–The U.S. states, counties and cities are PIIGS

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Mitchell’s laws: Reduced money growth never stimulates economic growth. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity breeds austerity and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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The euro nations, five of which are referred to as the PIIGS (Portugal, Italy, Ireland, Greece, Spain), are in deep financial trouble because years ago they voluntarily surrendered the single most valuable asset any nation can have — Monetary Sovereignty — and this problem is exacerbated by being net importers.

As monetarily non-sovereign nations they are not able to create their sovereign currency (they don’t have a sovereign currency, in that the euro is not sovereign), and as net importers they see euros continuously drained from their economies. (Germany, a euro nation, prospers because it is a net exporter, thus draining euros from its neighbors).

Those two economic problems, monetary non-sovereignty exacerbated by net importing, are identical to the situation in which the American states, counties and cities find themselves. For the euro nations, there are two, and only two, long-term financial solutions:

1. Return to Monetary Sovereignty by re-adopting their sovereign currencies
or
2. The EU to give (not lend) euros to member nations as needed.

For the American states, counties and cities, the number of long-term solutions comes down to #2: The U.S. government to give, not lend, dollars as needed.

The Washington Post
States face bleak economic forecast, report says
By Michael A. Fletcher, Published: November 28

States are caught in a fiscal vise as weak economic growth, dwindling federal help and increasing appeals from hard-pressed local governments squeeze their budgets.
[…]
The Fiscal Survey of States says that even as states struggle with tepid revenue growth, they will be called on to spend more because of the economic distress caused by continued high unemployment.

“State budgets are certainly improving; however, growth is weak, and there is not enough money for all the bills coming in,” said NASBO Executive Director Scott Pattison. “State officials will still be cutting some programs, and increases in funding for any program except for health care will be rare.”

It is mathematically impossible for any monetarily non-sovereign governments — whether states, counties, cities or PIIGS — to survive long term, without money coming in from outside their borders.

Relying on internal taxes for support is a losing proposition. As inflation-adjusted dollars are drained from a state, either via imports or inflation, fewer tax dollars are available. This produces a downward helix of fewer dollars begetting greater needs, requiring even more tax dollars.

The counties and cities must have state support, while the states must receive federal support. However, the deficit-cutting frenzy in Washington makes federal support of the states difficult, if not impossible.

The report says that Medicaid, the combined federal-state health program for the poor and the disabled, will place the biggest budgetary burden on states. Because of increasing caseloads, declining federal help and spiraling health-care costs, state Medicaid spending is growing much faster than state revenue, crowding out funding for other priorities.

The federal government had provided extra Medicaid help to states as part of the stimulus program. But that help has ended, prompting states to increase their Medicaid spending by an average of 29 percent this fiscal year, according to the Kaiser Family Foundation.

Many states have streamlined their Medicaid programs in an effort to control costs. Still, officials in more than half of the states said in a recent survey that there is an even chance that their Medicaid programs will face a budget shortfall as enrollment continues to increase.

The monetarily non-sovereign states simply cannot afford to pay for Medicaid, nor should they. This program should be folded into Medicare and supported by our Monetarily Sovereign, U.S. government, which easily can afford to do so. Keep in mind that Medicare is not supported by FICA. No federal program is supported by taxes. That is one of the truths of Monetary Sovereignty. So for the federal government to assume all Medicaid payments would not require taxes to be increased by even one dollar.

States are also struggling to meet the needs of local governments. Many states cut aid to localities during the recession, and many of them want it restored.

Ultimately, our lives are local. We urgently feel the effects when our city or village is unable to maintain roads, sewers, water, police, fire protection, zoning and other local initiatives. These are the problems local governments should care for, not national problems like Medicaid and other unfunded federal mandates. There, in fact, should be no unfunded federal mandates.

In addition, states are bracing for further reductions in federal aid that are likely to come from Washington’s efforts to slow the growth of the deficit.

The fiscal pressure on states has become a drag on the job market; local and state governments are shedding jobs, even though the private-sector job market has shown signs of improvement.

State and local governments have cut 455,000 jobs since the beginning of 2010, and public-sector jobs account for the smallest share of the nation’s employment since the 2008 financial crisis, according to the Bureau of Labor Statistics.

The U.S. states, like the PIIGS, are in deep trouble, and for exactly the same reason: They are monetarily non-sovereign and are not receiving sufficient help from their sole Monetarily Sovereign source, the central government.

Unless Congress and the President come to their senses, and begin to understand the facts of Monetary Sovereignty, the states will suffer the same fate as the euro nations: Insolvency leading to chaos. The euro nations are more fortunate in that they have the alternative of leaving the EU. The U.S. states are stuck in that they don’t have the alternative of leaving the Union.

Or do they?

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. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
b>Gross Domestic Product = Federal Spending + Private Investment + Private Consumption + Net exports

MONETARY SOVEREIGNTY

Published by Rodger Malcolm Mitchell

MBA Northwestern, business turnaround expert, economist

Published

18 thoughts on “–The U.S. states, counties and cities are PIIGS”

  1. YES,YES,YES,.
    One little no or perhaps just a slight change.

    **”The EU to give (not lend) euros to member nations as needed.”
    In this non-utopian world there needs to be an interest charge,but this interest is to be returned to the borrower.
    This is really insurance (read interest) against “moral hazard”,”unintended consequeces” and “loss”.Also a means to control the quality and quantity of the currency.
    EXCERPT FROM THE INTERNET.
    THIS IS AN EXCERPT FROM THE INTERNET, WRITTEN BY SOMEONE ELSE: @ aish.com
    ” Wealth and the Occupy Wall Street Movement”
    I wish the Occupy Wall Street movement would be a little clearer about what they’re protesting.
    Even as it continues to grow and gain followers outside of New York, with satellite protests in more than 60 American cities as it threatens to go global, the demonstrators still haven’t directly identified their enemy.

    And before I can make up my mind whether or not I support them, I think they need to tell us whether this is more about money or morality.
    What troubles me is that much of the anger of the protesters seems to be fueled by a sentiment about wealth … There have always been people who believed that spirituality demands that we forsake materialism. Rich people are wicked by definition. Accumulating a great deal of money is a sin.
    ….Wealth is not ignoble; it presents us with precious opportunities. …The philosopher Philo had it right when he summed ..(the) sentiment in these words: “Money is the cause of good things to a good man, of evil things to a bad man.”
    Wealth may destroy those who possess it but it can also be the source of the greatest blessing. Precisely because it has this quality, it becomes doubly holy. When we choose to use a potentially destructive object in a positive and productive manner, we have learned the secret of true (wealth).
    “Show me your checkbook stubs,” said the noted psychologist, Erich Fromm, “and I’ll tell you everything about yourself.” Self-indulgence or selflessness? Wine, women, and song or charitable works? Hedonism or helping others? …
    For those whose crusade against Wall Street is synonymous with a vendetta against all those with wealth, there needs to be recognition of the great good accomplished by many of those who’ve been blessed with prosperity. Just because someone has “made it” doesn’t make him a villain. To add the adjective “filthy” to the word rich in signs hoisted by Occupy Wall Street protesters is to unfairly castigate those who … may have rewarded because they’re wise enough to work on … creating a better world.
    We could all learn much from Michael Bloomberg, the self-made billionaire founder of the Bloomberg financial information firm and New York Mayor, who for two years in a row was the leading individual living donor in the United States, according to The Chronicle of Philanthropy. He recently said he intends to give away most of his fortune, because “the best measure of a philanthropist is that the check he leaves to the undertaker bounces.” And that will insure that he dies a very happy man.
    Capitalism isn’t only about accumulating more and more money. Just a few years ago TIME named Bill and Melinda Gates as its “Persons of the Year.” Gates, a Wall Street superstar, was acknowledged as one of the most influential people in the country – not because of how much money he has but because of how much of it he is willing to give away. He came to the conclusion that greed isn’t meant to be our goal in life.
    Having made more money than he will ever need, he has one more vision that drives him. He would love to convince world business leaders that being socially responsible isn’t just altruism but sound business practice. Gates says he has learned that greed is self-defeating. It destroys the very people who make it their god.
    Today Gates is spearheading a drive to get the super wealthy to publicly commit themselves to giving away most of their fortunes for charitable purposes – and Warren Buffett, chairman of Berkshire Hathaway Inc. and one of the world’s wealthiest men, among others has signed on to this noble endeavor.
    When the Occupy Wall Street crowd talks about cleaning up corruption, when it points a finger at all those whose financial recklessness plunged the country into the Great Recession, when it gives voice to the anger we all feel at the perpetrators of highly immoral business practices that hurt millions of innocent victims – for all of these righteous causes they deserve our unqualified thanks.
    It’s only when they confuse anyone who is wealthy with the enemy that I think we need to remind them that just as much as the poor don’t deserve to be despised for their poverty, the rich don’t deserve to be hated simply because they have money.
    This article originally appeared on aish.com.
    This is not original,nor is it complete,it is an email sent to justaluckyfool@aol for informational purposes .
    I submit as a comment about “the most powerful force in the universe ” and how it may be used.

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    1. All hail the job creators! If you think stereotyping, generalizations, (kinda stings when it is reciprocated from “dirty, entitled hippies”) and “wealth envy” is at the center of the 99%’s argument, you just aren’t paying attention. Even those who are confused know a good robbery when they see one.

      “True compassion is more than flinging a coin to a beggar; it comes to see that an edifice which produces beggars needs restructuring. ”
      ― Martin Luther King Jr.

      Thanks for the charity argument but there are also plenty who climb over bodies to obtain wealth which no amount of scrap tossing can atone for.

      I’m really tired of hearing about “self-made” folk who were mostly born on 2nd or 3rd base and still think they’re homerun hitters and ignore the fact than nobody (not Bill Gates, not Steve Jobs, not Warren Buffet) in this world gets “wealthy” (I assume you mean accumulating paper capital) without the benefit of an entire system made up of an intricate web of the functions of other people.

      If these socially responsible business leaders are true moral champions then they’ll start making citizens arrests and turning in the crooked cheaters they play golf and drink scotch with that are giving them such a bad name.

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  2. Rodger,
    Interesting analogy.

    The states may end up just like the PIIGS.
    And the “states” started out a lot like those Eurozone members.
    Monetarily sovereign – to the degree necessary to prosper.
    Joining in a confederation that required giving up that sovereignty, hoping for greater prosperity.

    Our Federation included a quid-pro-quo on behalf of the Feds.
    – that, in response to the states’ giving up their monetary sovereignty, the Feds would provide the medium of exchange necessary to allow their economies to prosper.

    How’s that working out?
    For the states I mean.

    Not sure if you’re remedy is to restore public service affordability via massive growth in aggregate demand, or not.
    Not sure how that would affect each and all of the states.

    What I am sure of is that in Dennis Kucinich’s Bill reforming the money system so as to restore monetary sovereignty, it is inclusive of the recognition of the money power transferred to the central government via a new sharing of the monetary power back with the states, directly, on a per capita basis.

    Based on a 25 percent sharing of new monies going directly, debt-free, to the states, today’s economy would generate something like $100 Billion in payments for state investment, annually.

    For a small state like Vermont, something like $200 Million annually.
    For a large state like Illinois, something like $17 Billion.

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  3. If Walter Mondale had understood Monetary Sovereignty in 1984, he wouldn’t have said these words that doomed his chances of election:

    “Here is the truth about the future: We are living on borrowed money and borrowed time. These deficits hike interest rates, clobber exports, stunt investment, kill jobs, undermine growth, cheat our kids, and shrink our future.

    “Whoever is inaugurated in January, the American people will have to pay Mr. Reagan’s bills. The budget will be squeezed. Taxes will go up. And anyone who says they won’t is not telling the truth to the American people.

    “I mean business. By the end of my first term, I will reduce the Reagan budget deficit by two-thirds.

    “Let’s tell the truth. It must be done, it must be done. Mr. Reagan will raise taxes, and so will I. He won’t tell you. I just did.”

    Geez, he sounded like President Obama does today.

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    2. Politicians in general, except when a supply-sider wants to make the point, confuse tax revenues with tax rates. It’s true, taxes (revenues) went up during Reagan’s second term. And Federal Income Tax rates went down. And taxes went up after the infamous “Bush tax cuts”. Taxes are going up even now, as Congress does nothing to tax rates. Taxes went up in 2011, after they cut the FICA rates by 2%. Some would infer causality from tax rate cuts to tax revenue increases, via increased economic growth.

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  4. But in over 200 years no US state has ever gone bankrupt. The Euro will not last that long.

    Don’t the states have the same option as any other non-sovereign entity, such as a family, to spend only what they can “earn” in taxes, Federal Revenue-sharing, and exports to other states? (And to borrow for capital spending, and pay back the principal in inflated dollars?)

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  5. By law, states are not allowed to go bankrupt. if they were, Illinois and California would have done so, years ago. They simply don’t pay their bills.

    I should mention that the myth of paying back with inflated dollars does not help states pay their bills. They owe a finite number of dollars, regardless of the “value” of those dollars, when compared to some earlier period .

    If, in 2012, Illinois owed $100 billion, and the value of one 2012 dollar had shrunk to 1 cent in 2011 dollars, Illinois still would have to pay $100 billion out of taxes and federal support.

    The only debtors to benefit from inflation are monetarily non-sovereign entities whose dollar income increases as a result of inflation. To the degree inflation caused Illinois tax receipts to increase, Illinois would benefit — except its expenses would go up, too.

    Rodger Malcolm Mitchell

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    1. Or they sell off public assets like the guy in a rigged poker game begins tossing his wedding ring, watch, shirt, and eventually his children into the pot.

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    2. I’ve never paid taxes in Illinois, but a state with a progressive income tax would see a greater percentage increase in its income tax collections than it would see in its expenses, thus being a net beneficiary of inflation. And the other taxes (sales, property) should just about keep up.

      If that $100B in 2011 were equal to the property tax on “X” acres of farmland, then to pay it back in 2012 would require tax receipts from only X/100 acres of farmland.

      Inflation transfers real wealth from creditors to debtors.

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      1. I understand the old “paying-debts-with-cheaper-dollars belief, but when you dig into it, you find it really doesn’t work. While your debts are worth less in commodities, so are your savings. So it works best if you have lots of debt and zero savings, or if you’re paying a mortgage on a house that inflation increases in value.

        Also, the assumption is that inflation causes salaries to go up faster than the cost of expenses — a dubious assumption at best.

        Regardless, whether there is inflation, deflation, stagflation or any other kind of “flation,” it is mathematically impossible for any state, county or city to survive long term without dollars coming in from outside its borders.

        Rodger Malcolm Mitchell

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        1. “it works best if you have lots of debt and zero savings”

          Or, you could say it “works” any time your debts are greater than your savings, i.e., you are a net debtor. Like a typical homeowner with a mortgage (and a job), or a typical state with bonds outstanding. A typical retired homeowner (or renter, for that matter) with no mortgage and a pension not adjusted for inflation is the donor of the net financial assets.

          I never said, and I do not assume, that salaries will rise faster than inflation. That has certainly not been the case in the US over the past decade or so. You may have been confused by my comment about the progressive income tax. When higher rates apply to higher nominal income, then rising wages mean the tax is a higher percentage of income. Wages don’t have to rise faster than inflation, or even as fast, in order for tax collections to increase in real terms.

          Suppose the tax rate is 0% on the first $10,000, 5% on the next $10,000, and 10% above $20,000. If my salary increases from $50,000 to $60,000 (+20%) my tax goes from $3500 to $4500 (+28.6%). Even if inflation were 25% (meaning that real wages had dropped), the increased tax rate means the state still gets more real income than before ($4500 nominal = $3600 in constant dollars, vs. $3500 before).

          While Federal tax brackets are automatically adjusted for inflation, so as to eliminate this “bracket creep”, State brackets typically are not. The legislature would have to act, and they do so only sometimes.

          And, yes, obviously, a State, like a family or a business or any other currency user needs income from outside itself in order to grow financially. However it’s not clear to me that they could not survive long term in an equilibrium state, with no net drains on their financial assets, but also without growth. But I don’t know what that has to do with the topic at hand, either.

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  6. The real PIIGS may be doomed.Posted from FORBES’

    ” Robert Lenzner, Forbes Staff

    + Follow

    Investing|11/30/2011 @ 6:15PM |1,585 views
    Smart Money Says The End In Europe Is Going To Be Bad.
    … My clever hedge funder guru on Europe told me today; “All this (the central bank liquidity plan) does in delay the inevitable.”

    “Inevitable”– as in Greek default, Portugal default. Italy/Spain are maybe probable defaults. All (this) could take time (even years),” my guru added. “It is hard for me to see how the Euro continues in its current form. It’s possible but only if the Germans are willing to give money to southern Europe.”

    This from a trader/investor whose fund has been short sovereign debt since the summer of 2010. He agrees with me that the violent bounce in European bank stocks today– was due in part certainly to the covering– buying back of previous short interests.

    The umbrella of central banks offering liquidity– the US, Germany, Japan and Canada was a mighty powerful step that minimized the credit downgrading of UBS, Barclays, HSBC, Goldman Sachs and Bank of Americas by S&P just on the eve of the policy shock that drove markets substantially higher today.

    Bank shares had been tumbling in volatile trading for weeks as the European Central Bank struggled to raise at least $1 trillion required to refinance nations like Greece, Italy and Portugal– as well as inject much needed capital resources into banks of those nations that were holding sovereign securities that were declining in price.”

    My comment;The only question is when?

    mFollow me on Twitter. Read my Forbes blog here.

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  7. Rodger says “there are two, and only two, long-term financial solutions..”. I suggest there is a third, namely to cut wages and prices (in nominal terms) in PIG countries. This amounts to the same thing as a PIG having its own currency and devaluing it.

    In fact the latter is one of the basic objectives of the austerity imposed on PIGS. But of course it’s a very long drawn out, and painful way of doing a devaluation. In fact the process is so slow and painful that there’s a good chance that anarchy breaks out in PIG countries before the process is complete.

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