Understanding MMT: Why deficits?

Why has our nation run deficits nearly every year?

Why has the “debt” gotten so big?

If you’ve never heard of MMT or Modern Monetary Theory than you probably still believe the U.S. governement has a “debt” that must be paid back.  But that is an economic myth.

I don’t believe in conspiracy theories, so I don’t think some old rich white guys are in secret societies and laughing everytime they hear the media, a politician, or your tea party cousin scream “we’re running out of money, the ‘debt’ is going to kill us”.  Instead I believe even the old rich white men in their secret societies also believe in the economic myth of government “debt”.

To illustrate why “debt” isn’t actually debt and why deficits are needed, let’s start with a small but growing society:

Let’s start with a small society of only 10 people.  They decide barter and trade is too hard, and want to create a common currency that they all agree on so they can more easily exchange their goods and services.  These 10 people decide $1,000 is all they needed to trade goods and services back and forth.  They form a government and issue notes and they call it “debt”.  Why – that’s a story for another post, but this money is evenly distributed because in our fictional society everyone is pretty even in terms of their economic value to their little society.

That works great for a while.  But over time several things happen.  1) the population grows.  2) the productivity of the population grows.  3) some of the most productive and/or best savers start storing their money – saving for their less productive years.   With only $1,000 in circulation, this society might end up with 1,000 people and instead of $100 per person they all average only $1 per person.  An extreme example is one person earning all of the dollars and saving them because they have a self sufficient farm and don’t need anyone else.  In which case there is ZERO money is in circulation.

All of a sudden a productive society used to dealing in dollars comes to a halt.  What is a government to do?  Tax it out and redistribute?  That’s one idea.  Or simply create more money, and spend it into the system.  Or do combination of both.

Either way, this simplistic government and society answers the question of how we have so much “debt” and where it comes from.  First, it isn’t debt.  It is the government supplying money – money they simply create or print – to the economy and its citizens.  And the larger and more productive the society – like the U.S., with a lot of people (and businesses) saving money, the government MUST continue to create money, and spend it into the system, in order to accommodate an ever-growing need for its currency.

Next question – when does that “debt” need to be paid off?  Nope, that’s not the next question.  The next question is why on earth do we call government spending money into the system “debt”?  If the population, and the productivity of the economy, and the savings by people and businesses keeps growing – how could it ever be paid back?  The answer is that it is NOT debt, and it NEVER has to be paid back.

The myth of debt has many beginnings, but what keeps the myth going is simply calling it “debt” when it isn’t debt at all.  The fear mongering, the “debt ceiling”, the “deficit commission” and the Tea Party can all just go away.  There is no there, there.

The objection to the above truth is that printing of money doesn’t make you rich, and so the government can’t just print money or else it would cause another kind of collapse – a hyperinflation collapse.  But those fear monger arguments forget about the underlying productivity, population growth, and desire for savings of the population.

So when more money is printed, is everyone richer?  Yes, IF they produced more and/or used it for productive purposes.  By producing first, they earned that money.  And the government simply printed it out of thin air and gave it via grants, tax cuts or spending programs.  If the government saw an economy in recession with untapped productivity – which is exactly what high unemployment is, the government could spend first in proportion to how much productivity it thought it could find and spur on.

So the government will almost always have to run a deficit, and will always grow its debt, until or unless there is too much money in circulation.  And how that might happen is the opposite of the things that caused the need for more money.  Maybe people die off in war or in great plagues?  Maybe productivity drops, crops fail, and good dry up.  If the government keeps printing/spending money into the system there would be too much money chasing too few goods.  Money locked up in savings might hit the economy at the same time, and prices keep rising.  But it is 2011 as I write this piece, and we have too little money in circulation.  There are a lot of reasons for that – for one, the richest 1% have locked up a vast proportion of the wealth and it isn’t making it into circulation.  Another we’ve lost money via debt destruction and deleveraging.  And so the solution to these problems is to either tax the money out of where it is hiding and redistribute it, or for the government to print and spend more into the economy – and into the hands of productive people and uses where the money will actually get circulated and not locked up in the vaults of the richest 1%.

Either way, the next time you hear we have a debt or a deficit problem, you need to not fall into the intellectual trap.  With so much focus spent on an imaginery problem, we can’t fix the real problems with realistic solutions.

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