Critical Insights from Modern Monetary Theory
While Americans have been occupied with opposing the climate liars and deniers in Congress, and the Liar and Misspeaker-in-Chief in the White House, another major government perpetrated fraud has flown under the radar since Pres. Nixon took the US off the gold standard in 1971. That action had the effect of removing a significant constraint on the ability of the federal government to spend money. The US currency is a legal creation of Congress. The authority to issue dollars belongs solely to the Treasury Department. When private banks make loans, they issue credit, not new dollars.
It has always been true, despite public understanding to the contrary, that the federal government creates new dollars to finance itself, through the everyday act of spending. It does not, and has not depended upon federal taxation to fund itself.
It is as if, while every school child has been taught that two plus two equals four, a handful of people maintain the closely guarded secret that the correct answer is five, and use that knowledge to benefit themselves and their friends. On the federal level, that handful is Congress, which has subjected us to an ongoing and adamantly asserted deception. That deception claims the US relies upon tax payments to cover its spending; that deficit spending — spending that exceeds such payments — is dangerous to the economy and should be minimized or avoided altogether; that the US “borrows” to cover its excess spending and that the federal “debt” is too high. It is incorrect to refer to federal taxes as revenue, i.e. income, for the simple reason that tax payments are not reused by the government for any purpose. They are deleted once credited to the sender’s account.
We have long been encouraged to believe that money travels along the following path: we pay taxes to the IRS; Congress makes a budget based upon the projected “revenue”; Congress authorizes spending that revenue on the budget items such as education, health, the military, etc.; the Treasury and the Federal Reserve Bank carry out Congress’ spending plan; that money finds its way into the hands of businesses and the public.
However, that pathway breaks down as soon as one asks “From where do people get the money to pay their taxes? Since the federal government is the sole issuer of the currency, it had to first spend into the economy for businesses and individuals to then have the money to pay taxes. This is the reality of how money works at the federal level, and it is because our nation is monetarily sovereign, the creator of its own currency. And it is the very reason that comparisons between the federal budget and your household budget are false equivalences. States, counties, cities, individuals and businesses are users of the currency, not creators of it. Consequently, they all do depend upon income of one sort or another in order to pay their bills.
At the federal level the money path actually begins when the Treasury spends money into existence, let’s say to pay military salaries, at the behest of Congress. And it ends when the IRS receives tax payments, which are deleted from the record once they are credited to our accounts. That is the life and death cycle of sovereign currency. Think of a football game. When a team scores, points go up on the scoreboard. Where did those points come from? Well, they were simply created for the occasion. And when the game is over, all the points on the board are just deleted. And new ones are created at the next game. Weird as it is to wrap your head around, that is exactly what happens with money at the federal level. It is created for each spending occasion and it is retired once partially recovered in the form of tax payments.
Up until 1971 Congress was constrained as to how much new money creation it could authorize because the dollar was backed by and convertible into gold. If it absolutely needed to spend more, it would first have to build up its reserves in Ft. Knox. Nixon decoupled the dollar from gold and its conversion value, so it was free to find its own level on the world market.
Once the dollar was decoupled from gold, Congress gained the ability to safely spend until full employment was achieved. However, it has not used that freedom, in my opinion because capitalism prefers a large pool of unemployed workers as a way to keep wages low. Were Modern Monetary Theory policies to prevail, and through a Job Guarantee Program full employment was achieved, further government spending would then risk inflation. However, MMT economists assert that at full employment the economy would be humming at peak efficiency and continued “deficit” spending would no longer be necessary. In this context, deficit spending is simply a description of the situation wherein spending exceeds tax payments. It has no other meaning, since the two have no functional relationship.
It should be intuitively obvious that a government that issues its own currency never has a need to borrow that currency. Nevertheless, we continue to be told by our Senators, Representatives and their media echoes that the government is sometimes forced to borrow to finance its deficit spending. Note the compound lie here. This borrowing purportedly takes the form of selling Treasury bonds. The reality, however, is much different. A bond sold by the Treasury is functionally similar to a CD sold by your bank. When someone buys a T bond or a CD, they are not making a loan to the institution, they are establishing an interest-bearing savings account. The bank doesn’t use your invested money for anything, and neither does the government. What is cynically labelled the “national debt” by the Washington propagandists is actually the sum total of savings deposited by individuals, businesses, institutions and foreign governments. Whenever bonds come due, our government simply creates new money to cover the obligation, and would never have a problem repaying, no matter how large the amount.
Just as perpetuating the lie about climate change is having a huge negative impact on our ability to remediate its effects in a timely manner, the lies about the deficit and debt are also crippling to society. While claiming that there is not enough “tax revenue” to pay for programs important to, and desired by the people, Congress proceeds to use the government’s power to create money to benefit their 1 percent patrons, by giving hefty subsidies to already extremely profitable industries, padding the Pentagon budget, and overpaying for Medicare prescription drugs, to mention a few examples. They use our sovereign currency in a duplicitous, corrupt manner, rather than for the benefit of the people they are elected to represent.
