It takes only two things to keep people in chains:
The ignorance of the oppressed
and the treachery of their leaders
Federal finances are much different from state & local government finances, and different from business and your personal finances.
Many people find the federal government’s finances to be counter-intuitive, because the federal government is Monetarily Sovereign, while state & local governments, businesses, and people themselves are monetarily non-sovereign.
The purpose of today’s post is to demonstrate a step-by-step logical progression, that will make federal financing more intuitive and defendable.
All science begins with certain propositions or axioms that in themselves, cannot be proved, but are assumed to be true. From these axioms flow the conclusions of the science.
For example, in Euclidian (plane) geometry, there are five propositions:
1. A straight line may be drawn between any two points.
2. Any straight line may be extended infinitely.
3. A circle may be drawn with any given point as center and any given radius.
4. All right angles are equal.
5. For any given point not on a given line, there is exactly one line through the point that does not meet the given line.
None of the above can be proved. They are statements that are felt to be self-evident. From these statements, all of plane geometry flows.
For millions of earth’s years, there was no U.S. government and no U.S. dollar. Finally, in 1792, a group of men arbitrarily created certain laws out of thin air. Like all laws, these laws had no physical existence. They were mere concepts.
The laws created, also from thin air, a legal entity known as “The United States dollar.” Although some U.S. dollars are represented by printed paper, dollars themselves have no physical existence. Dollars are nothing more than bookkeeping entries.
The men who created the U.S. dollar created as many dollars as they wished. They could have created many more or fewer.
The original dollar arbitrarily was given a value related to 371 grains of silver, and since then, Congress and the President have retained the power to give the dollar any value they chose.
Just as a car title is not a car, and a house title is not a house, the dollar bill, being a title to a dollar, is not in itself a dollar. The vast majority of U.S. dollars are not represented by paper dollar bills. All dollars — indeed all forms of money — are nothing more than bookkeeping records.
The popular belief that gold or silver are money or once were money, is false. Gold never has been money. It is a barter commodity. In world history, many commodities have been used for barter: Cattle, horses, wheat, diamonds, land, buildings, silk, etc., though none is money.
Money is the debt of an issuer. Dollars are the debt of the U.S. government. All debt has collateral, and the collateral for the U.S. dollar is the full faith and credit of the U.S. government. See: Full faith and credit.
Six propositions, a basis for U.S. Monetary Sovereignty, are bolded:
- All money is debt.
(Money is a debt of its issuer, backed by the issuer’s full faith and credit. Debts are bookkeeping entries, having no physical existence.)
- The U.S. dollar bill is a title to a U.S. dollar, not a dollar in of itself.
- The U.S. Congress and the President retain the unlimited ability to create as many sovereign dollars as they wish.
- The U.S. dollar, like all commodities, is valued according to its Supply and Demand [Value = Demand/Supply].
(In 1971, President Richard Nixon arbitrarily decided that the Value of the dollar no longer would be related to gold or to silver, and the Supply of dollars no longer would be limited by the federal government’s Supply of gold or silver.)
- The Demand for a U.S. dollar is based on Risk and Reward. [Demand = Reward/Risk]
- The Risk of owning a dollar is inflation. The Reward for owning a dollar is interest.
(The dollar not only is a “good” in its own right, but also is an exchange medium. Its market Value is related to the market Value of Goods & Services. The formula for the market Value of the dollar):
Dollar Value = (Demand/Supply of dollars) / (Demand/Supply of goods & services)
The U.S. government is Monetarily Sovereign. It is sovereign over the dollar, and has the unlimited ability to create, destroy, or change the value of the dollar.
Other Monetarily Sovereign governments include Canada, Japan, China, Australia, and the UK.
Governments that are monetarily non-sovereign include those of euro nations, and U.S. cities, counties and states. These governments do not have the unlimited ability to create their sovereign currency, as they have no sovereign currencies.
They can run short of money and be unable to pay their financial obligations.
The six propositions lead to the following conclusions:
- Every form of money is “fiat,” i.e. created by the fiat of an issuer. (Contrary to popular belief, “fiat” does not mean “paper” as opposed to gold. There is no “paper” money, nor is gold money. Unlike barter commodities, money has no physical existence. )
- The U.S. government can pay any obligation denominated in U.S. dollars. It is impossible for the U.S. government unintentionally to run short of its own sovereign currency.
- No agency of the U.S. government can run short of U.S. dollars unless that is the intent of Congress and the President. (This includes such agencies as the White House, the Supreme Court, the military branches, Social Security, and Medicare.)
- The U.S. government neither needs nor uses tax dollars nor borrowing to pay its bills. (Because the Monetarily Sovereign U.S. government cannot unintentionally run short of its own sovereign currency, it has no need to obtain dollars from outside sources.)
- FICA does not pay for Social Security of Medicare benefits. (Even if FICA were $0, the government could pay unlimited benefits, forever.)
- The federal government does not borrow. (It accepts deposits in Treasury Security accounts. It does not use the dollars in those accounts. The dollars remain in the accounts until maturity, at which time they are returned to the account owner.)
- Deposits in T-security accounts provide a safe depository for U.S. dollars (which stabilizes the dollar), and assist the Fed with its interest rate (and inflation) controls.
- Raising interest rates increases the Demand for dollars (to purchase dollar-denominated debt.)
- All dollars received by the U.S. government are destroyed upon receipt. (They disappear from any money supply measure.)
- There are two ways to create dollars and two ways to destroy dollars:
I. Lend dollars
II. Federal deficit spending
I. Pay off a loan
II. Federal taxation
- Lending creates dollars. When a loan is supported by a loan document owned by the lender, the loan document is money. Like a dollar bill, it represents dollars owned by the lender, while the borrower receives new dollars. That is the difference between a loan and a payment. Though both are transfers of dollars, loans create new dollars, payments do not.
- Federal spending creates dollars. To pay a creditor, the federal government sends instructions (not dollars) to the creditor’s bank, instructing the bank (“Pay to the order of”) to increase the balance in the creditor’s checking account. The instant the bank obeys those instructions, new dollars are created an added to the money supply (M1).
- Paying off a loan destroys dollars. It reduces or eliminates the value of the loan document owned by the lender.
- Federal taxes destroy dollars. They remove dollars from all measures of the nation’s money supply.
- State and local taxes do not destroy dollars. These taxes are held in private bank accounts (M1 and M2), from which the state and local governments take them for paying creditors.
- The purpose of federal tax dollars is to control private spending (i.e. “sin” taxes, tax deductions for businesses, etc.)
- The Social Security and Medicare “trust funds” are bookkeeping fictions. (In private-sector trust funds, receipts are deposited and invested. In federal trust funds, receipts are recorded and removed from the nation’s money supply. Spending creates new dollars, ad hoc.)(Medicare Part A supposedly is paid by a fictional “trust fund,” while Medicare Parts B and D are paid out of the Treasury’s “General Fund.” The Medicare “trust fund” supposedly is running short of money; the General Fund never can run short of money.)
- The formula for Gross Domestic Product (GDP) is: Federal Spending + Non-federal Spending + Net Exports.
- Federal deficit spending stimulates GDP growth by adding dollars to the economy, i.e. by increasing Federal Spending and Non-federal Spending.
- Reductions in federal deficit spending lead to recessions. (Vertical bars are recessions. Red line is deficit spending.)
- Recessions are cured by increases in deficit spending.
- Decreases in federal debt lead to depressions.
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
- The Federal Reserve controls inflation via interest rate control. (Interest rates support Demand for dollars.)
- The primary cause of inflation has been an insufficient Supply of goods, not an excessive Supply of dollars.(Most modern inflations have been related to a shortage of oil. Every hyperinflation also has been caused by a shortage, usually a shortage of food.)
- Despite endless concerns that the federal “debt” (deposits in T-security accounts)) may be a “ticking time bomb,“ the federal government has no difficulty servicing its “debt” and inflation has averaged close to the Fed’s 2.5% target.
Red line is federal “debt.” Blue line is inflation.
- The commonly referenced federal Debt/GDP ratio has no function or meaning. It does not indicate economic health, nor does it indicate the federal government’s ability to service its obligations (which is infinite).
- Interest rate increases are economically stimulative. They force the federal government to pump more interest dollars into the economy.
- A trade deficit is more beneficial to a Monetarily Sovereign nation’s economy than is a trade surplus. In a trade deficit, the Monetarily Sovereign entity receives scarce goods and services, while sending money it has the infinite ability to create from thin air. In a trade surplus, the Monetarily Sovereign nation, receives money it doesn’t need in exchange for goods and services it must create by valuable labor and scarce resources.
- People stimulate GDP by being creators, producers and consumers. Political entities (nations, cities, counties, states) that have net immigration grow compared with entities that have net emigration. GDP is a spending measure; adding immigrants increases government and private spending.
- Federal anti-poverty spending is economically stimulative. It increases the nation’s money supply, and it helps the poor population to be more creative and productive.
- Bigotry is economically depressive. Bigotry marginalizes a population (a gender, a race, a religion, a sexual preference) and prevents that population from being as productive as it otherwise could be.
- The sole purpose of government is to improve the lives of the people. Liberals think the purpose of government is to protect the poor and powerless from the rich and powerful. Conservatives think the purpose of government is to protect the rich and powerful from the poor and powerless.
In answer to the title question, now you know more than most university economists. Read the “Ten Steps” below, and you’ll know even more.
Rodger Malcolm Mitchell
Twitter: @rodgermitchell; Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell
The single most important problems in economics involve the excessive income/wealth/power Gaps between the have-more and the have-less.
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 (Guaranteed Income)) 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
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.
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.