Thursday, February 26, 2015

When good analogies go bad

We've all heard it. 

"If I ran my business like the government I'd be bankrupt". 

It sounds so intuitive; so moral. It would be irresponsible for a government to keep spending more than is earns. And for many governments, it really is true - all those cities, states, and the nations that do not issue their own currency (like Greece). Yes - they all have to get the money they spend because they are all users of a currency.

But what about nations that issue their own currency? After-all, that's most sovereign nations. 

Let's go back to our analogy. We said if I ran my business like the government... stop right there. What business issues its own money? Businesses are currency users just like cities, but the United States is a currency issuer. In what way can a business ever run like a currency issuer?

Some analogies are just bad. So bad, in fact, that they can mislead whole nations into thinking something false is true, and something true is false. Or, to put it in moral terms, they lead us to believe that something very destructive to our economy is actually the only righteous solution, and that the very thing that could help society and people is deemed irresponsible and even evil. 

That's what happens when good analogies go bad.

So how can we best describe a sovereign currency-issuing government that is "of and for the people"? Is there a simple metaphor that can resonate with our sense of morality and be intuitive? 

Honestly, I'm still searching for the best answer to that question and would love your input, but one I find helpful is this: the government should run itself like a bank for public purpose, not like a business for profit.

Yes, rather than the household or business metaphor, which draws images of "fiscal responsibility" through annual balanced budgets, the bank analogy is a much more appropriate metaphor for currency-issuing nations.

Here's why.

Banks have been granted a special power to issue new money for profit-seeking people & businesses, or for those who can demonstrate an ability to repay. They perform this public service so that resources that otherwise could not be afforded out of savings can be deployed to create value. Every new loan results in new money going to fund some asset. We rely on banks to evaluate good investments and the ability of those that seek them to pay back their loans. 

Bank credit is a powerful invention that can create real assets that benefit people and businesses. (Note: this special money-creation power given solely to private banks needs to be carefully regulated so that this power isn't abused for speculative & non-productive purposes that increase financial instability and risk, as is too often the case today!)

With all that said, bank money creation is limited to only those things that have sufficient cash flow to enable their repayment with profit. Bank credit doesn't work well for the host of other things that nations deem important but that have little or no immediate monetary benefits (e.g. national parks & highways) or that take too long to generate cash (e.g. much scientific research & technology development).

For thousands of years societies have organized themselves to create and benefit from such things that serve a common good. 

  • A city temple for religious cohesion and authority for the settlement of disputes. 
  • A great wall of protection from invading northern hordes. 
  • Aqueducts to bring fresh water from miles away. 
  • Roads and highways to enable commerce or support troop movements. 
  • Universities to educate the next generation of civil leaders and advance the nations knowledge. 
  • The list can go on and on. 

In each case, these projects and initiatives were deemed to be in the interest of the collective society or the ruling class or protection of the state. They don't generate near term cash flow for profit-seeking interests.

How did we, as evolving and developing societies, solve this? We created sovereign money!

Just as we give banks power to create money for private interests, we have also granted to our government the ability to issue new money for public purposes. 

Governments shouldn't be compared at all to a business that balances a budget, but rather to a bank that issues money for what the people deem to be their national interests. Nations differ on their priorities but most seek some level of national security, rule of law, general education, public health, public safety, national infrastructure, research and development, and much more.

As the currency-issuer, the government has a solemn responsibility to make sure that it issues (net of what it taxes back) just the right amount relative to the obligations it has been directed to perform. If it issues too little money it creates unemployment; too much and there's a risk of inflation. 

It is quite obvious that our governments are issuing too little today, given the high unemployment numbers and low economic growth.

Think of the government as a public bank - issuing money for public purpose. It can do so without limit, so it is up to us to decide what is in our best interests and to invest in our nation's & children's future. Full employment should always be our goal, but there are also many other very important initiatives that we can and should direct our resources toward: from transitioning our economy toward a sustainable energy & resource system to investing in the skill development of all workers to ensuring we have the advances in medicine and resources for medical care to meet the needs of all. 

A balanced budget would be disastrous for our nation, economically and in the toll it would take on human lives and the opportunities for the next generation due to lack of investment in the real things needed for health and prosperity. It would starve our economy of sufficient inflows of money to make up for the money leaving the economy via imports and what sits on the sidelines as our total national savings. 

All because of a bad analogy.

Sovereign governments are nothing like businesses that earn income to pay their expenses. They are like banks - issuing money for public purpose. We're not broke. We're not over-indebted. We're not fiscally irresponsible when we issue more money than we tax. That's just a sovereign government acting normal - we just need to make sure they do it enough to balance the whole economy and keep our nation moving forward. With this understanding, the future suddenly gets a lot brighter!

Does this metaphor make sense to you? 
How can we improve it or is there a better one?
What do you think is in our public interest today?