There was a time when people believed the world was flat. Their descendants now are economists.
Before I show you some “flat-earth” economic opinions about the federal tax, here are the facts:
There are several money-supply measures, with the most liquid being termed, “M1.”
What Is M1?
M1 is the money supply that is composed of physical currency and coins, demand deposits, travelers’ checks, other checkable deposits, and negotiable order of withdrawal (NOW) accounts.
M1 includes the most liquid portions of the money supply because it contains currency and assets that either are or can be quickly converted to cash.
M1 includes the most easily spent forms of money. The dollars in your checking account are the M1 dollars you send to the U.S. Treasury.
But what happens to those M1 dollars when they reach the U.S. Treasury? They disappear. They are not part of any money-supply measure. There is no money supply measure for dollars at the Treasury.
You might think they become a part of the money the federal government “has,” but how much is that? How much money does the federal government have?
Don’t feel bad if you don’t know. And don’t bother trying to “google” the answer. You won’t find it. You might just as well ask, “How many numbers are there?”
The answer to both questions is: “Infinite.” The U.S. Treasury “has” infinite U.S. dollars.
The U.S. federal government, being the original creator of the U.S. dollar (which it created from thin air by creating laws from thin air), has the infinite ability to create “dollar” laws and that gives it the infinite ability to create dollars). The federal government is Monetarily Sovereign.
This is different from state/local governments which do not have that infinite ability to create dollars. They are monetarily non-sovereign.
How does the federal government create dollars? Answer: By spending dollars. This is the process:
- To pay a creditor, the federal government sends instructions (not dollars) to the creditor’s bank.
- The instructions are in the form of physical checks (“Pay to the order of”) or electronic messages.
- The instructions tell the bank to increase the balance in the creditor’s checking (M1) account.
- The instant the bank obeys those instructions, new M1 dollars are created and added to the M1 supply.
- The bank then balances its books by clearing the instructions through the Federal Reserve, which debits the Treasury, the owner of infinite dollars. No money is destroyed because infinite minus any amount, still is infinite.
When you pay creditors, you follow the same first four steps. The difference is in step #5. The Federal Reserve sends your instructions back to your bank, telling your bank to reduce the balance in your checking account. At that moment, the dollars you created with your check, immediately are destroyed.
There is a moment of time, between when your instructions create dollars and when the dollars are destroyed. Those dollars often are known as the “float.”
When you spend, the money you create — the “float” — exists anywhere from a few seconds to a day or two. When the federal government spends, much of the float is permanent. It stays in the economy. The rest is destroyed by federal tax collections.
The “float” money created by the federal government — the money that is not destroyed by taxes — is called the federal debt.
In short, federal spending creates dollars and federal taxing destroys dollars. The federal deficit is the net number of dollars added in any single year. The federal debt is the net total of all deficits.
Contrary to popular wisdom, the federal deficit and debt are not a burden on the federal government. They are not a burden on future taxpayers. To “pay off” any part of the federal debt, the federal government merely returns dollars that exist in T-security accounts. No taxes are involved.
The federal deficit and debt are assets to the economy. The larger the federal deficit and debt, the more money is added to the economy. If there were no federal deficit and debt, there would be no U.S. dollars.
Gross Domestic Product (GDP) is the most common measure of the U.S. economy. The formula for GDP is:
GDP = Federal Spending + Non-federal spending + Net Exports
Mathematically, any reduction in the federal deficit and debt will reduce GDP. Most recessions and all depressions have been caused by reductions in deficit and debt growth.
Federal surpluses remove dollars from the economy, which causes depressions and recessions.
1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.
No government can tax itself into prosperity, but governments easily can tax themselves into recession.
While it is true that private banks create massive numbers of dollars simply by lending, this process begins with the very existence of U.S. dollars. The first dollars ever created constituted the beginning of the federal debt. If the federal government had not created dollars from thin air, there would be no dollars.
How is the process different for state/local governments?
For state/local governments, which like you, are monetarily non-sovereign, the process is identical to your personal spending process. Their money-creation instructions end up not at the Treasury but at private banks, so money the that is created, very quickly is destroyed when it comes out of the state/local government checking accounts.
Why does the federal government levy taxes, if it has the infinite ability to create dollars?
Answer: To control the economy by taxing what it wishes to discourage and by giving tax breaks to what it wishes to discourage. The federal government does not levy taxes to acquire spending money.
So why would the federal government borrow dollars?
Answer: The federal government does not borrow dollars. What erroneously is termed “borrowing” actually is the acceptance of deposits into Treasury security accounts. Those dollars are owned by the account holders and are not touched by the federal government. They remain in the accounts, gathering interest, until maturity, at which time the dollars are returned to the account owners.
In short, while state/local governments do borrow and do spend taxpayers’ money, the federal government does neither.
The federal government neither borrows nor does it spend taxpayer dollars.
It creates new dollars, ad hoc, every time it pays for anything.
Those Social Security dollars you receive each month are newly created. The Medicare dollars your doctor receives are newly created. The military salaries are newly created dollars. Every single dollar spent by the federal government is newly created. None are tax dollars. None are borrowed.
Which now takes us to some words from “flat-earthers.”
How are U.S. taxpayer dollars spent?
By: Dave Roos
Your federal income tax dollars help to pay for the items on the federal budget. In fiscal year 2010, the government collected $2.4 trillion in tax revenue, but spent $3.5 trillion.
The gap between revenue and spending is known as the budget deficit.
The money the federal government borrows to cover the budget deficit is what creates the national debt, which stood at $14 trillion at the end of 2011.
Sorry Dave, you’re wrong about “U.S. taxpayer dollars.” And, you’re wrong about “federal government borrows.” And the gap between revenue and spending actually is net dollars added to the economy.
Rather than being referred to with the pejorative word “deficit,” they more properly should be called, the “economic surplus.”
And the Big Lie is everywhere:
Donald Trump Built a National Debt So Big (Even Before the Pandemic) That It’ll Weigh Down the Economy for Years
The “King of Debt” promised to reduce the national debt — then his tax cuts made it surge. Add in the pandemic, and he oversaw the third-biggest deficit increase of any president.
by Allan Sloan, ProPublica, and Cezary Podkul for ProPublica Jan. 14, 2021
One of President Donald Trump’s lesser-known but profoundly damaging legacies will be the explosive rise in the national debt that occurred on his watch. The financial burden that he’s inflicted on our government will wreak havoc for decades, saddling our kids and grandkids with debt.
The national debt has risen by almost $7.8 trillion during Trump’s time in office. That’s nearly twice as much as what Americans owe on student loans, car loans, credit cards and every other type of debt other than mortgages, combined, according to data from the Federal Reserve Bank of New York. It amounts to about $23,500 in new federal debt for every person in the country.
Sorry, Allan and Cezary, but what your saying is total bull excrement.
While Donald Trump ranks among the worst, most dangerous traitors in American history, his deficit increase was not “profoundly damaging,” nor is it a “financial burden” on the government, nor will it “wreak havoc,” nor will it saddle our kids and grandkids with debt.
In fact, the deficits and debt grew the economy (as adding dollars to the economy always does), and they are not a burden on anyone.
Allan and Cezary, the “havoc” will come only when guys like you convince the nation that running federal surpluses is financially prudent, at which time we will sink into the recession or depression federal surpluses always cause.
Ignorantly comparing federal debt to personal debt, and implying that each person in America owes the federal debt is so atrociously wrong as to get you fired if your bosses understood economics, which seemingly they don’t.
This is the sort of nonsense one expects from flat-earthers and conspiracy theorists, not from your self-described “nonprofit newsroom that investigates abuses of power.”
We’ll end this blog with one last bit of garden fertilizer:
JULY 8, 2020
How worried should you be about the federal deficit and debt?
Even before the pandemic, the federal deficit was large by historical standards and projected to rise. The sharp recession and the spending increases that Congress and the president approved in response has made the deficit even bigger.
Big deficits mean a growing federal debt—the total the government owes—already at its highest point since World War II.
Extraordinarily low interest rates allow the U.S. to shoulder a heavier debt burden, but the debt is on an unsustainable course and its size may limit the government’s ability or willingness to continue to fight the economic ill effects of the pandemic or future economic downturns.
Ah, David, so few words, so many errors.
The federal government does not “owe” the debt any more than your bank “owes” you the contents of your safe deposit box. Like a safe deposit box, the deposits into T-security accounts are not touched by the government, and when you want your money back, your deposits simply are returned to you.
Having infinite money, the government does not benefit from “extraordinarily low interest rates.” It could pay a 50% rate just as easily as a .0005% rate. No difference for a Monetarily Sovereign entity.
David, your problem is you don’t know the difference between Monetary Sovereignty and monetary non-sovereignty, which means, you don’t understand economics. Monetary Sovereignty is the foundation of U.S. economics, and not understanding it is like not understanding heat in a baking class.
Your comments would apply perfectly to state/local government deficits and debt, but they are truly laughable when applied to federal deficits and debt.
Well, perhaps not laughable, because the Big Lie is far too damaging to be laughed at.
Yes, folks, the earth is flat, politicians tell the truth, and your federal taxes fund federal spending.
Believe all three.
Rodger Malcolm Mitchell
Facebook: Rodger Malcolm Mitchell
THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.
The most important problems in economics involve:
- 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:
- Eliminate FICA
- Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
- Social Security for all
- Free education (including post-grad) for everyone
- Salary for attending school
- Eliminate federal taxes on business
- Increase the standard income tax deduction, annually.
- Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
- Federal ownership of all banks
- 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.