The National Debt Ceiling and How Money is Created

Modern Monetary Theory

This idea is going to alarm most everyone who has been led to believe that taxes pay for federal spending. That idea allows the maintainers of the system to keep control and power over how money is spent. As one supporter/critic of this article has observed, the phrasing and wording is non-standard from a wonkish economist's perspective, and it may have oversimplified the details  at the actual mechanisms, to the point of misinformation, but this point of this article is reasonably accurate. It is designed to make an essential point by strategic analogies, avoid finance jargon, so it is easier to understand by the rest of us. This is especially important as we head into this manufactured crisis over the national debt.

So please try to understand that there is entire movement of economists that see the validity of what I am about to tell you. I will have to provide extensive answers to your questions and outrages. So be patient. Okay here we go.

We have a fiat currency system that is backed by nothing but our faith in the system of exchange. Money is created by the commitment to spend. Most often this is a loan. So whenever debt is incurred money is created. Now, that explanation is way too simple and incomplete but for our purposes good for clarity.

Our federal government DOES NOT fund itself through taxes. State governments do spend by tax revenue but they also get federal funding as a complement. The Federal government funds itself by commitment to spend and printing (digitizing) money.

As long as there are corporations or people or governments willing to spend - actually purchase products and services - we can create all the money we need as long as we produce those products and services. Taxes and economic output (jobs) are used to control inflation. That is to put money out of circulation to keep its value high in case production does not keep up with spending.

Now, there isn't literally a person that sits at a computer, adding several zeros to a program, makes sure other parameters are simpatico, and to make sure there is new money to spend.  But, if our purposes we might as well think of it that way. Recently, during the pandemic, the Federal Reserve created 6 trillion dollars, by pressing a few buttons to mostly bailout big businesses. None of your taxes were involved. Only the commitment to do a job or fix the ledgers of that someone sees as valuable. That could be digging holes in the Arizona desert, poetry, sitting at home or saving a big corporation from its monthly debts.

So, now you may be wondering if there is any tangible basis for money? Well, of course there is. Wealth ultimately arises from the natural resources that country is able to exploit; or its ability to trade whatever other services it has in exchange for the ability of another country to exploit natural resources.  Our whole civilization’s physical infrastructure depends on the ammonia, concrete, plastic and steel that burning fossil fuels allows to manufacture efficiently. 

So, we can choose to either allow this money generation system to be directed at corporations (that have bought our politicians) or the public sector, the basic housing, health and education infrastructure of the nation. One thing is absolute. When poor people are provided money the put it in circulation as they spend it, providing jobs and stimulating the economy. When rich people are given tax cuts or government subsidies, they hoard that money in overseas bank accounts or equity of the companies, putting the money out of circulation and depressing the economy of main street.

The collusion between corporate and party interests has made sure that that the general public thinks that there is a limited amount of money to spend, because somehow things have to balance like a personal checkbook, as with limited amount of money to spend with a household budget. But that notion simple is instilled in you to hide the truth that your willingness to work at a lower wage/benefit and government service package that allows those that control the monetary policy to skim more off the top of a total spending to money creation ratio.

I know how difficult this is to accept. Its sorta like plate tectonics or Einstein's relativity. Seemingly obvious "truths" like entire continents don't move or the passage of time does not speed up or slow down is hard to let go of. But please try.

So the upshot is; we can spend as much money on whatever national purpose we want to achieve. The ONLY limitations are actual natural resources that would hinder that effort ....and the belief that those that understand the system are entitled to the lion share of spending to available money ratio.

I have a real world American success story to illustrate the circularity of the economy. I will provide if you need clarification by example.

Sources

"Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is 36 AMERICAN AFFAIRS not convertible into gold or into some other commodity."

Addendum on Accounting

There was once person who has no training in economics, but who is very good at spreadsheets and accounting, was debating MMT with an economic journalist friend of hers, but got lost at a certain point. She asked me to explain how a government can create money from nothing. Here's how I showed her, and it helped her grasp the accounting nature of it:

First, I asked her what is "zero", and showed her how numbers can be positive or negative (she already knew that). So, I asked her to split zero into two parts. Huh? What do I mean?

Second, I took a sheet of paper, and cut it up into little squares. I wrote positive numbers on half of them (1, 2, 3, 4, etc.), and wrote their counterparts on the other half (-1, -2, -3, -4, etc.).

Third, I put the positive numbers in one jar, and the negative ones in another. We agreed that if you add up the numbers in the jars, they still sum to zero. Right? We just split zero into two jars of numbers. I then hid the negative jar out of view. Let's call that the "deficit".

Fourth, presto! We now have some positive numbers to spend, and we can call that "money", and even give it a name, like baht or dollars. So, then we create some imaginary entities in the "non-government sector" who provide goods and services. I (the government) use the jar of positive numbers to pay them. And they can pay each other too, etc. We act out a little economy.

Fifth, now we tax those entities, by force. So I take a 4 from here, a 7 from there, a 10 from another, etc. What about our forgotten jar? Let's get the matching -4, -7, and -10 out. Let's match them together. You agree that -7 added to 7 makes zero again, right? Same for the others. So, the taxed "money" disappears back into zero. Poof! Let's throw those bits of paper away.

So now the "deficit" jar is less, and the "money" in the "economy" is less, but they still match, right? One is the counterpart of the other, and the total still sums to zero, right?

If we want more "money" we can always go through the process again, right? We can always split another zero, because we can never run out of zeros, and we can never run out of numbers that add to zero.

She immediately got it. And she went back into battle with her economics journalist friend with new enthusiasm. It's numbers, organized into two parts of a balance sheet. Every transaction has two parts -- a debit and a credit. By the rules of accounting they must always match.