The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. If you understand the following, simple statement, you are ahead of most economists, politicians and media writers in America: Our government, being Monetarily Sovereign, has the unlimited ability to create the dollars to pay its bills.

Recently, the noted commentator, Charles Krauthammer, wrote an article titled, “Et tu, Jack Lew?” In this article, he said:

The Social Security trust fund is a fiction. If you don’t believe me, listen to the OMB’s own explanation (in the Clinton administration budget for fiscal 2000 under then-Director Jack Lew, the very same). The OMB explained that these trust fund “balances” are nothing more than a “bookkeeping” device. “They do not consist of real economic assets that can be drawn down in the future to fund benefits.”

In other words, the Social Security trust fund contains – nothing.

I was amazed. Krauthammer actually gets it? He’s right, of course. There are no dollars in the so-called “trust fund,” simply because FICA, and indeed all federal tax money, is destroyed upon receipt. This is one of the features of a Monetarily Sovereign government. It has the unlimited ability to create money, so it has no need to store money.

But alas, Krauthammer’s understanding was not to be, for in the very next paragraph he said:

Here’s why. When your FICA tax is taken out of your paycheck, it does not get squirreled away in some lockbox in West Virginia where it’s kept until you and your contemporaries retire. Most goes out immediately to pay current retirees, and the rest (say, $100) goes to the U.S. Treasury – and is spent. On roads, bridges, national defense, public television, whatever – spent, gone.

Wrong, wrong, wrong. Our Monetarily Sovereign federal government does not spend tax money on anything. In fact, there is no relationship whatsoever, between federal taxes and federal spending. This has been true since 1971, the end of the gold standard, and Krauthammer et al have not yet noticed the most influential economic change in our lifetimes. Today, even were federal taxes to fall to zero, this would not affect by even one dollar, the federal government’s ability to spend. (This is not the case for the states, counties and cities, which are not Monetarily Sovereign and so do spend tax money.)

Krauthammer goes on to say:

In return for that $100, the Treasury sends the Social Security Administration a piece of paper that says: IOU $100. There are countless such pieces of paper in the lockbox. They are called “special issue” bonds.

Special they are: They are worthless. As the OMB explained, they are nothing more than “claims on the Treasury [i.e., promises] that, when redeemed [when you retire and are awaiting your check], will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.” That’s what it means to have a so-called trust fund with no “real economic assets.”

Wrong again. Federal spending is not financed by raising taxes or borrowing.

When you retire, the “trust fund” will have to go to the Treasury for the money for your Social Security check.

Yes, the Treasury will do what has been doing and is designed to do: Create the dollars to pay Social Security benefits.

So when (Office of Management and Budget Director Jack Lew) tells you that there are trillions in this lockbox that keep the system solvent until 2037, he is perpetrating a fiction certified as such by his own OMB. What happens when you retire? Your Social Security will come out of the taxes and borrowing of that fiscal year.

No, federal taxes and borrowing do not fund federal spending. Both could be eliminated, and the federal government could continue to spend trillions. Yes, there can be inflation implications, but the federal government neither needs nor uses tax money for anything.

Think about it. If you had a money-printing press in your basement, and had the unlimited ability to print money, would you borrow the money you previously had printed, and could continue to print, forever? Would you ask for tax money so you could pay your bills? Would you have any unpaid debts? Would creating money cause a “deficit”?

Krauthammer’s (as well as politician’s, other media writers’ and mainstream economists’) confusion comes from three sources:

1. Prior to 1971, when the federal government was not Monetarily Sovereign, it did spend borrowed and tax money.
2. The states, counties and cities, being monetarily non-sovereign, do spend borrowed and tax money.
3. You and I and all businesses, are not Monetarily Sovereign. We do need a source of income before we can spend.

In short, Krauthammer et al, do not realize the federal government is completely different from all the monetarily non-sovereign entities. He confuses federal “debt” and federal “borrowing” with personal debt and personal borrowing.

So when your Social Security benefits are cut needlessly, you’ll understand why. It’s the Krauthammers of the world, ignorant of economic reality, who are driving our economy. And this indeed is scary.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth.