absorbed into the broader EU economy following an insolvency. There is no moral upside to treating a nation like a firm that deserves to be liquidated and a whole lot of terrifying downside. This is our “economic consequences of the peace” moment. Troubled European countries can be long-term solvent, given capital on generously nonburdensome terms and better financial hygiene going forward. That is what we should provide for them.

(BTW, despite my perhaps sharp disagreement, is that how you write when you are drunk, I’d hate to face your sobriety. As always, you thoughts are smart, interesting, and much appreciated.)

Regarding our previous exchange, I think we agree as an accounting matter that central banks have the capacity to not show any capital hole if they don’t wish to. This is part and parcel of the fact that fiat money is equity. Since central banks never face a liquidity crunch, the usual function of a balance-sheet solvency analysis — to predict future illiquidity events — is short-circuited. A central bank can offset new currency issue with unrealistic marks on its assets, and no capital hole is revealed. Whether or not central bank shows a capital hole, the securities a central bank issues may gain or lose value in the open market, and there is little or no correlation between a CBs expressed capital position and the value of the scrip it issues. So ultimately, the only question that matters is whether the CB is managing its currency issue in a manner consistent with meeting its macroeconomic goals. A central bank’s formal capital position is a meaningless nullity, unless by some confidence loop it affects the value of the currency. So central bank accounting standards are ultimately determined (and constrained) instrumentally, by how accounting communications will affect the behavior on currency users. I’m sure it is true that central banks that lose confidence of investors end up with especially silly marks on their balance sheets, but again, I don’t think that central balance balance sheet strength or “accuracy” (that’s hard to define here) much correlate with the actual standing of real currencies. In addition to communicating accounting statements, central banks have a lot of tools they can use to manage the scarcity of their scrip.

I think I’ll respond to your latest in a separate comment.

Re: Behavioral risk aversion vs power imbalance, I’d argue that they are mutually reinforcing. Suppose people lend rather than take an equity interest because of risk aversion and/or asymmetric information, both very “natural” explanations for the popularity of debt. If the people who have lent have political power, they will strongly enforce “creditors rights”, which will reduce the risk to borrowing and reinforce its appeal to the risk averse. Even if lenders do not explicitly exercise political power, if they lend because they are risk averse, and treat loans as low risk (i.e. they do not provision for possible default), they will become vulnerable to severe misfortune if loans are not paid. If lenders as a group are politically visible, if their misfortune would disrupt the functioning of the polity, the mere fact of their situation will conjure the protection of the state. Which of course will further attract risk-averse lenders, and further discourage them from provisioning for potential default. Creditor risk-aversion + the existence of a state to which creditors are a nonmarginal group create a mutually reinforcing dynamic of risk-aversion, protection, and systemic fragility to potential default.

Let’s look at it another way. Suppose that the government has already acquired the use of real resources by spending money into the economy. Now the government taxes back some of the money, the raising of which requires the production no new good or service. Then the government spending was itself the equity infusion. The taxation becomes a swap from a higher seniority to lower seniority form of equity. That is, I had an equity claim in the form of an explicit financial security. After taxation, I retain an equity claim, but it takes the form of an unwritten, loose claim on the benefits and services of government, rather than scrip whose exchange value the government is not obligated to, but often does support.

You may object, quite reasonably, that “exchange” doesn’t seem right, because when I surrender currency for taxes, my claim on the governments benefits and services is no stronger than it had been prior to the exchange. I had the rights and obligations of a citizen before paying taxes, and retain those rights afterwards. But that’s a fallacy of failing to compose. In aggregate, citizens really do strengthen their claims to the benefits and services of government by surrendering taxes. Government would not be able to supply those benefits and services if it did not compel taxation, and an “optimal” government would tax only in a manner and to a degree that any new tax demanded is matched by an increase in the quality of governance, the benefits to which taxpayers in aggregate hold an equity claim.