The Penny Game

By Jonathan Denn

This demonstration will work well in the classroom or barroom. There are five levels, the first is designed for someone who knows nothing about sector balances, each level adds a new variable and complexity.

Level One

You’ll need three rolls of pennies and three people. One person is the “Government US”, the second is the “Private Sector US”, and the third is the “Foreign Sector.” For the sake of simplicity, G=Government, P=Private Sector, F=Foreign Sector.

The game starts with G having all the money. Why? Because the United States has a monopoly issuing the dollar, or in this case the penny. So, to begin with G buys goods and services from the private sector P, like paying the brave men and women in the armed forces, teachers, buying airplanes, ships, tanks, research, roads, all the things to serve the public purpose. Now some of these purchases go directly to the F, like humanitarian aid, or goods or services that are not available domestically or are cheaper oversees (or politically prudent). For this example, let’s crack open the penny rolls and capitalize the game (our country), and spend 100 to the (P)rivate sector, 10 to (F)oreign sector, and 40 remains with (G)overnment.

Now, each round is a year: (G)overnment buys 2 pennies worth of goods and services from the (P)rivate sector, and 1 from the (F)oreign sector. During this time the P and the F also trade with each other. But, as you know the US has a trade deficit so each round P will have to give 2 pennies to F. So here are the penny (or sectoral) balances per round/year.

Government=150, Private=0, Foreign=0

G=40, P=100, F=10

G=37, P=100, F=13

G=34, P=100, F=16

G=31, P=100, F=19

And ten rounds/years later

G=1, P=100, F=49

Oops, game over, (G)overnment is broke, and the (P)rivate sector is stagnant with zero growth. Now the deficit scolds want to lend G money and get (too) high rates of interest, and not have to do anything to earn it. Is that good or bad? Both, if you are retired and struggling, it’s nice to get a return on your hard-earned savings to live on. But, if you are just rich and lazy, we have ourselves a political or partisan question. The F may want to lend G some pennies (I mean, what else are they going to do with a foreign currency?) but this doesn’t make it into the first five rounds of The Penny Game.

I can hear the critics. They will say as money is drained from the private sector, prices will fall (deflation) to the point that US goods and services will favorably compete with the foreign sector (Hume’s specie flow mechanism, and thanks to Dan Kervick for pointing this out), so less than a penny will be going to F in the later rounds/years, let’s look at that in…

Level Two

Same three rolls of pennies, and the same three folks.

We’ll start the game again with G=40, P=100, F=10, but we’ve experienced about a 30 to 50% deflation. Now, here are the flows, G spends 2 pennies to P each round (it goes further) but 0 pennies to F, and P still sends 1 penny to F.

G=40, P=100, F=10

G=38, P=101, F=11

G=36, P=102, F=12

And the game ends after 18 rounds/years later with

G=0, P=120, F=30

The Private Sector is doing well, but G is “broke” yet again.

Yes, I know, just like the last round deflation will kick in even more, and maybe even get us to a point that we have no trade deficit. We’ll look at that in the next round. But first, who has the 100 pennies in the Private Sector that we began with?

The following is based on research by Professor Dan Ariely and was the basis of a viral video on wealth in America. To play along, take the 100 pennies and divide them in five equal stacks of 20. This is socialism.

But America is a meritocracy. So, let the three players redistribute the pennies from the lowest 20% to the highest, in five stacks—what they think would be the “ideal” distribution in a free, non-crony-capitalist country.

Now, here is the “actual” distribution of wealth in America. Make the stacks. See if you can get the top one to not fall down.

Top 20% 83 pennies
Next 20% 10 pennies
Next 20% 4 pennies
Next 20% 2 pennies
Next 20% 1 penny

How does the “ideal” distribution compare with the “actual”?

I came to Modern Monetary Theory through electoral and clean government reform. The duopoly is funded by the top 20%. Wouldn’t you think in a society this large there would be more than two competitive parties? By the way, the first step needed to do that is to Ban Single Mark Ballots. It probably won’t be too much longer before the bottom 60+% come to realize that the system is literally stacked against them. The one thing deficit hawks, doves, and MMTers should be able to agree upon is ending crony capitalism.

But, let’s get back to the example with government “broke” yet again…

Deficit doves say, tax P to keep G at a constant 40 pennies! But then P will be taxed into bankruptcy in 100 years, because every year there is 1 penny of trade deficit. The game’s end looks like this…

G=40, P=0, F=110.

Now deficit hawks say, cut G’s spending in half! Then we’ll finally have a balanced budget. Of course, there is no way to cut government spending in half and remain a civilized, well-protected society.

Isn’t this a fun game?!

Now, speaking of taxes, how in the world can the lower 60% afford to pay more? While P is on its slow road to bankruptcy, it will surely happen (happening) from the bottom up. Not pretty.

Level Three

So, let’s say, we have had such severe deflation that we no longer have a trade deficit. Government spends 2 pennies each round, and taxes 2 pennies from P, this is the famous balanced budget. So, the game begins and ends with

G=50, P=100, F=0

But in the next decade we will have a 7% population growth. So, let’s estimate that over the next three decades there will be a 20% population increase.  

Now the three players need take P’s five penny stacks, and decide how to make them six to accommodate an extra 20% of Americans. Each one represents 16.6% of the population. Since the same 100 pennies remain in the Private sector, the standard of living is dropping for at least the bottom 60%, because they essentially have no savings to draw from, and are maxed out in their borrowing. When you are done, return the pennies to the actual income distribution’s five stacks. This leads us to…

Level Four

So, how do we keep the standard of living at least the same for all and more Americans? Let’s assume that each year we have stable prices/zero inflation. We start the game with

G=50, P=100, F=0

But now, every decade we have to add 7% more pennies so, hopefully, they find their way to these new Americans starting out in their careers in the bottom 16.6%. So we get  

G=43, P=107, F=0

If not, then we have a decreasing standard of living.

But is staying even, enough? Unemployment including the disaffected, those who have dropped out of the workforce or are only working part time are about 15%. If we want to put them back to work then in the first round/year then G needs to provide the 15 pennies. That will raise them up from the bottom of the bottom 20% to the top of the bottom 20%. Doesn’t seem extravagant, does it?

G=28, P=122, F=0

If G gets to 0, then it would have to deficit spend 15 pennies. As MMTers know there is no need to borrow the money, it could just be issued and spent by Congress, if the law was changed. But interest rates presently are near zero anyway.

Level Five

Oh, by-the-way, a penny is worth, roughly speaking, $500,000,000 in all these examples. I really tried to make each coin be $1 Trillion, but alas, deflation is an ever-present threat.

Now, debt is sort of like the empty paper, penny rolls. The private sector swaps IOUs scribbled on them a promise to refill the penny rolls in the future. It endogenously increases the number of pennies in the private sector, but someday they have to be paid back. So they aren’t real shiny pennies—more like tarnished ones. Remember the real estate bubble?

There is a misnomer about the Private sector creating wealth. It operates within the velocity of pennies (how fast the money changes hands), and within the ranges of asset bubbles and private debt—all the Private sector does is compete with the Foreign sector and itself. For example, Amazon puts mainstreet bookstores out of business. Home Depot is a net serial destroyer of jobs because its staff is way more productive than the now-defunct mainstreet hardware stores were.

What P does well, is innovate to create goods that the Foreign sector wants. P can only get real pennies from G or F. That’s accounting not ideology as MMT and The Penny Game demonstrates.

Now, depending on the amount of pennies in circulation, even the temporary tarnished ones, there may be goods and services chasing pennies, or vice versa. This is also dependent on how much of P’s total coins are in savings and not circulating through society.

Since, as you can see, the top 40% of society must have a lot of pennies in their piggy banks (really, how much stuff can you buy?) so the most likely scenario is more deflation, as no one else can dip into savings, or borrow anymore against their homes, to chase goods and services. Maybe we could work ourselves into a trade surplus. But my $.02 is that’s not going to happen anytime soon or in these first five rounds.

So here’s the final round to put everyone back to work, account for the population increase, and to raise the standard of living of the bottom 60% (without transferring wealth from the top 40%!) from a total of 7 pennies to just 15 pennies which would look like this

Top 20% 83 pennies
Next 20% 10 pennies
Next 20% 7 pennies
Next 20% 5 pennies
Next 20% 3 pennies

Not socialism by any stretch of the imagination. 

Government would need to deficit spend approximately 37 pennies, assuming a zero trade deficit.

7 to account for population growth

15 to reach full employment

15 to support the poor and lower middle class

This would have to happen over a few rounds/years or at least a decade, and make sure it is targeted to the bottom 60%, perhaps through payroll tax holidays, guaranteed jobs, infrastructure spending, child care reimbursements, special bonds with higher rates for struggling seniors, and earned income credits or living wage adjustments.

I know some of you deficit hawks and doves are worried about hyperinflation but as MMTers know the deficit is sustainable and even contracts as long as the interest rate on Treasuries is below the growth in GDP rate. [per Scott Fullwiler*] And in case you are wondering, the Fed sets the overnight interest rate not bond vigilantes or foreign governments. So, this is something G or the People can control.

Who knew a few simple rolls of pennies could be so informative to the world economy?

A penny for your thoughts?

*

Jonathan Denn is editor of aGREATER.US, an internet platform to find a greater political platform for the US. He is on the board of the Clean Government Alliance, and has a popular column “the GREATER Platform” on IVN-Independent Voter Network.

16 responses to “The Penny Game

  1. The link (for the viral video) just takes me to YouTube, not the referenced video. Is there more information so I can find it? I’m pretty sure I’ve seen it, but didn’t save it, and can’t find it using any of the terms that came to mind. Thanks!

  2. Tom Whelan

    Here’s my two cents. P1 fishes, P2 picks berries, and P2 bakes bread before G mints his first penny. P1 catches 3 fish a day, P2 picks three berries a day, and P3 bakes three loaves of bread a day. P1, P2, and P3 agree 1 fish = 1 bushel of berries = 1 loaf of bread. The three Ps can barter or issue IOU’s to each other. The three P’s have no need for G’s pennies to produce, save, or invest.

    Then G establishes a monopoly on the issuance of currency. The introduction of currency does not increase the number of fish, bushels, or loaves. While currency is a measure of the nominal price of assets and claims, minting another penny, or tossing it in the river, does not increase or decrease the amounts of real assets or claims.

    From an accounting perspective, MMT treats currency as if it gives G a claim, in an accounting sense, on every penny denominated asset.

    • Yes, the claim is taxes.

      • Tom Whelan

        G’s honest claim against private resources is taxes. But when MMTrs go on to argue that G can discharge its liabilities with monopoly money (pay liabilities levying taxes on assets or incomes), monopoly money functions takes private wealth indirectly every bit as surely as does a direct taxation.

    • “The introduction of currency does not increase the number of fish, bushels, or loaves.”

      First (and least important) there are surely real gains that follow the introduction and acceptance of legal tender. Second, and far more relevant today, is that in a financial economy, when there is a shortage of net financial assets, real output runs below capacity (of full employment if you prefer). A large output gap clearly implies that enlarged sovereign deficits will increase the amount of real goods and services produced and consumed.

      “While currency is a measure of the nominal price of assets and claims, minting another penny, or tossing it in the river, does not increase or decrease the amounts of real assets or claims.”

      See above.

      “From an accounting perspective, MMT treats currency as if it gives G a claim, in an accounting sense, on every penny denominated asset.”

      Not sure how you arrive at this. MMT says that a sovereign G can issue currency to provision itself with real goods and services. I’ve never heard that extended to a claim on every asset. What’s your logic here?

    • P1, P2, and P3 agree 1 fish = 1 bushel of berries = 1 loaf of bread. Never happened, anywhere, before states, and their creature, money.

      The three Ps can barter or issue IOU’s to each other. The three P’s have no need for G’s pennies to produce, save, or invest.
      Barter is a figment of the neoclassical imagination. As is a unique unit of account and consistent relative prices before a state. On the other hand, the IOUs developed into the states’ monies. State money, fiat money is a kind of credit money. The credit of the state. Read Mitchell Innes & the Mitchell Innes volume. Read Geoffrey Ingham, etc.

      Then G establishes a monopoly on the issuance of currency. The introduction of currency does not increase the number of fish, bushels, or loaves. While currency is a measure of the nominal price of assets and claims, minting another penny, or tossing it in the river, does not increase or decrease the amounts of real assets or claims. The point is that it can. Money is not neutral. Saying it is is tantamount to saying “the division of labor is neutral”. A modern economy saves up its pennies (tosses them in the river). This is an obstacle to production of fish, bushels and loaves, which in a modern economy depend on the movements of pennies, which is obstructed by penny saving. So the state minting pennies, in return for valuable things from the private sector, e.g. JG labor, definitely can create real assets. By definition it will modify the quantity of claims, see below. But the increase in productive power caused by money and finance is so great, the scope of division of labor and stable expectations of the future so beneficial, that the usual introduction of unemployment attendant upon a monetary economy does not negate this increased productive power unleashed by wider coordination of economic activity engendered by the state. And the state’s currency issuance monopoly does increase, by definition the number of the abstract rights to perform economic activities, the rents that the state sells in return for its IOUs, its currency.

      From an accounting perspective, MMT treats currency as if it gives G a claim, in an accounting sense, on every penny denominated asset. Of course it does, tautologically. G, which has the unique power of issuing the unit of account penny (in a modern economy) by definition can claim every penny denominated asset (asset which is priced in pennies, the state’s pennies.) This is the state’s ability to levy real taxation (taxation in kind) by exchanging the pennies it mints at will for penny denominated assets. If it couldn’t do this, then the asset would not be accurately described as penny denominated.

      As usual, these objections just boil down to the standard ones: money doesn’t exist, full employment is inevitable, money is neutral stuff. Which boil down to not understanding what money is.

      • Tom Whelan

        Galgacus:

        Salt, gold, beads, beaver pelts, and virtually every staple used by human beings has been traded, at one time or another, for different things at one time or another. During the depression, when money was too scarce, barter increased in an attempt to fill the shortage of this money as a medium of exchange. During WWII, people traded ration coupons in one good for ration coupons in other goods: meat coupons for coffee coupons, coffee coupons for cigarettes, coupons of other un-rationed goods, and coupons for money, and so on. These exchanges, too, are forms of barter. If you assert that, as a historical fact, barter never happened, never served as the primary means of exchange, or never supplemented money as a medium of exchange, I believe you are mistaken.

        But you are not alone. Being mistaken, from time to time, almost every day in my case, is the fate of the better part of mankind. But unfortunately for those of us cursed with fallible human reason, every conclusion we embrace with certainty supposes the correctness of an infinite (or, is it really just innumerable) regress of subsidiary premises, making infinitesimally small the probability that any conclusion is right.

        I do not consider myself neoclassical, but a heretic at odds with every school. In any case, knowing I could be dead wrong, I venture the following hypothesis: the relative the value of goods and services is constantly changing relative to other goods and services and the relative value of one unit of account (e.g., dollars or euros) also is constantly changing relative to other units of account and relative with respect to goods and services. The constantly changing relative exchange value of money for goods, goods for gold (or its historical predecessor, salt) and gold for money leaves us without an unchanging reference value against which to measure value.

        Fiat money, issued by a state minting monopoly, is not the equivalent to a “credit” of the issuer. The fact a state issues fiat money does not mean that the real or financial assets denominated in that state’s currency are assets or claims (credits or debt) of that state or that a state, by issuing currency, has a claim on assets denominated in the issuing state’s currency.

        The first premise of Innes’s credit theory of money is that a sale and purchase is the exchange of a commodity for credit. This description of the sale transaction, however, is the single entry presentation of a sale transaction between the seller and buyer, not the double entry presentation for each that requires quadruple entries that both Minsky and Fisher, correctly I believe, argue are necessary to present the full economic and financial effect of any transaction.

        I largely agree with Innes that it follows from Innes’s first premise that “the value of credit or money does not depend on the value of any metal or metals, but on the right which the creditor acquires to “payment,” that is to say, to satisfaction for the credit, and on the obligation of the debtor to “pay” his debt and conversely on the right of the debtor to release himself from his debt by the tender of an equivalent debt owed by the creditor, and the obligation of the creditor to accept this tender in satisfaction of his credit.” Where I part company with Innes and MMT is the tendency to separate financial assets and claims from the real assets and claims to which the financial assets and claims correspond.

        This tendency is more than evident in Wray’s note on nonfinancial wealth (real assets) explaining MMT. First Wray asserts that one person’s financial asset is necessarily offset by another person’s financial liability. In the aggregate, net financial wealth must equal zero. Next he asserts real assets represent one’s wealth that is not offset by another person’s liability, hence, at the aggregate level net wealth equals the value of real (nonfinancial) assets. And then he gives this example.

        You might have purchased an automobile by going into debt. Your financial liability (your car loan) is offset by the financial asset held by the auto loan company. Since those net to zero, what remains is the value of the real asset — the car. In most of the discussion that follows we will be concerned with financial assets and liabilities, but will keep in the back of our minds that the value of real assets provides net wealth at both the individual level and at the aggregate level. Once we subtract all financial liabilities from total assets (real and financial) we are left with nonfinancial (real) assets, or aggregate net worth.

        Deconstructing Wray’s example exposes a flaw at the heart of MMT’s logic and Keynes’ paradox of thrift. Spending=Income (Revenue), but Income (Revenue) = Net Income + Costs. When Costs exceed Net Income, net financial wealth does not necessarily equal zero, and aggregate net worth = real non-financial assets minus the amount by which costs exceed net income.

        Dan Depositor deposits his labor (I mean the $100 cash Rich Boss paid Dan for Dan’s labor) with Lender. Lender now has a $100 asset (formerly Dan’s savings from his labor) in cash or keystrokes and a $100 liability (IOU) to Dan. Dan’s net financial assets = $100. Lender’s net financial assets = $0.

        Lender transfers the $100 to Buyer, which becomes Buyer’s asset, Buyer delivers a $100 note and pledges the car (Buyer’s liability to Lender), then Lender records the note and lien as a $100 asset in place of the $100 in cash or keystrokes (originally Dan’s labor) Lender still owes to Dan. Dan’s net financial assets = $100. Lender’s net financial assets = $0. Buyer’s net financial assets $0.

        Buyer then pays $100 for the car. Buyer now has a $100 real asset, the car, and a $100 financial liability, to Lender, the note and lien. Seller records the $100 cash or key strokes as an asset in place its inventory, the car. Seller records the $100 cash as an asset in place of its inventory, but the car is on Seller’s books at $150, the amount Seller incurred to pay workers and suppliers.

        Dan’s net financial assets = $100. Lender’s net financial assets = $0. Buyer’s net financial assets = ($100). Buyers real asset the car =$100. Seller’s net financial assets = ($50), $100 cash asset, $100 payroll liability, and $50 liability to suppliers.

        MMT says Aggregate NFA=$0
        But Dan’s NFA $100 + Lender’s NFA $0 + Buyer’s NFA ($100) + Seller’s NFA ($50) = ($50)
        MMT says Aggregate Net Wealth = Real Assets
        But Real Assets =$100
        Net Wealth of the Community =$50

        • My apologies for excessive detail. The example with Dan etc. You aren’t doing it right.:

          The meaning of Aggregate NFA = 0 is that it all adds up to zero if you include every creditor and debtor, including the government. There was no government involvement in your sequence of transactions, except for the presence of cash = government debt, so what this then means is that the sum of the NFA, of cash, held by all these nongovernment people together will not change. Every form of money and credit is an IOU from a debtor to a creditor, a relationship between them, which does not involve anybody else. So when you aggregate the creditor and the debtor, these internal relations of the aggregated entity disappear, and still don’t involve anybody else. That’s what “aggregation” means. Aggregation ignores internal relations of the aggregated entities.

          So just trace the cash. The amount doesn’t change. If you aggregate everything and don’t get zero, you missed something, you added wrongly somewhere. Somehow you added up a string of zeros AND you got something nonzero. 0+0+0… = 0 no matter how many +es there are. No matter how you split up the 0s into +1s + -1s and rearrange in order to confuse oneself.

          E.g.: The workers and suppliers in the second line of your last paragraph are forgotten. Should add in their $150. With them, the sum remains at $100, the $100 Rich Boss started with.

          To simplify what is going on, you can aggregate Rich Boss, Dan, Lender and Buyer. Together “They” start with $100 cash. “They” end up with no cash, but acquire a car. Also aggregate the workers and suppliers to W&S.
          So before the car is built : They: $100, Seller: $0, W&S:$0.
          After the car built – They $100, Seller:($150) W&S:$150. Still $100NFA cash total. Now the seller, has acquired a debt to his workers and suppliers, this debt is W&S’s credit of course.. Not yet settled using the usual (pen)ultimate method of settlement, cash = government debt.
          After sale, They $0; Seller $100+($150) = ($50) net; W&S: $150 . 150-50 =100. Still no change, because there can’t be any change.
          The Seller could partially settle his debt to W&S with the $100 he got from “They”. Then: They $0. Seller ($50) +$0 cash W&S: $100 cash + $50 (remaining debt owed by Seller to W&S) Still, 150 -50 = 100.

          If Seller remembers he had $50 cash in a jar in his garden, add $50 to all his amounts throughout. So the total NFA is $150 at all times, not $100. Then he can completely settle with W&S with that $50.
          They: $0 Seller:$0 W&S: $150 in US government cash.

          Then They ended up with a car and paid for it with $100. Seller ended up losing 50 dollars . The workers and suppliers got $150 for their labor and supplies. The money and credit “flowed” in the opposite direction to the real goods and services, as always. From Uncle Sam’s perspective, nothing happened – in this dream, none of the transactions are taxable, and he has enough cars already. If we include Uncle Sam to the analysis at any time, then his liability position will exactly cancel the cash position of everyone else, so everything adds up to zero, at all times.

          Already rather long to reply to other points. Can do so later. Not clear which paper or argument of Wray you are referring to, or what the objection(s) to Innes theories are – they are really just definitions, which are irrefutable and obvious once you understand them – many don’t properly. E.g. state money is just state credit, at the most fundamental level exactly the same ‘thing’ as bank credit.

    • The story in reality goes like this: P1 fishes, P2 picks berries, P3 bakes bread, and P4 guards the fishes, berries and loaves of bread whilst P1, P2 and P3 are sleeping or eating or taking their kids to the park. In the beginning there was no P4, but after a while of bad guys appearing from the forest and stealing/robbing the berries and the fishes, P1 and P2 and P3 got together and said: let’s put aside 1 fish, 1 bushel and one bread per day, and get P4 to do the guarding.

      Later, this was called tax, and it is in effect a safe environment for production and trade that the government provides us with, and for which we pay. Roads through the forest and education for the kids, but this was later, when P5 the road builder and P6 the teacher appeared….

      Even later. with hundreds of P1s, P2s, P3s and so on spread all over the forest, it became inconvenient to lug around all the bushels and the fishes, so they had cowrie shells that represented bushels, and they set these cowrie shells aside for the P4s, who could now go to the forest and buy bushels, fishes and loaves as they needed them. This was called money. Taxes can exist without money, as you set aside bread to pay your soldiers, but money makes it conveniently portable to prove you have paid your taxes.

      So the government claim on money does not appear out of thin air, initially it is people grouping together to implement the primary functions of a society, so they can operate their trade, and putting aside productive fruits of their labour for the non-productive, but necessary parts of the society.

      Then government, as it grows, distances itself from people, starts becoming corrupt and so on, but this is a longer story for another time…

  3. “Since the same 100 pennies remain in the Private sector, the standard of living is dropping for at least the bottom 60%, because they essentially have no savings to draw from, and are maxed out in their borrowing.”

    Apparently the answer in this situation is to deregulate the financial sector to let the music play on for a bit longer… :\

  4. Arthuro, The Penny Game has nothing to do with financial regulation, it’s about Congress’ fiscal policy. The Private sector can’t spend a dollar until Government spends it first. Unless it’s a “borrowed” penny that hopefully will be paid back. Personally, I’d bring back Glass-Steagall.

  5. Jon, that was tongue in cheek. But fact is, private sector credit expansion (gross financial asset additions) can carry the game on a bit longer. That’s essentially what we saw c. 2006, until Stein’s Law took over. (In other words, I was saying more “borrowed” pennies allow the game to continue a bit longer, and go a bit further into Minsky’s Ponzi territory. If it sounded like I thought that was a good thing, I apologize.)

  6. Overall think this is a good thought experiment, but I have some quibbles with a couple parts.

    “The game starts with G having all the money. Why? Because the United States has a monopoly issuing the dollar, or in this case the penny.”

    As far as the issuance of what citizens call dollars, the US government doesn’t have a monopoly on dollar issuance. Over 90% of dollars are issued through private bank loans. These credit dollars are used for nearly all of the transactions not involving government in the economy. US govt has a monopoly on the issuance of bank reserves and cash and coin, in addition to being the sole issuer of US dollar denominated risk free assets, but as far as the money that people use for every day business and spending, the majority of it originates from private bank loans. Correct me if I’m wrong but didn’t money and credit issuance of private bank IOUs from counting houses and gold smiths exist in the US before the US government formally began issuing currency (or even existed for that matter).

    “There is a misnomer about the Private sector creating wealth. It operates within the velocity of pennies (how fast the money changes hands), and within the ranges of asset bubbles and private debt—all the Private sector does is compete with the Foreign sector and itself. For example, Amazon puts mainstreet bookstores out of business. Home Depot is a net serial destroyer of jobs because its staff is way more productive than the now-defunct mainstreet hardware stores were.”

    Wealth isn’t ownership of Government Bonds, wealth is productivity. Enhancements in productivity have massively improved living standards and hence increased real wealth. Admittedly since 1980 the financial distribution of the benefits of these productivity gains have overwhelmingly accrued to the upper income echelons, but overall, the availability of quality goods and services is far better than it was in 1980. This is because the private sector invested in innovative, productivity enhancing, wealth building projects, not because of government deficit spending. Government deficits act as a facilitator to private wealth creation by helping to eliminate the deflationary bias of saving and keeping aggregate demand high enough to keep the incentive to invest high. So yes, too small a deficit will lead to unemployment, which may slow the wealth building process, but it’s stretching to say that all the private sector does is compete with itself in some kind of zero sum game.

    • Banks create credit not dollars, businesses using the credit may steal market share from the foreign sector, and may create demand and therefore increase the velocity of money. While this is happening, the larger macro functions of government spending, deflation and inflation, trade deficits or surpluses determine whether times are good or bad. It really is a zero sum game—give or take bank credit’s role. It’s unacceptable for a society to essentially discard 15% of its population by not sufficiently spending enough pennies into existence.

      • Either way, banks create something that others, from businesses to households use for spending and investing. Because its credit based and has to be repaid, it has a built in deflationary bias that can only be offset by perpetual new lending, so that enough new credit is created to pay off the existing principal plus interest. The GFC was proof that this isn’t sustainable as the private sector reaches its debt capacity, and I agree that a larger government deficit can help offset some of the deficiencies of credit money. I don’t disagree that more fiscal spending right now would go a long way towards improving household balance sheets.

        I still take issue with the zero-sum game part. New industries crop up all the time, displacing existing industries or entering new frontiers all together. This innovation in my opinion is a net benefit overall, despite dislocations of some parts of the labor force. Cars replaced horse and buggy, but I don’t think we should call it a zero-sum game because we put carriage drivers out of work. Historically most of this investment is funded through bank loans or some form of bank credit money. I’d say that over the last decade, bank lending in general has failed to loan towards investment that boosts productive capacity and helps a society prosper, and instead has helped fuel financialization and speculative bubbles in real estate and derivatives. A credit expansion cycle can likely last much longer with less inflationary pressure when the new loans are primarily used to fund income generating productive investments. But I’d hesitate to say that all of the private sector’s activity is some form of robbing from Peter to pay Paul. In my opinion supportive government deficits will have a stronger impact and less prone to be inflationary in an economy that encourages investment and competition than one that does not.