Postmodern Monetary Theory: The NSA and Unconventional Monetary Policy

On August 12, damaged by the revelations emanating from the leaked NSA documents by Edward Snowden, President Obama empaneled a commission to make recommendations for reforms of US cyber-surveillance.  On December 12 this group submitted its report, “Liberty and Security in a Changing World”.

One item that has attracted a bit of attention is a proposal, lodged in Recommendation 31, that reads as follows:

We recommend that the United States should support international norms or international agreements for specific measures that will increase confidence in the security of online communications. Among those measures to be considered are:  

(1) Governments should not use surveillance to steal industry secrets to advantage their domestic industry;  

(2) Governments should not use their offensive cyber capabilities to change the amounts held in financial accounts or otherwise manipulate the financial systems.....

This last item is interesting.  No documents have yet been released that suggest that the NSA or its foreign affiliates have altered financial accounts through electronic manipulation, but the commission presumably had access to a wide range of materials without knowledge of which will be made public in the future.  It may be the case, then, that they are acting to preempt a future revelation.  Even if there has actually been no such financial intervention, however, it is clear that there could be and that it would be prudent to consider the implications of such actions.

First, what sort of financial adjustments would authorities engage in?  It is unlikely that they would debit financial accounts, since affected parties would seek redress and, if their funds are not legally impaired, they would have a strong claim.  Crediting such accounts, on the other hand, is easily accomplished.  Recipients are unlikely to protest; on the contrary, they may be allied in some fashion with security authorities, perhaps providing some type of quid pro quo.  In that case, the alteration of financial accounts becomes of a form of monetary transfer, and it is this activity that economists may want to consider more closely.

What is the difference between the NSA or some other agency paying an external party (by check, suitcases full of cash, etc.) and crediting their account by hacking it?  Here are some of the possibilities:

1. A payment by intelligence authorities, even from a black account, is an expenditure charged to the treasury.  As such, it increases the fiscal deficit (or reduces the surplus) by a corresponding amount, which in turn alters the quantity of outstanding public debt.  To monetize this debt—to inject liquidity of equal amount so that the debt does not sop up existing liquidity—the central bank can expand its holdings equivalently.  (Saying this does not presume that the private sector cannot generate such liquidity on its own, only that monetary authorities may wish to do this under circumstances in which private credit creation is viewed as insufficient.)  Normally the treasury and the central bank are independent of one another, even if they do choose to coordinate.  In the case of credit creation by the NSA, however, payment and monetization are accomplished in the same act.  It is as if the central bank became the paymaster.  This is efficient if liquidity expansion is indeed the goal, but calls for some form of sterilization otherwise.  (Here the debiting of other accounts would be the simplest route if it could be accomplished.)

2. NSA payment through “direct deposit” is not a public expenditure and has no effect on public sector accounting.  Nevertheless it does affect national income accounts in the same way that traditional payments do: if it is payment for a counterflow of goods or services it should be incorporated into final demand, while if it is a transfer payment it alters the net tax calculation.  What is troublesome is the violation of double-entry accounting, since we now have flows into the accounts of some parties without flows out of the accounts of others.  It should be noted, however, that the application of double-entry bookkeeping to the issuance of currency is essentially pro forma, and that, in a fiat currency world, central banks do not take on any meaningful liabilities in this process.  Perhaps a fictitious liability can be designed for the NSA in order to enable the accounts to balance.

3. In the traditional practice of open market operations, central banks directly intervened only in the market for short term treasury debt.  Quantitative easing has changed this: now monetary authorities can select particular credit markets, public or private, to intervene in so as to alter the structure of interest rates.  NSA liquidity injections offer even more precise targeting at the level of individual market actors.  It is not difficult to imagine how this practice could be defended as the least-cost method of achieving narrowly defined goals in support of financial markets.  Of course, in a more roundabout manner, similar actor-targeted transfers were enacted globally in the post-2008 bailouts on a very large scale.

4. One striking feature of NSA financial capability is that it, like the virtual system it intervenes in, is borderless.  Thus, an agency of the US government can increase the stock of euros, yen, pounds, renminbi or any other currency as readily as it can inject US dollars.  It is easy to see how such a capability could be abused, and I can imagine that there may have been quiet discussions among the relevant authorities over this concern.  At the same time, however, this global capacity opens up a new chapter in international monetary policy coordination.  If, for instance, expansionary monetary policy in the US is inhibited by an unwillingness of the ECB to follow suit, explicit agreement can be circumvented.

5. The ability to intervene in any currency should also have a profound impact on the future likelihood of international monetary crises.  If there is a run on a country’s currency, that country can cause foreign exchange of any denomination to simply materialize.  Moreover, it no longer matters whether borrowing is undertaken in home or external currencies, since the borrower now has sovereign power over both.  For countries with the capacity to engage in NSA-type activities, the distinction between soft and hard currencies may be a thing of the past.

This is just a first pass at what ought to be a deeper investigation.  In the long history of money and credit, what is the significance of a public authority that can unilaterally alter the financial accounts of any market participant anywhere in the world it chooses?