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.
The opening paragraph of this article made me think that at last, Time Magazine knew the difference between monetary non-sovereignty and Monetary Sovereignty.
Does the World Believe America Will Pay Its Debts?
By Christopher Matthews | April 5, 2012 |
If you spend any time reading about economics on the internet, you’re aware of the many virtual pamphleteers who loudly portend the impending downfall of the American government and global financial system in general. It’s become somewhat fashionable to proclaim America a banana republic, arguing that she is financing her debt with central bank purchases of government bonds, a strategy that is unsustainable and often ends in a blaze of hyperinflation and economic collapse.
No serious observer really believes that the U.S. faces this fate in the near term.
O.K., lookin’ good . . . except for that “unsustainable” thing. But, we can cut them some slack.
Perhaps much of this hyperbolic rhetoric is merely an effort to get the U.S. to reign in its debt – something, long term, it certainly needs to do. But a strand of this thinking has made its way into the mainstream and is distorting the debate about the federal government’s attempts to steer the economy out of a recession.
Huh? “Needs to do”? Why? “Reining in the debt” is the worst thing the government could do. The economy cannot grow without growing federal deficits, and though federal debt is a meaningless relic of the gold standard days, deficits are necessary (And no, debt is not the functional result of deficits.)
But they’re right that this debate does interfere with the federal government’s attempts to steer the economy out of a recession.
Lawrence Goodman opined in the Wall Street Journal last week that, “Demand for U.S. Debt Is Not Limitless.” In the piece, Goodman takes aim at those who have argued that demand for U.S. debt is strong, and that regardless of what the rating agencies say, the marketplace believes the U.S. will pay its bills.
Hilarious . . . or sad. Demand for debt is meaningless. If the U.S. did not sell one more T-security, it would have zero effect on the government’s ability to create dollars and pay its bills. Remember this whenever you think, read or talk about economics: There is no relationship between federal debt (i.e. the creation of T-securities) and federal bill paying. Zip, zilch, nada..
In particular, he highlights the “stunning” fact that in 2011 the Fed purchased 61% of the debt issued by the Treasury, up from negligible amounts prior to the 2008 financial crisis. This, he added, “not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.”
Deficits not only are necessary for economic growth (That’s the way the government creates dollars), but functionally do not cause debt. With a minor tweak in the law, there could be deficits without T-securities and there could be T-securities without deficits.
Most people don’t understand how a majority of the debt issued by the U.S. government last year could be purchased by an arm of the very same government. It is the effect of the much-talked-about “quantitative easing” program the central bank began in the wake of the financial crisis to suppress interest rates.
By purchasing these bonds, the Fed drives up the price of government debt and drives down the interest rate the government pays on that debt. The purpose of this is not to “subsidize U.S. government spending” as Goodman suggests, but to drive down rates for the rest us and stimulate the economy.
Correct. That is one way the Fed controls interest rates, especially long-term rates. Short term rates are controlled via the Fed Funds rate.
(Lewis Alexander, Chief Economist at Nomura Securities said) that nobody in American government is arguing that, in the long run, debt isn’t a problem. Both Democrats and Republicans have recently proposed budgets that would put us on a sustainable fiscal path . . .
What is a “sustainable” fiscal path? Is it a path on which the federal government always will be able to pay its bills and no federal check ever will bounce?
Not only are we on the path, but we’ve been on that path since August 15, 1971, when the U.S. government became Monetarily Sovereign.
Sadly, Time Magazine, Christopher Matthews and Lewis Alexander don’t understand that.
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