SCOTT PELLEY: Is that tax money that the Fed is spending?

BEN BERNANKE: It’s not tax money. the banks have — accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. So it’s much more akin to printing money than it is to borrowing.

PELLEY: You’ve been printing money?

BERNANKE: Well, effectively.

60 Minutes Interview with Fed Chairman Ben Bernanke – 2009

The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.

Alan Greenspan, former Fed Chairman – 2011

Regular readers of this blog will likely already be familiar with my promotion of a model community-building project that runs largely off of a Basic Income foundation. I call these larger communities “Bigger Home Bases,” groups of 100-150 people who band together in a large domestic/economic household, operating off a simple charter committed to ecological footprint downsizing, the purposeful withdrawal of some labor from the formal workforce, reduced consumption, bringing functions currently purchased on the market back in-house, etc. The overall goal here is to increase people’s financial stability and self-reliance, while sharply curtailing negative environmental impact.

For the community-building project itself, the idea is that a private, and as much as possible, anonymous, group of donors/patrons would fund the creation of 15-20 model BHBs around the country, and as people see them succeed, a huge popular swell of support for Universal Basic Income and logistical support for BHB formation would emerge, driving either the wholesale transformation of one or both of our major parties, or, more likely, the establishment of a new political party committed tightly to these policy goals.

Feel free to check out earlier posts to see a lot more details on how this could all work.

But there is a third leg to the stool, one that I have not covered nearly as much, both because it it a little harder to explain and envision, and also because it generally comes last sequentially in the particular story of trying to build a UBI-BHB future. That third foundational concept is Modern Money Theory (MMT). And while coming last in the story, MMT is actually just as important as the other two legs, and it is an absolutely crucial philosophical-ethical platform for any national or international transition to a new kind of civilization.

So what is MMT, and why is it so important?

First of all, it is worth mentioning that I am obviously not a professional economist, and I don’t claim to understand all of the complex details of MMT, which is a large and robust field. So I would recommend that people check out general MMT sources like Stephanie Kelton or Randall Wray for more detailed info. But here is my take on what I consider to be the most important tenets of Modern Money Theory:

• For countries that issue their own currency (sometimes referred to as “fiat currencies”), the federal government can never “go broke” or become insolvent, unless it chooses to do so. A government like the United States can thus always afford to spend as much money as it wants, on whatever it wants, regardless of any incoming money via taxes or bond sales.
• Operationally speaking, taxes do not “pay for” federal spending. Taxes and financial outlays are completely different systems inside the government apparatus, so “deficit spending” can continue indefinitely, even with other economic factors (inflation, unemployment) taken into consideration.
• A fiat currency government does not need to balance its budget. The government is not a currency USER, like individuals, businesses, localities, and states. Rather, the government is the currency ISSUER, not a currency USER. This needs to be repeated over and over again, so that it is not forgotten. Say it 10 times to yourself now: “The federal government is the currency ISSUER, not a currency USER.”
• Considering the bullet above, it follows that the commonplace description of the federal government as just a giant household or business, which must balance its checkbook accordingly, is completely fallacious, even though it is believed by most members of the public and by Congress itself (the latter should know better, but there’s a lot they don’t know).
• Modern money is not “pegged” to any purely physical thing. Since 1971, no country has been on a gold standard, and no major nation is tied to any physical substance to determine its currency value. Modern currencies are free-floating, deriving value from internal economic conditions and external economic relationships.
• Perhaps even more importantly, money is also increasingly unrelated to any older moral standards like hard work, honesty, creativity, law-abiding, or fairness. Instead, money is now, more than ever, a purely social and technological entity, reflecting the goals, traits, and trends of the political and financial spheres, especially the brute technics of power.

In the light of these observations, we need to completely change the popular understanding of government spending. It is not a matter of sensible, kitchen-table checkbook-balancing. Rather, the government has basically unlimited powers to spend as much money as it wants, to do whatever it wants. Remember the aftermath of the 2008 crash, when the government bailed out the banks with anywhere between $1 trillion and $16 trillion, depending on how you look at it? Where did that money come from? Did we levy extra taxes, like when a condo association has a special assessment to pay for the new roof? No, as Ben Bernanke noted in the opening quotation above, the money was just moved around inside accounts at the Fed, keystroked out of thin air. Similarly, the entire mechanics of our “national debt” [actually a misnomer, as we’ll see later] takes place via keystrokes inside the Fed, as digital money is moved from interest-bearing accounts to non-interest accounts, and vice-versa.

One popular metaphor used by MMT economists is that of a sports scoreboard. The individual teams must earn their points via their play, in order to get points to show up on the scoreboard. But where does the scorekeeper get those points? Well, that’s just a dumb question. The scorekeeper doesn’t get them from anywhere, as they are the ISSUER of the points, just as the federal government is the issuer of currency. The scorekeeper has as many points as needed, to accomplish the purpose of the game, just as the federal government can use as many dollars as are needed to accomplish the purposes of our society and economy.

So if the government doesn’t need to “earn” dollars through taxes in order to spend — if the government can just keystroke currency into existence whenever it wants — then what are taxes for? Well, on the state and local levels, taxes ARE needed to pay for things, as those sub-federal entities are currency users themselves, and cannot just create money out of thin air. But at the federal level, taxes basically serve three purposes. First, they drive the use of the currency itself. Because people can’t pay their taxes in gold, or pork bellies, or Chinese Yuan, households and businesses must earn and use US Dollars. This essentially commands the legitimacy of the dollar itself, solidifying the physical, political, and economic unity of the United States. Secondly, taxes can serve to juice or slow the economy, by either taking money out of the system (tax increases) or putting more money in (tax cuts). This helps to control inflation or deflation, as conditions dictate. Thirdly, federal taxes SHOULD (and this is a big condition) be used to encourage or discourage certain kinds of actions and behaviors, as decided by the public via the political system. So theoretically, taxes should penalize pollution, reckless corporate abuses of labor, environmental destruction, fraudulent financial practices, etc.

[One side note on the first function of federal taxes, the driving of the currency. I personally believe that a Universal Basic Income could itself serve as a sufficient driver, since those trillions of dollars would all be in USD, basically catalyzing currency “buy-in” and use by sheer volume. There is the potential with UBI, therefore, to largely eliminate personal income taxes altogether.]

This brings us to some big questions about government finance and spending in general: What kind of economic reality do we want? What kinds of of behavior, individual and corporate, should we be encouraging and discouraging, through the budget and taxes? What segments of society are we trying to enrich? And are we engaging economic reality with our spending policies, or are we serving obsolete fantasies of the past?

Currently, everything in the US is set up as a support system for the plutocrats, and the government operates via the Treasury and the Fed to serve the ideologies of the already-powerful. In this moral universe, money must be kept scarce for regular people, so that they are forced to work in order to not die. If we don’t compel this labor, the people will just get lazy and nothing will get done. However, money should NOT be scarce for the already-rich. They have obviously “earned” their status, so federal tax, regulatory, and spending policies should always grease the wheels for the plutocrats, who are, after all, John- Galt-like titans of creative genius, providing all the glorious loot that the parasitic rabble take for granted. Also, economic growth must be pursued at all costs, because only growth can create the surplus profits that capitalism needs to live, as well as providing full employment, a (supposed) economic necessity. So ideologically, our present system is completely committed to preaching hard work sacrifice, and austerity for the people, combined with free and frictionless access to money for the already-rich. And it is all rationalized by the master metaphor of the government as a big household bound by checkbook-balancing rules, just like me and thee.

In the big picture, this is really just the ideology of every ruling class, as Max Weber outlined in The Protestant Ethic and the Spirit of Capitalism. The wealthy view themselves as divinely blessed and elect, wondrous people who earned their fortune with holy help, a testament to their superior virtue. The non-rich can thus be ignored, as their economic distress is ample evidence of their moral inferiority.

It is this solid foundation of plutocratic moralizing that MMT has the potential to blow apart. If combined with UBI and BHBs — and I think that all three components are crucial — MMT could completely reset the fundamental purpose of the US government. Instead of making money scarce for regular people and easily abundant for the wealthy, an MMT-based spending platform would make the government a direct supporter of people’s wallets, giving them the upper hand in negotiating wages, improving working conditions, reducing consumption, etc. Instead of periodic and massive bailouts for big banks and other reckless financial actors, the American people would get a kind of perpetual bailout, a steady infusion of cash to keep them alive and thriving, with the dignity that comes from not having to sacrifice one’s soul just to earn the right not to die.

Finally, let’s take a deeper dive into the deficit and national debt. Because the federal government is not like a household or business, the very terms “deficit” and “debt” are at best useless, and at worst highly damaging to a proper understanding of how money works. Even more, the national debt panic, which always seems to be a crisis only when the other party is in charge, masks the actual mechanics of how the federal government greases the skids for the plutocrats and keeps everything humming along to satisfy their needs.

So what exactly are the deficit and the debt, at the federal level? Well, the deficit just means that the government spends more than it takes in via taxes and other revenue. But this input-output discrepancy is such a ubiquitous feature of every major country, that the term deficit, with its negative connotation, is simply a misnomer. In actuality, every dollar spent by the federal government enters the private sphere and juices spending and general economic activity (the economic multiplier effect). It would be more accurate to say that the “deficit” is actually a government “investment” in the private economy, as all those spent dollars end up being re-spent or saved by individuals, businesses, and local governments (this is one of the more technical aspects of MMT, where accounting identities show that every federal deficit is mirrored in a private sector surplus).

And remember, taxes don’t pay for spending anyway, so linking them together with a term like deficit is invalid on its face. They are different parts of the system, different mechanics altogether. The only thing that links them together is the faulty logic of politicians who want to push the illegitimate metaphor of the government as a big household. It’s a self-fulfilling fallacy that needs to be tossed out.

But what about the national debt, another earth-shattering crisis that only seems to bother national pols when the other guys are in the driver’s seat? Well, the national “debt” is simply all the outstanding balances of interest-bearing accounts at the Fed, made up of bonds, t-bills, etc. And these are all denominated in US dollars. So what happens when investors — other countries, businesses, financial institutions, local governments, and even other parts of the federal government itself — want to “cash out” all of this US “debt?” Normally, when government investment instruments mature, these investors just roll them over into new interest-bearing bonds and such, because US dollars are considered safe, and are always needed to purchase stuff denominated in USD. And all that debt maturing and repurchasing happens inside Fed accounts, because that’s how US “debt” is operationalized (all these major inventors, including foreign countries, have accounts at the Fed, and that is where their money sits).

But what happens if all or most of these investor entities decide to NOT buy more bonds, to truly cash out and not re-up for new US federal investment instruments? Well, there’s no crisis, because the Fed, again, can just keystroke dollars from interest-bearing to non-interest accounts. But then, it’s not like all those investors can then get gold, silver, pork bellies, Yen, or Yuan back when they cash out. They’ll get US dollars, held in the Fed, and they’ll have to spend those dollars on things denominated in USD anyway, the lion’s share of which is still located inside the US economy itself. Thus, those dollars end up being spent back into US, in large part. Not really a crisis, just an accounting reality with how modern money and economics work.

When we look at the national debt like this, it becomes obvious that when the US government issues bonds, they are acting like a scoreboard operator. Where does that money “come from” to issue those bonds? Which taxes are used to create those bonds? Well, none. Bonds are just created and USD are keystroked into existence again via the investors’ accounts at the Fed.

US federal “debt” is really just a powerful way to bind or link businesses, banks, institutional investors (and their clients, mostly plutocrats), and other countries into the US economy itself, creating co-dependent monetary relationships that stabilize national and international economies, which then spurs the whole gamut of society-wide activity. Also, countries that are tightly linked by mutual monetary obligations and credit are much less likely to blow up the world.

But despite these positive aspects of national debt, if MMT were to be embraced at the federal level, the massive amounts of government bond issues should be wound down, not because of any checkbook-balancing problem, but because bonds and other financial activity at the Fed largely function to create free money for plutocrats. Regular people are mostly shut off from access to this money, as the vast bulk of all investment instruments, maybe 90%, is controlled by the top 10% of the population. As such, the national debt is just another piece of that overall plutocratic ideology that keeps money scarce for regular people but abundant for the wealthy.

An MMT US government would pour much more cash directly into people’s hands instead of massive bond sales that enrich the already-flush. Again, some bond issuing is necessary, to provide safe financial havens and to link the US to other countries for trade purposes. But as bond sales are not needed to “pay for” federal spending (again, totally separate systems), there is no need to engage in lending and borrowing at the scale that exists today.

Now, at the end of this long piece, you might be saying, “That’s ridiculous! Things are not that simple. What about inflation, and private sphere crowding out, and debt ceilings, and international currency flows, and a lot of other complicated stuff?”

Well, again, I am not a professional economist; so sure, there are complexities that I have not covered, and probably a lot that I am not even aware of. But think of it this way: complexity in the economic/financial sphere is often used to disguise the underlying simplicity of the situation, and to distract people from a lot of nefarious shit that’s going down. Again, remember the 2008 GFC? It was initially described by analysts as a problem with the opaqueness and complexity of a new class of super-complicated investment tools, confusing derivatives with strange things like tranches and other mumbo-jumbo. But the underlying problem itself was very simple: American-style capitalism produces incredibly unequal results, and predatory corporations and investors needed to keep producing profits when regular people were already bled dry by declining wages, disappearing benefits, the soaring cost of living, precarious employment, etc. So the wealthy just concocted new ways to get more cash out of the dry rock, which ultimately proved unsustainable. Not a surprise.

So yes, the mechanisms of the 2008 crisis were complex, but the underlying cause — predatory and historically-unequal capitalism — was pretty simple. And we still have not corrected this simple situation, which largely explains the rise of Trumpism. Wages are still stagnant, the cost of living is still in the stratosphere, household debt and default are at historic levels, people have no retirement savings or net worth, and demographic transition is creating a funding crisis (in non-MMT terms) for intergenerational wealth transfer. Oh, and economic inequality continues to soar.

In these complex, dizzying, and infuriating times, the antidote is difficult but ultimately simple: MMT, UBI and BHBs. This new constellation would directly challenge the reign of the plutocrats, and it’s the best battleground on which that conflict needs to take place.