The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
Yesterday, I was interviewed by Abigail Romaine on radio station WNZF. The interview opened with some audio clips of Ron Paul pandering to his audience with silly jokes about how irresponsible it would be to increase the debt ceiling, and federal borrowing and debt are unsustainable, and why we should cancel the health care program and why we should go back on the gold standard. He got a huge laugh from his audience about creating money from thin air, as though that were something unimaginably ridiculous.
Abby asked for my comments. I fought the impulse to tell her Ron Paul knows as much about economics as I know about quantum chromodynamics. And this is the man who is Chair of the House Monetary Policy subcommittee! Yikes! No wonder we are in trouble.
But instead, here is the context of what I told Abby on air.
Economics is complex, but the real complexity is that the basis for modern economics is counter-intuitive. The key questions in modern Economics are:
#1. How many dollars CAN the federal government create?
#2. How many dollars SHOULD the federal government create?
I. How many dollars CAN the federal government create?
In 1971, we were on the gold standard, which limited the federal government’s ability to create money. Had the situation continued, we actually could have faced bankruptcy, identical with what Greece, Italy et al now face. President Nixon unilaterally took us off the gold standard, and made us Monetarily Sovereign, which meant dollars no longer had to be backed by gold or by anything else. Money no longer was related to anything physical.
This is difficult for most people to imagine, but we see the same thing in our everyday life. Warren Mosler gives a “scoreboard” example on his web site and in his book. Imagine a football game in which the scoreboard reads 0-0. One team scores.
Now the scoreboard owes that team 6 points. Where will the scoreboard get those 6 points? Someone pushes a computer button, and now the scoreboard reads 6-0. Where did the scoreboard get the 6 points? Is there a scoreboard tax that people pay into a scoreboard fund, to provide points for the scoreboard?
No, the scoreboard is sovereign for points just as the U.S. government is sovereign for dollars. The government can’t run out of dollars any more than the scoreboard can run out of points. The points have no physical basis, just as dollars have no physical basis.
Because the U.S. dollar is not physical, you can’t hold a dollar. You can’t touch a dollar. You can’t see a dollar. The dollar is just a score. “But wait,” you say. “The dollar is physical. I have some in my wallet. I can see it, touch it, fold it. The dollar is perfectly physical.”
And that is one source of the misunderstanding about money, for that piece of paper in your wallet is not a dollar; it is a receipt for a dollar. Imagine you own a house. How do you know you own the house? You have a piece of paper called a “title.” That title is your evidence you own the house. The title itself is not a house. You can’t live in the title. It’s just a receipt.
Similarly, that piece of paper in your wallet, which we confusingly call a “dollar,” is just a receipt showing you own a dollar, but it in itself is not a dollar. A dollar is just a score, and the federal government can change that score by pressing a computer key, the same way the scoreboard operator can change the score.
Imagine you’re on Social Security. You have $2,000 in your checking account. When you receive your $1,000 monthly benefit, suddenly you have $3,000 in your account. How did that happen? The government pressed a computer key, which changed that 2 to a 3, just like the scoreboard.
So, in answer to the question, How many dollars can the federal government create, ask yourself, “How many points can the scoreboard create?” The answer, of course: “Unlimited.” Send government a bill. To pay you, the government simply will change the numbers in your bank account. This means the federal government never can run out of money. There is no “scoreboard ceiling,” just as there should be no debt ceiling.
What are the implications?
1. If all federal taxes were reduced to zero, this would not reduce by even one dollar, the federal government’s ability to spend.
2. It’s impossible for the federal government to be forced into bankruptcy. All federal debt is sustainable.
3. People worry about our $900 billion debt to China. Imagine that China said, “You owe us $900 billion, and we want it all tomorrow.” What would the federal government do? No problem. It simply would press a computer key, and China’s checking account at the Federal Reserve bank would be increased by $900 billion.
4. No agency of federal government can be forced into bankruptcy. Congress is an agency of the federal government. It has no source of income. There is no “Congress tax.” There is no “Congress fund.” Yet, Congress never runs out of money. The federal government supports Congress by creating money. It simply clicks that computer key.
Similarly, the Supreme Court is an agency of the U.S. government. It has no source of income. There is no Supreme Court tax; no Supreme Court fund. Yet the Supreme Court never runs our to money. The government pushes a computer button and all Supreme Court bills are paid.
Social Security and Medicare are agencies of the federal government, but misleadingly, there are Social Security and Medicare funds. These funds don’t exist. They are an accounting fiction. And there are Social Security and Medicare taxes. They have no function. The federal government supports Social Security the same way it supports Congress and the Supreme Court. It pushes computer buttons to add money to the bank accounts of creditors.
Despite all the misguided hand-wringing about when Social Security and Medicare will run out of money, FICA could be eliminated, and this would not move Social Security and Medicare even one dollar toward insolvency. Social Security and Medicare can no more run out of money than could Congress and the Supreme Court.
State and local governments, business, you and I can be forced into bankruptcy. We can run out of money. But for Monetarily Sovereign, no debt is unsustainable. Sadly, Ron Paul does not understand Monetary Sovereignty. He thinks federal debt is like personal debt. His ignorance hurts America.
II. The second key question was: How many dollars SHOULD the federal government create? There is but one limitation on federal money creation: Inflation. Though the dollar is not physical, it is a commodity. It even is traded on the Chicago Mercantile commodity exchange. The value of any commodity is based on supply and demand. If we were to increase the supply of money too much, the value would go down, and we would have inflation.
So to prevent inflation, we either must reduce the supply or increase the demand.
Normal population increase reduces the per capita money supply, but does not allow for economic growth. A growing economy requires a growing supply of money, and history shows that when money growth lags, we have recessions and depressions.
To prevent these recessions and depressions, while also preventing inflation, we must increase the demand for dollars. Demand is influenced by the reward for owning money, which is interest. When interest rates are high, people invest in money. That is, they invest in money market accounts, bank CDs and savings accounts. When rates are low, people invest in non-money: stocks and real estate.
This is why the Fed raises rates when it anticipates inflation and lowers rates when it anticipated deflation. The system has been reasonably effective. Since we went off the gold standard, the federal debt has increased an astounding 3600%, yet inflation has been reasonably close to the Fed’s target rates. In fact, a graph of inflation vs. deficits shows no relationship between the two. Rather, inflation has been caused by oil prices.
Ron Paul likes the debt ceiling. He does not consider the hardships it will cause for us, our children and our grandchildren. Less money will be spent on roads, on bridges, on the military, on health care, on research, on education, on security, on the ecology, on fighting poverty, on fighting crime. All this pain for our children and grandchildren, because the Ron Pauls in Congress do not understand the basics of economics.
The federal government can pay any debt of any size. Why have a ceiling? What is the purpose? History shows every depression and most recessions come from too little debt. And what is “healthcare reform”? Cutting dollars the federal government not only can provide at the touch of a button, but which actually benefit us adding money to the economy? This nation should make sure all Americans can afford the best health care, not cut health care because we don’t understand Monetary Sovereignty.
The federal government, unlike the state and local governments, doesn’t need to borrow. Borrowing is a relic of gold standard days. We could end borrowing tomorrow, and this would not affect by even one penny, the government’s ability to spend.
Politicians think the federal government is like you and me. But the federal government is Monetarily Sovereign. And you and I are not. The only restraint on federal money creation is inflation, and we have the means to control that.
The Ron Pauls of the world want to sentence our children and grandchildren to miserable, unhealthy lives of poverty, rather than allow our government to use its powers to provide prosperity. Ignorance has its costs.
I’ll let you know about any follow-up conversations I have with Abby.
Rodger Malcolm Mitchell
No nation can tax itself into prosperity.