Modern Money Operations

We discuss  modern monetary policy solutions most feared by the Plutocracy.

The Good Federal Deficit

 

What Deficit Terrorist Won't Tell The 99%


by 

Potomac Oracle

December 12, 2011


In a November 2011 speech at Heritage, Pat Toomey said, "tax revenue isn’t the problem facing the United States in the future; it’s the massive increase in federal spending." Following the failure of the Joint Select Committee on Deficit Reduction, Sen. Pat Toomey (R-PA) criticized liberals for insisting that any deal include a massive tax hike.  He had it half right.  He just had to turn his proposition upside down. We need more spending and much lower taxes. 


In July,2012, Timothy Geithner, US Treasury Secretary said, referring to the debt ceiling..."A deal will be agreed because the alternative is "unthinkable"," Geithner argued on CNN.  He continued, "....for us to get this done by 2 August, which is critical, they need to start this process in the House on Monday night so they can demonstrate to the world we're going to be on a path to get this done … We cannot leave the threat of default hanging over the American economy for a longer period."


In April of this year we heard the following from these experts:


Sen. Marco Rubio said...."Raising the debt ceiling may be economically necessary, but it’s politically lethal. Only 16 percent of Americans want the debt ceiling raised, according to an NBC/Wall Street Journal poll.   He said, "I wouldn't vote for an increase unless it included a plan for fundamental tax reform, an overhaul of our regulatory structure, a cut to discretionary spending, a balanced-budget amendment, and reforms to save Social Security, Medicare and Medicaid” — everything on the conservative agenda, basically.


David Stockman, who served as Ronald Reagan’s budget director....“Once the interest rate starts to rise, the ballooning of the interest-carry cost on this debt will scare the bejeesus out of the system, and it’ll be a feedback loop into the market, in other words, the more the market worries about our ability to repay our debt, the harder our debt becomes to pay back. High interest rates slow economic growth and increase the amount we have to pay to borrow, both of which mean our debt grows as a percentage of our economy."


Each of these comments leads readers to fear for the survival of the Republic.  Readers have been warned in the starkest terms that America could default on its debt, is spending too much, must reform: taxes, regulations, Social Security and Medicare/Medicaid, balance the national budget, and lower interest rates. 


None of these, "the sky is falling" admonitions could be further from the truth, with the exception of higher interest rates.


Assessing each in turn would be a very long essay. It will suffice to remind the reader of a few irrefutable monetary and economic axioms which together disarm the clarion warning of financial Armageddon in America.  


Axioms:


1. Because the Federal Government (The Treasury and Federal Reserve) are authorized to issue the currency, the Federal Government does not depend upon tax revenue per se to spend.


2.  In a fiat currency system the Ggovernment does not need to finance spending in which case the issuing of debt by Treasury has to serve other purposes.


This is a fundamental departure from the gold standard mechanisms where borrowing was necessary to fund government spending given the fixed money supply (fixed by gold stocks). Taxation and borrowing were intrinsically tied to the government’s management of its gold reserves.


3.  The important conclusion is that the Federal government is not financially constrained and can spend as much as it chooses up to the limit of what is offered for sale. There is no inevitability that this spending will be inflationary and it does not necessarily require any increase in government debt.


These axioms and more are discussed by L. Randal Wray, Warren Mosler, et al, proponents of Modern Monetary Theory/Operations (MMT/O), at: http://neweconomicperspectives.blogspot.com/ and www.moslereconomics.com


We begin this debunking; its a logical inconsistency to state that the U.S. government has a default/solvency problem.  The U.S. Government has a monopoly over the creation of it's currency, it never, involuntarily, faces a default/solvency issue.  It can create as much or as little of it's own currency as it deems appropriate. Moreover, it can meet any obligation denominated in its own currency. This sovereignty over its currency is absolute.  The government is the only entity that can create this definitive currency – "base money" (bank reserves plus physical currency), constituting the "monetary base".  No other institution in America or the world can legally create this base money.  


Which means it can "spend" simply by making computer entries in checking and saving accounts held by the Federal Reserve: accounts for the Treasury Department or any other political entity, sovereign government, or financial institution.  


This, "currency sovereignty" eliminates the constant need for the Federal government to tax or borrow to raise revenue to spend.  


It taxes and borrows, however, for reasons little known or understood by the 99%.

Gov. claims it must tax or borrow to: 


(a) pay Federal Reserve System stakeholders a 6% dividend mandated by law, 

(b) stabilize aggregate demand (keep the economy from over heating (inflation) or under

      spending (deflation-lower tax rates,) 

(c) forces citizens to work to get the currency with which it must pay the tax levied by the 

      Federal government, 

(d) manage the term structure of interest rates through Fed/Treasury securities 

      markets, and 

(e) constrain entry into many markets and manage income distribution. (Full details here)


With the above as foundation it is indisputable, the U.S. can never go broke. It can't default unless it wants to; that is, it ignores self-imposed constraints like debt ceilings and budget constraints.  Both of these are policy constructs that no longer should apply in today's world now most nations in which are untethered from the rubrics of the pre-1971 gold standard and fixed exchange rates.  


Nonetheless, you would think that the Treasury Secretary would exercise a bit of candor and inform his President to never make the mistake of saying the following: In a CSPAN interview with Scott Pelley, on May 22, 2009:


PELLEY: "....Yet, it all takes money. You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion.  At what point do we run out of money? 


OBAMA: "Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we've made on health care so far. This is a consequence of the crisis that we've seen and in fact our failure to make some good decisions on health care over the last several decades."  


A President "APPARENTLY" unaware of the monopoly control his government has over its money, forfeits extraordinary political and economic leverage to those who need to keep him from this information, and from a VERY successful Presidency.  If however, his knowledge of these operational facts is keen, then he has obviously succumbed to the Bilderbergs and the .001% by feigning ignorance and mouthing the lie to Pelley.


-----If, back in 2008, right after the bank fraud blowup, a President who understood, or at least listened to those who did, would have used his sovereign control of the currency to simply guarantee all threatened deposits with Treasury issued currency, of which there is an infinite amount.  


----If, back in 2009, the President understood that going broke was impossible, the debate over health care would have included the Single Payer Option precisely because it could never force America into bankruptcy.  Insurance Companies would compete, rates would decline, and all Americans would have access. 


----If the President understood that base money can be issued debt free, there would have been no tiresome debate over debt ceilings.  Unfortunately, like 99% of Americans, the President "evidently" does not understand that the government must spend money before it can take it back in taxes, or buy securities. 


This Federal Government monopoly over our money ought never to be confused with the creation of bank credit.  That is an entirely different process.  It leverages commercial bank reserves and creates debt.


However, when the Federal Government deficit spends it adds net financial assets to the non-public sector.  No matter how hard we might try, we cannot all run surpluses. It is a lot like those children at Lake Woebegone who are supposedly all above average. For every kid above average there must be one below average.  Similarly, for every deficit there must be a surplus.


See here


In a three-sector world, (public, non-public, trade) all national budget transactions balance to zero. A deficit in the public sector means there are savings (surpluses) in the non-government sector....to the penny. [7] Likewise in a multi-sectoral world  at least one sector has to have a deficit or a surplus for all sectors to balance to zero.  Which means that on 2 April 2013, debt held by the public was approximately $11.959 trillion or about 75% of GDP.  Intragovernmental holdings stood at $4.846 trillion, giving a combined total public debt of $16.805 trillion.[4][5][5][6] As of January 2013, $5.6 trillion or approximately 47% of the debt held by the public was owned by foreign investors, the largest of which were the People's Republic of China and Japan at just over $1.1 trillion each.  


See, here for a Primer on National Income Accounting.  Economist Martin Wolf explained in July 2012 that government fiscal balance is one of three major financial sectoral balances in the U.S. economy, the others being the foreign financial sector and the private financial sector. The sum of the surpluses or deficits across these three sectors must be zero by definition.


The magic in balancing these national accounting rules is that Governments with sovereign "fiat currencies", like the U.S. Japan, Canada, U.K, China, etc. generate that balance through central bank electronic operations which transfer Central Bank reserves as credits and debits on to various balance sheets held at the central bank/Fed.  


Arguments supporting balanced federal budgets are therefore, specious.  Since all money (99.97%) is debt based paper, created through "fiat" (except the .003% of metal coins from the U.S. Mint) there is no need to balance the President's Budget with revenues collected from anyone.  Until the government first spends or borrows money into society there can be no act of taxation. There is only a need to use stabilizers (taxation and borrowing) to manage inflation and deflation


When the government taxes or borrows money it previously issued, it reduces aggregate spending which dampens production and eventually all tax revenue, and increases unemployment and social safety net costs. Therefore, taxation makes things worse for consumers and producers, particularly during a recession. 


In conclusion, 99% of Americans need to know that our government will never run out of money, go broke, default, or fail to fund needed social safety net programs.  The 99% need to understand the concept of currency/monetary sovereignty in a world not bound by gold standard or fixed exchange rate principles.

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