It turns out that the Achilles heel of democracy is democracy. Politicians must be elected to push their policies, and that often means agreeing with general misperceptions and outright lies if they are widely believed among the population. This is where the intersection of politics and economics, especially macro, becomes problematic.
What if the whole monetary system didn’t function anything like 99% of voters believes it does? Would the aspiring politician be wise to expose this problem, bucking against a touchy point of a passion-inducing subject, or simply accepting the lie and doing the best s/he can while not exposing that the people had been conned? Would the fact that the prevailing lie is responsible for holding back much of the population from realizing economic security effect one’s decision, even if it meant being elected was a longshot after one’s opponent was given such a soft target to focus its fire on?
What if I came to your door asking for your vote and my main platform involved a completely new perspective on our federal government’s deficit spending and debt? If I told you that deficits are almost always required for a healthy economy and that a balanced budget will guarantee a recession if it was sustained for any length of time? Would you be open-minded enough to hear me out, or would you shut the door in my face and write me off as a crackpot?
I’m sure you are as worried about the debt as much as most Americans. After all, all the mainstream politicians and economists have treated it as the harbinger of the apocalypse, right? Some may acknowledge that we have more latitude than others give us, but almost all “experts” say that at some point we will have to pay the piper. Would your impression of me as a crackpot be reinforced if I said that paying off the debt could be done tomorrow with no tax increases or sacrifice, but that it wouldn’t be wise to do so? How about if I claimed that it isn’t necessary to tax anyone or borrow to fund anything that can be purchased that is priced in dollars?
All of those crazy claims are absolutely true, and it only takes a bit of knowledge of our monetary system and a bit of logic to prove it.
First of all, one cannot collect or borrow what doesn’t exist yet, so neither can “fund” spending. It is more accurate to say that spending “funds” taxes and borrowing, which is exactly how the order of operations works at Treasury and the Fed. Because the monetary system was designed to protect the gold reserve it was difficult to “hold” money at the federal level while also holding the gold it represented. This also didn’t conform to dual entry spreadsheet accounting that is used worldwide to track money.
It is simply less problematic to create a negative entry in the government’s sector of the spreadsheet to match each dollar created in the private sector and let that entry “cancel” any dollars that found their way into the government sector, balancing both to zero. This means that all spending is via new currency/debt creation and the sum of outstanding currency can always be tracked with the “debt” entries in the government sector. As the monopoly issuer of the nation’s currency, the government neither needs nor uses tax or bond revenue to enable spending now that we are no longer using the gold standard.
Both are only useful to reduce the supply of currency outstanding to prevent inflation, reduce inequity. and to accomplish social goals. Bonds also enable the Fed to manipulate interest rates via purchases on the secondary market, but that is proving far less effective in affecting economic growth or decline than is commonly assumed. This reality also goes against the accepted logic of “borrowing” at the federal level, In any other bond operation the proceeds of bond sales are used to “fund” some spending, but federal bonds simply destroy any proceeds which are then replaced by new money creation when the bonds mature.
They are sold at discounts determined by the Fed, not investors, and replaced at face value. Without a need to draw down excess reserves to meet the demands of the gold standard, bonds are mostly useless and should be discontinued, although there is some comfort in having a bottom for investments. From this knowledge, one can deduce that “saving” in bonds is only possible for anyone who isn’t the federal government for who the bonds represent liabilities, not assets. Furthermore, any use of bonds to store funds for future use, such as FICA/Social Security or Medicare, is completely futile and the deductions for such “funds” do nothing to enable the benefits to be paid in the future.
This makes the concept of limiting Social Security to the bonds the system owns rather more folly than economics. We can “afford” any level of benefits Congress agrees to pay as long as seniors have access to real resources which the benefits are deployed to purchase without the tax reducing their buying power over their working lifetime. Ditto for Medicare part A. Note that part B is never “in trouble” because it is funded via general spending, not a bond fund, as is the drug benefit, part D.
I’m sure you can realize the implications of being able to “afford” anything that is for sale in dollars, including the excess labor the private sector rejects. Only individual resources that are scarce or suffer supply chain problems can inflate in price, and that doesn’t reflect in the price of any other resource/commodity. This, altogether, means that “ANY” misery in this economy that can be mitigated with spending is strictly a political decision, not economics.
What say you? Vote for me, or slam the door in my face? I am offering the key to solving many of society’s problems at no cost, and all you have to give up is your illusions about money and how it currently works in our fiat economy. Spend some time exploring #MMT (Modern Monetary Theory) and get back to me.
PS: Bernie knows this stuff. Here is an article his econ adviser, Dr. Stephanie Kelton, wrote for the New York Times. She is one of the major proponents of MMT in the US but does consulting for governments and investment firms worldwide.
