Tuesday, March 22, 2016

Backward Thinking Americans

You know what's funny to me? Well, not exactly funny, but odd. Well, not exactly odd, but annoying. Yes, annoying.

What's annoying to me is that probably most Americans are convinced, totally convinced, that our federal government gets its money from the American people. You see it when people talk about the government spending taxpayer money. You see it when certain politicians and their disciples complain about out-of-control federal spending. You see it in Tea Party and Republican and even some Democrat platforms to cut federal spending in order to reduce taxes. You see it when people rant about the federal deficit and how the resulting federal debt will impoverish our children and grandchildren and in how the federal debt amounts to $55,000 per person.

Why do I find it annoying for people to complain about federal spending? Why do I not fall in and join the complaint about the federal government spending too much of my money, wasting it on people who don't work, on countries that don't like us, on initiatives that are counter to my beliefs?

I find it annoying because I know, and you should know, that the federal government does not get its money from the American people. In fact, just the reverse is true. The American people get their money from the federal government. Only the federal government is authorized to create and issue US dollars. No one else can. The federal government issues those US dollars every time it spends into the private sector to acquire the goods, services, and goodwill that only the private sector can produce. It produces those US dollars out of thin air when it spends because each US dollar is nothing more than a federal government IOU backed by the good faith and credit of the US government. In short, the government creates money and injects it into our pockets, the private sector pockets. The private sector does not create dollars and inject them into the government sector. We get our money from the government, not the other way around. Isn't that ironic, since most of us think it works the other way?

Taxes? Taxes at the federal level do not fund the federal government. The taxes we pay, whether income taxes, payroll taxes, estate taxes, corporate taxes, or whatever, simply drain dollars from the money supply. The taxes we pay disappear from this earth when we pay them. After all, we are simply returning to the federal government a bunch of its own already-issued IOUs. An IOU back in the hands of the issuer is meaningless. It is no longer an IOU. It is nothing but history.

So, rather than the American people funding the US government, it is clear to me that the US government funds the American people - just the opposite of what most Americans think. It is funny, odd, and annoying to me that the American people can be nearly unanimously, almost 100 per cent, backwards on this issue.  

Monday, March 21, 2016

Here's To You Debt Phobes


National debt...

Those two words scare people, way too many people, because they needlessly conjure up images of federal bankruptcy, failed government, and bank failure. Even worse, national debt angers many people who are convinced that government spending means big, irresponsible government, massive tax increases, and strangulation of private sector business and freedom.

Here is a quote from one such person:

"The government takes as much as they can, spends it all and then borrows more and blows that too. And now we have a tremendous debt that has to be paid back."

There is so much wrong with that statement, in fact, everything is wrong with that statement, but it is probably how most people think the federal government must operate. Conventional wisdom, sadly all too common, is that "government is just like a household or business". People act like the national debt is their personal debt. This paradigm could not be more wrong. Why? Because the federal government issues US dollars while households and businesses cannot. And by "issue", I mean that the federal government creates US dollars. Households and businesses cannot create dollars. That makes all the difference. The issuer of the US dollar has absolutely no need to take tax money or to borrow dollars from someone else in order to spend. Yet the federal government does take tax money and it does sort of "borrow", which makes it difficult if not impossible to convince people that it does not spend those taxes and "borrowed" dollars.

When the federal government spends, it orders the receiving bank to insert a deposit into the recipient's bank account. At the same time, the Federal Reserve Bank credits the receiving bank with a like amount of dollars called "reserves". Reserves represent actual US dollars while the recipient's deposit amount is a credit against those dollars. At that point in time the federal government has created and issued brand new US dollars. It is that simple. To spend tax dollars and borrowed dollars would be redundant and the government does not spend them. In fact, tax dollars go out of existence altogether and "borrowed" dollars go on the shelf, so to speak. The federal government "borrows" dollars by selling Treasury securities to investors worldwide who seek a safe and secure interest-bearing place for their extra dollars. Both taxing and selling Treasury securities are artificial constraints the Congress has placed on itself along with the "debt ceiling", an artificial limit on the amount of Treasury securities the government can sell.

Now, what about that "debt"? The national debt is merely the sum of unexpired Treasury securities. It is "debt" only in the sense that the federal government holds someone else's money that it must give back at some point in time. The government does not take out loans or use a Chinese credit card to fund its expenditures. Why should it? It issues US dollars. Taxing and "borrowing" are not funding mechanisms; they are mechanisms for draining dollars from the money supply to reduce the likelihood that federal spending will cause inflation. Dollars not in circulation are not inflationary. The fact is private sector lending is far more likely to cause inflationary pressure than is federal spending because private lending adds credit to the economy equal to three times the amount of federal spending.

Because the federal government does not spend Treasury securities and merely holds dollars like a bank holds savings accounts, and because the federal government can always create US dollars by issuing them, there is absolutely no way that the US government can go insolvent or bankrupt, unless the Congress decides to artificially limit or put an end to federal spending. So the threat of federal bankruptcy is a myth, a bogeyman, a bad joke. It will not happen. No taxes will be raised to pay for it. No heavy burdens will be laid on our grandchildren. You can read all about how the US "borrows" by selling Treasury securities in many books and blogs, and one of the best explanations can be found here.

Finally, there are a couple of standard quips that people always utter when confronted with the above revelation. The first is that "only the private sector creates wealth". Well big whoop. Everybody knows that, and what does that have to do with anything anyway? People who like to say that do not seem to realize that "Only the federal government creates US dollars, and only the private sector creates wealth." The two go hand in hand.

The second quip is this "federal spending costs taxpayers money." That too is wrong. Federal spending supplies the US dollars that people spend, save, and give back in taxes. Federal spending is private sector revenue, your revenue directly or indirectly. Federal spending does not cost taxpayers money - federal taxes cost taxpayers money and as we saw earlier, federal spending does not rely on or use taxes.

To summarize, the federal government does not have money issues because the federal government issues money. Federal "debt" is private sector savings. Federal spending creates US dollars. Federal taxes destroy US dollars. We need federal spending. We do not need federal taxation. Taxpayers foot the bill only for taxes, not for spending and not for paying off any federal "debt".


Tuesday, March 15, 2016

Democrats vs Republicans - Both Wrong

The problem with Democrats is that they think we have to tax more to spend more. The problem with Republicans is that they think we have to spend less to tax less. Both are dead wrong! Federal taxes are not revenue. They are never respent. They simply drain dollars out of the economy.

The federal government is in no way like a business or a household. It is the source of all US dollars, not just a mere user like a business or household. It does not need or use income to fund its spending, it creates new dollars each time it spends. The sooner we all realize that, the sooner we can quit all the stupid bickering about harmless federal deficits and debt and get on with rebuilding our failing physical and social infrastructures.

Virtually all politicians either don't get it, or are profiting from our ignorance. We need to get real and create a politic based on spending more and taxing less at the federal level. A balanced budget just means that the federal government will no longer provide the money that the private sector economy needs for spending and saving. And if you disagree for financial reasons, then you do not understand the US economy.

Sunday, March 6, 2016

What Photographers (and the Rest of Us) Should Know About Federal Spending

Do you remember how photography used to be a very different activity than it is today? Because you needed film in your camera to take pictures, and because each picture used up some of that film, you had to be very sparing and judicious with the pictures you took. You missed the opportunity to get some of your best shots because you had to be frugal with your film. The danger of taking more than a few pictures was that you would run out of film. Because you had to put new film in the camera to take more pictures, you were constrained in the number of pictures you could take by the amount of film you had at your disposal.

Then along came digital photography. Suddenly the film constraint was gone. Since then, you have been able to take as many photos as you like with no worry about running out of film. The only constraint with digital photography is that you might run out of storage capacity to hold all the pictures. At that point, you could delete some pictures or add more storage.

One might argue that unlimited picture taking is wasteful, but why? Each film photo expended some amount of a limited supply of film while each digital photo costs nothing.

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Do you remember how federal spending used to be a very different activity than it is today? Because the government needed gold to back its dollars, and because expenditures tied up some of that gold, the government had to be very sparing and judicious with the amount of its spending. The government missed the opportunity to do what was best for the country because it had to be frugal with its dollars. The danger of spending more than a few dollars was that the government would run out of gold. The government had to take back some dollars to free up gold so it could spend again. It was constrained in the number of dollars it could spend by the amount of gold in its vaults.

Then along came the end of the gold standard in 1971. Suddenly the gold constraint was gone. Since then, the government has been able to create (spend) as many dollars as it needs to with no worry about running out of gold. The only constraint with federal spending now is that the economy might some day run out of capacity to hold all those dollars. At that point the government could remove some dollars from the economy or the economy could expand to absorb those dollars.

One might argue that unlimited dollar creation is wasteful, but why? Each gold-backed dollar expended some amount of a limited supply of gold while each unbacked dollar costs nothing.

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When President Nixon took us off the gold standard in 1971, he eliminated the risk of federal bankruptcy or insolvency. Since then the government has had the ability to create unlimited quantities of dollars without needing to recover dollars by taxing or borrowing (yet it inexplicably continues those activities). Federal spending no longer transfers money to some by taking it from others. The federal government has been freed to spend on the things America really needs, such as better health care, better education, better roads and infrastructure, safer environments, and medical and technological advances.

For some reason, ignorance I think, we continue to act as though we are still on the gold standard. We act as though the next dollar spent will send the federal government into bankruptcy. We cry and moan about the government taking dollars from hard workers and giving them to lazy shirkers. We are too stupid to realize that we have moved from film to digital with respect to federal finances. The capacity constraints have, if not lifted entirely, been altered to the extent that any limit on federal money creation is not in running out of money, but in creating too much if the economy itself is at full capacity. Federal insolvency is not in the picture, so to speak.   

Friday, March 4, 2016

If the Federal Government Creates Dollars, Why Borrow?

If you believe that the federal government truly must borrow and tax to be able to spend, then quit reading and move on because you won't accept what I'm about to tell you anyway. But if you acknowledge that the federal government creates US dollars and wonder why, with that ability, it taxes and borrows as well as spends, then listen up.

But first, let me acknowledge that there is some truth to the common assertion that "printing" too much money could, under conditions of full production, cause inflation. So for you folks who like to talk about the US turning into the Weimar Republic or Zimbabwe, this is for you.

Now, as I have said many times, federal spending creates US dollars while federal taxing destroys US dollars. The federal government's ability to create dollars gives it the ability to spend however much Congress wants to spend, even if there were no such thing as taxes. The purpose of taxing, then, is not to respend those dollars. Taxes do not produce revenue. There is no operational need for revenue. There are a few reasons for having taxes, all pure policy, but the main purpose for having federal taxes is a policy decision to reduce the supply of US dollars in order to prevent inflation. Taking dollars out of circulation helps prevent there being too much money and theoretically helps thwart inflation. It may not really be necessary to tax in order to check inflation, but policy is policy.

Okay. But why does the federal government borrow?

The same reason - to prevent inflation.
Each year the government spends about $4 trillion and taxes back about $3+ trillion. That leaves about $1 trillion or so more spent than destroyed. That $1 trillion or so is called the federal deficit and could be inflationary, or so Congress thinks. In order to remove that $1 trillion deficit from circulation and keep it from being inflationary, Congress has mandated that the Treasury offer the public very safe savings accounts in which to hold those extra dollars. Thus, the Treasury "sells" Treasury securities which means the Treasury accepts and holds onto peoples' current dollars in exchange for a promise to give those dollars back later with interest. And each year they do it in the amount of the deficit. Over the years those Treasury security savings accounts add up and now have reached $19 trillion, otherwise known as the federal debt. Imagine that. The combined private sector savings at the Treasury is called the federal debt and considered by many to be a big problem of some kind. I'm still trying to figure out why savings is a problem.

So with all the newly created and spent US dollars taken out of circulation by taxes and "borrowing", we can safely say that federal spending is not inflationary.

Yet, we still have inflation to varying degrees. Why? Not from federal spending. Taxes and "borrowing" have seen to that. But the federal government does not control all spending. The private sector creates "money" (although not US dollars) by bank lending and credit creation. All the debt money created by the private sector amounts to about $12 trillion a year compared to the $4 trillion actual dollars created by the federal government, it's easy to see that any inflation pressure (which hasn't been much in recent years) comes from the private financial sector, not federal spending.

So there you have it. The federal government has reasons for taxing and borrowing, but those reasons have nothing to do with its ability to spend. That makes any accusations of the government taking money from some people in order to give it to some other people inherently false.