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We need to understand money.
Article 1, Section 8, Clause 5 of the U.S. Constitution reads:
[The Congress shall have the Power] To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures
The power “to coin money” and “regulate the value thereof” has been interpreted by Supreme Court decisions and Constitutional experts to authorize the creation of every form of money – coin, paper, electronic. This challenges everything we are led to believe about money. Our Federal Government, through the U.S. Treasury and Federal Reserve Bank (the Fed), is the Constitutionally authorized, source of the nation’s money.
Clause 5 means our Federal Government can never run out of money. Lack of money at the Federal level is always a political, not monetary, decision. Politicians fund billionaire defense contractors nearly a trillion dollars every year, no questions asked. But supporting working people – infrastructure repair, universal healthcare – brings the immediate refrain – – “how are you going to pay for it?” The answer: “The same way we pay for defense spending. Congress is going to approve of infrastructure repair and universal healthcare, and the Treasury and Fed are going to create the money to do it. That’s how we’re going to pay for it.”
Clause 5 means our Federal Government does not tax us to fund Federal spending. Exactly the opposite, Federal Government spending creates the money we use to pay our taxes. If the Federal Government didn’t create the money we use to pay taxes, where would the money come from? Would we counterfeit it? Taxes at the Federal level have 4 other functions: Taxes enforce the legitimacy of the dollar as the nation’s currency; taxes help control inflation/deflation; progressive taxes reduce gross inequality; taxes reduce unwanted behavior (e.g., taxing tobacco, alcohol).
Clause 5 means the terms “deficit” and “debt” are entirely misleading when applied to our Federal Government. The deficit is the annual difference between how much money the Government creates out of nowhere and spends into the economy, and how much money it taxes back out. The “deficit” isn’t “owed” to anybody. It’s money the Government has created to enable a functioning economy. The Federal “debt” is the total of yearly “deficits.” Like the deficit, the debt isn’t “owed” to anyone in the conventional sense of the word. It isn’t going to “bankrupt our grandchildren.” Not providing decent infrastructure or healthcare for our grandchildren will bankrupt them. As a percentage of Gross Domestic Product deficit and debt were highest following World War II, enabling unprecedented middle-class prosperity.
Clause 5 means China is never going to “own” us. A trade deficit with China means Americans buy more stuff from China than the people of China buy from us. As a result, China has excess dollars it places in low interest-bearing savings accounts called U.S. Treasuries (currently 1.1 trillion). It is misleadingly said the U.S. Government has “borrowed” these dollars from China even though the U.S. Government created these dollars. Of course, none of this money physically exists. China doesn’t have 1.1 trillion dollar bills in a giant box at the Fed. It’s just numbers on a computer. If China wishes to spend 10 billion dollars, the Fed deducts that amount from China’s computer Treasury savings account and adds it (along with interest it creates out of nowhere) to China’s computer checking account. China is then free to spend the money.
Because we are all used to a household budget where we need to get money before we can spend it, we recoil from accepting our Federal Government is just the opposite. It has to spend more than it taxes for the private sector to have money (this is why the “Balanced Budget” Amendment is such a dangerously ignorant concept). Of course, none of this applies to state and local government. They cannot create money so must tax or receive funds from the Federal Government to spend.
Below, from the Congressional Record (on YouTube), is a 2005 conversation between then Chairman of the Fed, Alan Greenspan, and then Congressman, Paul Ryan.
Ryan attempts to lure Greenspan into agreeing the Social Security System, providing retirement income for millions of elderly or disabled Americans, was becoming insolvent and the way to save it was to privatize it through “personal retirement accounts” (turn Social Security funds over to Wall Street). Greenspan educates Ryan in how the Federal budget actually works:
Congressman Ryan: “Do you believe that personal retirement accounts can help us achieve solvency for the system [Social Security] and make those future retiree benefits more secure?”
Chairman Greenspan: “I wouldn’t say the pay-as-you-go benefits [Social Security payments] are insecure in the sense that there is nothing to prevent the Federal Government from creating as much money as it wants and paying it to somebody. The question is. . . How do you set up a system which assures that the real assets are created which those benefits are employed to purchase? So – it is not a question of security – it is a question of the structure of a financial system which assures that the real resources are created for retirement as distinct from the cash.
One cannot overstate the importance of what Greenspan said. Translated: Social Security is in no danger of becoming insolvent because the US Treasury and the Federal Reserve Bank are the creator of the nation’s money and can create whatever money is needed to pay social security benefits. The system cannot become insolvent unless Wall Street manipulated politicians decide to make it insolvent. It’s a political, not monetary decision.
This discussion will be seen as heresy by many. Trying to be brief, much is not included. The important function of community banks in expanding the money supply through fractional reserve banking is left out, and of course the “inflation” fear mongerers will come screaming (ask why trillions spent on defense spending, Wall Street bank bailouts, or tax cuts for the rich aren’t inflationary but infrastructure or healthcare are). These topics have long since been addressed in the formal literature on this subject. To learn more, see:
“The Deficit Myth” by Economist Stephanie Kelton
“The Seven Deadly Innocent Frauds of Economic Policy” by banker and hedge fund manager Warren Mosler available free online at Mosler Economics
Believing a Fairytale About Where Money Comes From by Professor Mary Mellor
Dave Svetlik, Kronenwetter