The headlines are full of crises because Government is apparently short of money. From the City of Stockton’s impending bankruptcy to the Federal budget deficit, we hear government is “broke.”
It’s bad enough that a fellow shopper recently told me–completely out of the blue–that if we don’t mend our ways, the U.S. would become like Greece, where creditors clamor for more austerity, and suggest the Greeks mortgage their ports and the Parthenon.
But this “shortage” is as delusional as the belief that the sun revolves around the earth. Deficits cannot possibly overwhelm any government with a sovereign currency.
When government is not constrained by a treaty–as the euro is–or a fixed exchange rate and when dollars are not backed by commodities like gold or silver, then our government can issue money at will.
Issuers of sovereign currency do not even have to tax their citizens to get spending money–although taxes are important since citizens must pay them in dollars, and therefore will want dollars to pay taxes. But U.S. government spending does not depend on tax revenue or on the generosity of the Chinese.
And the U.S. central bank–“The Fed”–knows this perfectly well. Its recent, first-ever audit, sponsored by the congressional odd couple, democratic socialist Bernie Sanders and libertarian Ron Paul, disclosed that the Fed issued $16 – $29 trillion to bail out the Finance / Insurance / Real Estate (FIRE) sector of the economy in the wake of Lehman’s failure in 2007.
But why does FIRE, whose frauds caused the current economic meltdown, get trillions at the drop of a hat, and social safety net programs and revenue sharing with states, whose needs are far more modest, get the “one-finger salute”? Because dismantling these social programs, not “fiscal responsibility,” is the point of this deficit frenzy. The really newsworthy fact is that destroying social programs is not the result of some natural shortage. It’s the product of political scheming and nothing else.
The observation that governments can issue infinite amounts of sovereign fiat money seems at once obvious and suspicious. No matter how much we know it’s true, it doesn’t seem trustworthy, based on our experience. We want government to be like something familiar–a household that has to tighten its belt in tough economic times, for example. But government is not like that. Unlike households, Government is an issuer, not a consumer of money.
But won’t creating lots of dollars be inflationary? It can be, but the scary historical examples of hyperinflation–Zimbabwe and Weimar Germany–originated with constrained production, not out-of-control mints. Despite the trillions given FIRE, the U.S. economy’s current economic problem is idle productive capacity and deflation, not inflation. The bond market confirms this by continuing to support record low interest rates. It’s worth mentioning that deflation also promotes the current Banana-Republic income divide between rich and poor, favoring creditors over debtors.
In any case, losses stemming from unused capacity–in both factories and human capital–are much greater than any hypothetical inflation’s cost. So don’t buy the B.S. about deficits.
Finally, for all the gold-bug monetarists who remain skeptical, this is not a theory, or a plea to print infinite money. It’s an observation about what has already occurred and a request that we put money to work for ordinary people suffering in the bankster-caused downturn, instead of bailing out the banksters themselves.
Despite this disclaimer, and the lower cost than these bailouts to help social programs, some will still insist that inflation is the inevitable product of issuing sovereign, fiat money. Say such skeptics: “Governments manipulate data so core inflation appears lower than it really is. Look at the price of gas [and not the price of homes]!”
Such people can look at shadowstats.com for a serious attempt to eliminate any such politically-motivated manipulation. Shadowstats offers alternatives to government statistics, but it still reports no massive shift in inflation because of the multi-trillions issued by the Fed. The Fed’s intervention exceeds an entire year’s GDP so why isn’t inflation higher than official figures or even Shadowstat’s modest report? Answer: Because people are paying off debt and hoarding dollars — all symptoms of deflation.
Of course, this will not convince the unconvince-able. To them I say: if you really believe all the value has actually been inflated out of those dollars, and creditors cannot count on being repaid if they accept dollars, please mail those useless dollars to me in care of this publication. I look forward to hearing from you.
Mark Dempsey is a writer and political junkie who lives near Folsom, California, with his family and his dog Yoshi.
- Yves Smith’s Econned book, and her Naked Capitalism blog.
- New Economic Perspectives (blog)
- Michael Hudson, Steve Keen…and many others…