My letter to the New York Times.
Glenn Beck’s Economics Are a Danger to Our Country
by Michael Norman
Last night I watched in shock and amazement as Glenn Beck attempted to educate viewers on the subject of banking and government finance on his Fox News show.
America is suffering through some really difficult times so it’s bad enough when financial journalists, media pundits and mainstream economists plead their own selfish interests when purporting to tell it like it is; but when radio show hosts turned TV commentators start offering their misinformed versions of macroeconomics as fact, that’s downright dangerous.
It wasn’t so much his sophomoric use of animation (Beck was clearly trying to highlight what he perceives as the absurdity of the current situation), inasmuch as the blatant ignorance he displayed in “explaining” the banking system and the activities of the Treasury and the Fed.
Beginning with a scene from the movie, “It’s a Wonderful Life,” Beck attempts to clarify the workings of the banking system for us, or so he believes. This is where all the misinformation begins. Right from the get go, it appears, Beck fails to understand the distinction between George Bailey’s Building and Loan (functionally a financial intermediary) and today’s commercial banks, which do not use customer deposits to make loans. On the contrary, commercial banks create money.
Beck’s explanation of government finance was no less flawed. According to his tutorial the government collects income taxes from all of us then distributes that according to the spending mandates of the Congress (represented by a caricature of Barney Frank). If we’re out of money, so then is the government according to Beck.
While the Federal government does collect taxes, its spending is not limited by the amount of tax revenues it takes in. Nor is it constrained by a need to sell Treasuries. (The latter just functions to maintain reserves at a level consistent with where the Fed wants to keep its interest rate.)
The U.S. Government, along with all governments that issue their own currency and spend in that currency, have no limit on the amount that they can spend. The only constraint is political. Operationally, the spending is done by simply crediting the reserve accounts of commercial bank accounts held at the Fed, resulting in an increase in reserves in the banking system. In other words, spending adds to the monetary base in the form of increased reserves. The sale of Treasury securities functions to manage the level of reserves. In essence, Treasuries are nothing more than interest bearing accounts offered by the Government in exchange for those reserve balances.
Under this paradigm the government, by definition, can never be out of money. Its ability to credit bank accounts is without limit and the only constraint, again, is political. Moreover, only Federal Reserve notes, coins and bank reserves are accepted for the payment of taxes or for the purchase of government securities. The public can only get these funds if the government spends them into existence in the first place. It’s the equivalent of saying, the funds to pay taxes and buy Treasuries comes from government spending itself.
Beck informs us that since the government is out of money (because we the people are out of money), China must come to our rescue by lending to us. Once again this is false. China has accumulated dollar reserves as a consequence of having exported lots of goods to us. The buying of Treasuries does not constitute a “funding” of America as it is often characterized, but simply the desire to exchange those dollar reserves for a U.S. Government interest bearing account called a Treasury.
The most misleading claim by Beck, however, is that China is no longer “lending us money” and therefore, the Fed is the only entity left that can buy Treasuries from the government. This is completely incorrect and is an example of a gross misunderstanding of monetary policy and how the Fed sets interest rates, its primary monetary policy tool.
The Fed sets interest rates by manipulating the level of reserves in the banking system. It does this by buying or selling Treasuries. The Fed recently lowered its overnight lending rate to zero, but it has also been active in lowering rates all along the term structure, which it has the prerogative to do. To accomplish this the Fed has been buying Treasuries from the public, not from the U.S. Treasury. The Feds actions have resulted in an historic increase in reserves in the banking system. The greater the level of reserves, the lower the overnight lending rate will fall and it has fallen—to zero, the Fed’s target.
Ongoing Treasury sales to the public have been acting to reduce those reserve balances, as the public pays for Treasuries with funds that had been already provided by both the Fed’s actions and government spending.
Finally, this claim about “printing money,” is flat out wrong. While government spending necessarily results in an increase in reserves in the banking system as just discussed, reserves are not part of the money supply. Moreover, even if they were part of the money supply (as cash and coins are) they’d constitute only a fraction of what we call “money,”
Most money in a modern economy is credit money created by banks. This means checking accounts and other types of demand deposits, which are created in the banking system and exist as liabilities on bank balance sheets. That is what most of us refer to when we talk about money.
Even with the historic expansion of the monetary base over the past five months, that level, at $1.5 trillion, is just a fraction of the $9.7 trillion of total bank credit. Moreover, bank credit has been shrinking recently, despite the Fed’s best efforts to make it grow.
It is very important to understand these facts and not embrace the misguided and uninformed opinions of media personalities and economists who plead their own selfish interests. Both the Federal Reserve and the Treasury must become more active and effective in providing a better understanding of these basic concepts. Until they do, many Americans, including policymakers, will continue to be guided by misinformation, dogma and false paradigms, which in the long-term, could be permanently damaging to our nation.
Michael Norman is an economist and private investor. He writes a blog at www.mikenormaneconomics.org