DIAGRAMS & DOLLARS: Modern Money Illustrated

by J.D. ALT

economists and budget theorists

now debating

Modern Money...

This small eBOOK is an attempt to

My hope is

All the transactions that occur in the Private Sector (PS) pot add up to what is called the GDP (gross domestic product).

The second “pot” is the Federal Government (FG), and the Dollars contained in this pot are SPENT to pay for public goods –weather forecasting, bridge repairs, Medicare services, etc.—and to make the “transfer” payments like social security, unemployment aid and food stamps that many Americans depend on to one degree or another.

the diagram gives Congressional leaders the clear impression that the Private Sector somehow creates the U.S. Dollars we all use, though there is no exact articulation about how this occurs.

if the two spigots draining Dollars out of the PS pot are opened too wide—if too many Dollars are drained out of the PS pot into the FG pot—the entrepreneurs won’t have enough money left to invest in creating jobs and making profits, and the Private Sector GDP (Gross Domestic Product), as a consequence, will begin to shrink.

It is fear of this shrinkage that appears to constrain the number of Dollars that Congress can allow to flow into the FG pot, and this, of course, constrains the amount and kind of public goods and

services that can be planned for in the N...

that spending is really of two kinds: “Entitlement” spending and “Discretionary” spending.

As Entitlement spending (Social Security, Medicare and Medicaid, Food Stamps etc.)

Discretionary spending (infrastructure, education, medic...

PG

Thus, if we plan to take care of our elderly, under-nourished, poorly housed, accidentally disabled, under-educated and unemployed citizens—which somehow seems an ever-growing need as the popu...

bridges, our water and sewer systems, our electrical grid and public transit systems, all of that (and more) must...

this diagram is a large part of the reason they so relentlessly fight and bicker over every topic imaginable, because every topic imaginable seems ultimately tied to the frustrating fact that we simply don’t have enough “money”.

But how do we know if a diagram is accurate—that it reflects the actual realities we are dealing with?

First, we could ask if all the “parts” have been accounted for. Maybe some important things have been left out.

Then we could ask if the relationships and flows are co...

Since our diagram seems to naturally follow a “plumbing” metaphor, we could ask, in essence, have...

the Federal Government buys its public goods and services from the Private Sector. Aircraft carriers and submarines are built by Private Sector shipyards. Weather and GPS satellites are designed and built by private engineering laboratories. And while the space-launch facilities at NASA are a “public” enterprise, all the scientists and technicians who work there are private citizens. Even the Navy’s Vice-Admiral in charge of sea-recovery operations, when he goes home on weekends and changes into his gardening clothes, is a private citizen.

the Dollars for discretionary spending, then, flow into the bank accounts of private U.S. citizens—into, that is, the PS pot.

the same is true with entitlement and transfer payments: Social Security checks are directly deposited into private bank accounts, food-stamp Dollars flow into the bank accounts of farmers and food processors and distributors. Dollars for unemployment aid are used by the unemployed to buy shoes and subway tokens and cups of coffee—all going by some direct or indirect route into the private bank account of a U.S. business or citizen.

but if we change the “plumbing”

the realities just described (as shown above) it makes a significant difference in what we see.

changed the plumbing on the other side of the FG pot: the “principal & interest” payments on the Federal Government’s “debt” also are deposited into private bank accounts as well—the overwhelming maj...

government’s spending goes back into the Private Sector pot—benefiting

benefiting U.S. citizens and businesses with both public goods and Dollar deposits—the amount of Dollars available for government spending is still limited to what can be “safely” taxed or borrowed out of the Private Sector pot in any given budget-year.

Even though we have a better picture of the complete cycle of the fiscal flow, we still have the dilemma that if we open the TAX and “BORROWING” spigots too wide, the private entrepreneurs won’t have enough Dollars left to start ventures, create jobs, and m...

Allowing the Private Sector to keep vastly MORE of the Dollars it creates

Small government and unfettered markets are the ticket—and the diagram (even the “complete” one we are now looking at) seems to support this perspective.

Except for one problem—one fundamental flaw in the diagram’s most basic logic: it is not possible for the Private Sector pot to “generate” its own U.S. Dollars!

Of course banks in the PS pot leverage U.S. Dollars with bank loans into huge sums of “bank dollars” and these are used for “money” in the PS pot just as real U.S. Dollars are used.

As the FG spends, the number of Dollars in the PS pot grows. If the number of goods and services available for people to buy in the PS pot does not grow by an equivalent

amount, the additional Dollars flowing in will cause prices to go up—perhaps dramatically. This is the “inflation” that Congressmen and economists are constantly warning against. To prevent this from happening—or to prevent the rate of inflation from getting disruptively high—there has to be some means for taking Dollars out of the PS pot.

This essential REMOVAL operation is accomplished with two pieces of “plumbing” we can now add, one at a time, to the new diagram: The first plumbing addition is a “drain” that simply takes Dollars out of the PS pot and destroys them. This drain is Federal Taxes. Drained out and destroyed, Dollars paid in Federal taxes are no longer availabl...

Shouldn’t the “drain” really be a sump-pump that lifts the tax Dollars back up and dumps them into the FG pot?

It would be a mistake, though, to add the “sump-pump” plumbing to our diagram. The reason is the underlying reality of what a U.S. Dollar actually is: It is simply a promise, by the U.S. sovereign government, that it will accept the Dollar as payment for a Dollar’s worth of taxes.