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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. . . .
Maybe to fix the 'deficit' we must redefine our terms.
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.
30 Comments
Thanks. Rec’d.
As a synonym for “deficit,” I still prefer “stimulus” to “contribution” or “addition,” which I find too abstract and non-specific. Everyone know intuitively what the intent of a stimulus (or stimulant) is.
Similarly, I think that “de-stimulus” is the appropriate synonym for “surpluses,” which have an awesome record of shutting down the economy — per Stephanie Winston in the LA Times of 12/21:
The lesson: surpluses, rather than being a sign of economic virtue, tend to shut down the private-sector economy (by extracting liquidity from it). It’s similar to what would happen if you drained the oil from a running engine; it seizes up. Duh!
Let’s not be abstract and academic about this. Let’s use terminology that the average person intuitively understands.
A related observations: The federal government’s finances are analogous to those of your family if and only if your family:
(1) prints its own money
(2) runs a protection racket that requires payment in that money.
Hi wigwam, I think you meant to say “Stephanie Kelton” rather than Stephanie Winston above. Stephanie is one of the leading MMT thinkers, EconomicsDepartment Chairperson at UMKC and the editor of the NEP blog, which is my home blog at this point.
A couple of other points. First, the person who first pointed out the close association of surpluses and depressions/recessions was Randy Wray in a piece in New Deal 2.0 in 2010. Also Stephanie preferred not to mention in her statement that the Clinton surpluses did result in a recession in the early 2000s, which quickly abated when Bush began to run deficits, and the Federal Reserve along with the banksters blew the giant credit bubble that burst in 2008.
Second, on the terminology, I have misgivings about the “stimulus”/”de-stimulus” terminology because, until now, “stimulus” has meant specific legislation designed to get us out of a recession or depression. It hasn’t meant all positive gaps between government spending and tax revenues. So, I think using that term will create confusion and won’t allow people to easily conclude that nations like the US need to run “government additions” every year if they want to support private sector savings and imports of real wealth into the US economy. I think you’ll agree that running constant “government additions” isn’t what people associate with the term “stimulus.”
On “de-stimulus” I think that term has the problem of “abstraction” you spoke of and is really rather a rather neutral label for the destructive practice of impoverishing the economy and the middle and working classes by trying to run consistent government destruction of high powered money. I mean, we’re talking brutal austerity policies here; we need a more vivid and negative word to describe that than “de-stimulus.”
You bet!
a) Federal Deficits – Net Imports = Net Private Savings, is strictly true. See fig4 of http://pragcap.com/understanding-modern-monetary-syste
If this equation is summed over all years, we get
b) Cumulative Federal Deficits – Cumulative Net Imports = Cumulative Private Savings, or,
c) Cumulative govt “debt” = national wealth.
The last equation is my definition of govt debt which is the left hand side of b). This definition accounts for the foreign sector also.
from
http://pshakkottai.wordpress.com/2012/07/31/cumulative-deficit-vs-household-net-worth/
Using the new terminology this would be stated
d) Cumulative govt credit = national wealth.
This definitely sounds better!
Chronic use of stimulants is the norm in the U.S. I take several cups of it each morning and can’t functions otherwise. The fact that stimulus has traditionally been used to get out of depression/recession does not IMHO cause confusion in the public mind.
And, most Americans will be startles to learn that surpluses are quite depressants to the economy — Professor Wray showed and Professor Kelton wrote in the LA Times, surpluses (quite literally) depress the economy. The metaphoric value of these terms couldn’t be more excellent.
OT a bit: Per HuffPo:
In fact, the Article 1 Section 8 of the U.S. Constitution gives Congress three powers by which to raise funds to pay expenses it has appropriated:
• To lay and collect Taxes, Duties, Imposts and Excises … [Clause 1]
• To borrow Money … [Clause 2]
• To coin Money … [Clause 5]
What Geithner is say is: “I refuse to pay the the rest of nation’s bills unless I can do so with borrowed money.” It’s beneath him (and his boss) to mint coins to pay the nations debt. The last time he did this shit, it cost the nation an unnecessary $18.9 billion. You’d think he’d learn.
That is a very good point you are making.
Per Michael Hoexter’s article cited in the diary:
Huh? The only money that the government spends into existence are the coins that it mints, which constitute only a fraction of a percent of our money supply.
Tax deficits are funded by borrowing which generated new bank credit, in the case of treasuries purchased by banks, and replaces existing money with treasuries, in the case of treasuries purchased by banks.
The point that I’m trying to make here is that the only portion of the deficit that “contributes” to the money supply is that which is funded by freshly issued money, i.e., coin seigniorage, which covers less than 1% of the deficit. I don’t see how the portion that is funded by borrowing can be called a “contribution.”
Okay, so instead of “de-stimulus,” how about “depressant”?
I think it does!
Well, I guess we just disagree on this. The connotation of “stimulus” is established in the MSM. They won;t accept the use of the term you’re proposing.
Hmmm. IIUC, in the MSM, “stimulus” means a package of tax cuts and spending hikes to pump money into the general economy, which is exactly what a deficit does.
About 90% of the money is created by fractional reserve. The rest is created money including coins and dollar bills. The money created by fractional reserve disappears when the loans are paid back but the created money(“deficit” in the old terminology, credit in the new proposal) results in wealth.
In http://en.wikipedia.org/wiki/Fractional-reserve_banking
we have actual numbers for 2007
“Components of US money supply (currency, M1, M2, and M3) since 1959. In January 2007, the amount of “central bank money” was $750.5 billion while the amount of “commercial bank money” (in the M2 supply) was $6.33 trillion. M1 is currency plus demand deposits; M2 is M1 plus time deposits, savings deposits, and some money-market funds; and M3 is M2 plus large time deposits and other forms of money. The M3 data ends in 2006 because the federal reserve ceased reporting it.”
Here commercial bank money in M2 is about 9 times the primary federal reserve created money.
Thanks.
IIUC, you’re saying that 10% of our money is currency (coins + Federal Reserve notes), and the rest (of M2 or M3, whichever) is bank credit.
That was pretty much my impression until a couple of months ago when I ran across this, which claims that:
Please understand that even Warren Mosler seems to subscribe to the money-as-credit theory. I like that theory, but then government-issued money becomes even less significant, by a factor of five.
Maybe he and his boss are intentionally not learning. After all, if they learned, then they’d have no rationale for cutting SS or other entitlements.
Thanks, which one?
Michael views the Fed system as part of the Government because the Board of Governors is a Federal Agency and the regional Feds are non-profits tightly regulated by the Board, so he, and most MMTers say that the Fed, the Congress, and the Treasury are all part of the Government system which makes and implements financial and economic policy.
The way MMTers look at it, the deficits aren’t “funded” in the sense that the Government uses the borrowed money to do the deficit spending. What happens instead is that the Government (the Treasury) issues and sells the securities when it wants to deficit spend Congressional appropriations. The buyers of the securities have their reserve accounts debited by the Fed; and their securities accounts credited. That move destroys reserves in the private sector, and creates securities, a slightly less liquid form of money carrying interest, in the private sector. The Fed then credits one of the Treasury’s TT & L accounts with reserves using its unlimited power to create them out of thin air.
This is a part of the Government, the Fed, that can create reserves, creating them by crediting another part of the Government, the Treasury with those reserves. The Treasury has the authority, once the reserves are created in the TT and L accounts to instruct the Fed to debit those accounts and credit the Treasury General Account (TGA) with an equal amount of reserves, which Treasury can then spend in the non-government, including the private sector.
Just looking at the reserve picture in the short term, you’re right that no new reserves are created by this process of deficit spending. However, if you look at the picture from a more long-term point of view, the Treasuries sold eventually must be repaid, and sooner or later, assuming the Treasury needs to keep on borrowing to repay debts and also use more deficit spending, that longer term process would lead to a tightening of the supply of reserves in the system. The Fed, again part of the Government handles that through its open market and QE operations, eventually expanding the money supply and creating the net reserve addition initiated by the process kicked off by the Treasury when it issues debt prior to deficit spending.
I know that you know all this. But we MMTers think it’s important for people to recognize that Government deficit spending isn’t “funded” in the way every non-government entity is funded, through a borrowing process that has definite credit limits. Instead, the government borrowing process is just a step in a broader process whereby the Government uses its fiat money creation power to do the deficit spending. The US Government does use a very roundabout process to exercise its fiat currency powers; but it does get there, and it is really accurate to say that the only net money the government creates is from coinage.
As I said in my reply preceding this, deficit spending is initially a contribution to non-government net financial assets (the new Treasury securities sold) and to the money supply in the fullness of time when the Fed does its open market or QE operations.
“Depressant” is better, taken by itself. But if paired with “stimulant” then I think not as good as the “addition”/”destruction” pairing.
Right; but this isn’t about the logic, it’s partly about the prior usage of these terms. “Stimulus” isn’t just running deficits. It refers to a deliberate and major effort to promote an economic recovery when the economy is in recession. Continuous full employment addition (deficit) spending is just different from that.
As I noted, the sale of a treasury to a bank puts additional fresh bank-issued money (credit) into the economy, but Michael insists that bank-issued money doesn’t count, because it’s scheduled to be paid off. Well a treasury is a loan and has a maturity date, so the same logic applies. And, the same logic applies when the bank involved is the Fed, buying a treasury is making a loan. Either the credit resulting from loans counts or it doesn’t.
I happen to believe that it does count, i.e., that bank-issued money is “coin of the realm,” because the Treasury accepts it in payment of U.S. taxes.
Also, IIUC, banks can buy equities (stock) with freshly-issued credit, which is a counter-example to Michael’s claim that all bank-issued money has an expiration date and therefore doesn’t count.
I have to agree, but for a different reason. I suddenly realize that, depending on the multipliers, one can have a deficit that depresses the GDP, and conversely one can have a surplus that stimulates it. To predict the effect of a budget on the GDP, one needs to apply the multipliers, which can differ by a factor of five, e.g., .29 for the Bush tax cuts vs. 1.29 for the payroll tax holiday.
In http://pshakkottai.wordpress.com/2012/05/25/188/
I have a plot of deficit vs. GDP and a description of that plot.
FIG 6 : This is a plot of yearly GDP and yearly deficits in unadjusted dollars starting from 1960 ending in 2010. The deficit is increasing slowly from 1960 to 1972 during the days of gold standard. From 1972 to 2000 GDP increases as the deficit is decreasing with a slope equal to 4000billion in 500 billion or 8. For 1 dollar of deficit GDP changes by $8. After this deficits increase again and the GDP rises more slowly. GDP changes by 1000 billion for a deficit change of 300 billion, a slope of 3. In the region of falling deficits the slope is larger, near 8. Most recent data shows deficits increasing a lot and the GDP falling. This is the region of Wall street gambling, mortgage crisis, trillion dollar wars etc. which have done nothing good to the economy.
Any other explanations?
I don’t see Michael is saying that bank money isn’t coin of the realm, but just that when it’s created it doesn’t add net financial assets to the economy. On the other hand, when the Government deficit spends under present arrangements it doesn’t add any net money to the economy, because the money it adds is offset by the money it takes away in selling the Treasury Bond. However, in the long run, when the Fed creates money out of thin air to buy back bonds to expand the money supply, then the end result is that money is eventually added to the economy by the deficit spending.
It would be better, because it is more transparent, if things didn’t proceed in such a roundabout way, and that’s why I favor, above all, re-organizing the Fed to place it under Treasury, so Treasury could create its own money when it as to deficit spend. Failing that, of course, I prefer using the Platinum coin as in the $60 T proposal, because it forces the Fed to provide the money for Treasury to deficit spend Congressional appropriations.
I agree, but some spending multipliers are even higher, so that Food stands and UE payments are somewhere in the range of 1.7 or nearly 6 times the multiplier of the Bush tax cuts.
You have too look at more than deficits vs. GDP. You also have to look at nongovernment savings and the foreign sector current account balance. The deficit and GDP are both driven by those things.
Hmmmm. I don’t see why that’s any different from when a commercial bank buying the bonds (except that the Fed’s interest comes back to the Treasury).
I agree in the case where a non-bank buys the bond. But, when the buyer is a bank, it purchases the bond with money that’s freshly issued on the spot from thin air. So, in that case, the government doesn’t take away any pre-existing money in selling the bond.