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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Have we come to the end of empiricism in economics? The increasing influence of the Tea Party and its philosophies, makes this question especially timely.
To quote from Wikipedia: “Empiricism is a fundamental part of the scientific method that all hypotheses and theories must be tested against observations of the natural world, rather than resting solely on a priori reasoning, intuition, or revelation. Hence, science is considered to be methodologically empirical in nature.”
If economics is a science, all hypotheses in economics must be tested against observed reality, not against intuition or faith. Here are some observed realities in economics:
1. Being on a gold standard requires a nation to hold gold in an amount equal to, or greater than, the amount of sovereign money it issues, according to an agreed-upon formula.
2. In August 1971, the U.S. federal government exited the gold standard.
3. Exiting the gold standard gave the U.S. government the legal ability to create unlimited numbers of dollars without being restricted by gold inventories.
4. Being able to create dollars without limits, the U.S. government does not need to obtain dollars from any other source.
5. Not needing to obtain dollars, the U.S. government needs neither to borrow dollars nor to levy taxes. It merely can create dollars to support any spending need.
6. The above is part of “Monetary Sovereignty.”
7. Not all entities are Monetarily Sovereign. The U.S. states, counties and cities, and the euro nations, are monetarily non-sovereign. They do not have the legal ability to create unlimited quantities of money.
8. Because a Monetarily Sovereign nation can create unlimited money, it cannot go “broke,”i.e., be unable to pay its debts, nor can paying any debt be a financial burden, nor must future generations be forced to pay taxes.
9. Again, quoting from Wikipedia, “A commodity is a good for which there is demand, but which is supplied without qualitative differentiation across a market.” The U.S. dollar is a commodity. It is freely traded on exchanges, and all U.S. dollars are identical.
10. A decrease in the perceived value of a dollar, compared to the perceived values of goods and services, is known as “inflation.”
11. The value of a commodity is based on supply and demand. An increase in supply without a corresponding increase in demand, generally reduces the value of a commodity.
12. Demand is based on risk and reward. An increase in risk, without a corresponding increase in reward, generally reduces the value of a commodity. For money, risk is inflation and reward is interest.
All of the above are empirical. While there may be some legitimate quibbles about the exact wording, I suspect there is agreement that all of the above have been the subject of countless observations.
13. Therefore, the constriant on money creation by a Monetarily Sovereign nation is neither taxes nor borrowing, but inflation.
14. Inflation can be prevented/cured by reducing the supply of, or increasing the demand for, money.
These last two are not empirical, but follow logically from the above empirical statements.
15. Reductions in money supply growth have been associated with recessions and depressions. Increases in money supply growth have been associated with recoveries.
This last statement is not itself empirical, but is based on empirical data. See: Understanding economics.
The following statements neither are empirical, nor are they derived from empiricism. No facts support these statements. They are not science, but rather are based on intuition and popular faith. Yet they not only are parroted, but are believed, by many politicians, economists and members of the general public.
A. Knocking on wood will improve my luck.
B. The federal deficit (or debt) is unsustainable [or a ticking time bomb].
C. Taxpayers or taxpayers’ children will pay for federal spending.
D. Reducing the federal deficit (or debt) will improve Americans’ quality of life
E. Reducing the federal deficit (or debt) will improve security, defense, education, housing, the infrastructure and/or the ecology.
F. The federal deficit (or debt) is similar to your personal debt.
G. The federal deficit (or debt) is similar to states’ debt
H. The U.S. government is broke or going broke.
I. The federal Debt/GDP ratio is too high.
J. When the federal Debt/GDP ratio reaches [any figure], the U.S. economy will suffer.
K. Ireland’s [or any euro nation’s] finances are similar to those of the U.S.
L. The federal debt ceiling is a good thing with a good purpose.
M. Social Security (or Medicare) will go broke without a tax increase or a benefit decrease.
N. Cutting the deficit (or debt) will reduce unemployment.
O. Small government is better than big government
P. Friday the 13th is an unlucky day.
So as Congress, led by the Tea Party and freshman senators, marches toward a debt ceiling showdown, we ask again, have we come to the end of empiricism in economics? Have we come to the end of economics?
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
No nation can tax itself into prosperity, nor grow without money growth.
#Monetary Sovereignty - Mitchell 
I think your premises (observed realities) support the truth of C, I, J, and N in the “non-factual” list you wrote.
I’ll just address the first non factual statement (C): “Taxpayers or taxpayers’ children will pay for federal spending.”
Now, granted, by definition taxpayers of every sort pay for federal spending. That is exactly what it means to be a taxpayer. However, the implication is that taxpayers will suffer more the more the federal government spends. This conclusion is directly supported by three of your previous premises: (5) “Not needing to obtain dollars, the U.S. government needs neither to borrow dollars nor to levy taxes. It merely can create dollars to support any spending need.”, “The value of a commodity is based on supply and demand. An increase in supply without a corresponding increase in demand, generally reduces the value of a commodity.” and 10) “A decrease in the perceived value of a dollar, compared to the perceived values of goods and services, is known as ‘inflation.'” How so?
By defining federal spending as the creation of money, and defining inflation as a drop in demand for the commodity of money or the increase of the monetary supply without an increase in demand, one can conclusively state that any federal spending that expands the monetary supply but does not result in an increase for monetary demand will cause inflation – a burden which will be laid on the shoulders of future taxpayers, as their money will be worth less. This imbalance in monetary supply and demand most often manifests in failed federal speculation (such as government subsidization of Solyndra, the dot com bubble, or the student loans bubble being created right now). Ultimately, funds are being simultaneously created and pumped into economies that are non-productive, thus creating burdens for anyone invested in that currency. (Non-productive in this case refers to projects that cannot survive without artificial life-support such as government funding – granted, this term applies to the majority of the large business community, but that’s a different argument altogether).
Anyway, I’d like to address the first assumption you make in this paper: that economics is a science. Ever read XKCD? I’m quite fond of that webcomic. In this installment: http://xkcd.com/435/ the “purity” of differing sciences are arranged. I like to think that the study of economics is several hundred feet to the left of “sociology.” I have a very specific reason for this: in order to make any definitive statements about anything that occurs in the field of economics, the number of variables you must take for granted immediately makes such propositions so problematic as to be laughable in most other “scientific” fields. Economists can’t even suggest the degree of error in their work without making so many assumptions that it becomes meaningless.
Jorge Luis Borges came up with an interesting analogy to economists use of “mathematical models” to support their economic statements: there was once a city that had the greatest cartographers in the world. In fact, they were such good cartographers that the level of detail they could produce required maps of cities to be the size of an entire block, and maps of provinces to be the size of entire city. As their art improved, they began to realize that the only way to achieve perfect purity in their work would be to draw maps to a 1:1 scale, thus creating a map the exact size of whatever they wished to recreate. Obviously, this is ridiculous, but it goes to show the ridiculousness of the problem: in order to achieve perfectly foreseen outcomes in systems of macroeconomic scale – especially those systems that are built of the individual minds and desires of billions of human beings, as well as all natural events and outlying circumstances – one would need to recreate a scale simulation of the system that takes into account the innumerable variables that go into it. Despite Asimov’s dream of the validity of the science of psycho-history, man has yet to find the algorithm that solves and predicts human desire, intent, and ability, and it’s likely that we never will.
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Federal taxing does not pay for federal spending. In fact, federal taxing has no relationship with federal spending at all. Whether federal taxing fell to $0 or rose to $100 trillion, neither event would affect the federal government’s ability to spend.
This is not true of monetarily non-sovereign governments like the states, counties, cities and the euro nations, where taxing does pay for spending.
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Technically, the federal government’s ability to spend would be greatly affected – in certain circumstances. If federal spending reached the point where huge amounts of funds were going into non-profitable, dead end ventures forcing massive liquidation, inflation would rise to the point that the only way the federal government could survive would be to continue the trend. Obviously, as historically evidenced in Argentina, Japan, and Germany, this leads to hyper inflation and the collapse of the currency. Now, taxation, because it does not create new money, is a far safer means by which to spend. However, obviously, it is a burden tax payers, and is not as invisible a threat to their spending power as inflation is.
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I think your premises (observed realities) support the truth of C, I, J, and N in the “non-factual” list you wrote.
I’ll just address the first non factual statement (C): “Taxpayers or taxpayers’ children will pay for federal spending.”
Now, granted, by definition taxpayers of every sort pay for federal spending. That is exactly what it means to be a taxpayer. However, the implication is that taxpayers will suffer more the more the federal government spends. This conclusion is directly supported by three of your previous premises: (5) “Not needing to obtain dollars, the U.S. government needs neither to borrow dollars nor to levy taxes. It merely can create dollars to support any spending need.”, “The value of a commodity is based on supply and demand. An increase in supply without a corresponding increase in demand, generally reduces the value of a commodity.” and 10) “A decrease in the perceived value of a dollar, compared to the perceived values of goods and services, is known as ‘inflation.’” How so?
By defining federal spending as the creation of money, and defining inflation as a drop in demand for the commodity of money or the increase of the monetary supply without an increase in demand, one can conclusively state that any federal spending that expands the monetary supply but does not result in an increase for monetary demand will cause inflation – a burden which will be laid on the shoulders of future taxpayers, as their money will be worth less. This imbalance in monetary supply and demand most often manifests in failed federal speculation (such as government subsidization of Solyndra, the dot com bubble, or the student loans bubble being created right now). Ultimately, funds are being simultaneously created and pumped into economies that are non-productive, thus creating burdens for anyone invested in that currency. (Non-productive in this case refers to projects that cannot survive without artificial life-support such as government funding – granted, this term applies to the majority of the large business community, but that’s a different argument altogether).
Anyway, I’d like to address the first assumption you make in this paper: that economics is a science. Ever read XKCD? I’m quite fond of that webcomic. In this installment: http://xkcd.com/435/ the “purity” of differing sciences are arranged. I like to think that the study of economics is several hundred feet to the left of “sociology.” I have a very specific reason for this: in order to make any definitive statements about anything that occurs in the field of economics, the number of variables you must take for granted immediately makes such propositions so problematic as to be laughable in most other “scientific” fields. Economists can’t even suggest the degree of error in their work without making so many assumptions that it becomes meaningless.
Jorge Luis Borges came up with an interesting analogy to economists use of “mathematical models” to support their economic statements: there was once a city that had the greatest cartographers in the world. In fact, they were such good cartographers that the level of detail they could produce required maps of cities to be the size of an entire block, and maps of provinces to be the size of entire city. As their art improved, they began to realize that the only way to achieve perfect purity in their work would be to draw maps to a 1:1 scale, thus creating a map the exact size of whatever they wished to recreate. Obviously, this is ridiculous, but it goes to show the ridiculousness of the problem: in order to achieve perfectly foreseen outcomes in systems of macroeconomic scale – especially those systems that are built of the individual minds and desires of billions of human beings, as well as all natural events and outlying circumstances – one would need to recreate a scale simulation of the system that takes into account the innumerable variables that go into it. Despite Asimov’s dream of the validity of the science of psycho-history, man has yet to find the algorithm that solves and predicts human desire, intent, and ability, and it’s likely that we never will.
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Yes, the limit to federal spending is an inflation that could not be controlled by raising tax rates. As for hyper-inflation, the U.S. never, it its entire history, had hyperinflation, a phenomenon that is not caused by over spending, but rather by non-spending factors.
Consider all the economic situation through which the U.S. has gone — wars, recessions, depressions — and never a hyperinflation. Not one.
Germany: The onerous conditions placed on them by the Allies
Zimbabwe: The stealing of farm land from people who knew how to farm and giving it to people who didn’t.
Historically, hyperinflation has caused government spending and not the other way around.
Intuition is no substitute for facts.
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I agree with your statement that the US has never had hyperinflation, but I cannot agree with the assumption that hyperinflation is caused solely by non-spending factors and not by overspending. My disagreement stems from your previously stated assumptions: namely, that the nature of federal spending is different from the nature of private, local, or state spending. It’s a completely different ballgame when you spend with money created and not money earned (and I don’t just mean the lack of frugality that comes with the holders of “free money” – but that does play a part). Hyperinflation occurs when private spending drops AND federal spending/money increases. Put another way, hyperinflation occurs when market productivity drops (i.e., a drop in private spending, or a drop in private production) and the rate of money creation increases (i.e., there is an increase in the rate of growth in the monetary supply AND this growth is rushing into the market).
The reason this hasn’t happened in America? I say the reasons are two-fold: first, the American dollar is the reserve currency held by most of the world’s banks. This means that it is far less likely that debt will trickle into the market as currency without everyone suffering due to inflation. So, foreign debt offsets the increase in the monetary supply, and in the meantime, banks hold onto reserves tightly to avoid another recession. Secondly, our economic production has been able to keep up with our inflation, and it’s been monitored relatively closely over the past forty years. And before that, obviously, our currency was still tied to a commodity market. (No, I’m not a goldbug – tying any currency to a short list of valuable commodities is asking for trouble. Better to spread such dependencies on a wide range of ubiquitous, stable, and unchanging commodities for which the medium of exchange acts as stock.).
Historically, hyperinflation was caused by an increase in the monetary supply by governments, since examples of competing privately instituted currencies in any given market are unheard of without some sort of government intervention (see: American fractional reserve banks of the 19th century bound to accept gold and silver or trade bonds/bills for gold and silver by law).
I do agree that intuition is not a substitute for fact. However, “facts” are inherently quantitative, verifiable, and reproducible in nature; claiming to know “the true causes” behind effects in a system run primarily by human beings for their individual purposes is so prone to error as to be laughable by the standards of any other science. Hence why conclusions reached based on empirical evidence in the field of economics are so filled with speculation, politics, and presupposition that they are not capable of withstanding the same scientific rigor to which other fields are subjected.
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One thing never has happened in our nation’s history (even before that nation’s currency was the meaningless “reserve”), despite world wars, civil war, recession, depression, massive growth and shrinkage. NEVER. That thing is hyperinflation.
Another thing has happened often and is happening right now: Recessionary unemployment and widespread suffering:
So which is the greater threat?
Think before knee-jerk arguing!
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Either he doesn’t know anything about modern monetary theory or he is lying about the deficit. Either way he is a liar.
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