In a commentary last year Paul Krugman coined the phrase "Zombie Economics" and I have not forgotten it. But Krugman was and is more focused on supporting Keynesian economic concepts in preference to other macro theories.
More and more economists are recognizing that Keynes himself is a "Zombie". You see, the idea of Keynesianism is all wrapped up in borrowing in the lean times to support economic stimulus and then repaying the borrowed money when times are good. This infers perhaps tax cuts in bad times and tax increases in the good running times to counter the mythical business cycle. In "Fed Speak" (on the monetary side) it is called "leaning against the wind" and is done with interest rates as opposed to spending and taxation.
But the concept of true fiat money does not seem to intrude upon these wars between the Keynesians and the "Efficient Market Hypothesis" (EMH) people or the Austrians and the Hayekians. And it is a discussion of fiat money that must now come to the fore.
I would ask you all why you think US dollars have value; why do we respect these units of account and put our faith in them? There is, of course, simple convention and familiarity. We have always been able to trust the accounting systems and use our accounts (expressed and measured in dollars) to manage trades. And so the most common answer to the question of value is the old "everybody knows" that dollars are money. So perhaps the way to ask the question is to ask what would happen if certain suppliers of things we want and need were to lose respect for our accounted dollars and thence to ask why that is not likely to happen.
Try this on for size: What if the people that supply oil to the United States refineries were to decide that dollars are not what they want. What if the actual STUFF that pleases the sovereign owners of oil was to become less attainable through the use of dollars. That is to say that the suppliers of stuff other than oil wanted some other currency. If the manufacturers of goods and the producers of grain and other foods were to decide that they wanted their own currencies or some currency other than dollars in trade for their goods then what good would the dollars be? The answer is not very comforting since food crops aside the US produces very little of anything other than green house gases.
The real value of the dollar is based on the force of the United States government to collect taxes and tribute in its own currency. The United States says to the people who "own" the oil by right of sovereignty, "You will take dollars for oil or you will be replaced by a king that will". And you will take a share of the wealth of your oil giving most of it to multinational oil companies or we will make up some sort of BOOGERMAN story to convince the American dummies that you intend to attack the US.
Fiat money has always worked in exactly this way. The government SPENDS its money into existence and then demands that money in payment of taxes or tribute. In the case of the internal economy, the government appropriates and spends money for a battleship because the supposed representatives of the people are elected to do so.
As such the money is a loan for the purpose of ship building. The loan is repaid by tax collections (or not). The total amount of US dollars in the world is exactly equal to the national debt at all times. That is the amount of money the US government has spent into existence (as amplified by the banks) and is yet to be reclaimed via taxation. If we were to pay off the national debt, there would be no money in current terms.
Yet the people in your government, Republicans and Democrats alike are telling you that we have a "debt crisis". There is NO WAY IN HELL that an entity that creates its own money can have a "debt crisis". The Greeks have a problem because they owe EUROS and the Greek government can't create EUROS. California has the same problem with dollars. But the United Sates government can no more run out of dollars than the oceans can run out of water. It may be that monetization (polite term is now "quantitative easing") would cause dollar devaluation (polite term is inflation), but there is no way that the US government can ever default on its debts. The choice is actually between proper taxation and inflation. Inflation is not cured by high interest rates. It is cured by taxing the excess money out of the economy. And at present we don't have any inflation and NO REASON TO BORROW or to raise taxes.
Let us run through this again:
- Government spends money into existence (for all the purists this may be done with a short term loan from the fed, but the fed will NEVER bounce a government check and all interest on this loan or overdraft inures to the benefit of the Treasury. Ergo this part is tap dancing)
- Fed and Treasury monitor the inflation rate and if inflation is a problem then the Treasury sells T-Bills and or the Fed may sell other financial instruments. If taxation and spending are in balance there will probably be DEFLATION because a growing population and growing economy demands more dollars. In the current environment there is NO NEED for T-Bill sales at interest to China or anyone else. Not until stimulus spending causes inflation.
So why are the Congress persons protecting the rich???? WAGE PUSH INFLATION (the inflation caused by stimulus spending) hurts the people who have all the money and are owed money while it helps the people that earn WAGES.