I was reading some old economic blogs that I rarely get around to when I came across this great blockquote in a comments section that I just have to share with the class. The quote is from a 2010 article in "The Nation" magazine by economist James K. Galbraith, son of the famous economist John K. Galbraith. Here is the link to "The Nation" article:
And here is the section that I found to so beautifully describe the nature of our modern monetary system and how it effects our economy and our day-to-day lives.....enjoy.
To put things crudely, there are two ways to get the increase in total spending that we call "economic growth." One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that's basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors--public deficits or private loans--has to be in action.I hope that this description can help spark a so-called 'light-bulb moment' for some of my fine brother and sister Kossacks. The financial sector lives on creating debt and charging interest, other than fees, this is their main source of income. The corporate propagandists have successfully convinced far too many people (and a terrifyingly large number of my fellow progressives) that Govt deficits are inherently bad and something that we just 'can't afford'.....This is nonsense, the US dollar is not a scarce commodity, its our national utility. Our currency is an invention and not something that we can run out of. I regularly read comments and posts at this very site praising the Clinton surpluses of the late 90's as fiscal responsibility or congratulating Obama for bringing down our deficit right now, this type of thinking plays right into the hands of our opponents. When the Federal Govt deficit spends, this ADDS new financial wealth to the private sector, this is an unambiguously good thing when we have unemployment and an output gap.
For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in "net financial wealth." Ordinary people benefit, but there is nothing in it for banks.
And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don't like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over--a house or factory or company--that will then become the property of the bank. It's easy to see why bankers love private credit but hate public deficits.
All of this should be painfully obvious, but it is deeply obscure. It is obscure because legions of Wall Streeters--led notably in our time by Peter Peterson and his front man, former comptroller general David Walker, and including the Robert Rubin wing of the Democratic Party and numerous "bipartisan" enterprises like the Concord Coalition and the Committee for a Responsible Federal Budget--have labored mightily to confuse the issues.
The Federal Govt's budget is not like a household or business budget. So the next time someone writes about how good it is to make the Federal Govt deficit smaller.....ask them why they think the Govt should add less new money to the private sector economy? Is our economy running at full capacity and full employment so that this new money is going to cause increasing inflation?
Here is a great and simple rule of thumb that we should get comfortable using for determining whether or not the Federal Govt's deficit is too large or small....
Is the unemployment level too high? => then the deficit is too small
Is inflation stable and acceptable? => then the deficit is not too large
Its no more complicated than that.....
Please join our group here at Kos called "Money and Public Purpose". We are the only group that writes about and analyzes the economy through the lens of our modern fiat monetary system and not based on the false gold standard economic belief that the Govt is just like a household or business. We will never beat the deficit terrorists if we all continue repeating The Big Lie that the federal Govt must obtain its own currency from us taxpayers before it can spend money. This is illogical and not at all how our fiat money system works, for better or worse, this is just the way it is.
MMT = Reality