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.
I’ve almost despaired of teaching economics to adults. Too many fixed minds. Worse than fixed. Actively resistant. Those of us who try to the tell facts often meet not just with doubt, but with hatred. With name calling. Swearing. Sneering.
This isn’t sincere questioning, which I would love. It’s far deeper. Perhaps, it’s fear — the horror some people feel at discovering they’ve been wrong.
The adults may be hopeless. Eyes sewn shut. Ears plastered over. Brains cemented. So I’ve been thinking, maybe there’s hope for the young people. And with that thought, I’m going to write a few posts just for young people, whose minds still are open.
Sometimes, things that are complicated also are simple. Take the weather. Weather is complicated. It’s hard to predict more than a day or two in advance. Each second, millions of individual weather events, in locations around the world, affect weather in all other locations.
Heat in Africa can affect storms in America. Wind in China can cause drought in Kansas. It’s all connected.
Yet, weather also is simple. The sun warms the earth and the air. Cold air holds less moisture than warm air, so cooling air causes clouds, which lead to rain — or snow if the air is cold enough. Summer is warmer than winter, because the tilt of the earth makes seasons. And if you look up into a clear, blue sky, your picnic probably won’t get rained out. Simple.
Economics too, is complicated and hard to predict. Each second, millions of world-wide transactions affect other economies, worldwide. A purchase in America can change a salary in Asia.
Yet economics is simple, and that simplicity can be understood by young people, if not by adults. So here is the first attempt.
MONETARY SOVEREIGNTY FOR YOUNG PEOPLE– Part 1.
Before August 15, 1971, the United States government was on a gold standard. This meant, the U.S. government needed to own gold before it could pay its bills.
It didn’t pay its bills with gold. No, it paid with dollars. But unless it owned gold, the U.S. was not allowed to create its own dollars. That was the law. No gold, no dollars to pay bills.
And when the government didn’t have enough gold to make dollars to pay its bills, it had to get dollars from someone else. Either it had to borrow dollars, or it to levy taxes.
Not being able to create dollars, whenever you want to, is called being “monetarily non-sovereign.” You and I are monetarily non-sovereign. We can’t just create dollars. We can’t pay our bills unless we obtain dollars from someone else. Our states, counties and cities are monetarily non-sovereign. They have to obtain dollars from taxes or borrowing. They are not allowed to make dollars out of thin air. That is the law.
On August 15, 1971, President Nixon announced that the U.S. would change the law. No longer would we need to have gold. The federal government would simply create dollars without having gold. No gold. No problem. President Nixon made us MONETARILY SOVEREIGN.
And this changed everything.
Today, in America, only the federal government is Monetarily Sovereign. Only the federal government can create dollars out of thin air. The federal government is unique.
Here is how you and I pay our bills:
Personal Income (salary, investments)
+ Personal Borrowing
Personal dollars available to pay our bills
In order to pay our bills, we need to have a source of dollars. We are monetarily non-sovereign
And states, counties and cities pay their bills the same way the same way:
State Income (taxes)
+ State Borrowing
State dollars available to pay state bills
Yes, the states, counties and cities also need a source of dollars, to pay their bills. They too are monetarily non-sovereign.
That’s the way it is, and that’s the way it always has been. So naturally, many people think the federal government works the same way. And once it did, but now it doesn’t. Not after 1971. Here’s what the federal government does with any money it receives:
+ Federal Taxing
What??! The federal government destroys all that tax money you and your parents send it?? And the government even destroys all the money it borrows??
That’s right. All dollars going to the federal government simply disappear, never to be seen again. Amazing, isn’t it? All the taxes you and your parents pay, gone. Borrowed dollars, too. Gone. Useless. If taxes were $0 and borrowing was $0, the government still could pay its bills.
Of course, when you think about it, why would anyone who can create dollars, need to get dollars from someone else? If you had a “dollar-printing press” in your basement, would you ask your friends for dollars? Of course, not.
So, here’s how the federal government pays its bills:
1. A vendor sends the federal government an invoice, let’s say for $1,000.
2. The federal government sends instructions (not dollars) to the vendor’s bank, instructing the bank to increase the number in supplier’s checking account by 1,000.
If the vendor once had $5,000 listed in his checking account, that number now is $6,000. The vendor now has 1,000 more dollars than he had before. Where did that extra $1,000 come from? The vendor’s bank created it out of thin air, because it had received the federal government’s instructions.
And that’s it. Every day, the federal government sends those kind of instructions to banks, and the banks obey those instructions. The banks don’t ask whether the federal government has or doesn’t have and dollars. The banks just do as they are told. That’s the law. That’s how the federal government creates dollars.
What do instructions look like? Sometimes they are government checks. Other times, they just are invisible wired instructions. Dollars are just numbers in a bank account. So, changing the numbers changes the amount of money in the bank account.
So why do we pay federal taxes? Before 1971, the federal government was monetarily non-sovereign, just like you and me and the states, counties and cities. It needed a source of dollars so it could pay its bills. It did not have the unlimited ability to send instructions.
Unfortunately, the politicians in Washington, DC do not yet understand that the federal government became Monetarily Sovereign in 1971. They do not understand the differences between Monetary Sovereignty and monetary non-sovereignty. So they act as though the federal government’s spending still relied on taxes and borrowing, as it did when we were on a gold standard.
So, misleading themselves, they mislead you, the public. But it’s not. The federal government made a law that allows it to destroy tax dollars, and to create more dollars by spending.
When the government spends more dollars than taxpayers send it, that is called a “deficit.” Many people don’t like the idea of a “deficit.” It sounds negative. So they want to reduce the deficit.
But “deficit” merely tells how many dollars the federal government has created from thin air. To reduce the deficit, the government would have to increase taxes or spend less.
Would you or your parents like to pay more taxes? I don’t think so. Paying taxes makes people poorer. And if the government spends less, we’ll have less of things we like. Worse roads. Broken bridges. Less health care. Less Social Security. A weaker army. Poorer schools. The federal government uses “deficits” to pay for millions of things that benefit us.
No, reducing the deficit is the worst thing that could happen, because it takes dollars out of everyone’s pockets. To make our economy grow, and to make our lives better, the government needs to cut taxes and spend more. It needs to increase the deficit.
Some people are afraid that if the deficit increases, we’ll have inflation. Inflation is when everything gets more expensive. The government likes a little bit of inflation, because that makes people buy things today, rather than waiting until later. When people buy things today, rather than waiting for later, the economy grows, there are more jobs, and people lead better lives.
However, it is true that if the deficit goes up too much, we could have too much inflation, so it’s important that if ever we start to have too much inflation, the deficit should stop going up. The deficit should go up enough to make the economy grow, but not enough to cause too much inflation.
Fortunately, though sometimes we have had too much inflation, this never has been caused by deficits. (Actually, inflation has been caused by oil prices.) So far, the U.S. has been free to increase the deficit by cutting taxes and increasing spending, and not cause too much inflation.
Later, we’ll talk about what dollars really are — and are not. Meanwhile, just write any questions into the comments box, and I’ll try to answer them.
And if you’re an adult, please show this to a young person.
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