Paying Off the National Debt

The national so-called "debt", all $20 trillion of it, will belong to the Republicans about four weeks from now. It cannot happen, but let's suppose they follow through on their neoliberal ideology and decide to pay the "debt" off. Just suppose. First, how would they pay it off and second, what happens to all that money when they do pay it off?

First, the easy part, paying the debt off. The national "debt" consists almost entirely of US Treasury securities held by individuals, businesses, retirement funds, and governments from around the world. All it would take to pay off the so-called "debt" is to cancel all the Treasury securities, transfer the $20 trillion out of the security accounts at the Fed, and give the money back to the people who invested in those securities. Poof! Debt gone. Balance zero.

Then what?

Well, all of a sudden the world would be full of extra US dollars on the loose and millions of people who must figure out what to do with them. People had those $20 trillion in Treasury securities because they wanted their extra dollars protected in a safe, secure, virtually risk-free investment. Now, they must place those dollars elsewhere, but where? Very little of it would be spent because these were investment dollars, extra dollars that people chose to hang on to for various reasons. Some of it probably would go into other, more risky non-federal savings accounts. A trickle might be repurposed to more risky business ventures. But my guess is that the bulk of it would go into relatively secure foreign government bonds. Remember, the $20 trillion was "safe" money, no risk, small return money because people wanted it that way. They likely will look for another safe haven, even if overseas.

So, paying off the national "debt" does nothing for the US government except to remove its major inflation-fighting tool, put dollars into foreign accounts, strip the Fed of its major interest-rate setting tool, and probably force the Treasury into changing its accounting procedures and issue dollars strictly as a debit to a spending account with no incoming credits.

One thing for sure, it would prove to the debt-hawks that the so-called national debt really is a private sector asset and not the tax curse on our grandchildren that they think it is. Many would probably soon wish we had it back.

The Secret Language of Conservatives

My US Congressman, Walter Jones (R-NC), loves to claim that federal spending is "out of control" and that the federal debt will spell financial disaster for our kids and grandkids. Congressman Jones has voted against every stimulus bill and every debt ceiling increase that has come up during his tenure in the House of Representatives. You could be forgiven if you accused Rep. Jones of being tight-fisted or niggardly. You might even confuse him with Ebenezer Scrooge.

But I have noticed that Rep. Jones has no problem voting for expenditures for expanding the military presence in North Carolina, or for improving veteran care, or for protecting North Carolina fisheries, or for stabilizing the beaches along North Carolina's shore. He does, however, want to defund Planned Parenthood, cut welfare, privatize Social Security and Medicare, and pass a balanced budget amendment, all of which are deeply rooted in right-wing ideology.

Well, I have decided that Rep. Jones and his so-called "conservative" cohorts in Congress and the Senate are not really stingy at all. Rather, they are devious. They are not really worried about "out of control" spending, deficits, or federal debt at all. They just want the public to worry about those things. Why? To cloak their ultra-conservative ideological agendas from the public.

Jones and crew know that many constituants may not be as rabidly conservative as they are. In fact, many of their constituants are beneficiaries of the federally funded programs that he and his cronies despise, programs like SNAP, the Affordable Care Act, Medicare Disability, and many others. While there may be disagreement on the ideologies behind various federal funding initiatives, Jones and company are pretty safe in assuming that nobody wants the government to go bankrupt. So these devious politicians have developed a very effective code language that they drag out when their ultra-conservative ideologies are challengable. If a bill promises to garner too much liberal support for Rep. Jones to bear, all he has to do is say that the bill will increase the deficit and send us deeper in debt with out of control spending. That rhetoric brings out the fiscal conservative in even the most left-wing constituants. It's a very effective code.

Of course, we know from studying monetary sovereignty and modern monetary theory that the federal government cannot involuntarily overspend or go insolvent because it alone issues the free-floating US dollar and can do so with no limit as long as there are goods and services available for it to spend dollars on. If Jones knows this, he is not fessing up to it. To do so would, in fact, break the code.

Social Security Increase! Yay! Er....

The good news is that Sue and I each got a Social Security cost-of-living raise for 2017. Wonderful! The bad news is that the Medicare premium that is deducted from our checks went up by exactly the amount of the raise. So our SS checks will not change at all. Basically, the increased Medicare premium accounts for the full increase in the cost of living.

This is especially egregious to me because I know, unlike most of you, that the Medicare premium is not a premium at all but a tax. The federal government does not need money in order to spend money, even on Social Security and Medicare. Every dime of Social Security and Medicare outlay is brand new money created by the federal government as it is spent. That's how it works. A dollar is simply a promise from the federal government to you. It cannot recycle that promise (money) any more than you can recycle a promise because the promise (tax dollars), once collected, ceases to exist. But the people who run the government, Congressmen, do not know this. They are dumbbells. They still think taxes pay for federal spending. The Treasury people know that's not the case, but they aren't saying anything because they are afraid of inflation and they think that by extracting dollars from the money supply and destroying it via taxation there will be less inflationary pressure on the economy. They too are dumbbells. And we are all dumbbells for letting both those groups continue to think that way.

SS and Medicare explained here.

Taxes explained here.

With thanks to Geoff Coventry for the links.

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.

So You Don't Like Welfare, Huh?

1935 - A time when the USA still promised to redeem dollars in gold (internationally but not domestically). It was critical then for the government to limit the country's money supply to an amount that did not exceed by too much the amount of gold it owned. Defaulting on its promise to redeem dollars with gold could have brought the entire monetary system down and taken the economy and the country with it. To limit the money supply, the government systematically destroyed dollars by taxing the people.

In that year, 1935, President Roosevelt and Congress concocted a federal welfare program called Social Security (actually it was called The Old-Age, Survivors, and Disability Insurance Act) in which people of retirement age, and some others, could recieve money from the government in an amount based on what their working salaries had been. But Roosevelt and Congress had a problem. They knew that Social Security expenditures would increase the money supply well beyond the amount of gold on hand. They knew that they would have to raise taxes to drain enough money from circulation to keep the money supply in check. But they also knew the people of the US would not stand for higher taxes. Then one of them had a brilliant idea. He said "Hey. Instead of just raising taxes, suppose we taxed a percentage of payroll dollars and instead of calling it a tax, let's call it a contribution. Then the people will think they are actually paying for their own retirement plans. Ha, ha, ha, ha, ha." "Good one!" said Roosevelt. "Let's go with that." And they did. Ever since then we have been thinking that the payroll tax we pay is not a tax at all, but a contribution to our Social Security accounts.

In 1971 the US abandoned the gold standard and it has not been necessary or advisible to limit the money supply so severely. Even though taxes have not been necessary since 1971, the payroll tax has remained and continued to drain dollars from the people and the economy. People have continued to be fooled that they were actually contributing to their Social Security accounts and they stand ready to fight if told that their Social Security is, in fact, a form of federal welfare..

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".