Rather than jump into deconstructing the arguments one at a time, it makes more sense to start at the very beginning and build up to the point where all the absurdity is obvious. One of the best ways I've ever seen it put that breaks one out of stale thinking is this compact hypothetical exchange worded by Dustin Mineau:
What keeps the government from spending whatever it wants?
Well it has to tax or borrow that money.
Well why doesn't it just print it?
zOMG Inflation!
So you're saying the only thing that limits federal spending is inflation, not taxing or borrowing. Which is my whole point.
Um... yeah, never thought of it that way...
Interested? For the time being, please humor me and forget everything you know about the monetary system.
Currency is a token that allows an improved abstraction over barter whereby the two parties in a transaction can trade even if one side doesn't have a real resource the other is immediately interested in. Many physical manifestations have existed across different times and cultures, including seashells, metal coins (often gold or silver), and paper. Two of these are what is called resource-based and are limited in supply (paper money often got its start as a representation of something bulkier, but nowadays that's no longer the case). The important thing about all currency is that it has no inherent worth. You can't eat seashells, gold, paper bills or numbers in a database. It has only a few requirements: it has to be universally agreed upon as the denominator of transactions in order to be useful, and the amount of it in circulation needs to roughly match the number of transactions that need to be denominated.
The standardization of a currency begins with the authority of the entity that issued it, usually the state*. That line on the dollar bill that says "legal tender for all debts, public and private"? If you owe someone a debt, they must accept payment in this form or else they have no case against you in court. But more importantly, taxes to the state must be paid in the state's currency. You can't pay your property or income tax in the US with wheat, you have to sell it for dollars first and then use those to pay. This creates a situation where everyone wants and needs the state currency, making it much more likely that anyone and everyone you meet will be buying and selling in that rather than something else. This applies universally, not just to "fiat" currency. If a government accepted payment only in gold, whether in the form of gold coins or raw metal, then gold would quickly become that country's preferred way to denominate all transactions. Remember that there's nothing special about gold or silver; they're not inherently valuable, and only ever seemed like an obvious choice for money because we're still living down ancient fascinations with how pretty they are compounded by an even more ancient human psychological trait brilliantly summarized as "Ideally people would love exclusive ownership of something everybody wants."**
One of the key differences between a resource-based currency like seashells, gold coins and previous incarnations of the US Dollar or British Pound, and a "fiat" currency like the modern US Dollar or British Pound, is that in the first case the supply of currency is uncontrollable (or perhaps more correctly, controllable only through elaborate and incomprehensible processes which history proved to be unreliable) whereas in the second it is possible to add or remove currency from circulation as necessary. Fiat currency is a technological innovation that freed governments and economies from the artificial and totally ludicrous situation where they could not increase the supply of currency, denominate more transactions between more parties, and thereby grow the economy, without first digging up rocks out of the ground and burying them in a vault somewhere else. That is why all modern currencies around the world are fiat, and so I'll only be discussing that type from here on out. Specifically, US Dollars.
Expanding on the idea of intelligently and deliberately adjusting the supply of currency, an important attribute of dollars is that only one entity can issue them: the government*, the same entity that collects them as taxes. When the government runs a surplus, it means that they've taken more dollars out of circulation than they've spent back in, which means that they've shrunk the supply. When the budget is perfectly balanced (which is what many are clamoring for without understanding the implications), it means that the supply of currency is unchanged. When the government deficit spends, the supply of currency increases. This means that the only way the economy can grow (worded another way, the only way that more transactions can be denominated) is through deficit spending. You read that correctly, the US economy cannot grow if the budget is balanced because the US Dollar cannot come from anywhere else. The only time you would ever want to balance the budget is if you want to stop economic growth. Perhaps the most core tenant of MMT, this can be summarized as government spending creates money, taxes destroy it.
So, what, deficit spending forever? This idea usually trips people up because they're reasoning by analogy with their personal finances, which is understandable but 100% wrong. This is another core tenant of MMT: a monetarily sovereign government (meaning one that issues its own currency) is special and has enormous operational freedom. It's different from a household, a company, a city, a US state government, or European Union member nation's government. It does not get that currency from anywhere or anyone else. It does not borrow. It does not need to generate revenue. It just plain, straight-up creates it when it needs to, out of nothing*. Deficits aren't like an overdraft at your bank or racking up credit card debt. The US government doesn't owe that amount to anyone*, all it means is that they created more dollars than they destroyed that year. Greece can't create Euros, and so is operationally constrained in all these ways. This turned out to be a disastrous side effect the EMU for member nations. I like to summarize it this way: there is no sovereignty without monetary sovereignty. Various people in the know predicted back when the EMU was first being created that this eventual breakdown was inevitable. Their only choices as I see them are to default, leave the EMU and return to their own currencies, or to federalize and give up on being sovereign nations. For the sake of their people, I hope they all choose the first.
Ok, so deficit spending for as long as needed is possible, but isn't that inflationary? Not if done properly. Inflation is caused by introducing too much currency into circulation relative to the real resources and labor and actual need for currency, which describes post-WWI Germany (the textbook example of hyperinflation) since millions were dead or wounded and, more critically, they had to pay reparations to the victors of the war.
http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic
the "London ultimatum" in May 1921 demanded reparations in gold or foreign currency to be paid in annual installments of 2,000,000,000 (2 billion) goldmarks plus 26 percent of the value of Germany's exports.
The total reparations demanded was 132,000,000,000 (132 billion) goldmarks which was far more than the total German gold and foreign exchange.
Beginning in August 1921, Germany began to buy foreign currency with Marks at any price, but that only increased the speed of breakdown in the value of the Mark.[17] The lower the mark sank in international markets, the greater the amount of marks were required to buy the foreign currency demanded by the Reparations Commission.
See what they did there? The hyperinflation wasn't caused by printing a sane number of marks to be injected into the German economy, it was caused by printing a certifiably insane number with which to buy foreign currency to satisfy the terms of a punishment metered out by still-bitter nations that had just narrowly defeated them in the bloodiest war in human history up to that point. That's a very special circumstance, all the way around. That does not describe our circa 2011 United States. If anything, we're potentially facing deflation.
The only time you would ever want to run a budget surplus is if you want to either cause negative growth or track it when it's outside of your control, such as if there's a decline in population, real resources or the number of transactions people want to carry out causing a decrease the amount of currency that needed to circulate.
Now is not one of those appropriate times to halt or reverse growth. Totally the opposite, we have near-unprecedented real resources gathering dust and countless workers who want a job to do but can't find one. Why? Because apparently nobody, people or businesses, have money to spend. Where it went is a valid question but in any case this is exactly the sort of time when the government's duty is to either spend money into circulation or reduce taxes or both in order to get money circulating again. Everyone who is calling for a balanced budget as the first step to recovering from a recession or depression either doesn't understand this, or has ulterior motives for wanting economic decline. The cynical among us believe that an upper "looting" class finds cyclical boom times and recessions to be the ultimate "pump and dump" scam, and austerity measures to be the best way to convert the middle class back into the poor and the poor back into serfs. I see naked class warfare where the intended victims have been tricked into demanding what will ruin them. If the people all knew how the system worked just well enough to realize what they've been asking for, they'd change their tune.
That's enough for a single post. Up next, returning from the basics back to the current non-crisis and political theater.
* But Federal Reserve! Treasury bonds! Hang on, we'll get back to that in depth eventually. This wouldn't be an introduction if it didn't gloss over some things.
** For the full, raw context of that quote (NSFW):
http://therawness.com/pimp-week-1-iceberg-slim-scene-1/
http://therawness.com/pimp-week-2-iceberg-slim-opening-scene-interpreted/
The psychology of desiring exclusive ownership of things everyone wants is all an outcome of the most basic human social programming dictating that we differentiate ourselves from and compete with our own sex and thereby impress the opposite sex. In the very beginning there were only the most obvious things to fight over, but the stakes were gradually raised by finding new ways to try to show the margin by which one out-competed one's adversaries, such as ornaments made of really rare rocks that most people didn't have. When you break it all the way down like this, our obsession with things like gold is stunningly primitive. It was jewelry first, money second and only because it could be made into jewelry. If you're smart and confident enough to explain your worth clearly, you don't need ornamentation.
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