That’s Right, the US Government is not Running out of Money….
Matt Yglesias has an important piece over at Slate discussing the idea that the US government is “running out of money”. He says:
“As Mark Schmitt wrote last year regarding a book from Welch and co-author Nick Gillespie this assertion that America is “out of money” has become an all-purpose crutch through which Reason can push an ideological agenda of skepticism about programs without actually making the case in its particulars. But it’s simply not true that we’re out of money. Many states and municipalities are up against hard budget constraints, but the US government has the ability to create US currency in unlimited quantities. It hasn’t run out of money and won’t ever run out of money. It would be nice for people to understand this point separately from controversies over whether public sector programs are wise or just. “
I know regulars are tired of hearing me beat this drum for years on end, but it’s important so if you know the story feel free to move on. Anyhow, how does this work? What makes The USA so different from, say Greece? As I’ve explained before, the USA is structured in such a way that the government is always able to procure funds from the private sector. It can tax us at will. And it can harness the private banking system to sell bonds. Although the US Treasury is designed as a currency user it can always procure funds.
The only situation where the government is unable to procure funds is during a very high inflation or period of hyperinflation (tax receipts would decline and banks would likely reject their mandate to buy bonds at auction as they become survive first, government agents second). But even in this scenario the government does not “run out of money” because it can always tap its central bank to provide the funding. Again, there’s no constraint like there is if you’re on a gold standard. The government quite literally has a printing press at its disposal if it really needs it.
But this all highlights a crucial understanding. Unlike Greece, the USA is specifically designed in a way that it cannot have a solvency constraint that results in it “running out of money”. In fact, this is lack of unity in the European monetary system is one of its primary flaws. Granted, we could suffer a high inflation or possibly even a hyperinflation, but this is a totally different phenomenon than suffering from a solvency constraint like Greece. Misunderstanding this crucial element of the monetary system is playing a substantial role in our economic malaise as one of the most powerful tools we’ve ever designed (our very government) is being misrepresented as having a constraint that is totally inapplicable. And during a time of 1.7% inflation that’s causing a lot more hardship than is necessary….
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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13 Comments
It’s important to address what people mean and not just what they say.
What happens to the ‘animal spirits’ when you tell people that the debt is backed by the printing press and not tax revenues?
What happens when inflation returns (another way of saying what do we do when the currency becomes devalued.) Do you stop printing money then, or is printing money a forever strategy?
Can we please be honest about actual inflation and its impact on the standard of living of people who don’t own financial or hard assets? It sure isn’t 1.7 percent.
And if we’re going to print money, why do some people have access to it and others don’t?
As Cullen likes to point out, the tax base and debt case is backed up by 15 trillion dollars of output.
So how does that work? If I have a $10,000 Treasury note does that mean I have a claim on the output of my fellow citizens.
Deficit hawks would agree and argue that future output (via taxes) will have to pay down that debt.
But Cullen says that is not true — that federal debt will never be paid pack, or it will be paid back because Uncle Sam has a printing press. Or it will be rolled over and passed from hand to hand — meaning, that debt is the same as money.
Oh yes, the US won’t run out of money any time soon, the US can print as much money as they want. But the problem today is too much debt. And that’s what the hardcore goldbugs overlook.
Showering the country with USDs, with the population in a deep deflationary mood, it won’t rekindle inflation anytime soon. Because people would use that money to pay down their debt. And that’s extremely deflationary.
I agree.. but the faster we pay down debt or deleverage, the faster we recover. People are going to pay down debt either way, the question is whether we make it easy or not.
Additionally, inflation helps the markets clear. It’s a way to handle the problems of sticky wages, sticky prices, etc.
Right, it is the debt claims. A mortgage is a piece of paper that claims with an exponential function. It claims from the real economy over time. Therefore it drives the population to pay the exponential usury. The debt money comes into existence as a loan – (90%) of our supply. Therefore all credit money drags around this correlated debt on our output.
In Babylonian times, a loan could only be 5 years. In that 5 year period the principle would be paid back, hence the creditor now had double his original (the payback amount plus original principle). The loan + payback would have grown to twice its original size. The pay back would be the “matured” offspring of the parent, hence the term maturity. The matured amount, now equal to its former parent, could then go looking for another debtor, where it had to make new claims on the economy.
The offspring did not stay attached to the parent in perpetuity, growing along the exponential and outside of natures boundaries. The offspring had to do the hard thing and find a debtor and some sort of benefit in production. The offspring might even take an equity position and avoid the grabbing nature of our current credit scheme.
Today, our loan rules force us to drive up the exponential, which becomes an ever steeper curve over time.
Monetarists and gold bugs will never admit to this reality though. The bugs will always advocate for credit to ride on top of the gold. Then when the credit collapses, they want their private banks to acquire assets. It is a wealth transfer scheme.
Let me see if I can explain this concept a little further. An economist named Price described how compound interest worked in a thought experiment. If we loaned Jesus .10c at 5%, by today to pay off the loan, would require a solid mass of gold. This solid mass would be sphere that extends out past the planet Pluto. The sphere would be bigger than the solar system.
Compounding interest claims on the economy are outside of natures boundaries. Yet here we are in a matrix, and humanity has still not dealt with this problem.
So Greece, Spain, other non-autonomous currency issues are dependent on the market to fund themselves (not counting taxes)? As opposed to the US where the structure is such that the primary dealers can provide funding?
Just looking for clarification. Thanks.
The dealers in the USA have a bid requirement. Further, they’re happy to hold large quantities of US Treasury bonds because they know there is no solvency risk. The problem in Europe is that this assurance isn’t there. So private banks reject bonds periodically and yields go higher.
‘In fact, this is lack of unity in the European monetary system is one of its primary flaws. Granted, we could suffer a high inflation or possibly even a hyperinflation, but this is a totally different phenomenon than suffering from a solvency constraint like Greece.’
Ask a neutral observer which risk he’d rather live with: solvency or currency collapse, I wonder what answer you would receive?
I guess debtors would vote for the currency collapse (hence Obama wins), and savers would vote for a string stable currency.
A balanced view from a large number of countries is actually a big strength of the Euro by the way, as balance reigns. Unlike in America, where spend spend spend with ever rising deficits is all the rage.
During WW2 the American people paid off their debt and didn’t buy consumer goods. The war effort allowed Gov. to borrow at 3/8 of 1% (.375), which funded labor so it could pay off its private bank debts.
How the money is spent should be debated, but we don’t seem to be having that debate as a country. For example, deficit spend onto unemployment, so someone can buy a Chinese TV, is not helpful. The dollars recycle as a TBIll adding a future claim on our output.
If we spent into industry and infrastructure, that leaves efficiencies in the wake, the money circultes in the economy; and can be taxed away if need for drain.
All right, Cullen.
Let us assume you are right: that it is physically impossible to run out of money.
There is no way the federal government can declare bankruptcy. How does that apparent fact make a difference in the lives of ordinary Americans versus the lives of those people who live in cash-debt constrained economies?
Don Levit
this is related on why the myth is perpetuated by billioinaires & their rightwing think-tanks & politicians they own:
1) greater gov deficit spending(money creation) drives down interest rates to 0% or whatever rate the Federal Reserve targets it at (because greater deficit spending increases bank reserves, which are then used to buy US bonds)
2)US fiat money has value because it can buy $15 trillion in production (food, pharma, software, technology, etc).. just like gift cards or gift certificates, all money/gift cards has value due to what it can buy ..and by law, US currency must be accepted for all debts(mortgages, autoloans, credit, bank loans) as well as for all gov taxes/fees.. .thus all businesses need US currency to pay off tax liablities as well as $15 trillion in US production
3) Despite the 2.6% average inflation rate for the past 80 yrs of non-stop money creation by US gov money creation, there’s the myth that deficit spending increases inflation despite the fact that money creation STIMULATES INCREASED PRODUCTION & INCREASED SUPPLY of goods/services, which REDUCES & OFFSETS INFLATION..
hyperinflation results ONLY if there’s a monopoly or embargoe that restricts greater production such as OPEC oil embargoes of the 1970s or the 8+ month strike by almost all of WEimar Germany’s industrial workers resulting in 90% drop in production in industrial sector (energy, coal, steel, manufactured goods, etc)
or
Zimbabwe’s 30%-57% drop in production of all sectors due to Mugabe expelling all the educated, professional skilled white people/workers.
4) http://rodgermmitchell.wordpress.com/2012/09/05/we-are-in-a-never-ending-war-on-which-side-are-you/
–We are in a never-ending war. On which side are you? Wednesday, Sep 5 2012
Mitchell’s laws:
●The more budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity is the government’s method for widening the gap between rich and poor
●Austerity starves the economy to feed the government, and leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
We are at war. Since the beginning of civilizations, we have been at war. The war is between our ruling class and the rest of us.
Governments rule and are ruled. There are many forms of government: Democracies of various kinds, dictatorships, theocracies, tribal. The list is endless, as every form has subdivisions, exhibiting sometimes subtle differences. But all have certain similarities.
They all have a ruling class, whose power depends on gaps between them and the general populace. The greater the gaps, the greater the power held by the ruling class. And just as power corrupts, widening the gaps corrupts.
Gaps come in many flavors. Examples are: financial (rich vs. poor), police/military (strong vs. weak), moral (good vs. evil), informational (educated vs. uneducated), gender (male vs. female) or some combinations thereof. In all cases, the goal is to set the ruling class further and further apart from the ruled.
Consider a theocracy: It takes money from its followers, enriching itself at the expense of the donors. Poorer people are told to give their money to wealthy churches, widening the financial gap.
A theocracy makes laws that followers (but not the leaders) are compelled to follow, lest they be punished by ostracism, torture or death. Thereby, the police/military gap is widened.
Theocratic leaders claim morality, with all others being labeled “sinners.” And the religious leaders create, then translate, religious documents (Bible, Koran, et al) according to their whim, making them the educated ones, while all others are ignorant.
Finally, theocracies almost universally have been misogynist, anti-gay and xenophobic, with “outsiders” viewed as threats to the power of the domestic elite.
Consider the United States federal government: It taxes its citizens, though being Monetarily Sovereign, it has neither need for, nor use of, tax money. The US makes the laws we all must follow (based on its sole interpretation of morality).
It enlists into the army and police, men and women from the private sector to enforce those laws, strengthening itself at the expense of the private sector, both morally and physically.
As now seen in Syria, (and in America, whenever the #Occupy movement protests), and indeed in every nation where tread-upon people demand redress from their leaders, the ruling class demands a strong police/military, to enforce “law and order.”
At the direction of the ruling class, the U.S. government controls the dissemination of information; it lies, denies and omits facts, thus creating, then preying upon, the ignorance of the populace.
The U.S. remains a male-dominated society, as witness the makeup of Congress (16% female) and CEOs of Fortune 500 companies (4% female).
Thus, the US ruling class covers many gaps: financial, police/military, moral, informational and gender. The wall between the U.S. and Mexico, and the various anti-immigrant, anti-minority state laws are symbols of a renewing xenophobia — a typical gap.
The question often is asked: If the United States government has the unlimited ability to create dollars, why does it siphon tax dollars out of the private sector? It has no need to widen the financial gap, since that gap is infinite.
The reason: The leaders of the US government are supported by, and beholden to, the wealthiest among us. And to these wealthy people, widening the financial gap is paramount. Psychologically, the financial gap is more important than the score.
You might think you would be happy to earn $1 million per year, especially if everyone you knew earned “only” $50K per year. But how would you feel if all your friends earned $100 million per year, and you still earned “only” $1 million?
Salaried people are more concerned about the income gap between them and their co-workers, than their salary itself. Give them a $100 raise and they are happy– until they learn another worker was given a $200 raise.
Meanwhile, the boss cares very little about any gap between employee A and employee B. He might even use it as leverage against them.
He is more interested in the gap between him and his peers – and his workers. The U.S. is the wealthiest nation on earth, that gap being of great pride to us all.
Our ruling class “encourages” taxes favorable to themselves. They own newspapers and television stations that falsely tell the public social benefits must be reduced or taxes increased, lest these benefits “go bankrupt.”
Not only do our leaders maintain the most damaging and regressive tax in American history (FICA), but they even tax the Social Security benefits people ostensibly have “paid for,” and repeatedly delay providing those benefits
– all because the ruling-class owns and controls the media and the politicians, who lie that Social Security can go bankrupt.
Our Monetarily Sovereign federal government easily could provide health care insurance to every man, woman and child in America. Instead, our politicians, at the behest of the ruling class, tell the 99% their own benefits must be reduced.
Our Monetarily Sovereign government easily could support every retired person in America, without FICA. Instead, our politicians, at the behest of the ruling class, tell the 99% such support would cause inflation, bankrupt the system, and be “unsustainable” (a favorite word of the rulers).
The power of the people begins with population. If the Syrian revolution succeeds, it will be because the people are able to sustain greater losses and continue to fight. The ruling class is few in number.
In a democracy, the power of the people comes is expressed with the ballot. But that power can be subverted by misinformation, a tactic the 1% have used for millennia.
The purpose of this blog is to provide information. Because of previous brainwashing, many people initially resist anything that counters the propaganda of the ruling class (as delivered by the politicians and the media.).
So we continue to pound away at the facts: The U.S. government never can run short of dollars, never can go bankrupt.
The government can pay for Social Security and Medicare for everyone.
FICA is harmful, unnecessary and saps the strength of the middle- and lower-classes. Federal taxes take dollars from the economy, do not support the government and should be reduced..
Federal deficits are necessary to grow the economy. Inflation easily can be controlled, even with massive, deficit spending.
When people ask me, “If taxes are not necessary, why does the government levy them?” my only thought is, “Don’t you get it? We’re in a war. It’s like asking why your enemies are shooting at you. The ruling class wants to defeat you. Don’t let them convince you to give them your bullets.”
When you vote in any election, ask yourself which candidate is more likely to widen the gap between the ruling class and you. Ask:
●Which candidate and party is more closely aligned with the ruling class and more likely to increase the gap between rich and middle classes?
●Which one makes greater demands for a strong police to enforce “law and order” against public protest?
●Which candidate and party is less likely to support citizen movements like unions and #Occupy?
●Which one is more likely to reduce legal protections for the 99% via “deregulation”?
●Which one leans more toward theocratic and religious extremism?
●Which candidate backs “widening the tax base” (increasing the number of poor people paying tax), while cutting taxes on the rich?
●For which candidate and party are the ruling-class owners of newspapers and TV stations more likely to vote?
●Which candidate favors reduced federal support for social programs – Medicare, Social Security, Medicaid, food stamps and other poverty programs?
●Which one is less xenophobic, favoring an easier path to citizenship (adding to the population of the 99%) and better relations with foreign nations?
●Which candidate and party leans more toward women’s rights and the rights of minorities?
And finally, ask yourself:
●Which candidate has more consistently advocated the positions I want?
We are in a war. Like it or not, you are a soldier in one of the armies. Which is your army? Cast your vote accordingly.
Rodger Malcolm Mitchell
Monetary Sovereignty