NVDAILY.COM | Opinion
Posted October 27, 2012 | 5 Comments
Reader Commentary: Myth drives the budget fuss
By Thornton Parker
The economy is often shown as a circular flow of goods and services moving in one direction from producers to consumers, and money to pay for them flowing in the opposite direction. ike a juggling act, the flow keeps running until something interferes. Families that save interfere by removing some of the money. They also remove money when they buy more things from other countries than the U.S. exports. The flow of goods and services slows down when money is removed unless some other party replaces it.
The details of how the country's money system works are complicated, but the basics are simple. Most of our money consists of bank deposits that are transferred electronically or by check. Behind most deposits are mortgages, credit card balances, and other types of loans. When things work well, banks create money as it is needed by lending to increase deposits and remove it when the loans are repaid. As the population grows, as people want to save, and as the country imports more than it exports, new money is needed to supplement the bank deposits. The government creates that new money by spending more than receives from taxes.
If you understand that paragraph, you've got it! You are way ahead of most Americans and nearly all our politicians.
The power of the money system is also easy to understand. Because the government creates money by spending more than it receives from taxes, it will always be able to pay its bills. Neither it nor any of its programs can ever be forced into bankruptcy. This means that there are no Social Security, Medicare, or Medicaid crises.
While there is widespread unemployment, there is no financial reason not to help those in need or spend to create jobs. It is negligent to put off upgrading school buildings, roads, bridges, power grids, and water and sewer systems until they fail. It is gross mismanagement to force state and local governments to fire thousands of public service employees - that could be avoided with federal revenue sharing. And it is a basic social failure to not educate our young and prepare them for life without burdening them with education debts.
There are limits: if the government creates too much new money, it can lead to inflation. But inflation is not a problem now, when millions of people are out of work or not earning adequate incomes because too little money is in circulation. If our leaders understood how the system works, they would see how easy it would be to prevent serious inflation with taxes.
None of the arguments against actions to improve the situation today are valid if they are based on the myth that because the government is like a family it can't afford to spend beyond its income. In reality, the government is just the opposite, or a mirror image of a family.
Thornton Parker is a resident of Harrisonburg and the author of "What If Boomers Can't Retire? How to Build Real Security, Not Phantom Wealth." Email him at email@example.com