An alternative to popular faith
The debt hawks claim to be concerned about your children and grandchildren, but their proposals actually will punish your heirs. The debt hawks say future taxpayers will pay for today’s federal deficit spending. This is factually wrong. Unlike state and local governments, the federal government does not spend tax money. It, in fact, destroys the tax money sent to it, and it creates new money, ad hoc, when it credits the bank accounts of creditors. Federal spending is not limited by, or related in any way to, federal taxes. Thus, taxpayers never have, nor ever will, pay for federal spending.
What the debt hawks fail to mention is that their solutions (raising taxes and cutting federal spending) to this non-existent problem will impoverish you, your children and your grandchildren. Here is a sampling of debt hawk proposals. Read them carefully, and think about each proposal’s effect on current and future generations.
Retirement:
Raise the normal retirement (Social Security) age to 68
Reduce scheduled Social Security benefits
Reduce Social Security spousal benefits
Increase taxes on Social Security benefits
Health care:
Tax insurance benefits
Tax employees for employer-paid premiums
Cut Medicare payments
Cut Medicaid payments
Raise Medicare premiums
Cut spending on graduate medical education
Raise the Medicare retirement age (again)
Cut federal Medicaid funding to states
Jobs:
Do not enact a new jobs bill
More taxes; higher taxes
Raise taxes on higher incomes
Increase the inheritance (“death”) tax
Increase the gas tax
Enact a VAT tax
Increase the payroll tax (FICA)
Eliminate the mortgage interest deduction
Eliminate state and local tax deductions
Tax life insurance benefits
Eliminate EITC (Earned Income Tax Credit for low and moderate income workers
Eliminate the $400/person making-work-pay credit
Eliminate the “American Opportunity” college tax credit
Add and excise tax on high-cost health plans
Military and Security:
Reverse the “Grow the Army” initiative (fewer paid soldiers)
Reduce purchases of weapons systems
Reduce veterans’ income security benefits
Reduce Homeland Security spending
Aid for the poor:
Cut food stamps
Cut average unemployment benefits
Cut temporary assistance to needy families (TANF) program
Cut funding for adoption and foster care
Education:
Cut federal funding of K-12 education
Cut school breakfast programs
Cut funding for the education of disadvantaged and disabled children
Infrastructure:
Cut federal highway funding
Cut funding for bridge repair
Research & Development:
Cancel NASA missions to the moon and Mars
States and Cities:
Cut mass transit funding
Cut federal funding to the states and cities
This is the world — a world of higher taxes and fewer benefits — the world the debt hawks propose for you, your children and your grandchildren.
And what is the federal debt the debt hawks worry over? The federal government spends by crediting the bank accounts of its vendors. Every credit demands a debit, and this debit on the government’s balance sheet is called “debt.” It more properly should be called, “money,” because the way the government creates money is by crediting bank accounts. That balance sheet merely is a score sheet, showing how much money the government has created.
You don’t owe it, nor do your children and grandchildren. It’s just a score sheet.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
No nation can tax itself into prosperity
#Monetary Sovereignty - Mitchell 
I just found out where debt hawks spend their morning coffee break- WSJ comment pages.
http://online.wsj.com/article/SB10001424052748703559004575256860701115920.html#articleTabs_comments%3D%26articleTabs%3Dcomments%26commentId%3D1197469
It seems like few of the people there would challenge many of the points of your post.
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The WSJ is remarkably clueless about government finances, especially considering they are a financial paper. See: https://rodgermmitchell.wordpress.com/2010/04/24/europe-and-the-welfare-entitlement-state/
As a result of them not educating their readers, these people are clueless, too. It’s a shame the media don’t wish to learn and disseminate the facts.
Rodger Malcolm Mitchell
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Why does the US Federal Government sell bonds to the government of China?
If the government creates money by giving it to someone (by buying something) then the government destroys money by receiving it from someone (by selling something).
Why does the government of China buy these bonds?
Kevin
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You ask an excellent question, but let me clarify something for you.
The U.S. government creates money when it pays for something, and destroys money when it taxes. Bonds are an even exchange. The government creates bonds out of thin air, then sells them. Money coming to the government is destroyed.
So money (bonds) is created and an equal amount of money is destroyed. It’s a wash — an unnecessary wash, which is why I suggest the elimination of T-securities.
Your last question is the best. Since China is a monetarily sovereign nation, and can create all the yuan it wants, why does China buy U.S. bonds?
Think of the process. First, China must acquire dollars, then deposit these dollars into its checking account at the Federal Reserve Bank. When it buys a T-bond, those dollars are removed from China’s checking account, and dollars in the form of a T-bond are deposited in China’s savings account at the same bank. In essence, dollars have moved from China’s checking account to its savings account.
When the bond matures, the dollars move back to China’s checking account, plus a few extra for interest. What has China gained? A few dollars, which it could have had simply by exchanging yuan for dollars. The whole transaction is useless.
So, my answer to your question is: Before 1971, the end of the gold standard, neither China nor the U.S. had the unlimited power to create money, so the transaction made sense, as it facilitated the flow of gold. The economic community has not yet caught up with the current reality. Buying and selling bonds is a useless exercise for monetarily sovereign nations.
Rodger Malcolm Mitchell
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China hand Prof. Michael Pettis of Beijing University on why China buys US bonds.
China: What the PBoC Cannot Do With Its Reserves
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Tom, the article asks the telling question: “How can a reduction in foreign purchases help the USG fund its massive fiscal deficit?” This demonstrates the author’s lack of understanding about how the US government pays its bills.
The post ignores the fundamental truth that both China and the U.S. are monetarily sovereign. They each have the unlimited ability to create money.
If by magic, every T-security owned by China suddenly became worthless, this would not reduce China’s ability to spend by even one yuan.
Each government pays its bills by crediting the bank accounts of its creditors. It can do this endlessly. The process is not in any way dependent on foreign exchange, taxes, the current account or any form of federal income.
The post may have value to currency speculators or for government actions against inflation, but it is meaningless from the standpoint of US federal debt affordability.
And because China and the US each have the unlimited ability to create money, they also have the unlimited ability to stimulate their economies and employment, regardless of the balance of payments.
Rodger Malcolm Mitchell
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Check out this proposed solution to it all!!!
http://tcifelli.wordpress.com/2010/02/21/proposal-to-eliminate-the-income-ta/
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Tom, the article proposes a convoluted solution to a non-problem, that non-problem being that the federal government needs income in order to pay its bills.
The U.S. federal government is monetarily sovereign, meaning it has the unlimited power to create all the money it needs, to pay any bills of any size. If federal taxes and federal borrowing were $0, that would not affect by even one penny, the federal government’s ability to spend.
Replacing one unnecessary form of taxation with another unnecessary form of taxation is . . . unnecessary — actually harmful.
Rodger Malcolm Mitchell
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Roger,
I’m quite impressed by your theories. In fact, I’ve read Warren Mosler’s work and I agree with it as well. I’m not an economic policy expert nor an advanced economic scientist to understand in depth the complex dynamics of economics but my knowledge does allow me to tell the differences within the mechanisms of the supply of money before and after the Gold Standard.
However, I find myself amazed at the number of endless economic debates currently being held by our state leaders and central bankers on what to do about our stagnant economy, whether to keep welfare policies or cut expenditure, and so on and so forth.
However, If the concept of “monetarily sovereign” is as clear and sound as we understand it, what’s impeding our leaders – whose intellectual capacities I don’t question – on carrying this policy forward and start pumping money into the economy to instigate growth without the fear on defaulting, which in turn leaves them “no choice” but to commit the same mistakes that caused the economic upheavals of the 30´s?
I don’t want to sound particularly neo-Marxist on this, but isn’t this orthodoxy still being applied partially as a means to keep certain interests and economic balance (i.e wealth accumulation) where it has always been ever since the early establishment of the financial system?
Taxation and inflation are old phantoms that inhabited the realms of monetary policy, when money value was constrained to the precious metal, setting a huge trade-off for nations between trade and economic well-being back then. However, these days are long gone, so in your concept, what do you think keeps the economic powers (and every other state for that matter) playing the game under the same old rules?
Regards,
Juan
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Thanks Juan,
You ask a question that has bedeviled me for more than 15 years: How can otherwise intelligent and sane people, stare facts in the face, while continuing to believe total nonsense? After all these years, I still do not know the answer.
I have written and spoken dozens of times to economics professors, politicians, columnists, editors and lay people, with slim success.
A classic example is the Chicago Tribune, whose editors have received at least 100 letters from me (See: LETTERS , and even printed many, while continuing to refer to the federal debt as “unsustainable” and a “ticking time bomb.”
For at least 70 years the debt has been a “ticking time bomb.” (See: Time Bomb. ) One would think the public or the editors themselves, would tire of this always-ticking, never-exploding, time bomb.
But the beat goes on. It would be humorous, were not so many people injured by this ignorance.
Rodger Malcolm Mitchell
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Be careful saying taxpayers never have paid for federal spending. You say it yourself, that prior to 1971 the federal government was not a monetary sovereignty, therefore taxes were still helping to pay for spending. Even if they could create some money based on gold “creation”, that wouldn’t cover all the spending. On another note, what implications does this have on the prices of commodities like gold and silver?
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In answer to why all those intelligent people stare facts in the face, then turn and walk the other way, you should read John Taylor Gatto’s book on education. (www.johntaylorgatto.com you can read it for free online.) There’s an intrinsic problem with our system that may not be fixable, but it answers some of why they do what they do. Also, take into consideration the political interest groups that actually control the government. They don’t want a bunch of educated, well-off people voting on logical policies, they want to be in control of everything (which is basically what he talks about except that he attributes the power to a smaller group of people than what I would think, I still have to finish his book though).
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You are correct. Taxpayers have paid for federal spending prior to 1971. Further, state and local taxpayers still pay for state and local government spending.
The price of all commodities is based on supply and demand, both of which differ considerably for silver vs. gold. Neither are money. They simply are commodities, just as are aluminum, diamonds and fresh water.
Rodger Malcolm Mitchell
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