The debt hawks are to economics as the creationists are to biology.

In a previous post, –The solution for France and the other Monetarily Non-Sovereign Governments (MNSGs) – I commented on France’s difficulty in resolving union pension demands with the European Union requirement of financial austerity. I suggested that as long as France remained monetarily non-sovereign, there would be no resolution to this dilemma, and France would face bankruptcy, along with it’s EU partners.

A reader, Tom Hickey agreed, while reminding me of Keynes WWII suggestion that the world adopt a quasi “super euro” called the “bancor.” Under the heading, “They never seem to learn,” the bancor was one in a long list of attempts to eliminate monetary sovereignty, with the ostensible goal of facilitating trade, but with the underlying goal of preventing inflation. It was yet another scheme to create one, uniform currency in a multi-nation world. It was a “standard,” and as such, it was similar to the gold and silver standards of yore, and to the current “euro standard” and the “dollar standard” (under which the U.S. states, counties and cities labor).

If there is one rule fundamental to the science of economics, it is this: A growing economy requires a growing supply of money. So, any time you create a standard, you also must create a method for each political entity to grow its money supply. The EU forgot this.

Subsequent to Keynes’s ill-conceived bancor idea, the U.S. dollar became the world’s “reserve” currency, without the baggage of being an official or fixed standard. Nations wisely retained the power to control the supply of their own currency and the exchange rate with the dollar, a reasonable process.

However, as always happens in economics, there was a perceived problem, and that perceived problem was called the “Triffin dilemma.” Going back to the fundamental rule of economics, a reserve currency must increase in availability, which the Triffin dilemma requires U.S. to run trade deficits fulfilling world demand for dollars. And trade deficits lead to the dreaded federal deficits – at least dreaded by debt hawks.

Although all money is debt, some economists and all politicians tell us that anything containing the words “debt,” “deficit” or “negative” – as in federal debt, federal deficit, trade deficit, negative balance of payments, current account deficit – are to be much feared, despite no rational reason for such fear. So, our saying the current world financial system requires America to run trade deficits, is tantamount to economic blasphemy, though trade deficits actually benefit America.

This is explained in more detail at Trade Deficit Myth, but briefly, trade deficits supply us with scarce goods and services in exchange for the dollars we create at the press of a computer key.

In short, the European nations would have been far wiser to support the U.S. dollar as their trading currency, while using their monetarily sovereign power to buy as many dollars as they wished – a system used by most other nations, worldwide. Instead, they voluntarily surrendered their monetary sovereignty for a mythical financial prudence. They made a pact with the devil, and now pay the price.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity