“TO FUTURE AND CURRENT COMMENTATORS (let me save you some trouble)
None of these economists are arguing that the government should spend willy-nilly. It is precisely the point that if you do not spend wisely you bankrupt your REAL economy--inflation, unemployment, inequitable income distribution, sick elderly and poor children....etc.... But you cannot bankrupt the Federal Reserve (the bank of the Treasury)--it is operationally impossible and this post is really about technicalities. (Greece does not have its own sovereign central bank that issues Euro reserves). Unless people understand these technicalities, we will continue to slash social security, education and much needed govt expenditures because of some misplaced government phobia.”
Jordan5 on Apr 29, 2010 at 23:59:15
“But Lynn, if what you say it true, that the Fed can never go bankrupt, then why not spend willy nilly? If what you and the writers in the post say is true, then it makes sense to just print piles of money to pay for what you call the real economy - inflation, unemployment, inequitable income distribution, sick, elderly, and poor children, etc
The reason this will not work is because what the writers in the post say is not true.
Debt never has been and never will be savings.
Government spending is indeed constrained by revenue - and the interest rate demanded by our creditors to buy our debt.
When anybody - even China - moves money from checking to savings it is never called debt.
What Mr. Greenspan said is true. A government can't become insolvent with respect to obligations in its own currency. However, when it can't find buyers for its debt, this doesn't matter any more. There will be no money to fund its operations.
What is being espoused here is indeed dangerous.
The comments here are not government phobia. They are an accurate assessment of the fallacies of the writers in this post.
I don't want debate. I want the truth.
What has been written in this post is not truthful.”
“You don't have an infinite amount of money obviously. But the government does. Every wallstreet guy and military contracted knows that this is 'free money' which is why our government spending has always been directed to these sectors. Read what these authors have been arguing all of their careers--they have said that you must always tie government spending to something useful and productive to make sure that you are not deflating the value of the currency. If you overheat an economy, you could raise taxes, but if your economy is underemployed that is completely unnecessary.”
“I do not want to government to pay its debt. I hold lots of Treasury securities in my retirement account; they pay interest, even if small. I prefer them to cash. But even if I want to cash them in, will the Fed/the Treasury's bank/ run out of dollar reserves to pay me? Of course not! But I am small fish, if you want to wipe out the rentiers, those who are unproductive but just live off the interest on their bonds, then pay off the debt, absolutely. get rid of that interest income.”
“None of these posts endorse 'printing money willy-nilly. They are about balance sheets, accounting, operations. How can the Fed run out of reserves? Have you ever seen the Fed bounce a government check? Its not possible. NO one has argued here that the Fed should create reserves for whatever it chooses...the way it has done so far (Financing Wars and Financial Bailouts). The only theory here is that we might consider creating reserves for useful things--hospitals, jobs for the unemployed, infrastructure. We can always PAY for govt spending, but that does NOT make all govt spending good”
K Smith on Apr 30, 2010 at 00:52:27
“It is true that government checks don't bounce.
But if the currency in which the check it is written is worthless, a bounceproof check is meaningless.
When that happens, a person doing any future business with the government will demand payment in a currency that holds its value.
“This is about pure accounting. There is no chartalist theory here. It is about tracking the flows of all payments of all sectors, ONLY one sector pays in its own liabilities--the government and it never runs out of liabilities. THIS IS NOT AN ENDORSEMENT THAT THE GOVT SHOULD SPEND ALL IT WANTS. The posts clearly state that too much issue of liabilities can create inflation.”
“These economist have demonstrated that the Earth is not flat; the reaction of this blog is part of the natural course of events, As Arthur Schopenhauer put it: "All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident." This is a good beginning to explaining how modern monetary systems around the world work in reality.”
David Doney on Apr 27, 2010 at 17:45:40
“This one is going to stay in the ridiculed stage for a long time. The President, GAO, Treasury, CBO, Niall Ferguson, Auerbach & Gale, all say we are on an unsustainable financial trajectory. The Right is even more aggressive in this argument that the folks above.
We cannot print enough money or borrow enough money to pay for about $45 trillion in unfunded liabilities for Medicare and Social Security. Further, we cannot afford to spend about $850 billion per year on the Wars, base DOD spending, and Homeland Security.
The truth is taxes must go up, defense and entitlements must get cut. We are spending $2 for every $1 in tax collections, with much of the shortfall covered by printed money. Interest rates and inflation are serious risks, which could destroy the savings Americans have worked so hard for. I have not worked hard for 20 years and saved my money so some "inflation doesn't matter" hack can hit the reset button (essentially inflate our way out of debt).
Americans need to take the tough medicine that is coming. If we don't set a path for a balanced budget over say 10 years, the credit rating agencies will downgrade us. And it's all dowhill once that happens. This is our last best chance and articles like the one above are highly irresponsible and dangerous.”
“None of these pieces suggest that the government can spend all it wants without any effect. In fact, what they say is that we need to move past the technicalities of financing a sovereign government and we measure deficit spending in terms of its impact on the real economy, not the size of the deficit itself. The government is solvent, now let's make sure it works for everyone. Tie deficit spending directly to job creation and production.”
“Those economists are not arguing that you can eliminate taxation. Taxes give value to a paper currency, but they do not 'finance' the federal govt they way they finance states. There is a fundamental difference between these two institutions. This article gets past all the bureaucratic and institutional fluff and track the government flows precisely. In good times or bad, the US federal government spends one way only -- by crediting bank accounts, it removes excess money from circulation through taxation by debiting them. You eliminate taxes, the currency clearly loses its value but that's an entirely different point.”
hroark314 on Apr 27, 2010 at 18:15:26
“This post flat out states that it's a myth that the government needs to tax or borrow money in order to spend. It is not a myth. Fiat money only works if the government treats it as though it were a real asset with real limits on supply. These authors are essentially arguing that the government can print money willy-nilly without damaging the value of our fiat currency as a medium of exchange. That's not true. If the government treats our paper currency as though it were simply paper, then that is exactly what it will become. This is so very simple - fiat currencies only work if people trust that the product of the supply of money and its velocity will remain relatively unchanged. If the government took any of the actions that this post suggests it can take in Myths 2 through 9, then it would completely destroy the value of our currency.”
“The currency will inflate only if you have not produced something of value. If you tie government spending directly to employment and production, you can stop worrying that 'too much money is chasing too few goods'.”
MFS001 on Apr 27, 2010 at 17:01:33
“But we haven't -- we've doubled the debt this decade from about $6 trillion to $12 trillion. Where is that extra $6 trillion in goods or jobs. If you factor in unfunded liabilities, the estimated debt jumps to $50 trillion or more. A figure virtually impossible to imagine. Have we created $50 trillion in value? i think we should be worried about "too much money."”
“The Fed is the residual buyer of treasury securities so they can always be 'financed'. None of these authors are saying that the govt should print money til the cows come home, but that you should always link your deficit spending to real employment and output. There is such a thing as too much government spending, but "financing" govt spending is technically not limited plus the government always pays one way--by crediting accounts--this not theory, this is reality. just because it does, does not mean it should deficit spend without considering what is going on to real production and employment. obviously, it has to spend wisely.”
“An understanding of history should make it clear that we are no longer on the gold standard and cannot apply that logic to a modern monetary system. Instead we should be trying to explain how a fiat system works now, not how you think it should work. An understanding of history makes it obvious that gold standards are fundamentally deflationary and periodically abandoned to deal with crises. And finally, throughout history many governments around the world which are sovereign have been able to maintain price and currency stability, now it's a matter of figuring out how to maintain employment stability, eliminate poverty and provide for our retiring citizen by producing the real goods and services they need to consume. The govt can always send a social security check, but what can they buy with it??? this is the question we should be asking.”
“The Federal Reserve and the Treasury are two agents of the US government. They issue govt liabilities. Any interest the Fed earns from the Treasury it transfers back to the treasury. It's called reserve accounting, double entry book keeping--they do not lend to the government--they are the government and together they issue their own sovereign liabilities-whether these are called reserves or bonds. The only way, as Bernanke put it in a congressional testimony recently, for the Tsy to default on its bonds is if congress decides "not to pay" i.e. puts a political/artificial limit on the debt ceiling. Otherwise the Fed will never bounce a govt check or will never fail to redeem a govt obligation.”
K Smith on May 5, 2010 at 03:51:27
“The federal government does not issue currency.
We have a central bank that issues a fiat currency. It is called the Federal Reserve. It is not a government agency. It is a private bank. It is not federal and there are no reserves.
It is called the Federal Reserve to make us think that someone somewhere in government is watching over it. This is not true.
A bill requiring an audit of the Fed has been introduced in Congress but lobbyists have succeeded in convincing legislators to not allow it to come to the floor for a vote.”
Hank Rearden on Apr 27, 2010 at 16:52:00
“When the Fed loans money to the Treasury it is increasing the money supply. When a pension or China buys a security it is actually a loan. I.e. it is not increasing the money supply. When non governmental institutions don't accept/want/buy US debt anymore then the Fed can print all the money it wants and Zimbawe us into extinction.”
“We are not on a gold standard anymore. There are no "assumptions" in these myths. They show how the government actually spends in reality. Good or bad, take it or leave it, this is how it works, so now the issue is how to prevent governments from abusing this sovereign power (with the exception of some notable cases, most sovereign governments have been able to avoid runaway inflation for decades) so you can still credit bank accounts without creating too much money. The government does not PRINT currency; let's please get things right and stop using this incorrect analogy. We need responsible government spending--one that maintains price stability and full employment!”
MFS001 on Apr 27, 2010 at 14:35:58
“"The government does not PRINT currency."
Ok, how about it creates it out of thin air. The government sells a bond; the Federal Reserve buys that bond by writing a check that "creates" the money, as a derivative of debt. Whether it's an accounting entry or an actual paper dollar, the result is the same -- the currency inflates.”
“This is exactly the kind of knowledge we need. Outdated textbooks need to catch up with the realities of fiat monetary systems. Once we can get past the technical issues, we can overcome this deficit mania and start asking the REAL questions. What was the impact of government spending on the economy? How did it affect our communities, poverty, income inequality, did it benefit the few or the many? I am glad that someone is finally demonstrating that the deficit in and of itself is not a problem and will not bankrupt the nation, so now let's talk about HOW the government should be spending and how many jobs it should be creating.”