One of the most emotional issues in American politics is the sovereignty of the United States itself, and its independence from foreign powers, interests, other nations and their ruling elites, and emerging globalizing elites who place their own interests against the nation interest of America and its people. The issues of fiscal sustainability and fiscal responsibility should be discussed from the viewpoint of our national interest, not from the viewpoint of abstract financial ratios, or supposedly critical indicators that generate a lot of sound and fury signifying nothing.
When we look at fiscal policy in the United States from the viewpoint of our national interest, among the first things we must consider is maintaining the national sovereignty of the United States. Most Americans want the United States to remain autonomous and independent, and to not be subject to the economic control of any foreign power, whether another nation, an international organization, or an international political grouping of a more informal character.
This desire is a constant throughout our history and it is the basis for the relative unpopularity of the United Nations here. A very important dimension of our national sovereignty is sovereignty in our own currency. The Constitution gives Congress authority: “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.” That authority, through interpretation by the Supreme Court over the years, has come to mean that it is constitutional for Congress to cause the issuance of fiat money, whose value may be regulated by the government, at will in order to serve the public purpose.
Today the Federal Reserve Bank interprets the power to “print money,” as the power to “mark up” accounts in the banking system by computer, in the process of augmenting the money supply or in implementing spending by the Treasury. There is no limit on the power of the Government to create money this way, provided that Congress doesn’t set such limits itself.
In addition, to its unlimited power to create fiat money, the United States also has a constitutional obligation that is worth mentioning when talking about economic sovereignty, since the classical notion of sovereignty is also related to obligation. Section 4 of the 14th Amendment states:
“. . . .the validity of the public debt of the United States, authorized by law… shall not be questioned.”
Of course, constitutionally, the Government can only spend what Congress has appropriated; but, beyond that, there are other constraints that Congress has set for the Government which are not mandated by the Constitution, and which limit the degree of economic sovereignty of the Government. Here are three:
– the Treasury is not allowed to run a negative balance at the Federal Reserve,
– the Treasury must issue debt when it expects to deficit spend, and
– the Treasury cannot issue debt beyond the statutory debt limit,
The first two constrain the Government by forcing it to remove money from the non-Government sector before it can deficit spend; even when Congress has already appropriated the deficit spending. The last constraint is intended to impose an arbitrary limit on deficit spending by bringing it to a halt, even after it has been appropriated. Its purpose right now seems to be to provide periodic and very public opportunities for political kabuki theater during which the two parties can express their core political values as they apply to fiscal policy, while they dismantle the heritage of the New Deal.
The kabuki opportunities carry a very high cost, however, since the constraints making them possible:
– cause Government shutdown crises,
– sometimes create doubt that the Government will voluntarily become insolvent and fail to meet its obligations, and most important of all,
– are responsible for the existence of the National Debt of $14 Trillion, and for the “welfare” for the rich and foreign nations paid to them every year in the form of interest on Treasury securities, which, except for the Congressional requirement to issue debt, the Government would never have to pay.
Why does the Congress limit the fiscal flexibility of the Government, including its own flexibility, with constraints like the three above?
Why are some in Congress trying to get a balanced budget amendment passed to further limit flexibility in Government spending and fiscal policy?
Why do many in all three branches want to limit the monetary power of the Federal Government and its potential for helping America achieve in public purposes?
Why, in short, are so many politicians so much in favor of limiting the currency and fiscal sovereignty of the United States?
Why are we letting them do it?
Why aren’t we as protective about our currency/fiscal sovereignty, as we are about other aspects of sovereignty, such as our territorial integrity, and our political independence?
Before I try to answer these questions, I’ll review what fiscal/monetary sovereignty is.
What It means To be Sovereign In Your Own Currency
Deficit hawks in the United States envision a day when the United States Government will go broke, unless we curb government spending on entitlements. Well, governments can go broke in the sense that they can run out of money they need to pay their debts. But not all governments. Only Governments:
– whose monetary systems are commodity-based, such as those on the gold standard; or
– those using fiat money, whose official fiat currency is issued by supra-ordinate authorities, or
– those who owe debts in a fiat currency issued by another governmental authority,
can all “go broke,” involuntarily.
Governments issuing their own fiat currency, subordinate to no higher authority, and owing no debt to anyone else in a currency other than their own, can never “go broke,” or put another way, become insolvent, due to events in financial markets, or decisions made by other nations. This is true, because all they need to do to spend money is to issue credits to non-government sector accounts in banks, and all they need to do to pay back other Governments who have lent them their own currency, is to credit the accounts of the lender Governments in that currency, an action which they have full authority to do, absent any political constraint they may have placed on themselves preventing them from exercising their full monetary sovereignty.
We call such Governments “sovereign” in their own currency. And because they have this kind of sovereignty, they also have flexibility to facilitate economic activity to accomplish public purposes that Governments without that kind of sovereignty don’t have. But with that fiscal flexibility also comes fiscal responsibility – the responsibility to use the operationally unlimited spending power of an economically sovereign government to use that spending power for public purpose and not for private gain.
One of the Governments that fit these criteria and so can never go broke is the US Federal Government. Other common examples are Japan, Australia, New Zealand, and Canada, and the UK. Governments that don’t fit these criteria and that can go broke include the nations of the EU, such as Greece, Portugal, Spain, and Italy. Even France and Germany can go broke, since they no longer issue their own currency. Other examples include all those developing nations with loans from the IMF, the World Bank, and other international authorities that must be paid back in US Dollars, or any other currencies they cannot issue; as well as state, local, provincial, and other governments subordinate to a super-ordinate currency-issuing authority such as California.
Most governments that are sovereign in their own currency haven’t been fiscally responsible in a very long time. While some have performed better than others in seeking and achieving public purposes, most have continued to act as if they are constrained by the gold standard, and have attempted to either reduce spending at the expense of the less well off, or to fail to pursue programs for full employment, or to fail to make enough investments that will fulfill other pubic purposes. In most of these cases, deficit hawkism and specifically the desire to either reduce deficits, or to balance budgets, has trumped the desire to fulfill public purposes.
In short, governments sovereign in their own currencies have been acting like governments on the gold standard, or those who owe debts in currencies they don’t issue. They have been acting in a fiscally irresponsible way given their fiat monetary systems, while at the same time claiming to be fiscally responsible. They can get away with this, because very few people make the distinction between governments sovereign in their own currency and governments that are not. And even fewer go on to recognize that what may be fiscally responsible for gold standard governments, or governments that are not economically sovereign, is most certainly fiscally irresponsible for economically sovereign Governments.
In systems where governments are economically sovereign like the United States, it is a big mistake to measure how well the nation is doing fiscally by using deficit, the national debt, or debt-to-GDP ratios. That mistake is one the United States and most other nations with monetary sovereignty are making right now.
Those measures, in fact, are the wrong things to measure. The government is a scorekeeper that can always credit accounts when it needs to spend or pay what it owes, or even set interest rates by flooding the market with reserves and driving short-term interest rates down to near zero. In such systems, the money is always there for the non-governmental sector, not in the sense that the government has accumulated some physical stock of it, but in the sense that the Government can always spend or pay back by crediting accounts, regardless of any physical stock it may have.
In such systems, fiscal responsibility is not about what the Government has accumulated either in debt or in surpluses, since given its unlimited ability to create new currency, these neither constrain nor support its further ability to spend What it is about, however, is the Government’s success in spending on worthwhile things that produce actual value, rather than spending on worthless outcomes.
Why Are We Self-limiting Our Currency Sovereignty?
There are a few contributing reasons. First, most Americans don’t understand that the power of Government to help the economy to recover from recessions and to achieve full employment, is dependent on the ability of the Government to deficit spend and to add net financial resources to the private sector. To the extent that the ability to deficit spend is limited by fiscal rules, the fiscal sovereignty of Government is impaired, diluted, or, in the case of balanced budget amendments like the one gathering steam in Congress, largely destroyed.
Second, most Americans don’t understand that deficit spending and the resulting deficits and debts, carry no solvency risk. They view the US Government as an analogue to a household, and they think that, like a household, the Government cannot spend more than the revenue it raises through taxing or borrowing without risking insolvency, and that the more it borrows, the more it will need to borrow and the less its ability to borrow will be. Of course, the Government is different from a household in many ways, but most importantly, in that: all money in the United States ultimately derives from Government-issued money, and the Government, of course, can always add more money to the private sector if it chooses to do so.
Third, most Americans don’t understand that every dollar of Federal deficit spending adds a dollar of net financial assets to the non-Government sector of the economy. The asset can be base money, if the Treasury is allowed to spend without issuing debt, as it sometimes has been, or it can be in Treasury securities if it is required to continue debt issuance. Many think that when Government deficit spends it impoverishes the private sector, because it competes with it for resources. But this is clearly not the case, when there is an output gap and much of our productive capacity is unused.
Fourth, most Americans don’t understand that global elites and corporations don’t want the United States to retain its currency/fiscal sovereignty, because they make more risk—free money if the Government’s currency power is constrained, and if we must buy/”borrow” our previously created USD, rather than make more. So, long as we issue debt instruments rather than just issue currency, they have a risk–free place to put the money they’ve previously acquired, and get an interest return besides. Over the next 15 years, the interest paid on the debt will be roughly $12 Trillion. If the Government can and does use its full currency sovereignty, and deficit spends, without issuing further debt, then the global elites can say goodbye to that money.
Fifth, global elites recognize that if Governments use their power to create currency to benefit any other groups other than the global elites themselves, then that potentially harms the elites and makes their USD holdings worth less. Perhaps not immediately, because demand is slack and businesses will try to increase production rather than raise prices for their valued goods. But, eventually when full employment is reached, they fully expect that either the need to regulate inflation will subject them to increased taxes, or, alternatively, the occurrence of inflation will cause the de-evaluation of their own money and Treasury Securities.
Issues about governments sovereign in their own currencies, as well as others having to do with fiscal sustainability and fiscal responsibility have been addressed at the Fiscal Sustainability Teach-In Counter-Conference last April 28th. It provides the answers to the continuing attempts of the deficit hawks and austerity mongers to orchestrate and implement a political process that will result in transferring more wealth from the middle class and the poor to the very well-off and the corporations, and that has already resulted in the failure of many nations, including our own, to end the sufferings of the unemployed and others victimized by the wholly avoidable crash of 2008.
The primary anti-deficit hawk message of the Teach-In was this: Since the United States Government is sovereign in its own currency: We. Are. Not. Running. Out. Of. Money. The. Money. Was. There. All. Along. The. Money. Is. There. Now. The. Money. Will. Be. There. Tomorrow. And. It. Will. Be. There. For. Our. Children. And. Our. Grandchildren. Too.
This is a message that needs to be sent to Congress, to the President, and to Republican budget-cutters like Paul Ryan, Jon Kyl, Mike Pence, and all the tea party folk, whose “pay off the national debt by cutting spending and taxing to get a surplus,” austerity nonsense, will ruin the United States, and create the second great depression, if we go along with it. We must not forget that every dollar less of deficit spending translates to at least a dollar subtracted from the dollars available to the non-Government sector, and the amount may well be more than a dollar if the dollar less is in a high fiscal multiplier segment of the economy. The attempts by budget-cutters to cut high-multiplier deficit spending will accelerate the downward spiral of the macro-economy, especially as compared with the impact that increased taxes on the wealthy may have had.
Finally, I have to wonder why the very legislators who are always so quick to wrap themselves in The American Flag, are also the ones who are quickest to put forward and implement fiscal rules that will constrain American currency sovereignty and subject the best interests of the American people and the public purposes of the United States to the interests of globalizing elites, foreign Governments like China, Japan, Middle east oil exporting nations, the Eurozone, Wall Street, the bond markets, and the wealthy like themselves. The fiscal rules Congresspersons have implemented and new ones they are seeking to implement to force the nation to pay off the national debt through economic surpluses, have the effect of subordinating the national interest, which they are elected to uphold, to the interests of multi-national corporations, global elites, and foreign nations.
We must recognize this problem for what it is. It isn’t just a technical issue of economics. It’s an issue of patriotism. It’s an issue of whether our economy will be run for we, the people, or interests both domestic and foreign who place their own needs for more wealth above the interests of most Americans to be able to influence our own economic futures and opportunities.
If you’re really worried about your children and your grandchildren, not to mention yourself, then you need to stop the deficit hawks and the deficit doves from destroying the economic sovereignty of the United States with their fiscal rules. You need to insist instead on the freedom and economic independence of the Government from the bond markets and all other elite interests. You need to insist that we act in our own national interest and not in the interest of the global elites. You need to insist that the Government keep its spending/currency creation power intact and use it for the public purpose. You need, in other words, to insist that we remain a Government sovereign in its currency, and to begin to act like one, taking responsibility for the miserable state of the economy within our national borders.
(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).