The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics.
A reader, KK Tipton, asked what I suggest our government actually do, since being monetarily sovereign, it has the unlimited power to create money, without support from taxes or borrowing. First a little background:
Yes, the spending by a monetarily sovereign government is constrained neither by tax receipts nor by borrowing. So with no financial constraints, it could, as KK humorously suggests, build “ . . .two walls of aircraft carriers, end to end tomorrow, to protect our shores. Why not?”
Well, the “why not?” has to do with the only constraint on federal spending: Inflation. There is a point at which federal spending could become so massive as to cause inflation. Pump $100 trillion into the economy next month and I can guarantee a great big inflation.
However, we are nowhere near that point, and have been nowhere near that point since 1971, the year in which the U.S. federal government became monetarily sovereign. Even the inflation of 1979 was not caused by federal deficit spending, but rather by oil prices.
The above graph shows that inflation (red line) generally reached its peak at a time when federal deficit spending (blue line) was reaching a trough, and that inflation peaks correlated most closely with peaks in energy prices (green line).
Because federal deficits stimulate the economy and are constrained only by inflation, the goal is to maximize stimulation while keeping inflation at an acceptable level, perhaps 2% – 3%. Modern Monetary Theory (MMT) holds that inflation can be cured by increasing taxes. This is true, but it’s like preventing facial acne by cutting off your head. Increasing taxes removes money from the economy, which is anti-growth, causing recessions and depressions. (See: A quick summary of the facts )
I prefer to prevent and cure inflation by increasing interest rates, which increases the reward for owning money. This increases the demand for money and makes money more valuable. MMT followers say high interest rates increase business costs, thereby actually causing inflation. Nice theory, but not in accord with the facts. Contrary to popular wisdom, there is no relationship between high rates and slow growth, or low rates and fast growth. See: Interest Rates . Both Chairmen Greenspan and Bernanke may have learned this after 20 rate reductions accomplished nothing.
Given all of the above as a background, here’s what I suggest we do:
1. Eliminate T-securities. A monetarily sovereign nation does not need to borrow the money it created earlier – money it can create without limit. This would end all federal debt along with the misguided concerns about federal debt – concerns that have helped destroy our economy..
[All of the next suggested activities would be done incrementally, the way a lion stalks its prey. Make a small move, then stop to see what happens, then make another move, always getting closer and closer to your goal of maximum growth with acceptable inflation.]
2. Eliminate the FICA tax. This is a tax collected weekly or monthly, so it neatly allows for the “lion stalking” approach. A more complete discussion is at Ten reasons to eliminate FICA, but briefly, this would put about $1 trillion (See: Budget of the United States Government 2011) into the economy next year, exactly where it is needed most: Half in the hands of business; half in the hands of employees.
3. Eliminate taxes on business. These are projected to be about $300 billion next year, less than 12% of total federal projected receipts of $2.6 trillion. Business is the engine of our economy. Pulling money out of the engine is the worst way to grow an economy.
4. Gradually reduce personal income tax collections, which are projected to be $1.1 trillion next year, by increasing the standard deduction. We could begin by freeing from taxes, anyone earning less than $50,000 a year. Then we could incrementally raise the amount, until the last people in America paying personal income tax would be Bill Gates and Warren Buffet. (Of course, we would have to find jobs for all those accountants, tax lawyers, IRS employees, prosecutors and federal prison guards, whose livelihoods depend wholly or partly on income taxes. But a healthy growing economy should take care of that.)
As you can see, I would begin by slowly but persistently eliminating taxes, and putting the money back in the hands of the people. After the tax situation was resolved, I would begin to increase spending, on humanitarian things like Social Security, universal health care insurance and unemployment insurance. I would fund the states by providing a per-capita allowance. Being monetarily non-sovereign, they cannot create money, and so require outside support (See: “–Here is the financial solution for your state, county and city”).
So there you have a quick summary. Like a lion, creeping up on a covey of ignorant debt hawks, I first would reduce/eliminate taxes, then increase federal spending.
What are your thoughts?
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”
#Monetary Sovereignty - Mitchell 
Rodger,
Although I agree with you in theory I have worries about the consequences of putting this into action. You can already see how fears of QE or money printing as others falsely refer to it has caused huge spikes in the prices of many commodities this year (sugar, corn, soybeans etc).
OTOH, I believe that 99% of people falsely believe that the federal government is limited or constrained in how much money it can print because the government must issue bonds or borrow the money.
If the Feds would stop issuing bonds and just spend money into existence (print money) although there is no real difference from what they do now. I believe the fears of unconstrained money-printing would fuel a rush into commodities that dwarfs the one we’re seeing now. Please understand that I’m not claiming that money-printing will in itself cause commodities to sky rocket. I think it will be the fear of inflation when people who formerly thought the government was shackled by the bond market from printing too much money that will drive it. I’m not sure if I’ve made the distinction clear, but I think the proof of my assertion is already in the commodities markets’ fear of QE.
You can argue that I may be right, but then the Fed will simply raise interest rates high enough to stop the speculation. If they do that though and mortgage payment s double or triple due to higher interest rates you’ll get another massive drop in the price of housing because the affordability of them will drop in tandem. I know you also claim that interest rates have no effect on the price of housing, but if my mortgage payment on a potential home is $1,000/month when rates are 4% and $2500 when rates are 10% the price of homes will have to plummet. Where else are people who need a mortgage going to come up with the extra $1500/month?
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Jason: “You can already see how fears of QE or money printing as others falsely refer to it has caused huge spikes in the prices of many commodities this year (sugar, corn, soybeans etc).”
Is that why? Ever since the crisis I have noted that the price of oil has kept pace, roughly, with the stock market. The recession ended officially in the summer of 2009. That means that the recession for Wall Street and Los Ricos ended then, not the recession for the rest of us, i. e., Main Street and consumers. The money that Wall Street and Los Ricos are making is not, by and large, going into jobs or productive investment. Perhaps it is that money that is fueling the increases in commodities (and stocks), rather than fears of inflation. (Just a thought. :))
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Jason, you are correct that fear of an unlikely event actually can cause the event (the stampede effect), but I suspect inflation caused by fear rather than by true shortages, would be short-lived, as higher prices stimulate increased production.
Ultimately, fundamentals create prices. Ask the Hunt brothers.
Since 1971, the commodity that seems to have influenced overall inflation is oil. This makes sense, because oil affects so many products and services. I don’t see much overall inflation, today, despite corn and sugar.
Rodger Malcolm Mitchell
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Min,
Not sure what your point is. Perhaps you can clarify?
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One thing I learned (from reading) about investing is to follow the money. If there is a lot of money on the sidelines, look for it to come into the markets and boost prices; conversely, if there is no money on the sidelines, “nobody” will buy and prices will fall. I was just applying that idea to our current situation, where the investor class is awash in cash, but normal business investment or lending is not attractive because of a lack of paying customers. That offers a possible explanation for rising commodity and stock prices.
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Yes, that’s exactly what the Fed is hoping for. Additionally, the low interest rates almost force savers/investors into riskier assets because the interest earned in a savings account or T-bill doesn’t even cover the inflation loss.
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Mr. Mitchell,
If we followed your plan, what would be the effect on the dollar exchange rate? Wouldn’t the dollar fall massively? And if the dollar falls far enough, what happens when OPEC starts pricing oil in euros? And what do we do when no country accepts our fiat dollars anymore?
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GaryD,
Money is a commodity. The value of a commodity is based on supply and demand. Yes, if the supply goes up, the value goes down — unless the demand goes up. Demand is based on risk and reward. The reward for owning money is interest. So if the value goes down, raise interest rates.
In the very unlikely event OPEC prices oil in euros (a currency that is in deep trouble), we simply would have to print dollars and use them to buy euros. No problem.
All nations use fiat money. There has been no other type of money for centuries. Even gold was fiat money, since it had minimal intrinsic value.
Every nation that wishes to export to us must accept dollars. That’s why, for instance, China has so many dollars. They have no alternative.
You may find this post interesting.
Rodger Malcolm Mitchell
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Do you believe that our reliance on taxes post-1971 is simply a political artifact of the now-defunct gold standard? What do you believe would be the political impact of Congress declaring: “We are monetarily sovereign, therefore there is no need for any federal income tax, nor federal borrowing. Heretofore the federal tax rate will be reduced to zero, the IRS will be disbanded and we will satisfy all our needs by printing money, and continue to regulate inflation via the Federal Reserve. States – you continue to do what you need to do.”
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Sandy,
The political impact would be negative, because the change would be too sudden, and very few people understand the concept of monetary sovereignty. The typical conversation goes like this:
Debt-hawk: “The United States is broke, the deficit and debt are unsustainable, and our grandchildren will pay the taxes.
Me: “No the United States is not broke. It can “print” unlimited amounts of money, which means it can sustain a debt of any size, and does not need or even use taxes.
Debt-hawk: “Well, yes, the United States can print money without limit, but that would cause inflation. Look at pre-war Germany and Zimbabwe”
Me: “There is a point at which money printing could cause inflation, but we are nowhere near that point. Since 1971, there has been no relationship between deficits and inflation. Germany’s inflation was caused by the Allies’ onerous post WWI terms, and Zimbabwe’s was caused by Robert Mugabe.”
Debt-hawk: “Well, why not just end all taxing and give everyone a million dollars.”
Me: “That much sudden money printing, all at once, would cause inflation. We need to move in that direction in a measured way. My suggestions are first to eliminate T-securities and FICA,” etc., etc.
Debt-hawk: “Well, if you are right, why don’t the newspapers, politicians and economists agree with you?”
Me: “I wish I knew. All I can do is supply data and hope someone prefers facts to intuition.”
Rodger Malcolm Mitchell
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