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.
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You may think that when you pay taxes, you send money to the federal government. Wrong. You send only instructions to the federal government. The instructions tell the government, “Debit my checking account and credit your checking account.” Money never is sent anywhere. Just instructions.
Mail a dollar bill and all you are mailing is instructions to the federal government to credit the account of the person who hands the dollar to a bank teller. That’s all a dollar bill is: Not money, but instructions.
Think of it this way. Say you own two houses, a summer house and a winter house, but you can afford electricity for only one house. So, during the summer, you tell the electric company to connect the electricity for your summer house. Then, when winter comes, you tell the electric company to disconnect your summer house and connect your winter house.
Question: Have you now sent electricity from your summer house to your winter house? No. You only have sent instructions. So it is with dollars. Though I often have said, “Money never stops,” meaning whoever receives money immediately passes it to a bank or spends it or invests it, the truth is, money doesn’t exist in any physical form, so in fact, money never moves. It can’t.
Things that have no physical presence can’t move. Can a number move? Can a story move? Can a memory move? No, and neither can money. When you “send” money, what moves are instructions.
Mail a check and you are mailing instructions. Run your charge card and you are sending instructions. The transaction merely is a debit to one account and a credit to another.
This is important, because it can help you understand what happens to your taxes. When you send a check (instructions) to the IRS, your checking account is debited and the government’s account is credited. If the government were like the states, counties, cities, businesses or persons, crediting their account would give them dollars they previously didn’t have.
But the federal government is unique. Crediting its accounts does not give them anything they didn’t previously have, because as a Monetarily Sovereign nation, the federal government already has the unlimited ability to credit all bank accounts, including its own.
Yes, the federal government can credit its checking account any time it wishes. Whether the IRS debits your account $1 for taxes or $1 trillion, this does not affect the federal government’s ability to credit bank accounts. Essentially, your tax money is destroyed. Useless. Gone. And the government has no more money than if you paid no taxes at all.
The government does not spend your tax money. Federal spending is not related to taxes. This is the fundamental difference between the federal government and state/local governments. It is called Monetary Sovereignty, and it is why our children and our grandchildren never will “pay for” federal deficit spending. There is no mechanism by which a private party can “pay for” a federal obligation.
The government “pays for” things by sending banks instructions to credit accounts, and we taxpayers have no role in this.
Because federal taxes do not enrich the federal government by even one cent, the whole discussion about the so-called federal “deficit” and “debt” is nonsense. The federal government’s ability to debit your bank account does not change the federal government’s ability to credit someone else’s bank account. The fact that credits to someone else’s account may exceed debits in your account (aka a federal “defict”) means nothing. The two are unrelated.
So when you hear or read someone pontificating about the “unsustainable,” “ticking time bomb” “burden” of the federal deficit – when you read that our children will have to “pay for” the federal deficit — understand this: The federal deficit merely is the difference between debits to private bank accounts and credits to federal bank accounts, and the federal government has the unlimited ability to credit any bank accounts, public or private.
Now, how does it feel to know the federal taxes you pay are destroyed, useless, meaningless and a net loss for you and for the economy?
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
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No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetarily Sovereign, and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.
Remember that the next time you’re tempted to ask a dopey teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it screwed up the economy.”
MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 
Seems that your article flies in the face of this WH initiative. Not that I don’t agree with you but it seems that there is no way the general population would believe you over this.
http://www.whitehouse.gov/taxreceipt
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Rodger,
The last three posts are magnificent. They should be required reading by a specific 535 member subset of our electorate. I feel I am almost ready to take on a cocktail party.
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Dan,
I know of no politician, whether in the Executive or the Legislative branches who has admitted to understanding Monetary Sovereignty. They all talk and act as though federal finances were identical with state and local finances. They offer the same solutions to the federal government as they would offer to the state and local governments.
Demonstrating that the Executive branch has no concept of Monetary Sovereignty, they even have opened a wed site called “Understand how and where your tax dollars are being spent”. Sorry, Mr. President, tax dollars are not spent. Read my posts.
Rodger Malcolm Mitchell
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I think Dick Cheney did a few years ago with his ‘deficits don’t matter’ comment.
Quote from a Google search: “O’Neill said he tried to warn Vice President Dick Cheney that growing budget deficits-expected to top $500 billion this fiscal year alone-posed a threat to the economy. Cheney cut him off. “You know, Paul, Reagan proved deficits don’t matter,” he said, according to excerpts. Cheney continued: “We won the midterms (congressional elections). This is our due.” A month later, Cheney told the Treasury secretary he was fired. ”
Even though I think most of what he did and stood for was vile, it sounds like he may have truly understood how things actually work. I suspect he and a few other senior Republicans are only ever debt hawks out of pure political conveniance.
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You know, from the Monetary Sovereignty standpoint, Bush/Cheney are the greatest ever. They love tax cuts and don’t care about deficits.
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Yes, they may or may not have known what they were doing, but their cut-taxes-increase-spending program cured the Carter inflation and began one of the more impressive economic growth periods in our history.
Rodger Malcolm Mitchell
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Republicans are only against deficits when they don’t occupy the white house. I bet even Michele Bachmann would cut taxes and spend like crazy if elected President. After the disastrous Clinton budget surplus in his second term, we don’t want a budget balancing Obama second term to destroy the economy again, do we?
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Hi Rodger.
You say “… their cut-taxes-increase-spending program cured the Carter inflation and began one of the more impressive economic growth periods in our history”.
How did increasing spending reduce inflation?
Thanks!
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Phil,
Must have been drunk or late at night. It was the Clinton recession, not the Carter inflation. Thanks for your question.
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Hamish, Warren Mosler has said that he once explained monetary sovereignty/ MMT to Arthur Laffer, and that Laffer explained it to Cheney. So Cheney does speak from some real knowledge of how things work. If only it were not true that “most of what he did and stood for was vile.”
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As long as he understands Monetary Sovereignty, “most of what he did and stood for” doesn’t matter. What could be worse than the Carter inflation, the Clinton surplus or the Obama cuts?
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Starting endless, insane wars.
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“Endless, insane wars” paid for with endless, instant dollars can’t hold a candle to the economic destruction caused by the Clinton surplus. By the way, how’s that Nobel Peace Prize going for Obama?
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Tell that to the dead. Without the military-industrial death and wealth destruction machine, the US and world economy & politics would be much different and much healthier. Obama is just another serial killer.
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That’s why what Cheney did and stood for doesn’t matter. They’re all serial killers which makes their understanding of Monetary Sovereignty a far more important issue. Pick your poison.
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I don’t think Cheney thought about MMT for a single second when making those comments. He simply put 2 & 2 together….the world didn’t blow up when the deficit was high, so who gives a toss….yippee, let’s spend some more money, especially if it helps my mates at Halliburton.
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You seem to forget Dick Cheney was Vice President when he said “Reagan proved deficits don’t matter”. Don’t you think he is more knowledgeable than all economics Nobel laureates combined?
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Then again, Cheney simply may have meant that deficits don’t matter in elections. Who knows?
Rodger Malcolm Mitchell
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I thought your position was that oil prices were the cause of the Carter inflation? How did Reagan/Cheney tame inflation?
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Raised interest rates.
Rodger Malcolm Mitchell
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It was Volcker who had the brains, cojones, and position (as Fed chair) to raise interest rates enough to truncate the 70s’ oil shock cost to price spiral. Recall that his appointment was by Carter. Just one more white horse that Reagan rode across the stage after someone else saddled him up.
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Thanks Robert,
And let us not forget the executive subset, along with the media and the vast majority of the educational set.
Rodger Malcolm Mitchell
P.S. The people at the cocktail party will tell you you’re an idiot. Been there.
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Rodger,
A question that has been puzzling me. You always state (correctly) that a growing economy needs a growing supply of money. However it seems that the US economy needs a percentage increase in money that far outstrips the corresponding growth in GDP. Do you agree with this and if so why do you think it’s true?
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Jason, Assuming the money supply is to keep up with GDP (in real terms), it needs to keep up with, 1, population growth (say 2% a year?), 2, inflation (say 2% a year?) and 3, increase in GDP per head (say 2% a year?). If the above “2%s” are roughly right, the money supply has to expand by about 6% a year.
In the last two years or so there has been an astronomic monetary base increase: part of the Fed’s desperate attempts to escape the recession. But if you ignore that, and look at the expansion in the monetary base in more normal times, say between 1985 and 2005, the expansion is very much in line with the above 6%. It’s actually been between 7 and 7.5% according to my calculations.
There is a monetary base chart at the St Louis Fed site.
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Jason, you are correct.
Additional dollars also must overcome federal taxes, the trade “deficit” and population growth. The later is especially needy of additional dollars.
A mathematician, proficient in regression analysis, might be able to determine the relative values of each variable. It would be a huge job, primarily because of the uncertain values assigned to each variable.
That is, how much really is GDP, all federal taxes, total population, the trade deficit and the money supply, all (but population) adjusted for inflation?
And population could have many subsets — age, sex, education, ethnicity, citizenship — each of which could impact GDP.
Speaking of the almost infinite variety of money measures, one of my favorites is Debt of Outstanding Nonfinancial Sectors which on a year-to-year percentage growth basis seems generally to parallel GDP growth.
Rodger Malcolm Mitchell
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Kudos! Rodger for President 🙂 finally someone who understands and can explain the true methodology of the system. But what about the ongoing declining Velocity of Money that has been going on since the so called QE program started? Isn’t that going to be the poisonous sting causing a severe lack of liquidity in the real economy in the end? Could you please elaborate on that in a future article?
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Koen,
I have difficulty with “velocity” which is the ratio of aggregate transactions vs money supply (however that may be measured).
GDP is not stimulated by the ratio, but rather by the transactions. That is given any specific level of aggregate transactions, the ratio is irrelevant.
If the money supply rose massively, and the transactions rose somewhat less, the ratio would go down while having a positive effect on GDP.
Rodger Malcolm Mitchell
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Tnx, I get that, but the Money Supply isn’t really rising massively (as QE is just swapping sides, it doesn’t add to the supply) but still the ratio is declining rapidly. It keeps me puzzled. What if the transactions just stop, just like the creditmarkets froze over back in 2008? Can we still spend our way out of that missery?
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Rodger,
Another unrelated question: There has been a huge surge in the price of precious metals. There are many “explanations” for this, but one of them is that both individuals and governments are growing increasingly suspicious of fiat currencies, especially the dollar as it is the weakest. Do you think their line of reasoning is delusional and thus the precious metals are experiencing a bubble with no real fundamental basis, or is something else going on?
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Koen,
Right. That’s one of the reasons I have difficulty with “velocity.” The formula is V=T/M where T is transactions and M is money supply. So what happens to this ratio when M increases faster than T?
Right, the ratio goes down, even if both T and M were to increase massively.
I’ve stopped looking at velocity, partly because it’s a derivative number. The government doesn’t stimulate velocity, directly. It stimulates money supply, which in turn, stimulates velocity. I wouldn’t know how to advise the government about how to increase velocity without increasing the money supply.
Rodger Malcolm Mitchell
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I think one thing that people mean when they speak of “velocity” is the huge amount of money that is sitting on the balance sheets of many of the largest banks. It’s just sitting there, collecting interest, and doing nothing for the overall economy, except making the already rich even richer.
Now, some people can see some rationality in this, blaming it on the fact that the banks don’t want to loan money to producers because the producers don’t have customers. And as far as I can tell, that is true: there is a shortage of customers in most aspects of the US economy.
This signifies, to me at least, that the money is in the wrong place. It should have been put in the hands of the customers instead of the hands of the banks. Then the customers would have the wherewithal to purchase goods and services, and then the economy would be up and running now.
The best way that the government can put money in the hands of customers in an economic downturn is to engage in an aggressive program of infrastructure refurbishment. We will need to do this at some point anyway, so why not now?
This is one thing that the public does “get”; a very substantial majority of the public is in agreement with this approach.
If only we had a president that could “get” it too.
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Jason,
The U.S. dollar is a currency supported by the full faith and credit of the United States government. Gold is an element, having almost no intrinsic value, supported only by faith and the “greater fool” theory.
The words “an element, having almost no intrinsic value, supported only by faith and the ‘greater fool’ theory.” comprise the very definition of a bubble.
This is not to say bubbles can’t be profitable. Many people have made fortunes with bubbles.
Rodger Malcolm Mitchell
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And yet, the Central Banks of Monetary Sovereigns around the world keep gold as part of their official reserves.
A lump of yellow metal that is no longer used in the monetary system. Go figure.
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Hi, In my opinionthe bubble may be in fiat dollars and not in PMs?
People are buying PMs because too much money is being printed, more than the demand for US dollars. Thus inflation is rising alongside oil prices because theres more dollars going after the same amount of goods.
You can’t create gold atoms by pressing buttons on a keyboard, unlike fiat currencies which are on a race to 0 at full gear. Gold has been used as money for milleniums, theres no foolishness in storing wealth in precious metals, and as long as theres excessive money creation theres no bubble in gold either in my opinion.
I just recently started trying to educate myself in economy so I could be wrong, and I did spend some time thinking about Monetary Soveignity and I came to the conclusion that I don’t agree with it. Sure its better to simply create money than to borrow it at interest, but the creation of money itself isn’t enough to solve everything. The US government uses way too much money and its expenditure can only be afforded by creating more money and devaluating the currency.
I believe the excessive creation of fiat is what mainly drives the price of oil to go up aswell as other commodities, don’t you think so?
Regards.
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Nice theory, but where is the inflation?
You buy a useless metal, backed by nothing, hoping someone else will pay you more for that useless metal? Sounds a bit bubbly to me.
The price of oil is not based on normal supply and demand. OPEC arbitrarily sets the price as high as it can, while not causing a world-wide depression.
Rodger Malcolm Mitchell
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Where is the inflation? I can see it in pretty much every first necessity products. Things that people had to stop buying because of the crisis are dropping in prices aswell as products that lose value with time (technological products and such) but thats pretty much it. The things that really matter like food, oil and water keep going up every year.
And Gold is backed by its rarity, industrial use and history as preserver of wealth. It certainly has more value than fiat money which loses value over time.
You hold “x” currency, backed by the faith in it and the economy of “y” country, hoping that the currency won’t lose value over time even tough its being created too much too fast. Does Gold sound that bad right now? As long as more fiat money is created per hour than the value of gold digged from the ground in said fiat currency gold will keep on raising and the fiat money will keep losing buying power.
The dollar, euro, pound, yen and so on are racing too fast to 0 right now for gold to be a bubble. The end of qe2 will bring gold down but if they do go for round 3 then you will get to see once again the effects of free money.
Regards.
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Rodger,
I’m aware of your stance on the metals and agree. However, your definitional answer (gold is an element) is either dodging the question or declining to answer it. I think simply to dismiss the fact that precious metals make all-time highs week after week (for almost ten years now) may be somewhat ostrich-like.
Markets can certainly defy logical explanation for minor periods of time, but when I see a ten year bull market in anything, I tend to want to understand what is driving it. What is it that people believe they are seeing that would explain why silver has gone from $4.00 to over $40 and gold from $200 to $1500? Is it complete delusional or is there something you’re overlooking?
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Roger,
Many thanks for your replies. Shake hands, I’ve difficulty with Velocity too 😉 I won’t have my eye on the debt nor the deficit, it shouldn’t be a problem for the government, but on V as V is all puzzles to me. Cheers!
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Jason,
Real estate proved to be a 70-year bubble. I don’t know why people like gold other than the fact that other people like gold.
In 1980 gold was about $800 per ounce, then fell to about $300 at the end of that bubble. So now there is a new bubble. What will prick it? I have no idea.
Rodger Malcolm Mitchell
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Koen,
The government can create an environment to stimulate velocity by increasing money supply, but transactions are market based. If the private sector has deleveraged enough and saved enough, transactions will follow. Obviously, the current environment is a classic example.
Food stamps and school vouchers would lead to immediate transactions, but that is certainly limited.
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Roger, Your second last paragraph claims that politicians, economic conservatives, etc think the deficit is unsustainable because they don’t realise the government has an “unlimited ability” to print as much money as it wants. I suggest Republican politicians and their like have all heard about the Weimar Republic, Mugabwe, etc. I.e. they are well aware that governments can print money.
What they don’t understand is a quite different point. This is that a monetary base increases raises demand and reduces unemployment. And as to inflation, a money supply increase will not stoke inflation till that demand becomes excessive. (David Hume pointed this out 250 years ago. Would be nice if economics had advance in the last 250 years, wouldn’t it 🙂
I.e. get the monetary base increase right, and we’d get a significant reduction in unemployment with little by way of increased inflation.
And when I say “get the monetary base increase right” that means not just the QUANTITY but also channelling the relevant money in the right direction. E.g. stuffing the pockets of Wall Street crooks has far less effect than directing money to Main Street.
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Nuno,
Your personal intuition about inflation is as accurate as is any individual’s personal intuition about our economy. Go to INFLATION where you will see various measures of inflation, and you will see that nationally, inflation is quite low — within the Fed’s target range.
If you feel gold is safer than dollars, you should invest in gold. Be aware, however that gold has an uneven price history. Don’t be fooled by the recent, panicky, gold buying that resulted from the recession.
Good luck,
Rodger Malcolm Mitchell
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Rodger,
I’m interested in your opinion of the following statement from Cullen Roche, in which he argues that redistribution is something that does happen at the federal level:
“The real problem, in my opinion, is that the concept that ‘taxes destroy’ money just gets the flow of funds totally wrong and implies a self funding entity where there isn’t really one. It basically implies the Trillion Dollar Coin situation is our actual operating environment, which it isn’t. It also implies that loans create money, taxes destroy that money, then govt spending creates that money. By this sort of thinking you could say that every single action in the economy creates and destroys money due to changes in balance sheets. Oh, I spent money at Wal-Mart and my bank account was debited at JPM and credited at BAC. That must mean money was destroyed and created (yeah, I know MMT usually refers to this during deficit spending, but it’s the same basic concept). You would never say that.
“There’s a very specific flow of funds that accounts for balance sheet items and their changes. And yes, when you pay your taxes the govt definitely takes your bank deposit and gives them to someone else. They didn’t credit their own account and your money didn’t disappear into a blackhole. You really did lose money that the govt then used to spend into someone else’s account. I know, in theory, the govt didn’t NEED your money to be able to spend, but in the current monetary arrangement that is what it really does. There is no self funding occurring here. At least not in the USA….
“We can explain the govt’s solvency issue and special ability to fund itself without having to misconstrue any of the accounting there. In other words, any MRist or PKer can understand the MMT concept of a govt not ‘running out of money’ without ever having to distort the actual way the flow of funds works so why do it at all?”
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–The federal government IS a self funding entity.
–Loans DO create money.
(Federal self-funding and private sector lending are the two primary sources of dollars.)
–Taxes (federal taxes, not local taxes) DO destroy money.
–In the Wal-Mart (sic) example, money neither is created nor destroyed.
–When you pay federal (not local) taxes the government does NOT take your money and give it to someone else.
–The federal (not local) government REALLY (not “in theory”) doesn’t need your money to be able to spend.
In short, Roche is completely clueless about the differences between Monetary Sovereignty and monetary non-sovereignty.
The good news is that this demonstrates the greatness of America: Anyone can say virtually anything, and acquire a following.
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The part which really irked me was when he wrote, ““And yes, when you pay your taxes the govt definitely takes your bank deposit and gives them to someone else. They didn’t credit their own account and your money didn’t disappear into a blackhole. You really did lose money that the govt then used to spend into someone else’s account.”
That’s what Paul Krugman believes, which is partly why Krugman is always calling for higher federal taxes on the rich. Krugman thinks the revenue gained can be redistributed to the non-rich.
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I live in Virginia, where the top income tax bracket starts at $17,001 and is 5.75%. We could, for example, pay our public employees so much more if the top bracket started at $1 million and was 9%.
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