Modern Money PART II
Us, them, and everyone else. Sectors are everything.
Sector, section, sect; to divide, cut, partition. We can divide just about any numbers into groupings according to varying criteria to gain a better understanding of their movements, or the groups themselves. We most often define people by sex/gender, age, politics, income, to gain insights into how each compares to others. In economics, sectors are defined most often by their relationship with the currency and how they use it. As we saw in Part I, the federal government is both the creator and destroyer of the currency. It creates the dollar (US) when it spends, and it destroys those dollars when it taxes. It can also remove currency from circulation (money supply) temporarily by selling Treasury bonds, which investors purchase to gain a small interest return on dollars they hold if they agree to allow their destruction and subsequent replacement as a specified later date (maturity).
Because the federal government has these powers over the currency it belongs in its own sector. No other entity has the authority to create the high power money that can be used to pay a federal tax obligation. It is also unique in that it has no need for the currency it creates by decree. It neither has nor doesn't have its own currency at any time. This is because it creates the currency when it purchases the goods and services it requires and that currency is not a tangible thing that holds intrinsic value, but rather a guarantee of credit toward payment of tax obligations. When the government “collects” a unit of the currency in taxation the act of collecting cancels that guarantee and it is destroyed as part of the money supply.
This process is much like a movie theater or sports stadium selling tickets. The tickets have no value beyond guaranteeing one a seat at a specific event. When one attends the event the theater/stadium generally destroys the ticket so it can’t be used again. If one wishes to attend another event they must purchase another ticket to guarantee their admission, and the theater/stadium will issue a new ticket for that event. It doesn't store and recycle tickets from previous events to sell for upcoming events, as those have served their purpose. The only distinction between this process and the government’s ability to create and collect its own currency is that the government is not functionally limited in the quantity of its own currency it is able to create or destroy, while the theater/stadium has a physical limitation defined by the number of seats it can guarantee.
When the government spends to provision itself and to pay for programs that it has decided it would fund, the currency is created from thin air via accounting of the tax credits it grants. Those only become “money” when they are accepted by a non-government entity. Since only the government sector can decree the currency into existence and all others are “users” of that currency, the definition of “non-government sector” is apt for them. The non government sector is where commerce takes place as the tax credits are traded for goods and services between currency users. This commerce is only possible if the government creates more tax credits than it cancels by collecting taxes.
If the government sector “balances” its budget continually, collecting taxes equal to what it spends, it effectively disables commerce denominated in its currency in the non government sector that will, eventually, realize that it is being hoodwinked into providing the goods and services the government sector requires without payment for those except what the government sector demands back in taxation. This creates a very unfriendly opposition relationship between government and everyone else, akin to extortion, and the non government sector has little choice but to establish an alternative currency for use in commerce. Such a fool’s errand on the part of the government, especially considering it has no use for the currency it collects and only destroys it upon receipt, is the stuff discord and revolutions are made from.
This is a good point to toss another fly into the ointment by defining another “sector”, splitting the non government sector into two fragments. So far, we have only touched on the government’s relationship with the rest of the world as a single entity for simplicity, but that isn't entirely accurate. The domestic users of the currency/tax credits also face competition for that currency from those countries we trade with, the foreign sector. As we trade with other countries they remove, or add, currency to the total, and as a resource rich country with a capitalist economic system our foreign trade added considerable wealth to our economy, — — — until it didn't. You may see this balance accounted for in economic discussion as “current account balance”.
I’ll assume everyone is somewhat familiar with the trends in foreign trade that shifted drastically from positive numbers post WWII to considerable negatives as America’s post war production superiority eroded and our demand for cheaper goods could only be filled by countries with lower living and wage standards. In our effort to maintain the peace, we exported much of our prosperity to our trading partners, shifting many domestic jobs overseas as other countries recovered their production capacity.
While this drain on American prosperity was somewhat mitigated when Nixon removed us from the post war Bretton-Woods treaty and the gold standard/fixed exchange it imposed upon our currency, the shift it created in the balance between capital and labor in the US was never properly addressed in any way that allowed labor to maintain any control of its own standard of living. Consequently, the domestic economy has suffered from considerable currency drain from the gains made by the foreign sector. This would not have presented the threat it did had the government sector compensated for that drain by increased deficit spending into the domestic economy. Doing so would have preserved the positive effect of trade on the domestic economy and simply allowed us to purchase “real” resources and labor represented by the imported goods with currency that would leave the domestic money supply, creating no inflationary pressure.
However, the concept of a completely fiat currency with no tether to a commodity or exchange rate was quite new to America’s elected government and economists and we have never really adjusted to the dynamics, or opportunity, it presents. Just as America was ramping up its import of the cheaper foreign goods a political movement was conceived that convinced many voters that government fiat spending was not actually income to the non government sector, but was only borrowing from the private sector that would have to be repaid at some time with dwindling finite resources. Taxation was largely painted as the government sector’s “income” and balanced budgets, mostly achieved via reduced currency creation that ignored the reality of simple dual entry spreadsheet accounting, became the holy grail of political rhetoric.
The net effect of this reversal of perception to the functional reality of the currency creation and management has been a steady decline in the government’s ability to manage the domestic economy effectively without causing considerable political upset. The biggest hurdle currently facing the American economy is entirely political as voters view their government with a jaundiced eye and a perception born out of their own budget/finance as “users” of the currency. As they demand less government spending as a result of their mistaken perception of taxation as “revenue/funding” for the government and the money supply as “debt” that they, or their children, will have to repay they are starving their own economy of the lifeblood it requires to remain healthy, which is a flow (velocity) of currency that can only originate from the federal government.
This would have crashed our economy long ago except for the increased role that banking has played in our economy, but that is the next topic to be addressed. The points to be taken from this part are; government and non government sectors are separated by the ability of the federal government to create/destroy the currency into/out of the economy while everyone else is only allowed to “use” that currency; and that the red ink (debt) of the government sector is the black ink (net fiscal assets/savings) of the non government sectors, including the foreign sector.
