Now that I have gotten your attention, this concerns fiscal finance, not the host of other subjects on which both are wrong. It is a crucial subject, though, and one for which wrongheadedness can be exceedingly foolish, to the point of being dangerous. Allow me to explain.
Ms. Ocasio-Cortez expresses the notion that deficits are not bad and supports a fiscal approach called Modern Monetary Theory or MMT. The relation between the two is most immediately through a predecessor of MMT, Chartalism, which considers money a creature of the State. However, the concept is as ancient as it is logical, especially when it is used in fiscal finance. The way that the State creates money is through deficits, by spending tokens, or charta, into the economy of its country. This fiscal money then returns to the State through the tokens being accepted for taxes.
However, AOC is off the mark in accepting the deviations of MMT from Chartalism proper. This is where we get to the complete error of the Conservatives: thinking that there is any other form of money besides fiat currency and that there is any other way of creating it besides spending it into the economy.
The conservatives cling to the long-discredited idea that money evolved out of barter and that, by that fanciful history, should be forever tethered to commodities. Their precious gold was, is, and will always be a commodity. If it is used in a transaction with another commodity, that transaction is barter. If some actual money has its value tied to gold, or silver, or any other rare commodity, it is a contrivance intended to manipulate the value of the actual money. Such attempts inevitably fail, emptying the treasuries of those rare commodities, and diverting them from their true purpose: creating coins which are hard to counterfeit.
Here the plot thickens, because it introduces another form of money. The story thread begins with deposits of precious metals in a bank, a reserve. The banker gives the depositor a note which is declared to be as good as the gold which was deposited, by virtue of being payable in gold by demand of its holder. At this point, the note is just another commodity and the transactions made with it a glorified form of barter. Instead of lugging around gold bricks, the owner of the gold carries the much lighter gold demand note. It is only when the banker issues new notes as loans to people who have not deposited gold, that money is created by fiat: debt money. The act of disbursing the notes constitutes spending into the economy and thus creating money.
Though the gold has disappeared from the vaults of the banks, the process is the same for the modern banks and their loans. A loan is issued and the funds disbursed as positive balances in the borrower’s account, thereby creating debt money. The error in MMT is that it confuses the two kinds of money and, in so doing, gives debt money a standing it should not have in fiscal finance. This error is compounded by the confusing role of the Federal Reserve, which uses federal debts to allow the creation of debt money and then of the quasi-fiscal Federal Reserve Note. MMT wades into this morass and is unable to extricate itself in formulating a rational theory of fiscal finance.
Let us now give a clean exposition of fiscal finance in the context of the United States. This will allow us to correctly state its application to policy:
- The contents of the Treasury are not money. Even the coins which are minted, as long as they are stored there, are not money. The same applies to the paper currency and the electronic balances of the Treasury. None of it is money because it has not yet been spent into the economy.
- When the Federal Government spends money on some program, then and only then is fiscal money created.
- Some time after the fiscal money is created, some of it may be returned to the Federal Government in taxes. It is placed in the Treasury, thus destroying it as money. It is now Treasury contents and therefore no longer money.
That is it. Now let us state the application to policy:
- Contrary to the Conservative canard, federal spending is not the taxpayer’s money. It was never the taxpayer’s money. After the spending, the money is created. After it is created, it is the citizen’s money. When the citizen is taxed, the portion which is taxed is no longer the citizen’s money, thus not the taxpayer’s money. Then when the taxes reach the Treasury, they are no longer money.
- Similarly, the Conservative challenge “how are you going to pay for it?” has the process exactly backwards, the cart before the horse. “It makes the pay” would be the accurate response.
- There is no need for federal debt in this process. In fact, federal borrowing only gums up the works. It prevents new money from being created, instead using existing money in place of fiscal money. Because no fiscal money is being created by federal borrowing, it fails to add new economic activity. This adds no new tax revenue by which fiscal money would be destroyed. Instead, existing money is diverted from one purpose to another, from investments and spending to bonds, to treasuries. It should be noted that government bonds promote no productive activity and are a drain on the Treasury. This is where AOC and MMT are off the mark.
- If more new money is being created than can be destroyed by revenue or can be absorbed by the economy, and if the excess money is not held, there will be a general inflation. This general inflation will then increase tax revenues, destroying money and bringing the fiscal finances back into balance. In other words, this fiscal finance system is self-correcting.
- Since the spending creates the fiscal money supply, and taxes destroy it, the fiscal finance system needs a cumulative net fiscal deficit, though some days will have a fiscal surplus. This is where AOC is more correct.
The issue of eliminating the federal debt, a debt which we have here proven unnecessary, is addressed in The Way Out… In that book, I also allay the unreasonable fears which Conservatives try to cast on any fiscal finance system. However, its remedy to our ongoing crises cannot be applied if it is not read, and read in large numbers. This will not happen if the conservative commodity theory of money is not thoroughly debunked in the public forum, as I am attempting to do in this article.
I know that many are inclined to be complacent when policy is discussed. The prevailing attitude is that it is too much effort to even broach a topic which most people assume is beyond their ken. Instead, they take out their political Barbie dolls and play at protests and marches. The folly, the great danger is that real crises need their attention: the crises of a multi-trillion dollar federal debt, of a government frequently closing, and of an economy which, despite the manipulated and misleading statistics, is still in the doldrums. Those crises need the public’s attention, and my solution needs the public’s support, because the public officials will not give it their attention and will not apply my remedy if they think the public is distracted, playing with dolls and action figures.