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:

  1. 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).
  2. 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.
  3. 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:

Karl Widerquist

About Karl Widerquist

Karl Widerquist has written 873 articles.

Karl Widerquist is an Associate Professor at SFS-Qatar, Georgetown University. He specializes in political philosophy. His research is mostly in the area of distributive justice—the ethics of who has what. He holds two doctorates—one in Political Theory form Oxford University (2006) and one in Economics from the City University of New York (1996). Before coming to Georgetown he was lecturer in Political Theory at the University of Reading (UK) and a Murphy Fellow at Tulane University in New Orleans (LA). He has written or edited six books. He is the author of "Independence, propertylessness, and Basic Income: A Theory of Freedom as the Power to Say No" (Palgrave Macmillan 2013). He is coauthor of "Economics for Social Workers" (Columbia University Press 2002). He is coeditor of "Basic Income: An Anthology of Contemporary Research" (Wiley-Blackwell 2013), "Alaska’s Permanent Fund Dividend: Examining its Suitability as a Model" (Palgrave Macmillan 2012), "Exporting the Alaska Model: Adapting the Permanent Fund Dividend for Reform around the World" (Palgrave Macmillan 2012), and "the Ethics and Economics of the Basic Income Guarantee" (Ashgate 2005). He is currently under contract to author or coauthor two more books: "Prehistoric Myths in Modern Political Philosophy" (Edinburgh University Press 2014) and Justice as the Pursuit of Accord (Palgrave Macmillan 2015). He was a founding editor of the journal Basic Income Studies. He edited the USBIG NewsFlash for 15 years and the BIEN NewsFlash for five years. He is one of the founding editors of Basic Income News on the basicincome.org website. He has published more than a twenty scholarly articles and book chapters. His articles have appeared in journals such as Political Studies; the Eastern Economic Journal; Politics and Society; and Politics, Philosophy, and Economics.


  • roger erickson

    It’s even worse than that. We went to a fiat currency in 1933, then went back to a quadi-gold std at the Bretton Woods conference in 1944 (all cooperating currencies remained fiat, all were convertible to $US [at FIXED rates!], and ONLY the $US was convertible upon demand to gold, and ONLY by other governments). Talk about a naive, manipulated system! It only makes sense given the absolute world domination of the USA post WWII. We’ve acted like the richest kid on the block ever since, so rich that we don’t even HAVE to think critically.

    The REAL rub? How do you tell the 99% that they, their parents & their grandparents never needed to be taxed for SocSec at all? How do you tell people that 3 generations of the poor have been taxed ONLY to hold ’em down? But no form of corporate subsidy has to be “paid for” by a tax on their income.

    Social Security, of course, is no different than the DoD, NASA, DoJ or any other public agency & service. If we can’t run out of public initiative, then SocSec can’t go bankrupt.

    Now, please go make some more complacent citizens VERY angry about this travesty.

    • Phoenix

      Roger, thank you very much for commenting. It is amazing how we can live in a “matrix”, thinking the money world operates one way and then discovering it is all together different from what we have been propagandized to believe. To carry the matrix analogy further, some people can stand to take the red pill and some can’t. I wrote this piece hoping to get comments and thoughts from others. I find that I often learn the most in the Comments Section of essays and opinion pieces. Thank you again for taking the time to respond.

  • I have a hard time convincing MMTers that we’ve been off the gold standard since 1933, because their mantra revolves around August 1971 when Nixon freed we monetary slaves.

    But my Dad, a monetary reformer in the 60s, and many monetary historians quickly point to an earlier than ’33 fact of American monetary history, sovereignty and democracy.


    Modern progressives are ignorant of the important political role played by the Greenback Party in the decades after the death of Lincoln.

    MMTers are adjusting their date for monetary emancipation, but the fact is that the government’s public money administration could run the money system(Issuance, Valuation and Use), even on a managed and regulated gold standard. There has been a great deal left on the bankers’ table all these years.
    I do not agree on a lot of the MMT construct about money.
    But their core belief in using the monetary system to achieve economic democracy is laudable.
    The Kucinich Bill in the Congress, HR 2990,

    accomplishes these social objectives without the monetary mystery that is at the heart of MMT.
    For the Money System Common

  • Brad Lewis

    Thanks for a great article with an excellent summary of some of MMT. Ironically, MMT – Modern Monetary Theory–is not really theory so much as observation that is used to create a sensible understanding. If we think of money as the lubricant of the economy, fiat money offers a low-cost way of creating the right amount. Create too little and you starve the economy of the credit needed to do daily business. Create too much and you have inflation. Add to the net supply and, as Phoenix indicated, the private sector saves!

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