Fiat Money - Bugs and Features
It is rare to find anyone who truly understands how money works and I count myself among the confused. The 2008 crisis led many of us to look more deeply into the issue and whole libraries of books were sold that "explained" the 2008 crash but turn out to have mainly deepened the confusion.
One thing you learn quickly is that "fiat" money is really based on debt. Debt is generally quite real and it's the source of the solid reality of money. For example, it's true and somewhat mysterious that the bank can create $500,000 out of thin air and "lend" it to you to buy a house. The house is totally solid and real. So is the debt. For many of us who have spent their entire lives struggling to pay off a mortgage, we know that the money created out of "thin air" must be repaid. It is our dependable nature as solid citizens, our earnest desire to pay our debts and the bank's assessment that we are "good for it" that make money real.
But what we may not understand is that repaying the debt destroys that $500,000. When the mortgage was created, that $500,000 was an asset on the bank's balance sheet. With every payment, that asset is whittled down, eventually to zero. Of course, the bank charges interest for its services and that's an actual cash flow from you to the bank. Income to the bank, and expense for you. Miraculously, the house still stands and the money that bought it has vanished.
Modern Monetary Theory (MMT) is based on a few clear-eyed accounting principles applied to less familiar transitions, with shocking results.
The federal government draws up a budget, including tax regulations, which ("out of the blue") create a tax liability for ordinary citizens. Let's say that I owe taxes of $10,000. Just as with the mortgage, this liability to me has an offsetting "asset" side - in this case, an asset to the government (taxes owed). Just as with the mortgage, when I pay my tax bill, this asset vanishes. It makes no sense to think of that $10,000 as revenue. So what happened to my hard-earned $10,000?
Sit tight. You will not like the answer. For all intents and purposes, that $10,000 has gone up in smoke. The government has demanded, on pain of heavy fines and/or imprisonment, that you surrender $10,000 (for which you would have had other uses) and then burned it - cancelling out a debt that was created "out of thin air" just like the bank mortgage, but in this case there is no house involved. There is no "asset" on the government's books that can then be "spent" on government programs. The bonfire is made up of IOUs from the government to itself.
Once your head stops spinning about this astonishing fact, there are more to absorb.
Since taxes are not revenue to the government, where does the money come from to pay for the expenses in the government budget? Simple answer, "out of thin air". There is no connection between tax "revenue" and government expenses. What politicians ceaselessly talk about as the "deficit" is a creature of political fiction, along with promises to "balance" the budget or "reduce" government debt.
Anyone who has been listening to promises of balanced budgets for a few decades has tweaked to the fact that this will never happen. I began to smell a rat when reading Greenspan's memoir - that a balanced budget (under Clinton) would basically destroy the US economy. Nobody really wants a balanced budget - it's a fiction used in vaporous arguments between parties of opposite stripes that are always united in one thing: they will never balance the budget. This is not a "left/right" issue. I abandoned the NDP when Molcaire started to beat his gums about balancing the budget.
Such a "balance" equates apples and oranges. The "apples" are government expenses (basically printed out of thin air) and taxes collected (basically an account of how much money was taken out of the economy and burned). One has nothing much to do with the other. Anyone with a smattering of accounting knowledge knows that having someone pay off debt is not "revenue". Think again of the mortgage example.
But wait a minute! Isn't the "deficit" real in some sense? Don't we need to "service" government debt? Well yes (like mortgage interest), but the government can cheerfully print money to service the debt. A sovereign government cannot go bankrupt. It can always meet its obligations by creating more money. This is perhaps the key finding of MMT. Famous examples of countries "going bankrupt" are mostly stories of governments who lost or gave away their sovereign right to issue their own currency. Examples that come to mind are Argentina (which pegged its currency to the US dollar and Greece which adopted the Euro).
The other insight about government debt is that it is equal and opposite to the financial savings o the private sector. In other words, viewed from the perspective of the private sector, government debt is an asset. Elimination of that "debt" would eliminate the safest and much-preferred means of saving for many of us (including me). I will leave you to wonder what the impact of that would be. MMT says it would be a catastrophe and something tells me it sounds like monetary policy behind the 1920 crash.
It is important to understand that MMT begins simply by applying ordinary accounting principles to things that are routinely mislabeled and looking closely at financial transactions that are buried in myth and misdirection. This must not be confused with the policy directions that many well-known fans of MMT propose, nor do opponents succeed in undermining MMT by criticizing the policy directions recommended by MMT fans, such as Bernie Sanders. MMT does not, for example, say that governments can print any amount of money they chose. That is a "straw man" attack on Sanders, just like the catch-all "socialist" label.
What bothers me is something I don't see mentioned in discussions of MMT. What happens when the man on the street realizes that the taxes he pays have no connection to government "revenue"? All the political BS about tinkering with the tax system, all the professionals who advise about minimizing taxes are a vast house of cards, based on a persistent misunderstanding of what taxes are. They are just a big bonfire of cash. The average citizen won't have time to delve into the details. Expect a huge tax revolt. Stripped of mumbo-jumbo about tinkering with the tax system, what, if any, is the difference between Federal political parties? What, if any, is the justification for "raising" or "lowering" taxes that have no impact on Federal revenue?
At levels below the Federal, taxes are totally real and work the way you would think. Provincial and civic governments actually need to collect taxes as revenue to cover their expenses. On the other hand, the Federal government can print "grants" to the junior levels "out of thin air".
The obvious risk of too much "printing" is inflation, or what I prefer to call "price stability". Price stability is essential to keep a market economy working. Buried away in the arcane logic of MMT is the reason why taxes are necessary to provide price stability. This is somewhat debatable and some MMT proponents claim that taxes are indeed unnecessary to achieve price stability. Once your head stops spinning over the "bonfire" vision of taxes, you may be willing to entertain a far simpler way to burn cash - such as a GST or carbon "tax". That would put an army of "experts" out of work. You can bet that very few billionaires will welcome Bernie Sander's "wealth tax" that would burn a percentage of their (very real) wealth. Bernie's sweeping programs of "free" health care and college education need to be paid for by "air money", just like roads and intercontinental missiles.
Some MMT experts advocate "self-correcting" feedback mechanisms. One of these is the progressive income tax, which tends to "burn" more cash if the economy is too "bloated" with money. I am skeptical. Once people start thinking of that bonfire, they will stop paying taxes - progressive or not.
Of course, to prevent inflation, the government could throttle back on its printing press. This is historically unlikely. So all that is left is to borrow money from the private sector (increasing government debt and private savings), which seems to the preferred policy for many years.
It's all pretty complicated. Watch this space.
One thing you learn quickly is that "fiat" money is really based on debt. Debt is generally quite real and it's the source of the solid reality of money. For example, it's true and somewhat mysterious that the bank can create $500,000 out of thin air and "lend" it to you to buy a house. The house is totally solid and real. So is the debt. For many of us who have spent their entire lives struggling to pay off a mortgage, we know that the money created out of "thin air" must be repaid. It is our dependable nature as solid citizens, our earnest desire to pay our debts and the bank's assessment that we are "good for it" that make money real.
But what we may not understand is that repaying the debt destroys that $500,000. When the mortgage was created, that $500,000 was an asset on the bank's balance sheet. With every payment, that asset is whittled down, eventually to zero. Of course, the bank charges interest for its services and that's an actual cash flow from you to the bank. Income to the bank, and expense for you. Miraculously, the house still stands and the money that bought it has vanished.
Modern Monetary Theory (MMT) is based on a few clear-eyed accounting principles applied to less familiar transitions, with shocking results.
The federal government draws up a budget, including tax regulations, which ("out of the blue") create a tax liability for ordinary citizens. Let's say that I owe taxes of $10,000. Just as with the mortgage, this liability to me has an offsetting "asset" side - in this case, an asset to the government (taxes owed). Just as with the mortgage, when I pay my tax bill, this asset vanishes. It makes no sense to think of that $10,000 as revenue. So what happened to my hard-earned $10,000?
Sit tight. You will not like the answer. For all intents and purposes, that $10,000 has gone up in smoke. The government has demanded, on pain of heavy fines and/or imprisonment, that you surrender $10,000 (for which you would have had other uses) and then burned it - cancelling out a debt that was created "out of thin air" just like the bank mortgage, but in this case there is no house involved. There is no "asset" on the government's books that can then be "spent" on government programs. The bonfire is made up of IOUs from the government to itself.
Once your head stops spinning about this astonishing fact, there are more to absorb.
Since taxes are not revenue to the government, where does the money come from to pay for the expenses in the government budget? Simple answer, "out of thin air". There is no connection between tax "revenue" and government expenses. What politicians ceaselessly talk about as the "deficit" is a creature of political fiction, along with promises to "balance" the budget or "reduce" government debt.
Anyone who has been listening to promises of balanced budgets for a few decades has tweaked to the fact that this will never happen. I began to smell a rat when reading Greenspan's memoir - that a balanced budget (under Clinton) would basically destroy the US economy. Nobody really wants a balanced budget - it's a fiction used in vaporous arguments between parties of opposite stripes that are always united in one thing: they will never balance the budget. This is not a "left/right" issue. I abandoned the NDP when Molcaire started to beat his gums about balancing the budget.
Such a "balance" equates apples and oranges. The "apples" are government expenses (basically printed out of thin air) and taxes collected (basically an account of how much money was taken out of the economy and burned). One has nothing much to do with the other. Anyone with a smattering of accounting knowledge knows that having someone pay off debt is not "revenue". Think again of the mortgage example.
But wait a minute! Isn't the "deficit" real in some sense? Don't we need to "service" government debt? Well yes (like mortgage interest), but the government can cheerfully print money to service the debt. A sovereign government cannot go bankrupt. It can always meet its obligations by creating more money. This is perhaps the key finding of MMT. Famous examples of countries "going bankrupt" are mostly stories of governments who lost or gave away their sovereign right to issue their own currency. Examples that come to mind are Argentina (which pegged its currency to the US dollar and Greece which adopted the Euro).
The other insight about government debt is that it is equal and opposite to the financial savings o the private sector. In other words, viewed from the perspective of the private sector, government debt is an asset. Elimination of that "debt" would eliminate the safest and much-preferred means of saving for many of us (including me). I will leave you to wonder what the impact of that would be. MMT says it would be a catastrophe and something tells me it sounds like monetary policy behind the 1920 crash.
It is important to understand that MMT begins simply by applying ordinary accounting principles to things that are routinely mislabeled and looking closely at financial transactions that are buried in myth and misdirection. This must not be confused with the policy directions that many well-known fans of MMT propose, nor do opponents succeed in undermining MMT by criticizing the policy directions recommended by MMT fans, such as Bernie Sanders. MMT does not, for example, say that governments can print any amount of money they chose. That is a "straw man" attack on Sanders, just like the catch-all "socialist" label.
What bothers me is something I don't see mentioned in discussions of MMT. What happens when the man on the street realizes that the taxes he pays have no connection to government "revenue"? All the political BS about tinkering with the tax system, all the professionals who advise about minimizing taxes are a vast house of cards, based on a persistent misunderstanding of what taxes are. They are just a big bonfire of cash. The average citizen won't have time to delve into the details. Expect a huge tax revolt. Stripped of mumbo-jumbo about tinkering with the tax system, what, if any, is the difference between Federal political parties? What, if any, is the justification for "raising" or "lowering" taxes that have no impact on Federal revenue?
At levels below the Federal, taxes are totally real and work the way you would think. Provincial and civic governments actually need to collect taxes as revenue to cover their expenses. On the other hand, the Federal government can print "grants" to the junior levels "out of thin air".
The obvious risk of too much "printing" is inflation, or what I prefer to call "price stability". Price stability is essential to keep a market economy working. Buried away in the arcane logic of MMT is the reason why taxes are necessary to provide price stability. This is somewhat debatable and some MMT proponents claim that taxes are indeed unnecessary to achieve price stability. Once your head stops spinning over the "bonfire" vision of taxes, you may be willing to entertain a far simpler way to burn cash - such as a GST or carbon "tax". That would put an army of "experts" out of work. You can bet that very few billionaires will welcome Bernie Sander's "wealth tax" that would burn a percentage of their (very real) wealth. Bernie's sweeping programs of "free" health care and college education need to be paid for by "air money", just like roads and intercontinental missiles.
Some MMT experts advocate "self-correcting" feedback mechanisms. One of these is the progressive income tax, which tends to "burn" more cash if the economy is too "bloated" with money. I am skeptical. Once people start thinking of that bonfire, they will stop paying taxes - progressive or not.
Of course, to prevent inflation, the government could throttle back on its printing press. This is historically unlikely. So all that is left is to borrow money from the private sector (increasing government debt and private savings), which seems to the preferred policy for many years.
It's all pretty complicated. Watch this space.
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