Sunday, June 19, 2011

Private and Government Finances are Not the Same

Many people accept without question that federal and private budgets should be thought about in the same terms. Republican leadership has compared federal deficits to household deficits, and have alluded to the specter of bankruptcy. President Obama has said that the country is running out of money and that like households, the government must tighten its belt. Nothing could be farther from the truth.
Below, we make some comparisons between federal and private finances that make us wonder why anyone would think they should be the same. 

Private entities seek to profit by providing goods and services to buyers. 
Government does not seek to profit, but tries to provide a secure, fair, healthy, and just environment in which its citizens can prosper.

Issuer vs User
Private entities are users of dollars, earned or borrowed, to enable spending on goods and services.
Government is the issuer of dollars that it creates in the process of spending to purchase goods and services from the private sector.

Currency as IOUs
Private entities can borrow up to creditable limits, but they cannot force anyone to accept their IOUs.
Sovereign currency represents government IOUs that are binding as legal tender.

Private entities become insolvent when their debts exceed their ability to pay them off, which leads to undesirable consequences.
Government is never insolvent; with a sovereign, floating exchange rate currency it can always meet any debt obligation denominated in its own currency.

Private entities earn, save, and invest.
Government spends, taxes, and makes policy to steer the economy toward full employment and stable prices.

Gold Standard
It is apparent that government finances are completely unlike, even the opposite of, private finances. Under the gold standard, which was abandoned for good reasons in 1971, government and private finances were similar. 

United States Gold Certificate
Fifty Dollars In Gold Coin
Payable To The Bearer On Demand

As people, even our President, regard private and government finances as comparable, it reminds us that the transition has not yet been made from the old, convertible, fixed-exchange rate Gold Certificates to the modern, non-convertible, variable exchange rate, Federal Reserve Notes.

One of the disadvantages of the gold standard was countries that consistently ran foreign exchange deficits, as we do, were unable to stimulate their economies to compete with other countries. They were literally losing money to those countries. Our country is behaving as if we were constrained in the same way we would be under a gold standard. It's killing our future!

Related Reading:

Edited 06/27/2011 to make it easier to read.


  1. View Robert Reich on Youtube "The Truth About the Economy in less than 2 minutes and 17 seconds." MDM

  2. MDM, thanks the for reference to Reich. I'm surprised that a labor wonk like him did't propose a WPA-like program. Unfortunately, he and others are so intimidated by deficits and debt they can't see that the government has a lot of room to spend, even if the rich don't pay more.
    If we take the trouble to understand our money system, we will be less pliable to arguments like Greece representing our future and other misinformation.