Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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In comment #4. in the post titled, “Obama joins the Tea Party,” Tyler F. asked, “If you had 3 minutes to speak at a town hall meeting, what would you say?”
Well, three minutes could be a problem, only because so many questions remain unanswered, and for something most people are not prepared to understand, much less believe, the racetrack approach doesn’t work.
Nevertheless, given perhaps five minutes, I might say something like this:
In just five minutes, I can show you how to cure America’s economic problems.
The U.S. became Monetarily Sovereign in 1971, when we went off the gold standard. That change was so counter-intuitive, few economists, politicians or media writers understand it.
Unlike you and me, unlike the states, counties and cities, unlike Greece and Ireland, a Monetarily Sovereign nation has the unlimited ability to pay its bills. I must live within my means. The federal government has no means to live within. You must have a source of money before you spend. The government creates money by spending. The financial rules that apply to you and me, do not apply to the government.
Something else counter-intuitive: The dollar does not exist. Just as the number seven does not exist, the dollar merely is a balance sheet number. If you own a home, you have a title; it is evidence you own the home. But the title is not the home. Similarly, that dollar bill in your wallet is not a dollar. It is a title; it is evidence you own a dollar.
Because a dollar is just a balance sheet number, the federal government has the power to create and destroy dollars, merely by changing numbers. When you receive a government check, that check is not money. It is a set of instructions telling your bank to change the number in your bank account.
Your bank account number goes up, and a government balance sheet number goes down. No dollars move from the government to you. Dollars can’t move because dollars don’t exist. Your bank could be on Mars, and the government could pay you by changing the number in your bank account. That is the meaning of Monetarily Sovereign – infinite control over sovereign currency.
So, how is it possible for a Monetarily Sovereign nation to run short of its sovereign currency? Why would a nation, that can pay all its bills by changing bank account numbers, ever need to borrow its own currency? Why would a nation with infinite control over its sovereign currency, need tax money to pay its bills?
The answers are: The U.S. government never can run short of dollars. The U.S. government no longer needs to borrow money or to levy taxes. Borrowing and taxing are relics of the gold standard. To pay its bills, the U.S. government simply changes numbers in bank accounts.
So, what is the purpose of the debt ceiling? Answer: It has no purpose. It too is a relic of the gold standard.
By definition, a large economy contains more dollars than does a small economy. So, to grow from smaller to larger, an economy must have a growing supply of dollars. The government adds dollars to the economy by deficit spending, that is by changing numbers in bank accounts.
Why then does Congress wish to reduce deficit spending? Because Congress does not understand Monetary Sovereignty.
So, what about inflation? The value of money is based on supply and demand. Demand is based primarily on the reward for owning money, which is interest. So, preventing inflation requires reducing the money supply or increasing interest rates. However, reducing money supply growth historically has led to recessions and depressions. That is why the Fed controls inflation by raising interest rates.
To summarize, There is a simple and direct solution for our economic problems: Grow the economy with federal deficit spending, and use interest rate control to prevent excessive inflation.
Yes, this could be cut to three minutes, but people need more time to absorb a counter-intuitive concept. Even five minutes doesn’t really do it.
That’s why town hall meetings are not informative but rather are stage shows for the amusement of the audience.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
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No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia.
MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 
Thank you very much, Rodger. I think this nutshell – MS in its essence – expression will be helpful in my little day to day advocacy to whoever.
I know you’ve utilized and emphasized the concepts of counter-intuitive and gold standard relic before, but I especially like the way you employed them in this format.
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Thanks Roger… I have been looking for a succinct way of describing the counter intuitive aspects of Monetary Sovereignty and MMT to people. The part that I find most people react most negatively towards is the “government just changes numbers in a computer” statements.
While literally true, most people think that explanation is too easy, and if it were so easy why not mark numbers up so indefinitely and just spend away any problem or issue that comes our way. What is the value of restraint and how can that be factored?
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Broil,
The value of restraint is inflation. Create too much money (i.e. increase supply beyond demand) and there would be inflation.
The problem for debt-hawks: They fear inflation, which is not an immediate problem and which the Fed knows how to tame by increasing demand (i.e. increasing interest rates). But they do not fear recessions and depressions, which are an immediate problem and which the Fed cannot cure,
It’s as though the patient’s blood count and blood pressure are way too low, but the debt-hawk doctors apply leaches to drain more blood, because they fear high blood pressure.
Numbers should be marked up far higher than they are. We have had a recession on average, every five years, and the main problem is debt fear. A program that fails continually, should at least be suspect.
Rodger Malcolm Mitchell
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Thank you for your response Roger. (And its “Broll” not “Broil”… I’m not looking to cook anyone).
In someways inflation seems like it would be a welcome cure… If you’re heavily in debt with no savings, wouldn’t inflation (granted your earnings would have to become inflated) erode the size of your debt?
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Broll,
Inflation would erode the value of your debt, but not the size of your debt. If you owe $100, you must pay $100. The value of your debt will have shrunk, but so will the value of your bank account.
Rodger Malcolm Mitchell
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Right (and I’m sure this is an overly simplistic way of making this an example)… Let’s have these conditions: I owe $100, and have $0 in savings. My income is $20 a month and my expenses are $18. Inflation causes all the things I need to go up in price, but my salary goes up accordingly. So now I make $200 a month with expenses of $180. My debt is still $100. I can pay off my debt in 5 months rather than 50 as a result of inflation. I had no savings, so I don’t feel anything on that end.
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A couple of questions.. is there a connection between money and the general economy?? That is the economy is made up of individuals/companies etc which produce products and services so how does money interact with those products and services?? Along those lines is there any relationship between those products and services and money?? And which comes first..does an economy grow by producing more products and services which then creates a need for more money…or does the creation of money lead to the increase of products/services which grows the economy or is it a little bit of both/an interaction of both hence the supply and demand aspect ..obviously a monetary sovereign govt can create money which will flow into certain sectors and can stimulate an economy but is this sustainable or is this what leads to recessions/depressions rather than creating money in relation to an economy that is already growing ??
Also you say that inflation erodes the value of ones debt but not the size of the debt what do you mean by that?? Is it that the value of the debt that has been eroded ie. it is now say $95 instead of $100 or would it be more accurate to say it is the value or purchasing power of money has been eroded to .95 from a $1.00 for example rather than the debt itself that has eroded or is this the basically the same thing..that is the value/purchasing power of money has eroded therefore the value of the debt has eroded??
You suggest that a monetary sovereign entity can just add zero’s but is there a limit..doesn’t it all have to reflect what is actually going on in economy. Similar to the scoreboard example..yes a scorekeeper can add as many points as he/she would like and the scoreboard if physically able to can go up to infinity but in order for the game or money to have any value doesn’t the scoreboard need to reflect the actual points being scored and doesn’t the points being scored ie..touchdowns, field goals etc need to come first before the scorekeeper can add points??
So I ask these questions to try and get my head around all of this and what the actual connection is between money if we can just add money any time we like and the actual economy???
Thanks
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I’m sure smarter folks than I have the answers for you, but you managed to articulate many of the same questions I’ve had. As I read your post, I started to think that increase in goods/services and the increase in money needs to be exactly simultaneous. One out-pacing the other has negative effects. I supposed that’s one reason this whole economy thing is so confounding for everyone.
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The reason people find the economy confounding is explained at Anthropomorphic economics disease.
Unfortunately, even old-line economists suffer from this disease. And Obama is in the late stages.
Rodger Malcolm Mitchell
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Steve,
Money replaces barter. So there can be goods and services without money. But money eases the exchange. Money is economic fuel.
You can reap a small field by hand, using no fuel. You can reap a larger field using a small machine, that requires a small amount of fuel. You can reap a huge field with a big machine that requires a large amount of fuel.
So, if you want to reap bigger fields, you have to buy more fuel. Growing the economy requires more fuel (money). But the politicians want to cut the fuel. In short, how will Obama’s proposal to reduce the money supply by $10 trillion help the economy grow?
Inflation is a reduction in the purchasing power of money. In everyday speech, people say things like, “$100 in now worth $95.” What they really mean is $100 now buys what $95 formerly bought.
The limit to federal deficits is inflation, which is determined by supply and demand. So yes, we can add as many zeros as we wish — up to the point of excessive inflation. (The Fed want some inflation, with more than about about 3%-4% being considered excessive.)
Fortunately, inflation is easily prevented/cured by increasing demand with interest rate control. Curing recessions requires adding money.
Rodger Malcolm Mitchell
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Sorry Rodger, I don’t mean to be difficult but you seem to be saying the same things over and giving links to the same info but your not really explaining it or I am just not getting it.
Also what do you mean when you say the limit to federal deficits (I assume this is federal deficit spending??) is inflation and then you say that yes you can add as many zeros as you want?? How would that work??
Wouldn’t federal deficits mean an increase in the money supply since money is being created when there is deficit spending and if the limit to that creation of money is inflation then how would that work if you can add as many zeros as you want.. how would that effect inflation or is inflation something that happens separately and if so then why would inflation be a limit to federal deficits and money creation (obviously there is price inflation ie..a early freeze knocks out half of the oranges from California thus increasing the price vs the erosion of the value/purchasing power of the dollar due to excessive deficit spending)??
Just a note…of course money replaces barter, it makes barter easier. Money is simply a unit of account ie..1 loaf of bread = 3 apples = 1 can of soda = depending on what one does a unit of labor, all of which may equal a dollar. So there is a relationship between good and services and money. When you create money out of thin air ie add zeros without an increase in goods and services doesn’t it change that relationship which if the goods and services produced does not change it would then erode the value of the money ie..inflation??
Using your example of fuel yes you can reap bigger fields with more fuel but in your example you would also need a bigger machine not just more fuel..obviously you could buy more fuel and run the smaller machine for a longer period of time assuming your not running it 24hrs a day but if you are then you need more than just more fuel!!
I agree with you on inflation $100 now buys what $95 bought etc and that the feds try to limit inflation to a target range to help stimulate growth and I also believe that you can stimulate growth up to a point by adding zeros but you cannot do it forever ie..it is like a junkie needing more and more drugs just to get high and that you cannot just add as many zeros you want without without it having any effect.
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Sorry Rodger, I think I misquoted you when I said that you said you can add as many zeros as you want…you actually said up to excessive inflation. My apologies…but I think in other places I believe you said you could just add as many zeros as you want without the qualifier of up to excess inflation which confused me a bit but again if that is not correct then my apologies…however I think most of what I said still applies and the questions are still valid…
So if the limit to deficit spending is inflation then are you saying that inflation can be caused by excessive money supply (in addition to individual factors such as supply/demand or what is generally known as price inflation) and there is a relationship between goods and services. And if that is the case then wouldn’t deficit spending by the government at some point be a concern?? yes/no or are we talking about different things when you say deficit spending??
However I think that is where the real issue lies…The managing of the economy… Obviously you can use deficit spending to stimulate the economy to produce more goods/services but that is the real trick and it is the managing of the economy ie..increasing the money supply to stimulate economic growth rather than growing the economy and then increasing the money supply as a response to the growth which is the real problem. Although there is no perfect solution since we are all human!!
Also let me just throw this out..the economy the last I checked is about 12 trillion with a 3.6 trillion dollar budget (or something it is over 3 trillion) for the current year. If we are targeting 3-4% growth in the money supply that is about 3 trillion dollars. In addition we have a 14 trillion dollar debt (last I looked could be more). In different spots I believe (I wanna be careful how I quote you and I believe it was in one of your posts ie..how to eliminate federal debt) you say that for all our debts we can just credit people accounts..and then we can do away with borrowing since it is just a relic of the gold standard and just expand the money base. I hope I have that correct if I don’t please let me know..That for state an local governments we can help them out by just crediting their accounts. All of this would be done through deficit spending or just crediting peoples account. Also all of this would lead to increasing the money supply and supposedly economic growth assuming we do not reach excessive inflation. However if excessive inflation is over 3% and we already have a budget of 3 trillion how would crediting peoples account not create inflation then how would that work??
Also this brings to mind another question..for you does inflation matter or do you think we should ignore inflation??
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Broll, better check your math.
Anyway, with any assumptions you can come to any conclusion, but this is the assumption that doesn’t work: ” Inflation causes all the things I need to go up in price, but my salary goes up accordingly.”
Apparently you are not a married parent. 🙂
Rodger Malcolm Mitchell
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I know I’m veering off topic, but do traditional calculations of inflation factor in purchasing power or change in prices? Wouldn’t anyone who derives their income from the sale of goods or services see their salary increase in correlation to the inflated sales prices (assuming the volume stays consistent)? Things cost a whole lot more, but your salary gets inflated too, so it is a wash… unless you have significant savings to erode.
…and I am a married parent. 😉
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I’ve written about the difficulty measuring inflation, because of changes in goods and services. It’s inexact at best.
Salaries have a vague relationship to inflation, but are far more connected to the supply and demand for specific kinds of labor. If you’re going to sit back and expect a raise simply because inflation is growing, I have some sad news for you, dad.
Anyway, are you making the point that inflation never is a problem? I’m not sure what you are arguing.
Rodger Malcolm Mitchell
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My questions in regard to inflation are to understand our lawmakers all consuming fear of inflation. The fear that drives them to slash and burn everything rather than test the waters of inflation by adding the needed money to the economy. Like I believe you have said –they’re leaching an anemic patient for fear of high blood pressure. At this stage, which is the more palatable option: inflation or a full blown depression?
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Hi Rodger,
That was a great post!
Not being proficient in economics as some (you may see this as a good thing as I have lass to unlearn), I wondered about QE1 and QE2 in all of this. I did a search of your entire blog but could not find any references made to it.
How does the QEing factor in to all of this, is it a similar thing as deficit spending? If so, would a QE3 be positive for the economy? Or am I totally off track?
Also, I would suspect a growing economy, and hence a growing money supply would be attractive to outside investors and hence create demand for that currency, would this be correct? Are there any factors that could negate this effect, whilst we had a ‘growing economy’?
cheers
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The QE series was useless, as all it did was exchange one form of money (dollars) for another form of money (T-securities). It added nothing.
Demand for currency is based on risk and reward. Neither are related to economic growth.
Rodger Malcolm Mitchell
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Schmerls,
Inflation matters.
The value of money is based on supply and demand. Demand is based on risk and reward. Risk is inflation. Reward is interest. To control inflation, control demand by controlling interest rates.
Federal so-called “debt” is T-securities. To “borrow, the Treasury credits “lender’s” T-securities account; debits checking account, thereby destroying the dollars in that account..
To pay off “debt,” process is reversed. Treasury credits “lender’s” checking account; debits T-securities account, thereby destroying the T-securities in that account.
No dollars move from hand to hand. Accounts merely are debited and credited.
Rodger Malcolm Mitchell
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Rodger,
I believe you’ve tried to answer my questions about the exchange of T-securities for dollars before, and I thank you for that. I still have some questions.
I understand the concept of exchanging non-yield dollars for interest bearing securities. In this limited example, it’s easy to see how the dollars are destroyed and replaced with a new/different form of asset (to the “borrower”) or debt (to the “lender”). Borrowing and lending seem to be ill-chosen terms in this scenario.
This is clear to understand if it is looked at strictly as a service that Treasury offers to currency users/investors. But how does this process function when looked at through the lens of creating funds for the government to pay for its operating expenses? The government has a bill to pay, so it sells t-securities to obtain the dollars to credit towards that payment. The dollars received from the t-security purchase are then not destroyed, but allocated towards other governmental expenses, no?
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Broll,
No, the exchange of T-securities for dollars has no current function. None. Zero. Zip. Zilch. It is an obsolete exercise, a relic of gold standard days. The federal government, being Monetarily Sovereign does not pay its bills with borrowed dollars or with tax dollars.
It pays its bills by crediting the accounts of its creditors. Taxes and borrowing are not in any way related to federal bill paying.
You simply must begin to understand that the federal government does not operate like you and me. It is Monetarily Sovereign; you and I are not. The federal government does not use or need income. It does not pay its bills by sending dollars anywhere. It merely credits bank accounts.
Rodger Malcolm Mitchell
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I do understand the premise, perhaps what I’m struggling to bring into alignment may be the archaic operational laws/procedures still in place.
Under your example, we could have government workers crediting private accounts through computer terminals with zero regard to how much “money” the government physically posses (or has sitting electronically on a balance sheet somewhere). I believe that this is pretty close to what happens (or at least should happen). The only constraint would be inflation, at which point the Fed can direct other actions.
But under today’s procedures, this is not really what happens in practice, is it? Those people who’s job it is to credit accounts via computer instructions are working with some sort of theoretical sum of funds to spend are they not? When that gets low, is that not the argument for the Treasury to sell securities to replenish that original account?
I’m not saying that this is operationally necessary, but is our problem not that almost everyone believes that it is? The idea of the government needing to “buy back dollars” is believed so necessary that it’s written into our laws as they way the Treasury must operate?
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No. They never contact the Treasury to see if there is enough money to spend. They mail the social security checks regardless. They don’t know how many people became unemployed this week so they can’t budget.
It’s all smoke and mirror. A dainty dance. The government spends, the Treasury back fills the account and everybody pretends the fill came first.
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Broll,
Your 2nd paragraph is correct. The government does not physically possess any money. The amount it can spend is the budget, which has zero relationship to taxes or T-securities.
The budget is not “replenished” by anything. It is just a budget number, decided upon by Congress. Tax receipts or T-securities do not affect the budget.
The laws you refer to were written for a gold-standard (monetarily non-sovereign) nation. These laws are obsolete, but still on the books.
Yes, almost everyone does not understand Monetary Sovereignty. I can forgive the public for not understanding. I can forgive the media, and perhaps even the old-line professors. But the President of the United States of America?? What’s his excuse?
Rodger Malcolm Mitchell
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“The budget is not “replenished” by anything. It is just a budget number, decided upon by Congress. Tax receipts or T-securities do not affect the budget.” – And there is the problem, no? Congress and the President decide the budget number based on tax receipts and T-security sales, no? It would be like deciding how much you should eat by the temperature outside. You can rationalize the decision, but there is no correlation.
Did you hear the President’s latest one… “we can’t pay Social Security because our coffers are bare”, he says. He’s either horribly ignorant or criminally insane… neither of which you can afford to be as the President.
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Yes, the economic ignorance of Congress and the President is the most frightening thing in today’s world, much scarier than Freddy Krueger.
Rodger Malcolm Mitchell
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Today’s idiocy:
Fox News reported:
There are no “coffers.” There is no stash of dollars. Your Social Security check merely is a set of instructions to your bank to mark up your checking account. The government can send endless instructions, and your bank will obey them all.
The fact that the President of the United States of America does not understand the difference between Monetary Sovereignty and monetary non-sovereignty almost is beyond comprehension.
Rodger Malcolm Mitchell
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I think when you hear authorities make claims like this before the event it is a distraction for something else or an agenda of some sort…why on earth else would you tell people they might not get paid next month unless you wanted some sort of reaction?
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