Mitchell’s laws: The more budgets are cut and taxes inceased, the weaker an economy becomes. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
A reader named Tyler, called to my attention a fine Washington Post article, written by Dylan Matthews, about Modern Monetary Theory (MMT), a sister to Monetary Sovereignty (MS): Modern Monetary Theory, an unconventional take on economic strategy
I urge you to read the article, because it makes some of the points that are most relevant to today’s economies. I’ll quote briefly from the article, then comment:
Most (economists) viewed the (Clinton) budget surplus as opportune: a chance to pay down the national debt, cut taxes, shore up entitlements or pursue new spending programs. James K. “Jamie” Galbraith viewed it as a danger: If the government is running a surplus, money is accruing in government coffers rather than in the hands of ordinary people and companies, where it might be spent and help the economy.
Almost. Yes, surpluses are a danger. Every depression in U.S. history began with surpluses, and nearly all recessions have begun with reduced deficit growth. See Items 3 and 4.
But money does not accrue in government “coffers.” The federal government has no “coffers,” nor does it need “coffers.” It creates dollars ad hoc, every time it pays a bill. Instead, when the government runs a surplus the money simply disappears.
All money is nothing more than a balance sheet debit on the government’s books, and when the government receives money, that account is credited, the two offset, and together, they disappear. There are no “coffers” (whatever that term is supposed to mean.)
In a “fiat money” system like the one in place in the United States, all money is ultimately created by the government, which prints it and puts it into circulation. Consequently, the thinking goes, the government can never run out of money.
Again, almost. The federal government doesn’t “print” money. It does print paper dollar bills, which like the titles to houses, show evidence of ownership. But titles are not houses and dollar bills are not dollars. When the government pays a bill, it sends instructions, not dollars, to its creditors’ banks. The instructions tell the bank to mark up the creditors’ checking accounts.
At the instant the checking accounts are marked up, dollars are created. This is important. The government does not first create dollars, then send them to pay its bills. The very act of bill paying is what creates dollars. The federal government itself has no dollars.
This doesn’t mean that taxes are unnecessary. The need to pay taxes compels people to use the currency printed by the government. Taxes are also sometimes necessary to prevent the economy from overheating. If consumer demand outpaces the supply of available goods, prices will jump, resulting in inflation (where prices rise even as buying power falls). In this case, taxes can tamp down spending and keep prices low.
Once again, almost. While there is some debate about whether taxes are necessary to create demand for dollars, federal taxes are not needed for this purpose. There are ample state an local taxes to compel usage of dollars.
As for consumer demand outpacing supply, this is the now obsolete “too many dollars chasing too few goods.” Inflation is a general price rise, not just the price rise of one or two products. In today’s world import/export economy, it is impossible for a general price rise to be caused by too few goods — with one exception: Price increases in oil can cause all other prices, worldwide, to rise. And in fact, inflation invariably has been associated with oil prices and not with federal deficit spending.
(Paul) Krugman regularly engages economists across the spectrum in spirited debate. He has argued that pursuing large budget deficits during boom times can lead to hyperinflation.
Not even, almost. This is the old Weimar Republic myth. You have seen the relationship between oil prices and inflation. You have seen the lack of relationship between deficit spending and inflation. In the past 40 years, since the U.S. became Monetarily Sovereign, we have had 6 recessions — and average of one ever 7 years. Each could have been prevented with adequate deficit spending.
With all the dire warnings, one reads, guess how many hyperinflations the U.S. has had. The answer: Zero.
So here we have the economics version of Henny Penny, running in all directions warning about something that never has happened here (and even in the case of the Weimar Republic, was short lived — only about two years), but completely ignoring something that happens every seven years (and we still feel the effects of the last recession).
When the government deficit spends, it issues bonds to be bought on the open market. If its debt load grows too large, mainstream economists say, bond purchasers will demand higher interest rates, and the government will have to pay more in interest payments, which in turn adds to the debt load.
Sort of. The federal government does not need to issue bonds. It could deficit spend trillions and never sell a single bond. The bond-sales process became obsolete on August 15, 1971, when we became Monetarily Sovereign. The government sells bonds because an old law says it must. The law easily could be, and should be, changed.
But when the government pays more interest, that adds to the money supply which is economically stimulative.
“You can’t just fund any level of government that you want from spending money, because you’ll get runaway inflation and eventually the rate of inflation will increase faster than the rate that you’re extracting resources from the economy,” says Karl Smith, an economist at the University of North Carolina. “This is the classic hyperinflation problem that happened in Zimbabwe and the Weimar Republic.”
Whoops, there it is. The hackneyed Weimar Republic / Zimbabwe mantra. Sorry, Professor Smith, but neither of those hyperinflations was caused by excessive money “printing.” Weimar was caused by the onerous conditions put on Germany after WWI, and Zimbabwe was caused by Richard Mugabe’s confiscatory land “reforms.” In both cases, the hyperinflation caused the money “printing,” and not the other way around.
The risk of inflation keeps most mainstream economists and policymakers on the same page about deficits: In the medium term — all else being equal — it’s critical to keep them small.
And therein lies the problem. The fear of uncontrolled inflation (which the Fed controls via interest rates), overshadows what should be a much stronger fear of recessions and depressions. The economists, in effect say, “We must prevent something rare, which we know how to control, even if it means causing something frequent, which we don’t know how to control.
“It seemed clear to me that . . . flooding the economy with money by buying up government bonds . . . is not going to change anybody’s behavior,” Galbraith says. “They would just end up with cash reserves which would sit idle in the banking system, and that is exactly what in fact happened.”
Really? How does cash sit idle? Do you mean banks don’t invest their cash balances? Nonsense. Banks invest every penny. And it functionally is impossible for invested money to “sit idle.”
According to MMT, when the government runs a surplus, it is a net saver, which means that the private sector is a net debtor.
Correct. This is a fundamental equation in economics: Federal Deficits – Net Imports = Net Private Savings
“I have two words to answer that: Australia and Canada,” Joe Gagnon, an economist at the Peterson Institute, says. “If Jamie Galbraith would look them up, he would see immediate proof he’s wrong. Australia has had a long-running budget surplus now, they actually have no national debt whatsoever, they’re the fastest-growing, healthiest economy in the world.” Canada, similarly, has run consistent surpluses while achieving high growth.
As Shakespeare said, “Comparisons are odious,” especially when comparing nations. There are so many differences among nations, one gets into a “yes, but” dialog. It is true, however, that an economy can grow while deficits decline or even turn into surpluses — for a while. For instance:
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
Depending on many circumstances, and economy can grow with many years of surplus, until one of the basic equations in economics takes hold: Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports. For an economy to grow, money must come from somewhere — the government, the private sector and/or from net exports.
We already have seen that Federal Deficits – Net Imports = Net Private Savings. Put the two equations together and we find that if Deficits decline, Savings will decline, which will reduce Private Investment and Consumption. This leaves economic growth reliant on Net Exports — the current German model.
There is no magic to this. GDP growth requires spending growth. Spending growth requires money growth. Ultimately, all domestic money is derived from federal deficits. The entire world of economics changed on August 15, 1971, when the U.S. became Monetarily Sovereign. Old-line economists, not recognizing this change, continue to preach lessons that were correct pre-1971.
It’s as though they still teach football strategy to students who 40 years ago, stopped playing football and now are playing baseball.
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. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports