The National Economy: A Brief Lesson

• Howard
• Arlington VA

When I took my first course in Money and Banking in the 1960’s, I realized the general public is never going to understand how the system works – not because it’s too complicated, but because it violates rules people think are essential to virtue. That all our money is, in fact, debt is over the top, despite the words “Federal Reserve Note” printed on every piece of paper money. It’s a promissory note from the Federal Reserve, created out of thin air, with no limit except a promise not to create too much. (I hate to mention this, lest Congress get the idea of a statutory money supply ceiling which right-wingers could then threaten not to raise.)

My professor kept repeating that the national budget is not analogous to a family budget, a business enterprise budget, a city budget, or a state budget. The national government has powers and responsibilities that are profoundly different. Nobody pays attention when things are rocking along, but when economic trouble arises, people suddenly want the national government to start behaving like a thrifty citizen, exactly the wrong thing to do.

As long as inflation is low and people are out of work, the government needs to start passing out paychecks to people who perform useful work that the private economy won’t underwrite. The government can pay off it’s own debt, if it has to.

But that seems malevolent, especially in the South, where that same government is still resented for abolishing Jim Crow fifty years ago.

(November 7, 2013, 9:44 PM)

That just points out that the federal government has the sovereign ability to create its own debt which can be repaid later at a smaller percentage of its original value, meanwhile stimulating the economy to grow at a multiple of its prior rate–an ability that only a sovereign state can exercise.  This is an ability that must be exercised during a recession, the worse the recession, the more urgent the exercise.