Stop Using The Term 'Printing Money'
Try to understand: The public tends to view dollars/pounds in terms of a physical object that travels in an eternal circular flow.
I: Introduction - The Errant, Fantasy View of Currency
People tend to view “money” as though it were a precious stone. It's always been here since the beginning of time. It was discovered by the private sector and put to use as a medium of exchange. This makes barter easier. “Money” is a store of value. “Money” is scarce. There are different types of precious stones too.
The Australian dollar, the US dollar, the Canadian dollar, and the New Zealand dollar all might be called “dollar”, but they are very different types of precious stones. The Pound Sterling is a special type of rock. The reason why the United States uses the US dollar is that everyone in the private sector agrees to use it. The same goes for the UK – Everyone agrees to use it. National governments are forced to compete with the domestic private sectors of their nations for their respective currencies. For example, the US government is forced to compete with US private sector entities for the scarce supply of US dollars.
If these governments tire of competing for the scarce supply of “money”, or in a fit of irresponsibility they wish to spend wildly beyond what they can collect in taxes or borrow, they start “printing money”. The act injects fake, monopoly money into the economy diluting the “money supply”, devaluing the “money”.
In very simple terms, people view a dollar as a diamond and government “printed money” as cubic zirconia – a fake diamond. So, there is no entry point into the economy and no exit point. It just circulates forever and ever. Of course, you will hear people say that a dollar only leaves the economy temporarily when the paper bill “gets too worn out”, but it is replaced with a new one. In saying that, they unwittingly admit that their view of “money” is wrong – a total fantasy. Who replaces the dollar bill? The government does. How the hell does a precious commodity get “too worn out”, and how does the government manage play God by conjuring into existence a scarce commodity called the “US dollar” to replace the old “worn out” commodity if the government can’t do anything right, and the government cannot create real “money”?
But, that’s beside the point. The point is that when you use the term “printing money” to describe government spending, you are perpetuating the above nonsensical view of currency with the general public. It must stop. Another thing that really gets to me is when I hear people say, “The government CAN always print money to pay its bills.”
Can? OMG! Can? First, people employ a term that has no application to the real world, then they want to double-down on delusion through their choice of verbs. How does “can” double-down on delusion? Think about it. By using the term “printing money” you are telling the public that there are real dollars and fake government-printed dollars, and then by using the verb “can”, you are telling the public that the government doesn’t need to spend real dollars because, if it so chooses, it CAN print fake dollars:
“Don’t worry about Social Security going broke. It can’t go broke because the government CAN simply ‘print money’ (Can = If the need arises).”
I do not care if that is not what you mean by “printing money”; that is what the public will hear and think you mean. MMT novices tend to use the term frequently, and the reason why they do is that they themselves do not know what currency is. How can that possibly be? The problem unintentionally stems from the MMT activist community’s method of outreach.
II: Problems Specific to Novices
The goal of the MMT activist community is to break through wrong thinking by starting discussions concerning the one thing that the public gets hung up on: Taxation. There’s nothing wrong with this approach per se. Whether the approach is wrong or not depends entirely on what the goal of the activist is: To teach MMT, or to raise awareness of what MMT implies in order to effect meaningful change. Oftentimes, people who have been exposed to MMT by an activist will mistake the activist for a teacher of MMT. Even worse, many times they will mistake the activist for a professor, or they will call the activist “an economist”. The same mistake is also applied to actual teachers too.
Just because the person is a teacher of MMT, that doesn’t mean he or she is or was a professor or even an economist. What if they are financial analysts? What if they are econometricians or statisticians? What if they are bond traders? What if they are lawyers? What if they are intelligent people who have studied MMT for 10 years and are more than qualified to teach the basics on social media? What if they are sociologists? What if they are university students pursuing a degree in economics? So, that’s another thing that novices need to forget about – status and credentials. Krugman’s credentials mean about as much to economics as a banana peel lying in a mud puddle does to medical science. There are MMT academics out there. They are the core team. Rely on them and their body of work 100%.
I’m getting off track here, so let me put this as bluntly as I can so that I might close out this point with zero misunderstanding:
A novice cannot teach MMT to anyone.
A novice can help spread the word, but he or she cannot teach. The very idea is dangerous. The words “beginner” and “novice” make this point obvious.
novice (noun): A person new to or inexperienced in a field or situation.
Further, it is insensible and thoroughly meaningless for a novice to pursue the status of teacher. The novice should be spending his or her time learning, and when I say “time”, I don’t mean two, three, or six months max to teacher status. I mean time as in “years” spent educating yourself. Now then, can a person who has diligently studied MMT for 2-4 years teach the basics? Yes, more than likely they can. If they have the knowledge, then it will all boil down to their teaching skills. I know some actual tenured professors who know their subject, but they suck as teachers. However, less than 24 months? No.
Can a novice be an MMT activist? Absolutely; right off the bat. So, to sum up: A teacher teaches, and an activist reaches. A teacher teaches methodically, even if those methods are highly unorthodox, and an activist raises awareness. A teacher can be an activist, but an activist isn’t necessarily a teacher.
I have great faith that Bill Mitchell’s MMT University (www.mmtuniversity.org) which opens this October will help to sort things out.
Teaching has everything to do with knowledge of the subject matter, a certain mastery of that subject, or parts of it thereof, and the potential for those who do not possess the knowledge required to mislead others, or at the very least, make the novice look silly occasionally. A novice doesn’t have the knowledge to teach, and if he or she tries their hand at it, they will inevitably confuse people at some point and then I and others will have to undo it. This makes things more difficult for people like myself, and for those who are genuinely trying to learn. Which, then, brings me back full circle to the use of the ubiquitous term “printing money”. Time for a deep dive.
III: What Currency Is
As I mentioned, the activist reaches people and to do that requires a very deliberate attack on a fundamental misunderstanding of the purpose of a national government’s taxation efforts. Oft repeated in the US is the phrase, “Federal taxes don’t fund federal spending”. Beginners think that this is the beginning of MMT; the fundamental insight – It is not.
Firstly, the taxation issue is halfway through the beginning. It skips over the question “what is currency”. Hence, most who are new to MMT do not begin at the beginning and are left with the same errant view of currency that the public has, and they attempt to debate and discuss the subject from the standpoint of “money” being a medium of exchange. This makes things harder for the novice because, now, they have to back up and start over with what is a very abstract concept – abstract, but reality nonetheless – given their errant view of “money”. I will address this concept with an overview momentarily.
Secondly, the fact that the national government doesn’t tax to fund its spending is not a fundamental insight of MMT. The fundamental insight of MMT is that the national government has flexible policy space because it does not have a hard financial constraint on its spending. Technically, as Bill Mitchell says, the government budget constraint is an ex-post accounting identity, not an ex-ante financial constraint as the mainstream errantly views it. This realization allows the government great flexibility in pursuit of its social agenda. And, as a side note for beginners, this is precisely what the national government’s “budget” is – an agenda. Through fiscal policy, the government sets its social agenda for the nation. This is why the word “budget” when applied to a currency-issuing national government is misleading and should not be used. The term “fiscal agenda” is more appropriate. The term “budget” is not synonymous with fiscal policy.
All that being said, I will use part of an article that a wrote in March 2018 to provide you, the beginner, with a brief overview of the concept of currency and debt to demonstrate why the use of the term “printing money” makes no sense and must stop.
Using common terms to facilitate understanding with the general public, the dollars required to pay federal taxes do not come from the private sector. They do not come from the rich, the middle class, the working class, the poor, large corporations, medium-sized businesses, small businesses, nor do they come from foreign entities such as China. All dollars used by the US private sector to pay federal taxes come from the US federal government. In short, you do not fund the US government, the US government funds you.
IV: The Unit of Account
In the US, the unit of account is the US dollar. In the UK, the unit of account is the pound sterling. In Australia, it is AUD. The US government owns and controls the unit of account in the United States. The US dollar is not a piece of paper or a coin. It is a unit of measurement just like kilometers is a unit of measurement. But what is it that the US dollar is measuring? To answer this question, let’s take a look at the different ways that we measure things.
V: Units of Measurement
Let’s ask the question, “How far is it from Chicago to Miami?”
The distance from Chicago to Miami is 2,216.
Hey, that’s great. But 2,216 what though? Clearly, the number alone is not enough information. We need to know the unit of measurement before we can know the distance. Is the number 2,216 miles, light years, meters, feet, or astronomical units? In this case, 2,216 is the distance measured in kilometers. To know the distance in miles we must change the unit of measurement. We must now convert kilometers to miles which will then result in a different number:
The distance from Chicago to Miami is 1,377 miles.
Now, let’s look at measuring size. We ask the question, “How tall is Bob Behunia?”
Bob Behunia is 180.
That’s great for Bob, but not so great for us. 180 what? Again, we need to know the unit being used to measure Bob’s size. In this case, the unit is centimeters. Bob is 180 cm tall. To know Bob’s height in feet we must change the unit of measurement. We must now convert centimeters to feet:
Bob is 5 foot 11.
In both of these cases, we are measuring something that is physically real. But now, let’s measure something that isn’t physically real: The size of an obligation. In this case, we will have a real object but we are going to measure something imaginary that is attached to the real object.
VI: Measuring the Size of an Obligation
An obligation is a debt, whether that debt is service related such as labor charges to fix a car, or satisfied over a long-term such as with a mortgage, or is satisfied immediately when you buy groceries. Like distance, length, and size, to measure the size of an obligation we first need a unit of measurement. When it comes to economics, we measure the size of obligations by denominating them in a particular unit of account. In other words, we price things. So, when we measure the size of an obligation attached to a good or service, we are pricing that good or service. For example, consider an iMac:
A 27 inch iMac is 1,799.
And just like the examples measuring distance and height, we are stuck with the same question: 1,700 what? Again, the number isn’t enough information to go on. We need to know the unit of measurement (the unit of account). In this case, we are talking about US dollars:
The size of the obligation attached to a 27 inch iMac is $1,799. That is its price, or in other words:
The obligation attached to a 27 inch iMac is 1,799 US dollars in size when measured in US dollars.
If we wish to know the price of the iMac in the UK, we must change the unit of measurement (unit of account) to pound sterling. Just like kilometers to miles, and centimeters to feet, we must convert US dollars to pound sterling:
The obligation attached to a 27 inch iMac is now 1,285 pound sterling in size when measured in pound sterling.
In short, the price of the iMac is now £1,285.
The iMac itself is real, the obligation attached to it - the price - is an idea and so is the money used to purchase it. And because the obligation is an idea, the price is highly elastic and can change (inflation/deflation) even though we are using the same unit of measurement. We need not convert to another unit of measurement to change its dimensions. If you are in the United States and you want one, then you are obligated to pay one thousand, seven hundred ninety-nine US dollars. If you are in the United Kingdom, then you are obligated to pay one thousand, two hundred and eighty-five pounds.
And so, that is what ‘money’ is. Money is not a scarce commodity or a medium of exchange. Money is a credit denominated in a particular unit of account that offsets a debt (obligation) denominated in the same unit of account. When we are talking about currency and national government tax liabilities, we are talking about State currencies and what makes them the most widely-accepted monetary instrument in their respective nations.
VII: The National Government as the Currency Monopolist
If the national government in question declares a unit of account, denominates its tax liabilities in that unit of account, and then issues tax credits (currency) also denominated in that unit of account, floating on an exchange free of a currency or commodity peg, then the national government in question is a sovereign currency-issuing government and it is the monopoly supplier of currency for the nation that it sits in authority over. As the monopolist, the national government sets the price level of all goods and services by denominating all obligations in its chosen unit of account. It achieves this by first imposing tax liabilities that are denominated exclusively in its chosen unit of account, and then issuing tax credits that are also denominated in its chosen unit of account, and then demanding them back as the only means to settle the tax obligation. Attached to the tax liability is a prescribed punishment for not paying the tax. The threat of punishment is the key; it is a sufficient condition to cause a demand for the government’s currency. In other words, the force of taxation causes people to need the government’s money to pay their taxes to avoid punishment. Entities within the nation find themselves in a position where they are required to do something to obtain the government’s money. What is that something? They must either:
1.) Offer their goods and services to the national government, or
2.) Offer their labour to the national government.
Hence, national government taxation drives goods/services and labour power to the national government. Taxation is what allows the government to supply itself with the things necessary for it to function as government.
As the national government is the currency monopolist, it is the only supplier of currency for the nation. In other words, since the government is in a position of authority to declare a unit of account, to impose tax obligations denominated in that unit of account, and to determine the ‘money thing’ that it will accept as payment for taxes, and to issue the ‘money thing’ denominated in its chosen unit of account that people need to pay their taxes, and to prescribe punishment for not paying the tax, the private sector is not in a position to demand a price in that unit of account from the national government for its goods and services, or for its labour. The national government determines the price that it is willing to pay for goods and services and for all labour offered to it.
Put simply, because the national government is the currency authority, it alone denominates (prices) all obligations in its unit of account.
The private sector now brings its goods/services and its labour to the national government, and the government declares that it will pay so many dollars for the goods/services and labour. The private sector can do nothing but accept what the government is willing to pay because there is no other means available of obtaining the tax credits necessary to extinguish the tax liability. The national government then generates its own money thing (tax credit) denominated in its chosen unit of account and “pays” the private sector for the goods/services and for the labour. It does this by crediting bank accounts: Making numbers larger.
Treasury will credit an individual bank account which then compels the central bank to add reserves to the bank’s reserve account which is maintained at the central bank. Treasury credits a bank account by simply ordering the bank in question to make the numbers in the account larger. The central bank then adds reserves to the bank’s reserve account in the same way: By making the numbers in the account larger. Both activities are accomplished through keystrokes. There is no gold, nor paper notes, nor coins backing the keystrokes. The keystroked numbers are mere credits that are denominated in the US government’s chosen unit of account, and those keystrokes are called “US dollars”, “Pound Sterling”, “Australian dollars”, etc., though most of the general public is unaware of this fact. The reserves emitted by the central bank are “government money” (high powered money, or HPM for short) which is necessary to allow payments to clear.
An individual bank account is a bank statement; a record of how many central bank liabilities the account holder has a claim on. When you spend $35 with your debit card, what you are doing is merely subtracting the number 35 from your bank statement. In doing so, you are also adding the number 35 to the bank statement of the person from whom you purchased something. When your employer pays you, he/she/it is doing the same thing: Subtracting numbers from their bank statement and adding numbers to yours. The important thing to note here is that the payments between the banks have not cleared and cannot do so without government money being subtracted from one reserve account and added to another. To clear the payment, the central bank deletes the number 35 from your bank’s reserve account and then keystrokes the number 35 into the reserve account of the bank where the seller has an individual account. The payment is now settled.
Reserves are central bank liabilities denominated in the government’s chosen unit of account and they are the highest form of monetary instrument. The reason why is because the government has declared that central bank liabilities are the only thing which can settle all tax liabilities owed to the government. Because treasury credited bank accounts and because the central bank emits government money (reserves) into reserve accounts, the private sector now has the central bank liabilities necessary to settle its tax obligations owed to the government. Put simply, when the national government spends, it is actually issuing tax credits. If the government issues more tax credits than it taxes away, then the private sector as a whole realises an income.
The important insight from this that the novice should obtain is that the US dollar, the Pound Sterling, the Australian dollar are units of measurement, just like “meters”, “feet”, ‘inches” that measures the size of obligations. When the government spends, what it is doing is employing a social tool to measure the size of obligations – the entire price level of all goods and services. As the monopoly issuer, it alone chooses when to adjust that measurement up or down. Hence, inflation/deflation is, as Warren Mosler says, a function of the national government’s price-setting capacity as the currency monopolist. Continuing with an example from Mosler, if last year, the government measured (spent) $1 trillion, but this year, the government measures (spends) $0, that’s some serious deflationary force unleased.
VIII: The Term “Printing Money” Has No Connection to the Real World
Now to the meat of it. I touched on some of what follows in the introduction, but essentially, the novice who uses the term “printing money” is saying that:
1.) The national government prints paper cash to spend.
2.) The dollar is a precious, rare commodity and the national government has none of these dollars.
and that's what the public will hear because that is what the misinformed public believes.
The typical misinformed person believes that there are real dollars that are scarce, found only in the private sector, and then there are these fake dollars that government prints and spends into the economy. So, when the government “prints money” it dilutes the supply of real, all-natural, wholesome dollars with monopoly paper money, devaluing the dollar and it will eventually create hyperinflation.
Use of the term “printing money” by an novice MMT proponent is a case of too much too fast: A novice wanting to spread the word and “teach” (A novice "teaching" - God give me strength) others before they have the knowledge to do so and their use of the term stems from a fundamental misunderstanding as to what the dollar is.
Again, the dollar is not a commodity. It is not a physical thing. It is not an object. The novice believes that it is these things, which is why they ask the question, “If we don’t print our own money, then how does the government create money to spend?” You can see this incorrect understanding manifesting itself in a meme circulated by MMT novices showing sheets of paper currency being printed by the Bureau of Engraving and Printing with a caption informing everyone that this is where the government gets its money to spend. That meme is utterly embarrassing.
Further, it is quite clear that the misinformed public believes printing money will devalue the currency. Wrong for two reasons:
1.) Devaluation only occurs in a fixed exchange regime, not in a free float, inconvertible fiat regime. Currency depreciates in the latter arrangement.
2.) As there is no gold pegged to the dollar, which would require that the government ensure that the level of circulating currency is commensurate with the supply of gold at the fixed exchange rate, increasing the net money supply cannot possibly “devalue” the currency already in circulation.
To be clear, what these unfortunate people mean by “devalue the currency” is creating inflation. Some novices have no solution for dealing with the devaluation argument as they are unaware that inflation is what the person is talking about. Other beginners are aware, but then when the subject of inflation is brought up, it is common to see the novice who uses the term “printing money” reply:
“Inflation is too much money chasing too few goods”
which, believe it or not, is nothing more than the QTM viewpoint! Yet another "God give me strength" moment for me. But I digress.
Hopefully as you can clearly see, the term “printing money” has no connection to the real world because currency is not a physical object, or even a digital one. It is a social construct; an IOU; an idea. The names “US dollar”, “Pound Sterling”, and “Australian dollar” are units of measurement that are controlled exclusively by their respective national governments. “US dollar” is the name of the “money thing”. The “money thing” is the credit issued by the US government. A paper $10 bill is just the physical representation of what is actually a mere idea; a social construct; an IOU issued by the US government.
So then, ask yourself:
When you measure the length of a driveway, are you “printing meters”? Are you “printing feet”? When you measure the distance between Chicago and Miami, are you “printing miles”? Are you “printing kilometers”? When you have a good idea, are you “printing ideas”?
No. That’s silly. And when the government bypasses the private sector and sells bonds directly to the central bank, it is not “printing money”. When the government runs off dollar bills at the Bureau of Engraving and Printing, it is not “printing money” so that it can spend. Government “spending” is the measuring of things. The “US dollar” is the name of the unit of measurement, and the numbers represent the size of the obligation that the government is measuring.
Do you see how silly this “printing money” business is?
Novice: “I tell people that the government prints its own money, but people keep on telling me that government is devaluing the dollar!”
And that’s because when you use the term “printing money” you are telling people that you agree with them. You might not be agreeing with them, but they think that you are because that’s what they are hearing.
“Money” is a vague, very bad term to fling around. I only use it for the sake of familiarity when I assume people might not understand me, and when I do use it I place it in quotes, unless I forget to do so. Hey, shit happens. “US dollars” or “British pounds” are also other potentially misleading terms, though not as bad as just plain old “money”. And yes, I do have to explain this.
We say “ten US dollars”, or “one hundred British pounds” because anything that measures in size greater than the number one obviously must be plural. What you might not be aware of is that this does not mean that $2 is two separate physical or digital objects combined. It’s just $2 and it will always be $2. If you spend fifty cents, then the $2 doesn’t break into smaller bits. The number $2 is just replaced by the number $1.50.
For example, because the obligation attached to an iPhone is larger than the number one when measured in US dollars, we pluralize and say, “Four hundred and ninety-nine dollars”, but not because 499 individual real, physical or digital objects used as a medium of exchange are required in trade to purchase an iPad. You’re not trading anything; you are extinguishing an obligation by measuring out credits in terms of US dollars.
A number is not a physical object. 10 is just 10, 5 is just 5, 100 is just 100. You cannot reuse the number 100 or move it to another destination. Once you type it or write it down, it is brought into existence and it exists in that one spot. Once it is deleted, if you need it back, the only thing you can do is type another separate instance of the number 100. When you subtract 100 from 1,000, the number 100 doesn’t move to some holding tank. The number 100 merely tells us that this subtraction operation will cause the number 1,000 to be replaced by the number 900.
IX: What the Monetary System is and the Fundamental Problem with Mainstream Economics
The monetary system is nothing but a system of credits canceling debts, both denominated in the same unit of account, controlled by the national government. And the entity that keeps track of all of the credits canceling obligations is the central bank. The market activity of buying and selling goods and services is a secondary activity to the main activity which is credits cancelling debts. Being a seller or a buyer of goods/services is just one way of many that a person can become a creditor or a debtor. But this is the activity that orthodox economics holds as fundamental, and it is the activity which the orthodoxy asks you to pay exclusive attention to. Why? Because orthodox economists believe that pure barter is how economies worked prior to the introduction of “money”, and they believe that “money” is a commodity used as a medium of exchange to make barter easier. Hence, orthodox economists believe that barter is the underlying activity called “the economy”, and that markets preceded kings, authorities, and governments.
The truth is that mainstream economics has everything upside down: Governments, by issuing currency, create the conditions necessary for markets to develop. You cannot possibly have the buying and selling of goods and services priced in US dollars, let alone the more fundamental activity of credits extinguishing debts both denominated in US dollars unless the US dollar exists, and the only way that it can exist is if the US government first declares the US dollar to be the unit of account and denominates its taxes in it, so that the private sector will offer up goods and services to the government, enabling the government to price the goods and services in US dollars, and then issue the tax credits denominated in US dollars!
See that? That is the fundamental error of orthodox economics, and from that core error, nothing but total nonsense flows. The entirety of mainstream economics is pure fantasy.
And that is the beginning of monetary theory. Abstract perhaps, but nevertheless, reality.
So, I hope that you can now better understand why the term “printing money” should not be used unless you know what you are doing. A better term for novices is “net issuance of currency”, or “issuing currency”, or you could just say that the government spends by crediting bank accounts with its IOU.
Also, hopefully you now have a better understanding of currency, although I’ve provided a mere overview and there is much, much more to study regarding the concept. It should be enough to get you thinking in the correct way.
“Printing money” is not a valid shortcut. It should not be used by novices at all. It will only perpetuate mainstream nonsense, unless the person has sufficient knowledge to explain the difference between what the mainstream means by “printing money” and what the MMT proponent means by the phrase. And note, it requires an explanation of some length. There is no bumper sticker version of MMT, and there never will be one. Neophytes should stop looking for one. Many concepts are simply going to require lengthy explanations, and that requires knowledge of the subject matter, which means, homework time for beginners. This is precisely why I always urge beginners to spend their time learning.This doesn't mean you can't be an activist. You can. Go for it. Spread the word. But please, spend much of your time learning, don't try teaching, and don't use the term "printing money".