The Federal Government and the Perception of Running Out of Money: Debunking Common Myths

It's a common perception that the federal government is running out of money more quickly than in the past, necessitating an increase in borrowing. However, this notion is based on misconceptions about how money is created and circulated. In this article, we'll explore the truth behind this perception and clear up any misunderstandings regarding how the federal government manages its finances.

Factors Behind the Perception

One major factor contributing to the perception that the federal government is running out of money is the ongoing growth of the national debt. Coupled with higher bond yields, the government has to pay more in interest on its growing stock of debt. This can create the illusion of a money shortage, but it's important to understand the role of debt in the current economic system.

Another contributing factor is the use of continuing resolutions, which allow the government to spend beyond what was previously approved by Congress through the budget process. These resolutions address short-term funding needs but often lead to a sense of financial strain due to the complexity of the budgetary process.

Myth: The Federal Government Will Run Out of Money

A common myth surrounding the federal government is that it will eventually "run out of money." However, the reality is quite different. The federal government is the sole source of all money in the United States. Banks create credit, which is essentially a demand for present and future currency that the government backs. This credit creation is not limited by the actual stock of currency in circulation, as the government can and does create new currency as needed.

While the government has the ability to "trash" the value of its currency through excessive creation, it strives to maintain the purchasing power of the currency through various means, including taxation. Taxation is not simply an end in itself, but rather a mechanism for managing the money supply and ensuring that the currency has a stable value. This value is often determined by political considerations, such as the distribution of the tax burden across different sectors of society.

The Mid-20th Century and Beyond

In the mid-20th century, the U.S. economy was able to gradually eliminate much of its national debt owed to individuals and corporations. This was achieved through high tax rates on the wealthiest individuals, who had benefited most from the wartime economy. Additionally, selective controls on goods and capital helped manage the overall economic situation. As a result, the U.S. experienced significant growth in the standard of living for its population, with productivity gains often shared with employees.

However, the deregulation of finance in the 1980s changed this dynamic. Financial deregulation led to a decline in the proportionate rise in remuneration for workers relative to increases in productivity. This shift has resulted in a more unequal distribution of wealth, contributing to the current perception of a "money shortage."

Borrowing and Domestic Liabilities

When it comes to borrowing money to fund domestic deficits, the government does not create a true debt. Instead, this borrowing allows the finance and commercial sectors to act as intermediaries, drawing on government-issued currency to meet their needs. The government creates money out of nothing to pay its liabilities and necessities, ensuring that there is enough money in circulation through various channels.

If the government were to borrow from the banking system, it would need to ensure that there is enough consumer and corporate demand for government-issued currency. This is managed through taxation and other financial mechanisms to maintain the stability of the money supply. In essence, the government has the power to create its own money, making the notion of a true domestic debt somewhat misleading.

Managing International Financial Liabilities

The federal government also has international financial obligations, particularly in a globalized economy. When a country imports goods priced in a foreign currency, incurs charges for transporting goods, pays premiums on foreign insurance, or makes payments to foreign investors, it creates a liability in the foreign currency. This is managed through a combination of domestic currency creation and the use of foreign exchange markets to maintain the value of its currency.

For instance, if a country purchases goods or services from another country with a different currency, it must either pay in that currency or have its currency easily convertible into the required foreign currency. This is facilitated through international trade and financial relationships, where currencies are traded and managed to ensure smooth transactions.

A Fiat Money System

The world operates on a fiat money system, meaning that the only source of currency is the government. The government does not need to borrow from anyone to service its domestic economy. Any deficits in the domestic economy are not actual debts but rather a mechanism to pump money into the economy, which is then managed through various financial mechanisms.

Deficits are often used as an excuse to create a convenient safe haven for individual and corporate cash, and the government has the power to manage these financial liabilities through bond markets and other financial instruments. These bond markets help manage the financial liabilities of the government as it engages in international trade and other financial activities.

Conclusion

In conclusion, the perception that the federal government is running out of money is largely based on misconceptions about how money is created and managed. The government is the source of all money in the U.S., and it has the ability to create and manage its currency to meet its financial needs. The concept of a domestic debt is often misleading, and the government's international financial obligations are managed through a combination of domestic and international financial mechanisms.

Understanding the true nature of the federal government's financial management is crucial for anyone seeking to comprehend the complexities of modern economics.