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 PIIGS are monetarily non-sovereign, which means they cannot control their own money supply. One of the PIIGS, Greece, soon will leave the euro and re-adopt the drachma. It must.
As I said way back in 2005, “Because of the Euro, no euro nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the euro.”
The euro is a failed system. Long term, all monetarily non-sovereign entities require money to come in from outside their borders, either via imports or via assistance from another government. There are no exceptions to this.
The U.S. became Monetarily Sovereign in 1971. It can create all the money it needs; it can pay any bills of any size, any time. But, you and I, the states, counties and cities all are monetarily non-sovereign. You and I receive income – i.e. money coming in from outside our “borders.” The states and counties receive money from exports, tourism (a form of export) and aid from the federal government.
My village, Wilmette, receives income from our neighboring big city, Chicago. Many of our residents work in Chicago and are paid by Chicago firms. We then take some of that Chicago money and pay taxes to Wilmette. That is how monetarily non-sovereign Wilmette survives.
Which brings us to Greece. Here are some excerpts from the excellent blog, “naked capitalism”
. . . Germany is activating “Plan B”, telling banks and insurance companies to prepare for 50pc haircuts on Greek debt. . . Germany is “studying” options that include Greece’s return to the drachma.
German finance minister Wolfgang Schauble . . . said there would be no more money for Athens under the EU-IMF rescue package until the Greeks “do what they agreed to do” and comply with every demand of `Troika’ inspectors.
Yet to push Greece over the edge risks instant contagion to Portugal, which has higher levels of total debt, and an equally bad current account deficit near 9pc of GDP, and is just as unable to comply with Germany’s austerity dictates in the long run. From there the chain-reaction into EMU’s soft-core would be fast and furious.
Let us be clear, the chief reason why Greece cannot meet its deficit targets is because the EU has imposed the most violent fiscal deflation ever inflicted on a modern developed economy – 16pc of GDP of net tightening in three years – without offsetting monetary stimulus, debt relief, or devaluation.
The Eurozone is addicted to a failing remedy. Even if it could get its integration act in gear, austerity, as we predicted, is only making matters worse.
So much for the idea that economists had learned from financial crises and developed better reflexes. Economics has to an increasing degree become an exercise in promoting ideologies to defend the privileges of the rentier classes. They look to be about to be hoist on their own petard. Unfortunately, a very large number of innocent bystanders will suffer along with them.
Though the PIIGS are monetarily non-sovereign and the U.S. is Monetarily Sovereign, there is at least one parallel: Austerity breeds austerity. Tax increases and federal spending decreases reduce economic growth, increase unemployment, and reduce the quality of life for all residents.
This is a lesson not yet learned by the Tea/Republicans, old-line economists and the media. These slow learners, by demanding a reduction in the federal deficit, effectively will make the U.S. monetarily non-sovereign, and will guarantee a return to recession if we are lucky and depression if we are not.
Greece is the bellwether. That nation demonstrates what happens to monetarily non-sovereign entities, long term. Though it is the Tea/Republicans who strive to make the U.S. monetarily non-sovereign, perhaps these politicians can be excused their ignorance. They are, after all, politicians. The economists cannot be so excused. They should know better.
Austerity breeds austerity, in the PIIGS and in America. Unless we see a dramatic change in economics understanding, the last chapters of the Age of America now are being written. These chapters will describe a life of misery for you, your children and your grandchildren.
It’s not to late to rewrite this ending. The first necessary step is to understand that a growing federal deficit is necessary — today, tomorrow and forever.
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