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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Although economics can be mind-spinningly complex, the essence of economics is rather simple, in that it boils down to a few facts, about which there can be no argument:
Fact 1. The U.S. federal government is different from you and me. It alone has the unlimited ability to create (“print”) dollars. If it wished to do so, the government could create a billion trillion dollars tomorrow, merely by pressing a computer key. It has had that power since 1971, the end of the gold standard, and that power is called Monetary Sovereignty.
Fact 2. Given such power, the federal government has the unlimited ability to spend dollars, and does not need to tax or borrow in order to spend. Were taxes and borrowing to fall to $0 or rise to $100 trillion, neither would affect by even one penny, the federal government’s ability to create and spend dollars and to “sustain” any size debt. In federal terms, taxes and borrowing do not fund spending.
Fact 3. Therefore, the only limitation on federal spending is not taxes or borrowing, but uncontrollable inflation.
I know of no economist, no columnist, no politician who disagrees with the above. Yet virtually all of them seem to agree that the federal debt and deficits are “unsustainable,” and should be reduced, despite the fact our massive deficits have brought us nowhere near uncontrollable inflation. (Only recently, we were worried about deflation.)
Logically, that makes no sense. How can a debt or deficit be a problem, if the government can create unlimited money and inflation is not a threat? It’s as though one part of the brain was not communicating with the other part. The psychologists call it “cognitive dissonance,” and since they have a name for it, perhaps they have an explanation, too.
So if you are a psychologist, and/or understand cognitive dissonance, I ask you; Why do otherwise intelligent people hold two, mutually exclusive ideas about our economy?
Some have speculated it’s merely the confusion between personal finances (which are not Monetarily Sovereign) and federal finances. But economists should not be confused about so simple a concept. Even the dullest economist should understand the difference between a personal bank account and the federal government’s money creation. There must be something more than mere confusion.
Perhaps, we hard-wired to believe the “no-free-lunch” idea that you can’t get something for noting. But can it really be so difficult to see that the federal government can “print” dollars?
I just don’t understand it. No one debates the underlying facts, which seem obvious and straightforward. The federal government can create infinite dollars, limited only by inflation, which we are nowhere near. Everyone agrees. Yet, after that there is a huge disconnect, leading to notions about needing tax increases and debt ceilings and the deficit being unsustainable. It’s beyond logic.
So because it is beyond logic, I am asking for assistance from psychologists to explain why the logical and obvious are invisible to people, who acknowledge the facts while simultaneously being blind to them.
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 Monetary 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 my future.”
MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 
Here’s a passage from Abba Lerner’s Economics of Emoployment, which has several relevant chapters on resistance to functional finance from various quarters.
An important element is the feeling that money is sacred. …Very often this objection seems to be based on the idea that in the normal course of events money is provided not by human action but by Nature with a capital “N.” The idea of money being made and destroyed by mere man seems to be a shocking thought. It is as if all the “sound” money which is in existence always has been in existence and always will be in existence – a theory of the immaculate conception of money, original and indestructible. (I am indebted for this expression to my friend Ernest Van den Haag).
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Indeed, the whole thing is psychological in nature. It’s been kept secret deliberately by those who benefit from the myth.
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To be more factual you should also add: the unlimited ability to create and/or spend is only limited by the WILLINGNESS of the Congress to appropriate funds AND increase the debt ceiling.
One could argue this is more the mechanics than the psychological, but it is the politics of the process. In the current political climate, facts are simply ignored, or twisted to fit one’s political agenda.
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I am a social psychologists, and while I probably can’t provide a satisfying answer to your questions, I can clarify one thing. Cognitive dissonance is not “holding to inconsistent or incompatible thoughts”; rather, and more specifically, it refers to the state of psychological/emotional distress that occurs when a person holds cognitions and/or behaviors that are subjectively incompatible with one another. The subjective aspect is a big part. If someone holds two beliefs that you perceive as incompatible, but that he or she perceives are compatible, or at least are irrelevant to each other, then there will be no cognitive dissonance. A person who does see how the cognitions are incompatible, who can rationalize them or reconcile the incompatibility, will not experience dissonance. Cognitive dissonance is a motivational force that moves people to change inconsistent attitudes or behaviors in order to achieve consonance… but if they never perceive the inconsistency to begin with…
Mark Johnson
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Thanks Mark,
Much appreciated. Actually, their cognitive inconsistency is giving me dissonance! 🙂
Or, more probably the dissonance will occur when their Social Security benefits, Medicare benefits, Medicaid benefits, and the thousands of other government-supplied benefits are lost, and they wonder how those brilliant politicians for whom they voted, could have allowed that to happen.
Rodger Malcolm Mitchell
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What’s weird is that during the time of Keynes and Lerner, economists and ordinary people understood money & monetary sovereignty better. Then as the last shred of political constraint was removed, and things became clearer to everyone, the whole academic economics community turned on a dime and effectively engaged in a massive bout of book-burning and brainwashing.
Two amazing things that need psychology & philosophy to explain and counter:
(1) The commodity / metallist theory of money is probably the worst scientific theory of all time. That was Mitchell-Innes’s opinion in 1913.
(2) And then the effective return to what had been shown to be superstition – with calamitous effects in the real world, in people’s lives – exactly when there were no longer even bad reasons to believe in it. It was like returning to a belief that the Sun went around the Earth exactly when some extraterrestrials stopped the Earth’s rotation and made the Sun stay in one place in the Earth’s sky.
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I think Fact 1 is wrong. The artificial controls set in law by congress make this untrue. Right?
Or can you explain with facts the mechanics of such a transactions. Are you talking about a QE3 type of thing where the FR buys up all outstanding Treasury tomorrow.
Is there currently a mechanism for the Treasury to print unlimited money without any constraint from laws?
“We” have to be careful stating something is a fact when the current laws of our government forbid such actions.
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Steve,
Fact #1 is correct. Congress is part of the federal government. It has the power to create unlimited dollars, simply by raising the debt ceiling. It does so by crediting bank accounts.
For instance, if you receive Social Security benefits, one day each month you awaken to find your checking account balance higher than it was the day before. How did it get that way? The federal government simply told your bank to increase your balance. Not only did your bank balance increase, but the total dollars in the economy increased.
No dollars were shipped from a Washington, DC vault. The entire transaction was done via electronic notification. That is the way the federal government creates dollars, which it can do endlessly.
Rodger Malcolm Mitchell
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Rodger,
Thanks for the response.
I do understand your point and agree; but I’m trying to make a rhetorical point about how best to win the debate. Most people would quickly dismiss that “fact”. Legislation is not a trivial matter and as you know, changing laws is very slow and difficult; hence my issue with the “tomorrow” comment.
I also wanted to clarify the mechanics of how this “money printing” occurs. The term is thrown around all the time, and is very debatable. From my own reading of all the MMT blogs, my understanding of money printing is one of two things 1) deficit spending, 2) FR operations like QE or other asset purchases like MBS (which really isn’t putting new financial assets in the system).
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I think Steve has a point because one could argue that even under the gold standard the federal government was still monetarily sovereign but deliberately constrained itself by adhering to an artificial, statutorily imposed gold standard, just as today’s debt ceiling is an artificial, statutorily imposed constraint on federal spending.
The gold standard is no more a real or physical constraint than the debt ceiling, except where a nation uses actual gold for its currency without any paper currency at all.
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Steve, if people dismiss fact #1 based only on the rhetorical point, I’m satisfied. Unfortunately, they simply believe the federal government functionally must rely on taxes and borrowing, regardless of law.
But, since you understand and agree, how would you phrase it so it easily is understood?
By the way, I don’t hope to win the debate. Too many people are on record with, and have a vested interest in, the lie. If a man’s life and fortune depend on his believing the ocean is dry, no amount of debate or facts will convince him it’s wet.
Rodger Malcolm Mitchell
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I would have dropped the million billion line and the “tomorrow” line. …I will give it a shot.
Fact 1a. The act of deficit spending by the FEDERAL government, adds a net financial asset to the private sector (do the T accounts).
Fact 1b. The U.S. federal governments “debt” is not debt at all in the way you and I understand it in our own personal lives or with state governments. It is nothing more than an artifact from the gold standard days when government spending did need direct funding through bond issuance.
Fact 1c. Without the foolish constraint of the debt limit, the government has the unlimited ability to create new financial assets (“dollars”) through deficit spending. It has had that power since 1971, the end of the gold standard, and that power is called Monetary Sovereignty.
..facts 2 and 3 are great.
I think the goal is to get this down to a debate on productive capacity (inflation). Judging by some of the comments I read online and in the news, I see real progress. The real hurdle is getting guys like me to disassociate government spending from big bureaucratic government and welfare queens.
Thank you for all the great information you provide. You do a great job of simplifying the message.
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Steve,
You might be interested in a summary at https://rodgermmitchell.wordpress.com/2009/09/07/introduction/
Rodger Malcolm Mitchell
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Walter,
Right. If money creation is constrained, the nation is not Monetarily Sovereign. One could argue, as Steve has, that the gold standard was no more of a constraint than the debt ceiling. I disagree.
The gold standard was a powerful restrain because it involved the entire world, and we continually battled it. The debt ceiling is ours alone, and ours to change, easily and with no international shock whatsoever.
Taking Steve’s position to it’s logical conclusion, there would be no such thing as Monetary Sovereignty, because it is based on laws and every nation has the power to change its laws.
I suggest the rational interpretation is, for instance, Ireland and Greece are monetarily non-sovereign, and the U.S. is Monetarily Sovereign, unless Congress fails to raise the debt ceiling.
In that case, the U.S. will be Ireland and Greece. You might wish to mention that to the Tea (formerly Republican) Senators and Representatives.
Rodger Malcolm Mitchell
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The defference between Ireland and Greece vs the US is ‘ability to pay’. The debt ceiling pertains to ‘willingness to pay’.
‘Willingness to pay’ is not a matter of Monetary Sovereignty per se.
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PJ,
Nice succinct summary.
Rodger Malcolm Mitchell
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Abba Lerner said “Fundamentally the new theory, like almost every important discovery, is extremely simple. Indeed it is this simplicity which makes the public suspect it as too slick.” See p.39 here:
Click to access functional%20finance.pdf
I.e. image is everything and substance is irrelevant. For example, the phrase “Weapons of Mass Destruction” scores very well on the “image” rating: it sounds technical, which means the phrase can be used to persuade the idiots who make up 95% the human race that Saddam Hussein toppled the World Trade Centre. The fact that the weapons, had they existed, were just medium range rockets with at worst a cannister of poison gas in the warhead, and which would have killed at most 30 people a go, is of no interest to the above idiots.
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The Lerner article is pretty good, though it departs from Monetary Sovereignty. Lerner thinks taxes pay for federal spending and add money to federal coffers, which is wrong, but the overall philosophy of evaluating results rather than some theoretical criteria is correct.
Rodger Malcolm Mitchell
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