Friday, September 14, 2018

What Is That Dollar?

If I've heard it once I've heard it a thousand times, someone whines that the federal government spends by printing worthless paper money. Of course, they refer to the fact that the US dollar is not backed by anything, and by "anything" they mean it is not backed by gold. I say "So what?" Do people really think that if it were backed by gold, and that if the currency failed they would be reimbursed with gold? Hah! On the extremely remote possibility that the US dollar were to fail we would all have bigger problems than just getting our money reimbursed. Does a lack of intrinsic value make the dollar worthless? I think not. Is the paper deed to your house worthless? How about that paper title to your car? As for intrinsic value, the federal government doesn't actually spend paper dollars. It creates electronic dollars which have even less intrinsic value than paper dollars.

So what, exactly, is the US dollar and why does it not need gold backing? The US dollar is a promise to us from the US government that it will accept that US dollar in payment of federal tax. The US dollar is basically a tax credit that the federal government swaps us in return for the goods and services it buys. We, in turn, seek those dollars in lieu of other currencies because no other currency will be accepted in payment of federal taxes. That tax credit gives the dollar value and that value makes it a negotiable instrument that the public finds useful as a medium of exchange, a unit of value, and a store of value or, in other words, money. Those same people who whine about paper dollars having no intrinsic value apparently are simply fooling themselves because whenever I ask them to send me all of their "worthless dollars" they shut up.

Wednesday, September 12, 2018

What About That Deficit?

If you are a typical American you have been trained to believe that federal deficits are a danger to the American economy. To that I say retrain yourself. Actually, federal deficits are injections of new economy-building dollars from the federal government into the private sector in a fiscal year. Without federal deficits we would not have money growth and we would have to endure economic recessions such as that of 2008-2009 which was largely the result of Bill Clinton's federal surpluses of 1999-2001.

By definition, a federal deficit is the number of dollars the government spends in a fiscal year minus the number of dollars it takes back in taxes in that fiscal year. Thus, the only way to avoid a deficit is for the government to tax back every dollar it spends. Let me repeat. The only way to avoid a federal deficit is for the government to tax back every dollar it spends. That means no dollars available for saving or investment. No dollars available for growth. Does that sound good to you?

If you are a Democrat you probably believe that raising taxes is good because raising taxes pays for increased government spending. But you would be wrong. Federal taxes do not fund federal spending. Raising taxes just removes already-spent dollars permanently from the economy.

If you are a Republican you probably believe that cutting federal spending is good because less federal spending allows for lower federal taxes. But you would be wrong. Federal spending is not funded by federal taxes. Cutting federal spending just reduces the number of economy-growing dollars available to the private sector.

So, rather than raising taxes or cutting spending to reduce the deficit, why not rejoice in the deficit, be glad the government is there to fund the private sector economy, and demand greater federal spending and lower federal taxes -- that is -- just the opposite of what you have probably been taught to think? The only question concerning deficits should be was the money created and spent for the highest public good, not will the deficit bankrupt the government. It won't. The politics of deficits should concern how they can best be used, not how they can best be eliminated.

Monday, September 3, 2018

How US Dollars Are Created

How US Dollars Are Created

Okay. Some of you believe the federal government prints money and hands it out. Most of you think the government stockpiles your tax dollars and spends them, and if it falls short then it borrows money or charges things on a Chinese credit card. Forget all that junk. None of it is true.

The fact is, the federal government creates money in the form of US dollars each time it spends, simply by spending. Let me repeat, US dollars come into existence as a result of federal spending. Further, federal spending is the only way that US dollars come into existence. 

Follow closely -- here's how it happens.

1. Congress allocates spending via legislation. Example: Congress authorizes an $81 billion increase in defense spending.

2. The Treasury pays a bill. Example: The Treasury receives a $2 million bill from United Technologies for a fighter jet engine and directs the Federal Reserve Bank (the central bank) to pay United Technologies $2 million at the First Bank of Hartford.

3. The Fed pays the bill by simply crediting (marking up) the receiving bank's account at the Fed (its "reserve account") by the amount of the payment. This action, this credit to the reserve account creates new US dollars because reserves are dollars. Example: The Fed increases the First Bank of Hartford's reserve account balance by $2 million via a simple accounting transaction. When it does that, it has increased the MB Money Supply (the monetary base) by $2 million and new US dollars have come into existence. The monetary base (MB) includes reserves, cash in bank vaults, and cash in circulation.

4. The receiving bank then credits the receiving entity's deposit account by the amount of the payment. This acknowledges that the receiving entity is entitled to the number of US dollars (reserves) equal to his deposit account balance. Example: The First Bank of Hartford credits United Technologies' deposit account by $2 million, United Technologies now has $2 million it did not have before, and United Technologies marks its bill to the government as "Paid". By crediting United Technologies' deposit account by $2 million, the Bank of Hartford has increased the M1 Money Supply (highly liquid bank deposits plus cash in circulation) by $2 million.

Note 1: Private sector checking and savings deposits are measured in dollars but they are not dollars. They are a record of how much of the bank's reserves the deposit holder is entitled to. The reserves themselves, cash in vaults, and cash in circulation are the dollars. When a depositor gets cash from his bank's ATM, the bank reduces the depositor's deposit balance and hands over cash to the depositor. The bank got the cash from the Fed in exchange for lowering its reserve account balance by the amount of the cash it got.

Note 2: Banks also increase the M1 money supply by marking up deposit balances when they make loans. Such markups of deposit accounts indicate an increase in the number of US dollars to which the depositor is entitled. However, banks cannot create reserves (US dollars). Only the government, via the Fed, can do that. Therefore, bank loans cause deposit increases (the number of dollars the depositor is entitled to) but bank loans do not create US dollars (reserves). Example: If I borrow $1000 from First Citizens Bank, my checking account balance is increased by $1000, and the M1 Money Supply goes up by $1000, but no new reserves (US dollars) are added to the Monetary Base (MB). And yes, the result is that depositors are entitled to more US dollars than there are US dollars in existence


Dollars are created by federal spending thusly:
1. Congress authorizes spending.
2. Treasury authorizes the Fed to pay someone.
3. The Fed responds by increasing a bank's reserve account thus creating new US dollars and thereby increasing the MB Money Supply.
4. The bank responds by increasing the payee's deposit account thus increasing the M1 Money Supply.

Friday, December 22, 2017

The Tax Bandaid

So what's the big deal over this tax plan? I think we have just been sold an overly bally-hooed, suspender-snapping boast by the Republican congress.

If the estimate that it will add $1.5 trillion to the so-called national debt over a ten year period is true, then the thing saves the taxpayers very little. $1.5 trillion over ten years works out to only $150 billion per year. With recent deficits running in the $400 billion to $600 billion range, the addition of another $150 billion per year to the deficits is hardly anything to write home about, especially if those deficits are composed primarily of corporate and upper 10% earners' tax breaks which contribute little to the needed consumer demand that drives American production. An additional $150 billion added to the annual deficit averages only about $461.00 per US citizen. That's not much money in the big scheme of things. It certainly is not cause for any alarm about inflation nor federal bankruptcy (which, by the way, can never involuntarily happen).

Now, if the tax plan were adding $1.5 trillion per year to the deficit, that would be adding $15 trillion to the so-called (but not really) national debt over that ten year period. Even that would not be disastrous. It would just mean that an extra $15 trillion would have been used by the private sector before being stashed away in those private savings accounts called treasury securities.

All this concern over deficits and debt is just so much "the sky is falling" rhetoric. The tax cuts could have been and should have been much larger, especially for those making under, say, $125K per year. This thing, as it stands, is little more than a tax bandaid applied over an imaginary tax cut.

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).