Do Sovereign Nations "Print Money"?
Anyone who delves into the theory of money eventually runs into a powerful analogy - that "money" in your hand is actually an IOU issued by the government "out of thin air"*. This is shocking at first, but the real shock comes when you realize that the government tears some of those IOU's from your hands and burns them. Taxes are not "revenue". They are a bonfire of IOU's.
This is all totally true. Kinda. Like many great analogies, it's hard to recover from the impact of the words to step back and evaluate them as an analogy Are we getting trapped by words that seem true but actually don't apply to the situation under discussion? Really powerful and "true" analogies are called "essential", as in "Surfaces and Essences". Most "nonessential" analogies capture only one particular aspect of the similarity between two situations and lack power when digging deeper. Almost all analogies are like that and we have brains that automatically swallow them whole because language itself is a nasty tangle of analogies that can only be untangled by accepting most of them as they fly at us in every word we hear.
I think my own experience with IOU's is typical. The only time I can remember an IOU being collected is when I owed $50 to the school bully. Not paying would be a hazard to my health. Other than that, IOU's to me turned out to be as worthless as the paper they were scribbled on. Is the "IOU" of a $100 bill like that?
Let's pause to look at the question that started me along this road. Who is the "I" in the "IOU" of a $100 bill? It's the government, right? And who is the government? Well, in theory, it's "us", but a more skeptical view might say it's our sovereign economy. Back in High School, I seem to remember, someone said that that $100 is a claim on the "goods and services" produced by the Canadian Economy. The $100 bill is "backed by" the assets of the country. Again, an analogy, but perhaps closer to the truth than an "IOU". Or maybe both reveal a clue to what's really happening.
If I hand you an IOU, you can't do much with it except hope I'm "good for it" and will pay you off.
But if I have a government job and the government cuts me a cheque for $100,000 "out of the blue"*, it says something very different:
The way to overcome "analogy traps" is to take the time to understand what's really going on. This is too much work for most people, even "experts" who should know better. "Money" like the "quark" that will eventually yield to hard work and better analogies.
We need to stand back a bit and remember another insight of MMT. This is that a sensible government will not "print" more of these IOU's than the economy can "cover" with actual resources (goods and services) that are available for sale in that currency. If it "prints" too many IOU's it's "easy to see" (but this is another analogy) that people selling goods and services will demand more - prices will rise - inflation***. The value of your cash IOU will erode as it sits under your mattress. Whether by taxes or other means, the government needs to guard the value of its IOU's or people will stop taking them, or at least demand more of them for any given thing - which is perfectly within their right to do.
Money in our hands is both a carrot and a stick. Now MMT claims that we are forced to take these IOU's because we need them to pay our taxes. We are also forced to take them in payment of all debts. This is the "stick". But I think that, at least in modern economies, MMT should pay a bit more attention to the "carrot" and perhaps come up with a whole new set of analogies.
Standing back a bit further, we need to look more closely at other analogies that come to mind when we learn about MMT (such as the leaky bathtub). In fact, the whole of MMT is a giant analogy. It's just a better analogy than the ones we take for granted or the ones spouted by federal politicians who claim we need taxes to pay for government programs. We don't. We just need a lot of carrots**.
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* "Out of the blue" is another compelling analogy, but, in fact, the government is issuing both money and taxes as part of a plan called a budget which, among other things, aims to preserve the value of money and assumes the collectability of taxes. At bottom, MMT is simply asking the government to draw up its budget with a more realistic analogy in mind. But still an analogy.
I note that "out of thin air" is also used for bank loans, in which case the "money" that appears in your bank account is created "out of thin air" by the bank, with an offsetting asset to the bank - your loan. In this case, my analysis here is even more clear. The bank takes pains to ensure that you are "good for it" and they have a few sticks of their own.
** Perhaps "bread" is a better analogy than carrots since it seems that a fair percentage of the bread I buy winds up "taxed back" by mold.
*** MMT challenges the assumptions behind the shaky analogy of "inflation".
This is all totally true. Kinda. Like many great analogies, it's hard to recover from the impact of the words to step back and evaluate them as an analogy Are we getting trapped by words that seem true but actually don't apply to the situation under discussion? Really powerful and "true" analogies are called "essential", as in "Surfaces and Essences". Most "nonessential" analogies capture only one particular aspect of the similarity between two situations and lack power when digging deeper. Almost all analogies are like that and we have brains that automatically swallow them whole because language itself is a nasty tangle of analogies that can only be untangled by accepting most of them as they fly at us in every word we hear.
I think my own experience with IOU's is typical. The only time I can remember an IOU being collected is when I owed $50 to the school bully. Not paying would be a hazard to my health. Other than that, IOU's to me turned out to be as worthless as the paper they were scribbled on. Is the "IOU" of a $100 bill like that?
Let's pause to look at the question that started me along this road. Who is the "I" in the "IOU" of a $100 bill? It's the government, right? And who is the government? Well, in theory, it's "us", but a more skeptical view might say it's our sovereign economy. Back in High School, I seem to remember, someone said that that $100 is a claim on the "goods and services" produced by the Canadian Economy. The $100 bill is "backed by" the assets of the country. Again, an analogy, but perhaps closer to the truth than an "IOU". Or maybe both reveal a clue to what's really happening.
If I hand you an IOU, you can't do much with it except hope I'm "good for it" and will pay you off.
But if I have a government job and the government cuts me a cheque for $100,000 "out of the blue"*, it says something very different:
"Thank you for your service. Here is a piece of paper written on behalf of your goverement (i.e, the people of Canada with their customs and laws). You ma cash it in for anything you want. Perhaps a car or downpayment on a house? Anything available for sale in Canada. In fact, it is against the law for anyone to refuse this for payment of any debt."You can go out and "spend" - or "cash in" that "IOU" on anything your little heart desires. It's not like your run-in-the mill IOU. The nation is good for it. But there is a catch. Perhaps the government will come back later and grab back some of it, say $10,000 as a "tax". This means, "After much thought, I have decided "out of the blue"* that you need to give back $10,000 - which means I only gave you $90,000 in the first place. This is another reason why the "IOU" analogy fails. Money is a very special kind of IOU - a thing in its own right and not really "like" anything else. In particular, "taxes" seem to defy logic - a fact that is born out by the fact that even politicians who should know better fail to understand what they are "for".
The way to overcome "analogy traps" is to take the time to understand what's really going on. This is too much work for most people, even "experts" who should know better. "Money" like the "quark" that will eventually yield to hard work and better analogies.
We need to stand back a bit and remember another insight of MMT. This is that a sensible government will not "print" more of these IOU's than the economy can "cover" with actual resources (goods and services) that are available for sale in that currency. If it "prints" too many IOU's it's "easy to see" (but this is another analogy) that people selling goods and services will demand more - prices will rise - inflation***. The value of your cash IOU will erode as it sits under your mattress. Whether by taxes or other means, the government needs to guard the value of its IOU's or people will stop taking them, or at least demand more of them for any given thing - which is perfectly within their right to do.
Money in our hands is both a carrot and a stick. Now MMT claims that we are forced to take these IOU's because we need them to pay our taxes. We are also forced to take them in payment of all debts. This is the "stick". But I think that, at least in modern economies, MMT should pay a bit more attention to the "carrot" and perhaps come up with a whole new set of analogies.
Standing back a bit further, we need to look more closely at other analogies that come to mind when we learn about MMT (such as the leaky bathtub). In fact, the whole of MMT is a giant analogy. It's just a better analogy than the ones we take for granted or the ones spouted by federal politicians who claim we need taxes to pay for government programs. We don't. We just need a lot of carrots**.
---------------------
* "Out of the blue" is another compelling analogy, but, in fact, the government is issuing both money and taxes as part of a plan called a budget which, among other things, aims to preserve the value of money and assumes the collectability of taxes. At bottom, MMT is simply asking the government to draw up its budget with a more realistic analogy in mind. But still an analogy.
I note that "out of thin air" is also used for bank loans, in which case the "money" that appears in your bank account is created "out of thin air" by the bank, with an offsetting asset to the bank - your loan. In this case, my analysis here is even more clear. The bank takes pains to ensure that you are "good for it" and they have a few sticks of their own.
** Perhaps "bread" is a better analogy than carrots since it seems that a fair percentage of the bread I buy winds up "taxed back" by mold.
*** MMT challenges the assumptions behind the shaky analogy of "inflation".
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