Yves here. Although J.D. Alt is correct to criticize Republicans for passing a tax “reform” bill that shamelessly enriches the already wealthy, it’s disingenuous for him to depict the balanced budget/deficit hawk obsession as a Republican scheme foisted on Democrats. The Clinton Administration was in thrall to the bond gods, and fetishized not only balancing the Federal budget but even saw paying down the Federal debt as desirable, when Modern Monetary Theory stresses that what should drive the decision as to how much deficit spending a currency issuer should engage in depends on how far the economy is from full employment and how much other resource slack it has.
As a reminder, Randy Wray discussed
For most people, the greatest challenge to near-and-dear convictions is MMT’s claim that a sovereign government’s finances are nothing like those of households and firms. While we hear all the time the statement that “if I ran my household budget the way that the Federal Government runs its budget, I’d go broke”, followed by the claim “therefore, we need to get the government deficit under control”, MMT argues this is a false analogy. A sovereign, currency-issuing government is NOTHING like a currency-using household or firm. The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency.
Indeed, if government spends currency into existence, it clearly does not need tax revenue before it can spend. Further, if taxpayers pay their taxes using currency, then government must first spend before taxes can be paid. Again, all of this was obvious two hundred years ago when kings literally stamped coins in order to spend, and then received their own coins in tax payment.
Another shocking truth is that a sovereign government does not need to “borrow” its own currency in order to spend. Indeed, it cannot borrow currency that it has not already spent! This is why MMT sees the sale of government bonds as something quite different from borrowing.
When government sells bonds, banks buy them by offering reserves they hold at the central bank. The central bank debits the buying bank’s reserve deposits and credits the bank’s account with treasury securities. Rather than seeing this as borrowing by treasury, it is more akin to shifting deposits out of a checking account and into a saving account in order to earn more interest. And, indeed, treasury securities really are nothing more than a saving account at the Fed that pay more interest than do reserve deposits (bank “checking accounts”) at the Fed.
MMT recognizes that bond sales by sovereign government are really part of monetary policy operations. While this gets a bit technical, the operational purpose of such bond sales is to help the central bank hit its overnight interest rate target (called the fed funds rate in the US). Sales of treasury bonds reduce bank reserves and are used to remove excess reserves that would place downward pressure on overnight rates. Purchases of bonds (called an open market purchase) by the Fed add reserves to the banking system, prevent overnight rates from rising. Hence, the Fed and Treasury cooperate using bond sales/bond purchases to enable the Fed to keep the fed funds rate on target.
You don’t need to understand all of that to get the main point: sovereign governments don’t need to borrow their own currency in order to spend! They offer interest-paying treasury securities as an instrument on which banks, firms, households, and foreigners can earn interest. This is a policy choice, not a necessity. Government never needs to sell bonds before spending, and indeed cannot sell bonds unless it has first provided the currency and reserves that banks need to buy the bonds.
By J. D. Alt, author of The Architect Who Couldn’t Sing, available at or iBooks. Originally published at
The Republican tax reform will be criticized on many fronts. It is a battle of criticisms that will likely become as chaotic, ill-informed, and counter-productive as the tax reform process itself has been. This is because it will surely ignore the only strategic battle-front that ultimately matters: the basic premise of what taxes are for and why they’re necessary.
Before the Republican tax reformers even said a word, their arguments and proposals were packaged in the tired and tiresome macro-economic assumptions that misguidingly underpin our entire political discourse. Namely: (a) The federal government collects taxes in order to pay for federal spending; and (b) it cannot collect enough taxes to meet the spending needs of the budget it annually produces. To solve this conundrum some combination of reducing the budget and increasing taxes is therefore required. The magic Republican formula to simultaneously accomplish both of these goals is to dramatically reduce taxes on the wealthiest class of corporate operatives—which is made palatable to the voting masses by attaching to the corporate coat-tails some colorful snippets of tax-relief for lower and middle-class working families.
These mental gymnastics result in a strange form of double-speak: From one corner of the Republican mouth comes the logic that allowing the wealthy corporate operatives to keep more of their dollars will result in BUSINESS EXPANSION—creating new working-class jobs with taxable wages that will subsequently increase federal tax collections. Out of the other corner of the mouth comes the logic that because the necessary tax reductions will increase the budget deficit, it can only be fiscally responsible to subsequently reduce the budget itself which, alas, will require cuts to the nation’s retirement, food, and medical safety nets (since everything else in the budget is essential for national security, public safety, and the profitable functioning of the corporate economy.)
If these hyperbolic, self-enriching, and mean-spirited pronouncements cause you to want to rush out with your musket to one of the street barricades now manned by the Republican guard—stop! These are feigned battle-fronts where ultimately you cannot win for the simple reason that you will have bought into the false premise that underpins the whole battle scene the Republicans have laid out. (This is what Barack Obama proved when he agreed to parley over a “grand bargain” to cut the federal budget deficit.) This smoke-screen front is where the corporate operatives and their Republican guards want you to come to fight. Where they don’t want to do battle is on the field of macro-economic reality where their arguments cannot withstand the simplest of truths and facts. That’s the battlefield you want to rush to. But you don’t need a musket (hopefully). What you need to arm yourself with is just a few of those simple truths and facts. Here’s a start:
- The federal government issues and spends fiat-dollars first―then it collects some of those dollars back This is like Time: it can only go in one direction. Or football: a wide receiver cannot catch a pass until after the quarter back throws the ball. Republican tax reformers want you to believe the pass is caught first, and then it’s handed back to the quarterback to throw!
- The federal government has to collect tax dollars for two simple reasons:
- First a U.S. sovereign fiat-dollar (what the federal government issues and spends as “money”) is, in fact, a tax credit: its purpose is to make available to citizens the one and only thing they can use to pay their taxes It is called a “Federal Reserve Note.” It is called that because it is, legally, a “promissory note”―and what it “promises” is that the U.S. government will accept it back as a tax payment. That’s the only promise a “Federal Reserve Note” makes.
- For the fiat-money system to work, the federal government has to continuously drain dollars out of the economy because new fiat-dollars are continuously being created and spent into the economy. If dollars were not consistently drained out in taxes, we’d soon be swamped in so much money the price of everything would begin to spiral out of control.
- If the federal government collects back fewer dollars than it has issued and spent, we call that a “deficit” because it appears to our everyday thinking that—like an undisciplined household—the government has spent more than it earned. This seems reasonable until you confront the fact that the sovereign government doesn’t “earn” Federal Reserve Notes, it “issues” them. Each Note is the government’s promise to accept the Note back as a tax payment. When the tax payment is made, the promise is fulfilled and the Federal Reserve (promissory) Note is cancelled. The Note is not something the government has “earned.” When it needs to spend again, it simply issues another Federal Reserve Note.
- Tax-paying citizens want the federal government to collect back fewer Federal Reserve Notes than it has issued and spent! If it collects back more of the Notes than it has spent, we—the citizens—will have to dip into our savings (or even borrow) Federal Reserve Notes in order to pay our taxes.
- The currency-issuing sovereign government doesn’t need our tax dollars to buy public goods and services for the simple reason that it has already bought them—which is why we, the citizens, have the Federal Reserve Notes in the first place to pay our taxes with. The federal government buys public goods and services first, then it collects back some of the Notes it paid to citizens to provide those goods and services.
These basic macro-economic facts ought to be defining the real questions in our tax-reform debate: What are the collective goods and services American families and American commerce are most in need of? How many Federal Reserve Notes will the sovereign government need to issue to pay American citizens and businesses to create and provide those collective goods and services? Given that level of federal spending, how many Federal Reserve Notes will need to be drained to maintain price stability? What is the fairest, most effective way to drain those Federal Reserve Notes out of the system? Where do excess Notes—the ones that aren’t being used to , clothe, and house families, that aren’t being used to invest in productive and useful products and services, that are being used instead to simply make bets in a speculative gambling casino—where do those excess Federal Reserve Notes tend to accumulate? These are the questions, I think, that should be establishing the real battleground of America’s tax reform debate.