Stanley Dundee

Back: The Government Must Tax or Borrow to Spend? Unh-unh Top: Getting Money Right

The Government is Like a Household? Not

How often have you heard a politician or pundit cite the folk wisdom that their household or business has to balance its budget or be taken in bankruptcy, and the government is (obviously) subject to the same constraint. Not true for sovereigns! The sovereign creates money for subjects by spending, and destroys money in receipt of taxes and fees. It cannot be forced into involuntary bankruptcy. Bankruptcy for the soverign is purely a matter of policy.

Because the sovereign is the issuer of the money, it can only default by choice. Subjects, by contrast, as mere users of the money, can be forced into bankruptcy when their liabilities exceed their assets and they default on debt service payments. At that point, the owners of the liabilities get to use the forces of the state to divvy up whatever assets can be confiscated from the defaulter. Can't happen to the sovereign, except by its own choice.

Not all governments are sovereign. National governments can cede their sovereignty. The member nations of the Eurozone have given up their monetary sovereignty to the union, which is basically a banking consortium. That's what permits the spectacle of Greece breaking on the austerity rack, having ceded its sovereignty to the dour banksters of the Eurozone. Less drastically, some potentially sovereign nations have at times choosen as a matter of policy to attempt to peg their currency to some other sovereign's currency by fixing exchange rates.

A non-sovereign goverment must borrow from banks or other investors when its tax revenues fall short of its expenditures. Over the long run, without the support of sovereign issuance, non-sovereign governments can only grow their money supply by running persistent trade surpluses. But few nations can manage that, since one nation's surplus is another's deficit. In a world of balanced national budgets, economic stagnation and trade war are the consequences to anticipate.

US state and local governments are subjects, although in historic times, states in the USA have been currency sovereigns. Today, all non-federal governments in the USA are subjects. Hence, they could be forced into bankruptcy and be involuntarily deprived of their assets. A contemporary example is Puerto Rico, which has recently defaulted on its borrowings, and will soon be subject to banker-mandated austerity with higher taxes and reduced services, along with seizure of public assets for transfer to private creditors. Of course, the sovereign US government could readily bail out its colony, as the debts are denominated in US dollars, of which there is unlimited supply. Whoops! They're not bankers, so no bailout! Detroit got whacked a few years ago. Illinois may be next. In the fullness of time, barring significiant policy changes, I expect many if not most non-federal governments in the USA to be subject to bankruptcy and hence subject to looting by creditors.

The sovereign is the issuer of fiat money. There's no physical limitation on issuance. Subjects are users of fiat money and can only obtain money from payments by others. Only subjects, never the sovereign, can be forced into involuntary bankruptcy and suffer the seizure of their assets. When you hear a pundit or politician equate the US federal government to a household or any other subject, up to and including countries like Greece, ask yourself: ignorant or lying?