Howl of frustration

John Alt

I recently received a plaintive howl from someone who had just finished viewing my five Video-Diagrams: “How”, he agonized, “can your explanation of Modern Fiat Money be true when virtually every “official” explanation of government spending, taxes, and the debt ceiling says the opposite?” How could he be expected to explain modern fiat money to friends if everything they read on the internet makes him look like a fool?

This cry of frustration may not equate to Munch’s existential scream – but in the larger scheme of things, they may well be connected. Here is my first attempt at an answer:

Two Premises

The vexing confusion, I believe, stems from the fact that we have two different premises looking at the same reality from two different points of view.

If we begin with Premise #1, that tax revenues pay for government spending, and spending beyond tax revenues generates a “deficit” that must be made up by issuing “debt instruments” (Treasury bonds), then all the “official” explanations on the internet are perfectly logical, even “true.”

If, for example, the government collects $1,000 in tax revenues and then spends $1,500 in government initiatives, it obviously has created a “deficit” that must be made up by borrowing the $500 shortfall. If this debt build-up continues unrestrained, either the government will default, or the next generation will be overwhelmed by the taxes needed to repay the ballooning indebtedness. It is, therefore, “fiscally responsible” to impose a “debt limit” on what the government can borrow, and then restrain spending initiatives to stay under that limit.

However, if you begin, instead, with Premise #2, that major economies have been using a fiat money system for over half-century (which is demonstrably true since “hard money,” gold and silver, have not played a role in the U.S. since 1971) then in that case a very different narrative immediately unfolds. In a fiat money system, the government issues and spends fiat dollars first and follows by imposing taxes which can only be paid with the fiat dollars it has issued. Tax payments to the government, then, simply cancel the tax liabilities the government has imposed, and the government then issues newly created fiat dollars for its next round of spending.

The best illustration of this fiat moneylogic is the money issued by the American Colonies before the revolutionary war. The Colonial government issued paper fiat money notes, bought goods and services from the citizens using the notes as payment, and then imposed taxes on the citizens that could only be paid with the notes. On taxcollection day, the citizens came to the town square and paid their taxes.

Their tax liability was crossed off the official ledger and (so there was no chance the same paper notes could be used to pay taxes twice) the fiat money used as payment was publicly burned in the square. The Colonial government then issued new paper fiat money notes in order to initiate a new round of buying goods and services from its citizens, and a new round of tax collections followed.

What is crucial to observe here is that within the fiat money system just described, the concept of a government “deficit” does not exist. A colonial citizen, of course, could have a “deficit”— arriving at the public square on taxpayment day with a shortage of money (notes) and, in that case, may have had to borrow money from another citizen to make up that “deficit.” But as for the Colonial government itself – if, after having collected and then burnt $1,000 in tax payments, it then issued $1,500 new fiat money notes to pay for its next round of spending – that difference of $500 could hardly be defined as the government’s “deficit.” It is not a shortfall that has to be made up but is simply an additional $500 it has issued and spent.

If there is no government “deficit” in a fiat money system, there is no need for the government to borrow to make up the shortfall. By logic, then, there is no need for a “debt limit”, and no need to curtail public spending to stay within its limits. The constraining factor on the government’s spending is not tax revenues, but rather what is actually available for the government to buy: If what it wants to buy doesn’t exist, it’s of no use to create the fiat money to buy it. If, on the other hand, it is available for purchase, there is no constraint on issuing the fiat money to acquire it.

Seeing Double

The confusion between these narratives lies in the fact that our “modern” economy has managed to create, and found a way to clumsily operate with,a dualistic “hybrid” of Premise #1 and Premise #2. While we are, for sure, operating with a fiat money system, it doesn’t look like the Colonial model used to explain it. We don’t have a sovereign government issuing fiat dollars, spending them to buy goods and services from citizens, standing in the public square receiving, and burning, those fiat dollars as tax payments, and then issuing new fiat dollars for another round of spending.

Instead, for reasons of historic complexity, while government has retained its authority to collect taxes — and its responsibility to spend for the public good — it has assigned its sovereign authority to issue fiat dollars to a separate Agent, the central bank. And it has assigned this authority with the specific caveat that the central bank cannot directly issue fiat dollars for the government’s spending.

The hybrid (and confusing) situation therefore exists where the government collects fiat dollars in taxes and also spends fiat dollars for public initiatives (like the Colonial government example) but, unlike that example, the U.S. government appears to have no means of issuing the fiat dollars that it needs for its next round of spending. Since that authority has been given to the central bank — and since there is no public burning of the fiat tax dollars collected — it appears the government must be spending those tax revenues! What other money could it be using?

This seemingly irrefutable reality inescapably supports the logic of Premise #1. If the Treasury spends more than it collects in tax revenues, it obviously has a “deficit.” Since it is not authorized to issue fiat dollars directly, it must then issue “debt instruments” (Treasury bonds) to make up that “deficit.” And since the “debt” appears to be something that must be repaid with future tax revenues, it seems “fiscally responsible” to impose a limit on how large that “debt” can become, and to curtail public spending initiatives to stay within that limit.

This is why common-sense thinking is so resistant to the fiat-money explanation of Premise #2. While Premise #1 seems to reflect the reality we “see”. Premise #2 simply describes an idea -an idea that may have had historical moments of embodiment and experimentation – but an idea that is clearly (and dramatically) different than what we “see” happening today.

Except here’s the thing: If you make a slight shift in the structure of Premise #1, it dissolves instantly into Premise #2, and you realize they are, in fact, the same reality viewed from two different perspectives. And if we are dealing with a single reality, rather than two competing realities, the only question to be resolved is: which perspective is the most useful — for society in general, and for you, as a member of that society.

Resolving the Duality

The structure of modern fiat money (embodied in the U.S. Colonial government example) was transformed into our present hybrid confusion by one simple “shift” – the sovereign government’s decision to assign its authority to issue fiat money to a separate agent, the central bank. This shift created a disconnect in the fiat money logic – as if an electrician had inadvertently left a wire hanging loose, preventing electricity from properly flowing through the circuit.

Modern Monetary Theory (MMT) posits that this circuit was never really broken but continues via “another wiring” that has subsequently evolved.

There are at least two ways to illuminate this other “wiring.” The first is by what MMT refers to as “consolidated government” accounting, which assumes that the central bank and the Treasury are a single, unified, entity: when the central bank issues fiat money, that is identical to the government issuing them. Thus, the fiat money model remains operational: The “consolidated government” issues the fiat money, collects the tax money, destroys it (unceremoniously), and issues new fiat money for the next round of spending, etc.

This works but prevents an enthusiastic embrace by common sense: it does not seem to reflect what actually happens. It feels as if MMT is bending the facts to fit its premise. If the U.S. Congress rewrote the Federal Reserve Act of 1913, enjoining the Treasury and the central bank (FED), all would be well. But that is a tall order.

A second illumination, I believe, works better: It acknowledges the reality that the U.S. Treasury and the FED are separate entities. The FED issues fiat money in the form of digital Reserves and paper Federal Reserve Notes — while the Treasury, in turn, accepts these fiat monies as tax payments. The new circuitry is established by realizing that Treasury bonds — which the Treasury then issues for its spending — are not “debt instruments” but, in fact, are themselves, instruments of sovereign fiat money.

Treasury bonds become fiat money simply because their conversion to Reserves or Federal Reserve Notes is guaranteed — by fiat — and they are, operationally, interchangeable with fiat dollars at the FED. Thus, the structure and logic of modern fiat money is restored: The government Treasury collects tax-dollars, destroys them while cancelling tax liabilities, then issues NEW fiat dollars (in the form of new Treasury bonds) to initiate new spending. This happens again and again, so long as Congress directs the Treasury to spend. The concept of a government “deficit,” once again, is inapplicable. The idea the government must borrow fiat dollars that must be repaid with future taxes disappears. And the need for a so-called “debt limit” becomes non-existent.

Choosing Perspectives

So, what seems like a grand confusion is just a choice between two perspectives. We can stand over there and look at our fiat money system from the perspective of Premise #1 and its narrative with the “broken circuit.” Or we can stand over here and look at our fiat money system from the perspective of Premise #2 with the circuit restored.

From over there, what we see is a national government chronically short of money, constantly struggling with the “perceived” need to downsize and curtail its spending initiatives for our collective wellbeing. As a result, we are divided against each other, competing for some share of what we believe is a shrinking pot of money, and making us vulnerable to political-economic predators and opportunists.

Looking from over here, on the other hand, we see a national government that is fully capable of paying us to undertake and accomplish anything we decide is necessary, or useful, for our collective wellbeing — so long as the real resources are available to be employed for the task.

Which perspective seems the most useful to you?

Source: 19 March 2025
John Alt from Paying for it (Modern Fiat Money Operations) [email protected]
Republished with the author’s permission.

John Alt is an architect-writer working to devise ways of explaining and visualizing Modern Money Theory for laypersons, hoping to shift the political-economic dialog about what we can afford to undertake and accomplish for our collective well-being. He now publishes his essays and VideoDiagrams on the Substack Publication “Paying For It.”