One thing that confuses those who are not familiar with Monetary Sovereignty, is the fact that federal tax dollars, rather than being used to fund spending, are destroyed upon receipt.

It may be hard for you to imagine those dollars you work so hard to obtain, are of no use to the federal government and so, are destroyed.

The Treasury either does or does not destroy your tax dollars, and both statements are true, and it doesn’t make any difference.

Now that I’ve confused you, let me try to clarify.

In earlier posts, I’ve compared the federal government to the Bank in the board game, Monopoly®.

Monopoly generally involves four players plus a “Bank.” The Bank, like the federal government, is Monetarily Sovereign. That is, by rule, it never needs to run short of dollars.

To play the game, participants buy and sell Monopoly real estate and charge rent on the properties they buy. The player gaining the most Monopoly dollars wins.

The purpose of the Bank is to provide the money for the game and to sell the real estate properties to the players. Consider the Bank a corollary to the U.S. Treasury.

Imagine that you and three friends wish to play Monopoly, but when you open the box you discover the board, some game tokens, and some instruction cards, but no Monopoly dollars inside.

No problem. You simply take a sheet of paper and draw four columns, one for each player. The Bank then provides each player with a given amount of Monopoly money, say 5,000 Monopoly dollars, by writing the number “5000” at the top of each column.

Thus, the total Monopoly “economy” would consist of 20,000 Monopoly dollars.

As the game is played, the players periodically receive 200 Monopoly dollars from the Bank, for passing one square on the board, called “Go.”

Each time a player receives or pays money, that amount is added to his column.

Where does the Bank get the money? Where does it get the 20,000 start-up dollars, and where does it get the 200 dollars to pay the players for landing on “Go”?

Like the U.S. federal government, the Monopoly Bank creates Monopoly dollars out of thin air, simply by writing numbers into each player’s column. The Bank has no source of dollars other than the rules of the game.

The Bank needs neither to borrow nor to tax. It obtains dollars by creating dollars.

Now here comes the interesting part:

At various points in the game, the rules require players to pay money to the Bank, either for properties, for fines or for taxes.

Let’s say a player must pay a $100 tax to the Bank. In that case, 100 is deducted from that player’s column.

But where does the 100 go? The Bank has no column. The 100 simply disappears. In effect, those tax dollars have been destroyed.

Of course, if that bothers players who are accustomed to double-entry accounting, they simply could give the Bank a column of its own, and the 100 tax dollars could be added to the Bank’s column.

But it would make no difference whether of not the Bank has a column. The Bank is not part of the “economy.” And since the Bank has the unlimited ability to create Monopoly dollars from thin air, there is no way to determine how much money the Bank “has” at any moment in time. It has infinite dollars.

Whether or not the Bank has its own column, this would not have any effect on the Bank’s ability to pay players whatever it owes them.

No matter how many dollars are shown in The Bank’s column, The Bank can be said to have zero dollars or infinite dollars.

Thus, when a player sends tax dollars to the Bank, this does not affect how many dollars the Bank has available to spend. Taxes do not fund the Bank’s spending.

Similarly, the U.S. Treasury and the Federal Reserve are not part of the U.S. economy. Just like the Monopoly Bank, the Federal Reserve creates dollars at will by spending dollars into the economy.

Any U.S. dollars in the Treasury’s or Federal Reserve’s “column” are not part of the U.S. economy’s money supply.  Only dollars in the economy are part of the money supply.

So, like the Monopoly Bank, the Treasury and Federal Reserve can be said to have zero dollars, or infinite dollars. Either way, the tax dollars you send to the Treasury have no effect on how many dollars the government has available to spend. Taxes do not fund federal spending.

Although the U.S. Treasury and the Federal Resereve do keep accounting records, these records do not measure an ability to pay bills. These records don’t measure what the federal government “has,” because what the government “has” is both irrelevant and unmeasurable.

So take your pick. The U.S. Treasury either does or does not destroy the tax dollars you send it, and in either case, these tax dollars affect nothing. Whether or not the Treasury receives tax dollars, the federal govenment can continue to pay its bills, forever.

If the Treasury’s balance sheet is irrelevant, and federal tax dollars don’t fund federal spending, why do we pay taxes?

Three reasons:

1. Historical: In the years when the U.S. was on a gold standard, it did not have the unlimited ability to create dollars from thin air. Its dollar creation was limited by its gold hoard. So, it needed to obtain dollars from taxes or from borrowing. Today, that reason no longer exists.
2. Control: Taking tax dollars from specific segments of the economy is one method Congress uses to control the economy. This approach has been perverted by business interests, that have bribed Congress to create tax loopholes.
3. Gap Psychology: The richest .1% own Congress. They pay Congress to widen the Gap between them and the rest of us. The tax code is designed to do this, as the vast majority of taxes are effectively regressive. At the behest of the rich, Congress levies taxes to widen the Gap and spends money to get votes.

In short, you pay tax dollars to the U.S. Treasury, which neither needs, nor uses those dollars. Though the government tracks dollars in balance sheets, the dollars do not affect the government’s ability to spend.

Think of it this way. When you pay taxes, you write a check. The dollars come out of what is called the M2 money supply measure.

But when the dollars reach the Treasury, they instantly disappear from the M2 money supply measure and are not found in any money supply measure. 

In short, they disappear. They effectively are destroyed by joining the Treasury’s infinite money supply. Adding dollars to infinite dollars still yields infinite dollars.

These dollars, which are not spent and are not part of any money supply, no longer exist. They have they been destroyed.

 

Rodger Malcolm Mitchell
Monetary Sovereignty

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THE RULES

•Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

•Any monetarily NON-sovereign government — be it city, county, state or nation — that runs an ongoing trade deficit, eventually will run out of money no matter how much it taxes its citizens.

•The more federal budgets are cut and taxes increased, the weaker an economy becomes..

•No nation can tax itself into prosperity, nor grow without money growth.

•Cutting federal deficits to grow the economy is like applying leeches to cure anemia.

•A growing economy requires a growing supply of money (GDP = Federal Spending + Non-federal Spending + Net Exports)

•Deficit spending grows the supply of money

•The limit to federal deficit spending is an inflation that cannot be cured with interest rate control. The limit to non-federal deficit spending is the ability to borrow.

•Until the 99% understand the need for federal deficits, the upper 1% will rule.

•Progressives 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.

•The single most important problem in economics is the Gap between the rich and the rest.

•Austerity is the government’s method for widening the Gap between the rich and the rest.

•Until the 99% understand the need for federal deficits, the upper 1% will rule.

•Everything in economics devolves to motive, and the motive is the Gap between the rich and the rest..

MONETARY SOVEREIGNTY