–What is our priority: The recession and joblessness — or inflation?

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

If you drove your car onto a railroad track, while a train was bearing down on you, would you worry about the price of gas, or would you step on the accelerator to get out of the way?

Clearly, the more immediate problem is the train. But according to debt-hawk thinking, you should ignore the immediate problem and wait until gas prices come down. Today, the Tea/Republican party is worried that federal servicing of deficits causes inflation . They wrongly claim that for the federal government to service larger deficits, it must “print” so much money eventually there will be inflation, even hyperinflation..

As always, the Tea/Republicans are wrong: Federal government borrowing does not increase the money supply. Borrowing is a simple asset exchange, in which T-securities are created and traded for dollars, which are destroyed. The servicing of federal debt is the exact opposite. Dollars are traded for T-securities and the T-securities are destroyed. During the entire process, no inflationary money is created.

Which is one reason federal deficit spending has not been associated with inflation since 1971, when we went off the gold standard and became Monetarily Sovereign. (See the following graph)

Inflation vs. Deficits

Yes, let’s forget that the Tea/Republicans simply do not know what they are talking about from a factual standpoint, and instead let’s focus on priorities. Look at the graph below, and tell me whether today’s priority is inflation or recession/joblessness.

Inflation vs Unemployment

Clearly, today’s priority is the weakness of the economy and unemployment. The economy is starved for money. To treat a starving patient, you must feed him. How do you feed a starving economy? By giving it money. How do you give an economy money? Via federal deficit spending.

But, debt-hawk Tea/Republicans will tell you that adding ”infinite” money to the economy (a straw man nobody is recommending) will cause inflation and even hyperinflation. Oh really?

Here is an excerpt from an article in Time Magazine:

Inflation Falls: Is the Economy Saved or Doomed?
Posted by STEPHEN GANDEL Friday, July 15, 2011

Gas prices fell last month, prompting the first drop in overall prices in a year. (Lucy Nicholson / Reuters)

Inflation in June fell for the first time in a more than a year. The Consumer Price Index (CPI), which is the government’s most widely watched gauge of what the things average Americans buy cost, fell 0.2% last month. The drop was mostly driven by a fall in gas prices, which were down nearly 7% alone in June.

Lest you think that gas prices were the sole cause of low inflation, take another look at the first chart. The red line is total Consumer Price Index. The black line is CPI less food and energy. Both are headed down.

And, even when inflation eventually crops up, the Fed can increase the value of the dollar (fight inflation), by raising interest rates to increase the demand for money. That is the way the Fed has controlled inflation for many years.

So tell me, which is the more immediate problem, the recession/joblessness or inflation? Are you the type who would not drive off the tracks until gas prices come down? If you are, then welcome to the Tea/Republican Party.

Historians will look back at 2011 and shake their heads at the suicidal bent of the Tea/Republicans and even the Democrats. The notion that federal deficit spending, which adds money to the economy, should be reduced at a time of economic starvation, is so unbelievably wrong-headed, future economists will say, ‘What were these fools thinking? At just the time they should have been adding money to the economy, they were searching for ways to bleed money out of the economy.

Of course, The debt debate has nothing to do with the economy. It’s just economic blackmail for political power. Neither the Democrats nor the Tea/Republicans give a damn about the people of this nation. The sole concern is who wins the next election. So when you see these phonies, giving their speeches (inevitably standing in front of American flags, the bigger the better), realize they don’t care about America. Not even a little bit. It’s all about them and their lust for power.

What would you call a person, who deliberately endangers America, who actually is willing to sacrifice America, just to advance his own career? I’d call him a traitor.

That will be the legacy of today’s politicians, and the media and old-line economists who went along with this travesty, and that is the pain our generation will cause our children and our grandchildren.

Rodger Malcolm Mitchell

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.


7 thoughts on “–What is our priority: The recession and joblessness — or inflation?

  1. “As always, the Tea/Republicans are wrong: Federal government borrowing does not increase the money supply. Borrowing is a simple asset exchange, in which T-securities are created and traded for dollars, which are destroyed. The servicing of federal debt is the exact opposite. Dollars are traded for T-securities and the T-securities are destroyed. During the entire process, no inflationary money is created.”

    it’s a simple asset exchange that’s ok, but one asset (dollars) is part of the money supply and the other (t-securities) is not, so it changes the money supply and inflationary money is created (i can spend my dollars but i can’t spend my t-securities…)
    am i wrong?


    1. Technically you can’t spend your bank deposit because those aren’t dollars either.

      When you put dollars into a bank account you are buying a bank deposit with them. The dollars become the property of the bank who promptly spends them.

      Normally the sale and exchange process is completely transparent – until there is a run on the bank which is when you find out that the bank deposit isn’t dollars.

      Similarly with T-bills there is a highly liquid market that allows you to spend if you want to. Nothing about T-bills stops spending per se. The interest rate on them is merely a discouragement.


      1. Neil: Don’t think that is a good way of putting it. You can spend your bank deposit/check/credit/banknote. They are money, because the government stands behind them and says bank dollars are as good as state money – except for transactions between the bank and the state itself – and therefore they are accepted as widely as state money.

        Jan: With a developed system of credit, since one can borrow against t-bonds as collateral, or trade them, they are really just another form of state money. What would be economically meaningful, what would affect inflation, is if the state issuing this form of money affected consumption and investment. It doesn’t do that very much, far less than if one were money and the other not. Though there can be many conflicting effects, and Rodger might disagree, the longterm evidence is that issuing bonds – raising interest rates, especially long term ones – instead of just printing money tends to be inflationary – the reverse of mainstream dogma.


  2. Many definitions of “money”: M0, M1, M2, M3, L. The definition I like best is “Debt Outstanding Nonfinancial Sectors.” T-Bills are included in L and in DONS. The difference among these definitions is liquidity, so as you go up the scale from M0 to DONS, money becomes less liquid.

    You spend T-bills the same way you spend any other dollars; you transfer ownership. The difference between a T-bill and a dollar in your savings account is expiration date.

    However you wish to define money, the “borrowing” process does not create money. Think of the process: First, T-securities are exchanged for dollars, and the dollars are destroyed. Later, the process is reversed: Dollars are exchanged for T-securities and the T-securities are destroyed.

    So, if you do not count T-securities in your definition of money, then borrowing actually would decrease the money supply, until the T-bills expire. In all definitions, federal borrowing temporarily reduces liquidity, which cannot be considered inflationary.

    Rodger Malcolm Mitchell


  3. Rodger,
    We leave the running of our government to politicians. That’s all well and good when things are going well. Unfortunately, when things go badly, they have to get to a full crisis before the right thing gets done. It’s our system. The best and brightest want no part of government and the BS it’s administration entails.
    I do think the word is getting out regarding operational realities. It is a slow process, as many of those who really understand it are financially secure and thus complacent. Look at the traffic the MMT websites are getting compared to a year ago. The comments sections seem to be gathering more proponents as the months pass.
    Keep plugging away. Thanks!


  4. Cal,

    You are correct that t-securities are a form of money called Total Outstanding Nonfinancial Debt (two steps above M3.) However, every form of money does not have the same effect on the economy (See: https://rodgermmitchell.wordpress.com/2010/06/14/is-federal-money-better-than-other-money/ ).

    Issuing T-securities reduces liquidity by destroying dollars in favor of T-securities. Redeeming T-securities increases liquidity by destroying T-securities in favor of dollars. Since both “borrowing” (terrible term) and redeeming happen continually, the effect on the economy is minimal. However:

    “Borrowing,” by reducing liquidity, would seem to have a depressing effect on the economy, while redeeming, by increasing liquidity is stimulative.

    I see no evidence that increasing interest rates is inflationary. Admittedly, the data can be interpreted either way, because the Fed raises rates in anticipation of inflation, so there is a historical parallel between inflation and the Fed Funds rate. (See: http://research.stlouisfed.org/fredgraph.png?g=19a ). Perhaps the best evidence came in the early 1980’s when high interest rates seem to have cured the worst inflation in recent history.

    As for long-term rates, they generally should correspond with inflation, because they are the result of market anticipation. If you thought inflation was coming, you would demand higher rates before you bought long-term T-securities.

    Rodger Malcolm Mitchell


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