An alternative to popular faith
In a March 4, 2010 editorial titled, “Bunning had a point,” the Chicago Tribune wrote: “Bunning had a very good point. Congress won’t pay for what it spends.” What the writer meant is, Congress doesn’t levy as much in taxes as it spends — the old balanced-budget theme. The editorial goes on to criticize President Obama: “‘Congress can only spend a dollar if it saves a dollar somewhere,” ‘President Obama proclaimed.’ But here Congress was spending $10 billion without saving a dime elsewhere.”
If there is one statement that is the uncontested bedrock of truth in economics, it’s this: A growing economy requires a growing supply of money. That statement actually is a tautology, for the very definitions of economic growth are measured in terms of money. Big economies have more money than do small economies, so for any economy to go from small to big, it has to increase its money supply, and for real growth, it has to increase its per capita money supply.
What is money? Every form of money is a form of debt. Bank accounts are bank debts. Credit card accounts are card-holder debts. Money market accounts are money market debts. Travelers’ checks are debts of the issuer. T-bills are federal debts. All are money and all are debt. There is no form of money that is not a debt. Even dollar bills (which have the words “Federal Reserve Note” printed on them) are debts of the U.S. government. ( “Bill” and “Note” are words signifying debt.)
So, to grow the economy, we must increase the money supply, i.e. increase the debt supply. But whose debts should we increase? We can select from personal, bank, business, state or local government and federal debts.
Shall we increase personal debts? That often is part of economic growth, though it can get to dangerous levels, at which time the frequency of bankruptcy increases and the economy suffers. So there is a limit to personal debt. Further, increases in personal debt usually are the result of economic growth, seldom the cause. And finally, what action could America’s politicians take to force increases in personal debt?
Shall we increase bank debt, also known as “savings accounts”? Increased saving sometimes is thought (wrongly) to be beneficial to the economy. Of late we have seen complaints that saving instead of spending slows the economy.
Shall we increase business or state and local government debt? Like personal debt, this can be dangerous debt. Many state and local governments already are over-borrowed, and are trying to reduce their debt.
That leaves the federal government as the safest source of increased debt/money. The federal government has the unlimited ability to create money; it cannot run out of money; it cannot go bankrupt; it has complete control over its debt-creation; it even can control the inflation some feel results from money creation. In short, the federal government is the ideal source of additional money to grow our economy
But the Chicago Tribune wants a balanced budget, meaning the federal money supply does not grow. Worse yet, in a balanced budget, the real money supply shrinks. Say in year 1 the money supply is $10 trillion and inflation is only 2% annually. By year 2, the real value of that $10 trillion has shrunk to $9.8 trillion. By year 10, with the same ongoing inflation, that balanced budget money supply has shrunk in real value to only $8.2 trillion. A balanced budget, with only 2% annual inflation, will cause our real (inflation adjusted) money supply to shrink almost 20% in ten years.
To achieve economic growth, the per capita money supply growth must exceed inflation, the trade deficit (which sends money overseas) and population growth, combined.
So yes, President Obama deserves criticism, but not for wanting to spend too much or tax too little. He deserves criticism for his populist, balanced-budget pronouncements, which by disparaging money growth, hurt America.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
#Monetary Sovereignty - Mitchell 
A lot of your premises are the correct logical conclusions of current economic policy, i.e. fiat money means that there technically isn’t any correlation between tax receipts and expenditures. I get that, and I respect the fact that you openly acknowledge this while politicians beat around the bush.
However, I don’t understand on what basis you insist that “a growing economy requires a growing supply of money.” Pretty much all of your arguments stem from this simple assertion, and without it they are meaningless. You say this statement is a tautology, but the funny thing about tautologies is that *they are meaningless*. A growing economy requires a growing supply of money because we have defined it as such, with our measures of GDP. You make a leap of faith by then stating that “for real growth” a country must “increase its money supply.” How does fiat money, created by the government with no underlying production, equate to real growth?
The Keynesian would say that the government isn’t just giving money away, it is paying economic agents for production. Printing $1 million and then giving this money to a construction company for a new highway is real production. The problem with this statement is that the people involved in building the highway *could have been doing something else*. Keynesian economics rests on the assumption that there are enough resources sitting around unused that the government’s expenses don’t crowd out normal production. But your logical extremes take this assumption beyond reason.
As an aside, I’d like to point out that the reason the government pretends to try and balance the budget is that it is a limitation on governmental power. It would be obvious to the people that the government had violated Constitutional limitations if it were to abolish taxes and simply print money for any expenditures. Of course, fiat money is clearly proscribed in the Constitution so I doubt the founders ever imagined this could even have happened.
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A large economy, by definition has more money than does a small economy. For instance, California has more money than does Oregon. Therefore, to grow (i.e. to go from small to large) an economy’s money supply must grow. That is the tautology.
If you don’t believe it, give me an example of an economy that has grown, while its money supply has shrunk.
I don’t know what you mean by “crowd out normal production.” What is normal production, and what makes it normal?
By the way, the people building the highway keep the money for just one day. It immediately goes to the bank, which invests it, and the investors invest it, etc., etc. Or the money goes to the local tavern, gas station, cleaning store, restaurant, clothing store, etc. — all the places highway builders spend money. From there it goes to other employees and on and on and on. Money never stops.
Which Constitutional limitations?
Fiat money is proscribed? Please direct me to the sentence.
The government talks about balanced budget because the people have been taught that balanced budgets are prudent. It’s just politics.
Rodger Malcolm Mitchell
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Rodger, I would quibble with the statement that all money is debt. Debt implies a creditor and the US government has no creditor when it issues its own currency under the present system. The Treasury is not “in debt” to the Fed, as many erroneously think, nor does the US government pay interest to the private bankers for its money creation. As you have observed previously, currency issuance and tsy issuance are unrelated operationally.
What is correct to say is that all money is someone’s liability. All debts are liabilities, but not all liabilities are debts. The US currency is a liability of the government that the government accepts as the only form of payment in satisfaction of liabilities to it, e.g., taxes, fees, and fines. The fact that US currency is a government liability does not make it government “debt,” at least in the conventional sense in which the public customarily uses the term “debt.”
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