The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. If you understand the following, simple statement, you are ahead of most economists, politicians and media writers in America: Our government, being Monetarily Sovereign, has the unlimited ability to create the dollars to pay its bills.
Perhaps the biggest problem with Monetary Sovereignty is it’s so counterintuitive. It does not match our everyday experience. You and I don’t create unlimited money out of nothing. Even the states, counties and cities and many nations can’t do it. But the federal government routinely creates dollars and T-securities seemingly from thin air. It just feels wrong.
And because it feels wrong, the notion that deficits can climb and climb, and still remain “sustainable,” (whatever that means) feels wrong. The fact that federal taxes and federal borrowing do not pay for federal spending feels so wrong as to be laughable. And why won’t our children and grandchildren have to pay for the debt? It just feels wrong.
And surely, if we keep printing money, we’ll be another Weimar Germany, won’t we? And, if I spend more than I earn, won’t I eventually go bankrupt, and if so, why won’t America? And why does everyone – I mean everyone– say the federal deficit should be reduced, if it isn’t true? And really, if every politician, newspaper editor, columnist, economist and teacher says the federal deficit must be reduced, why should people believe me?
All 300+ posts on this blog attempt to defeat each of those doubts with facts. But intuition is a powerful opponent. And I long have felt the need for an ultra short piece anyone can understand, not only intellectually but intuitively. And this is what I’ve come up with. Tell me what you think.
In 1971, the U.S. went off the gold standard, and became “Monetarily Sovereign,” which created two basic questions:
1. How much can a Monetarily Sovereign government deficit spend?
2. How much should a Monetarily Sovereign government deficit spend?
The answer to #1 is: An infinite amount. That is what “Monetarily Sovereign” means. The federal government’s “printing presses” are limitless. They can create endless dollars to pay endless bills and to service endless borrowing. Unlike state and local governments, the federal government never can run short of money. That’s why federal taxes and borrowing, which are relics of the gold standard, don’t pay for federal spending.
The answer to #2 is: Enough to grow the economy but not enough to cause excessive inflation. (A little inflation is considered desirable.) Deficit spending is the government’s process for adding dollars to the economy. Money is the lifeblood of an economy; a growing economy requires a growing supply of money. Federal deficit spending is a compromise. Too little and we have recession or depression. Too much and we have excessive inflation.
Today, lack of growth, not excessive inflation, is our major problem, so we should increase deficits to stimulate growth. If excessive inflation were to emerge, we will have two methods to control it:
1. We can reduce federal deficits and/or
2. We can raise interest rates to increase the value of the dollar.
Both would reduce inflation, though historically, reduced deficit spending has caused recessions, while increased interest rates have not. Which is the better choice?
This is a foolish time to focus on preventing excessive inflation, when our urgent need is to grow the economy.
What do you think? Can it be simpler?
Rodger Malcolm Mitchell
No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetarily Sovereign, and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.
Remember that the next time you’re tempted to ask a dopey teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it screwed up the economy.”