Thursday, September 19, 2013

Time to mature

The idea that money itself is a commodity is one of the largest impediments to societal prosperity. This mental construct of money inevitably leads to the feeling that a government can "run out" of its own money, which of course is ridiculous in the modern world. As I have said before, money is just a unit of transaction and means of facilitating commerce.

No society should ever constrict its growth through any arbitrary spending constrains, whether they be gold standards or debt ceilings. It never makes sense for any nation, at any point in time, to be producing anything less than its full capacity, and only a certain amount of aggregate spending can bring this about. Our founding fathers deeply understood the importance of money and how it could be used to bring a society to full productivity. It was for this reason they granted Congress, and only Congress, the right to coin money and regulate the value thereof. To do anything less would be to betray our founders, and betray the millions of un and under employed.

I suppose coming to this realization would be a signal of the US maturing as a nation and embracing modernity, by eschewing the Calvinist idea of money as instric worthy and embracing the human rights implications of anything less than full employment.

Saturday, September 14, 2013

The (debt) Ceiling Can't Hold Us

As the next Congressional showdown over the debt ceiling approaches, the whirlwind of Beltway discussions will once again tilt towards US debt and deficits. There are literally thousands of people Washington, DC whose job it is to analyze and comment on federal budgets, deficits and debt. There are also countless organizations and think tanks dedicated to these subjects, many of which emanate from octogenarian billionaire Pete Peterson, who funds several debt-hysteria groups such as the Concord Coalition, Fix the Debt, and the more recent, youth oriented “The Can Kicks Back”.

Unfortunately, nearly all of these groups and commentators are dead wrong. Simply, the United States Federal Government is the monopoly issuer of its currency, the dollar. The US government is no longer under a gold standard, or any other fixed-exchange rate currency regime, and thus has the ability to issue currency in unlimited amounts and pay all its debts. Article 1, Section 7 of our Constitution grants the US Congress the unique prerogative to “coin Money [and] regulate the Value thereof.” Congress has assigned this incredibly important task to two of its agents: the United States Treasury and the United States Federal Reserve. These two government agencies work in tandem to ensure that funds are always available to meet congressional appropriations.  Contrary to consistent statements from economists, budget experts, and our economically illiterate president and congress, there is absolutely no scenario in which the US Treasury can involuntary become insolvent, default on its debts, or “run out of money” (this is not the case for state and local governments, who are only currency users). Social Security, Medicare, and all other federal programs can never go bankrupt, regardless of the status of “trust funds” or other accounting mechanisms.

All such solvency concerns are remnants of the gold standard currency regime, which was ended domestically by Franklin D. Roosevelt in 1933 and internationally by Richard Nixon in 1971. Modern money is simply a means of facilitating commerce and moving real goods and services around the economy. As a fiat currency, the US dollar is no longer arbitrarily backed by the value of some shiny rock; in our modern civilization it is backed by the ever increasing productivity of American workers. So where does all this money come from? All that happens is the gnomes at the Federal Reserve sit in front of computers and type numbers into bank accounts. As Chairman Bernanke said to Scott Pelly of 60 minutes in a2009 interview: “…it’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank…we simply use the computer to mark up the size of the account that they have with the Fed.”

The job of paying the bills is almost solely in the hands of the Treasury and the Fed, with the exception of the legally and ethically dubious debt ceiling – a provision that prevents these bodies from performing their Congressionally appointed duties by mandating that they refuse to make payments on existing obligations without Congressional approval, once the debt limit has been reached.

Why does such a provision exist? Many members of Congress believe that exceeding an arbitrary dollar amount in federal spending is destructive to the country, for reasons that are to this point beyond comprehension. Attempting to induce draconian spending cuts or extreme tax increases to meet the obligations posed by this capriciously determined ceiling would be equally ridiculous, as it would depress economic growth for no reason other than self-imposed austerity. Such lack of spending has forcibly excluded millions of people from contributing to our economy. We already throw millions of people in jail for smoking some weed and prevent them from being part of the economy; why do we need to force millions of others to live in an unemployed state of house arrest?

So then what is debt, exactly? Our $17 trillion national debt exists mostly in the form of US Treasury securities, of varying maturity. These securities are simply a default-risk-free, interest bearing alternative to dollar balances. They are functionally nothing more than savings accounts at the Federal Reserve. In fact, all values of US dollar deposits and treasury securities outstanding are accounted for by the Fed. The nature of US government debt is entirely different from private debt, since no private actors are currency issuers. Further, concerns about China funding our debt are misguided; the Chinese have earned several trillion in dollar balances in their reserve account at the Fed, by selling us goods and services for several decades. Instead of making the Chinese, or any other holders of US dollars, just hold these dollar balances in non-interest bearing accounts, the US Treasury offers debt, or its securities, as an interest bearing alternative to dollar balances. The market for US Treasury securities is broad, deep, and highly liquid. Since leaving the gold standard, the Treasury has never had any problem selling all of its securities at auction, and never will. With few exceptions, there is also really no such thing as “paying down the debt.” The value of Treasury securities outstanding has increased consistently over our nation’s history, and the Treasury has been able to seamlessly roll over these securities since 1789, without any grandchildren involved. It can continue to do so into perpetuity, with interest rates determined not by markets, but by policymakers at the Federal Reserve.

US government debts serve as default risk-free asset to all private actors, and play an irreplaceable role in the global financial system. The sum total of bank reserves, cash, and US Treasury securities outstanding represent the net dollar assets of the private sector. As a simple matter of accounting, the US federal deficit equals the nominal net savings of the private sector, to the penny. Deficit spending does not subtract from anyone’s savings or “crowd out” the ability of the private sector to make investments; to the contrary, all the dollars that the government spends in excess of those which it taxes back remain permanently in the private sector. Over the course of US history, our government has added around $12 trillion more than it has taken from its citizens. The simple fact that you or I have a dollar in our pockets is proof that the government has at some point spent more than it has taxed back. In no way should this be considered a bad or unsustainable phenomenon! Here is proof:

What then is the role of taxation in a fiat currency? It is not, as most people believe, to raise revenues, for the Treasury can simply sell securities to fill its general account. Instead, modern federal taxes function primarily as a control on purchasing power, and therefore aggregate demand and inflation. We do also use the tax code to accomplish other political and policy goals, but in modern times the federal government does not need to tax back its own money before it can spend again. I am fully aware that this reality may not be palatable for some people on the political spectrum, but it is true nonetheless. Marriner Eccles, the Chairman of the Federal Reserve during the 1930’s and40’s, was one of the first men to openly and repeatedly acknowledge this new economic scenario, and correctly advocated for large government deficits; first to fight the depression, and then to fight fascism.

So what does all this mean for policymakers?  If the deficit is too small (not enough spending or too much taxation) to overcome the natural and constant desire of the private sector (which includes individuals, large and small businesses, pension funds, foreign central banks, and others) to net save, unemployment will result. And right now, the massive hangover of private debt, including mortgages, credit cards, and student loans, is preventing the private sector from borrowing, lending, and expanding on its own, no matter what kind of asset swaps and purchases the Federal Reserve may try. Therefore, it is the sole responsibility of Congress to deficit spend until the economy reaches full employment of labor and resources; nothing more and nothing less. The overriding economic concern of this spending is its ability to cause inflation, but not its creation of any arbitrary debt number or ratio. While some of this spending will certainly be considered “wasteful” by partisan observers, we must remember that absolutely nothing could be more wasteful than allowing millions of our fellow citizens to go unemployed or underemployed.

At this point, it should be clear to casual observers that the economic expertise of current policymakers is sorely lacking, and as such their policy regimes have utterly failed. The latest employment figures for the summer of 2013 have been awful, and our current employment-to-population ratio remains painfully low. So given these conditions, what might be an easy way to increase employment? How about we stop taxing it! An easing or full repeal of the regressive FICA (payroll) tax might just do the trick. Getting to full employment should be the number one priority for all progressives, because the political reality is that the American people will have little appetite for progressive reforms until the economy is strong again. Our great nation has already suffered through five years of high unemployment, weak growth, and deferred dreams, represented by the nearly $5 trillion in lost economic output since the 2008 financial crisis. Dumb policymakers aside, we the people need not allow this tragedy to continue for one more day.

The author is a 2013 graduate of the George Washington University with a bachelor’s degree in Political Science, a current graduate student in the GW Legislative Affairs program, and blogger at “All Wonks of Life.” For more, please read “The Seven Deadly Innocent Fraudsof Economic Policy” by Warren Mosler, and “Freedom from National Debt” byFormer Deputy Secretary of the Treasury Frank Newman.