The title of this post is similar to the title of Warren Mosler’s book.
Mosler, Warren (2012-10-25). Soft Currency Economics II (Modern Monetary Theory) (Kindle Locations 1003-1015). . Kindle Edition.
The Kindle addition can be purchased from Amazon for $3 and read on your Kindle, if you have one, or on your computer or smartphone if you don’t.
Even though the book is short, it’s not light reading for non-economists, so the intent of this post is to give Mosler’s conclusions only, along with the conclusions I’ve drawn from the work.
The amazing thing is, the content of this book is common knowledge among many analysts at the Fed, which has issued its own publications on the same topic. Alan Greenspan and Ben Bernanke have made comments to congressional committees along the same lines. But, many economists, politicians, press, and pundits either are not aware of it’s content, can’t get their minds around it, or refuse to acknowledge it to further their own agendas.
Mosler is only one of many economists who understand what goes under the acronym, MMT, Modern Monetary Theory, these days. Others include most of the economic faculty of the University of Missouri, Kansas City and others in Universities around the world. The people who have done the most to publicize the misunderstandings of our current system, in addition to Mosler, include Stephanie Kelton, L. Randall Wray, Michael Hudson, Marshall Auerback, and William Mitchell. These individuals consult with governments around the world on the subject and have blogs on the internet in addition to their academic contributions.
The following is the Conclusion from Mosler’s book:
“The supposed technical and financial limits imposed by the federal budget deficit and federal debt are a vestige of commodity money. Today's fiat currency system has no such restrictions. The concept of a financial limit to the level of untaxed federal spending (money creation/deficit spending) is erroneous. The former constraints imposed by the gold standard have been gone since 1971. This is not to say that deficit spending does not have economic consequences. It is to say that the full range of fiscal policy options should be considered and evaluated based on their economic impacts rather than imaginary financial restraints. Current macroeconomic policy can center on how to more fully utilize the nation's productive resources. True overcapacity is an easy problem to solve. We can afford to employ idle resources. Obsolete economic models have hindered our ability to properly address real issues. Our attention has been directed away from issues which have real economic effects to meaningless issues of accounting. Discussions of income, inflation, and unemployment have been overshadowed by the national debt and deficit. The range of possible policy actions has been needlessly restricted. Errant thinking about the federal deficit has left policy makers unwilling to discuss any measures which might risk an increase in the amount of federal borrowing. At the same time they are increasing savings incentives, which create further need for those unwanted deficits.”
The following are my conclusions drawn from the work.
1. Any government with its own currency cannot go broke. The government does not need to borrow from the private sector or impose taxes to pay its bills. It simply uses keystrokes on a computer to debit and credit the appropriate accounts. Any limitation on the national debt can only be imposed through law.
2. Individuals and states in the US do not have their own currency so they do not operate under the same rules as the federal government. Hence, their budgets are constrained, whereas the federal budget is not constrained in the same way. Comparison of what individuals and states must do to what the federal government must do are erroneous.
3. Ignoring international transactions, when the private sector runs a savings surplus, as it is now, the federal government must run a deficit. It’s an accounting identity and has been proven by scientific observation of the spending and saving patterns.
4. Banks don’t take deposits and make loans from them. They make loans and then add to their reserves at the Fed from other funds on hand after the fact. If they don’t have funds on hand to increase their reserves, they borrow the money from the Fed or from other banks.
5. The main limitation that the federal government has in running up deficits and debt is the threat of devaluing the currency. This only occurs when the demand for goods and services exceeds the capacity of the country to produce them, not a condition that exists now. This condition leads to rising prices and devaluation of the currency. So, when the economy is booming and this condition occurs the federal government must impose additional taxes or retire federal debt to reduce demand to where it can be satisfied by existing productive capacity.
6. The statements made here are conditioned by international trade. International payments can change the balance between federal deficits and private sector surpluses. So, there are actually three sectors that must be considered. We have not gone into the ramifications of the third international sector here to make the essential points without getting overly complicated.
Other posts in this blog have identified resources for further investigation.