My wallet used to hold US Notes. When Congress spent them, it did not owe interest for printing dollars, and sometimes was not in debt.
Then Congress gave the power to print money, a duty the (second) US Constitution expected of Congress, to the central bank (who made their notes look just like the US’s). Now Congress borrows money from the “Federal Reserve”. To lend the US money, the “Fed” uses dollars that never existed until spent on government bonds. The “Fed” gets to charge interest, putting the US trillions of dollars in debt.
To erase it, some academics propose “Modern Monetary Theory”. Want a new nuclear bomb? Pay your own new money to the bomb maker. Politicians get back to creating money and the central bank becomes a toothless tiger. This MMT is neither modern nor theoretical. For most of its history, the US printed money and did fine without a central bank.
MMTers propose that politicians spend only on projects the public can use—freeways, Medicare for all, etc. If the value of these new programs equals the value of the new dollars, then the currency geyser can not create inflation. And, using its own new money, the government does not have to tax anyone to fund programs. No taxes? Who wouldn’t like that?
Proposing that politicians spend only on MMTers’ pet projects and actually persuading politicians to spend on such projects are two wholly different mammoths. Where’s the guarantee? Why would politicians suddenly stop subsidizing agri-business and bridges to nowhere? Especially if they could print all the money they wanted? And never had to pay anyone back? Nor tax voters? Proposing free money for politicians is like giving car keys and whiskey to a sixteen year-old boy then expecting safe driving. Not very rational.
Presently, instead of print money, government sells bonds it’s supposed to pay back with interest. That debt to bond buyers is now $29 trillion. MMTers propose to print new money to pay off the old debts. But so many fresh new dollars circulating would inflate prices which would devalue the pay off to bondholders. To date, the US has defaulted four times; paying back with funny money would be a fifth—not very honorable.
The US—Federal Reserve and Treasury—lent central bankers et al $30 trillion after 2008, that supposedly those lucky recipients paid back. If they can, why can’t the US? Especially if Congress halts its corporate welfare. And passes any of the current tax-the-rich bills.
The branch of the US that sells bonds is the Treasury. Actually, the US does not sell bonds. It hires Goldman Sachs et al to do it. Wall St charges us a hefty fee. Often, Goldman Sachs provides the Treasury with its Secretary. Sometimes the US fines Goldman Sachs and others on Wall Street for their illegal shenanigans. The managing brokers do not pay the fine but pass it on to shareholders. Plus, they write it off their corporate taxes … even when they never pay all the fine.
When corporations borrow, that loan is not taxed and the interest reduces income that is taxed. Corporations also sell bonds to buy back their stock; paying bondholders is cheaper than paying stockholders, and managers who sell their stock make out like bandits. Aren’t inner workings much more interesting than outer workings?
MMTers face tough sledding. The rich and powerful don’t want we hoi polloi to enjoy free money. They want us paying taxes, which keeps people obedient. They want to buy government debt, which safeguards their fortunes. Even when US bonds pay little, 2% of a $1 billion is still $20 million every year.
MMTers can not keep straight economics vs. politic. Of course the state—the monopoly on legal violence—can spend what it prints. It can do pretty much whatever it wants. But should it? In one-company towns, the company can pay employees with company scrip, good for renting company-owned houses and shopping in company-owned stores. But should it?
Another MMT, “Magical Mystery Tour”, was the Beatle’s only commercial flop. MMTers never have to create value in the real world—manage employees or negotiate deals. If they had to get their hands dirty, they’d probably think realistically, broadly, deeply—plus become annoyed by inflation.
For the public, bonds serve a useful purpose.
1, Pensions funds own government bonds. If MMTers get rid of them, pension funds might pay retirees nothing, if they can’t find a secure substitute investment. If such existed, bonds would not be so popular.
2, Presently, government goes into new debt to pay off old debt—the behavior of an addict—and to wage war, to build white elephants, etc. However, if government had to pay off its bonds only from a rise in site value around new projects—no rise, no pay back—then nobody would buy bonds that propose unprofitable schemes.
Proposing how government can avoid debt, MMTers are late to the party. They’re like the generals who’re planning how to win the last war. Actually, government should not be spending so much; most of it goes to waste. As for keeping up with a growing economy, growth is killing the biosphere. Like any living thing, the economy has matured. It’s time to level off, operate at steady-state.
While MMTers remain fixated on central governments, local cooperatives already issue money as needed and not at interest. For backing, they leave gold and silver for jewelry and tableware. In some systems, producers buy others's products with coupons that sellers use to buy other producers's products. In other systems based on trust and confidence, the co-op issues new notes to new members who spend them on others’s products then sell others their own products. It’s those needing to consume who need currency, not producers; they already have goods and need paying customers.
Once a new currency grows large enough, government could grant it legal tender status. It’d compete with notes issued by a central bank or central government. If any of those currencies misbehave, people will avoid them and those dollars will go the way of Confederate notes.
If government needs money, there’s no need to crank out excess worthless dollars. Available is an immense surplus of wealth—the annual rental value of locations like downtowns and resources like oil, plus government-granted privileges like corporate charters and monopoly patents. Now those values create class and reinforces hierarchy. Government could recover them… but not necessarily spend them.
Since politicians don’t spend responsibly, take away their discretionary power. Put the budget on the ballot so voters can vote up or down major categories. Most categories—education, health—can go, once citizens get a share of social surplus, leaving governments with little to nothing to spend on.
Once society recovers and disburses all rents, nobody would need excess dollars causing inflation. As techno-progress drives down costs, prices will follow. Then less money, not more, will be needed for all investing and producing, for all selling and buying. The challenge won’t be to create more money but to destroy it. Society could lock the hood on the economy, and on the polity, too.
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JEFFERY J. SMITH published The Geonomist, which won a California GreenLight Award, has appeared in both the popular press (e.g.,TruthOut) and academic journals (e.g., USC's “Planning and Markets”), been interviewed on radio and TV, lobbied officials, testified before the Russian Duma, conducted research (e.g., for Portland's mass transit agency), and recruited activists and academics to Progress.org. A member of the International Society for Ecological Economics and of Mensa, he lives in Mexico. Jeffery formerly was Chief Editor at Progress.org.