The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics.
When blind ignorance masquerades as “fiscal prudence,” we all suffer.
On July 5th, 2010, I wrote a post titled, “How President Obama’s National bipartisan Commission on Fiscal Responsibility and Reform could destroy America
On October 6th, I wrote, “How the debt-hawks would ‘save’ Social Security and Medicare”
Both posts describe the damage debt hysteria is doing and will continue to do to our nation and our way of life.
Today, I read this:
Washington Post: Breaking News Alert: Deficit panel leaders propose curbing Social Security increases
November 10, 2010 1:20:14 PM
—————————————-Leaders of President Obama’s bipartisan deficit commission are proposing to reduce the annual cost-of-living increases in Social Security.
The proposal would also set a tough target for curbing the growth of Medicare. And it recommends looking at eliminating popular tax breaks, such as mortgage interest deduction.
Because of the mistaken, unsupported-by-any-data belief that the federal debt is too high, massive damage is about to be made to our life style. And this blind ignorance is what passes for “fiscal prudence” in America.
Again, I urge you to contact your media editors, columnists, Senators and Representatives and beg, threaten and cajole them to learn about Monetary Sovereignty, before they hurt us further.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
#Monetary Sovereignty - Mitchell 
Ignorant comment of the day: “This country’s out of money and we better start thinking,” said Erskine Bowles, co-chairman of the panel created by President Barack Obama.”
Someone please explain to Mr. Bowles it’s not possible for a monetarily sovereign nation to be “out of money.”
Rodger Malcolm Mitchell
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Quote from Bloomberg: None of the (presidential commission’s)proposals would take effect next year to avoid disrupting the economic recovery.
In other words, tax increases and/or spending cuts hurt the economy, so we’re not going to do them now. Instead, we’ll wait until later to hurt the economy.
Anyone see anything wrong with this “logic”?
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Well, I’m gonna cut right to it…
Who are these people REALLY working for?
I don’t think anyone in the US is ready to find out. Maybe they don’t want to know.
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Write to your Congressperson and the President, and express that sentiment. That’s the only way sanity will enter the picture.
Rodger Malcolm Mitchell
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Do these people even pay attention to what they say? I read the quotes from the commission and I started thinking to myself that they don’t listen to the words that come out of their mouths. If they did, they’d actually hear that the logic doesn’t make sense. Makes me cringe at the “leadership” going on in DC.
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I have been studying your site with some interest. Are you basically denying the first rule that every freshman econ student is taught? There really IS a free lunch?
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Yes, your textbook and your teacher (?) are wrong.
The federal government is monetarily sovereign. It creates money out of thin air and is constrained neither by taxes nor by borrowing. In this it is different from Greece, Italy, Ireland, Illinois, California, Cook County and Chicago, none of which is monetarily sovereign.
The only constraint on federal money creation is inflation. But we are a long, long way from inflation. Despite massive money creation, the Fed is fighting deflation.
Ask your teacher to discuss the implications of monetary sovereignty. Or just print this out, and show it to your teacher for comment. Also show him/her this page: https://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/.
Let me know what your teacher says.
Rodger Malcolm Mitchell
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Actually, my last econ course was more years ago than I care to admit.
I’m still wrapping my head around some the logical conclusions…
To use theological language, if the Federal gov’t is PRIMARILY monetarily sovereign, could not some of our more troubled states become CONTINGENTLY sovereign inasmuch as they could go to the Fed hat in hand and have their empty coffers refilled? State taxes could then be zeroed out as well. State workers could retire at 40 with triple pensions. The more profligate the waste, the better.
Following the same trail, should I spend effort advocating for a federal policy to zero out my own mortgage, or better yet have them credit my checking account with my annual living expenses?
Sure beats workin’.
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Ed,
The U.S. federal government is monetarily sovereign. Period.
I know you were being sarcastic, but actually you have a good suggestion — a suggestion I have made many times: The federal government should support the states; the states should support the counties; the counties should support the cities.
Monetarily non-sovereign entities, like the states, counties, cities, you and me require an inflow of money to overcome annual inflation and to grow economically. Taxes do not provide an inflow of money; they just circulate the money already in the state.
An inflow can come from two sources: Exports and federal support. Since it is very difficult for all states to be net exporters, eventually every state requires federal support.
If you go to https://rodgermmitchell.wordpress.com/?s=%22taxes+alone%22, you will see my specific proposal.
Rodger Malcolm Mitchell
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It seems that you’re fighting against more than traditional economic ideas, but also the notion that money is created through the provision of goods and services that clients willingly pay for.
When a company hires you to turn it around, you transform the formerly ignorant managers thereof into enlightened geniuses, thus creating wealth. Your account is credited and they are educated.
The sovereign Fed could easily just credit your account the same amount while you sleep. However, you would have created no wealth in the form of enlightened managers in the process. The wealth is not the dollars, but the product.
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Ed: “It seems that you’re fighting against more than traditional economic ideas, but also the notion that money is created through the provision of goods and services that clients willingly pay for.
“When a company hires you to turn it around, you transform the formerly ignorant managers thereof into enlightened geniuses, thus creating wealth. Your account is credited and they are educated.”
In this scenario, no money is created. It just changes hands. 🙂
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Money is an individual commodity, separate from goods and services. Unlike goods and services, it has no intrinsic value. It’s only purpose is as an exchange medium.
The value of money, like all commodities is based on supply and demand. Increase the supply and you reduce the value (aka “inflation”). Increase the demand (by increasing the reward for owning it, i.e. interest), and you increase the value.
The one difference in money vs. all other commodities, is its value is relative to the perceived values of goods and services.
That word “relative” is important. It means you can increase the supply of money, but not have inflation if the perceived values of goods and services falls. It can be a bit mind-bending, but it helps explain why massive increases in supply (aka deficit spending) have not been related to inflation.
By the way, do you consider gold to be “wealth”? Those who wish to return to a gold standard, merely would exchange one commodity with no intrinsic value (paper) for another commodity with almost no intrinsic value (gold), the main difference being gold would destroy the government’s control over the money supply.
Rodger Malcolm Mitchell
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No, I do not consider gold to be wealth – other than as a medium for the jeweler’s art. It seems silly that for an economy to grow, more gold needs to be dug out of the ground. Any fixed value assigned to it is by fiat anyway, so I don’t see what is gained by using it as a standard.
Money is the intermediate means to exchange the fruits of your talent (business turnaround) with mine (sailboat design). You and I create it out of thin air through our creative efforts. If I can get money for free from Uncle Fed, I can assure you there will far fewer sailboats coming from my drawing board!
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You are 100% correct regarding gold. All money is fiat, the only question being, “Does the government have control over the supply?” For a monetarily sovereign nation, the answer is “Yes.”
You said, ” . . .there will be far fewer sailboats coming from my drawing board.”
Apt analogy, for there was a time when the government taxed luxury boats (took money away), and the luxury boat market collapsed. If boat lovers had more money, there would be more sailboats coming from your drawing board. True?
Perhaps if the government gave you $500,000 per year, you might stop working. But what what if the government gave you $5,000 per year? Would you stop working, or more likely would you save some and spend some, thus stimulating the economy?
Rodger Malcolm Mitchell
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The extra $5000 would be appreciated, but would not significantly alter my lifestyle. It would also be money not earned through any creative effort on my part or risk-taking to aid others in their creative efforts and as such would not be the result of wealth creation.
The Federal government, on the other hand, makes financial decisions on a huge scale. If money is free, there is no financial consequence for poor Federal decisions. Let’s build more bridges to nowhere, John Murtha airports, and high speed trains that nobody rides. Or, to upset lefties, let’s build and maintain larger armies to topple tyrannies wherever we find them.
If Federal money is free, why haven’t Congressmen, whose stock in trade is to bring expensive projects to their districts, caught on to this? Endless largesse without zero financial down side would mean endless re-election, or would at least transform Congressional elections into bidding wars. Goodbye fiscal conservatives.
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Should read “endless largesse WITH zero financial down side…”
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Ed: “Should read “endless largesse WITH zero financial down side…”
That is not the claim. Inflation is a potential problem.
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Ed: “If Federal money is free, why haven’t Congressmen, whose stock in trade is to bring expensive projects to their districts, caught on to this?”
As for the Reps, the starve the beast strategy depends on there being real constraints, or upon the people believing that there are real constraints. Admitting that there are not undermines the politics.
As for the Dems, Robert Rubin, Larry Summers, et al., have convinced them that they have to kowtow to the bonds market. They have been getting bad advice.
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Ed,
“. . . would not significantly alter my lifestyle” Exactly. You would save the money or spend it, which would stimulate the economy.
“If money is free, there is no financial consequence for poor Federal decisions.” But money is free. For a monetarily sovereign nation, there is no limit on the government’s ability to spend. It creates money by pressing a computer key.
“. . . why haven’t Congressmen . . . caught on to this? Yes, why indeed? Perhaps for the false beliefs the federal government is like you and me, and that the federal government needs a source of income before it spends.
Unlike you and me, Greece, Italy, Spain, Illinois, California, Lake County and Chicago, the federal government, as a monetarily sovereign nation, neither needs nor uses any source of income. It creates money ad hoc, at will. If taxes and borrowing were $0, that would not affect by even one penny, the government’s ability to press that computer key and create money.
Actually, most people do acknowledge the government’s unlimited ability to create money, so we then get to the heart of the matter: The belief that if the government creates “too much” money, we’ll have inflation.
And they are right. “Too much” money causes inflation. But how much is “too much”? In the past 40 years, the federal debt has grown 3,500% — on average above 9% per year. In the past 10 years, the federal debt has grown 10% per year. And in the past 5 years, the federal debt has grown more than 15% per year.
And where is the inflation? Today, we worry about deflation.
Data indicates no relationship between federal deficit spending and inflation, in the past 40 years.
So in summary:
1. The federal government has the unlimited power to create money, with neither taxes nor borrowing.
2. Money creation, even at the 15% annual level, has not resulted in inflation. In fact, we are nowhere near inflation.
Yes, Ed. There really is a free lunch.
Rodger Malcolm Mitchell
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Yes, the system as it stands right now is a free lunch.
If the govt. decided to give you $5,000 a year, this would be fine. Then the govt. should deduct this $5,000 x (population of US) from the military budget.
See, your “representatives” are choosing to spend this “free lunch” money on guns, bombs, and killing weaponry of all kinds. NOT GOOD. Some of it goes to soldier’s paychecks. They come home and spend a bit on stereos, TVs, cars, homes. etc. All well and good.
Your representatives should give YOU the money directly. Instead they are giving it to their “Military–industrial complex” buddies.
This would be OK with me if the US military was used for the DIRECT defense of the United States PERIOD. They can have all the atom bombs, aircraft carriers, planes, whatever…as long as they cannot leave the limits of the US waters/land etc.
This would really cut the size of the military drastically freeing up “free lunch money” for other peaceable uses. $5,000 a year (or more)for everybody, greatly increased spending on hospitals/high tech research/arts etc.
Other countries DO NOT spend $$$ like our insanely militarized US does. Other countries are not the #1 arms dealer to the world.
We could be #1 in many other categories, yet we choose to spend for war and death.
That’s it in a nutshell.
Buckminster Fuller said it best when he invented the phrase Livingry:
“The essence of Livingry is human-life advantaging and environment-controlling. With the highest aeronautical and engineering facilities of the world redirected from weaponry to Livingry production, all humanity would have the option of becoming enduringly successful.”
http://www.nous.org.uk/livingry.html
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There is no connection between the government giving me money and taking money from the military. Two totally unrelated actions.
Rodger Malcolm Mitchell
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I agree with your strict definition.
But I think the two actions should be linked in reality. Just my opinion.
It would be a financial win-win.
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Per your comment:
“2. Money creation, even at the 15% annual level, has not resulted in inflation. In fact, we are nowhere near inflation.”
Basically redirect the cash from the military to useful things..keeping the money creation level at 15%. Or whatever rate deemed necessary to keep the game going forever.
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They used to be linked. Before 1971, when the government still was on a gold standard, taxes and borrowing paid for spending. It’s the system used by Greece, Italy, Ireland, Portugal and Spain, and it explains why they are in financial trouble.
Because of annual inflation and population growth, an economy requires a growing money supply. But relying on taxes means eventually the money runs short.
Some nations can survive by bringing in money from outside (aka “exports” or “tourism”). But long term, a nation must have the ability to increase its money supply, and relying on taxes prevents this.
Do you see the math?
Rodger Malcolm Mitchell
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KK,
The point of the discussion is that if money is free, then there are no FINANCIAL consequences to Federal defense (or any other) spending. Whether we have one carrier battle group or fifty is only a matter of discretion. We can buy fifty and we don’t have to pay anyone back.
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Correct. The only constraint on federal spending is inflation, and we are nowhere near that.
Example: A group of well-known MMT economists assisted me in writing an article titled “Ten Reasons To Eliminate FICA. The basic concept came from my book FREE MONEY, written 10 years ago.
Rodger Malcolm Mitchell
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Yes.
In your estimation, when might we be “near that” as you say?
I don’t care about “debt limits” or any of that. How would you “manage” the system to keep it going “endlessly”? I’m thinking in a best practices way.
I mean, ok, money is totally free, no strings attached. We should then commence in building two walls of aircraft carriers end to end tomorrow to protect our shores? Why not?
What’s holding us back?
I know two things, but they are not related to free money. I’d just like to hear what you would do personally.
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KK
Excellent question. I may write an entire post on this, but for now, the answer is: I would be a hunting lion. That is, I would move forward, wait to see what happens, then move forward again.
If, at any time, inflation rose beyond 3%-4%, I would stop, while increasing interest rates to bring it down. When it fell below 3%, I would reduce rates, and move forward again.
That’s the ideal, and events don’t always allow for the ideal (wars, natural disasters, oil shortages), but I would plan accordingly.
My very first act would be to end FICA, then wait six months or so.
If that didn’t cause excessive inflation, my next act would be to increase the standard deduction, or make some other tax move, so that no one making about $50,000 per year or less, would pay any federal tax at all, then wait another six months, before my next move.
And that is how I would manage the system — like a hunting lion, until I had killed all the debt hawks.
Rodger Malcolm Mitchell
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