The Millennials’ Money (Pt 2)

By J.D. Alt

The comments on Part 1 have given me pause and food for thought—and they are much appreciated. Obviously, the generational theme is a lot more complicated than simply BGXers versus Millennials, but I don’t want to get lost explaining or defending the generational theories of Strauss & Howe. I’m sensitive to the critique that making BGXers out the way I am is a dramatic oversimplification and might, in some degree, be counterproductive to my goals by alienating the BGXers themselves. I’m struggling with that because, on the other hand, I want the book to be a “simple” and highly focused message—and the message is (a) that understanding and effectively using modern fiat money could very usefully become the “political brand” of the Millennials, and (b) the BGXers, because of their ideological baggage, can be expected to resist the whole way down the road.

In the meantime, what comes next in the proposed book is the essay Diagrams & Dollars, which I won’t repeat here, since it is already posted. The beginning and end of the essay will be re-written to better flow with the Millennial narrative. The section after D&D is what follows below. This is a particularly difficult segment for me: I am trying to convey, accurately, the money operations described by L. Randall Wray—which is a bit like trying to describe the rotations of a rubric’s-cube puzzle—and to do it in a way that won’t wrangle the brain of a typical Millennial reader who isn’t aspiring to being a banker. Comments here will be especially helpful!

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Rules and Values

The question now to be asked is this: If the diagrams we have just developed, illustrating how a modern fiat money system actually works, are true, why then do we behave as if they were not? Why do our political and media leaders—both conservative and liberal alike—insist that the dollars our federal government spends are the dollars it has collected in taxes, or borrowed from the Private Sector pot? We’ve already suggested a possible answer, but now we should explore a bit further. Having a forceful response to this question will be essential to the Millennials’ efforts as they come to power and seek ways to pay for all the things the BGXers have left for them to resolve.

In our brief history of how President Nixon took the U.S. (and consequently the rest of the world) off the long established gold standard, we noted that the existing “rules” that determined how the government could issue dollars remained unchanged—even though those rules had been specifically created to prevent the government from issuing more dollars that it could back up with gold. We also noted that the generation just beginning to come to power at the time—the baby-boomers—were more than happy with the arrangement because the old “rules” reinforced the ideological view of the world they wanted to impose. Specifically, we noted, the “rules” made money scarce, which in turn supported the boomer’s ideology of competition as the basis of American values.

Given this history, it seems the Millennials have essentially two tasks before them: First they have to clearly see that the old monetary “rules” are illogical and counterproductive in today’s world of modern fiat money. Second, the Millennials must debunk the belief-mantra of the BGX generations that the end of money scarcity—at the level of collective society—will lead to a socialist “nanny” state, destroy the benefits of market-based competition, eliminate the motivation of merit-based rewards, and destroy the special human capacities for creative entrepreneurship, self-actualization and personal achievement. If anything, as we stated earlier, modern fiat money, properly managed by a cooperative democracy, can support these American values in ways—and at a level—the BGXers never imagined. The Millennials, as they begin building their political brand in earnest, need to start making arguments as to why modern fiat money makes this positive outcome a real possibility.

Let’s explore these two tasks in turn.

The “Golden” Rules

As we’ve already noted, the main purpose of the gold standard was to “protect” the value of money by limiting the amount of dollars the federal government could issue. (We won’t go into the probable history of why, ultimately, this failed to work—as exemplified by what President Nixon was forced to do when French President De Gaulle asked for his gold! In today’s world of modern fiat money, it doesn’t matter.) What does matter is seeing the “rules” that were intended to make it work—and understanding the fact that, even though the circumstances they were designed for no longer exist, those rules are still operational today. And the operations the rules impose profoundly affect how we “see” the world of money.

Here, then, is a simple overview of the “golden rules” we’re currently living with:

As far as money is concerned, the U.S. federal government is set up with two “money departments.” Department one is the Central Bank (called the Federal Reserve or, typically, the “Fed.”) Department two is the U.S. Treasury. The Treasury is given the job of spending the federal government’s dollars to buy goods and services the government needs or wants from the American people. The Fed is given the authority to issue dollars—that is to simply create them by fiat. By law, however, even though the Fed is the department that legally can create money, it is not allowed to spend that money to buy goods and services. Spending can only be done by the Treasury. Nor is the Fed allowed, by law, to simply issue dollars and deposit them in the Treasury’s checking account so it can then spend them. Nor is the Treasury allowed, by law, to borrow new dollars directly from the Fed.

What these rules boil down to is that a very intentional wall was erected between the department that can create sovereign money, and the department that can spend it. The purpose of this “wall” is not hard to figure out: Without the ability to spend dollars, there was no incentive for the Fed to simply issue money indiscriminately, which could result in the issuing of more dollars than there was gold to back them up. But how, then, did (and still does) the Treasury department get dollars to put into its account so it can spend them to buy goods and services? Again, following the “golden rules”, the Treasury is only allowed to obtain dollars for spending in one of two ways:

First, it can collect taxes. When citizens pay their federal taxes the dollars are deposited in special bank accounts across the country, and the Treasury can transfer those dollars at any time into its checking account for spending.

Second, if the Treasury needs to spend more dollars than it has in those special tax collection accounts, it can obtain the additional dollars—again, by law, it’s the only option provided—by selling Treasury bonds to a very special and elite group of financial businesses called “primary dealers”. Today there are 22 primary dealers in the U.S. (among them a few familiar names like Goldman Sachs and J.P. Morgan.) Basically, what happens is the Treasury calculates the number of additional dollars it needs for spending, then announces a Treasury bond auction for that amount—and the primary dealers “buy” the bonds at the stated price (so it’s a bit mysterious why they call it an “auction.”) The dollars from the “sale” of the bonds goes into the Treasury’s checking account for spending. The primary dealers then “sell” the Treasury bonds (which pay interest) to other financial institutions and private investors, earning fees for the transactions.

Looking at the snapshot just described, it very much appears that our diagram of sovereign fiat money cannot possibly be true! It looks very much like the U.S. Treasury does have to collect taxes in order to have dollars to spend—and that it actually spends the tax dollars it collects (rather than simply cancelling them as I.O.U.s). Even more disconcerting, it also appears that if the Treasury has to spend more dollars than it has collected in taxes, it does, in fact, have to sell Treasury bonds—or “borrow” money from the Private Sector!

Except for one detail that is such a miraculous sleight-of-hand hardly anyone notices it or understands, actually, how it works: When the Treasury announces that it is going to have an “auction” of say, $20 billion in Treasury bonds, where do the dollars that the primary dealers use to “buy” those $20 billion worth of bonds come from? The answer is, the dollars will come from the Fed—and they will be newly issued fiat dollars which previously did not exist. The Fed puts these new dollars in the hands of the primary dealers by “swapping” them for “old” Treasury bonds the dealers had on hand.

In other words, the dollars the primary dealers use to buy the new Treasury bonds with—which are deposited in the Treasury’s checking account for spending—are actually coming directly from the Fed’s authority to issue fiat money “out of thin air”. It turns out, then, that in order to spend, the Treasury is not “borrowing” money from the Private Sector at all! It just appears that way because of the arcane operations the old “golden rules” impose. As far as the Treasury “spending” the tax-dollars it has collected, we’ve already understood what is really happening there as well: the Treasury (1) cancels the tax I.O.U. the dollar it has collected represents, (2) it issues a new I.O.U. to replace the cancelled one, and (3) it then spends the new I.O.U. to buy new goods and services from the Private Sector.

There is one other thing that is very important for the Millennials to clearly see: The primary dealers—the brokers who are in the enviable position of managing these cryptic operations to put new fiat dollars in the Treasury’s spending account—are not complaining about the “chore” they’ve been given to do; nor are they ever likely to. Unless, of course, the Millennials come along and begin to wonder why, in fact, things are done in such a convoluted and sleight-of-hand fashion. Why, if the Fed is going to issue the new fiat dollars that will enable the Treasury to buy goods and services from the American people, why run all that money unnecessarily through the hands of a few elite Private Sector brokers? Why not, instead, do the simple and straightforward thing of enabling the Fed, by law, to issue the new dollars and deposit them directly in the Treasury’s spending account? Not only would that eliminate the windfall fees and commissions the primary dealers have been skimming for decades, it would also have the virtue of making “visible” from where the money actually flows. And this, in turn, would do everyone the favor of turning off the BGXer’s incessant mantra about the government spending—or misspending—the citizen’s tax-dollars.