The word “deficit,” when applied to the Government financial accounting of a monetarily sovereign nation, that is, one that issues a non-convertible fiat currency, with a floating exchange rate, and no debts in a currency it doesn’t issue, is a problem, because the label “deficit” when applied to such a Government doesn’t mean what most people think it means. As Michel Hoexter points out:
. . . The word “deficit” is a hold-over from conventional accounting and the era of the gold-standard when currencies were supposed to be fixed in their quantity by convertibility of the currency into a fixed quantity of precious metal. Deficit means primarily a “lack”, an “absence” and in conventional accounting it means being “in the red”, not having taken in enough income to cover expenditures. . . .
The term “deficit” in this sense can be properly applied to households, corporations, other private and inter-governmental organizations, and states and nations that aren’t monetarily sovereign such as the US States and the members of the Eurozone. In all these instances the governments involved can run out of money, and the more deficits they run, the more the risk that they will become insolvent increases. But when that term is applied to monetarily sovereign nations, then the “deficit” notion is profoundly misleading because neither the size of the “deficit,” nor its accumulation over time when it is accompanied by selling debt instruments, makes a bit of difference when it comes to solvency, because monetarily sovereign governments always have unlimited power to issue currency, if they decide to remove all self-imposed constraints on currency issuance and use that power.
There’s a corresponding problem with the term “surplus” as applied to monetarily sovereign Government accounting. Surpluses are supposed to represent the situation where tax revenues exceed spending and the gap between them is described as net “savings” increasing the financial assets of the Government running the surplus. A surplus over a particular time period is viewed as being “in the black” for that time period, as a good thing for the Government doing it, and as reducing the “debt” of that government giving it an increased financial capability to spend in the future.
The term “surplus” in this sense can be properly applied to households, corporations, other private and inter-governmental organizations, and states and nations that aren’t monetarily sovereign such as the US States and the members of the Eurozone. In all these instances the governments involved can accumulate surpluses as financial assets, and the more surpluses they run, the more the risk that they will become insolvent decreases. But when that term is applied to monetarily sovereign nations, then the “surplus” notion is also profoundly misleading because neither the size of the “surplus” during a time period, nor its accumulation over time, makes a bit of difference when it comes to solvency, or adding to the government’s capability to spend in its own currency either currently or in the future.
So, from the viewpoint of Modern Money Theory (MMT), both the terms “deficit” and “surplus,” and also the term “national debt” are misleading when applied to monetarily sovereign nations. Recognizing this, some of us have been kicking around the idea of using new terminology for talking about national financial accounting. In the recent post by Michael Hoexter I referred to earlier he proposes:
“Instead of a “deficit”, I would submit that the excess of spending over taxes collected represents the government’s “net contribution” to the economy. One can either expand or contract this phrase depending on the needs of the situation: it could be made more explicit by expanding it to “the government’s net monetary contribution to the growth of the economy” or shorten it to “the contribution”. “Contribution” denotes the adding of something without necessarily the subtracting of something else from someone else.”
I think this proposal is on the right track, and I agree with the underlying idea as I understand it. But I don’t think the terminology is quite what we need. The reason is that the “net monetary contribution” is an improvement over “the deficit”; but it doesn’t address “the surplus” meme, and the false idea that there can be national financial savings above and beyond the unlimited capability of a monetarily sovereign nation to create its won currency.
We could say that “the deficit” should be called the net positive monetary contribution of the Government to the economy, while “the surplus” is the net negative monetary contribution. But I don’t think this will work as well for spreading the MMT point of view as other alternatives we may arrive at, because as soon one gets to terminology like net positive and net negative contribution, people’s eyes glaze over more than they do when one uses the “deficit” and “surplus” terminology.
So, here’s another proposal for renaming/reframing key terms in monetarily sovereign government accounting.
– When a monetarily sovereign government spends more than it taxes during a specific time period, that is Government creation of net financial assets in the non-government sector. Let’s call it “the addition.”
– The accumulation of net financial assets created over time is national net financial savings, let’s call it “the national credit.” The current total of debt instruments subject to the limit is equal to “the national credit.”
– When a monetarily sovereign government taxes more than it spends during a specific time period, that is Government destruction of net financial assets in the non-government sector. Let’s call it “the destruction.”
– The accumulation of net financial assets destroyed over time is national net financial depletion. Let’s call it “the national depletion.”
So, to summarize, for monetarily non-sovereign households, organizations, States, and Nations, all of which are users of the currency of others, or subject to markets in those currencies, we can talk about:
– the household, organization, or national deficit;
– the household, organization, or national debt;
– the household, organization, or government surplus; and
– the household, organization, or government savings.
But for monetarily sovereign nations (which all have an unlimited capability to issue their own currency) we must talk about:
– the government addition;
– the national credit;
– the government destruction; and
– the national depletion.
Now let’s open up this proposal for discussion!
(Cross-posted from New Economic Perspectives.)
Photo by Images of Money released under a Creative Commons License.