The Fiscal Cliff: Why Politicians Have it all Wrong
Dr. Randy White
As I write this article, politicians on both sides of the aisle are deadlocked in debate over how to fix the so-called ¡°Fiscal Cliff,¡± which they themselves created. The cliff, in short, is a combination of higher taxes and lower government spending set to automatically kick in beginning January 1, 2013.
In this article, I want to ¡°cut to the chase¡±, with a summary at the beginning. We have a fiat currency, but a commodity currency mind-set. Right-wing ideologists (like me) hold strongly to the commodity mind-set. Left-wing ideologists are no different; they simply see a different solution. I am convinced the mindset is the problem. Because of this ¡°assumption problem,¡± almost all of our economic problems are self-inflicted by politicians who think they are fixing the problem. In the end, I fear that the politicians will create such a mess that society will crave socialism to fix the problem.
The above paragraph is so important that I want you to read it again. When you think you know what I am saying, then allow me to spend a few lines to change the way you think, especially about our mounting national debt. In this article, I¡¯ve used much more bold print than normal, trying to highlight the important issues.
The Old Way: Money as a Commodity
In the beginning, money was a commodity. It was either made of silver or gold, or it represented a share of wealth, and was readily convertible into that wealth. Under this system, a government needed the commodity, or its money equivalent, in order to carry out its work. It went something like this:
¡ñ The government needed an army.
¡ñ The government taxed the people to get the money/commodity in order to pay the Army.
¡ñ When the taxes came in, the government would use the revenue to pay the Army.
¡ñ If the government paid the Army more than its revenue, it would go to the open market and borrow additional money in order to fully pay the Army. This borrowing would be in the form of the sale of treasury bonds, which the government was obligated to pay back at a later date.
The old way (money as a commodity) became very challenging during times of crisis, such as a war. In fact, it was in a time of crisis that the convertibility of the US dollar into gold was removed. Today, it is illegal for the US government to convert dollars into gold. You can use dollars to buy gold on the open market, but the government cannot convert them for you. President Nixon, during the Vietnam War, abolished the gold standard completely. Since the Nixon administration, the old way (money is a commodity) has been nonexistent.
While the old way went away with President Nixon, our economic paradigm (that is, the way we think about money) is still governed by the old way of money. We continue to talk as if money is a commodity. However, a new day has dawned. For the government, money is not a commodity. The government does not need gold, silver, precious stones, wood, hay, or stubble in order to make money. Nor does it need any of the above for its money to have value. Nor does it ever need to worry about having enough of the commodity in order to pay back its debts. Nor does it need to have enough of a commodity in order to spend like there is no tomorrow. The government is now able to do whatever it wants to do for the public good (or bad), regardless of commodities on hand. The only ¡°commodity¡± the government needs is the ability to tax, and this ability is not needed to raise revenue, but to give currency its value.
I know that about now you're wagging your head concerned about how our government is just printing money, spending like a drunken sailor, and mortgaging our children's future. You're concerned that someday the Chinese may repossess us, and that the government is spending us into a great depression. Stick with me as I explain that the old paradigm has changed, and your fears are unfounded.
The New Way: Fiat Currency
We know that our money is no longer on a commodity-based system. However, we continue to think and talk as if it was. When asked to explain Fiat currency, most of us explain that the only value of the US dollar is "the full faith and credit of the United States government." This kind of thinking does not change that paradigm, it simply changes the commodity: rather than money being based upon the commodity of gold, silver, precious stones, wood, hay, or stubble, now we have substituted the full faith and credit of the government as the commodity. Our fear, then, is that the government will outspend its credit and lose its faith among the people, making the currency worthless.
I want to propose, based on study of others more learned in this area than I, that this is entirely impossible unless there is an all-out complete revolt against this taxation system. Let me attempt to explain the new paradigm.
The new paradigm works something like this:
¡ñ The government needs an army.
¡ñ The government offers to give able-bodied men 100 business cards every month if they will join the Army. (Substitute whatever you want for business cards: toothpicks, napkins, electronic points--it really doesn¡¯t matter).
¡ñ The government has a problem, because able-bodied men have no need for 100 business cards.
¡ñ The government quickly solves this problem by instituting a tax of 10 government business cards each month. The government has instantly created value for the business cards.
¡ñ Since there is no other source for these business cards, a sufficient number of able-bodied men join the Army, and receive 100 business cards each month.
¡ñ These soldiers are now able to pay their 10 card per month tax. The government has no need for these worthless cards, so when they receive them, they shred them.
¡ñ Everyone, not just those in the Army, needs to pay the tax of 10 business cards per month. This reality means that the soldiers now have a valuable "commodity" in their government issued business card.
¡ñ The soldiers will now trade their business cards to other taxpayers for goods and services.
¡ñ What once was a worthless business card has now become a sought-after commodity.
Now suppose that this government, complete with full army, realizes that it needs to get its army to the other side of the river. Under the old paradigm, the government would have to tax the citizenry (or mine gold) in order to gain the resources to build a bridge across the river. Our entire country, from the President to the Congressman to the man on the street, still seems to think under this paradigm. Under a Fiat currency, however, this is totally inaccurate. The government has absolutely no need to tax it citizenry in order to get enough resources to build the bridge. The government simply has to offer its business cards to bridge builders, who are in need of 10 business cards each month to pay their government obligation. The bridge builders will gladly enter into contract to build the bridge for the government in exchange for its business cards. When the bridge builder pays its taxes with these business cards, the government will simply shred them. Why? Because business cards have absolutely no value. The government is able to provide an endless supply of these business cards. They represent no true commodity. Their only value is for nongovernment entities who owed the government 10 business cards every month. Now, of course, the bridge builders will take their surplus business cards and buy goods and services from other taxpayers who are themselves clamoring to pay their business card tax.
The bottom line of the new paradigm is this: the value of currency comes completely and solely from a government's ability to tax. As long as a government can tax, its currency is valuable.
Recession or Inflation Is Politically Created.
Under the old paradigm, business cycles often receive the blame for periods of high unemployment, declining GDP, and other bumps in the road. Under a Fiat currency, every economic problem is a political problem. Consider these scenarios.
With a Fiat currency, the government is able to create projects sufficient to employ every able-bodied worker within its borders. Under a Fiat currency, high unemployment is the result of bad political decisions. While I know that what I'm about to say will cause many of you to have heartburn, please stick with me to the end! In periods of high unemployment, the politicians are taking too many business cards out of the hands of the employers. If you're thinking in the new paradigm, this is tremendously easy to fix. One way to fix the problem would be to simply lower the business card requirement for businesses or even individuals. Now, having more business cards in hand, these businesses will be able to hire more individuals. If the politicians decide they want a quick fix, they can even offer a business card grant to any business that will hire a new employee, under whatever conditions they choose to set. The government can say, "For every new employee who receives at least 100 business cards per month, we will give the business 50 business cards per month, for the next 12 months. Of course, businesses would immediately hire as many of these half-price employees as possible. Soon, every worker would be able to find a job. These workers, now gainfully employed, would jumpstart the economy, almost overnight.
Undoubtedly, you are thinking that such a sudden influx of business cards into the economy would devalue the business cards and cause inflation. In reality, this is highly unlikely, and easily solvable. It is unlikely because an economy which is unable to produce to its fullest extent (thus high unemployment) is short on cash (business cards) in the first place. The influx of business cards will fill the gap that is currently a reality. If, however, the politicians do put too many business cards into the economy--to the point that businesses are attempting to hire more workers than the society has produced-- then the price for an employee will begin to rise, perhaps dramatically, and inflation will set in. At this stage, the government can certainly stop the program, and increase the monthly business card tax. An increased tax will remove the excess supply of business cards.
I know what you're thinking! In order for the government to send out all these business cards, it¡¯s creating a huge debt, which will be a burden for the future. Your assumption is based on your long-held view that that money is a commodity. That is, you¡¯re reasoning under the old paradigm. There is probably a place for federal debt under the new paradigm, but in reality, it¡¯s not even necessary. Why does the government, who is the sole producer of business cards, need to borrow business cards in order to use them? All the government really needs to do is distribute their business cards as they wish.
If a government does wish to have a ¡°federal debt¡± of business cards owed to others, it can choose to do so. For example, a government may wish to provide its citizenry an opportunity to store business cards for future personal use. In this case, a federal debt will accommodate such opportunity. Under the new paradigm, federal debt is nothing more than a government contract to provide a certain individual with a certain number of business cards at a certain time in the future. There is no need to wonder whether or not the government will be able to provide these business cards to this individual. When the debt comes due, the government will simply give the business cards to the individual, and then continue to control the economy through the level of taxation. The government can have an unlimited amount of this kind of debt, and never have any fear of being unable to pay. All that a debt does is make a future impact on the number of business cards in circulation. In other words, federal debt is the creation of money at a set-date in the future, in exchange for transferring that money within society today. (Federal debt does not create more current money supply, it simply moves it from one owner to another, creating an ¡°I Owe You¡± to the original owner, and enriching the new owner). It matters not who owns this debt--the Chinese, Siamese, or whomever you please, because when they cash-in their debt, they will only have currency that can be used within that currency¡¯s society, and will, thus, enrich the debt-maker¡¯s society and no one else.
With a Fiat currency, the danger is not how the government is going to get enough resources to do what it needs to do, nor how the future is going to pay the debts of today's government. Government creates money out of nothing. That money has its value in the power of the government to demand it from the people. Taxation is the commodity of a Fiat currency. All our worries about runaway government spending and untenable federal debt are needless. These are simply not a danger under Fiat currency.
So what is the danger? As I see it, the danger is twofold. First, there is the danger that politicians, and those they represent, will continue to view currency as a commodity. They will continue to see taxation as the means by which a government gathers the resources to carry out its governance. They will continue to see the need for a balanced budget (something that is completely needed by an individual, or entity, that cannot create its own "business cards"). Working under an old paradigm, they will continually make the wrong decisions which will result in continuous struggles in the economy. Needless struggles.
Second, and in my opinion an even greater danger, will only happen if one segment of the population begins to understand Fiat currency and the other segment does not. Since conservatives are the most vocal about a balanced budget, reducing the deficit, and wanting a sharp cut in government spending, it will likely be the conservatives who operate under the old paradigm. The more liberal element of society, often called the "tax-and-spend" party, will learn that their spending actually encourages economic growth and decreases unemployment. They will also learn that the deficit is not the big bad monster it's made out to be. The liberal worldview, however, tends toward socialism. The Liberals may understand Fiat currency before conservatives do. They will use the power of Fiat currency to buy up businesses and industries. In time, they will use the new paradigm to create a socialist society. Everything from transportation to healthcare, education, the environment, and everything in between, will be controlled by the government. As a conservative, I would be thrilled if my fellow conservatives began to understand Fiat currency, and thus turn aside from their fear of a national deficit. Their penchant towards lowering taxes is exactly what is needed during a time of economic distress like we are living in today. Their corresponding desire for low deficits will serve to offset their desire for lower taxes. Remember the days of Ronald Reagan, when taxes were drastically lowered and the deficit drastically increased. And what was the result? A very healthy economy!
What to do?
As I write this, President Obama is ordering a pay raise for the Vice-President, Congress, and others in the government. And, how will he pay for this? Easy: fiat currency. I get every impression that the President will use the Fiscal Cliff as needed to create chaos so that he can then use fiat currency to create his dream of a socialist society. Conservatives need to realize that a new paradigm has arrived. If we continue to see the federal debt as the enemy, we will fail to ever fix our problems. Let¡¯s work together to elect politicians who not only understand fiat currency economies, but will use the power of fiat currency for societal good, and individual freedom, rather than social change that is bent toward socialism-- which, in the end, always tends toward dictatorship.
Fiat currency and the theory espoused in this article can only be used by a country with a sovereign currency. Because of this, the word ¡°debt¡± is not really even the best word for the future-commitments of such a country. Debt is, by nature, a commodity concept. Debt, as a commodity concept, can be (and often is) very unhealthy for individuals, families, churches, businesses, municipalities, and states¡ªall of which must earn revenue in order to pay debts. This is why the Bible refers to the debtor as a slave. For a country with a sovereign currency, no such revenue need exists to pay its debts.
If you¡¯ve ever played Monopoly and served as the banker, you know the power of sovereign currency. When another player passes ¡°Go¡± and earns $200, you pull from the bank and give it to them, and it does not cause you or any other player a single cent. The money comes from the source of funds. There is a virtual unlimited supply of the banker¡¯s money. This is not true for any other player. Other players sometimes forgo purchase opportunities, mortgage properties, or take out loans in order to accomplish their goals. The bank never does so, because it has a ¡°fiat currency.¡± If the Monopoly banker was worried about paying its players $200, the game would come to a halt. The problem with our politicians is that they forget how the bank of sovereign currency works, and they fail to provide the ¡°players¡± the resources that are needed for the game to continue. What¡¯s ahead? Our ¡°bankers¡± will either create an unneeded economic catastrophe or they will use the power of fiat currency to create prosperity and a healthy economy. My fear is that the wrong politicians will use the power of fiat currency and will create a state-run economy and business structure that will be anti-family, anti-community, anti-individual, anti-capitalist, and anti-Christian.
Dr. Randy White is the Pastor of First Baptist Church in Katy, TX. His teaching is heard daily on the Word for the World radio program.
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