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Free-Marketeers (Em-Ay-Ar-Kay-e-Tee-E-E-Ar-Ess, Em-Oh-You-Es-EEEEE!) simply do not understand how modern economies work.  Their theories of economics are thoroughly rooted in the 19th and early 20th centuries, when the Gold Standard was sovereign.  Granted, the nitty-gritty of Macroeconomics is very difficult work, but the basics of a modern Monetary Sovereign macroeconomy are easy enough to grasp if you're willing to listen.

Here's an actual quote I encountered as a 'response' to Kevin Drum's piece over on MoJo (and Kevin gets it wrong TOO!)

We don't need charts & graphs to understand that liberal socialists want to tax, spend, & print money, while common-sense conservatives believe in fiscal prudence and personal responsibility, with as little government meddling as possible.
Follow me below the fold to learn what differentiates households, businesses, states, cities, counties and more from the U.S. Government...

First, let's ask a question:

Who is owed what when the USG prints a dollar?

Not a soul. The USG prints dollars free of prior entanglements. So, right off the bat, when the government prints a dollar, or a trillion, precisely zero people have a lender's claim to that dollar.  Nobody.  Nadie.  Think about it.  The US may print a dollar because it has a prior service to pay off, but that just means that the printed dollar immediately has a direction to go to.  Nobody lends the government that dollar (we'll hold off on the interaction between bond buyers and the government for a later discussion).

If that's the case, why do we call it 'debt'?

It becomes 'debt' because of accounting TERMINOLOGY, not because Currency Originators like the USG (and Japan, the UK, Australia, Russia &ct) owe anyone for the privilege of printing out a dollar bill (or a trillion).

The Order of Events is as Follows:
1. A dollar gets printed (actually, entered in an spreadsheet nowadays)
2a. The dollar gets distributed outside the USG (a bond holder, a SS recipient, a gardener for the National Mall, a Park Ranger, the Koch brothers, whatever)
2b. The dollar gets taken off the USG's balance sheet because it was disbursed.
3. Now, when your outflow is higher than your income in an accounting context, what's the term for that? Running a deficit.
4. And when you are accumulating a deficit in an accounting context, what is the term for what you are accruing?


But remember, we don't owe a single soul for the privilege of increasing our holdings of dollars, so while it may be called 'debt', it's not 'debt' in the traditional sense, rather it's the Monetary Contribution of the government to the economy.  Remember that phrase, monetary contribution.  Because that's what the deficit is, a number that shows how much the US has contributed to the supply of dollars.

The idea of Sovereign Currency Issuance doesn't get addressed along with with the idea of accounting very often. In reality, Currency Issuers are on a totally separate accounting track than the version of accounting that States, Cities, Counties, Towns, Businesses and Households use. Those entities are users of currency, not issuers of the stuff.

If the USG practiced 'fiscal responsibility' like 'fiscal conservatives' wish it to, then Outflow would equal Income, as well as would the resulting deflation as the number of goods and services increased (not to mention population!) but the number of dollars stayed constant.  Why?  Because the Monetary Contribution of the government would be...$0.00.  It wouldn't contribute anything at all.

So, when wealth and population increase, but supply of money doesn't, what happens?  Deflation.  And believe you me, NOTHING, but NOTHING kills an economy faster than deflation.  When you can increase the value of your monetary holdings over and above the value of modest investments by doing nothing but sleeping on a fat wad of cash, those modest investments just stop being funded altogether. (Incidentally, this is related to why there's a huge pool of money trapped circulating and recirculating Ouroboros style in the upper 1% of the economy - it doesn't go anywhere but to OTHER people in the 1%, who are limited in what goods and services they can even USE, let alone benefit from.  This also touches on the reason for bonds, essentially, they're the Investment of Last Resort, more on that another time though.)

Fiscal responsibility means printing enough money to keep up with wealth creation and ensure that everyone has access to (not possession of, access to) enough currency to conduct business. Better, if you print a bit more than required, you can get a low, constant and reliable source of inflation, which encourages people to USE their money for investments rather than stuff it in a mattress. Money that isn't being used doesn't contribute to the economy and makes for less money in circulation, creating conditions that threaten deflation.  

So, unless a country has currency coming in because they are a net exporter like Germany, in order to keep up with the wealth creation and population increases that will inevitably happen (provided there's nothing catastrophic going on like Godzilla, that is) and in order to prevent the same amount of dollars being split up between more and more people and more and more wealth, it's quite clear that it's an absolute necessity to 'run a deficit'.

Now, one can argue about the SIZE of the deficit, but that we must have one as long as we are net importers as a country is not really challengeable.

Originally posted to Zyx on Wed Sep 25, 2013 at 04:05 AM PDT.

Also republished by Money and Public Purpose.

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