–An update on “The conversation Barry Ritholtz wouldn’t publish”

The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. If you understand the following, simple statement, you are ahead of most economists, politicians and media writers in America: Our government, being Monetarily Sovereign, has the unlimited ability to create the dollars to pay its bills.

Background: This began with “The conversation Barry Ritholtz wouldn’t publish.” You also could read Barry’s impressive description of himself at Barry Ritholtz, Curriculum Vitae.

Summary: I frequently have commented on Barry’s blog that he seemed not to understand Monetary Sovereignty and seldom supported his theories with facts, and in each case I’ve provided facts to counter his assertions. Barry became so exasperated with being doubted, that he refused to publish my final comment and instead published an “f-bomb,” which usually indicates a paucity of facts.

I offered to send him an outline of Monetary Sovereignty, which he could critique, so rather than merely disagreeing on generalities, we could disagree on facts. He answered, “My response to you was that your premise — I had been saying federal debt and deficit were too high — was wrong. If you want to send some bullet points, go ahead. ( I have seen much of the standard literature on it)”

O.K., so that was progress. Barry is on record as not believing the federal debt and deficit are too high, a point I have been making for 15 years (although his denial doesn’t seem to square with the comments he has made all these years. But hey, anyone is allowed to change their mind.) Following up on his invitation, I sent him this on March 6th, 2011:
Sounds good. I look forward to an educational discussion. Here are some points describing Monetary Sovereignty:

1. In August, 1971, the U.S. became Monetarily Sovereign, meaning the U.S. federal government’s ability to create dollars no longer was constrained by gold supplies nor by the supply of any other physical substance. Dollars no longer existed in any physical sense, but like the score of a game, existed only as an accounting notation.

2. The federal government pays its bills simply by changing the numbers in the bank accounts of its creditors, which it can do endlessly. Federal dollar creation is constrained neither by borrowing nor by taxing, but only by inflation. Thus, inflation aside, even were taxes and borrowing to fall to zero, the federal government would retain the unlimited ability to create the dollars to pay its bills. There is no connection between federal taxes and federal spending. Either could exist without the other. Therefore, taxpayers do not pay for federal spending.

3. The federal government “borrows” by creating T-securities out of thin air, then exchanging them for dollars it previously created out of thin air. Using China as an example, the “borrowing” process is:
a. China first deposits dollars into its checking account at the Federal Reserve Bank
b. The U.S. debits China’s checking account and simultaneously credits China’s T-security account, also at the Federal Reserve Bank.
c. To redeem those T-securities, the U.S. reverses the process; it debits China’s T-security account and credits China’s checking account.
d. The U.S. has the unlimited ability to credit China’s checking account at any time. Thus, the U.S. could eliminate the federal “debt” to China, tomorrow.
e. Dollars are more liquid, and T-securities pay interest and have expirations dates, but both are forms of U.S. money. (Dollars are part of “M1;” T-securities are part of “L.”)
f. Exchanging one form of U.S. money for another form of U.S. money, neither adds nor subtracts money from the economy; the exchange has no inflationary implications.

4. Only federal law, and not dollar need, requires the Treasury to create and exchange T-securities in an amount equal to federal deficits (the difference between taxes and spending). Federal “debt” is the total of outstanding T-securities, not the total of federal deficits. Federal debt could exist without federal deficits and federal deficits could exist without federal debt. The two are related only by law and not by function. Federal “borrowing” is a relic of gold standard days; it neither is needed nor used to support federal spending.

5. Taxes too, do not support federal spending. Were federal taxes eliminated, this would not reduce by even one cent, the federal government’s ability to credit bank accounts.

6. Though federal taxes do not support federal spending, they do serve to destroy dollars. Every federal tax dollar is destroyed upon receipt. For this reason, federal taxes reduce the money supply, and if taxes were eliminated, the money supply would increase dramatically, potentially leading to inflation. Therefore federal taxes help prevent inflation.

7. By definition, a large economy has more money than does a small economy. Thus, a growing economy requires a growing money supply. Historically, all depressions and most recessions have coincided with reductions in federal deficit growth, and all recoveries have coincided with increases in federal deficit growth.

8. A sufficiently large increase in money supply could cause inflation. However, since the U.S. went off the gold standard, there has been no relationship between federal deficits and inflation, which instead has been related to oil prices.

9. The U.S. states, counties, cities, businesses and residents are not Monetarily Sovereign, nor are the euro nations, Greece, Italy et al. Unlike the U.S., they do not have the unlimited ability to credit bank accounts. They do rely on income to pay their bills. They cannot eliminate debt instantly. In monetarily non-sovereign nations, taxpayers do pay for national spending.

10. The terms “debt,” “borrow” and “deficit” have entirely different meanings for Monetarily Sovereign governments than for monetarily non-sovereign entities. The confusion caused by using the same terms for Monetarily Sovereign nations as for monetarily non-sovereign entities, is responsible for many false economic beliefs and harmful actions.

On 3/9, not having heard from Barry, I wrote: “Barry, I hope you received this (I don’t trust Emails), and will give me your thoughts. Because you don’t believe the federal debt and deficit are too high, much of this will be obvious to you, but I’d welcome your ideas where you disagree.

Today, is 3/10. I hold out hope Barry respond will with facts, though he never has in the past. If he does, I’ll keep you apprised.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth.


9 thoughts on “–An update on “The conversation Barry Ritholtz wouldn’t publish”

  1. Wouldn’t it be fair to amend #6 to include “federal taxes also serve to give the currency value to the population. It gives the population a reason to want the currency.”


    1. Matt, that once was the belief of the MMTers. However, in my discussions with Warren Mosler and Randy Wray, they now agree there are sufficient state and local taxes, which makes federal taxes unnecessary for that purpose.

      As an aside, I personally believe there are many reasons people accept dollars, aside from the need to use them for paying taxes. I think if there were no taxes, people still would accept dollars — but it’s just belief.

      I’m not aware of any nations that collect no taxes, but of course, we are only 40 years away from the end of the gold standard.

      Rodger Malcolm Mitchell


  2. Hi Rodger,

    I have been following MMT for almost 3 years now. Is there any data point or paper from pre-gold standard days regarding inflation, debt, and deficits? Because I know historically U.S. has changed various times.

    Thanks and any help will be appreciated.


  3. I am a retired lawyer working as an economic consultant and I write articles on Seeking Alpha. I am very frustrated at the public misunderstanding of this issue and I am absolutely stunned at the “experts” and cognoscenti who constantly rant on the the national debt issue. I think one of the problems is that your views (with which I agree) are counterintuitive. As a writer, I have been thinking of ways to make this more understandable. For example, suppose the Treasury sold a $10 trillion one hundred year zero coupon bond to the Fed; At this point the only important “repayment” issue would be whether or not the Fed would agree to renew the debt instrument one hundred years from now. Perhaps,if mechanisms like this were used, it would become obvious that we don’t really have to think about “repaying” the national debt. I am very fearful that unless this issue becomes better understood, we will blunder into a repeat of the Great Depression.


  4. Philip, the public will not understand until the media and the politicians understand. The media and the politicians will not understand until the mainstream economists understand.

    The mainstream economists will not understand, because they have invested years of speaking and writing about the myth of federal deficits and debt. There is no way these people will say, “I was wrong.” It simply won’t happen.

    Today, you and I and the relatively few others who understand the facts of federal finance, have become the Ignaz Semmelweises of economics.

    Keep plugging.

    Rodger Malcolm Mitchell

    P.S., Barry Ritholtz never responded to the ten points I sent him. I guess he was too “busy.”


  5. I’m sorry, but they have a professional, ethical and moral obligation to chase the truth, learn, adapt and strive for improvement by applying new knowledge and innovation.

    Unfortunately when the Money/Power elite set the agenda and construct shields of impenetrability (own MSM, education system/content, politicians) to maintain the status quo and ward off competitive ideas and actions. It takes a ‘revolution’ to make substantive changes triggered when a critical mass of society is disenfranchised and discontent.


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