© by Mark Dempsey (See also Four More Questions About Money)
The Washington Post sternly 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 fiction because it refuses to understand how currency works. To bring readers up to date, here are some clarifications.
1. Q: What is money, exactly?
A: It's an IOU, a marker for debt. This explanation often puzzles people, until they understand the way bank debt works. If you have a bank account, that's your asset, but to the bank, it's a liability (debt).
Writing a check assigns a portion of the bank's debt to the payee. Currency is checks made out to "cash" in fixed amounts. Dollars appear in our central bank's accounting as debt, too. In fact, the dollars themselves say they are "Federal Reserve Notes," and "note" is the legal term for a debt. Dollars are the equivalent of a non-interest-bearing checking account, while Treasury Bills and Bonds are the equivalent of savings accounts.
Ask yourself whether you would join a mob of depositors with torches and pitchforks confronting the bank manager where you kept your deposits, demanding that he reduce the bank's debt (i.e. the size of your accounts) by increasing bank fees and reducing interest paid on savings. That's what the National "Debt" anxiety promotes. Not really sensible, is it?
2. Q: What is National "Debt," then?
A: It's like bank debt, not household debt. That means National "Debt" is actually the sum of the nation's dollar financial assets. Like those bank accounts, it is the savings of the population. Reduce National "Debt," and those savings diminish too, making the economy more fragile, and the population even more at the mercy of creditors.
3. Q: Does reducing National "Debt" (the cumulative sum of deficits) Make Sense?
A: Sometimes. Modern Money Theory economics founder and former bank operations officer Warren Mosler compares deficits to a thermostat. Sometimes you want the economy to heat up (with bigger deficits) and sometimes you want it to cool down (smaller deficits).
It is important that the deficit exist, most often, because the economy constantly creates things of value. Adam Smith's example of economic activity was adding value by carving an axe handle from a fallen tree limb. If the economy continues to add value, but the number of dollars in circulation shrinks, deflation occurs. Creditors love deflation because they are repaid with more valuable money, but it crushes debtors and often coincides with serious economic downturns.
Historically, the U.S. has reduced its deficit significantly seven times since 1776. The last such reduction was the Clinton surplus. The reduction before that occurred in 1929. Andrew Jackson even paid the entire National "Debt" off in 1835.
While ascribing causality is difficult in any system as complex as the U.S. economy, a Great Depression-sized hole followed every one of those significant deficit reductions. In the above examples, the Great Recession, the Great Depression and the Panic of 1837.
Meanwhile, both political left and right continue to publish calls to reduce the "Debt" like NPR's story: "Despite Strong Economy, Federal Deficit Soars"... But larger Federal deficits heat up the economy!
4. Q: Why would anyone promote National "Debt" reduction?
A: To take advantage of the distress. When people cannot pay their obligations because their savings have been reduced, then a wave of asset forfeitures and foreclosures is the result (that Great Depression). Vulture capitalists can then pick up these distressed assets cheaply.
One of the biggest promoters of the reduce-the-National-"Debt" meme was Pete Peterson. His Blackstone Group is now one of the biggest landlords in the nation, thanks to all the foreclosed properties it bought. For its next step, Blackstone raised rents, and started to sell off its properties at the recovery-based price. If Peterson's heirs succeed again in reducing the population's savings, we can look forward to a repeat of this procedure, and even more people reduced to debt peonage.
Mark Dempsey is an instructor in the CSUS Renaissance (Senior) education program, and a Modern Money Theory Maven.
The Washington Post sternly 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 fiction because it refuses to understand how currency works. To bring readers up to date, here are some clarifications.
1. Q: What is money, exactly?
A: It's an IOU, a marker for debt. This explanation often puzzles people, until they understand the way bank debt works. If you have a bank account, that's your asset, but to the bank, it's a liability (debt).
Writing a check assigns a portion of the bank's debt to the payee. Currency is checks made out to "cash" in fixed amounts. Dollars appear in our central bank's accounting as debt, too. In fact, the dollars themselves say they are "Federal Reserve Notes," and "note" is the legal term for a debt. Dollars are the equivalent of a non-interest-bearing checking account, while Treasury Bills and Bonds are the equivalent of savings accounts.
Ask yourself whether you would join a mob of depositors with torches and pitchforks confronting the bank manager where you kept your deposits, demanding that he reduce the bank's debt (i.e. the size of your accounts) by increasing bank fees and reducing interest paid on savings. That's what the National "Debt" anxiety promotes. Not really sensible, is it?
2. Q: What is National "Debt," then?
A: It's like bank debt, not household debt. That means National "Debt" is actually the sum of the nation's dollar financial assets. Like those bank accounts, it is the savings of the population. Reduce National "Debt," and those savings diminish too, making the economy more fragile, and the population even more at the mercy of creditors.
3. Q: Does reducing National "Debt" (the cumulative sum of deficits) Make Sense?
A: Sometimes. Modern Money Theory economics founder and former bank operations officer Warren Mosler compares deficits to a thermostat. Sometimes you want the economy to heat up (with bigger deficits) and sometimes you want it to cool down (smaller deficits).
It is important that the deficit exist, most often, because the economy constantly creates things of value. Adam Smith's example of economic activity was adding value by carving an axe handle from a fallen tree limb. If the economy continues to add value, but the number of dollars in circulation shrinks, deflation occurs. Creditors love deflation because they are repaid with more valuable money, but it crushes debtors and often coincides with serious economic downturns.
Historically, the U.S. has reduced its deficit significantly seven times since 1776. The last such reduction was the Clinton surplus. The reduction before that occurred in 1929. Andrew Jackson even paid the entire National "Debt" off in 1835.
While ascribing causality is difficult in any system as complex as the U.S. economy, a Great Depression-sized hole followed every one of those significant deficit reductions. In the above examples, the Great Recession, the Great Depression and the Panic of 1837.
Meanwhile, both political left and right continue to publish calls to reduce the "Debt" like NPR's story: "Despite Strong Economy, Federal Deficit Soars"... But larger Federal deficits heat up the economy!
4. Q: Why would anyone promote National "Debt" reduction?
A: To take advantage of the distress. When people cannot pay their obligations because their savings have been reduced, then a wave of asset forfeitures and foreclosures is the result (that Great Depression). Vulture capitalists can then pick up these distressed assets cheaply.
One of the biggest promoters of the reduce-the-National-"Debt" meme was Pete Peterson. His Blackstone Group is now one of the biggest landlords in the nation, thanks to all the foreclosed properties it bought. For its next step, Blackstone raised rents, and started to sell off its properties at the recovery-based price. If Peterson's heirs succeed again in reducing the population's savings, we can look forward to a repeat of this procedure, and even more people reduced to debt peonage.
Mark Dempsey is an instructor in the CSUS Renaissance (Senior) education program, and a Modern Money Theory Maven.
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