in the fiat system of currency creation adopted with the Central Bank starting 1913, money, is relative as much or more to time as amount.
Spend or Tax the Government is just making data entries on their spreadsheet. Right Now! it is imperative that money be left in the hands of desperate people so they can pay bills, and buy what they need to survive. So Small Business can stay afloat and hire people. Immediate Activity! Not hands in the Pie in the Sky STIMULUS!
Mike Norman: But, isn't that what people refer to as "printing money"? I mean, you hear this all the time, that they're printing … some people might get it, at least in the abstract. Not the way you explained it, but they understand that the government could just, without limit, credit bank accounts. They call that printing money. Is that bad?
Mosler: That’s what they call it. And that expression came from the gold standard, where there was actually something called printing money, where you had more money than you had gold. That’s all gone, but the term has carried over. Right now, there’s only one way for the government to spend, and that’s to change a number. You can call it printing money; you can call it data entry; you can call it whatever you want.
But the question is, then, well, why does government tax if they don’t need your money to spend? And there’s a very good reason. They need to tax to take away our spending power, so that when we spend money and they spend money, it doesn’t cause inflation. The purpose of taxing is to do what economists call reduce aggregate demand. Take away our spending power to prevent inflation.
Well, how much should they take away? If they take away too much, we have an economy like today, where there’s a lot of unemployment, and we’re excess capacity everywhere, big recession. If they don’t take away enough, then there’s inflation and unemployment goes too low.
Norman: All right. Regulating taxes is one way to have an impact on demand.
Mosler: Right.
Norman: But the government can also spend and have an impact on demand. The supply-siders were always of the tax reduction school of thought.
Mosler: Right.
Norman: But, they could also spend to inject demand into the economy.
Mosler: Right. But the question I was answering is, why do we tax if we’re just going to throw the money away? The purpose of taxing is to reduce demand. Now, if there isn't enough, and if we’ve taxed to the point where there isn't enough demand, how do we get demand back? How do we get the economy going? Well, we have two choices: We can either reduce taxes or increase spending, as you said. And that depends on one’s politics.
(and Democrats are for the people right?)
Norman: So, theoretically, then, if I understand, there’s no limit to how much the government could spend. They don’t actually have to take in any money in order to spend. But, is there some sort of a limit or a constraint? I mean, if we use up all of our available capital and resources, that’s somewhat of a limit, isn't it?
Mosler: Yes, that’s not the limit to how much you can spend, that’s the limit to where more spending will simply cause inflation.
Norman: So, that’s the real definition of inflation, you would say?
Mosler: Well, that’s another problem. You know, our definition of inflation turns to CPI?consumer price index?which is not what an economist would call inflation. But I would say that there is no agreement of what inflation actually is. But what the problem is, when inflation is high enough where it becomes a political problem, those are our political limits. The limits to spending, nominal spending, are political. They're not numerical.
(Like it or not, constitutional or not, technically the Fed has no constraint on money creation. The important thing is the time frame and velocity in which the money is circulated)
Norman: I want to switch a little bit, change the direction of the conversation a little bit. Because, here’s another thing we hear all the time. We hear, for example, if China or Japan don’t buy our debt, there’s going to be some kind of financial Armageddon. What’s right or wrong with that statement?
Mosler: Well, it’s complete nonsense, to give you the answer first. And the question I usually get is, how are we going to pay back China? So let me answer that one. And first you have to understand how China gets money and what the money is. And I use the example where China decides to sell us a billion dollars’ worth of T-shirts. We buy a billion dollars’ worth of T-shirts from China.
And the way we pay them is somebody pays China. And the money goes into their checking account at the Federal Reserve. (Literally a credit balance in the big computer at the Fed).
Now, it’s called a reserve account because it’s the Federal Reserve, and they give it a fancy name. But it’s a checking account. So we get the T-shirts, and China gets $1 billion in their checking account. And that’s just a data entry. That’s just a one and some zeroes.
Norman: Their checking account gets a credit. Ours gets a debit. We have the T-shirts.
Mosler: Whoever bought them gets a debit. You know, it might have been Disneyland or something. So we debit Disney’s account and then we credit China’s account.
Norman: Right. Then what happens?
Mosler: First of all, now we’ve increased our trade deficit by $1 billion. But it’s not an imbalance. China would rather have the money than the T-shirts, or they wouldn’t have sent them. It’s voluntary. We’d rather have the T-shirts than the money, or we wouldn’t have bought them. It’s voluntary. So, when you just look at the numbers and say there’s a trade deficit, and it’s an imbalance, that’s not correct. That’s imbalance. It’s markets. That’s where all market participants are happy. Markets are cleared at that price.
Okay, so now China has two choices with what they can do with the money in their checking account. They could spend it, (buy some stuff from the U.S.) in which case we wouldn’t have a trade deficit, or they can put it in another account at the Federal Reserve called a Treasury security, which is nothing more than a savings account. You give them money, you get it back with interest. If it’s a bank, you give them money, you get it back with interest. That’s what a savings account is.
Norman: Well, they’re not, in effect, lending us anything. All they're doing is swapping that balance in that checking account for a savings account which pays them interest.
Mosler: Right.
Norman: That’s essentially what a treasury is.
Mosler: Right. So, when they buy Treasury securities, they buy them because they want them. They’d like to earn the half a percent interest instead of nothing in their checking account. So we say, “Fine; you own a six-month Treasury security.” And we take the money out of their checking account, and we put it in their savings account, which we call Treasury security.
Now, what happens? Now we owe China $1 billion. Well, what do we owe them? At maturity, we give them the guarantee that we’re going to take the money out of their savings account and put it back in their checking account. And they’re paid off. Now, this is why there’s never been a problem with paying off treasury debt. It matures every day, almost every day. And what the Fed does is take the money out of the holder’s savings account and put it in their checking account;
(What you have to realize is the Fed has no limit, except it's duty to control inflation, and now that deflation is the problem, it's time to get money where it is needed most! WORKING PEOPLE!!!)
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