If an intelligent being from another galaxy visited the developed countries of the Earth to learn about modern earthly ways, that intelligent being would surely, in short order, begin to ask the Earthlings he met, “What is this money stuff you Earthlings are flinging around all the time?” If this alien happened to be in the United States when he asked that question, he would likely learn from the typical citizen on the street that dollars are what US citizens use to buy stuff with. The alien would surely then ask, “But where do citizens get these dollars to buy stuff with?” The typical US citizen would then answer that there are many ways to get the dollars, such as working for them, collecting Social Security, receiving a pension, earning interest on savings, selling assets and possessions, to mention but a few. The alien might then ask, “But where did businesses, Social Security, pension payers, interest givers and asset buyers get the dollars they give to you typical citizens?” At this point the typical citizen would start scratching his head, and after thinking about it for a few moments, would answer that the money came from somebody else, that everybody exchanges money all the time with everybody else. The alien, being rather bright, might then ask, “But who made all the dollars in the first place? Where did they come from?” At this point in the conversation the light would go on in the ordinary citizen’s head and he would answer that the government made them. The alien might then say, “OK, so how did the government distribute the dollars it made to any citizens outside the government where they are made?” At this point, the typical citizen would throw up his hands and indicate that he does not know for sure, but maybe the dollars were exchanged by the government for gold or something like that, and that’s why the government has so much gold stored at Fort Knox.
So an alien would learn from the typical US citizen that money is the key medium of exchange in the non-government sector of the US, but while this typical citizen knows that the government makes the dollars, he does not know how these dollars get distributed nor whether the government will exchange them for something else, such as gold. If the alien were to ask more highly educated citizens the same questions, he would find many who would argue that the government does not exchange dollars for anything like gold anymore, but must make and distribute new dollars by acquiring old dollars first through taxation of or borrowing from the non-government sectors—including the foreign sector, you know from China.
It is almost guaranteed that the alien would not find a single citizen, educated or not, who would point out that the US dollar is a fiat currency, created out of thin air by the government, that can only be officially exchanged for itself; that the government does not have to tax or borrow to create and issue the dollar—even for deficit spending—and that, in fact, the government must create dollars and distribute them into the non-government sectors first before it can ever tax or borrow them back, since potential tax and loan dollars do not even exist in the non-government sector until the government creates and distributes them first. The alien would not find a single citizen who knows the truth.
Contrary to popular belief in most countries across the Earth, it is a simple fact that a sovereign government that issues its own fiat money, money that floats freely on foreign exchanges, exercises a monopoly over the creation and distribution of that money and has no inherent economic or monetary limitations, other than those politically self-imposed, on how much money it can create and distribute in any time frame. In other words, a sovereign monetary issuer can never run out of money.
This is not to say that there are no penalties that can arise if a sovereign government were to create and issue too much money. Issuing too much money into an economy with full employment and too little capacity for further economic growth would surely create inflation and drive exchange rates below acceptable levels. But with countries such as the US exhibiting extremely high unemployment and tons of excess production capacity sitting idle, inflation and plunging exchange rates are completely out of the picture. Obviously, in today’s economic setting, money needs to be spent and it needs to be spent now to create enough demand to grow the economy and reduce unemployment. So why is the President of the United States telling his citizens that their country has “run out of money?” In attempting to answer this question let’s continue to look at the economy from the alien visitor’s point of view.
Let’s imagine that US has made contact with an advanced alien world and that the US government has agreed to host one of the brightest alien economists in a review of the American economic system. When the alien economist lands in the United States and begins touring this great land to see, first hand, how the economy works, he quickly discovers multitudes of abandoned houses and factories lying dormant in various states of decay. He sees millions of unemployed Earthlings living homeless in decaying streets and unkempt parks, or living with parents and never leaving home, while millions of houses are boarded up with foreclosure signs on the windows. He sees thousands upon thousands of businesses with excess capacity to produce all the products and services the unemployed would purchase if they had a job. In other words, he sees nothing but unused potential, both human and capital, just begging to be utilized. The alien also quickly realizes, for he is very smart, that the money stuff seems to be concentrated in the hands of a very few, let’s say the top 1% or so, and that the middle class is barely getting by, losing real wage share to profits every year even though worker productivity has been skyrocketing for over 30 years. He sees that the middle class has been shrinking, with workers ever more frequently slipping into poverty even though they have a job—part-time and low-paying as it is.
So the alien, once he has learned all the above, goes to the governmental representatives and asks, “Why are you wasting all your resources, both human and capital? Why don’t you put them to work?” The Republicans in the government answer that they’re waiting for the job creators, the business community, to put all those resources to work, but the job creators are overtaxed by the Democrats and too worried about the national debt (which has grown to $16 trillion) to create the jobs. They tell the alien that the government is taking too much money from the job creators through taxes and giving it to the slackers (the citizens who are takers and expect the government to give them everything) for unemployment, medical treatment and Social Security. They tell the alien that the nation needs a free market with no regulations to allow the job creators to do their job-creating thing, that private employment and enterprise is always more effective and efficient than public employment—in other words, they tell the alien that the government is, in fact, the problem. According to the Republicans, every individual is responsible for his own actions and well-being; all men must pull themselves up by their boot strings in a social Darwinian world based on a reality where only the strong and vigilant deserve success. And besides, they tell the alien, we have run out of money and can’t afford to borrow more. It’s time to put on the brakes and stop this socialistic madness.
The Centrist Democrats in the government can hardly restrain themselves when they hear the Republicans ranting about too much taxation. The President, who is their spokesperson, tells the alien that the Republican’s taxation concerns are pure nonsense. He points out that taxes on businesses, corporations and the wealthy are way too low, and, in fact, were significantly higher during past eras of great economic growth. What we need, says the President, is a balanced (adult in the room) approach, where taxes are raised a little bit on the rich to generate more government revenue and major reductions are made in budget expenditures, including reasonable adjustments to Medicare and Social Security since these programs are unsustainable in their current form and will go broke if we don’t reduce something.
The President points out to the alien that the financial sector is the critical engine behind the US economy (too big to fail) and that it must be kept whole and healthy so that it can begin again to invest in America’s private enterprise future—only private sector (free market) growth stimulation like that seen during the Clinton years is good for the nation in the long run. He points out that the government has already borrowed and spent too much, and that the US has been living beyond its means and must cut back. The government can no longer spend what it needs to utilize the idle human and capital resources because it will ruin it’s children’s future by borrowing more today. Interest payments on the current debt alone cannot be sustained, let alone creating more debt interest.
The President argues that borrowing more (deficit spending) jeopardizes the government’s bond rating because the financial sector bond vigilantes will see that the government is crowding out private reserve resources needed to stimulate financial and entrepreneurial growth, and the bond vigilantes will stop lending to the government altogether if the government doesn’t do something drastic in the near future to at least balance the budget and begin paying off the debt. The government needs to stimulate the economy in a sensible, balanced way, says the President. Our children’s futures are at risk with all this debt our government has foolishly piled up during the past Republican administration. It is now mandatory for the current administration to be responsible and fix the excesses of the past by exercising a reasonable and just austerity (share the pain) to balance our budget, grow the economy and, thereby, employ all those idle resources.
The Progressives in the government have been shuffling their feet and mumbling among themselves as the President speaks. The alien can tell that they respect the President, but they do not agree with everything he is saying. Their spokesperson comes forward and tells the alien that while Progressives agree that the debt level is too high and must be reduced in the long run, the government needs to significantly deficit spend on job creation now to grow the economy while, at the same time, significantly raising taxes on the rich who have not been paying their fair share.
They argue, just as the alien observed in his tour of the country, that the wealthy are getting too much of the money stuff and that the middle class, the economic engine of the economy, is losing its fair share and can longer generate enough demand to keep the economy going. They argue that job outsourcing, anti-union legislation and middle class migration to lower paying jobs over the past 30 years has resulted in a huge shift in wealth distribution to the already wealthy. The progressives point out to the alien that government must promote the general welfare of all citizens and not just the top wage earners and financial plutocracy. They argue that that there is a moral imperative for the government to protect all its citizens, not just those who successfully pull themselves up by the bootstraps. They agree with the alien that the idle human and capital resources need to be utilized immediately, but indicate that they are a minority and cannot get the Democratic Centrists and Republicans to agree and increase spending rather than reduce it.
The alien, who is very smart, smiles sadly and slowly shakes his head as the Progressive government representative finishes his view of the current economic malaise in the US. He tells the government assembly before him that he has come many billions of light years to get to the Earth and that he fully appreciates and understands each governmental group’s view of the economy. He tells the assembly before him that his impartial review of the US economy and monetary system, as it actually works in the real world, shows him that all three views expressed by the government representatives before him have some points of validity, but all of them, in the broad scope of things, are dreadfully wrong.
The alien stops for a minute and pulls on his stumpy chin as he gazes out at the faces around him. He then tells those before him that there are many aspects and complicated macroeconomic reasons as to how they are wrong, but there is one fundamental overriding mistake—one that should be easy for them to understand—that they are all making when thinking about money and the economy. He tells them that they have all, in their leadership role as governmental representatives, fallen in love with money, money that they as a governmental body have complete control over. In other words, he tells them they have created, like doctor Frankenstein, a monster that will destroy them if they do not take back control of their own creation.
The alien pauses again for a minute to let the rumbles of displeasure surging through his audience subside. He then clarifies his point by stressing that love of money is not a universally bad thing. In fact, he points out to the governmental representatives before him, it is the individual citizen’s love of (or need for) money that makes money work in their economic system. If individuals did not want money, they would most likely use something else, since it is otherwise really only worth the paper it is printed on. Why do individuals need money? Obviously as a means of common exchange for purchasing things. But more fundamentally, individuals need money foremost to pay taxes, which the alien reminds those before him, are the government’s (their) responsibility to set and collect. The alien’s clarification seems to settle the crowd down a bit.
The alien then points out that while money is critical to the individual, it is nothing more than a tool for the government to use in advancing political goals and basic commerce within the economy. He then stresses emphatically that government should create and use money as a tool to promote sustainable growth in the employment of human and capital resources, not vice versa. It makes no sense, he stresses, for the government to hold the employment of human and capital resources hostage to the lack of government created money. Such action makes money—a mere creation of the government— more important than the employment and development of real people who the government is supposed to represent. As representatives of your citizens, he tells the group, you must not fall in love with money—even though in your personal life it is critical. Government should never love money more than its citizens. The government’s objective should be to use its monetary monopoly to create full employment, economic growth and price stability. Its objective should never be denigrated to some arbitrary and unattainable budget outcome put ahead of the productive growth and well-being of its people.
The alien notices that the representatives are again getting uneasy with his observations. He raises his voice a little as he proceeds to tell them that they are not out or money nor will they ever be out of money, unless they choose politically not to create it. He points out that they have the cart before the horse: They don’t tax to get revenue to allow spending, they spend in order to be able to tax. Taxes merely bring value to the money they create and allow the government to move real things from the private sector to the public sector by creating a desire for the private sector to sell those things to the government to get its created money to pay taxes; but taxes are never needed by the government to spend since the government must spend or distribute money into the private sector first before the private sector ever has any money to pay its taxes with or to lend back to the government, for that matter. The government therefore never needs to raise funds through taxation or borrowing to spend—no matter what the level. If it chooses to do so, it is a self-imposed political decision, not an economic monetary requirement.
The alien tells the representatives that the government deficits and debt that they are so worried about reducing and paying back are not really debt at all in the normal sense as understood in the private sector since it is impossible for the government (or anyone else, for that matter) to borrow back its own IOU’s (the reserve dollars used by the private and foreign sectors to buy government bonds). What the government actually does when it thinks it is borrowing is swap one IOU (the dollar) for another IOU (the interest paying bond). In either case they are just swapped IOU’s, with the only difference being interest payments on the bonds, which the government can always pay by issuing more dollars (IOU’s), no matter what. The government only sells the bonds because it voluntarily chooses to swap interest earning bonds in place of reserves to either promote net saving in the private sector or to drain excess reserves (dollars) to meet overnight interest-setting objectives as established by the Federal Reserve.
The national debt, then, is not a debt in terms that the ordinary citizen could normally understand. It is not like any debt they would incur as a household. In fact, the national debt is actually the private sector’s net savings. The national debt is the net contribution the government has made through deficit spending to the private and external sector’s desires to net save over time—the private and external sectors can only net save in the government’s deficit spent IOU’s (be they dollars or bonds). Given the current desire of the citizens to consume more products from foreigners than they sell to them, there would be no net savings in the private sector without government deficit spending. Every penny net saved by the private sector was deficit spent by the government first. If the citizens continue to have a desire to save, then it is certain that the government will have to deficit spend in the future to meet that desire—otherwise it would be impossible, outside the nation becoming a net exporter, for the private sector to increase its net savings. And on the flip side of the coin, if the government is going to run a surplus and reduce its so-called debt, it will only run that surplus if the private sector as a whole reduces its net savings.
The alien now observes that the rumble in the crowd has subsided and the governmental representatives are stunned into silence, their jaws hanging open in disbelief. The alien tells them that he understands their shock and disbelief, but implores them to listen further to his impartial, outsider’s view of the real world. He then continues by telling them that their country is not suffering unemployment and growth stagnation because the government has borrowed too much. Quite the contrary. He tells them that they are having the problems they are having because the private sector borrowed too much, and unlike the monopolist government, the private sector cannot always pay back what it borrows if it borrows too much.
He tells them that it has been the government’s lack of regulation over the private financial sector that has caused the problem. It was the government’s love of money that brought them, as leaders of the country, to see the economy and the people of the US as subservient to the financial sector. He tells them that in their country (and the whole Earth, for that matter) the economy exists to support the financial system rather than the financial system existing to promote the economy.
He points out that the Progressives are right when they say that the government must stop primarily supporting the financial plutocracy and begin to support the middle class, but they are wrong when they think that simple progressive taxation of the rich will solve the debt problem, since there is in reality no debt problem at all. The real problem with the poor, the disappearing middle class and the unemployed is the financial distribution of the money stuff within the so-called free marketplace as it is regulated and supported by the government. Taxation may help regulate that distribution, but it cannot do it all. He tells them that they, the government, have the power to politically promote fair distribution of money stuff wages and that they can at any time employ any productive resources, be they human or capital, that are shunned by the private sector without harming the economy at all. In fact, without employing these resources they are neglecting their duty to promote employment, economic growth and control prices.
The alien now sees that a revolt has taken place in the ranks of the governmental representatives around him and many of the leaders are walking away from him in disgust. He is not surprised. He did not expect them to overcome their ideological love of money—their creation and their God. He has seen it before in the collapse of many civilizations throughout the galaxies. It is a common weakness of early evolving beings. But for those representatives who remain and care to hear more, he refers them to study the works of Warren Mosler(http://moslereconomics.com/... ), Bill Mitchell (http://bilbo.economicoutlook.net/... ), Randall Wray (http://neweconomicperspectives.org/ and http://www.economonitor.com/... ), Stephanie Kelton (http://neweconomicperspectives.org/ ) and many other neglected professional economic Earthlings who have already uncovered the same truths that he has in his review. Listen to them he implores. Study their arguments well and you will get all the answers you need at any economic level of sophistication you demand. He tells them that what he has shared with them here today is just the tip of the iceberg. You are living below your means not beyond them, he implores. He then gets into his intergalactic spaceship and speeds off for other distressed planets in the Galaxy.