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Guess What? Krugman Didn't Get The Memo.

The Anarchist's picture

"This Manifesto (Paul Krugman's) fails to inform Americans that the Federal Government is not constrained by revenue to spend since it must issue all the dollars, it needs no revenue from taxation/borrowing.

Before 1971, the federal government needed to obtain money from outside sources, because it did not have the unlimited ability to create money. It’s ability to create money (actually, to credit accounts), was limited by its supply of gold. In August, 1971, the federal government gave itself the unlimited ability to credit accounts. It became Monetarily Sovereign.

This meant, from a fiscal sense, it no longer needed to “borrow” nor did it need to tax. It could credit accounts at will. Borrowing and taxing have no effect on the federal government’s ability to credit accounts.

Borrowing is a relic of the gold standard days, and while taxing does have anti-inflationary purposes, it no longer funds federal spending. Thus, taxpayers do not pay for federal spending. The federal government credits accounts ad hoc, regardless of taxes.

The federal government borrows by creating T-securities out of thin air, more specifically, if you buy a T-bill, the government will credit your T-bill account and debit your checking account. During this so called “borrowing” process, the federal government receives nothing. It merely debits and credits accounts, according to your instructions.
The U.S. is Monetarily Sovereign, meaning it can credit accounts at will. Borrowing no longer is necessary. But, the law still is on the books.

Why does the federal government borrow?

The answer lies in history. Borrowing is necessary for a monetarily non-sovereign government (states, counties cities, Italy, France et al), because such governments are unable to credit accounts at will. So, the U.S. has a pre-1971 law requiring the Treasury to borrow an amount equal to the federal deficit.

What is the relationship between federal deficits and federal debt?

Functionally, none. Federal crediting of checking accounts could exceed federal taxes (aka “deficit) by many trillions of dollars, yet the government never would have to create a single T-bill. Similarly, the federal government could credit T-bill accounts by many trillions of dollars, and never have to credit a single checking account. The only relationship between federal deficits and federal debt is a legal one. Either can exist without the other.

So the next time you hear a politician say he wants to reduce federal deficits because the debt is too high, realize he has no idea what he’s talking about. And the next time you hear him say the deficits or debt are unsustainable, realize he’s claiming that somehow the federal government has lost the ability to credit checking accounts.

What about inflation?

There are two fundamental questions in economics:
1. How many dollars can the federal government create?
2. How many dollars should the federal government create?

Debt hawks confuse the two questions. The federal government can create dollars (i.e. credit checking accounts) endlessly. There is no limit. The federal government has the power to credit checking accounts by a trillion trillion trillion dollars, tomorrow. So all federal deficits and debt are sustainable. The federal government never can run short of money. Never. (Unless a mindless Congress tells the government not to credit checking accounts beyond a certain point known as the “debt ceiling.”)

But if the federal government credited checking accounts too much, this could cause inflation. While the Fed has done a good job controlling inflation via interest rate control, I feel confident there is some point at which checking accounts could be credited so much that even interest rate control could not prevent inflation.

Not only are we nowhere near that point, but we never have been near that point. Since that magical year 1971, inflation has been caused by oil prices, never by federal crediting of checking accounts (spending), and with very few exceptions, inflation has been close to the Fed’s target level.

What’s the bottom line?

The federal government neither needs nor uses borrowed dollars or tax dollars. It can credit checking accounts at will At current or even foreseeablly higher levels of federal spending, there is no danger of uncontrollable inflation. Reducing the federal government’s ability to credit checking accounts will hurt taxpayers by reducing the benefits of federal spending. There is no functional connection between federal deficits and federal debt.

In short, budget cutters – the people who unnecessarily raise taxes and/or cut spending – will punish us today and punish our children, tomorrow. And all with no good purpose.

Congress is engaged in a meaningless debate about the budget ceiling. A good analogy would be if Congress were to limit the number of stars the Hubble telescope is allowed to access. In Congress’s view, accessing too many stars would cause a star deficit.

Rodger Malcolm Mitchell

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mtngun's picture
Submitted by mtngun on

We should either repeal the law requiring treasury sales to match the deficit, or else just pay off the debt with platinum coins.

Even though the platinum coins are a gimmick, there's a lot to be said for using them, just to take the debt issue off the table.