Four More Questions about Money

© by Mark Dempsey

The Washington Post warns us about the dangers of "Trump ... awash in a sea of red ink" (Retitled by McClatchy as "The nation's exploding deficit and our future.") Mainstream media can only continue to publish such fictions because it refuses to understand how currency works. To bring readers up to date, here are some clarifications (this follows Four Questions about Money).

1. Q: Is the Government running Out of Money? 
A: Is the scorekeeper running out of points? Both questions make about the same amount of sense. Modern economies use fiat money, not tied to or limited by a commodity like gold. Money is a measurement of obligation, debt or credit, not a thing. Notice, incidentally, that even gold-backed currency is an IOU...in this case "I owe you a lump of gold."

2. Q: Doesn't Government need to collect taxes to provision itself?
A: Not a sovereign, fiat money creator (with a floating exchange rate). Governments like the U.S. create the money, and have no need for tax revenues to fund their programs. If you paid your taxes at the Treasury Building, after marking your obligation "Paid," their employees would shred the dollars.

Believing the government has to collect money to provision itself overlooks logic, too. Government has to spend the dollars, before it can ask for some back in taxes. Where would taxpayers get the dollars with which they pay taxes if government didn't spend them out into the economy first?

Bonus question: What's another name for all the dollar financial assets the government does not retrieve in taxes, but leaves out in the economy? Answer: National "Debt."

3. Q: If government doesn't need the money, why have taxes?
A: To make the money valuable. Dollars retire an inevitable liability; that is why they are valuable. Taxes are necessary, they just do not provision the government that issues the money.

4. Q: Wouldn't making all these printed dollars lead to inflation, even hyperinflation?
A: In theory, it's a possibility. In practice, it never happens. First of all, simply creating money does not cause inflation. According to its own audit, the Federal Reserve (the U.S. Central Bank) created $16 - $29 trillion to bail out the financial sector in 2007-8. It still has $4 trillion in troubled assets on its books, dating from that time. So...where's the inflation? No indicator, like the Consumer Price Index (government), or MIT's "Billion-price Index" (semi-public) or Shadowstat's (private) inflation indicator shows a surge of inflation then.

The (Koch-funded) Cato Institute published a study of 56 inflationary episodes throughout human history. Says economist Stephanie Kelton*: "Not a single one of … the 56 cases were caused by a central bank that ran amok. In virtually every case, the inflation was not caused by too much money but too few goods." In the most famous of often-cited hyperinflations, farming collapsed in Zimbabwe as Rhodesian farmers left, leading to a food shortage, and France annexed the industrial Ruhr depriving Weimar Germany of manufactured goods while it had foreign currency-denominated reparations to pay. "Inflation is overwhelmingly driven by cost-push variables... Printing money just doesn't do it. If it did, Japan would have exploded decades ago, because they've been trying quantitative easing for nearly 20 years, and they can't move the needle on inflation. We've been trying it here in the U.S. for about five years, and Bernanke can't even hit his 2% [inflation] target."

...

This means all of the "we're out of money" excuses explaining why we cannot have nice things are false. We can fix global warming, have free college tuition, universal healthcare, guarantee a living-wage job for every able-bodied unemployed person, and produce a golden age. We have the money to do it, if we want it. All of the panic-stricken excitement about national debt is just propaganda designed to disempower the population, subjecting them to debt peonage.

*Kelton was an advisor to the Senate Budget committee.