–We never will find a solution, because we’re discussing the wrong problem.

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.

Here are five headlines and the first lines of their articles, from the May 26th Washington Post. What do these five articles have in common? What is their fundamental premise?

Senate rejects GOP budget plan that would overhaul Medicare
The Senate voted 57 to 40 against GOP Rep. Paul Ryan’s 2012 budget proposal, with all but five Republicans supporting the spending plan.

Plum Line: Senate Dems up pressure on GOP over Ryancare
Senate Democrats are going to hold a vote today on the GOP budget plan that includes the proposal to end Medicare as we know it, in an effort to put Senate Republicans on the spot and keep up momentum after the big Dem victory in NY-26.

2chambers: Ryan says Democrats have ‘lied to’ voters about his budget plan
One day after his party — as well as his 2012 budget blueprint — was dealt a stinging defeat in a New York special election, House Budget Committee Chairman Paul Ryan (R-Wis.) said Wednesday that the election was not a referendum on Republicans’ proposed changes to Medicare, and he argued that Democrats had distorted the issue for political gain.

The California researcher who could save health-care reform — and the budget
Joe Selby has been named director of the Patient-Centered Outcomes Research Institute

Ezra Klein: When ex-budget directors stop being polite and start getting real
Peter Orszag, concluding a column on why Paul Ryan’s Medicare reforms won’t work to control costs.

The fundamental premise is that the federal deficit should be reduced, and not one of these articles even questions it, much less discusses it. Imagine a group of people discussing the best way to sail from Europe to India, without falling off the edge of the world. Many ideas are debated fervently, but the fundamental premise – that one can fall off the edge of the world — never is discussed. When the fundamental premise is wrong, all solutions will be wrong. And that is why there never can be a good solution to our economic problems, no matter how long, passionately and cleverly we debate.

In a Monetarily Sovereign nation, deficits are what supply money to the economy. Without deficits, America would have no money and no economy. Because a large economy has more money than does a small economy, a growing economy requires a growing money supply. So growing deficits are necessary for economic growth. Further, a Monetarily Sovereign nation has the unlimited ability to pay any bills of any size, instantly.

All efforts to reduce the deficit, i.e. reduce the money supply, by necessity must result in recessions and depressions, and that is exactly what history has shown us. (See: Facts about Monetary Sovereignty )

Our economic problems cannot be solved so long as the discussions are based on a faulty premise. Only when we acknowledge the basic truth of Monetary Sovereignty – federal deficit spending is necessary and sustainable — will we create a solid foundation for economic progress.

We can’t find our way home if we take the wrong path.

Rodger Malcolm Mitchell

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.”


6 thoughts on “–We never will find a solution, because we’re discussing the wrong problem.

  1. Don’t think we’ll get that acknowledgement any time soon. Meanwhile only Republican Presidents have shown that they didn’t mind federal deficit spending at all.


  2. It’s important here to distinguish between the structural deficit / debt, and in contrast, the deficit / debt that derives from stimulus. I don’t have figures to hand, but the bulk of both the debt and deficit are structural, aren’t they?

    The structural d/d derives simply from failure to collect enough tax to cover spending (a failure which can occur even at full employment). I don’t see any harm in reducing the structural d&d. Government just raises taxes and/or cuts spending, and pays back creditors. The latter then have surplus cash, which induces them to spend, which boosts demand.

    Of course it would be over simple to suggest that the amount of extra tax collected is necessarily equal to the amount of debt repaid: that’s a technicality which needs addressing. But basically I don’t see any harm in reducing the structural d/d.


  3. Ralph,

    “It’s important here to distinguish between the structural deficit / debt, and in contrast, the deficit / debt that derives from stimulus.”

    Why? They have the same effect. You are talking about intent. The money supply doesn’t care about intent. The harm in reducing the money supply is this: It causes recessions and depressions. See: https://rodgermmitchell.wordpress.com/2009/09/07/introduction/

    By the way, deficits and debt are not functionally connected, just legally connected. We could have debt without deficits and we could have deficits without debt.

    Also, federal taxes do not pay for federal spending.

    Rodger Malcolm Mitchell


    1. Roger, When government incurs a structural debt, there is by definition no effect on aggregate demand. It must therefore be possible to reverse the process, again with no effect on aggregate demand.

      “The harm in reducing the money supply..” There is no effect on the money supply (on the normal definition of the word money). That is, government collects $Xbn in tax and gives $Xbn to bond or debt holders. So the total amount of money in private sector hands remains constant. But that is an over simple description of what happens. To be more realistic one has to take account of the fact that the value of bonds in private sector hands declines.

      When a structural debt arises, government collects insufficient tax, so it borrows instead. It has to make sure that the deflationary or demand reducing effect of the borrowing equals the deflationary effect of the tax that ought to have been collected. To do this government could let the borrowing have its full crowding out effect, i.e. govt could let interest rates rise. Or it could go for a quantitative effect, that is borrow much more than the above amount of tax. Either way, the borrowing has a deflationary effect.

      When the process is reversed, everything is mirror image. That is, for example, the amount of borrowing paid back would be more than the amount of tax collected. Thus the amount of money in private sector hands would rise.

      In short, if a government knows what it is doing (and I doubt such a government exists on planet Earth) structural debt can perfectly well be paid back without any demand reducing effect.


      1. Government doesn’t need to borrow Ralph. You just need to put the excess money beyond use.

        Rodger’s argument is that in those ‘structural’ situations you just put interest rates up and the private sector will crowd itself out by not spending its hoarded cash (just as it is demonstrably doing right now – honce no inflation).


  4. Ralph,

    I suspect you mean structural deficit, the non-cyclical difference between federal taxes and spending. All deficits add money to the economy, which increases aggregate demand.

    Borrowing is not an alternative to taxing. There is no functional relationship between federal debt and deficits. The only relationship is a legal one: the Treasury is required by law, not by necessity, to issue T-securities in the amount of deficits. Our Monetarily Sovereign nation has the unlimited ability to create infinite dollars with zero borrowing.

    Because the U.S. is Monetarily Sovereign, we could have federal debt without deficits, and we could have deficits without debt. Federal debt can and should be eliminated, but deficits should be increased for economic growth.

    For a Monetarily Sovereign nation, borrowing neither increases nor decreases the total supply of money (but for interest); it merely changes the liquidity. Dollars and T-securities both are forms of money, with dollars being more liquid.

    To see an explanation of the misnamed “borrowing” process, see: https://rodgermmitchell.wordpress.com/?s=borrows

    Your comments are more appropriate to a monetarily non-sovereign government (which does use borrowed money) than to a Monetarily Sovereign government. For each comment, ask yourself this question: “How is this different for a Monetarily Sovereign nation vs a monetarily non-sovereign nation?”

    Rodger Malcolm Mitchell


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