You may think that when you pay taxes, you send money to the federal government. Wrong. You send only instructions to the federal government. The instructions tell the government, “Debit my checking account and credit your checking account.” Money never is sent anywhere. Just instructions.

Mail a dollar bill and all you are mailing is instructions to the federal government to credit the account of the person who hands the dollar to a bank teller. That’s all a dollar bill is: Not money, but instructions.

Think of it this way. Say you own two houses, a summer house and a winter house, but you can afford electricity for only one house. So, during the summer, you tell the electric company to connect the electricity for your summer house. Then, when winter comes, you tell the electric company to disconnect your summer house and connect your winter house.

Question: Have you now sent electricity from your summer house to your winter house? No. You only have sent instructions. So it is with dollars. Though I often have said, “Money never stops,” meaning whoever receives money immediately passes it to a bank or spends it or invests it, the truth is, money doesn’t exist in any physical form, so in fact, money never moves. It can’t.

Things that have no physical presence can’t move. Can a number move? Can a story move? Can a memory move? No, and neither can money. When you “send” money, what moves are instructions.

Mail a check and you are mailing instructions. Run your charge card and you are sending instructions. The transaction merely is a debit to one account and a credit to another.

This is important, because it can help you understand what happens to your taxes. When you send a check (instructions) to the IRS, your checking account is debited and the government’s account is credited. If the government were like the states, counties, cities, businesses or persons, crediting their account would give them dollars they previously didn’t have.

But the federal government is unique. Crediting its accounts does not give them anything they didn’t previously have, because as a Monetarily Sovereign nation, the federal government already has the unlimited ability to credit all bank accounts, including its own.

Yes, the federal government can credit its checking account any time it wishes. Whether the IRS debits your account $1 for taxes or $1 trillion, this does not affect the federal government’s ability to credit bank accounts. Essentially, your tax money is destroyed. Useless. Gone. And the government has no more money than if you paid no taxes at all.

The government does not spend your tax money. Federal spending is not related to taxes. This is the fundamental difference between the federal government and state/local governments. It is called Monetary Sovereignty, and it is why our children and our grandchildren never will “pay for” federal deficit spending. There is no mechanism by which a private party can “pay for” a federal obligation.

The government “pays for” things by sending banks instructions to credit accounts, and we taxpayers have no role in this.

Because federal taxes do not enrich the federal government by even one cent, the whole discussion about the so-called federal “deficit” and “debt” is nonsense. The federal government’s ability to debit your bank account does not change the federal government’s ability to credit someone else’s bank account. The fact that credits to someone else’s account may exceed debits in your account (aka a federal “defict”) means nothing. The two are unrelated.

So when you hear or read someone pontificating about the “unsustainable,” “ticking time bomb” “burden” of the federal deficit – when you read that our children will have to “pay for” the federal deficit — understand this: The federal deficit merely is the difference between debits to private bank accounts and credits to federal bank accounts, and the federal government has the unlimited ability to credit any bank accounts, public or private.

Now, how does it feel to know the federal taxes you pay are destroyed, useless, meaningless and a net loss for you and for the economy?

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

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No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetarily Sovereign, and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.

Remember that the next time you’re tempted to ask a dopey teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it screwed up the economy.”

In the previous post, we saw that federal debt is a bookkeeping number based on an obsolete law requiring the Treasury to issue T-securities in the amount of federal deficits. The “debt” is functionally just the total of outstanding T-securities, not the total of deficits. We saw that, in a Monetarily Sovereign nation, there can be deficits without debt, and there can be debt without deficits.

The major, ongoing news story of the day, is the battle between Tea (formerly Republican) Party members and the Democrats concerning the debt ceiling. You should find this battle amusing:

With rare exception, every speech, every comment, every article, every editorial you read or hear concerning the federal debt is based on ignorance.

Neither those who argue for an increase in the ceiling, nor those who argue against an increase, know what they are talking about. The federal debt is unnecessary, and so, the federal debt ceiling is unnecessary. To argue about modifications to a law that is fundamentally obsolete, is like arguing about the proper number of times a witch should be dunked.

There neither should be an increase, a decrease or a maintenance of the debt ceiling. All the arguments for or against involve discussions of the federal deficit. Those against increasing the debt ceiling argue that it helps prevent excessive deficit spending by the federal government. Those who argue for an increase in the debt ceiling claim increased deficit spending is necessary.

They both are wrong for different reasons. Empirical evidence shows the debt ceiling has done nothing to prevent federal spending. And while increased federal deficit spending is necessary for a growing economy, federal deficit spending does not require the creation of T-securities (aka “federal debt”).

So while the self-proclaimed economics experts in Congress and in the media waste their time and yours, exploring all the reasons to, and not to, increase the debt ceiling, you can sit back and laugh (or cry), thinking “What fools these be. They are arguing over something that could be eliminated with one touch of a computer key and/or one minor change in an obsolete law.”

In short, if you don’t find it hilarious, when the President of the United States gives an impassioned speech about the need to improve a nonsensical law, and the Speaker of the House gives an equally impassioned speech about the need to maintain that nonsensical law, then you are a tough audience, indeed. I, myself, find it comical – and sad.

Enjoy the debates and the clowns.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

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No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetarily Sovereign, and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.

Remember that the next time you’re tempted to ask a dopey teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it screwed up the economy.”

MONETARY SOVEREIGNTY

Federal debt is not the total of federal deficits

I’ve mentioned this before, as part of other posts, but this seems like an appropriate time to give it its own post, especially since the media and the politicians discuss reducing the federal deficit and reducing the federal debt as though this were the same thing. It isn’t. There is no functional relationship between federal deficits and federal debt.

Money is not physical

The story begins with the end of the gold standard in 1971. At that moment, money not only became not physical in itself, but had no physical surrogate. When I say money is not physical, I mean you can’t see it, touch it, send it, hold it or store it. Money is nothing more than an accounting notation.

That dollar bill you have in your wallet is not money. It is a receipt from the federal government, saying the government owes the holder a dollar. In that sense it is similar to a check you might write, which tells your bank to credit the recipient’s account. Think of that dollar as like the title to your house. The title is not the house. The title merely states that you own the house. A dollar bill is just a “title” to an invisible, non-physical dollar.

What is the federal deficit?

The federal government is said to run a “deficit” when it receives less tax money than it spends. Right? Well, yes and no. The word “receives” implies that money moves from Point A to Point B. But because money has no physical existence, it cannot move. What happens is that an account at Point A is debited and an account at Point B is credited. There is no movement.

When you pay taxes, your bank account (Call it “Point A”) is debited, and the Treasury’s account (Call it “Point B”) is credited. There never is a time when money moves between Point A and Point B. That tax check you mail is just a set of instructions telling the federal government to debit your checking account and to credit it own account — which it just as well could do without your instructions.

Similarly, when the federal government spends, it does not send money anywhere. It merely instructs banks to credit certain checking accounts, while it debits its own accounts. Simplified, the federal deficit is the difference between the credits to the “Taxes” account and the debits to the “Spending” account.

And none of this adds to the federal debt.

The end of the gold standard

Before 1971, the federal government needed to obtain money from outside sources, because it did not have the unlimited ability to create money. It’s ability to create money (actually, to credit accounts), was limited by its supply of gold. In August, 1971, the federal government gave itself the unlimited ability to credit accounts. It became Monetarily Sovereign.

This meant, from a fiscal sense, it no longer needed to “borrow” nor did it need to tax. It could credit accounts at will. Borrowing and taxing have no effect on the federal government’s ability to credit accounts. If borrowing fell to $0 or rose to $100 trillion, neither act would affect by even one dollar, the federal government’s ability to credit accounts. The same is true for federal taxes. If taxes fell to $0 or rose to $100 trillion, the federal government’s ability to credit checking accounts would remain infinite.

Borrowing is a relic of the gold standard days, and while taxing does have anti-inflationary purposes, it no longer funds federal spending. Thus, taxpayers do not pay for federal spending. The federal government credits accounts ad hoc, regardless of taxes.

How does the federal government borrow?

The federal government borrows by creating T-securities out of thin air, then exchanging them for dollars it previously created out of thin air, then destroying the dollars. More specifically, if you buy a T-bill, the government will credit your T-bill account and debit your checking account. During this so called “borrowing” process, the federal government receives nothing. It merely debits and credits accounts, according to your instructions.

You may think you have sent dollars to the federal government, but in reality, you have sent nothing. The government has debited your account and credited its own account, which it could have done without debiting your account. Your checking account balance was reduced, and your T-bill account was increased, without benefitting the federal government in any way. Your checking account dollars were destroyed. It’s simply an asset swap.

Why does the federal government borrow?

The answer lies in history. Borrowing is necessary for a monetarily non-sovereign government (states, counties cities, Italy, France et al), because such governments are unable to credit accounts at will. So, the U.S. has a pre-1971 law requiring the Treasury to borrow an amount equal to the federal deficit. The U.S. is Monetarily Sovereign, meaning it can credit accounts at will. Borrowing no longer is necessary. But, the law still is on the books.

What is the relationship between federal deficits and federal debt?

Functionally, none. Federal crediting of checking accounts could exceed federal taxes (aka “deficit) by many trillions of dollars, yet the government never would have to create a single T-bill. Similarly, the federal government could credit T-bill accounts by many trillions of dollars, and never have to credit a single checking account. The only relationship between federal deficits and federal debt is a legal one. Either can exist without the other.

So the next time you hear a politician say he wants to reduce federal deficits because the debt is too high, realize he has no idea what he’s talking about. And the next time you hear him say the deficits or debt are unsustainable, realize he’s claiming that somehow the federal government has lost the ability to credit checking accounts.

What about inflation?

There are two fundamental questions in economics:
1. How many dollars can the federal government create?
2. How many dollars should the federal government create?

Debt hawks confuse the two questions. The federal government can create dollars (i.e. credit checking accounts) endlessly. There is no limit. The federal government has the power to credit checking accounts by a trillion trillion trillion dollars, tomorrow. So all federal deficits and debt are sustainable. The federal government never can run short of money. Never. (Unless a mindless Congress tells the government not to credit checking accounts beyond a certain point known as the “debt ceiling.”)

But if the federal government credited checking accounts too much, this could cause inflation. While the Fed has done a good job controlling inflation via interest rate control, I feel confident there is some point at which checking accounts could be credited so much that even interest rate control could not prevent inflation.

Not only are we nowhere near that point, but we never have been near that point. Since that magical year 1971, inflation has been caused by oil prices, never by federal crediting of checking accounts (spending), and with very few exceptions, inflation has been close to the Fed’s target level.

What’s the bottom line?

The federal government neither needs nor uses borrowed dollars or tax dollars. It can credit checking accounts at will At current or even foreseeably higher levels of federal spending, there is no danger of uncontrollable inflation. Reducing the federal government’s ability to credit checking accounts will hurt taxpayers by reducing the benefits of federal spending. There is no functional connection between federal deficits and federal debt.

In short, budget cutters – the people who unnecessarily raise taxes and/or cut spending – will punish us today and punish our children, tomorrow. And all with no good purpose.

Congress is engaged in a meaningless debate about the budget ceiling. A good analogy would be if Congress were to limit the number of stars the Hubble telescope is allowed to access. In Congress’s view, accessing too many stars would cause a star deficit.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

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No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetarily Sovereign, and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.

Remember that the next time you’re tempted to ask a dopey teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it screwed up the economy.”