DIAGRAMS & DOLLARS

Modern Money
Illustrated

By  J.D. ALT

Text & Graphic
Copyrights © 2014 J.D. ALT

All Rights Reserved

What’s this eBOOK about?

Many economists and budget theorists are now debating the
realities and implications of a new understanding about MONEY. Modern Money
Theory (or MMT) is a term that pops up more and more in mainstream discussions
about our current economic malaise and National Budget. On the one hand, the
new understanding seems to hold out great possibilities, but on the other it
seems highly improbable, if not impossible. There is much disagreement even
among the economists themselves —and for those of us who are not economists,
the topic seems overwhelmingly complicated.

This small eBOOK is an attempt to illustrate the basics of
this debate for the “non-economist”. My hope is that in making the basic
concepts more visible, the topic—and its remarkable implications for our
National Budgeting process and collective well-being—will become more widely
discussed.

The illustrations and explanation were first created for New
Economic Perspectives, a website and blog at the University of Missouri KC
School of Economics. Under the leadership of Dr. Stephanie Kelton and L.
Randall Wray, NEP has moved to the forefront of a world-wide effort to inform
political leaders, economic thinkers, and engaged citizens about the realities
and possibilities of the “modern” fiat currencies we use today. Readers
interested in going beyond the basic concepts illustrated in this eBOOK would
do well to go to the NEP website: www.neweconomicperspectives.org

Table of Contents

What's this eBOOK About?

1. The
“unsolvable” Riddle of our National Budget

2.
Diagrammatic Dilemmas

3. Diagram
Reality Check

4.
TREASURY BONDS—Are they really what we think they are?

5.
QUESTION: Is the FG really a “Pot”?

6. The most
Amazing Coincidence

7. The
Right Words

8. Let’s
call it: “Net Spending Achievement”

9. Our NATIONAL SAVINGS CLOCK

10. Why we
should LOVE our new diagram

About the Author

1. The “unsolvable” Riddle of our National Budget

Being an architect, I’m fascinated by diagrams visualizing
things which otherwise are invisible. In designing a building we usually begin
with diagrams to explore and understand the functional and spatial
relationships—the flows and interactions—the architecture needs to accommodate.
Getting the diagrams right is important—if they’re wrong or incomplete, the
building we design could turn out to be a dysfunctional disappointment for its
owners and users.

With this in mind, it occurs to me the reason our current Congressional
leaders are having such a difficult time with our National Budgeting process is
because they’re trying to design a “building” based on an incorrect diagram. No
matter how they add up the numbers, they seem incapable of devising a budget
that builds America forward in a positive way. In fact, their budgetary efforts
more closely resemble the actions of a wrecking crew than a construction team!

Here is my best effort to construct the diagram it appears
the Congressional leaders are presently trying to use.  I’m putting it together,
as best I can, from the story they tell us, every day, about the fiscal dilemmas
they are struggling to resolve. Please do not get too enamored with this
diagram because what I’m going to show you is why it is WRONG—and why, being
wrong, it makes it impossible for our Congressional leaders to build a
constructive National Budget.

The main features of the diagram are two “pots” containing
Dollars. One pot is labeled the Private Sector (PS). This is basically
the national economy—businesses and corporations, families and foundations,
state and local governments, etc. All the transactions that occur in the
Private Sector (PS) pot add up to what is called the GDP (gross domestic
product). The second “pot” is the Federal Government (FG), and the
Dollars contained in this pot are SPENT to pay for public goods –weather
forecasting, bridge repairs, Medicare services, etc.—and to make the “transfer”
payments like social security, unemployment aid and food stamps that many
Americans depend on to one degree or another.

The diagram shows that the Dollars in the Federal Government
(FG) pot are obtained via two spigots in the Private Sector (PS)
pot: one spigot is TAXES, the other is the “BORROWING” spigot through which the
Federal Government (FG) obtains Dollars by “selling” Treasury Bonds to
the Private Sector.

So what could possibly be wrong with this diagram? It seems
to reflect the everyday reality we read about all the time in our newspapers,
right? Before answering that question, let’s look at the National Budgeting
dilemmas it poses.

2. Diagrammatic Dilemmas

While the diagram seems straightforward and obvious, there
are aspects of it that are less than clear. For example, the diagram gives Congressional
leaders the clear impression that the Private Sector somehow creates the U.S.
Dollars we all use, though there is no exact articulation about how this
occurs. The PS pot is clearly full of Dollars—they had to come from somewhere,
right?—but the diagram shows no source other than the PS pot itself. There is a
vague “story” about entrepreneurs investing Dollars in business ventures which
make profits, allowing them to hire more and more workers, which enables them
to generate more and more Dollars, etc. How the money is actually created seems
to matter less than the “obvious” fact that if the two spigots draining Dollars
out of the PS pot are opened too wide—if too many Dollars are drained
out of the PS pot into the FG pot—the entrepreneurs won’t have enough money left
to invest in creating jobs and making profits, and the Private Sector GDP
(Gross Domestic Product), as a consequence, will begin to shrink.

It is fear of this shrinkage that appears to constrain the
number of Dollars that Congress can allow to flow into the FG pot, and this, of
course, constrains the amount and kind of public goods and services that can be
planned for in the National Budget. This fear is exacerbated by another which
can be visualized by looking at the diagram in more detail:

As illustrated, the “BORROWING” spigot appears to require
that the Federal Government not only pay back the Treasury Bond’s principal at
some point in the future, but also to pay interest on that principal. Following
the logic of what we’re looking at, it appears the Federal Government will be
forced to collect even more taxes at some point in the future (to pay
the principal plus interest) creating a huge financial burden for our
children and grandchildren. As a result, it seems clear to Congressional
leaders that the “BORROWING” spigot must be carefully constrained to not exceed
a certain percentage of the Private Sector pot, or else—it seems mathematically
obvious—the TAX spigot ultimately will have to drain the P.S. pot completely
just to pay for the government’s debt! This is what is meant when the
Congressional leaders say the Federal Government’s debt is “out of control” or “unsustainable”.

We can also look at a close-up of the FG spending side of
the diagram, the side which generates the Public Goods and Services we
collectively benefit from.

Looked at more closely, that spending is really of two
kinds: “Entitlement” spending and “Discretionary” spending. Here too the diagram
seems to illustrate the enormity of Congress’ fiscal dilemma: As Entitlement
spending (Social Security, Medicare and Medicaid, Food Stamps etc.) grows
larger, it has to compete with the Discretionary spending
(infrastructure, education, medical research, etc.) for the limited number of
Dollars that can be allowed to flow into the PG pot. Thus, if we plan to take
care of our elderly, under-nourished, poorly housed, accidentally disabled,
under-educated and unemployed citizens—which somehow seems an ever-growing need
as the population increases and ages—our airports, highways and bridges, our
water and sewer systems, our electrical grid and public transit systems, all of
that (and more) must inevitably fall into disrepair.

Or, as many Congressional leaders warn us against, we’ll be
forced to borrow even more Dollars from China, hastening the inevitable
wreckage and bankruptcy of our economy:

It is easy to see how, using this diagram as a guide, it is
literally impossible for our Congressional leaders to come up with a
rational and constructive budgetary plan to build America’s future. This has
got to be a big part of why, whenever they appear on television, our Senators
and House Representatives are wearing such pained expressions. And, no doubt,
this diagram is a large part of the reason they so relentlessly fight and
bicker over every topic imaginable, because every topic imaginable seems
ultimately tied to the frustrating fact that we simply don’t have enough
“money”.

3. Diagram Reality Check

In order for a diagram to be useful, it has to be accurate. But
how do we know if a diagram is accurate—that it reflects the actual realities
we are dealing with? First, we could ask if all the “parts” have been accounted
for. Maybe some important things have been left out. Then we could ask if the
relationships and flows are correctly portrayed. Since our diagram seems to
naturally follow a “plumbing” metaphor, we could ask, in essence, have we got
the “plumbing” right?

The first thing we can see pretty easily is that the diagram
has, indeed, left out some key parts of the fiscal “plumbing”. The Dollars that
flow out of the FG pot to pay for public goods and services—either entitlement
or discretionary spending—don’t just disappear into the right page margin after
they are spent. They go somewhere. They are paid to somebody. And who
might that be?

In fact—and when you think about it, it’s obvious—the
Federal Government buys its public goods and services from the Private
Sector. Aircraft carriers and submarines are built by Private Sector
shipyards. Weather and GPS satellites are designed and built by private
engineering laboratories. And while the space-launch facilities at NASA are a
“public” enterprise, all the scientists and technicians who work there are
private citizens. Even the Navy’s Vice-Admiral in charge of sea-recovery
operations, when he goes home on weekends and changes into his gardening
clothes, is a private citizen.

With the exception of some payments that go to foreign
contractors, the Dollars for discretionary spending, then, flow into the bank
accounts of private U.S. citizens—into, that is, the PS pot. Obviously the same
is true with entitlement and transfer payments: Social Security checks are
directly deposited into private bank accounts, food-stamp Dollars flow into the
bank accounts of farmers and food processors and distributors. Dollars for
unemployment aid are used by the unemployed to buy shoes and subway tokens and
cups of coffee—all going by some direct or indirect route into the private bank
account of a U.S. business or citizen.

I don’t want to be overstating the obvious here, but if we
change the “plumbing” of our fiscal diagram to reflect the realities just
described (as shown above) it makes a significant difference in what we see. Please
note that I have also changed the plumbing on the other side of the FG pot: the
“principal & interest” payments on the Federal Government’s “debt” also are
deposited into private bank accounts as well—the overwhelming majority
of which belong to private-sector U.S. citizens.

We still have a hopeless budget problem, however. Even
though we can now clearly see that the government’s spending goes back into
the Private Sector pot—benefiting U.S. citizens and businesses with both public
goods and Dollar deposits—the amount of Dollars available for
government spending is still limited to what can be “safely” taxed or borrowed
out of the Private Sector pot in any given budget-year. Even though we have a
better picture of the complete cycle of the fiscal flow, we still have the
dilemma that if we open the TAX and “BORROWING” spigots too wide, the private
entrepreneurs won’t have enough Dollars left to start ventures, create jobs,
and make the profits that generate the PS pot’s money in the first place.

So our plumbing changes haven’t really solved the budgetary riddle
that has Congress—and the President as well—tied up in knots. Many people will
conclude that the optimum solution is to close the PS spigots as much as possible,
allowing just enough Dollars to trickle into the FG pot to pay for the absolute
minimum collective goods and services necessary to maintain public order (and a
strong military). Allowing the Private Sector to keep vastly MORE of the
Dollars it creates through entrepreneurial ventures, they argue, will enable
those private ventures to create more and more jobs, so there will be less need
for government assistance programs like unemployment aid and food stamps. Small
government and unfettered markets are the ticket—and the diagram (even the
“complete” one we are now looking at) seems to support this perspective.

Except for one problem—one fundamental flaw in the diagram’s
most basic logic: it is not possible for the Private Sector pot to
“generate” its own U.S. Dollars! This is because, by law, a U.S. Dollar can
only be created—printed or issued electronically—by the U.S. sovereign
government. Anyone else who tries to create or issue a U.S. Dollar is a
counterfeiter and subject to imprisonment. Of course banks in the PS pot
leverage U.S. Dollars with bank loans into huge sums of “bank dollars” and
these are used for “money” in the PS pot just as real U.S. Dollars are used.
But Federal Taxes must always be paid with real U.S. Dollars—and the
“bank dollars”, when the loans that created them are repaid, ultimately, in the
long run, net to ZERO.

This does get complicated, but we don’t need to unravel the
intricacies to realize there is something fundamentally skewed with our
diagram. If sovereign spending by the Federal Government is always made
with official U.S. Dollars issued by the FG, and is never made with the “bank
dollars” generated inside the PS pot, we have to look at our diagram
again and wonder if we really understand what’s happening in it.

Here’s a simplified version that focuses on the direction
of flow:

What we think we are seeing is this: Dollars get created in
the PS pot and flow into the FG pot, from which they then flow, by means of
government spending, back into the PS pot. The key thought-phrase here is “Dollars
get created in the PS pot…” because it suggests that the PS pot is the
“driver” or “generator” of the flow of Dollars. But if it is an unequivocal
fact that only the sovereign U.S. Government can issue U.S. Dollars,
then it must be the case that the FG pot is actually the “driver”. This
suggests, first of all, that we’ve got the Diagram upside down! Basically, it should
look like this:

Hmmm....??? What we are seeing now is a completely new
fiscal perspective: The sovereign government issues U.S. Dollars in the FG pot
and then spends those Dollars through it’s own SPENDING spigot
into the PS pot! Entrepreneurs in the Private Sector then use the Dollars the
FG has issued and spent—leveraging them with bank loans and creative
financing—to launch business ventures that generate private sector jobs and
wages. Can this possibly be the way it actually is? Please hold onto your
objections for just a few minutes.... You might be pleasantly surprised, or at
least find yourself reconsidering some of your basic assumptions about our
National Budget.

Before looking at this new diagram in more detail, let’s consider
its most basic implication: As the FG spends, the number of Dollars in the PS
pot grows. If the number of goods and services available for people to buy in the
PS pot does not grow by an equivalent amount, the additional Dollars flowing in
will cause prices to go up—perhaps dramatically. This is the “inflation” that Congressmen
and economists are constantly warning against. To prevent this from
happening—or to prevent the rate of inflation from getting disruptively high—there
has to be some means for taking Dollars out of the PS pot.

This essential REMOVAL operation is accomplished with two
pieces of “plumbing” we can now add, one at a time, to the new diagram:

The first plumbing addition is a “drain” that simply takes
Dollars out of the PS pot and destroys them. This drain is Federal Taxes.
Drained out and destroyed, Dollars paid in Federal taxes are no longer available
for Private Sector spending—and, therefore, can no longer contribute to
price-inflation.

Obviously, this plumbing feature—the TAX “DRAIN”—needs some
further explanation: Why would the Sovereign Government destroy the tax
Dollars it collects? Doesn’t it need those tax Dollars to pay for its spending?
Shouldn’t the “drain” really be a sump-pump that lifts the tax Dollars back up
and dumps them into the FG pot?

It would be a mistake, though, to add the “sump-pump”
plumbing to our diagram. The reason is the underlying reality of what a U.S.
Dollar actually is: It is simply a promise, by the U.S. sovereign government,
that it will accept the Dollar as payment for a Dollar’s worth of taxes. That’s
it. A Dollar—whether it’s a paper Dollar or an “electronic” Dollar—is nothing
more than that promise. The sovereign government doesn’t promise to exchange a
Dollar for gold or silver, or for anything else of intrinsic value. It promises
only to accept the Dollar in exchange for the cancellation of a Dollar’s
worth of taxes due. In other words, a Dollar is the I.O.U. of the sovereign
government. The Dollar says: “I owe you one Dollar’s worth of tax credit.”

This I.O.U. means a lot more to all of us in the Private
Sector (households and businesses) because we also use this I.O.U.
Dollar for our everyday MONEY—we use it to buy goods and services from
each other, to invest in business ventures, and to save for future spending in
our retirement. But at its most official heart, the U.S. Dollar is simply the “I.O.U.
a Dollar’s worth of Tax credit” promise of our sovereign Federal Government.

This underlying reality of what a Dollar actually is has a
lot of importance for our new diagram. First, it tells us why we (all of us
citizens working in the Private Sector) are willing to accept Dollars in
exchange for our very real goods and efforts: Because we need those
Dollars in order to pay the taxes we owe the Federal Government! We can’t pay
our taxes with apples or Pesos. We can only pay our U.S. Taxes with U.S.
Dollars. So that’s why the FG SPENDING spigot works in the first place—because
all the citizens and businesses in the Private Sector are willing to
provide goods and services to the Federal Government in exchange for the
Dollars they need to pay their Federal Tax bill.

The second thing the underlying reality explains is why the
Dollar is “destroyed” when it is used to pay U.S. Taxes. You give the Federal
Government back its I.O.U., the FG declares your taxes paid, and the I.O.U. is
cancelled. That I.O.U. no longer exists because the promise has been
fulfilled. It is easy to see this when the tax-Dollar redeemed is electronic
(as virtually every tax-Dollar paid today is): the taxes owed and the taxes
paid simply cancel each other out. Even if the tax-Dollar paid is a paper
Dollar, it is still easy to see there is no difference between the FG
“recycling” the paper tax-Dollar by spending it again (in which case it becomes
a new I.O.U.), on the one hand, and shredding the redeemed paper
tax-Dollar and then printing a new one for the new FG spending—the net result
is exactly the same.

So the TAX “DRAIN” really is the correct diagram! Federal
taxes drain Dollars out of the Private Sector pot and—POOF!—they’re gone. How many
Dollars should be drained every year to keep price-inflation in check is a
crucial question, but we don’t need to answer that to get our diagram right. We
do need to add some additional plumbing pieces, however. This is because there
is a another, very important, means for taking Dollars out of the PS pot to
control inflation.

4. TREASURY BONDS—Are they really what we think?

Recall that in the old diagram we started out with—the one
Congress seems to be using as a guide for its budgeting process—Treasury Bonds
appear to be the mechanism by which the Federal  Government “borrows” Dollars
from the PS pot. Since we now understand that a Dollar is actually the Federal
Government’s I.O.U. for tax credits, we can also see that it is illogical for
the Federal Government to “borrow” these I.O.U.s. Why would it “borrow” its own
I.O.U.—something it can instantly create any time it wants by simply saying, “I
Owe You”? If that is the case, why does the FG “sell” Treasury Bonds?

Treasury Bonds play a big role in the Central Bank’s
regulation of the Private Sector banking system, and also in the complex and
arcane “method” by which the U.S. Treasury “spends” Dollars—but, for the
purposes of our Diagram, we don’t need to deal with such trivia. All we need to
understand is that, in fact, the Federal Government doesn’t really “sell” Treasury
Bonds at all. To see this, we only need to review something we’re already familiar
with: our own Bank Accounts.

As we know, there are basically two kinds of bank accounts:
one kind of account we can withdraw Dollars from at any time, “on demand.” We
can write a check, or we can find an ATM machine and exchange the “numbers” in
our account for real Dollar Bills. As a general rule, banks pay us ZERO
interest on these “demand” accounts. (In fact, they usually charge fees for our
various transactions.)

The other kind of bank account is one which requires that we
DO NOT remove our money for a specified period of time. These accounts are
often called “certificates of deposit” or CDs. In exchange for our agreeing not
to withdraw our money from the CD, the bank pays us interest. This arrangement
is sometimes referred to as the bank “selling” us the CD, but everyone who has
ever “bought” a CD knows that what is really happening is not the buying or
selling of anything at all. Instead, we are simply taking some of the money out
of our checking account (which doesn’t pay interest) and transferring it to
another account (the CD) which does pay interest.

This, in fact, is exactly what is happening when the Federal
Government “sells” a Treasury Bond. U.S. Dollars—whether they reside in a bank account
or a wallet—do not pay interest. When a bank (or business, or person) “buys” a Treasury
Bond from the FG, that bank or business or person is simply transferring some
its financial wealth from Dollars (which pay no interest) into a Treasury Bond
“account” which does pay interest. And the agreement is exactly the same
as with the CD: In exchange for receiving the interest, you agree to leave your
money in the Treasury Bond “account” for a specified period of time.

Viewed from this perspective, it is easy to see that one of
the important consequences of the Federal Government “selling” Treasury Bonds
is that a great number of Dollars are, in effect, “removed” from the PS
pot! With this information, we can now add the second set of plumbing features
to our new Diagram:

We have added a “Treasury Bond Account Chamber” which holds
the Dollars that have been transferred into Treasury Bond “accounts” for a
period of time. We have also added an “INTEREST” spigot to the FG pot—the
Dollars paid as interest on the Bonds flows from this spigot into the PS pot. We
can see that this plumbing arrangement, in effect, prevents a very large
number of Dollars from chasing goods and services in the Private Sector
economy—something that would push up prices (inflation)—and replaces those
Dollars with a much smaller purchasing power (the interest payments.)

So our diagram now has two effective mechanisms for
preventing the FG spending spigot from filling up the PS pot with Dollars to
the point of overflowing (another way to visualize “inflation”—which we will now
keep diligent track of with our “Inflation Meter”.) Theoretically, for a given
amount of Sovereign Spending, we should be able to adjust the draining
operations of Taxes and Bonds to keep prices under control.

It is worth noting that the “Treasury Bond Account Chamber” is
also a very pleasing feature for citizens and businesses who happen to have a
lot of excess Dollars. They are pleased because they can now trade their excess
Dollars (which earn zero interest) for Treasury Bond “accounts” which provide
them with a steady income that requires very little effort to “earn”.

5. QUESTION: Is the FG really a “Pot”?

One of the most striking features of the diagram we now have
is that there are no Dollars flowing INTO the FG pot! Dollars flow out
of the spending and interest spigots into the PS pot; Dollars drain out of the
PS pot in taxes; and Dollars move back and forth from the PS Pot to the “Treasury
Bond Account Chamber”. But the diagram shows no Dollars ever flowing into
the FG pot. How can that be?

We already know the answer: A Dollar that flows into the FG
pot can serve no logical purpose. The Federal Government doesn’t need that
Dollar in order to have a Dollar to spend. For the sovereign to collect I.O.U.s
to itself makes no sense. What we have been calling the FG “pot”, then, is not
really a “pot” at all in the sense that something can be added to it—and
we should modify our diagram slightly to avoid this potential confusion:

The FG “pot” has now been replaced with a “Sovereign
Currency Issuer”. The SCI has only one function: to issue sovereign U.S.
Dollars. You don’t have to put anything in the SCI (except paper, ink,
and electricity to run the computer keyboards) to get Dollars out of its
spigots. And this “machine” works—Dollars flow out of it as the Federal
Government spends them—because we, the citizens, have agreed to the proposition
that if we don’t pay our taxes with the Dollars the SCI produces, the FG then has
the proper authority to put us in jail. At heart, it’s really a very
simple (but dynamic) proposition. Of course, in our everyday lives we don’t
think of it in those terms—we work and exchange our goods for Dollars simply
because we know that everyone else will accept those Dollars for goods and
services they provide to us. But at the very center of things, what makes the
Dollars go round is that we’re all in debt to the sovereign government, and can
only cancel that debt with the sovereign’s I.O.U.s.

6. The most Amazing Coincidence

Let’s take a closer look at what is actually the most remarkable
aspect of the diagram we now have before us—that is, the Sovereign Spending
which flows out of the FG spigot. We now understand this Sovereign Spending is
necessary to get U.S. Dollars into the PS pot where entrepreneurs and
businesses then leverage them with bank loans to create goods and services,
jobs and careers. What is amazing to contemplate, however, is that the initial
Sovereign Spending of these Dollars also accomplishes something else: it pays
us to create for ourselves goods and services that we benefit from collectively
as a society—in many cases, that we benefit from substantially (as in: we might
not even be alive without them.) In other words, the thing that drives
our fiscal-monetary system coincidentally also makes it possible for us
to pay ourselves to build and create goods and services that make us
collectively healthy and prosperous. The implications of this dynamic
coincidence—when you actually “see” it—are astonishing, to say the least.

It’s important, then, that our new diagram somehow makes
this most fortunate coincidence visible. I’d like to draw weather and GPS
satellites, next-generation air-traffic control towers, fuel-cell powered
bullet trains connecting city-center to city-center across the country,
neighborhood health clinics, Home-Care providers in fleets of mini-vans filled
with medicines and lasagna dinners, folding flood-gates around Manhattan and
Norfolk, neighborhood Early-Reading Centers manned (and wommaned) with teachers
trained and focused exclusively on teaching kids to read, renewable-energy
electric grids that make fracking and transporting toxic waste-water completely
unnecessary—but that would break the age-old rules of architectural diagramming:
Keep it simple and symbolic. So I’ll do it like this:

What I’ve added is just a visual gesture indicating that the
result of Sovereign Spending is the creation of something that
“supports” the Private Sector pot itself—holds it together, keeps it from
falling apart and rolling down the hill.

The important thing to understand about this “support”
structure—whether it is services we provide ourselves (e.g. medical care), or
structures and technology we build for our collective benefit (e.g.
charging-station networks for electric vehicles)—is that what can be accomplished
is not limited by the number of Dollars available for Sovereign
Spending. (Remember, the FG has an “infinite” supply of its tax I.O.U.s.) The
limitation, instead, is imposed by the real resources—labor, materials, energy,
and technology—which are sustainably available to implement our collective goals.

7. The Right Words

There’s only one thing left to make our new diagram useful
for guiding the design of an informed and constructive National Budget. We need
to decide on the proper terminology we’ll use to talk about—and measure—the
flows that are occurring in the new diagrammatic plumbing. If we use the wrong
words, or if someone uses one set of words and somebody else uses another,
there could be a lot of confusion and misunderstandings. So a consistent and
accurate “diagram terminology” is important.

For example, we might want to talk about (and measure) the
number of Dollars that are proposed to flow, in a given budget year, from the
FG spigot into the PS pot—and compare that to the number of Dollars that are
drained out by taxes in that same year. In the old diagram (the one Congress is
still struggling to use) the difference between what the FG spends and what it
“collects” in taxes is called “The Deficit”. It would be called a surplus if
the FG “collected” more in taxes than it spends, but since that rarely occurs,
this measurement is almost always called “The Deficit”—and the FG spending that
occurs beyond what is “collected” in taxes is called “Deficit Spending”.

These are terms we hear a lot from our Congressional
leaders, and news media. But how do they “fit” with our new diagram? “Deficits”
and “surpluses” are clearly very meaningful terms for everyone in the Private
Sector pot—all the households, businesses, state and local governments.
Everyone knows they cannot spend more Dollars than they earn without getting
into financial trouble—and further understands the advisability of actually
spending less than they earn, building up the security of a savings
account against the day they need extra money. These are realities we all begin
learning in early childhood.

Our new diagram, however, clearly illustrates that for our
sovereign FG, things are different. Because of its unique position and role in
the structure of our society, the sovereign FG is dealing with a startlingly different
set of dynamics. For starters, the Dollars the FG spends are NOT Dollars it has
to earn—they are Dollars the FG has simply issued. Indeed, it is
meaningless to even think of the FG as “earning” its own Dollars! It can only
issue them. When Dollars are “earned” as tax payments, they simply become
cancelled I.O.U.s. So the idea of the sovereign government spending more than
it “earns” is a completely illogical terminology.

For the same reason, it is meaningless for the FG to “save”
its own Dollars—to try to build up a surplus of them. Our new diagram is
showing us that the only logical reason the FG would need a surplus of its own
Dollars would be if, for some reason, its “Sovereign Currency Issuer” stopped
working. The only way that could happen would be if the sovereign were
overthrown—stripped of its sovereign power—in which case having a surplus of
its own Dollars would be of little help anyway.

So the new diagram makes it clear that if the FG spends more
Dollars than it drains in Taxes, it is inaccurate and misleading to call that
difference a “deficit”. The FG is not deficient in anything at all! There is no
hole that someday has to be filled back in. The calculation we are now trying
to name is nothing more than the simple accounting of the number of Dollars, in
a given budget-year, the FG issues and spends into the PS pot minus the
number of Dollars the FG drains out of the PS pot when those Dollar “I.O.U.s” are
presented (and cancelled) as tax payments.

Before trying to think of a more accurate and less confusing
name for this calculation, however, we should consider an important question: What
is the result if Congress actually succeeds in achieving its declared and
on-going aspiration to create a “balanced budget”—or even the holy grail of a
“budget surplus”? The old diagram clearly begs for this goal to be achieved: If
the FG could just manage to create a National Budget that enabled it to “collect”
more tax Dollars than it needs to spend, then the Federal
Government would, at last, be “fiscally responsible” and not have to “borrow”
all those Dollars to make up its shortfall!

But our new diagram reveals the remarkable folly of this
perspective.  When a sovereign government is its own “currency issuer”, the
results of applying these terms is quite different than we imagine. Here are a
series of simplified “plumbing flows” showing each of the conditions we’ve
discussed:  A “balanced budget”, a “budget surplus”, and a “budget deficit”. In
each case, the diagram series begins with the Private Sector pot containing the
net Dollars (savings) left over from the previous budget-year cycle.

In the first diagrams Congress has finally achieved its
“balanced budget”. It has, for the given budget-year shown, drained out of the
PS pot the same number of Dollars (in taxes) that it has spent into the PS pot.
The result? The Private Sector, in that budget-year, has ended up with zero
new net savings. In general, the financial “wealth” of the Private Sector is
the same as it was at the beginning of the budget-year. The only logical reason
the FG would want to constrain that wealth would be if price inflation had
become a threatening condition in the PS pot. Otherwise, the “balanced budget”
simply imposes an austerity on the Private Sector without rhyme or reason.

In the second series of diagrams, our Congressional leaders
have achieved what they believe to be their holy grail: a “budget surplus”!
They have actually managed to spend fewer Dollars into the PS pot than
they have drained out in taxes. But what they view as a “surplus” is actually a
net deficit for the Private Sector! At the end of the budget-year, the
PS pot actually has fewer Dollars than it started out with. The result?
In order for the Private Sector households and businesses to maintain what had
been their current level of expenditures (their “lifestyle” so to speak) it
becomes necessary for them to spend their savings from the previous
budget-years--or to borrow bank dollars to make up the difference. If
Congress runs a “budget surplus” for long, the Private Sector will either have to
diminish its economic activity in general (go into recession)—or plunge
hopelessly into debt (borrowing bank money it can’t repay, possibly causing a
banking crisis)—or both.

In the third set of diagrams we can see that, in the given
budget-year, the FG has drained out fewer tax Dollars than it has spent
into the PS pot. The result is that the Private Sector retains an
additional net savings of the Dollars the FG has spent. Those Dollars can be
literally “saved” if they are put in Certificates of Deposit at a bank, or
transferred into Treasury Bonds—or they can be invested in new business
ventures. In either case, the net Dollars remaining in the PS pot are an
expansion of the financial “wealth” of the Private Sector in general. This
looks good, right? But pinch yourself and realize: this is exactly the
condition our current “thinking”, in its infinite confusion, calls a “deficit”!

The idea, then, of looking at the difference between what
the FG spends and what it drains in taxes in terms of “deficit”, or “balance”,
or “surplus”—and using those terms to somehow guide our National Budget-planning
process—is clearly not a functional view of reality. Applied to a sovereign “currency
issuing” government, which is creating and issuing its own tax I.O.U.s, the
terms are completely meaningless. Worse than meaningless, these terms create an
intuitive misunderstanding that leads us to make irrational budgetary decisions
that do irreparable harm to our collective well-being.

8. Let’s call it: “Net Spending Achievement”

My first attempt at a more useful term for describing the
difference between what the FG plans to spend in a given budget-year, and what
it plans to drain away in taxes, is “Net Spending Achievement”. Economists may
not like it much but, as an architect, I find this phrase appealing for the
simple reason that it strongly suggests the purpose of Sovereign
Spending, first and foremost, is to actually build something concrete and useful
for our collective good. The emphasis of the phrase is not numerical but
visionary. It talks about paying ourselves to create things—public goods and
services—we all benefit from in profound ways. The actual “net number of
Dollars” spent is unimportant (unless price inflation is a problem). What is
important is what we actually decide and agree to achieve with that
spending.

Please imagine, for a moment, how our political discourse might
change if everyone understood the discussion was no longer about the size of
our national “budget deficit” but, instead, was about the concrete goals of our
annual “Net Spending Achievement”. This is what our new diagram is asking us to
do.

9. Our NATIONAL SAVINGS CLOCK

We won’t attempt to re-vocabularize all of conventional
economics, but there is one term our new diagram clearly begs should be
reconsidered: the “National Debt”. This term competes aggressively with
“National Deficit” to sow confusion and chaos in our Congressional budgeting
process.  Evidence of this confusion is a digital “clock” on Sixth Ave. in
Manhattan (it used to be on Times Square) that tallies up, in real time, the
U.S. Dollars which are transferred from Private Sector “Dollar” accounts into Treasury
Bond “accounts” paying interest. The accumulating number is staggering (which
is why, of course, the clock is such a novelty)—and terrifying, because it
appears to measure (using the old diagram Congress seems hopelessly stuck with)
the number of Dollars the Federal  Government has borrowed to make up
its “shortfall” in tax collections. Here’s what the “clock” reads as of today:

Followers of this “clock” like to take this number and
divide it by the U.S. population, generating the share  of the “National Debt”
each private citizen will, some day, have to repay—currently:  $54,293.48. (And
it keeps going up!)  How is each of us ever going to manage to pay that off?
How could the U.S. Federal Government even think about borrowing that
much money? Panic in the streets!

If we take this “clock”, however, and insert it in our new diagram,
we can see it is actually measuring something quite different than what the “National
Debt” panic perpetrators lead us to believe.

As we can see, there is no logical place to connect the
“clock” other than at the flow between the PS pot and the “Treasury Bond
Account Chamber”. The “clock”, then, is actually measuring the number of
Dollars in the PS pot which have been transferred from a “Dollar” account
(which pays no interest) to a Treasury Bond account which does pay interest—in
exchange for the pledge that those Dollars will be kept tucked away in the Bond
account for a specified period of time.

After the agreed upon time period, the Dollars are simply
transferred back to the “Dollar” account in the PS pot from which they
came. In most cases, what happens next is that the owners of those Dollars want
to “roll” them back into the Treasury Bond account (as quickly as possible) so
they can continue to draw their “free” interest payments from the FG spigot.

The “clock” then, is not measuring “borrowed” Dollars
that have to be “repaid” or “replaced” in any logical sense of those terms. It
is simply measuring the real financial wealth which U.S. citizens, businesses, state
and local governments have moved into a savings account (Treasury Bonds) at the
Sovereign Central Bank. Semantic honesty, therefore, would have us give it a
new name: It is, in fact, our “NATIONAL SAVINGS CLOCK”!

Now when New Yorkers walk down Sixth Ave., rather than panic
at the financial hole they think they’re in, they can actually feel a sense of
security at the enormous wealth they have collectively earned and saved.

If you’re concerned the FG still has to pay interest
on all those saved Dollars (which it does) just remember that those interest
payments are simply made with Sovereign Tax I.O.U.s which the Federal
Government has an infinite supply of—and remember, too, that the net result of
this savings and interest operation is to prevent trillions of U.S.
Dollars from chasing goods and services in the PS pot (which helps control
price inflation.)

10. Why we should LOVE our new diagram

So there it is: an architect’s attempt to draw a diagram
that might be a more constructive guide for our National Budgeting process than
the diagram Congress is currently struggling to make sense of. It doesn’t solve
all the problems we face as a collective society—but it does make clear that we
can, in fact, afford to pay ourselves to build and do whatever is necessary to try
to solve them as best we can. It doesn’t eliminate income inequity in our
Private Sector society either—but it does make clear that if we view a decent
livelihood for every citizen to be a “collective good”, benefitting us all
together, then the only thing preventing us from achieving that is our lack of
imagination in creating useful things for everyone to do.

The diagram may look like a Rube Goldberg machine
(architectural diagrams—especially ones visualizing flows—tend to have that
flavor) but the National Budget “edifice” it makes possible is quite
remarkable. To summarize, what the diagram is showing us….

1.
We do NOT want a “balanced” budget—or, even worse, a budget “surplus”!
What we want (as long as price inflation is under control) is the largest and most
effective “Net Spending Achievement” we can envision.

2.
The “achievements” we can realize are NOT limited by how many Dollars
are in the U.S. Treasury, because the U.S. Treasury literally has an infinite
number of Dollars to spend (as long as price inflation is under control).

3.
The “achievements” we can realize are limited ONLY by the real,
sustainable resources (labor, materials, energy, technology) which are actually
available in exchange for the Sovereign Spending.

4.
“Entitlement” and “Discretionary” budgets do NOT have to compete with
each other for a fixed pot of Dollars. As long as price inflation is under
control, whatever Dollars are necessary can be allocated to the “Net Spending
Achievement.”

5.
The U.S. Federal Government will never have to—or, indeed could it—“borrow”
U.S. Dollars from China. Like anyone else who holds a zero-interest bearing
Dollar, the Chinese can transfer their Dollars into Treasury Bond “accounts”
that will pay them interest—but, as we now understand, the FG is not
“borrowing” those Dollars from China or anybody else!

Finally, in contemplating our new diagram, the most
astounding and empowering thing to “see” is that while it remains emphatically
true that we, as individuals, are financially constrained by the finite
number of Dollars each of us can earn and save—as a collective society,
working and cooperating together, we have all the financial resources
necessary to pay ourselves to accomplish virtually anything we are capable of.
This, in the end, is the astonishing “truth” that will solve the “unsolvable”
dilemma of our National Budget.

About the Author

J.D. ALT is an architect and writer living in Annapolis,
Maryland. He has written (and sometimes illustrated) over thirty essays for NEW
ECONOMIC PERSPECTIVES (www.neweconomicperspectives.org). His novel, The
Architect Who Couldn’t Sing, won the 2012 eLIT gold award for architecture.
He is currently at work on a book which explores the possibilities of Modern
Money Theory and architecture as a collective good. The working title is: HOUSING
for the MASSES, DWELLINGS for the SOUL.