Thursday, December 15, 2016

News Flash! The Government Is Broke!

OMG! The federal government really is broke!

At least in the sense that it does not have any money. That's right, the federal government does not have any money. Nothing in a bank account, nothing under the mattress, no stacks of paper money idling away in vaults. The federal government has no money!

But what about all those taxes we paid? Oh, those are just destroyed and disappear once they leave your bank account. Federal taxing just drains dollars out of circulation and destroys them. The government does not, in fact cannot, save and respend those.

But what about all the money it has borrowed from China and elsewhere? It's surely not all spent already? Actually, none of it was spent. What hasn't been returned to the "lenders" is sitting in securities accounts under the lenders' names at the Treasury. Those don't belong to the federal government but to the people who have asked that their extra dollars be stored away as interest-bearing savings at the Treasury. That's what is known as the "national debt".

So, does the government being broke mean we now have tipped the scales of disaster that the politicians always warn about? Are we headed for depression and doom?

No, no, no. Get over it. The federal government has no money because, by definition, money is not money unless it is in the hands of someone other than the issuer. In our case, money resides only in the hands of the private sector. And that's okay because the federal government doesn't need money. It creates money in the form of US dollars whenever it spends. And conversely, the federal government does away with money by un-issuing, or taxing, US dollars out of existance.

So, the federal government is broke in the sense that it has no money. But the entire country is rich in the sense that the federal government provides the private sector with the medium of exchange it needs in order to produce, sell, and save. In that sense, we are rich because the government is broke.

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