This shrinkage is not only due to inequality, but also the reluctance of Congress to replace dollars leaked, or sequestered, out of the economy. With the current voter ignorance about their own economy and where their money comes from congresscritters are continually under pressure to cut any except military spending in a mistaken assumption they are “saving” taxpayers money that would otherwise go to funding a bloated government.
If one follows a newly created dollar in the private sector, and the “debt” entry made in the government’s sector of the spreadsheet to track and error check the money supply, it soon becomes obvious that tax and bond receipts can’t actually fund anything because they are balanced (deleted) when they get together with their own debt entry in the same sector.
This means that each dollar collected vanishes into the thin air it was created from, only serving to reduce an accounting entry, and any spending must be via new money creation and new debt. The government sector never “has” dollars because it always has debt for every dollar in circulation in the private sector. “Tax revenue” is an oxymoron meant to misinform regular morons.
Reagan used the term “taxpayer dollars” to convince voters that it was “their” money being lavished on programs for the poor, who he characterized with the fictional “welfare queen” who drove her new Cadillac to the store to use her food stamps. No examples of that were ever found in the wild, but the concept of the people “funding” their government’s wastefulness was implanted and nurtured as the bedrock of conservative economics and trickle-down that positioned the private sector as the “source” of all dollars.
This resonates quite well with voters, and many politicians, because it is how their personal budget process, and that of any entity “not” the monopoly issuer of the currency, works. To a voter, a dollar is a “thing” that they must obtain before spending and borrowing too many of them is unwise. This equating of personal and federal budget processes is only applicable if each “taxpayer” has a legal printing press in their basement churning out dollars on demand.
This basic misconception surrounding federal finance, prevalent even among economists who were trained by “gold standard” teaching, fails to account for dollars that are leaked from circulation by trade deficits and wealth accumulation. Neither is any real threat by itself as long as those dollars are replaced by Congress issuing new dollars, but misinformed voters have created a political environment that makes that very difficult.
If you are a wealthy investor this errant perception of money is quite beneficial as it keeps the middle-class worker cheering for his own demise and supporting the concept that “you” fund his living standard. That worker will resist any attempt by the government to regulate or tax your business for you and will blame any economic misery on the government that s/he sees as a competing “user” of the currency, not the “source” of all currency not balanced by private sector debt.
In a fiat currency economy with a floating exchange rate, wealth is entirely relative and dependent upon what your wealth will buy. If J.D. Rockafeller was transported in time today with his fortune he would barely be a blip on the list of top wealth owners if his money wasn’t adjusted to inflation. While inflation is the boogeyman dragged out anytime the subject of “printing money” by the government (which doesn’t actually print money any longer) is forwarded, it is beneficial to wage earners as long as it is compensated for with additional spending. It drives accumulated wealth back into investments that are less safe, but offer higher returns to avoid wealth erosion.
The Fed is having trouble hitting its inflation targets (which I would double) because it can’t convince Congress to spend into the economy sufficiently. As trade deficits and wealth accumulation drain away dollars the workers are forced into financing many of their necessities with bank debt. That debt carries an automatic inflation factor but cannot be retired without dollars only Congress can create, so it is a death spiral only mitigated by GDP growth to “rollover” private debt.
Any time growth slows in economic downturns the house of cards is at risk of complete failure, as we saw in ’08 and only large injections of federal money via automatic stabilizers can stop domino-like failures of supply chains. As voters pressure their government to make cuts to the safety nets this risk increases drastically. As middle-class wealth is depleted and the ability of workers to retire their bank debt is at risk the wealthy will take their incomes from the government directly with increased subsidies of their businesses and extreme tax breaks and will hide it offshore. This is “late-stage” capitalism and is where we are now.
