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.