The Federal Budget is NOT like a Household Budget: Here’s Why
Wednesday, 02/10/2010 - 12:49 pm by L. Randall Wray | 35 Comments
L. Randall Wray takes the fear and loathing out of understanding federal budget deficits.
Whenever a demagogue wants to whip up hysteria about federal budget deficits, he or she invariably begins with an analogy to a household’s budget: “No household can continually spend more than its income, and neither can the federal government”. On the surface that, might appear sensible; dig deeper and it makes no sense at all. A sovereign government bears no obvious resemblance to a household. Let us enumerate some relevant differences.
1. The US federal government is 221 years old, if we date its birth to the adoption of the Constitution. Arguably, that is about as good a date as we can find, since the Constitution established a common market in the US, forbade states from interfering with interstate trade (for example, through taxation), gave to the federal government the power to levy and collect taxes, and reserved for the federal government the power to create money, to regulate its value, and to fix standards of weight and measurement-from whence our money of account, the dollar, comes. I don’t know any head of household with such an apparently indefinitely long lifespan. This might appear irrelevant, but it is not. When you die, your debts and assets need to be assumed and resolved. There is no “day of reckoning”, no final piper-paying date for the sovereign government. Nor do I know any household with the power to levy taxes, to give a name to — and issue — the currency we use, and to demand that those taxes are paid in the currency it issues.
2. With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since. Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. I do not know any household that has been able to run budget deficits for approximately 190 out of the past 230-odd years, and to accumulate debt virtually nonstop since 1837.
3. The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might manage to work this up to yet another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, by the way, our less serious downturns have almost always been preceded by reductions of federal budget deficits. I don’t know of any case of a national depression caused by a household budget surplus.
4. The federal government is the issuer of our currency. Its IOUs are always accepted in payment. Government actually spends by crediting bank deposits (and credits the reserves of those banks); if you don’t want a bank deposit, government will give you cash; if you don’t want cash it will give you a treasury bond. People will work, sell, panhandle, lie, cheat, steal, and even kill to obtain the government’s dollars. I wish my IOUs were so desirable. I don’t know any household that is able to spend by crediting bank deposits and reserves, or by issuing currency. OK, some counterfeiters try, but they go to jail.
5. Some claim that if the government continues to run deficits, some day the dollar’s value will fall due to inflation; or its value will depreciate relative to foreign currencies. But only a moron would refuse to accept dollars today on the belief that at some unknown date in the hypothetical and distant future their value might be less than today’s value. If you have dollars you don’t want, please send them to me. Note that even if we accept that budget deficits can lead to currency devaluation, that is another obvious distinguishing characteristic: my household’s spending in excess of income won’t reduce the purchasing power of the dollar by any measurable amount.
If you put your mind to it, you will no doubt come up with other differences. I realize that distinguishing between a sovereign government and a household does not put to rest all deficit fears. But since this analogy is invoked so often, I hope that the next time you hear it used you will challenge the speaker to explain exactly why a government’s budget is like a household’s budget. If the speaker claims that government budget deficits are unsustainable, that government must eventually pay back all that debt, ask him or her why we have managed to avoid retiring debt since 1837-is 173 years long enough to establish a “sustainable” pattern?
Roosevelt Institute Braintruster L. Randall Wray is Professor of Economics at the University of Missouri-Kansas City.
Hear hear. Now I hope I can convince some of my associates to actually read this article…
Posted by James Call | February 11th, 2010 at 7:05 am
The powers of seigniorage and taxation that make a government so different are not perpetual. Abusing them can cause them to weaken or disappear entirely. Just because the US Federal Government has been able to maintain them for 173 years, doesn’t mean that they will in the future. History is littered with the corpses of empires with much longer tenures on the world statge, that went broke borrowing and coining, why is the US empire any different?
Are you saying there is no limit to the US Gov’t power to coin and tax? No point at which the interest burden becomes too much to bear?
Posted by Brian | February 11th, 2010 at 10:23 am
For a moment, just try to set aside all of the anthropocentric reasons which supposedly “explain” the current economic depression. Instead, consider the the fact that energy is defined by physicists as the ability to do work.
All activity (economic or otherwise) requires energy. Without energy LITERALLY NOTHING HAPPENS! It’s therefore axiomatic that if there is less available energy to do work, there is less work that can be done. Occam’s Razor is the principle that states that the simplest explanation or strategy tends to be the best one. It’s amazing how none of the mainstream, and even progressive circles, seem to realize that something as simple as the fact that there is less energy available to do work, is what’s actually caused the massive problems we see today, and why, in the absence of a truly revolutionary energy source, things will only get worse.
We have to realize that money DOES NOT make the world go turn - ENERGY DOES. Money is just a symbol, an information medium, to communicate who has the energy. We need to abandon surface explanations, and take a biophysical economic perspective.
http://questioneverything.typepad.com/question_everything/2009/12/economic-dynamics-and-the-real-danger.html
“But not one of these bright lights considers that the root cause might be something entirely different from all the usual neoclassical suspects. Not one considers that the actual cause of this debacle is the fact that less real physical (economical) work is being done because there is less net energy available with which to do it. The debt was definitely a factor in the rate and severity of the collapse since debt since at least the 1970s has been built up against a presumed future of production sufficient to pay back both principal and interest. But also since at least the 1970s the net energy available for non-energy extractive economic work (meaning other resource extraction and refining, manufacturing, and all of the service work) has been in steady decline (see: What counts as real wealth). In other words, the world has been decreasingly able to do the work necessary to service and retire that debt. Yet debt financing became the only way anyone could see to keep the engine running. News flash for economists: It isn’t dollar bills that power your car, it is gasoline. When the latter is starting to diminish in availability it takes more of the former to buy the same amount of power.”
- George Mobus
Posted by catagenesis | February 11th, 2010 at 10:32 am
So wait. A household can take on debt to finance long-term security, right? We call that “buying a house” and it’s generally considered a good thing.
How is that any different, metaphorically speaking, from federal deficit spending?
Posted by Dan Ancona | February 11th, 2010 at 1:10 pm
Thanks for comments.
1. govt interest payments are not a “burden”. The nongovt sector gets income in the form of credit of interest to bank acct. govt accomplishes this by pusing a key on the keyboard and making an entry.
2. yes taxes are a burden–reduce disposable income. and yes, moving more resources to govt sector means less available for private sector if the economy is operating at full employment.
Posted by L. Randall Wray | February 11th, 2010 at 1:28 pm
continued:
3. yes nongovt sector can go into debt to finance purchases; and “investment” based on debt can make sense. but that debt must be serviced out of income flows or asset price appreciation. Not the same for govt. It services debt by crediting bank accts.
4. govt can lose sovereign power. it can lose a war, it can suffer a revolution. it can voluntarily give it up (peg to gold, adopt a foreign currency). it is possible that one of those three might occur in the case of the US, but i would bet against it happening any time soon. and none of these are implied by running deficits.
Posted by L. Randall Wray | February 11th, 2010 at 1:32 pm
Thanks, for whatever reason the lightbulb came on after reading this blog. Having a concretes Understatnding of the difference between a household budget vs a Sovereign govt’s budget cuts through the fog of deficit cutting mania.
Also, pure insanity to issue US treasuries in liieu of simply printing greenbacks. How many trillions of dollars in interest have been paid to banks in interest & for what?
Posted by Jonathan | February 11th, 2010 at 2:35 pm
Great article. But, as you know, Larry Summers is a very bright guy and understands that this is the way the system works, soooo……what are the political motives behind this bizarre emphasis on deficits??? Is this all a ruse to further privatize the public sector and crush the labor movement?
Please elaborate.
Posted by Mike | February 11th, 2010 at 8:13 pm
Hi Mike: see my latest at our blog site. http://neweconomicperspectives.blogspot.com/
It goes through the politics, which is a partial answer.
Posted by L. Randall Wray | February 11th, 2010 at 11:10 pm
Love the piece. Now can you do one about how and why government ought not be run like a business?
Posted by Barry | February 12th, 2010 at 9:32 am
LRW,
Contrary to what even I believed, the actual national debt fell in nominal dollars from $278.7 billion in 1945 to $256.7 billion in 1950. See http://fraser.stlouisfed.org/publications/ERP/page/4980/1722/download/4980.pdf. Yes, the Federal government ran surpluses back then and the debt fell in nominal dollars. Of course, with inflation it fell much faster in constant dollars. No depression occurred.
Posted by Peter Schaeffer | February 12th, 2010 at 4:51 pm
Your analysis is great, but I’m interested in why a country like say, Argentina, which has already defaulted on its sovereign debt, hasn’t caught on to this approach. Why wouldn’t the U.S. eventually become another Argentina? Is it perhaps that the dollar is the world’s reserve currency?
Posted by William Beyer | February 12th, 2010 at 5:58 pm
At first, it seems like you make some valid points.
But can governments just keep printing endless amounts of money without facing any consequences? If so, then we really don’t have anything to worry about.
But I recall hearing something about people in Germany using paper money to heat their homes because they were worthless. I also read about the same thing in Zimbabwe. Argentina also went through a lot of turmoil with their money.
Are you saying that the US doesn’t have to worry about any such developments?
Posted by Tim Maitski | February 13th, 2010 at 10:27 am
Tim, it’s likely that Professor Wray is talking about spending within reason. Although, I don’t know what his limits are. He’s just pointing out that it doesn’t look like the deficit poses an imminent threat.
Posted by SDProg | February 13th, 2010 at 10:49 am
In my opinion your claims about the linkage between the retirement of public debt and depressions are suspect. Let’s start at the beginning. The public debt of the U.S fell from $127 million in 1816 to $96 million in 1819). That’s a reduction of around $7 million per year. Back then U.S. GDP was roughly $750 million back then. In other words, the public debt fell by roughly 1% of GDP per year.
Did this crash the U.S economy and if not what did? Well an examination of the GDP deflator provides a better explanation. From 1814 to 1819 the GDP deflator fell from 8.39 to 5.19. Falling prices brought down the U.S. economy.
Why were prices falling so dramatically? Well as it turns out 1814 was the all time high for many commodity prices because of the Napoleonic Wars. Global commodity prices crashed after the Congress of Vienna. The U.S. economy was commodity based back then and predictably suffered as commodity prices fell.
For another perspective see “Financial Panics of the 19th Century”. A quote
“Panic of 1819. It was triggered by a collapse in cotton prices. A contraction in credit coincided with the problems in the cotton market, and the young American economy was severely affected.”
It is worth noting that real GDP never fell in the crash of 1819 and actually grew every year from 1816 to 1825.
The actual course of the public debt doesn’t support your argument about the crash of 1837. Public debt fell gradually from 1820 to 1826 with no apparent adverse impact on the U.S. economy. After 1826 ($81 million) public debt plunged until 1833 ($7 million). The economy didn’t crash. After 1833 public debt was so low (less than 1% of GDP) that the changes aren’t material.
The U.S. economy did crash in 1837. See the same source for some details. Notably, the GDP deflator fell from 5.24 in 1837 to 4.95 in 1840. Real GDP continued to increase over the period in question.
Why did the economy crash in 1837? Of course, we have the standard (and quite real) arguments about runaway speculation ending in disaster (a recurring theme). However, many folks point to a more specific cause. In 1836 Andrew Jackson issued the legendary Specie Circular requiring that public lands be paid for in Gold or Silver (versus paper money). It appears that this executive order popped the bubble.
The crash of 1857 fits the same pattern. The public debt did fall from $68 million in 1851 to $29 million in 1857. However, nominal GDP was around $4.14 billion in 1857. So we are talking about a reduction in public debt of around 0.15% per year.
In truth, the 1850s were a period of stellar growth in U.S. GDP rising from $49.59 billion (2005 dollars) in 1850 to $72.84 billion in 1857 to $82.11 billion in 1860. For better or worse, the economy was not a precipitating cause of the Civil War.
The crash of 1873 provides a more ambiguous case. Public debt did fall from $2.773 billion in 1866 to $2.148 billion in 1873. Given that nominal GDP was $8.99 billion in 1866 and $8.75 billion in 1873 (real GDP grew much faster, the GDP deflator was falling), the public debt was declining by around 1% of GDP per year.
Did this trigger the crash of 1873? The usual sources attribute the crash to speculation, railway overbuilding, the fall of Jay Cooke and company (he was trying to build the Northern Pacific). All of that is true.
However, the economy was under significant pressure from a declining money supply. Notes in circulation fell from $983 million in 1865 to $750 million in 1873 (the low point was $700 million in 1870). The GDP deflator fell from 9.39 in 1865 to 6.33 in 1873. Given the falling money supply and prices the crash isn’t that surprising.
The crash of 1893 did occur in a period of declining public debt. However, the details from the period don’t show any causality. Actually, they could be used to argue that a failure to reduce the debt caused the crash. The debt falls from $1.723 billion in 1880 to $725 million in 1890. Over the same period real GDP rises from $191.8 billion in 1880 (in 2005 dollars) to $319.1 billion in 1890. Given that nominal GDP was $15.1 billion in 1890, the debt is falling by around 2/3rd of a percent per year with fast economic growth.
After 1890, the public debt stops its rapid decline (falling from $725 million in 1890 to $585 million in 1893) and the economy stalls. Real GDP was virtually the same in 1890 and 1893. The crash of 1893 appears to be a consequence of poor economic growth that finally brought down the stock market and the economy. Notably, real GDP fell from 1893 to 1894. This was the first significant fall in real GDP in U.S. history save for the first year after the Civil War.
Overall, the 19th century can be divided into two periods. Before the Civil War, the public debt was too small and changes were too small to account for the crashes that occurred. Other well known (at least today) factors were clearly evident.
After the Civil War, the public debt was material. However, changes in the public debt were a consequence of booms and busts, not a cause. The causes appear to be found elsewhere in the money supply and general economic trends.
Posted by Peter Schaeffer | February 13th, 2010 at 2:04 pm
OK Mr Schaeffer has been very busy trying to come up with an alternative explanation for the empirical correlation. First, he argues there were other factors involved. Fine–there always are. These are not well-controlled experiments. And, as JK Galbraith said about the 1929 crash, any number of events could have finally set off the crisis–it was a crisis waiting to happen. I am sure much can be said about every other depression, and also about our most recent collapse from 2007 to ???
Posted by L. Randall Wray | February 13th, 2010 at 3:26 pm
Second, he loves to manipulate the data in all sorts of ways–divide by GDP, divide by price level. As far as I can tell, this is merely to confuse the discussion. What I said is that when govt runs a surplus sufficient to retire a significant amount of debt, that is followed by a severe downturn. I did not invoke any ratios or adjustments for inflation. It is in strictly nominal terms.
This is not because I think that the ratios to GDP are not interesting or important for other discussions–but they are not relevant to this particular correlation.
Posted by L. Randall Wray | February 13th, 2010 at 3:27 pm
Third, for interested readers, here are references where you can read more about the empirical correlations:
a) Rodger Malcolm Mitchell, author of the book “Free Money: Plan for Prosperity”. Following is an excerpt from his website:
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1998-2001: U. S. Federal Debt reduced 9%. Recession began 2001
2004-2008: Deficit Growth reduced 40%. Recession began 2008.
Posted by L. Randall Wray | February 13th, 2010 at 3:28 pm
b) Here is the original article by Thayer, who is the source I used: http://findarticles.com/p/articles/mi_m0254/is_n2_v55/ai_18262055/
unless you subscribe you will find it easier to get a version here:
http://www.epicoalition.org/docs/thayer.htm
Posted by L. Randall Wray | February 13th, 2010 at 3:31 pm
And in the interests of balance, here is a naysayer:
http://usbudget.blogspot.com/2009/10/do-balanced-budgets-cause-depressions.html
who criticizes both mitchell and thayer. I do not find his arguments to be very strong, but read them for yourself. At least he does not try to manipulate everything by converting the debt numbers to ratios.
Posted by L. Randall Wray | February 13th, 2010 at 3:33 pm
Please see my piece, Surplus Mania from 1999 at http://www.levy.org/pubs/pn99_3.pdf
It extends Thayer to postwar period, explains why budget surpluses kill the economy, and predicts recession because of the Clinton surpluses.
Here are 2 brief passages from my piece (written 11 years ago):
If, as projected, the federal government continues to run surpluses (resulting in Treasury debt retirement), this
must as a matter of course remove $4.5 trillion of private sector wealth over the next 15 years. Can an economy
withstand such a bloodletting? Our own history suggests not, and we can also look to the recent experience of
Japan.
Americans know that Japan’s growth rate in the 1980s was the envy of the world, but they are generally
unaware that the government deficits as a percent of GDP rivaled those in the United States. The enormous
growth of the 1980s caused government tax revenue to rise faster than spending so that by 1990 the budget
moved to surplus. The Japanese economy moved into a recession-cum-depression from which it has not been
able to recover. Government deficits have been restored, but as a result of the sluggish economy, not as a result
of discretionary, expansive, fiscal policy. While there have been some small initiatives to cut taxes and increase
government spending, Japan has relied on monetary policy. For the second time in a year, Japan is pushing
interest rates essentially to zero in an attempt to stimulate the economy. To this point, the most expansive
monetary policy the world has seen since World War II still has not succeeded in jump-starting Japan’s
economy. This might serve as a cautionary tale for those who believe that Chairman Greenspan can keep the
U.S. expansion going in spite of budget surpluses that are expected to rise well above 2 percent of GDP early
next century.
Posted by L. Randall Wray | February 13th, 2010 at 3:52 pm
LRW wrote:
“1. govt interest payments are not a “burden”. The nongovt sector gets income in the form of credit of interest to bank acct. govt accomplishes this by pusing a key on the keyboard and making an entry.
2. yes taxes are a burden–reduce disposable income. and yes, moving more resources to govt sector means less available for private sector if the economy is operating at full employment.”
How is the amount of interest that is paid out of the Federal Budget not a burden to it? The more debt the treasury issues, the more interest must be paid, the more taxes must be collected.
Our currency is not based in government credits, but in the private notes of the for profit and privately owned FRBs. The treasury doesn’t issue credits, it issues debt that is traded for privately issued FRB Notes whose supply is controlled by the privately owned FRB Cartel. That is the “non government sector” that benefits from these shenanigans, not the taxpayer. The taxpayers are being systematically striped of their property, first by inflation, then by deflation. Good morning, we are homeless on the continent our fathers conquered.
Posted by Brian | February 14th, 2010 at 12:31 am
I realize the accounting is difficult to follow. Try this:
This comment is pending approval and won’t be displayed until it is approved.
Govt is first a creditor: it imposes a tax on you which is your liability and its asset.
Next govt is a debtor: it issues currency to buy what it wants, and now you are creditor
Next you pay your tax, wiping out your debt, your asset, the govt’s debt and the govt’s asset
If it spends more than it taxes, it is a debtor and you are creditor. it pays no interest unless you want to exchange a bank deposit for a treasury (or if your bank wants to exchange reserves for a bond). in that case it will pay interest and does so by crediting bank accts.
It is all so elementary. Hope you get it.
Posted by L. Randall Wray | February 14th, 2010 at 10:36 am
The US government does NOT issue currency, and it hasn’t since 1913. Your argument presupposes a sound currency, which we most certainly do not have.
So this is how your statement should read:
Govt is first a creditor: it imposes a tax on you which is your liability and the Federal Reserve’s asset.
Next govt is a debtor: it issues currency to buy what it wants, and now the Federal Reserve is a creditor
…
If it spends more than it taxes, it is a debtor and the Federal Reserve is a creditor. it pays no interest unless the Federal Reserve wants to exchange a bank deposit for a treasury (or if your bank wants to exchange reserves for a bond). in that case it will pay interest and does so by crediting the Federal Reserve.
Your conflation of the Fed and the taxpayer is troubling; the Fed and its member banks hate the taxpayer, neo-feudalism is their end game. They’ve successfully used the age old Money Changer play-book (ie inflate then deflate; blow bubble after bubble) to steal everything of value in the private sector. The only borrower left dumb enough to keep borrowing after this last bubble burst is the Government. And that is the biggest bubble of them all, Sovereign Debt, when that one blows, it really is game over.
Posted by Brian | February 14th, 2010 at 11:46 am
Randy,
While your principle is valid, there is a question of sustainability of runaway deficits.
The US budget is on an unsustainable track, with an aging population and rising Medicare and Medicaid and Social Security expenditure rising faster than GDP in the next decade and beyond. Before the current financial crisis, government deficit was 3% of GDP and public debt was 40% of GDP. Within these number, you principle is valid.
But the financial crisis and the resultant recession have put the federal deficit to more than10% of GDP and public debt at 64% of GDP and gross government debt at 90% of GDP. in 2010, both expected to rise in the next decade. There is a general consensus that public debt cannot be sustained if it is allowed to rise above 60% of GDP, projected to reach 88% of GDP within a decade.
Another issue is how and where the deficit is spent. The 2009 U.S. military budget is almost as much as the rest of the world’s defense spending combined, albeit its still only 4% of US GDP.
Democratic Congressman Barney Frank called for a significant reduction in the defense budget during February 2009: “The math is compelling: if we do not make reductions approximating 25 percent of the military budget starting fairly soon, it will be impossible to continue to fund an adequate level of domestic activity even with a repeal of Bush’s tax cuts for the very wealthy. I am working with a variety of thoughtful analysts to show how we can make very substantial cuts in the military budget without in any way diminishing the security we need…[American] well-being is far more endangered by a proposal for substantial reductions in Medicare, Social Security or other important domestic areas than it would be by canceling weapons systems that have no justification from any threat we are likely to face.”
Henry
Posted by Henry C.K. Liu | February 14th, 2010 at 1:34 pm
Brian: Fed is a part of govt, a creature of congress, no more separate than is the DOT or Social Security. Love it or hate it, it is govt–whether it loves or hates you, too. All balance sheet operations betw fed and treas are just internal book-keeping operations that constrain treas only if we want them to.
Henry: am writing a piece right now on this “sustainability” topic. The problem is not the deficit, the debt, or govt finance. It is whether we can mobilize resources to keep such a huge military, conduct foreign wars, take care of retirees, and provide for the young and poor. So while I agree we need to cut military by a quarter–I’d cut it by more than that–this has nothing to do with finance. Anyway, I’ll have a paper on this soon.
Posted by L. Randall Wray | February 14th, 2010 at 3:50 pm
The Fed Board of Governors http://www.federalreserve.gov/ is part of the government, but he individual banks, http://www.newyorkfed.org for example are not.
The Federal Reserve Banks are private corporations managed by a Board of Directors who are appointed by its share holders (2/3rds) and the Fed Board of Governors (1/3rd). Private corporations by law have only one mission, to maximize profits for its shareholders. They do not serve the taxpayers, and I have no representation there.
Posted by Brian | February 14th, 2010 at 6:54 pm
Brian: if any of the Fed banks EVER tried to max profits you can be sure Congress would intervene in the blink of an eye. They do not act like corporations. The ownership is not relevant either. They return 6% to “owners” who actually have almost no control over them; returns above that go to Treas.
Posted by L. Randall Wray | February 14th, 2010 at 8:03 pm
I find some of the comments posted responding to this article more troubling than the article (which I mostly disagree with) itself. Especially stuff like
“Govt is first a creditor: it imposes a tax on you which is your liability and the Federal Reserve’s asset.”
I don’t consider myself or my ability to create wealth anyone else’s asset to expropriated. Last I checked (legal) slavery ended with the American Civil War. I can’t think of anyone I know who goes to work each day reminding themselves how they toil so hard so that they can support the financial burden of the various taxing authorities. Taxes are what we pay for the priveledge of living in civil society and supporting common goals/values. It is a giant leap between that concept and government’s unchecked claim on all present and future wealth created by each of us.
And if governments have no need to ever repay debt and can print currency as needed to make up any short-fall from taxation, then why not dispence with taxation altogether and just print money (or issue credits on desposits on reserve with the FED - or any other form of printing)?
Doing the above thought exercise just demonstrates, that the power to create money untethered to any claim on wealth already created means that that same money is nothing but a claim on someone elses wealth to be created in the indefinite future, i.e. a tax. It seems to me that this thought experiment is playing out in real life so we’ll see who is right soon enough. Each of us should position our personal finances and investments on the basis of our answer to that question.
Treating government finances as somehow different than household finances simply because it has the unlimited ability to create currency at will inplies that the micro-economic principles don’t apply when scaled up to the macro economy and applied to government. I think the premise of this argument falls flat until governments invent a way to create wealth out of thin air the same way they create money. It is more likely that someone will invent a perpetual motion machine.
Posted by B Salz | February 14th, 2010 at 8:10 pm
You said : Fed is a part of govt, a creature of congress, no more separate than is the DOT or Social Security.
So why can’t we get a full audit of the Fed? I thought they were fully independent? The Fed can do anything that they want. How is this part of our government?
Posted by Tim Maitski | February 15th, 2010 at 4:42 pm
Congrats for this fantastic demonstration!
And I think it can be extended to management: You cannot manage a country (public services) like you manage a household or a company.
Anyway, talking of the US dollar, could you make please some comment about the fact that on our “small island” called “Earth”, you get one “big tribe” which members works like hell and have indexed their currency over the US dollar?
I mean we puchase heaps of things from China but the Yuan/US rate doesn’t move up a single cent. However when you purchase to a foreign country, you must pay (directly or indirectly) your supplier in their local money. Consequently, because a country is not supposed to print money without decreasing its “absolute” value, purchasing things to a foreign country should make its currency raising, wouldn’t it?
Therefore having a money like the Yuan arbitrary indexed (and I think largely under-evaluated) against the US dollar, makes China a new State of USA, doesn’t it?
Is this fact understood and accepted by the US Congress?
Posted by Guillaume Rosquin | March 3rd, 2010 at 8:28 pm
You can track your expenses and manage your budget with web application at this link http://www.troskovnik.podzone.net/
Posted by Ficho | March 20th, 2010 at 4:17 am
I have a question about new issue treasuries. If I´ve understood MMT correctly when the treasury issues bonds, it is to adjust the interest rate and not to fund the government.
Does this mean there is no relationship between budget deficits and new treasuries issued in a budget year?
Posted by dagman | July 7th, 2010 at 5:52 am
I was wondering if you were aware that the start of the 6 depressions you mentioned in your article all fall in the 9/56 year panic cycle. This applied to panics in 1819, 1837, 1857, 1873, 1893 and 1929.
Interestingly, 2007 also falls within the pattern.
http://www.davidmcminn.com/pages/fcnum56.htm
Cheers David
Posted by david mcminn | August 7th, 2010 at 3:16 pm
Perhaps federal government debt is reduced before depressions/recessions because tax receipts rise faster than spending in the boom periods before the bust periods…
I think it’s a gross simplification of our complex economy to link a reduction of debt with every depression/recession.
If we follow your logic, we should just keep printing money and spending away!? That’s ridiculous.
Debt always comes due. If we pay for it using printed money, that results in inflation.
Posted by John Vignocchi | August 19th, 2010 at 3:03 am