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Modern Monetary Economy: Misunderstanding and Misinformation

How many times have we heard, particularly in the last month, that the U.S. is going broke?  Interesting that this is usually mentioned in context of Social Security or extension of unemployment insurance or other government fiscal policies that actually may help working class people.  But we never hear this in context of war or defense spending or the bailing out of Wall Street.  Why?

OMG, “the U.S. is going broke” or “U.S. bankruptcy is imminent”.  This non-sense is usually spewed by politicians, pundits and economists that either don’t understand our modern monetary economy or do understand it but because of ideology chose to misinform the public.  It’s time that we understand our modern monetary economy before we are lead down the path to complete destruction of the working class and further degradation of our democracy. 

Characteristics of Modern Monetary Economy - U.S. Dollar

The U.S. Dollar (USD) is a fiat currency system.  USD is a floating rate currency which means that the Fed and/or Treasury Department don’t have to take special measures to defend USD whether through management of foreign exchange reserves, currency pegs or government currency boards.  USD has no intrinsic value - it isn’t convertible to gold or silver - we dropped the gold standard in early 1970’s.  U.S. government, whether Treasury Department or Federal Reserve Bank, have a monopoly over the issuance of USD.  The viability of or demand for USD is determined entirely by the fact that USD is the only unit that is acceptable for payment of taxes and other financial demands by federal government - eliminate federal taxes (libertarian dream) and viability USD/fiat currency collapses.

Modern Monetary Economy is very powerful

If you don’t think so consider this - how many wars, foreign aid and war machines were funded without any consideration to whether we can afford it or not.  Heck, when Treasury Department and Fed decided to bail out Wall Street affordability was never an issue.  This is powerful stuff. 

Federal government is NOT like businesses and even households.  It has a monopoly over issuance of fiat currency and it is NOT revenue constrained.  If federal government was revenue constrained we would NOT be able to afford two wars and huge bail out of Wall Street. 

It’s all about the sectors or sectoral balances.  Government sector deficits mean non-government sector (mainly private sector) savings.  This a very simple concept that is supported by actual data.  The federal government via spending (deficits) is the only entity that can create what are considered net financial assets that allow the private sector to save and as a result eliminate unemployment.  The economic consensus in Washington and mainstream (neoliberal) economics chooses to ignore this simple concept but at our peril. 

What gives?

Our modern monetary economy is very powerful stuff.  It can redistribute income/wealth very easily.  The status quo for the past 25+ years (with possibly a brief hiatus during Clinton years) has meant a redistribution of income/wealth upward toward top income households and corporations (subsidies and privatization).  The most recent example of this redistribution of income/wealth upward was the $14 trillion bailout of Wall Street - no one in Washington said we couldn’t afford that. 

The issue is not the size of the deficit - the issue is who does the deficit benefit.  Reagan and Bush II both prove that.  Both ran huge budget deficits that largely benefited top income households and corporations. 

So now with the possibility of a Democratic administration and a Democratically controlled congress changing the status quo and our modern monetary economy we hear rumblings from deficit hawks.  Where were they with Reagan or even Bush II? 

There are constraints to federal government/fiscal policy and our modern monetary economy - mainly in the form of resource constraints or inflation.  And government spending can be wasteful.  Responsible modern money economic policy should not be determined by some arbitrary accounting function (deficit), but by how the policy impacts the REAL economy. 

Good luck.