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Free-Marketeers (Em-Ay-Ar-Kay-e-Tee-E-E-Ar-Ess, Em-Oh-You-Es-EEEEE!) simply do not understand how modern economies work.  Their theories of economics are thoroughly rooted in the 19th and early 20th centuries, when the Gold Standard was sovereign.  Granted, the nitty-gritty of Macroeconomics is very difficult work, but the basics of a modern Monetary Sovereign macroeconomy are easy enough to grasp if you're willing to listen.

Here's an actual quote I encountered as a 'response' to Kevin Drum's piece over on MoJo (and Kevin gets it wrong TOO!)

We don't need charts & graphs to understand that liberal socialists want to tax, spend, & print money, while common-sense conservatives believe in fiscal prudence and personal responsibility, with as little government meddling as possible.
Follow me below the fold to learn what differentiates households, businesses, states, cities, counties and more from the U.S. Government...

First, let's ask a question:

Who is owed what when the USG prints a dollar?
Answer:

Not a soul. The USG prints dollars free of prior entanglements. So, right off the bat, when the government prints a dollar, or a trillion, precisely zero people have a lender's claim to that dollar.  Nobody.  Nadie.  Think about it.  The US may print a dollar because it has a prior service to pay off, but that just means that the printed dollar immediately has a direction to go to.  Nobody lends the government that dollar (we'll hold off on the interaction between bond buyers and the government for a later discussion).

If that's the case, why do we call it 'debt'?

It becomes 'debt' because of accounting TERMINOLOGY, not because Currency Originators like the USG (and Japan, the UK, Australia, Russia &ct) owe anyone for the privilege of printing out a dollar bill (or a trillion).

The Order of Events is as Follows:
1. A dollar gets printed (actually, entered in an spreadsheet nowadays)
2a. The dollar gets distributed outside the USG (a bond holder, a SS recipient, a gardener for the National Mall, a Park Ranger, the Koch brothers, whatever)
2b. The dollar gets taken off the USG's balance sheet because it was disbursed.
3. Now, when your outflow is higher than your income in an accounting context, what's the term for that? Running a deficit.
4. And when you are accumulating a deficit in an accounting context, what is the term for what you are accruing?

Debt.

But remember, we don't owe a single soul for the privilege of increasing our holdings of dollars, so while it may be called 'debt', it's not 'debt' in the traditional sense, rather it's the Monetary Contribution of the government to the economy.  Remember that phrase, monetary contribution.  Because that's what the deficit is, a number that shows how much the US has contributed to the supply of dollars.

The idea of Sovereign Currency Issuance doesn't get addressed along with with the idea of accounting very often. In reality, Currency Issuers are on a totally separate accounting track than the version of accounting that States, Cities, Counties, Towns, Businesses and Households use. Those entities are users of currency, not issuers of the stuff.

If the USG practiced 'fiscal responsibility' like 'fiscal conservatives' wish it to, then Outflow would equal Income, as well as would the resulting deflation as the number of goods and services increased (not to mention population!) but the number of dollars stayed constant.  Why?  Because the Monetary Contribution of the government would be...$0.00.  It wouldn't contribute anything at all.

So, when wealth and population increase, but supply of money doesn't, what happens?  Deflation.  And believe you me, NOTHING, but NOTHING kills an economy faster than deflation.  When you can increase the value of your monetary holdings over and above the value of modest investments by doing nothing but sleeping on a fat wad of cash, those modest investments just stop being funded altogether. (Incidentally, this is related to why there's a huge pool of money trapped circulating and recirculating Ouroboros style in the upper 1% of the economy - it doesn't go anywhere but to OTHER people in the 1%, who are limited in what goods and services they can even USE, let alone benefit from.  This also touches on the reason for bonds, essentially, they're the Investment of Last Resort, more on that another time though.)

Fiscal responsibility means printing enough money to keep up with wealth creation and ensure that everyone has access to (not possession of, access to) enough currency to conduct business. Better, if you print a bit more than required, you can get a low, constant and reliable source of inflation, which encourages people to USE their money for investments rather than stuff it in a mattress. Money that isn't being used doesn't contribute to the economy and makes for less money in circulation, creating conditions that threaten deflation.  

So, unless a country has currency coming in because they are a net exporter like Germany, in order to keep up with the wealth creation and population increases that will inevitably happen (provided there's nothing catastrophic going on like Godzilla, that is) and in order to prevent the same amount of dollars being split up between more and more people and more and more wealth, it's quite clear that it's an absolute necessity to 'run a deficit'.

Now, one can argue about the SIZE of the deficit, but that we must have one as long as we are net importers as a country is not really challengeable.

Originally posted to Zyx on Wed Sep 25, 2013 at 04:05 AM PDT.

Also republished by Money and Public Purpose.

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Comment Preferences

  •  Tip Jar (7+ / 0-)

    Violence is the last refuge of the incompetent.
    - Salvor Hardin, Foundation by Isaac Asimov
    Permissive Liberal: -7.62, -7.95

    by Zyx on Wed Sep 25, 2013 at 04:05:11 AM PDT

  •  Isn't there a tax liability created and if the $s (1+ / 0-)
    Recommended by:
    Zyx

    in circulation are far greater than the tax liability, value is diminished. Moreover, chartalism arose two centuries ago as well.

    “Well, when the president does it, that means it is not illegal.” Richard Nixon, 1977.

    by Kvetchnrelease on Wed Sep 25, 2013 at 05:39:40 AM PDT

    •  Yes. And No, Both. (2+ / 0-)
      Recommended by:
      cynndara, psyched

      Tax liability has a role to play in determining the value of the money certainly, but wealth creation (which is NOT currency creation, mind you) is a much larger driver.

      How you're correct:

      Income (taxes) and Outflow (printed money) are not tightly connected when you're a sovereign currency issuer.

      The primary reasons to tax are
      1. To ensure that people USE your currency.
      2. To get money out of places where you don't want it.
      3. Following 2., to give you room to put money IN where you DO want it.

      However, this quote is germane to your question:

      A prince, who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind, might thereby give a certain value to this paper money; even though the term of its final discharge and redemption should depend altogether on the will of the prince - Adam Smith, WoN
      To a certain extent, the value of a dollar is dependent on how much the government taxes, true.  And a sovereign currency issuer must tax, so that they can ensure that money circulates in the economy.

      But if you and I trade, we create wealth, and if we continue creating wealth and the tax liability stays relatively-to-us constant, then we are having to use the same amount of dollars to cover more and more wealth.  So, to cover the wealth creation, the currency issuer is pretty much required to keep printing currency, unless, like I said above, the economy in question is a net exporter of goods (and conversely, a net importer of currency).

      Hope this helps. :D

      Violence is the last refuge of the incompetent.
      - Salvor Hardin, Foundation by Isaac Asimov
      Permissive Liberal: -7.62, -7.95

      by Zyx on Wed Sep 25, 2013 at 01:08:51 PM PDT

      [ Parent ]

  •  a dollar printed is a transfer from existing (1+ / 0-)
    Recommended by:
    Kvetchnrelease

    holders of dollars to the new holders.  MMT mistakes the signifier - the dollar - for the signified - purchasing power.

    •  Only in limited cases (1+ / 0-)
      Recommended by:
      psyched

      You forgot to include the case where the economy is growing.

      In that case, more and more wealth is being created, but only the sovereign currency issuer can create money.

      If the sovereign does not do so, then each unit of currency has to stand in for more and more wealth.  This is deflation and it's bad.  Very, very, bad.

      Violence is the last refuge of the incompetent.
      - Salvor Hardin, Foundation by Isaac Asimov
      Permissive Liberal: -7.62, -7.95

      by Zyx on Wed Sep 25, 2013 at 01:11:07 PM PDT

      [ Parent ]

  •  MMT? (0+ / 0-)

    MMT appears as a tag and a comment above, but isn't mentioned otherwise, according to my browser's text searcher.

    Might be helpful to write that out for readers unacquainted with it.

    Cheers

    •  My Apologies! (2+ / 0-)
      Recommended by:
      cynndara, psyched

      MMT stands for Modern Monetary Theory, it's a descendent of Chartalism, the moniker under which the first understandings of fiat currency came about.

      The main idea is that in fiat currency regimes, the value of currency is mainly based on two things:

      1. How much money is taxed BACK compared to how much is put INTO the economy.
      2. How much money exists compared to how much wealth there is at a given point in time.

      If you think about it, both of these things basically boil down to "What's the relative amount of money compared to how much stuff there is."  

      In the case of the currency itself, think about Faucets (printing money) and Drains (taking money out of the system).  If your drains are slower than your faucets, you have an ever increasing volume of water (money).  That could be bad... inflation could happen, where the water overflows the sink.

      BUT, if your economy is growing, then the size of your sink is ALSO increasing, and you want to keep the water at a certain level, too little water and you can't wash the dishes, too much water and you have to mop the floor.

      If you want an absolutely stellar example of how MMT operates, look at the economy of EVE Online.  Pun fully intended.  There are drains: taxes that take money OUT of the system, like combat and auction fees and corporation fees.  And faucets: systems that put money INTO the system like mining asteroids and running missions.  Then there are activities that shuffle money around while increasing wealth like trade and gifts, these increase the size of the sink itself.

      The PhD economist hired by CCP to run the economy has to carefully consider how much of a given resource is allowed to be gathered at any given point in time.  He controls the faucets and the drains, the players control the size of the sink.

      Violence is the last refuge of the incompetent.
      - Salvor Hardin, Foundation by Isaac Asimov
      Permissive Liberal: -7.62, -7.95

      by Zyx on Wed Sep 25, 2013 at 01:24:17 PM PDT

      [ Parent ]

      •  Thanks (1+ / 0-)
        Recommended by:
        Zyx

        Your comment would make a fine diary.

        I took a macro econ class half a lifetime ago, and though I didn't recall the abbreviation MMT immediately, I was willing to search for it with Ye Olde Google. Some readers just move on when they encounter unexplained jargon, however, and it's how some authors lose a perfectly good audience.

        My hint was meant to suggest that many readers appreciate when authors use jargon sparingly and carefully.  :)

        Cheers

  •  Federal Reserve Bank? Treasury? (1+ / 0-)
    Recommended by:
    Zyx

    Maybe I'm confused...

    I thought the Federal Reserve Bank "owns" the newly printed money, and distributes it to member banks (which have accounts in the Fed).
    The Treasury also has an account in the Fed and writes checks from that account.  I'm not aware of the Treasury handing out cash...

    The Treasury can't write checks that aren't covered by its account in the Fed.  So, printing money isn't going to help avoid difficulties if the Debt Limit isn't raised.  If the Debt Limit is raised, then the Treasury can borrow money from the Fed (QE) and continue to write checks.

    Don't be a DON'T-DO... Be a DO-DO!

    by godwhataklutz on Wed Sep 25, 2013 at 09:08:19 AM PDT

    •  I abstracted out the interplay... (1+ / 0-)
      Recommended by:
      psyched

      between Congress (who sets the 'debt' limit), the Fed (who usually creates the money) the Treasury (which disburses money through the Bureau of the Mint).  

      In addition, the Treasury has seigniorage rights, so given both (that the Treasury actually disburses and that it can print on its own by order of the President or Congress), we could just consider it to be the case that it's the Treasury prints the money and abstract the Fed out completely.

      There aren't any policy decisions that you can't substitute 'the Treasury' for 'the Federal Reserve' if you think about things this way.  And by black-boxing the Congress-Fed-Treasury interaction, we keep the action simple enough to follow along with without requiring readers to keep track of nine or ten different things going on at once.

      Violence is the last refuge of the incompetent.
      - Salvor Hardin, Foundation by Isaac Asimov
      Permissive Liberal: -7.62, -7.95

      by Zyx on Wed Sep 25, 2013 at 01:41:33 PM PDT

      [ Parent ]

  •  Forgive me, but I first heard this "insight" (2+ / 0-)
    Recommended by:
    psyched, Zyx

    discussed in detail during frequent conversations among my father, some uncles, and several friends beginning in 1946 and continuing until I went away to college in 1957. So, by now, this "insight" seems obvious to the most casual observer.

    But the more important idea, to me at least, is why we borrow money at all. The obvious answer is that some people benefit and they control our government.

    Out of this idea comes the question: how are they able to get and hold power?

    And, of course, the ultimate question is what do we want to do about it? Where do we want to go? How do we get there from here?

    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 Wed Sep 25, 2013 at 04:10:52 PM PDT

    •  But it's not obvious... (1+ / 0-)
      Recommended by:
      psyched

      People still think of the USG in terms of household debt.  

      In fact, there's an entire party who's rhetoric is entirely dedicated to convincing people that money is a limited resource and that we have to balance our budget because we're overspending and therefore leaving too little for the "job creators".

      Sound familiar?  Yeah.  And worse, they actually viscerally believe that crap.  You might get them to intellectually state, yes, the USG is not fiscally constrained, but that insight never becomes a factor in their decisionmaking, where the government's budget is put on equal footing with the budget of a McDonald's fry cook.

      Go test it out, see how much pushback you get when you politely inform people that, in fact, the USG has no limits on spending at all and that taxes are only loosely coupled to it, there for reasons other than enabling spending for the most part.  

      As an example, here're Progressives on Twitter defending a comment that implies a direct relationship between taxes and spending: https://twitter.com/...

      But the more important idea, to me at least, is why we borrow money at all.
      This actually has an interesting answer, though I do not deny the knockon effects you point out that are present as currently implemented.

      We're not 'borrowing' money.  We're the Investment of Last Resort.  Bond yields are what, at or below inflation, right?  Ok, so that means that people who purchase bonds (or other USG financial products) aren't getting much use out of the money, but it's not going to be lost either.  

      People buy bonds when they want money to stick around, but they don't want to risk it on anything.  Some do that to keep their nest eggs safe, large investors do it when they don't have a current use for their money.  In other words, there's TOO MUCH money in a certain segment of the economy.  Buying a bond takes that money out of circulation for a period of years and it's then returned with 'interest' that keeps it at around the same value it had when it was put in.  That interest?  100% Pure Brand New Car Smell Fiat Currency, fresh off the Excel Spreadsheet.

      We can pay infinite amounts of interest for an infinitely long time.  It may not be wise to do so, but that's a matter of the relation between how much money is going to the drains/faucets and how fast the sink is growing.

      Violence is the last refuge of the incompetent.
      - Salvor Hardin, Foundation by Isaac Asimov
      Permissive Liberal: -7.62, -7.95

      by Zyx on Thu Sep 26, 2013 at 11:01:23 AM PDT

      [ Parent ]

      •  Ho, hum... nt (0+ / 0-)

        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 Sep 26, 2013 at 01:24:19 PM PDT

        [ Parent ]

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