A great deal of angst has emerged over the huge amount of money, initially two trillion dollars, being conjured “out of thin air” to counter the economic collapse occurring under to stay-at-home orders and business closures as the COVID-19 pandemic accelerated. The Two trillion dollars quickly proved to be wildly insufficient to stimulate the economy and put money in the pockets of workers who either have lost their jobs or were furloughed when all non-essential businesses closed on orders by most state governors.
Modern Monetary Theory advocates say that a government that controls its own currency can “print” (or create on its electronic books as debt) as much money as it wants without causing instability in the economy.
Of course, today the economy is already plunging into a collapse that will likely become deeper and more severe than the Great Depression, because of the necessity of social isolation to suppress the COVID-19 pandemic. A number of issues swirl about these developments, but here I will focus on the myths and illusions about money and in particular the US monetary system.
Fiat Money, Fiat Debt
As long as I can remember, since taking my first social psychology class in college, I have wondered why there is so much confusion about money. Really, what is the difference between “real money” and “fiat money”? A lot of history is involved, but our debt-based economy resulted from the passage of the Federal Reserve Act in 1913, almost identical to a plan forged in a secret meeting of bankers and financiers in 1910. That is why the US Treasury has to borrow from the central bank to create money “out of thin air.” That, rather than “wasteful spending,” is the origin of most of our “national debt.”
Why is it that a sovereign nation must “borrow” money from its own central bank in order to infuse cash into its economy? Because private bankers and financiers shaped the US banking system in a secret meeting on Jekyll Island off the coast of Georgia in 1910, that’s why. Nothing—other than the legislation outlined secretly on Jekyll Island—in the nature of money or banking requires a sovereign nation to subordinate itself financially to its own banking system. The US Congress created the Federal Reserve banking system based on the agreements forged in that meeting of six members of the nation’s financial elite.
Fiscal conservatives worry about the federal debt growing too large. On the other hand, such ballooning debt would not exist but for the Treasury being required to borrow from the Fed in order to issue money. As the debt grows, servicing interest payments becomes an ever-growing burden on the federal budget. On the face of it, that seems unhealthy, at least for “the economy.” Yet, Modern Monetary Theorists argue that the size of the national debt does not really matter that much.
Even Trump, who has had a steady flow of money troubles and bankruptcies in his checkered business career, has said of the federal debt during his 2016 campaign, “you never have to default because you print the money.” Like most of his statements, that is not accurate. The Treasury “prints” only money it has “borrowed” from the Federal Reserve, which creates it out of thin air by adding another Treasury debt to its balance sheet. Wall Street hedge funds and investment banks have also taken to the idea of unlimited borrowing of phantom money.
Virus Pandemic and Economic Depression
In response to the COVID-19 pandemic shutting down the US economy, few will complain that the government should not borrow to provide cash to workers who suddenly have no income on which to survive. Fiscal conservatives would argue that this should be an exception to the rule of fiscal frugality. In any case, it appears that large corporations—rather than the suddenly unemployed and cities and states whose revenue streams suddenly stopped flowing—get most of the money. This is yet another example of the failed “trickle-down” theory of economic policy. The legislation includes little to restrain stock buybacks or executive bonuses This will only deepen and lock in a depression of the main street economy.
Many fear an economic collapse and devaluation of the dollar. But then, we already have an economic collapse, one unlike any before. It will only get worse as the pandemic works its way through the population. Given the epidemiology of the COVID-19 pandemic and its projected course, the economic consequences will likely exceed those of the Great Depression of the 1930s. The foolish politicians in Washington will not be able to turn on a switch to “restart” the collapsed economy any more easily than wish away a second wave of the pandemic.
Any rational person would conclude that we need to transform the economy as well as establish a pandemic early detection and response system.
Robert MacNeil Christie, Author 