The U.S. Dollar is not a limited commodity like gold. It is a social construct, a tool, an accounting term used to measure and facilitate economic transactions-it is infinite.
Think about that for a minute.
Most people do not understand how money is created. Economists should know, and they do, but they have been trained to look at it in the wrong way. They use scary terms like debt, and deficit. The endless tears and the rending of garments in the media and on Capital Hill over our debt has reached a fever pitch. All this does is obscure the real problems we face in this country and we cannot solve them until we stop thinking of money as a commodity. It is not. It is simply a tool that we use to measure our economic activity and tally the value of our resources.
Money was created as a method to exchange goods and services. Our world would be rather difficult if when we received our paycheck, it was a bag that held all the goods and services we need to consume for the next two weeks. Or worse yet, we received in return for our labor, the very product we had produced and then we have to go out and exchange that with other laborers for what we really need. It would be sort of hard to drag our 'paycheck' home on Friday. It would be even more inefficient for us to then have to stand at the corner on Saturday hoping someone would come by with what we need to trade while willing to take what we had. This method of exchange may have worked a few thousand years ago in a simple economy, but they also used money then to measure the exchange of goods when it got too complicated. Back then money was often a valuable commodity because it was what gave it value.
Today, we get a simple piece of paper with a number printed on it that represents the value our labor has in the market. We can then exchange that labor that is measured in dollars at a future date for what we need or want to consume. It makes our economy and our markets operate efficiently and has for thousands of years. It really does not matter what an individual, group or government choose as the vehicle designated as money, anything we agree on would work. Now, most money and its exchange is simply an entry on a computer with a number that measures the value and it is designated in U.S. dollars (USD.)
Now if you haven't already formed a petrified opinion it's possible to start thinking of money in a new way when it comes to our U.S. economy. But first, you need to throw out everything you think you know and stop listening to the chicken little Budget Monsters™ or Ron 'love me some gold' Paulbots on the news. WE ARE NOT BROKE. Far from it. How can we be broke when we still have a large labor force able to produce? How can we be broke when we have natural resources at our disposal? How can we be broke when we have the infinite power of our minds to create? If we think of money as the vehicle to measure our economic activity then we must accept that we have a huge gap to fill when we have many out of work, creative minds to educate and idle factories boarded up for lack of business.
It is ridiculous that people who should know better push this fantasy that we are broke. Even Alan Greenspan admitted this was true.
"The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default" said Greenspan on NBC's Meet the PressIt is a dysfunctional world they choose to live in when they tell us we have no more money to spend. This falsehood is designed to obscure the real agenda [insert conspiracy theory here] and it is also why we need to understand where money really comes from and how it should be used. Since money is a tool, we should think of it as one and stop letting it control us.
Our economy creates no money, zero, nada, zip. Our currency does not exist and will not exist until the government 'spends' it into existence. Some people call this "printing money" and will try to scare you with all kinds of conspiracies and boogeymen cometh type stories. Ignore them. First, you need to understand that our U.S. Constitution gives our government the power to create money.
To coin Money, regulate the Value thereof... Article 1; Section 8 - U.S. ConstitutionThis power is infinite as the Constitution does not put a limit on the amount.
But what gives that money value? It used to be that our money was backed by gold. People thought it would only have value because they could go to the government and ask for their dollars to be exchanged for gold, which as a commodity, has value on the open market. In this respect we could use oil or wheat as money because it will always be worth something on the market. Gold is just easier to carry. But our money no longer can be exchanged for gold and it doesn't need to be. It is not backed by anything but the "Full faith and credit of the United States."
So what does that really mean? Faith and Credit are the important concepts here to understand. There are two main reasons why that gives our money value.
First, our country has been and still is the largest economy in the world. It has a stable democracy and large resources. Our laws are designed to allow business to operate through enforceable contracts, patents, trademarks and regulations that prevent other entities from encroaching on the market unfairly. We also have a trained labor force through publicly funded education that is mobile throughout our economy. Our infrastructure is well developed and allows our businesses to function efficiently to bring their goods and services to market. We also have a large Public University structure and a Military that funds research and development that then benefits our private markets. In short, our country has allowed business to prosper and creates the opportunity for new business to be formed. This drives our economy and benefits all our citizens.
The faith that the world has in our economy to continue to function and grow is why the dollar is considered a reserve currency. What continues to makes it a Reserve Currency is also important to understand.
*The U.S. has the world's largest economy and well regulated financial markets.
*International trade has been mostly settled in dollars. The World Oil market completes transactions in U.S. dollars.
*The dollar is used in 85% of all foreign exchange transactions according to the Bank of International Settlements.
*Central banks hold more than 60% of their reserves in U.S. dollars according to the International Monetary Fund
Up until just recently the faith in the U.S. government and its ability to pay its debt was not questioned. But of course we have more than a few trolls who have tried mightily to undermine this faith. When they try to tell us that our dollar is losing value, that we are 'broke', that we will 'default' on our payments by not raising the debt limit and that we have too much debt, they are chipping away at the faith in our currency which is the true cause of it losing value. If more people understood what was at stake they might rethink their position.
Second, our Treasury could create a $16 Trillion coin tomorrow that we could use to pay off all our debts.
Every. Single. One.
This gives us unlimited credit. They could even create second coin for any amount that they would then hold in our 'bank' account (Federal Reserve) that allows us to spend all the money we need to meet our budget, maintain or build our infrastructure, fund healthcare for all, provide a college education to every citizen, pay out all Social Security, Medicare and Medicaid benefits and provide a job to everyone who needs one. This ties back quite nicely with the Faith part of the statement "Full Faith and Credit". If foreign countries, business and the citizens of the U.S. have faith that the U.S. has unlimited credit, they will consider our currency to have value because they know they will always be paid back. The large amount of U.S. Treasuries purchased by foreign governments is further proof of their faith in our currency. In truth, the U.S. 'debt' held by China is simply the dollars they took in payment from us for their goods which they then turned around and invested right back into a U.S. treasury 'savings' account that pays interest. If that is not faith in our creditworthiness, I do not know what is.
Our government has set up a political construct to the amount of money we can 'borrow' with a legal debt limit. Our Constitution gives congress the power...
To borrow money on the credit of the United States... Article 1; Section 8 - U.S. ConstitutionThis debt limit is like the brakes in a race car. But the key word here is credit. We are not borrowing money from other countries, we are actually issuing our own currency and borrowing it from ourselves. Our 'debt' is simply an accounting entry to show what amount of currency was issued. When the U.S. Govt sells a Treasury Bond, the money did not exist before it was 'spent' into the economy. When someone redeems a Treasury Bond, the Treasury just issues new 'debt' to pay for it. This means the debt limit was designed so that our government will use their unlimited credit in a fiscally responsible way. Unfortunately, it will only work effectively if we understand that we DO have an unlimited credit and that it MUST be used responsibly. Our failure comes in not understanding that a debt limit must be set that allows for growth and full employment for all.
But let us understand what that word debt really means in this context.
The U.S. maintains an accounting of all currency spent into the economy. The yearly budget is a plan for how that money
should will be spent for the public benefit. Each budget that is approved can be in surplus, balanced or in deficit. What this means is the difference in the net amount of money created and spent by the government minus the amount of revenue received. This is where the confusion comes in. Since it appears from the use of the term 'budget' it needs to be in balance or surplus just like the budget you or I would make. When we talk about the U.S. budget as if it is the same as a household budget, everyone assumes that the revenue the government collects is what pays for it's spending. This is false. Our government is not like you and me. Remember, they can add NEW money through spending or by just throwing it out onto the street whenever they choose, they don't need revenue to fund it.
Okay, first remember that 'revenue' = taxes, and 'spending' = new money. Now, imagine if the net amount of NEW money spent into the economy is LESS than the amount of revenue received? That would mean we had LESS money going into the economy than we are putting in. In Washington they call this a Budget Surplus. By this same logic a balanced budget means that the Government is spending the same amount of NEW money into the economy as it is taking out of the economy in revenue. Everything would be equal and we would have no growth. So if you have followed this logic so far you would already have figured out that - In order for an economy to grow, NEW money must exceed the amount of money taken out of the economy. This kind of turns all their talk of running out of money on their head now doesn't it?
But why do we need to have revenue at all if we can create money up to the point where all our needs are taken care of?
Well for two reasons, first; This 'budget' construct is a way to get us to do something that none of us like, but some of us think is necessary in order to have a functioning government. Pay taxes. But we also pay taxes in order to DESTROY money in the economy. If we continue to put NEW money in, eventually it will lead to an imbalance that will need to be dealt with, but the way to take it back out is to tax. The trick is to find that right balance and stop talking about our currency in terms of debt, deficit and being broke. But there is another reason we pay taxes, it gives our money value.
There are two things that common wisdom tells us we cannot avoid; death and taxes. We must pay our taxes to the government in U.S. currency. If our government did not require us to pay taxes, we would have little reason to use the currency they issue. This also gives it value. Try paying your taxes in Gold and see how far you get. I am pretty sure they do not accept payments in Yen. So in order for us to pay our taxes, the U.S. government must 'spend' our money into existence first. They could just give it to us too, and then tell us to return a portion of it back in taxes, but what would be the point of that? Think about it. I promise to give you a dollar if you give me back $0.20. You well may ask, why not just give me the eighty cents and be done with it? Good question. And the answer is that transaction would create nothing of value and would not give our government power over our currency. Talk of a 'flat tax' misses the point of taxes in two ways. First, taxing authority gives our government issued currency value, but secondly, it is also used to encourage or discourage behaviors. Because the reason for taxation is not understood, our conversation about it is mostly silly. We don't need to tax to raise revenue in order to spend, so we should be using our ability to tax to encourage and discourage behaviors in our economy.
So if you put it all together, our government has enormous power to create an economic system where everyone is able to have a minimum level of the necessities to live; life, safety, health, food, warmth and an education. They not only can create all the money they need, they can manipulate the economy by increasing or reducing the amount of money they put in and take back out to keep everything in balance. They can use their tool, money, to do so many things but yet we have many who can't seem to grasp basic math. Creating enough spending in the economy to take care of our needs - To promote the general welfare of it's citizens - is a true balanced budget.