Why do so many people—including the authors of most economics textbooks—believe the U.S. banking system creates the U.S. dollars we earn and spend and pay our taxes with? It’s because the U.S. banking system does, in fact, “issue” the great majority of the dollars we use—by making loans to businesses and citizens which are not backed by “real” dollars the banks have on deposit. What everyone overlooks, however (for reasons not entirely clear) is the fact that these new loan dollars are “made real” by the U.S. government’s solemn promise to convert them at any time, on demand, into actual, “real”, sovereign U.S. dollars. The U.S. government is able to make this promise because, by law, it can issue the necessary actual dollars by fiat (by simply “declaring” the dollars into existence.) A lot of people (again for reasons not entirely clear) don’t like to hear that last part. But it’s simply a fact of life: the cash dollar bills you get from an ATM machine are not printed up (created) by the banks—they are printed (or created electronically as needed) ONLY by the U.S. sovereign government.
MMT has emphasized that there is a close relation between sovereign power to issue a currency and its power to impose tax liabilities. For shorthand, we say “Taxes Drive Money”. I’ve dealt with that topic in the previous instalments of this series on MMT’s view of taxes.
We’ve also demonstrated (as if it needed demonstration!) that sovereign governments do not “need” tax revenue in order to spend. As Beardsley Ruml put it, once we abandoned gold, federal taxes became “obsolete” for revenue purposes. I’ll have more to say about good old Beardsley in the next instalment.
In today’s instalment I want to step back a bit to ask a more fundamental question: does the issuer of a money-denominated liability need to obtain some of those liabilities before spending or lending them?
The Ebook DIAGRAMS & DOLLARS (in top 10 best-sellers on Amazon/ category money & monetary policy!) paints an optimistic picture of what “Sovereign Spending” could achieve for our collective benefit. The video made from it (approaching 3,000 views on YouTube—thank you Haiku Charlatan!) ends with cheering calisthenics around the final diagram of our national prosperity. Unfortunately, the “real world” of our Congressional leaders and media spin-machine is painting a very different picture—a dire vision of out-of-control government spending and national insolvency. Understanding why that is, and what we can do about it, is the real challenge we have before us.
Based on my new understanding of Fiat Money, I’ve concluded that it is both logical and desirable for the U.S. sovereign government to issue and spend MORE dollars than it collects back in taxes. Doing so accomplishes two fundamental goals:
It enables the sovereign government to purchase from the Private Sector goods and services which will benefit society as a whole; and
It enables the businesses and households in the Private Sector to build up a reserve of fiat dollars which can be used to expand the goods and services available in the Private Sector economy. Continue reading →
The President appeared surprisingly upbeat and confident: He grasped the sides of the lectern—not as he often had in the recent past, as if to support and steady himself in moments of national turmoil—but rather as if he were about to lift it up and toss it aside. Adjusting his papers, he quickly made eye-contact with each reporter in the front rows, usually with a quick nod of greeting, but sometimes with a stern hesitation. Continue reading →
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.
By Fadhel Kaboub (Cross-posted from Al-Ahram) I read Niveen Wahish’s article ‘Less is more’ (Al-Ahram Weekly, 3-9 November) with a great sense of frustration about the prevalence of the conventional wisdom that tax revenues finance government spending and that “borrowing” is inherently destabilising. If Egypt is going to lead the way in a new era in the Middle East, it must abandon the “sound finance” mythology, which is a relic of the gold standard, and embrace a model of true financial sovereignty. A financially sovereign country prints its own currency, collects taxes in that same currency, and most importantly issues government bonds that are only denominated in that same sovereign currency. As such, Egypt can finance all the national priorities that its people demand. A national debt is always manageable under a flexible exchange rate system and an adequate agricultural and industrial policy. Egypt’s most valuable assets are its people and their ingenuity. The country must also harness support from and cooperation with like-minded nations that are interested in fair trade amongst equals rather than neo-colonialist subjugation. The real burden on Egypt’s economy is the odious debt that was incurred under the Mubarak regime. This debt must be repudiated in the same way that Iraq’s and Ecuador’s debt were. Debt cancellation (not forgiveness) is the least that the West can do today to make up for the ills that Mubarak and his Western supporters have done to the people of Egypt.