What do money supply, interest rates and religion have in common? A lesson on confusing the public.

Mitchell’s laws: The more budgets are cut and taxes inceased, the weaker an economy becomes. 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.

The 2008 explosion of the real estate bubble cost America vast amounts of money, which loss caused the “great recession.” Scientific logic and historical precedent show that recovery from the current recession demands increased deficit growth.

But based on all the non-factual, faith-based beliefs being preached, these are not scientific times. Now comes Michael Sivy, who tells us money growth is dangerous.

First, a bit about Mr. Sivy:
Michael Sivy is a Chartered Financial Analyst and a former securities analyst for an independent stock research firm. He was an investment columnist at Money for more than 23 years as well as a guest columnist for TIME’s international edition. Sivy has appeared as a stock-market commentator on television, including the networks ABC, CBS, NBC, Fox, CNBC, CNN and MSNBC. In addition, he has been heard on NPR’s All Things Considered, PRI’s Marketplace and on the CBS Radio network. He is the author of Michael Sivy’s Rules of Investing: How to Pick Stocks Like a Pro. Born in Manhattan, Sivy holds B.A. and M.A. degrees in classics from Columbia University, and studied theology at Oxford University and Yale Divinity School.

Time Magazine: Are We Already Planting the Seeds of the Next Financial Crisis?

Central banks are trying to revive weak economies by injecting large amounts of money. That policy helps in the short run, but easy money can also create the conditions for future booms and busts.
By Michael Sivy, February 13, 2012

The wreckage of the housing bubble and the banking crisis haven’t yet been cleared away completely, but already there are hints of renewed speculation – warning signs of a problem that often arises when central banks try to bolster weak economies.

Expanding the amount of money in circulation is, of course, beneficial in the short run because it stimulates business activity and takes some of the pressure off overextended borrowers and banks.

Federal deficit spending also is beneficial in the medium run and the long run. Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports. It’s not clear how expanding the money supply “takes pressure off overextended borrowers.” Perhaps it’s just a matter of faith.

But easy money also encourages risk-taking and temporarily pushes the prices of safe investments up to unsustainable levels, thereby creating the potential for future financial crises.

Note the subtle shift from “Expanding the amount of money in circulation” to “easy money.” The former simply has to do with the quantity of money; the later relates to interest rates — two different circumstances. Mr. Sivy seems not to be concerned with the difference.

This problem last occurred – with catastrophic results – in the years following the 2000 technology stock crash, when Federal Reserve Chairman Alan Greenspan repeatedly stoked the money supply. That did help revive the U.S. economy, but it also fueled a bubble in home prices that contributed greatly to the 2008 banking crisis.

Increased money supply caused the bubble in home prices? Huh? I wonder why the increased money supply of the 1980’s didn’t cause a real estate crash. Innocent me, I thought the 2008 crash was caused by bad lending practices against insufficient collateral.

Is current Fed Chairman Ben Bernanke . . . risking future bubbles because he is trying to compensate for a past one? . . . Bernanke has bluntly announced that he will hold down interest rates close to zero until 2014. That may be intended as a confidence-building measure, but it will also make speculators feel more secure. Consider these signs of a growing appetite for risk:

Aggressive investments are becoming more popular. Low interest rates are making investors take greater risks in the search for yield. Sales of junk bonds picked up in January, and February looks strong as well, with billion-dollar-plus offerings by casino owner Caesars Entertainment and hospital operator HCA.

O.K., so he is talking about interest rates and not about money supply. Hard to keep track. Anyway, he is correct that low interest rates do nothing positive for the economy. They make borrowing more attractive, but lending less attractive, and more importantly, cause the federal government to pump less interest money into the economy. Historically, low interest rates have corresponded with slower GDP growth.

Safe investments have enjoyed big price gains recently.

Whoa! First it was “Aggressive investments are becoming more popular.” Now it’s “safe investments enjoying big price gains.” So, what he’s saying is, prices of all investments are rising. What a revelation: Prices rise coming out of a recession. Who’d a thunk?

Anyway, the article continued, again confusing money supply with interest rates, correctly denouncing the Fed’s low-rate policy, and incorrectly denouncing increases in the money supply.

Terminology has been the undoing of economics. “Debt” and “deficit” continue to confuse the politicians, the media, the public and even the old-line economists, for these words mean something substantially different when applied to the Monetarily Sovereign U.S. government vs. monetarily non-sovereign entities.

“Easy money” is another example, in that the term combines low interest rates with increased money supply, either of which may occur without the other. The federal government can lower rates without increasing the money supply, simply by spending less. Or it can increase the money supply without lowering rates, by spending more.

Mr. Sivy, like so many in the media, is confused, and this confusion confuses the public. He is right about interest rates, wrong about money supply, and seemingly doesn’t understand the difference. His criticism of Bernanke is as though he is saying, “God has created too much water because people drown in it.”

Bottom line: Money growth is stimulative, low interest rates are anti-stimulative, and Mr. Sivy’s divinity studies may be perfect for today’s faith-based, proof-lacking economics, where the economists and the media are the high priests, and their prestige trumps data.

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


9 thoughts on “What do money supply, interest rates and religion have in common? A lesson on confusing the public.

  1. “The federal government can lower rates without increasing the money supply, simply by spending less.”

    Is there a typo in this sentence?

    Seems to me that according to MMT (and there is no disagreement by MS on this point, as far as I know) less spending would lower (or reduce the growth rate of) the money supply, not interest rates. The Fed controls the overnight interest rate, and would lower it (prevent it from exceeding their target rate) by buying T-bills, adding reserves to the banking system, which would have no effect on the money supply as the T-bills and the cash are equivalents. No change in spending is involved.

    Have I misunderstood something?


      1. I get that.

        But what you said is that spending less would lower interest rates. You don’t mean that, do you?

        Spending less would lower the (growth of the) money supply.

        Buying bonds would lower interest rates.


  2. “I thought the 2008 crash was caused by bad lending practices against insufficient collateral.” Are you speaking strictly of the crash of the housing bubble or the economic crash in general?


    1. Good question.

      The crash was caused by the reduction in deficit growth, but the trigger was the housing bubble. Although recessions and depressions are caused by the reduction in federal deficit growth, there always needs to be a trigger event.


  3. could it be Roger that what he thinks is happening is that old myth about the money multiplier? banks expanding their reserves therefore expanding lending?
    problem of course being that there isnt much demand for loans


    1. Could be, but of course, bank lending is not constrained by reserves. Banks can get all the reserves they need from the Fed, other banks or lenders. My company used to lend our bank millions of dollars every night, and take them back in the morning (called, “overnights”).

      Bank lending is constrained only by capital. So called “fractional reserve lending” is yet another myth in the pantheon of false economic beliefs .

      Rodger Malcolm Mitchell


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