August 1st, 2011
in Op Ed
by Guest Author Warren Mosler (bio here)
Imagine a card game, where each entity in the economy is one of the players, and Congress is the scorekeeper. This discussion is about the difference between being the scorekeeper and being a player.
A problem arises when the scorekeeper starts acting like one of the players. The mistake is compounded when, because of the resulting conflict of interest, the scorekeeper begins to use false analogies.
The correct analogy is between scorekeepers in card games and government’s role (with the agency of the Fed as accountant) as scorekeeper for the US dollar. The scorekeeper keeps track of how many points everyone has. Points are awarded to players with winning hands. This is offset by subtracting points from players with losing hands.
So, if you are the scorekeeper, let me ask: How many points do you have? Can the scorekeeper run out of points? When you award points to players with winning hands, where do those points come from? When the scorekeeper subtracts points from players with losing hands, does he have more points?
Do you understand the difference between being the scorekeeper and being a player?
The scores being counted are U.S. dollars. The score is kept by marking up numbers in bank accounts at the Fed, just like Fed Chairman Bernanke has testified before Congress.
When a tax is levied, the Fed marks numbers down in bank accounts. Yes, the Fed accounts for what it does, but doesn't actually get anything, just like the scorekeeper of a card game doesn't get any points himself when he adds or subtracts points from the players. When Congress spends more than it taxes, it's just like the scorekeeper of the card game awarding more points to the players' scores in aggregate than he subtracts from their scores. What happens to the players total score when that happens?
It goes up by exactly the amount of the deficit.
More directly to the point - What happens to dollar savings in the economy when Congress spends more than it taxes? It goes up by exactly that differential amount, to the penny.
The score keeper keeps the books on everyone’s status in the game. Likewise, the Fed accounts for all the dollars all its member banks and participating government agencies hold in their accounts at the Fed.
Accounts at the Fed are simply record keeping entries.
Foreign Ownership of U.S. Debt
So when China sells us goods and services and gets paid in dollars, the Fed - scorekeeper for the dollar - marks up (credits) the number in their reserve account. And when China buys US Treasury securities, the Fed marks down (debits) the number in their reserve account and marks up (credits) the number in China's securities account at the Fed.
Reserves and Securities
Thus, 'government borrowing' and 'government debt' is the shifting of dollars from reserve accounts to securities accounts at the Fed. Yes, there are some $14 trillion in securities accounts at the Fed. This represents the net (negative) dollars the economy has left after the Fed added to our accounts when the Treasury spent, and subtracted from our accounts when the IRS taxed. Yes, I said when the Treasury spent. They didn’t burn the money but spent it into the economy. Thus, this total of $14 trillion in the securities account represents exactly the economy's total net savings of dollars.
And paying back the debt is the reverse. It happens this way: The Fed (the scorekeeper) shifts dollars from securities accounts to reserve accounts and the debt decreases. Again, this is all done on its own books. This is done for billions of dollars every month.
There are no grandchildren involved.
The Fed (the scorekeeper) can't 'run out of money' as all too many have presumed.
The Fed (the scorekeeper) spends by marking up numbers in accounts with its computer. This operation has nothing to with either 'debt management' (overseeing the shifting of dollars between reserve accounts and securities accounts), or the internal revenue service (which oversees the subtraction of balances from bank reserve accounts).
Global Income and Savings
And so yes, your deficits of recent years have added that many dollars ($14 trillion) to global dollar income and savings, to the penny. Just ask anyone at the CBO. It is no coincidence that savings goes up every time the deficit goes up. It's the same dollars that you deficit spend that necessarily become global dollar savings, to the penny.
Greece is a Player, not a Scorekeeper
Greece is not the scorekeeper for the euro, any more than the individual U.S. states are scorekeepers for the dollar. The European Central Bank is the scorekeeper for the euro.
Greece and the other euro member nations, like the U.S. states, are players. Players can run out of points and default. Players who have lost all their chips can appeal to the scorekeeper for a bailout.
What does all this mean?
There is no financial crisis for the U.S. Government, the scorekeeper for the US dollar.
It can't run out of dollars, and it is not dependent on taxing or borrowing to be able to spend.
That sky is not falling. Ever.
Let me conclude that the risk of under taxing and/or overspending is inflation, not insolvency. And monetary inflation comes from trying to buy more than there is for sale, which drives up prices.
But, as they say, to get out of a hole first you have to stop digging. (I don't think you, or anyone else, believes acceptable price stability requires 16% unemployment?) Someday there may be excess demand from people with dollars to spend for labor, housing, and all the other goods and services that are desperately looking for buyers with dollars to spend.
But today, excess capacity rules.
An informed Congress which recognizes its role as part of the scorekeeper function, and recognizes the desperate shortage of consumer dollars for which business is competing, would be debating a compromise combination of tax cuts and spending increases.
Instead, mistakenly presuming itself to be a player rather than scorekeeper, Congress continues to act as if we could become the next Greece, as it continues to repress the economy and turn us into the next Japan.
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