IBM ‘federal government’ v. IBM ‘non federal government’

The day that IBM went from being a private company to a public company was the day that IBM went from being a user of someone else’s currency to a sovereign issuer of their own. Understanding that difference is understanding the difference between the federal gov’t and everyone else.

If you ask any of IBM’s accountants (or any publicly traded corporation’s accountant) how many dollars they are budgeted to spend this year, he or she can give you a figure to the penny. Ask that same person how many shares of their stock that they are budgeted to issue and grant out, and they can’t—because there is always a limitless amount of shares that can be created. There is no IBM shares ‘budget’. IBM boardroom executives will ‘print’ whatever amount of IBM shares it deems necessary, and ‘spend’ those IBM shares just like a currency, to meet the long-term interests of the company. How IBM shares are valued in the market is partly a reflection of how good or bad those IBM boardroom decisions have been.

The same paradigm difference exists for the US federal government and US dollars, or any monetary sovereign that is the monopoly issuer of a fiat currency. Know this and you know how the post-gold standard, modern monetary system really works. If you are getting tired of shivering every time a politician or a pundit click-baiting you yet again about the dangers of the US national “debt”, then just step back from that picture, tune out that noise, and be the first kid on your block to understand the heterodox economic theory known as Modern Monetary Theory (MMT).

In the post-gold-standard, modern monetary system, the two different paradigms of our federal and nonfederal government are, in its entirety, not so different from any publicly traded company that constantly issues more of its own shares to be used as a currency for an incentive for executives, to acquire other companies, etc. Shareholders want that company to do this, because it hopefully grows the company. The part of IBM Corporation that deficit spends with dollars (let’s call this the IBM ‘nonfederal government’ division of the corporation), because it cannot issue more dollars, it is getting into debt of dollars; or, to put it in another way, every time IBM deficit spends in dollars, it is adding to the outstanding float of debt in dollars. The part of IBM that deficit spends with IBM shares (let’s call this the IBM ‘federal government’ division of the corporation), because it can issue more IBM shares, it is not getting into debt of IBM shares; or, to put that in another way, every time IBM deficit spends IBM shares it is subtracting value from the outstanding float of IBM shares…

The big difference between the IBM ‘federal government’ issuing more IBM shares and the US federal government issuing more dollars is the amount of dilution that takes place. When IBM announces that it is issuing more IBM shares, you can calculate exactly how much less a percentage of ownership in IBM that each outstanding IBM share will become. For example, if there are 10 shares of IBM stock outstanding, 10 people own a share, meaning each shareholder owns 10% of IBM, and IBM issues 10 more shares, then the outstanding float is diluted exactly 50%, and each shareholder now owns only 5% of IBM. On the other hand, when the US federal government issues more dollars, how much or how little shrinkage in the purchasing power of the outstanding float of dollars at that given time depends on many more moving parts. For example, if the prevailing economy was soft, if demographic changes were weakening the economy, if geopolitical events were creating deflationary winds against the economy, then the inflationary bias of those newly-created dollars may not be causing any inflation at all because it is vaporizing on impact.

You, me, all households, all businesses, all local governments, all state governments, plus all foreign governments, all together, are the nonfederal government, the users of dollars (because we, and they, cannot issue dollars). Whenever a user of dollars deficit spends, they are adding to an outstanding float of debt in dollars. The US federal government, however, is the issuer of dollars, dollars that since August 15, 1971 are no longer convertible to gold, nor fixed to anything, so whenever the US federal government, the issuer of dollars, deficit spends, rather than adding to an outstanding float of debt in gold-backed dollars, it is simply subtracting some purchasing power from the outstanding float of fiat dollars…

Prior to 1971, the US national debt amount was an actual debt, and it represented a US federal government debt of gold-backed dollars, something that may have been difficult to be paid back. Since 1971 however, this amount has evolved from a gold-standard-era national debt to a ledger posting, an accounting entry, a post-gold-standard-era national ‘debit’ of fiat dollars. Today’s national ‘debt’ amount simply represents the running total of non-convertible, non-fixed, non-pegged, free-floating, pure fiat dollars issued, or ‘debited’ from the federal government and added, or ‘credited’ to the non federal government.

Today, in the post-gold-standard, modern monetary system, the US federal government, the issuer of dollars, has as much to worry about ‘paying back’ all the dollars it issued as IBM has to worry about ‘paying back’ all the IBM shares it has issued. If someone buys an IBM bond denominated in dollars, or lends IBM some dollars, that’s one paradigm, that would be an actual debt for IBM, because IBM cannot issue dollars, and IBM would have get dollars from somewhere to service that debt, to pay that debt in dollars back. However, IBM can issue an unlimited amount of IBM shares, IBM will never ‘run out’ of IBM stock, so there is nothing to worry about IBM ‘paying back’ any IBM shares that IBM issues. The same goes for the US federal government ‘paying back’ all those US Treasury bonds, that’s another paradigm, that’s nothing to worry about, because US Treasury bonds are not denominated in gold-backed dollars, they are denominated in fiat dollars, a totally different currency, which the US federal government has sole monopoly power to issue. Any one, any country, ‘lending’ the US federal government some fiat US dollars is just like someone ‘lending’ IBM Corporation some IBM shares. The US federal government no longer needs to ‘borrow’ fiat dollars, it will never ‘run out’ of fiat dollars. There is no longer any national ‘debt’ to ‘pay back’. Orthodox economics, based on outdated, pre-1971, gold-backed, gold-standard era economic idiosyncrasies, co-mingles and confuses these differences between a monetary sovereign spending in gold-backed currency vs. spending in fiat currency.

Rather than thinking of it as a federal government national ‘debt’ of dollars, think of it a national ‘debit’ of dollars that was ‘credited’ to you, the non federal government, and that amount is actually the total savings of the non federal government. The national ‘debit’ is the national treasure. The United States is a strong nation because of the national ‘debit’, not in spite of it. Like I mentioned above, how IBM shares are doing in the market is partly a reflection of how good or bad past IBM boardroom decisions have been; likewise, how the US dollar is doing in the marketplace is a reflection of our federal government’s policies. The airwaves may try to convince you differently, but think about it, in just 240 years, the United States is the envy of the planet, the US dollar is the world’s reserve currency, US dollar denominated Treasury bonds are the safest, most liquid, most risk-free investment worldwide today, and the US dollar based economy is still the strongest on earth.

Once you step back from the picture and tune out the noise, you can take stock in the modern masterpiece that is our post-gold standard, modern monetary system.

Thanks for reading,

Pure MMT for the 100%

Real Macro for the 100%



“The central government is the societal organization most suited to administer the unit of exchange. If the government then decides to print unlimited numbers of these units for its projects then the agreed upon value of the unit is debased.”—George Powell

Exactly…Which is why a company (a country) has a board of directors (a Congress) that decides if newly-created stock (if deficit spending) to be used to fund a proposal (to fund a ‘prescription’) would be productive enough (would be productive enough) to outweigh the dilution of the outstanding float of stock held by all shareholders (to outweigh the debasement of the outstanding float of $$$ held by all citizens).