Derp: (noun): Foolishness or stupidity.
In the profession of economics, there’s a lot of derp. I mean, a lot of it. In fact, when it comes to economics, derp is everywhere. On TV, derp is there: from Fox Derp, Bloomderp, CNBDerp and Derp Dynasty, to MNSBDerp and Derp Maddow. Newspapers too, like The New York Derp and The Wall Street Derp. In Congress, derp makes itself at home. In the Oval Office, derp sits behind the big desk and conjures up macro policy. But, these advocates of economic derp aren’t the subject of our discussion today. I wish to address one particular group that is well-known for extreme derp. Its website, in fact, is 100% derp. There’s not a single, intelligent, realistic statement to be found contained within it; from the front page to the “Donate” section. Even the search function results in derp. It hands out T-Shirts with derp printed on them, which then become signs for the people wearing the shirts that says, “I want to rid America of US Dollars!” It uses derp to cause citizens great anxiety and fear at the thought of savings accounts that pay interest. Derp is its life blood; it’s daily bread and without it, the group wouldn’t exist at all. No, I’m not talking about nutty organizations like the Concorde Coalition or the Heritage Foundation. They promote economic derp, but they also deal in other types of derp. I’m talking about an organization that is dedicated exclusively to promoting the most pernicious form of economic derp. I’m talking about the Count Derpula of economics fear mongering called, Fix the Debt.
According to Fix the Debt, its mission (should you choose to accept it) is to:
“…put America on a better fiscal and economic path. We have come together from a variety of social, economic and political perspectives, around the common belief that America’s growing national debt threatens our future and that we must address it now with a comprehensive, bipartisan plan.”
In other words, Fix the Debt’s mission is to gather citizens together from a variety of social, economic and political perspectives, around the common belief that savings accounts which pay interest threaten our future. In short, Fix the Debt hates US Dollars and wants to rid the US domestic economy of as many as possible. So, in light of that reality, from this point on in our discussion, I will refer to Fix the Debt as “Promote the Derp”.
Why Promote the Derp’s derp is derp and why you should not listen to this silly organization
Promote the Derp thinks that the year is 1922 – that’s where the derp begins. Promote the Derp assumes that the US Dollar is still on a fixed exchange regime called “the gold standard”. The reason why such a thing has profound implications on Promote the Derp’s thinking patterns, is because the gold standard required the US government to defend its gold reserves through taxation.
Firstly, when we talk about the US Dollar, we need to know what a dollar really is, before we can discuss deficits and public debts. The US Dollar is the exclusive product of the US government, which is where all US Dollars come from. The US Dollar is not a commodity; it is essentially a unit of measurement. When we measure, we use numbers: 1, 5, 10, 20, 50, 100 and define the measure as feet, meters, kilometers, etc. The “$” is called “the Unit of Account” and if we are talking about the United States, then it is the exclusive product of the US government. Breaking a dollar down like this into two parts helps clarify the concept for those who believe that the US Dollar is a commodity:
One hundred what?
Now it’s one hundred feet.
Now, it’s one hundred dollars.
Now, it’s one hundred British Pounds
So, what I mean to do when I say, “the US Dollar is just a number with a “$” symbol” is, I’m taking $1 and breaking it down as $ + a number, in order to highlight the fact that the US Dollar is just a series of numbers defined as “$”. In the UK, the Pound is just a series of numbers defined as “£”. The point is to show that a US Dollar is not a commodity, but in fact, it is infinite because numbers are infinite.
The US government begins by placing a unit of account “$” and then typing numbers after that from 0 to infinity, because numbers stretch to infinity:
$100, $1,000, $1,000,000, $20,000,000,000,000,000,000,000,000,000 to “$infinity”.
So, we have the unit of account, “$”, then we ask, “How many US Dollars?” The answer to that question is determined by the US government when it creates US Dollars by spending them. The US government goes into a bank account and types:
and one hundred dollars exists, where before, one hundred dollars did not exist. So, “How many US Dollars?” $100. The US government simply defines and then issues the unit of measurement that we then use to obtain goods and services. For instance:
Ok, so how do we obtain an apple in a monetary economy? Well, first, there must be a price to be paid that is defined in the US government’s unit of measure “$”:
Apples: $1 each
Now we know how many apples we can obtain based upon how much of the US government’s unit of account we will need. In this case, we will need $1 to obtain 1 apple and $5 to obtain 5 apples. What you need to understand is that the apple is what’s important here. It’s the thing we are trying to get our hands on and we need the US government’s currency to obtain it. If there were no goods and services to buy with the US Dollar, then what good would the US Dollar be?
So, the US Dollar is issued as a voucher that entitles the person who has possession of the voucher to any goods and services that are priced in US Dollars equal to that number on the voucher.
Let’s assume you have a $1 bill, a $10 bill and a $100 bill. What you have are three different vouchers: one voucher entitling you to $1 worth of goods and services; one voucher entitling you to $10 worth of goods and services and one voucher entitling you to $100 worth of goods and services and they can be used individually or combined to obtain goods and services. Now forget about cash. Let’s assume a debit card or check. If you have $20 in the bank, then you can buy $20 worth of goods and services, but no more than that. If you have $1,000,000 in the bank, then you can buy $1,000,000 worth of goods and services, but no more than that. The key thing here is that those goods and services you are trying to obtain must be priced in US Dollars. If they are priced in British Pounds, then you cannot obtain the goods and services with US Dollars. You must first convert the US Dollars to British Pounds. So, the US government, being the sole currency issuer, can buy anything as long as it is priced in US Dollars. But if the goods and services are priced in British Pounds, then the US government cannot buy those goods and services. In other words, the reality is this:
As long as goods and services are obtainable priced in US Dollars, the US government cannot go broke. However, if the US government ignorantly pegs its infinite US Dollar to a finite commodity like gold, then the US government intentionally limits its ability to issue US Dollars and can go broke.
The gold standard was a system where the US government regulated the value its own currency, the US Dollar, by fixing it to a certain amount of gold. In order for the gold standard to work, the US government had to agree to exchange US Dollars for gold. Therefore, the US government had to keep a supply of gold on hand and defend that supply. The US government also could only allow the number of US Dollars in circulation to be equal to the gold supply it held. If the US government brought in more gold, then it could increase the amount of US Dollars. If the gold supply decreased, then US government also had to decrease the amount of US Dollars in circulation. The US government had to spend in order to maintain itself and the economy. The way the government ensured that the gold reserves would not be depleted when it needed to spend, was to tax in order to fund spending.
Federal taxation defended the gold supply and nothing more. The US government would first create US Dollars, spending them into existence up to the level of the gold supply, then take back from the private sector what it first spent and respend it. In this manner, the dollar supply remained consistent with the gold supply. But, if the US government needed to spend more than it reclaimed from the private sector in taxes, which we call “deficit spending”, in order to address domestic unemployment or major projects, it could not raise taxes higher, because that would choke aggregate demand and result in a recession. So, the US government had to borrow back the US Dollars that it initially created and spent by issuing Treasury bonds and so, go into debt.
Taxation is the involuntary reclamation of US Dollars. In other words, tax payments to the US government if owed are not voluntary. In order to entice the non-government sector to voluntarily hand over more US Dollars, the US government offered to pay interest to bond holders. A person would buy a Treasury bond and the US government would spend that and any tax dollars that it brought in. Again, in this manner, the dollar supply remained consistent with the gold supply. To pay the interest to bond holders, tax dollars were used. Hence, the errant statement we hear today, “Taxpayers will shoulder the burden of the US national debt.” There is no truth to this statement in a free-floating, inconvertible fiat currency regime.
Today, there is no gold standard. The US Dollar is not on a fixed exchange regime. Because of this, the US government does not tax and borrow to fund spending anymore, because there are no gold reserves to defend.
Today, when the federal government spends, it simply enters a bank account somewhere and credits that bank account with its own IOU (The US Dollar). Taxation is the destruction of US Dollars in a free-floating fiat regime and serves several functions, none of which is to fund spending. The main function of federal taxation is to create a demand for US Dollars and to provision the US government. Another function of federal taxation is to reduce spending power, which then controls inflationary pressure by removing excess US Dollars from the domestic economy. Another purpose of federal taxation is to modify behavior, discouraging socially unacceptable activities, such as smoking (Cigarette tax). Even the function of Treasury bonds today is different. Bonds under a fiat regime are nothing more than savings accounts that pay interest. When you buy a Treasury bond, the US government simply shifts those dollars used to buy the bond from a reserve account to a securities account where they remain, earning interest. To pay back the bond, the US government simply shifts those dollars sitting in the securities account back to a reserve account and then types into existence the correct amount of interest due.
Treasury bonds are also used by the Federal Reserve to maintain its target interest rate. By conducting open market operations (OMOs), the Fed adds and drains off excess reserves. Banks cannot lend out reserves to customers, but banks can lend their excess reserves to other banks who happen to be short of required reserves. This activity can negatively affect the Federal Reserve’s target interest rate. In order to deal with the problem, the Federal Reserve simply drains away the excess reserves by replacing those liquid dollars with a Treasury bond. In this manner, it maintains control over monetary policy.
So, to “pay off” the US national debt doesn’t require taxing the private sector into the ground. In fact, it doesn’t require federal taxation at all. All it requires is a simple shift of dollars from one account to the other. All you have to do to “pay off” the $20 trillion US national debt is to have the Federal Reserve simply shift all of the US Dollars in securities accounts back to reserve accounts, then type into existence the correct amount of interest due and that’s it. Debt paid. Now, to avoid any future public debt, all Congress has to do is order the Federal Reserve to maintain a Zero Interest Rate Policy forever and then, because the Fed is no longer trying to defend a target interest rate above zero, it will not have to use bonds to drain off excess reserves, so Congress from that point can order the US Treasury to stop issuing treasury bonds. Thus, no public debt in the future either.
Today, every time the US government deficit spends, it is simply creating US Dollars and then giving them to the private sector to use. In other words, federal budget deficits are income for the private sector. Whatever amount of US Dollars the US government deficit spends will be found somewhere within the domestic economy or foreign sector, together called “the non-government sector”. So, let’s look at an example from Promote the Derp’s website:
“The federal budget deficit for fiscal year 2016 is expected to be $590 billion, which is up 35 percent from last year. And deficits will continue on an upward course, reaching the $1 trillion mark by 2024 and continuing to rise.”
In reality, this is not dangerous whatsoever. What it simply means is that in 2016, the non-government sector is expected to receive an income from the US government of $590 billion and will also expect an increase in its income to $1 trillion by 2024. Nothing more. Let’s examine why.
A federal budget deficit of $590 billion will equal, to the penny, a $590 billion surplus in the non-government sector, because:
(G – T) = [(S – I) – (X – M)]
where government spending (G) minus taxation (T) is equal to savings (S) minus investment (I) minus exports (X) minus imports (M). (G – T) is the US government, (S – I) is the domestic private sector (You, me, Walmart), and (X – M) is the foreign sector. Together, (S – I) and (X – M) are the non-government sector. Notice that Promote the Derp has no interest in mentioning the Sectoral Balances equation to you? That’s because Promote the Derp either doesn’t know about this equation and concept which is well-known in economics, or it doesn’t want you to know about it, so its fear mongering will be taken as truth. Either way, Promote the Derp is derp because:
Government Sector Spending = Non-Government Sector Income
Or, said in another way:
Government Sector Deficit = Non-Government Sector Surplus
Government Sector Surplus = Non-Government Sector Deficit
So, if the US government were to do what Promote the Derp wants it to do and run a surplus to irrationally pay off the national savings, the US government would be removing US Dollars from the non-government sector and then destroying those dollars. If the US government were able to achieve, say a $590 billion surplus, the result would be a catastrophic collapse in consumer spending, causing high unemployment and a deep recession. The US government would be confiscating $590 billion from you, me and everyone else in the private sector and then destroying the dollars leaving the private sector short $590 billion.
In other words, Promote the Derp is demanding that the US government first destroy the US economy before it conducts a simple shift of US Dollars from one type of account to another.
Folks, that’s some serious derp. I mean, really – think about it. if you want to move $1,000 from your savings account to your checking account, do you first burn your house down, trash your car with a sledgehammer, and throw out all of your food? People would think that you were nuts. But that’s exactly what Promote the Derp is demanding. It wants to run down as much wealth as possible and hurl the US economy into a deep, prolonged economic depression to eliminate a bunch of savings accounts.
Now that’s derp. Or, as the French would say, “Le Derp”.
The reason why a budget surplus to “pay off” the national debt would result in such a condition, is because the US imports more than it exports. Essentially, what that means is that US Dollars are flowing out of the US and into foreign hands to purchase imports. When the US government adds more US Dollars to the economy, some of those dollars which could be used by the private sector instead flow out of the United States and into the rest of the world, so the US private sector can’t use them. As the dollars continue to flow out, the domestic economy needs more US Dollars from the US government to avoid a collapse in consumer spending, high unemployment and a recession. This, then, leads us to the reality that a balanced budget amendment is nothing short of economic suicide. The federal government would never add a single dollar to the domestic economy, and so, it would literally be impossible to address unemployment, or recessions, or even to progress. And with imports exceeding exports, well, I’ll leave it to you to imagine the catastrophe.
Now, to be honest, Promote the Derp doesn’t just advocate a balanced budget. That alone won’t do. It also says that elderly people and the disabled need a bit of roughing up and a working over to reduce the deficit. You see, in its apparently infinite capacity for derp, Promote the Derp thinks Social Security is facing financing problems too. Think privatization here. Just goes to show you how much Promote the Derp really knows about anything economics. Social Security is never facing a financing problem, because the question for Social Security is never “money’, because the US government issues US Dollars to finance it. The question for Social Security is, “are there enough goods and services being produced for Social Security beneficiaries to buy right along with everyone else in the US?” It’s a real resources question, not a ‘money” question.
Secondly, FICA, like all federal taxation, doesn’t fund Social Security. It’s common knowledge that FDR placed the payroll tax there as a political measure to prevent politicians from destroying Social Security:
“I guess you’re right on the economics. But those taxes were never a problem of economics. They are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program” – FDR
All FICA is, is an enormous income tax on working Americans that needlessly reduces their spending power. Social Security is always monetarily solvent, because beneficiaries are paid only in the US government’s unit of account – The US Dollar. Social Security can become insolvent if:
1.) Politicians intentionally and voluntarily kill the program.
2.) The real resources of the US become seriously compromised through a natural disaster, such as an asteroid strike, or the Yosemite super volcano erupts, or through war, such as global thermonuclear war or a foreign nation occupies the United States.
3.) The US government discovers that it can no longer enforce its tax collections.
But under current conditions, Social Security is eternally solvent.
Again, Le Derp. Derp, derp, derp and derp.
So, that’s what Promote the Derp wants for America. It demands a total evisceration of the US economy to eliminate $20 trillion worth of savings accounts. To ensure that the national debt never comes back again, it also demands lost output forever and that we financially beat up the elderly and disabled too.
The national debt is not a problem, budget deficits are how the private sector gets its income and the US government’s budget is nothing like a household’s, because the US government is the sole issuer of the US Dollars that households use. What really needs to happen is Promote the Derp’s website needs to be taken offline and its doors in Washington D.C. closed for good.
Whatever you do, do not donate your dollars to Fix the Debt. If you are looking for a worthwhile organization to donate your money to, please consider St. Jude Children’s Research Hospital.