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.  

Here's To You Debt Phobes

GOVERNMENT MONEY ISSUES?

NO…

GOVERNMENT ISSUES MONEY!

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".

     

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.

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.   

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.

Why Did Gatlin Resign His Confederate Commission?

On March 19, 1862, five days after the Union Army gained control of much of North Carolina's coastal plain with its victory in the Battle of New Bern, the Confederacy dismissed Brigadier General Richard C. Gatlin from command of the Department of North Carolina. Gatlin, ill with fever in Goldsboro, was unable to lead his troops in New Bern, leaving Brigadier General Lawrence O'Bryan Branch to suffer the battlefield loss. The local newspapers excoriated Gatlin for the loss, claiming he had neglected New Bern's defenses and his Department in general, and that he was drunk during the battle. The papers soon recanted their stories, but for some reason Gatlin never was assigned another command in the Confederate Army. After spending a full year trying to determine why the Confederate War Department, a War Department that was in desperate need for experienced military leaders, overlooked him for another command position, he gave up and resigned his commission on March 23, 1863, effective September 8, 1862. We do not know why Gatlin became persona non grata. Bad publicity may have kept him from receiving another command, he may have refused to serve in Virginia, away from his beloved North Carolina, or there may have been other reasons. We may never know, but here is Gatlin's resignation. It was accepted and made official by Special Order No. 85 from the Confederate War Department in April 1863.

Gatlin's Resignation from the Provisional Army of the CSA

The following is a true and full transcription of a photocopy of a document written by Richard Caswell Gatlin, such document on file with the National Archives. The photocopy was sent to James L. Gaddis Jr from the National Archives upon his request for military records of Richard Caswell Gatlin July 5, 2001. Transcription by James L. Gaddis Jr, January 31, 2016.  

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On the 19th Mar. 1862, Brig. Gen'l Gatlin was relieved from duty in the State of N. Carolina in consequence of ill health. On that day he addressed a note to the War Dep't asking an investigation into his conduct while in command of the Dep't of N.C. provided it had not met with the approval of the government, and this request was further urged in a note dated the 27th of March. The reply of Sect'y Randolph, though unsatisfactory from its neither exonerating or condemning, or promising investigation could only lead to one conclusion, viz that Gen'l Gatlin had been relieved for the reason stated in the order and from no other. Hence when he reported for duty on the 23rd of May 1862, he confidently expected to be at once assigned to a Command. This was not done however, and he continued to make the stated monthly reports until the month of September when he received Asst Adj't Gen'l Whiting's letter notifying him "that having no assignment, his appointment of Brigr Genl in the Provisional Army was vacated under the 2 par: of Genl Orders No 48." Soon after, Genl Gatlin proceeded to Richmond, and in an interview with Secty Randolph on the 24th of Sept, it was stated that the order was designed to be an exponent of the law, but if Genl Gatlin did not think that it applied to his case, he might protest, and the matter would be referred to the law Officer of the Government for his opinion.

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The protest was then made, not with the vision of forcing his services upon the country, but to place himself in a position to again repeat his request, to have his conduct investigated by a proper tribunal, which could not be done so long as his appointment of Brigr Genl was not acknowledged by the Government. The investigation was the more to be desired, in as much as the Secty had stated that certain reports, rumours or allegations - not specified - prejudicial to Genl Gatlin had reached the War Dept. He had expected a speedy reply to his protest, as he did not presume but that the Secty had referred it according to promises. Up to this time however, nothing has been heard from the War Dept on the subject.

In as much as so much time has elapsed since the protest was made, that if an answer favorable to Genl Gatlin was now returned, he could hardly hope to have his conduct investigated, without which he would not willingly serve in the Army, he desires that the letter of Asst Adjt Genl Whiting be withdrawn or cancelled, and his resignation of the appointment of Brigr. Genl in the Provisional Army - which he believes he still holds under the law - be accepted to take effect on the 8th Sept. 1862, the date of Major Whiting's  letter.

March 20th 1863. 

Are US Dollars Really Federal Debt?

Here is how dictionary.com defines debt:

1.       Something that is owed or that one is bound to pay to or perform for another: a debt of $50.

2.       A liability or obligation to pay or render something: My debt to her for advice is not to be discharged easily.

3.       The condition of being under such an obligation: His gambling losses put him deeply in debt.

4.       Theology. An offense requiring reparation; a sin; a trespass.

Because we are not discussing theology, forget about #4. Let us, though, discuss the US dollar and its relation to debt.

The US Dollar is a Federal Debt

Clearly, a US dollar satisfies both definitions 1 and 2. When the federal government spends, it issues US dollars. Each dollar is a federal IOU, that is, an accounting liability to the government and an asset to the holder. That IOU (the dollar itself) signifies that the US government owes something to the holder of that dollar. That something is simply a credit for one US dollar, not 1/35th of an ounce of gold, nor a chunk of silver, but only another US dollar. That is because the US monetary system is a fiat monetary system with a currency not pegged to any commodity or to any other country's currency. It seems evident that the US dollar is, in fact, a debt of the US government and that, consequently, the US government is in debt to the holder of that dollar.

How Ae Debts Discharged?

Paying a debt discharges the debt. Example: I owe you $5.00. If I give you $5.00, the debt is paid. I no longer owe you $5.00. By giving you $5.00, I have transferred my $5.00 asset to you, thus reducing my assets. I also have reduced my liability by $5.00. Even though I may be cash-poor now, I no longer am obligated to pay you. My side of the transaction is in balance because both my liability and asset have been reduced equally. You, on the other hand gained a $5.00 cash asset but you lost a $5.00 loan asset. You are better off cash wise, but you no longer have a loan due you. Your side of the transaction is in balance because you have gained and lost equal amounts of assets. The crux is that the debt is eliminated by paying it back.

How Does the Government Discharge Its Dollar Debts?

Okay, this is going to sound bizarre, but there is no way the federal government can discharge its US dollar debt to you by paying it. Think about it. If you have $5.00 (a $5.00 bill, $5.00 in your checking account, or whatever), it means the federal government owes you $5.00. Remember that US dollars are a form of government debt. If the government then pays you another $5.00, it does not discharge the original debt; it simply means that the government is now in debt to you for $10.00. This is because US dollars are IOUs, that is, federal liabilities. Paying money to you does not reduce the federal liability - it increases it. Consequently, the federal government cannot discharge or reduce its debt by issuing more money. No. The federal government can reduce its debt (at least the debt inherent in the US dollar) only by taking those dollars back! Stop now. Think about that. Only by taking those dollars back can the government pay its debt to you. Stated another way, the federal government can discharge its US dollar debt to you only by your paying it! Got that? The government owes you money and the only way it can stop owing you that money is for YOU to pay that money back.

How does it take money back? It taxes you. By taxing you the government removes your asset, removes its liability, and voila, the liability, the asset, and, thus, the US dollar are all gone. Once back in the hands of the issuer the IOU no longer exists. The debt is gone, accounted out of existence. Taxes can be viewed as the government reneging on its debts. Federal taxes simply remove money from your pocket and from the money supply.

So Are US Dollars Really Debt?

If the person to whom the debt is owed must pay off the debt to the debtor, as with federal taxes, is it really debt to begin with? Is the US dollar, although clearly a federal liability, really a federal debt to you the holder? You can decide that for yourself. If US dollars are not debt, then does the federal government actually accrue any debt by spending? You can decide that also.