Key Points

I. Foundations:

– The United States is a nation.
– A nation is comprised of all citizens and real resources within the borders of the nation with a supreme government at the head.
– The real resources are the property of the nation.
– The US government is the supreme authority of the nation called the United States.

II. Political Economy

– God did not demand Capitalism.
– There is nothing natural about Capitalism.
– Capitalism is not the product of the universe, nor is it a guiding principle in the universe.
– Capitalism is a man-made thing; an idea of mankind.
– Capitalism is a choice.
– The US government merely allows entities which we choose to label as ‘private entities’ to access the nation’s real resources and to use them.
– There is nothing natural, good, wholesome, heroic, righteous, holy, or necessary about the ‘private’ ownership of production.
– ‘Freedom’ and ‘liberty’ are unrelated to Capitalism.
– The US government merely allows the ‘private’ ownership of production.
– Capitalism is a choice that is made by the US government.

III. Monetary Instruments

– The US dollar is a monetary instrument.
– A monetary instrument requires an issuer, a face value, and a promise from the issuer that it will take back the monetary instrument as payment for something.
– The US dollar is the supreme monetary instrument in the United States.
– There is nothing ‘natural’ about the US dollar.
– The US dollar is a man-made thing.
– The US government alone issues the US dollar.
– Gold itself is not a monetary instrument.
– A gold coin issued by the US government is a monetary instrument, because it has an issuer and a face value stamped on it, not because of the gold contained in the coin.

IV. Currency Regimes

– There are fixed (inflexible) and flexible currency regimes
– In a fixed regime, the government pegs its currency to something else (gold, silver, another currency) and then determines (fixes) the exchange rate of its currency. The government may also operate a currency board.
– The government must promise to exchange its currency on demand for the item pegged to the currency. This is called ‘conversion’.
– The government must have on hand an adequate supply of the item pegged to its currency in order to affect the exchange.
– The government must ensure that the supply of the item pegged to its currency is not depleted.
– The government must tax and borrow in order to ensure that the supply of the item pegged to its currency is not depleted. Taxing and borrowing ensures that the amount of currency available does not exceed the supply of the item pegged to its currency at the fixed exchange rate.
– The Gold Standard was a type of fixed exchange regime.
– FDR suspended gold convertibility in 1933.
– After World War II, another type of fixed exchange regime was introduced called the Bretton-Woods system.
– The US government agreed to fix the US dollar to gold at the fixed exchange rate of $US 35 an ounce.
– Participating nations then maintained a supply of US dollar reserves.
– Participating nations were required by the Bretton-Woods accord to defend an exchange parity between their own currencies and the US dollar. (Example: £1 = $US2)
– Richard Milhous Nixon abandoned the Bretton-Woods system in 1971.
– The Gold Standard officially ended in the US in 1973.
– In 1973, the US dollar embarked upon a flexible currency regime.
– Today, the US dollar freely floats on an exchange, the exchange rate determined by the supply of and demand for the US dollar.
– Today, the US dollar is an inconvertible currency. The US government will not exchange US dollars for gold, silver nor anything else on demand save for US dollars. If you give $100 to the US Treasury, the only thing it is obligated to give you in return is $100.
– Today, the US government funds its spending through direct high powered money creation and spends by crediting bank accounts. When it spends, it marks up bank accounts, and when it taxes, it marks down accounts.
– The concept of ‘printing money’ to fund federal spending no longer exists.
– A currency union (the EMU) behaves like a fixed exchange regime because the nations involved do not issue the currency (the Euro) and so effectively use what amounts to a foreign currency.
– Nations within the EMU currency union must, therefore, tax and borrow to spend because they are, by design of the currency union, required to relinquish their ability to issue their own currencies and are required to use the Euro.

V. Fundamentals of a Modern Monetary Economy

– The US government requires goods and services to operate as government.
– The US government taxes citizens and businesses so that it can move goods and services to itself.
– The US government declares severe penalties for not paying the federal tax.
– Federal tax is payable only in US dollars.
– Because of the federal tax and the consequences for not paying the federal tax, the citizens and businesses must sell their goods and services to the US government in exchange for the US government’s US dollar.
– The US government chooses the price that it will pay in its own currency (US dollars) for goods and services.
– Because the US government is the only issuer of the US dollar and chooses the price that it will pay for goods and services, the US government is the price-setter for the market, and the market begins operating based on the US government’s US dollar.
– The US market is the creation of the US government.
– Citizens and businesses can now pay their federal taxes and can accumulate a savings in US dollars if any US dollars remain after the federal tax settlement
– Federal taxation invokes a demand for the US dollar and the US government’s ability to enforce tax collections maintains that demand.
– Federal taxation reduces spending power to attenuate inflationary pressures.
– Federal taxation alters society’s behaviour.
– Federal taxation frees up real resources for the US government’s use.
– Federal taxation withdraws US dollars from the nation and destroys them.
– Federal spending always comes prior to federal taxation.
– All federal spending is US dollar creation.
– A federal budget deficit adds more US dollars to the nation
– A federal budget surplus withdraws US dollars from the nation.
– The US national debt is the sum total of all US dollars spent into existence by US government and added to the nation through deficit spending, since the beginning of the United States, minus what the US government withdrew in taxation since the beginning of the United States. (Deficits – Surpluses = The National Debt)
– The $20 trillion national debt is not an actual debt of any kind.
– The US government’s debt equals the nation’s savings.
– Because the US government deficit spent $20 trillion, the nation now has $20 trillion in savings.
– The national debt is a group of savings accounts held at the Federal Reserve called ‘securities accounts’.
– After a successful bid for US Treasury bonds, reserve balances held in reserve accounts at the Federal Reserve are shifted to securities accounts held at the Federal Reserve.
– To ‘pay off’ the national debt, the US government simply shifts the balances held in securities accounts at the Federal Reserve back to reserve accounts held at the Federal Reserve.
– Imports are real benefits, exports are real costs.
– When a nation imports more than it exports, the nation in question is what we call a ‘net importer’ and this status results in a current account deficit.
– Foreign entities and nations do not finance US consumers’ purchase of imports.
– The current account deficit exists because foreign entities desire to save in US dollar
denominated financial assets.
– To save in US dollars, foreign entities must sell their production to US consumers in exchange for US dollars.
– There is no such thing as a ‘trade imbalance’ because the current account deficit is offset, dollar-for-dollar, by a capital account surplus.
– When the rest of the world decides that it no longer wishes to save in US dollars, then foreign entities will stop exporting their production to the US, eliminating their US dollar savings, and the current account deficit will evaporate.
– Since a current account deficit exists, the US government cannot run a budget surplus, because (G – T) = (S – I) – (X – M).
– (G – T) = (S – I) – (X – M) is not subject to opinion. There is no way around it.

VI. Implications of the Above Key Points

The concept that the US government has no money of its own by design and must tax and borrow to fund its spending is an imaginary concept.

All constraints placed upon federal spending are political choices. They are not hard financial constraints.

The notion that commercial banks are the issuers of US dollars and that the US government must borrow from commercial banks in order to spend is an imaginary concept promoted by people who wish to obstruct the US government from doing its job as a currency-issuer and spending for full employment and the public purpose.

The notion that the Federal Reserve is a private bank, independent of the US government and wholly owned by global commercial banks, and that the US government is at the mercy of the Federal Reserve if it needs to spend is an imaginary concept promoted by people who wish to obstruct the US government from doing its job as a currency-issuer and spending for full employment and the public purpose.

The notion that the US government is at the mercy of bond markets is an imaginary concept promoted by people who wish to obstruct the US government from doing its job as a currency-issuer and spending for full employment and the public purpose.

As Warren Mosler states: “The US government never has or doesn’t have US dollars.” The reason is because it spends them into existence when it wishes to buy something. Because of its infinite spending capacity and the vast real resources at the nation’s disposal, the US government has extremely flexible policy options with regard to any problems in its domestic economy.

As L. Randall Wray states: “The US government can always afford to buy anything as long as it is priced for sale in US dollars.” The US government can always out bid any entity on planet Earth to acquire a person, place or thing, as long as the person, place or thing up for bid is priced in US dollars. To put this reality in very simply terms – 1.) If the moon went up for sale priced in US dollars, only the US government could afford to purchase it, 2.) the US government will always be the winning bidder at a Sotheby’s auction if it chooses to be the winning bidder, and if the object up for auction is priced in US dollars, and 3.) the US government can easily deposit $100 trillion in your bank account right now.

The only realistic constraint to federal spending is the ability for the domestic economy to respond to that spending with increased output, and even then, the US government still has the capacity to spend well beyond that limit if it chose to do so. If the US government chooses to spend beyond the domestic economy’s ability to increase output, then inflation can occur from deficit spending.

It is operationally impossible for the US government to pay for universal healthcare, the military, a tin of baked beans, or anything else with the proceeds collected in federal taxes, because the US government spends through direct high powered money creation, high powered money is the instrument that settles federal tax liabilities, and federal spending must proceed federal taxation in order for ‘private’ entities to have the US dollars required to pay the tax.

It is operationally impossible for the US government to save in US dollars, because it is the only issuer of US dollars and its capacity to spend US dollars into existence is infinite.

It is operationally impossible for the US government to borrow its own US dollars to fund deficit spending, because the US government spends through direct high powered money creation, high powered money is the instrument that is used to settle a bond purchase transaction, and federal spending must come first in order for ‘private’ entities to have the US dollars required to buy a US Treasury bond.

China has no authority to issue US dollars. It must earn US dollars by selling its production to the US in order to buy US Treasury bonds. When it buys bonds, it is merely choosing to place its earned dollars into savings accounts at the Federal Reserve. The same applies for any foreign entity.

No nation on Earth loans the US government US dollars because the US dollar is the US government’s currency.

All problems and failures in the US economy (The financial crisis of 2008, the 2002 recession, low wage environments, deflation, private debt expansion, etc.) are the result of errant political decisions which lead to inappropriate macroeconomic policy, and so, are the fault of Congress.

The US government alone controls the unemployment rate through deficit spending. If the federal budget deficit is too low, then unemployment will result. There is nothing ‘natural’ about unemployment.

There is nothing ‘natural’ about poverty in the United States. Poverty exists in the US exclusively because Congress wills it to exist. Congress authorizes federal spending. US dollars are used to access real resources and to increase production. If the federal budget deficit is too low, the US government effectively shorts the economy of much needed US dollars, and so, real resources are left idle, output is lost, production falls below what is necessary to satisfy the needs of the entire population, stable consumption of production is artificially limited, and unemployment and poverty result. Unless Congress deficit spends up to the limit of the domestic economy’s ability to respond with output and to maintain the situation in perpetuity, then Congress has failed.

VII: Conclusion

There is no political, social or economic argument that can negate I – VI.