But claims like “‘all’ money is a creation of government spending from thin air” are misleading. Most money is created by banks, not the government.
Banks do create reserves within the banking system to facilitate interbank transfers of loan proceeds, but those reserves are always balanced by the principal of the loans in aggregate and can never leave the Fed system. The reserves created are also “obligations” on the books of the banks, balancing the “assets” of the borrower’s IOU. In the “net” accounting only public money created by Congress is available to “net” retire those obligations/loans or be “net” saved.
If the government never spent a dime, it could issue a currency in exchange for whatever it deemed valuable (gold, stocks, mortgages, real estate), and those dollars could serve as reserves for a robust banking system with a large multiple of dollars over those issued by the government. And, if it didn’t issue that money, the private sector would issue it against those assets, as the goldsmiths did when they invented fractional reserve banking.
You gold bugs never solve the “first dollar” dilemma inherent in your ideology. Mainstream economists just ignore it and push forward from the imaginary position that each country has some pile of currency just waiting to be given value by digging a shiny metal out of the ground. Do you imagine that miners just patriotically donated their gold to the government?
Taxation has always driven the acceptance for state-issued currencies. The state, however, must spend its currency into the economy before it can collect taxes, and yes, that spending is always “out of thin air”, given value by the ability of the issuing government to f’ up your life for non-payment. By only accepting its own currency back to satisfy tax obligations the government is assured it can provision itself on demand, but the issuing government never “needs” its own currency back to spend currency, even without a revenue stream.
Fractional reserve banking hasn’t been a thing since ’34 when we left the gold standard domestically. It also made taxing for revenue obsolete, as the chairman of the New York Federal Reserve bank, Beardsley Ruml, stated in a paper he authored in ’46 titled “Taxes For Revenue Are Obsolete”.
We should also banish “out of thin air” from the monetary/fiscal vocabulary.
It’s comical how so many who strongly oppose their elected government creating money “from thin air” believe that it’s acceptable for private banks to do so. Out of thin air is the only way money, being an imaginary thing with no inherent value, can be created. We would never say we can't build a bridge because we ran out of feet or inches, but we hinge all of our progress on another, just as vague, unit of measure, the US dollar. Get over it.
But, consistent with Mr. Evans’s view of things, we don’t know a priori whether any given issuance will in fact result in inflation, because we don’t actually know the country’s credit limit, the point at which further money issuance will impair the value of the money already outstanding.
The fear of “monetary” inflation is pure laziness from economists that takes advantage of a general ignorance of the people, especially those who vote. Monetary inflation is actually all but impossible to create in an economy with a free-floating sovereign fiat currency. Inflation is a comparison of demand against supply and each product/commodity will be individually responsive to increased demand. If that commodity is required in several products any price increase in that commodity will raise prices of all products requiring it, as happened in the ’70s when oil, practically a universally required commodity, was in short supply.
The increase in the money supply was only a reaction to that inflation to allow consumers to purchase the higher priced goods without contracting the economy in extreme. Inflation with a sovereign fiat currency will always be a reaction as long as resources and a competitive market exist.
If we decide to stupidly spend a trillion dollars on new bridges in a short time span most products involved in bridge making, along with skilled labor needed, will likely be inflated, but that doesn’t increase the price of butter or eggs. Eventually, the shortage of concrete, steel, skilled labor, etc will cause secondary inflation in the price of homes, commercial buildings, and anything else requiring the products and labor in short supply. The price of butter and eggs will still not increase.
This is “cost-push” inflation and has no relationship to the total money supply. Prior spending has no determinate effect on future spending except in any resource depletion it may have caused.
The relevant denominator for testing the national debt is the ratio of debt outstanding to the future value that can be delivered against it. When GDP is a good measure of that future value, debt/GDP matters. But, as technology makes GDP a poorer measure of what the next dollar can buy, it becomes a weaker test of the national debt. If we can keep creating dollars, at the government and banking level, without stressing the supply of goods and services, the debt will not be a problem.
MMT has a problem with using GDP at all, but it is what it is for now. If I sell my house I will increase GDP by the sale price plus my cost of relocating. If I burn down my house I will have approximately the same impact on GDP but I’ll still have the house that I can sell and double my impact on GDP. We have been burning down our collective house for many decades. Climate change makes that analogy even more apt.
A much better indicator of the condition of the economy is employment, and not the phony numbers we now use to placate voters. Full employment, everyone wanting a job having one with livable wages and benefits, should be our spending target. Most MMTers agree that the only way to effectively achieve this is with a federally funded guarantee of a job for anyone who shows up willing and able to work in public service.
The wage and benefits offered would replace the minimum wage and unemployment benefits in setting a floor for private employers and greatly mitigate the very real cost of misery and increased contraction during downturns in the business cycle. This would make recoveries quicker and recessions shallower and less frequent with countercyclical injections of public money. The value of avoiding domino unemployment in supply chains cannot be overemphasized.
What happens if the Chinese and OPEC and our own pension funds and insurance companies decide that it would make more sense to own US real estate than USD? Just how quickly could things really go South for the currency?
I highly doubt that the minimal yields offered by Treasuries deter any investment in our real estate. Treasury bonds offer a safe haven for excess dollars in reserve accounts at the Fed. Those who have made their dollars doing what they do don’t want to take on the considerably higher risk and demand for attention of owning real estate, or they would be doing so now.
My point is that a person with his credentials cannot be elected by the issuer of the world’s reserve currency. We must appear not only to be smart enough to reject him, but rich enough in leadership for someone qualified to beat him. Where was the GOP leadership when Trump was running against sixteen also-rans?
The GOP has been preparing the ground for a Trump for decades, but they now don’t know what to do with him except use him as a highly visible target for the ire of the voters not in their base while moving forward the neoliberal corporatist agenda at lightning speed. He has undone most of the gains made by America away from fascism since WWII in just two years.
Establishment Democrats would like to lay off their blame for this on Russian intervention and Bernie Sanders/Jill Stein, but the truth is that they have been reticent in offering any real opposition to the Republicans or any benefit of value to Americans for voting for them since Bill Clinton’s Presidency. Hillary’s decades of experience worked against her, as most people saw her as Republican-lite, which she was with a little warmongering added. She was a centrist only if one considers Eisenhower as left of center.
The gyrations necessary for the DNC and the media to secure her win against a grouchy old socialist with little name recognition should have told the leadership that all was not well in paradise and America was in the mood for change, not more of the status quo neoliberalism Hillary was offering. Trump offered that change, albeit disingenuously. Yes, he’s a terrible President and is doing damage to our status in the world, but don’t expect that to give a free pass into power for the establishment Democrats.
I see a repeat of the ’08 crash in our immediate future and the election may hang on the definition of immediate. If the economy hangs on, however tenuously, through to Nov 2020 it will take a powerhouse to unseat Trump because the progressive wing of the DNC is not voting for a Hillary like corporatist.
We can issue the debt we issue only because we are the greatest power in the history of the world. We must either do what it takes to remain such, or we must reduce the debt down to a level more suited to our civic incompetence.
That is not the debt that is harming us. You’ll have to get over the negative knee jerk to the word debt to understand our monetary system. The national debt is the nation’s supply of high power money that is able to retire private bank debt and be net saved. Fix that in your head and then think again about the implications of reducing it via taxation and spending cuts. Treasury bonds lock up money away from the economy, not provide revenue for the government that has no need for revenue.
Every bit of growth in GDP eventually requires more public money to retire the private debt that created it. This double counting is part of what makes GDP so bad as a way of measuring growth. Without this public money, growth must be continually promoted to “roll over” existing debt. Public money creation doesn’t automatically require Treasury debt as spending first goes to reserves to enable purchasing bonds. The current flap over funding for the wall is Trump telling us how this works. He is threatening to fund the wall directly from a Fed account for disaster where the Fed simply makes sure the checks don’t bounce.
