The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
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AP: August 12, 2009:
“The Obama administration is projecting that when the current budget year ends on Sept. 30, the (deficit) will total $1.84 trillion. The soaring deficits have raised worries among foreign owners of U.S. Treasury securities including the Chinese, the largest holder of such debt.”
Perhaps no subject has caused more controversy than the federal debt and deficit. The deficit includes interest payments, which this year are projected to be $260 billion, a substantial amount, even with today’s low interest rates. Interest payments will continue to grow as the debt and interest rates rise.
So we deal with three related worries: We worry about paying for the large and growing federal debt. We worry about our creditors buying our debt. And we worry about the growing amount of interest the government must pay.
Every one of these issues could be solved with one stroke of the pen.
The federal government borrows by creating Treasury securities (T-bills, T-notes and T-bonds) from thin air, backed only by “full faith and credit.” It then trades these securities for dollars it previously created. When the securities mature, the government trades them back, plus interest.
“Full faith and credit” is an intangible collateral. The government has an unlimited supply. This gives the government the power to create unlimited amounts of T-securities. Finding buyers for these T-securities is addressed by offering interest rates high enough to attract investors.
While the government currently creates T-securities from thin air, it just as easily creates dollars from thin air – similarly backed only by full faith and credit – and can eliminate the borrowing step. No longer would we be troubled by federal debt, federal deficits, concerns about China et al or interest payments. The same controls over T-security creation would apply to money creation. We merely would eliminate the one step that causes so much controversy.
Why does the U.S. government create T-securities ostensibly to obtain U.S. dollars? Borrowing is a relic from the gold-standard days, which ended in 1971. Prior to that, U.S. dollars were backed in part by gold, a tangible product in limited supply. This limit prevented the government from creating as many U.S. dollars as it needed, so it had to borrow these dollars.
When you think about it, the notion of the U.S. government “borrowing” U.S. dollars – dollars it alone has the power to create – is ironic. The government can eliminate debt, along with all the controversy these subjects cause.
Rodger Malcolm Mitchell
For more information, see http://www.rodgermitchell.com
#Monetary Sovereignty - Mitchell 
I don’t know If I said it already but …Cool site, love the info. I do a lot of research online on a daily basis and for the most part, people lack substance but, I just wanted to make a quick comment to say I’m glad I found your blog. Thanks, 🙂
A definite great read..Tony Brown
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Thanks Tony,
The objective is to provide information and a point of view different from what commonly is published in the media and voiced in Congress.
Rodger Malcolm Mitchell
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It is not ironic, it is inefficient, it is also stupid and contradictory and deliberately obfuscating. 🙂
BTW, why not make “Free Money” available as a downloadable edition as well? A fast pdf edition would be great, and cheaper.
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I have been reading through your blog for a while and trying to wrap my head around this new way of looking at things but isn’t money somehow related to the value of goods and services created? Money is in other words a proxy for goods and services. The value of my time and skills is compensated by the value of dollars. In other words, one hour of plumbing is equal to 30 units of value called dollars. This 30 units of value can be exchanged for other goods…food, entertainment etc. at a certain rate.
If the government decides to just print trillions of dollars it wouldn’t change the fact that the economy is only producing a certain number of goods. In other words because the government prints twice as much money doesn’t mean that the economy will produce twice as many material goods and services. It would simply erode the value of the proxy (the dollar) and which I would require more of to complete my hour of plumbing work.
If all of a sudden I saw that the government was printing money to the point where it was not a stable compensation for my work I might demand another proxy such as gold, or lima beans or whatever.
So I am a little confused how printing money is not a dangerous thing.
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To me that is the flaw of this logic. The money has to stand for something tangible of value. There has to be productive economic activity or a reason for dollars. Yes, the gov can print dollars, but the intrinsic value of these dollars has to be based on something. To me its another scheme to redistribute wealth.
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What is the “something tangible of value” that the U.S. dollar stands for? What is the “intrinsic value of these dollars”?
Or are you saying the U.S. dollar has no value?
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The federal debt has risen $3600% in the past 40 years. Would you consider that to be a large amount? During that same period, there has been no relationship between federal deficits (aka “money printing”) and inflation. See: Summary
In the event inflation did appear, the Fed would increase the demand for money by raising interest rates.
Rodger Malcolm Mitchell
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Hi Rodger,
Nice website. Good stuff; however, I believe you are overlooking the balance of payments deficit and its impact on the US (not just the economy, but the US as a nation).
You are entirely correct that we could pay off all our ‘debt’ by instantly crediting the foreign central banks, but the impact could be devastating.
Firstly, why did we ‘go off’ the gold standard in 1971? We did it because foreign nations were calling in our debt; France did it, Germany did it too and we saw an outflow of gold. This became critical as the Vietnam war escalated. Basically, and I’m sure you’re aware of this, the problem was how to manage the massive spending if it ended up going overseas, ending up in foreign central banks’ coffers. Once they accumulated enough dollars they could, and did, start calling in this debt for gold due to a variety of reasons including exchange rates.
This was unacceptable to the US, who wanted to wage unlimited warfare at enormous cost. The solution? No longer tie the dollar to gold, but rather to the US itself. Foreign countries could no longer take our gold, but they could buy US goods and commodities traded in dollars (oil).
This was not a problem at the time since we still manufactured goods and oil was relatively aplenty. The problem is that we are still doing this after 40 years. Foreign central banks have trillions in US Treasuries that, at the moment, are kept out of the economy. This is the old MMT concept of bonds soaking up reserves, except it’s not for US banks as MMT’ers suggest, but rather foreign governments.
So we end up with a situation where we have wasted money on wars, defense spending, tax breaks for the rich and corporation, etc…, but have avoided most of the inflationary impact of such actions. The foreign central banks have done this for us, but for how much longer.
The question remains: what would the impact be if trillions of dollars appeared suddenly in foreigner’s hands? Some allies, some not. How would they spend these dollars? On commodities driving up prices and killing us with inflation (we’re already seeing some of this due to the Fed’s lunacy with QE2 and Congress’ bailouts)?
My feeling is that our main problem is the balance of payments. It must be addressed. We, as a nation, should have no problem feeding, clothing, and educating the poor. The only reason we do is due to inept leadership and vested interests, but we do have a problem with our ‘hidden’ dollars.
I don’t know the solution, but I suspect it would take an increase in US based production (including basic manufacturing) while foreign nations increase their internal demand (namely China). The US must once again produce something that others want and in enough abundance so that demand does not greatly exceed supply.
Any thoughts from you on this?
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Paying off federal debt merely means debiting T-security accounts and crediting checking accounts. In essence, it’s exchanging a less liquid form of U.S. money (T-securities) for a more liquid form (dollars). As an even exchange, it does not add money to the economy. I see no problem there.
A negative balance of payments means we import fewer dollars than we export. I see no problem there either, as the U.S. has the unlimited ability to create dollars.
Inflation is caused by the increase in supply of money without a corresponding increase in demand. Demand for dollars can be stimulat4ed by increasing the reward for owning dollars (interest). The Fed has all the tools it needs to stop inflation.
The notion that somehow we are subject to the whims of T-security holders is a myth. Actually, since the U.S. does not need to borrow, T-securities can and should be eliminated.
Rodger Malcolm Mitchell
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Good Morning Rodger,
Think of it from the view of the foreign central banks and their masters. What does one do with excess foreign debt? What does one do when that debt is losing value through currency depreciation and a drop in the yield of foreign held securities? Furthermore, what does one do when the issuer of the debt deliberately devalues their currency while at the same time attacks them for supposedly doing the same?
Additionally, are these foreign holders of US obligations friends, allies, co-dependent on the US, independent, etc…???
To argue that crediting these T-security accounts is not a problem because “it does not add money to the economy” is to assume that 1) the money is already in the economy and 2) that it can’t be used in a way to create additional or excessive demand.
I would say that the money is not in the economy. One of the main tenents of MMT is that government bond sales soak up excess reserves, i.e. keeps the money out of the economy. Also, what would happen to the price of gold, oil, and food if these nations suddenly had too many dollars on their hands?
One could argue these nations could hold onto the dollars, but why would they if they are losing value. They can’t sell them because it will appreciate their currency and destroy their export economy. They would need to spend and there are limited things to spend on at this time especially considering that the US is all but closed to the big players like China.
I don’t think we are at the whim of the T-seucrity holders as long as they are also reliant on us; but, this is not how it will always be and the balance of payments deficit just keeps increasing while their reliance begins to decrease.
Regards,
Jason Ray
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Jason,
If you give someone money, no new money is created. If you lend someone money, new money is created. Private lending creates money, because the note is money and the dollars lent are money.
However, when you lend the federal government money (buy T-securities), the dollars are destroyed, while the note (the T-security) remains. T-bills are a form of money called “L.”
What happens however is that a more liquid form of money (M1) is exchanged for a less liquid form of money (L)
Rodger Malcolm Mitchell
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Some of the lawsuits filed against Bayer and Johnson & Johnson say that the company failed to warn the public of the dangers of irreversible bleeding.
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Yes, the government should warn the people that a balanced budget amendment will result in irreversible bleeding of the economy.
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