This paper comes at a significant moment in our history.
The purpose of government is to improve and protect the lives of a nation’s residents. But here is why the American government can’t do that job:
In his March 1, 2022, State of the Union speech, President Biden promised to reduce the federal deficit and debt.
The audience stood and cheered, not knowing or not caring that what he really told them was, “I’m going to cut the net amount of money the federal government will send into the economy, and if I succeed, we’ll have a recession or depression.”
“Reduce the federal debt” means “take dollars from you Americans and give them to the federal government.” Is that something to cheer about?
Or is the need to cut the federal debt just a Common Myth?
Economics is filled with Common Myths that have no basis in data. For example:
Common Myth: The federal government should handle its finances like you and me.
Reality: In the beginning of the U.S., the federal government created laws from thin air, and some of those laws created the U.S. dollar from thin air.
There was, and remains, no limit to the number of laws the government can create, just as there was, and remains, no limit to the number of dollars the government can create.
This fact is known as “Monetary Sovereignty.“
Unlike state and local governments, unlike businesses, and unlike you, and me, the federal government cannot unintentionally run short of its own sovereign currency, the U.S. dollar. The U.S. federal government has available to it, infinite dollars.
The government creates dollars ad hoc, by paying its bills. The more bills the government pays, the more dollars it creates.
To pay a creditor, the government sends instructions, in the form of checks or wires (“Pay to the order of”), to each creditor’s bank, instructing the bank to increase the balance in the creditor’s checking account.
The instant the creditor’s bank obeys those instructions, new dollars are created and added to the M1 money-supply measure.
Common Myth: The federal debt should be reduced.
Reality: The federal “debt” is not a debt of the federal government or of taxpayers. It is not even a debt. It is the total of deposits into Treasury security accounts.
These accounts resemble safe-deposit accounts, the contents of which our government, being Monetarily Sovereign and having the infinite ability to create its own sovereign currency, never needs or touches.
Just as the contents of your bank safe deposit box are not your bank’s debt, the contents of T-security accounts are not the government’s debts. They are dollars you own in your T-security account that eventually you will transfer to your checking account.
The notion of the government struggling to reduce the debt is ludicrous. Not only does the federal government have absolute control over the amount of deposits in T-security accounts, but there is no reason to reduce these deposits.
They are not a burden on the government or on future taxpayers.
Common Myth: Taxpayers or your grandchildren will be liable for paying off the debt.
Reality: When you invest in a T-bill, T-note, or T-bond, you take dollars from your checking account and deposit them into your Treasury Security account. There your dollars remain, accumulating interest until account maturity, at which time your dollars are returned to you.
The federal government does not remove those dollars for any purposes.
Returning your dollars is no burden on the government or on future taxpayers. No tax dollars are involved. Your grandchildren will not pay for the federal “debt.”
To pay off the “debt,” (which isn’t a debt) the dollars in your T-security accounts simply are returned to you. It is a simple money transfer from your T-security account to your checking account.
Common Myth: When federal taxes are not sufficient to pay for things, the federal government borrows dollars via T-bills, T-notes, and T-bonds.
Reality: The federal government never borrows. The purpose of T-securities is not to provide spending money. Rather, the sole purposes of T-security accounts are to:
1. Provide a safe, interest-paying place to store unused dollars. This helps stabilize the dollar.
2. Help the Fed control interest rates by setting the rates of interest the government pays into T-security accounts.
Common Myth: Reducing the debt would be fiscally prudent.
Reality: By law, the federal “debt” matches the net total of federal deficit spending. Because federal deficits add dollars to the economy, they are economically stimulative.
Every time the debt has been reduced, we have a depression or recession.
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.
Even when the debt growth rate declines, we have recessions. Recessions are cured by increased deficit spending, i.e. debt growth increases.
Common Myth: Federal deficit spending can lead to inflation
Reality: No inflation in history has been caused by government adding dollars to the economy. All inflations have been caused by shortages of key goods and services.
Massive government spending had been going on for many years without inflation. Yet suddenly, today, we have inflation. Why?
The spending did not cause inflation yesterday, nor did spending cause today’s inflation. Today’s inflation, and all past inflations, are is caused by shortages — in today’s case, shortages of energy, computer ships, shipping, food, labor, etc.
Today’s inflation can be cured by government spending to encourage energy production, computer chip production, shipping, and farming.
Labor can be encouraged by the reduction of the FICA tax and income taxes, both of which make jobs less attractive by reducing net income.
We have recessions (gray bars) when federal debt declines. Recessions are cured by debt increases.
Debt/GDP has no relationship to inflation. There is no historical relationship between changes in federal debt and changes in inflation.
Common Myth: The Debt/Gross Domestic Product fraction is too high.
Reality: The Debt/GDP fraction is meaningless. It neither determines the current, nor the future health of a nation’s economy.
Today, Japan’s ratio is above 200%. The U.S. ratio is near 100%. By contrast, Russia’s, Chile’s, Libya’s, Qatar’s and others are below 10%, all of which tells you nothing about their economies but says a great deal about the meaningless Debt/GDP ratio.
The Debt/GDP ratio does not indicate “the country’s ability to pay back its debt.”
Mathematically, the fraction makes no sense. “Debt” is the net total of all federal deficits for the past 250 years. GDP is a one-year measure of all spending by both the public and private sectors.
A 250 year measure cannot be compared to a one-year measure. Further, the whole nation’s spending on goods and services, has no relationship to the federal government’s ability to transfer dollars from T-security accounts at the FRB to checking accounts at private banks.
The fraction also does not take into consideration Monetary Sovereignty. Some nations have it; others don’t. The fraction may have some meaning for monetarily non-sovereign entities, but for Monetarily Sovereign nations it is completely meaningless.
Common Myth: The Social Security and Medicare Trust Funds will run short of dollars unless taxes are increased or benefits are decreased.
Reality: These so-called “trust funds” are not real trust funds and federal taxes do not fund federal spending.
In fact, federal taxes (unlike state/local taxes, are destroyed upon receipt by the Treasury.
(Being Monetarily Sovereign, the government has infinite dollars. When you pay taxes, you take your dollars from your checking account, which is part of the M1 money supply. Because the government has infinite dollars, they are not counted as any part of any money supply, so your federal tax dollars cease to exist in any money measure. They effectively are destroyed. State/local tax dollars continue to exist, however, because those governments are not Monetarily Sovereign.
In summary, the false notion that the federal government must be “prudent” in its creation and distribution of dollars to the private sector has prevented Social Security for All, Medicare for All, Free College for All, repair of our infrastructure, support for science and exploration, and many other programs that would help narrow the Gap between the rich and the rest.
Common economic myths prevent the federal government from using its Monetary Sovereignty to improve and protect the lives of Americans.
The President of the United States lied about basic economics. It simply cannot be due to ignorance. He is surrounded by the most prominent economists in America.
Surely, he knows that what he said was myth. We only can assume:
- He is afraid to tell the truth because he feels the American public will not believe the truth, or
- He is lying to protect rich donors who do not want the public to know the government has the unlimited ability to provide Gap-narrowing benefits.
Take your pick.
[Why would any sane person take dollars from the economy and give them to a federal government that has the infinite ability to create dollars?]
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.
7 thoughts on “Why the government can’t do its job.”
It’s all political theater. Biden knows Republicans are blaming inflation on Democratic “spending”, so he throws in the “I am going to reduce deficit and debt” canard to cut off the argument. Inflation will eventually come down once pandemic induced supply chain issues normalize, and reducing the deficit and debt in Washington pol-speak typically means reduction in the rate of growth, not actual reduction (which, BTW, will happen regardless as the pandemic spending winds down). Of course if the Ukraine-Russia conflict widens, the defense spending spigots will open, and no one will remember the deficit reduction promise.
Even just the reduction in the rate of deficit growth leads to recessions. https://fred.stlouisfed.org/graph/fredgraph.png?g=nz3t
Sundowning Joe… better than Trump, but not much better in terms of being hopelessly dense.
“Today, Japan’s ratio is above 200%.” More like 90% following two decades of QE asset swaps. BOJ owns more than half of that big scary debt. They just haven’t gotten around to canceling it out yet. Shit the US could the same at any time.
2016 article: https://asia.nikkei.com/NAR/Articles/Bank-of-Japan-holds-more-than-a-third-of-all-JGBs
You ever read the book ‘Princes of the Yen’?
Are you sure Biden knows? Also which of three theories of banking [1,2, or 3] https://www.sciencedirect.com/science/article/pii/S1057521915001477?via%3Dihub does he believe to be true? DELAWARE as an acronym stands for Dollars & Euros Laundered & Washed At Reasonable Expense so one would think he would know something about banking and where credit comes from.
Re: the debt to GDP ratio. This ratio doesn’t make any sense for the reasons you mention, but also because the “debt” is a stock of money and GDP is a flow of money.
You simply cannot compare the two. It’s worse than apples to oranges because those two things are at least both round fruits.
Flows can feed into stocks, the annual deficit flow from the government feeds into the stock of the “debt”. But, any analysis that isn’t stock-flow consistent is garbage.
Why haven’t all the ivory tower eggheads yet been able to see and acknowledge this?
As RMM says: No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia.
Two key equations in economics:
1. Federal Deficits – Net Imports = Net Private Savings
2. Gross Domestic Product = Federal Spending + Private Investment and Consumption – Net Imports
Was earlier asking someone I know in Ottawa how tightwad Canada is going to manage to feed, cloth, educate, and house an “unlimited” number of Ukrainian refugees for at least two years without a serious amount of deficit spending.
Even the far left NDP party up there led by a Sikh guy with a pink turban is firmly in the we need high taxes on everything to fund spending camp:
“On 16 June 2019, Singh and the NDP announced A New Deal for People, the party’s campaign platform for the October federal election. One of its key policies was a national pharmacare program. The platform also addressed climate change, vowing to end subsidies to gas and oil companies and increase emissions targets. The party also promised to expand cell coverage and broadband Internet and set caps on Internet and cell phone bills. In addition, the NDP platform emphasized affordable housing and confirmed its commitment to reconciliation and Indigenous rights. It also promised better housing, clean water and education for First Nations, Inuit and Métis communities. To help pay for these plans, the NDP proposed increasing the corporate tax rate and highest income tax rate, as well as imposing a new one per cent wealth tax on fortunes worth over $20 million.”