Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
Quote from Fox News, 8/6/11:
For the first time in history, Standard & Poor’s downgraded the U.S.’s vaunted Triple-A rating to double A+ after the market’s close on Friday night, a rating it has held at S&P since 1941.
The rating was dropped to double-A+, S&P says, because of its deepening concern that Washington, D.C. cannot get a grip on the nation’s finances in the mid – to long-term, as well as fears that the economy could weaken, and that interest rates could spike higher, causing interest costs on the debt to rise. S&P also cited a weakening federal revenue picture as part of its reasons behind its downgrade.
Let’s examine this one line at a time:
“For the first time in history, Standard & Poor’s downgraded the U.S.’s vaunted Triple-A rating to double A+ after the market’s close on Friday night, a rating it has held at S&P since 1941.”
Think of it. S&P rated the U.S. AAA all through World War II, during which the federal debt was much higher relative to the size of the economy, and when we were being attacked by two powerful enemies, who very well could have defeated us. Today, with a relatively lower debt, and much greater national security, the U.S. is downgraded to AA+.
“S&P says, because of its deepening concern that Washington, D.C. cannot get a grip on the nation’s finances in the mid – to long-term . . . “
What does “get a grip on” mean? No one really knows. Does it mean the federal government will not be able to service its debts? No. As a Monetarily Sovereign government, it can service any size debt denominated in it sovereign currency, the dollar (100% of the federal debt is denominated in the dollar). In fact, the federal government has the power to eliminate all federal debt tomorrow, merely by crediting the bank accounts of all T-security holders. No T-securities = no federal debt = no debt worries.
Or perhaps S&P is not worried about the debt, but rather worried about the deficit??? If so, S&P may not understand the lack of functional connection between debt and deficit (we could have either without the other), but for certain they do not understand this basic equation in economics: Federal Deficit – Net Imports = Net Private Saving. If they did understand that equation, they would know that reducing the deficit reduces saving, which slows the economy.
“. . . as well as fears that the economy could weaken, and that interest rates could spike higher, causing interest costs on the debt to rise.”
Yet another thing S&P doesn’t understand: As a Monetarily Sovereign nation, the U.S. has the unlimited ability to service any debt including any amount of interest. In fact, there actually is a slight, but positive, relationship between federal deficits and GDP growth. The probable reason: Federal interest payments add stimulus dollars to the economy. Further, there is no historical relationship between federal deficits and interest rates.
“S&P also cited a weakening federal revenue picture as part of its reasons behind its downgrade.”
Finally, S&P does not understand that unlike spending by the states, counties and cities, spending by a Monetarily Sovereign nation is not constrained by revenue. If federal taxes fell to $0 or rose to $100 trillion, neither event would affect by even one dollar, the federal government’s ability to spend.
Someday, someone will ask the officers of S&P how their evaluation of France (a monetarily non-sovereign nation that hangs at the edge of bankruptcy, yet incredibly has been gifted with an AAA rating) compares with their evaluation of Monetarily Sovereign United States, a nation that unlike France can pay any bill, and time. Can you visualize the officers of S&P looking at each other and mumbling “Duuuhhhhh. . .”?
And that might be the smartest thing they will have said all year.
Rodger Malcolm Mitchell
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings