Mitchell’s laws: To survive, a monetarily non-sovereign government must have a positive balance of payments. Economic austerity causes civil disorder. Reduced money growth cannot increase economic growth. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
The June 2010 post, “Is federal money better than other money” showed how recessions come after declines in federal deficit growth (blue line) and increases in all other debt growth [(Total Domestic Nonfinancial Debt) - (Federal Domestic Nonfinacial Debt)] (green line).
You can read the post for a more complete discussion, but to summarize: Federal deficit growth is money growth. A growing economy requires a growing supply of money. This is especially true when the nation has a negative balance of payments (as we do), which pulls dollars out of the domestic economy.
“All other” debt growth also is money growth, but unlike the federal government, the “all other” category is constrained by the payback burden. So as the “all other” debt grows, payback becomes more and more difficult and debtors become more and more burdened — a growing weight on the economy.
Here, for your convenience is a simple visual — the Recession Predictor –you can check periodically. It will update each quarter.
When the blue line (federal deficit growth) is pointing up and the green line (non-federal debt growth) is pointing down, there is a historic tendency for us to recover from recessions. When blue is pointing down and green first points up, then down, we most often head for recessions.
This reflects that fact that:
While deficit spending cures recessions, following recessions, federal deficit growth is allowed to decline. Meanwhile, encouraged by the end of the recession, non-federal debt growth increases until it reaches a point where borrowers feel it is not safely sustainable.
That “not-sustainable” point marks the fundamental difference between federal debt and non-federal debt. The federal government is Monetarily Sovereign, so its debts are infinitely sustainable. It can service any debt of any size at any time.
When both federal and non-federal debt growth, i.e. total money growth, begin to decline, the stage is set for another recession.
Ironically, the Fed has reduced interest rates in an effort to stimulate non-federal borrowing, while trying to reduce federal deficits — the exact opposite of what the economy needs.
Today, as Congressional and Presidential anti-deficit sentiment has us headed for another recession, the only questions are “when” and “how bad”. These questions will be answered by yet another question: How soon will Congress and the President come to their senses, turn away from the counter-productive, Tea Party, austerity philosophy, and recognize the necessity of federal deficit spending for economic growth?
Considering that not one politician, not one newspaper editor or columnist, not one TV commentator, and the vast majority of Nobel economists believe blue (federal deficit spending) should point up, the outlook is very poor, indeed.
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