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Posted by on Feb 16, 2016 in Budget, Economy, Finance, Government | 5 comments

More Briefings? Yeah, More Briefings: On Government and Taxes (Guest Voice)

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More Briefings? Yeah, More Briefings.
By Robert P. Coutinho

Just like Daffy Duck, who was trying to get Elmer Fudd to shoot Bugs bunny, I find myself seemingly unable to get through to the populace at large. “How do we pay for xxxxxx [regarding the federal government]?” “We increase taxes.” NOOOOOO!!!

Federal taxes do NOT need to be collected in order to pay for things. Federal taxes need to be collected in order to prevent inflation from going out of control. This is the reality. It is not up for discussion—that discussion was finished when Richard Nixon took us off of the gold standard. Federal spending puts money into the economy. Federal taxes take money out of the economy. It is not a hard concept to articulate, but it is a really, really hard concept to understand.

To wit: think of the federal government as parents of a household. They are parents in a very progressive society (the world economy), they are so wealthy in that society that they are looked upon as being able to pay their bills at any time (but with stuff, since the society has no set money). These parents, Sam and Marty (just for kicks), have children. Some of their children (the states) have more sophisticated needs and desires, some of them (private individuals, corporations, etc.) have more basic needs and desires. The first group (states) also have the responsibility to take care of some of the younger children.

Now, Marty and Sam have had a wonderful relationship with each other and have lots and lots of kids. They also recognize that they need to ensure that their kids are thrifty, industrious, hard working, as well as kind, fair, and do not cause too much trouble—particularly regarding violence or ridicule of others. They decided to create a system by which their children earn privileges. Since Sam and Marty have vast tracts of farmland, various machine shops, lots of small children who need to be cared for and kept out of trouble, etc., they have created a system of rewards and costs. The rewards are in dollars, the costs are for what we will call luxuries (it might include time to watch television, time on the computer, the ability to spend credits at the local markets for items the individual children might want, extra helpings of dessert and such). Okay, are you still following? If not, try rereading from the third paragraph.

Sam and Marty are the only ones who can create dollars. One or the other must sign for them, and they can easily tell if one of the kids counterfeits a bill. Meanwhile, other wealthy farmers in the area also made currency (called pounds, marks, francs, etc.) with which they rewarded their children. Initially the parents made the rewards out of silver and gold, since the metals were so rare that very few children could ever counterfeit that! However, it became too difficult to create enough reward tokens for all those kids, so the adults (quite correctly, I might add) logically decided that they would, instead, try to prevent counterfeiting. Meanwhile, some of the children in the community discovered that they wanted rewards that Sam and Marty offered, while some of Sam’s and Marty’s children discovered that they wanted rewards that other parents offered. The parents were accommodating and agreed that they would honor the reward papers with rewards that were available on their list. In addition, some of the children of different families offered to trade chores in order to obtain rewards from parents other than their own so that they would not have to go through the process of coaxing one of the children from that family into trading reward tokens with them. As things got really involved, most of the parents began keeping track of the total tokens that each child had by using a computer.

Reread that paragraph until you believe that you can fully understand the mechanics of what is happening. It is really that important.

Eventually, many of the parents and children lost sight of how the various reward tokens got created in the first place. Parents were buying stuff from the children of other families. Children were buying stuff from other children—both in their own families and in other families. There was a thriving economy going on. Once in a while someone would attempt to gain control of a huge pile of reward tokens. It was unclear as to why anyone would want them. Yes, they could, theoretically, buy anything that a child (or a parent) was willing to exchange for those tokens; but it seemed kind of silly to the rest of the parents that this person believed that he had to horde tokens for later. I mean, come on! Any parent could instantly create more tokens just by declaring them to be in existence in a computer! Granted, if all the other tokens were then immediately “cashed in” for rewards, the value of the tokens would drop immediately; but if the hoarder wanted to “spend” those tokens they could do so anyways. There was nothing stopping them other than their will to do so.

Now I would like you to ask yourself a question. “How many dollars do Sam and Marty need to insist that their children pay for their luxuries each week in order to not run out of tokens?” If Sam and Marty do not get enough from their children, how much do they need to borrow; from children, from other parents, etc; in order to pay their children for the chores that are being done? How much interest should Sam and Marty pay on the amount of reward tokens they have “borrowed” from their own children, other families’ children and other parents?

If you are wondering why in the name of all that is holy would Sam and Marty EVER borrow the reward tokens that they, themselves, have created, and have sole capacity to create—welcome to my world. The only good reason for Sam and Marty to make sure that a certain amount of reward tokens are turned in each week is so that their children will still value those tokens. After all, their children can not “purchase” their luxuries without the tokens.

What does this mean in the “real” world? Everything. The USA has a sovereign currency (dollars) that they are the sole creators of. No other entity except for the federal government of the USA is allowed to produce dollars—and no state, province, city or other entity within the USA is allowed to create a circulated currency. This has been the case ever since the US Constitution was adopted. It was one of the primary reasons for the Constitution to be written. No amendment has changed this monopoly. Since the USA is the only entity that can create dollars, it follows that they must have a way of making those dollars worth something.

Since silver and gold are nice to look at—and silver has numerous industrious uses—the country could choose to exchange dollars for those metals. The main problem with doing this is that Russia is the number one producer of gold; and having Vladimir Putin as our Chairman of the Federal Reserve seems like a rather risky proposition. Instead, since August 1971, Richard Nixon negated the Bretton Woods II accords and took the USA off of the “Gold Standard.” Now the money has value as:

Wait for it:

…wait for it…

Money. It also is required to pay taxes and fees that are due to the federal government (which is no small thing, btw).

Since you need to pay your taxes and fees in US dollars, you need to coax somebody into trading some of that stuff to you! The “primary” recipients of the dollars are the people who get paid directly by the federal government. These include (but are not limited to) soldiers, sailors, marines, air force personnel, civilian workers, contractors, Social Security recipients and others. These people get dollars. They use said dollars to buy things from others. Those people pay their taxes with dollars (along with buying things from other people who are not selling directly to a primary recipient). Thus, the federal government spends money into existence. The federal government taxes money out of existence.

Again: the federal government spends money into existence. The federal government taxes money out of existence. If you were to go to Andover, MA and pay your tax bill in cash; the clerk would give you a receipt, probably thank you for being a good citizen, and then send the money to be destroyed. The US Treasury Department does not have a hotline to Andover IRS (or any other IRS office, for that matter) in order to make sure that deposits have been made. The US Treasury Department issues checks without checking to see if they have a positive balance in the ledger. They do not need a positive balance in the ledger because no licensed bank in the US is allowed to fail to honor a US Treasury check. What is even more, the Federal Reserve Bank of the United States is not just unlikely to fail to dishonor such a check—it absolutely, positively, beyond any doubt WILL NOT FAIL TO HONOR THE CHECK!

“But what about all that money we keep on borrowing? Don’t we owe the Chinese like 1.3 trillion dollars or something?”

Yes and no. Back in the mid-twentieth century we had a policy of exchanging excess dollars (held by foreign entities) with gold from Fort Knox. We stopped doing that. All sorts of problems were occurring between 1968 and 1973, culminating in the elimination of the exchanging of gold due to currency accumulations and losses. Now, the value of money is, mostly, contained in the ability of it to be used to pay taxes in a given area and the blind faith that people put into it regarding it having some sort of value. Nobody went, hat in hand, to the Chinese wealthy elite and asked them to buy US Treasury Certificates (T-Bills). Similarly, nobody asked the Europeans, Japanese, Middle-Eastern sheiks or other private or foreign entities to buy T-Bills. They, more or less, had to beg us to let them buy the things. When the Treasury gets ready to sell T-Bills, they have already lined up the US banks that will purchase them. Only if somebody wants to get paid less interest than what the Treasury is offering the banks, only then does the individual get to purchase a T-Bill.

“Well…then why do we even have T-Bills?”

That gets to something that is really beyond my ability to answer. As a scientific reality, we don’t actually need to issue T-Bills as a running count of how much money we have added to the economy since 1837. Yes, it has been that long. No, we did not fail to honor any T-Bills. No, we do not need to fail to honor T-Bills. No, we can not go bankrupt by force—only by stupidity. This has been especially true ever since 1971-1973 (whenever one decides that the gold exchange process really ended—it gets kind of fuzzy). If $1.3 Trillion of T-Bills were to be cashed in by the Chinese tomorrow, the Federal Reserve Bank would just take $1.3 T out of savings and put $1.3T into checking for the Chinese. It can be done by a clerk in a computer—probably in a few minutes (assuming that a quantity that large would have at least SOME sort of safeguards in order to complete the transaction, otherwise in seconds).

“What about the debt limit?” We do not need a debt limit, nor do we need a running count of the amount of deficit spending we have done in the past. “How can that be? If I kept on borrowing money to pay my bills, I would go bankrupt really fast!” You are not allowed to print money—and you are not allowed to borrow in money that you have to sole power to print, either. You work with US dollars (or whatever your country uses, for our readers outside the US).

“You have to be wrong! This goes against everything that any politician has ever told me! Even the Wall Street Journal would call you a crackpot! This can’t be TRUE!!”

In the immortal words of John Galt, in Atlas Shrugged, by Ayn Rand, “A is A.” Somewhat ironically, Ms. Rand did not understand finances very well, and thus came to many, many false conclusions. She is right, however, that A is A.

It may be (and I have at least a 10-90% feeling, depending on my mood, that it is) that our federal officials do not want the general populace to realize that US dollars are hinged on such a weak basis. This would explain why presidents ever since Ronald Reagan, presidents who campaigned on the need for balancing the budget, have never really worried about having a balanced budget. They know that balancing taxes with expenditures (for the federal government only, remember!) is only useful when the economy is too heated and inflation starts to get beyond our tolerance level. There are, of course, other ways of curbing inflation (not the least of which is having the Federal Reserve increase the overnight interest rate), but in the end, since all loans have to be repaid—usually with interest—the only sound way to curb out of control inflation is to tax more than you spend. This takes money out of the system, thus denying the availability of someone to pay the extra amounts. If people do not have the money to pay higher prices, then they will buy less—usually leading to either a price drop or less consumption (Economics 101).

Another possible reason why this is not mainstream teaching in university classes is that most of the economics text book writers do not believe that money has anything to do with the economy. “That’s just stupid!” you say? That is really what they think. They believe that economics principles—especially macroeconomic principles—are independent of the item(s) used for money. It happens to be wrong. It has been proven to be wrong. But, hey, it’s kind of hard to break a paradigm.

Yet another possibility is that the people who are the oligarchs of the world do not want us to know. They will spend a lot of money to ensure that we do not know, because of the implications of the reality that is Modern Monetary Theory (note theory here is used in the same way as the theory of gravity). You see, if taxes are only needed to 1) give value to the money and 2) curb inflation, then congress might go way overboard on promising goodies to their constituents—which would likely lead to hyper-inflation. Hyper-inflation is not a good thing—especially for those who have a lot of money. If the US Congress believed that they really could write a blank check, they might have a hard time refusing to do so—even in the name of keeping the country whole and prosperous.

Back in 1933, President Roosevelt pursued a policy of trying to ensure that the working class and middle-class people would have a major share of the resources produced by the country. This continued until about 1978. In the 1970’s the oil embargo and later the Iranian revolution caused the price of oil to skyrocket. We had something called, stagflation. In other words, unlike what Keynesian
economics suggested, we had both inflation and economic stagnation. Keynes did not get his math wrong; he just had not accounted for the possibility that a group (oil producers in this case) would be able to unilaterally increase their prices and still keep up high demand. Since OPEC had a large enough share of the oil production, they could increase prices regardless of competition. This caused some people to pounce on the seeming contradiction (inflation when the economy was not in overdrive) to claim that demand-driven economics did not really work. It was false. It is a lie. It is even a damned lie. However, it worked—and the middle-class and working-class folks have been losing ground ever since.

So, the next time that you hear someone talking about us putting our great-great-grand children into a debt which they can not possibly pay back; ask yourself, “To whom would they have to pay this debt?” They can not send us goods and services (that we are allegedly borrowing from them); just as we can not send planes, tanks and guns (artillery pieces) to our forebears in WWII so that they can defeat the Imperial Japanese Empire and Hitler’s Third Reich. All the goods and services (with only a very, very miniscule exception) that are produced today are consumed by those living today. A is A.

That we have accumulated some $17-18 Trillion of debt with the federal government is, more or less, false. We do not need to keep a running tally. We (probably) should toss out the figure and stop issuing T-Bills. We should place curbs on Congressional spending (or on the tax income) such that we do not have out-of-control inflation. Thus, we could mandate (in the Constitution) that Congress can set the amount of inflation that we are willing to accept, Congress can decide how much the federal government needs to spend, and Congress can decide how the excess money (amount that is needed to prevent inflation) is to be collected. They might decide that the first $2 trillion is to come from progressive taxes on the wealthiest earners, the next $1 trillion is to come from a tax schedule which includes people of middle-class or moderate means (say $50,000 per year or more), that the next $1 trillion comes in an ever-increasing amount to include people with lower income, and so on, until the figure for acceptable inflation is met. They SHOULD NOT be allowed to decide how much needs to be collected in taxes. That is fiscally, financially, and economically disastrous. They have neither the expertise nor the inclination to collect excess money in a fiscally responsible way.

Let me say that again. The US Congress should not be allowed to decide how much needs to be collected in taxes and fees. They should be allowed to decide all the other things (including how the final figure is portioned out), but financial gurus, mathematicians, and other such people; appointed by the country independently of the politicians, with the mandate to keep inflation at an agreed-upon level, should be the ones to decide how much money the US government takes out of the economy. They could coordinate this with the Federal Reserve Bank (who set the money supply and overnight lending rates). Anything else is asking for trouble.

So, to sum up the reality:

1) We do not need to “find some way to pay” for any federal program
. We need only have the government cut the checks. We “may” (and should) need to find a way to curb inflation if the federal government increases what it is spending. The rate of inflation would probably go up; but at the moment we are actually having trouble reaching the rate that the Federal Reserve Bank wants us to be at anyways. In other words, we are not spending enough (minus taxes) to get us to as high of a rate of inflation as the Fed would have liked. (At least that was the case for the past six or seven years—we rarely ever got to 2%)

2) We do not (really) owe anyone $18 trillion; that is simply the amount of money that people have in a savings account called T-Bills. Since T-Bills are the most liquid asset on the planet, if anyone who has them wishes to buy something in US dollars, there is nothing stopping them (other than banks who have them for a cash reserve). Thus, one must conclude that they do not currently wish to purchase anything else denominated in US dollars at the moment. If they did all decide to cash in their bonds and spend the money, we might see a rise in inflation, but most people would see a huge boost to their incomes (due to $18 trillion being injected into the economy), and we would probably put up with the fact that some prices would rise.

3) The only way that the US government goes insolvent (unable to pay its bills) is if Congress decides to not pay the bills.
They have little reason to do such a stupid thing, but that has not stopped them in the past. The logical move for Congress would be to stop having a debt ceiling—or a running debt for that matter.

4) Taxes are what give value to the money. Taxing the wealthy more than the middle-class and poor tends to help produce a more robust economy, however, ever since President Reagan’s time the amount of money going to the very top has been increasing. (It was going down until about 1978, when Carter stated instituting a conservative agenda including reducing the amount of “entitlements” to the poor and lowering the taxes on the very rich—Reagan increased this with a vengeance). During the time of 1933-1978, the US pursued policies that followed a demand-driven economic system. We now have had that co-opted by a view of trickle-down economics. Hint: trickle-down does not work as advertised (other than the suggestion that the very wealthy are peeing on the rest of us, I suppose).

This means: Social Security can not run out of money (unless, once again, Congress—in its infinite stupidity—chooses to not pay its bills) since the US can not run out of money. We could have massive inflation—thus making Social Security payments worth less than they currently are, but the program can not (or at least not in any rational world) go insolvent. The same is true for every federal program. The United States pays its bills in US dollars (it also only borrows in that currency).

All of this has profound implications; not the least of which is that we could (and probably should) ensure that anyone who wants to work (and is willing to accept the lowest wage offered) can work. We could, thus, abolish the minimum wage; replacing the entire system with a minimum wage/benefits package that every able-bodied adult in the US could access by agreeing to work at whatever job the federal government assigned to them. We could (and possibly should) eliminate all corporate income taxes—taxing the dividends instead (and at a progressive level). This might coax corporations to bring jobs back to the US (since not having to pay income taxes would be a huge incentive). We should tax income earned by US citizens and/or earned in the US regardless of where that income is derived. Thus, we should probably eliminate all tax havens (looking at you, Cayman Islands), declaring that all income obtained by people living here counts towards their ability to buy stuff. Finally, we absolutely should tax very-large inheritance. Once a person has had his/her chance to spend the stuff, it gets recycled back into the society as a whole. There are numerous reasons why establishing an entrenched, monetary-based oligarchy will end up hurting our society.


Robert Coutinho is a disabled pharmaceutical chemist living in Massachusetts. He has been learning about life, the universe, and everything since he was born in 1963. He has had little else to do since his disability began in 1997. He has written a fictional novel, Their Last Best Hope, which is currently available at Tate Publishing, internet venues, and bookstores.


graphic via shutterstock.com

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  • I apologize in advance for a few typos. It was a long article (I did proof-read it seven times and had some family members do so as well).

  • Slamfu

    Great article Robert! Stuff like this should really be taught in high school. People have these wild misconceptions about how things work, which goes hand in hand with extremely strong opinions about what to do with perceived problems. One of my personal favorites is when people make comments about how money is evil, which just kills me. Money is just a tool for keeping track of things, it is a tool like a shovel is a tool. Being mad at currency is like being mad at a shovel in my eyes. But what are you going to do but try and get the word out.

    Anyways I’ll be rereading this today as I’m sure I only absorbed about half of it on the first go around. Again, great article.

  • KP

    Well done Robert! I know how much time you put into this work and it is much appreciated. You had alluded to this before in comments I had trouble cracking the code, so to speak. The analogies are helpful.

    Another couple reads and I may even have a question or two. Great way to start a day.

  • JSpencer

    Thanks Robert for making my head hurt. Seriously though, I appreciate your effort to put such a daunting subject into perspective. I was thinking the other day about the ever popular refrain of democrats wanting “free stuff”, when if anything it’s republicans who want “free stuff”. But what do I know, I’m just some blue collar guy..

  • I believe the convolutions are solely so that the populace believes in the dollar. Without that faith, it loses its value.
    I have tried to explain aspects of this, especially in regards to the ‘debt’- the US debt is only payable in US dollars.
    I think what cemented MMT for me was the fed buying up treasury bonds. In any reality, that just wouldn’t seem possible. The fed gets money from the treasury, then uses that money to buy treasury bonds (loaning money back to the treasury), the treasury then pays interest on those bonds to the fed, then the fed takes the money ‘it made’ and gives it back to the treasury (the fed is required to give any profits it makes back to the government). This seems like an obviously fraudulent or disastrous idea- and that on some level it has to at least undermine other countries faith in the currency (another big part of monetary theory), but it works just fine. My concern is that it might only work because we have such a large military- although Iceland seems to be doing pretty well.

    Another point that I try to make is that the money supply needs to keep expanding as the population and the economy grow.

    I never really understand how money worked until reading up on MMT. Now, I have come to believe that though understanding some fundamentals is important, it doesn’t necessarily help. In our society, money/ currency represents a lot of other things beyond a representative means of exchange- it’s power and moral authority. Who deserves it and who doesn’t. Who is ‘winning’. The bank account is a score card and we have even brought God into it- God is on the dollar and if you have enough God dollars, it’s proof of his love and approval.

    It goes beyond the actual reality to the perceived reality creating the actual.

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