Monday, February 28, 2022

What MMT Means by "No Financial Risk"

Just to be clear, when MMT says that the federal deficit and federal debt pose no "financial risk", we mean simply that federal spending does not lead to federal insolvency or federal bankruptcy.

Why not?

Because the federal government incurs no financial obligation, that is, it incurs no debt when it spends or distributes US dollars. When it issues US dollars, the federal government creates those  US dollars from scratch, brand new. Those dollars carry no promise of convertability to any commodity like gold or silver, no obligation to be converted to some other currency, no obligation to pay anything else. Those dollars ARE payments, in and of themselves, from the federal government to the receivers of those dollars. And the US government, as the sole Constitutionally authorized creator of US dollars, can always create more dollars whenever Congress decrees that it do so. 

The US dollar is simply a US government issued tax credit. The government promises us nothing more when it spends those US dollars than that it will always accept those dollars back in payment of our taxes. That's it. It's that simple. 

Now, the federal government's spending more US dollars than there are goods and services available could, conceivably, result in inflation. But that is an entirely different issue than "financial risk", isn't it?

Wednesday, February 2, 2022

US National Debt Hits $30 Trillion - No Biggie, No Debt

Did you see that the so-called national "debt' went over the $30 trillion mark this week? Did you feel it? Did the earth shake? Did your bank close down? Did you sense the crisis all around you? No? Neither did I. The "debt" reaching the $30 trillion mark was a non-event, kind of like you hitting your 30th birthday. It may make you feel differently psychologically, but you are virtually unchanged from when you were 29.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said, “This [$30 trillion] is a jaw-dropping number that is a real cause for concern. It is the result of both borrowing for really important crises, most notably the Covid pandemic, but also trillions and trillions of borrowing for no reason other than politicians have stopped being willing to pay the bills.”

But Maya MacGuineas is wrong. What we call the national "debt" is not the result of politicians not paying their bills. In fact, just the opposite is true. The federal government always pays its bill, in cash, with no borrowing, no credit card, no deferred payment. You see, when the federal government buys something or fulfills an entitlement, it does so by creating brand spanking new US dollars, every time. When the federal government spends, here's what happens:
1 - The Treasury authorizes the Federal Reserve Bank to make the payment.
2 - The Federal Reserve Bank, or "Fed", identifies the payee's bank and credits that bank's reserve account at the Fed where banks' US dollars are kept. By crediting reserves, the government has created new US dollars.
3 - The receiving bank credits the deposit account of the payee, thus making those US dollars available to the public.

Example: When it's time for the government to make your monthly $1500 Social Security payment, the treasury notifies the Fed, the Fed credits your bank's reserve account for a new $1500, and your bank credits your deposit account for $1500. That's it. Dollars are created by accounting.

When people or businesses or even countries accumulate US dollars, they often decide to put some of those dollars away in savings. If they put those dollars into a banking savings account, there is no effect on the number of bank reserves (US dollars) in the economy. But sometimes they decide to park those dollars safely away into US treasury securities accounts. They do that by "buying" treasuries.

US treasury securities are just accounts at the Fed, special savings accounts that are time-limited and on which the federal government pays interest. When someone "buys" a treasury security, the buyer's (saver's) bank debits his deposit account, the Fed debits his bank's reserve account (thus removing dollars from the economy), and credits the securities account at the Fed. That is what the government, many economists, and the media call "borrowing" as though government is "borrowing" that money from the public. But the government does not spend that money. It sits on it until the security term expires at which time the Fed debits the securities account, credits the buyer's bank's reserve account thus adding those dollars back to the economy while adding some extra for interest, and the bank credits the buyer's deposit account. In no sense can treasury securities be called "debt" because the dollars in those securities accounts continue to be owned, not by the government, but by the buyer.

So, the national "debt" did not go over $30 trillion this week. There is no national "debt". Rather, the good news is that the national "savings" went over $30 trillion this week. So Joe down the street, Ford Motor Company, and China and Japan, among others, just continued to add to their US dollar savings by voluntarily buying treasuries as has been happening since 1787.

By the way, remember I mentioned that treasuries accounts are time limited? Well, in fiscal year 2021 the US government redeemed $119.56 trillion in expiring treasuries and savers from the US and all over the world deposited $121.04 trillion back into treasuries savings. So, if $30 trillion seems like a lot, consider that four times that much moves in and out of treasury securities accounts every year.