The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
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America struggles, has struggled and will struggle, unless one fundamental changes, and that fundamental is economics. We have had an average of one recession every five years. The recovery lags. Again and again, our people lose their homes, their livelihoods, their lives. Who is at fault for our repeated economic problems?
I accuse you mainstream economists, with special mention of those who have won prestigious awards, for leading America astray. I accuse you mainstream economists for lying to America. I accuse you mainstream economists who:
1. Refuse to understand Monetary Sovereignty, which reveals that the federal government has the unlimited ability to create money, restricted not by taxes nor by borrowing, but only by inflation. You who do not understand the implications of Monetary Sovereignty do not understand economics, yet the nation relies on your ignorance for leadership.
2. Refuse to acknowledge that the so-called federal “debt” merely is the total of outstanding T-securities created at will, from thin air, a process that has become unnecessary since August 15, 1971, when President Nixon took America off the gold standard. Rather than creating T-securities from thin air, then trading them for dollars previously created from thin air, all federal debt could be eliminated if T-bill creation were eliminated. The Treasury is required by law to create T-bills in an amount equal to the federal deficit, the difference between taxes and spending. This is not a financial need; it is a legal requirement, made obsolete in 1971. You mainstream economists don’t explain this to the people.
3. Refuse to adapt your philosophies to post 1971 economics. Ask many of you mainstream economists a question about federal debt, deficits, taxes, spending, inflation, deflation or stagflation and your answers today likely will not differ in any fundamental way from your answers pre-1971, though coming off the gold standard made a vast change in economics. It’s as though physicists gave all the same answers post-Einstein as they had given pre-Einstein.
4. Refuse to acknowledge that a balanced federal budget would mean disaster for America. A large economy, by definition, has more money than does a small economy. Therefore a growing economy requires a growing supply of money. And federal deficit spending creates the money to grow the economy.
5. Equate federal debt with personal debt. You tell the populace a large federal debt is “unsustainable” and a “ticking time bomb,” when neither is true. Because the U.S. government creates money by clicking a computer key, which it can do endlessly, any amount of federal debt is sustainable. While personal debt is a danger to the debtor, requiring income to service, federal debt is no danger to the federal government, and its service does not require income. You mainstream economists fail to explain this.
6. Insist that federal initiatives be “revenue neutral,” depriving Americans of the benefits federal spending can provide. Example: You falsely tell us America cannot afford universal health care, and that paying for universal health care would require tax increases for our children and grandchildren, when neither is true. U.S. government spending is not constrained by taxes. Thus, you mainstream economists deprive millions of our children and grandchildren of their health and their lives.
7. Equate financial problems in the euro nations with America’s finances. The euro nations are not Monetarily Sovereign; they cannot create euros at will. America is Monetarily Sovereign. It can create dollars at will. The difference is as black is to white.
8. Fail to reveal that our monetarily non-sovereign governments — the states counties and cities — cannot survive long-term on taxes alone, and must have money coming in from outside their borders. Monetarily non-sovereign governments, unlike the federal government, do pay their bills from tax money received. But because their citizens also pay federal taxes, which remove money from the local government, substantial federal input is needed, else the local government continually will lose money. Yet the federal government, misled by you mainstream economists, asks state governments to pay for such things as Medicaid, housing, schooling, security, infrastructure, etc. – all responsibilities that could and should be met by the federal government.
9. Fail to reveal that Social Security and Medicare are not supported by FICA and will not go bankrupt when FICA payments don’t equal benefit payments. Medicare and Social Security are but two of the more than 1,000 federal agencies, all supported by the federal government, and not by taxes. Among the other 1,000+ agencies, not supported by taxes, are all federal courts including the Supreme Court, the Army, Navy, Marines, Air Force, the Army Corps of Engineers, Justice Department, Bureau of Prisons, Census Bureau, Congress, Consumer Products Safety Commission, Customs and Border Protection, CIA, FBI, Department of Energy, Department of Education, Treasury Department, EPA, Federal Reserve System, FDA and on and on. We don’t hear about these federal agencies going bankrupt. Yet you mainstream economists continually warn us about the impending bankruptcy of Social Security and Medicare, warning that result in reduced benefits and higher taxes.
10. Fail to acknowledge the need to eliminate business taxes. Such taxes hamper business –our economic engines — while providing nothing useful for a Monetarily Sovereign government that neither needs nor uses taxes.
11. Fail to inform the American public that recessions and depressions are not part of a normal economic “cycle,” but rather are the result of errors made by our political leaders, who take their lead from misinformation supplied by you mainstream economists.
12. Fail to explain that for a Monetarily Sovereign nation, exports are not better than imports. When China exports to America, it expends massive amounts of energy, manpower, time and scarce resources to create products, which it sends to us in exchange for dollars, which we create at no cost, by touching of a computer key. Thus, China is our slave, working and sweating essentially for nothing.
13. Fail to explain that immigrants do not take jobs from citizens nor do they commit more crimes nor take federal benefits from taxpayers. Immigrants, being consumers, create jobs by buying. They are not more likely to be criminals, for fear of being deported. And taxpayers’ money does not pay for federal benefits, the simple reason being that taxes do not pay for federal benefits. You mainstream economists do not explain this to an innocent public motivated by fear-mongering politicians.
14. Fail to speak against the federal debt ceiling, when such not only is unnecessary but harmful to economic growth.
15. Fail to inform the public that nearly every recession and depression has resulted from a series of years in which federal debt growth declined.
Yes mainstream economists, Nobel-winning, article-writing, much admired and much feted mainstream economists, I accuse you of harming America, harming our children and our grandchildren. You have done us more damage than all the Communists, all the Fascists, all the drug dealers and murderers, all the terrorists and traitors. You have undermined our nation at its very economic core.
Why do you do this to us?
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
No nation can tax itself into prosperity, nor grow without money growth.
#Monetary Sovereignty - Mitchell 
No sooner had I posted the above, than I saw this Article showing the damage mainstream economists have created and continue to create.
Rodger Malcolm Mitchell
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Note from Thornton Parker:
Dear Rodger and Randall,
After thinking a great deal about the ideas that you and others are writing, I have reached a few tentative conclusions. To summarize my current level of befuddlement, I accept the ideas that:
1. The US and other countries that have Monetary Sovereignty have far more latitude to spend as they see fit than entities that do not have it. The ideas that the US may not be able to pay its bills or will go bankrupt if its debts get too high are being overblown.
2. Modern Monetary Theory, that relates household, business, government, and foreign financial balances appears to be correct.
3. Those who argue that the government must reduce its deficits will surely delay this country’s recovery from the recession and they may lead to a depression.
But, I think:
1. While the ideas of Monetary Sovereignty and Modern Monetary Theory appear to be more correct than the ideas that now drive public policy, from a practical standpoint, they are less than adequate guides for the US government.
2. There has always been tension between individual freedom and governmental power in this country, and since colonial days, the power of the purse has been a primary way to limit government actions. Even if the idea that government must raise money before it spends it has not been true since the elimination of the gold standard, it remains a useful handle for citizens to exercise their own sovereignty, on which the Constitution is based. The periodic passion play about raising the debt ceiling is absurd for several reasons, but unless Monetary Sovereignty is buttressed with something else, there would be no practical limit to what the government could do.
3. We know that some governments that had Monetary Sovereignty created too much money and got into serious troubles. While I agree that the US is not at that point now, I believe those who promote the concept need to explain in some detail what the practical limits are and how to recognize when they are being approached.
4. The three of us have our reasons for thinking that the market is less than prefect for guiding long term decisions. And long ago, I concluded that government domestic programs are attempts to cause different things to happen than would happen if guided only by the market. But by itself, Modern Monetary Theory has the potential to disrupt some things that the market does relatively well. It can be used to justify government intervention in ways that are fundamentally flawed. For example, we can’t afford too many mistakes like the ethanol program that appears to be disrupting food supplies while not even being efficient on an energy-in-energy-out basis.
5. Unfortunately, Modern Monetary Theory comes on the heels of the Efficient Markets Theory and Modern Portfolio Theory, which have been like the Pied Piper of economics and finance. I think it should be relatively easy to show how MMT is based on real world observations while EMT and MPT are based on unprovable assumptions, but I don’t know that the case has really been made.
So, I conclude that both Monetary Sovereignty and Modern Monetary Theory are works in progress. They need more work at their outer ends to show how they can be applied with reasonable levels of control and expectations of success.
And as a grandfather, I think that your task is much like helping children understand why something that looks right to them can really hurt them. The task is one of leading and gentle explaining, not battling.
I urge you to keep up the good work and I hope these comments are useful.
Respectfully,
Thornton “Tip” Parker
1115 Glenmoor Drive
Harrisonburg, VA 22801
540-437-8828
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Thanks Thornton.
Here are my thoughts. You said, “. . .unless Monetary Sovereignty is buttressed with something else, there would be no practical limit to what the government could do.”
Monetary Sovereignty is a description of reality, and does not change the limits of government power. There is in fact, no practical limit to what government can do, other than elections or riots in the street.
The debt ceiling is a creation of the government and is moved by the government. It is not a limit on government.
As MMT and Monetary Sovereignty long have said, the sole “limit” on federal money creation is inflation. (It’s not really a limit so much as a guidepost.)
That said, (and here is where I differ from MMT), the emergence of inflation does not necessarily mean money creation should stop or even slow. The first step, in my opinion, would be to increase the reward for owning money by raising interest rates.
You said, ” . . .Modern Monetary Theory has the potential to disrupt some things that the market does relatively well.” I believe you are saying, the false belief that federal deficits are unsustainable actually benefits us by limiting federal spending.
I doubt whether false belief ever is beneficial. While you gave the example of ethanol, I could give you dozens of examples where this very same false belief has injured hundreds of millions of Americans. Shall we begin with universal health care, infrastructure, ecology, education, unemployment, Social Security and research & development? If we could have any of these supported properly by the federal government, I’d accept a thousand “ethanols.”
The bible is based on a simple statement: The Golden Rule. All else is explanation. Monetary Sovereignty and MMT also are based on a simple statement: A monetarily sovereign government has the unlimited ability to create its sovereign currency. All else is interpretation.
Now, if only we could get the mainstream economists to understand that one, simple statement . . .
Rodger Malcolm Mitchell
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Regarding #12, the part about China giving us stuff in return for electrons, what if China take the money credited to it decides not to waste is on USG bonds and the like, but rather buys tangible things in the U.S. like General Motors, General Electric, or even Apple? Then those electrons would be converted to real stuff, and the profits from those investments would go toward buying more “stuff” in the U.S. until eventually they own the whole place, $200-300 billion at a time, every year. Is that a good thing?
Another point, if you’ll allow me. Let’s say the US government agrees with MMT and stops issuing bonds to finance itself. What would be the effect on the dollar’s exchange rate? Wouldn’t it drop like a stone?
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Gary,
You may be too young to remember this, but there was a time when people worried about Japan buying America. For a while they focused on buying Hawaiian properties, and there was quite an uproar amongst the American patriots. When inevitably, Hawaiian properties didn’t prove as profitable as Japan hoped (the price rose too high because of Japan’s buying), Japan got out — at huge losses.
I suspect if China were willing to invest $300 billion per year buying U.S. properties, after perhaps a thousand or two thousand years, they would own us. Of course, well before then, the price of those properties would have risen enormously, then burst like a bubble, and China would have met the same sad fate Japanese investors did.
In short, we are just too damn big to be bought, and if you try, the price rise will sink you. Remember the Hunt brothers?
As for the dollar’s exchange rate, this is based on many factors. An important one is interest rates. You might think that eliminating T-securities would affect interest rates, but actually, the Fed arbitrarily sets rates through the discount window.
Summary: I don’t know why eliminating T-securities would reduce the value of the dollar.
In that regard, what if the exchange value of the dollar did decline? Our imports would cost more, which would be inflationary, so we simply would raise interest rates to prevent/cure the inflation. No problem.
Rodger Malcolm Mitchell
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Well, the problem with mainstream economists is that they are really that ignorant (to use a kind word), and do not understand money (or much else) at all. As for Pete Peterson – he most certainly does understand monetary sovereignty. He just wants to live in a world with a few billionaires and billions of desperate debt-peons.
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This corrects a lot of grammar errors in my previous post.
I would adjust one of the sentences to say that a growing economy allows the government to increase the deficit, or that deficit spending invested *wisely* to increase production efficiency can grow the economy. In this 2nd case, the money supply increases before economic expansion which devalues the currency. But the value in the currency can be regained if future economic gains and/or higher taxes enable a fiscal surplus that is “burned” or held in a vault, awaiting future economic expansion.
But because we have the world currency, we have to issue new dollars to enable world growth (i.e. an increasing demand for dollars), in order to keep the supply/demand ratio for dollars constant (i.e., try to keep the value of the dollar constant so markets understand the price signnal and therefore make good contracts in wages and production).
If the world uses fewer dollars, or shrinks in GDP, the excess dollars come home, taking away our previous gains. We need to convert dollars and other currencies based on a basket of commodities before it’s too late.
Blind money printing has only a temporary benefit if the world GDP is not requiring an increasing number of dollars. They will someday come home if the world GDP ever shrinks. Money printing must be used to increase *our* production efficiency through all infrastructural means: education, health care, roads, research, etc. Sending them overseas to create jobs and infrastructure and a trade deficit is not good for our future unless we eventually default on the T-bills that result from foreign banks of surplus countries having too many dollars. There may be other ways we can stop honoring foreign claims on the value of the dollar to profit now, and protect ourselves later (this could be called theft, or a way to blame our creditors for letting us hang ourselves with debt that leads to a devalued dollar after our industry is stripped down). But we’re OK if we only print money as fast as the world’s dollar-based GDP grows … if it never contracts too much.
This is what I see missing from your article. Also, in another article, I see you referring to debt/GDP ratio and citing Japan. It’s not the debt/GDP ratio that always ends empires. It’s the *foreign* debt/GDP ratio. We are at the historical brink. We’ve been allowed to reach the brink because countries have had not choice except to accept the dollar. They have been forced to allow us to hang ourselves, otherwise they would have been taking precautions to ensure they can be paid back in something other than dollars from thin air.
If you take into account the increase use of the dollar in world GDP since 1971 then you can see why we’ve been able to print so much without much inflation. (Relative to a basket of commodities, adjusted upward based on large efficiency gains since 1971 that lowered the price of commodities outside the effect of the dollar.)
I do not see any overt errors in the 2 articles I’ve read, but they seem to be avoiding the deeper understanding I’ve given above.
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zawy,
Foreign debt/GDP and debt/GDP are equally meaningless. One reason: Federal “debt” is meaningless. Before you faint, let me explain.
Federal debt merely is the total of outstanding T-securities, which the federal government created out of thin air, then exchanged for dollars, which it previously created out of thin air. Prior to 1971, when the federal government was not Monetarily Sovereign, it was necessary for the government to exchange T-securities for dollars, because it did not have the unlimited ability to create dollars.
So the Treasury was required, by law, to create T-securities in the amount of the federal deficit, and exchange them for dollars.
Today, the federal government does not need to borrow the money it has the unlimited ability to create. So issuing T-securities, then trading them for dollars, remains as a relic of the pre-1971 days.
The government easily could redeem all outstanding T-securities tomorrow. All it would need do is credit the checking accounts of T-security holders, and debit their T-security accounts. No new money would be created; it simply would be an exchange of one form of money for another.
Most of your post seems to hint at the belief that federal money creation causes inflation. I believe there is a point at which this can be true, but we are nowhere near that point. This I know, however. Lack of federal money creation absolutely, positively causes recessions and depressions. A summary of this is at: Summary
Rodger Malcolm Mitchell
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Again, I don’t disagree with anything you’re saying, except for the big picture, i.e. the 1st sentence and the last point about money printing does not cause inflation. Yes t-bills are the same as dollars, and they can come home. If the last 40 years of dollar expansion comes home by the world being able to find substitutes, supply/demand will definitely affect the value of the dollar. The $10 trillion that was printed in dollars and T-bills in past 10 years provided a stimulus, but it did not cause inflation in prices because it caused inflation in land value of real estate without affecting the rent calculation and subsidized building industry and infrastructure in surplus trade countries. So the ongoing stimulus is providing neither inflation nor increasing production efficiency. It’s making people think money printing has not and will not cause inflation in the future. But the inflation is being built up as as a hidden tension in the form of foreign debt, impending interest rate hikes, and our inability to competitively produce anything the world wants. CPI can’t see this “inflation” but commodity prices can because a basket of commodities is the gold standard of a currency because they provide the inputs to all real production capacity. We’ve brought the value of the dollar to 1/3 of it’s 2000 value in terms of commodities. We have to do another $15 trillion of printing dollars and T-bills (dollars) in order to reduce the value of the dollar to 1/3 it’s 2010 value in terms of commodities. As this occurs over the next 10 years, our wages will finally be 1/9 their 2000 value in 2020 in terms of commodities *and* in terms of the RMB. China’s next two 5-year plans switch them to a consumer driven economy to help the RMB value become apparent. At this point, Chinese workers will be more able to afford commodities and notice a nice increase in living standards. Since commodities lay the foundation of 1/3 of the CPI, our inflation will be 100% over the next 10 years as the past 10 year tension is released in addition to the next 10 year’s inflation not being invisible to the CPI. That’s 7.2% inflation the next 10 years instead of the previous 2% over the past 10 yrs.
You’re thinking inside the Fed and banking system’s warp field. You haven’t escaped from the CPI lens. I’m not talking about the core-CPI delay problem. I’m talking about a 10 year delay in the CPI. There’s another even bigger issue that is related to the parasitic costs of non-productive interest and fees which make up 1/3 of the CPI. The increase in the “FIRE sector” and wasteful military the last 30 to 50 years has stolen most of our technological and monetary sovereignty gains.
Foreign debt/GDP ratio is important because that determines how much interest banks demand on t-bills. True, if that ends, we can just print money, which is what we’re doing now. But then the dollar loses its trust and therefore sovereign status and then all those dollars come home in which case the CPI will skyrocket and the U.S. is much less able to buy commodities on the world market. That’s why it leads to empire collapse.
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Nice hypotheses, but like so many projected apocalyptic scenarios, I see no support data.
Just one of many examples: Interest rates are determined by the Fed, specifically the Fed Funds rate. If this rate goes up, T-bill rates will rise. Foreign debt/GDP has nothing to do with T-bill rates.
Rodger Malcolm Mitchell
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I wouldn’t call 7% CPI inflation for 10 years apocalyptic. I was trying to explain classical economics, not to present any new ideas or a hypothesis. Maybe by hypothesis you mean my 7% projection. That’s really a best case scenario with a smooth transition that gives china time to unwind its treasuries and dependence on the dollar in trade. China, Japan, and others will help us and themselves by trying to prevent an apocalypse during the next 3 years by *not* being bond vigilantes. It’s getting more and more difficult.
The fed funds rate is set by increasing or decreasing the monetary base through open market operations. If they set the rate too low compared to foreign holders’ faith/dependency in the dollar, we will be flooded with their dollars which will cause inflation, which could become out of control unless the fed raises rates. This is what happened in 1981. Bernanke will soon have to resort to doing what Volker did. No one predicted 19%, but this time some of us can see it coming.
So if foreign debt finds an alternative to the dollar, which they *must* find if food prices rise too much in terms of dollars, then we *have* to let foreign debt dictate higher interest rates or suffer high inflation from them selling. It happens suddenly.
If 1/4 of Chinese spend 1/2 their income on food commodities, and if QE + drought doubles the price of food commodities, then the Chinese government has two options: 1) keep the peg to the dollar and let 1/4 of their population starve or 2) drop the peg and let the yuan appreciate. The Chinese just took another step towards this by tightening interest rates to reduce the inflation we’re sending them, thanks to the peg they are trying to keep. They’re trying to get off the dollar as a reserve and unwind their treasury holdings before releasing the peg.
China has started trading with brazil, russia, malaysia, and several others without the dollar using currency exchange agreements. IMF is pushing the SDR alternative, although it seems to be a difficult path. Euro seems like it is not a viable alternative.
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Classical economics lives in the pre-1971 days and does not understand Monetary Sovereignty.
The Fed Funds rate is set directly by the Fed, not by its open market operations.
The inflation of 1981, and indeed all inflations for the past 40 years, was caused by oil prices. (See: Oil.)
The inflation of the late 1970’s was not caused by a low fed funds rate. See: Interest)
I agree that fighting inflation requires raising interest rates. I should mention that MMTers disagree; they say higher rates increase business costs, which is inflationary. We fight about that all the time.
The reason I don’t care about foreigners owning T-securities is simple: We could eliminate all T-securities tomorrow, by exchanging them for dollars. Since this would be a simple exchange of money, no new money would be created, so the entire transaction would be inflation-neutral.
Rodger Malcolm Mitchell
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My rebuttals are adequate to refute your arguments. Invest in food, water, and energy, and if you’re savvy, the right tech companies too. Stay away from bonds and dollars. Good luck if you don’t!
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The chart seems to indicate the higher funds rate always causes inflation, or that inflation causes the fed fund rate. You’ve made statements to contradict either interpretation of the chart, so I don’t know why you cite it.
Right, rising oil prices cause inflation.
Debt doesn’t cause *today’s* inflation because it either expands GDP in addition to the money supply, or it inflates asset prices that do not affect the CPI today. But debt causes the future inflation of commodity prices such as oil which causes inflation which requires the fed funds rate to be increased. In this way, debt dictates the fed funds rate even though it appears to be a choice. Bad choices in setting the fed funds gives less freedom in setting the fed funds rate in the future.
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You had said, “If they set the rate too low compared to foreign holders’ faith/dependency in the dollar, we will be flooded with their dollars which will cause inflation, which could become out of control unless the fed raises rates. This is what happened in 1981.”
The chart shows low rates did not cause that inflation. It also shows how the Fed raises interest rates in anticipation of inflation, and that inflation has been caused by oil prices.
Federal debt dictates nothing. Issuing T-securities is a useless exercise, which could be eliminated tomorrow. By the way, Federal debt is not the accumulation of federal deficits — two separate processes, related only by law, not by function.
Rodger Malcolm Mitchell
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Higher funds rate deflates everything except rents and loans, which are about 1/4 of the CPI.
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Those dollars coming home instead of expanding with the world’s GDP will be a new phenomena that has not occurred in the past 40 years. It is the result of us becoming less of a production powerhouse.
When the fed is forced to raise rates to reduce inflation from those dollars coming home, you’re going to conclude that the high fed funds rate ‘choice” caused the inflation, which is looking backward rather than looking forward in time. I am explaining what will happen in the future, but you’re coming to an opposing view based on the same facts because you’re looking at it backwards in time.
Higher commodity prices such as oil is the same thing as an excess of dollars coming home for the first time since 1971: our oil cost will increase.
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The Fed arbitrarily raises the Fed Funds rate to fight inflation.
Dollars “come home” when our exports exceed our imports, which would result from lower interest rates.
Oil prices are based on the supply and demand for oil. It just happens that oil is the one commodity that affects all other commodities, which is why oil price increases cause inflation.
Rodger Malcolm Mitchell
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You’re thinking that we can get something for nothing by simply printing money. You’re absolutely right. For the past 40 years we’ve been getting something for nothing. Now that position has to unwind. The process has to reverse due to our lose of productive capacity. The world is just having trouble figuring out how to get off the dollar.
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I see no reason why “that position” (printing money) “has to unwind.” Deficit reduction has led to every depression and nearly every recession in our history.
Money creation is not dependent on productive capacity.
Rodger Malcolm Mitchell
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My comment on production is not sufficient to explain why things have to unwind. To expound: if trade had always been balanced, the dollar could have remained trustworthy in the world economy and continue to expand with the world’s GDP. The US could have continued to print money for nothing and buy up commodities for free at the same rate that the world required a higher supply of dollars to keep commodity prices constant. Thereby the dollar would have been pegged to a basket of commodities. If the world GDP ever decreases under this balanced trade scenario, we would have had to pay back all the free commodities we took in the first place if we wanted to keep the commodity peg to the dollar. Of course instead of just selling back our commodities and then “burning” the excess dollars, we would take the less painful option of just letting inflation come in proportion to world GDP contraction (via theory of money) so that the rest of the world can help us to absorb the unwinding position.
But going from trade surplus to trade deficit in addition to increasing debt beyond our ability to pay with *constant* dollars can force the world to unwind the position on us even as world GDP rises. We needed to expand our real productive GDP (that does not include banking or insurance profits) with the world’s real GDP in order to keep our sovereign advantage.
If we do not produce enough commodities that the world needs to continue producing for us, and if commodities in terms of dollars threatens to destroy economies outside of the U.S. (as will happen if food commodities double again) then obviously China and other surplus countries are going to remove the peg. They will resort to bartering if that’s what’s required to avoid using dollars.
Those dollars coming home is the unwinding, not deficit reduction.
The Clinton years were a depression?
What I’m trying to convince you of is “earth shattering” to your view, even as we agree on almost all the supporting facts. You have a huge position to unwind in your mind. It will be remarkable if you’re able to make the leap. But I believe you’re still in the warp field of the Fed and banks. In fact you carried their comments to its logical conclusion which results in the absurdity that you can get something for nothing. They don’t want you to be that rational and clear thinking because you will come to see it’s a Ponzi scheme that is coming to an end.
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It’s important to keep an eye out and carefully consider articles like this:
Dollar dominance is ending:
http://www.cnbc.com/id/41886920?__source=yahoo|headline|quote|text|&par=yahoo
As countries raise interest rates to slow down the inflation we’re exporting into commodities, fewer people will buy U.S. treasuries so that the the fed has to raise rates. If the fed simply prints more money instead of selling treasuries like you say they should, then it will only increase the speed with which countries get off the dollar. In the extreme we would be the only ones accepting dollars as a valid currency.
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The Fed doesn’t have to raise rates to sell Treasuries, simply because the U.S. does not need to sell Treasuries.
“If the fed simply prints more money instead of selling treasuries like you say they should, then it will only increase the speed with which countries get off the dollar.”
Neither you, nor foreign nations accept the dollar because you can buy Treasuries with it. There are a few other things you can buy with dollars, too. Treasuries are merely dollars that pay interest (more dollars).
If countries “get off” the dollar, no problem. We will be in the same position as China, India, Canada, Australia, Japan and every other Monetarily Sovereign nation. I see no calamity here.
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The Clinton surpluses led to the 2001 recession.
A “Ponzi” scheme requires input from later investors to pay previous investors. The Federal government requires no input from anyone. It creates unlimited dollars.
And yes, you can get something for nothing. That is the definition of Monetarily Sovereign money. The federal government creates money and T-securities out of thin air.
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“And yes, you can get something for nothing. That is the definition of Monetarily Sovereign money. The federal government creates money and T-securities out of thin air.”
That’s what I said. My whole point is that your discussions seem to think it can go on forever. The world is no longer part slave to the U.S. They do not have to put up with it anymore. Smartphones with currency trading tools are going to accelerate freedom from the dollar.
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“Put up” with what? Yes, it can go on forever. All Monetarily Sovereign nations create money out of thin air: China, Canada, Australia, UK, Japan, and on and on and on. Money is not a physical substance; it is a notation.
The euro nations gave up their Monetary Sovereignty, which is why their system cannot go on forever.
Think of a football scoreboard. Where does it get the points it gives to each team? Do the teams object to receiving points created out of thin air?
Monetary Sovereignty is the only system that can go on forever. It was the gold standard that came to limits.
Rodger Malcolm Mitchell
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“Put up” with us getting their commodities and assets without working for them. Right now, a huge amount of QE is being leveraged out as loans to buy up Asian assets, inflating them, and making them more expensive for Asians. They do not want to put up with this inflation any more and they have recently announced monetary tightening that decreases demand for dollars.
Money must represent measurable, agreed upon, transparent, physical substances of relatively stable value so that contracts for wages and production can be made, and for trade. There are esoteric assets such as I.P., but these too do not have value except in the context of the economic system that depends on the physical world. We can’t create a fantasy economic world that does not depend on energy and matter. Tying money to mass and energy is the only way to bring economics under the rubric of physics and therefore a rational science where we can assign real connections and causality.
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“Money must represent measurable, agreed upon, transparent, physical substances of relatively stable value so that contracts for wages and production can be made, and for trade.”
100% wrong. It was true when we were on the gold standard. No longer true. Which “measurable, agreed upon, transparent, physical substance of relatively stable value” does the dollar represent? Please read Monetary Sovereignty I’ll print your further posts when you assure me you have read and understand it.
Rodger Malcolm Mitchell
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OK, I read it. I think that’s the same article I quoted from before about why reference to japan is not relevant to the U.S.
Again, besides trying to compare japan and the U.S., I do not disagree with any of your observations except for the big picture: what you propose would lead to inflation.
In my quote above that you say is 100% wrong, let me be more explicit. When I said “Money must…” I meant a currency that is legitimate, and by legitimate, I mean a money that does not steal from one group of people and to give to another. The $14 trillion debt we’ve accumulated the past 40 years is equal to theft if we do not pay it back. One way to not pay it back is to simply print the money and thereby devalue all the other dollars in the world. There are approximately $8 trillion dollars floating around in the world according the fed back in summer 2009. If they simply printed $14 trillion dollars to pay back all the debt, it would more than double the money supply and thereby cut the value of all dollar-pegged assets to less than half. That would be theft.
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And if we had been just printing all along and not promising to pay it back, then it would have been devaluing the dollar all this time and the dollar would already be worth less than half what it is today. There would be $24 trillion in the money supply instead of $8 trillion. The debt is very large compared to the money supply.
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Zawy,
Here is how the federal government borrows, let’s say from China:
1. China opens a checking account at the Federal Reserve Bank and deposits U.S. dollars into that checking account.
2. The federal government “borrows” by taking dollars from China’s checking account at the Fed and adding T-bills to China’s T-bill account, also at the Fed. T-bills are part of the money classification called “L.” T-bills are the same as dollar bills, with two exceptions: They have an expiration date and they pay interest.
3. The government then destroys the dollars it “borrowed.” Why? It has no use for them. It creates dollars ad hoc, when it spends. So, borrowing creates no net money. T-bills are created; dollars are destroyed.
4. Now, to “pay back” the loan, the government simply exchanges new dollars for the T-bills, and destroys the T-bills. This also creates no net money, because while dollars are created, T-bills are destroyed.
In short, the government always pays back all its debts, and neither the borrowing nor the payback creates money. Even were the debt $100 trillion, the federal government easily could pay it tomorrow, and this would create no money.
I understand this is counterintuitive, but that’s Monetary Sovereignty. Intuition is not science.
The situation is vastly different for private debt or state and local debt, where borrowing does create money and payback destroys money.
Rodger Malcolm Mitchell
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No, the dollars it receives from China in exchange for new T-bills are used to fund the government, which includes paying off old T-bills. The electronic bits representing dollars are not erased, they are transferred from one account to another.
If the government ever prints new dollars (creates bits on computers without creating a new loan on the balance sheet) to pay back old T-bills, it is not increasing the deficit. It is increasing the world supply of dollars. If this occurs faster than the use of dollars in the world, then it causes inflation.
Dollars are taken off the market only as bank loans are being paid off. New dollars are put into the market only when new bank loans are created. This is what helps keep the dollar stable even though it is not pegged to commodities.
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So you think a government, having the unlimited ability to create dollars from thin air, needs to borrow the dollars it previously created from thin air?
How does your hypothesis differ from the gold standard days?
Rodger Malcolm Mitchell
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Yes. The custodian of the world’s measure of value should have acted as a good custodian. We did not, and we will reap what we sow. We started with a certain number of dollars in 1971. At that point, we should have only printed enough dollars to replace existing dollars. Any debt we took on should have been debt we can repay.
The world was increasingly demanding more dollars in international trade which would have increased the value of the dollar which would have had good and bad effects, and good and bad effects if it reverses.
Excess dollars coming home will be inflationary, but it will also be a stimulus. I had not thought of that benefit before.
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A growing economy requires a growing money supply. All depressions and most recessions came when the money supply didn’t grow enough. See: Summary
Rodger Malcolm Mitchell
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I really appreciate this debate and I think you should continue. I must say, though, that you both seem to be talking past each other. The more Zawy posts, the more it he (or she) seems to be advocating the gold-type standard. On the other hand, he raises some good points about inflation.
One thing I’m not sure about – do other countries have accounts at their national bank or a local commercial bank which are denominated in dollars, or do all dollar-denominated accounts have to be at the FED or in a U.S. bank? For example, when we buy oil, do the electrons flow to Saudi Arabia or only to Saudi Arabia’s account at the Fed?
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I agree my answer is probably too “hard line” and that it is probably necessary to expand and contract the money supply as the world economy grows and shrinks its demand for dollars. I mentioned this before. But I don’t know how we should do it. I agree it should not be by debt. It should be simply printed during expansion and destroyed during contraction. But I do not know how to inject it into the economy and remain fair to all market participants. Right now we’re doing it by issuing treasuries that we will not pay back. So our gov gets funding (money printed), and then the Chinese might get defaulted on (money destroyed).
The government usually does it by adjusting lending rates and lending ratios, but that does not work for an ever-increasing world GDP.
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Gary,
Yes, like most politicians and the media, and even many economists, zawy is stuck in the gold standard. Though he claims to have read Monetary Sovereignty, clearly he can’t get past his intuitive belief that money must have some physical backing, and that the federal government will have difficulty paying its debts and that federal debt is a burden — all false after 1971.
Intuition has led zawy astray. Common problem. Even Einstein’s intuition led him astray regarding quantum uncertainty, when he said, “I, at any rate, am convinced that He does not throw dice.” Zawy is wrong, but so was Einstein, so zawy is in good company.
The gold standard folks tell us how federal debt will hurt our children and grandchildren, but fail to mention how lack of debt hurts us today, tomorrow and forever. Look at the damage the debt ceiling will cause.
Whenever you meet a debt hawk, ask him how his beliefs about federal debt differ from his beliefs about state and local debt, and also ask him how his beliefs changed after 1971. People who are ignorant of Monetary Sovereignty have not changed their beliefs after 1971, and think federal debt is comparable in nature to state debt.
Rodger Malcolm Mitchell
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zawy,
It never is a good idea to destroy money during a contraction — that is the worst time to run a federal surplus.
And, the federal government always pays its debts and always will, barring an insane debt ceiling. The Chinese never will be “defaulted.”
Suggestion: Re-read Monetary Sovereignty until you understand it.
Rodger Malcolm Mitchell
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I said contracted with the *world* dollar demand (usually GDP) contraction. We are not responsible for stimulating the *world economy.
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Contracting the money supply, whatever the reason, leads to recessions. By the way, how is your philosophy different for the federal government vs. state governments? Also, how has your philosophy changed pre-1971 vs. post-1971?
Rodger Malcolm Mitchell
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If we had contracted our money supply to match our GDP growth since 1971, there would be less than zero dollars in the world today. We have had to expand our money supply to match the GDP growth so that there are enough dollars in the world to conduct transactions. The expansion/contraction requirements for stimulus/tightening that you are referring to are about 10 times smaller.
What philosophy or hypotheses are you saying I have? I do not know if we should be on a gold standard.
If the number of dollars in the world are held constant, or if they are strictly expanded to match GDP on a percent increase to percent increase basis (if GDP doubles, then you need twice as many dollars out there to conduct transactions…basic theory of money stuff) THEN the dollars *do* have the physical backing I require for a legitimate, non-manipulated currency. The physical backing in this case would be the physical pieces of paper themselves. By the two methods i just described, market participants will then know the dollars trading hands represent a limited number of bills out there, or that they represent a number that expands and contracts with GDP. The 2nd option seems a lot better and therefore better than gold. The problem is how do you add and subtract bills out of the economy and remain fair?
I think maybe that the best thing would be to have the bills represent commodities. For example, $1 would be worth a specific mass of various commodities in a basket. This has a remarkable advantage: if the supply of the commodities in the world was tight, the money supply would likewise need to be reduced to keep prices the same. Since commodity and non-commodity producing stocks trade opposite to each other over 15 year cycles, this has the exact effect of providing keynesian stimulus and keynesian tightening at the times it is needed. For example, in 1919, 1940, and 1980 stocks had been flat for a decade while commodities were near the peak of a boom, usually a 5x to 10x above previous lows. Consumers and stocks could not afford the commodities that form the foundation of all economic activity. Booms in commodities might even be the cause of all recessions. By making the commodities themselves a stable currency, there is no boom in them, and it prevents stocks and consumers from suffering during recessions. Also, at the end of a stock boom, commodities prices hit rock bottom. Oil in 1998 for example was dirt cheap, and had been throughout the 1990s. That was probably key to the 1990’s growth. If the money is tied to the commodities like oil, then consumers and stocks would not able to get cheaper commodities to fuel the bubble. Therefore no bust.
Commodities now are 3 time what they were in 1998 and stocks are same as in 1998. If history is any guide, commodities will be 3 times more in 4 to 8 years. I’m betting nearly everything on it.
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zawy,
I must confess, I have no idea what you’re talking about. Probably too deep for me. Or maybe I was stopped by the notion that “The physical backing in this case would be the physical pieces of paper themselves,” which surely is one of the silliest ideas I’ve heard recently.
Anyway, I surrender in this attempt at education. You may have the last word.
Rodger Malcolm Mitchell
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Concerning the fixed number of bills: imagine a new element was found on a meteorite that just fell from the sky and it could be traded like gold. Now imagine that everyone is sure that it will be the only source of the element that is ever available. But it’s a fixed, constant quantity. That is the same as a fixed currency that is printed once and only once by a government and it somehow has perfect security so that the bills can’t be faked. And then the government says the bills are the only way you can pay taxes, and it’s the only way the government will pay for things. If any bills were permanently lost or destroyed, it would be OK to replace, but not required. The remaining ones would just increase in value.
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Here’s what I’m talking about. It was recommended by warren buffett’s hero benjamin graham and received support even the opposing forces in economics, hayek and keynes.
http://www.bufferstock.org/introd.htm
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