Thursday, July 13, 2017

The Stupid Debt Limit

The federal so-called "debt" consists almost entirely of unexpired treasury securities. The debt limit is an artificial constraint on the allowed dollar amount of unexpired treasury securities. Once that limit is reached, the Treasury is not permitted to sell more T-bills and such. So?

Well, recording treasury securities sales amounts is an artificial mechanism for crediting the balance of the Treasury General Account, the "checking account" from which the Treasury supposedly spends. Another artificial mechanism for crediting the TGA is to record the amount of tax collections there. The Treasury sells T-bills (securities) equal to the amount of government spending over and above tax collections in order to to not overdraw the TGA. So?

If outstanding securities hit the debt limit and the Treasury is no longer allowed to sell securities, then the TGA cannot be credited enough to cover federal expenditures. So?

So technically, the Treasury can't spend.

The trouble is -- all these constraints, the TGA itself, the rule that the TGA cannot be overdrawn, the crediting of the TGA with tax dollars (which actually cease to exist once collected),  the crediting of the TGA with T-securities sales, and the debt limit itself -- these are all artificial, self-imposed constraints that have no practical purpose except to discourage congress from spending frivolously. They are carryovers from the long ago abandoned gold standard. The federal government does not need to tax and borrow in order to spend.

There is no real constraint on how much the federal government can spend because it does not spend existing "money". It, through its agent the Federal Reserve, spends by creating bank reserves and deposits in commercial banks and there is no real limit on how many reserves and deposits it can create. Remember, the TGA is an artificial, self-imposed constraint, so any shutdown of federal spending related to shortages in the Treasury General Account, especially one caused by reaching the debt limit, is totally optional.

Thursday, June 22, 2017

The Old "Socialism Card!

We as a country are so screwed up by our misunderstanding of how our economy works. We all use and need money, every day, yet most of us have no clue about where our money comes from or how it gets into our pockets. Well, here's a capsule description. The US government creates every dollar in our economy and inserts those dollars into circulation by spending them into the private sector. Although banks create credit against those dollars, the US government is the sole issuer of our US dollars, not the private sector, despite what many people want to believe. We have a system. It works, although today's fiscally conservative political preference seems geared toward breaking it. Our private sector well-being depends on a functioning federal government doing its part in supporting our economy by providing the private sector with the medium of exchange that it has been constitutionally mandated to do.

There are too many people whose rancor toward government in general has blinded them to the federal obligation and authority to create US dollars. They seem to think that the private sector itself rightly creates US dollars and that by "printing" money the federal government is overstepping its bounds. Ultimately, many of those people believe that federal participation in the economy is nothing short of the dreaded "socialism".

Here is an exchange I had the other day that demonstrates the absurdity of so much of today's conventional thinking about our country:

Jim : What I am describing is the way our economy and monetary system works ... the private sector creates the value and the federal government supplies the money by buying into private production.

Respondent: That's just socialism you describe Jim... The government buying into or supplying the money is nothing more than subsidizing private interest or corporate welfare.

See what I mean? The respondent, in his eagerness to bash the federal government, pulls out and plays the old "socialist" card. By doing so, he basically contends that we, now and in the past, have a socialist form of government. Really? Really?

Wednesday, April 12, 2017

Politicians Lie? They Fooled You Didn't They?

Much bad politics thrives on a simple lie -- that the federal government might go bankrupt. That tidbit of misinformation is the basis for  many an unnecessary federal spending cut and for many an unnecessary federal tax hike. The federal government is monetarily sovereign, which means that it, and it alone, creates the US dollar, can do so at will and in any amount necessary, and can always pay any bill or debt denominated in US dollars. When a politician tells you that Social Security is running out of money, that federal spending is out of control, or that your grandkids must pay for our current spending, you can be assured that that politician is either lying or is woefully misinformed about federal finances. Could federal spending cause national inflation? Possibly, but highly unlikely when we have unused productive capacity.

But do not take my word for it. Here are some expert views on this topic:

"The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default." Alan Greenspan, former Federal Reserve chairman.

"There is 0% chance that the US will be forced to default on the debt." John T. Harvey, PhD, Texas Christian University.

In the case of United States, default is absolutely impossible. All U.S. government debt is denominated in U.S. dollar assets.” Peter Zeihan, Vice President of Analysis for STRATFOR.

“In the case of governments boasting monetary sovereignty and debt denominated in its own currency, like the United States (but also Japan and the UK), it is technically impossible to fall into debt default.” Erwan Mahe, European asset allocation and options strategies adviser.

“There is never a risk of default for a sovereign nation that issues its own free-floating currency and where its debts are denominated in that currency.” Mike Norman, Chief Economist for John Thomas Financial.

“There is no inherent limit on federal expenses and therefore on federal spending…When the U.S. government decides to spend fiat money, it adds to its banking reserve system and when it taxes or borrows (issues Treasury securities) it drains reserves from its banking system. These reserve operations are done solely to maintain the target Federal Funds rate.” Monty Agarwal , managing partner and chief investment officer of MA Managed Futures Fund.

"As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational." Federal Reserve Bank of St. Louis.

“A sovereign government can always make payments as they come due by crediting bank accounts — something recognized by Chairman Ben Bernanke when he said the Fed spends by marking up the size of the reserve accounts of banks.” L. Randall Wray, Professor of Economics at the Univertsity of Missouri-Kansas City and a Senior Scholar at the Levy Economics Institute.

(Thanks to John T. Harvey for providing some of these quotes).

Friday, January 6, 2017

Let's Talk Savings

Let's talk about savings. We can all agree that savings are a good thing, or at least I think we can. Whether you are an Ayn Rand libertarian or a Lyndon Johnson liberal you undoubtedly consider putting some money aside for retirement, college, a new car, or a rainy day a characteristic of all good Americans. Saving some of their money is what responsible people do. Savers are hardworking, industrious, smart, and foreward-thinking. Savers are planners and doers. They are the backbone of the American economy. We should all save our money and build up as much of a financial surplus as we can - right? Right! Of course. And many, many of us do, both liberals and conservatives.

There are so many ways to save money, from stuffing it under the mattress to keeping a bank savings account, to contributing to an IRA or 401K account. But one of the most popular ways for Americans to save, not to mention the safest way to save, is to buy US Treasury securities. The US Treasury has a voluntary public program by which it holds peoples' US dollars in savings for varying lengths of time. At the ends of those times the saver can get his dollars back with interest, very much along the same principle as a bank Certificate of Deposit (CD). The savers' deposits are called "securities" and the Treasury refers to taking in savers' deposits as "selling securities". US Treasury securities are super safe because they are held in accounts at the Federal Reserve Bank and are guaranteed by the good faith and credit of the US government. American individuals are not the only ones who save by buying Treasury securities. American businesses, pension funds, banks, the Federal Reserve itself, plus foreigners, foreign companies, and even foreign governments save their US dollars in US Treasury securities. Treasury securities currently amount to nearly $20 trillion. That is nearly $20 trillion out of circulation, not exerting any inflationary pressure on the economy. $20 trillion neatly and responsibly tucked away in savings by people who voluntarily sought out and found a safe vehicle for the extra money they have chosen to save. So, I think we can agree that US Treasury securities are a national asset, a good thing for the mature, adult people among us who have opted to live within their means and not spend all their money frivolously. So, there you have it - savings - the signature of a responsible nation, provided and serviced by the US Treasury. It is a very good thing.

Oh, one other word about the $20 trillion in US dollars saved in Treasury securities. They have another name. They are also known as the "national debt", you know, that same horrendous national debt that so many of us and our political representatives are so afraid of and so anxious to eliminate. Cognitive dissonance anyone?

Saturday, December 24, 2016

Paying Off the National Debt

The national so-called "debt", all $20 trillion of it, will belong to the Republicans about four weeks from now. It cannot happen, but let's suppose they follow through on their neoliberal ideology and decide to pay the "debt" off. Just suppose. First, how would they pay it off and second, what happens to all that money when they do pay it off?

First, the easy part, paying the debt off. The national "debt" consists almost entirely of US Treasury securities held by individuals, businesses, retirement funds, and governments from around the world. All it would take to pay off the so-called "debt" is to cancel all the Treasury securities, transfer the $20 trillion out of the security accounts at the Fed, and give the money back to the people who invested in those securities. Poof! Debt gone. Balance zero.

Then what?

Well, all of a sudden the world would be full of extra US dollars on the loose and millions of people who must figure out what to do with them. People had those $20 trillion in Treasury securities because they wanted their extra dollars protected in a safe, secure, virtually risk-free investment. Now, they must place those dollars elsewhere, but where? Very little of it would be spent because these were investment dollars, extra dollars that people chose to hang on to for various reasons. Some of it probably would go into other, more risky non-federal savings accounts. A trickle might be repurposed to more risky business ventures. But my guess is that the bulk of it would go into relatively secure foreign government bonds. Remember, the $20 trillion was "safe" money, no risk, small return money because people wanted it that way. They likely will look for another safe haven, even if overseas.

So, paying off the national "debt" does nothing for the US government except to remove its major inflation-fighting tool, put dollars into foreign accounts, strip the Fed of its major interest-rate setting tool, and probably force the Treasury into changing its accounting procedures and issue dollars strictly as a debit to a spending account with no incoming credits.

One thing for sure, it would prove to the debt-hawks that the so-called national debt really is a private sector asset and not the tax curse on our grandchildren that they think it is. Many would probably soon wish we had it back.

Monday, December 19, 2016

The Secret Language of Conservatives

My US Congressman, Walter Jones (R-NC), loves to claim that federal spending is "out of control" and that the federal debt will spell financial disaster for our kids and grandkids. Congressman Jones has voted against every stimulus bill and every debt ceiling increase that has come up during his tenure in the House of Representatives. You could be forgiven if you accused Rep. Jones of being tight-fisted or niggardly. You might even confuse him with Ebenezer Scrooge.

But I have noticed that Rep. Jones has no problem voting for expenditures for expanding the military presence in North Carolina, or for improving veteran care, or for protecting North Carolina fisheries, or for stabilizing the beaches along North Carolina's shore. He does, however, want to defund Planned Parenthood, cut welfare, privatize Social Security and Medicare, and pass a balanced budget amendment, all of which are deeply rooted in right-wing ideology.

Well, I have decided that Rep. Jones and his so-called "conservative" cohorts in Congress and the Senate are not really stingy at all. Rather, they are devious. They are not really worried about "out of control" spending, deficits, or federal debt at all. They just want the public to worry about those things. Why? To cloak their ultra-conservative ideological agendas from the public.

Jones and crew know that many constituants may not be as rabidly conservative as they are. In fact, many of their constituants are beneficiaries of the federally funded programs that he and his cronies despise, programs like SNAP, the Affordable Care Act, Medicare Disability, and many others. While there may be disagreement on the ideologies behind various federal funding initiatives, Jones and company are pretty safe in assuming that nobody wants the government to go bankrupt. So these devious politicians have developed a very effective code language that they drag out when their ultra-conservative ideologies are challengable. If a bill promises to garner too much liberal support for Rep. Jones to bear, all he has to do is say that the bill will increase the deficit and send us deeper in debt with out of control spending. That rhetoric brings out the fiscal conservative in even the most left-wing constituants. It's a very effective code.

Of course, we know from studying monetary sovereignty and modern monetary theory that the federal government cannot involuntarily overspend or go insolvent because it alone issues the free-floating US dollar and can do so with no limit as long as there are goods and services available for it to spend dollars on. If Jones knows this, he is not fessing up to it. To do so would, in fact, break the code.

Friday, December 16, 2016

Social Security Increase! Yay! Er....

The good news is that Sue and I each got a Social Security cost-of-living raise for 2017. Wonderful! The bad news is that the Medicare premium that is deducted from our checks went up by exactly the amount of the raise. So our SS checks will not change at all. Basically, the increased Medicare premium accounts for the full increase in the cost of living.

This is especially egregious to me because I know, unlike most of you, that the Medicare premium is not a premium at all but a tax. The federal government does not need money in order to spend money, even on Social Security and Medicare. Every dime of Social Security and Medicare outlay is brand new money created by the federal government as it is spent. That's how it works. A dollar is simply a promise from the federal government to you. It cannot recycle that promise (money) any more than you can recycle a promise because the promise (tax dollars), once collected, ceases to exist. But the people who run the government, Congressmen, do not know this. They are dumbbells. They still think taxes pay for federal spending. The Treasury people know that's not the case, but they aren't saying anything because they are afraid of inflation and they think that by extracting dollars from the money supply and destroying it via taxation there will be less inflationary pressure on the economy. They too are dumbbells. And we are all dumbbells for letting both those groups continue to think that way.

SS and Medicare explained here.

Taxes explained here.

With thanks to Geoff Coventry for the links.