“Your editorialist, Thomas G. Donlan, wrote, “People might learn that it’s all funny money.” I suggest we use the more proper term “fiat money,” wherein our nation is an autonomous issuer of its own currency, existing within a floating exchange-rate system.
We must be careful comparing the federal government with a household (or state or business) because Washington has no solvency constraint. The federal government can’t run out of money (unless Congress decides it should), as it can always call on the banks and the Federal Reserve to serve as agents of the government.
The constraint is inflation, not solvency. But given the weakness in our economy, along with high unemployment, I don’t see much risk of inflation anytime soon.”
That’s precisely right. We need to really hammer this out there. Although the US government has outsourced the creation of money to the private banking system it still wields incredible power via its ability to tax and essentially bribe banks to do its bidding. Of course, an autonomous government doesn’t eliminate the risk of hyperinflation occurring, but it does eliminate the risk of running out of money. So, when we discuss the debt ceiling and other such debates it’s foolish to think of the government like a household. Unless you have the ability to tax $16 trillion of output then you’re not in the same boat as the government.
Anyhow, thanks to Steve W on helping others better understand the way our monetary system is actually designed.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.