–The world parade: Europe marches over the cliff. America follows. Tea Party cheers.

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 = poverty 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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Latest news on the world parade:

Merkel vows faster eurozone reform after S&P downgrades
Yahoo Finance, Reuters 1/14/12, By Robin Emmott and Brian Rohan

European leaders promised on Saturday to speed up plans to strengthen spending rules and get a permanent bailout fund up and running as soon as possible, a day after U.S. agency S&P cut the ratings of several euro zone countries’ creditworthiness.

In a conference call with reporters and analysts after downgrading nine of the euro zone’s 17 countries, Standard & Poor’s said it saw continued risks from the debt crisis that has overshadowed Europe for the past two years and said the single currency area was heading towards recession.

It also warned that France, which suffered a downgrade to AA+ from the top-notch AAA, was at risk of further cuts if a recession further inflates its debt and budget deficit.
“The policy response at the European level has in our view not kept up with the rising challenges in the euro zone,” S&P credit analyst Moritz Kraemer said on the call, forecasting a 40 percent chance of euro zone gross domestic product contracting by up to 1.5 percent in 2012.

Hmmm . . . I wonder why a group of nations, each having surrendered their single most valuable asset — their Monetary Sovereignty — would suffer GDP contraction.

(German) Chancellor Angela Merkel said the downgrades underlined why a so-called ‘fiscal compact’ must be signed by member states quickly, and the next bailout mechanism, known as the ESM, should be funded soon.

“We are now challenged to implement the fiscal compact even quicker … and to do it resolutely, not to try to soften it,” she said at a meeting of her conservative Christian Democrats (CDU) in the northern city of Kiel.

The “fiscal compact,” which I refer to as the “suicide pact,” mandates more centralized EU control over national budgets and sanctions for countries that do not meet deficit and debt reduction targets. Just what anemic nations need: Blood removal.

European Central Bank policymaker Joerg Asmussen warned that Europe’s drive to tighten fiscal rules was being softened, considering the latest draft of the agreement a “substantial watering down” of budgetary discipline because it would allow extra spending in extraordinary circumstances, the Financial Times Deutschland reported.

It’s hard to know whether to laugh or to cry.

Leaders including Merkel have urged countries to tighten their belts with higher taxes and deep spending cuts to rein in massive budget deficits. But that has heightened market concern about their ability to grow their way back to health, pushing borrowing costs even higher for heavily indebted governments.

By what economic mechanism can higher taxes and deep spending cuts rescue an economy? Tea Party insanity has infected Europe as well as the U.S.

S&P said it was not working on the assumption of a euro zone break up, although it blamed its leaders for focusing too much on cutting debts and not sufficiently on competititeveness. “We think that the diagnosis of policymakers regarding the crisis is only partially recognising the origin of the crisis,” said Kraemer, mentioning the focus on budget austerity.

“The proper diagnosis would have to give more weight to the rising imbalances in the euro zone in terms of the external funding positions, current account positions, much of it is based in diverging trends of competitiveness,” he said.

Total gobbledgook. S&P favors austerity — and also doesn’t favor austerity. It straddles the fence, and later, when the whole thing comes crashing down, will say, “I told you so.”

“The downgrade is bad news for Austria but it should wake everyone up when such a thing happens,” Finance Minister Maria Fekter said. “Now everyone recognises that this … is a matter of debt and deficits, not primarily of the economy.”

Huh?

“The downgrade is far too broad, it effects too many countries, it effects the very credibility of the euro,” (Spain’s) Treasury Minister Cristobal Montoro said on the radio.

The euro has credibility?? Since when? Readers of this blog remember the line, “Because of the Euro, no euro nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the euro.”

I said it on June 5, 2005, in a speech at the University of Missouri, Kansas City.

Germany’s Merkel backed a proposal to reduce the reliance of institutional investors on ratings agencies. The idea would be to introduce legislation to allow institutional investors to evaluate risk themselves and make decisions independent from the U.S.-based agencies.

Don’t like the ball game score? Change umpires. Ironically, while the euro nations are angry at S&P, if anything, the ratings are too high, and absolutely, positively will continue to be lowered, unless the EU gives (not lends) euros to member nations.

European leaders are set to meet at a summit on January 30 to discuss how to boost growth and jobs, and Merkel’s words on Saturday suggest she will also be looking for faster progress on tighter common fiscal rules.

That’s the guaranteed-to-fail plan: Try to boost growth and jobs with more austerity. Help a runner by cutting off his feet. Sadly, that’s the same plan the U.S. Congress and President have borrowed from the Tea Party.

However, Merkel is no fool. Austerity will weaken the rest of the euro nations, making Germany even more dominant. That’s the real plan, and the euro nations are falling for it.

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
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports

#MONETARY SOVEREIGNTY

–Again I lay my head on the MMT chopping block. Why JG (formerly ELR) is obsolete.

Based on comments I’ve received, both on this blog and in correspondence, there seems to be some confusion about what the MMT (Modern Monetary Theory) proposed JG (Job Guarantee) really is, and why it is .

The confusion about “what” revolves around the question: Who provides the jobs, the government or the private sector? That is, under JG, would unemployed people be able to work for, and be paid by, the federal government? Or would the federal government merely pay private industry to hire the unemployed? Or both?

Here is what Randy Wray wrote to Warren Mosler and me on January 11, 2012, regarding JG (formerly called “Employer of Last Resort” –ELR):

I do not know of any proposal that advocated creation of any new “company” or bureaucracy. I, personally, have never advocated any new federal govt jobs (altho I am not necessarily against that as a supplement). So I have no idea where you got these ideas.

At most, I have advocated federal funding, paying to a social security number (a private bank account); and using existing unemployment offices as necessary to help link workers to jobs. but I’m not sure even that is needed. I think we might need one new Federal government employee to run the program. Everything else is already in place.

O.K., that’s clear. Randy says the federal government would supply the money, and function as a kind of super employment agency, and private industry would supply the jobs. (Note that the former title, “Employer of Last Resort,” implies government jobs).

But wait. Here’s a summary from a writer who posted to Wikipedia:

The JG is based on a buffer stock principle whereby the public sector offers a fixed wage job to anyone willing and able to work thereby establishing and maintaining a buffer stock of employed workers. This buffer stock expands when private sector activity declines, and declines when private sector activity expands, much like today’s unemployed buffer stocks.

According to that writer, the government would supply the money and the jobs. I’m not sure there is an “official” MMT view on this. If ever a JG were instituted, it probably should be something like the Randy Wray version. It is much closer to the Monetary Sovereignty idea: Merely extend unemployment compensation.

All of this takes us to the stated purpose of JG: To create “full employment with price stability.” There is, in fact, a Center for Full Employment and Price Stability at the University of Missouri at Kansas City (UMKC), the heart of MMT in America. Clearly the association of full employment with price stability is an important part of MMT.

And here may be where Monetary Sovereignty (MS) truly diverges from MMT, for MS disagrees with the need for full employment and it disagrees with the use of employment to achieve price stability.

Here is what the Wikipedia author said:

A job guarantee (JG) is an economic policy proposal aimed at providing a sustainable solution to the dual problems of inflation and unemployment.

When private sector employment declines, public sector employment will automatically react and increase its payrolls. So in a recession, the increase in public employment will increase net government spending, and stimulate aggregate demand and the economy.

Conversely, in a boom, the decline of public sector employment and spending caused by workers leaving their JG jobs for higher paid private sector employment will lessen stimulation, so the JG functions as an automatic stabilizer controlling inflation. The nation always remains fully employed, with a changing mix between private and public sector employment.

Since the JG wage is open to everyone, it will functionally become the national minimum wage. To avoid disturbing the private sector wage structure and to ensure the JG is consistent with price stability, the JG wage rate should probably be set at (or slightly below) the current legal minimum wage.

Yes, that is completely different from Randy Wray’s concept, which demonstrates the confusion, and does not answer the question, “Why full employment?” I won’t repeat the contents of previous posts, which in summary said, employment neither is a public nor a private goal. Most people seek jobs, not as an end, but as a means to income.

(Yes, I know. People have a need for activity, but relatively few would work in their current jobs, were they not bribed. The popularity of weekends and vacations speaks to that. Surely, few young people have told their parents, “I want to grow up to become a Burger King server.)

It is the nature of minimum wage jobs that while they may be useful, they are not economically constructive. Human advancement does do not emanate from minimum wage jobs, so the drive to increase the availability of those jobs seems misplaced. Far better, simpler, faster, easier it would be to provide the end (income) than to create a convoluted, complex system for providing the means (minimum-wage jobs) to the end.

And that leaves us with price stability (inflation). There is a hypothesis, with some historical merit, that unemployment mitigates against inflation, and “too-full” employment causes inflation. This hypothesis is called “Non-Accelerating Inflation Rate of Unemployment” (NAIRU) – the level of unemployment below which inflation rises.

The logic is simple. When unemployment falls “too low,” and employees are hard to find, competing employers must increase wages, which adds to costs, which pushes up prices. Conversely, when unemployment rises, employers feel free to offer jobs at lower salaries, which cuts costs and subsequent prices.

If the U.S. were a closed society, NAIRU would work. We aren’t, so it doesn’t.

Especially in the past two decades, international trade has become the growing norm for product and service supply. If a product or service can’t be found at a low price in America, that product will be produced in China. Or India. Or Thailand. Or Mexico. Or Vietnam. Or any of a few dozen other nations.

The fact that no nation is an island unto itself means that to an ever-increasing degree, inflation has become more a worldwide phenomenon caused by energy (mostly oil) prices and less by local conditions.

Given that minimum-wage employment, in of itself, neither is a productive nor a demanded goal, and controlling unemployment no longer controls inflation, the entire “full employment with price stability” paradigm becomes obsolete.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

#MONETARY SOVEREIGNTY

MMT’s Job Guarantee (JG) — “Another crazy, rightwing, Austrian nutjob?”

Well, I really did it this time. A few days ago, I posted Why Modern Monetary Theory’s Employer of Last Resort is a bad idea, and I feel like a guy who has kicked a hornet’s nest. The MMT folks have responded in exactly the same way debt hawks respond when they are told they are wrong (which proves people are people, no matter what their stripe).

Here is just one of many written comments I received, and this is 100% verbatim: “Are you serious, or just yet another crazy, rightwing, Austrian nutjob jacking off in public to get your jollies off?” Believe it or not, that clever note came to me from one of the most respected MMT people in America. I won’t embarrass him by giving you his name, but if you know MMT, you know of him.

In the above-mentioned post, you saw a large number of questions about the practicality of ELR, which the MMT folks have changed to JG (Jobs Guarantee). As a long-time businessman, I thought the questions were legitimate — the kinds of questions I would have about any business idea. You can read that post to see whether you agree.

I believe there is a fundamental problem with JG, and that is, it implies, then tries to solve two, completely separate problems, and one of them might not be a real problem at all:

1. How to get money into the hands of people who have lost their primary source of funds.

2. How to give people something to do.

Problem #1 is both legitimate and easily solved. Addressing poverty or even impending poverty is an important task for the federal government. The Declaration of Independence calls for a “Government, (that) shall seem most likely to effect (citizens’) Safety and Happiness.” It’s why we surrender some personal freedoms to a government.

In 2008, the federal government attempted to address the new recession by sending money to taxpayers. It was an excellent idea, but unfortunately, the effort, as I predicted, was far too little and way too late.

Had it been increased at least ten-fold, it would have put many dollars into the hands of consumers, who would have spent those dollars, thereby increasing business profits. Given additional profits, the businesses would be motivated to interview and hire additional, qualified people, who in turn would have spent more dollars, and we wouldn’t even be thinking about JG, today.

I suggest this would be a far better solution to #1 than having some government agency hire anyone — able, unable, qualified, unqualified, smart, stupid — and putting them to work in a job determined, not by the economy but by the government.

Call me a “crazy, rightwing, Austrian, nutjob,” but I believe a private business, reviewing resumes and selecting the most qualified candidates, usually will evaluate, hire and train for its own specific business needs far more productively than will a federal bureaucrat, who knows little and cares less about the business, and whose sole task is to guarantee a job for whomever drops in off the street.

Job Guarantee is an indirect, rather clumsy solution, if #1 is the problem we are trying to solve. Far better simply to give people money — perhaps by extending unemployment insurance or a similar device.

Which brings us to #2: Give people something to do. There are those who believe people should be required to work for money, rather than having it handed to them. There may be a couple of reasons for this, and I’m not sure which is overriding.

Perhaps they feel that if people are given money, they won’t look for work. But at the pittance MMT is talking about — something less than minimum wage, so as not to compete with private industry — only those least motivated and least able would settle for such a permanent placement. Skewing an entire program, just to deal with the few at the bottom of the barrel, seems like misplaced priorities. Since dollars are free to the federal government, and federal spending costs you and me nothing, I say give money to the sloths, and don’t worry about it. Even sloth money benefits the economy.

Then there are those who feel a moral revulsion against giving money to people who don’t work. I assume these good people don’t give to charity, either. The most moral of us give without making demands on the recipient, because in truth, we can’t look into someone’s mind nor understand their circumstances. You can’t feel someone else’s pain.

And of course, the rationalizers say people should work because that provides pride and a feeling of accomplishment, although the government probably would send the vast majority to jobs they never would select for themselves. No pride or accomplishment involved.

Bottom line, simply stating a problem correctly is the first step to a solution. MMT incorrectly states the problem as “unemployment,” while the real problem is lack of income. Positioning the problem as a need for a job rather than as a need for money, leads to an inefficient, unsatisfying, unproductive solution.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

#MONETARY SOVEREIGNTY

–Three ignorant and one cleverly ignorant

Just catching up on a bit or reading –some old, some new — and not perceiving any increase in economics knowledge by media writers. Here are bits from four articles written by opinion leaders. As usual, the opinion leaders demonstrate abysmal ignorance of Monetary Sovereignty, the basis for all economics.

Nina Easton, Fortune Magazine, July 4, 2011

Average citizens are rightly shocked by the levels of public debt weighing down the economy – and their tax-paying children. According to the President’s National commission on Fiscal Responsibility and Reform, (headed by Democrat Ersking Bowles and Republican Alan Simpson), debt held by the public will outstrip the entire American economy, growing t as much as 185% of GDP by 2035 – with hundreds of billions of dollars doing nothing but servicing debt. Despite those numbers, conversations about how to reduce the exploding costs of entitlements – like Medicare – are swamped by screaming political rhetoric, with little hope of compromise.

The only screaming I hear comes from the “sky-is-falling” debt hawks, who claim the U.S. is going broke, already broke or somewhere beyond broke.

Jeff Colvin, Fortune Magazine, July 4, 2011

Medicare has become the largest issue in America because it threatens the country’s economic future. Ten former chiefs of the Council of Economic Advisers, from both parties, warned in March that if we don’t get the national debt under control, the result will be a “crisis that will dwarf 2008.” The first worrying signs have since appeared; the cost of insuring against a once-unthinkable U.S. debt default rose by more than 50% in late May, and Moody’s and S&P have warned that the country’s debt rating is in peril. By far the largest element in America’s worsening debt outlook is the growth of Medicare. If we don’t fix it the right way, the country will become dramatically poorer and weaker.

Given the time and inclination, I probably could post 50 Fortune Magazine articles parroting the standard, pre-1971 line. What is it about those people? The only way the U.S. could default on its debt is if the Tea Austerities convince Congress to stop paying – or make us join the euro nations! 🙂

Time Magazine
By STEPHEN GANDEL The Curious Capitalist 1/11/12

Inflation would shrink the value of the debts both the government and borrowers have to pay, improving our collective balance sheets.

This is the “paying debts with cheaper dollars” myth. Think: If you owe $10,000, your balance sheet reads “$10,000” and you pay $10,000, no matter what the exchange value of the money is. You don’t pay with value; you pay with dollars. Paying debts becomes easier only if your income rises, and there is no necessary correlation between inflation and income. The reverse can be true.

And, for the federal government, paying debts does not rely on income, so inflation has zero influence on the government’s ability to pay its debts.

Gandel makes a very special effort not to understand Monetary Sovereignty. I’ve sent him many Emails and often have commented on his articles, but he continues to write the same crap. Ignorance is excusable – we all have it — but intentional ignorance is not.

A. Barry Rand, CEO AARP 1/11/12

Without any changes, (Social Security) can pay all promised benefits until 2036 and roughly 75 percent of benefits after that. Social Security is not in crisis, but as you have told us, we need to do something — the sooner the better — to extend its life for generations to come. Social Security does not need a radical overhaul. And we can restore it to long-term solvency without making damaging benefit cuts, especially for current recipients.

If you pay into Social Security, you should receive the benefits you’ve earned over a lifetime of hard work.

Even AARP doesn’t understand Social Security. I don’t know what he means by “changes” (tax increases or benefit cuts, I suppose), but without either of these, Social Security could last, forever. In fact, benefits could be tripled and FICA could be eliminated, and Social Security still could go forever.

And you don’t earn benefits by paying FICA.

Sadly, AARP doesn’t understand Monetary Sovereignty, so is fighting a battle based on adverse assumptions, while it could be a force for education.

But perhaps Mr. Rand is the clever dope. Perhaps he realizes that if the government (properly) paid all Medicare benefits, consumers would have no need for supplementary insurance, and that massive insurance agency known as AARP might go broke. So it behooves him not to understand. Yes, give him credit for cleverness, albeit cynical cleverness.

In the unlikely event these people come to an epiphany, and see the truth, they undoubtedly will say they knew it all the time.

I award 4 dunce caps, one for each.

Rodger Malcolm Mitchell

http://www.rodgermitchell.com

#MONETARY SOVEREIGNTY

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