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 IMF proclaims on its web site: “The International Monetary Fund (IMF) is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

For an organization with the word “monetary” in its title, it knows nothing about Monetary Sovereignty, and for that reason, it has accomplished none of what it claims. It lends money to troubled debtors (thereby increasing their debt). At the same time, scolds debtors to reduce their debt (i.e. to reduce their money supply), as a way to grow their economies. It’s beyond ignorance. It’s a big reason the world is so screwed up.

They are the classic leech doctors, who bleed patients to cure anemia. Here’s what they say.

FINANCE & DEVELOPMENT, September 2011, Vol. 48, No. 3
By Jiri Jonas and Cemile Sancak

PUBLIC debt has grown rapidly in many advanced economies as a result of the recent severe global downturn. Now those countries will have to undertake unprecedented expenditure and tax (that is, fiscal) adjustments to ensure debt sustainability.

Note to IMF: Monetarily Sovereign nations are different from monetarily non-sovereign nations. The former do not pay debts with tax money. The later do. In a Monetarily Sovereign nation, a government surplus is a private sector deficit.

Earlier attempts at fiscal adjustment provide important lessons to guide policymakers in this effort. We look at efforts undertaken more than a decade ago in Canada and the United States that provide lessons for today’s issues.

Both nations faced growing fiscal deficits and public debt in the 1980s, and the initial attempts to correct them proved insufficient. As deficits and debt mounted in the first half of the 1990s, both countries introduced adjustment plans to restore debt sustainability.

Think about what “debt sustainability” means. Does it mean Canada and the U.S. will not be able to pay their bills? That never has happened, so clearly the debts have been “sustainable.” But IMF never says what “debt sustainability” means. It’s just one of those magic phrases, having no substance, while sounding prudent and knowledgeable.

In Canada . . . the ultimate goal was a balanced budget.

Balanced budget = no money supply growth. Why would any country want to end the growth of its money supply, especially with a growing population (fewer dollars per person), inflation (making each dollar worth less) and the needs of a growing economy?

Here is how Gross Domestic Product is calculated:

Federal Spending
+ Private Investment
+ Private Consumption

+ Net exports

Three of the four factors comprising GDP require an increased money supply. But IMF wants to cut the money supply. So from where with growth come?

Both countries perceived growing public debt as a threat to economic prosperity, though for somewhat different reasons. The Canadian government stressed the negative implications of high interest payments on growth . . .

Logically, this makes no sense, as increased federal interest payments are identical with every other economic stimulus the government uses. They add dollars to the economy. The U.S. experience is that, contrary to popular wisdom, higher interest rates are, in fact, stimulative.

. . . the importance of intergenerational equity (that future citizens should not pay the bills of living citizens) . . .

In Monetarily Sovereign nations, like Canada and the U.S., taxes do not pay for federal spending. If taxes fell to $0 or rose to $100 trillion, neither event would affect by even $1, the government’s ability to spend. There is no relationship between federal taxes and federal spending.

. . . and the need to maintain the ability to spend on valued public programs such as health care and old age security, without jeopardizing long-run fiscal stability.

Another phrase I love: “fiscal stability.” What is ‘stable” about reduced fedefral spending or increased federal taxes? No on knows, least of which the IMF.

A Monetarily Sovereign government pays bills by instructing creditors’ banks to mark up the creditors’ checking accounts. These instructions are not constrained by, or related to, tax collections.

The U.S. government emphasized the adverse effect of high interest rates on private investment and, through that channel, on economic growth.

History shows no such adverse effects.

In both countries, deficit reduction turned out to be greater than expected. In the United States, the actual deficit was close to zero in 1997, and the budget balance moved to a surplus that exceeded 2 percent of GDP by 2000.

Which led to the recession of 2001. No surprise, though. Every depression in U.S. history has been preceded by a series of surpluses, and nearly all recessions have been preceded by a series of reduced deficit growth.

In Canada, the overall balance moved to surplus during 1997–98.

Which led to the Canadian recession of 1999. After that, Canada’s oil exports rose dramatically, replacing the dollars lost to government surpluses. A government surplus is a private sector deficit.

canada oil exports
CIA World Factbook

The U.S. fiscal position deteriorated and the deficit exceeded 3 percent of GDP by 2003.

The years 2002-2007 saw solid GDP growth in the U.S. For the IMF, a successful position is low, or no, money growth, regardless of economic growth — or lack thereof.

In contrast, Canada’s overall balance remained in surplus until the global financial crisis in 2008, and Canada’s net debt-to-GDP ratio is now the lowest among the G7 countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States).

They lump monetarily non-sovereign nations, which do have debt sustainability problems, with Monetarily Sovereign nations, that can service any size debt.

In hindsight, it is clear that the fiscal improvement experienced by the United States in the late 1990s and early 2000s had a less solid foundation, because it was in part driven by temporary factors related to the stock market boom and realized capital gains, as well as by strong economic activity boosted by rapid credit expansion.

And what supported the stock market boom, realized capital gains and rapid credit expansion? The increased money supply. The IMF confuses effect with cause.

In the early 2000s, policymakers debated over what to do with fiscal surpluses. . .

A Monetarily Sovereign government doesn’t do anything “with” surpluses. Unlike you, me, the states, counties and cities, and the euro nations, the U.S. does not save dollars. Why should it? I creates dollars, ad hoc, by paying bills.

Readers of this blog have seen how I have, at various times, awarded dunce cap symbols, clown symbols and traitor symbols to deserving “experts.”. As I am sovereign in these symbols, I maintain no supply. I award them ad hoc. That is how our federal government operates with its sovereign currency.

The IMF simply cannot comprehend Monetary Sovereignty vs. monetary non-sovereignty. If they were doctors, they would prescribe vasectomies for women, and tubal ligation for men.

The main lesson is that fiscal adjustment based on structural reforms is more likely to be sustainable compared with improvements based on temporary factors. Given the size of fiscal imbalances and future fiscal pressures related to population aging, many advanced economies will have to maintain fiscal discipline for several years, if not decades.

Thereby assuring ever deeper and longer recessions and depressions. For the IMF “doctors,” the measure of success is not the patient’s economic health, but rather how much medicine the patient takes.

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