–Monetary Sovereignty: The key to understanding economics

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.” ====================================================================

Perhaps no words more accurately and succinctly illustrate the confusion about economics than “Monetary Sovereignty.”

It is not a theory or a hypothesis or a philosophy. In its essence it merely is a description of the way federal financing actually 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 exclusively unlimited power to create the dollar.

China, Canada, Australia, the UK and Japan are Monetarily Sovereign. They have the exclusively unlimited power to create their sovereign currencies.

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 possible.

Being sovereign over the dollar, the U.S. can do anything it wishes with the dollar. It can make the dollar equal to three euros, two pumpkins or one partridge in a pear tree.

The federal government’s sovereignty over the dollar is unlimited.

Image result for bernanke and greenspan
It’s our little secret. Don’t tell the people we don’t need or use their tax dollars.

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 the exclusively 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.

It doesn’t need to tax or borrow, and it never can be forced into insolvency. It can pay any dollar-denominated invoice of any size at any time.

In fact, the federal government creates money by paying its bills. 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 personal 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 itThey could pay benefits, forever.)

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 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, since every dollar needed to be backed 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.

In effect, 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 Portugal, Ireland, Italy, Greece and Spain (The PIIGS), 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 this 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, as usual, 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 productivity. The two are unrelated). So-called federal “debt” is nothing more than the total of dollars deposited in T-securities accounts at the Federal Reserve Bank. These accounts essentially are savings accounts.

To “pay off” the federal debt, the Federal Reserve Bank merely debits these T-securities accounts and credits holders’ checking accounts, the same way your personal bank transfers dollars from your savings account to your checking account. No new dollars 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 has no relationship to federal spending and so, 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.

To pay its bills, the government sends instructions (not dollars) to creditors’ banks, instructing the banks to increase the dollar amount in creditors’ checking accounts. These instructions are in the form of checks or wires. At the moment the bank obeys those instructions, dollars are created, and the money supply is increased. This is how the federal government creates dollars — not by “printing,” but by sending instructions.

If U.S. federal taxes and borrowing 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.

Although Monetarily Sovereign nations need neither to tax nor to borrow, they may choose to do so for reasons unrelated to financial need.

The spending by Monetarily Sovereign nations had been constrained only by 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, and benefits even could be tripled, 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.

On occasion, the federal government has “saved” money by firing, or reducing the pay of, federal employees. Those so-called “savings” would be money not sent into the economy, and therefore, are recessive.

The federal government, having the unlimited ability to create dollars, does not need 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:

  1. How much money can the federal government create? Answer: Infinite
  2. 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 since 1971, we are not anywhere near the point where deficits could cause uncontrollable inflation (which is controlled via interest rates).

As of this writing, we are closer to fighting deflation than inflation. 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.

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 reduce unemployment or grow the economy? 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 income for the economy.

Therefore, both a tax increase and a spending decrease reduce money growth in the economy.

Because GDP = Federal Spending + Non-federal Spending + Net Exports, a reduction in money growth 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:

  1. Eliminate FICA
  2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
  3. Social Security for all
  4. Free education (including post-grad) for everyone
  5. Salary for attending school
  6. Eliminate federal taxes on business
  7. Increase the standard income tax deduction, annually.
  8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
  9. Federal ownership of all banks
  10. 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.

631 thoughts on “–Monetary Sovereignty: The key to understanding economics

  1. All money is backed by nothing other than the full faith and credit of something. By definition, money has no intrinsic value. So are you opposed to money?

    As for a Ponzi scheme, the very fact that the federal government has the unlimited ability to pay any bill is what makes the U.S.dollar NOT a Ponzi scheme — the opposite, in fact. Maybe you should learn what that term means before you use it again.

    And as far as screwing the next generations, that’s exactly what happens when the debt hawks reduce federal spending for Social Security, Medicare, Medicaid, medical research, roads, bridges, food inspection, financial regulation and every other federal initiative you can think of.

    Who do you think benefits from that spending and who do you think will suffer when it’s reduced? The next generations.

    So why do you want to screw the next generations by reducing the deficit, and why do you want to reduce the money supply in America?

    Rodger Malcolm Mitchell

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    1. WHY?
      So that we are no longer able to pay our Masters (read the 1%),go into servitude,have nothing,then have a real revolution in order to start all over again.
      Why is it that a simple consept such as,”the most powerful force in the universe” (Einstein) compound interest is
      greater “than standing armies” (Thomas Jefferson).
      Read Michael Hudson,”Comments on Interest”,
      This most powerful force can be used as a Weapon of Mass Destruction, or Means to Prosperity for All.
      PLEASE CHALLENGE,OR ENDORSE.
      Please post “–Monetary Sovereignty: The key to understanding economics.”
      Perhaps, we can arrive at a solution before the end of 2012,OR THE MAYA’S MAY BE “JUSTALUCKYFOOL”
      One that attemps to fortell a future event is a fool,if by chance;correctly,then he is justaluckyfool.

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  2. Sadly Rodger, I’m not trying to argue with you, yet you keep acting like an arrogant intellectual. I’m trying to understand your rational, which I believe is “keep printing more money”. As long as other countries are willing to take our money then we can just keep printing it forever and not worry about inflation, debt, taxes, etc.

    It sounds to me like that’s what you’re saying. The dollar is king and everyone will accept it forever regardless of how much of it we print, with no risk of inflation. If that’s the underlying principle then you’re right, debt, taxes, spending are all irrelevant. In fact, why even have a gov’t budget. Just let gov’t spend whatever they want and pay for it by printing more money. Is that what you’re advocating?

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  3. I understand that we can “debit & credit” and how the process works, I’m wondering what China’s response would be if we told them that we were printing an extra 15 Trillion and crediting them 5 Trillion to wipe out our debt?

    Again, I’m not against your ideas, just trying to understand the process and equate it to the real world. If you’re right, then the Fed gov’t doesn’t need a budget. Taxes, debt, and spending are irrelevant. As long as gov’t spends as much as they want during times of hi-unemployment and low productivity and cuts back when it hits full employment then we don’t have to worry about inflation. Is this accurate?

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    1. China’s response would be what it always has been, because that is exactly what we always have done: Create dollars and credit their account.

      Taxes and “borrowing” do not support spending, which is limited only by inflation. We need budgets to determine where to spend. The answer to your “As long as . . . ” question is: We always have to be concerned about inflation, but it easily is controlled via interest rates. If we had an inflation that interest rates could not control, then we could cut back.

      You’re now on the edge of understanding the difference between federal finances and your own kitchen-table finances. Good job. Keep at it.

      Rodger Malcolm Mitchell

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      1. Patronizing tone aside, I appreciate the information. Assuming we can print money indefinitely,I still don’t understand why we need a budget? Spending would still have to be appropriated. In fact, we don’t have a budget today, Congress keeps passing appropriations bills where spending far exceeds taxes. Assuming you’re right and debt is irrelevant, do we need any type of restraints on Congress? In a time where politicians only care about the next election and will do everything in their power to buy votes and grant special favors what would stop politicians from passing every single pet project they wanted? At least today, there is a pretense of restraint but under your theory, why wouldn’t Congress just baseline SS at 8% per year and spend Trillions on everything else? I bet that would get them all re-elected. If inflation hits they could just adjust interest rates?

        As another example, why wouldn’t Congress invest in a 1000 Solyndras and keep pumping money into them indefinitely or at least until unemployment reached full employment? Of course the moment that happened and Congress stopped funding these companies they would all go bankrupt, increasing unemployment and starting the cycle over again.

        To take this even further, if Congress can print money forever, I could easily see them pass a guaranteed living wage law, where every person would be guaranteed enough money to pay all their basic necessities. If that’s the case then why work? Productivity would go down, unemployment would go up and Congress could just keep printing money?

        Please don’t take this the wrong way. I know you think that I’m just trying to prove my own preconceived opinions, but I’m not. I’m actually curious how your theory would work in the real world. For example, I was born in Russia and my family escaped in the late ’70s. In theory, Socialism is great, but, as my family experienced first hand, in practice it doesn’t work (I’m not equating Monetary Sovereignty with Socialism just making an analogy where a theory sounds great on paper but due to human nature, doesn’t work in the real world).

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        1. Max, you’ve got to read more closely. MMT doesn’t advocate infinite money creation, and does say that excessive money creation can lead to inflation.

          So, how much would be excessive? $10T in a year, yes. $3T this year, with 9% unemployment? Hmm, maybe, maybe not. $1.3T this year, our current budget deficit? Definitely not enough to cause even an adequate recovery, never mind enough to be “excessive”.

          A growing economy requires a growing money supply. As long as the economy grows “indefinitely”, the money supply (and the federal debt, if the law continues to require debt for deficits) must grow “indefinitely”. That means deficits every year, large enough to offset the money removed each year by saving (including foreign sector saving, aka the trade deficit) and the additional money needed to purchase the expanding production.

          Indefinitely. Without limit. Forever, or at least until the nation no longer exists, or is no longer monetarily sovereign.

          I’m with you on the size of government issues. I prefer to do it with tax cuts, starting with payroll taxes, and increased revenue sharing to the states, rather than more hair-brained projects like Solyndra.

          I recommend http://neweconomicperspectives.blogspot.com/p/modern-money-primer.html and http://moslereconomics.com/mandatory-readings/

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      2. Hi again,

        The government could and should create all money without inflation. Today a fraction of the money is created by the federal reserve and the rest by the commercial banks through fractional reserve lending. The ratio is set to 10% but, as was revealed through a recent audit, the commercial banks have not followed this law and created from the lawful 9/10’ths, all the way up to 30 times more than that.

        But the problem does not stop at the private banks creating 95% of the money supply. The federal reserve is also not under government control. It is instead controlled through mandate by local federal reserves, which are all in turn controlled by the biggest commersial banks in each sector. Your constitution clearly states that the power to coin money, and regulate the value thereof, belongs to the peoples congress, not to a private corporation.

        Best regards

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  4. What if international does not use dollar as their reserve?
    What if China does not want your t-bills anymore?
    What if the world come to realize that their dollar is worthless because you guys are printing monies while you can?

    What if the world have a new currencies as a reserve?

    Would you still print monies like now?

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    1. Yes.

      China, Canada, Australia, Japan are not the world’s reserve currencies, and they seem to be doing fine.

      The U.S., being Monetarily Sovereign, does not need to borrow its own sovereign currency. T-bills could be eliminated tomorrow.

      All money is worthless, in that is has no intrinsic value.

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      1. “All money is worthless”
        Isn’t “money” a form of a record of what is owed from a transaction?A receipt ?
        $100 worth of drinking water will always have a value.Even if today it may be 100 galloons,but in the future only 1 single drop.
        Money would have the intrinsic value of what it is a receipt for,namely “the good faith,and material,and intellectual benefits of the one that issues that money.

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        1. ADD TO COMMENT:
          Modern money that is created by fractional reserve banking,may indeed be absolutely worthless because it is created from zero.Nothing is actually owned,its base is
          “money” that is held for safety (deposit). ZERO of which
          is owed by the reserve issuing lender (who incidently owes interest on it.).

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  5. Max, if Congress spent on all those projects, the economy would grow and unemployment would drop, and poverty would all but disappear.

    If Congress spent so much as to cause an inflation that could not be controlled by interest rates, the public would protest and the politicians would cut spending then to reduce inflation, rather than cutting spending now because of a misunderstanding about economics.

    As for “why work?” the answer would be: “To get more money.” You’ll notice that the 1% work, and I see no reason why the 99% wouldn’t, too.

    Realize of course, you are presenting some “what if’s” that ignore the current reality: Unemployment and an economy starved for money. So my question is, why are you more concerned about a possibly distant future than a current disaster?

    Think of the lady who lets her house burn down, because she’s afraid her neighbor might get mad if she wakes him to borrow his hose.

    Take care of today’s real and urgent problems before you worry about tomorrow’s highly theoretical, possible problems.

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    1. My concern is being short-sighted. If you are wrong and we continue to print money then we’re creating the mother of all bubbles. Meaning are we really solving the problem or kicking the can down the road?

      I remember listening to an economist during the housing bubble argue that it wasn’t a bubble. They provided economic data showing the dynamics of US families were changing and multiple generations were living in the same house. They showed how poor people with no income or credit were buying houses then creating “wealth” by refinancing, taking money out and pumping it back into the economy. And they claimed that as long as someone else was willing to buy the house for more it could go on indefinitely. It all sounded great until someone else was no longer willing to buy the house for more.

      In addition, I remember sitting in my college Econ class which was taught by an adjunct professor who was the head of some gov’t economic department. She brought in an expert economist who argued that deficits were good and we needed higher deficits and more spending. He argued that as long as Japan (back then we were all worried about Japan taking over the world) was willing to sell us their goods for paper we should increase our trade deficit as much as possible. I actually asked, what would happen if Japan decided to no longer take our paper and keep their own goods or sell them to other countries and he said that would never happen.

      It seems to me that the only way Monetary Sovereignty works is if everyone plays along.

      PS. With regards to people working to make more money, I would point you to the reality of welfare and social programs. How many people are not working today because the gov’t provides enough for them to live on. Look at Greece? How many of their citizens aren’t productive and live on gov’t social programs? Look at nearly every Socialist country out there and I guarantee you will see a large portion of the population NOT working, regardless of how much extra money they could make. Finally, if the people get accustomed to the gov’t providing everything they need and we can print money forever, what real incentive is there to make more money? Instead, just get the gov’t to increase your living wage or healthcare benefits or cell phone minutes?

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      1. “It seems to me that the only way Monetary Sovereignty works is if everyone plays along”

        And throughout history, everyone (that matters) has always “played along”. If other people don’t want a currency, they exchange it for something else, some goods from the currency owner’s country, or another currency. With floating exchange rates, an “unwanted” currency will drop in price. So what? What does it mean to not “play along”?

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      2. To MaxP : I find ” if the people get accustomed to the gov’t providing everything they need and we can print money forever, what real incentive is there to make more money?Justaluckyfool would answer,”None,but what government COULD OR WOULD PROVIDE EVERYTHING THE NEED?
        “we can print money forever”
        I would answer according to “The All Inclusive Solution.The Federal Bank of America” would only occasionally print (read put in circulation) more money.
        Simply because the money initially put into circulation carries a penaly (tax) (compound interest) which is used to fund the congressional appropriations.
        To Anton Dahr:…
        “Your constitution clearly states that the power to coin money, and regulate the value thereof, belongs to the peoples congress, not to a private corporation.”
        ABSOLUTELY.
        Today the US Treasury could by law passed by Congress ask the US MINT to make a “COIN” of Platinum with a face value of $1 Quadrillion (how I love that word),with the instructions that they are to deposit any profit from that coin into the US treasury,that being $1 Quadrillion minus $2,500 the cost to make one really nice coin.
        Crazy but true.(The money would be electoniccally deposited with the Magnificent “coin” placed on display next to the Liberty Bell.Could you even begin to imagine what congress could do with a profit (interest) made from that amount for WELFARE,EDUCATION,HEALTHCARE,”PURSUIT OF HAPPINESS?
        To RMM, please, CHALLENGE or ENDORSE
        http://www.justaluckyfool.wordpress.com-“The all inclusive solution.The Federal Bank of America”
        I once again apologize for taking up so much space.
        (read could you imagine if I really knew how to write and type?)

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        1. I understand the concept, I’m just concerned about the implementation. All these theories are great but do they take into account greed and human behavior. The Federal gov’t could mint a coin made of plastic, stamp a Google on it and it would be “worth” 1 Google dollars. I get that and I’ve gotten that from the beginning, but what happens next? The gov’t deposits the coin and credits its account by 1 followed by 100 zeros. Where do you think that money will go? Will it actually go to help the people or does each politician’s bank account suddenly get a bump of Google/535 (Pres, other cabinet members and special interest groups excluded)? It’s like when we give a 3rd world country a Billion dollars in aid. All the sudden 999 million ends up in a foreign bank account under the name of whoever rules that country and a million is inefficiently spread out amongst the people?

          Maybe what I don’t understand is, is it just the creation of money and hence the increase in the monetary supply that causes economic growth or is the proper use of that newly created money that creates economic growth? In other words, is just creating 3 Trillion and having it sit in a bank account somewhere enough, or does that 3 Trillion actually have to stimulate the economy and really help the people?

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    1. If the reason my house is burning is because I played with matches and gasoline in the garage, the first thing I would do is NOT fill the rest of my house with matches & gasoline. I would then put out the fire in my garage using a standard, proven method such as a hose and water. I realize that I would have to park my car outside for a couple months and wait for the garage to be rebuilt. It will be inconvenient, maybe even painful but at least I would’ve saved the rest of my house.

      Of course I could always drop a bomb on my house. It would explode, suck up all the air and put out the fire. In the short run, the fire would be out, but in the long run, I would not only have no garage but also no house.

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  6. Another question? How much more money do we need to print? The gov’t has printed 5 Trillion dollars in about 3 years and we’re still at 9% unemployment. Do we just keep printing until we get the result we want or is there actually some mathematical equation or economic formula we can follow.

    I realize that the gov’t is not run like a business but in the business world, if I want to invest in a new project, I put together the business plan. I include all the financials and define measurable metrics to gauge my success. In other words, if I invest 1 million then in 6 months I should be at 20 new customers averaging 20,000/yr. 6 months later I can actually measure my success or failure and adjust accordingly.

    According to MS, the gov’t can’t fail because it can always print more money, so what happens if we print another 5 Trillion tomorrow and unemployment still stays around 8%? Do we consider that a failure or do we just print more money?

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    1. To MaxP:
      ” How much more money do we need to print? The gov’t has printed 5 Trillion dollars in about 3 years and we’re still at 9% unemployment.”
      Correction: According to “FED Audit” as per US SEN. Bernie Sanders,it is been shown to be $16 trillion and that is only which has been “revealed”.
      To RMM,Thank you,
      ” I understand the concept, I’m just concerned about the implementation. All these theories are great but do they take into account greed and human behavior.”
      Thank you again,for this challenge.
      The answer will mow be written into “The All inclusive Solution”
      With the Federal Bank of America having so much power,we must be on guard against unintended consequences such as fraud, deception, greed,and on and on,especially knowing “that power corrupts,absolute power absolutely”.
      The Federal Bank Of America must be designed with a transparency in place like no other before.
      **RMM-“Maybe what I don’t understand is, is it just the creation of money and hence the increase in the monetary supply that causes economic growth or is the proper use of that newly created money that creates economic growth?”
      The answer.The Federal Bank of America will become the only source for newly created money and have the money to enable the people to charge interest on that money which then becomes income to the US Treasury,thereby taking away “the most powerful force in the universe” from private lenders.Private lenders will only be allowed to make loans,make investments from already existing money with 100% margin.
      888Must post this part,please read next post.The very essence of The FBA is to control the quality and quantity of money .k

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      1. The essence of The Federal Bank of America is ;It becomes the institution that places the money into circulation.It the loans the money for real estate ,businesses,states,countries,whoever has a need for money and especially banks.The Federal Bank of America must charge an interest rate,”the most poewerful force in the universe”.This rate will be the profit that is earned from the money and by law must be turned over to the US Treasury.Simply stated if $1 Quadtrillion were to be deposited in the FBA,it would first BUY ALL LOANS on American Real Estate,thereby immediately ending the housing crisis.It would make new loans at 3% for 48 years.
        All loans of American dollars made by anyone must have a 100% reserve..no more fractional lending.Any institution wishing to make a loan may borrow from the FBA if needed to have a 100% reserve.
        The essence of the FBA is to take away the WMD as it is presently used and return that massive power back to the people.
        Try to imagine ,what properity we would have if we were able to lend to people,busines’,other countries that $1 quadrillion at an average of 3% for 24 years.
        Income tax ? What lousy income tax, we would be earning
        $30 trillion a year for CONGRESSIONAL APPROPREATIONS.
        Inflation ? What lousy inflation,the borrowers would be paying back $333 trillion a year and if we do not return the $30 trillion we earned back ,they would never be able to pay the full note and be forced into servitude.
        Because of unintended consequences (fraud ,greed,and other things) a budget would be required but I would suggest it be one stated in percentages ,for example 10% for welfare,10% for education,etc.
        TAXPAYERS,and borrowers paying revenue for the betterment of its own people instead of for the personal enrichment of 1%.
        PLEASE CHALLENGE,OR ENDORSE.
        “The All Inclusive Solution.The Federal Bank of America.” justaluckyfool@aol

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        1. Hi Rodger,

          I appreciate the clarification and it is starting to make sense (see I was actually trying to learn), though I can’t say I’m still 100% bought in but I do understand the principles behind it. The obvious next question is, how does the country go about implementing this plan?

          – Max

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  7. Sorry, but I just thought of another question. The underlying argument for MS is that the economy grows based on the money supply and as you mentioned earlier Roger, the reason we’re in this mess is because of “Unemployment and an economy starved for money”. Is the economy really starved for money? Corporations are flush with cash and making record profits. They are not investing because of uncertainty, and the current anti-business climate and rhetoric coming out of the gov’t (this is not partisan, this is coming from business leaders from both sides of the aisle). If the gov’t prints another couple Trillion why wouldn’t corporations just hoard that money and effectively remove it from the economy? Doesn’t printing money also have to be coupled with pro-business legislation and rhetoric?

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  8. Isn’t that the definition of a bubble? We keep printing currency out of thin air and as long as others take it, we’re good, but once someone else stops taking it the bubble bursts? I realize that everyone could “always play along”, but regardless, isn’t this essentially what MS is, an ever expanding bubble?

    My question is do you think that just by printing another 3/5/10 Trillion that would be enough to cure unemployment and the recession or does it have to be coupled with pro-business legislation & rhetoric. In other words, is it just pumping more and more money into the economy until we get the result we want or does there have to be some pro-business, pro-consumer component?

    BTW, I read your article on Greece? I grew up in Russia which was a MS country. At that time Russia dictated exchange rates of 1 ruble = 1 Dollar (or something along those lines). However, on the street 1 dollar was the equivalent of 20-100 rubles. Street vendors wanted to deal in dollars not rubles, so the more rubles the Russian gov’t printed the less they were worth. So again, doesn’t this mean that ALL nations would have to play along?

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    1. Interesting, I reread my entire comment and there wasn’t a “what if” statement anywhere? What I did notice is that your response did not answer my question, which I think is valid. Is it just the process of pumping money into the economy that will get us out of the recession or does that have to be coupled with pro-business, pro-consumer policies?

      What’s my plan? My plan is to empower the private sector and allow them to create jobs without gov’t constraint. The first thing I would do is take the repatriation tax to 0%. There’s an estimated 11 Trillion dollars legally stored overseas to avoid paying US repatriation taxes*. Let’s bring that money back. An 11 Trillion stimulus of private not public money free to be invested in the US economy. I think we would both agree that increasing the available money supply by 11 Trillion is a good thing for the economy.

      I would then lower the corporate tax rate to 0%. Corporate taxes are an illusion, only consumers pay taxes. Let corporations make decisions based on business policies not tax policies. Every company wants to be in the US but can’t be because of our noncompetitive tax system. I would then eliminate the payroll tax, which is the most regressive tax system we have and the highest tax that most people pay. Finally, I would eliminate the income tax (and others) and replace it with a temporary progressive national sales tax (often called the FairTax). Once I did all this, I would slowly shrink the size of gov’t and bring it back to the powers enumerated in the Constitution. Once that’s done I would get rid of the national sales tax and go back to the Constitution again and only impose indirect taxes, such as excise taxes.

      But that would all be in a perfect world and I don’t have any illusions that shrinking the gov’t would be easy. Regardless I would still pass the FairTax and eliminate payroll, income, repatriation, corporate, capital gains, inheritance, and AMT and replace it with a single, transparent, 1 time point of sale tax.

      *John Linder states an estimated $11 trillion is held in foreign accounts (largely for tax purposes), which he states would be repatriated back to U.S. banks .., becoming available to U.S. capital markets, bringing down interest rates, and otherwise promoting economic growth in the United States.

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      1. Max, how is your plan different from “printing money”? A deficit is a deficit. It means spending more than taxing. Reducing taxation by $1 does the exact same thing to the deficit, and to the economy, and to the exchange rate and the interest rate and everything else it affects as raising spending by $1 would have done.

        The reason the numbers required are so large, by historical comparison, is that the bursting of the housing bubble destroyed such an enormous amount of household wealth. It is up to government deficits to replace what has been lost, if we are to return to the same level of spending and production. Anything less will have an effect, but if it is not sufficient then it may well be viewed as “not working”.

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  9. John,

    You misunderstood my question. How does a corporation “hoard” money? What does Google do with its billion in cash?

    They don’t put paper dollars in a big, iron box and bury it in the back yard. So what do they do with it? Remember what money is, and think about the money flow. You will see it is impossible for them to “hoard” it.

    Rodger Malcolm Mitchell

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    1. It’s not impossible to hoard it, they could put cash in a safe deposit box, but they don’t. If they have no immediate use for it, they would ordinarily buy treasury debt, or highly-rated corporate debt, easily convertible to cash and counted as “cash and marketable securities” in a single line on the balance sheet. Or, as WSJ points out, they may have plans or want to be prepared for an acquisition. Google doesn’t pay dividends, but others might, and they might be getting ready to do a stock buyback.

      Rodger could have been clearer in saying that any of these typical corporate actions return the dollars back into the economy, one way or another, even thought they remain as “cash” on the Google balance sheet. They don’t disappear from circulation in the same way that taxes do.

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  10. Yep, lets hope those monies go into a real productive asset, not to create another asset bubble. Because as far as i know, increase to much money supply without increase in productivity will create either inflation or assets bubble.
    I got your point. Economy is simple, what you made and others made, and then trade it.
    “Hey China, produce any kind product that you can manufactured, and US, keep on high on consuming, give service to the rest of the world.” Who needs money?
    If it doesnt work, just use the ultimate tools, create war, so that world economy spins. hehe…

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  11. First an apology to Rodger Malcolm Mitchell with the hope for understanding that in answering questions it should be understood that JUSTALUCKYFOOL is not answering solely on your behalf,let alone with your authority.
    I am a firm beleiver in ” Monetary Sovereignty: The key to understanding economics.” Friday, Aug 13 2010 .
    I do not yet know if or how much RMM has endorsed my opinion of “Where and How America Went Wrong and How to fix It.”
    With that said,I wish to answer Max P’s question.
    “I appreciate the clarification and it is starting to make sense (see I was actually trying to learn), though I can’t say I’m still 100% bought in but I do understand the principles behind it. The obvious next question is, how does the country go about implementing this plan?
    The people must get those elected to Congress that will:

    – Max

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  12. enact legislation that will:THE FEDERAL BANK OF AMERICA (FB A) will be a fully taxpayer owned bank. It will be operated by the people,of the people and for the people.
    ONE SHARE FOR EACH AND EVERY CITIZEN.
    THE FEDERAL BANK OF AMERICA will operate openly with full disclosure .The FBA will be the source for the American borrower to acquire funds and the interest paid shall be revenue income for the funding of their government.
    The Federal Bank of America will be the maker of all loans,not guarantee them for others, they will be the maker of these loans and will retain all profits. Profits which by law will be turned over to the US Treasury,as funds for Congress for government expensive’s.
    The Federal Bank of America:
    -Will no longer allow the paying of interest for the use of its own money.
    -Will not take deposits from anyone other then the US Treasury.
    -Will not be involved in any financial investment services.
    The Federal Bank of America will be the sole lender of legal tender. Any financial institution that wishes to loan American Dollars must acquire any legal tender that it may need from the Federal Bank of America,as all loans must be backed with a 100% reserve (Either dollars on hand or borrowed from the FB of A)
    The Federal Bank of America may raise or lower rates of interest to insure the quality and quantity of the American Dollar.
    The Federal Bank of America shall be funded by the US Treasury
    The bottom line is,The evil lies in who is getting the compound interest and what they are doing with that income.
    We the people need to take charge of that WMD and turn it into a way and means to the pursuit of happiness.

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  13. I have another question as a point of clarification.

    We currently have 15 Trillion in debt. If the federal gov’t instructed the treasury to pay off that debt with a swipe of the keyboard, would we really see any inflation? Is that 15 Trillion already priced into the economy? In other words, we call it debt, but that’s money that has already been spent, so will clearing it out make any difference? Hope this question makes sense.

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    1. It would not increase the money supply, but temporarily would increase liquidity somewhat, which could have a temporarily inflationary effect. Remember, billions of T-securities are redeemed every day, so within a decade, virtually all have been replaced, anyway.

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          1. That’s what I meant. So essentially all this money is already in the economy. In other words, China bought bonds, we spent the money and China is holding an IOU. If we just print up the money and give them back what they gave us, it shouldn’t make that much of a difference on inflation, correct?

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    2. You could create new money and pay of that debt in two ways, either by minting coins of that worth or, as JF Kennedy did, re-issue Lincolns Green-backs. However, this would put all that money and buying power in the hands of those who hold the loans. The better alternative would be to call that entire debt fraudulent by court rule and then start a new economy by printing green-backs or similar together with government controlled electronic money. All you got when taking these loans were dollars that you should have created yourselves. Same situation here in Sweden.

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    3. The Chinese got their bonds by
      1. Selling us stuff they made
      2. Vendors depositing their dollars in their bank in China
      3. The Chinese Central Bank depositing their dollars at the Fed, and finally,
      4. Exchanging them for T-Bills.

      If we take back their T-Bills and give them dollars, what will they do with them? Or, in a macro sense, if they trade them on the FX market or buy oil or gold or whatever for dollars, what will the ultimate holder do with them, assuming that we will not be selling any more T-Bills? The only thing they can do is buy US goods and services, or US real assets. That will raise aggregate demand in the US, but it’s a one-time shot not an ongoing thing. The ongoing thing is that our trade deficit will disappear and there would be a corresponding reduction in the Federal budget deficit.

      It’s probably not a good thing to do all $15T in one day, because we would not have enough stuff on the shelves to sell. If we did $1T a year for 15 years, in addition to wiping out the trade deficit of about $600B a year, that would turn the economy around pretty well, and maybe not cause all that much inflation, because our taxes are too high to allow for full employment.

      And foreigners don’t own all $15T. The Fed owns a lot of it, and Americans own some.

      But why? If we don’t sell any T-Bills, and buy up all the available supply, there is no way for foreigners to save $US, and therefore no trade deficit. Imports are a real benefit, exports a real cost.

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  14. Rodger, in the 5th paragraph you state: “the federal government creates money by paying its bills” UNTRUE. Money is created when (the private) Federal Reserve buys Treasury bonds with NEWLY created monies. Voilá !
    This is because the USA is not monetary sovereign. It borrows from the Fed. All must be paid back: principa + interest. Yhe interest coverage has never been created. Therefore there is more debt than money and this system has no other future but a grand crashhhhhhhhhhh.

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  15. Rodger, in the 5th paragraph you state: “the federal government creates money by paying its bills” UNTRUE. Money is created when (the private) Federal Reserve buys Treasury bonds with NEWLY created monies. Voilá !
    This is because the USA is not monetary sovereign. It borrows from the Fed. All must be paid back: principal + interest. The interest coverage has never been created. Therefore there is more debt than money and this system has no other future but a grand crashhhhhhhhhhh.

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    1. 100% wrong. Clearly you have no background in economics, and are just making stuff up.

      The Fed was created in 1913. According to your hypothesis, there should have been no money possible before then.

      Here are the facts: When you submit an invoice to the federal government, the government instructs your bank to mark up your checking account. That markup creates dollars.

      Prior to August 15, 1971, the U.S. was not Monetarily Sovereign. It was on a gold standard and so, did not have the unlimited ability to create its sovereign currency. Today, the government has that ability.

      T-bonds (i.e. “borrowing”) are completely unnecessary for a Monetarily Sovereign nation, because a government with the unlimited ability to create its own currency does not need to borrow.

      I suggest you read the above post, carefully.

      Rodger Malcolm Mitchell

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  16. The false premise in all this argument that sovereign debt is not the same as personal debt is the belief that sovereign debt has no impact on real resources. But it does, just like personal debt.

    Debt is borrowing real resources from the future to consume in the present. To compensate for this and to ensure the supply of real resources will continue, the borrowing has to ensure that it is not pure consumption and that it is investment that will continue to deliver real wealth creation. Otherwise any economy is in a downward spiral of lesser and lesser growth and productivity.

    Don’t be deluded by the veil of money. Bankers have made every effort to perpetuate that illusion by creating instruments of increasing complexity.

    But reality will tell in the end. Economic stagnation and falling living standards.

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    1. Federal debt has nothing to do with “borrowing real resources from the future.” Our Monetarily Sovereign government does not borrow in the classical sense, and has no need for “borrowed” funds, anyway.

      Here’s how we “borrow” from, for instance, China:

      1. China adds U.S. dollars to their checking account at the Federal Reserve Bank.
      2. China instructs the FRB to mark down their checking account and mark up their T-security account, also at the FRB.
      3. When the T-securities mature, the FRB marks down China’s T-security account and marks up China’s checking account.

      That’s it.

      All of the above is a relic of the pre-August 15, 1971 days, when the U.S. was not monetarily sovereign. Today, the U.S. has no need to “borrow.” It has the unlimited power to create dollars. Why would the U.S. ever borrow dollars it previously created and can create at will.

      Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

      Rodger Malcolm Mitchell

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  17. Rodger wrote,
    “Because so-called federal “debt” is the total of T-securities outstanding, all federal debt easily could be eliminated tomorrow, if the federal government merely credited the bank accounts of T-securities holders. That would require pressing a few computer keys, which would increase the checking accounts and decrease the T-security accounts of federal creditors. As this would be a simple asset exchange, no new money would be created and there would be no inflation consequences.”

    This is wrong. Checking account balances are money and T-securities are not money. They are interest bearing assets that you can buy with money, little different than buying an apartment building for the rental revenue.   Whoever owns a T-security has “spent” money to buy it. Whoever has sold a T-security now “has” money to spend. 

    A checking account balance *is* money. M1 is checking account balances and cash held by the public (i.e. not including cash held by private banks in their vaults). So if the government created $15 trillion of new checking account deposits to pay for their purchase of all the T-securities outstanding, that would indeed be the *addition* of $15 trillion of new money into the M1 money supply. 

    That money is immediately available for spending or investing. The fact that the $15 trillion had previously been “invested” in interest bearing Treasury debt suggests that the parties who now have $15 trillion of new money in their checking accounts will be looking for new assets to buy, rather than looking for ways to blow the money on consumption, which means the new money will almost certainly add to demand for investments which will cause asset price inflation. 

    T-securities are government “debt” (not “money”), which debt is “paid” when Treasury gives the holders “money” in exchange for the Treasuries. Discharging or extinguishing a debt means paying the money you owe to the party you owe the money to, the party who owns your T-security, which is your promise to pay interest and your promise to repay the money when the debt matures.  Despite MMT Orwellianspeak which shouts out, “Treasury debt is not debt!”, Treasury securities are “debts”, payable in “money”, and the debts are owed by the government/taxpayer to whoever lent the government money to spend by purchasing the Treasuries.  

    When a primary dealer (PD) bank buys a new T-security at auction, the bank pays by creating a new deposit in Treasury’s account at that bank. The bank created the money, and exchanged the money for Treasury’s promise to pay interest and to repay the principal when the debt matures. 

    Treasury then transfers the new money from its PD bank account to its accounts in the regional Federal Reserve banks, which are the bank accounts that Treasury uses as its checking accounts to deposit its income (taxes, etc) and its loan proceeds from selling T-securities, in order to have “money” to cover the checks that Treasury “spends”.  As the checks come in for payment, the regional Fed bank debits Treasury’s account and credits the check recipient’s account in the private banking system (i.e. not a Fed bank: the Fed is only banker to the government and to the private “commercial” banking system; the Fed can create loans for banks but not for the government; only commercial banks with “primary dealer” status are allowed to create loans for the government).  

    Treasury has no overdraft privileges at its Fed bank accounts, and the Fed is not allowed to buy T-securities from the government or otherwise directly lend money to the government.  Unlike North Dakota and other “public banks” in Japan and Germany, Treasury does not have its own bank where it can create deposits for itself and clear its own checks  by “marking up accounts”. All of the debiting and crediting of accounts takes place in the BANKING SYSTEM (I can shout too), not ‘in the government’, as MMT absurdly insists. 

    When a PD bank created new money by buying a new Treasury security, Treasury then spent that borrowed money into the economy. Two years later when the security matures, Treasury needs to get “money” to redeem its security, to “repay its debt” of the money it borrowed. Any inflation was caused when Treasury spent the new money into the economy. If Treasury now gets money to repay the loan by taxing money out of the economy, that causes an equal amount of deflation. If Treasury gets the repayment money by selling a new Treasury security to a PD bank, then the original spending inflation stands and using the new loan money to repay the old loan has no further impact on inflation or deflation. 

    Like all banks in our money system, the PD bank who bought the T-security did so by creating a new credit of bank deposit money in Treasury’s account, and the PD marked the deposit as a liability on its balance sheet, and accounted Treasury’s interest bearing debt as an asset on its balance sheet. Two years later Treasury makes a deposit in the same PD bank in order to repay its loan, and the PD joins the asset to the liability, uses the deposit to write down its asset (the expired T-security) to zero, which simultaneously reduces the deposit to zero. The bank’s purchase of the security created the money that was deposited to Treasury’s account; and Treasury’s repayment of the money discharges or extinguishes or reduces to zero both the asset and the liability, the debt and the money. From the borrower’s (the government) perspective the new deposit is its “asset”, its “money”, and the T-security it sold is its “liability”, because the government will have to repay the money in order to buy its  security back when the debt matures. But from the bank’s perspective the government’s interest bearing debt is its money earning “asset” and the money it loaned is its “liability”, because the bank is legally responsible for ensuring the debt is repaid and if the borrower defaults and fails to pay, then the bank has to make up the loan loss out of it profits or its capital. 

    Treasury securities and money are an “asset swap” in the same way apartment buildings and money are an asset swap. But Treasury securities are not spendable money any more than apartment buildings are money. Maybe somebody who has money will trade it for your “assets”, but until you convert your building or your government dent instrument into money, those assets ARE NOT MONEY. 

    The government legally COULD create its own money by organizing itself as a public bank, or by exercising its authority to mint platinum coins or print US Notes. But the government DOES NOT do any of these things. And until government actually does start behaving as a money issuer, rather than behaving like just another severely indebted user of bank credit money, all of the virtuous money mechanics of MMT are moot, pie in the sky dreaming of what could be “if only” the government started issuing its own money. 

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    1. Derryl,

      Your long, long comment really is about the definitions of money, of which there are many. M0, M1, M2, M3, L. I prefer “Debt Outstanding Domestic Non-financial Sectors” (DODNS)

      “L” includes T-bills and DODNS includes all T-securities. M3 includes demand deposits, which are debts of banks. M2 includes money market accounts, which are debts of money markets.

      Every form of money is a form of debt. Even a dollar bill represents debt. It is an IOU. On its face is printed, “Federal Reserve Note.” The words “bill” and “note” describe debt instruments (as in “T-bill”and “T-note”). These instruments are held by creditors to demonstrate debt. See: https://rodgermmitchell.wordpress.com/?s=%22full+faith%22

      Many forms of money earn interest — bank savings accounts, some bank checking accounts, money market accounts to name a few. A distinguishing characteristic of all U.S. money is that it has no physical presence and is backed only by the U.S. government’s full faith and credit. That is why an apartment building is not money.

      As for spending, all money is spent the same way: Ownership is transferred. That is how dollar bills and Treasury bills are spent.

      MMT and Monetary Sovereignty do not describe what could be, but rather what is. The federal government creates dollars by spending and destroys dollars by taxing.

      Example: When you receive a Social Security payment (federal spending), the government instructs your bank to mark up your checking account, which adds dollars to the economy. When you pay taxes, the government instructs your bank to mark down your checking account, which removes dollars from the economy.

      Rodger Malcolm Mitchell

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      1. Rodger,

        MMT often uses the term “financial assets” or “Net financial assets”.

        In MMT, I think, NFA (of the non-government sector) are limited to their holdings of obligations of the US government: currency and treasury debt.

        However, ordinary people think of things like ownership of stocks or corporate bonds as their financial assets as well, and as distinct from things like their cars and houses, which they would consider “real assets”.

        Would you comment, please, on some common assets (e.g., demand deposits, time deposits, various derivatives, etc.) and whether they are “real” or “financial”, and why the distinction is important to policy? For instance, how would his help us to interpret the recent housing bubble and collapse, and the appropriate policy response both during the bubble and after the collapse (unless appropriate policy would have prevented the bubble and/or the collapse)?

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      2. Rodger wrote, “When you receive a Social Security payment (federal spending), the government instructs your bank to mark up your checking account, which adds dollars to the economy. When you pay taxes, the government instructs your bank to mark down your checking account, which removes dollars from the economy.”

        This is no different than when I get a bank loan then write a check to you. My bank makes the loan by creating a new deposit in my bank account, which “adds dollars to the economy”, as you say, when I spend the money. Then when I earn the money back out of the economy and deposit it in my account to repay the bank loan, the bank writes down both my deposit and my loan balance to zero, which “removes dollars from the economy”, as you say. Government borrowing and spending, and taxing and repaying loans, is no different in principle and in effect.

        But my bank loan (and the government’s) also adds a deposit to the banking system. The banking system is a balance sheet equation with the economy’s (and government’s) interest bearing debts in its “assets” column, and the economy’s money (bank account deposit balances) in its liabilities column. The equation is A=K+L; assets = capital plus liabilities; and the balance sheet must always balance so that positive number assets on the left side are exactly = negative number liabilities on the right side, so the equation sums to zero. This is a simple corporate balance sheet equation, as anyone who files their own corporate taxes will recognize.

        As long as I keep the deposit in my account, my bank has no need to attract another deposit to keep its balance sheet balanced. My new “debt” of $1000 on the bank’s asset side is exactly offset by my new deposit on the bank’s liability side. If I write a check to you, and you bank at my same bank and deposit the check in your account, then the deposit goes from my account to your account and our bank’s balance sheet remains balanced. If you deposit the check in a different bank, then your bank will have excess deposits and my bank might borrow the deposits from your bank to balance its balance sheet; or a borrower’s deposit from the other bank might end up being deposited in my bank to balance things out.

        When I make a payment to you I am instructing my bank to mark down my checking account balance by the check amount, and my bank instructs your bank to mark up your account by that amount. The US government, just like you and me, first has to deposit money in its bank accounts BEFORE it can spend the money, before the government’s bank (the Fed regional banks where the government keeps its checking accounts) can “instruct my bank” to mark up my account.

        The government has to fill its accounts with money it gets from taxing or borrowing, or else it has no money in its Fed bank accounts, and it has no money to spend. That is what the debt ceiling debacle was all about. The government bank accounts at the regional Fed banks were running dry, and unless Congress authorized Treasury to “borrow” more money by selling Treasury securities to the PD banks, Treasury’s power to “instruct its bank to credit other people’s accounts” would be exhausted, just like when you spent all the money in your bank account and your bank bounces the next check you write because you have no money and no overdraft privileges.

        My argument is not about the definition of money, as you claim. I only brought up M1 to show that checking account balances are considered spendable money equivalent to cash; and I brought this up because when a PD bank buys a Treasury security it pays by creating a checking account deposit in Treasury’s account at that bank; and Treasury then transfers the credit into its checking accounts at the regional Feds; THEN Treasury can direct debit/direct deposit, or write checks, that instruct its bank (the regional Feds) to “mark up” other people’s accounts by drawing down Treasury’s checking account balances.

        Treasury’s orders to its bank will only be honored if Treasury has FIRST filled its accounts with money, that it gets by taxing and borrowing. Treasury has no mechanism by which it can reach into the banking system and “mark” people’s accounts, any more than you or I have that power. We can give “instructions” telling our banks to move our money, but we cannot directly move money around in the banking system.

        Treasury has no banking powers. Treasury’s spending power is limited, just like your and my spending power is limited, by the amount of money we earn/tax, or borrow, and deposit in our bank accounts. If this does not “prove” to your satisfaction that BANKS are creating the money and Treasury is BORROWING that money just like every other bank loan customer, then I suggest that your beliefs about how Treasury gets the money that it spends are not built from knowledge of actual financial operations but are preconceived by some theory that is immune to the empirical evidence of reality.

        I don’t mean to be offensive. But the persistent MMT delusion that Treasury ‘spends money into existence’ without borrowing that money from banks and incurring meaningful, expensive to taxpayers, and politically dangerous “national debt” in the process, is blocking progress toward understanding the nature of what ails us and blocking development of real workable solutions to our current monetary system problems.

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        1. Darryl, visualize a brand new nation, just getting started. No money yet exists. It can’t borrow any, because none exists. Where does this nation get money?

          That’s where the U.S. gets money.

          Do you see the illogic of the U.S. having to borrow the dollars it previously created?

          Rodger Malcolm Mitchell

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        2. Rodger,
          We don’t have to visualize a brand new nation getting started, because we have a historical brand new monetary system getting started with the Bank Act and Federal Reserve Act of 1913. The Federal Reserve Act gave the Fed exclusive authority to distribute US$ currency (Federal Reserve Notes, banknotes) to the commercial banks. The Treasury controlled Bureau of Engraving and Printing actually prints the banknotes, then Treasury sells them to the Fed at the cost of printing (currently about 10 cents per banknote), so Treasury earns no seigniorage from printing banknotes.

          And the Bank Act gave the commercial banks exclusive authority to create the economy’s circulating money supply as bank deposits that are loaned into existence. Commercial banks have to borrow currency (the Fed’s banknotes) from the Fed, and the economy only gets banknotes by converting a deposit balance into cash through their bank. So aside from the, by today’s reckoning, miniscule number of dollars that preexisted 1913 and became the first bank deposits in the new system, all of the bank deposit money is created as loans by the commercial banks. And a bank customer only gets cash by converting some of his deposit balance money into cash money, so cash adds no additional money into the economy beyond the bank deposits that are created as loans. The only way to increase your cash holdings is to decrease your bank deposit holdings, i.e. “withdraw” cash from your bank account.

          The 1913 system intends to prevent a recurrence of Lincoln’s printing of government money, United States Notes, that circumvents the banking system in the creation of US dollars. The government hasn’t given up its power to print US Notes (Kennedy printed some; and arguably the constitution demands that the government retain this money power) and spend them into the economy without borrowing or taxing to “get” the money; and in 1996 Congress passed legislation authorizing the executive to mint proof platinum coins of “arbitrary” face value, so the government could mint trillion dollar coins and deposit them into Treasury’s bank accounts at the Fed then spend the new deposit balances, getting the money by coin seigniorage without borrowing or taxing to get the money.

          But outside of printing and spending US Notes, or minting platinum coins and spending the new money, Treasury has no options for getting money except taxing and borrowing from the banks. The gold standard and fractional reserves are smoke and mirrors. The commercial banks create ALL of the money that the economy and the government uses (except net export earnings, in which case the Fed would convert the excess yuan or yen or euros into dollars that add to the US$ money supply, but the US is a large net importer and so gets no additional dollars in this way) by making loans of bank deposits, which the banking system creates on its balance sheet.

          There is no government money in circulation. There is only banking system money, all of which is always owed as a debt by the borrower (private or government) who borrowed it from a bank and spent it into the economy.

          The Fed’s own balance sheet, which expands when the Fed creates additional new money to buy government debt in the secondary market (i.e. from the commercial banks who are members of the federal reserve system, which banks act as dealers for “the public” in their transactions with the Fed) in QE and other “open market operations”, comprises a tiny fraction of the total US$ money supply.

          MMT imagines that somehow the Fed or the Treasury creates “net financial assets”, “vertical money”, beyond what is created by the commercial banking system as loans of bank deposits. But in fact the $15 trillion in outstanding Treasury debt is all owed to banks and institutional investors (including foreign central banks like the Bank of China) and hedge funds and other private parties who buy Treasury debt. All Treasury debt is initially sold to a primary dealer bank who pays for it by creating a bank deposit, no different than any other bank loan customer.

          In the secondary market, after a commercial bank has created the initial money to buy somebody’s debt instrument (the commercial banking system is where the debt instrument is created in the “primary” market), the Fed can buy corporate and municipal debt in addition to Treasury debt. The Fed pays for these purchases of debt just like commercial banks pay for their purchases of our debt: it creates a deposit in the seller’s account at the Fed; except deposits at the Fed are called “reserves” instead of simply calling them what they are, which is “deposits”.

          Only commercial banks who are members of the federal reserve system can have accounts at the Fed, so Fed open market purchases add reserves into the banking system, and none of this money necessarily makes it into circulation in the real economy (“pushing on a string”, where the banks have no good lending opportunities so they sit on their excess reserves). Treasury debt is considered “zero risk”, so PD banks (and non-PD banks who buy this debt from the PDs in the secondary market) can buy Treasury debt and add it to their balance sheets without incurring any additional capital or reserves requirements (Treasury debt and cash ARE “reserves”).

          Nowhere in this picture is “the government” creating and spending any money into existence. The Fed creates bank reserves in its open market operations, to the tune of, what, $2 trillion? Which is a fraction of the US$ money supply and a fraction of total national debt of $15 trillion. The Fed does not create the money that Treasury borrows for its deficit spending. PD banks create all this new money. And Treasury has to pay it back (roll it over by borrowing new money to repay its old loans as its bonds, bills and notes “mature”).

          When Lincoln printed US Notes and spent them into the economy, the government never had to “pay back” anything, because the government “issued” that money as “money”. When Geithner sells a trillion$ of bonds at auction the PD banks who buy the debt instruments create the money and pay it to Treasury on condition that Treasury pay the interest and repay the principal on maturity of the debt.

          Geithner has to “pay back” the money he borrows from the banks. It doesn’t matter that bid to cover ratios are high, that there is an ongoing “market” to fund Treasury debt. Geithner still has to scramble to borrow the money he needs to cover his deficit spending, whereas Lincoln “issued” his deficit spending money. He didn’t “borrow” money.

          So unlike all subsequent administrations, Lincoln created his own government money and spent it into the economy without adding anything to total debt that US taxpayers ultimately have to service (pay interest on) and repay if national debt is ever to be paid down rather than rolling it over to infinity. Geithner COULD create United States money and use it to redeem Treasury debt as it comes due. But so far nobody is talking about that. Treasury sells debt and banks create money to buy it, just like they create money to buy the promissory notes we sign when we get a bank ‘loan’. There is no “government money issuance” happening. Since 1913 all money issuance is private, by the commercial banking system, covered and obfuscated by the Federal Reserve Bank that the private banks own and operate for their benefit.

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  18. John,

    A caveat: Although I agree with much of MMT, Monetary Sovereignty and MMT do differ, so when you ask me about MMT, there may be times when I cannot speak for them.

    That said, the word “financial” can be confusing. Financial assets generally are assets based not on a physical backing, for instance real estate, gold, diamonds, etc., but rather on money. Bank accounts are financial assets. Similarly, the word “real” can be confusing, because it often means “inflation adjusted.” I usually don’t use those words to differentiate among assets.

    That said, I do use the term “Debt Outstanding Domestic Nonfinancial Sectors” (DODNS) as a measure of the total domestic money supply — more inclusive than even M3 or “L.”

    The housing bubble resembled a Ponzi scheme in which later investors pay earlier investors. And it collapsed in the same way. The housing loans depended upon continually increasing home prices, so that mortgages could be financed and re-financed by ever larger home values. A person owning essentially $0 could buy a home and pay the mortgage by continually refinancing against increased home value.

    This process worked for about 60 years, as prices continued to rise. However, the growth rate of DODNS – Federal Governement Sector declined from 2004 – 2008, and this decline combined with overly aggressive bank lending polices, led to the recession, which could have been delayed if:

    1. The federal deficit growth rate continue to increase
    and/or
    2. Banks had been less aggressive in their lending.

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    1. 60 years? You don’t see a major difference in the housing market between 1950-1990, for example, vs. 2003-2006?

      There were ups and downs before, but not the frenzy that immediately preceded the crisis.

      Should the bursting of the housing bubble have been delayed? Or should the bubble itself have been prevented? If so, should the more moderate increases of the 20th century have also been prevented?

      In terms of the Ponzi aspect, is that (partly?) a demographic consequence of the baby boom – the 1950-1990 part, I mean -, and maybe unpreventable?

      Like

  19. Darryl, you’re adding apples to telephones and coming up with planets.

    Yes, every form of money is a form of debt. Always has been that way, by necessity. So all dollars are debt. But the notion that somehow the Fed controls federal spending and money creation is just plain false.

    Congress and the President control the deficit and the entire economy, by spending and taxing. The technical flow of money, whether from a federal bank or from the corner loan shark, is meaningless economically meaningless. When Congress spends more money than it taxes, money is created. The Fed does not determine this; Congress does.

    The Fed has no power to increase the debt, reduce the deficit or do anything else that creates Debt Outstanding Domestic Nonfinancial Sectors — the best measure of money. The Fed didn’t create the $15 trillion deficit. It didn’t determine federal spending. It didn’t determine federal taxing. It is little more than a conduit, executing Congressional demands.

    And as for printing money, this too is meaningless, because no money is “printed.” A dollar bill is not money, nor is it a dollar. It is a title to a dollar. An actual dollar has no physical presence. It can be created only as an accounting notation. You and I never have seen a dollar, held a dollar or smelled a dollar. It is just a number.

    When you receive a check from the Treasury, and deposit that check in your bank account, you actually have received a set of instructions from the Treasury. The instructions tell your bank to mark up your bank account. At that instant, dollars are created. Treasury instructions create dollars.

    The Treasury does not need to borrow anything to send those instructions. Nor does it need to tax. It can send instructions endlessly. If borrowing and taxing totaled $0, the Treasury still could send instructions. Borrowing is currently a legal (not functional) mandate, which is why I write this blog. To get the law changed.

    Functionally, federal borrowing is unnecessary, and people should understand why that aspect of the law became obsolete in 1971.

    In that same sense, the federal debt is legally, but not functionally, the total of deficits. We could have deficits without debt and we could have debt without deficits. The two are not functionally connected.

    Anyway, the Fed is little more than a bookkeeper. It most important job is interest rate fixing. All those QEI, QEII, QEIII were meaningless PR stunts, having no economic impact.

    And by the way, the most important economic event in your lifetime occurred on August 15, 1971, when the entire world of economics changed. How has your philosophy changed with it?

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  20. JUSTALUCKYFOOL’S COMMENTS… TO THE HOUSING CRISES USING Rodger Malcolm Mitchell OWN WORDS:

    ——————————————————————————–

    September 13, 2008
    To: Chicago Tribune, New York Times, Seattle Post Intelligencer, Newsday, St. Louis Post Dispatch, Washington Post, Miami Herald

    To save Lehman Brothers, and indeed, to save the economy, the government should pump money into the largest, most troubled financial and commercial (Ford, GM) institutions. ((read and now in particular holders of MBS’s..N.B. justaluckyfool believes that Bernanke may be onboard when QE3 is announced in late Jan 2012,or at least for $545 billion.Quesion,How do you “print $16 trillion and not be a believer in MONETARY SOVEREIGNTY ??))))
    The man-in-the-street will find this unfair (“Why should big companies be saved?” “Where do we draw the line?”). But saving the biggest companies will prevent a domino effect that would roll downstream and injure us all. ((We simply must get off the idea that we should only help “the good” people and leave the “reckless” ones to their own ends. Whether the foreclosed house next to me was owned by a good guy or a reckless flipper doesn’t matter.. my home value goes down either way due to the foreclosure.
    We simply have to set aside moral judgments and fix the problem.}}
    The government has the unlimited ability to create money. Now, it must use this ability to pump money into an economy that is starved for money. The $150 billion stimulus package was a too-little, too-late attempt. Today, about $1 trillion(( or more)) is needed.
    When President Reagan cut taxes and increased spending, the massive deficits saved the economy from the Carter “malaise” and inflation, and gave us growth and prosperity.
    No, the deficits didn’t cause inflation. Deficits never have. And no, our grandchildren never paid that debt and never will.
    The government should use its money-creating power to save our economy by saving the largest companies in it. The longer the government delays and dithers, the worse the situation will become. Today, about $1 trillion is needed. Tomorrow, it will be far more.((IF THE MONEY IS LENT AS AN INTEREST BEARING LOANs,justaluckyfool would hope that at least $100 trillion is needed and maybe even throw in the $800 trillion in deviratives.AT 3% for 24 Years,we would have to end Income Taxes and for that matter ALL TAXES.Also to make matters “WORSE” The FEDS would have to “spend” many trillions each and every year just so the loans can be mathematically paid back ! !))

    Act now or face a depression.

    Letter sent by R.M. Mitchell ,comments in (( )) by justaluckyfool.

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  21. I find Mr. Mitchell’s beliefs a source of the problem our country finds itself in today and not a solution to the problem. As I will not try to change his economic beliefs (as he is in denial), I will instead give him some examples of people who either do not believe in his theory or did believe in his theory and went bankrupt anyway.
    First of all, the European Union decided to create the Euro and thereby eleminatede the possibility of creating unlimited amounts of money. They had to be either very stupid or Mr. Mitchell’s theory is incorrect regarding the advisibility of printing as much money as you need.
    The second example that I will mention is the old USSR. They had the ability to print as much money as they wanted and to control exchange rates, etc. and yet they went down the tubes.
    The botton line is that you can not continue to print money without there being production of goods and services. All the money in the world does you no good if we are not producing anything. In a perfect world where people are motivated, it MIGHT work. But in reality there are too many people who will choose to receive money for nothing rather than work. And for you bleeding heart liberals, I do not mean the people who truely need help. I am talking about the folks who choose to do nothing. Just one of many examples is that we have large numbers of single, white, teenagers getting pregnant and our government pays them to do this. These people have no skills, no jobs, and a 90% chance that they will remain below the poverty line for the rest of their lives. We actually encourage this behavior. This is why you can not simply continue to print all the money you want. Too many people will simple choose to take the money rather than make good choices with their lives.

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    1. I’m with John on this. The THEORY of Monetary Sovereignty sounds great, much like how the Theory of Socialism sounds great, but eventually Socialism fails and so will MS. Why? because it fails to take into account two major factors, human nature and greed. If you give the gov’t the unlimited power to print money then that money starts getting funneled to all the wrong places, for all the wrong reasons (aka Solyndra, Evergreen solar, Fister, Alice in Wonderland parties, bridges to nowhere, 85 overlapping and unproductive gov’t programs, social welfare, entitlements, etc). The power to print money is enormous and I prefer to subscribe to the Theory of Spiderman which is “With great power comes great responsibility” and I have ZERO faith in any gov’t agency acting responsibly.

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      1. Max, there is no THEORY of Monetary Sovereignty. It is a factual description of the way things are.

        The government has the unlimited ability to pay any bill. You may not like it, but the government has had that ability since August 15, 1971.

        By contrast, Greece, Italy, France et al do not have that ability. They are monetarily non-sovereign.

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        1. You can call it whatever you want but the idea of Monetary Sovereignty falls apart with the implementation. As long as humans (especially politicians) are the ones who get to decide how much money to print, it will be fraught with corruption and waste. How many special programs will be created in order to buy votes? We have a Treasury Secretary who didn’t pay his taxes. We have a President who refused to release his birth certificate, his college records or explain how he got a SS# from Connecticut when he never lived there. We have a company who received special trading privileges with the FED, was run by a former governor, Senator and someone who was rumored to be next in line for the Fed and that company mysteriously lost 1.2 Billion in customer funds. Remember, “With great power comes great responsibility” and I am hard pressed to find any gov’t that acts responsibly.

          Bottom line is that I don’t have a problem with Monetary Sovereignty, I have a problem with the people who implement it.

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  22. ” . . . the European Union decided to create the Euro and thereby eleminatede the possibility of creating unlimited amounts of money. They had to be either very stupid or Mr. Mitchell’s theory is incorrect regarding the advisibility of printing as much money as you need.”

    Yes, the EU is a wonderful example of financial acumen.

    “. . . you can not continue to print money without there being production of goods and services.

    What you erroneously call “printing money,” is the federal government purchasing goods and services.

    “Too many people will simple (sic) choose to take the money rather than make good choices with their lives.”

    When you’re out of a job, and “simple” can’t find one, I’d guess you gladly will accept unemployment compensation from the government, just like the “bleeding heart liberals” you sneer at.

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    1. In 1848 John Stuart Mill published Principles of Political Economy, and Marx/engels published the Communist Manifesto. Both of these books advocate shifting from a focus on economic growth to a focus on distributing the fruits of the massively productive industrial economy. Mill advocated a “steady state” but still capitalist economy, where Marx/Engels advocated the end of profit-seeking economics. Already hy the mid 19th century serious economists believed industrialization had solved the problem of economic scarcity. With fossil fuel powered machines doing so much of the work, full employment of humans was no longer economically necessary. Work may be psychologically and socially necessary, but all economic needs can be provided for with only a fraction of the population actively engaging in productive work. Economists wondered how to deal with the coming “age of leisure”. In the 1920s and 30s CH Douglas invented his “social credit” monetary system that featured payment to all citizens of a “social dividend”. He reasoned that any individual’s personal productivity, amplified as it was by centuries of social development of machines and technologies and socioeconomic infrastructure, was more due to the worker’s “cultural inheritance” than to his personal contribution. This justified distributing the fruits of his work to people whose work is not needed via the social dividend. But Douglas also knew that private bankers owned and operated the world’s money systems, and they would fight to the death with all the mighty power that unlimited money can buy, to maintain their exorbitant privilege. I agree with MMT about what a monetarily sovereign nation “could” do. But as Douglas’ ideas spread higher up the monetary policy foodchain during the Depression, he found out who is really in control of national money systems. It is NOT the democratically elected governments. And in today’s US, even the elections are bought and paid for political theater staged by the plutocrats to justify putting their guys in the big white house. Just like they recently did in Greece and Italy. So insofar as MMT claims any kind of democratic monetary sovereignty of the kind that would serve the interests of the people and their economy vs the interests of the money changers and their plutocratic corporatist allies, MMT is living in fantasyland. There will be no “age of leisure”, because money will be arbitrarily kept scarce, kept out of the hands of people who need to consume even though we don’t need them to produce, because artificial scarcity supports the value of money, and the banksters who own and operate the world enjoy a private monopoly on the creation and distribution of money, just as Jefferson et al warned would happen if we allowed private banks the power to create bank deposit money.

      Like

    2. Just wanted to make a quick comment about your last statement regarding being out of a job and taking gov’t assistance. When the gov’t provides more assistance than what can be made working, NO ONE will work. I have a retail store in SC. The true unemployment rate in SC is around 20%. I’ve been trying to hire someone for nearly 2 years, I pay $10/hr (notice that’s a decent amount more than minimum wage), and I’ve had no success. No one wants to work because they would have to give up their gov’t compensation. Actually, to be clear, no one wants to work above board. They are happy to work for cash and continue to take advantage of the 99+ weeks of unemployement but I won’t pay cash. So please don’t tell me that people will rather work than take gov’t assistance.

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      1. You said, ” No one wants to work. . . ”

        But you work. I worked for 55 years. 150 million people in America work. I don’t know why you can’t find an employee for two years (!), but please don’t tell me no one wants to work.

        If you can’t find an employee for two years, the problem may be with the job, the wages or the boss.

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        1. Please read what I wrote before responding in your condescending tone. I said that NO ONE will work if the gov’t provides them the same amount of money as they would get for working. If someone is receiving unemployment, WIC, food stamps, Section 8, gov’t cell phone, transportation vouchers, disability, and everything else the gov’t prints money on, they will not give that up for a $10/hr job.

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        1. One suggestion is to get back to sound money possibly backed by commodities.

          Another suggestion is for the gov’t to stop spending 43 cents more than every dollar it takes in (I know, according to you that 43 cents doesn’t matter because we can just print it but it does seem to matter to credit reporting agencies, business, and the general public).

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  23. Max, wonderful ideas. A gold standard and eliminating the deficit. That should do it.

    What makes any commodity “sound money.” What backs, for instance, gold? Dollars are backed by the full faith and credit of the U.S. government. Who backs gold?

    As for credit reporting agencies (you mean the ones that gave AAA ratings to worthless securities?), businesses and the general public, if they understood Monetary Sovereignty, I wouldn’t have to write this blog.

    Historically, eliminating, or even reducing deficits, has led to every depression and most recessions in U.S. history. If you care about facts, you can see them HERE .

    I’ve found it’s almost impossible to argue rationally about the four great mythologies in the modern world: Astrology, Theology, Psychology and popular Economics. People just know what they know, and by gosh, don’t bother them with facts.

    Rodger Malcolm Mitchell

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  24. Rodger, let me reiterate. I don’t disagree with the Theory, Principles, Ideas or whatever you want to call it of MS. I disagree with the implementation. Like I said earlier, MS is like Socialism, it sounds great but never works. Who will be responsible for printing this unlimited money, politicians? We have a Treasury Secretary who didn’t pay taxes. We have a President who didn’t reveal his birth certificate, college records or explain how he got a Connecticut SS# without ever living in Connecticut? We have a former Senator and Governor who was granted special trading privileges with the FED and yet his company stole (as in can’t find) 1.2 Billion dollars of client’s money. We have an entire Congress that for years was exempt from Insider Trading rules and that vote themselves raises in a down economy. These are the people you want to give unlimited money printing power to (and yes, I understand they already have it, which is why a new scandal erupts on a regular basis). Greed and self-interest will prevail. Money will be printed for the benefit of the individual and not the nation. How do you stop human nature from abusing MS?

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    1. Got it. Politicians are crooked. Business people are crooked. So tell me, how will a commodity-based money system and austerity (the other name for reduced deficts) cure this historical problem?

      By the way, we have been Monetarily Sovereign only since August 15, 1971. No problems before then?

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      1. No fair Rodger, you didn’t answer my question. How do you stop human nature from abusing the unlimited power to print money or is this just an acceptable by-product of MS?

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        1. You can’t. Nor can you stop human nature from abusing the limited power to run deficits, as witness the PIIGS. So the question becomes: Given the realities of human nature, which is better, Monetary Sovereignty or monetary non-sovereignty?

          I like the the growth potential of the U.S., Canada, Australia, China and Japan better than the austerity of the euro nations — if the Monetarily Sovereign nations begin to understand what happened in 1971..

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  25. Roger Mitchell could make counterfeiting look like it is fair and sound financial policy for the peoples of the world. Unfortunately it is a free ride for the USA and the beasts of burden are the rest of the world.

    Don’t be fooled by this “wisdom”.

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  26. MaxP asks. “How do you stop human nature from abusing the unlimited power to print money or is this just an acceptable by-product of MS?”
    Perhaps to answer the question,justaluckyfool would say,
    “First, human nature does not have “the unlimited power to print money.
    This power belongs to the Monetary Sovereignty which has a duty to print as well as a responsibility to control the quality and quantity of that currency.
    This begs the question,”Are we better off now allowing all private banks to print our own money (which they do by Fractional Reserve Banking) and charge us interest to use our own money that they printed, or would we be better off with an agency they MUST be FULLY TRANSPARENT,working “for the people.Creating interest as a redistribution of the currency instead of taxes ?
    “Zero Income Taxes,Solution to Worldwide Economic Crisis.”
    justaluckyfool

    Like

    1. justaluckyfool makes a good point. SOMEBODY has to create the national money supply. Either the government creates the money, or the private bankers create the money.

      Personally I have no problem with private banks creating and managing private credit, as long as this dangerous power of money creation is adequately regulated to prevent something like a subprime mortgage orgy (this was a failure of the entire American power structure: bankers, and Congress and the administration and the Fed who are supposed to ensure regulations are enforced).

      But I think it’s insane that the federal government has to “borrow” money that is created by private bankers to fund its deficit spending by selling ‘bonds’ to the bankers. The bankers buy the bonds with money they create, not with money they already have. Why should taxpayers pay interest to Wall St plutocrats for loans of money that the government is constitutionally authorized (and I would argue required) to issue for itself at no cost? The interest that taxpayers pay on government bonds are nothing more than a subsidy of “free money” to bankers who create money to buy bonds.

      I don’t care what anybody thinks about government spending and deficits. These things in fact happen, and it’s just a question of where the money is going to come from. Do you really think it’s appropriate that the government borrows dollars from bankers rather than creating those dollars for itself?

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  27. Hi Rodger,

    If all government debt was withdrawn (bought by the central bank, let’s say) and the government simply deficit spends by issuing by new money, how would the central bank then raise interest rates? If there are no bonds and only excess reserves the CB can’t carry out OMOs of course. Would it then raise rates by paying interest on reserves?
    Might there be any issues with this in the long term?

    Thanks,

    Phil

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      1. Would it raise the Fed Funds rate by paying interest on reserves, or by some other means? At present the Fed controls the FF rate by buying and selling government bonds, thus changing the quantity of reserves. If the government operated without issuing bonds then the Fed wouldn’t be able to control the FF rate in this way.

        Thanks for the reply

        Phil

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        1. The Fed sets the Fed Funds rate by fiat, not by buying and selling bonds. Banks can obtain reserves from the Fed at that rate. Banks also can obtain reserves from other banks or from private parties, and those rates are set by the market, but at almost identical rates as the Fed Funds rate.

          Long term rates are more market oriented, which is why the Fed engages in Open Market Operations, but it all begins with the FF rate set by the Fed.

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        2. This wikipedia entry needs to be re-written then:

          “In the United States, the federal funds rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances. The federal funds rate is an important benchmark in financial markets.

          The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate.

          The federal funds target rate is determined by a meeting of the members of the Federal Open Market Committee which normally occurs eight times a year about seven weeks apart. The committee may also hold additional meetings and implement target rate changes outside of its normal schedule.

          The Federal Reserve uses open market operations to influence the supply of money in the U.S. economy to make the federal funds effective rate follow the federal funds target rate. ”

          New York Fed:

          “By trading government securities, the New York Fed affects the federal funds rate, which is the interest rate at which depository institutions lend balances to each other overnight. The Federal Open Market Committee establishes the target rate for trading in the federal funds market.”

          Are you not talking about the discount rate?

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        3. My question was:

          if the government were to deficit spend without issuing bonds, the interbank rate would fall to zero as the banks would end up with increasing quantities of excess reserves. How would the Fed set the rate in this situation? Banks wouldn’t need to borrow reserves from the Fed as they would already have more than they need, so the Fed would have to pay the banks interest on their reserves in order to raise the interest rate, or else drain excess reserves in some way. No?

          Thanks for the reply again.

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        4. So how does the Fed set the Fed Funds rate by fiat if the government is deficit spending without issuing bonds and the banking system therefore has excess reserves?

          WIth an excess banks won’t need to borrow from the Fed. So it seems to me that the choice is either to drain excess reserves somehow or to set the rate by paying interest on reserves. Draining excess reserves is normally done by selling bonds.

          If the rate is to be set by paying interest on reserves, a) might there be any issues with this long term? (I don’t know), and b) isn’t there something a bit wrong about handing out free money in the form of interest on reserves directly to the banking system?

          I’m not trying to attack your position or catch you out, I just want to know your opinion. You’ve stated that the Fed just sets the rate by fiat but you haven’t explained how it does this when they have excess reserves and the government doesn’t issue bonds.

          Thanks.

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  28. Phil,

    Banks hold their excess reserves at the Federal Reserve Bank, where they earn interest, the amount of which is controlled by the Fed.

    Sorry, I don’t know what your questions (a) and (b) mean.

    Yes, discount rate is the proper term. There actually are several rates, primary, secondary, seasonal. In any event, the Fed controls these rates within a few basis points.

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    1. Question b) is about the fact that interest paid on reserves is essentially a direct subsidy paid (largely) to the financial sector. The larger and wealthier you are, the greater your government subsidy ends up being. Banks cream off a part of this subsidy as profit, earned for no reason, and without having to take any risk.

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    2. Controlling inflation through interest rates in part involves bringing about economic contraction so as to slow demand growth. This involves increasing unemployment and increasing the drain on debtors. At the same time those with capital (creditors) gain a higher subsidy direct from the government (interest paid on reserves).

      So when interest rates go up, inflation is essentially controlled by putting more people out of work and makings things harder for debtors, whilst increasing direct public subsidies to the wealthiest in society, including the banks. Interest rate rises basically redistribute wealth upwards, the opposite of wealth redistribution downwards through taxation/spending. Oddly unfair.

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      1. Phil,

        Actually, it doesn’t work that way. See:https://rodgermmitchell.wordpress.com/2009/09/09/low-interest-rates-do-not-help-the-economy/

        Think of money as the commodity you exchange for goods and services. The value of any commodity is based on risk and reward. The reward for owning money is interest. Raising interest rates increases the value of money, which is anti-inflationary.

        Yes, people and institutions with more money earn more interest than those with less money? You and I can earn risk-free interest by purchasing T-securities or insured CDs. Are you opposed to that?

        There are many other, far more important income gap factors. My all-time favorite is FICA.

        Like

        1. Inflation can come from cost pressures or demand in excess of productive capacity. Higher interest rates can increase the incentives to save money rather than spend or lend it, reducing demand. Higher rates make it more expensive to borrow money, reducing demand, and make it harder to sustain or repay debts, again reducing demand by requiring belt-tightening (more income going towards debt repayment) or defaults and bankruptcies, leading to reduced demand. All of these factors combined lead to economic contraction, which also means higher unemployment. Demand falls and inflation comes down.
          If the government compensates for this contraction by increasing spending to offset the credit contraction, then inflation will continue as before.

          Like

        2. *demand in excess of productive capacity – it’s more complicated than that of course, but that’s the general principle.

          Like

  29. “if the government were to deficit spend without issuing bonds, the interbank rate would fall to zero . . . ”

    Not sure how you come to that. Federal deficit spending adds dollars to the economy.

    How does that make the interbank rate fall to zero?

    Why would a bank lend at zero when it can earn more at the Fed?

    Like

    1. It’s only sice 2008 that the fed has started paying interest on reserves. If they didn’t then QE would have pushed interest rates all the way to zero. It’s not certain that this policy will continue in future.

      Like

  30. Let’s say the fed outs up interest rates to 10% to control inflation.

    Simple example:

    1. Mr A has savings of $10,000, so receives a decent but modest interest payment from the government. However, higher rates mean his business can’t pay its debts so it closes and Mr A loses his job. Mr A ends up living on unemployment benefit.

    2. Mr B has savings in one form or another of $100 million, so receives a vast interest payment directly from the government. Maybe he has a job but whatever the guy has hundreds of millions in the bank.

    Like

    1. Even if you ignore the possibility that Mr A loses his job, we still have the situation in which government tries to control inflation by handing Mr A a small interest payment (hundreds) and Mr B a VAST interest payment (millions).

      So we have state-sponsored ever-accelerating wealth inequality.

      All of those government interest payments piling up in the accounts of the wealthy are bound to become inflationary at some point (excessive spending).

      An alternative way to control inflation in the scenario described above would be to raise taxes. You could charge everyone the same amount or you could take more from Mr B and less from Mr A.

      Your method of controlling inflation through interest rates appears to involve transfering increasingly large portions of national income to the bank accounts of the wealthy.

      Like

      1. So you think high rates hurt the poor? Please tell that to all the homeowners with mortgages, and all the retired people who depend on CDs, money markets, savings accounts and T-securities to live on.

        And then there is the absolute fact that high rates do not hurt businesses, but actually are slightly stimulative.

        Phil, you have arrived at the point where you are ignoring fact and are rushing to toss in any possible, negative hypothesis that comes to mind. Time to slow down a bit, catch your breath, and don’t be so anxious to argue.

        Like

        1. There’s a lot of scope for disagreement over the effects of high interest rates on every aspect of the economy over time. These things are complex and difficult to predict.

          However, one thing is certain: exclusively using high interest rates to control inflation (without a concurrent compensatory system of taxation), effectively entails government-created ever-increasing inequalities in wealth.

          Quite simply, those with the most money receive the highest payments. Higher payments lead to greater wealth, meaning even higher payments in future, etc. Is this really the purpose of government?

          Like

          1. That’s your intuition. Now, here are the facts:

            No relationship between high interest rates and a high Gini ratio (the higher the ratio, the greater the gap).

            One problem may be that you’re not taking into account the additional money pumped into the economy by federal interest payments. That additional money is economically stimulative, which helps the poor proportionately more than the rich (just as recessions hurt the poor more than the rich).

            Like

          2. That’s an interesting graph, thanks for that. However it does describe a world in which there exists a system of progressive taxation. As far as I’m aware you advocate scrapping taxes and just controlling inflation with high interest rates. The MMTers advocate controlling inflation with taxes and spending changes, the JG program, and changing restrictions on bank lending, whilst leaving the base interest rate at zero. I don’t know whether this would work any better though.

            Like

  31. Quoted:
    “There are quite a few problems with the article:
    1. While a fiat system allows as many units of that currency to be printed as the central authority requires, they cannot enforce an exchange rate. Countries that play fast and loose with coinage tend to end up having debts denominated in other countries currency, and so can become bankrupt. That said, if the US suddenly and completely unexpectedly decided to pay off all its bonds with printed money, and the Federal Reserve went along with the plan, they could do so. The long term costs of such actions have so far been sufficient to stop that from happening (except once, and that was to the French).

    2. Prior to 1971, the US was on the Bretton-Woods system which had a lot in common with a bimetallic system, where value was dictated by the supply of both gold and $US. During this time there was little to restrain the US from expansionist currency policies since exchange rates with other currencies were fixed, but the supply of dollars was not. The problem then was that while the $us-gold exchange rate was fixed at a certain level, there was really nothing to stop that exchange rate being changed at the convenience of the US. The last proper gold standard was before WWI. That system did constrain money creation since a countries currency never deviated from its fixed value in gold, which was enforced through international trade.

    3. The problems with the mentioned European countries was primarily due to their debt levels. Sure, they cannot print money to get out of the problem, but that would be somewhat equivalent to paying the debt off by taxing all their citizens in proportion to their wealth, but with additional consequences into the future.

    4. The reason Japan can service its debt is through borrowing/issuing debt, which is bought mostly by Japanese. It has little to do with the ability to coin money. However, their overall level of debt is still growing so the problem is pushed down the road.

    5. The stated lack of relationship between deficit spending and inflation he cites is missing a lot of detail. Part of it is from the created $US being vacuumed up by Japan, China etc in return for trade goods and also as investments in US treasury bonds by both those countries and other investors. There are lags in the relationship which make direct correlations sketchy. Looking at autocorrelations would be a better method. Increases in productivity can offset inflation effects. etc etc etc. Inflation is a much more long term phenomenon than deficits, but changes can most easily be detected in treasury bill prices after announcements of changes in government spending (for those interested see Balduzzi etal 2001).

    6. The employment/fiscal stimulus issue ignores the case where a previous federal employee gained more productive employment in the private sector.

    7. Money supply should be considered in relation to money demand, which is a function of the size of the economy which has grown by 1200% over that time frame. ”

    End Quoted

    In conclusion, the guy is, as you say, nuts.

    Like

    1. 1. The economic costs come with the creation of the bonds. Paying off is merely an exchange of existing assets. You are confusing personal finance with Monetary Sovereign finance. It is impossible for a Monetarily Sovereign nation to go bankrupt.
      2. If Bretton Woods didn’t constrain money creation, we still would be on it.
      3. The problem with the euro nations is they are monetarily non-sovereign — like you and me.
      4. Japan, being Monetarily Sovereign like the U.S., does not need to issue debt, and could end all their debt tomorrow.
      5. If correlations are “sketchy,” how do you know what you’re saying is correct?
      6. Huh?? Who is that previous employee?
      7. Money demand is a function of risk and reward.

      Like

      1. Rodger Malcolm Mitchell says: (reply to Yorkie)
        April 27, 2012 at 8:38 am
        1. The economic costs come with the creation of the bonds…..YES that cost is also known as “Compound Interest” Get rid of paying compound interest on our own money and start collecting compound interest as revenue instead of income taxes. “Great News !! Zero Income Taxes…”
        2. If Bretton Woods didn’t constrain money creation, we still would be on it.
        YES that is one of the major problems only because banks are allowed to create money, The Moneytary Sovereignty MUST be the ONLY legal
        supplier of its currency.

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        1. @justaluckyfool: The last point you’re making is most important! People misunderstand fractional reserve banking, believing that a bank with a $100 on asset would lend out merely $90, while the truth is they instead lend out $900, making the $100 on asset the required 10% reserve requirement for the total $1000. They create money when they lend on real assets like government bonds, but when it comes to deposits it’s the other way around I believe, so they could only lend out $90 out of a deposited $100.

          I’m from Sweden so please pardon my language. The Best to all of you!

          Like

  32. Phil,

    I address this elsewhere on the blog, but to save you the agony of going through 650+ posts, I’ll quote from a relevant one.

    The other area of difference (between Monetary Sovereignty and MMT) is the prevention and cure of inflation. Perhaps the most fundamental equation in all of economics is: Value (or Price) = Demand/Supply. Increase the Supply of money or decrease the Demand for money, and the Value of money goes down, i.e. you get inflation.

    For adherents of MMT, inflation is a matter of money supply. Thus, they feel inflation is to be prevented and cured by regulating the creation and destruction of dollars. MMT suggests that federal taxes be increased when excessive (above a target rate) inflation appears. In fact, according to MMT, that is a fundamental purpose of taxes – providing value to fiat money.

    I agree and disagree. There is no question that removing dollars from the U.S. economy would help prevent/cure inflation, by giving greater value to the remaining dollars. Scarcity increases value. But, I have strong concerns about this approach.

    While, in theory, tax increases can prevent inflation, in actual practice, tax changes would be inefficient and damaging. They are far too slow (When will they be collected?), far too political (Which taxes?) and not incremental (How much?).

    Although the federal government has managed to control inflation, federal taxes have not been the controlling device. Interest rates have.

    That is, while MMT hypotheses have focused on supply, the Fed, in the real world, has focused on demand – successfully.

    Interest rates are fast, incremental and immune from politics.

    Perhaps even more importantly, anything that reduces money supply growth (tax increases or spending decreases) historically has led to recessions and depressions. Raising interest rates does not negatively impact GDP growth; in fact the opposite.

    Rodger Malcolm Mitchell

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  33. You seem to be confused about money and wealth. When new money is created new wealth is not, the value of existing money is just diluted. You also seem to be confused about who creates new base money: in the US the Fed does it, but the Fed is a private bank independent from the govt. Decades ago Canada the govt owned bank of Canada used to create base money, but today that power has been relagated to member banks.

    Like

    1. Sorry for my confusion. I’ve only been doing this for 15 years, and just can’t seem to get the hang of it.

      Just one question, if creating new money dilutes the value of existing money (i.e. inflation), why does federal deficit spending not cause inflation? See: https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/

      Also, I think Congress will be shocked to hear that the Federal Reserve, which Congress created in 1913, is independent from the government. Congress also will wonder how the Fed now creates the dollars Congress always has dictated must be spent.

      Thanks for the information.

      Like

  34. {Because so-called federal “debt” is the total of T-securities outstanding, all federal debt easily could be eliminated tomorrow, if the federal government merely credited the bank accounts of T-securities holders. That would require pressing a few computer keys, which would increase the checking accounts and decrease the T-security accounts of federal creditors. As this would be a simple asset exchange, no new money would be created and there would be no inflation consequences.}

    I had to create a sequential aide to picture the consequences of that:

    Government(G)–>Creates $1T out of thin air and distributes to one wealthy entity–>(G) then issues bonds and swaps $1TB ($1 trillion in bonds) with the wealthy entity for the $1T previously created–>(G) spends $1T on goods and services but there are no taxes so government can’t get their money back–>(G) prints another $1T and exchanges it with the wealthy entity to retire the outstanding $1TB. What is then the total currency in the system? Answer: $2 trillion.

    If the wealthy entity then starts spending or lending, there is no way it will not cause inflation unless supply is infinite.

    Like

    1. As you probably know, federal “debt” is nothing more than the total of outstanding T-securities. Here is how the government “borrows,” say from China.

      1. China deposits already existing dollars into its checking account at the Federal Reserve Bank.

      2. China then instructs the FRB to debit China’s checking account and credit its T-security account, also at the FRB.

      Now here is how the government pays off the so-called “debt:”

      The government instructs the FRB to debit China’s T-security account and credit China’s checking account. No new dollars are created.

      It’s exactly the same as you telling your bank to transfer money from your checking account to your savings account and then back again.

      As you can see, federal “borrowing” is much different from personal borrowing, and is completely unnecessary, now that the government is Monetarily Sovereign.

      Rodger Malcolm Mitchell

      Like

      1. I agree up to your and my last points. Let me replace each step in my original sequence with new currency added to circulation (first step “Government(G)” being zero:
        0–> +$1T (initial currency creation) –> 0 (G swaps bonds to get cash) –> 0 (spends cash on G&S but no tax revenue) –> +$1T to repay bond holder.

        The original trillion is still diffused in the economy from the government spending on goods and services. The ending $2 trillion has to be inflationary if the bond holder turns around and spends or lends once they’ve got cash again.

        Like

        1. Your “G swaps bonds to get cash” is wrong, for two reasons.

          1. The government doesn’t need to “get cash.” I creates cash by spending. When the government pays a bill, it sends instructions to the creditor’s bank to increase the number in the creditor’s checking account. At that instant, dollars are created.

          Unlike you and me, the federal government does not need to “have” dollars in order to spend dollars. There is no money creation involved in federal “borrowing,” other than interest payments. Federal money creation comes from federal spending, not from federal borrowing.

          2. The government does not “get cash” when it “borrows.” The process is completely different from when you and I borrow. The T-security buyer’s T-security account is credited. it’s exactly the same as you telling your bank to debit your checking account and credit your savings account.

          Again, federal finances are completely different from personal finances. What seems logical for personal finances is wrong for federal finances.

          Like

    2. I tried to get this useless sight from sending me emails, but the keep coming, jus like out-of-control government sending. Here is an anti-Roger post, that if you read and do an analysts of the authors writing will find how totally screwed up Roger’s economic position really is. Here is the post and good bookmark it before Roger deletes this comment -> http://www.financialsense.com/contributors/detlev-schlichter/abandoning-gold-standard-central-planning-chaos

      Like

    3. ” (one ) ..spends $1T on goods and services but there are no taxes so government can’t get their money back” is a false statement.

      As a repy to justaluckyfool’s comment , “Zero Income Taxes”your consequences would not apply.
      The government always gets their money back because it is issued in the form of a “loan with interest”. There would not be any goods or services available without some one borrowing currency to enable productivity. Also as for the currency that is already in circulation, the private financial institutions are sucking that up as “profits”(taxable?). As a matter of math ….if the government does not give back “re distribute” the interest, it would be mathematically imposible to pay the loan back.
      This collection and distribution of all new currency allows for the prevention of inflation,stagnation, and deflation.
      By definition a Monetary Sovereignty can issue all the currency it desires.Period. But with that ability comes a responsibility; it must protect
      against inflation,… “deflation, stagnation, and moral hazard” quote justaluckyfool.

      Like

  35. John Gault advises readers to go to a gold bug web site (Do they still exist?), in which the author said: ” The point is simply that by fading out gold as a fairly inelastic basis of the monetary system and replacing it with essentially fully elastic and unlimited fiat money, as happened around the world in the period from 1914 to 1971, we have made the financial system and by extension our economies substantially more unstable.”.

    Er, ah, excuse me, but the world was ON a gold standard until 1971, and it was during that gold standard period that we had the Great Depression, which because of gold-standard thinking, lasted more than 10 years. We went off the gold standard, because lack of gold threatened to make the government unable to pay its bills.

    By don’t let facts confuse you, John.

    If there are people who know less economics than the gold bugs, I’m not sure who they are. For those of you who would actually like to understand economics I recommend you look at the following site: http://pragcap.com/understand-the-modern-monetary-system/understanding-modern-monetary-system

    Rodger Malcolm Mitchell

    Like

    1. {Again, federal finances are completely different from personal finances. What seems logical for personal finances is wrong for federal finances.}

      Not according to your own source!

      From “Understanding The Modern Monetary System”:
      {The federal government’s true constraint is never solvency, but inflation. The government must manage the money supply so as to avoid imposing undue harm on the populace via mismanagement of the money supply.}

      Without sterilizing operations, the money creation you have been referring to will be inflationary. I think you are conflating the insolvency and inflation points. A monetary sovereign can’t be insolvent, but it can be inflationary.

      Like

        1. “Right. A Monetarily Sovereign government never can be insolvent, but it can cause inflation. So, how does that differ from anything I’ve said?”RMM

          Absolutely correct, but where is there accountability for allowing private banks to “create new money” just as if it were the Monetary Sovereignty ? Perhaps over creating the supply of currency to a point
          of a “bubble”.Then perhaps,
          “”There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” — Ludwig von Mises
          Challenge the solution,correct it,improve it, start teaching.

          *********(Google: justaluckyfool
          or
          “Great News !! ;Zero Income Taxes Solves Worldwide Economic Crises.”)

          *THE MEANS OF AVOIDING THE FINAL COLLAPSE !
          Back the credit with 100% of borrowed dollars,allowing the financial institutions to de-leverage at a cost of 2% for 36 years.Prevent collaspe and at the same time serve a new master-“We The People”
          THE PEOPLE’ S CHOICE:
          Total catastrophe
          or
          ZERO Income Taxes.
          When will we show our leaders,
          (as stated on ” 60 minutes” (12/11/11)”
          President Obama said,”You can’t raise revenues by lowering taxes unless you get the money from somewhere else.” ?
          YES, JUST COLLECT INTEREST ON OUR OWN MONEY, INSTEAD OF TAXES !
          Don’t End The Fed, Amend The Fed . Federal Reserve Charter should
          be the ONLY agency mandated to preserve the quantity and quality of the US Dollar and to provide Congress with funding for the general welfare,life,liberty and the pursuit of happiness

          Like

    2. Well, I sent my precious time reading this non-sense (http://pragcap.com/understand-the-modern-monetary-system/understanding-modern-monetary-system). The guy, like you, and the current fools running our ecumenic system wants Keynes theory to work so bad, they will do anything to keep it alive. Well, good for them. The problem is, what happens when the government can’t buy anything? Let’s say, the capitalist realize (they do realize) that they are being screwed (think Apple’s DOF law suite for example) and tell the government that they are selling anything to the government. Let’s then say, they actually stop making things. Then what are you liberals going to do? You see the problem with the free market is, not that many can succeed. That is why the Occupiers and Roger liberal types hate them. They hate the fact that only a few are really good and the rest are second handers. They is why Keynes stuff is so refreshing for the second handers. They get to play, even though they can’t. Keynes was a academia, public servant, and queer. He never implemented his theory is real life. He was no Steve Jobs, but more of a Peewee Herman. It is refreshing to note that his theory, like the communism, fascism, and liberalism all have the same results and that is total and absolute failure. Time will right the ship, but only once the navigation system gets fixed.

      Like

  36. Roger this is totally off topic, but today I saw a photo of that famous “national debt clock” in Manhattan.

    I say it’s purpose is to maintain the lie that national finances are the same as personal finances. That’s why the sign has been operating since 1989, and is now near Wall Street. When people see a national debt of $15.8 trillion, they think, “The politicians are right! We must have more austerity!”

    Of course, there is no need for austerity, or a national debt. If our currency and central banking were put back under public control, then we could print money as needed to maintain economic prosperity for all. We would not have to borrow from private bankers.

    We would have to eliminate our physical trade imbalance, but this would do-able if money were once more circulating among the 99%, and we had a government that cared.

    I suspect that Wall Street bankers pay to maintain the “national debt clock.”

    Like

    1. I comment on this at: https://rodgermmitchell.wordpress.com/2011/07/25/the-debt-clock-a-symbol-of-economic-ignorance/

      Actually, there is no need to eliminate our physical trade imbalances. The so-called “trade deficit” is us receiving valuable goods and services in exchange for dollars our government can create at will. I discuss that at: https://rodgermmitchell.wordpress.com/2012/04/16/a-think-piece-what-if-the-u-s-passed-a-law-against-exporting/

      Like

  37. If anyone wishes to waste time looking up John Galt’s article, they will find that the author “disproves” the truths about a Monetarily Sovereign nation, namely that increases in net federal spending are stimulative. How does he do it? He focuses on the monetarily non-sovereign, (Yikes!) four-year, post-WWII period, and uses the totally meaningless “gross federal spending/GNP statistic.

    If these errors weren’t egregious enough, he confuses gross federal spending with net federal spending, so does not consider the effect of taxes.

    Why does he focus only on 4 years? Because none of the 65 years, since the world war, conform to his theory. As one can see from the graph, below, every recession has begun following a series of reductions in federal deficit growth.

    Monetary Sovereignty

    Finally, he mentions, “in 1947, the budget surplus was over 5 percent of GNP.” This is supposed to be some sort of proof of something. Well, I guess it is. It’s proof that surpluses tend to lead to recessions and depressions:

    The federal surplus of 1947, caused the 1948 recession, which ended only when we went back into deficit.

    And:

    1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
    1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
    1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
    1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
    1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
    1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

    As best I can understand from this truly confused article, the author is attempting to prove that federal deficit spending is not stimulative and federal surpluses are stimulative. Apparently, he believes removing dollars from the economy is the best way to grow the economy. If he were a doctor, he would apply leeches to cure anemia.

    He finishes with this amazing statement: “Since we must cut the federal budget deficit, the best way to do so is with cuts in spending.” Spoken like a true 1%er.

    Like

  38. If man is governed by the laws of nature and nature herself has limited resources, how in hell can man create perpetual wealth!
    Today inflation is at an all time high…..Check your food purchases to seeing where we are headed. This currency is only surviving because of the confidence in it and that oil is paid for in USD. As reflected in nature, nothing last forever and confidence in things are easily abandoned.
    I think your theory has no basis in reality and is more suited for simulacra.
    People anything that has no interrelationship with nature is bound to fail! There is nothing new under the sun.

    Like

    1. Here are the limits of nature’s resources: The earth alone weights 6,000,000,000,000 ,000,000,000,000 kilograms. All the planets together weigh 2.66883 x10^27 kg. Plus, the sun itself weighs 1,989,881,989,610,210,000,000,000,000,000 kilograms.

      That’s a lot of resources.

      But that’s just our solar system. There are 300 billion stars in the Milky Way galaxy and there are 200 billion galaxies in the universe.

      You and I have no idea what our limits are.

      But that is why God gave us brains.

      Like

  39. Three simple words “supply and demand.” The US is primarily a consumption driven economy (70% of GDP). If we are creating money in perpetuity no one would want to send us anything because the dollars we send them back would be worth less and less. It comes down to simple supply and demand. If you create infinite amounts of dollars they will be worth less in the world economy than the paper that they are printed on. We would run out of trees sooner or later!

    Also, loved this comment: ““There also has been talk about the federal government “saving” money by firing, or reducing the pay of, federal employees. Those so-called “savings” would be money not sent into the economy, and therefore, anti-stimulative.”

    If the government is employing one person to dig a ditch and the other person to fill the ditch what is the net benefit to the economy? We need production, savings and investment not government waste because they can print up the money and hand it out to people to spend.

    Like

    1. The benefit to the economy is this: The digger and the filler each have income, which they spend on goods and services, benefiting the people who supply goods and services. Then these people have income, which in turn, they spend on goods and services.

      We have been creating massive amounts of money since we became Monetarily Sovereign. Contrary to popular myth, there has been zero relationship between money creation and inflation. See: Inflation

      Like

  40. You are correct about Federal spending to the point of inflation when done in a vacuum. Your money creation theory is all true except when we look at trade. All you have to do is look at Argentina as an example as well as the 1980’s when the US was figuring out how much to print. At some point printing of money devalues the money with other countries.

    Which is your point about print until you feel inflation. When that happens, cost of goods goes up for two reasons. Foreign demand for those domestically produced goods goes up as it is purchased cheap and price of imports goes up because of the quantity of dollars on the market versus demand.

    You could argue that the rise in exports would create more jobs but then inflation would rapidly make those jobs worth less to the worker. The easiest way to fix our current economy is to figure out how to get more people producing things other people want to purchase, OUTSIDE of the US. Instead we produce more journalism students that can not produce anything. This is also sort of a side effect of a green america. Less mines and manufacturing, less jobs. Or kick off a global war and wipe out everyone else ability to produce.

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  41. All exporting does is send dollars into the U.S. economy, identical with what the federal government does when it deficit spends. In fact, deficit spending is better, because it does not use domestic assets.

    Why expend valuable time and materials to acquire dollars, when we can produce dollars free, at the touch of a computer button?

    Also, since we became Monetarily Sovereign, there has been no relationship between federal deficits and inflation. See: https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/

    Like

    1. Nonsense Roger. Printing money reduces its value to nothing. We are well on the way to that now. Producing goods is the hard part. Not everyone can be a producer. That is why people like you and Obama hate capitalist so much. You can do what they can do and you know it. They know it too, and that is why they know people like you and Obama hate them. They don’t really give a rats ass, because they know they are better than you and in the end, if they stop producing, there wouldn’t be anything to buy. Well good for them. Maybe they should stop.

      Like

  42. We have been “printing money” since 1971, when we became Monetarily Sovereign. Since that time, there has been zero correlation between “printing money” and inflation. My proof is at: https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/

    Where’s yours?

    I “hate capitalist”???

    Because I “can do what they can do”???

    “they know people like (me) and Obama hate (us).”

    John, I really wish you wouldn’t write to me while you’re drunk.

    Like

    1. Frankly if I did not own any assets I would be all for printing away until global trade broke down. Always trade hard goods for electronic money as long as they will accept it. The exposure to the inflation bomb is the only problem with playing this out since the US would not have any control of the timing of collection.

      The only reason the float works for the US is that so many countries are involved in the float. Many of those same countries are trying to get off of it and are slowly reducing their dependance on the dollar system. Some argue that the US went to war against Iraq because they began trading oil outside of the dollar. What reason would a foreign country keep dollars if the US is printing so many of them? Austerity measures are bout keeping faith of those holding dollars and nothing else. Print too many and they will be forced to take the financial hit. Guns are pointed both directions.

      In reality the gold standard was dropped earlier but the entire scam was tossed front and center by De Gaul in 1965 when he demanded gold from Britain and the US. By 1971 the US could not keep up the exchange rate of gold and finally had to break from it as a standard. In reality the US was already floating and printing money in the 1960’s. That float caused real estate to rise over the last 50 years. It also has caused the rise of wages as well for many of those years.

      “Perhaps never before had a chief of state launched such an open assault on the monetary power of a friendly nation. Nor had anyone of such stature made so sweeping a criticism of the international monetary system since its founding in 1944. There was Charles de Gaulle last week proclaiming that the primacy of the dollar in international dealings was finished, calling for an eventual return to the gold standard —which the world’s nations scrapped 50 years ago — and practically inviting other countries to follow France’s lead and cash in their dollars for gold…”

      Read more: http://www.time.com/time/magazine/article/0,9171,840572,00.html#ixzz22JvYGopv

      In regards to your theory, you should look at Japan to understand how that plays out in the long run. Printing money, then loaning the US money to buy products is death to their economy since it inflates stuff at home in the long run and causes asset bubble in Japan that are self owned. Brazil and other developing countries absorbed the bubble since the US did not have goods to offset the demand to spend.

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  43. I continually am amazed at the debt hawk belief in the “deficits-cause-inflation” myth in the face of evidence to the contrary: https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-

    And then, when faced with proof that there is no American correlation between deficits and inflation, in desperation, the debt hawks turn to some foreign nation — like Japan. Again, the evidence shows the danger to Japan comes from deflation and too little inflation:
    Monetary Sovereignty

    This all is a demonstration that in humans, intuition is far more important than fact, which is why debt hawks persist in our world.

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    1. You are right about Japan and deflation. Deflation is the after effect of high inflation caused by Heisei & Nikkei bubbles collapsing due to the running of trade surpluses with the US. All those printed dollars drove up property value and stock markets in Japan the same way running deficits in the United States have inflated the economy to prevent a crash. Today without any way to inflate the yen, the country has been on a very long deflation.

      The difference is the Yen rose against the dollar since the 1980’s while the dollar collapsed by 50% since the inflation had more of a basis in actual goods as opposed to thin air.

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      1. Understood. You have the perfect, no-lose hypothesis. If inflation follows spending, you say, “See, spending caused inflation.” If deflation follows spending, you say, “See, spending caused deflation.”

        So, why does Japan have no way to inflate the yen? Didn’t you say that “printing money” causes inflation? Why not just “print” yen?

        (By the way, I put “print” in quotes, because neither the U.S. nor Japan “prints” money. Both create their sovereign currency by the act of spending. No printing involved.)

        Anyway, since in the U.S. massive spending has not been associated with inflation, what is your recommendation for the U.S. — “print money” or don’t “print money”?

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  44. Rodger, in trying to understand your facts on Economics I still have a few questions. You say “Because our Monetarily Sovereign nation has the unlimited power to create its sovereign currency, the dollar, it never needs to ask anyone for dollars.” If this is the case why do we borrow from other nations?”

    There is currently $4.3 trillion owed to countries such as China, Japan and the United Kingdom. China owns roughly 27% of this total. The United States currently has a public outstanding debt total of over $14.1 trillion. Of this total, China owns roughly 8%.

    Source: http://www.davemanuel.com/so-how-much-money-does-the-us-owe-to-china-85/

    Because no Monetarily Sovereign nation can be forced into bankruptcy, none of that nation’s agencies can be forced into bankruptcy. The U.S Supreme Court, the Department of Defense, Congress, Social Security, Medicare and any of the other 1,300 federal agencies cannot go bankrupt unless the federal government wishes it. (All the talk about Social Security or Medicare going bankrupt is misguided. Even if FICA were eliminated, Social Security and Medicare would not need to go bankrupt.)

    If Social Security can’t go bankrupt, why do we pay into it? We do we as private citizens have accounts that we invest in for retirement purposes? Why doesn’t the government just pay us a retirement income at 65 based on your regular earnings? Why do we worry about not having a national medical insurance program? With the recent US Supreme Court ruling that Obama care is a tax, that we at some point in time will have to pay for, why even go down this road? The government could just cover all citizens with Medicare and all worries would be over. No longer a debate between supporters and opponents of Obama care!

    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 bankruptcy, 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 debt ceiling. This could force the U.S. into bankruptcy.

    If this is a true statement, then why all of the political battles and discussions regarding raising the debt ceiling and questions on the ability to borrow? Just raise it and be done; no worries, right?

    From the Congressional Research Service:
    On August 2, 2011, President Obama signed the Budget Control Act of 2011 (BCA; S. 365; P.L.
    112-25), after an extended debt limit episode. The federal debt had reached its legal limit on May16, 2011, prompting Treasury Secretary Timothy Geithner to declare a debt issuance suspension period, allowing certain extraordinary measures to extend Treasury’s borrowing capacity. The BCA included provisions aimed at deficit reduction and allowing the debt limit to rise between $2,100 billion and $2,400 billion in three stages, the latter two subject to congressional disapproval. Once the BCA was enacted, a presidential certification triggered a $400 billion increase, raising the debt limit to $14,694 billion, and a second $500 billion increase on
    September 22, 2011, as a disapproval measure (H.J.Res. 77) only passed the House. A January 12, 2012, presidential certification triggered a third, $1.2 trillion increase on January 28, 2012. On January 18, 2012, the House passed a disapproval measure (H.J.Res. 98) on a 239-176 vote. The Senate declined to take up a similar measure (S.J.Res. 34), on a 44-52 vote on January 26, 2012. Secretary Geithner has said the debt would reach its limit “very late” in calendar year 2012. Some private forecasters project that the government could exhaust its ability to borrow in early 2013.

    Source: http://www.fas.org/sgp/crs/misc/RL31967.pdf

    Controversy Involving The Debt Limit Continues
    07/08/11
    WDTV
    From Republican Congressman David McKinley’s web site:
    Republican Congressman David McKinley spoke out about the controversy involving the debt limit. He claims the Obama Administration has been exploring the use of the 14th Amendment to raise the debt limit without the approval of congress, and he is not too happy about it.

    “If the president follows through with his plan to use the 14th Amendment to raise the debt ceiling, Congress will not stand for it. The ability to increase or decrease spending – resides with the Congress in accordance to the U.S. Constitution.” – U.S. Rep. David McKinley

    The Reconstruction-era amendment, in part, reads: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

    But a statutory limit has restricted total federal debt since 1917. Congress has raised it repeatedly 10 times since 2001.

    Source: http://mckinley.house.gov/in-the-news/controversy-involving-the-debt-limit-continues/

    Just asking…

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