Sunday, February 3, 2013

Fiat Currency in (very) brief

[Vox ‏@deniseromano

[#TeaParty didn't protest about taxes when white POTUS put two illegal wars on a credit card & [blew the Clinton surplus #tcot #GOP #ccot

Taking a great leap into space from this Tweet. Please note: This in no way is intended to suport Bush or denigrate Clinton. I suspect that neither realized the implications of what they were doing.

First, two (at least) illegal wars. Yes, so we move on.

Next, on August 15, 1971, President Nixon ended our currencies convertibility to gold. One of the few things I applaud him for. As of that date we have operated with a fiat currency. (Not the car.) I need to skip detail here but a fiat currency is given value because it is the only way to pay the federal taxes that the federal government imposes.

So taxes give the currency value. They also provide an efficient means of draining excess currency (demand) out of the economy. The government in  a fiat economy is free to print all the money it needs. In fact the government can never, never, never go broke. It's impossible. So the government can put money into the economy pool we play in and, if there is too much (inflation), drain some out.

And that's it for taxes. Taxes do not pay for anything. This is like learning that Santa Claus doesn't exist but it's true. The government can print all the money it needs. If it prints too much and inflation shows up, it drains the excess with taxes. That's all; show is over; nothing more to see here.

Which means that the government must, must run a deficit. If it didn't there would be no money to tax. The deficit is the money we get paid and exchange for goods and services. No deficit, no economy; it's that simple.

How to tell if there is a danger of inflation? Is there unemployment? Then the demand for goods and services is obviously not at a maximum. Is our production capacity not at its maxiumum? Then the supply is obviously not at a maximum. If either of these is not at its maximum then the last thing we want is a budget surpluses.

I know that everyone praised Clinton for his surplus. This would have been reasonable if not especially good while we were on the gold standard. However, the surplus meant that the public were going into debt and that proved to be un-sustainable.

And all that borrowing? What are we "borrowing"? It has to be money we have already printed and spent. You cannot buy a US bond with anything but US currency. And the payment? A bond holder can only expect US currency in payment. And who has the monopoly for printing said currency? I rest my case.

I’m sorry that this is, at once, too long and too short. Ask questions and I will try to answer; I will expand on this theme here from time to time.

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