MMT Discussion – Part 3 – My taxes paid for That!

BRADFROMSALEM

If you have not read Part 1 and are unfamiliar with the concept of Modern Money Theory [MMT], click here for a brief introduction. In Part 2 I cover 4 of the 5 reasons taxes are still necessary even though MMT explains that taxes do not fund Federal spending, click here to read about the first 4 reasons. Below, is the 5th reason for collecting taxes in an economy that honors the MMT economic descriptions.

The most popular feature of the MMT description of how money is created, circulated into the economy, and then ultimately destroyed is undoubtedly the approach to taxes. In the previous entry I described 4 reasons why taxes are collected even though the MMT description does not require tax receipts to fund government activities. Instead government activities are funded by money creation and taxes are ultimately destroyed. But MMT’s description of money creation limits that act to funding government expenses that serve a public purpose. Currently, in the news we have an expenditure that cannot be described as providing a public purpose. I use the example of the cost of maintaining a lavish and separate lifestyle for Mr. Donald Trump and his wife more for its notoriety than its dollar amount.

If we were funding government expenditures solely by creating whatever is required to pay for everything that is an expense, what is the public recourse? While there is little truth to the near myth that printing money will cause inflation, there is as my language indicates a path to that occurring. Also as I noted in the previous blog, should inflation start to accelerate, then raising taxes would brake that situation. To take the Trump example a little further, without a lever that the public can exercise to prevent extravagant spending by not just the President, but by all elected officials; who would gladly use that power to enrich each other along with their friends and others as well. It becomes evident that eventually the power will be abused and even with a remedy at hand (raising taxes) a better approach would be to allow tax receipts to be “allocated” as an accounting trick to certain government expenses.

This will allow taxpayers the right to proclaim, as they do now, that they do not want to pay taxes for Trump’s lifestyle choices. Taxes to serve the public purpose of maintaining citizen sense of ownership. In fact it’s more than a sense of ownership, it is real ownership. Something that rounds out the public purpose of spending. The question is then, how are public purpose expenditures separated from operational expenses that will not enhance serve the public purpose? One possible way is to fund all maintenance costs from tax collections. This would be items like road repair, upkeep of National Parks, along with salaries and expenses of Federal office holders and their direct staff. One critical expense would be all military spending, unless there is a true declared war.

Spending via money creation would be on all capital expenses. New infrastructure, Health Care, Social Security, Federal Job Guarantee, Basic Income Guarantee, and Public Education come to mind immediately. These are all items that serve a public purpose. Under the present arrangement these are the costs that are deferred, cut back or never even considered because it is believed we cannot afford it.

There are political advantages to restricting some expenses to be budgeted according to tax revenues. Using the model of assigning maintenance costs to those revenues is not perfect. There will be public purpose spending happening, but since the maintenance areas are the ones people care about the most means there is less push back from taxpayers when they have well maintained parks, roads and power grids.

There is one last caveat to the capital expenses that must be understood. The MMT descriptions only apply to the Federal government’s expenses, states, counties along with city & towns still must collect taxes to pay their bills. With an MMT model we do get more done with less taxes, but as I have shown taxes are a necessary and critical component of a healthy economy and a component essential to a dynamic democracy.

(I plan to write some more on other MMT aspects such as the Basic Income and Job Guarantee along with why it describes money so well and other descriptions are lacking.)

Modern Money Theory – Part 1 – Not a Theory, It’s a Description

BRADFROMSALEM

We all know that the US collects taxes and then uses those tax dollars to pay for whatever expenditures the US has. We also know that for nearly every single year of this nation’s existence, the taxes, tariffs, fines and fees collected were not enough to pay for those expenses, so the US borrowed money by issuing Treasury notes, to cover the difference. That is the annual deficit. Of course the deficit borrowing gets paid back with interest from taxes, tariffs, fines and fees [TTF&F] or new borrowing as each Treasury note matures.

All pretty well known and nearly universally accepted. Except, it does not represent fiscal reality. That reality is neatly described in an economic philosophy called “Modern Money Theory” [MMT] which posits that since all US Dollars originate from the US government (a legal fact, try to print your own US Dollars!) and all TTF&F must be paid in those same US Dollars. Then as those dollars come back to the Treasury where they were first created, each one of those dollars are effectively destroyed. That means that every dollar spent by the US is created by the Federal Reserve, an agency that was created for that purpose. The amount of money it creates is not in any manner solely dependent upon any part of the TTF&F collected. I suggest obtaining J.D. Alt’s book on Amazon that explains how this all works with simple language and drawings of bathtubs and other plumbing artifacts by clicking here.

But even though the US does not need your tax money to pay its expenditures, it still must collect taxes. In fact there are 5 reasons it needs to levy and collect taxes. I will cover those 4 of those reasons in a blog to be published in the next day or two, followed by a blog covering the 5th reason a day or two after that.

Propose Don’t Oppose

BRADFROMSALEM

Republicans, free of any serious opposition, have revealed their unverified template to reinvigorate the American economy, dissolve government’s role in any matter not connected to protecting the US from foreign entities real or imagined, and enhance government’s role in enforcing moral choices connected in any manner to sexual or other personal activities.

That’s a large agenda, and to be fair, not all Republicans are on board with every line item in the two major proposals, Mr. Ryan’s Health Care bill and Mr. Trump’s Budget proposal. The party as a whole, however, will define these two critical items with next to no alternatives coming from the Democrats in office. Democrats will pushback against the Republican plans and instead of responding to criticisms of the ACA, most elected Democrats respond entirely by defending the ACA, when all the solutions to the problems with the ACA can be corrected. It is called Medicare for All. The Republican idea that a budget and any legislative proposals reduce annual deficits is universally accepted as the “gold standard” of economic virtue and that guarantee to growing the American economy is never opposed by elected Democrats. This leaves little room for proposed legislation such as infrastructure growth, free higher education and expanded Social Security, all items that will grow the economy organically based on historically verifiable precedent.

The Republican assumptions cannot be accepted by anyone that is opposed to their vision of America. The debate can no longer be about presumed truths, presumed enmities (that include both Russia and China), who talks to who or any metric that is not measured against doing what is moral and right. Amorality has become America’s real enemy and both party’s establishment fully endorses and legislates on amoral standards. Changing the paradigm will break down the political monopoly trust that is stagnating the US. Yes, Trump has got to go, because doing so will start to establish that the American people are ready for the change to a moral standard; a goal much, much larger than firing a single incompetent President.

THE US BUDGET. IT’S NOT THE SAME AS YOUR BUDGET.

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Don’t be like Lester. Do your thinking outside the box.
  BRADFROMSALEM

The moment you apply the rules of balancing your books to a national budget, you have made a colossal mistake.  Read on, let me know if agree.

It is Budget season on Washington when various caucuses and even the President all submit a different budget for consideration.  And certainly there are many differences between the President’s budget, the Progressive Caucus Budget, the Democratic budget and this year’s winner, the Republican budget; which passed through both the House and the Senate. Now for all the complaints about the Republican budget and the others as well, they all share one very critical trait that deserves closer examination. But before I get to that, there is another item that is very important. A budget for the US Government is just an outline. There is little in there that enforces any cuts or increased spending. And the little that is in there for cuts and increases can be overridden when an actual bill is passed and signed by the President. It is all for show.

Back to that critical trait I mentioned, which is not just for show. All expenditures must be accounted for by taxes, tariffs and fees that the government collects. Any shortfalls are made up by selling Treasury notes that are repaid with interest. Similar to any loan that many of us take to pay for a house, car or college education. I call this method of funding the government Tax to Spend. The term is temporally correct since, first the government sets tax rates, then, as the money is coming into the government coffers, Congress authorizes spending. When there is a shortage, the Treasury Bonds are issued and sold. Those bonds represent what is called the deficit and every budget brought up in Congress targets reducing the deficit until the budget is balanced. In fact a balanced budget is the proclaimed purpose of creating a budget in the first place.

But what happens when there is an economic downturn? When millions of people suddenly turn to government to help fulfill their basic needs. Among those are unemployment payments and since the unemployed have no income they need subsistence assistance like food stamps so their lack of work does not let their families starve. Often economic downturns occurrences are coincidental with changes in the workplace so education and job training assistance are needed to provide access for the unemployed into this modified workscape. But also day care help makes certain that children are cared for when their parents are in a school or training or working at entry level wages.  When more persons are suddenly in the low wage end of the income spectrum, how should government pay for it all?  Most Conservatives will insist that by supplying people with “free” unemployment checks, education, low cost food and even housing the government is encouraging bad behavior, so just level fund all the programs so people will go get themselves a job.  Liberals will usually insist that we raise taxes on those that are still doing real well and use that increased tax income to fund all the programs and also create jobs. Conservatives counter that by taxing the wealthy, the wealthy will be unable to expand their businesses and restore jobs.

Surprise! The Conservatives are correct. Raising taxes in tough economic times increases the pressure on business to contract when demand is shrinking.  And taking taxes from persons with no income is very much out of the question. The government could “borrow” more to cover all the increased expenses during a downturn, but that just means that persons of considerable wealth are getting paid (interest) to put their money into the government instead their business. Putting money into funding the government where the interest rate certainty outweighs the risk of investing in any business and profits are not guaranteed. So we are left with a choice of increasing taxes or paying the wealthy to fund government expenses.

But, there is another way that government gets money to pay for implementing all the items in the budget, as they are enacted in law. The US Government and the US Government alone has the authority to actually ‘print’ or coin money.  Ever since President Nixon took the US off of the gold standard, the US Dollar is a floating currency. It’s worth is based on what people are willing to pay for it. Just like a Realtor will always tell you that your house is worth what a person is willing to pay for it, the same is true of the US Dollar. What this means is that probably by the stroke of the President’s pen alone all all tax deficits can be funded by the US Treasury requiring the Federal Reserve to “print” the necessary currency.  (Side note: Money is not actually printed, it is just an entry typed into the US’s ledger by the Fed)

With the funding question now addressed, what a bout taxes? If we eliminate them entirely why would Americans or American businesses use the US Dollar. That is because, by taxing as well as only accepting the US Dollar as a tax payment a value actually gets assigned to the US Dollar. It also turns out that taxes can be a great tool by which government can implement economic management via the tax collectors. I call this the Tax to Manage economic model. Managing economic conditions is something that all governments do, but with its spending role mostly eliminated the management function grows in importance. For example, historical evidence indicates that income inequality increases as the range of marginal tax rates shrinks. So, it would seem that by raising the highest tax rate over 50%, probably to 75%; income inequality will diminish. Also, since that rate will stay consistent across economic upticks and downturns, the negative impact of raising taxes on the wealthy is minimized. At the other end of the spectrum, taxes on lower income persons can be lowered significantly, especially if no taxes are collected until pay reaches past a living wage.

One last word about what most skeptics will reflexively bring up. Hyper Inflation.  And they are right, it is a risk, but not very likely. High inflation will occur when some critical resource that is needed by nearly everyone becomes scarce. The correction, when inflation starts to rise, is to simply manage it away by raising taxes and by addressing the shortage by some reasonable substitute. Once the economy stabilizes, return the tax rates to normal. In the final analysis, we need to alter how we fund government activities, so that government can meet the promise made in the preamble to US Constitution when it declares that the government as defined by the Constitution will “Provide for the general welfare”. By making money collected in taxes the major source of government income the US has weakened itself economically so that money cannot be used to mange the economy.

So What Happens Now?

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BRADFROMSALEM

I read posts and comments and columns about the upcoming catastrophe. The end of our nation, is how I would best summarize it. The Democrats lost the Senate and as I noted in my previous blog, it was not the fault of the electorate, but instead it was the fault of the party. So, does that mean, next week when the new Congress convenes, their first order of business will be to mobilize a special military force or perhaps a special media force, whose entire purpose will be to dismantle the US as we know it. Or, at least think we know it. How much will change?

From where I sit, not much. First of all both of the mainstream parties are terribly fractured. So that on the Republican side you have a small vocal minority of individuals that mostly have no idea how government works. These, of course, are the Tea Party adherents. There are just enough of these silly people to allow the other two Republican factions to actually put together a coherent Birthday Party, let alone a political platform.  The other two are the Ayn Rand Libertarians/Objectivists and the rest all want to be Ronald Reagan, or at least what they imagine him to be.  Whatever comes out of this crew is sure to be horrible legislation that in most cases will rarely have enough Republican votes to pass. And the ones that do get through, usually with the help of some Democrats will almost never have enough support to pass a Presidential veto.

Democrats of course have their Progressive Wing and the Blue Dog wing, they at least talk to each other, but it appears they have not figured out that if they had a common agenda, they can probably run the board. Instead, they just run away from using common messages. The look just like Will Rodgers described them years ago.  “I do not belong to any organized politic party! I’m a Democrat.”

And there, my friends is the problem. Knowing this tells us exactly what the outcome of this Congress will be. It will be whatever President Obama wants it to be. The worst of it is called the Trans-Pacific Partnership (TPP). A treaty with a group of Pan asian nations that has been years in the making, a treaty that for most of those years was being negotiated in secret, a treaty that the administration is looking for Congress to authorize it without amendments, and to give that authorization prior to actually seeing the agreement.  This agreement is more of the same ilk as NAFTA, only more so.

By taking our cue from this particular treaty, we can surmise that the President will allow us continue down the same path started by Reagan (perhaps Nixon, but that is another story). Pushed onto the American public by Presidents Clinton and both Bushes. President Obama had a chance to break this cycle when he first arrived in office. Instead he brought on board the old Clinton crew. We can expect that public policy will mostly be framed by a simple concept. The American government should do nearly anything in its power to ensure that American corporations are profitable in the world markets.

Of course, I do expect that in really lame cases, such as the Keystone pipeline and a few other environmental issues, Obama may show some toughness. In other words, it won’t be all bad, and the worst stuff will be mostly the same as it is now. Foreign policy is run from the White House, and will continue to, so that won’t change much.

Real, transforming change can occur in 2016. Until then. Let’s just watch the show, let the Republican pro business agenda loose. Let the American people see for themselves what it really means to believe that supporting businesses over people actually helps more than a few persons. I am willing to bet the 2016 election it, unless Hillary is the Democratic candidate.

THEY ARE ALL THE SAME

Ropes Garden 2 years ago today
Ropes Garden 2 years ago today

 

BRADFROMSALEM

Primary elections are still happening everywhere and every day we inch closer to the elections in November. In case you were not aware of it, every single seat for Congress is on a ballot somewhere. Thought important elections only occur when we elect a President? Not true, in fact not only is every seat in the House up for grabs but 1/3 of the entire Senate is as well. So perhaps you won’t vote because you can’t tell the Democrats from the Republicans and you won’t vote for a so-called 3rd party because they cannot win anyways. So you only vote for President, every 4 years. Yet, Congress passes the laws, not the President. The President can’t even introduce legislation, only Congress can.

But what difference does it make, they are all a bunch of crooks and they only pass laws that help themselves. True, so why vote? Here’s why.

They are all crooks, but they are not the same. So here is a simple metric to help you folks that don’t vote in these years when 1/3 of the entire Senate can be changed as well as the entire House of Representatives. Be selfish. Take care of you and your family. Vote for the candidates that will do something for you today, or at least during the next 2 years.

Vote for candidates that will pledge to raise the minimum wage. We will lose jobs, the opponents say. But if anyone in your family is making a minimum wage you know damn well they deserve better pay. Be selfish, vote you and your family a raise.

And then also make sure your candidate will support job creation. Perhaps you or someone in your family has been out of work, be selfish. Vote for the candidates that will increase jobs. Remember the guys and gals that tell you if you give rich people more money, the rich people will create more jobs? They won’t. And neither will any company that gets a tax cut. If they would do that, it would have happened already. So make sure you vote for a candidate that will spend government money building and fixing roads, improving our access to high speed internet, hiring more teachers with better training and so much more.

Don’t worry about the debt scolds. You may have heard the President and others tell you that our economy cannot be compared to your household budget. Even if you don’t believe anything President Obama says, on this he is correct. Want proof? Look at Greece. The EU has been trying to fix them by treating the Greek budget as if it were a household budget. It has not worked. Vote for candidates that will support investing in you and your family. Be selfish.

Last of all, remember the story of Sodom and Gomorrah. Its not a tale about the sins of sex. It is a message about the sins of treating strangers as different from you and your family. Another way to consider the story is as a parable for the Golden Rule. Jews state it as “Whatever is hateful to you, do not do to others”. The rest of religious and other moral teaching is commentary. Not only should we learn it, but act on it.

Think about whatever Golden Rule you follow and then vote selfishly. If all of us vote our personal best interests, we cannot, as a nation do anything but get better. If we all do better, isn’t the entire nation better of?

Vote. But vote selfishly, the way you yourself want to be treated.

Gallery

LOWER TAXES CAN BE A PROGRESSIVE SOLUTION

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BRADFROMSALEM

Is that true?  Can lowered taxes lead to reducing economic inequality, more opportunity for all, an end to hunger and homelessness, a revitalization of the entire US infrastructure, and all while making green energy the most prevalent source of energy; with enough left over for full employment?  I’ll let you decide. But first lets take some things into consideration. Just lowering taxes will not create the opportunity to do anything constructive, at least not until our monetary system is radically revamped.  You see,  the trickle down folks actually are like a clock running backwards; it’s correct if you look at it from the other side. And doing that means a lot of other things get changed as well. But more precisely, our economy is mixed. There are services performed by the private sector and services performed in the public sector. The same is true for goods as well. Although the private sector provides mostly goods and the public sector provides mostly services.  These two sectors are intertwined so tightly, that putting everything into one or the other causes major disruptions in both. The recent economic crises is an example of try to fix a crises by moving everything entirely to the private sector does not facilitate recovery. But our economy also has mixed economic models. We have both socialism and capitalism. This is a healthy that can do much to keep the economy balanced and on an even keel. Less bubbles, more opportunity; less inequality, larger wealth for everyone. But, there is one thing that no matter if the economy is managed by the private sector, the public sector or by no one; there is one commodity they all have in common. Money.

What is money?  There are a couple of ways to think about money. First, it is a medium of exchange. I go over to your farm and tend your pigs every day. Each day I get paid for taking care of your pigs. Most times you pay me with some milk and other dairy products, or maybe a chicken. And every now and then I get a whole pig; and that is a week’s pay. But eventually I have to pay the man at the store for my clothes, and he doesn’t want 2 dozen eggs for a shirt. No, he wants cash. And why not? How is he going to buy that shirt to sell to me, or pay the rent on his store. So I ask you to start paying me in cash and If want a chicken or even a pig; then I will pay you back some of that same cash.  But, you don’t keep that kind of cash in the house, it is in your bank which is downtown right next door to the clothing store. So you give me a piece of paper, bearing your signature, every week for the same amount of money that you would get for selling one of your pigs. Then, when I buy the shirt,  I give the owner of the clothing store another signed piece of paper for the price of the shirt. The banker keeps track of it all.

Soon, I get a second client taking care of his pigs. So, I go to the banker and tell him I want to buy a house, so can you lend me the money to buy a house? Now I am paying a mortgage every month to the banker. And every month he gets back some of his money; plus interest. Whoa!  Where did that interest come from? We know where my money came from. When I worked, I got paid. I spent some of that pay for items, such as a shirt. But I also saved some money. The banker gave me some extra cash for allowing him to hold my money. And I give the banker some extra money every month just because he let me borrow some of the money he was holding for me and you.

This example shows two critical aspects of money. First, money can represent a trade value. I get paid the same amount of money each week that is the going price of a pig. (Sorta the pig standard!) And that is payment for a service, taking care  of your pigs every day. The shirt or the price of the pig are both examples of using money to represent something tangible. Time = 1 pig/week ;  Shirt = 24 eggs; house = 1 pig paid monthly?.  But how about the interest earned? There is no tangible item for it to represent, other than money itself. That money was just added into all the money that represents all real items and services, even though money is not real.

The second definition is simpler to say, but much harder? to comprehend. Money is just another unit of measure, like inches for example.  How many inches are there? Unless I restrict that to an ‘how many inches long is item X’  query the answer  can only be that there are an infinite number of inches.

Money is a unit of measure that is used to establish value of any item or service, even money itself. And when money is referencing itself, then more money is added to the potentially infinite supply. So what the heck, just put together a printing press or invent a secret algorithm and create all the money you may ever need. Wrong. Why should I take your freshly printed currency to pay for tending your pigs? Taxes are due this month and the IRS only accepts US dollars.  Taxes!  Did you read the title carefully?  If not, go look; I’ll wait.

OK, did you catch that it said Lower Taxes not No Taxes?  Good, because unless there are taxes being collected, there is no reason to trust even the US Dollar. Everything has its limit, and taxes cannot even approach zero let alone become zero without major, major economic disruption.

Currently what happens is that when Congress spends, the US Treasury draws from it’s account at the Federal Reserve Bank to pay the bill. Occasionally, the Fed will notify the Treasury that the account is about to run out of money. The Treasury then instructs the Fed to issue bonds to any interested buyer.  The income from those bonds are deposited into the Treasury’s account and the bills can be paid.  When the bonds become due, the original purchase price plus interest is paid back to the investors. They are always paid back in US Dollars.  The numbers also show that most of the persons investing in America are actually members of those that are part of the upper 2%  of  Americans with regard to income.  The relatively small amount that actually goes to China, is still paid out in US Dollars. If the Chinese don’t want to lose money, they would not do anything to jeopardize their investment in the US. Progressives (like yours truly) generally want to gain access to those investor’s dollars by taxes, instead of borrowing it from them.  And overall, that is true. it certainly is a better solution than lowering their taxes without paying for all those items I noted earlier. Besides, it is actually good to run an economy at a deficit, as doing so helps the private sector continue to grow.  As I noted, it is one way to keep US Dollars intact and thereby maintain the currency’s value, so that holders of that currency, upon spending it , or even saving it; strengthen the dollar.  Foreign nations such as China investing in the US Dollar, keep the dollar strong. By the way, foreign investment is the only debt we actually have to be concerned with. And that debt is perfectly OK to carry as long we can pay it back and as long as it remains in US Dollars.

But, there is actually a better solution than raising taxes so wealthy Americans and others don’t finance the nation, even if a dose of that is good. Remember I noted a mixed economy, what I am proposing is a change in the how the mix is allocated on the fiscal side. It would allow taxes to be cut and everything paid, it also defines exactly what our taxes do pay for and even what part of the budget is done through deficit spending.

The Treasury must take back from the Fed the ability to “print’ money as needed with a few very notable exceptions. It is important to note that money is not printed, it is actually just entries in a super secure spreadsheet. What this means is that Congress can allocate as much money as it takes to reinvent our infrastructure and provide for the hungry and  the homeless.  There are real world limits on how much Congress can spend however. But the limit is not infamous wheelbarrows of money from Post WW I Germany, just printing money alone will not create that kind of inflation. That inflation was caused by the incredible cost of reparations placed upon Germany by the Allies after the War. The reparations drained Germany of a large portion of it’s resources, leaving the private sector competing over scarce resources leading to inflation.  But right now the US has tremendous resources, people, land, abandoned properties waiting to be rebuilt, and natural resources as well. And Congress can accomplish the list of goals that I started this post with tax free.

So, what do we pay taxes for? The first one is the safety switch in case Congress does over reach the limits of our resources, and inflation starts to rise. To stop the inflation, just raise taxes and it will slow it down . But raising taxes, implies that taxes are in place; so during times when inflation is not a problem. So, we maintain a Progressive income tax rate to manage income inequality.  No matter what the economic situation is, keeping the top rate well over 50% has been shown to serve as a brake on income inequality; in other words, taxing the wealthy is good for the economy whether need their money or not, as it forces a better distribution of income.   The next tax item, serves a social good.  The entire military budget must be paid only from tax collections. By hitting persons with a potential tax increase every time we decide to halt the boogie man of the Century, (20th Century boogie man were Communists; 21st Century has Terrorists) it is very unlikely that people will jump at the opportunity to go into undeclared wars without cause. Of course, an actual declared war would be exempt from this requirement. Historically, the US Government has “printed’ money to support declared wars.  Also, any expenses directly paid to the 3 branches of government and their staffs would be paid from tax revenues as well as paying down any foreign debt.  Last of all, the US Government can continue to maintain fiscal balance by borrowing any money that is sent to the states.

So, yes it is possible to achieve full employment and reinvigorate the entire economy and there will be no excuses not to lead the world on the issue of Climate Change, with lower taxes.  If you agree, please like this blog entry and share it as well.     Thank You.

 

I would like to acknowledge the scholars at Modern Money Theory, who regularly blog on this subject. They are centered at University of Missouri – Kansas City. The overall framework is mainly drawn from their writings; the ideas and concepts regarding which categories of expenditures  should be paid via printed money, taxes, or debt are my own.