Mitchell’s laws: To survive, a monetarily non-sovereign government must have a positive balance of payments. Economic austerity causes civil disorder. Reduced money growth cannot increase economic growth. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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Susan Webber, aka Yves Smith, runs perhaps the best economics blog, Naked Capitalism. She is very smart, and usually on target with her comments. Usually.
A recent post, titled “Hoover’s Great Depression” contained this comment:
First, it is clear that depressionary credit crises lead to political dysfunction and a worsening fiscal picture that results from the conflicting priorities which emanate from that dysfunction. This was true during the Great Depression. We have witnessed it in Japan in the last twenty years and we are certainly witnessing it again in the US and Western Europe.
Here she equates Western Europe, most of which is monetarily non-sovereign, with the U.S. and Japan which are Monetarily Sovereign. She continues:
. . . no amount of government spending is going to allow this credit system to grow its way out of debt. The problem isn’t ‘fixable’ without significant deleveraging. . . There are four ways to reduce real debt burdens:
1. by paying down debts via accumulated savings.
2. by inflating away the value of money.
3. by reneging in part or full on the promise to repay by defaulting
4. by reneging in part on the promise to repay through debt forgiveness
In not differentiating between the federal government (Monetarily Sovereign) and private debtors (monetarily non-sovereign), Yves provides solutions for one that do not apply to the other.
Solution #1 does not apply to a Monetarily Sovereign nation, as such a nation does not service debts with “savings.” The government pays its debts by instructing creditors’ banks to increase the numerical balance in the creditors’ checking accounts. It does this without any reference to so-called “savings.”
Solution #2 also does not apply to a Monetarily Sovereign nation, as such a nation does not service debts with money value. If the federal government owed $1 trillion, and annual inflation were 10% or 100% or 1,000%, the federal government would pay its debt the same way: By crediting the bank accounts of its creditors for exactly $1 trillion, regardless of the purchasing power of that money.
Solutions #3 and #4 are unnecessary for a Monetarily Sovereign nation, though appropriate for the euro nations.
All four of the above solutions could apply to private debt, which is monetarily non-sovereign, but the statement “. . . no amount of government spending is going to allow this credit system to grow its way out of debt,” is not correct. In fact, federal spending is exactly what is needed.
Yves concludes her post with:
Now intellectually, you can make all sorts of arguments about the US’s being the sovereign issuer of currency or how the government is not like households or how we need to increase aggregate demand or how the government’s deficit is the non-government sector’s surplus. I certainly do. You can make these arguments until the cows come home. It’s not going to work.
Perhaps she understands Monetary Sovereignty, but she dismisses it with “It’s not going to work.” Well, yes, it won’t work if you ignore the facts. It won’t work if you pretend the facts don’t exist. In essence what Yves tells her readers is: “We know the world is round, but people think it’s flat. So there is no reason to argue with what people erroneously believe. Rather than telling them the truth, we should act as though the world is flat, and agree not to sail too far west.”
Shame on you, Yves. You could be a voice for truth, but prefer to go along with the ignorance. Sounds like another “Obama compromise” to me.
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. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings
MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 
You need to be more careful about when and how you respond to posts. It was NOT Yves Smith who wrote the post. If you were paying attention, you would have seen it was me, Edward Harrison.
Moreover, as I replied to your commentary at the post, I understand monetary sovereignty very well, thank you. See here for example:
http://www.creditwritedowns.com/2011/07/sovereign-debt-crisis.html
Ask Randy Wray, Scott Fullwiler or Marshall Auerback, leading voices in talking about the centrality of currency sovereignty as an issue, and they will tell you that as well.
I suggest you read any of the number of posts tagged ‘Currency Sovereignty’ at Credit Writedowns:
http://www.creditwritedowns.com/tag/currency-sovereignty/
My discussion of debt in the quote you refer to was PRIVATE sector debt, which is the problem for the US.
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Sorry Edward,
I’m delighted that Susan didn’t write that post. (Whew!)
Apparently, when you refer to “the debt,” you mix references to private debt with references to federal debt — a mix that is the prime source of economic misunderstanding.
For instance, the graph to which you sent readers, was titled, “The National Debt and the Debt Ceiling.” I now assume that graph is irrelevant to the “four ways to reduce real debt burdens” you suggested.
Also, you mix monetarily non-sovereign nations with the U.S., when you say, “Right now, everyone is fixated on the first path to reducing (both public and private sector) debt. I do not believe this private sector balance sheet recession can be successfully tackled via collective public sector deficit spending balanced by a private sector deleveraging. The sovereign debt crisis in Greece tells you that.
In response to your summary comment, “I’m just being realistic here,”I might have said, “In essence what Edward Harrison tells Yves’ readers is: ‘We know the world is round, but people think it’s flat. So there is no reason to argue with what people erroneously believe. Rather than telling them the truth, we should act as though the world is flat, and agree not to sail too far west.’”
I assume you meant to say something like, “Because people have heard so much about Greek debt and personal debt, they are not ready to accept the notion that federal debt is different, so there is no use trying to dissuade them. Instead, we should go along with reducing federal debt, and focus on trying to reduce personal debt, as being more achievable.”
Does that do it? If so, I don’t believe it.
Rodger Malcolm Mitchell
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My own readers have read my posts enough to know the distinctions between public and private sector debt. I re-read the passage and I think they are reasonably clear, particularly when I say:
“Right now, everyone is fixated on the first path to reducing (both public and private sector) debt. I do not believe this private sector balance sheet recession can be successfully tackled via collective public sector deficit spending balanced by a private sector deleveraging.”
I use the terms PRIVATE and PUBLIC many times there; enough I believed to allow my own readers to make the necessary distinctions. But, you have not done. To each his own.
I do want to respond here because you have a false impression about the article.
As I wrote at NC:
“Your interpretation of my statement is incorrect.
The logic is as follows.
1. Present a rational discussion of currency sovereignty often, hoping its centrality to the euro crisis is evident
2. Recognize that present dogma will LIKELY make these vain attempts – but do it anyway.
3. Make predictions on the LIKELY economic outcome which emanates from a continued adherence to mainstream dogma
Using your example, I would say instead
“We know the world is round, but people think it’s flat. So there is every reason to argue with what people erroneously believe. Rather than just telling them the truth and believing it will be accepted, we should be realistic and prepare for worst case scenario in which people like our leaders freely decide not to sail too far west.””
Again, there are a HUGE number of articles tagged ‘Currency Sovereignty’ at Credit Writedowns, that’s why I say “Now intellectually, you can make all sorts of arguments about the US’s being the sovereign issuer of currency or how the government is not like households or how we need to increase aggregate demand or how the government’s deficit is the non-government sector’s surplus. I certainly do.”
And I will continue to make those arguments, cognizant they may/probably will not be accepted. But who knows, one day my efforts may be fruitful. The leading lights of MMT know that Credit Writedowns has moved their framework much further into the mainstream and that I will continue to do so.
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I would go even further and argue that 1 – 4 are not even solutions for Europe.
They are only temporary fixes:
– Given that certain countries in the “union” are very export driven (ideologically) and will try to maintain that stance at any cost.
– Resetting debt (forgiveness – ?maybe? the best of the 4) may work until the periphery nations adopt “structural adjustments” (a 10 year project) which is really a slow strangulation of the economy with the balanced budget approach
– This leads to the inevitable race to the bottom conditions that lead to lower worker wages, evisceration of safety nets etc. over the longer term.
In short Europe needs to figure out MS/MMT soon or face a very bleak future (except for the usual elite suspects).
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Agreed, gf
There remain but two long-term solutions for the PIIGS and PIIGS-like nations. Either:
1. Quit the euro and return to a sovereign currency
or
2. Form a true United States of Europe, in which the EU provides euros to the nations.
All other “solutions” are temporary Band-Aids.
Sadly, the euro nations voluntarily surrendered the single most valuable asset any nation can have: Monetary Sovereignty. When you give up your most valuable asset, bad things happen.
Rodger Malcolm Mitchell
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Rodger,
Is not the immense transfer of wealth from the working/middle class to the 1% the root of the problem? I am of the opinion that for the vast majority of middle class folks in the U.S. the complete suppression of wage growth and the transfer of retirement savings from our accounts to those of the criminally greedy is the crisis and not, as many seem to present in their “blame the victim” sentiments, unruly debt. Many of us made every effort to live within our means and did not use our homes as a cash cow. Yet, we suffer because our incomes have been severely either reduced or stagnated.
Charles Fasola
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Edward – though not so sure as Rodger, I had similar tentative reactions. It is hard to see what you are saying in the quote Rodger italicizes above, or when the US or UK or Japan are compared to Ireland or Greece. Or “Japan has been able to run up public sector debt to 200% of GDP because it alone was in a balance sheet recession and its private sector was willing to fund this debt.”
Embiggening the US public debt is a surefire cure for private debt/ balance sheet recessions, by enabling the private sector to pay off its debts with its new savings, garnered from a full employment economy with higher than usual government spending. That’s how the US got out of the Great Depression through the New Deal & the war. The relevance of Greece’s crisis is obscure.
Whether the patients, who have been listening to imbalanced witch-doctors for decades, will take this well known cure before rampaging debt-deftlation, depression and default is a political question, not an economic one.
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Charles,
The rich got richer and poor stayed the same or got poorer. But that doesn’t mean there was a “transfer” from the poor to the rich.
It’s like digging for diamonds. The rich found them and the poor didn’t; no diamonds were transferred. This may be nitpicking, but it gets to an important point that often is overlooked: The poor will not benefit from anything done to lessen the incomes of the rich (i.e. increased taxing of the rich). Quite the contrary.
To help the poor, and indeed to help the whole country, we must help the middle and poor. That’s why I recommend such steps as:
–Eliminate FICA
–Increase the standard deduction by $10K each year
–Medicare for all
–Increased Social Security benefits
They all help the middle and poor, and don’t hurt the rich.
Rodger Malcolm Mitchell
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Rodger,
I understand your points. However, the fact remains that pensions have indeed been eliminated or decreased. Where did that money go? Incomes have stagnated, yet productivity has increased, who benefited? In many job classifications the salaries employees are willing to pay for the same types of work have fallen by factors as high as 25-30%. And please don’t tell me that incomes for all employers have fallen equally and that is the justification. I personally know that it is not the case across the board. The suggestions you make to help the poor/middle classes are admirable and certainly will put more cash in the pockets of those groups, however, they will not provide sufficient relief to make up the losses; ever. Sorry, an extra couple K will not my lifestyle change significantly. It’s like the Guaranteed Jobs Mosler recommends at $8.00/hr. Yes sireee, a great existence those folks will have. I buy alot of what you say, Rodger, but cannot agree here. In the present case, the middle class had some diamonds as well and the one percent pilfered them. The type of concentration of wealth that currently exists allows those at the top to take more and more and more. No need to expound on the how it is done. It needs to be forcefully taken back. The whole damn system is a cesspool of corruption No amount of trying to fix it from within will ever create the necessary changes.
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Finally, a simple equation: (Inequality = Debt = Austerity). Which equals criminality with no consequences. Yes, it’s theft plain and simple; no matter how you justify it all for them. If it’s not obvious then you’re a facilitator.
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When tens of trillions of dollars deliberately flow to the top economic one-tenth of one percent of the global population, while large percentages live in poverty, you have to conclude, in technical terms, that a Neo-Feudal-Fascist state is upon us. The rich have never been richer, while their paid off politicians make budget cuts for the poor and middle class, and cause the cost of basic necessities to skyrocket.
What do you call it? If not transfer. We don’t want to hurt the damned criminals do we now? They just found the diamonds before everyone else, no? C’mon give me a break. I love your theories but if you don’t see it for what it is, you’re just one of them.
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Question: Is the situation different today from what it has been during the past 5,000 years of civilization?
I’m not defending the rich, or the poor, or the differences between them. But I suspect this is a part of human nature. like lust and desire.
Anyway, my point was that if you consider it a “transfer,” you make the wrong decisions, like “Robin Hood” laws. The better solution is to lift the poor, without punishing the rich for being rich. That way, the entire economy grows, which helps the middle and the poor.
Rodger Malcolm Mitchell
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You should be defending the poor. The only way to be “rich” in monetary definitions is to have someone else labor & produce it for you. Money produces artificial scarcity (or artifical greed). Look at what has happened with water. Could you imagine paying for a bottle of water 20 years ago? Are you ready for figurative toll booths for walking down the street and breathing air? It’s time for humanity to grow past pubescence.
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Thanks Edward,
As your own readers already understand your position, you had no need to write for them. You now might consider writing for people who don’t already know your position.
You spoke of “the LIKELY economic outcome which emanates from a continued adherence to mainstream dogma.” The likely outcome is a depression. Period. While you “prepare for that worst case scenario,” I will continue to try to prevent it.
I suggest that simple truth should be stated forcefully, and as often and by as many people as possible, rather than surrendering to the ignorant, with, “It’s not going to work.”
The only way to cure ignorance is with the facts, stated clearly. I hope you will join in.
Rodger Malcolm Mitchell
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Rodger,
My opinion is that the “earth is flat” crowd damn well knows the earth is round but have a vested interest in keeping everyone in the dark. Sadly, this is why your prescriptions will not be given the rational consideration they deserve.
I’ve included a piece (wouldn’t let me post link) that explains why I think many intelligent people believe creating more interest bearing debt money to solve our problems will only be a band-aid. People often omit other serious/external problems that arise from the inevitable “growth” imperative that comes with said money, such as the wars that come with it, how it enslaves people, and the toll it takes on our ecosystems and environment.
http://www.realitysandwich.com/sacred_economics_ch_6_usury
I don’t know if you’ve read any of John Perkin’s books but he breaks down a very simple fact. The U.S. is approximately 5% of the world population and consumes around 25% of its resources. Now you have other countries trying to duplicate the Capitalism model. You don’t have to be a mathlete champ to come to the conclusion that this is going to lead to a MAJOR sustainability problem.
~ Pete
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Pete, the federal government creates dollars by instructing creditors’ banks to mark up the numbers in the creditors’ checking accounts. T-securities are unnecessary — a relic of the gold standard. The parable in Reality Sandwich does not apply to a Monetarily Sovereign nation.
Although all money is debt, the dollars created by the federal government do not charge interest. They simply are credits to checking accounts.
Bank dollars do involve interest, but the notion that this means eventual exhausting of resources, is wrong. The symptom of such “exhaustion” would be inflation, which is nowhere to be seen. This article seems to be one of those “unsustainable” stories debt hawks love.
Rodger Malcolm Mitchell
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Well, if you think never ending growth is possible, we better start working on cloning the planet earth. The book is about the story of money, and how that narrative is what gives money its real value. We are running out of stuff to monetize (“grow”) which is why you see the fabric of the system deteriorating all around you. I’ve only read a few chapters online but it will give you some fresh perspective.
I’m not debating your explanations of the mechanics of MS. You seem to speak of money as if it is a law of nature and not a human/social construct. There’s a several part interview series on utube with Charles Einstien (he’s not a debt hawk) called “Money & Life”. I hope you can muster to give it some time… fascinating stuff. Happy Holiday weekend and keep up the good work.
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Pete,
Got it. You hate the rich. You hate money. You’re foaming at the mouth in anger. You said:
I am. I said, “The better solution is to lift the poor, without punishing the rich for being rich. That way, the entire economy grows, which helps the middle and the poor.” Punishing the rich does nothing for the poor.
You said:
Total “commie” nonsense. In a modern society, everyone benefits from the labor of others.
You said:
So now you want to get rid of money? Back to barter? That ought to help the poor you claim to defend.
You said:
So don’t buy bottled water. It’s a choice, a silly choice in my opinion, but a choice.
You said:
No. Are you ready to build your own house, your own street, water and sewer lines, and grow your own food and collect your own garbage, and remove your own appendix — rather than having someone else do all these things for you? No? You must be one of those evil rich people.
You said:
Especially, dream-world Marxists who believe that destroying money and rich people is the way to help poor people. That experiment has been tried. It caused poor people to become poorer.
Rodger Malcolm Mitchell
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Rodger,
I’m not mad, just honest. I don’t hate the rich, they are a product of a system that rewards various deeds, some “good” or what some might consider “valuable”, some glaringly awful.
“Total “commie” nonsense. In a modern society, everyone benefits from the labor of others.”
Umm, how so? In the current system, labor, the actual producers, are compensated in inverse proportion to the rentiers, who produce very little or nothing. One might reference the mutant growth in CEO to worker compensation ratios. Indeed many CEOs are even rewarded for the ability to completely fail, liquidate labor, and loot & plunder. The only reason we even had a middle class in this little blip in history is the abundance of cheap fossil fuels. Global serfdom is coming soon to a town near you. Are you under the impression that the austerity blanket being spread across the Western world is just some misguided leadership? Do you notice more and more public goods being packaged up and alienated into the hands of a few?
“So don’t buy water.”
Rodger, private companies are now buying up the world’s fresh water supply. What has been a public trust for 2000 years is now being auctioned off to the controling interest of a few. Futures are being sold on the Great Lakes Basin.
These are all symptoms of the growth imperative, which is the real Utopia, and its mathematically impossible on a finite planet. That’s why you see the desperate acts of trying to monetize more and more services & resources around you to prop up the house of cards. To think otherwise is to believe in magic or join the “earth is flat” crowd.
There are a lot of intelligent people discussing some really good ideas about money as we face the transition from this crumbling old paradigm. It’s not all doom and gloom and it doesn’t have to fall into the old false narrative of “Capitalism vs. Communism”. All isms can be converted to Totalitarianism by the servitude to interest bearing debt.
Humans actually began in “gift economies” before there was ever barter. Check out Charles Einstein’s “Sacred Economics” thinking on the subject. At any rate, you can keep attempting to apply band-aids if you like, and I applaud your intentions, but I think that’s a deep form of denial.
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Pete, your data-free, fact-free comments are so outrageously “Henny Penny,” I’ll bother with only one. You asked, “Are you under the impression that the austerity blanket being spread across the Western world is just some misguided leadership?”
My answer: Yes. Austerity (aka the road to depression) is unnecessary for a Monetarily Sovereign nation.
Rodger Malcolm Mitchell
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By the way, Pete, your hero’s name is Eisenstein, not Einstein.
For the amusement of those who enjoy poetry masquerading as economics, I’ll post a paragraph he seems particularly proud of (It’s what he posted on his blog):
“Reunite with nature”? “Relationship to earth shifts toward that of a lover”? “New human identity of the connected self living in cocreative partnership with Earth”?
It may be poetry; it may be religion. But it isn’t science.
Rodger Malcolm Mitchell
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Rodger,
To believe that humans and their constructed economic/money sciences are somehow exempt, above, and disconnected from nature and that humans are to be corralled as instruments of economic systems is the very reason we are in this mess. I’m deeply sorry you don’t understand that.
Here’s a more easy to digest passage:
The Growth Imperative
“I hope it is clear how this story maps onto the real economy. Because of interest, at any given time the amount of money owed is greater than the amount of money already existing. To make new money to keep the whole system going, we have to breed more chickens-in other words, we have to create more “goods and services.” The principal way of doing so is to begin selling something that was once free. It is to convert forests into timber, music into product, ideas into intellectual property, social reciprocity into paid services.
Abetted by technology, the commodification of formerly nonmonetary goods and services has accelerated over the last few centuries, to the point today where very little is left outside the money realm. The vast commons, whether of land or of culture, has been cordoned off and sold-all to keep pace with the exponential growth of money. This is the deep reason why we convert forests to timber, songs to intellectual property, and so on. It is why two-thirds of all American meals are now prepared outside the home. It is why herbal folk remedies have given way to pharmaceutical medicines, why child care has become a paid service, why drinking water has been the number-one growth category in beverage sales.”
I’m merely trying to show you where things are heading, regardless of your number crunching and currency prescriptions, which are all very educational. No need for the ad-hominem attacks.
~ Pete
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From a diagnosis standpoint, this is a really good read including the ensuing discussion.
http://attempter.wordpress.com/2010/12/23/the-limits-to-racketeering/#comments
I also forgot to ask you Rodger. When you declare that “everyone benefits from the labor of others..”. When U.S. corporations created “Globalism” (a quite Orwellian euphemism for the expansion of resource conquest) and exported sweat shop labor over seas, please explain how “everyone” benefited from that.
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Unless you dig your own ore and smelt your own aluminum and steel, and grow your own food, and make your own medicines, and reap your own cloth, and sew your own clothes, and not only print, but write your own books, and home school yourself — unless you do the million things that others do for you, you benefit from the labor of others.
In fact, right now you are benefiting from my labor in trying to educate you. Well maybe you aren’t benefiting, because I don’t detect a willingness to learn.
No more on this. Bye.
Rodger Malcolm Mitchell
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You miss the point. Those in the sweat shop are not “benefitting”. They are rented slaves. Some jackass in a far away place is enriching himself off of someone else’s toil. It’s called exploitation, as in what happened to the resources of the entire global south, but I guess that doesn’t factor in to your version of the “everyone benefits” fairy tale.
It’s ironic because your entire blog is dedicated to removing the religion from economics but you still think economics is the horse and not the cart. That is the arrogance of human exceptionalism.
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Pete:
False. Was the iPhone once free? The computer, the modern car, the airplane, all the inventions of mankind? We just need to keep making better things. The desire to make better things is good, right?
False. Poor countries decimate their forests to get rich. Then, rich countries replant their forests. And are you seriously decrying copyrights? Really?
Huh? What does that questionable statistic have to do with anything?
This is getting silly. You really think herbal folk remedies are better than pharmaceutical medicines? And bottled water is a bad thing that has happened because of interest?
Pete, I’m going to give you the last word on this. I’ll respond no more. The conversation has now veered from the merely ridiculous to the downright new-wave hippie version of non-economics. And if ever you (God forbid) get cancer, be sure to consult a shaman.
Rodger Malcolm Mitchell
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