Scene:

United States Senate Committee Hearing. The Chairman of the Board of Governors of the Federal Reserve System in the U.S. is appearing before the Committee as a witness, as s/he is required to do under US law from time to time. The Federal Reserve Chairman is undergoing questioning from a member of Congress.

The Fed chairman who had had gotten the questions in advance for study. We pick up the proceedings ...

Senator X:

Isn't it true, Mr. Chairman, that last year's budget defict of $298 billion ADDED exactly that amount to the savings of financial assets to the non government sectors? Not $297 billioin or $299 billion or one of these two gentlemen from the CBO sitting here with me would have to stay late at work and find his arithmetic mistake?

Senator Y:

Excuse me, Senator X, but before the chairman answers, let me get this straight. Are you suggesting government deficits ADD to savings? Haven't we been hearing for years that they take away from savings?

Senator X:

Yes, senator, you heard the question correctly. And these gentlemen with me from the Congressional Budget Office are here to substantiate this testimony as a matter of accounting, not theory.

Senator Y:

And just what do you mean by 'non government' savings?

Senator X:

Just that, Senator, everyone who is not part of the US government That includes households, businesses, residents, and non residents, as well as foreign corporations and foreign central banks. I am asking the Chairman to confirm that last year's $298 billion government deficit added a total of $298 billion in net financial assets - financial savings - to the other sectors. And these are the gentlemen that do the accounting to make sure the total savings the deficit added to those sectors- often casually called the 'private sector'- equals that $298 billion in government deficit spending.

Can the chairman answer the question now?

Senatory Y:

Certainly, but please repeat it, thank you.

Isn't it true, Mr. Chairman, that last year's budget defict of $298 billion ADDED exactly that amount to the savings of financial assets to the non government sectors? Not $297 billioin or $299 billion or one of these two gentlemen from the CBO sitting here with me would have to stay late at work and find his arithmetic mistake?

Fed Chairman:

Yes

Senator X:

Thank you. And, likewise, Mr. Chairman, did not the surpluses of 1997-2000 SUBTRACT exactly that much from what I ask you to allow me to call 'private savings' of financial assets?

Fed Chairman:

Yes, that is correct.

Senator X:

Thank you, Mr Chairman, so we have confirmed that surpluses take away from savings, and deficits add to savings, to the penny?

Fed Chairman:

Yes.

Senator X:

Now, Mr. Chairman, tell me, is it not true that if one were to pay their taxes with actual cash at the Fed, the Fed would give that person a receipt that says his taxes have been paid, and then take that cash and toss it into a shredder?

Fed Chairman:

Yes, that's our current policy. In the past cash received that way was incinerated.

Senator X:

Most interesting! So if we levied additional taxes, perhaps as an attempt to 'save social security' and those taxes were paid in cash, those bills would be shredded?

Fed Chairman:

Yes, that is operationally correct.

Senator X:

Well then, clearly, the government isn't collecting taxes in cash to use that cash to pay for anything, or it wouldn't destroy it?

Fed Chairman:

Yes, Senator, that is correct.

Senator X:

Now, if taxes are paid by check, does the government actually 'get' anything? I assume a gold coin doesn't jump out of the Fed's computer or anything like that (laughs).

In fact, if I pay by check isn't all you do at the Fed is reduce the balance of my bank at the fed, and my bank reduces my balance?

Fed Chairman:

Yes, that's exactly what happens.

Senator X:

So when I pay my taxes by check, a number on my bank statement gets changed. But again, it seems the Fed isn't actually 'getting anything' to spend?

Fed Chairman:

Correct, Senator, however we 'account' for the payment with a credit to the US Treasury's account. And, by law, the Treasury can't spend without money in it's account.

Senator X:

Understood, thank you. Now when you specify 'by law' are you saying there's nothing operationally to stop the US Treasury from spending? In other words, you could, operationally, 'clear' any check the Treasury writes, so the constraint on the Treasury from spending more than the balance in its account is what I would call 'self imposed' by government statue, and not an operational constraint?

Fed Chairman:

Very true.

Senator X:

Is is then fair to say that government spending is not inherently revenue constrained? And that any such constraints on government spending are necessarily self imposed? Or, put even simpler, treasury checks don't bounce even with no money in it's Fed account, as long as the Fed DECIDES to clear the check?

Fed Chairman:

Correct again, sir

Senator X:

So a social security check won't ever bounce, regardless of trust fund balances, if the Fed DECIDES to clear the check?

Fed Chairman:

Yes, there is no operational danger of social security checks not clearing if Congress mandates the checks clear.

Senator X:

Even with no money in the social security trust fund?

Fed Chairman:

Yes, even with no money in the social security trust fund.

Senator Y:

So what is the risk of the trust fund running out?

Senator X:

Mr. Chairman, isn't it about inflation, not solvency?

Note this actual quote from former Chairman Greenspan in respone to Congressman Ryan

*RYAN:* "Do you believe that personal retirement accounts can help us achieve solvency for the system and make those future retiree benefits more secure?"

*GREENSPAN: "*Well, I wouldn't say that the pay-as-you-go benefits are insecure, in the sense that there's nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase."

Fed Chairman:

Yes.

Senator X:

So collecting taxes is also about controlling inflation? As we just showed the government shreds the currency when taxes are paid in cash and paying by check doesn't give the government anything that is actually, operationally spent, so it must be about inflation?

Fed Chairman:

Correct

Senator X:

Thank you. And just to clarify, when someone gets their social security payment, all the government does is change the number in that person's bank account, either directly when direct deposit is utilized, or when a check is deposited?

Fed Chairman:

Yes.

Senator X:

So the government doesn't lose anything 'real' when it spends?

Fed Chairman:

Correct

Senator X:

Would you agree this is much like what happens when you go bowling. When you knock down 5 pins and your score changes from 20 to 25, no one questions where the bowling alley gets the points? Or when you kick a field goal, and the scoreboard changes from 7 points to 10 points, no on questions where those points come from?

Fed Chairman:

Yes, today's monetary system is very much akin to scorekeeping.

Senator X:

So just like no one would demand a bowling alley keep 100,000 points in reserve in case a lot of people came in to bowl to make sure they could get their score, the government keeping it's own dollars in reserves makes no sense either?

Fed Chairman:

Yes, I would agree with that.

Senator X:

So now let's move on to inflation, the real danger of over spending, not solvency, default, or bankruptcy?

Fed Chairman:

Yes, agreed.

Senator X:

So let's take social security again. Might it be more useful to 'score' the future of social security by the inflation it might create rather than by the size of the trust fund, or the size of a future deficit it might create?

Fed Chairman:

Absolutely

Senator X:

Same for healthcare proposals?

Fed Chairman:

Yes.

Scene fades out ...

Credits: Warren Mosler

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