Saturday, April 12, 2014

What I am NOT saying...

This blog is about understanding how our monetary system actually works. Not how we wish it would work. Not how some best-selling “next-big-market-crash” author says it works. Not how the gold exchanges want it to work. Not how the Tea Party, Republican Party or Democratic Party thinks it works.

The myths and facts I have laid out can be verified by those who know the inner workings of the Treasury, the Federal Reserve Bank, and the banking system. Extensive research has gone into uncovering, explaining, and validating this system (see the links and books on the blog for reference).

This blog is also about choices. It is about options that we did not know about or were taught were harmful.

In our ignorance, we have invented problems and proposed cures that harm our economy and our lives. And we have given the controls to those who use the monetary system for their personal gain, to the detriment of the citizenry. Once we properly understand how our money works we can begin to think how to use it for the good of all, and to hold our elected representatives accountable to do what is right.

I know many of you have been a bit stunned, perplexed, or confused by my recent Money Myths posts. This is to be expected since belief in these myths is quite pervasive. My hope is that I get you thinking…that maybe, just maybe, things are not the way we thought.

I realize that I have left much unsaid – deliberately. Too often we reject ideas before we have thought them through because they appear counter-intuitive. And without a doubt, government monetary systems do appear counter-intuitive at first blush.

Here’s what we’ve covered so far:
  • Taxes do not fund government spending; all government spending is via the creation of new money.
  • The government does not borrow from the private sector to fund deficit spending.
  • The government does not borrow from China or other nations to fund the national “debt”.
  • We are not leaving a debt burden to our children.
  • Fiat money is “backed” by a nation’s authority to tax.
  • The Fed does not print money; it manages interest rates and bank reserves.
  • There’s no such thing as “unfunded liabilities”; the government can always “afford” any monetary obligation such as Social Security.
  • Interest rates are controlled by the Fed; foreign nations or bond investors cannot drive rates higher.
  • Government deficit spending increases the net financial assets of the private sector; it does not take away from private sector financial wealth.

With that said, it is time to give a few clarifying words about what I am NOT saying.
  • I am specifically addressing the operational functions of how a national monetary system like the US or Canada or UK can work. For nations that do not issue their own currency, do not allow that currency to float, peg their currency to gold, or promise to convert it to another currency they do not issue, the principles and options described here may not apply or will be greatly limited.
  • I am not saying that nations cannot (many in fact do) choose to pass laws to put limits on monetary functions (debt ceiling limits, balanced budgets, mandatory Treasury account balances, etc.) that unnecessarily restrict the operational value of the monetary system or render ineffectual its capabilities.
  • I am not describing or advocating for a centrally planned economy, or greater government control over the means of production, but I do support the necessary “rule of law” and appropriate regulatory framework that functioning societies and economies require.
  • I am not saying that taxes are unnecessary or that insufficient taxation is not harmful to the currency (in fact taxation is what drives currency).
  • I am not saying that government spending levels do not matter, and that what the government spends the people’s money on has no economic effect (in fact fiscal policy has been greatly overlooked since we created the Federal Reserve, to our detriment).
  • I am not saying that the more governments spend and the less they tax the better off we are (although as I write this there is a great need for more spending and less taxation).
  • I am not saying that inflation cannot happen if governments spend too much relative to taxation levels, savings desires, and the productive capacity of the country (although we are a long way from this today). 
  • I am not saying that even moderate inflation has no negative effects (hence the need for a job guarantee to provide a floor for those who bear a disproportionate impact of inflation).
  • I am not saying that we will not have another harmful economic crisis (rather that the causes are usually not government debt but private sector excesses).

Finally, I understand (to some degree) the concern many have in inefficient and overreaching government. I see the fear and anger in many online forums. I only suggest that we do what our representative system was design for… understand first what needs to be done, and then collectively let’s change it. 

The good news is that there really is a clear and hopeful path forward. 

Additional reading

Check out the Levy Institute paper Modern Money Theory 101: A Reply to Critics by Éric Tymoigne and L. Randall Wray.