Tag: deficits

–Another attempt to explain why taxpayers don’t pay for federal spending

The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics.

In my never-ending effort to explain more clearly why federal spending costs taxpayers nothing, here is a new thought that perhaps will make the concept more intuitive. It was precipitated by a question from Mr. Tyler Fairleigh, which is published in the comment section at Monetary Sovereignty.

Imagine John Jones sells something to the federal government for $100. John sends the government a “bill.” A bill is nothing more than a little note containing this instruction: “Please credit John Jones $100.” It costs John nothing to send that note. In fact, John could send such a note (bill) to the government every day for the next ten years, and still it would cost John nothing.

Of course, the government is under no obligation to do as John requests, but the point is, that little note costs John nothing. He need have no money in the bank to send it.

Assume, the government checks its records and finds that indeed it owes John $100, so it sends him a check for $100, which he deposits in his bank. The government’s check is not money; it is an instruction. The check is a little note containing this instruction: “John’s bank. Please mark up the number in John’s account by $100.”

The government has the power to send an unlimited number of instructions (aka “checks”) at any time. These instructions do not require the government to “have” any money. They merely are instructions made by a monetarily sovereign government.

So John’s bank obediently raises the number in his account by $100, then informs the Federal Reserve Bank of what it has done. For accounting reasons, all sorts of accounts are credited and debited, some of which may or may not be related to taxes. But in reality, all that has happened was, John’s bank received an instruction from the federal government and did as it was told.

These instructions also cost taxpayers nothing. Taxpayers are not even involved. Even if no one was paying taxes, our monetarily sovereign government still could send an unlimited number of instructions to banks all over the world, and they all would obey. Why? Because they know the Federal Reserve Bank of the United States will mark up their accounts by the exact amount of the check. Why? Because the U.S. government is monetarily sovereign, meaning it has the unlimited power to mark up accounts.

Compare this with Greece, Spain, Illinois, California, General Motors, Chicago, you and me. None of us in monetarily sovereign, so none of us has the unlimited power to mark up bank accounts. Our power is limited by the number in our own bank account or by what we can borrow.

Yes, you too could send an unlimited number of such instructions, but unless your bank account had a high enough number, your bank would not obey these instructions (aka bounce your check). But no bank bounces the federal government’s instructions. Never has; never will. A monetarily sovereign nation cannot be forced into bankruptcy.

And what about that worrisome federal debt? It is the total of the T-securities (aka IOUs) the government creates from thin air. It can do this forever.

To pay the debt, the federal government merely sends notes to the various T-security holders’ banks, instructing them to mark up accounts. Taxpayers don’t owe the government’s debt, nor do your children nor grandchildren. You aren’t even involved.

And as for the federal deficit, it is just a balance sheet entry, showing the difference between taxes collected and money spent, or more accurately, the difference between the number subtracted from taxpayers’ bank accounts and the numbers added to vendors’ bank accounts. Of course, taxes do not pay for spending. The government could add numbers to vendor’s bank accounts without subtracting from taxpayers’ accounts.

So that’s it. Government spending is just instructions to banks. The debt is just IOUs created from thin air. Paying the debt is just instructions to banks to raise numbers in accounts. The deficit merely is an arithmetic difference. And taxpayers neither pay for, no owe, any of this.

Does that make things clearer?

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–The Fed’s $500 billion bond purchase

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
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Rumor has it the Fed soon will announce approximately $500 billion in Treasury bond purchases, with possibly more purchases in the future. The effect of the Fed buying government bonds will be to add dollars to the economy.

This is in recognition of two realities:

1. The economy has been starved for dollars by the economically suicidal, debt-hawk mantra of “lower federal deficits and less federal debt.” Bernanke and the Fed now will officially have acknowledged the economy needs more dollars and the federal government has to supply them.

2. Congress and the President either are ignorant of this economic fact or, more likely, are too afraid of the debt hawks to add dollars to the economy via deficit spending, and instead have passed that hot potato to the Fed.

The question now is whether adding $500 billion is sufficient to pull us out of this economic funk. I suspect it is not, and that something north of $1-2 trillion in actual spending will be needed.

Rather than relying on the indirect effect of bond purchases by the Fed, and hoping that somehow the dollars will find their way into the hands of business and consumers, Congress and the President should use a direct approach. They should reduce all tax rates and specifically eliminate FICA. That would provide both an immediate and long-lasting economic stimulus, resulting in stronger business and more jobs.

Yes, that would add to the dreaded and much maligned federal deficit and the debt, which is exactly what a growing economy needs. It also might bring the debt hawks to their senses, and finally we could stop, for instance, cutting Medicare payments to doctors and reducing Social Security benefits.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind one of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–How the Republican strategy won

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
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If the Democrats take a beating this coming election, as is predicted, they have only themselves to blame. The Republicans want the economy to stay weak, giving them the opportunity to remove the recession blame from President Bush and to hang it on President Obama. So they have directed their efforts toward reinforcing the myth that federal deficits are bad, the federal debt is worse, and anything that is not austerity is worst of all.

This wonderful, though cynical strategy guaranteed a weak recovery, hurting the Democrats, while hurting the American people, worse. But hey, who cares about that?

The Democrats, rather than educating the public about federal finance, allowed the Republicans to stigmatize any recovery effort that required deficit spending. Either through ignorance or spinelessness, they fell right into the Republicans’ trap, thereby guaranteeing not only a continuation of economic weakness, but a loss this coming Tuesday. They now suffer, and we the people, suffer, though most of the people don’t know why.

The only thing that can create a recovery is deficit spending, the more the better, but the Democrats never tried to get that message across. They even agreed with the Republicans about the evils of federal debt. Talk about slashing your own throat.

The Republicans have succeeded. Deficit spending has been too little, too late, as I predicted way back in Letter dated April, 2008. The Democrats struggled to spend while not spending, the Republicans threatened to filibuster everything that smacked of deficit, the Democrats cowered in terror, and the economy languished.

What should the Democrats have done? Simple. Tell the truth. Rather than believing the voting public is too stupid to understand facts, the Democrats should have instituted a two-year educational program, starting immediately after the Obama election. Yes, at first the public would have rejected the counter-intuitive ideas that deficit spending is absolutely necessary for growth, our children and grandchildren will not pay for federal spending, and inflation is not a serious threat. But over time, these fact-based ideas would seem less radical, more acceptable and ultimately, desirable, because well . . . they’re fact-based.

That would have allowed the Democrats to improve Social Security, enhance Medicare, provide universal health care, save the economy and win the election. Oh well, there’s another election in two years. Maybe the Democrats will smarten up or “courage-up” in time.

On second thought, doubtful.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–Easy money for debt hawks.

The debt hawks are to economics as the creationists are to biology.

O.K. boys. It’s time to put up or shut up.

The Concord Coalition is a self-proclaimed “non-partisan, grassroots organization dedicated to educating the public about the causes and consequences of federal budget deficits, the long-term challenges facing America’s unsustainable entitlement programs, and how to build a sound foundation for economic growth.” Their web site http://www.concordcoalition.org/ asks for donations.

The Committee for a Responsible Federal Budget – http://crfb.org/ – publishes articles like: “How To Avoid a Debt Doomsday,” and writes, “Creditors could lose faith and pull their money from the United States. Interest rates would spike, causing interest payments to grow. The government would be forced to borrow more, which would push rates even higher. The endgame would be a vicious debt spiral and another recession.” They too ask for donations.

As you have seen from my previous post, “How to make a million. No kidding,” Warren Mosler (Mosler) said “it is an indisputable fact that U.S. Government spending is not operationally constrained by revenue and will give $100 million of his own money to pay down the Federal deficit if any Congressman or Senator can prove him wrong.” O.K., he said Congressman or Senator, but I’m sure Warren will be glad to extend the offer to any debt-hawk who can show that Social Security is “going broke” as so many claim, or that FICA supports Medicare and Social Security, or that the federal debt is “unsustainable.”

Back in July, I offered ($1,000 ) for the same kind of proof, but I guess I’m a piker, and no one has taken me up on it. Warren is offering the big bucks.

Just think. $100 million dollars, debt-hawks, and all you need do is prove what you have been preaching all these years. You’ve been begging for donations and here is your chance. I urge all my readers to go to any debt-hawk web site – you know, the ones publishing those ridiculous debt clocks and claiming the government can’t afford this or that, or saying we need austerity, or debt reduction or some other suicidal action — and urge these folks to come up with the proof. And if they don’t, I guess we’ll all know that what they are selling is a load of BS.

Speak up, boys. My book is called FREE MONEY, but this offer is easy money, and the money is waiting for you. Warren is waiting. I’m waiting.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”