Only two things keep people in chains: The ignorance of the oppressed and the treachery of their leaders
Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency. There is nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The United States can pay any debt it has because we can always print the money to do that.”
===================================================
Perhaps no words more accurately and succinctly illustrate the confusion in economics than “Monetary Sovereignty.”
It is not a theory, hypothesis, or philosophy. It is a description of the way federal financing works.
A Monetarily Sovereign government has the exclusive and unlimited power to create its sovereign currency. Monetary Sovereignty is the foundation of economics.
The United States is Monetarily Sovereign. It has the exclusive, unlimited power to create the U.S. dollar.
China, Canada, Australia, the UK, and Japan are Monetarily Sovereign. They have the exclusive, unlimited power to create their sovereign currencies.
By contrast, America’s states, counties, cities, businesses and people all are monetarily non-sovereign. They are users, not creators of the dollar and not sovereign over its creation.
In the 1780s the U.S. government created the very first dollar from thin air, by first creating from thin air, all the laws and rules that made the dollar exist.
Being sovereign over the dollar, the U.S. can give the dollar any value it wishes. It can make the dollar equal to three euros, an ounce of silver, or a partridge in a pear tree.
The U.S. federal government can never unintentionally run short of dollars. Even if all federal tax collections totaled $0, the federal government could continue spending forever.
Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
Alan Greenspan: “Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit. A government cannot become insolvent with respect to obligations in its own currency.”
St. Louis Federal Reserve: “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.
Illinois, Cook County, and Chicago are monetarily non-sovereign. The dollar is not their sovereign currency, and they do not have the unlimited power to create dollars.
France, Germany, and Italy are monetarily non-sovereign. They do not have exclusive, unlimited power to create the currency they use, the euro. That power is owned by the European Union.
You, your business, and I also are monetarily non-sovereign. Even Bill Gates and Warren Buffet do not have the unlimited power to create dollars. They are monetarily non-sovereign.
Because our Monetarily Sovereign nation has the unlimited power to create its sovereign currency, it never needs to ask anyone for dollars.
The federal government doesn’t need to tax, and it never borrows dollars. It never can be forced into insolvency. It can pay any dollar-denominated invoice of any size at any time.
The federal government creates money by paying its bills. To pay its bills, the government sends instructions (not dollars) to creditors’ banks, instructing the banks to increase the dollar amounts in creditors’ checking accounts.
These instructions are in the form of checks or wires. The moment the bank obeys those instructions, dollars are created in creditors’ checking accounts, and the M1 money supply measure is increased. This is how the federal government creates dollars — not by “printing,” but by sending instructions.
The U.S. has created many trillions of dollars, simply by pressing computer keys, and it will continue to do so. It does not “owe” anyone for creating these dollars.
The U.S. government cannot live beyond its means; it has no means to live beyond. By contrast, if the debts of France, Germany et al, exceed their ability to obtain euros they, as monetarily non-sovereign nations, could be forced into insolvency.
They did not create the euro, nor do they have the unlimited ability to pay euro-denominated bills.
Everything you believe about your personal finances — debts, deficits, spending, affordability, saving, and budgeting — are inappropriate to U.S. federal finances.
For this reason, your intuition about U.S. financing likely is wrong.
Because the U.S. cannot be forced into insolvency, none of this nation’s agencies can be forced into insolvency. The U.S Supreme Court, the Department of Defense, Congress, Social Security, Medicare, and any of the other 1,300 federal agencies cannot become insolvent unless the federal government wishes it.
(All the talk about Social Security or Medicare running short of dollars is misguided. Even if FICA were eliminated, Social Security and Medicare would not need to default on their obligations, unless Congress wished it. They could continue to pay benefits.)
The unlimited ability to create money is an uncontested fact for Monetarily Sovereign nations although, at any given time, economic growth, inflation, deflation, recession, depression, and social factors may influence a nation’s decision to create money.
A Monetarily Sovereign nation even can choose to declare insolvency, for various reasons, but this would be an arbitrary matter of choice, not a forced necessity.
An example would be Congress’s failure to raise the useless debt ceiling. This could force the U.S. into insolvency.
There are those who do not (or do not wish to) understand the implications of Monetary Sovereignty. You never will see that term on such debt hawk websites as The Committee for a Responsible Federal Budget” or the Concord Coalition.
If you go to those sites you will see federal debt described in the same terms as personal debt – as an unsustainable obligation.
While debt can be unsustainable for you, me, businesses, states, cities, counties, and the monetarily non-sovereign EU nations, no dollar debt is unsustainable for the U.S. government.
Debt hawks suffer from Anthropomorphic economics disease — the false belief that federal finances are like yours and mine.
The U.S. was not always completely Monetarily Sovereign. Prior to 1971, the U.S was on a gold standard. It had a sovereign currency, but it did not give itself the unlimited ability to create that currency.
The government passed laws saying every dollar must be matched by an arbitrary amount of gold. No gold; no dollars.
The amount of gold needed to back the dollar was arbitrarily determined by Congress and the President, and that requirement could be changed at any time by Congress and the President, a fact often forgotten by gold lovers.
Even while on a gold standard, the dollar actually was backed by federal fiat, not by gold.
The EU nations are on a euro standard. Their ability to create euros is limited by law.
Our states, counties, and cities are on a dollar standard. Their ability to create or obtain money by borrowing or taxing is limited by local law, by voters, and by lenders.
The financial problems of the euro nations are due not to deficits and debt.
These nations’ financial problems are due to them having surrendered the single most valuable asset any nation can own — their Monetary Sovereignty — thus preventing them from servicing their debt by creating money.
Some debt hawks say that a Debt/GDP ratio exceeding 100% puts a nation on the brink of bankruptcy. Yet today, Japan has a Debt/GDP ratio above 200%, and that Monetarily Sovereign nation has absolutely no difficulty servicing its debt.
When the U.S. exceeds that magical 100% ratio, it too will have no trouble servicing its obligations.
The debt hawks, having learned nothing from this, continue to wail about the meaningless Debt/GDP ratio, which because it is a classic apples/oranges comparison, is devoid of significance (the numerator is a 200-year measure of cumulative T-securities outstanding; the denominator is a one-year measure of spending. The two are unrelated).
So-called federal “debt” is nothing more than the total of dollars deposited into T-securities accounts at the Federal Reserve Bank. These accounts are similar to safe deposit boxes. The government never touches the dollars in those accounts. The contents are owned by the depositor, not the government.
To “pay off” the federal debt, the Federal Reserve Bank merely takes dollars from these T-securities accounts and adds them to the holders’ checking accounts, the same way you take dollars from your safe deposit box and add them to your checking account.
No new dollars are needed.
Thus, Congress easily could eliminate all federal debt, tomorrow. That would require pressing a few computer keys. It would be a simple asset exchange, with no new money created and no inflation consequences.
Because a Monetarily Sovereign nation has the unlimited ability to create its sovereign currency, that nation needs neither to tax nor to borrow. Why would it?
Further, that nation does not use tax money or borrowed money to pay for spending. Federal income does not fund federal spending. Taxes and borrowing are unnecessary.
When the states, counties, cities, you and I spend, we transfer dollars from our checking accounts to some other checking accounts. When the federal government spends, it creates new dollars.
If U.S. federal taxes fell to $0, or rose to $100 trillion, neither event would reduce by even one penny, the federal government’s ability to create the money to pay any size bills.
The spending by Monetarily Sovereign nations had been constrained only by fears of inflation. However, since 1971, the end of the gold standard and the beginning of Monetary Sovereignty, there has been no relationship between federal deficit spending and inflation.
More about this at Inflation and at SUMMARY.
Because taxes do not pay for federal spending, FICA does not pay for Social Security benefits. FICA could (and should) be reduced to zero. Benefits even could be tripled or more, and this would not affect by even one penny the federal government’s ability to pay Social Security benefits.
Recently, the federal government made a profit on its purchase and sale of corporate stock (GM et al). All such profits came out of the economy, and therefore the government’s profits were recessive — harmful to the economy and useless for the federal government.
By reducing the money supply, federal profits = losses for the economy.
Federal surpluses = economic losses.
Unlike state and local tax dollars, federal tax dollars are destroyed upon receipt by the Treasury. Taxes come from private checking accounts, the contents of which are part of the M1 money supply measure.
But when the dollars reach the Treasury, they instantly cease to be part of any money supply measure. The reason: The Treasury has infinite dollars, so no measure applies.
Since the federal government neither needs nor uses tax dollars why does it tax?
- To control the economy by penalizing what the government wishes to discourage and by using tax cuts and loopholes to encourage what the government wishes to reward
- To guarantee demand for the U.S. dollar by requiring dollars to be used for tax payments.
- The rich, who run America, like taxes because they pay at much lower percentages (via tax loopholes) than you or me. This widens the income/wealth/power Gap between the rich and he rest, effectively making the rich richer.
On occasion, the federal government has “saved” money by firing, or reducing the pay of, federal employees. Those so-called “savings” are money not sent into the economy, and therefore, damage the economy.
The federal government, having the unlimited ability to create dollars, never needs to “save” dollars.
Politicians and the press do not yet seem to understand Monetary Sovereignty. However, no one intelligently can discuss national deficits and debt without acknowledging the implications of Monetarily Sovereignty.
The concept is the basis for all modern economics. Monetary Sovereignty is to economics as arithmetic is to mathematics.
The next time you go to any economics blog or website, see if the contributors understand Monetarily Sovereignty and use it in their discussions.
If they do, it might be a good site. If they don’t, the site is worthless. All debt hawk objections revolve around just two questions:
- How much money can the federal government create? Answer: Infinite
- How much money should the federal government create? Answer: As much as necessary to grow the economy and to narrow the gap between the rich and the rest.
Despite an astounding 50,000% increase in the federal debt from 1971 through 2020, we did not go anywhere near the point of uncontrollable inflation (which is controlled by procurement and distribution of scarce goods and services).
Ironically, the best cure for inflation is more federal deficit spending. The reason: Inflations are caused by shortages, usually of food and/or energy. Additional federal spending can cure the shortages that cause inflation.
Though the Federal Reserve is tasked with controlling inflation, only Congress and the President can obtain the goods and services, the scarcity of which causes inflation.
The Fed mistakenly uses interest rate increases to stem inflation, but those increases increase the costs for goods and services. Thus, contrary to popular wisdom, increasing interest rates exacerbates inflation.
Thus, most of our economic problems are caused by the politicians, the media, the economists, and the public not recognizing the implications of Monetary Sovereignty.
By crippling the federal government’s ability to grow the U.S. economy, the politicians have injured more Americans than terrorists.
I suggest you next read the data at Summary, for detailed answers to your questions.
Question of the day: How does a tax increase or spending decrease affect unemployment or economic growth? Answer: When the federal government taxes, dollars are removed from the economy.
When the federal government spends, dollars are added to the economy. A federal deficit is growth income for the economy.
Therefore, both tax increases and spending decreases reduce economic growth and increase unemployment.
Because GDP = Federal Spending + Non-federal Spending + Net Exports, a reduction in federal spending always reduces economic growth.
Money is the lifeblood of an economy. Cutting the federal deficit to cure a recession is like applying leeches to cure anemia. [For more on this subject, see: Free Lunch]
…………………………………………………………………………
Rodger Malcolm Mitchell [ Monetary Sovereignty, Twitter: @rodgermitchell, Search: #monetarysovereignty Facebook: Rodger Malcolm Mitchell ]
THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE. The most important problems in economics involve:
- Monetary Sovereignty describes money creation and destruction.
- Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”
Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps: Ten Steps To Prosperity:
- Eliminate FICA
- Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
- Social Security for all
- Free education (including post-grad) for everyone
- Salary for attending school
- Eliminate federal taxes on business
- Increase the standard income tax deduction, annually.
- Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
- Federal ownership of all banks
- Increase federal spending on the myriad initiatives that benefit America’s 99.9%
The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.
#Monetary Sovereignty - Mitchell 
“A monetarily sovereign nation does not use tax money or borrowed money to pay for spending. Spending itself creates money. If U.S. federal taxes and borrowing fell to $0, this would not reduce by even one penny, the federal government’s ability to pay any size bills. Monetarily sovereign nations need neither to tax nor to borrow, but may choose to do so for many reasons unrelated to financial need.”
Wow this is great! If only the public would be as enlightened as you, Americans would never have taxes again!
LikeLiked by 1 person
I can’t tell whether you are sarcastic or serious, but you are correct. After 1971, federal taxes no longer were necessary, or even used, to fund federal spending. (Before 1971 taxes were necessary and used.)
States, counties and cities still rely on taxes as do the European Union nations, which is why they are struggling to pay their debts.
Rodger Malcolm Mitchell
LikeLiked by 1 person
Interesting blog post. I agree in theory, although wouldn’t the sovereign be constrained in its debt obligations? Meaning that if it were to issue too much of its currency to cover it’s debt obligations it would therefor be devaluing its currency & destroying the purchasing power of it’s currencies holders. So taxes are needed to contract some of the money supply that it net spends… Correct me if I’m wrong.
LikeLiked by 1 person
Joe, there are three separate issues:
1. Does the U.S. have the power to create unlimited money? The answer is “Yes,” and this makes it impossible for the U.S. or for any agency of the U.S. ever to go bankrupt.
2. Does money creation cause inflation? Yes and no. An enormous amount of money creation could, but we are nowhere near that point. Since 1971 (the end of the gold standard), there has been no relationship between federal money creation and inflation (See: https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/) If the U.S. gave $1 million to every citizen, I suspect this would cause inflation. But I already have suggested the U.S. give $10,000 to every citizen.
3. Is inflation prevented and cured by taxes? Yes, but that is a bad system. Inflation can be cured by reducing the money supply (taxes) or by increasing the demand for money (interest). History shows that reducing the money supply causes recessions and depressions. Increasing interest rates has not had an adverse effect on the economy, and is a faster, more sensitive approach.
Tax bills are slow, cumbersome, political, subject to endless wrangling and difficult to scale proportionately. For instance, if inflation were 6%, and you wanted it to be 3%, what kind of tax bill would you pass, and how long would it take you to pass?
Rodger Malcolm Mitchell
LikeLiked by 1 person
FREE MONEY!!!
Yes of course money creation inflates the currency. You think we can just keep those greenbacks rolling and that somehow makes us wealthy? You understand nothing on economics.
LikeLike
So where is the inflation?
The federal debt has increased an average of 10% a year for the past 10 years. During that same 10 year period, inflation increased an average of less than 3% annually.
But that’s nothing. Federal debt has increased more than 15% per year for the past 5 years. During that same period, inflation increased an average of only 2% annually.
So where is the inflation?
The value of money is based on the supply and demand for money relative to the supply and demand for goods and services. You focused only on the supply of money, and neglected the demand for money and the supply and demand for goods and service.
There is no historical relationship between federal deficits and inflation. See: INFLATION
I understand this is counter-intuitive, but all unfamiliar ideas are.
Rodger Malcolm Mitchell
LikeLiked by 1 person
Why do you say debit has gone up 3500% with out appreciable inflation? Debt is not the same as printing money, the reason for low inflation is because we HAVE NOT (yet) started printing too much money. The dollar wasw backed by gold untill we ‘fell’ off the gold standard. have you ever heard of the expression “not worth a confederate” or know how many times the Mexicans have lost all their savings due to hyper inflation.
LikeLiked by 1 person
“inflation increased an average of only 2% annually.”
I would refute that statement. Using the government provided statistics is not an accurate source for inflation data. Government stats are only a convenient tool for political purposes and are highly manipulated.
The average of 2% is only valid if you believe in CPI geometric weighting and Hedonics, both used for politically convenient purposes.
LikeLiked by 1 person
Jay, All federal data can be disputed. What is your inflation figure? What is your debt figure?
Rodger Malcolm Mitchell
LikeLiked by 1 person
I’m not even sure what to say to this. Normally, I will devote at least 1,500 words and significant research to critiquing such sites. In fact, I have never written a reply even close to this short, but this is breathtaking.
What about my grandchildren?
In anothjer 200 years, when you devalue our currency, built up by our fore-fathers’ blood-sweat and tears, by toughing out recessions, protecting the currency rather than sacrificing it to give themselves an easy ride, what will happen?
What you are speaking of is mortgaging our children’s futures.
I have always been a proud American, but for my country, there are some things of which I am ashamed. Slavery, our governments exploitation of the Indians, but I never though I would see americans knowingly planning to devalue our currency, mortgaging our children’s future, so that we can have it easy.
You are speaking of inflation that will likely average at least 15% annually, we can take that for a few decades, but make no mistake, it cannot last forever.
What about our children?
LikeLiked by 1 person
Chris,
Thank you for your brevity.
I don’t know where you came up with your estimate of 15% inflation per year. In 1971, the end of the gold standard, Federal Debt Held By Private Investors (perhaps the best measure of federal debt) was about $225 billion. Today it is more than 7.8 trillion — close to an astounding 3,500% increase, averaging about 9.25% per year.
During that same period, inflation rose a “meager” (by comparison) 450%, an annual average of about 4.4%. This is very close to the Fed’s target range.
During this time, the Fed could have reduced inflation, merely by raising interest rates, and there has been no relationship between federal deficit spending and inflation. See: INFLATION
Since you are worried about your children, I invite you to read Worried About Your Children? to see what your children will give up due to false debt fear.
Rodger Malcolm Mitchell
LikeLiked by 1 person
You can see by my comment co-posted on NakedCapitalism’s article on the Fed today that I generally agree with your postulation here – the key to economic stability for all national economies is quite simply to end the debt-money system and restore national monetary sovereignty.
I wish you good luck, and I hope that you can proceed with a healthy dialogue who Chris, who might use a whole series of short, kind of bite-sized, criticisms of your efforts, and in doing so that Chris will base his criticism on a solid understanding of what a monetary system is, what monetary sovereignty really means and how an adequate supply of money to balance the potential for economic growth causes neither inflation nor deflation.
Hope you have seen Dr. Yamaguchi’s paper that I referenced in my NC comment. It represents the beginning of the end of debt-money.
LikeLiked by 1 person
Joebhed,
Having read Yamaguchi’s paper, I’m sorry to see he does not understand monetary sovereignty. But I am even sorrier that our easily cured economic slump has brought out all the nonsensical, change-the-world hypotheses.
First, the slump easily would be cured by sufficient federal “deficit” spending. I said in 2005 that it was too little, too late (See: April 9, 2008 Email to the Chicago Tribune, and that never changed.
Second, Yamaguchi said, in referring to the federal government, “. . . the burdens of debt repayment. […]This paper investigates how to liquidate runaway government debt under the current financial crises.” He thinks federal debt is a “burden” so he refers to it as “runaway.”
In a monetary sovereign nation, federal debt never is a burden. The U.S. federal government has the unlimited ability to create money and pay any bills of any size, merely by pressing a computer key. And money creation never is “runaway,” unless it causes uncontrollable inflation, which clearly it has not.
Third, the so-called federal “debt” easily could be eliminated simply by not creating T-securities out of thin air, then selling them. Post-1971 (gold standard), the government has had no need to borrow the money it previously created out of thin air. T-securities are a relic of gold standard days.
Yamaguchi also worries about deficits causing inflation, though today deflation seems to be the concern, and there has been no relationship between federal deficit spending and inflation. (See: INFLATION ). He mentions Japan as an example, but Japan, with its huge “debt” suffers from deflation.
So, as is typical for academics, Yamaguchi offers numerous formulas, but his basic assumptions are wrong, so the formulas are meaningless.
Yes, there are many changes that should be made in the details of how the government runs the economy, but this slowdown could be cured simply by eliminating FICA (See: FICA ) and supporting the states with a per-capita stimulus payment. I suggest $10,000 per person.
Rodger Malcolm Mitchell
LikeLiked by 1 person
I should also have mentioned that Yamaguchi thinks we have a fractional reserve banking system. We don’t. Bank lending is not limited by reserves; banks receive all the reserves they need from the government or from other banks.
Banks lend against capital, not reserves. I mention this merely as a further demonstration of the weaknesses in Yamaguchi’s arguments.
Rodger Malcolm Mitchell
LikeLiked by 1 person
So I can buy a beer today and pay it back next year with printed ‘Monopoly’ money, but how many times can I steal from the beer maker before he wises up?
LikeLike
Robert, your analogy is nonsensical, irrelevant and meaningless. Other than that it’s helpful to the discussion.
LikeLike
Rodger,
I think you’re far too dismissive without adequate consideration of Dr. Yamaguchi’s work.
And far too presumptuous about what Dr. Yamaguchi believes.
Neither do I appreciate your general dismissiveness as a blog-manager. A more educational perspective is in order.
Shall we?
How do you know what Dr. Y. believes based on his models?
In explaining his models, Dr. Yamaguchi started with the gold-standard – he built a macro-economic model on how it worked back then.
Then he transitioned to the present system – yes, of fractional-reserve, debt-based money creation – how it works.
He did this because, as he said, this is what the neo-liberal economists believe the present system is about(thus his neo-liberal references).
It’s not what he believes, it’s what he believes he must model in order to satisfy the econ-du-jour.
Your claim that a model based on “fractional-reserve banking” demonstrates additional weakness is itself extremely weak. You would need to know the effects of econ-speak “exogenous” money creation on the model results before it can be dismissed.
I discussed this exact issue with Dr. Y after Steve Keen pointed out this meaningless difference at the AMI conference.
Dr. Y agreed to model the debt-money creation without a base of reserves, with reserves falling into place based on Keen’s own models. But he assured me the results would be the same, with only a temporal adjustment of the effect of a period of six-months to a year.
Since he modeled for 50 years, this is of zero significance, as is your additional criticism.
Then he modeled the three changes from the AMA.
From your writing, I begin to think that YOUR view of monetary sovereignty is based on a similar view to the Neo-chartalists. But I do not presume that.
In reading DelMar’s Histoty of Monetary Systems, monetary sovereignty simply means that a government has the right to create the nation’s money supply as a natural monopoly.
That is what I, Dr. Yamaguchi and Alexander DelMar believe.
What do you believe monetary sovereignty means?
For the present I will ignore your assurance about additional “deficit” spending as I am not sure what you mean by that.
Moving on to the burden of national government debt. Like the NCists, you easily dismiss the government debt. But, since concern over government debt is what is driving us to Austeria, it is not something that Dr. Y can ignore in his macro-economic mofdeling. He must address the research paper conclusions of the IMF, WB, BIS and the Fed – even if they’re wrong.
How else can he model the debt-free money issuance results if not agaonst what these guys believe we are doing wrong?
It should be painfully obvious to any open-minded person that Dr. Y knows that we the people’s government can repay our government debts by the stroke of a key – as that is one of the changes proposed in the AMA that he modeled.
And, being from a Japanese University, a country that has lost a generation to continual massing of government debt, it should be no surprise that his paper begins with – “On the Elimination of Government Debt…..”
He doesn’t think that the government debt must be a burden, he knows that it is a burden causing great human suffering in his own country, as we discussed. This is not an academic view, but based on his personal experiences.
It turns out I am called to dinner away.
I will continue tomorrow.
But I leave you with this.
Are you saying that there is error in Dr. Yamaguchi’s conclusion that a switch from whatever you call the present system to a debt-free money issuance system?
Do you not believe that such a change can achieve such results?
Rodger, there are MANY things with which I agree with you completely. You can see from my website that I have been a monetary reformer for most of my life and have always based that advocacy on monetary sovereignty.
I wish we could achieve greater understanding.
The Money System Common.
LikeLike
Joe,
Thank you for your thoughtful response. I thought I did a reasonable job, within the confines of a blog, of telling why I “dismiss” Yamaguchi’s paper.
You asked, “How do you know what Dr. Y. believes based on his models?” I infer it from what he says. Frankly, I dismissed his models, and did not explore his math, simply based on his comments.
You said, “You would need to know the effects of econ-speak “exogenous” money creation on the model results before it (fractional reserve banking) can be dismissed.” Well perhaps, but if it doesn’t exist, it doesn’t exist. He should know better. I don’t need econ-speak for that.
You said, “It’s not what he believes, it’s what he believes he must model in order to satisfy the econ-du-jour.” Basing a model on incorrect assumptions?? Hardly scientific. Be honest. Do you personally believe you must satisfy the econ-du-jour on your blog?
You said, “. . . monetary sovereignty simply means that a government has the right to create the nation’s money supply as a natural monopoly.
I agree (depending on the definition of money. According to one definition, banks create money by lending). But he doesn’t seem to understand the profound implications of that simple fact.
As you said, his paper begins with “On the Elimination of Government Debt…..” But anyone understanding monetary sovereignty should know:
1. “Government debt” merely is a synonym for “government-created money” and
2. There is no reason to eliminate government created money.
The elimination of government debt is the debt-hawk nonsense, I would expect on the Concord Coalition web site.
If his paper began with “On Why the World is Flat,” I might be equally dismissive.
Finally, you said, “He doesn’t think that the government debt must be a burden, he knows that it is a burden causing great human suffering in his own country, as we discussed. This is not an academic view, but based on his personal experiences.” Most American economists are ignorant about how the American economy really works. I assume the same is true in every country, including Japan.
Please explain how money created by the government is a “burden causing great human suffering.” My research: Lack of money creation by the government has caused every depression and most recessions in U.S. history.
Rodger Malcolm Mitchell
LikeLike
Rodger,
Thank you.
I couldn’t decide if I should just walk away, or order your book – which I have done.
I may ask Pete if we can do a CWJ tomorrow on this chat.
I hope in your book I find your proposal for solving the economic crisis. I expect from your writings on this page that it is going to parallel somewhat the Neo-Chartalist positions of Wray, Mosler, etc. We shall see.
You can see our opinion of the NC-view in several videos we have posted.
For a moment, I want to avoid your continuing critical position that goes something like – you can’t get there from here – based on the fact that ‘here’ is a myth.
So, no I don’t agree with your statement that government money creation is the same as government debt (or vice-versa).
To me, the sovereign act of creating the nation’s money is for the most part the opposite of government debt. It is government-created credit against no offset in any balance sheet, it represents our national equity and our national wealth.
To me, government debt involves a temporal transfer of private virtual wealth (when ALL money is government created) for use by the government. Private peoples, or private citizens of public entities, purchase government debts(securities) with monies that have already been created. The sale of government securities in a sovereign monetary state does not create any money. It can never be necessary. That’s just my opinion of how things work. But it’s immaterial to my earliest comment and to Dr. Yamaguchi’s work, and that it is what I hope to discuss.
Dr. Yamaguchi has found, based on macro-econometric analysis, that doing away with the debt-money system – call it fractional-reserve money-creation or WHATEVER you want to call it – where ALL money is created as a debt, and replacing that debt-based monetary structure with a system of government-issuance of money without debt, can result in the elimination of government debt (WHY should we have any?), the achievement of full national economic growth potential, and the elimination of inflation and deflation in the process.
So, my question to you is whether such a system would be desirable, or whether there may be any reason for not pursuing such a system.
Again, Rodger, the transition Dr. Yamaguchi proposes is clearly based on monetary sovereignty, as no country could abolish the private debt-money system without asserting it’s own public right to create the national circulating medium.
You seem quite attached to the notion that something like this is the way that things should be done. As am I. What I am thankful for is the fact that somebody of Dr. Yamaguchi’s economic modeling prowess has taken that great notion and proved that it works better than the system we have had since 1913 in this country, and since Bretton Woods in the rest of the developing world.
Your ‘currency’ in dismissing Dr. Yamaguchi’s work is based entirely on the “fact” that fractional-reserve banking (the debt-based money system) does not exist. As a result, you say, we cannot transition from something that does not exist (can’t get there from here).
To be clear, fractional-reserve banking does exist in the minds and policies of every country-member of the IMF, in our Fed, in the BIS, the Banking and Currency Committee of the Congress(or whatever it is now called), in the academic halls of all business schools and in the minds of the bankers that cover their asses with reserves when the bank regulator comes to town.
As we said to Steve Keen, the temporal dislocation of acquiring the reserves after the fact of making the loans is immaterial. We know how bankers will bend every rule to keep their bottom line in the green. The only thing that is material to the discussion we are having is the debt-based nature of creating the nation’s circulating medium.
That system is unsustainable, pro-cyclical and technically insolvent. So, we need a new system.
Again, I look forward to a read of your book to see if you have come up with anything as good as what Dr. Yamaguchi has done.
Respectfully.
LikeLiked by 1 person
You said, “I don’t agree with your statement that government money creation is the same as government debt.” Then you said, “Dr. Yamaguchi has found . . . that doing away with the debt-money system . . . where ALL money is created as a debt, and replacing that debt-based monetary structure with a system of government-issuance of money without debt.”
Those two sentences contradict each other.
In fact, all money, including federally created money, is debt. Can you think of any money in America that is not debt?
You said, “. . . fractional-reserve banking does exist in the minds and policies. . .” I really don’t care what myths exist in what minds. Fractional reserve banking is a myth and the bankers are well aware of it. Fractional capital banking is the reality.
I’m absolutely sure you will find Dr. Yamaguchi’s solutions superior to mine.
Rodger Malcolm Mitchell
LikeLike
Rodger
Please explain why you think there is a contradiction. I’m not aware of it.
The creation of government debt is not the creation of money, as I said – government debt is purchased with already existing money – that is, it is purchased with issuance of a debt.
The government created money in Dr. Yamaguchi’s example is created without a debt.
They are not the same.
One is government debt.
One is government money.
The question should be- which one better serves the needs of economic stability in the national economy?
If you like the term fractional capital, then fine. The capital ratios “recommended” by the bankers at Basel just supplant a proportion between certain “types” of capital assets and total lending for the cash, deposit reserves of the Fed. Bankers are still required to true up to their reserve requirements whenever they can find a bank regulator to have a visit.
Far more important is the debt-nature of all of the money that is created by the bankers under either fractional-reserves or fractional-capital.
With a Constitution that gives the people the right to control the issuance of the currency under monetary sovereignty, why would we NOT issue the money into existence without debt, and let the bankers lend real money?
LikeLiked by 1 person
You can keep your photocopied paper from the fed(only with special inks and paper, concept it the same). I will keep my goods and commodities that have real value(more so than a stack of green paper that a group of people tell me is valuable without any backing)
LikeLiked by 1 person
Jim, next time you buy something at the grocery store, be sure to bring your goods and commodities instead of “photocopied paper.”
Rodger Malcolm Mitchell
LikeLiked by 1 person
Jim,
I’m not sure if that comment was for me or Rodger. In case it was me because of my advocacy of the debt-free money system contained in the American Monetary Act proposals that were modeled by Dr. Yamaguchi –
When you say the currency has no “backing”, you must mean no commodity standard of value against which to trade that currency.
My view of currency is much different. The purpose of monetary systems and national currencies are to provide for the means of exchange for national economies – they represent the capacity of a national economy to function. That’s the purpose of a national monetary system. Anyone who doesn’t understand this needs to read Soddy’s “Wealth, Virtual Wealth and Debt” and Alexander Del Mar’s “History of Monetary Systems”.
All currencies have the natural backing of their national economies more than anything else. Our national currency is in a free-exchange international market that sets its value for trading in comparison to the currency of all other countries.
But, what really backs the nation’s money is the potential GDP of the economy at any time.
If the nation creates too much money (neither ink nor papers required) relative to the potential growth in the economy, then inflation will result.
If the country fails to create sufficient money relative to the potential GDP, as we are now because debt-money contracts in a self-escalating spiral, we have deflation.
Sooooooo, what’s the problem?
Slogans are cool, but they don’t really help the dialogue towards understanding how money works.
And, if that comment wasn’t directed to me ……. Sorry.
LikeLike
“. . . what really backs the nation’s money is the potential GDP of the economy at any time.”
Partly true. The first line of support for the dollar is the requirement that all taxes be paid with dollars. The second line of support is the fact that U.S. creditors must accept dollars if they are offered, and do not have to accept foreign currencies.
Rodger Malcolm Mitchell
LikeLiked by 1 person
Rodger, sorry I jumped in there.
Yes, these are the legal tender requirements for any national economy. They are part of the foundation necessary to have a national money system. All countries must have such a legal foundation for their money.
LikeLiked by 1 person
Joebhed,
What Yamaguchi does not understand is that there are only two forms of money: Physical money like gold, wheat etc., or debt money. When a government issues money, by necessity, that is debt money.
All money in America is debt, not because the government issues T-securities (which in today’s America no longer are necessary), but because the government owes the holder full faith and credit.
If you go to Understanding federal debt, you will find that full faith and credit is not some ephemeral wisp of smoke, but rather an important and valuable collateral for this debt called “money.”
The government could end the sale of T-securities, and continue to create money endlessly, and all of this money would be debt. And when you put the money in your checking account, the bank owes you the money, so it continues to be debt.
It is impossible for a government to issue money that is not debt, so a debt-free money is a contradiction in terms, unless you wish to begin again trading wheat.
Rodger Malcolm Mitchell
LikeLiked by 1 person
Actually, Rodger, I’m beginning to think that despite the title of your blog, it is you that does not understand money.
I read that link and find it seriously wanting in any basis of logical facts.
From what authority do you claim that only either commodity money or debt-based money can exist? If you make a claim, you should back it up.
If all money is debt- which 99.7 percent is under our present debt-money system – what about the other 0.3 percent, which is coins issued at face value, paid directly to the banks without any debt ever created?
Why can’t that 0.3 percent be 1 percent or 10 percent or 100 percent?
Also, what of the Greenbacks?
There were fully $450 Million of no-debt monies issued by the government of the United States and circulated as a medium of exchange for over a hundred years?
So, if your claim is a truism, please explain these contradictions.
Having read Del Mar and Zarlenga’s Lost Science of Money Book, my belief is that it was Aristotle who correctly observed that the basis of all money is the law.
And since we write the laws, we can make money be anything we want it to be – either wheat, or coins or electronic transfers created with or without debt attached by the magic of what we write into law with a pen.
Please explain why you believe that “full faith and credit” is anything more or less than implied on its face?
If you listened to the quote on yesterday’s Coffee With Joe from Thomas Edison, which comports to Nobelist Frederick Soddy’s writings in The Role of Money, then you can see that the direct payment by the government using its sovereign power as monopoly issuer of the currency requires no debt in order to deliver the full faith and credit payment that is due for goods and services.
I can lend you $10 based on your full faith and credit of repayment, or I can hold your pocket watch as collateral.
This is all about a simple reality from understanding monetary systems.
We continually need more money to maintain economic prosperity. That additional money can either be LENT into existence, in which case it might need to be secured by collateral, or that money can be PAID directly into existence for goods and services received by the governmental authority with the monopoly power of issuance under the concepts of monetary sovereignty.
Respectfully.
LikeLiked by 1 person
“. . . what of the Greenbacks . . .”
A paper dollar, often referred to as a dollar bill is a debt instrument. It is a federal reserve note. “Note” and “bill” are words signifying debt (as in T-note and T-bill).
All debt requires collateral. The collateral for federal debt is “full faith and credit,” which involves certain, specific and valuable guarantees, among which are:
– The government will accept U.S. currency in payment of taxes
– It will pay it’s debts (T-bills et al) and its bills with U.S. currency
– It will force all your domestic creditors to accept U.S. currency, if you offer it, to satisfy your debt.
– It will not require domestic creditors to accept any other money
– It will maintain a market for U.S. currency
– It will continue to use U.S. currency and will not change to another currency.
– All forms of U.S. currency will be reciprocal, that is five $1 bills always will equal one $5 bill and vice versa.
So, in short, that paper dollar merely is a debt instrument. It’s only value is as a debt instrument; it has no intrinsic value.
When you buy a car, you can give the seller 20,000 green federal notes. Or you can give the seller your personal note. The only difference between a federal note and your personal note is the borrower. For federal notes, the government is the borrower. For your personal note, you are the borrower.
In either case, you have exchanged debt instruments for a car. Today, all money is debt.
Rodger Malcolm Mitchell
LikeLiked by 1 person
Joebhed – inexplicably, Roger seems to believe there is no difference between the current Federal Reserve Note and the Lincoln-issued Greenback.
He does not seem to acknowledge that Federal Reserve Notes are created by the Federal Reserve (a privately-held banking cartel) and then LENT to the US Government. As opposed to how the Greenback was simply ISSUED by the US government directly.
I wish Roger could see the difference, so that he could be a proponent for the system he seems to desire, instead of partly defending the current debt-money regime.
As a quick aside to one of your earlier remarks, and a minor quibble, I do not think money supply needs to grow to ensure economic prosperity (though it does depend upon population growth, etc.). I personally think the paradigm of the benefits of inflation (I understand the distinction between inflation and money supply growth) is misplaced. Without inflation, savers could reliably and easily store their wealth over time. Instead, they now must enter the regime of the ‘money-changers’ to hustle to maintain value over time. In a paradigm of stable to declining prices, the non-additive endeavors of money-changing would be rendered essentially obsolete.
I too prefer a system of government-issued scrip.
LikeLiked by 1 person
Wow, thanks for that because I was pondering whether to unsubscribe from Rodger’s post here when I saw your comment. I too wish Roger could see the difference, but he seems genuinely unable to do so.
It’s like, “Hey Roger, this guy Yamaguchi has paved the road to monetary sovereignty manifested.”
Roger says, “Paved or not, you can’t get there from here”.
What’s to say?
For some reason, we are having a debate over whether there is any such thing as debt-free money. As if, given the legal construct that makes money what it is, we the people who own the money system are incapable of deciding how we create the money.
To me, that is the true essence of monetary sovereignty.
It’s like, if you read the results of Yamaguchi’s modeling, it is obvious that the flaw in the system that prevents achieving potential prosperity and economic stability is the debt-based nature of money creation. It’s hard to draw any other conclusion.
Roger is not willing to address this very important issue based on the fact that Yamaguchi has modeled the change from the present debt-money system on the basis of labeling it “fractional-reserve banking” – which Rodger proclaims does not exist.
I think Steve Keen is having he same problem, which we addressed on a CWJ a couple of weeks ago titled by Pete as : “Does Steve Keen Understand Monetary Reform” here:
The issue is that whatever you want to call the present debt-money system, fractional-capital or fractional-reserve, it is a system flawed by the fact that it creates all money as a debt through private means where there is a profit incentive to create bubbles and busts.
The BIS, IMF and WB all agree that it is the pro-cyclical aspects of the financial system that is the cause of its collapse(work in progress). They are incapable of identifying the systemic, structural causes of that pro-cyclicality which has as its heart the creation of all money as a debt, payable with interest.
Roger says you can’t change to a system of debt-free money because of some narrow view of what money is. It prevents Roger from seeing the way out of this debt mess, which is why I asked for his solution.
On the aside of whether the money supply needs to grow along with population and/or some measure of economic activity –
the only reason I say it is preferable to not increasing the money supply is to maintain the stability of the buying power of the dollar. That should be the mark of the value of the currency – it’s internal price stability. And, in reading the 1939 Program proposals, the major cause of recessions and depressions was what they called “the lawless variability of the supply of our national circulating medium”.
So, obviously I am not a fan of the inflation theory either. I am a fan of economic stability and that by definition requires price stability, with neither inflation nor deflation.
Thanks again for your comment.
LikeLike
“The issue is that whatever you want to call the present debt-money system, fractional-capital or fractional-reserve, it is a system flawed by the fact that it creates all money as a debt through private means where there is a profit incentive to create bubbles and busts.”
– There is no truer statement on this entire blog.
Re: price stability – if you had stable prices it would end the need for the vast and parasitic ‘money-changing’ industry, since citizens would not need to ‘out-earn’ inflation over time. It would be a great way to return to a more ‘productive’ economy.
Cheers!
LikeLike
All paper money, by virtue of having no intrinsic value, derives all of its value from being a debt instrument.
By definition, a large economy has more money than does a small economy. So, for a small economy to grow larger, it must acquire a larger supply of money. QED
By the way, if you disagree with my hypotheses, you can make an easy $100 million. Just go to $100 million
Rodger Malcolm Mitchell
LikeLike
‘Debt’ is defined in Black’s Law Dictionary, at p. 490, as ‘[a] sum of money due by certain and express agreement . . ..’
If the US Treasury issues Greenbacks directly, who is owed and by what agreement? Sure, the full faith and credit of the Treasury creates confidence in the currency – but where is the liability created by the direct issuance of currency? What are the terms of the agreement?
We were discussing the prosperity of an economy, not its nominal size. In a simplistic example, assume $1,000,000 money supply and an economy made up of 10,000 bushels of corn. There is $100 of currency per bushel of corn. If there is a productivity improvement that now brings 20,000 of bushels to the economy, that means there is now $50 of currency per bushel. Therefore, citizens have become more prosperous per unit of currency as expressed in bushels of corn. And no, I am not advocating comodity based currencies. Just using an admittedly basic example.
But in this example citizens can store labor/wealth over time (i.e. save) and become more prosperous. It also avoids the issues of inflation and the siphoning of wealth by the money-changers.
This would also create more confidence in the fiat currency, as citizens would not be threatened by continual debasement of currency. I am not suggesting no money supply growth, but in many ways deflation is not the bogeyman made out to be. [It is though in any compounding-interest based lending regimes.]
I am not eligible for his challenge, since I am not one of his opponents…
LikeLike
“If the US Treasury issues Greenbacks directly, who is owed and by what agreement?” The holder is owed full faith and credit. Otherwise, no one would exchange valuable goods for paper.
“We were discussing the prosperity of an economy, not its nominal size.” No difference, except for inflation. So shall we say a large economy has more inflation-adjusted money than does a small economy?
“. . . citizens would not be threatened by continual debasement of currency.”
As all money is a substitute for trading goods, it always is subject to debasement.
I’m pleased that you agree with Warren, as he agrees with everything I’ve told you.
Rodger Malcolm Mitchell
LikeLike
Owed “full faith and credit” is far different from there being a necessity for repayment. Full faith and credit might simply be that the Treasury-issued ‘dollar’ can be used for the payment of taxes, or a requirement that merchants accept it for payment. A debt requires repayment. Greenbacks did not require repayment. Paper currency can be a medium of exchange without it being a debt. http://legal-dictionary.thefreedictionary.com/Full+Faith+and+Credit+Clause
And see below for definition of money.
No we shall not. Size and prosperity may or may not be related, but they are not equal. Which is the more prosperous economy, India or Switzerland? Now, which one is larger?
Just because it is subject to debasement doesn’t mean it has to be debased. Assuming positive productivity, and a stable money supply, ‘deflation’ would actually be the result. Deflation benefits savers and workers, as they can store wealth/labor over time.
First, it is a $1 million challenge. Not $100 million. Second, to be eligible, you have to be one of his campaign opponents (I’ve seen it written as any congress-person too). I did not say that I agreed with him, and maybe I will try to convince a lame-duck congress person to prove him wrong with the evidence available.
But, I’ve never seen a more childish way to end an argument than that…
Black’s Law Dictionary:
Money: In usual and ordinary acceptation it means coins and paper currency used as circulating medium of exchange, and does not embrace notes, bonds, evidences of debt, or other personal or real estate. Page 1005.
“Federal Reserve Notes are not dollars.” Russell L. Munk, Assistant General Counsel, Department of the Treasury, February 18, 1977.
LikeLike
Rodger,
There are a few things that I agree on with Warren.
Back at the previous height of Euro-madness Warren proposed a Trillion-Euro give away directly to the people to restore “aggregate demand” as he likes to call it. He never said where the money would come from.
I wrote to him directly pointing out that he never said where the debt-ridden Euros were going to get the money, and inquired whether he was advocating the Trillion-issue be done without creating new debt.
He answered directly that there would be no debt issued by anyone.
To which I said that wasn’t presently legal and he agreed.
I confirmed this with him at the Hyman Minsky Conference in April, and our dialogue has been up on his site for many months.
I still say that there is no proof of your position here in Warren’s correct statement that sovereign monopoly issuers of free-exchange currencies that do not borrow in any other currency cannot default, either with debt-money or debt-free.
Please feel free to bring Warren into this.
LikeLike
I don’t understand your question. Are you saying a monetarily sovereign nation can be forced to default? It can decide to default, but that would be an arbitrary decision, unrelated to its ability to pay.
Oh, and the money would come from the EU, not from the EU nations.
Rodger Malcolm Mitchell
LikeLike
No, endthefed, it’s $100 million. And it only “ends the argument,” because you have no facts. If you had facts, you’d be jumping right in there to claim the money. (I’m sure my friend Warren would pay you, even though you aren’t a Congressperson.)
Your “Blacks” quote doesn’t include M2, much less M3 or L. And your final quote, “Federal Reserve Notes are not dollars,” is beyond silly. Read what it says on a dollar bill. Together these quotes are indicative of someone who argues for the sake of arguing.
The fundamental facts are: The federal government has the unlimited ability to create money and is in no danger ever of going bankrupt, nor is there any need to raise taxes nor to decrease Social Security or Medicare benefits. FICA could be, and should be, eliminated, as the government neither needs nor spends tax money. Federal borrowing also is unnecessary to fund federal spending.
We don’t need to change the money system. The government merely needs to spend the money, and all should forget about the ridiculous austerity programs and equally ridiculous conspiracy theories about the Fed.
If you have proof this is wrong, rather than wasting time writing comments to me, spend your valuable time claiming the $100 million. If Warren won’t pay you, I’m sure a winning Congressperson would share with you.
Rodger Malcolm Mitchell
LikeLike
joebhed,
You say you’re a fan of stability. I’m a fan of growth, which most economists feel requires a small amount of inflation, mostly for psychological reasons.
For growth, the government needs to spend money, which it does by creating money ad hoc. Whether you name that federally-created money “debt” or not is irrelevant. In fact, FREE MONEY suggests not calling it “debt,” but rather calling it “money created.”
You’re making a huge deal out of federal money being called “debt,” when it simply does not matter. The federal government creates money by crediting the bank accounts of its creditors and this money creation is not dependent on federal borrowing.
If not one T-security were created and sold, this would not affect the federal government’s ability to create money. This spending is not directed by the Fed, as you seem to believe. The Fed does not decide how much money the federal government creates and spends. The Federal Reserve Bank acts as a conduit, just as your personal bank acts as a conduit for your bill payments, which you direct.
The Fed also purchase T-securities, when it gets involved in QE, but that is a small part of money creation. The Fed Chairman is appointed by the President of the United States and does as the President says. If he doesn’t, he gets fired. The Fed is not, as some people say, a completely independent, completely privately owned bank. It’s an amalgam, with direction coming from the President.
As for bank-created money, call it what you wish. The instant you deposit a dollar in a bank, you have created a dollar, because the bank now owns the dollar and you still own the dollar. You have transformed one dollar into two dollars.
That’s the difference between a deposit and a gift. Deposits are loans, which create money. Gifts are not.
Rodger Malcolm Mitchell
LikeLike
I’m not sure if this will be comment 21 or not, but certainly my final comment.
Rodger: “What Yamaguchi does not understand is that there are only two forms of money: Physical money like gold, wheat etc., or debt money.”
” When a government issues money, by necessity, that is debt money.”
Joe: “He answered directly that there would be no debt issued by anyone.”
Rodger: “I don’t understand your question. Are you saying a monetarily sovereign nation can be forced to default?”
My point is that Warren said that a Trillion Euros (money) could be created without issuing any debt – in direct contradiction to your earlier quote here that all money must be either commodity money or debt money.
Rodger: “the government needs to spend money, which it does by creating money ad hoc. Whether you name that federally-created money “debt” or not is irrelevant.”
Above you criticized Dr. Yamaguchi for not understanding that all non-commodity money is debt money and here you say it is irrelevant what you call that ad-hoc government money, and that in fact it is not debt-money but “created-money”, which is what Dr. Yamaguchi describes as “debt-free money”.
Obviously the Euro question does not engage the matter of whether the sovereign country can default, because the Euro nation’s are almost exclusively non-sovereign in their money-creation powers.
So, there it is Rodger.
For some reason a guy who claims to profess belief in the significance of monetary sovereignty finds it impossible to stick on one side of an argument so as to promote understanding of his belief system.
I know that underneath all of this you and I would agree on a lot of stuff, certainly most stuff.
But, my posting a suggestion that you and your readers have a look at Dr. Yamaguchi’s work resulted in a solid foundation of mistrust and misunderstanding that does not seem salvageable.
And for that reason, I bid you goodbye and I wish you good luck.
Joe Bongiovanni
Harborton, Virginia
The Kettle Pond Institute
LikeLike
Joe, it’s a semantic misunderstanding, which begins with the many definitions of “money” and of “debt.”
The U.S. federal government actually issues two kinds of debt: Money, which in itself is debt, and T-securities, which are the debt everyone talks and worries about.
Warren (and I) meant that the EU could create money, just as the U.S. does, and could do it without issuing debt (Treasury) securities. That money still would be debt, because all money is debt, but would not appear as “debt” on the books.
The U.S. has required itself, by law, to issue T-securities equal to the money it creates, so we have forced ourselves to have that worrisome, unnecessary “debt” on the books. To eliminate the debt on the books, we merely need to stop creating/selling T-securities.
I’ve been saying that for more than 10 years (see FREE MONEY), and I reiterated it last year in How to Eliminate All Federal Debt.
The federal government does not need to borrow. It is monetarily sovereign. Borrowing should be eliminated, not just for functional reasons, but perhaps more importantly, for psychological reasons. It confuses the public and the politicians (and sadly, many economists).
While all money is debt, the elimination of borrowing would calm the debt-hawks, who have ruined our economy.
Rodger Malcolm Mitchell
LikeLike
I have a question into Warren to clarify his challenge, and if he is arguing that the US is sovereign within the context of the current FRN/Federal Reserve paradigm, I most certainly believe I can prove him wrong. You seem to have a very difficult (impossible) time understanding the substantial available evidence that the Federal Reserve is a privately-held banking cartel. The ownership of the Fed is a critical question of whether the US can independently create FRN’s – irrespective of any purported influence Congress or the President would have on an elected Board President.
I most certainly believe that the US could (and should) issue money without selling debt (a US Treasury Dollar). My question on Warren’s site has been awaiting moderation for almost a day now.
And no, not all money is debt.
P.S. Have you ever read Modern Monetary Mechanics printed by the Chicago Federal Reserve?
LikeLike
endthefed,
Perhaps Warren will be able to explain it to your satisfaction, though I doubt it.
Yes, I’ve read Modern Monetary Mechanics. It essentially is an explanation of the misleadingly named “fractional reserve” system, misleading because bank lending in reality is not limited by reserves. A bank with too little in reserves merely can borrow reserves from the FRB, other banks or the public. It is capital, not reserves, that limits bank lending.
Anyway, the Fed is not as independent as you think. Its board is appointed by the President, and it is overseen by Congress. It’s independence is quite limited, as is it’s ability to create money.
When you’ve seen Greenspan and Bernanke sweating in front of Congress, that’s not the sweat of independent men.
Federal deficit spending is determined not by the Fed, but by Congress, which sets all spending budgets. It is Congress, not the Fed, that decides to spend a trillion dollars on the war. It is Congress, not the Fed, that sets the spending budgets for the 1,100 federal agencies. The Fed facilitates the flow of money necessary to pay for Congress’s actions.
You are confusing the facilitator with the determiner.
The federal debt is the total of the creation and sale of T-securities by the Treasury Department, which current law unnecessarily requires to equal federal deficit spending.
Someone has convinced you of the conspiracy theory that the Fed is a privately-held, independent cabal, creating money as it sees fit. Or perhaps you have magnified, in your own mind, the words, “Federal Reserve Note” printed on dollars, to give you that false impression.
In short, the Fed does not decide the deficit; Congress does.
Warren isn’t as good as I am at trying to explain basics to non-economists who insist on wild, unsupported theories, so if he doesn’t answer you, don’t take it personally.
But hey, if you can prove Warren wrong, go for it. Don’t forget to pay taxes on that $100 million.
Rodger Malcolm Mitchell
LikeLike
I totally agree that Congress determines spending. But I contend that private banks and the Fed create FRN’s through the fractional-whatever banking system. Therefore, the Treasury/Congress must borrow FRN’s in order to spend them. This is a very different system then a UST issued currency like a Greenback or Kennedy Treasury-issued dollar.
Anyway, my question is up on the moslereconomics.com site, and you can see the conversation unfold. The $100 million challenge would go to pay off the national debt (which is ironic) – it is not offered as a prize to the individual.
LikeLike
Won yet?
LikeLike
2/3 of the US trade deficit is oil.
At some point, they won’t take worthless paper for their oil any more.
Then things will get ugly.
LikeLike
At what point? They have no choice, if they want to sell their oil. Every nation’s money today, is “worthless paper,” in that it has no intrinsic value.
By the way, if you’re a gold bug, I should remind you that gold too has virtually no intrinsic value.
Rodger Malcolm Mitchell
LikeLike
I am completely new to this discussion and it is very interesting. But I think the point about oil is very valid in that it has intrinsic value, limited supply and it seems to me that we are trading our sovereignty for this. In time the Arabs will find that our dollars will not buy enough liquor and prostitutes in Dubai and they will own enough us stock, banks and real estate and they will come to prefer another paper currency over ours. At that point we will need to get in line as a debtor nation behind that country.
Is this a valid point?
Bill
LikeLike
If they were to “own us,” they would prefer to use dollars vs any other currency. They already are stuck with many billions of dollars; they want those dollars to have value.
LikeLike
1. Am I correct in thinking that a sovereign nation needs other nations to accept its currency in payment for goods?
2. Would I be correct in thinking that other nations are more inclined to do this when the purchasing nation is a well developed industialized nation with a modern infrastructure?
3. If the US allowed its infrastructure and industries to collapse and population to lay idle then would its currency would be less likely to be accepted?
4. Therefore would it mnake sense to invest as much as possible into our nation?
LikeLike
Mr. Hart:
1. Mostly true, but not necessarily. It is possible for a nation to use another nation’s currency. Ecuador, for one, uses the U.S. dollar as its official currency.
2. Again, mostly true, but not necessarily. Some nations restrict their money for domestic use. Before the breakup of the Soviet Union, the ruble was not internationally exchangeable.
3. Probably.
4. Make sense for whom? Please say a little more about what you mean by the phrases, “as much as possible” and “invest in our nation.”
Rodger Malcolm Mitchell
LikeLike
Would it not make sense for sovereign nations such as the US and the UK to invest in our infrastructure and people so that we do not fall behind other nations? The debt hawks say that we cannot afford to do this. It seems to me that we cannot afford not to.
LikeLike
Mr. Hart,
You are absolutely correct. There is no limit to what the federal government can afford. The sole constraint on federal spending is inflation, and we are a long way from that.
The debt hawks have limited Social Security, limited universal health care insurance, limited infrastructure restoration, limited research & development and limited economic growth. They have caused more harm to America than the worst traitors and terrorists ever could dream of.
Osama bin Laden is an amateur compared to the debt hawks.
Rodger Malcolm Mitchell
LikeLike
Tyler,
I’m going to take the liberty of adding your note to the blog, so that others can learn from your question.
=================================
Question from Tyler Farileigh:
I’ve recently discovered your blog and others that promote an understanding of MMT. I’m grateful for what I’m learning. Thank you for your work.
I wonder if you might have a moment to address a question. Bear with me if I pose it somewhat clumsily.
I get the fact of monetary sovereignty. You’re very accessible writing makes it quite clear – “A monetarily sovereign nation does not use tax money or borrowed money to pay for spending. Federal income has no relationship with spending and so, taxes and borrowing are unnecessary.” “Monetarily sovereign nations need neither to tax nor to borrow, but may choose to do so for many reasons unrelated to financial need.”
I feel like I’ve got a pretty good handle on this and can express it to others. But I’m a little thrown, for lack of a better word, in reconciling the above statements with Treasury and Fed procedures that L. Randall Wray writes about in a New Deal 2.0 post that you recommended to your readers back in July.
Here’s the part from the Wray post:
“Currently, when the Treasury wants to spend, it transfers funds from its tax and loan accounts at private banks (to minimize effects on banking system reserves, the Treasury temporarily holds tax receipts in private banks) to its account at the Fed. If its spending exceeds the deposits it has in private banks, it first sells bills or bonds to special banks that are allowed to buy them on credit (this is, again, to minimize undesired impacts on bank reserves); the Treasury’s account at the Fed is credited by the amount of the sale. This procedure is equivalent to allowing an overdraft facility for the special banks so that they can buy Treasury debt before they have the reserves they need to redeem. When the Treasury spends, private banks are credited with reserves, cancelling the overdraft.”
Being a monetarily sovereign nation these tax and loan account transfers and bill and bond sales are for “reasons unrelated to financial need.” Correct, right? So these procedures are legacy of the gold standard, correct? Also, it seems that throughout MMT writings there’s a notion or description of government spending as being simply an electronic marking up of bank accounts and taxes an electronic debiting of accounts without any dependent relationship between the two. But Wray’s post seems to contradict that somewhat.
So if a layperson is trying to explain MMT, monetary sovereignty and the operations of government spending and taxing how do you explain or talk about the operations that Wray describes?
Again thank you for your work. It’s so vital in this time of really unbelievable and unremitting deficit hysteria. It’s a wonderful resource and I’ve got a lot more reading to do.
Tyler Fairleigh
Louisville, Kentucky
LikeLike
Tyler,
Randy is describing an accounting function that has no basis in reality. Not that he’s wrong; it’s just that accounting is a process or a recipe, not reality.
For example, when a business sells a product, that becomes a credit to Accounts Receivable. Then when it actually receives the money, it debits Accounts Receivable and credits Cash(?)
But what has happened in reality? For the credit to Accounts Receivable, has any money actually moved? Then, when the check arrives, and Accounts Receivable is debited, again has anything actually moved? No, to both questions.
I’m not enough of an accountant to understand all the intricacies of the various Fed machinations. I merely tell, in layman’s language, what actually happens. And what actually happens is this:
That is why federal spending costs taxpayers nothing.
Does that help clarify?
Rodger Malcolm Mitchell
LikeLike
It is a gross oversimplification to say that federal spending “costs taxpayers nothing.” It depends on what the government spends money on.
If the government spends money on non-productive goods, services, or infrastructure, then the money introduced into the system will make all dollar holders poorer in real terms, holding other variables constant. This are the proverbial “bridges to nowhere” or “digging ditches to fill them up” examples that anti-government types such as Mish use.
It does matter what the government spends money on, even if we abolish treasury bills, bonds, federal reserve notes, interest payments, taxes, etc. People use money as a store of value. Anything that diminishes the purchasing power unit value of money makes the people poorer. Even if the government gave $10,000 to every US taxpayer, they just made the foreign holders of dollars that didn’t get the handout poorer. The fallout from this would be a downward revision in the USD forex rates. Which ultimately affects the real wealth of domestic dollar holders. It all matters.
LikeLike
So every bridge is a bridge to nowhere?
The American Society of Civil Engineers gave the nation a D in 2005, the latest report available, after assessing 12 categories of infrastructure ranging from rails and roads to wastewater treatment and dams.
“Which ultimately affects the real wealth of domestic dollar holders.”
What about the majority of Americans that hold negative amounts of dollars?
LikeLike
Sandorgb,
You are confusing two separate issues:
1. Does taxpayer money pay for federal spending?
2. Does federal spending cause inflation.
The answer to #1 is “No.” The federal government does not spend tax money. It creates money, ad hoc, when it spends. Even were taxes $0, this would not change by even one penny, the federal government’s ability to spend, so spending does not cost taxpayers nominal money.
The answer to #2 is “Yes and No.” Yes, there is a point at which federal spending can cause For example, giving every American $1 trillion probably would cause inflation. However, since the end of the gold standard in 1971, there has been no relationship between federal spending and inflation (See: https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/ )
So the spending we have done in the past 40 years has not cost taxpayers real money.
We have had inflation because the Fed’s target is about 2%, and it adjusts interest rates to meet that goal, not because of spending.
Rodger Malcolm Mitchell
LikeLike
Hello Roger
US GDP has increased from $500billion in 1960 to $14,000billion today
Where have the $13,500billion come from?
Debt hawks would presumably like to reduce the GDP. Is their idea that this would increase the value of the dollar so that those people currently holding a lot of dollars would see their wealth increase, and people with debts would see the value of their debts increase?
I assume this outcome is not guaranteed?
Graham Hart
LikeLike
The GDP was able to increase because the federal government has pumped more than $7 trillion into the economy.
Remember however, that GDP dollars are not additive. If I buy something from you for $1, and then you buy something from someone else for that $1, that’s $2 in GDP, even though just $1 was used.
I do not know what debt-hawks want, nor do they, nor in all honesty, do most people. I discuss this at: https://rodgermmitchell.wordpress.com/2010/10/15/do-you-know-what-you-want-deficits-vs-exports-vs-stronger-dollar-vs-inflation/
LikeLike
What would have happened if the govenment had pumped no dollars into the economy?
LikeLike
We would be in the midst of a depression that would make the Great Depression look like a Saudi bank account. See: https://rodgermmitchell.wordpress.com/2009/09/07/introduction/
Rodger Malcolm Mitchell
LikeLike
I am somewhat convinced by your article.
I have a few questions:
What would happen, if anything, if the USA printed off 7.8 Trillion dollars worth of bills in order to reduce the national debt to zero?
And; is this only a viable option when just one monetarily sovereign nation does what you suggest? What I mean is, if all the monetarily sovereign countries in the world printed off enough of their currencies to reduce all of their debts to zero, would this cause worldwide inflation?
Would this not defeat the purpose of buying and selling with money, and take us back to a day where barter is a more desirable form of trade?
I’m not criticising in any way, I am just curious as to these possible scenarios.
LikeLike
Redeeming $7.8 trillion all at one time might shock the world’s economy. But why do it? The national debt means nothing. It has no negative effect on our economy. It’s not like the sword of Damocles hanging over our heads.
This is what people need to understand. The federal government is not like you and me. Federal debt is not a problem to be solved. Debt is not a burden for the federal government.
We don’t need to borrow. We should just stop creating T-securities, and let the existing ones mature. Meanwhile, just ignore them. They do no harm.
Rodger Malcolm Mitchell
LikeLike
Excellent blog.
If treasury didn’t have to adhere to the law and issue bonds to fund the deficit, how would congress initiated spending ever be kept in check? I think the law was put in place to limit the ability of government to grow disproportionate to size of the economy as well as to keep the power to create the money in hands of economists rather than the politicians.
Any time a monetary sovereign had to create money to meet its debt obligations in past, result was loss in its value (Mexico, Argentina, Italy and Greece prior to Euro etc.) When currency loses value, it takes more of it to pay for imports which will result in inflation.
LikeLike
Bonds don’t “check” government spending. The federal government has no difficulty selling bonds, never has, never will.
Your concern about spending causing inflation is possible, though far removed from current reality. In the past 40 years, through huge deficits (remember Reagan?) there has been no relationship between federal deficits and inflation. (See https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/ ) Further, inflation easily is prevented/cured by increasing interest rates.
The debt hawks continually rail about inflation, while the Fed currently is trying to fight deflation, despite massive deficit spending.
Rodger Malcolm Mitchell
LikeLike
“Bonds don’t “check” government spending”
“check” = keep track of it.
I’m not a fan of giving politicians a blank check on spending. If money supply grows disproportionately to the economy, inflation will result.
Inflation can be controlled with interest rates but amount of currency in circulation could directly affect the rate that would bring inflation under control. For example, if oversupply of currency is minor, lower interest rate would be required. But if money supply keeps increasing, rates would have to keep going higher to achieve the same target inflation rate.
Not to mention that interest rate controls inflation is by stalling growth and increasing the unemployment.
“In the past 40 years, through huge deficits (remember Reagan?) there has been no relationship between federal deficits and inflation”
True for US, but how many other nations can say that? Most other nations had no choice but to devalue their currencies when introducing cash into their economies. Are you accounting for special status US$ has had since WWII? The special status currently under threat as the political climate in US becomes more unstable and unpredictable.
LikeLike
Going through the entire T-security process just to “keep track” of spending would appeal to Rube Goldberg.
You said, “If money supply grows disproportionately to the economy, inflation will result.” I provided data showing this has not happened, and that data seems to have made no impression.
The economy already has grown disproportionately. So where is the inflation? Specifically, how much “disproportion” is required? And more importantly, what sort of data would be required to affect your intuition?
“Most other nations had no choice but to devalue their currencies when introducing cash into their economies” Really? Specifically, which other nations? Exactly, when? Were they Monetarily Sovereign at the time? What evidence shows they had no other choice?
Exactly how has the “special status” of the US$ affected all of the above; exactly how and why is it changing and what indicates the political climate in the US has become more unstable, and exactly how does this affect inflation?
Goran, I’m not picking on you. 🙂 But economics is a science. People should stop making general, populist statements, unsupported by data. My goal is to make economics respected as a science and to end the “sky-is-falling” comments that have no scientific basis.
Are you with me?
Rodger Malcolm Mitchell
LikeLike
Would Milton Friedman agree with your statements? It’s my opinion he would not. If printing money is that is needed, then why did the 2008 crisis happen? I know as a fact the US Mint printed billions of dollars that was sent to foreign banks and governments. I also know that OFS is staggering to find answers to our current woes. Sounds like money doesn’t grow on trees, but the paper used to print money does come from trees. We (US) made a mistake in 1971 and that continues to be drag on the US.
LikeLike
I’ve not spoken to Professor Friedman about his beliefs or mine. If you review the information at Summary, you will see that the lack of deficit spending (aka “money printing) has led to all depressions and most recessions in our history.
LikeLike
I very much agree with you Roger.
We should allow economists to tell us how to run our economies just like we allow physicians to tell us how to best deal with disease.
I know there are still people that disagree with physicians, usually because they don’t like the healthy lifestyle adice they are given, but in general most people accept that if they are sick then a physician is the best person to turn to for help.
At the moment many people fight to discredit economists because they don’t like what they are saying. We have to fight these people as they are harming our economies.
LikeLike
Graham, unfortunately there are many doctors and many economists who provide bad advice. The history of medicine is littered with examples of doctors prescribing worthless or harmful treatments. The sad story of Dr. Semmelweis shows how wrong the mainstream can be.
Similarly, mainstream economists have no understanding of Monetary Sovereignty, so they make false statements like, “The federal debt is too large.” Rather than believing an “authority,” I suggest people believe the facts.
Rodger Malcolm Mitchell
LikeLike
Ha, I think Rube would have a lot more fun with some of the ideas being proposed here.
To keep track, to make it transparent, however you’d like to word it. I’m not a native English speaker but let’s not get stuck on semantics. If politicians could create currency our of thin air without anyone knowing, they would certainly overdo it.
“Specifically, how much “disproportion” is required? And more importantly, what sort of data would be required to affect your intuition?”
As for science, the average prices of products in a country is (roughly speaking) the ratio of the quantity of currency in the country to the quantity of products produced in the country. So in economic science you should be able to get some reasonable models on what’s proportionate.
“Most other nations had no choice but to devalue their currencies when introducing cash into their economies” Really? Specifically, which other nations? Exactly, when?
Examples are too many to list here. Russia for one.
Exactly how has the “special status” of the US$ affected all of the above; exactly how and why is it changing and what indicates the political climate in the US has become more unstable, and exactly how does this affect inflation?
US$ is reserve currency for most of the countries in the world, it’s used in international trade, and many countries are still maintaining the fixed exchange between their currencies and US$. With devaluation of US$ over the past 10 years, this special status is getting challenged.
“what indicates the political climate in the US has become more unstable?”
For over 60 years, one party controlled the US Congress projecting stability. Then in the past 15, this control has drastically shifted from one party to the other, each with very different economic agenda. This projects uncertainty about the future of US$.
“and exactly how does this affect inflation?”
If US$ is deemed too risky, it could be dumped as the medium of international trade and as reserve currency which would cause it to drop. I’ll let you relate such currency devaluation to inflation.
LikeLike
You said, “If politicians could create currency our of thin air without anyone knowing, they would certainly overdo it.”
But they can create money out of thin air. Nothing prevents it. And who said anything about nobody knowing?
Anyway,
1. You didn’t really defend your statement, “If money supply grows disproportionately to the economy, inflation will result.” The problem you face, and the reason you really didn’t address the issue, is that:
A. This hasn’t happened (despite massive increases in the money supply) and
B. a growing money supply actually fosters economic growth (and a shrinking money supply suppresses it).
2. Your Russia example is typical for those who ascribe all financial problems to “too much debt.” In fact, there was a key ingredient in Russia’s problem, missing from the U.S. Russia was not Monetarily Sovereign See: http://research.stlouisfed.org/publications/review/02/11/ChiodoOwyang.pdf
3. The U.S. may be a reserve currency, but any nation is foolish to peg their currency to the dollar. That merely surrenders its Monetary Sovereignty. When the U.S. dollar no longer is the world’s reserve currency, nothing bad will happen to the U.S. It’s a valueless title. China proves that every day.
4. Your theory about stability uses selected data. See: http://uspolitics.about.com/od/usgovernment/l/bl_party_division_2.htm. Through history, there have been frequent splits between the Presidency and Congress. And don’t forget splits between Congress and the President and the Supreme Court, the 3rd branch of our government. Roosevelt fought with the Court all the time.
5. You said, “If US$ is deemed too risky, it could be dumped as the medium of international trade and as reserve currency which would cause it to drop.” Yes, if perceived risk increases, demand goes down, unless reward also increases. That is the basic law of risk/reward. It has nothing to do with reserve currencies.
The debt-hawk approach is to theorize without data. I’d like to see some data to support debt-hawk theories. This blog is loaded with data to support Monetary Sovereignty. You can begin at https://rodgermmitchell.wordpress.com/2009/09/07/introduction/ and work your way forward.
Rodger Malcolm Mitchell
LikeLike
To Robert Inks, who said,
“Debt is not the same as printing money, the reason for low inflation is because we HAVE NOT (yet) started printing too much money.”
Federal debt is the total of outstanding T-securities, which by current law must equal the net total of federal deficit spending. In popular vernacular, deficit spending is referred to as “printing money,” though very little is physically printed.
The common belief is that federal deficit spending causes inflation. The graph at Summary, item #8 demonstrates that has not been true since 1971, the end of the gold standard. It is a popular myth.
Rodger Malcolm Mitchell
LikeLike
Hello Roger
Here in the United Kingdom we are just recovering from a big freeze.
Thousands of people have been without water for over a week due to under investment in our water infrastructure.
So we have millions of unemployed people that could manufacture water equipment and repair the infrastructure but our government thinks that we cannot afford to do it.
Our politicians must be cave men.
LikeLike
Mr. Hart,
Yes, England was brilliant not to give up the pound and remain Monetarily Sovereign. Then it forgot why it did. So it acts as though it’s Greece or Spain.
Just a hunch, but I suspect Europe became hysterical about inflation prior to WWII, and never recovered. So any potential for inflation above some target rate causes instant panic.
While reducing government deficits can fight inflation by limiting the supply of money, that approach also leads to recessions.
Better to increase the demand for money by increasing the reward (interest) for owning it. The U.S. has been very successful fighting inflation, despite monster deficits, by raising interest rates (which contrary to popular myth, is stimulative. See: Interest vs. GDP).
Meanwhile, as you said, people suffer now. The current medicine is worse than the potential disease.
LikeLike
Joe, it’s a semantic misunderstanding, which begins with the many definitions of “money” and of “debt.”
If you knew that, why the constant bickering, which you could have resolved at the outset? You missed an excellent opportunity because you prefer to be a wiseacre. You will fail because you lack respect for people and overestimate yourself. Warren, in contrast, is unfailingly polite and that is why he commands respect. You will not find at his site the typical “smart ass” comments that are sprinkled through your replies; instead, there is high quality intellectual exchange.
LikeLike
Harold, I’ve been saying the same thing for 15 years. It’s in my book. If you had been saying the same thing for 15 years, and people continue to deny the facts, you might become a bit testy, too.
I’m much, much older than Warren, and have been fighting the fight longer than he has. My future years are limited. Perhaps that increases my impatience with people who refuse to look at the plain facts, staring them in the face.
Yep, I’m just a crotchety old man. But I have been neither more nor less successful than Warren in delivering the message — in short, not successful at all. I pray one of us — the polite one or the angry one — will succeed. America needs it.
Rodger Malcolm Mitchell
LikeLike
I admire your reply and respect you for it. You have my best wishes in all you do.
LikeLike
Harold,
You can help. Write to your political representatives and the media. Talk to people. We need more voices.
Rodger Malcolm Mitchell
LikeLike