The Mainstream Media Myths on Economics
Economics is a social science that is dependent on politicians in government, and how those governments have set up their economic systems. With hundreds of different governments and thousands of politicians running those governments, the sheer number of theories and ideas surrounding economics provides a general distaste for the laymen when it comes to trying to understand economics in depth. And because of how poorly most of these systems are run there is even further distaste. Just think of how bad you would dislike music if all the musicians were tone deaf? That is essentially how our economy is run.
When it comes to the media reporting on economic situations they have to do it at the level of the laymen so that people don’t change the channel or the radio station. I completely understand why the media would do this, as a former layman who decided to learn economics I know from experience that the language is downright difficult to understand. The key to understanding economics in any system is to understand the rules and responsibilities of its agencies (accounting, central banking, legislation ability, the properties of that currency, etc). The intent of this blog is to go over the United States economic system and expose many things that Americans take as truth that are actually myths and to do so in a way where everyone could easily understand.
Before 1971 our government was backed by gold and/or other precious metals, with the exception of a period during the Civil War and Great Depression. Our mainstream media, partly at the fault of our politicians’ lack of understanding economics, report many myths about our government and economics that are a holdover from the Gold Standard era that we left behind in 1971 (in the econ world this is referred to as Bretton Woods). This gold standard way of thinking is a destructive myth that permeates our media on a daily basis, regarding our economy. It prevents politicians and the public from understanding the most basic level of how our currency should be managed, and how economic strategies should be implemented.
Is it the medias fault for reporting these myths over and over again? I would argue that it isn’t, because these myths are an institutional part of our education system. What are these destructive myths that are holdovers from gold standard thinking? There are many of them, but they all generally stem from a few basic myths: that taxes are necessary to fund the government, that the government should operate like a household, and that we owe China (and other countries) money.
Before I get into discussing how these are myths, there needs to be a quick little lesson in history. In August of 1971, Richard Nixon severed us, and most of the world, from the gold standard. At that time we were experiencing a run on gold exchanges and rampant speculation, which made our economy very susceptible to market conditions we couldn’t control. After the Nixon legislation to remove our backing from gold, our currency was no longer backed by a rare commodity and instead became backed by the faith that the American economy would produce things of value so people would demand USD to purchase those things (this characterizes a fiat currency and what gives it part of its value).
We now have more freedom, liberty and flexibility in how to manage our currency and economy. The problem that arose after this shift in currency backing was that the people running our system seemed oblivious to it. The politicians stuck with gold standard thinking and didn’t change to fiat thinking in the planning of the economy, and as our politicians have continued with gold standard thinking we have suffered the consequences.
One of the more destructive gold standard remnant myths is that taxation is necessary to fund the government, it definitely is not. Beardsly Ruml, a former Chairman of the Federal Reserve bank of New York wrote this in 1946:
“The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government. Two changes of the greatest consequence have occurred in the last twenty-five years which have substantially altered the position of the national state with respect to the financing of its current requirements.
The first of these changes is the gaining of vast new experience in the management of central banks.
The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold.”
In non-economic terms what this means is that our currency is solely issued by the government and thus makes them the issuer of its own revenue. That makes the collection of taxes, for revenue, an obsolete concept. The main features of tax collection is now to prevent inflation or redistribute currency, but I will get into this later. In order for you to pay any taxes at all, the federal government had to create that money in the first place!
The collection of taxes to obtain revenue is, in my opinion, the most harmful myth that is carried out in our media and political world today. If we could get past this myth, the arguments would change. It wouldn’t be about how to balance budgets or how to collect enough revenue. The arguments would be how to alter the tax system to keep possible inflation in check and how to redistribute the money to areas of the economy that need it most. In order to understand fiat money or monetarily sovereign nations (nations that have the ability to print their own currency), you must now acknowledge that taxation for revenue is obsolete. This isn’t even debatable.
After acknowledging that governments don’t need taxes for revenue, then another mainstream myth falters, and that is that governments should have a budget like a household. A household depends on income to balance its budgets, pay debts and to buy goods and services that it needs. A government like the US has no income needs, there for no need to balance its budget or to depend on revenue, because it is the sole issuer of our currency. But don’t just take my word for it, Randall Wray a professor of economics at the University of Missouri Kansas City reiterates this point:
“The federal government is the issuer of our currency. Its IOUs are always accepted in payment. Government actually spends by crediting bank deposits (and credits the reserves of those banks); if you don’t want a bank deposit, government will give you cash; if you don’t want cash it will give you a treasury bond. People will work, sell, panhandle, lie, cheat, steal, and even kill to obtain the government’s dollars. I wish my IOUs were so desirable. I don’t know any household that is able to spend by crediting bank deposits and reserves, or by issuing currency. OK, some counterfeiters try, but they go to jail.”
As does the very first Nobel Prize winner Paul Samuelson:
“I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say ‘uh, oh what you have done’ and James Buchanan argues in those terms. I have to say that I see merit in that view.”
The government isn’t required to earn its income, its only job is to print the currency that you and I need to earn. Think of how silly it would be to be dependent on collecting something when you are the only one who has the ability to create it! So the idea that the government can’t spend more than what it takes in is ridiculous, it has the ability to spend as much as it wants, and whenever it wants (no I am not suggesting this, just pointing out the ability of government). In order for the private sector to have the ability to buy things, to hire employees, and to grow, the government has to spend money into existence. The government deficit that we are taught to fear is simply a measurement of assets the government has added to our economy.
Now some will say “okay great, our deficit is primarily owed to us, but what about China?” Our debt to China is also not really a debt to them, but a savings account with a maturity date. China takes the dollars that we give them to purchase their products and attempts to buy things from us in return. But if they can’t purchase enough items, then it is in their best interest to take those dollars and invest them so they earn interest.
The debt we owe to other countries is just a result of a trade imbalance and as a result those countries with an export surplus decide to buy our bonds so that they earn interest. Otherwise all that money we give them for their stuff just sits there. If China didn’t buy our bonds then they would hold our currency as if they were putting it under their mattress for later use.
China isn’t trying to buy us for some evil plot to take over our country, they are simply trying to get some interest payments from all of the USD they hold, that is it! In the past we had these fears about Japan, but now that China is our largest trade partner, the fear has been shifted to them. That fear shouldn’t exist, in time China’s middle class will get wealthier (through higher wages) and eventually their goods will be too expensive for us to buy.
There is also the fear that China will one day decide to collect on the debt we owe them. This would be a bad move for China. The money we own them is interest on treasury bonds, and calling in that debt would cancel the interest we owe them and China would lose out on large amounts of money. If they decided to do this they would also be in the same position they were before they purchased the treasury bonds, they would have a mattress full of US currency (so to speak) and nowhere to put it.
I know a lot of this information comes as shocking and may seem on the verge of nutty (I have been called this numerous times), but it is absolutely true. This is how things are, not how I want them to be. There is no ideology behind this or any suggestion of policy, just an acknowledgment of accounting principles and currency management and how things work. And anything that you see with a hyperlink is there for the purpose of further education and understanding of U.S. economics.