Why Government Deficits are      not a problem      John Bradford, Ph.D.
‘Taxes Drive Money’               Fundamentals• Money is fundamentally a unit of accounting; a  unit of measuring credits ...
How Money Circulates                  Historical Illustration                                            OCCUPIEDRome issu...
Explaining Public Deficits• Normally, tax revenue will                $10  be less than total  government spending:  TAXES...
Is ‘Public’ Debt a Problem?• A government cannot collect in taxes more  money than it makes available: if all ‘debts’  wer...
Two Views on ‘Money and Taxes’Conventional View • Taxes finance government spending.   Whatever revenue isn’t collected in...
Is ‘Public’ Debt a Problem?          Two Views on ‘Austerity’Conventional View• Persistent deficits should be avoided• Aus...
Public Money vs. Private CreditPublic (State) Money            Private (Bank) CreditCurrency created by state via   Privat...
Public Money vs. Private CreditPublic (State) Money              Private (Bank) CreditValue is relatively stable, based Va...
Accounting Fundamentals• In the aggregate, financial assets always equal  financial liabilities.• In other words,         ...
Accounting Fundamentals• WHY? One person’s debt (liability) is another  person’s credit (asset).                          ...
Accounting Fundamentals       ASSETS                   LIABILITIES AND NET WORTH       Financial Assets (FA)    Financial ...
Accounting Fundamentals       ASSETS                  LIABILITIES AND NET WORTH       Financial Assets (FA)   Financial Li...
Deficit Spending by the Government => Net Saving in the          Private SectorGovernment Net Liability = Private Net Assets
Accounting Fundamentals• Here is what happens when $10 of interest is applied:  Banker’s assets increase $10, and “Bob’s” ...
Accounting Fundamentals• The application of interest makes the financial assets  of the banker and the financial liability...
Accounting Fundamentals• Unlike governments and unlike banks, “Bob” can only  acquire the money to repay his liability fro...
Linking Inequality and Debt• New money (i.e. credit) is primarily loaned into  existence by private banks.• Because of the...
Linking Inequality and Debt1. The current system functions like a   pyramid scheme: it is built on the   expectation of in...
Linking Inequality and Debt• COMPOUNDING INTEREST  INEQUALITY• Compounding interest means that creditors  exponentially e...
Linking Inequality and Debt• The debt pyramid is like a game of musical  chairs: in the aggregate, the total liability  of...
Money Creation in the U.S.             (standard view)                                IOUs (Bonds)                        ...
Money Creation in the U.S.• In the US, the Federal Reserve  prints “Federal Reserve notes”  which function as legal tender...
The United States does not “borrow”         Dollars from China• The United States  cannot “borrow” dollars  from China bec...
The United States does not “borrow”         Dollars from China• Next, China trades these  dollars for interest-  bearing I...
The United States does not “borrow”         Dollars from China• The bottom line: THE US  GOVERNMENT NEVER  NEEDS TO ‘BORRO...
Holders of US Treasury Securities                       2010                                 Other                        ...
The countries that own the 47% of foreign-              owned Treasuries                Major Foreign Holders of Treasury ...
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Money notes 2 14-13

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  • In all major economies, the vast majority of money is created by private banks as debt through the fractional reserve system. In the US, all new money is created by private banks, as debt.
  • In the U.S., much of the ‘debt’ is artificial, an internal account procedure- arising from the fact that the Treasury appears to ‘borrow’ from the Federal Reserve whatever it doesn’t collect in taxes; the Treasury could just as well exercise the power to create currency itself!
  • In all major economies, the vast majority of money is created by private banks as debt through the fractional reserve system. In the US, all new money is created by private banks, as debt.
  • Compounding growth will engender “power-law” distributions of wealth and/or income even when profits and losses are randomly distributed (i.e. when mean profits = 0); compounding interest is a monetary (rather than physical) form of compounding growth.
  • For the Federal Reserve (aka Monetary Authority) holdings, go to: http://www.federalreserve.gov/releases/z1/current/accessible/l108.htm
  • Acceptability as a means of tax payment is sufficient (but not necessary)for something to become money.
  • In all major economies, the vast majority of money is created by private banks as debt through the fractional reserve system. In the US, all new money is created by private banks, as debt.
  • Money notes 2 14-13

    1. 1. Why Government Deficits are not a problem John Bradford, Ph.D.
    2. 2. ‘Taxes Drive Money’ Fundamentals• Money is fundamentally a unit of accounting; a unit of measuring credits and debts.• This unit is determined by a government that issues currency denominated in this unit (e.g. US Dollars).• Money is valuable because governments accept only their own currency as a means of payment for taxes (and fees and penalties, etc.)• Money is accepted as a means of exchange because people need money in order to pay taxes.
    3. 3. How Money Circulates Historical Illustration OCCUPIEDRome issues (spends) coins VILLAGEto Roman soldiers occupyinga village. Rome thenimposes a tax on thevillagers, and the tax canonly be paid in Roman coins!Now, the villagers willprovision the Roman soldierswith food, clothing, shelter,etc. in exchange for thesecoins, so that they can usethem to pay taxes to Rome. ROME
    4. 4. Explaining Public Deficits• Normally, tax revenue will $10 be less than total government spending: TAXES < SPENDING Government Public• Why? Governments cannot collect more money than they have created! TAXES <= $10
    5. 5. Is ‘Public’ Debt a Problem?• A government cannot collect in taxes more money than it makes available: if all ‘debts’ were paid off, there would be no money left in circulation! TAXES < SPENDING• Deficits are normal, and budget surpluses are necessarily temporary.• Unlike households, currency-issuing governments have no budget constraints.
    6. 6. Two Views on ‘Money and Taxes’Conventional View • Taxes finance government spending. Whatever revenue isn’t collected in taxes must be borrowed by issuing government IOU’s (i.e. bonds).‘Taxes-Drive-Money’ View(Lerner 1943; Wray 1998)• Governments do not need the public’s money in order to finance their spending! Instead, the public needs money issued by government in order to pay taxes.
    7. 7. Is ‘Public’ Debt a Problem? Two Views on ‘Austerity’Conventional View• Persistent deficits should be avoided• Austerity is the inevitable result of ‘too much’ borrowing and spending, and its ‘remedy’!• NO PAIN, NO GAIN‘Modern Money’ View• Persistent deficits are normal.• Austerity is unnecessary and self- imposed.• ALL PAIN, NO GAIN! Austerity protests in Greece
    8. 8. Public Money vs. Private CreditPublic (State) Money Private (Bank) CreditCurrency created by state via Private credit created by“deficit” spending private firms as loans,Collected (or ‘destroyed’) Collected (or ‘destroyed’)through taxation. through repayment of loans.“Debtors” = tax payers; Debtors = borrowers; whoeverwhoever has to pay taxes. is originally given the moneyLocus of Debt is flexible Locus of Debt is fixed
    9. 9. Public Money vs. Private CreditPublic (State) Money Private (Bank) CreditValue is relatively stable, based Value is volatile, based solelyon governments ability to on the expected ability ofcollect taxes borrowers to repay original loan, plus interestFacilitates indirect, Generalized Facilitates direct, DyadicExchange ExchangeCounteracts inequality Amplifies inequality
    10. 10. Accounting Fundamentals• In the aggregate, financial assets always equal financial liabilities.• In other words, TOTAL DEBTS = TOTAL CREDITS; TOTAL DEBITS = TOTAL CREDITS; or lastly, TOTAL BORROWING = TOTAL LENDING.
    11. 11. Accounting Fundamentals• WHY? One person’s debt (liability) is another person’s credit (asset). $100 Banker IOU “Bob” $100 ASSETS LIABILITIES ASSETS LIABILITIES Bob’s IOU $100 cash $100 cash $100 DEBT worth $100 (loaned to Bob)
    12. 12. Accounting Fundamentals ASSETS LIABILITIES AND NET WORTH Financial Assets (FA) Financial Liabilities (FL) Real Assets (RA) Net Worth (NW) ASSETS = LIABILITIES• “Net worth” is a ‘residual’ category: NW = FA + RA - FL• TOTAL Net financial wealth = the sum of all financial assets less the sum of all financial liabilities, which always nets to ZERO. Why? Because total financial assets = total financial liabilities.• However, nonfinancial or REAL assets (i.e. material wealth) DO NOT SUM TO ZERO- i.e. ARE NOT OFFSET BY ANOTHER’S FINANCIAL LIABILITY.
    13. 13. Accounting Fundamentals ASSETS LIABILITIES AND NET WORTH Financial Assets (FA) Financial Liabilities (FL) Real Assets (RA) Net Worth (NW) WHY DOES THIS MATTER?• If total financial assets = total financial liabilities, then the financial liability (DEBT) of government must EQUAL the financial assets (SAVINGS) of the non-governmental private sector!• Summary: government debt = private savings!
    14. 14. Deficit Spending by the Government => Net Saving in the Private SectorGovernment Net Liability = Private Net Assets
    15. 15. Accounting Fundamentals• Here is what happens when $10 of interest is applied: Banker’s assets increase $10, and “Bob’s” liabilities increase $10. This is a net transfer of wealth of $10. $100 Banker IOU “Bob” $110 ASSETS LIABILITIES ASSETS LIABILITIES Bob’s IOU $100 cash $100 cash $110 DEBT worth $110 (loaned to Bob)
    16. 16. Accounting Fundamentals• The application of interest makes the financial assets of the banker and the financial liability of the borrower GROW EXPONENTIALLY.• Assets still equal Liabilities in the aggregate, but the net financial wealth of the bank increases by the same amount as the net financial wealth of the borrower decreases. Banker Net transfer “Bob” of $10 ASSETS LIABILITIES Bob’s IOU $110 DEBT worth $110
    17. 17. Accounting Fundamentals• Unlike governments and unlike banks, “Bob” can only acquire the money to repay his liability from somewhere else. From where?• In the aggregate, all new money comes either from the government (in the form of deficit spending) or from banks (in the form of private loans’). Banker Net transfer “Bob” of $10 ASSETS LIABILITIES Bob’s IOU $110 DEBT worth $110
    18. 18. Linking Inequality and Debt• New money (i.e. credit) is primarily loaned into existence by private banks.• Because of the application of interest, total debt will always exceed the size of the existing money supply to repay it. (amount that can be used to pay debts) < (TOTAL DEBT)
    19. 19. Linking Inequality and Debt1. The current system functions like a pyramid scheme: it is built on the expectation of infinite, exponential growth!2. This is impossible, because aggregate financial wealth always nets to zero. (assets=liabilities).3. Interest payments generally do not recycle back into the general population as earned income.
    20. 20. Linking Inequality and Debt• COMPOUNDING INTEREST  INEQUALITY• Compounding interest means that creditors exponentially expand their claims on wealth.
    21. 21. Linking Inequality and Debt• The debt pyramid is like a game of musical chairs: in the aggregate, the total liability of the borrowers can only be paid off (cancelled) with the creation of new money,• New (net) money comes from only two possible sources: 1. Private banks, which will lend the money, thus reinforcing the debt cycle, or 2. Government, which can deficit spend, i.e. spend more than it collects in taxes, thus adding net reserves to the system.
    22. 22. Money Creation in the U.S. (standard view) IOUs (Bonds) Money as Debt Federal Reserve Federal Reserve prints money, from US Treasury nothing, and pays Treasury.Whatever bonds the other banks do not purchase, the Federal Reserve purchases.The Federal Reserve can exercise a power that the Treasury cannot: it can simplyprint the money from nothing! But it creates this money as public debt, i.e. thegovernment’s liability.
    23. 23. Money Creation in the U.S.• In the US, the Federal Reserve prints “Federal Reserve notes” which function as legal tender or fiat money.• This money essentially represents debt to the Fed, (i.e. the government’s liability).• US coins, however, are produced by the US Treasury, and do not represent debt to private banks.
    24. 24. The United States does not “borrow” Dollars from China• The United States cannot “borrow” dollars from China because $USDollars China does not produce dollars!• Instead, China trades Chinese Goods their goods in exchange for US dollars.
    25. 25. The United States does not “borrow” Dollars from China• Next, China trades these dollars for interest- bearing IOU’s (bonds) called Treasuries. IOU Dollars• Treasuries are just (Treasuries) promises to pay back more dollars in the future.• This is basically like $US Dollars moving one’s cash from a checking account to a savings account, that earns interest.
    26. 26. The United States does not “borrow” Dollars from China• The bottom line: THE US GOVERNMENT NEVER NEEDS TO ‘BORROW’ THE CURRENCY (MONEY) IOU Dollars (Treasuries) THAT IT CREATES IN THE FIRST PLACE! (whether from China, or anyone else) $US Dollars• Any currency-issuing government can ‘afford’ anything sold in that currency.
    27. 27. Holders of US Treasury Securities 2010 Other 2%Here is some actual data Mutual Fundson who holds US Pension 7% Individualsgovernment debt. Funds 12% Banking 9%More than half of the Institutionspublic debt in the US is 3%owned within the US. Insurance CompaniesInstead of borrowing the Federal Reserve 3%funds, the Treasury could 11%have 1. raised the money Foreignthrough taxation, or 2. 47%printed the moneyitself, debt-free. State and Local Govts 6%
    28. 28. The countries that own the 47% of foreign- owned Treasuries Major Foreign Holders of Treasury Securities 2011 Other 23% ChinaSwitzerland 26% 2% Hong Kong 3% Russia 3% Taiwan Japan Carib 20% 4% Bnkng Ctrs 4% Brazil United 4% Oil Exporters Kingdom 5% 6%
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