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The word “deficit,” when applied to the Government financial accounting of a monetarily sovereign nation, that is, one that issues a non-convertible fiat currency, with a floating exchange rate, and no debts in a currency it doesn't issue, is a problem, because the label “deficit” when applied to such a Government doesn't mean what most people think it means. As Michel Hoexter points out:

. . . The word “deficit” is a hold-over from conventional accounting and the era of the gold-standard when currencies were supposed to be fixed in their quantity by convertibility of the currency into a fixed quantity of precious metal. Deficit means primarily a “lack”, an “absence” and in conventional accounting it means being “in the red”, not having taken in enough income to cover expenditures. . . .  

The term “deficit” in this sense can be properly applied to households, corporations, other private and inter-governmental organizations, and states and nations that aren't monetarily sovereign such as the US States and the members of the Eurozone. In all these instances the governments involved can run out of money, and the more deficits they run, the more the risk that they will become insolvent increases. But when that term is applied to monetarily sovereign nations, then the “deficit” notion is profoundly misleading because neither the size of the “deficit,” nor its accumulation over time when it is accompanied by selling debt instruments, makes a bit of difference when it comes to solvency, because monetarily sovereign governments always have unlimited power to issue currency, if they decide to remove all self-imposed constraints on currency issuance and use that power.

There's a corresponding problem with the term “surplus” as applied to monetarily sovereign Government accounting. Surpluses are supposed to represent the situation where tax revenues exceed spending and the gap between them is described as net “savings” increasing the financial assets of the Government running the surplus. A surplus over a particular time period is viewed as being “in the black” for that time period, as a good thing for the Government doing it, and as reducing the “debt” of that government giving it an increased financial capability to spend in the future.

The term “surplus” in this sense can be properly applied to households, corporations, other private and inter-governmental organizations, and states and nations that aren't monetarily sovereign such as the US States and the members of the Eurozone. In all these instances the governments involved can accumulate surpluses as financial assets, and the more surpluses they run, the more the risk that they will become insolvent decreases. But when that term is applied to monetarily sovereign nations, then the “surplus” notion is also profoundly misleading because neither the size of the “surplus” during a time period, nor its accumulation over time, makes a bit of difference when it comes to solvency, or adding to the government's capability to spend in its own currency either currently or in the future.

So, from the viewpoint of Modern Money Theory (MMT), both the terms “deficit” and “surplus,” and also the term “national debt” are misleading when applied to monetarily sovereign nations. Recognizing this, some of us have been kicking around the idea of using new terminology for talking about national financial accounting. In the recent post by Michael Hoexter I referred to earlier he proposes:

“Instead of a “deficit”, I would submit that the excess of spending over taxes collected represents the government’s “net contribution” to the economy. One can either expand or contract this phrase depending on the needs of the situation: it could be made more explicit by expanding it to “the government’s net monetary contribution to the growth of the economy” or shorten it to “the contribution”. “Contribution” denotes the adding of something without necessarily the subtracting of something else from someone else.”

I think this proposal is on the right track, and I agree with the underlying idea as I understand it. But I don't think the terminology is quite what we need. The reason is that the “net monetary contribution” is an improvement over “the deficit”; but it doesn't address “the surplus” meme, and the false idea that there can be national financial savings above and beyond the unlimited capability of a monetarily sovereign nation to create its won currency.

We could say that “the deficit” should be called the net positive monetary contribution of the Government to the economy, while “the surplus” is the net negative monetary contribution. But I don't think this will work as well for spreading the MMT point of view as other alternatives we may arrive at, because as soon one gets to terminology like net positive and net negative contribution, people's eyes glaze over more than they do when one uses the “deficit” and “surplus” terminology.

So, here's another proposal for renaming/reframing key terms in monetarily sovereign government accounting.

-- When a monetarily sovereign government spends more than it taxes during a specific time period, that is Government creation of net financial assets in the non-government sector. Let's call it “the addition.”

-- The accumulation of net financial assets created over time is national net financial savings, let's call it “the national credit.” The current total of debt instruments subject to the limit is equal to “the national credit.”

-- When a monetarily sovereign government taxes more than it spends during a specific time period, that is Government destruction of net financial assets in the non-government sector. Let's call it “the destruction.”

-- The accumulation of net financial assets destroyed over time is national net financial depletion. Let's call it “the national depletion.”

So, to summarize, for monetarily non-sovereign households, organizations, States, and Nations, all of which are users of the currency of others, or subject to markets in those currencies, we can talk about:

-- the household, organization, or national deficit;  

-- the household, organization, or national debt;

-- the household, organization, or government surplus; and

-- the household, organization, or government savings.

But for monetarily sovereign nations (which all have an unlimited capability to issue their own currency) we must talk about:

-- the government addition;

-- the national credit;

-- the government destruction; and

-- the national depletion.

Now let's open up this proposal for discussion!

(Cross-posted from New Economic Perspectives.)

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Comment Preferences

  •  The full title of this post is: (2+ / 0-)
    Recommended by:
    psyched, Nada Lemming
    Government Financial Asset Addition = “Deficit”; Government Financial Asset Destruction = “Surplus”
  •  Receipt for runaway inflation (0+ / 0-)
    monetarily sovereign governments always have unlimited power to issue currency

    A conservative is a man with two perfectly good legs who, however, has never learned how to walk forward. Franklin D. Roosevelt

    by notrouble on Wed Dec 26, 2012 at 01:41:26 PM PST

    •  Receipt? Maybe recipe, but that's wrong, too. (2+ / 0-)
      Recommended by:
      psyched, Letsgetitdone

      Or are you going to go all Weimer-Zimbabwe on us? That get's so old. You do know, don't you, that the supply shock led to the hyperinflation that led to the rampant money printing? You do know that most people have zero understanding of this and get the whole thing just exactly backwards, don't you?

      •  recipe... (0+ / 0-)

        god damn spelling police. I spell it wrong and auto-correct makes it worse. It doesn't make you look smart to correct anyones spelling or grammar. It mostly makes you look like an...

        Please define currency and what gives it value. Describe, in detail, how increasing the available amount of a currency can not effect its value. There is this certain subset of the left that seems to have this odd view, I'd almost describe it as the equal and opposite of "voodoo economics."

        A conservative is a man with two perfectly good legs who, however, has never learned how to walk forward. Franklin D. Roosevelt

        by notrouble on Wed Dec 26, 2012 at 08:01:17 PM PST

        [ Parent ]

        •  See (2+ / 0-)
          Recommended by:
          psyched, Old Surgeon

          notrouble, please see: here, here, here, here, and here. All your objections are answered.

        •  Some answers (0+ / 0-)

          Currency is government debt which can be used to pay taxes or make other payments to the government.

          Of course MMTers agree that if the unlimited power to issue currency is used in an unlimited way, the value of the currency will collapse. But that is not what happens in the real world. Hyperinflation is a rare phenomenon. Hyperinflation coming from reckless money printing is vanishly rare, maybe nonexistent.

          What happens in the real world is the opposite - that governments tend to make their currency so scarce that serious unemployment arises. Unemployment which could be erased instantly, by the simple introduction of a Job Guarantee - a WPA - which is basically a nation with two perfectly good legs that has learned how to and decided to walk forward.  

          The point is that when a nation decides to walk forward, decides to have full employment, then the value of the currency will not decrease. Why? Well, first, the demand for currency will not diminish because the tax system is not changed - increasing government spending will just go back to the government, because the increased economic activity will increase tax uhh receipts :-).  As Keynes said "Take care of the employment, and the budget will take care of itself."

          Second, sane government spending, a JG, a WPA, a New Deal, imposes a cost on the private sector to obtain the new dollars spent - the work it must do to obtain them, under the job program. Nobody is saying that governments should just hand out money. Most of the time, giving it to most of the people,  would be quite inflationary.  So there are natural structural limitations to spending increasing the "money supply"  - the government (tax structure) & the population (limited supply of labor).  Sure spending when labor and other resources become scarce is inflationary. But the idea that spending to set people to work, at a fixed wage, is inflationary is something that only people whose minds "have been fuddled by nonsense for years and years" (Keynes) can believe.
          Forcing people to be idle is inflationary - not allowing them to work and increase their own and everybody else's wealth.

  •  bananas. (0+ / 0-)

    b-a-n-a-n-a-s bananas.

  •  National Investment instead of (3+ / 0-)
    Recommended by:
    psyched, Nada Lemming, hestal

    National credit. I'm thinking there's a more positive connotation to investment.

    Just another faggity fag socialist fuckstick homosinner!

    by Ian S on Wed Dec 26, 2012 at 02:50:28 PM PST

  •  This an excellent diary, (0+ / 0-)

    and it provides, for me at least, confirmation of the need for some ideas that I have been working on for some years now. MMT, in general, as everybody realizes, has enormous potential. However, I think that the discussion is severely limited by the need to explain things in terms of the way our current system works and in terms of the way that the intelligentsia converse with each other about it.

    The current system is seriously flawed as an instrument for managing our national resources, including the collective productivity of the People. I think that using the family budget approach can be very useful.

    To wit, every hypothetical family has goals that can usually only be achieved over time. By working, the family breadwinners exchange their time on this earth for the money they need to make their goals a reality. Educations for their children, housing, clothing, health care, transportation, vacations, and all the rest. They sell the only thing they have to sell: the sweat of their brows and the power of their brains, which I call personal productive power (PPP), which can only be expended over time. Early death, divorce, health problems, unemployment, theft of time and services by nefarious institutions such as the Wall Street banks, purchase of goods and services that fail to work satisfactorily and thereby squander the time that the family spent to make the purchases, and all the rest serve to destroy the earning power, the PPP, of each person and family, and can result in heartbreaking disappointment as their goals are not met, and they run out of time.

    Our national system, devoid as it is of goals, does a rotten job of assisting the People, through their families, in realizing their goals. That is the heart of our problem. All consumption of our national productive assets, NPA, should be directed explicitly toward serving the goals of the family unit, and maximizing the efficiency of their PPP. And, ultimately, the management of our productive assets should be discussed and planned on a generational basis. We should have national plans and goals based on the life cycle of human beings, and those can be organized along the lines of four generations of twenty-five years each. The youngest generation will be all Americans under age 26, or in other words, those of ages 0 through 25. Then 26-50, 51-75, and 76-till the end.  

    The youngest generation’s age span correlates exactly with the development of their brains, and the goals for that generation should be focused on education with the government providing maximum resources to make certain that the time on earth for that generation is spent in the best way possible to give the People in that generation the best chance of achieving their goals and, in turn, producing individual and national wealth in assets that will serve the coming generations as well as the older generations.

    Each generation will have a role to play, and this approach has the signal advantage of changing our national conversation to one that is goal-oriented and which includes all the People. The “government” is a term that will cease to be of importance. The goals will be the topic of conversation: what they are, how to reach them, and how we are doing.

    So, money, in this generational, goal, PPP, and NPA approach is primarily a tool the shows how much of our NPA we wish to invest in each generation, which, to aid discussion, analysis and management will be broken down into projects of NPA value. Thus money is simply a record-keeping tool that helps the nation and the family to measure our progress.

    But because we need to worry about inflation and the need to have our currency accepted on favorable terms in other nations, we need to manage our money toward those ends. So money can fill two roles. The first is as an investment in America, in which the People will be given their money in exchange for working on projects of national value. The second is as a tool for coping, hopefully controlling, inflation and the international standing and acceptance of our currency and our goods and services. In both cases money will be viewed by all concerned as simply a record-keeping device and which will be understood in terms of the purposes it serves.

    Now the foregoing implies a national system structure that is far different from the one we have today. But it is already beginning to form. For example the development of MMT shows how the Internet and other media, through diaries such as this one and others, can be used to develop complex, useful, ideas in a collaborative, collegial way. In other words we the People will rely on systems that will enable us to join our hearts, hands, and brains and do many mighty things.

    For whatever it may be worth, the foregoing is a summary, developed in just a few minutes this morning, of more elaborate ideas that I develop more fully in a book that I am readying for publication. I hope to have it out before Father’s Day.

    Might and Right are always fighting, in our youth it seems exciting. Right is always nearly winning, Might can hardly keep from grinning. -- Clarence Day

    by hestal on Thu Dec 27, 2012 at 04:19:14 AM PST

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