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Wally Grigo's avatar

Deficit hawks need to answer 3 lines of inquiry. 1) Do your own US dollars free and clear (in the form of treasury bonds, CD's or cash stuffed in your mattress)? If so, where did those dollars come from? 2) What would happen if the US gov't embarked on a 10 year program to eliminate the "national debt" by running annual $3 trillion surpluses over the next decade? 3) Why on earth does the Treasury/Federal Reserve sell bonds in the 1st place?

Answers: 1) Since "bank money" is created when banks issue loans, and all loans are simultaneously assets and liabilities for both the bank and borrower that sum to zero, the only way you could own this kind of money is if you robbed a bank. US dollars don't grow on trees! But they are created out of thin air by the federal gov't, and when the gov't spends more of these dollars than it collects in taxes, this creates a "deficit." And that's where your dollars come from. Where else could they come from? So be careful what you criticize. Deficits are the source of our FINANCIAL WEALTH.

2) If the gov't started to collect $3 trillion each year of this "thin air" money that you and other deficit hawks mistakenly rail against, by year 3 of this program you would have to sell your living room furniture to pay your taxes. Treating our accumulated deficits as if it's a "debt" is idiotic and a massively destructive way to think about things. Paying down our accumulated deficits only serves to make us poorer.

3) Warren Mosler pointed out almost 30 years ago that the Fed doesn't sell bonds to "borrow" money (it's an absurd concept that the gov't would ever have to borrow money it can create at will--we're not talking gold doubloons here), but rather to remove excess currency reserves from the banking system to maintain the Fed's target interest rate. If the Fed didn't do this, every bank in the system would be flush with cash and would never have a reason to borrow in the overnight market to settle accounts--and the target interest rate would plunge to zero. But for over a decade now banks can legally offer "Interest On Reserves." As long as these deposits are fully insured by the full faith and surety of the US gov't, what is the practical difference between this system and selling bonds? The Fed will set the interest rate on these IOR's (because it can!), and then bond traders will have to go out and get themselves a real job.

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Tim Slavin's avatar

As I understand things, much of this debt is caused by steep reductions in capital gains taxes, corporate taxes, and individual taxes on wealth over the past 40 years. And that much of the pearl clutching over the deficit is about maintaining these tax cuts by distracting people with the size of the deficit. The people screaming loudest never talk about restoring steep progressive taxation based on wealth as a full or partial solution to reduce the deficit. Despite the progressive taxation from roughly the 1930s through the 1970s being part of a mostly deficit-free economy. I'd be curious to hear your thoughts on taxation and re-taxation as it relates to the deficit and MMT.

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