The word “deficit,” when applied to the Government financial accounting of a monetarily sovereign nation, that is, one that issues a non-convertible fiat currency, with a floating exchange rate, and no debts in a currency it doesn’t issue, is a problem, because the label “deficit” when applied to such a Government doesn’t mean what most people think it means. As Michel Hoexter points out:
. . . The word “deficit” is a hold-over from conventional accounting and the era of the gold-standard when currencies were supposed to be fixed in their quantity by convertibility of the currency into a fixed quantity of precious metal. Deficit means primarily a “lack”, an “absence” and in conventional accounting it means being “in the red”, not having taken in enough income to cover expenditures. . . .
The term “deficit” in this sense can be properly applied to households, corporations, other private and inter-governmental organizations, and states and nations that aren’t monetarily sovereign such as the US States and the members of the Eurozone. In all these instances the governments involved can run out of money, and the more deficits they run, the more the risk that they will become insolvent increases. But when that term is applied to monetarily sovereign nations, then the “deficit” notion is profoundly misleading because neither the size of the “deficit,” nor its accumulation over time when it is accompanied by selling debt instruments, makes a bit of difference when it comes to solvency, because monetarily sovereign governments always have unlimited power to issue currency, if they decide to remove all self-imposed constraints on currency issuance and use that power.
There’s a corresponding problem with the term “surplus” as applied to monetarily sovereign Government accounting. Surpluses are supposed to represent the situation where tax revenues exceed spending and the gap between them is described as net “savings” increasing the financial assets of the Government running the surplus. A surplus over a particular time period is viewed as being “in the black” for that time period, as a good thing for the Government doing it, and as reducing the “debt” of that government giving it an increased financial capability to spend in the future.
The term “surplus” in this sense can be properly applied to households, corporations, other private and inter-governmental organizations, and states and nations that aren’t monetarily sovereign such as the US States and the members of the Eurozone. In all these instances the governments involved can accumulate surpluses as financial assets, and the more surpluses they run, the more the risk that they will become insolvent decreases. But when that term is applied to monetarily sovereign nations, then the “surplus” notion is also profoundly misleading because neither the size of the “surplus” during a time period, nor its accumulation over time, makes a bit of difference when it comes to solvency, or adding to the government’s capability to spend in its own currency either currently or in the future.
So, from the viewpoint of Modern Money Theory (MMT), both the terms “deficit” and “surplus,” and also the term “national debt” are misleading when applied to monetarily sovereign nations. Recognizing this, some of us have been kicking around the idea of using new terminology for talking about national financial accounting. In the recent post by Michael Hoexter I referred to earlier he proposes:
“Instead of a “deficit”, I would submit that the excess of spending over taxes collected represents the government’s “net contribution” to the economy. One can either expand or contract this phrase depending on the needs of the situation: it could be made more explicit by expanding it to “the government’s net monetary contribution to the growth of the economy” or shorten it to “the contribution”. “Contribution” denotes the adding of something without necessarily the subtracting of something else from someone else.”
I think this proposal is on the right track, and I agree with the underlying idea as I understand it. But I don’t think the terminology is quite what we need. The reason is that the “net monetary contribution” is an improvement over “the deficit”; but it doesn’t address “the surplus” meme, and the false idea that there can be national financial savings above and beyond the unlimited capability of a monetarily sovereign nation to create its won currency.
We could say that “the deficit” should be called the net positive monetary contribution of the Government to the economy, while “the surplus” is the net negative monetary contribution. But I don’t think this will work as well for spreading the MMT point of view as other alternatives we may arrive at, because as soon one gets to terminology like net positive and net negative contribution, people’s eyes glaze over more than they do when one uses the “deficit” and “surplus” terminology.
So, here’s another proposal for renaming/reframing key terms in monetarily sovereign government accounting.
— When a monetarily sovereign government spends more than it taxes during a specific time period, that is Government creation of net financial assets in the non-government sector. Let’s call it “the addition.”
— The accumulation of net financial assets created over time is national net financial savings, let’s call it “the national credit.” The current total of debt instruments subject to the limit is equal to “the national credit.”
— When a monetarily sovereign government taxes more than it spends during a specific time period, that is Government destruction of net financial assets in the non-government sector. Let’s call it “the destruction.”
— The accumulation of net financial assets destroyed over time is national net financial depletion. Let’s call it “the national depletion.”
So, to summarize, for monetarily non-sovereign households, organizations, States, and Nations, all of which are users of the currency of others, or subject to markets in those currencies, we can talk about:
— the household, organization, or national deficit;
— the household, organization, or national debt;
— the household, organization, or government surplus; and
— the household, organization, or government savings.
But for monetarily sovereign nations (which all have an unlimited capability to issue their own currency) we must talk about:
— the government addition;
— the national credit;
— the government destruction; and
— the national depletion.
Now let’s open up this proposal for discussion!
While I appreciate the contribution to this discussion on MMT semantics, “destruction” still seems off the mark a bit. my reasoning is that under the gold era reasoning it would be destruction of the tangible currency “Erasure” seem closer in the context of fiat credits in an accounting context, but still lacking.
Perhaps “foreiture” is a better choice in the context of fiscal policy in that the fiction of a budget “surplus” is not possible without first there being an allocation by legislative decision making, as muddled as that process may be in vivo. Tracing a history of these ideas seems to have a value here.
Bill Clinton after all chose to not allocate funds that had been approved in effect forfeiting the contribution of the allocated funds into the non-govermental economy, and thereby reducing the national/sovereign net contribution. I’m not clear here if his boasting was based upon the subtraction from the legislated budgeted allocations of the collected taxes, as in full bore idiot fiscal economics, or merely posturing for the media and without even an inappropriate estimation. The destruction of either paper currency as a method of extinguishing units delivered to the Federal government in payment of fines or of taxation remains apt, was probably too reality based for political triangulation.
I don’t know that there was ever a direct subtraction of taxed currency units collected from units allocated by legislation or by executive either under the Greenback utility or the Gold regime which followed. This would give more weight to the “forfeiture” semantic. Certainly not during the Free Banking period for several reasons, though the private state based franchise to create debt based currency served a range of motives, there was little lack of a polygamy of currencies. I am also curious what rhetorical logic was used to ratify national contributions (aka national deficits) in each fiscal context. Though under the Continentals there was also massive counterfeiting by the British, I would guess that there was no consideration at all of even an analog to national net contribution other than winning under the aegis of the mercantile north and its slave owning south coalition of the captured “Continental Congress. This then raises the question of why then the rapid transition to a faux commodity basis under the redemption at full face value of state related debt and related bond instruments. The effects of the British counterfeiting does not seem to be enough explanatory power. To use a double negative, it could not have been unintentionally a monetary capture by private interests of the national net contribution. My side point here is also the utility of these finer semantic points relative to the history of monetary policies. This is partly in the shadow of Minsky’s comparison between the Union and the Confederacy on fiscal policies. The national accounting books seemed to have been intentionally “cooked” along the way, and this looms to the scale of a thesis.
thanks for this rolling discussion, Tadit
Eliminating “contribution” is an excellent contribution! To adhere still closer to accounting terms, I offer a minor change:
– “annual budget credit” and “national credit”;
– “annual budget debit”;
and since accumulated financial asset destruction back to George Washington has little meaning, we must treat destruction in a more restricted sense:
– “accumulated budget debit” (over a specified period).
I like these terms.
I would suggest terminology that everyone is familiar with for the sovereign currency issuer:
1. net government deposit (or contribution)
2. national account balance
3. net government withdrawal
4. national account balance
Just like your personal checking account.
Considering different audiences, it strikes me that MMT would want to appeal first, to those, today, who are most in need of being disabused of gold standard principles but don’t understand WHY those principles are different from the income/expenditure principles they adhere to in managing their check books.
“sunflowerbio” is on the track I support and with a bit more elaboration would capture the interest of the average checkbook manager.
Examples could be easily developed using everyday Federal gov expenditure sequences and familiar check book terminology.
After all the text for Macro Econ 101 is significantly simplified compared with that for 401. Aim for the low hanging fruit first.
Hi Tadit, Good points, but I’m not trying to create continuity with the gold standard period, and also this is about memes; “erasure” and forfeiture aren’t nearly as impactful as “destruction;” and taxing does take high powered money out of the non-Government sector and, in that sense, destroy it. One can debate whether crediting a Treasury Tax and Loan Account following debiting a private account for a tax payment is best seen as destroying private money and then creating new money in the TTL account, vs. merely transferring money from a private to a public sector account; but I don’t think it’s debatable that whatever construal you place on the debiting and crediting; it does subtract and, in that sense, destroy high powered money in the private sector.
Anyway John Marshall famously said “the power to tax is the power to destroy.” So, I thought it would be a good idea to take him literally.
The beauty of this terminology, beside its familiarity, is that the “national debt” becomes a positive “asset”, and withdrawals are seen as destruction of the asset.
I’m not sure what inaccuracies may be inherent in this, but simply putting it as ‘adding’ (deficit) or ‘removing’ (surplus) money to/from the wider economy, is simple and concise enough; I wouldn’t get any more complicated than “net addition” or “net removal” of money.
That keeps it relatively neutral/factual, as well as simple, so people will understand that better and even faster than they would deficit vs surplus; leave describing how “net addition” and “net removal” of money is good/bad until after (especially since whether or not either is ‘good’, depends upon inflation).
You want to avoid any terms which unnecessarily obfuscate understanding, because that is what scares people away from economics, and (in other economic schools) is what is used to deliberately obfuscate/confuse people, so they give up trying to understand and accept on faith (i.e. such obfuscation is used to propagandize).
WERE the government, IN FACT, the monopoly issuer of the sovereign fiat currency, as called for in the Kucinich reform proposal, THEN,
” When a monetarily sovereign government spends more than it taxes during a specific time period, that is Government creation of net financial assets in the non-government sector.”
But only if you are really ‘net-financial-asset’ minded.
You see, under the Kucinich Bill, which remove all of the self-imposed constraints against having a government monopoly currency issuer, real common-wealth is created by untaxed, but budgeted, government spending, and it is up to those receiving that common-wealth payment to turn it into ‘financial assets’ .
Not, in theory, but in reality.
Again, under the actual reforms of HR 2990, rather than…
“”The accumulation of net financial assets created over time is national net financial savings, let’s call it “the national credit.””, they would actually be accumulated common wealth.
If we lose the net ‘financial assets’ fetish, then there is no further reason to explain the positive impact of money issuance via a true public monopoly.
And once the rationale for real public money issuance has been provided, and both the method for doing so and the resulting accounting identities are provided, no further fiat-money-speak will be necessary.
It was done for Greenbacks.
It can be done for saving the national economy from the pending financial collapse.
Thanks.
I know it’s difficult to replace something with nothing… but isn’t that what is needed here?
In a previous article on this site, Mr. Firestone wrote what I thought were two of the best paragraphs I’d seen about the “fiscal cliff”:
The size of the deficit or surplus is not a proxy for such real outcomes, and responsible fiscal policy should not be attempting to maximize, minimize or optimize either deficits or surpluses, rather than the real outcomes of government fiscal policy.
Bingo! It doesn’t matter what you call it… the deficit tells us nothing useful. The most renaming it could do would be to get people to jump to different false conclusions.
I like this approach Joe, since it flips the meaning of both federal deficit and surplus to focus on the impact on the private sector, which is what people most directly relate to and should really care about. I like the “government addition (destruction) of financial assets,” but am less enthusiastic about the “national credit” and “national depletion” terminology (especially the former).
What about using “national net financial savings” (which you used in your post) instead of “national credit?” Though longer, it seems more clearly meaningful to me.
In any event, this seems like progress to me. Thanks!
How do we deal with the pervasive idea of “borrowing?” Since the money power belongs to all citizens of our country, are we not merely “managing” our own money?
The following (simplicity?) helps keep my thinking straight about MMT
For a “Monetary Sovereign”:
Spending = Currency creation
Taxing = Currency destruction
Deficit = “Savings created” (for private domestic or foreign entities)
Surplus = “Savings destroyed” (for private domestic or foreign entities)
Spending is: 1. Coins put in circulation
2. Notes put in circulation
3. Keystroke $$$’s put in circulation
Taxing is: 1. Coins paid to Sovereign
2. Notes paid to Sovereign
3, Keystroke $$$’s paid to Sovereign
Borrowing is silly, its only utility is give “guaranteed safe place” for “savors” who can think of nothing better to do with their “savings”
Works for me. Thanks
The Fed sets interest rate targets to guide how much money is in the economy. Banks create money through issuing loans, the Fed through selling bonds. That money is extinguished when those debts are paid back.
Under MMT, what is now reserved as fiscal policy would determine how much money is in the economy instead of interest rates for debt instruments.
When government spending is more than government taxation, money would be created. When taxation is more than spending, money would be extinguished.
Is there a money-as-economic-heat analogy to be developed here, where money creation adds energy to the system and energy is removed from the system when money is extinguished?
People already understand raising interest rates to cool off an economy that is expanding too quickly.
Firstly, I don’t think changing the commonly used terminology is going to help make matters clearer or simpler or help promote the understanding of MMT to the wider community. The reason I think this is because it places a further burden of explanation at the door of MMTers. At least this is my view under normal circumstances.
However, I think this post is helping me to investigate my own understanding of MMT. I am not a trained economist and I have a couple of issues in my mind that I would like to ask for some help with please.
When a sovereign government wishes to spend more than it has received in taxes over the accounting period then it needs to acquire those funds somehow. The problem I have is that there are various methods that a government capable of issuing its own currency can use to acquire the funds and the method chosen determines what I think the appropriate terminology should be for naming the difference between tax revenue and government spending.
For example, the government can sell a bond to the private market. In this case the funds are debited from a private bank account and credited to a government bank account. The government can then pay the public sector wages and so forth. In this case the government has momentarily removed spending power from the economy and only puts the spending power back into the economy as it spends the full amount of the loan. The government had a deficit and dealt with it by selling a bond and subsequently has a debt to that private investor. In a sense the government bond is an IOU and the government has created more IOU’s than it has destroyed over the accounting period. In this sense the deficit manifests as a private sector surplus and you could say that the government has made an addition to the economy and call it ‘the government addition’. This might be thought of as adding to the ‘national credit’. But for this type of deficit funding I do not think the new naming is appropriate because there is not any additional spending power in the economy because the bond form of IOU is not spendable in the way that the dollar form of IOU is spendable. The fact that the government bond form of IOU can’t be spent, and therefore cannot create wealth, is not an addition to the real economy in my mind.
Alternatively, instead of sell a government bond to the private bond market – the government could sell a bond to the central bank. There are some serious advantages to this approach. Firstly, there is no subsidy in the form of interest payments to be made to the wealthy owners of bond market funds. Secondly, the additional IOUs flowing into the economy are spendable and therefore capable of creating wealth in the real economy. Thirdly, this approach does not add a penny to the national debt. Fourthly, this approach to funding the deficit can be used to replace quantitative easing and be much more effective at stimulating the economy than conventional QE. We can call this method of deficit funding Alternative Quantitative Easing (AQE). If this approach were used then the deficit could very well be re-named ‘the government addition’ and the accumulation of extra spendable IOUs be regarded as ‘the national credit’. There is no debt to speak of.
Now I sense a big opportunity with the new naming convention!!! If a sovereign government is desperately seeking to stimulate growth in the economy then the new economic thinking (MMT) can be employed to save the day and explained using the new terminology that comes with it. The government can deliberately lower taxes so that it can employ AQE. The government can also increase spending on the moral goods infrastructure (see The Populist Manifesto @ Amazon). AQE is used to create ‘the government addition’ and added to ‘the national credit’. AQE could also be used to reduce the national debt by paying off creditors at a rate that pegs general inflation to something like 3 or 4% while moral goods deflate in price.
Psychologically this plays out beautifully with the public, the media and politicians alike! All are aware of QE and have been for a long time. There is no QE hysteria. Couple this with the change of terms and the deliberate nature of the shortfall and we could have not only a recipe for economic success but a propaganda coup too.
Please give thoughts / corrections thanks in advance.
Joe — it’d be great to rewrite the taxonomy.
But, in case no possibilities (Michael’s, yours, others stated above, …) seem likely to gain sufficient traction, here’s an attempt at getting past what is arguably the first hurdle, namely that both “deficit” and “debt” sound negative (beginning with “de-“).
Focusing on a smaller target, what if we frame it as “The government can print (or mint) as much money as it deems appropriate. It only has to pay back what it borrows from the sale of bonds. So, what it prints or mints is not something owed, a “debt” per se and doesn’t add to a deficit.”
I offer this because it may be too much to flip people’s understanding all the way in one swoop. This parsing lets them maintain the terms (deficit, debt) they are familiar with, but reduces those terms in scope and targets them more appropriately.
This would get across a sense of “issuing currency might very well be better than borrowing”. Any elaborations/extensions/clarifications could be folded in later once we get this foothold.
Again, I’m not trying to precise and perfectly correct at each stage.