By Thornton “Tip” Parker
Nearly everyone believes that Uncle Sam is like a family that must get money before it can spend. But that is not true. A basic function of any sovereign government is to create and run the country’s money system. Unlike a family, the US government is sovereign. It creates money and can never run out. All the words about America’s financial limits mean nothing.
Years ago, our money was based on silver and gold. But that did become a limitation when economies around the world needed money to grow faster than metal was dug out of the ground. The US went off the gold standard in 1971, but we still act as if its limitations remain.
The economy is often shown as a circular flow of goods and services moving in one direction from producers to consumers, and money to pay for them flowing in the opposite direction. Like a juggling act, the flow keeps running until something interferes. Families that save interfere by removing some of the money. They also remove money when they buy more things from other countries than the US exports. The flow of goods and services slows down when money is removed unless some other party replaces it.
The sovereign federal government is the other party. It creates new dollars by spending more into the flow than it removes with taxes. The big bad deficits that haunt so many people are just new dollars that the government crates to replace dollars that savers and importers remove. Moreover, the federal debt that causes so much heartburn is just the sum of all new dollars created since the country began.
Truth in labeling would have deficits called something like “new dollars created” or “new savings” and the debt would become “total dollars created” or “total savings”. This is shown every week when savers bid to buy Treasury securities as safe places to put their dollars. The debt is not a liability that will burden future generations, it is an asset that present and future generations of savers will depend on.
The details of how the country’s money system works are complicated, but the basics are simple. Most of our money consists of bank deposits that are transferred electronically or by check. Behind most deposits are mortgages, credit card balances, and other types of loans. When things work well, banks create money as it is needed by lending to increase deposits and remove it when the loans are repaid. As the population grows, as people want to save, and as the country imports more than it exports, new money is needed to supplement the bank deposits. The government creates that new money by spending more than receives from taxes.
If you understand that paragraph, you’ve got it! You are way ahead of most Americans and nearly all our politicians.
The power of the money system is also easy to understand. Because the government creates money by spending more than it receives from taxes, it will always be able to pay its bills. Neither it nor any of its programs can ever be forced into bankruptcy. This means that there are no Social Security, Medicare, or Medicaid crises. While there is widespread unemployment, there is no financial reason not to help those in need or spend to create jobs. It is negligent to put off upgrading school buildings, roads, bridges, power grids, and water and sewer systems until they fail. It is gross mismanagement to force state and local governments to fire thousands of public service employees that could be avoided with federal revenue sharing. And it is a basic social failure to not educate our young and prepare them for life without burdening them with education debts.
There are limits: if the government creates too much new money, it can lead to inflation. But inflation is not a problem now, when millions of people are out of work or not earning adequate incomes because too little money is in circulation. If our leaders understood how the system works, they would see how easy it would be to prevent serious inflation with taxes.
None of the arguments against actions to improve the situation today are valid if they are based on the myth that because the government is like a family it can’t afford to spend beyond its income. In reality, the government is just the opposite, or a mirror image of a family.
Thornton Parker is the author of What If Boomers Can’t Retire? How to Build Real Security, Not Phantom Wealth. His email is [email protected]