The Government “Debt” Flim Flam

golden eggIs government’s “debt” really a problem, and shouldn’t the federal budget balance? No, but vulture capitalists love creating an artificial crisis to promote public policies that would otherwise never pass on their merits. Such “debt” is obviously not a problem. Why? Unlike Greece, which has to beg the European Central Bank for euros, American government has the legal right to create literally unlimited dollars, so it can never be insolvent. It will run out of dollars when the Bureau of Weights and Measures runs out of inches.

Concerned about inflation? Even that is unlikely now. Inflation occurs when an economy’s capacity, or some critical commodity like oil, is at its production limits, and when unemployment is low. In other words: not now.

Deflation followed America’s Central Bank (“the Fed”) issuing $16 – $29 trillion in 2007-8 to fix the same financial sector whose frauds crashed the economy. Funding social safety nets and state revenue sharing requires far fewer dollars.The Fed’s current policy, “Quantitative Easing,” bids up financial asset prices, again, a remedy for deflation. We need QE for Main Street, not Wall Street.

At its core, the phony budget crisis conflates government “debt” and household debt. For households, debt is undesirable and surplus is desirable, but households use currency, they don’t create it. Currency-creating governments have exactly opposite desires.

Since 1776, the U.S. significantly reduced its “debt” seven times, eliminating it entirely from 1835 – 1837. Economist Randall Wray notes that ”every significant reduction of [government] debt has been followed by a depression…. [Even] our less serious downturns have almost always been preceded by reductions of federal budget deficits.”  Household budget surpluses don’t cause depressions.

Why does this happen? As a legacy of commodity-backed money, when government wants to spend $10,000,the Fed adds a $10,000 credit to its checking account and simultaneously creates an equal amount of government “debt,” so government “debt” is actually a mirror image of the financial assets in the non-government economy. The complete equation is: Government “debt” = non-government financial assets + net exports (which are negative now).

Before the Great Recession, households took on record levels of debt–300% of GDP, far more than government. Repaying that household debt impairs consumer demand now, so withdrawing financial assets from the private sector would lessen demand even more, worsening the recession.

The vulture capitalists who profit from deflation have funded a decades-long campaign to conceal these facts. They profit not only from buying things at distressed sales, but from a privatizing public property when states and localities, who don’t create money, are in trouble. Chicago already sold its parking revenue to Bear Stearns for 10¢ on the dollar, and German banks suggest the Greeks mortgage their ports and the Parthenon. Sacramento proposed selling its parking revenue for 50¢ on the dollar, and headlines warn of school, utility and road privatizations to come as the predatory flim flam persuades more people government “debt” is a problem even though the federal government can create dollars at will.

So before we get too anxious about government “debt,” let’s remember that it’s completely different from household debt. No compelling reason exists to reduce it, and a private sector that is de-leveraging needs the financial assets “fiscal responsibility” proposes removing from the economy. Let’s not shoot ourselves in the foot, shall we?

For more, see Randall Wray’s presentation about currency, or  this presentation about the Fiscal Cliff by Stephanie Kelton on CSPAN.From Randall Wray’s presentation here, quoting a publication of the St. Louis Fed (a bastion of right-wing, monetarist economics): “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills.

mark dempseyIn this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar-denominated assets.”

In short, government can never run out of dollars; it can never be forced to default; it can never be forced to miss a payment; it is never subject to the whims of the “bond vigilantes.”

Mark Dempsey

Posted: Sunday, 18 November 2012


  1. JoeWeinstein says

    Yes, the USA can create as much money as it needs to, since the USA is the legal arbiter of what money is. This is in effect what Ellen Brown has been telling us too, as an argument for creating government banks.

    Here in California we are tired of hearing how (allegedly) extraordinarily dysfunctional our state is because we are running deficits. In effect Dempsey and Brown are arguing strongly (by their USA example) for California’s re-asserting independence 162 years after our mistake of agreeing to join the Union. An independent California could print its own money too, backed by the dynamism and credibility of the world’s eighth-largest economy.

    Scarcely a dozen years after joining the Union, California was in fact the financial mainstay of the USA. Each month Lincoln’s Treasury Secretary Salmon Chase eagerly awaited confirmation of yet another successful shipment of California gold to New York – gold to back the USA dollar – which otherwise would have been stressed to perceived worthlessness by all the paper printed to cover the expenses of the Civil War.

    • says

      Secession isn’t necessary. Like North Dakota, California could create a state bank, and, like private banks, create money out of nowhere too. It could also issue bonds it will accept in payment of State taxes. Both of these fiat monies would serve as supplements to Federal revenue sharing.

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