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.”
8 thoughts on “–The loss of Monetary Sovereignty–How Congress puts us on a path to recession or depression”
So the U.S. hasn’t been Monetarily Sovereign since 1971 after all.
Since 1971, our “debt” has grown 3400%, so yes, we have been Monetarily Sovereign, else we couldn’t have supported that kind of growth. A nation decides, moment by moment, whether to be Monetarily Sovereign. Clinton was a setback, but today feels more serious to me, with both parties determined to cut the so-called “debt” and “deficit.”
At this moment, we are not Monetarily Sovereign and are headed for a repeat of the recession — or worse.
Rodger Malcolm Mitchell
End of the world, here we come.
Roger, You say the only thing stopping the Treasury creating dollars direct is a “bazaar, contrived and obsolete legal maze..”. That is a good description, though there is one thing to be said for stopping the Treasury creating dollars direct: it stops politicians having direct access to the dollar printing press.
But it’s a silly way of achieving the latter end, because politicians can still print debt instead of print money. And of course the US is not the only country that engages in this “silliness”.
It strikes me it would be better to have a system under which the central bank (or any committee of independent economists) decided how large the TOTAL stimulus package should be – increased debt and/or increased money supply. In contrast, politicians should concentrate on strictly political matters, like what proportion of GDP is taken by public spending and how that spending is allocated.
The current daft shenanigans in Congress largely stem from the fact that stimulus matters (e.g. how fast the debt should expand) are getting mixed up with the above strictly political matters.
Not really democratic that idea. The problem with half our public structures is that they are not run by politicians and therefore it is very difficult to give them the sack when they mess up.
A more appropriate structure would be for the second house or the head of state to be able to either veto spending proposals or refer them to the populus for approval.
I’ve been mightly impressed by the way Iceland has overridden its politicians desire to sell them down the river.
Tom Hickey also thinks the idea is undemocratic, but I don’t agree.
The democratic process is fine for determining the colour of government on the political left versus political right scale. It is also fine for determining major “allocation” decisions, like do we spend more on education and less on the military. But the democratic process is totally unsuited to TECHNICAL decisions like what sort of motors NASA uses in its rockets, or whether inflation is subdued enough to warrant some stimulus.
Yes, democracies have weaknesses. Voter ignorance is one. Majority domination of minorities is another. Slow reaction time is a third. Political instability a fourth.
That’s why there are different forms of democracies: See: http://en.wikipedia.org/wiki/Outline_of_democracy
Rodger Malcolm Mitchell
I’ve been trying to think of a federal asset more valuable than Monetary Sovereignty, and can’t think of one. Monetary Sovereignty allows a government to pay any bill of any size, any time. It allows the government to afford anything it wishes. MS eliminates the need for borrowing or for taxes.
That is one powerful asset.
Now, one could become philosophical as say our people are our most important asset, but every nation has people, and a couple have more than we do. Or one could say the Atlantic and Pacific, though not owned by us, still have kept us from being invaded, recently. Or one could say democracy is number one, but do we really own, or even have, democracy any more?
No, I think I’ll stick with Monetary Sovereignty as our most valuable asset — at least I would, had not the Tea Party (formerly known as the Republican Party) not destroyed this asset. Sad to say, our once powerful Monetarily Sovereign nation now is monetarily non-sovereign, just like Greece, Ireland, Portugal, Illinois and California.
Well, not really “just like.” The PIIGS might receive help from the EU, and our states often have received help from the federal government. But there is no one to help our monetarily non-sovereign government.
We are just hanging out there, held hostage by loud people who are ignorant of economics — debt-hawks, gold-bugs, hyperinflationistas and austerians. You can read many of their clueless comments even on this blog. These are people who normally would be laughed at, but bad times bring out the idiocy, to the point where we rush headlong into economic masochism.
Were I a debt rating agency, I certainly would downgrade U.S. bonds. The payment for these bonds is hanging by a thread. We are in the hands of fools.
Rodger Malcolm Mitchell