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.

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.

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?

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).

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?