Sunday, September 11, 2011

A Colossal Hoax

U.S. bankruptcy that is...I've been saying this for a while now, but Susan Feiner from the University of Southern Maine wrote a nice article on modern money about a month ago that is probably a better explanation than what I offer.

From EconIntersect
Readers put on your thinking caps and learn something new about money.

Modern money—not the old fashioned, greasy kid’s stuff—follows uber modern rules, rules which have been misrepresented/misunderstood in the coverage of Washington’s debt-ceiling hysteria.

First things first: no matter how much money we’re talking about, there’s nothing there—not gold not silver. At best, a few reams of green paper.

Follow up:
For some folks the fact that there’s nothing there is intolerable. “How,” they wonder, “can money be so important, and so insubstantial?”

That’s modern money. When was the last time your pay (if you still have a job, there are 29.2 million unemployed or underemployed in the US today) was cash in an envelope? Like 99.9% of Americans you get paid by check or a direct deposit.

Someone working for your boss tapped on a keyboard (just like the keyboard I’m typing on now), to initiate a transaction that put ‘money’ in your checking account by taking ‘money’ out of your boss’s checking account.

That money is just a click, an electronic blip, your ability to keep bread on the table and a roof over your head, an ineffable nothing, and the root of all evil.

“Get out! No way! Susan, you’ve gone loony tunes.”

The United States is sovereign in its own currency. (Note to readers: this is just a fancy way of saying that the US is the only entity in the world that can create dollar denominated money. Japan and Mexican have similar monopolies on yen and pesos.) Our government creates, spends, borrows, and pays interest in dollars.

Clerks at the US Treasury enter numbers into computers that record plusses in federal agency accounts. When agencies spend—more keyboard clicks—other bank accounts are credited, then those account owners spend their money.

Next, people like you and me drive on roads, attend public school, drink clean water, fly on safe planes, and eat food checked for deadly bacteria. Myriad other necessities flow from Congressionally authorized Treasury clicks: fire and safety officers ready at a moment’s notice to come to our rescue, energy delivered via the nation’s grid powers our appliances, Social Security checks feed our seniors, and infectious diseases are checked when kids are vaccinated.

Of course people work (caveat: those 29.2 million people are still unemployed), businesses earn profits (well yeah, it’s a lot harder to do this when there are 29.2 million unemployed), consumers spend and banks’ lend.

But, as frustratingly insubstantial as it may seem, the wheels of commerce are greased by nothing more than these accounting clicks.

“You’ve got to be kidding me. My business has cash reserves of six months.”

“Sure you do. Is that reserve—coin plus currency—buried in the backyard? Or is it on deposit at a bank? If the former, send me your address! If the latter, baby you’ve got blips. You run your business by telling the bank what to do with your blips.”

As I said, money is nothing. Money is everything. And that’s true in spades for the federal government.

We are in a different place than is the government, because you and I will die. At that point, our estates will be settled: if our assets (positive blips) are greater than our liabilities (negative blips), then our heirs inherit. If the reverse occurs, then nobody gets anything. Ditto for business bankruptcies—paying off creditors requires asset liquidation.

There’s nothing comparable to death for the US. The national analogy—revolution or an invasion/occupation—would render dollars useless, no longer accepted for purchases or paying debts.

Bankruptcy is simply not possible. As long as the debts owed by the US government are dollar denominated debts, we can always create all the dollars we need.

Yep, you’re right. Creating dollars ad infinitum could cause repercussions. But that’s not what we’re talking about. The topic is bankruptcy … running out of the money needed to pay our dollar denominated debts. That is impossible, short of a self-destructive decision not to pay the debt.

The inflation boogie man can be put to bed, as well. If we create money to retire debt, we are “printing money” that has already been spent. (That’s what debt is: money - oops, blips - that has been spent.) It has already supplied whatever inflation it could. Offsetting those blips that have already been spent cannot produce any inflation. This is what the “mobs” are missing.

If you’re just about to pull out your hair because you are thinking …. “this woman, what a dimwit, if we created all this ‘money’ no one in the world would lend us a dime” .…, relax.

The interest rate the US is paying on its debt is at a historic lows. Globally, cash rich (oops, make that blip rich) investors are queuing up to lend to us. In fact, on August 1 (the day before we hit the debt ceiling) the world’s investors were paying America for the privilege of lending us money. Negative interest! I am not making this up. Markets ain’t worrying ‘bout federal borrowing or money creation.

And you shouldn’t be either. Le deficit es mort. Viva le deficit.

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