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MMT, Functional Finance and ELR session at 12th International Conference
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Bank-created
money,
Monetary
Sovereignty,
and the
Federal DeficitToward a New Paradigm in
the Government-Spending
DebateAshton S. Phillips, JD
This is what Fiscal Panic looks
like.
Debt-ceiling crises
Credit Downgrade
Simpson-Bowles Commission
Sequester (Budget Control Act of 2011)
Recovery Act expiring (including cuts to
Food Stamps)
Government Shutdown
New Budget Talks
THE NATIONAL COMMISSION
ON FISCAL RESPONSIBILITY AND
REFORM “America cannot be great if we go broke”
“We have a patriotic duty to keep the promise of America to give our children and grandchildren a better life.”
“Ever since the economic downturn, families across the country have huddled around kitchen tables, making tough choices about what they hold most dear and what they can learn to live without. They expect and deserve their leaders to do the same. The American people are counting on us to put politics aside, pull together not pull apart, and agree on a plan to live within our means and make America strong for the long haul.”
“the most significant threat to our national security is our debt.”
Proposes: capping revenue at 21% of GDP by 2022 (within 10 years) and capping spending at 21% of GDP (“eventually”)
http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf ;
People believe this and are
scared
61% worry a “great deal”
But, as a matter of Constitutional
law, Congress can “print” its way
out of debt. The Congress shall have power to lay and collect taxes,
duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;
To borrow money on the credit of the United States; To coin money, regulate the value thereof, and of foreign
coin, and fix the standard of weights and measures;
To make all laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers vested by this Constitution in the government of the United States, or in any department or officer thereof.
Julian v. Greenwald (1884)
“[C]ongress has the power to issue the
obligations of the United States in such form,
and to impress upon them such qualities as
currency for the purchase of merchandise
and the payment of debts, as accord with
the usage of sovereign governments.
The Legal Tender Cases, 110 U.S. 421, 447-
48, 4 S. Ct. 122, 129-30, 28 L. Ed. 204 (1884)
Congress has done this before
Running the Machine
Congress is printing money to
pay (some of) its bills now
Sacajawea Dollar
Fed doesn’t like this
But, but, but: inflation!
Maybe, but Inflation is not necessarily a
bad thing.
The current inflation rate (1.6%) is well
below targets
Moreover…
Inflation depends on how the created
money is spent
MV=QP (Quantity Theory of Money)
And, other entities are
creating money now
Federal Reserve
Private commercial banks
Congress has delegated its
sovereign power to print
money to the Federal Reserve 1913 – Federal Reserve Act
Section 16:“Federal Reserve notes, to be issued at the discretion of the Federal Reserve Board for the purpose of making advances to Federal Reserve Banks through the Federal Reserve Agents as hereinafter set forth and for no other purposes, are hereby authorized. The said notes shall be obligations of the United States and shall be receivable by all national and member banks and for all taxes, customs, and other public dues.”
FOMC
Courts won’t touch this (exercise “equitable discretion” to decline to hear case, even when Court finds standing and actual controversy)
Quantitative Easing
More than $3 trillion so far
$85 billion per month since December
2012 – December 2013
“The one certain outcome of QE is that
those with assets benefit relative to those
without,”
John Kay, Quantitative easing and the
curious case of the leaky bucket, The
Financial Times, July 9, 2013.
The Fed’s “expanding
balance sheet”
$0.00
$500,000.00
$1,000,000.00
$1,500,000.00
$2,000,000.00
$2,500,000.00
$3,000,000.00
$3,500,000.00
$4,000,000.00
$4,500,000.00
Total Assets
Why is Fed Allowed to print
money?
Originally: to prevent bank runs by functioning as lender of last resort
Now: “to maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
12 U.S.C. § 225a
Private banks also create
money with blessing of Federal
Reserve
Fractional-reserve banking
Current Reserve Rates
0% for banks with “net transaction
accounts” of less than $13.3 million,
3% for banks with up to $89 million, and
10% for banks with net transaction accounts
in excess of $89 million.
How much money are private
banks creating through this
process?
Private banks create over 80% of money
supply ($11.103 trillion out of $14.831
trillion)
Monetary Base($3.728 trillion)
M2 ($11.103 trillion)
By comparison, the Fiscal
Numbers are:
Federal Deficit: $1.086 trillion (fiscal year 2012)
Total receipts: $2.450 trillion
Total outlays: $3.537 trillion
Total 2012 expenditures on food and nutrition assistance programs (including SNAP and WIC): $ 0.106 trillion
www.omb.gov (historical tables)
So what?
Simpson-Bowles is wrong: America cannot “go broke”
We need a new paradigm that recognizes the relationship between fiscal and monetary policy.
Congress should evaluate the policy value and inflationary effect of all money creation as weighed against policy cost of status quo.
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