Money is No Object:Accounting for Deﬁcits, Taxes and Trust in the 21st CenturyStephanie Kelton, Associate Professor, University of Missouri-Kansas City Financial Planning Association Annual Retreat Conference, May 5-8, 2012
What is Money?“Money is the most powerful and pervasive secular forceon the planet. Yet for most, it’s a source of mysticism andmystery.” - Dick Wagner, JD, CFP®
Barter Theory• Dominant within Economics• Metallist/Monetarist• Spontaneously Originates in Private Sector• Replaces Clumsy Barter• Eliminates “double- coincidence of wants” “Truck, Barter and Exchange” ~Adam Smith• Reduces Transactions Costs
The Evolution of Money (textbook story)• Primitive monies • stones, beads, shells, feathers, ﬁsh, cattle, etc.• Precious metals• Paper with metal backing• Fiat money -- Trust?
Textbook Conclusion• Money is what money does• A veil over the real economy• Not important in its own right• Money, debt and ﬁnance don’t even ﬁt into many economic models
Credit and State Theories • Chartalist/Cartalist • Anthropologists, Sociologists, Numismatists • Find origin of money in credit/debt relations • Precedes markets and exchange • Separate currencies not a coincidence Roman tally sticks, British Museum • State plays central role
Regardless of Origin, Today• All money exists as an IOU • The “I” is the debtor • The “U” is the creditor • IOUs are recorded in a money of account • The Australian dollar • The US dollar • The Japanese Yen • The British pound • The _____ Euro???
Money is Not an Object• The money of account is abstract • Like an “inch,” a “foot” or a “yard”• It cannot be seen or felt• It is represents a social debt relation• In any modern nation, the money of account is chosen by the national government
The Power of the State• Recognized as far back as Aristotle, through Adam Smith and into the modern era• John Maynard Keynes told us: “The age of Chartalist or State Money was reached when the State claimed the right to declare what thing should answer as money to the current money-of-account...To-day all civilised money is, beyond the possibility of dispute, chartalist.”
A Sovereign Government • Deﬁnes the money of account • Imposes taxes, fees and other obligations • Decides what it will accept in payment to itself • Chooses how it will make its payments
Sovereign Money• Most governments choose their own unique money of account and issue their own unique currency • “One Nation, One Money”• Most governments also require that taxes be paid in a currency that the state has the exclusive power to issue• These currencies are “sovereign money”
Taxes Drive Money• As long as the state has the power to enforce its tax laws, the people will need the government’s money• The currency will have value, and people will sell things to the government in order to get the government’s money• Whatever the government accepts in payment to itself will become the “deﬁnite” money in the system• The ﬁnal means of settlement
The Hierarchy of Money• The private sector Most acceptable “leverages” the Government government’s money Banks• Layering of IOUs with Non-ﬁnancial Business differing degrees of acceptability Households• But private sector cannot create net ﬁnancial assets • Only one ﬁnal means of Least acceptable payment
The US Hierarchy Issues the currency Taxes and spends at the top $ of the pyramid in dollars Non-convertible ﬁat money United States Government
The Beneﬁts of Sovereign Money • The government can never “go broke” or “run out” of money • It can afford anything for sale in the domestic unit of account • It does not need to borrow its own currency • It can set the policy interest rate at any level • It has an expanded policy space
Pre-1973, Bretton Woods Had to limit spending to Promised to convert Gold protect gold US$ into gold at a reserves ﬁxed price $ Dollars were subordinate United States Government
Post-1973 Fixed Exchange Rates Had to limit spending Did not issue the currency US$ to protect reservesat the top of the pyramid Ruble, Peso, etc. Heavily dependent on Sacriﬁced control of trade surpluses interest rates Russia, Argentina, Southeast Asia and Mexico
What about the Euro?• EMU is an exceptional case• The currency is divorced from the nation • “One Market, One Money”• The euro is effectively a foreign currency from the perspective of the individual nations• The EUR-17 are USERS of the currency• They lack the powers of a sovereign ISSUER
The Eurozone Does not issue the Governments can Eurocurrency that sits at the “run out” of euros top of the pyramid Heavily dependent on Must pay market trade surpluses interest rates Any EMU Country
Money Matters • Governments should be in control of the currency that sits at the top of the pyramid • Otherwise, they lack the power to keep their domestic economies on track “By virtue of its power to create or destroy money by ﬁat and its power to takemoney away from people by taxation, [the State] is in a position to keep the rateof spending in the economy at the level required to [maintain full employment].” ~Abba P. Lerner
How does a Currency Issuer Spend? • By directing its bank (usually the central bank) to credit someone’s account • Frequently happens without even writing a check • In the “modern money” era, government spending is accomplished through electronic keystrokes (Bernanke) • The monopoly issuer of the currency can always meet its obligations (Greenspan)
“We’re out of money .” “The government, just likeevery American household, has to live within its means.”
Is the Government Like a Household?• No - not anymore• We abandoned the gold standard• We ended Bretton Woods• We have “modern money” created by keystrokes on a computer• But we act as if we are still stuck in a ﬁxed exchange rate world
Why is the Eurozone a Train Wreck? • The EUR-17 gave up their keyboards! • Became users of the currency, much like individual US States • Italy is like Indiana. Greece is like Georgia. • Transferred spending authority to the ﬁnancial markets • Forced to accept job-killing austerity or risk defaulting on euro-denominated debt
The US Still Has its Keyboard• The US Government cannot “go broke”• It cannot “run out” of money• It is the monopoly issuer of the currency• It cannot run out of keystrokes anymore than a scorekeeper can run out of points
Money is No Object• As Chairman Bernanke explained on 60 Minutes in 2009: (PELLEY): Is that tax money that the Fed is spending? (BERNANKE): It’s not tax money. [W]e simply use the computer to mark up the size of the account.
The Issuer of the Currency Can’t Go Broke “[A] government cannot become insolvent with respect toobligations in its own currency. A ﬁat money system, like the ones we have today, can produce such claims without limit” ~Alan Greenspan, 1997
Then Why the Weak Recovery?• Policymakers (and most economists) don’t understand how the monetary system works• They think the government faces the same kinds of constraints that users of the currency (i.e. households, businesses and state/local governments) face• They warn that our ﬁscal path is unsustainable• And they ask for “shared sacriﬁce”
The Hawks Want Immediate Cuts• A deﬁcit hawk opposes deﬁcit spending on principle• Often favors “sound money” (e.g. gold standard or 100% reserve backing)• Would legislate rules to mandate balanced budgets
The Doves Want Eventual Cuts• A deﬁcit dove supports limited deﬁcit spending in tough economic times• Want the budget balanced over the business cycle• Support rules to limit the size of the deﬁcit (e.g. Europe’s Fiscal Pact)• Prefer to wait until after the economy begins to recover before imposing austerity
A New Bird in Town: The Deﬁcit Owl http://animalsexplaineconomics.tumblr.com/
A New Brand of Macro• Discovering an emerging school of economic theory• Modern Monetary Theory (MMT)• Exposes the fallacies in conventional economic theories “Academically, that school has • Views unemployment as socially not been challenged. And from harmful and economically inefﬁcient what I study on it, they’re right!” • Supports a full employment economy ~Bernard Lietaer
The MMT Deﬁcit Owl• Assigns no arbitrary limit to the size or duration of the deﬁcit• Relates government’s balance sheet to the rest of the economy• Uses sectoral balance sheet approach
A Simple and Fundamental Accounting Truth G>T $$$ Government Non-Government $$$ T>GGovernment Surplus = Non-government DeﬁcitGovernment Deﬁcit = Non-government Surplus
What They Show• In any given period, the sectoral balances show whether a particular part of the economy is: • Spending more than its income • Running a deﬁcit • Spending less than its income Surplus • Running a surplus Deﬁcit • Spending just equal to its income • Balancing its budget
The Whole Enchilada Internal: Domestic Private SectorInternal: Government Sector External: Foreign Sector
One Rule• The laws of double-entry bookkeeping apply• All sectors cannot take in more than they spend (i.e. be in surplus)• All sectors cannot spend more than they take in (i.e. be in deﬁcit) • At least one sector will be in deﬁcit
The Private Sector Balance• As a general rule, the private sector needs to be in surplus• Households and ﬁrms cannot continually borrow more than their income• At some point, lenders will run out of creditworthy borrowers who are willing to spend• Private debt levels may become unsustainable (Minsky)• When an expansion driven by private sector debt reaches an end, sales soften, jobless claims trend higher, and economic activity falters• Government revenues soon fall short of expenditures and the government’s budget eases
Achieving a Private Sector Surplus• There are only three ways to put the private sector in surplus: • 1.) Run a government deﬁcit and a current account surplus • 2.) Run a government deﬁcit > current account deﬁcit • 3.) Run a government surplus < current account surplus• Only countries with trade surpluses can avoid running government deﬁcits• But not everyone can be a net exporter! • As long as our current account is in deﬁcit, the US government needs to frequently be in deﬁcit
But We’re Terriﬁed of Deﬁcits• What if people lose trust in the dollar?• What if China refuses to buy our bonds?• What if interest rates skyrocket?• What if we set off hyperinﬂation?
So We Live Well Below Our Means 25 million Americans unable to ﬁnd full-time work Output gap estimated at $9.8 billion per day in lost incomeOne in four children $2.3 trillion infrastructure deﬁcit in poverty
There Is An Alternativeto Shared Sacriﬁce and Economic Stagnation Twitter: @deﬁcitowl
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