An alternative to popular faith
Are you too young (or too old) to remember the fable about Chicken Little, who believed the sky was falling down when an acorn fell on her head? She ran around in a panic, screaming “The sky is falling,” a now common idiom denoting an hysterical or mistaken belief that disaster is imminent.
Thus, have the debt hawks, aka Chicken Littles, been telling us for 30 years that the sky is falling, and that federal deficits will create disaster. Neither has occurred, or is likely soon, but failure of prediction neither embarrasses nor educates debt hawks.
We have arrived at a deficit of $1.4 trillion. In the past 30 years, the gross federal debt has grown an astounding 1,400%. The economy has grown, inflation has not been a problem, federal borrowing has not replaced private borrowing, countries have not refused to lend to us and because federal tax rates actually have gone down, no one’s grandchildren have paid for the $12 trillion gross debt.
The problem with debt hawks is they don’t understand money. They think of money as a scarce physical substance. It may be scarce to you and to me, but it no longer is scarce to the federal government, which since 1971, has created money at will, simply by creating T-securities from thin air, then exchanging them for the dollars it created earlier — also from thin air.
Visualize this. You go to a football game and the scoreboard reads 14 – 7. You might say one team “has” 14 points and the other team “has” 7 points. But in reality, the scoreboard merely has credited one team with 14 points and the other team with 7 points. The points are not physical things. No one “has” them.
Why is this important? Because in the economy, you and I are the teams and the government is the scoreboard. Points are not a real substance. Teams are merely credited with points. Money no longer (after we went off the gold standard) is a real substance. You and I, or more specifically, our bank accounts, merely are credited with money.
The scoreboard (government) never runs out of points. The government never runs out of the ability to credit you with dollars. The scoreboard does not need to ask either team to return some points so it can credit more points. Crediting a team with points does not reduce the scoreboard’s ability to credit more points. Crediting people or companies with money does not reduce the government’s ability to credit more money.
The scoreboard does not need to borrow points. The government does not need to borrow dollars. It as easily, safely and prudently can create dollars directly, rather than by creating and selling T-securities.
Imagine you decide to start a country from scratch. What is the first thing you will do? The people in your country need money, so you, as the government, will credit them with money. How? Perhaps by buying things from them. The people will give you material things and services; you will credit their bank accounts.
Debt hawks will call this exchange “deficit spending,” and they will demand that the people credit you, the government, back with some of the money. That’s called “taxation.” It is identical with giving the scoreboard back some points.
The scoreboard neither has nor needs points. The federal government neither has nor needs money. It never needs to be credited with money. It never needs to borrow money. It is the scoreboard. It can credit, endlessly.
The debt hawks continue to use obsolete, gold-standard thinking, from when money was a substance and was scarce to the government. Today, if the government wanted to give you $1 trillion, it simply would credit your bank account for $1 trillion, and debit its own balance sheets. Nothing physical would happen except the movement of a few electrons. The government can do this endlessly. In fact, last fiscal year, it did.
The government does not have a stash of money from which it spends. The government has no money at all. It merely credits bank accounts — yours, mine, foreign governments’.
Some may fear this can cause inflation, but the government now has absolute control over the value of its money through its control over both the supply and the demand (interest rates) for money.
The world changed in 1971, and the debt hawks have not yet understood that. Perhaps “hawk” is the wrong bird. More appropriate might be “Chicken Little.”
Rodger Malcolm Mitchell
http://www.rodgermitchell/
#Monetary Sovereignty - Mitchell 
(The belief in “revenue neutral” is as scientific as creationism, but more harmful.)
Members of the Chicken Little, “Sky Is Falling” Club
Membership in the Chicken Little, “Sky Is Falling” Club is awarded to those who claim deficits will destroy our financial world, while supplying no historical evidence to support their claims:
Economist Kevin Hassett : “You can have a stimulus every quarter from now until we go bankrupt.” [Grow the economy until we go bankrupt? Ever since the gold standard was eliminated, it has become impossible for a sovereign nation, with unlimited money-creating ability to go bankrupt.]
Federal Reserve Chairman Ben Bernanke who on 10/19/09 called for the United States to whittle down its record-high budget deficits . . .”
[These are the very same deficits that stimulated economic growth, not just during this recession, but repeatedly over the years. Perhaps Chairman Bernanke finds economic growth frightening.]
Diane Lim Rogers, Chief Economist for the Concord Coalition: “Revenues that the government chooses to use to fund new programs are revenues that are unavailable for deficit reduction” [Ms. Rogers apparently believes there is a fixed amount of spending available to the federal government. Never mind that the government created an additional trillion dollars in each of the past two years.]
Martha Lynn Craver , Associate Editor, The Kiplinger Letter: “What will be the impact (of the Health Care Bill) on Medicare? . . . More doctors may just decide to drop out of Medicare altogether.” [Yes, if the budget stays the same, and more elderly use Medicare, there will be fewer doctors to serve them. You can’t get two gallons of milk from a one-gallon jug. Of course, the better alternative is to increase federal spending. Ms. Craver doesn’t think of that.]
David Einhorn , President of Greenlight Capital: Our choice may be either to maintain large annual deficits until our creditors refuse to finance them or tolerate another leg down in our economy by accepting some measure of fiscal discipline. [Our creditors become our creditors, when they give us the money we previously created from thin air, in exchange for T-securities we also created from thin air. We don’t need creditors and we don’t need to sell T-securities. We simply could and should create money from thin air. That would eliminate federal debt and thankfully, eliminate debt hawks.]
Washington Post : Writes about the “fiscal time bombs that will need defusing soon… the Bush tax cuts…(which involve) huge costs…that the administration would, for the most part, prefer to assume away.”
[Is this the same “fiscal time bomb” that has needed defusing since 1979, yet never seems to explode? Is this the same “fiscal time bomb” that cured the Clinton-created recession that officially began January 1, 1980?]
Chicago Tribune: Says, “The $829 billion (health care) plan would reduce the federal deficit by $81 billion over 10 years . . . That sounded like a refreshing change from the budget-busting Democratic plans in the house . . . Congress has regularly bowed to doctors and rescinded scheduled cuts in their Medicare payments. There’s no reason to believe Congress will grow a spine and make those cuts stick.”
[The Tribune editors evaluate health care plans on the basis of cost, rather than on the ability to provide quality health care. Thus the editors feel the Bacus plan is better because it is cheaper, and cutting doctors’ payments is a good way to improve medical services. Presumably, the Tribune editors personally enjoy excellent health care coverage, which is why they have adopted the “I’ve got mine” attitude of Congress and the wealthy.]
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This is an excellent article about exactly how are money system works. It is true, a FRN is only worth what the gov says it’s worth. There is no material wealth behind it.
The problem with fiat money is that while the gov understands the rules and can print money legally out of thin air, you and I get screwed because if we did such an act we’d go to jail.
See, citizens have to work and labor to pull money out of the system (created via loans in banks), yet the gov does not have to.
So maybe the gov holds the monopoly on the legal use of force, but does it hold the same on the legal monopoly of loaning and creating money?
Commerce clause aside, did we really intend to give them the powers to endlessly fund two long wars in the middle east? Why do we even keep track of the national debt? Why are we still debating the cost of health care?
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Bryan,
You asked, “Why do we even keep track of the national debt? Why are we still debating the cost of health care?”
Two excellent questions. National “debt” is a misleading term, with pejorative implications. It should be called “money created,” or something equally accurate.
Debating the cost of health care, rather than creating the best possible health care, means we will sacrifice people’s lives and health, because of a misguided belief that federal money creation is limited.
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I’m curious what you think about what is happening in Zimbabwe now, or less dramatically, what happened with the Icelandic krona.
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What is your theory?
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Zimbabwe is an example where the government lost control of the money supply. They could neither control the supply nor did they have the wisdom to control the demand (through interest rates). Same thing happened to the Krona.
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I know nothing about Zimbabwe, though I have trouble understanding how a sovereign nation could lose control over its money supply. Losing control over demand occurs because of irrational fear about high interest rates.
Meanwhile, fear of deficits is quite damaging. See the posts titled: “Deficit fears do more damage than deficits” and “Deficits: The Possible vs. the Certain” (listed in the left hand column.)
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>[…] I have trouble understanding how a sovereign nation could lose control over its money supply.
Imagine that the US sold $12 trillion in bonds and then people stopped buying bonds. So then the US has to cover the full deficit and all the bonds that come due by creating new money. Most bonds are short term these days. If $5 trillion in bonds come due the first year, the US would have to increase the money supply by $5 trillion. This is losing control of the money supply, big time.
There is no way increasing taxes can make much dent in those kinds of numbers, so the usually valid idea of increasing taxes to reduce the money supply fails in this type of situation. This “bond sale failure” is what leads to hyperinflation.
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Vincent,
The short answer is, the U.S. would cover the $12 trillion in bonds with the $12 trillion it received from the bond buyer.
Let’s say China buys $1 trillion worth of T-bonds. It first must put $1 trillion into it’s checking account at the Federal Reserve Bank. Then, that $1 trillion is transferred to China’s T-bond account, also at the FRB.
When the bonds come due, the same $1 trillion (plus some extra for interest) is transferred back to China’s checking account. No problem. The money never leaves the FRB. It just transfers from one of China’s accounts to another of China’s accounts, then back again.
Rodger Malcolm Mitchell
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