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.”
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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 
That is possibly the most confused piece I’ve ever read. You seem to think that the power to print currency out of thin air and force people by law to use it means you can print wealth out of thin air. It’s no wonder you insist on capitalizing “Monetary Sovereignty” every time you type it. I suppose magic like that deserves proper noun status.
Instead of going into every fallacy point by point (which would probably just be a waste of time) I’ll just ask one question. If printing money poses no problem, why has the dollar lost over 95% of its purchasing power since the Federal Reserve Act in 1913?
http://www.examiner.com/finance-examiner-in-national/new-dollar-chart-shows-purchasing-power-going-negative-within-10-years-picture#slide=33601121
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Ask Mr. Mitchell if he knows what a Treasury auction is. The US doesn’t print money, it prints notes. All that money is borrowed, except coin, from the Federal Reserve and other banks and investors from around the world. This article is about as informative as moon landing deniers.
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“All that money is borrowed from the Federal Reserve and other banks and investors from around the world.”
Oh, really? And where do the Federal Reserve, other banks and investors around the world get those dollars? How are they created? Try actually reading the post, rather than relying on intuition. You might actually learn something.
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John,
I’m sorry you were confused. Some people are; some people understand.
I never used the world “wealth.” I seldom do, because the word is — well — confusing. No one knows what wealth is and no one can measure it. It may be the most inexact word in all of economics.
The dollar has lost purchasing power (aka “inflation”) because the federal government wants it to. There is common belief that a little inflation is a good thing. So the fed aims for a 2%-3% annual inflation, which it controls via interest rates.
Your chart claims the dollar will have “negative purchasing power in 10 years.” What is “negative purchasing power”? I can understand reduced purchasing power, but negative purchasing power literally would mean I will be able to buy more for $10 than for $20. Do you really believe that?
At any rate, since we went off the gold standard in 1971, there has been no relationship between dollar creation and inflation. See: https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/
As you will see, inflation has been related to energy prices.
Rodger Malcolm Mitchell
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Rodger you misunderstood me. I am not confused. Your piece was confused…as in you are confused. That chart was not mine. It was the Reuters/Jefferies CRB Index…as the title of the chart says. The caption on the website is a nonsense hyperbole to illustrate the trend. I doubt the author actually thinks “negative purchasing power” is a real thing.
I know exactly what wealth is. And you do not have to be able to cardinally measure it to know when you have more or less than before. And what your post here all but directly says, is that as long as you have a printing press, goods and services appear out of nowhere just as easily as the dollars.
You literally said that because you can print dollars out of thin air, a government “needs neither to tax nor to borrow”. Unless you believe in the Tooth Fairy, you have to realize that a government that does nothing but print is akin to skinning a sheep. It’s a one time thing and it doesn’t last long. So at the very least the majority of your post here is extremely misleading. Yes, you are technically correct that any size debt could be “paid” no matter the amount…even $100 trillion dollars. All they have to do is put some zeros on a piece of paper. But any novice who reads that is going to be led to believe that wealth is created from a printing press. The person (or government) receiving a trillion dollar bill is not getting “repaid”. He is getting defaulted on. Just because the nominal dollar amount is made good doesn’t mean the real value of the resources was returned.
And I have no idea what that link you just provided is supposed to prove. You state “there has been no relationship between dollar creation and inflation”…yet in the almost half dozen charts you post there, not even one mentions money supply.
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John,
You said what I wrote was confusing, so I assumed it was you who was confused.
In economics, what exactly is wealth?
I never said goods and services appear out of nowhere. That’s your straw man. A growing economy requires a growing supply of money.
Monetarily Sovereign nations can create money without limit. How is that a “one time thing”?
Fortunately, you’re not a novice who believes wealth is created from a printing press.
Debt hawks claim that if the government creates money “forever” (their term) we’ll have inflation. I assume inflation was the thrust of your comment about “defaulted on.” The graphs demonstrate that since we went off the gold standard, there has been no connection between what you call “printing dollars” (aka deficit spending) and inflation. So what is the default?
Anyway, perhaps you’ll find this graph more to your liking:
Or maybe this one?
Those are the facts. However, my experience with debt hawks is they much prefer personal intuition to facts.
Rodger Malcolm Mitchell
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Well, great Economist like Rose and Milton Friedman and Thomas Sewell all know what is wealth. Too bad Roger is one of those want a be economist who actually don’t know the difference. Maybe Roger can become the white house new economic advisor. The Mint is really close and they even have tours so you see all that printed money he talks about.
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Again, as I said, you misread me. Read my first comment again. I said your piece was “confused”…not “confusing“. I even restated this and explained it in my second post: “Your piece was confused…as in you are confused.” There is an enormous difference between saying something is “confused” and saying it is “confusing”.
I find it surprising that someone who purports to have such economic expertise would claim that “no one knows what wealth is and no one can measure it”. Again, as I stated, of course you cannot measure cardinally, as value is subjective…but you can certainly measure ordinally. If you would really like a full explanation of what wealth is, you can find it here. Also, this simple animation does a decent job. Among the full explanation, it defines wealth as “the continual ability to consume, and thereby satisfy your greatest desires.” I would consider this a decent way of explaining it to a layman. But if you want a more precise definition, I would say wealth is a claim on, or command of, resources (commodities, capital equipment, time, physical labor, etc) that have the potential to make the individual’s life easier, more comfortable or more enjoyable (i.e. “better”) than it would be in the absence of such things.
Therefore, the greater the amount of such things, the wealthier an economy is.
And yes, (again, as I said) you never directly stated “goods and services appear out of nowhere”. Of course that would be viewed as nonsense. But that’s exactly what you imply throughout this essay…as, again as I stated, a person unfamiliar with economics would be led to believe that the U.S. is in no real economic danger from its debt or virtually anything else, simply because “money” can be printed. And in fact you do (many times, actually) make the case that debts and deficits are not a concern, as long as you have the ability to print a currency with which to “repay” with.
But of course, as I was pointing out, money is supposed to be a medium of exchange…a commodity that represents real world resources. Repaying a debt with currency that required virtually no real world resources to create, is nothing more than a fancy and fraudulent way to default. Yes, a lender will “get his money back”. But if his money is worth less than the money he gave you—money which you actually used to obtain real goods and services—then has he really been repaid? Of course not.
“A growing economy requires a growing supply of money.” Yes, I saw where you claimed this here as well. In your words:
So basically the entire basis for your claim that “A growing economy requires a growing supply of money” is that money supply is the way the government measures growth…so apparently if that’s the way it’s measured, then that’s the only way it can grow. Argument by definition? What if we pose the question this way…are you claiming that for an economy to grow, the money supply has to grow? As in, if money isn’t created, an economy will not grow? And by that token, would you say that an increase in money supply results in economic growth? Or at least promotes it? Or let’s just boil it all the way down: Does the nominal number of units of a currency in an economy fully determine its strength? As in, the less dollars in the economy, the weaker it is, while the more dollars, the stronger it has grown?
And what I meant by the sheep analogy and the comment of it being a “one time thing” was that a government cannot be sustained by simply printing paper to exchange for real goods. It will only last for a finite amount of time. Eventually (and this wouldn’t take very long) the value of the currency would go to essentially zero, and the fact that it can be printed “without limit” would mean nothing, as it would not be able to be traded for real world goods. A look at Zimbabwe over the last decade would provide a nice proof of this.
How you could say a “nation needs neither to tax nor to borrow” as long as it can print up a currency, I do not know.
Do you not see that that is precisely where the logic of your statements go? You do not state that directly, but when you claim that debt does not matter so long as you have a printing press, that is exactly the implication you are making.
And it looks as though you are basing your entire theory on the fact that the government says prices aren’t rising. Even with the messy way money is defined and measured by the money aggregates, and the misleading-to-the-point-of-fraudulent way the government measures inflation, you can still http://inflationdata.com/Inflation/Inflation/Money_Supply_and_Inflation.asp>see the correlation between money supply and prices, especially when you consider how and what prices rise, when.
Would you be willing to take your argument through to its logical conclusion: that an increase in the supply of something does not reduce the real market marginal value?
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You forgot demand. Value = Demand/Supply.
Specifically, how would you grow the economy?
Rodger Malcolm Mitchell
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John,
Let me try to address one of your points using your terms of reference.
Rodger doesn’t mean to imply that goods and services appear magically from nowhere. In today’s economy, there is high unemployment and low capacity utilization. Producers produce only what they think they can sell.
If government were to spend more, for instance by buying some concrete to widen a road, concrete companies would react to the additional demand by hiring more workers and producing more concrete.
If government were to tax less, for instance by reducing the payroll tax by 2 percentage points, workers would use some of their additional take-home pay to buy all sorts of things, and the producers of all those things would react to the additional demand by hiring more workers and making more stuff.
In both cases, GDP would go up and unemployment would go down. There would be no inflation, because there are no constraints to production.
The real wealth of the country would go up, relative to what it would have been, because of the additional things produced.
That’s all very traditional economics. I think Rodger assumes that his readers understand that part of it.
What’s different for a monetary sovereign is that it does not need to borrow the money to buy the extra stuff, and it doesn’t need to raise revenue through taxation to get the money to spend, like Greece would or Arizona would. It can simply spend it. A monetary sovereign is able to create money in its own currency as it needs to do so, and the way it creates it is by spending. (Getting into mechanics from economics, now, spending by the monetary sovereign means directing the bank to increase the balance in the account of a currency user, like the concrete company.)
If that last part seems too weird to you, please read up on some MMT basics. There is a lot on this web site and others. I especially recommend http://www.moslereconomics.com, and the 7 Deadly Innocent Frauds document you can find there, and there is more there on the mechanics of the Federal Reserve System and banking, and Warren has some interesting policy proposals.
MMTers tend to spend less time discussing the dangers of excessive money creation because some of those dangers do not exist for a monetary sovereign, and that is the part of MMT that people don’t get. Greece, for instance, cannot stand to have too much outstanding debt, because it has to get Euro through taxation (or even more borrowing) to pay the interest on that debt, and there are limits to how much taxes Greeks are willing to pay, and excessive taxation slows down the economy (again, a traditional economic idea, not something new in MMT). Japan, by contrast, can and does have lots more debt than Greece, compared to the size of its economy, and need not have the same worries. Japan can create all the Yen it needs to create in order to pay the interest on its debt (the fact that the interest rate in Japan is near zero doesn’t matter. It could be any rate, and the statement would remain true). Greece cannot create Euro, it must take them from its own economy by taxation.
On a gold standard, a country can create its own currency like a monetary sovereign can do, but it promises to exchange its currency for gold at a fixed price. It must always have enough gold to be able to meet the demand, and if it creates too much of its currency it might not be able to do that, and usually it solves that problem by devaluing. A monetary sovereign does not promise to exchange anything for its currency, except to extinguish a tax obligation to itself. It need not have any amount of gold or anything else in its vaults.
Inflation can still happen. Even a monetary sovereign can create “too much” money, and cause “too much” inflation (I think the Fed is nuts to be trying to create 2-3% inflation, but I understand why they do it, because in terms of hitting any target other than controlling the overnight Fed Funds rate that they alone control, they couldn’t hit the ground with a heavy rock in an open field. So they are so afraid of deflation that they want to make sure they err in the other direction. They do succeed in erring. But that’s another whole subject.) Anyway, yes, if government creates too much money while the economy is at full employment, no additional production is possible and price rises will be the only result. We are so far from that situation that it is not a concern, and MMTers do not worry about it or discuss it. They should discuss it more, if only to make it clear that they are not in favor of it. At least that’s my advice to the movement, as a lay observer.
I hope this helps. If you want to respond to me, I would like for Rodger to allow it. If so, I would be happy to continue a dialog with you on any other issues you would like to bring up. I know that Rodger will correct me if I say anything “out of paradigm”.
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Roger is that all the response I’m going to get? I directly addressed every single point you raised and I asked plenty of questions in return. Is a single one-sentence question all I should expect?
I mean I’ll be happy to answer it, but will you not first do me the same courtesy of addressing my points and answering my own questions?
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. . . are you claiming that for an economy to grow, the money supply has to grow? “
Yes.
“. . . would you say that an increase in money supply results in economic growth? Or at least promotes it?”
Yes.
“Would you be willing to take your argument through to its logical conclusion: that an increase in the supply of something does not reduce the real market marginal value?”
Not if demand increases. Please stop ignoring all the money/inflation graphs.
“Does the nominal number of units of a currency in an economy fully determine its strength? As in, the less dollars in the economy, the weaker it is, while the more dollars, the stronger it has grown?”
Not strength. That’s your word. I said, “size.”
You have focused your attention on your lengthy intuitive arguments, devoid of data, while conveniently ignoring the data I’ve presented at https://rodgermmitchell.wordpress.com/2009/09/07/introduction/ and in many other posts on this blog, namely that:
1. Reductions in deficit growth repeatedly lead to depressions and recessions.
2. There is no post-gold-standard relationship between federal deficit spending and inflation.
Until you square those facts with your intuitive theories, don’t tell me you have “addressed every single point,” when in fact you have ignored every single point. I pay attention to facts not to intuition, and definitely not to over-long, over-wrought intuitive beliefs.
And now you can answer the question, “Specifically, how would you grow the economy?,” if you can.
Rodger Malcolm Mitchell
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Now I think we may be getting somewhere. When you say “growth” you’re not speaking anything about the actual prosperity of the economy or the standard of living of the individual people it is comprised of. You’re literally just talking about the money stock.
Well sure. I’ll concede that. If your definition of “economic growth” is simply “a larger nominal number of units of currency”, then of course, you increase the number of units of currency and you “grow the economy”. But if the dollars is all you’re concerned with (as, that is all you’re measuring) then you may as well just define “economy” as “number of dollars”. That would save a lot of confusion for most people.
But of course what the purpose of such a definition would serve? What would one hope to extrapolate from looking at the number of dollars and simply saying “The number went up. That means the economy grew”? I don’t see a useful purpose in that at all.
Generally when people talk about “economic growth” they are referring to an increase in the supply of goods and services to a point at which more people can obtain more things they desire at a lower cost. They’re talking about an improvement in the overall standard of living of individuals in the society. They’re talking about an increase in overall wealth (again, defined above). The number of units of currency in circulation tells us absolutely nothing about that. And certainly just increasing that number doesn’t do anything to improve those things.
To answer your question of “how would you grow the economy”, I suppose I would have to agree with you…if by “grow” you mean “increase the number of dollars” then, by definition one would have to “increase the number of dollars” to “grow the economy”. But that’s not economic reasoning. That’s just a tautology.
But I have not ignored any charts. As I said, (1) the typical money aggregates are misleading as measures of money supply because of the way “money” is defined. And your charts look M2 and M3. But even more importantly, (2) the other part of your charts is even worse. You chart different versions of the CPI and assume that is an accurate measure of inflation. The methodology behind CPI is incredibly flawed, and if you pay attention to the way the method has been adjusted over the years, it’s even more obvious that every part of the calculation is geared to make the result as low as possible. BUT EVEN STILL, as I said, you can still see the correlation. If you’d like more information on this I’d be happy to provide it.
But I’ll get back to the same question I did in my initial comment:
If printing money poses no problem, why has the dollar lost over 95% of its purchasing power since the Federal Reserve Act in 1913?
Your response to that was that “The dollar has lost purchasing power (aka “inflation”) because the federal government wants it to.” In this much, you are correct. But that doesn’t really address the heart of the question. The point was “if printing money poses no problem. Obviously, losing purchasing power is a problem…and the simple fact that the politicians in Washington want your savings to evaporate doesn’t mean it’s a good thing.
You follow that up with: “There is common belief that a little inflation is a good thing. So the fed aims for a 2%-3% annual inflation, which it controls via interest rates.” Let me ask you this…What is the reasoning behind this “common belief”? If we define inflation (the way you just did) as a loss of purchasing power, why, under any circumstance, would that be a good thing overall? Especially in the long run? It absolutely wouldn’t. The (stated) purpose of the 2%-3% target is the notion that that is the rate at which the economy grows (in terms of real-world goods…not dollars of course) on average under “normal” conditions. The idea is that as the amount of goods and services (aka “wealth”) grows, the money supply should be increased proportionally to keep prices relatively the same. (As, if the money supply were constant, an increase in the supply of goods would, ceteris paribus, lead to a decline in prices. This is a part of what is known as the “law of supply”.)
Do you see? It is not money supply that makes an economy grow…it is a growing economy that makes people think for some reason that the money supply should be increased to match it.
The crux of your whole theory depends upon the money aggregates being an accurate measure of money supply, and even more importantly, the CPI as being an accurate measure of inflation…because from there you claim that since you don’t see a correlation between the two with the charts you are using, that automatically means the increased money supply hasn’t devalued the dollar.
I didn’t ignore your introduction. If you’d notice, I even linked to it and quoted it in my post before. I pointed out how your “fact 1”, the basis upon which the entire rest of your extrapolation is founded on, is nothing more than an argument by definition. An iteration of a tautology. It’s ironic that you would begin the whole thing with the statement “when they interpret the data, they provide no evidence their interpretations reflect reality.” This is exactly what you are doing. You look at CPI and claim the value of the dollar has shown no correlation with money supply. But you provide no evidence that your interpretations reflect the reality of prices. Look at the CRB. Look at the price of milk in your grocery store. Look at the price of gasoline at the station. Of course these increases aren’t the total reflection, they are just the first signs…much like the canary in the coal mine. Currency devaluation often manifests first in commodities and products closer to the earliest stages of production. But your claim that there has been no relationship between dollar creation and a loss of purchasing power does not line up with reality.
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John, you invent definitions, and attribute your inventions to me. No, John, money stock is your definition of growth. Mine is GDP growth.
You say the government’s measure of inflation is wrong, then ask, ” . . .why has the dollar lost over 95% of its purchasing power since the Federal Reserve Act in 1913?” — a question based on the very measure you decry.
You disagree with the government’s measures of the money supply, but fail to provide data supporting whatever measure you use.
You have your own intuitive definition of inflation, based on your personal experience in your grocery store with the prices of milk and gasoline, a definition that disagrees with the government’s definition. So John, exactly how much inflation has there been in the past year? What is your data?
Also you don’t understand why the Fed prefers 2%-3% inflation, and even disagree that is a Fed goal. Look it up.
How does one have a serious discussion with a person who writes long-winded diatribes, inventing definitions and ignoring data in favor of personal intuition, and attributing beliefs that don’t exist.. One doesn’t. It’s fruitless to continue this discussion.
Rodger Malcolm Mitchell
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One question on “wealth”. You have a monk who lives with the bare necessities and states that he is happy and satisfied and Donald Trump…who is wealthier?
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Right. That’s why “wealth” is not an economic measure, but rather a philosophical and intuitive construct.
Rodger Malcolm Mitchell
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So Adam Smith;s Wealth of Nations is philosphical? Yea, right, and pigs have wings. Give it Roger, it is wealth Not pure money that drives people.
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Although your point is irrelevant, the fact is that Wealth of Nations is philosophical. Nevertheless, please tell me how much wealth there is in America. It would be useful to have that data, to help guide the economy.
Oh, you don’t know? Typical debt hawk. Never in doubt and never has data.
Rodger Malcolm Mitchell
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How to determine wealth: Inventory every items you own. Put a value in terms of money (dollars) to each item. Total up everthing. Then minus everything you owe (like car payments, beach house time sharing, electric bills, mortgage, etc) and that will determine a persons wealth. A nation can do the samething. You see weath is what you Own, not what others tell you own. My vehicles are paid for. they have value, minus the taxes I pay on them. Once I pay those taxes, my weath is decreaed and the taxman wealth hasbeen reduced. So yes, I know my wealth. Do you know yours>
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More typical debt hawk bob and weave. I ask how much wealth there is in America, and you tell me how to total your wealth. Classic evasion.
Again, how much wealth is there in America? If wealth is an important measure, at least you should be able to say how much there is. Answer the question with facts and I’ll continue to post your comments.
But you won’t and you can’t. Debt hawks have zero facts, but are full of opinion — and that’s not all they’re full of.
Rodger Malcolm Mitchell
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“Again, how much wealth is there in America?” Well the Federal Reserve would have a good idea, but no on elike us could ever get to that data, then there isn’t any asnswer to your question. More to ppoint thought, how much money does the uS have. The money printers such as your self should be able to provide that answer. To take it a bit further, based on answer you provide, what will be the value of thta money tomorrow since the US currency floats on the open market?
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Ah, perfect. As always with debt hawks, you have no data. I’ve never met one who had supporting data for any claim. The difference is, I do have data.
As you know (or maybe you don’t) there are various definitions of money, each having different purposes. Here is what the government says about the money supply:
M1 = $1,840 billion
M2 = $8,836 billion
and my personal favorite:
Total Domestic Nonfinancial Sectors Debt (TODNS) = $36,319 billion
As for your question about the money supply tomorrow, I can’t imagine why you asked, but: It probably will be mathematically the same, since the daily change probably will be smaller than the margin of error. I will admit however, I don’t know what the money supply will be next year. My crystal ball is not working.
So what’s a poor debt hawk to do? As usual, he has zero data to support his philosophy, and is left trying to challenge the Monetary Sovereignty guy, with whom he always disagrees, to supply the data.
Please feel free to comment further, if you have any data; otherwise, don’t bother. I have grown tired of debt hawks spouting unsupported opinions, and disagreeing with anyone who doesn’t share those unsupported opinions.
I’m trying to help economics be a data-based science, not a faith-based religion.
Rodger Malcolm Mitchell
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Two words: Weimar Republic.
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What about the Weimar Republic. Before you answer, be sure you know what caused their hyperinflation and how their situation compares with America’s.
Rodger Malcolm Mitchell
P.S. You forgot “Zimbabwe,” the other debt hawk favorite that is equally meaningless.
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Facts:
Economic indicators for US
Unemployment 9.1% (May 2011) [62]
GDP growth 1.8% (1Q 2011), 2.9% (2009 – 2010) [63]
CPI inflation 3.2% (April 2010 – April 2011) [64]
Poverty 14.3% (2009) [65]
Public debt $14.34 trillion (June 9, 2011) [66]
Household net worth $54.2 trillion (4Q 2009) [67]
Hint: Net worth = wealth.
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hiscross,
Thanks for all the data, none of which have anything to do with the question, “How much wealth is there in America.”
As for “Net worth = wealth,” that doesn’t answer the question, either.
Sorry, but this was your last comment. No more time for debt-hawk nonsense.
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I am sorry but after reading this article I can not help but to laugh out loud. I am only an undergrad in Economics and yet I understand that a government can not simply print money to solve debt problems. I realize that Economists disagree on many topics but I have never met a qualified Economist who actually believes that printing money is a viable method of solving debt problems. I am not trying to start a debate here as I believe John has already addressed and won that battle. I am just dumbfounded that someone could feel so strongly about Monetary Sovereignty and believe that printing excess money comes without serious consequences. I thought this was covered in all introductory Econ courses, maybe you were sick that day…
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Matt,
What is the difference between Monetary Sovereignty and monetary non-sovereignty, and why did the U.S. become monetarily sovereign?
Try looking up Modern Monetary Theory (MMT).
And please stop relying on intuition. Economics is a science, and science relies on data. It’s fine to disagree, but have some facts at your disposal. You said, “. . . a government can not simply print money to solve debt problems.” What data do you have to support that statement?
John, in his long-winded diatribes, never provided facts — just what he considered common logic. Being devoid of facts, his common logic was misleading.
Rodger Malcolm Mitchell
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Look Roger I understand fiat money and that we are Monetary Sovereign ever since we stopped backing our money with gold and started printing it as we see fit. But this does not mean we can print money endlessly without destroying our economy. Do you have a grasp on the macroeconomy? Do you understand hyperinflation, exchange rates, foreign trading/investing, and how the world economy functions? If you honestly think that a government, any government, can print limitless money to pay back debt without consequences then somewhere along the line you were misinformed. Go look at other economies who in the past tried to solve their problems by printing more money. You don’t need models or intuition because you can simply look at other countries that have made this mistake and printed loads of money to pay off debts. Long and behold hyperinflation which not only messes up domestic investing and their economy, but it messes up exchange rates and their function in the global economy. Say we borrowed enough money from China to purchase 100 units of goods and services in BOTH countries given the current exchange rate. Now say we decide to print more money to pay off this debt, however the obvious consequence is inflation (same amount of goods and services as before but now more money). We give it to China to pay our debt except the amount of money we gave them with the new exchange rate will now only buy say 50 units worth of the same exact goods and services, since the exchange rate is depleted due to our inflation. This means that unless we pay them back the amount, not numerically but quantitatively, in goods and services that we initially borrowed then we are in fact not actually paying back our debts. You would need to account for this by paying them back with a huge interest rate to offset the huge amount of inflation from printing money enabling them to purchase 100 units of goods and services at the new exchange rate. However this would leave us at the exact same place we started and we still owe the same amount (in G&S) but now much more money (numerically) to account for the inflation we caused. What will this solve?
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” . . . this does not mean we can print money endlessly . . .
No one said we could. “print money endlessly” are your words, not mine. I repeatedly have said the limit to money creation is inflation.
“If you honestly think that a government, any government, can print limitless money to pay back debt without consequences then somewhere along the line you were misinformed.”
Paying federal debt does not require creating new money. Federal “debt” merely is T-securities. To “borrow,” the Treasury creates T-securities out of thin air, then exchanges them for existing dollars, which are destroyed. No net money created.
To pay back debt, the process is reversed. The government creates dollars out of thin air, then exchanges them for T-securities, which are destroyed. Again, no net money created. Since both T-securities and dollars are forms of money (called “L”). No net money is created during the entire borrowing/repaying process.
I understand this is so different from the way you and I borrow, it can be counter intuitive, but I urge you not to rely on intuition when thinking about Monetary Sovereignty.
As for hyperinflation, it generally has not been caused by printing money, but instead by other factors. Look up the causes of the Wiemar and Zimbabwe inflations, and you will see that hyperinflation caused money creation, and not the other way around. In any event, the U.S. never has had a hyperinflation, and is nowhere near one now. What we are near is recession and depression, which is what you really should worry about .
As for curing inflation, nothing could be simpler. Money is a commodity. It’s value is based on supply and demand. Demand is based on risk and reward. Reward is interest. That is why the Fed raises rates to control (successfully) inflation.
Go look at data, not intuition. I suggest you begin with the very first (bottom) post on this blog, since it contains appropriate summary data. Try to think outside the old, obsolete channels. Come to this with the spirit of learning, not with the spirit of doubting, like some geezer. You are too young to lock your mind against new ideas.
Rodger Malcolm Mitchell
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“We give it to China to pay our debt except the amount of money we gave them with the new exchange rate will now only buy say 50 unit”
Great intuition. However where is the evidence that this happens?
The public debt in Japan has been increasing rapidly at next to no interest rate for over 20 years. Where’s the long term exchange rate move in the evidence.
It’s not there. Therefore your mental model is wrong. Any attempt to ‘special case’ Japan is further evidence the model is wrong.
Models need to fit the evidence. However beguiling the philosophy and the mathematics it is religion unless it fits the evidence, and it can predict accurately what happens in the real world.
Money is counter-intuitive. The assumption you are making is that all of it is ‘in use’ at any one time. It is not. That is what interest rates do, they cause people to store money out of circulation which reduces the amount flowing around the system.
Money in flow is the key. And we haven’t got enough of that at the moment.
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That’s because what you are studying is theology, not science. Qualified Economists are like qualified priests – they read good books and pontificate. But ultimately they have no answers because the models used are simply wrong. They bear no relation to reality.
That’s why all of them except a few heterodox economists completely missed the biggest financial collapse of the last 80 years. Anybody who persists with those models has no credibility whatsoever.
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Money is not a commodity. It is a symbol of VALUE.
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Thank you for that bit of sophistry. That “symbol of value” is traded on commodity exchanges, just like grain and pork.
Rodger Malcolm Mitchell
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I think what people are talking about when they say “economic growth” is real growth…not nominal growth. You don’t need more dollars to have real growth.
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How then do you measure real growth if not with more real dollars?
By definition, a large economy has more real dollars than does a small economy. So to go from small to large, the number of real dollars must increase.
Rodger Malcolm Mitchell
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By what definition? It sounds like you’re saying Djibouti simply has to print a $100 Trillion note and it will have the largest economy in the world. Is that accurate?
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But Djbouti can’t print a valid $100 trillion note. That would be counterfeiting. It could print a $100 trillion Djboutian franc note, but it’s value as perceived by the world (how do you measure the largest economy?) would depend on exchange rates.
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Wow I was upset with wasting time on reading this article, then I got a huge laugh out of the author trying to defend his position against john.
It’s articles like this that make me never want to read anything on the internet again.
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In your case, good idea.
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Good article at http://pragcap.com/resources/understanding-modern-monetary-system
Rodger Malcolm Mitchell
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No, Adam,
That is not what I’m saying. But, unless Djibouti creates enough money, it has no chance to have the largest economy in the world. Money is a necessary criterion, but money alone is not the automatic road to success.
Unless you practice hard, you can’t make the NBA, but even if you do practice hard, that’s no guarantee you’ll make the NBA. Get it?
Rodger Malcolm Mitchell
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So what is the definition then? If Djibouti won’t have the largest economy by having the largest number of dollars, what makes an economy the largest?
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Several definitions, but I’d vote for GDP.
Rodger Malcolm Mitchell
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So if one country’s GDP goes up and another country’s stays the same, the first country’s economy has grown and second country’s has not?
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Yes
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And can a country not make its GDP go up by printing money and spending it?
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To be more accurate, a Monetarily Sovereign nation does not “print money and spend it.” Not a two-step process. Money is created by the act of spending — actually by the act of crediting the bank accounts of creditors.
And yes, that, along with other factors, helps increase GDP.
Rodger Malcolm Mitchell
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So…why again couldn’t Djibouti spend/create a bunch of money and become the world’s largest economy?
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It doesn’t sound like he is saying that at all. Just because x implies y does not mean y implies x. (large economy)->(large money supply) does not mean (large money supply)->(large economy).
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It has to spend the money that it creates as a result of printing the note in order for the note to have any value.
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Djibouti could indeed become the world’s largest economy . . . if it spend the money in Djibouti. Remember, GDP means Gross Domestic Product.
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A note to those who think Monetary Sovereignty is merely my personal quirk:
Thanks Warren, but the politicians and media have so brainwashed the voters, they are convinced the emperor really does have clothes. Check the comments above, and you’ll see what I mean.
Rodger Malcolm Mitchell
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Note to Adam H.
Government domestic spending stimulates Gross Domestic Product. If Djibouti can spend a large enough “bunch of money” domestically, to buy enough goods and services domestically it can become the world’s largest economy.
Rodger Malcolm Mitchell
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I think the problem for Djibouti would be to produce enough goods and services to be bought by a large amount of new money, while prices remained relatively constant. Djibouti must have enough idle capacity to be put into use by the additional demand caused by the additional money.
When Djibouti runs out of idle capacity, then and only then does additional money cause no additional production, but simply a rise in prices for existing production.
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Except all that spending hasn’t fixed a dam thing.You better find out who has that money, because you bankster buddies seem to be having some issues, such Bank of America, CiTI, Wells, Chase, and GS.
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My bankster buddies???
Without federal deficit spending, I’m sure we now would be in the depths of a depression. Sadly, the stimuli were too little, too late, as I predicted back in 2008.
Why were they so little and so late? Debt-hawks prevented the government from providing a full course of antibiotics, so the patient received one pill when he should have received a dozen.
Fear not, however. The debt-hawk work is not finished. When Washington agrees on how much to cut the deficits (i.e. how much to cut your savings), we’ll have that depression.
Rodger Malcolm Mitchell
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So would you have a comprehsive list who received similus money? I know of a short road was built near me that seldom gets used. It has a nice big sign proudly stating it was funded by similus money. Since it isn’t used that much, I’m sure that sign and the road will look nice for many years to come.
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So your point is that there is wasteful federal spending? OMG! When did that begin? 🙂
Wasteful federal spending stimulates the economy. See: Federal waste.
Rodger Malcolm Mitchell
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Rodger,
So if the USA govt. were to credit the accounts of its debtholders and wipe away the debt, what would be the effect of the majority holders. I know we owe ourselves a portion, so that money would be destroyed, correct?
And China, UK, what would they do with the sudden trillions of dollars credited to their account? I just want to stretch the hypothetical a bit for my own understanding.
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Kurt,
The holders of T-securities, would have neither more nor fewer dollars. However, they would be somewhat more liquid. The economic effect probably would be minimal, though I’m not sure what China and the UK would do.
Perhaps they would let the dollars stay in their bank accounts, just as the T-securities were. Being Monetarily Sovereign, neither China nor the UK needs interest income, or even dollars, for that matter.
The money we owe ourselves would not be destroyed, for it does not exist. It’s a credit and a debit — in short, a big, fat zero.
Rodger Malcolm Mitchell
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Roger, correct me if I’m wrong but it sounds like you are saying that we should increase the money supply to a point where the distribution is ‘equitable’ or allows more people to participate without causing too much inflation. Obviously, if more people can participate there will be more inflation since they will be adidional bodies competing for resources (unless innovation keeps up fast enough to bring prices down – like in the case of consumer goods and it technology, but not necessary with health care, education and energy consumption). The key is balance to maximize the relationship between maximum inclusion and the target inflation rate. By doing this, real wealth can be created because more people will have resources they can use to innovate and create new products. If we are overly restrictive on the money supply, maybe only those who already have money can participate (bit of oversimplification there) and there will be no new wealth, just an oligarchy – which are rarely innovative. (excuse any typos in a rush to get this out before a tennis match)
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The basic problem in this post is that, IT DOES NOT analyze what exactly is a currency note, For the kind information of the author “A currency note is nothing more than a PROMISSORY NOTE , containing an unconditional promise to pay a certain amount of money’s worth to the bearer”.
You need to have some asset to support the currency note, That backing is called “THE VALUE OF YOUR CURRENCY” or “Exchange rate”, means how much foreign currency you can get in exchange of one note of your currency. It is also a measure of how much quantity of anything your money will buy
Currencies cannot be printed by pressing computer keys, If that was so, the nations with fastest printing presses will be richer,
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quickboyQuick,
In other posts (for instance: A dollar bill is not a dollar), I have explained that a dollar bill is not a dollar, but rather, as you say, a promissory note.
The backing for this note is not the exchange rate. If America were the only nation in the world, there would be no exchange rate, but dollar bills still would have value. The backing for the dollar note is full faith and credit, which I also explain at the above link.
The U.S. government creates dollars by paying its debts. Example: Say you receive Social Security payments. On the appropriate day each month, the federal government sends your bank instructions to raise the numbers in your checking account by a specified amount. This all is done automatically by pressing that mythical computer key.
The difference between a Monetarily Sovereign nation and a monetarily non-sovereign government is that the former creates money by paying bills, while the later transfers money by paying bills.
You, your state, county and city, and every business, all are monetarily non-sovereign, so when you pay a bill, you transfer money from your account to someone else’s account. The federal government merely sends instructions, not money, which it can do endlessly.
Rodger Malcolm Mitchell
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There is one little problem in all this, You say a US $ bill is not a promissory note? and deals in debts only?
May be you think so because the note says “This is legal tender for paying all debts etc.”. On it’s face, Well If I pay $1 and buy something, The seller accepts the note believing, that he can get his $ value from US. Government, Even though we may call it a “promissory note” , Well the term may not be very familiar to U.S,
But British knows what it is, (Well defined negotiable instrument,in all commonwealth nations) It is essentially the same, Meaning If I have a dollar , Or Pound, I get a guarantee that I will get it’s value, whenever I present it to the issuer,
This printing and cash back as you see it works if U.S lives in a closed bottle totally sealed and cut off from outside world, The moment a $ leaves it’s borders, Well anyone getting it will always look at what this paper offers him, That is, how sure he is, about the U.S federal treasury repaying the debt they owe him(as you say it), Well if they find the chances are bleak, you are downgraded, like you loose credit ratings etc….. That is exactly what I say by the PROMISE part. And also if you print too many notes, The total value of all that remains constant, means if you pay 1$ for a bread loaf today, and without any reasonable backing , print 10000$ notes, Well the person selling the bread will take 1000$ for the same loaf. That is reduction in value of money.
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Or they produce more bread, hire more people and everybody is better off in real terms because more people have bread.
And it still only cost $1.
Your scenario requires that there is no extra capacity *anywhere in the world* to produce anything more, either that or a complete monopoly in bread production.
Is that realistic?
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Well Have to somewhat agree on bread part, But then to produce more bread, you need more wheat, and to produce more wheat you need to work up more man-hours(or women-hours or whatever), more machines, more land, more energy to bake them, And if they are produced elsewhere in the world , well definitely the exchange-rate and valuation crops up, Pushing inflation over the top. So more paper wont solve anything, The right path will be to rationalize the spending, Means spend more on Health, building industries, training workforce, Lower wages,( but make sure the supply of essentials are cheaper, otherwise lower wages cause mystery for the population and demotivate them), And build a solid infrastructure to produce maximum essentials in your own land.
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Well Roger you are both wrong and missleading your guest posters how the Federal government makes payments. The government does send money to those whom are owned payment. The process works like this: the federal payment system sends batches of data after midnight to litterally thousands to of systems world wide. In each batch is accounting codes and actual payment amount to be credited to those accounts. The payment amount is debted from the treasury and credited to those who are paid. If you use on-line banking and make payments to you power,water, gas, and whatever the process is the same. No magical computer keys, but well designed and developed software and secure networking that makes this all possible. Also, when you write a check to pay a bill, that check is sent the Federal Reserve, photo copied, serialized, stored in one of the many Federal Reserve systems and then sent to a financial institution that will credit that check for payment. The check clearing process take 3 days, but can be done overnight, if needed. And one final note, if the government does not have the reserves to make any payments, No payments can be sent. That is why the debt ceiling was so critical. The money was there, but the government couldn’t use that money unless congress and the President said it was OK to do so. You see, the government payment systems do not automatical have the ability of to determine who gets paied and who doesn’t. Only by reprogramming the software will that it happen. That takes time ( a very long time). So stop with your magical computer key stuff and learn how automation works.
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John,
You said, “The money was there, but the government couldn’t use that money . . . ”
Where did the money come from that “was there”?
The difference between a Monetarily Sovereign government and monetarily non-sovereign you and me, is that we need a source of funds (income, savings or borrowing) in order to pay our bills. We transfer dollars from our account to our creditor’s account.
The federal government needs no source of funds. It creates dollars by paying bills. Neither taxes nor so-called “borrowing” pays for federal spending. If taxes and borrowing fell to $0 or rose to $100 trillion, neither event would affect the federal government’s ability to instruct banks to increase checking account balances.
You also said, “. . . if the government does not have the reserves to make any payments, No payments can be sent. That is why the debt ceiling was so critical.”
There is zero relationship between the debt ceiling and so-called “reserves.” There are no reserves. The federal government creates money ad hoc. The U.S. is the only nation in the world with a debt ceiling, but the other nations make payments every day. How do they do it?
The U.S. debt ceiling is a fairly recent invention. It began with the Second Liberty Bond act of 1917, but actually became an overall debt ceiling with the Public Debt Acts of 1939 and 1941. So all those years prior, the U.S. paid its bills. How did it do it?
So what is the purpose of the debt ceiling? It has no purpose. It is a wrongheaded attempt to limit paying bills that already have been incurred. What the debt ceiling actually does is limit the creation of T-securities, which are unnecessary, anyway. A Monetarily Sovereign nation does not need to borrow the money it has the unlimited ability to create.
To show you how meaningless the debt ceiling is, one of Obama’s possible solutions was to authorize the creation of a $10 trillion platinum coin. (There is a law that allows this.) The platinum coin would be deposited with the Federal Reserve Bank, which would use the money to liquidate all T-securities.
Poof! All so-called “debt” disappears.
Rodger Malcolm Mitchell
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“To show you how meaningless the debt ceiling is, one of Obama’s possible solutions was to authorize the creation of a $10 trillion platinum coin.”
Be careful with this point. I agree with everything else you have posted (a brilliant article BTW) but not this one.
Coins are still treated as Govt debt (and rightly so IMO)
http://www.correntewire.com/coin_seigniorage_and_irrelevance_debt_limit
“Looking into it, I found that while Federal Reserve profits are counted as a revenue source (larger than estate taxes and customs duties combined), US Mint profits are not.”
The key is to educate people about the importance of Govt debt in a debt based money system. Not hide debt in treasury revenue (crediting revenue rather than a debt liability account) by using creative accounting.
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“You said, “The money was there, but the government couldn’t use that money . . . ”
Where did the money come from that “was there”?”
The 2 leading money collectors for the US Government are 1) IRS 2) US Customs. This short list does cover all revenue collection. TARP payments by the bailouts have become positive as of early January. You really should work for the US Treasury or Federal Reserve to see how our financial system operates. Do you know when the Fed sends Treasury the discount rate?
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John,
You’re so anxious to disagree, you don’t seem to read my responses. So, since you have all the answers, why don’t you educate me: What do you understand are the differences between Monetary Sovereignty and monetary non-sovereignty?
Rodger Malcolm Mitchell
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I have just read this whole thread and am still a bit confused….
You’ve defined:
– Monetary Sovereignty as a nations the ability to print its own currency at will (The US may do so because we do not require our currency to be backed by gold)
– monetary non-sovereignty is the inability to print currency at will because it must be backed by a commodity (gold, silver, goat’s milk etc) or because of a political agreement (A Euro country can’t because the EU limits their production of Euros)
I think what is tripping me up about your argument (I’m not an economist obviously) is that you seem to be saying is that there are no negative effects of printing any amount of money. If this is the case, why would any Monetarily Sovereign nation incur any debt for any reason? Why not use print money for everything? Inner city schools need better funding, print more money, transfer it to the school district, viola! problem solved.
There must be some reason this is not done, could you please explain to me why?
Also separate question, If another nation holds our debt (say UK because their Monetarily Sovereign), as another currency (they loaned us 200m pounds) aren’t we not longer Monetarily Sovereign as we must meet an obligation measured in a currency other than our own (which we cannot print at will)?
Rob
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There is an infinite supply of money, but a finite supply of real stuff.
While there is spare real stuff available, the currency issuer can just buy it.
The metrics to watch are the unemployment rate and the inflation rate. While both of those figures indicate that there are spare real resources laying idle in the economy the currency issuer can continue to buy them. Once they signal that the economy is ‘full’, the currency issuer must stop.
So there are limits, but the limits are real. Financial limits are a myth.
US Treasuries are denominated in US dollars. If the UK govt bought them with Pounds there will have to have been a foreign exchange transaction first. You can’t buy US Treasuries directly with Pounds. The Treasury only accepts US dollars for them.
Moreover because they are denominated in US dollars, the exchange risk remains with the UK. The US Treasury will still only redeem them for dollars when the time comes. There is no requirement to repay in UK Pounds.
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I would just like to thank the author of this piece as it is very informative and eye opening. So am I right in thinking that the answer to our problems is not to cut spending and tighten our belts as a country but to actually and provide the economy with the stimulus it needs to get moving again. To me real value lies in the ability to provide a good or a service and money is just a representation of that value. The problem there is we do not seem to be producing many goods any more as a nation, so stimulus that is aimed at creating new industries that actually build things and create jobs would seem the right way to go.
The problem with that from what I hear is that there is no way we can produce anything cheap enough to compete with china, is this true? Ultimately we need jobs, and how do we create jobs without creating new industries. Can we literally print a ton of money and then place that money into the right places to stimulate new industries and job growth?
I am in no way an expert in any of this, I just find it very interesting and would like to learn more about it so I can maybe grasp a little bit of what is really going on here and what is the real solution to our countries woes.
I remember Economists saying in 08 that the answer to our problems was not to cut spending but to increase spending and stimulate our economy, somehow I and the rest of the nation seemed to forget that and started thinking of our nations finances in the same terms we think of our own finances.
One last thing if I understood correctly you mentioned the fed government doesn’t really rely on taxes because it is monetarily sovereign, so we could literally pay 0 taxes and it wouldn’t effect the fed governments ability to do business? Of course if that is the case would it not apply to the states because they are not monetarily sovereign therefore rely on taxes to do business?
Thanks again for the informative article.
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“So am I right in thinking that the answer to our problems is not to cut spending and tighten our belts as a country but to actually and provide the economy with the stimulus it needs to get moving again.”
You are correct.
” . . . what I hear is that there is no way we can produce anything cheap enough to compete with china, is this true?”
No. America is the world’s biggest producer.
Your penultimate paragraph is correct. The states (as well as counties, cities and euro nations) are not Monetarily Sovereign, so they do rely on taxes and borrowing to fund spending.
Rodger Malcolm Mitchell
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Roger:-
Received this from a friend—American Monetary Act
Web page site is as follows below—what are your recommendation
About this ACT—it is 32 page “PDF”
Click to access 32pageexplanation.pdf
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LW,
I’m too busy (or lazy) to read a 30-page document, think about it, then write a (30 page?) critique. Ask me something specific, and I’ll give you my thought.
Rodger Malcolm Mitchell
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LW
There is so much confused misinformation is this paper it is best to completely ignore it.
It based on ignorance of what money is and how the banking system works. The writers do not understand fractional banking , what the current problems are and their 100% reserve backing is confused nonsense. They are also confused about the role of interest. And overlook the fact that Govt interest (an expense) is interest revenue to someone else (that could be a pension fund).
I actually thought it was all plausible when I first read it (years back when first released) until I read more and used common sense. And simply followed all the accounting entries for Govt deficit spending for:-
The treasury
The Fed
The banks and
The banks customer.
Do this and you will clearly see how confused and flawed this proposal is.
Start with these two articles (the second book can be downloaded for free)
http://moslereconomics.com/mandatory-readings/what-is-money/
http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/
Or any MMT article. MMT is brilliant. It’s what I eventually found after working it all out for myself. And seeing how flawed and confused many proposals like the American Monetary Act are.
MMT understand banking and money. Lots do not. The confusion is almost unbelievable. (this article by Roger is brilliant BTW for helping to clear up ignorance and confusion).
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Hi again.
Someone else called RJ posted on another site that same link, “what is money” and someone else with a little more cunning pointed out:
“You should check sources before you base theory on a piece like that from Mosleyeconomics or whoever. That’s a cop and paste job that appeared in Washington DC in May 1913 to be circulated around bankster controlled newspapers. It was written by an A. Mitchell Innes. He was a british diplomat serving at the British embassy in Washington DC and an agent of the British Crown Authority. This was 7 months before the banksters got their Federal reserve act through.”
This from maxkeiser.com, link: http://maxkeiser.com/2011/10/11/bill-still-seeks-libertarian-nomination-for-president-nationalize-the-currency-not-the-banks/
Good day all!
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The answer to all your questions on debt and inflation is this. Debt is caused by borrowing from future productivity for immediate gratification. This causes an increase in demand for goods and services for today and thus and increase in prices (inflation). In order to pay back debt new money needs to be created to pay for the increase in prices. You see debt creation has not only outpaced production – contributing to inflation of accumulated debts secondary to price inflation – but also has outpaced the creation of money to back the increased accumulated debt. So the question is whether or not the government chooses to hyper- inflate the money supply to cover the increased debt or to allow asset prices to deflate until the money supply is able to pay for the cost of the now hyper-inflated price of assets.
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What this country is missing is a lack of production today. You can’t expect to continue to be the world leader in production and innovation when people are paid money to sit home and do absolutely nothing and while at the same our government has set a minimum wage that keeps many people priced out of a productive work force. Its no wonder corporations are outsourcing jobs overseas and that there is a huge cheap labor market for illegals. This country is not only quickly getting left in the dust but also has a long roe to hoe to play catch up. From what I see coming from Washington DC.its all downhill from here.
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Bert,
That is a reasonable interpretation of non-federal debt, but is totally incorrect for federal debt.
When you lend to the federal government, you first put dollars in your personal checking account. Then you instruct the federal government to debit your checking account and credit your T-security account.
This is a simple asset exchange. No dollars are created.
Then, when the government “pays” its debt, it merely debits your T-security account and credits your checking account. Here, a small number of dollars are created because of interest.
Despite what some think is massive federal debt, inflation has met the Fed’s target rate. The current concern is about deflation.
The government does not need to “hyperinflate the money supply to cover increased debt.” It services all debts merely by debiting checking accounts and crediting T-securities accounts, for the exact amount of the debts. The value of money (inflation) makes no difference at all.
I urge you to read about the difference between Monetary Sovereignty and monetary non-sovereignty.
Rodger Malcolm Mitchell
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Then what is keeping the Federal Government from quickly servicing its debt and why? Have you ever read “Economics in One Lesson”, by Henry Hazlitt from the 1940’s? It’s an extraordinary book. Perhaps the best economics book I have ever read. At the time the book was written we were not a monetary sovereign nation. I would really like to here of what you think about this book. Its free, online, only about 200 pages,
and it is in PDF format. Just Google the books title.
I just think that the blame for our countries problems can be placed squarely on our leaders in Washington DC. How do we go about getting the rest of the nation to realize this fact?
Thanks!
Bert
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Bert:
“Then what is keeping the Federal Government from quickly servicing its debt and why?”
The government always services its debt. You mean why doesn’t the government pay off its debt? The answer: There is no need to. The debt merely is outstanding T-securities. Why would the government need to get rid of them?
If the book was written when we were monetarily non-sovereign, it probably is obsolete.
Rodger Malcolm Mitchell
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The book “Ecnomics is one lesson”, is an exraordinary book in that it uncovers the major fallacies in economics theory. The main objective in the book exploits the way government try short term fixes without considering the long term effect to policy changes. It’s an exceptional book. Give yourself a gift and read the book.
Bert
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If the book was written when we were monetarily non-sovereign,
It was.
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A Monetary Sovereign has no problems provided the goods or services it wishes to have can be purchased for some price struck in its own currency because it can send a promise to pay in its currency to the seller of the goods electronically (a transfer) or physically (a coin or note) for an immediate promise or at a specified future time (a T bill or Treasury bond in the case of the US). From time to time this may be easier or more difficult for people who get or hold their source of monetary value in that sovereign’s currency depending on the relative amount they get or hold of that currency versus the amount of the currency the seller of the desired good or service wants. The Monetary Sovereign only has a problem when the seller of the desired good or service the sovereign wants refuses to accept the sovereign’s promise to pay in its own currency and demands the delivery of some other thing (possibly the promise of another Monetary Sovereign or another good or service) which also cannot be bought by the promise of the first Monetary Sovereign to pay in its currency. The people who want to govern the first Monetary Sovereign and who need to be elected by people who get or have their source of monetary value in the currency of the sovereign might have a problem when those people don’t have or get enough of the currency to buy the goods and services they want from a seller (who may be asking for the first Monetary Sovereign’s currency or other currencies or goods or services). So, if all the world’s oil product producers said tomorrow they would only accept Renmimbi for a barrel of product and the US government could not buy a Renmimbi from the Chinese government or anyone else for a promise to pay in US$ the US military might be grounded. Unless, of course, the US government just went and took the oil product but that would be called aggressive and nationalisation within its borders or war if it crossed someone else’s borders. Sometime earlier than that the people governing the US might be voted out but if most of the voters felt aggressive, maybe they wouldn’t???? But then again, maybe the US government or someone there might invent a complete alternative to oil products at some point???
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Well put!
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The federal government does not create money by paying it’s bill. It borrows it. All of it. Since we do not use gold as money, but rather Federal Reserve Notes, the US gov. gets it’s notes FROM the private Fed Bank.
The private Fed Bank is the monetary sovereign. THEY issue the money (notes, whatever). The US government CAN not print or issue their own notes/currency, etc. The did, twice, in the past (continentals and greenbacks) but today the families that OWN the Federal Reserve corporation issue our money.
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Doc, this is so far from factual, and so filled with myths, I wouldn’t know where to begin to correct you. Next thing you’ll tell me is the Rothchild’s actually run America.
I do like your note because it is a perfect example of how utter nonsense can be spread.
Rodger Malcolm Mitchell
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Quess who issues US dollars?
http://www.ny.frb.org/aboutthefed/fedpoint/fed01.html
So much for the US Treasury owning the money supply Roger
There is about $829 billion dollars of U.S. currency in circulation; the majority is held outside the United States.
The Federal Reserve Banks distribute new currency for the U.S. Treasury Department, which prints it.
Depository institutions buy currency from Federal Reserve Banks when they need it to meet customer demand, and they deposit cash at the Fed when they have more than they need to meet customer demand.
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Ah, John,
You continue to amuse. Clearly, you don’t know the difference between “currency” and “money supply.” The total money supply, according to the St. Louis Fed is about $37 trillion, of which the federal government has directly created about $10 trillion. See:http://research.stlouisfed.org/fredgraph.png?g=300
Currency is a minuscule fraction of the total money supply. Confusingly, the word “currency” can also be used to describe the sovereign “currency” of a Monetarily Sovereign nation.
Rodger Malcolm Mitchell
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Interesting how you can be so ignorant to facts. The Rothschilds DO run your country, and mine, Sweden, and most of the rest of the world. This is openly discussed in the muslim world which have PRESERVED the GOD-WRITTEN law prohibiting usery. They are still controlled by the old propaganda network of religion, which was prevailed over by the goldsmiths in the west som couple of hundred years ago.
Controlling the minds of the people is power and today most minds are controlled through “Media”, that in turn is controlled through usery. Here in Sweden ALL newspaper articles are signed with AP or Reuters, both owned by guess who?!
Thank you for reading
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The US gov. gets it is notes from the Fed. Bank?
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Ordinarily, I wouldn’t print such nonsense as expressed by Mr. Dahr, but I thought it might be instructive for our readers all to see the depth of ignorance that exists, and the difficulty sane people will have in educating the public about Monetary Sovereignty.
Facts and logic don’t permeate the closed minds of the media, the old-line economists and the public, so it will be a long, hard slog.
Rodger Malcolm Mitchell
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It was wrong of me to call you ignorant (proven by the fact you print my views), my apologies.
My political views are very much in line with the teachings of a man named Bill Still. Knowing that maybe you can respond in an eduacationary way and explain where you believe he goes wrong? If you havn’t heard of him, he is the man behind the 1996 documentary “The Money Masters” and he would like congress to create all money, both eliminating “the federal reserve” AND fractional reserve banking. (“the federal reserve is a company name just like fedEx.)
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Anton,
I never have heard of Bill Still. There are many thousands of people with religion-based beliefs about economics. At my age, I don’t have time for bible-science, and all those people who claim to know what is in God’s mind.
Rodger Malcolm Mitchell
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Rodger, it is never too late to understand what Bill Still says. Just invest 2 hours to watch “The Secret of Oz” and you will get another picture in your mind when you hear the term “Federal Reserve”… nothing “federal” there and ofcourse no “reserve” either.
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The phrase “The United States is Monetarily Sovereign” is stunning !!!
Did the USA finally nationalized the Federal Reserve?
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So the U.S. is not Monetarily Sovereign? Who is?
(Uh oh, sophistry alert)
Rodger Malcolm Mitchell
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Mario,
Two hours!
Here is the entire holy bible: Do to others what you would have them do to you. All else is explanation.
Here’s all of Monetary Sovereignty: It is a government’s ability to create its sovereign currency, limited neither by taxes nor by any other form of income, but only by inflation. All else is explanation.
Those each took you about 10 seconds to read and understand. Assuming Bill Still’s hypothesis is three times as complicated as either the bible or Monetary Sovereignty, I’ll go for a 30 second synopsis.
Rodger Malcolm Mitchell
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Roger – It sounds like your entire argument is based on the assumption that the gov’t can keep printing paper as long as it likes to pay its bills. Just curious, what happens when people stop accepting pieces of paper?
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Max, you’ll need to read more closely.
The federal government doesn’t “print paper” to pay its bills. It instructs creditors’ banks to mark up checking accounts. It can do this endlessly, without taxing or borrowing.
Why would it need to tax or borrow to obtain the dollars it previously created, and has the unlimited right to create? I hope you and I live long enough to see America and the world refuse to accept the dollar. In the list of economic concerns that one would rank at the bottom.
Better to worry about unemployment, recession, depression, etc.
Rodger Malcolm Mitchell
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Oh I read the article and you’re distorting my question. Fine the gov’t can instruct banks to “mark up checking accounts”. Which essentially is paper and backed by nothing other than the “full faith and credit” of the US.
I’m glad to see that you concede that eventually printing fiat currency is nothing more than a Ponzi Scheme, a massive bubble that will eventually burst. But as long as we’re both dead, screw the next generations.
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I’m just trying to make sure I understand your underlying argument. The US can continue printing money (whether physical dollars or electronic) and as long as other countries continue to take those dollars then we’re ok. And the only negative to printing an unlimited amount of paper is inflation which according to you is easily controlled and solved. (I wish someone would’ve told the gov’t that 100 years ago when my dollar was worth 95% more back then than it is today).
So let’s call up China and let them know that we’re printing another 15 Trillion and we’re going to cut them a check for 5 Trillion and wipe out what we owe them. You think that will work?
Also you mention that Greece is in the trouble they’re in because they gave up their Monetary Sovereignty. Assuming they take it back tomorrow and starting printing up money are you going to invest in them or take their new printed money as a valid form of currency?
To me it sounds like you’re advocating “unsound money”. So as long as all other nations play the game and America continues to be the world economic power, then we’re good.
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Nah, you’re not trying to understand. You’re trying to argue and defend your pre-existing beliefs.
Re. “100 years ago,” the U.S. government intentionally strives for an annual inflation rate of 2%-3%, under the belief that a little inflation stimulates people to buy now, rather than later, which stimulates the economy. The Fed could cause deflation, if it chose.
We “owe” China because they have a savings account, at the Federal Reserve Bank, called “Treasury Securities.” If they want to redeem those T-securities, we simply will debit that account and credit their checking account, also at the FRB. Both accounts are in dollars. No problem at all to redeem all so-called “debt.”
If Greece returns to the drachma, see: https://rodgermmitchell.wordpress.com/2011/11/08/what-would-happen-if-greece-returned-to-the-drachma/
The one thing you should to understand: The entire world of economics changed on August 15, 1971. Did your understanding of economics change then?
Rodger Malcolm Mitchell
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“…worth 95% more back then than it is today.” Your dollar is worth more today because you are paid more today. One hundred years ago it might have taken half of your monthly salary to buy a car. Today, it might take 15%, maybe less. Additionally, today’s car is more reliable, has more features and is light years safer. This concept applies to nearly every good/service available today.
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I think you’re conflating a couple different economic principles.
1) The reason that goods/services are “cheaper/better” today than 100 years ago has to do with investment in capital equipment which leads to production efficiency which leads to better quality and lower prices. For example, 100 years ago, an individual would move 1 box at a time with their bare hands, then a capitalist invested in a hand truck and that same individual could move boxes 4 at a time. Then a capitalist invested in a forklift and that same individual could now move pallets. The investment in capital equipment increases efficiency which in turn increases quality and puts downward pressure on prices. At the same time it makes the employees labor worth more driving up the employees salary. For all intent and purposes, it has nothing to do with the currency (whether hard or fiat).
2) While you’re correct that you’re paid more today which offsets the depreciating dollar, that only applies to your most recent paycheck. The paycheck you earned last year, 5, 10 or 20 years ago is worth less resulting in punishing savings and rewarding consumption (the exact opposite of what you want).
3) Finally, you’re wrong about the dollar being worth more just because you’re being paid more – those concepts are not related. As a simple thought experiment, imagine if 100 years ago you had $100 worth of gold. You could buy significantly more today with that gold than with the $100. So even though you’re paid more today that’s merely a reflection of the depreciating value of the dollar and has nothing to do with the increase quality and decreasing price of goods. Again, another way of viewing this is in the 1800s when the US was on the gold standard the value of gold appreciated while at the same time products got better and cheaper. Average citizens could take their gold, put it in a bank and watch the value increase while at the same time buy higher quality goods and services at ever decreasing prices.
In conclusion, the depreciating value of the dollar has nothing to do with quality and cost of goods (need further proof, look at any socialist economy that’s going through inflation. ie. If you’re lucky enough to have a job in Venezuela your paycheck is going up daily but the quality of goods are not increasing and the price isn’t decreasing). The reason goods and services are better and cheaper is because of Capital Investment NOT an inflationary dollar.
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Capital investment didn’t make goods better and cheaper. Knowhow of science did. Investors are merely the people who take advantage of the scientific goose that lays down the inventions of genius. They know a good idea when they see it but they don’t produce it.
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Henry Ford nor Steve Jobs were scientist, But they both used capital to make the world better.
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Capital investment is important but don’t put the cart before the intellectual horses. Capital chases after the ideas are proven FIRST. ie,Shark tank.
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