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.
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The first three Parts of this series mostly have provided facts, with just a few opinions. Some of the facts are:
–The U.S. government is Monetarily Sovereign (MS), while the people, businesses and state and local governments are monetarily non-sovereign
–Our MS government creates dollars by spending and destroys dollars by taxing. In contrast, you and I transfer dollars by spending, and never destroy dollars.
–A MS government has the unlimited ability to pay any bills of any size at any time. Monetarily non-sovereign people and governments do not have this ability.
–A federal deficit is the difference between taxes and spending.
–A MS government does not need to obtain its sovereign currency from anyone, so taxing and borrowing do not support government spending.
–Federal debt is the total of outstanding Treasury securities.
–The government pays its debt by subtracting dollars from a debt holder’s T-security account and adding dollars to the debt holder’s checking account. It’s a simple asset exchange.
–Reduced money growth has been associated with recessions.
Part 4. will continue showing you facts, but also will include far more of my opinions.
The purpose of a government is to do for people what the people cannot, or do not wish to, do for themselves. A man living alone in the woods, neither wants nor needs a government. He does everything for himself.
Most of us do not live alone in the woods. We want the government to help protect us from crime, fire, tainted food and water, poverty, disease and enemies. We want the government to provide us with roads, bridges, education, justice and many of the services that improve our lives. In short, we want government to address the three “P’s”: Poverty, Protection and Prospects (the opportunities for success, health, comfort and happiness).
Some people, who view themselves as self-reliant, call such help “socialism.” They are wrong. Help is what any government does. Socialism not only includes providing help, but more importantly includes government ownership.
Even “self-reliant” people encounter situations where they want government help. When their house is on fire, using a garden hose might not be enough, and few people wish to build their own roads and bridges.
In less advanced societies, help may come from friends and neighbors. The more advanced governments provide more help, and one measure of a government is how well it provides for its citizens.
Most advanced civilizations care for their aged. There are two reasons:
1. Older people need help. They often lose some ability – financial, physical or mental – to care for themselves, so purely for moral and humanitarian reasons, governments provide care.
2. Older people are valuable. They have knowledge. They often understand past events, successes and failures, and can apply these to the future. They can teach those younger than them. This passing of knowledge from old to younger is a human advantage. It is a key to our survival as a species.
Without drifting too deeply into philosophy, I offer you my opinion that Social Security is one of the crown jewels of the American society, a great benefit not only to the individuals receiving benefits, but to America as a whole.
I have, however, three arguments with Social Security as it now is implemented. In my opinion:
I. FICA (Federal Insurance Contributions Act) tax should be eliminated
II. The income tax on Social Security should be eliminated.
III. The benefits should be increased
I. Why FICA Should Be Eliminated
Contrary to popular belief, FICA does not pay for Social Security. The U.S., as a Monetarily Sovereign nation, which has the unlimited ability to create its sovereign dollars, neither needs nor uses dollars received from anyone.
Here is how the U.S. pays Social Security benefits:
1. Every month, it sends a wire to each recipient’s bank, or it sends a check to the recipient. The wire and the check are not dollars; they are instructions to the bank.
2. The instructions tell the bank to increase the numbers in the recipients checking account.
3. The bank does as it is instructed. Increasing those numbers is what creates dollars.
The federal government, being Monetarily Sovereign, has the unlimited ability to send instructions. Even if FICA were $0, and SS benefits were tripled, the federal government still would not run short of instructions to increase checking accounts and pay SS benefits.
The federal government can pay any bill of any size at any time. It never can go bankrupt. Because the federal government can’t go bankrupt, none of its agencies can go bankrupt, and none ever has. No federal check ever has bounced.
Social Security is a federal agency. If you go on line to federal agencies, you will see a list of about 650 agencies. Not one ever has gone bankrupt. Not one ever has bounced a check. Yet, only two of these agencies is “supported by” (actually, limited by) FICA or by any other tax collection: Social Security and Medicare.
Why was this limit placed on Social Security and Medicare? Both programs were created when the U.S. government was monetarily non-sovereign. So, Congress needed to be convinced these two programs wouldn’t cost anything, and that these two programs were like private insurance policies, in which people paid for the benefits they received. That was the only way to get Congress to create Social Security and later, Medicare.
Today, because the U.S. now is Monetarily Sovereign, FICA not only is useless, and financially harmful, but it creates the wrong impression about Social Security finances. Because of FICA, some people believe Social Security will run out of money.
These people are wrong. Like all federal agencies, Social Security is funded by the U.S. government, not by FICA. It never can run short of money unless Congress and the President decide to withhold dollars.
FICA is harmful because:
1. Like all taxes, it takes dollars out of the pockets of people and companies. When people are forced to spend less, the economy is injured.
2. FICA is a regressive tax. It hurts poor people much more than rich people. For many poor people, it is the biggest tax they pay.
3. Some people receive income that is not covered by FICA; they may pay no tax. When these people get old, they still may need Social Security, but they will not receive it. Eliminate all FICA, and this problem will disappear.
II. The Tax On Social Security Benefits Should Be Eliminated
Though the government wrongly tells people to pay the FICA tax to “support” Social Security, the government also collects taxes on the benefits people receive. Interestingly, no such tax is extracted from Medicare benefits, which also supposedly are supported by FICA, though I expect Congress to take that step, one day.
I have difficulty imagining the logic that first tells people to pay dollars to a government having the unlimited ability to create dollars – and then tells people to pay a tax on the benefit that supposedly was paid for by taxes..
III. Social Security Benefits Should Be Increased
The purpose of Social Security is to keep our senior citizens from poverty. But anyone trying to survive solely on Social Security benefits lives in poverty.
Millions of people, either because of low earnings, joblessness, sickness or other factors, have not been able to save enough for retirement. These people are not lazy. They do not “deserve” to be poor. For many of them, it’s a case of bad luck.
Perhaps they were born unintelligent or to impoverished parents who couldn’t afford to educate them. Perhaps they have been stricken with illnesses. Perhaps they tried business and failed, or were fired, or lost their home to recession. Perhaps they had to support sick relatives. There are many reasons for poverty.
Whatever the cause, they turned 65, and they don’t have enough money saved, and Social Security will not give them enough to lead decent lives. They may be hungry, homeless, without adequate clothing, without adequate care. Do we turn our backs?
America, this Monetarily Sovereign nation, has no excuse. The government can pay any bill of any size at any time. There is no reason for Social Security benefits to be below subsistence levels. Yet, according to the Social Security Administration, “The average monthly Social Security benefit for a retired worker was about $1,230 at the beginning of 2012.”
That’s just the average, so many people receive less. And that average comes to only $14,760 per year, which barely might be enough for a person living in a small, rural area, but guarantees starvation for someone living in a big city.
The next time you hear someone say Social Security will run out of money, know this: FICA can and should be eliminated; the tax on benefits can and should be eliminated; the benefits themselves can and should be greatly increased – and Social Security will not run out of money unless Congress and the President deliberately withhold funds.
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
#Monetary Sovereignty - Mitchell 
I understand your comments but am concerned that money creation by the Fed to help fund our govt. deficits has a limit. How long such a monetary scheme last is unknown but such a scheme can last far longer than anyone thinks. As long as people and other nations allow the govt to over spend and the fed to cover this overage, the scheme will go on. Confidence is the reason. Money has value because we accept it as such.
Personally, I am for more limited govt and less taxes. Let the free market system decide how dollars are to be allocated than a command and control government system. Unfortunately the US is moving toward more command
and control. In my opinion, this causes waste and an elitist class of citizens.
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the invisible hand of the free market dont work, tooth fairy aint real either, the private sector is greedy and couldnt care less for your healthcare needs, or your retirement(except to get there hands on your money)
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Mark, if you are talking about inflation, please read the previous post. I don’t know what the words “over spend” mean with regard to a Monetarily Sovereign government.
If you are talking about the myth that the private sector always knows better than the public sector, that’s what Alan Greenspan believed, and that belief led to the recession.
If you like a limited government, you might list what federal spending you would like to eliminate. The Tea/Republicans have failed spectacularly in trying to come up with such a list, as witness the latest Ryan budget.
There are many things the private sector does well, and many things it does poorly.
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Here’s what young people have to look forward to. Get the debtors prisons ready…. http://theautomaticearth.org/Finance/270-billion-in-us-student-loans-are-delinquent.html
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Pete, it’s a pretty good article, except for one line: ” . . . the US taxpayer is on the hook for the difference.”
The U.S., being Monetarily Sovereign, neither needs nor uses tax dollars for anything. But, I recognize the author doesn’t understand Monetary Sovereignty, and I agree with the spirit of the article.
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I think he does understand it, but until it moves from theory to practice there’s no need to factor it in. Just change “taxpayer” to citizen. Student debt is another “growth” industry based on our interest bearing debt based monetary system.
http://ineteconomics.org/video/interview/william-rees-dangerous-disconnect-between-economics-and-ecology
http://www.nakedcapitalism.com/2012/03/world-bank-nominee-kim-under-fire-for-dying-for-growth-book.html
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Pete,
It’s funny, that Monetary Sovereignty already is being practiced, as witness the $10 trillion debt. The leaders just don’t know they are doing it.
I agree that use of world resources should be factored into economics. The problem is complexity. In the very short term (a year or two), use of resources is irrelevant. In the long term, it’s very relevant, but no one knows how to factor it in.
There isn’t even agreement on when and how much, resources might be gone. And what about substitutions? Will we find a substitute for oil? Will we find a less damaging way to create energy? Will we find a cheap way to desalinate water?
Millions of unknowns affect long term economics.
As for our interest-bearing system, it’s based on lending. Private lenders need motivation. I’m not sure what the substitute for interest is.
The federal government, however, needs no interest and never should collect interest. So are you talking about the federal government being the nation’s lender?
If so, I agree. I long have said private banking should be eliminated. The banks’ profit motive is what caused the latest recession. The federal government need have no profit motive.
Rodger Malcolm Mitchell
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Is there a way to increase Social Security payouts to everyone, not just the more fortunate, without causing poisonous class jealousy?
I don’t think that it’s a monetary amount. A middle-class retiree who lives to be 90 will get much more from Social Security (even subtracting the amount that they put in) than a single mother on welfare for a few years. But it’s the single mother on welfare who attracts bitter envy and invective from society while the retiree is seen as getting their just desserts.
Bill Clinton directly increased income inequality because of his welfare reform, but rather than (most) people viewing him as a hateful Scrooge who snatched toys out of the arms of children they view this accomplishment as if he’s a tough-talking leader who knows how to stick it to the lazy welfare bums. It’s disgusting.
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Yes. It’s called a stipend. The government could send a check for, say, $500 to each citizen each month. It would be interesting to see what happened. I think people would be better off. Nobody refuses “free” money. What happens to the economy depends on what is done with the money, but of course, the real issue isn’t the economy, the real issue is people.
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Why just $500? Why not $100,000?
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There is but one limit to federal spending: Uncontrollable inflation. So the question is, at what deficit level do we reach uncontrollable inflation?
So far, we never have reached that point, because the Fed has learned to control inflation to its target rate of 2%-3%. Since 8/15/71, when the U.S. became Monetarily Sovereign, there has been no connection between federal spending and inflation.
It is my opinion (without proof) that if the government gave everyone $100,000, we would have inflation. It also is my opinion (also without proof) that if the government gave everyone $10,000, we would have prosperity without inflation.
Many economists believe that any amount of money can be created up to the point where we have full employment (about 4% unemployment).
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Joel,
A big part of the jealousy has to do with FICA. If no one paid FICA, and if every person — married, single, working or retired — received the same Social Security benefits, there would be no jealousy.
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Do you agree that every money printing exercise in the world leads to unintended consequences at a later point may be detrimental?
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Mark,
I don’t know what a “money printing exercise” is. Our federal government doesn’t print money, but its payment of bills creates dollars. So, I suppose, any payment of any bill could be called a “money printing exercise.”
Or perhaps you are referring to deficit spending, in which case the lack of deficit spending (i.e. surpluses) has been proven to have extreme adverse consequences in the form of recessions and depressions.
Due to the complexity of economics, I would agree that every financial exercise of any kind, can lead to unintended consequences, that at a later time, may prove to be detrimental — or not.
Rodger Malcolm Mitchell
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A lack of deficit spending is a “balanced budget”.
A lack of deficit is either a balanced budget or a surplus.
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Right. Lack of deficit spending = lack of deficit = balanced budget or surplus. And every depression in U.S. history has been preceded by surpluses. See: #3 at https://rodgermmitchell.wordpress.com/2009/09/07/introduction/
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Rodger,
Many foreign nations have built their economies around the idea of subjugating their populations into warehouse workers to create products to trade with us for our green bits of paper. The common perception is that these nations should either increase their prices or we should race them to the bottom and meet their pay and working standards.
Should we not be taking advantage of this situation by forgoing attempts to compete with the production of certain labor intensive manufacturing processes? Instead of say 1,000,000 unemployed factory workers we should have 1,000,000 new teachers. More scientists, more doctors and more healthcare workers.
Imports free up our national resources (with labor being our most valuable). Seems to me that if we’re not building cars, washing machines, TVs or toys, then the luxury of time creates an opening towards other loftier endeavors. Sadly, by the way the game is understood, it only creates unemployment.
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broll,
I agree.
A Monetarily Sovereign nation benefits far more from importing than from exporting. Exporting brings in only the nation’s sovereign currency, which it can create in unlimited quantities (think, “coals to Newcastle”).
Importing brings in valuable goods and services, while using none of the importing nation’s raw materials.
Of course the situation is different for a monetarily non-sovereign nation, which needs the currency it doesn’t have the power to create.
I believe what you suggest is best encouraged through education, and one way to encourage education is by paying a salary for attending school (See: “Salary for attending school” at https://rodgermmitchell.wordpress.com/2010/07/17/salary-for-attending-school/
Rodger Malcolm MItchell
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That’s fine as long as the trading partners are willing to accept that currency. Flooding the market with too much of it and making it clear that we never intend to pay our bills makes them want to redeem the currency they’ve been receiving from us as payment for commodities and capital goods (obviously they don’t want more consumer goods, or they would have purchased them already). You want to kill the goose that lays the golden eggs.
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“Never intend to pay our bills”?? We pay our bills every day and never have bounced a check. People buy lots of stuff from us that isn’t natural resources. Service, for one.
If we didn’t dig an ounce of ore or grow an ounce of vegetables, our money still would be good, so long as we provided services. That’s how natural-resource-poor Japan and Switzerland survive.
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… also the national benefit of being able to look forward to growing old in relative comfort, security and dignity. Contrary to popular theory, I believe lowering the age at which one can start to receive full SS benefits would open up more jobs for the young. Younger workers, while lacking experience, would bring newer skill sets and more energy. They could buy homes and cars and start/support their families. Rather than living with their parents or off unemployment (at best) or turning to crime (at worst).
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This is insane. Sure, the government can create as many dollars as it wants, but doing so has serious consequences. If you create dollars too fast, you’ll cause a panic. Dollars only have value because people are willing to accept them in exchange for goods and services; if you arbitrarily decide to double the amount in circulation, you’ll wind up with distortions far worse than just doubling prices (which would be catastrophic in and of itself). People will divert resources from consumption and wealth creation to wealth preservation (buying precious metals, art, jewelry and durable goods they neither want nor need because they don’t trust the currency as a store of value). Foreigners will likewise rush to redeem their dollar reserves for goods, services and hard assets.
If what you were suggesting were just a one-off event, it might be reasonable, but if you insist on not only funding our current $1 trillion+/year deficit by increasing the money supply, but tripling this deficit to turn Social Security into an even bigger fiscal nightmare than it already is, people will conclude that holding dollars is insane and create a run on the dollar. That way lies hyperinflation. You think FICA taxes are bad? Wait until you get a taste of hyperinflation.
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Read: https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/
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There is no way the economy can absorb the government running a deficit of 30% of GDP, nor would foreign creditors hold on to dollars when we are acting like Weimar Germany! You are right to say that hyperinflation is not caused by increasing the money supply; hyperinflation is caused by a panic resulting in a run on the currency, which is exactly what would happen if China saw us print currency (or do the electronic equivalent thereof) to purchase 30% of our economy.
You do not seem to accept that those dollars represent a claim on actual resources. Dollars indeed can be printed, but resources cannot. Idle capacity can be put to work, but it is inconceivable that the economy is capable of making good on the claims that you are asking for. Inflation psychology would take over. Even if you were right that inflation need not follow such printing, hyperinflation would follow anyway because of the panic it would create.
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Right now the deficit is about 9% of GDP — a long way from 30%. Neither you nor I know what would happen at 30%. You’re just making a wild-ass guess based on nothing.
Back in 1950, the deficit was about .5% (that’s one half of one percent) of GDP, and if someone had told you it one day would double or triple, much less grow 18 fold, you certainly would have predicted panic. Yet here we are — not only not in an inflation, but fighting deflation.
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Roger, what do you think? Had our founders begun w a monetarily autonomous nation and had they fully embraced your grasp of how their economy would actually work, how might the Constitution have differed (if
at all) to allow for that reality?
I very much enjoy your e-mails and admire your saavy…………
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Wow, good question, but it’d take me months of Constitutional study to figure it out.
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Don’t bother. After the fiasco known as the Continental Dollar, no one would have taken paper money not backed by gold or silver issued by the US Government in the early days. They could have issued fiat money, but it wouldn’t have been worth anything because people knew they couldn’t be trusted not to print it unrestrained. The people wanted gold and silver, not pieces of paper like the Continental, which was printing in such high quantities and so easily counterfeited that it was essentially worthless by the end of the Revolutionary War, and scrapped soon afterward.
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Yet here we are. No gold. Lots of money. How is that possible?
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In time, people came to accept fiat money, but fiat money would have been rejected had we attempted to implement it at the beginning of the Republic, due to the bad experience with the Continental Dollar.
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