The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics.
In my never-ending effort to explain more clearly why federal spending costs taxpayers nothing, here is a new thought that perhaps will make the concept more intuitive. It was precipitated by a question from Mr. Tyler Fairleigh, which is published in the comment section at Monetary Sovereignty.
Imagine John Jones sells something to the federal government for $100. John sends the government a “bill.” A bill is nothing more than a little note containing this instruction: “Please credit John Jones $100.” It costs John nothing to send that note. In fact, John could send such a note (bill) to the government every day for the next ten years, and still it would cost John nothing.
Of course, the government is under no obligation to do as John requests, but the point is, that little note costs John nothing. He need have no money in the bank to send it.
Assume, the government checks its records and finds that indeed it owes John $100, so it sends him a check for $100, which he deposits in his bank. The government’s check is not money; it is an instruction. The check is a little note containing this instruction: “John’s bank. Please mark up the number in John’s account by $100.”
The government has the power to send an unlimited number of instructions (aka “checks”) at any time. These instructions do not require the government to “have” any money. They merely are instructions made by a monetarily sovereign government.
So John’s bank obediently raises the number in his account by $100, then informs the Federal Reserve Bank of what it has done. For accounting reasons, all sorts of accounts are credited and debited, some of which may or may not be related to taxes. But in reality, all that has happened was, John’s bank received an instruction from the federal government and did as it was told.
These instructions also cost taxpayers nothing. Taxpayers are not even involved. Even if no one was paying taxes, our monetarily sovereign government still could send an unlimited number of instructions to banks all over the world, and they all would obey. Why? Because they know the Federal Reserve Bank of the United States will mark up their accounts by the exact amount of the check. Why? Because the U.S. government is monetarily sovereign, meaning it has the unlimited power to mark up accounts.
Compare this with Greece, Spain, Illinois, California, General Motors, Chicago, you and me. None of us in monetarily sovereign, so none of us has the unlimited power to mark up bank accounts. Our power is limited by the number in our own bank account or by what we can borrow.
Yes, you too could send an unlimited number of such instructions, but unless your bank account had a high enough number, your bank would not obey these instructions (aka bounce your check). But no bank bounces the federal government’s instructions. Never has; never will. A monetarily sovereign nation cannot be forced into bankruptcy.
And what about that worrisome federal debt? It is the total of the T-securities (aka IOUs) the government creates from thin air. It can do this forever.
To pay the debt, the federal government merely sends notes to the various T-security holders’ banks, instructing them to mark up accounts. Taxpayers don’t owe the government’s debt, nor do your children nor grandchildren. You aren’t even involved.
And as for the federal deficit, it is just a balance sheet entry, showing the difference between taxes collected and money spent, or more accurately, the difference between the number subtracted from taxpayers’ bank accounts and the numbers added to vendors’ bank accounts. Of course, taxes do not pay for spending. The government could add numbers to vendor’s bank accounts without subtracting from taxpayers’ accounts.
So that’s it. Government spending is just instructions to banks. The debt is just IOUs created from thin air. Paying the debt is just instructions to banks to raise numbers in accounts. The deficit merely is an arithmetic difference. And taxpayers neither pay for, no owe, any of this.
Does that make things clearer?
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”
#Monetary Sovereignty - Mitchell 
Good luck trying to get people to understand a systems approach to economics. This is about religion. Our economic and legal systems are philosophically based on the concept of ‘free’ will. Within that context, having a government that can control the economy by fiat is sacrilegious. The government should have to come begging to the bond market, where the collective will of successful rich people can constrain its actions. Further, the unemployed should suffer until they either (a) find a job or (b) starve to death. This is the Darwinian fight for survival and reproduction that each free individual has to overcome.
If you remove the concept of free will from the debate, then we can analyze human society as a system that can be cybernetically optimized and engineered. People are products of their environment and its history. There is NO MAGIC. If we want a better society, then we need progressive policy that improves the environment in which people develop. But we’ll never get that because the dominant religions and philosophies of the world (including Ayn Rand’s atheist Objectivism) begin with false premises about human nature that they’ve simply pulled out of their ass to appeal to their egos and vanity rather than using science. Our knowledge in neuroscience and cognitive psychology has grown by leaps and bounds in the past 40 years, but our economic and legal philosophies are grounded in medieval mysticism.
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Anon is right, I fear. There is the moral sense that is intertwined with our capitalistic economic system that breeds the idea that those who have money have “earned” it and to do anything that might change the balance of ownership is wrong. Even the poor and middle-class seem to believe this, as indicated by their voting.
On your explanation, the operative word is “could.” The government “could” just mark up bank accounts, but it doesn’t. It plays this crazy game with treasury securities and has the Fed doing quantatative easing, interest rate setting and such to confuse things further. It’s a tough slog. I think you are trying to oversimplify a complex system, and I’m not sure that does people a great service.
Best,
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Andrew,
So the moral sense doesn’t extend to the human damage false belief causes?
It doesn’t extend to the people who do without health care insurance, people struggling to live on inadequate Social Security, people whose income is devastated by FICA taxes, people who receive substandard education, all because of the false belief the federal debt and deficit are too high?
Actually, the government does just mark up bank accounts. The “crazy game” is irrelevant to what really happens. The system is complex, unnecessarily so. But if you believe my explanation oversimplifies it, I’d welcome a better one.
Perhaps your explanation can accomplish what mine have not.
Rodger Malcolm Mitchell
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It seems that the moral sense that is imbued with the capitalistic system is currently a greater one than the moral sense to care for each other. That we let this made-up money stuff prevent us from helping each other to the fullest extent possible is tragic.
I’ll have to work on a better explanation, but the simple fact is that when the government deficit spends, it marks up accounts of those it is buying from and it marks down accounts of those to whom it “sells” securities. This makes it seem as if the government couldn’t do the first deal without doing the second (which, of course, it could). When you say that the government just marks up accounts, you miss the second part of this transaction. You may claim they are separate operations, but the current law says when you do transaction #1, you have to follow it up with transaction #2. I think the point to be driven home is that the whole security sale thing could be eliminated.
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Your points are correct. The creation and sale of T-securities is an unnecessary relic of the gold standard days.
It is the “anti-Quantitative” easing. In QE, the Fed takes less liquid money (T-securities) in exchange for more liquid money (checking account balances). Exactly the reverse is true when T-securities are created and sold.
Rodger Malcolm Mitchell
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Divorcing money from character is leaving us with well-funded yet dysfunctional institutions that serve no one but those who run them.
Lack of money is the last reason that education is substandard. The cost per student of our worst schools is outrageously high. Discipline and accountability are indeed free in a financial sense and yet infinitely valuable.
These were vital components of the public education I received 40 years ago – one that was far superior to and cost a fraction of the bureaucratic morass of today.
My youthful impudence to my teachers was simply not tolerated. When I went home, my Dad further reinforced the lesson. This basic lesson was worth more than all the laptops and lab equipment in the world.
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Ed, it depends how the money is used.
Low student/teacher ratios have a value, though exceptions can be found. Money pays for “non-academic” classes like art, music, sports, as well as after-school programs, as well as the computers and lab equipment you mentioned — all valuable to eduction.
In many Illinois high schools, students themselves pay for text books. At the best schools, students buy the newest books. At other schools, they buy older books or share books.
And then consider my suggestion to: Pay Students a Salary for Attending School. This would help prevent dropping out, one of the biggest problems facing education.
No doubt family environment is quite important, but money is important, too. The government can’t mandate that every child have as good a family as you did, but it can mandate the money.
Rodger Malcolm Mitchell
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My public school provided all the “non-academic” activities that you just mentioned – while spending a fraction of the money that is required today for making excuses to not provide them.
Funding top-heavy bloated bureaucracies, even with unlimited free money, results in negative productivity.
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Ed,
You have a great family and a great school. Millions of people are not as fortunate as you.
The subject is federal spending. Your recommendation is that the federal government should spend less, the same or more on education?
Or are you suggesting the government merely should say, “You people should just straighten up. Fathers, don’t you run away or go to jail. Mothers, get a higher paying job so you can afford to send your kid to a better school. Schools, make better use of what you have”?
Where is the data that shows providing additional money to schools actually causes worse educational results? Could there be negative factors other than money involved?
And why the objection to spending money? It doesn’t cost you anything.
Did you read the post about salaries for students?
Rodger Malcolm Mitchell
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More money is being spent on education by far than on the run-of-the-mill American public school I attended 40 years ago – with worse results by any measure. Pouring money onto a dysfunctional system rewards and increases its dysfunction – to the everlasting detriment of its trapped clients.
I have no interest in producing a nation of rich barbarians.
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Ed: “More money is being spent on education by far than on the run-of-the-mill American public school I attended 40 years ago – with worse results by any measure.”
I don’t think so, Ed. 40 years is long enough for the Flynn effect to show. Kids are smarter now. If that does not show in the measures being used, there is something wrong with those measures. Besides which, there are statistics that minority kids are getting better educations than 10-15 years ago. There is a lot of anti-public-school rhetoric out there, prompted, perhaps, by opposition to teacher’s unions. Mike the Mad Biologist often has links about education on his blog. ( http://scienceblogs.com/mikethemadbiologist/ ) Check it out. 🙂
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Yes Ed, I understand your feeling. So your solution is . . .?
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Hi Rodger,
I’ve begun to address some of your concerns/economic errors here: http://conant.economicpolicyjournal.com/2010/10/refutation-of-mosler-economics-and.html
Additional parts will be forthcoming.
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Taylor,
Your post is a long diatribe against Mosler’s simplified examples, which are not meant to be reality, but only ways to help people visualize.
You might as will criticize someone who says, “Visualize the atom as a miniature solar system, with electrons being planets and the nucleus being the sun.” You would say, “No, the nucleus isn’t hot like the sun and none of the electrons have people living on them like the earth.”
Your comments fail in this way, time and time again. You criticize the analogy rather than the reality.
You insert the concept of “wealth” into a discussion of money mechanics — and by confusing “wealth” with money, you create an incomprehensible mess.
You seem to claim the federal government does not have the unlimited ability to create money. (It does.)
You seem to claim the federal government does not have the unlimited ability to pay its bills. (It does.)
You insert the concept of inflation, which Mosler and all economists agree can be caused by excessive money creation. (Except, since 1971, the end of the gold standard, there has been no relationship between inflation and federal deficit spending. See: Inflation
You display no understanding of Monetary Sovereignty, which is the basis for all economics, today.
In short, your eye-rolling “disclosures” in essence, have “proved” Einstein was wrong when he compared gravity to an elevator, because gravity doesn’t have cables.
And of course, you offer no alternative hypothesis to what Warren was trying to explain. But if you want one, you can find it at A Quick Summary of the Facts
Rodger Malcolm Mitchell
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Money creation does not seem to be constrained by inflation. China shows that you can print as much money as you like and keep inflation in check by using price control.
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Do you really want government price controls? How of your irreplaceable time do you want to spend waiting in line for things you need?
In spite of all the wonderful things we read about China, the per capita income there is still at poverty level and the government is a tyranny. Cities are polluted beyond the imagination of any American. Why supposedly erudite people insist on seeing China as an example of how to run our own affairs escapes me.
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Ed, that’s not what I meant at all. I was just saying as long as a monetarily sovereign government is willing to impose price controls, it can engage in excessive money creation, keep interest rates low and prevent inflation.
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Replace “impose price controls” with “run a tyrannical command economy that dictates the decisions of its miserable subjects”.
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