Stanley Dundee

Top: Getting Money Right

Fiat Money is Unbounded

Stanley Dundee

2018-01-23 v. 2

Fiat money, lacking a physical backing, is unbounded. Resources are not. Spending by the sovereign (money creation) in excess of resources generates inflation; inflation is controlled by taxation (money destruction). An exact balance between taxation and spending is neither necessary nor generally desirable. Because fiat money is unbounded, lack of money can never truly stand in the way of affording what we want.

Because fiat money has no physical backing, it is unlimited in quantity. A popular analogy in the MMT world is to compare monetary units (e.g. dollars) to points in a football game. Here's Mitchell, et al., p. 112:

The modern financial system can be seen as an elaborate system of record keeping, a sort of financial scoring of the game of life in a capitalist economy. Financial scoring can be compared with a scoreboard at a sporting event... the offical scorer awards points... the scoreboard will show the appropriate number of points... Similarly, in the game of life, earned income leads to points credited to the score that is kept by financial institutions. Unlike the game...every point that is award to one player is deducted from the score of another... money is not a thing but rather a unit of account in which we keep track of all the debits and credits -- or points.

It's easy to overlook the essentially unbounded quality of fiat money while the theater of government shutdown is playing on screens all across the USA. The federal government of the USA constrains itself in a self-imposed legal straightjacket, requiring taxation or borrowing to cover its spending. The straightjacket is tightened by a statutory debt ceiling that limits the total amount of debt issuance and hence must be frequently adjusted to accomodate the chronic deficits of the federal government. So we are subjected to periodic political spasms in which the entirely arbitrary ceiling is raised with dramatic posturing by congress and the executive.

Not only should the debt ceiling be abolished, but even the case for federal borrowing to bridge the gap between taxation and spending is quite dubious. Federal borrowing is a subsidy to the wealthy who hold some fraction of their assets in bonds and notes which are almost perfectly liquid (convertable to cash) and never subject to involuntary default.

Given the unbounded nature of fiat money, what's to stop the federal government from unbounded spending? Nothing inherently prevents unbounded spending, but the resources of the economy are certainly bounded, so if the spending is sufficient to create shortages, we might expect prices to rise, reflecting shortages. Inflation is the principal brake on unlimited spending by the sovereign. If price stability (lack of inflation) is a policy goal, then the demand that is created by federal spending must be counteracted by federal taxation, draining demand away as money is destroyed. The balance need not be exact, nor, typically, should it. The difference between federal spending and taxation represents an important component of the savings of the subjects of the sovereign. Those savings are highly liquid and free from the risk of involuntary default. No other financial assets in the economy have those characteristics. Those savings are subject to depreciation by inflation, however. If the economy is at full capacity, and additional spending is chasing scarce goods, we can anticipate inflation, and hence depreciation of money.

Despite regular accusations to the contrary, MMT proponents do not advocate unlimited federal spending, nor claim that deficits are irrelevant. What needs to be widely understood is that claims of lack of money at the sovereign level are always bogus. Lack of resources may indeed limit spending (evidenced by inflation), but where there's slack (unused resources), spending in excess of revenues can mobilize those resources and deploy them to the benefit of the public. Lack of money can never truly stand in the way of affording what we want.