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Both Republicans and Democrats have been explaining that “There Is No Alternative,” we need public policies promoting austerity because government is “out of money.” The question seems to be not “do we need austerity?” but “will we be austere sooner or austere later?” Meanwhile, the bipartisan consensus is that the government is definitely out of money.

money lesson

But these assertions are at odds with the common knowledge that the U.S. government literally creates its own money. Unlike the euro, the dollar is a sovereign, fiat currency, unconstrained by exchange rates or treaties. And since Nixon closed the gold window, government can issue dollars without waiting for gold or silver mines to provide any backing for them. So we can’t possibly be “out of money,” any more than the Bureau of Weights and Measures can be “out of inches.”

Nevertheless, even the private sector agrees with that “out of money” message. Billionaire Pete Peterson recently sponsored the Fiscal Wake Up Tour, essentially trying to drum up popular support to cut social safety nets, retirement programs and Medicare because we’re “out of money.”

Perhaps it’s a coincidence, but investors like Peterson profit from the “out of money” sentiment since it’s deflationary. When borrowers repay loans to creditors like Peterson with inflated money his investor class suffers investment returns that are lower than when dollars are scarce, and deflation prevails.

Even more conveniently, during deflationary times, the investor class can buy assets in the public realm at bargain-basement prices. If the public sector is “out of money,” then German bankers can demand, as they have, that the Greeks mortgage the Parthenon and their ports. The City of Sacramento can propose selling $500 million (present value) of its parking revenue to investors for $250 million in cash to fund a stadium. Chicago can sell the management of its parking meters to Morgan Stanley in return for only a tenth of the money those meters generate. That’s good for Morgan Stanley, but not so good for ordinary citizens relying on city services.

Our public realm once included cheap, and even free college education and high-quality infrastructure that made the U.S. the envy of the rest of the world. But “out of money” promises private opulence and public squalor instead. In other words, it leads to a society composed of toll booths sending the population into debt peonage. Ordinary people must pay economic rent to the investor class to use what used to be free or cheap in the public realm. This turns America into a banana republic with social and income inequalities we associate with only the most heartless and corrupt political systems.

The usual protest against government creating money is that it lacks restraint, so it tends to spend too much. Unrestrained government spending supposedly leads to inflation, penalizing savers and creditors alike, so we have to act like “we’re out of money,” even if it’s factually untrue.

But again, reality contradicts these predictions since a flood of dollars has come from government without any sign of inflation. Its recent audit disclosed that the U.S. central bank (“the Fed”) issued $16 - $29 trillion to fix the financial markets after Lehman Brothers collapsed in late 2007. That nearly doubled the base money supply, not incidentally bailing out the same investor class who crashed the economy. If anything was going to cause inflation, at least according to conventional economic theories, that was it.

But this multi-trillion-dollar bailout occurred roughly five years ago, and the consumer price index and bond yields continue to plumb record lows, indicating deflation is the real economic problem. Only things we can finance, like college educations, remain costly.

Why wasn’t this flood of money inflationary? Instead of demanding goods and services, driving up their prices, those trillions paid off debts and bets (derivatives). I’ve even heard inflation is low because the Fed is managing it to keep it down. Not true. The Fed’s current policy includes Quantitative Easing, which amounts to purchasing financial assets to keep their prices high. If the Fed were suppressing inflation its policy would look instead like the one Paul Volcker’s Fed executed in the early 1980s to kill the 12 - 13% inflation then at large. Volcker pushed the Fed Funds rate so high that mortgages were at 16% - 18% and the prime rate was 21%. This caused a recession, but squeezed the inflation out of the economy. In contrast to that policy, present Fed Fund rates continue to be very low, as are mortgage and Prime rates.

In truth, we could use a little inflation now. It would help society reduce its load of private debt. Private debt is an important ingredient in our current situation since the non-government sector’s speculation with borrowed money is what precipitated the current bust. This graph of private debt-to-GDP for the U.S. demonstrates how such indebtedness behaves in booms and busts.


Notice that the previous peak in private debt preceded the Great Depression, which was a period when debts were paid off, but the rest of the economy suffered from a decrease in demand. The bad news is that the recent debt peak is an even greater portion of the economy than the debt from the Roaring 20s.

One Modern Monetary Theory (MMT) economist, the blog author Steve Keen, suggests sending each American household $50,000 to pay down debts. The money would first pay debts, and those not indebted could keep the surplus. This would not only be cheaper than the $16-$29 trillion Wall Street bailout, it would bail out Main Street instead of the banks. It would also remove an enormous debt load that now suppresses demand, employment and production, perpetuating the Great Recession.

“But that would undermine personal responsibility,” say the opponents of such proposals. “Those (deadbeat) borrowers should never have taken on that debt load, and if they don’t suffer, they’ll never learn!”

Again, reality contradicts such assertions. Never mind that the recipients of the biggest bailouts was the financial sector, which was the biggest debtor, not all debts are legitimate. In fact lenders must consider the possibility that loans won’t be paid back, otherwise, we could borrow any reason, like getting a hot tip on a horse race.

Just before our current Great Recession, banks did not live up to their responsibility. They did not check whether loans were viable. Instead, lenders fraudulently inflated appraisals, falsified incomes, and even forged loan applications, all in service of higher CEO pay and a temporary surge in loan fee income. For one example, Countrywide Mortgage’s securitized loans were 80% frauds. News reports continue to confirm that both lenders and servicers robo-signed and forged documents to inflate their fees or legitimize previous frauds. Under such circumstances, blaming the borrowers for the problem loans is like blaming a rape victim for dressing too provocatively.

Meanwhile, the economy continues to recover from the indigestion of over-borrowing. Consumers, once buoyant with the proceeds of home inflation and “liars loans” are now tightening their belts so they can repay debts, no matter how legitimate, and the economy is contracting because of it.

Since borrowing lets people spend more than their incomes, paying off debts makes those who were previously consumers into “savers,” spending less than their income. This produces a dramatic turnaround in demand. Excess private debt added $4.5 trillion to normal demand in 2008, de-leveraging reduced that norm by $2.5 trillion in 2010. This produced the bust that followed the bubble, and accounts for our current condition.

When home prices rose 30% a year, fueled by “liar loans” the economy was in the throes of an asset bubble. Asset bubbles, like Ponzi schemes, inevitably collapse. When people borrow to speculate, the collapse is worse. MIT economists peg optimum, productive borrowing at roughly 100% of GDP. Homes need renovation, plant and equipment have to be updated, and the productive economy borrows to spend more than (current) income to do things like that. The recent peak in borrowing, however, was closer to 300% of GDP, which meant productive uses of the money were overshadowed by speculation on derivative, asset and commodity prices. Paying back that borrowed money spent on casino capitalist Ponzi schemes is what troubles the economy now.

 Government employment is an indicator of the size of its “stimulus.” The 2010 spike is for the census workers.

Government employment is an indicator of the size of its “stimulus.” The 2010 spike is for the census workers.

The current collapse reduced America’s net worth by 40%, producing a contraction greater than the Great Depression, moderated by modern social safety net programs and government spending like the Obama administration’s “stimulus.” “Stimulus” is in quotes because the contraction of local and state spending roughly equalled the Obama administration’s federal spending, so there really wasn’t much net stimulus, if any.

Set that aside, and notice the decline in government employees since Obama was elected. So much for “stimulus.”

In this context, despite the zero net stimulus, the “out of money” message continues to be the pretext for even more government cutbacks. The Obama administration’s Deficit Commission proposed cutting the Democratic party’s own crown jewels: Medicare and Social Security. The spirit of sacrifice is bipartisan too. Republicans conveniently forget Dick Cheney’s statement that “Reagan proved deficits don’t matter” and now propose even more draconian cuts to government, public works, schools and social safety nets, all in pursuit of their delusional idea of fiscal responsibility.

This accelerating trend of cutbacks makes some on the left unhappy: “Only Nixon can go to China. Only Obama can drown government in a bathtub,” writes one pundit. Despite the scorn heaped on him for his “Kenyan Socialism,” Obama’s policies are consistently to the right of Richard Nixon’s, and often to the right of his predecessor, George W. Bush. Not even Bush 43 prosecuted as many whistleblowers or deported as many illegal immigrants as Obama, for just two examples.

And don’t get me wrong, not all government spending is sensible. But, unlike Enron’s board meetings, most government proceedings are public, so there is plenty of news to validate my complaints and expose corruption, unlike private sector news which comes primarily from press releases. For example, that $3 - $7 trillion war on Iraq, a country that had neither WMDs or any culpability for 9/11, qualifies as a government SNAFU, to me.

Nevertheless, only government protects us, however poorly, from the attacks of a predatory investor class, ready to re-emerge and persecute those too vulnerable to protect themselves. And only the government can spend without creating something like family debt to expand the economy when the private sector is reducing spending to pay off its debts.

This is true, because government can create money out of nothing. Government does not need to create debt when it creates dollars, either. Nevertheless, as one legacy of a commodity-backed currency, the current system of issuing dollars always creates debts. Since government can create dollars without limit, these debts are not at all like family debts, but they are reported as “debt,” nonetheless.

The Fed creates dollars, typically by crediting an electronic account, and creates debt to match. The government asset (money spent into the economy) plus whatever contribution trade makes to the private sector, as the following graph shows exactly matches the debt created (government bonds).
Notice how the private sector balance plus trade (Capital Account) and government balances in the graph mirror each other.


Put another way, here is a chart of public debt and private spending in Europe:

The observation that spending and debt coincide means that reducing the government’s debt also reduces the non-government sector’s financial assets (and its spending) unless trade increases those assets. That means that the “out of money” crowd is promoting exactly the wrong remedy for our economic troubles when it recommends austerity and smaller government debt.

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Since all nations can’t be net exporters, we need a larger government deficit to increase financial assets available to the private sector. That would give the private sector the means to pay off that enormous debt load cited above. Either that, or we need to “cram down” the amount owed, and have the creditors take losses on some of their fraudulent loans. Cram downs are problematic because so many retirement accounts are invested in such loans, so they would take losses too. Keen’s $50K remedy neatly sidesteps this problem.


The current political debate about debts and deficits is really about whether creditors can collect those debts, no matter how legitimate, by foreclosing on borrowers, or if they must reduce loan balances somehow. This last solution seems unlikely because of the retirement problem cited, but also because investors in these loans say they won’t cede even a nickel, and to prove it they mount “out of money” marketing campaigns. Promoting the fear of government “debt,” no matter how unreasonable is that fear, makes the population more pliable. Even Chicken Little managed to get a crowd to follow him, at least for a while.

Another corollary to observation that government can create money without limit is that neither taxes nor borrowing funds government. Government doesn’t need money from the private sector, since it can create as much as it likes. It also follows that government “debt” is not a burden for future generations and any unfunded liability is equally illusory.

The real limitation on government spending is the economy’s ability to provide goods and services. That is nowhere near its limit now, so government spending, particularly spending that would let the private sector de-leverage would not be inflationary. Fears of inflation in the current context are overblown, if not delusional.

So why do people want “worthless” non-gold-backed government-created money? Because it extinguishes the inevitable government-created liability: taxes. Taxes make the money desirable, they do not fund government. If I told you that you would need my business card to exit a conference room we were in, my business card would become valuable too. Historically, when Britain colonized Nigeria, they could not get the native population to accept their currency until they instituted a “hut tax.”

Families do not create currency like government does, so they seldom appreciate the distinction between an issuer and a user of dollars. A family uses currency, and experiences its debt as hardship because it can’t legally go to the back bedroom and print the wherewithal to repay it.

Governments with sovereign, fiat currencies like the dollar experience none of that anguish, unless it’s for the sake of political drama, and in fact have no obligation that resembles family debt. The Fed or the U.S. treasury could literally create a enough dollars tomorrow to pay the debt completely. No natural shortage prevents that payoff, and only wilful political posturing makes government debt repayment even slightly risky. Standard & Poor’s downgrade report for U.S. debt said as much.

In truth, money is just a measurement of indebtedness used throughout the economy, and anyone can make money, although such money is not all as generally accepted as are dollars. If I handed you a mutual acquaintance’s IOU in payment for goods or services you sold me, we could call that IOU “money” too. That’s why, in addition to the government’s “base money,” banks can also issue money; and that’s why suggesting that the Fed can manage the money supply is not accurate. The currency banks create with fractional reserve lending is similar to, if a little more widely accepted than, those personal IOUs.

One myth about banks is that they lend their deposits. That’s backwards. Fractional reserve lending banks create money by opening a checking account for borrowers (a bank liability) in return for those borrowers’ IOUs (a bank asset). These exactly balance.

After the bank makes the loan then it looks for reserves or deposits to cover any withdrawals. Regulations require banks to have a minimum percentage of their loans in reserves, but they can borrow such reserves from each other or at the Fed. The lag between loans and retrieving reserves is about 30 days now. Bank credit is more commonly accepted “money” than personal IOUs, even if it’s not issued by the government in the “money of account” (dollars), but comes in the form of drawing rights on a bank’s checking account, measured in dollar units.

Incidentally, while states can’t create currency like the Federal government, what’s to prevent them from opening and running a bank to provision themselves? North Dakota has one, and is prospering despite the current downturn. So are even the states “out of money”?

Historically, the investor class has repeatedly created artificial money shortages. William Jennings Bryan’s “Cross of Gold” campaign in the 1890s occurred during one of these shortages. The bankers controlled the gold, and Bryan wanted to make silver an additional source of money.

Such money manipulations led to many bubbles and busts, historically. For example:

  • Panic of 1797 (Land speculation),
  • Depression of 1807 (trade-based, ends with war of 1812)
  • Panic of 1837 (Land speculation / banks),
  • Panic of 1857 (Bank runs after a life insurance company fails),
  • Panic of 1873 (Equine flu + a rail speculation bust. The New York Stock Exchange stops trading for 10 days),
  • Panic of 1893 (Rail bankruptcy + bank runs produce the worst depression until the 1930s),
  • Panic of 1907 (Trust bubble bursts for rail, steel, banking & oil),
  • Depression of 1920-21 (Postwar deflation, steep unemployment),
  • Great Depression 1929 (the "Roaring Twenties" bubble bursts).

The growth of a predatory financial sector preceded these various panics and depressions, and never more than recently. Currently, the U.S. has financialized its industry to the point that GMAC (the lender) is the big business for General Motors. Making cars is practically a sideline.


If anything, the financial sector is bigger now, than it was during those
19th century and early 20th century panics and busts.

The good news is that the financial turmoil of the 19th and early 20th centuries (a depression every 15 years or so) is unnecessary. In fact, as long as the New Deal’s financial regulations were in place the U.S. had no more of these bank panics. But as the Reagan administration deregulated lenders, it magnified the Savings & Loan scandal, which in many ways prefigured the sub-prime mortgage meltdown that continues to oppress the U.S. economy now.

More important corollaries to discovering government can’t be “out of money” remain. First, since taxes don’t fund government, using taxation to discourage unproductive activities, particularly speculation with borrowed money, is doubly important. The opponents of economic engineering with taxes say they don’t want (that crooked, blankety-blank) government picking winners, but given the enormous current subsidies for speculation, that objection is hardly credible. Never mind the egregious subsidies for extractive industries--the World Resources Institute estimates petroleum in the U.S. gets $300 billion annually in subsidies--income from stock speculation is taxed at a lower rate than regular income, and lower taxes on real estate make it easier for speculators to keep land off the market.

The Sacramento region has 20 years worth of vacant infill land, but persists in approving outlying, commute-lengthening sprawl development because the infill land speculators can cheaply keep their parcels off the market. It may seem counter-intuitive, but Prop 13 helps speculators keep infill land prices artificially high because their carrying costs are low.

One other corollary is that, in the current downturn, there is no reason, or “money shortage,” preventing government from employing the unemployed, making sure industry operates near capacity, or maintaining our infrastructure. Never mind humanitarian concerns--including the mental health, alcohol and drug problems induced by unemployment--unemployed people, factories and infrastructure waste valuable assets that could be productive. It’s far more wasteful not to spend the money.

In addition to its mandate to insure orderly financial markets, the Fed has a mandate to insure full employment. It could spend multi-trillions to help ordinary people without any more legislative guidance than it had to bail out the the financial sector. Unfortunately, the Fed is guided by a group of bankers. No labor representatives sit on its board.

A job guarantee is not just pie-in-the-sky, either. Argentina pulled itself out of a deep slump with just such a job guarantee program called “Head of Household” 2002. It not only worked economically, but those employed in this scheme reported increased self esteem, and more importantly, increased access to private employment.

No matter how persuasive, or frankly obvious, these arguments are, it’s unlikely those already sure that we’re “out of money” will change their minds, even if another option is obvious. It’s too big a change in the economic myths they have already believed. Max Planck used to say “Truth never triumphs — its opponents just die out. Science advances one funeral at a time.”

We now know that the planets revolve around the sun, but it was not always obvious. The church banned Copernicus’ works for a while, and Galileo spent his last years under house arrest for promoting that heliocentric fact. It just sounded too crazy to medieval audiences, who took the geocentric solar system for granted.

This writing describes a “Copernican revolution” in our usual economics thinking, and the way it can influence public policy. The economists responsible are the Chartalists, or Modern Monetary Theorists, and they have been around for some time, although neo-classical economics dominates academia and public policy. The MMT economists correctly predicted the Great Recession, and the troubles with the euro. Nations that adopt their recommendations will prosper just as the societies that accepted the accurate model of the solar system were able to improve their navigation and reach the New World.

So the next time you hear “we’re out of money,” remember these common sense truths instead of succumbing to the fear mongering. Government makes the money; it can’t ever run out. Issuing more money to pay off debts doesn’t necessarily cause inflation.

mark dempsey

For now, we’re used to seeing what happens when democracy serves money, what MMT reveals is that it’s possible for money to serve democracy.

Mark Dempsey

Mark Dempsey is a writer who lives near Folsom. The Modern Monetary Theorists who made this article possible include Yves Smith (, Steve Keen (, Bill Mitchell (, William K. Black and Marshall Auerback (, Warren Mosler ( and Kucinich economics advisor Michael Hudson ( Recommended viewing for a little historical perspective, Youtube video The Secret of Oz.

Posted: Monday, 27 August 2012