Are you too young (or too old) to remember the fable about Chicken Little, who believed the sky was falling down when an acorn fell on her head? She ran around in a panic, screaming “The sky is falling,” a now common idiom denoting an hysterical or mistaken belief that disaster is imminent.

Thus, have the debt hawks, aka Chicken Littles, been telling us for 30 years that the sky is falling, and that federal deficits will create disaster. Neither has occurred, or is likely soon, but failure of prediction neither embarrasses nor educates debt hawks.

We have arrived at a deficit of $1.4 trillion. In the past 30 years, the gross federal debt has grown an astounding 1,400%. The economy has grown, inflation has not been a problem, federal borrowing has not replaced private borrowing, countries have not refused to lend to us and because federal tax rates actually have gone down, no one’s grandchildren have paid for the $12 trillion gross debt.

The problem with debt hawks is they don’t understand money. They think of money as a scarce physical substance. It may be scarce to you and to me, but it no longer is scarce to the federal government, which since 1971, has created money at will, simply by creating T-securities from thin air, then exchanging them for the dollars it created earlier — also from thin air.

Visualize this. You go to a football game and the scoreboard reads 14 – 7. You might say one team “has” 14 points and the other team “has” 7 points. But in reality, the scoreboard merely has credited one team with 14 points and the other team with 7 points. The points are not physical things. No one “has” them.

Why is this important? Because in the economy, you and I are the teams and the government is the scoreboard. Points are not a real substance. Teams are merely credited with points. Money no longer (after we went off the gold standard) is a real substance. You and I, or more specifically, our bank accounts, merely are credited with money.

The scoreboard (government) never runs out of points. The government never runs out of the ability to credit you with dollars. The scoreboard does not need to ask either team to return some points so it can credit more points. Crediting a team with points does not reduce the scoreboard’s ability to credit more points. Crediting people or companies with money does not reduce the government’s ability to credit more money.

The scoreboard does not need to borrow points. The government does not need to borrow dollars. It as easily, safely and prudently can create dollars directly, rather than by creating and selling T-securities.

Imagine you decide to start a country from scratch. What is the first thing you will do? The people in your country need money, so you, as the government, will credit them with money. How? Perhaps by buying things from them. The people will give you material things and services; you will credit their bank accounts.

Debt hawks will call this exchange “deficit spending,” and they will demand that the people credit you, the government, back with some of the money. That’s called “taxation.” It is identical with giving the scoreboard back some points.

The scoreboard neither has nor needs points. The federal government neither has nor needs money. It never needs to be credited with money. It never needs to borrow money. It is the scoreboard. It can credit, endlessly.

The debt hawks continue to use obsolete, gold-standard thinking, from when money was a substance and was scarce to the government. Today, if the government wanted to give you $1 trillion, it simply would credit your bank account for $1 trillion, and debit its own balance sheets. Nothing physical would happen except the movement of a few electrons. The government can do this endlessly. In fact, last fiscal year, it did.

The government does not have a stash of money from which it spends. The government has no money at all. It merely credits bank accounts — yours, mine, foreign governments’.

Some may fear this can cause inflation, but the government now has absolute control over the value of its money through its control over both the supply and the demand (interest rates) for money.

The world changed in 1971, and the debt hawks have not yet understood that. Perhaps “hawk” is the wrong bird. More appropriate might be “Chicken Little.”

Rodger Malcolm Mitchell
http://www.rodgermitchell/