OPINION: Money Trees, Digital Deficits, and Ubiquitous Can Kicking
In December of 2010, CBS aired a segment of 60 Minutes in which reporter Scott Pelley asked Chairman Ben Bernanke a question about the bailout money provided to banks during the 2008 fiasco: Pelley asked, “Is it tax money the Fed is spending?” Bernanke replied, “It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing.” “You’ve been printing money?” Pelley asked. “Well, effectively,” Bernanke said.
Did you get that? The Chairman just told us that money is created out of thin air or rather is created with digital entries. When I first learned of fiat currency, I remembered a question my mom used to ask: “do you think money grows on trees?” Now, I would answer, “they don’t even need the paper from trees!” Maybe, just maybe, we need to educate ourselves about the creation of money—otherwise, we become like a child who cannot count, staring uncertainly at the coins returned to us by a store clerk with no means to determine whether or not we are short-changed.
Warren Mosler, a former Wall Street investment banker, has a book available at no cost on line called Seven Deadly Innocent Frauds of Economic Policy. In that book, he describes how the system truly works—how fiat money is created to cover the needs of the U.S. government by the Federal Reserve by simply adding digits to accounts. Mosler points out that when the U.S. went off the gold standard in 1971, a new monetary system came into play, yet many of the old gold standard rules continued to operate. Some economists, mainly at the University of Missouri-Kansas City, subscribe to this theory, referring to it as Modern Monetary Theory. They have a web site called New Economic Perspectives with contributors such as Bill Black, author of The Best Way to Rob a Bank is to Own One.
If Mosler’s description of how our monetary system really works is correct, then the following holds:
- The United States is a sovereign money creator; it is not like the states within the United States or Greece or Spain, who are all currency users. This means that the United States can never run out of dollars, as it simply creates them when necessary. It can never default on a debt unless intentionally–as when the Republicans tried to make a point (when they held out on raising the debt ceiling and simply refused to pay). It will always have the ability to pay. (All the Chicken Littles were running around screaming that our credit rating would be downgraded, and it would cost more to borrow. Yet when Standard and Poors downgraded the U.S. from four stars to three, the cost of interest on treasuries went down).
- Since the U.S. is a currency creator, it does not need your tax dollars or mine (or money from the Chinese or our grandchildren) to fund anything. It needs tax dollars to cool off the economy. As Mosler says, think of deficit spending as the spigot in the bathtub—think of taxes as the drain. Taxes become a way to limit someone’s buying power so that the tub doesn’t overflow (inflation). The political question now becomes whose buying power shall we limit—not how can we make everyone pay “their fair share”—an absurdity under the current system.
- The debt? Well, it simply represents all the money created to date by the U.S., and that money actually resides in the bank accounts of the private sector. If you quench the debt, you have to call that money back, which will lead to a recession/depression.
Mosler calls for a payroll tax holiday. As he points out, the FICA tax is a highly regressive tax, and is totally unnecessary. Medicare and Social Security should be funded just as the wars and all other government expenditures are funded. Mosler says that the creators of the Social Security gave it the moniker “Trust Fund” as a “useful fiction.” They understood that how you get people to think of a thing makes a difference in whether or not they will accept it.
If the American people understood how our fiat system worked, they would no longer feel like it was their tax dollars supporting someone on the “dole.” They could see through false analogies such as comparing the U.S. government (currency creator) with the theoretical mom and pop around the kitchen table (currency users) struggling to pay their debts. They would be more inclined to reduce the buying power of those who actually have buying power, and more inclined to give buying power to those who do not now have it. In such an atmosphere, I think BIG would be more acceptable as the moral hurdles now thrown at it would be far less. Given the current lies and deceptions about the economy, it will be all we can do to keep Social Security and Medicare intact. Unless something is done to educate the American people as to the true nature of the economy, the “austerity” plans that Simpson/Bolles/Peterson/Ryan advocate will be implemented—bringing more unnecessary suffering and make any hopes for BIG a pipe dream.
For more on Modern Monetary Theory go to: