Here's what the fiscal cliff is about.
In short, the fiscal cliff is an idea developed last year
(2011), when Congress couldn't agree on spending and tax measures as part of
talks about raising the debt ceiling.
The debt ceiling is basically the borrowing limit on the nation's credit card. If the debt ceiling wasn't raised, the government couldn't spend. A compromise was reached that allowed the federal government to keep running, without the steep budget cuts. That deal expires in January
The fundamental issue is whether to allow spending without increases in taxes. Many economists (Galbraith, Mosler, Wray, Kelton, Keen, Mitchell, Hudson) are convinced that this is issue based on faulty premises, and therefore, economic policies based on false premises exacerbate an already dysfunctional economic environment.
This discussion is based on historical events leading to the
To begin, policy makers who support tax increases as a means to raise revenue to spend and pay our bills do so based on the mistaken belief that tax revenue actually funds Federal Government spending. Nothing could be further from the truth in our fiat currency system.
Historically, revenue needed to spend was an operational fact when we were on the gold standard. If Congress appropriated more than tax or borrowing revenue would cover the value of the dollar was negatively affected and holders of dollars would demand gold to preserve the value of their holdings. This rule was designed to limit deficit spending when the world was on a fixed exchange rate.
This paradigm shift in monetary policy brought on a similar shift in how money was managed to fund obligations in nations sovereign in their own currency. None of these nations would ever need to face the issue of insolvency in their own currency. They would only need to manage inflation. However, American legislators failed to understand that this new monetary system rendered self imposed legislative constraints moot. No longer relevant would be legislation mandating a debt ceiling and prohibitions on Treasury overdraft authority or Congressional concerns about revenue equaling expenditures...balancing the Federal Budget.
Continuing these legislated constraints has lead to economic dysfunction year after year simply because Congress does not trust itself to spend responsibly. Congress could if it understood how modern monetary systems actually function repeal these laws. Since then there are no relevant economic constraints on the Federal Government's spending that can't be managed with appropriate use of tax and borrowing policy tools. Yet, not until President Obama entered the Oval Office has there been a serious Congressional threat to oppose increases in the debt ceiling.
Not understanding the role of fiat currency management it is no wonder that elected and unelected participants in the debate on the Fiscal Cliff also fail to understand that taxation and borrowing do not per se generate revenue to fund Federal Government expenditures.
It is indisputable that a nation sovereign in its own
currency can issue as much of it as it wants to pay any obligation denominated
in its own currency. It does not need to
The Federal Government levies taxes to manage inflation, distort income distribution and market prices, and forces acceptance of the currency. It does not, levy taxes to raise revenue per se to spend.
All statement from any source that tells you "tax payer funded this or that" simply displays the near universal misunderstanding in this nation of how our monetary system's tax policy functions post gold standard.
Lastly, the fraud of "The Balanced Budget." From the President on down society is bombarded with the silly mantra,
"We must balance the Federal Budget just like businesses and households must
balance their budgets or face the financial consequences of bankruptcy."
Again, this was likely under a gold standard, not so under a sovereign fiat currency system with flexible exchange rates. Why? Because until the government spends its fiat currency into the economy there is no money in the economy. And there is no legal alternative...gold...which could be used as legal tender. Moreover, all of the currency spent into our economy is interest bearing...it is debt money. When the government taxes it withdraws that debt money from circulation, it liquidates its own liabilities. It doesn't use those liabilities to balance anything. How could it? It would be issuing more debt money if it did.
The states, businesses, households, and individuals do not issue their own currency. They are currency users and must have income/revenue to balance their respective budgets or they will indeed be faced with the issue of bankruptcy/insolvency. There are currency issuers and currency users, only the latter must balance their budgets.
Because our Federal decision makers have this all wrong society is over burdened with the maldistribution of health care, housing, education, and transportation resources. Clearly the Federal government can't spend at will. Congress appropriates all funding. Congress is responsible for either providing enough or too little funding to meet the needs of Federal government responsibilities defined by laws Congress has enacted. If Congress fails to appropriate sufficient funding then it and it alone is responsible for the deficit. The President does not have Constitutional authority to authorize spending.
In sum, our elected and unelected decision makers need to
enter the 21st century of modern money management and disabuse themselves of
gold standard rubrics which today as the basis for fiscal policy decisions
severely exacerbates every aspect of economic life in
Review the following questions and common sense responses and you will be convinced that the President and all of the Congressional, Media Experts, Pundits, and Gurus don't have the first clue about how this government can avoid the Fiscal Cliff without inflicting unnecessary financial hardship on hundreds of millions of Americans and tens of thousands of businesses.
1. Is the U.S. dollar backed by or convertible into gold or silver?
No. That system of gold backed currency was abandoned by Nixon in 1971.
a) There are remnants in legislation which force the fiscal cliff issue. They are
the debt ceiling, and the prohibition against Treasury having overdraft
authority. These legislative relics of the gold standard should have been
repealed in 1971.
b) Because the Federal Government is the sole issuer of fiat currency there
are no operational constraints, only political, on its ability to buy or pay
for anything for sale in dollars.
2. What, then, backs our U.S. dollar and where does our currency, paper and coin,
come from before either enters the economy?
Our currency is backed by the "Good Faith
and Credit of the
of all currency is created by fiat, from thin air, by computer keystrokes. The
remainder, bills and coins are produced by the U.S. Mint.
4. What does the Federal Government use to pay for goods and services?
It uses the 99.7% of the currency it creates by fiat. It is the sole issuer and can
pay any obligation denominated in dollars. As the sole issuer the Federal
Government can never go broke or be insolvent in its own currency nor can any of
its Federally Funded
Programs for which there exists a Congressional Appropriation.
5. Why doesn't the Federal Government use tax and borrowing revenue to pay for
goods and services instead of fiat currency?
As the sole issuer of the currency the Federal Government never needs revenue
per se to spend. Why would it need revenue/income when it is the only entity
legally authorized to issue the currency?
6. Why then are we taxed and why does the federal government borrow?
We are taxed to make us accept the otherwise worthless paper upon which we
depend as a medium of exchange, the dollar. We have a tax driven currency.
That means the government levies a tax and will only accept its currency, the
dollar, in payment of that tax. Therefore, all other economic units must "get"
revenue/income to pay the
Government also uses its power to tax to manage inflation, distort income
distribution, market prices, and to subsidize various segments of the population
including the business sector.
The government borrows to also manage inflation using the Federal Reserve's
authority to set the Federal Funds rate. Like taxation borrowing withdraws money
from the economy to reduce spending.
7. So, if taxing and borrowing doesn't raise revenue for the government to spend
and the government can issue all the fiat currency it needs to pay its bills, why this
debate over the deficit, debt ceiling, and cutting discretionary programs?
The debate is a fraud. The Congress has the Constitutional authority to
appropriate funds in any
amount needed to meet all
in dollars. Because it fails to do so is why the Federal Government runs a budget
deficit. There is no operational reason for the deficit. The deficit exists because of
politically self imposed constraints such as the debt ceiling.
Those involved in this charade
claim we can't "afford" to appropriate funds for all of this
society's needs. All of them are lying. Dr. Stephanie Kelton writes,
"....when I look at the data I see around 16 per cent of available labor
idle in the
Given the idle labor and low capacity utilization rates the
government in the
Dr. Kelton continues, "Spending equals income. Someone has to spend for incomes to exist. For incomes to grow there has to be growth in spending. There are three sources of spending growth in a macro economy -- the external sector (if net exports are positive); the private domestic sector; and the government sector (if the budget is in deficit).
That is indisputable. Economic growth is defined in terms of production and production only occurs if there are goods and services being purchased. Firms do not produce to hold inventory. Firms may invest in response to their guesses about future sales. These guesses will be heavily influenced by current consumer actions.
So when you get commentators and high-level monetary officials arguing that growth comes from not spending you have to ask why anyone would listen to their views and why they are paid to express them."
8. But if the government just issues currency without constraints like the debt ceiling
won't the economy suffer high rates of inflation?
Yes, it could but it is not likely over the medium term...5-10 years...because we
have what economists call a huge output gap with 20-30 million Americans
unemployed, under employed, or no longer looking for work. These people are no
longer your average consumers and, therefore, will not be the vanguard spending
wildly, inflating 7the economy with too much money chasing too few goods. They
need jobs, incomes and then they spend but it won't be all at once. And to get
them there, the government should deficit spend on Employer of Last Resort
Programs until unemployment is reduced to 4% or 5%.
9. So how do we avoid the fiscal cliff in January 2013?
Americans need to rally around the fact that Congress is the villain not the President. Congress is the only Constitutional body with the authority to appropriate. It all boils down to that. What Americans need to tell Congress is that we are no longer bound by gold standard principles defining "affordability" and that it can and should appropriate the "means" for this nation to achieve economic growth. That Congress is the only constraint to doing this. It's resistance is purely political with not a shred of economic evidence to support its ideological austerity argument.