Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency.”
Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
St. Louis Federal Reserve: “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills.
The U.S. government, like certain other governments (Canada, UK, Australia, Japan et al), is Monetarily Sovereign. Two hundred and forty years ago, the U.S. created its sovereign currency, the U.S. dollar, from thin air, by creating laws, also from thin air.
The laws created the dollar, and so long as the U.S. doesn’t run short of laws, it never unintentionally can run short of dollars. It can create an infinite number of dollars, forever.
(The federal government also has absolute control over the value of dollars [inflation] by controlling the Demand for dollars, either via interest rate control or by fiat.
It has exercised this control many times in its history, by adjusting interest rates and by arbitrarily changing the relationship of a dollar to a specific amount of metal.)
Having that unlimited dollar-creation ability allows the U.S. government to pay any number of creditors any number of dollars, without its having any income.
Even if a billion creditors each claimed payment of a thousand dollars in invoices, the U.S. government instantly could make that payment by creating new dollars — which in fact is the way the government makes all its payments.
To pay a creditor, each federal government agency sends instructions (checks and wires) to the creditor’s bank, instructing the bank to increase the balance in the creditor’s checking account. At the moment the creditor’s bank obeys those instructions, brand new dollars are created and added to the nation’s money supply (M1).
The instructions then clear through the Federal Reserve. Being a federal agency, the FRB always clears all instructions from other federal agencies. No federal instructions ever have bounced.
This contrasts with payments by monetarily non-sovereign state and local governments, whose instructions also create dollars, but when cleared through the Federal Reserve, an equal number of dollars are deducted from their checking accounts.
Thus, while federal bill-paying increases the number of dollars in circulation, state & local bill paying does not.
Having that unlimited dollar-creation ability also means it is meaningless to determine how many dollars the federal government has.
If you somehow were to decide that the federal government has a million dollars, what would that mean? It would not tell you anything about the government’s ability to spend.
If today, the federal government paid $1 trillion worth of obligations, this would not change by even a penny, the federal government’s ability to pay obligations, tomorrow.
Thus, the federal government’s financial system can be referred to as a “black box.”
Definition: A black box is a device, system or object which can be viewed in terms of its inputs and outputs without any knowledge of its internal workings.
In fact, the federal government is the blackest of black boxes, because the government requires no input whatsoever. One could say the federal government “has” zero dollars or infinite dollars, and both statements would be equally correct.
What becomes of tax dollars?
When you send your tax dollars to the federal government, they leave the economy. They cease to be part of any money-supply measure. Effectively, your federal tax dollars are destroyed.
Contrast this with your state and local tax dollars, which are owned by the monetarily non-sovereign state and local governments, and deposited in monetarily non-sovereign, private banks. These dollars are not destroyed. They continue to circulate through the private sector, as part of the nation’s money supply.
All of the above provides the answer to the title question: “When does a dollar become a dollar?”
Any form of money becomes money when it passes from the hands of the creator into the hands of the users.
When a dollar is said to be “owned” by the federal government — i.e. when it is on the federal government’s books — it actually has no value and no real existence. At will, the federal government can add and subtract numbers from its own internal balance sheets, and these changes have no economic effect. They merely are recordkeeping files.
Adding or subtracting dollars from federal balance sheets neither increases nor decreases the federal government’s ability to pay its bills.
The federal government can pay any creditor any debt denominated in dollars, simply by creating dollars. So, one can say the government owns zero or infinite dollars, depending on their thought process.
Similarly, all foreign currencies when owned by the government or agency that created them, have no value. Monetarily Sovereign governments have infinite access to their own sovereign currencies.
But what about a U.S. obligation denominated in a foreign currency, say Japanese yen or Chinese yuan? Because these currencies are easily available on foreign exchange markets, the federal government can use its unlimited supply of dollars to purchase enough foreign currency to pay any foreign creditor.
This leads to the interesting reality that the U.S. federal government has either no assets or infinite assets, simply because with infinite money it has the infinite ability to buy infinite assets.
The public may find this confusing and counterintuitive, but it demonstrates how alien federal financing is when compared to personal, business, or local government financing.
Owning or selling federal assets neither increases nor decreases the federal government’s ability to pay its bills.
Like the above-mentioned “black box,” federal assets in themselves have no value to the economy. Only federal output has value.
The Statue of Liberty, the Grand Canyon, Mount Rushmore — none of these has any economic value beyond their contributions to our dollar-based economy.
The federal government’s ability to deficit spend is limited only by an inflation that cannot be prevented or cured via interest rate control or by government fiat.
For a Monetarily Sovereign government, which has the unlimited control over its own sovereign currency, no such inflation is necessary.
- The federal government created the U.S. dollar from thin air by creating laws from thin air. By controlling laws, the government controls all aspects of the dollar.
- The finances of Monetarily Sovereign entities are substantially different from the finances of monetarily non-sovereign entities.
- Monetarily Sovereign: Governments of the U.S., Canada, Japan, China, Australia and others. Monetarily non-sovereign: The governments of cities, counties, states, euro nations, businesses, you and I.
- Even with zero tax collections, the federal government could not inadvertently run short of dollars.
- The federal government has absolute control over the Value of dollars (inflation) by controlling the Demand for dollars, either via interest rate control or by fiat.
- Federal finances are a “black box,” in which internal bookkeeping is meaningless to the economy. Such accounts as the Social Security “trust fund” and the federal General Account are bookkeeping illusions, used only for internal tracking. They do not reflect the economy’s financial reality.
- A dollar, indeed all assets, are part of the U.S. economy, only when they are owned by the U.S. private sector. Dollars shown on the federal government’s books are not part of the nation’s money supply.
- The private sector owns a limited number of dollars. The federal government owns an infinite number of dollars. Thus, every transfer of dollars from the private sector to the federal sector is recessive, while every transfer from the federal government to the private sector is stimulative.
The federal government could solve many more problems than it pretends it can. It has the unlimited ability to pay for education, healthcare, housing, clothing, food, transportation and any other of life’s necessities. The federal government could narrow the Gap between the rich and the poor by pressing a few computer keys.
The federal government resists taking these actions because of “Gap Psychology,“ the desire of the richer to distance themselves from the poorer.
If you are among the 99% of Americans who are not rich — if you own less than several million net dollars of assets — know this. The federal government has the wherewithal to ameliorate your financial struggles and worries.
The rich, who control the government, don’t want the Gap to narrow, so they brainwash you into believing it can’t be done.
Rodger Malcolm Mitchell
Twitter: @rodgermitchell; Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell
The most important problems in economics involve the excessive income/wealth/power Gaps between the have-mores and the have-lesses.
Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.
Implementation of The Ten Steps To Prosperity can narrow the Gaps:
Ten Steps To Prosperity:
1. ELIMINATE FICA (Ten Reasons to Eliminate FICA )
Although the article lists 10 reasons to eliminate FICA, there are two fundamental reasons:
*FICA is the most regressive tax in American history, widening the Gap by punishing the low and middle-income groups, while leaving the rich untouched, and
*The federal government, being Monetarily Sovereign, neither needs nor uses FICA to support Social Security and Medicare.
2. FEDERALLY FUNDED MEDICARE — PARTS A, B & D, PLUS LONG TERM CARE — FOR EVERYONE (H.R. 676, Medicare for All )
This article addresses the questions:
*Does the economy benefit when the rich can afford better health care than can the rest of Americans?
*Aside from improved health care, what are the other economic effects of “Medicare for everyone?”
*How much would it cost taxpayers?
*Who opposes it?”
3. PROVIDE A MONTHLY ECONOMIC BONUS TO EVERY MAN, WOMAN AND CHILD IN AMERICA (similar to Social Security for All) (The JG (Jobs Guarantee) vs the GI (Guaranteed Income) vs the EB (Economic Bonus)) Or institute a reverse income tax.
This article is the fifth in a series about direct financial assistance to Americans:
Why Modern Monetary Theory’s Employer of Last Resort is a bad idea. Sunday, Jan 1 2012
MMT’s Job Guarantee (JG) — “Another crazy, rightwing, Austrian nutjob?” Thursday, Jan 12 2012
Why Modern Monetary Theory’s Jobs Guarantee is like the EU’s euro: A beloved solution to the wrong problem. Tuesday, May 29 2012
“You can’t fire me. I’m on JG” Saturday, Jun 2 2012
Economic growth should include the “bottom” 99.9%, not just the .1%, the only question being, how best to accomplish that. Modern Monetary Theory (MMT) favors giving everyone a job. Monetary Sovereignty (MS) favors giving everyone money. The five articles describe the pros and cons of each approach.
4. FREE EDUCATION (INCLUDING POST-GRAD) FOR EVERYONE Five reasons why we should eliminate school loans
Monetarily non-sovereign State and local governments, despite their limited finances, support grades K-12. That level of education may have been sufficient for a largely agrarian economy, but not for our currently more technical economy that demands greater numbers of highly educated workers.
Because state and local funding is so limited, grades K-12 receive short shrift, especially those schools whose populations come from the lowest economic groups. And college is too costly for most families.
An educated populace benefits a nation, and benefitting the nation is the purpose of the federal government, which has the unlimited ability to pay for K-16 and beyond.
5. SALARY FOR ATTENDING SCHOOL
Even were schooling to be completely free, many young people cannot attend, because they and their families cannot afford to support non-workers. In a foundering boat, everyone needs to bail, and no one can take time off for study.
If a young person’s “job” is to learn and be productive, he/she should be paid to do that job, especially since that job is one of America’s most important.
6. ELIMINATE FEDERAL TAXES ON BUSINESS
Businesses are dollar-transferring machines. They transfer dollars from customers to employees, suppliers, shareholders and the federal government (the later having no use for those dollars). Any tax on businesses reduces the amount going to employees, suppliers and shareholders, which diminishes the economy. Ultimately, all business taxes reduce your personal income.
7. INCREASE THE STANDARD INCOME TAX DEDUCTION, ANNUALLY. (Refer to this.) Federal taxes punish taxpayers and harm the economy. The federal government has no need for those punishing and harmful tax dollars. There are several ways to reduce taxes, and we should evaluate and choose the most progressive approaches.
Cutting FICA and business taxes would be a good early step, as both dramatically affect the 99%. Annual increases in the standard income tax deduction, and a reverse income tax also would provide benefits from the bottom up. Both would narrow the Gap.
8. TAX THE VERY RICH (THE “.1%) MORE, WITH HIGHER PROGRESSIVE TAX RATES ON ALL FORMS OF INCOME. (TROPHIC CASCADE)
There was a time when I argued against increasing anyone’s federal taxes. After all, the federal government has no need for tax dollars, and all taxes reduce Gross Domestic Product, thereby negatively affecting the entire economy, including the 99.9%.
But I have come to realize that narrowing the Gap requires trimming the top. It simply would not be possible to provide the 99.9% with enough benefits to narrow the Gap in any meaningful way. Bill Gates reportedly owns $70 billion. To get to that level, he must have been earning $10 billion a year. Pick any acceptable Gap (1000 to 1?), and the lowest paid American would have to receive $10 million a year. Unreasonable.
9. FEDERAL OWNERSHIP OF ALL BANKS (Click The end of private banking and How should America decide “who-gets-money”?)
Banks have created all the dollars that exist. Even dollars created at the direction of the federal government, actually come into being when banks increase the numbers in checking accounts. This gives the banks enormous financial power, and as we all know, power corrupts — especially when multiplied by a profit motive.
Although the federal government also is powerful and corrupted, it does not suffer from a profit motive, the world’s most corrupting influence.
10. INCREASE FEDERAL SPENDING ON THE MYRIAD INITIATIVES THAT BENEFIT AMERICA’S 99.9% (Federal agencies)Browse the agencies. See how many agencies benefit the lower- and middle-income/wealth/ power groups, by adding dollars to the economy and/or by actions more beneficial to the 99.9% than to the .1%.
Save this reference as your primer to current economics. Sadly, much of the material is not being taught in American schools, which is all the more reason for you to use it.
The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.
3 thoughts on “When does a dollar become a dollar? The federal black box.”
This is nitpicking and probably unimportant, but isn’t it accurate to say that state and local tax dollars are in a state of non-existence until the state or local government spends them?
I’m glad you asked.
State and local taxes are treated the same way your salary is treated. They are deposited into private banks.
Private banks are part of the private sector. Just as you would not call your salary “in a state of non-existence” until you spend it, state & local taxes remain in the economy.
By contrast, federal tax dollars never enter the economy. They disappear and never are part of any money supply. Dollars on federal books are not part of the economy.
Dollars on federal books are not part of the economy.
Thanks for this Rodger, I’m learning a crucial concept today. I think this needs to be repeated over and over again and literally shoved into the eyeballs of hard money folks such as those from your friends in the CRFB.
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