© by Mark Dempsey
If you think politics and religion are taboo Thanksgiving conversations, try talking about money! Talking about money with a Thanksgiving dinner attendee annoyed and confused him, especially when telling him government is not funded by taxes or borrowing.
The idea that taxpayers, or lenders-to-government are the source of the money in Federal spending is illogical. Where do people who pay taxes or lend to government get the dollars with which to do those things? The government must spend dollars out into the economy before they’re available to retrieve with taxes or borrowing. It’s “spend, then tax,” not “tax and spend.”
This means government is the only fiscally unconstrained player in the economy. It can spend as much as it wants, and buy anything for sale in its currency. This is true for any government with a sovereign, fiat currency and a floating exchange rate.
It’s also impossible for such governments to be involuntarily insolvent. They can’t go bankrupt because they can make the means of repaying their debts by creating more money. What about Greece? No sovereign currency! They cannot make Drachma any more, and must get their currency--the euro--from the European Central Bank. Bond markets knew this, too. Greek bond yields went through the roof to account for this risk while bonds from sovereign currency issuers (dollar, pound, yen) remained available at record low interest rates.
An objection to the above is “Why have any taxes, then, if the government does not need the tax revenue?” The answer to that is that taxpayers need dollars to pay taxes. Taxes make the money valuable. They do not fund the government. Don’t take my word for it, though, read an essay from Beardsly Ruml, chairman of the New York Fed, written in 1946 entitled Taxes for Revenue are Obsolete..
But don’t we have a National ‘Debt,’ though? Yes, but that is more like bank debt than household debt. Dollars, even commodity-backed dollars, are a form of IOU--“I owe you a lump of gold” in the case of gold-backed currency. An IOU doubles as an asset when you have a bank account. Your checking or savings account is your asset….but what is it to the bank? Answer: It’s the money they owe you. It’s a liability, a debt, an IOU.
When you write a check, you assign a portion of the bank’s debt to the payee. Currency amounts to checks made out to “cash” in fixed amounts, and not just bonds, the interest-bearing obligations equivalent to savings accounts, but dollars too appear on the books of the Federal Reserve--the Fed is our central bank--as a liability. So technically, government IOUs are what we use to conduct the economy’s business, not necessarily a sign that we have lent anything to the government.
That term--“National 'Debt'”--is just another name for the dollar financial assets circulating in the economy. The total amount of currency, T-bills/Treasury bonds, bank reserves, etc. in circulation equal, to the penny, the amount of National 'Debt'. That’s not exotic economics, it’s double-entry bookkeeping.
You might ask “OK, the government owes us something for a dollar IOU. What is it?” The answer--besides “another dollar”--is that the government owes you relief from a dollar’s worth of an inevitable liability: taxes. Taxes make the money valuable, they don’t provision the Federal Government. The fact that the government is a currency creator, not, a currency user like households (and state and local governments) makes all the difference.
The final objection: “B..but if you just print money, you’ll get [gasp!][hyper-]inflation!” Theoretically, that’s possible, but in reality, it’s just hypothetical. Theoretically, government, with its unlimited access to dollars, could bid up prices, competing with the private sector for finite goods and services, and it could always win the bid. That’s one reason plutocrats fear effective government. Their money can’t protect them from government action.
Could the Treasury issue a few trillion-dollar coins and deposit them in the Federal Reserve to balance that National “debt”? Answer: Yes, and legally, too. Where’s the bidding war, though? No inflation would result from trillion-dollar coin deposits.
Could the government offer a Job Guarantee, employing all the unemployed. Government buys surplus cheese, why not surplus labor? Would that cause inflation? Who else is bidding for the unemployed? Answer: no one. So no bidding or inflation for a Job Guarantee, either.
Historically, the inflation-producing bidding war never happens. The Koch-funded Cato institute’s study of 56 hyperinflations throughout history discovered that none of them originated with the central bank printing too much money. The hyperinflationary episodes typically began with a shortage--like the oil shortage that produced 1970’s U.S. inflation--and a balance of payments problem magnifies the problem.
Wiemar Germany first lost their industrial heartland (the Ruhr) to French occupation, and then experienced a shortage of goods. World War I reparations added to their international balance of payments problems, and these led to hyperinflation. Zimbabwe witnessed the exodus of their colonial, Rhodesian farmers, and was unable to continue producing enough food to feed itself. The shortage of food, and the need to import it was what started the hyperinflation, not the Zimbabwe central bank’s printing press.
As a counter-example, according to its own audit, the Federal Reserve extended $16 - $29 trillion in credit to the financial sector to cure the frauds brought to light in 2007-8. If just issuing money caused inflation there would be an enormous surge in that time frame, but no such surge appears in the Consumer Price Index (government), or MIT’s Billion Price Index (semi-private), or even in Shadowstats (private) inflation index. These trillions retired financial obligations rather than bidding for goods or services.
Artificial spending limits--austerity--justified by promoting inflation fears is the friend of creditors. It produces deflationary public policy, which means creditors are repaid with more valuable dollars when they lend. Inflation favors borrowers.
Whenever the U.S. has succumbed to the deflationary siren song of “Fiscal Responsibility™” borrowers suffer. In U.S. monetary history, since 1776, there have been seven major reductions of National 'Debt'--the last being the Clinton surplus. The time preceding that occurred in 1929. Andrew Jackson's administration even paid off the entire “debt” in 1835.
What correlates 100% with such “debt” reductions? A Great-Depression-sized hole in the economy, including the Great Recession, the Great Depression, and the Panic of 1837.
A history buff acquaintance disputed this account. He said the Panic of 1837 happened because Andy Jackson stole the Indian lands in the Southeastern U.S. The Supreme Court sided with the Indians, but Jackson ignored the ruling. After the genocidal Trail of Tears cleared out the Indians, the cotton plantations began farming the newly vacant land, borrowing massively to buy slaves. The resulting cotton surplus made the price of cotton plunge, despite the fact that they warehoused 60% of that crop. Then the plantations defaulted on their loans, and the typical depression scenario of asset forfeitures and foreclosures began.
But look at what the “Debt” payoff did: it withdrew dollars from the economy, impairing peoples’ savings. When time came for the plantations to pay their debts, they not only didn't get the expected cotton income, they didn’t have the savings to compensate for that shortfall. The “Panic of 1837” ensued.
An economy is a complex system. It’s hard to assign causality, but the 100% correlation of these “Debt” paydowns with Great Depressions is certainly suggestive. All of the headlines saying “Economy improves despite National ‘Debt’ increase” continue to promote ignorance of the connection, and the economic capabilities of government spending, but now you know what’s really far more likely to be one root cause of these massive downturns: reductions in National ‘Debt.’
So why all the publicity about government shortfalls? Just this week, for one example, McClatchy news reminded us that Social Security is out of money! Notice, incidentally that we weren’t out of money for $16 - $29 trillion in financial sector bailout, and could have paid off everyone’s mortgage for only $9 trillion. When it comes to bank bailouts or wars in the Middle East, we have plenty of money. But for social safety nets, somehow we’re fresh out.
Why? Two words: “Labor Discipline.” The message is that you had better take whatever crappy job is on offer, or your household will be unable to pay its debts, and will suffer the indignities of poverty, even homelessness and starvation. If you are extra ornery, we’ll incarcerate you! We may even replace you with robots and artificial intelligence!
But the truth is that people are more productive when motivated by their own interests rather than threats driving them to desperation. There is plenty of work to do--although not all of it is profitable. Among those unprofitable activities are things like raising our children, caring for our elderly, or observing environmental impacts. These could all be jobs. A Job Guarantee is not just possible, but would make a world where civility would be far more common, and dog-eat-dog capitalists would have to treat labor with respect.
The good news is that our biggest task is changing our minds. The bad news is that we’re reluctant to even consider something outside the conventional narrative that says currency creators like government are just exactly like currency users like households.
I’d even suggest that a population not reduced to desperate measures simply to survive is more likely to be generous with civil rights and tolerance, never mind mobilizing the economy to deal with really big problems like global warming. Whether prosperity or tolerance came first may be a chicken-and-egg problem, but the idea that they are not intertwined is absurd. “Labor discipline” includes immiserating and dividing the population into squabbling tribes of debt peons that are easy to dominate...er, I mean "govern."
H.G. Wells once said that civilization is a race between education and catastrophe. Whether we will experience more Thanksgiving gratitude depends largely on whether we learn our lesson before catastrophe wins the race.
Update: Stephanie Kelton (a Modern Money Theory economist) agrees in Huffingtonpost.
If you think politics and religion are taboo Thanksgiving conversations, try talking about money! Talking about money with a Thanksgiving dinner attendee annoyed and confused him, especially when telling him government is not funded by taxes or borrowing.
The idea that taxpayers, or lenders-to-government are the source of the money in Federal spending is illogical. Where do people who pay taxes or lend to government get the dollars with which to do those things? The government must spend dollars out into the economy before they’re available to retrieve with taxes or borrowing. It’s “spend, then tax,” not “tax and spend.”
This means government is the only fiscally unconstrained player in the economy. It can spend as much as it wants, and buy anything for sale in its currency. This is true for any government with a sovereign, fiat currency and a floating exchange rate.
It’s also impossible for such governments to be involuntarily insolvent. They can’t go bankrupt because they can make the means of repaying their debts by creating more money. What about Greece? No sovereign currency! They cannot make Drachma any more, and must get their currency--the euro--from the European Central Bank. Bond markets knew this, too. Greek bond yields went through the roof to account for this risk while bonds from sovereign currency issuers (dollar, pound, yen) remained available at record low interest rates.
An objection to the above is “Why have any taxes, then, if the government does not need the tax revenue?” The answer to that is that taxpayers need dollars to pay taxes. Taxes make the money valuable. They do not fund the government. Don’t take my word for it, though, read an essay from Beardsly Ruml, chairman of the New York Fed, written in 1946 entitled Taxes for Revenue are Obsolete..
But don’t we have a National ‘Debt,’ though? Yes, but that is more like bank debt than household debt. Dollars, even commodity-backed dollars, are a form of IOU--“I owe you a lump of gold” in the case of gold-backed currency. An IOU doubles as an asset when you have a bank account. Your checking or savings account is your asset….but what is it to the bank? Answer: It’s the money they owe you. It’s a liability, a debt, an IOU.
When you write a check, you assign a portion of the bank’s debt to the payee. Currency amounts to checks made out to “cash” in fixed amounts, and not just bonds, the interest-bearing obligations equivalent to savings accounts, but dollars too appear on the books of the Federal Reserve--the Fed is our central bank--as a liability. So technically, government IOUs are what we use to conduct the economy’s business, not necessarily a sign that we have lent anything to the government.
That term--“National 'Debt'”--is just another name for the dollar financial assets circulating in the economy. The total amount of currency, T-bills/Treasury bonds, bank reserves, etc. in circulation equal, to the penny, the amount of National 'Debt'. That’s not exotic economics, it’s double-entry bookkeeping.
You might ask “OK, the government owes us something for a dollar IOU. What is it?” The answer--besides “another dollar”--is that the government owes you relief from a dollar’s worth of an inevitable liability: taxes. Taxes make the money valuable, they don’t provision the Federal Government. The fact that the government is a currency creator, not, a currency user like households (and state and local governments) makes all the difference.
The final objection: “B..but if you just print money, you’ll get [gasp!][hyper-]inflation!” Theoretically, that’s possible, but in reality, it’s just hypothetical. Theoretically, government, with its unlimited access to dollars, could bid up prices, competing with the private sector for finite goods and services, and it could always win the bid. That’s one reason plutocrats fear effective government. Their money can’t protect them from government action.
Could the Treasury issue a few trillion-dollar coins and deposit them in the Federal Reserve to balance that National “debt”? Answer: Yes, and legally, too. Where’s the bidding war, though? No inflation would result from trillion-dollar coin deposits.
Could the government offer a Job Guarantee, employing all the unemployed. Government buys surplus cheese, why not surplus labor? Would that cause inflation? Who else is bidding for the unemployed? Answer: no one. So no bidding or inflation for a Job Guarantee, either.
Historically, the inflation-producing bidding war never happens. The Koch-funded Cato institute’s study of 56 hyperinflations throughout history discovered that none of them originated with the central bank printing too much money. The hyperinflationary episodes typically began with a shortage--like the oil shortage that produced 1970’s U.S. inflation--and a balance of payments problem magnifies the problem.
Wiemar Germany first lost their industrial heartland (the Ruhr) to French occupation, and then experienced a shortage of goods. World War I reparations added to their international balance of payments problems, and these led to hyperinflation. Zimbabwe witnessed the exodus of their colonial, Rhodesian farmers, and was unable to continue producing enough food to feed itself. The shortage of food, and the need to import it was what started the hyperinflation, not the Zimbabwe central bank’s printing press.
As a counter-example, according to its own audit, the Federal Reserve extended $16 - $29 trillion in credit to the financial sector to cure the frauds brought to light in 2007-8. If just issuing money caused inflation there would be an enormous surge in that time frame, but no such surge appears in the Consumer Price Index (government), or MIT’s Billion Price Index (semi-private), or even in Shadowstats (private) inflation index. These trillions retired financial obligations rather than bidding for goods or services.
Artificial spending limits--austerity--justified by promoting inflation fears is the friend of creditors. It produces deflationary public policy, which means creditors are repaid with more valuable dollars when they lend. Inflation favors borrowers.
Whenever the U.S. has succumbed to the deflationary siren song of “Fiscal Responsibility™” borrowers suffer. In U.S. monetary history, since 1776, there have been seven major reductions of National 'Debt'--the last being the Clinton surplus. The time preceding that occurred in 1929. Andrew Jackson's administration even paid off the entire “debt” in 1835.
What correlates 100% with such “debt” reductions? A Great-Depression-sized hole in the economy, including the Great Recession, the Great Depression, and the Panic of 1837.
A history buff acquaintance disputed this account. He said the Panic of 1837 happened because Andy Jackson stole the Indian lands in the Southeastern U.S. The Supreme Court sided with the Indians, but Jackson ignored the ruling. After the genocidal Trail of Tears cleared out the Indians, the cotton plantations began farming the newly vacant land, borrowing massively to buy slaves. The resulting cotton surplus made the price of cotton plunge, despite the fact that they warehoused 60% of that crop. Then the plantations defaulted on their loans, and the typical depression scenario of asset forfeitures and foreclosures began.
But look at what the “Debt” payoff did: it withdrew dollars from the economy, impairing peoples’ savings. When time came for the plantations to pay their debts, they not only didn't get the expected cotton income, they didn’t have the savings to compensate for that shortfall. The “Panic of 1837” ensued.
An economy is a complex system. It’s hard to assign causality, but the 100% correlation of these “Debt” paydowns with Great Depressions is certainly suggestive. All of the headlines saying “Economy improves despite National ‘Debt’ increase” continue to promote ignorance of the connection, and the economic capabilities of government spending, but now you know what’s really far more likely to be one root cause of these massive downturns: reductions in National ‘Debt.’
So why all the publicity about government shortfalls? Just this week, for one example, McClatchy news reminded us that Social Security is out of money! Notice, incidentally that we weren’t out of money for $16 - $29 trillion in financial sector bailout, and could have paid off everyone’s mortgage for only $9 trillion. When it comes to bank bailouts or wars in the Middle East, we have plenty of money. But for social safety nets, somehow we’re fresh out.
Why? Two words: “Labor Discipline.” The message is that you had better take whatever crappy job is on offer, or your household will be unable to pay its debts, and will suffer the indignities of poverty, even homelessness and starvation. If you are extra ornery, we’ll incarcerate you! We may even replace you with robots and artificial intelligence!
But the truth is that people are more productive when motivated by their own interests rather than threats driving them to desperation. There is plenty of work to do--although not all of it is profitable. Among those unprofitable activities are things like raising our children, caring for our elderly, or observing environmental impacts. These could all be jobs. A Job Guarantee is not just possible, but would make a world where civility would be far more common, and dog-eat-dog capitalists would have to treat labor with respect.
The good news is that our biggest task is changing our minds. The bad news is that we’re reluctant to even consider something outside the conventional narrative that says currency creators like government are just exactly like currency users like households.
I’d even suggest that a population not reduced to desperate measures simply to survive is more likely to be generous with civil rights and tolerance, never mind mobilizing the economy to deal with really big problems like global warming. Whether prosperity or tolerance came first may be a chicken-and-egg problem, but the idea that they are not intertwined is absurd. “Labor discipline” includes immiserating and dividing the population into squabbling tribes of debt peons that are easy to dominate...er, I mean "govern."
H.G. Wells once said that civilization is a race between education and catastrophe. Whether we will experience more Thanksgiving gratitude depends largely on whether we learn our lesson before catastrophe wins the race.
Update: Stephanie Kelton (a Modern Money Theory economist) agrees in Huffingtonpost.
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