This wonderful little book explains why sovereign governments can never go bankrupt. Sure, they can get in trouble by “printing” too much or too little money, but “print” they can. The US Federal Reserve, for example, just changes the numbers in “reserve” accounts (= checking) and “security” accounts (= savings) to adjust the amount in circulation (reserve accounts) versus held as assets (securities = Treasury bonds, bills, notes, etc).
The Fed creates new money by buying securities, which means increasing the reserve accounts of the sellers, balanced by corresponding increases in the Fed security accounts. When the government sells a Treasury bond, with the money coming from the Fed, then the government has new money to pay its bills. To pay off this bond, the government can just sell new bonds.
This money machine could be used to finance full employment, Social Security, Medicare for All, free college education, basic income, etc. Taxes do not “pay” for these things. Rather they serve to make sure that government spending does not exceed economic capacity (by raising taxes to reduce private spending) or that the economy does not slump into a recession (by lowering taxes to increase private spending).
Taxes may also serve as “sin taxes” to discourage certain activities, or they can be decreased (tax breaks, deductions, or credits) to encourage other activities. “Fiscal policy” can achieve many of the same effects by selectively increasing or decreasing government spending. To simplify all this, Mosler describes a household where the parents print “money” to pay their children to do chores, which the children use to buy goodies from their parents, except that a portion must be paid back periodically as taxes.
This analogy makes government “tax and spend” policy very intuitive, but I longed for a chapter where this intuition was connected to the technical details of how the Fed actually works, so that readers would know how to interpret the business pages and financial press. The book by Randall Wray is much better here (“Modern Money Theory”, 2015) but at the cost of more jargon.
Another point the Mosler glosses over is the political problem of actually creating and enforcing financially sound tax and fiscal policies. A good way to do this would be to establish an independent financial authority, preferably international in nature, to prescribe both target budget deficits and limits on these, according to the state of the economy. This authority would also assist the government with the design of tax and spend policies that would constitute automatic stabilizers to head off boom and bust cycles.
This concept is developed in a book by Mary Mellor (“Debt or Democracy”, 2016). She also raises the issue if private entities should be allowed to create money at all, which now happens when they make loans or any other leveraged financial instrument. That is, they would need explicit and limited lines of credit from the Fed, subject to direct governmental regulation. For example, government policy might limit credit for speculation, corporate takeovers, or luxuries.
A point where Mosler comes up short is on trade. He is correct that when a country runs a trade deficit (more imports than exports), then it is getting a free ride. So who could object? Apparently he has not considered the “curse of wealth”. That is, easy money won’t last forever. Meanwhile it spoils a nation, making its economy unsustainable and weak in the long run. Think about the Spanish empire gorging on gold and silver from South America, eventually losing out to the British empire, built on coal and industry. Or in today’s world many “petro states” will lose ground as their accessible fossil fuels run low. This includes the US, which also has the freebie of its dollar being in demand as the international reserve currency.
Meanwhile, it is often the elites which reap the most benefits from trade, not the workers, who have certainly suffered in the US despite its trade deficit. And China is deriving enormous benefit from its trade surplus, which it is using to build its industrial base and market share. This is much like Amazon running a huge deficit for many years (thanks to Wall Street) in order to dominate many markets, to eventually return huge profits.
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