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.
Susan Webber, aka Yves Smith, runs perhaps the best economics blog, Naked Capitalism. She is very smart, and usually on target with her comments. Usually.
A recent post, titled “Hoover’s Great Depression” contained this comment:
First, it is clear that depressionary credit crises lead to political dysfunction and a worsening fiscal picture that results from the conflicting priorities which emanate from that dysfunction. This was true during the Great Depression. We have witnessed it in Japan in the last twenty years and we are certainly witnessing it again in the US and Western Europe.
Here she equates Western Europe, most of which is monetarily non-sovereign, with the U.S. and Japan which are Monetarily Sovereign. She continues:
. . . no amount of government spending is going to allow this credit system to grow its way out of debt. The problem isn’t ‘fixable’ without significant deleveraging. . . There are four ways to reduce real debt burdens:
1. by paying down debts via accumulated savings.
2. by inflating away the value of money.
3. by reneging in part or full on the promise to repay by defaulting
4. by reneging in part on the promise to repay through debt forgiveness
In not differentiating between the federal government (Monetarily Sovereign) and private debtors (monetarily non-sovereign), Yves provides solutions for one that do not apply to the other.
Solution #1 does not apply to a Monetarily Sovereign nation, as such a nation does not service debts with “savings.” The government pays its debts by instructing creditors’ banks to increase the numerical balance in the creditors’ checking accounts. It does this without any reference to so-called “savings.”
Solution #2 also does not apply to a Monetarily Sovereign nation, as such a nation does not service debts with money value. If the federal government owed $1 trillion, and annual inflation were 10% or 100% or 1,000%, the federal government would pay its debt the same way: By crediting the bank accounts of its creditors for exactly $1 trillion, regardless of the purchasing power of that money.
Solutions #3 and #4 are unnecessary for a Monetarily Sovereign nation, though appropriate for the euro nations.
All four of the above solutions could apply to private debt, which is monetarily non-sovereign, but the statement “. . . no amount of government spending is going to allow this credit system to grow its way out of debt,” is not correct. In fact, federal spending is exactly what is needed.
Yves concludes her post with:
Now intellectually, you can make all sorts of arguments about the US’s being the sovereign issuer of currency or how the government is not like households or how we need to increase aggregate demand or how the government’s deficit is the non-government sector’s surplus. I certainly do. You can make these arguments until the cows come home. It’s not going to work.
Perhaps she understands Monetary Sovereignty, but she dismisses it with “It’s not going to work.” Well, yes, it won’t work if you ignore the facts. It won’t work if you pretend the facts don’t exist. In essence what Yves tells her readers is: “We know the world is round, but people think it’s flat. So there is no reason to argue with what people erroneously believe. Rather than telling them the truth, we should act as though the world is flat, and agree not to sail too far west.”
Shame on you, Yves. You could be a voice for truth, but prefer to go along with the ignorance. Sounds like another “Obama compromise” to me.
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