Bank-created

money,

Monetary

Sovereignty,

and the

Federal DeficitToward a New Paradigm in

the Government-Spending

DebateAshton S. Phillips, JD

This is what Fiscal Panic looks

like.

Debt-ceiling crises

Credit Downgrade

Simpson-Bowles Commission

Sequester (Budget Control Act of 2011)

Recovery Act expiring (including cuts to

Food Stamps)

Government Shutdown

New Budget Talks

THE NATIONAL COMMISSION

ON FISCAL RESPONSIBILITY AND

REFORM “America cannot be great if we go broke”

“We have a patriotic duty to keep the promise of America to give our children and grandchildren a better life.”

“Ever since the economic downturn, families across the country have huddled around kitchen tables, making tough choices about what they hold most dear and what they can learn to live without. They expect and deserve their leaders to do the same. The American people are counting on us to put politics aside, pull together not pull apart, and agree on a plan to live within our means and make America strong for the long haul.”

“the most significant threat to our national security is our debt.”

Proposes: capping revenue at 21% of GDP by 2022 (within 10 years) and capping spending at 21% of GDP (“eventually”)

http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf ;

People believe this and are

scared

61% worry a “great deal”

But, as a matter of Constitutional

law, Congress can “print” its way

out of debt. The Congress shall have power to lay and collect taxes,

duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;

To borrow money on the credit of the United States; To coin money, regulate the value thereof, and of foreign

coin, and fix the standard of weights and measures;

To make all laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers vested by this Constitution in the government of the United States, or in any department or officer thereof.

Julian v. Greenwald (1884)

“[C]ongress has the power to issue the

obligations of the United States in such form,

and to impress upon them such qualities as

currency for the purchase of merchandise

and the payment of debts, as accord with

the usage of sovereign governments.

The Legal Tender Cases, 110 U.S. 421, 447-

48, 4 S. Ct. 122, 129-30, 28 L. Ed. 204 (1884)

Congress has done this before

Running the Machine

Congress is printing money to

pay (some of) its bills now

Sacajawea Dollar

Fed doesn’t like this

But, but, but: inflation!

Maybe, but Inflation is not necessarily a

bad thing.

The current inflation rate (1.6%) is well

below targets

Moreover…

Inflation depends on how the created

money is spent

MV=QP (Quantity Theory of Money)

And, other entities are

creating money now

Federal Reserve

Private commercial banks

Congress has delegated its

sovereign power to print

money to the Federal Reserve 1913 – Federal Reserve Act

Section 16:“Federal Reserve notes, to be issued at the discretion of the Federal Reserve Board for the purpose of making advances to Federal Reserve Banks through the Federal Reserve Agents as hereinafter set forth and for no other purposes, are hereby authorized. The said notes shall be obligations of the United States and shall be receivable by all national and member banks and for all taxes, customs, and other public dues.”

FOMC

Courts won’t touch this (exercise “equitable discretion” to decline to hear case, even when Court finds standing and actual controversy)

Quantitative Easing

More than $3 trillion so far

$85 billion per month since December

2012 – December 2013

“The one certain outcome of QE is that

those with assets benefit relative to those

without,”

John Kay, Quantitative easing and the

curious case of the leaky bucket, The

Financial Times, July 9, 2013.

The Fed’s “expanding

balance sheet”

$0.00

$500,000.00

$1,000,000.00

$1,500,000.00

$2,000,000.00

$2,500,000.00

$3,000,000.00

$3,500,000.00

$4,000,000.00

$4,500,000.00

Total Assets

Why is Fed Allowed to print

money?

Originally: to prevent bank runs by functioning as lender of last resort

Now: “to maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

12 U.S.C. § 225a

Private banks also create

money with blessing of Federal

Reserve

Fractional-reserve banking

Current Reserve Rates

0% for banks with “net transaction

accounts” of less than $13.3 million,

3% for banks with up to $89 million, and

10% for banks with net transaction accounts

in excess of $89 million.

How much money are private

banks creating through this

process?

Private banks create over 80% of money

supply ($11.103 trillion out of $14.831

trillion)

Monetary Base($3.728 trillion)

M2 ($11.103 trillion)

By comparison, the Fiscal

Numbers are:

Federal Deficit: $1.086 trillion (fiscal year 2012)

Total receipts: $2.450 trillion

Total outlays: $3.537 trillion

Total 2012 expenditures on food and nutrition assistance programs (including SNAP and WIC): $ 0.106 trillion

www.omb.gov (historical tables)

So what?

Simpson-Bowles is wrong: America cannot “go broke”

We need a new paradigm that recognizes the relationship between fiscal and monetary policy.

Congress should evaluate the policy value and inflationary effect of all money creation as weighed against policy cost of status quo.