It's Time To Give Up On Mainstream Economics

Few modern economists would, for example, monitor the behaviour of Procter and Gamble, assemble data on the market for steel, or observe the behaviour of traders.  The modern economist is the clinician with no patients, the engineer with no projects. ~ John Kay, from The Map is Not the Territory: An Essay on the State of Economics, October 2011

I’m not quite sure what a depression is. ~ Martin Feldstein, in an interview with Kelly Evans of the Wall Street Journal, October 2011

A Failure To See the Obvious 

Prior to 2008 it was generally understood that the profession hardly merited its claims of its own predictive utility. So the failure to assign enough risk to such a crisis as befell the developed world in 2008 was, frankly, no surprise. But in the aftermath of the crisis, economics, in its professional form, has revealed itself to be damagingly disconnected from observable reality.

A glaring example of this is how it cannot come to any agreement as to how the debt crisis occurred, and accordingly remains quite confused in its proffered solutions.

Mostly the profession remains curiously naive about the nature of debt, an understanding of which is more critical than ever as the developed world enters a 'slow' to 'no-growth' phase of its history. Indeed, many of the papers, interviews, and op-eds from central bankers and economists in the face of our present-day sovereign debt crisis are little more than an eerie restatement of the discussions which took place about private-sector debt from 2006-2008.

For a profession tasked with the analysis of dynamic systems, modern economics can be ploddingly linear. And for a profession supposedly guided by math, the descent into "sociology lite" is all too routine. One of the more consistent errors (or nervous tics, if you will) comes in the area of scale and proportion. A favorite and most astonishing example for me remains former Dallas Fed President Bob McTeer’s explanation of the cause of the 2008 crisis. Writing in his blog at the end of 2009, McTeer set out to defend the US Federal Reserve for its role in the catastrophe:

It is taken as given these days that the Fed created the housing bubble. If this is true, then it must follow that the Fed is responsible for the bursting housing bubble, the ensuing financial crisis and subsequent recession. But, as I recall, the Fed did not create the housing bubble. It was the collateralized subprime loans, not a reversal of home prices, that caused the problems. Maybe there were too many loans, but, if so many had not been bad loans, air could have come out of the bubble without devastation...Subprime loans triggered the crisis and recession. Other things like too much debt and leverage made the problem worse, but didn’t cause it.

Let’s stipulate that the issue of causality can almost always broaden out into legitimate disagreement. But Mr. McTeer’s claim here is so grossly disproportionate to the total size of the credit bubble, which was not limited to housing, that one is compelled to ask if Mr. McTeer actually understands the system over which the Federal Reserve presides. This blind spot towards debt growth, and in particular the rate of debt growth, counts as one of the more curious revelations to emerge from the crisis. Indeed, while the crisis finally produced a broader appreciation by the public of debt dynamics, it also produced a clearer portrait of the economic profession’s intractable position towards debt. In short, they “don’t see it.”

And, here’s what they don’t see. The following chart is composed of total debt growth in the US economy from 1929 and helpfully covers the period through 2008, compared as percentage of GDP. As you can see, the rate of debt growth starting after 1999 should have been on the radar of economists and central banks. Especially the Fed. The 1985-1998 period was relatively slow by comparison. But starting in 1999, total US Credit Market Debt to GDP exploded higher, from 250% to 350%.

Let’s rework the claim of McTeer, as follows: Subprime loans represented too small a portion of total credit to have either triggered or caused the crisis and recession. When growth slowed, the unsustainable amount of debt and leverage in the entire system was revealed, and thus made everything worse.

The cruel irony of McTeer’s faulty understanding is that the US economy would be powering out of recession right now, with typical 4-6% GDP growth, had the credit bubble been confined (contained!) to subprime. The relegation of the crisis’ beginnings or causes to subprime is now considered a kind of joke that flags a financially illiterate (or political) view. The US should have been so lucky as to have merely faced a subprime problem. Now there are 10.7 million US homes in negative equity. Twenty-five years of strong credit growth, a deflationary labor shock from the developing world, and a phase transition in energy prices set the stage, not for a post-war recession, but a depression. A meandering economic stagnation that can never produce a full recovery. 

Founded On a Fallacy 

Modern central banking came into existence, of course, during a secular growth phase in the developed world funded by cheap energy. Its task for most of the past 100 years has been to regulate growth -- not to manage decline. Much of the commentary you saw prior to 2008, such as Ben Bernanke’s sincere lack of concern about a US housing bubble (“I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis...”) is, of course, duplicated today as we confront a similar endgame in sovereign debt.

Economists in 2010, when the European crisis began, were sanguine. In the tête-à-tête between Hugh Hendry and Joseph Stiglitz last year, Stiglitz was adamant that debt service for Greece was no problem. More recently this summer, Jeffrey Sachs claimed at FT that there was a way out for Greece, by allowing the country to borrow at rates enjoyed by Germany. That may have seemed like the biggest catch to such a solution. I would submit, however, that the Sachs proposal contained a much larger uncertainty that is now the new blind spot common to the economics profession: the assumption of continued growth.

One of the more irritating personality traits of economics as a discipline is that it continually incorporates every trend into its growth model, and then identifies it as a good thing. The secular decline in US manufacturing jobs was deemed as such, as it “freed up” the populace to take service jobs. Interestingly, in our post-crisis economy, much of the selected regional strength in the US is now very much related to exports and a small resurgence in light manufacturing.

The Fed should have been paying closer attention to the multi-decade trend in US manufacturing employment. Instead, Alan Greenspan, a fan of Ayn Rand, believed the world operated in a magically offsetting series of harmonics, in which self-interest propagated though the financial system, producing a grand balance of risk. It is easy to understand how debt growth, cost inflation in health care and education, and the unsustainable bloat in the financial sector would flourish under such a paradigm. After all, “one person’s debt is just another person’s asset,” so what could possibly go wrong?

Worsening What They Don't Understand

When central bankers can’t initially understand why markets are rebelling against debt levels, they often turn to simplistic behavioral concepts. But a small dash of social psychology can be a dangerous thing when injected into monetary policy. Perhaps some moderate respect should be given now, many years after his tenure, to Alan Greenspan, who in testimony finally admitted that "the entire model he used to describe how the world worked, was wrong." In similar fashion, Ben Bernanke in his 2011 public testimony has admitted that the Fed “cannot print oil,” cannot solve problems without help from fiscal policy, and probably cannot force a faster economic recovery.

But one wonders how evolved the Fed chairman really is, given his public statements in 2009 that the financial crisis was merely in the fashion of a 19th-century panic. Instead of exponential growth in private credit, capricious monetary policy from the Fed itself, or the guns-and-butter fiscal policies of the government, Bernanke voiced publicly in his PBS TV performance and also at Jackson Hole that we had merely suffered a Bagehot-type panic. This may have been why he thought, as did many others, that a normal recovery would ensue.

Here is the key passage from the Jackson Hole conference on August 21, 2009, Reflections on a Year of Crisis (Interpreting the Crisis: Elements of a Classic Panic):

How should we interpret the extraordinary events of the past year, particularly the sharp intensification of the financial crisis in September and October? Certainly, fundamentals played a critical role in triggering those events. As I noted earlier, the economy was already in recession, and it had weakened further over the summer. The continuing dramatic decline in house prices and rising rates of foreclosure raised serious concerns about the values of mortgage-related assets, and thus about large potential losses at financial institutions. More broadly, investors remained distrustful of virtually all forms of private credit, especially structured credit products and other complex or opaque instruments.

At the same time, however, the events of September and October also exhibited some features of a classic panic, of the type described by Bagehot and many others. A panic is a generalized run by providers of short-term funding to a set of financial institutions, possibly resulting in the failure of one or more of those institutions. The historically most familiar type of panic, which involves runs on banks by retail depositors, has been made largely obsolete by deposit insurance or guarantees and the associated government supervision of banks. But a panic is possible in any situation in which longer-term, illiquid assets are financed by short-term, liquid liabilities, and in which suppliers of short-term funding either lose confidence in the borrower or become worried that other short-term lenders may lose confidence. Although, in a certain sense, a panic may be collectively irrational, it may be entirely rational at the individual level, as each market participant has a strong incentive to be among the first to the exit.

The Fed Chairman is using a technique here called hiding in plain sight, or perhaps secrecy by complexity. It is inarguable that a behavioral panic took place. But the aim was clear: to avoid the debt saturation in OECD/developed nations and the United States and the years of slow-to-no growth it was fated to impose. More broadly, the Fed had been “managing” the growth of debt in the US economy for over two decades. 2008 was the signal that the long, secular era of lowering interest rates to help the economy manage its debt levels had reached its endpoint.

One possible explanation for this blind-spot towards debt is that the economics profession is largely in service to the political class. Books, such as Reinhardt and Rogoff’s This Time is Different, which addresses the limits imposed by debt, are generally not in favor in the current era. Equally, the moral flavor to much of the right-leaning thinking on debt is also unsatisfying, as it also does not address debt-saturation so much as fiscal rectitude. What matters instead are the levels in both private-sector debt and public-sector debt that impose operational restraints. Total debt service as a proportion of income will always create a limit eventually among private sector borrowers. That is precisely what began to occur in the US and was the prima causa of the recession. However, the precise, problematic levels of debt for sovereign nations are trickier to identify.

The Tide Is Changing

Through a combination of confidence, debt service, actual economic flows, and the marketplace, however, 2012 is almost certainly the year that the present sovereign debt problems will be resolved, one way or another. Also, this week’s US dollar swap operation likely points towards one of the two macroeconomic endgame pathways that I outlined last month.

The current economics profession in general, and our central banking leadership in particular, sheds even more credibility as it careens on, blinded by its own light. The process by which economic activity and resources are coaxed into being by stimulative monetary policy has reached its terminus, and the public will finally understand this dynamic over the next year.

In Part II: How The European Endgame Will Be The Death Knell For Modern Economics, we predict the coming endgame to the European fiscal and monetary crises. Doing so is becoming increasingly easier as we better understand the mindset of today's economic leaders and the shrinking number of options they have to address the issues before them. In fact, we think the shroud of awe and mystery that our grand economists have wrapped themselves in is fast-dissipating, and that the systemic pain their failures will inflict in 2012 -- initially most visible in Europe -- will finally cause the populace to look to a new school of economic thinking.    

Click here to access Part II of this report (free executive summary, enrollment required for full access). 

This is a companion discussion topic for the original entry at

Great article, but you need to specify that you are talking only about the Keynesian economist and their current view of the fiat money world they inhabit - in that world, many of the writings of Austrian economists and those philosophical works by people like Ayn Rand make no sense.  In fact many Austrian economists had been warning of the dangers of debt, but they are ignored because that view doesn’t allow for the endless growth of the welfare/warfare state.

There is a balance when you have sound money and risk associate with the debt.  It’s not magical - it’s self-interest, but in the current scenario it’s broken due to the fiat currency by which we measure cost of capital and risk. When you have no risk, you have no self interest.

In a sound money system this is true, because the person with the asset is dependent on the debtor paying their debt.  Due to this concern they are careful to whom they lend since they may loose as well.  However, with central banks creating money from thin air and handing it out to those connected to the central banks, there is no risk, since there was really no asset to lend in the first place.

Perhaps this should really be titled "It’s time to give up on Keynesian economics and fiat currency."

What is "sound money"?

I really like the article, except for this seemingly gratuitous swipe at Ayn Rand.  Yes, Greenspan was a fan and personal friend of Ayn Rand.  It is quite obvious to anyone familiar with Rand’s work, that Greenspan betrayed everything he believed in (or claimed to believe in) by the time or shortly after he became Fed Chairman. 

It is an impossibillity of logic to simultaneously believe in Rand’s philosphy and execute the powers of Fed Chairman without being clinically insane.  Therefore, Greenspan is either a) insane, or b) changed his beliefs.  If b), then he should publically announce to the world that he renounces everything Rand stood for, or else he is also c) a hypocrite of Biblical proportions. 

There are no other alternatives.  Implicating Rand with Greenspan’s disasterous career is not much more fair than tarring Winston Churchill because say, Timothy McVeigh, was a "fan".

Gregor; thanks for an outstanding analysis as usual. The only issue I have with your dissertation is your assignment of the cause of their failure to everything except to what I believe to be the central problem. The economic profession, the elites of the profession, much like the politicians have sold themselves to the private banking system, to their insatiable appetite for exponential debt rising to exponential profits and bonuses. They have become part and parcel of the parasitic financial system, it is the induction of the brightest of these economic minds to  this form of "prostitution’’ in return for, money, fame, ideology, …for whatever tickles their egos, just as most of our politicians have , that is the result of the crisis we have today. I find it hard to believe that inability to observe readily observable correlations is a genetic defect or a systematic training deficiency that ultimately manifests itself in these two professions.

[quote=rhare]Great article, but you need to specify that you are talking only about the Keynesian economist and their current view of the fiat money world they inhabit - in that world, many of the writings of Austrian economists and those philosophical works by people like Ayn Rand make no sense.  In fact many Austrian economists had been warning of the dangers of debt, but they are ignored because that view doesn’t allow for the endless growth of the welfare/warfare state.
I think the term "mainstream economists" excludes Austrian economists as Austrian economists are anything but mainstream. I agree with Farmer Brown on the Ayn Rand/Greenspan connection.

[quote=Farmer Brown]I really like the article, except for this seemingly gratuitous swipe at Ayn Rand.  Yes, Greenspan was a fan and personal friend of Ayn Rand.  It is quite obvious to anyone familiar with Rand’s work, that Greenspan betrayed everything he believed in (or claimed to believe in) by the time or shortly after he became Fed Chairman. 
I agree and here’s more:
Here’s Ayn Rand on Hymn to Money:
Here’s Alan Greenspan on Gold and Economic freedom:
The Gold and Economic freedom paper was of course published in 1966.
Greenspan never retracted the publication even after he became the Fed Chairman.
So I would go with (b) and (c).

[quote=Mark_BC]What is "sound money"?
LOL, good question. I think most people mean "sound money" to be something that is chosen by the free market for two functions: A) medium of exchange and B) a store of value. Valuable enough so that deferred consumption (savings) can be done with the understanding that the money asset can be exchanged for something of need in the future (say land or food etc.)
I think it is safe to say at this point that legal tender currencies are faltering big time for function (B) and getting devalued, therefore worsening in performance with respect to (A).
Wealth in and of itself does not have to mean gold. Productive wealth would be something that ensures an individual and his/her family’s sustenance {all the personal resilience associated things advocated by "What should I do series"}. If these are taken care of, one would still need a way to get to the "other side", with their deferred consumption component of their wealth intact. One possible vehicle is gold.

 The house of cards will fall when the last debtor can no longer pay . . . and then we will see Mad Max in the Western World.

 Is it just me or are the calculations or scaling on that Morgan Stanley chart off?

Self-interest with the helping hand of government is very dangerous.   We also call this Cronyism.  Ms Rand never argued for this.   Risk with no downside creates distortions in the economy that will eventually be paid for in some fashion: war, high unemployment, high interest rates, high inflation, hign write-offs, and all or any of these.

профессиональная раскрутка сайта, гарантированный результат

Risk with no downside creates distortions in the economy that will eventually be paid for in some fashion
For sure!  aka Moral Hazard.  
Risk with no downside creates distortions in the economy that will eventually be paid for in some fashion
For sure!  aka Moral Hazard.  

 Rand came to the fore in the era that was also marked by an emerging view of the world typified by Nash’s Game Theory.  While there were differences in the free market schools of thought, there were, and are, some significant problems in implementation.  For starters, Greenspan, finding himself espousing Randian free pursuit of enlightened self interest, must have suffered terrible cognitive dissonance when he accepted the very role of government economic tinkerer on behalf of interference.  He would have quickly found he could not obey two masters.  The attempts to do so created a good deal of the problem.
The issue is humans and their foolish tendency to address economics in both writing and policy as if it were an objective scientific discipline alone, examining and controlling objective rational behavior.  When in reality, economics seems to have lost touch with economies.  Economies are people driven systems.  If everyone is pursuing enlightened self interest I will pursue taking all of your stuff for myself and bribing the sherrif (or whatever law you allow to remain) to look the other way while I do it.

Free market theories still depend heavily on the rule of law to work properly.  When you have many individuals pursuing cut throat versions of self interest (F you buddy being the name of the game for a reason) they will remove what law restrains them and simply do as they damn well please.

Behavioral economics will probably be part of this emerging trend,  but Rand and Nash will not go easily and it would be a shame to throw out the good with the bad.

To add to that above statement, I like FOFOA’s definition of honest money much better:
My definition is that honest money is simply money that does not purport to be something it is not.
Full link at: FOFOA: The Return to Honest Money

Growth, debt, and the World Bank

by Herman Daly
When I was in graduate school in economics in the early 1960s we were taught that capital was the limiting factor in growth and development. Just inject capital into the economy and it would grow. As the economy grew, you could then re-invest the growth increment as new capital and make it grow exponentially. Eventually the economy would be rich. Originally, to get things started, capital came from savings, from confiscation, or from foreign aid or investment, but later out of the national growth increment itself. Capital embodied technology, the source of its power. Capital was magic stuff, but scarce. It all seemed convincing at the time.

Many years later when I worked for the World Bank it was evident that capital was no longer the limiting factor, if indeed it ever had been. Trillions of dollars of capital was circling the globe looking for projects in which to become invested so it could grow. The World Bank understood that the limiting factor was what they called “bankable projects” — concrete investments that could embody abstract financial capital and make its value grow at an acceptable rate, usually ten percent per annum or more, doubling every seven years. Since there were not enough bankable projects to absorb the available financial capital the WB decided to stimulate the creation of such projects with “country development teams” set up in the borrowing countries, but with WB technical assistance. No doubt many such projects were useful, but it was still hard to grow at ten percent without involuntarily displacing people, or running down natural capital and counting it as income, both of which were done on a grand scale. And the loans had to be repaid. Of course they did get repaid, frequently not out of the earnings of the projects which were often disappointing, but out of the general tax revenues of the borrowing governments. Lending to sovereign governments with the ability to tax greatly increases the likelihood of being repaid — and perhaps encourages a bit of laxity in approving projects.

Where did all this excess financial capital come from? Not from savings (China excepted), but from new money and easy credit generated by our fractional reserve banking system, amplified by increased leverage in the purchase of stocks. Recipients of new money bid resources away from existing uses by offering a higher price. If there are unemployed resources and if the new uses are profitable then the temporary rise in prices is offset by new production — by growth. But resource and environmental scarcity, along with a shortage of bankable projects, put the brakes on this growth, and resulted in too much financial capital trying to become incarnate in too few bankable projects.

So the WB had to figure out why its projects yielded low returns. The answer sketched above was ideologically unacceptable because it hinted at ecological limits to growth. A more acceptable answer soon became clear to WB economists — micro level projects could not be productive in a macro environment of irrational and inefficient government policy. The solution was to restructure the macro economies by “structural adjustment” — free trade, export-led growth, balanced budgets, strict control of inflation, elimination of social subsidies, deregulation, suspension of labor and environmental protection laws — the so-called Washington Consensus. How to convince borrowing countries to make these painful “structural adjustments” at the macro level to create the environment in which WB financed projects would be productive? The answer was, conveniently, a new form of lending, structural adjustment loans, to encourage or bribe the policy reforms stipulated by the term “structural adjustment.” An added reason for structural adjustment, or “policy lending,” was to move lots of dollars quickly to countries like Mexico to ease their balance of payments difficulty in repaying loans they had received from private US banks. Also, policy loans, now about half of WB lending, require no lengthy and expensive project planning and supervision the way project loans do. The money moves quickly. The WB definition of efficiency became, it seemed, “moving the maximum amount of money with the minimum amount of thought.”

Why, one might ask, would a country borrow money at interest to make policy changes that it could make on its own without any loans, if it thought the policies were good ones? Maybe they did not really favor the policies, and therefore needed a bribe to do what was in their own best interests. Maybe the goal of the current borrowing government was simply to get the new loan, splash the money around among friends and relatives, and leave the next government to pay it back with interest.

Such thoughts got little attention at the WB which was haunted by the specter of an impending “negative payments flow,” that is, repayments of old loans plus interest greater than the volume of new loans. Would the WB eventually shrink and disappear as unnecessary? A horrible thought for any bureaucracy! But the alternative to a negative payments flow for the WB is ever-increasing debt for the borrowing countries. Of course the WB did not claim to be in the business of increasing the debt of poor countries. Rather it was fostering growth by injecting capital and increasing the debtor countries’ capacity to absorb capital from outside. So what if the debt grew, as long as GDP was growing. The assumption was that the real sector could grow as fast as the financial sector — that physical wealth could grow as fast as monetary debt.

The main goal of the WB is to make loans, to push the money out the door, to be a money pump. If financial capital were really the limiting factor countries would line up with good projects and the WB would ration capital among countries. But financial capital is superabundant and good projects are scarce, so the WB had to actively push the money. To speed up the pump they send country development teams out to invent projects; if the projects fail, then they invent structural adjustment loans to induce a more favorable macro environment; if structural adjustment loans are treated as bribes by corrupt borrowing governments, the WB does not complain too much for fear of slowing the money pump and incurring a “negative payments flow.”

If capital is no longer the magic limiting factor whose presence unleashes economic growth, then what is it?

“Capital,” says Frederick Soddy,”merely means unearned income divided by the rate of interest and multiplied by 100” (Cartesian Economics, p. 27). He further explains that, “Although it may comfort the lender to think that his wealth still exists somewhere in the form of “capital,” it has been or is being used up by the borrower either in consumption or investment, and no more than food or fuel can it be used again later. Rather it has become debt, an indent on future revenues…”

In other words capital in the financial sense is the future expected net revenue from a project divided by the rate of interest and multiplied by 100. Rather than magic stuff it is an indent, a lien, on the future real production of the economy — in a word it is a debt to be repaid, or alternatively, and perhaps preferably, to not be repaid but kept as the source of interest payments far into the future.

Of course debt is incurred in exchange for real resources to be used now, which as Soddy says cannot be used again in the future. But if the financed project can extract more resources employing more labor in the future to increase the total revenue of society, then the debt can be paid off with interest, and with some of the extra revenue left over as profit. But this requires an increased throughput of matter and energy, and increased labor — in other words it requires physical growth of the economy. Such growth in yesterday’s empty-world economy was reasonable — in today’s full-world economy it is not. It is now generally recognized that there is too much debt worldwide, both public and private. The reason so much debt was incurred is that we have had absurdly unrealistic expectations about growth. We never expected that growth itself would begin to cost us more than it was worth, making us poorer, not richer. But it did. And the only solution our economists, bankers, and politicians have come up with is more of the same! Could we not at least take a short time-out to discuss the idea of a steady-state economy?

If not Jubilee then what??
Debt saturation is killing us. The least painful alternative is liquidation of existing debt with interest free "fiat" currency (Treasury paper). Anything else begs the question, ‘how does society escape more debt?’ Legacy debts would be redeemed with non-interest bearing Treasury paper in the face amount plus accrued interest. Thereafter, because  sovereign currency is it’s own revenue source, there would be no need for permanent taxation and borrowing.  These two events would only be used as stabilizers for aggregate demand in the short-run.

Because the federal government is the currency monopolist it would provide, to states and all other political jurisdictions, no strings-attached-grants with which to operate those jurisdictions. There would be no need for municipal bond markets. It makes little sense for sovereign currency regimes to pay interest on their own currency used to pay for goods and services which support and improve the commons.

Jus’ Sayin’

Damnthematrix,Truly excellent discussion of multilateralism’s cynical duplicity dressed in the cloth of the Good Samaritan. In the '70’s I was at A.I.D. and working with WB program and project economists.  I left  A.I.D. because it wanted to be the WB. The Capital Projects Directors in the four regions were wannabe bankers and sought not development but, as you point out, disbursement of loan funding, frowning on grant programs associated with technical assistance.  They asked, "…why should we teach them to fish, for free, when we can force them to pay us a rate of return we can’t get from the private sector?"
But I digress. You posit, "…And the only solution our economists, bankers, and politicians have come up with is more of the same! Could we not at least take a short time-out to discuss the idea of a steady-state economy?"
Oh, we can, and have discussed this ad nauseam.  I won’t repeat the themes here, but I will pose a question that moves this ad nauseam discussion beyond the boundaries of received wisdom to a perfectly rationale and workable financial alternative which has been purposely obfuscated  because it serves the objectives of populism more than pure capitalism.
The fundamental question is, in a world of sovereign governments, many with sovereign fiat currencies, why do those governments need to finance, at interest, the purchase of goods and services for the Commons?
What I find deficient in the steady-state discussion is recognition of the power of sovereign currencies no longer bound by the rubrics of the gold standard and fixed exchange rates.   Sovereign governments, with sovereign currencies, lawfully elected assemblies, and judicial systems relatively uncorrupted by political elites, can create all of the debt-currency it needs to fund the commons. There is no need to raise revenue in the conventional sense because sovereign currency is its own revenue creator. Confiscation (taxation) would only obtain, when aggregate demand needed to be constrained. Interest rate policy would also spur or dampen consumption, savings and investment. The Treasury Department can, and has manage these policies.
The only policy change that would be needed is the elimination or significant adjustment in fractional reserve ratios.   Freedom to create credit/debt along side the spending of debt-free currency destroys the notion of steady-state.
Spending, federal government (Treasury Dept.) distribution of fiat currency to all of America’s political jurisdictions to fund their budgets, would eliminate state and local debt and the credit/debt infrastructure which supported it.  Annual, budgets would reflect appropriate growth ratesfor; population, hours worked annually divided by GNP, etc. 
The actual size of the grant to political jurisdictions would be based on local experience over an agreed upon historical reference period. Something like the best approximation of lows, highs, and average outlays adjusted for anamolies.
The creation of credit through fractional reserve, as you point out, is the fundamental distortion in world economies.  Particularly, those economys not bound by Basel II or III. That is, where Central Banks can use back door facilities to make members whole at near zero rates. And, they in turn, leverage those central bank funds at 40 to 80:1. this debt devaluation is not sustainable.
The elimination of fractional reserve leaves the quantity of money issue solely in the hands of the people and their representative government. While it will be necessary to build a very effective control mechanism to prevent currency leakage, governments with long traditions of effective regulatory control and authority to levy sanctions will need to man-up to ensure steady-state growth.