Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
In August, 1971, the U.S. became Monetarily Sovereign by going off the gold standard. The purpose was to remove the artificial and uncontrollable limit on dollar creation imposed by gold mining and gold exchange.
The dollar now could be created without the supply limits of a physical substance. Thus, the federal government gave itself the unlimited ability to pay any bill of any size at any time, merely by crediting the bank accounts of its creditors. Unlike monetarily non-sovereign nations, the U.S. never could be forced into bankruptcy. We had total control over our finances.
Since that date, the Federal Debt Held by Private Investors has risen more that 3,400%. In the same period, inflation has risen comparatively less at 450%.
This may come as a surprise to those who link federal deficits with inflation, but there has been no relationship between federal deficits and inflation.
Deficits have not caused inflation. The main cause of inflation has been oil prices, (See: INFLATION). This, together with the Fed’s power to keep inflation at about 2%-3%, has kept the inflation forecasts, endlessly warned by the debt-hawks, (See: Unsustainable Debt) from coming to pass.
With our massive “deficit” spending, our Monetary Sovereignty has spared us the agonies felt by such monetarily non-sovereign nations as Portugal, Ireland, Italy, Greece and Spain (PIIGS), which are not on a gold standard, but rather are on a “euro standard.” These nations surrendered their unlimited ability to pay their bills, so they risk bankruptcy and depression.
Every depression in U.S. history, and most recessions, have been linked to reduced money growth (MONEY GROWTH. Because a growing economy requires a growing supply of money, these nations do not control the means to grow their economies, so are in serious danger. In fact, all monetarily non-sovereign governments – including American cities, counties and states – live on the edge of a razor blade.
Without additional money coming from outside their borders, these governments often find themselves unable to pay their bills. In the U.S., the source of this additional money can be the federal government, which has the unlimited ability to create our sovereign currency. The dollars created by the federal government are called (misleadingly) the “federal deficit.” Without federal deficits there would be no dollars in America.
Contrary to popular belief, the federal debt is not functionally the total of federal deficits. By law, the Treasury is required to create T-securities in the amount of federal deficits, and exchange these securities for dollars it previously created. The requirement is legal, not functional. The system is a relic of the gold standard days; it has no purpose for a Monetarily Sovereign nation, though it persists. The Treasury, just as easily, could create dollars directly, and eliminate T-security creation.
Because, there is no functional relationship between federal deficits and federal debt, the Treasury could create T-securities and trade them for dollars (aka “borrow”), without there being federal deficits. And the government could deficit spend, without borrowing. But via a bazaar, contrived and obsolete legal maze, the federal debt ceiling prevents the creation of dollars for economic growth.
Being Monetarily has allowed the American economy to build. Were we still on a gold standard, we would be unable to pay our bills. Unfortunately today, as this is written, the Unites States no longer is Monetarily Sovereign. We are monetarily non-sovereign, and in danger of recession or depression, just like the PIIGS. Our loss of Monetary Sovereignty comes from Congress’s refusal to increase the “debt,” which restricts the “deficit,” thereby restricting the money supply.
Because the so-called “deficit” merely is the government’s method for adding money to the economy, it more correctly should be called the “economic surplus.” Our economy is being ruined by a semantic misunderstanding. As money is the lifeblood of our economy, Congress’s actions amount to taking blood from an anemic.
A nation’s money supply can be expressed by this equation:
Money Supply = Trade Surplus + Federal Deficits + Loans (bank & non-bank)
That’s it. Couldn’t be simpler. If our Trade Surplus (i.e. imports minus exports) goes down, our money supply goes down. Currently, we are running a trade deficit, not a surplus, which removes money from our economy.
To counter the trade deficit — to grow our economy — federal deficit spending must go up. There are no alternatives. Germany has chosen the trade surplus route to growth, because it is monetarily non-sovereign, and cannot create its own money. So, it must have money coming in from outside its borders as payment for exports. This is a risky strategy, because it makes Germany subject to the whims of its customers. Just as large corporations can turn unprofitable and be unable to pay their bills, so can monetarily non-sovereign nations lose customers and be unable to pay their bills.
By contrast, our Monetarily Sovereign nation had total control, not only over our money supply, but over the value of our money supply (inflation) via interest rate control. We could live with a trade deficit because our financial control put us in a risk-free position – until America’s leaders voluntarily surrendered our Monetary Sovereignty.
By enforcing a “debt ceiling,” Congress and the President undo the one step that made possible 40 years of economic growth: The end of the gold standard. We now are subject to a de facto gold standard – call it a “politicians’ standard” – and there will be hell to pay. Unless our leaders miraculously come to their senses, our economy will decline and we will enter a period of recession, then depression, such as we never have seen, not even during the 1930’s.
Thus is our penalty for their ignorance.
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 teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it ruined my future.”