Whipping a horse while reining it in.

What happens when you spur the economy and rein it in at the same time.

Imagine you and me debating quantum chromodynamics.

I know nothing about the subject, and in all probability, you know virtually nothing, too.

So, our debate would be meaningless.

And yet, this is precisely what is happening in America, with regard to federal taxes: Debates by people who know nothing.

Consider excerpts from the following article:

The Memo: Biden tries to flip the script on taxes, by Niall Stanage
President Biden’s plan to increase taxes on wealthy Americans is reigniting one of the fiercest divides in politics: How much should the government do, and who should foot the bill?

Immediately you see the first bit of ignorance, with the words, “who should foot the bill?”

No one “foots the bill” for federal government spending.

The federal government creates new dollars, ad hoc, every time it pays a creditor.

Unlike state and local government taxes, which do fund state and local government spending, federal taxes do not fund federal spending.

This is basic economics that Biden and most in Congress surely must understand.

They understood it when they passed earlier trillion-dollar stimulus bills without tax increases. So how could they not understand it for the proposed trillion-dollar stimulus bill?

Biden this week will propose a massive boost to social infrastructure spending on things such as paid leave, child care and tuition-free community college.
To pay for it, according to multiple media reports, he will nudge up the highest rate of income tax and dramatically hike the capital gains tax paid by top earners.

Biden claims that the purpose of his proposed tax increase is to “pay for” his proposed spending boost. If he truly believes that, he is ignorant about federal financing.

More likely, he doesn’t believe it, which would mean he is lying. So, why?

The plan is expected to call for an approximate doubling of the capital gains tax, from its current level of 20 percent, for Americans with incomes of over $1 million.
At the heart of the plan is a key question: whether income derived from the sale of assets should be treated basically the same as income in the form of a paycheck.
Biden and his backers answer with an emphatic yes. Wealthier Americans derive a greater proportion of their overall income from investment, they note.
The beneficial treatment of capital gains, they say, has the effect of further helping those who are already in a privileged position – and therefore exacerbating wealth inequality and social incohesion.
A Gini ratio of 0 indicates perfect equality, where everyone has the same income. A Gini ratio of 1 indicates total inequality, where one person has all the income. Inequality in America has grown substantially.

Could it be that the real purpose of Biden’s tax proposal is to narrow the income/wealth/power Gap between the very rich and the rest of us?

Could it be that he is using the need for infrastructure and other spending, as an excuse to tax the rich more, while benefiting the “not-rich”?

If that is his motive, then I bow to him as a genius, and I pray he succeeds.

The wide, and widening, income/wealth/power Gap between the relative handful of Americans and the rest of us, is the single biggest, most corrosive economic problem facing America.

But there are counterarguments, too.
Those who favor keeping the capital gains tax low insist that it is a key driver of investment and that high rates encourage people to hold on to their assets rather than incur a high tax bill, thus diluting economic dynamism.

That “key driver of investment” line is utter nonsense.

All investment begins in the short term, and only after a year of inactivity does it become long-term and earn the lower tax rate.

In that sense, yes, it “dilutes economic dynamism.” But, is that a good thing?

Is there an economic benefit from encouraging people to hold on to their investments for a year or more?

I don’t see it. That phrase “dilute economic dynamism” is another way to say, “reduce speculation,” which the public has been taught is a bad thing.

Some economists hate “speculation,” which is short-term investing. But speculation is what grows America.

Every entrepreneur is a speculator, i.e. one who invests in businesses, stocks, property, or other ventures in the hope of gain but with the risk of loss.

That is how new businesses are created. “Economic dynamism” built the American dream, and now some stodgy, old economists want to tax it?

No, I hope the real reason for Biden’s tax proposal is to narrow that debilitating Gap between the haves and the have-lesses.

Then there are the politics to consider. Democrats up until recently were petrified of being labeled the “tax-and-spend” party by conservatives – a fear that was rooted in the knowledge of how effective such attacks had been in the 1980s and early ’90s.
Given the razor-thin Democratic majorities on Capitol Hill, whether Biden can even get his proposals passed will depend upon his ability to corral moderates such as Sens. Joe Manchin (D-W.Va.) and Kyrsten Sinema (D-Ariz.).

Because federal taxing does not fund federal spending, Democrats should become the “spend-and-don’t-tax” party.

Manchin and Sinema probably are not moderate in their beliefs. They are Democrats who won in historically Republican-leaning states.

So to maintain office, they must appear to be moderate. Yet, they probably are are social spending, economic-growth Democrats at heart.

Success is far from guaranteed. Progressives are adamant that the time is right for Democrats to cast off their traditional timidity about taxation and push a more egalitarian agenda.
Conservatives are equally emphatic that doing so would be a huge mistake. “This is how you stall an economy,” said Grover Norquist, the president of Americans for Tax Reform and perhaps Washington’s best-known anti-tax campaigner.

Norquist is absolutely correct when it comes to federal taxes.

Unlike state/local taxes, federal taxes do not provide spending money to the federal government, which has infinite spending money. Federal taxes, absolutely, positively are an anchor slowing the U.S. economy.

Most federal taxes should be eliminated, altogether. The sole purpose of federal taxes is to control the economy by taxing what the government wishes to discourage and giving tax breaks to what the government wishes to encourage.

Think of federal taxes as reins on a horse. They steer the horse, but reins do not make a horse go faster.

A problem occurs when taxation is linked with federal deficits and debt, both of which erroneously are decried as economic negatives. But deficit spending grows the economy.

Combining federal deficit spending with federal taxes is like spurring a horse while reining it in.

Biden, Norquist insisted, “could just have sat back because you are going to see this surge in the second quarter.
“There could be this incredible growth. You could be coasting on that, but instead what you are doing is chasing investment away from the United States, telling people, ‘You don’t want to get capital gains in the U.S.'”

Norquist is wrong about “sitting back” and “coasting.” In this competitive world, that is no way to win a race against other nations. Winning jockeys do not sit back and coast.

The Biden plan, Norquist argued, “is a boat anchor on economic growth when, going into 2022, you would want to be going gangbusters.”

The best way to “go gangbusters” (a phrase from the dark ages) is for the federal government to spend more and tax less.

Biden aides have been stressing how few people would be affected by the new top rate of capital gains tax.
Jen Psaki, the White House press secretary, emphasized the $1 million income threshold for the top rate on Friday, and added, “The president’s bottom line is that people making under $400,000 a year should not, will not, have their taxes go up.”

Is it $1 million or is it $400,000? A bit of confusion, here.

Ron Klain, Biden’s chief of staff, tweeted that the plan was one Biden had “campaigned on extensively.”
Klain added that it “changes the tax rate for less than 1% of Americans (in fact, less than 1/2 of 1% of Americans).”

If that is the case, then Biden would be using the federal tax for exactly what it is designed to do: Narrow the Gap between the rich and the rest.

Conservatives such as Norquist argue this framing is misleading.
They say, for a start, that a capital gains tax hike would have a detrimental impact on the stock market, thus affecting the huge number of Americans who have individual investments, 401(k) accounts or IRAs.
“If a 1 percent fall in stock prices is all that you get from a really major increase in capital gains taxes, that’s not a big problem,” Paul Krugman, the Nobel Prize-winning economist and liberal New York Times columnist, told Bloomberg TV.
More broadly, progressives are scathing of the predictions of doom from what they see as a basic move toward a more equitable tax structure.

Yes, that is exactly what America needs: A more equitable tax structure.

The current tax system disadvantages the middle- and lower-income groups, while providing massive tax breaks to the rich.

Donald Trump apparently paid no taxes at all in eight of the last ten years, and most business owners pay taxes at a lower rate than do their employees.

Begin with the FICA tax, which ostensibly supports Social Security and Medicare, but does neither.

It is a 15.3% tax on lower salaries. Then there are the business owners tax breaks on “business” (i.e. personal) expenses like vacations, yachts, clubs, meals, cars, planes, etc.

And while a home renter gets no tax breaks on rent, a home owner receives various tax breaks.

Jonathan Tasini, a Democratic strategist who backed Sen. Bernie Sanders (I-Vt.) in the 2016 presidential race, argued that any assertion about the dangers of hiking the capital gains tax rate “is greed dressed up as economic argument.”
“There is no rich person in the world who will honestly tell you that he … would not have invested money in a company because of capital gains rates.
You are making a profit already! What we are saying is you have to give back,” he added.

Correct. The tax is on profits. And, in fact, if there are losses, they lead to tax breaks (which is why Trump avoided taxes)

Tasini also argued that debates about taxation in general often proceed along false lines – as if the tax revenue simply disappears into the ether rather than being used for public benefit.

Here, Taxini veers into an area of which he knows little. Federal tax revenue does, in fact, “disappear into the ether.

It is not “used for public benefit.” When the U.S. Treasury receives tax dollars, those dollars disappear from any part of any money measure (M1, M2, M3, etc.) They simply are destroyed.

Federal taxes are destroyed upon receipt.

That is why federal taxes are, as Norquist describes them, a boat anchor on economic growth.” A growing economy requires a growing supply of money. Federal taxes reduce the supply of money.

(By contrast, state and local government taxes, do not disappear into the ether. They are deposited into commercial banks where they become part of the M1 money supply and bank reserves.)

“Nobody who makes money, whether you become rich or less than that, does so entirely on their own or because of their own genius.
All taxes are about giving back to pay for everything that society provides that allows you to make money and invest – and that includes having the roads and bridges that take you to the office where you make a living,” he said.

No, federal taxes do not pay for roads and bridges, although state and local government taxes do pay for these things.

The above is where Tasini confuses federal (Monetarily Sovereign) finances with state/local (monetarily non-sovereign) finances.

He now has moved into what we mentioned in the very first sentence of this post” Pontificating about quantum chromodynamics when he doesn’t even understand the basics of physics.

Mark Zandi, the chief economist of Moody’s Analytics, argued that the overall impact of Biden’s proposals was likely to be fairly modest, especially when the benefits of infrastructure spending are factored into the equation.
Taxpayers in the million-dollar-plus bracket are “a very rarefied group,” Zandi said. If the Biden plan were to pass, he added, then maybe in a decade “an econometrician would be able to tease out some negative effects, all else being equal.
But I think it is going to be very much on the margins.

Zandi is correct. The sole effect of the tax on the rich will be, to some very slight degree, narrow the income/wealth/power Gap.

The real narrowing device will be the increased spending for benefits to the middle- and lower-income groups.

The problem is that the Republican Party has become “the Party of the rich,” so it opposes taxes that affect the rich while supporting taxes that affect the not-rich, like FICA increases.

This is revenue that is going to presumably pay for the American Family Plan, which is child care and family leave, and some of it is going to less wealthy households who are going to use it and spend it.
It could help them go to work and so raise labor force participation.”
Overall, Zandi predicted, the plan would be “a tailwind rather than a headwind” for economic activity.
Even so, Biden faces a pitched political battle to get his plan passed. And opponents such as Norquist insist the American public is on their side. 

Biden faces a pitched political battle for two reasons:

  1. The rich, who run America, have bribed the media (via advertising and ownership), the politicians (via political contributions and promises of employment, later), and the university economists (via contributions to the universities and promises of lucrative employment in think tanks). They are the ones who fight against taxes on the rich.
  2. Economic ignorance afflicting the public and some in Congress.

If Biden simply cut taxes on the not-rich, he wouldn’t have to ask for a tax increase on the rich, and he still could pay for everything while narrowing the income/wealth/power Gap. That would be ideal.


Rodger Malcolm Mitchell [ Monetary Sovereignty, Twitter: @rodgermitchell, Search: #monetarysovereignty Facebook: Rodger Malcolm Mitchell ]


  • Monetary Sovereignty describes money creation and destruction.
  • Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

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 Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

  1. Eliminate FICA
  2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
  3. Social Security for all
  4. Free education (including post-grad) for everyone
  5. Salary for attending school
  6. Eliminate federal taxes on business
  7. Increase the standard income tax deduction, annually.
  8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
  9. Federal ownership of all banks
  10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 


The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.




15 thoughts on “Whipping a horse while reining it in.

    1. That is an excellent question.

      An economy either grows, or it shrinks. (It’s impossible to keep an economy level — too many factors for that. Think of trying to balance a razor blade on its edge.)

      A shrinking economy is called a “recession” or “depression.”

      America is a huge nation, with 320 million people, and not all people are affected equally by economic change.

      During a depression, the vast majority of people suffer. (The rich often grow richer during recessions, simply because “rich” is a comparative term, and during recessions and depressions the poor grow poorer. This makes the rich, richer.

      During growth, the vast majority of people benefit, because more jobs are available and/or stocks and home values appreciate.

      Bottom line: History shows that when economies grow, the majority benefits as compared to when economies shrink.


    2. As a general rule economies need to grow because populations tend to increase. Increasing populations require growing economies, and money supply, to maintain existing or increase standards of living. If populations were stable (zero growth/decline), then theoretically an economy would not need to grow, or at least not grow much. Stable population requires a native fertility rate of about of 2.1 (2.1 births per woman) assuming zero net immigration/emigration. The current U.S. fertility rate is well below that at about 1.75; however, historically, immigration has helped U.S. maintain effective fertility rates >2.0-2.2 assuring a growing population. The current freefall in U.S. fertility rates coincides with the large drop in immigration that started under Obama, which then went on steroids under Trump. Without immigration, U.S. population would eventually go into decline, as would it’s economy.

      Consider Japan. Japan’s fertility rate is about 1.4 and it’s population is aging rapidly. Japan also has very restrictive immigration policy. GDP for Japan has been flat since its peak in 1995. Japan’s GDP in 1995 was 5.45T with a government debt to GDP ratio of about 75%. In 2019, Japan’s GDP was only 5.08T with a debt to GDP ratio of well over 200%. So despite enormous growth in government deficits, Japan has been unable to grow its economy in a sustainable way, due in large part to it’s declining population.

      In contrast U.S. GDP rose from 7.64T in 1995 to 21.4T in 2019 (280%), with debt to GDP ratio increasing from 65% to just over 100% (most of the debt increase was due to the GFC in 2008). Immigration has been a large driver of U.S. economic growth over the last 40 years.

      The problem with a declining population is you end up with fewer and fewer workers supporting more and more aging retirees. As long as productivity can continue to increase, this can be sustainable for a while, but not under a purely capitalist economy, as economic growth is necessary to fund the required capital investment. To sustain an economy under declining population requires massive government intervention (i.e. socialism), as in the case of Japan.

      Of course the modern day GOP supports both restrictive immigration and capitalism, and is vehemently anti-socialism. The irony in all of this is these positions are mathematically untenable (as are most GOP policies, especially climate change). But math and science are not really GOP strengths, which is helpful when you prefer to live in an alternate reality with alternate facts.


      1. You are correct that immigration is economically stimulative. Immigrants, whether legal or illegal, are customers and producers. The add to GDP.

        You also are correct that the Republican stated position on immigration is stupid, though perhaps only slightly less so than the Democrats’ unstated position (which is almost identical).

        Just a couple of notes.

        1. The much-quoted Debt/GDP (or GDP/Debt) fraction is meaningless. It is predictive of nothing and a measure of nothing. It does not indicate the health of an economy, nor really anything else of note.

        It may be the single, most foolish fraction in all of science (but then, who says economics is a science?)

        2. Government spending, even massive government spending, is not socialism. Socialism is the ownership and control over the means of production. America has very few instances of so-called “socialism” despite spending trillions of dollars.

        3. About half of Japan’s debt is owned by the Bank of Japan, which like the Federal Reserve Bank has the unlimited ability to create money. It does this by the simple expedient of pressing a computer key (as does the FRB).

        Because Japan is Monetarily Sovereign (like the U.S.) it has absolute control over its money. It can create as much as it wishes, any time it wishes, and it can give its money any value it wishes. Like America, it does not need to issue debt, and it only does so to control interest rates, not to raise yen.

        If Japan wished, it could pay off its entire debt today, without levying one yen in taxes. (The U.S. federal government could do the same with the U.S. debt).

        Sadly, Americans don’t understand that U.S. finance is like a game in which the federal government makes all the rules. For reference, think of the U.S. as the board game “Monopoly.” By rule, the Bank in Monopoly is Monetarily Sovereign.

        It cannot run short of Monopoly money. The Monopoly Bank could have trillions of Monopoly dollars worth of debt (i.e. the excess of spending over income), and it would make no difference whatsoever.

        In fact, I once played in a Monopoly game that was missing all those colorful, printed Monopoly dollars. We simply put together a bookkeeping table to keep track of everyone’s money.

        No one worried about Bank “debt” for that same reason no one should worry about U.S. federal debt: It’s meaningless.

        The Monopoly game actually does have a GDP, but no one ever wastes time computing it. But if they did, they would see that the Debt/GDP ratio is as meaningless in the game as it is in the U.S.

        If Japan really wished to increase its GDP (for appearance sake, I guess), it simply could give every man, woman, and child a few dozen yen. Instant deficit spending = instant increase in GDP.

        I wish America could get used to the fact that the U.S. dollar is not like a typical commodity. The dollar is a creation of U.S. laws, and U.S. laws are totally under the control of the U.S. government.

        Unless someone can show me how the U.S. can run short of laws, I will continue to wonder how anyone can think the U.S. can run short of dollars with which to pay its bills.

        4. Finally, workers do not support retirees, at least not in the financial sense. FICA does not pay for anything, — not for Social Security and not for Medicare. Actually, no federal tax pays for anything, since all federal tax dollars are destroyed upon receipt by the U.S. Treasury.

        That said, I can imagine an economy so lacking in workers that it is unable to physically create food, housing, clothing, and medical care for its population, and in only that sense one could say that workers support retirees.

        So far, mechanization and computerization seem to be keeping us ahead of our physical needs, and I suspect that will continue.


        1. Thanks Rodger, I agree with your notes, but wanted to make a couple of clarifying points with regard to my earlier comment:

          1) I agree debt to GDP ratio is meaningless as a predictive measure, I was using the metric to highlight that even though Japan dramatically increased deficit spending (which is good), they were unable to move the needle on GDP over a 25 year period (which is not so good). There is nothing intrinsically good or bad with either low or high debt to GDP ratios, but it is a relative measure of the amount of government fiscal intervention in an economy.

          2) In my comment about fewer and fewer workers supporting more and more retirees, I was not referring to FICA and Social Security benefits, but rather to your later comment regarding the real human resources needed in healthcare and other services to support a growing aging population.

          As populations go into decline, at some point it doesn’t matter how much money government creates if there are not enough resources to do the actual work, and the result would likely be a continuing erosion of living standards. There’s no guarantee computerization and mechanization will be able to keep pace (e.g. driverless cars are not a resounding success story so far and development is at least 10 years behind original projections), which is why immigration remains vital to the U.S. economy for the foreseeable future.


  1. I think it is more than likely that the tax increases Biden is proposing is more about reducing inequality than it is about funding infrastructure. A little over two years ago, there was a seminar at The New School in New York on Anti-Austerity and it featured Mark Blythe and Stephanie Kelton (YouTube link below).

    At about the 1:32:00 mark, Blythe states: “you don’t raise taxes to pay for things, I get that, but you can, and sometimes you should, and here’s why…”. Blythe then goes into an argument for increasing taxes to reduce inequality and oligarchic control, but doing so under the “cover” of fiscal responsibility to “pay of things”, especially with respect to an existential threat like climate change.

    At first he said this position was at odds with Stephanie Kelton, but Stephanie later said they were perfectly aligned and that she had worked with Bernie’s Office on the estate tax and Elizabeth Warren’s office on the wealth tax, presumably to address inequality and wealth concentration and not to “pay for things”.

    I think most politicians understand that taxes don’t pay for things, but it is still not widely understood in the public domain due to the pervasive economic disinformation (the Big Lie) and therein lies the problem.

    A recent NYT poll (link below) showed raising taxes on the wealthy and corporations is supported by a majority of Americans: 80% Democrats, 70% independents, and 45% Republicans. I think the logic behind Biden’s tax hike to “pay for infrastructure” is four fold:

    1) it helps to address inequality,
    2) it addresses criticism from deficit hawks on both the right and left, as well as in the media;
    3) it is politically popular and carries little electoral risk; and
    4) total spending/tax proposal will be net benefit for the economy.



    1. Yes, I suspect you is correct. I just wish Biden, and virtually every other politician, didn’t think they had to use that “pay for it” phrase. It will come back to haunt them (and all of us), especially during discussions of Medicare, Social Security, college tuitions, climate change, and tax cuts for the middle class.

      While raising taxes on the very wealthy is a good idea (Step #8, raising taxes on corporations is a bad idea Step #6.)

      Ultimately, telling the truth always helps, and telling lies comes back to bite you. Truth is a concept that is alien to politicians.


  2. I’d like to add some more details about taxing the very rich while spending money on infrastructure. Additional taxes paid by the very wealthy will have an imperceptible effect on consumption spending since those folks have a very low “marginal propensity to consume”, which means they are unlikely to spend an additional dollar of income, or conversely, they are not likely to reduce spending due to a dollar less of income.

    OTOH, the infrastructure spending will go, mostly, to lower income folks who have a very high “marginal propensity to consume”, such as child care workers, road builders, employees at cement plants, etc. They don’t have everything necessary to make their lives comfortable and enjoyable right now. They are likely to spend almost every dollar of their additional income.

    The idea that the stock market is a great driver of the economy is completely false. Just note the difference between the market hitting historically high levels recently while most folks struggle to make the rent and pay for food or medical care.

    The only time the stock market is involved in capital formation for investment in assets for the production of goods and services is when an IPO is issued. After that it’s just trading existing assets back and forth, there’s no additional capital formation.

    Interestingly, many countries tax capital gains at the same rate as earned income (as it should be, IMNSHO).

    It’s a red herring to claim that investors will stop putting money into stocks or stop trading them. Receiving income without working for it is pretty much everyone’s dream. Income is income and traders gonna trade.


    1. John, I basically agree.

      There is, however, a difference between income and wealth. A strong stock market increases wealth, which for most people translates to increased spending on goods and services (i.e. higher GDP).


  3. Dear Rodger

    Wonder what you think of this, from a just-published interview with Sam Zell (I’ve attached the entire interview in a PDF since the link requires logging into a free subscription to globest.com.)


    *On US debt and fiscal conservatism:*

    I don’t think you can take the United States and, you know, 10 years ago we were ahead and whatever it is, 50 percent of our GDP in debt and now we’re at one hundred and two in a 10-year period of time. All of those borrowings have to be repaid. And you think about the risk free rate of return, the risk free rate of return for 30 years was five point six percent. If five point six percent were applied to our current debt levels, our country would be broke. So we’ve got to, in effect, continue interest rates at low levels in order to be able to service our debt, make some dint in repaying doing that and keep inflation, you know, restrained. It’s very difficult if you’re sending stimulus checks to people who don’t need it.

    *On inflation:*

    I’m worried about, you know, a government that seems to be irresponsible on costs and insensitive to what this kind of a debt structure means. And ultimately, what we’re really talking about is the role and the value of the US dollar. We have an extraordinary crutch in America because our currency is the reserve currency. Things would be a lot more expensive if the reserve currency were something else other than the US dollar. Yet we’re polluting its value and at some point, if we don’t get better at it, the US dollar will no longer be the reserve currency, and the impact on the United States will be quite serious.

    *On fiscal growth:*

    Redistribution of wealth is a governor on growth. And that’s where we’ve had so many years of subpar growth. I think that we’ve got to be very careful that we don’t let the government superimpose political views on when I call the basics of our economy. I mean, we have a unique system. It’s the most attractive economic system in the world. Everybody wants to be in the United States because of what you can do here and the freedoms that it represents. And I think that overemphasizing the role of government is not a productive solution.

    Curious what you think of this.

    JD Vercett


    1. Re. “debt and fiscal conservatism” What he says is correct — for monetarily non-sovereign states, counties, cities, businesses, you, and me. It is ignorant for a Monetarily Sovereign nation like the U.S. having the unlimited ability to create its own sovereign currency.
      There are no “borrowings” to be repaid. The U.S. does not borrow and never can be broke.

      Re. “inflation” The fact that the U.S. dollar is a “reserve currency” is irrelevant. It just means that banks keep dollars on RESERVE to facilitate international trade. Other reserve currencies are the euro, the British pound, the Chinese renminbi, and in more limited areas, the Japanese yen, the Canadian dollar, the Mexican peso, and others.
      Inflation never is caused by money creation. It is caused by shortages of critical supplies, most often food and energy. It is possible that a shortage of electronic chips could cause the next inflation.

      Re. “fiscal growth” As a wealthy man, he is opposed to “redistribution” of wealth. He wants to keep the poor poor, so businesses will have desperate people to hire at starvation wages. He doesn’t care that people who have money are better customers than people who are broke.

      In summary, he’s full of shit, and either knows or cares nothing about economic fact.

      (Was I too subtle?)


      1. Hi, Rodger. One quibble, the US dollar is called the world’s reserve currency because the vast majority of international trade is denominated in dollars, although that is starting to change, which I think is a good thing. But, that’s another discussion.

        Since most international trade is conducted in dollars, other countries’ exporters have to exchange their dollars into the local currency through their Central Bank so they can pay their workers and buy their production inputs.

        This results in Central Banks having a whole lot of dollars in their reserves, making US dollars the top holding of CB’s foreign currency reserves (which they usually deposit in T-accounts through New York banks). This has been the case since shortly after WWII because the US has been willing to have a large, continuing trade deficit. That means, as you have noted, a lot of our infinite zeroes and ones (dollars), are exchanged for real goods and services adding to the overall benefit our citizens (one hopes).

        You often use the formula Federal Spending + Private Spending + Net Exports.. I highly recommend you spend some time looking into the Sectoral Balance approach, since your formula is exactly that. The point is that the sum of those sectors must, by accounting tautologies, equal zero. If one sector has a surplus, one or both of the others must have a deficit, etc.

        Think in terms of which of those sectors are adding dollars to the economy and which are taking dollars out.

        Since the trade deficit is dollars being taken out of the US economy, and the private sector does not spend all of its income, saving some (which is taking dollars out of the economy), then there is only one sector left to make up for the dollars leaving the economy, the Federal government. And, the Federal injection of dollars (deficit spending) must be exactly equal to the savings desires of the private sector, plus the net dollars flowing out of the country to purchase goods and services from other countries. Otherwise, as you have emphasized fore many years, the economy will shrink.


        1. From Wikipedia (https://en.wikipedia.org/wiki/Renminbi): “The renminbi is the official currency of the People’s Republic of China and one of the world’s reserve currencies.”

          The dollar is the most-held reserve currency, but it is not THE world’s reserve currency any more than the United States is THE world’s economy. “Biggest” and “only” are different.

          Also, being the most-held reserve currency has nothing to do with whether or not the federal debt is too large or whether inflation is a threat. Those are the points I was trying to make.

          Stephanie Kelton uses the sectoral approach with a neat, little graph. I think it’s less clear than simply showing how cutting federal spending cuts GDP, but that is just my personal opinion.


          1. That there are multiple reserve currencies is the idea I was referring to when I said the status of the dollar as the world’s reserve currency was changing. This is particularly true of the renminbi, in part due to the Belt and Road initiative.


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