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 opening paragraph of this article made me think that at last, Time Magazine knew the difference between monetary non-sovereignty and Monetary Sovereignty.
Time Business
Does the World Believe America Will Pay Its Debts?
By Christopher Matthews | April 5, 2012 |If you spend any time reading about economics on the internet, you’re aware of the many virtual pamphleteers who loudly portend the impending downfall of the American government and global financial system in general. It’s become somewhat fashionable to proclaim America a banana republic, arguing that she is financing her debt with central bank purchases of government bonds, a strategy that is unsustainable and often ends in a blaze of hyperinflation and economic collapse.
No serious observer really believes that the U.S. faces this fate in the near term.
O.K., lookin’ good . . . except for that “unsustainable” thing. But, we can cut them some slack.
Perhaps much of this hyperbolic rhetoric is merely an effort to get the U.S. to reign in its debt – something, long term, it certainly needs to do. But a strand of this thinking has made its way into the mainstream and is distorting the debate about the federal government’s attempts to steer the economy out of a recession.
Huh? “Needs to do”? Why? “Reining in the debt” is the worst thing the government could do. The economy cannot grow without growing federal deficits, and though federal debt is a meaningless relic of the gold standard days, deficits are necessary (And no, debt is not the functional result of deficits.)
But they’re right that this debate does interfere with the federal government’s attempts to steer the economy out of a recession.
Lawrence Goodman opined in the Wall Street Journal last week that, “Demand for U.S. Debt Is Not Limitless.” In the piece, Goodman takes aim at those who have argued that demand for U.S. debt is strong, and that regardless of what the rating agencies say, the marketplace believes the U.S. will pay its bills.
Hilarious . . . or sad. Demand for debt is meaningless. If the U.S. did not sell one more T-security, it would have zero effect on the government’s ability to create dollars and pay its bills. Remember this whenever you think, read or talk about economics: There is no relationship between federal debt (i.e. the creation of T-securities) and federal bill paying. Zip, zilch, nada..
In particular, he highlights the “stunning” fact that in 2011 the Fed purchased 61% of the debt issued by the Treasury, up from negligible amounts prior to the 2008 financial crisis. This, he added, “not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.”
Deficits not only are necessary for economic growth (That’s the way the government creates dollars), but functionally do not cause debt. With a minor tweak in the law, there could be deficits without T-securities and there could be T-securities without deficits.
Most people don’t understand how a majority of the debt issued by the U.S. government last year could be purchased by an arm of the very same government. It is the effect of the much-talked-about “quantitative easing” program the central bank began in the wake of the financial crisis to suppress interest rates.
By purchasing these bonds, the Fed drives up the price of government debt and drives down the interest rate the government pays on that debt. The purpose of this is not to “subsidize U.S. government spending” as Goodman suggests, but to drive down rates for the rest us and stimulate the economy.
Correct. That is one way the Fed controls interest rates, especially long-term rates. Short term rates are controlled via the Fed Funds rate.
(Lewis Alexander, Chief Economist at Nomura Securities said) that nobody in American government is arguing that, in the long run, debt isn’t a problem. Both Democrats and Republicans have recently proposed budgets that would put us on a sustainable fiscal path . . .
What is a “sustainable” fiscal path? Is it a path on which the federal government always will be able to pay its bills and no federal check ever will bounce?
Not only are we on the path, but we’ve been on that path since August 15, 1971, when the U.S. government became Monetarily Sovereign.
Sadly, Time Magazine, Christopher Matthews and Lewis Alexander don’t understand that.
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 
This is certainly a strange land to be a stranger in, Rodger. But I’m beginning to get my sea legs. It occurs to me that deficits are something like the bias on a transistor. Without the bias, current simply won’t flow. So the deficit is an artificial predisposition for economic blood supply, also kind of like propping the plane, or cranking the starter. Without it, the creature never rises from the laboratory table.
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re date of leaving the gold-std; this is a confused topic that is not simple to fully leverage
We went off the gold-std initially in 1933. Went back on it, partially, with the 1944 Bretton Woods agreement (all currencies convertible upon demand into $US, only $US convertible upon demand into gold and then only as a gov/gov Fx exchange), and then finally completely off gold in 1973 (Nixon/Connally announced in 1971 that the policy would go into effect in 1973).
Without knowing the timeline, readers can’t readily link economic expansions/contractions of the last 80 years to increases & decreases of the currency supply used to denominate steadily growing economic transactions.
Currency supply has to denominate net economic transactions, and must follow – not try to arbitrarily dictate – whatever flow of production/consumption/exchange we’re capable of creating. It’s easier for people to understand that if they realize we’ve been monetarily sovereign since 1933, not just 1973.
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Nixon took his action, because we were running out of gold, which would have prevented us from creating the dollars to pay our bills. A Monetarily Sovereign nation does not need to depend on the supply of any commodity. Though there were different kinds of gold standards through the years — gold specie standard, gold exchange standard, gold bullion standard — the U.S. most definitely was on a gold standard (gold exchange standard) in 1971, and was not Monetarily Sovereign until 8/15/71.
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here are links to a coupla vids you all might find of interest.
first, an excerpt of nixon’s gold stardard announcement in ’71:
second, an excerpt of a documentary discussing the lead-up to FDR’s removing the US off the gold standard. note that, according to this film, it was prompted by a international “rush” on the US gold supply:
now, i dunno if it’s true, but i have heard that nixon’s action in ’71 was also prompted by another rush back in ’69, started by france (actually, it was also started by france back in the ’30s–so i guess they’re really the guilty party in this).
i totally agree with roger erickson’s statement above and i would add to that that whenever you hear people out there talking about nixon (or fdr) taking us off the gold standard, they NEVER mention what exactly drove them to do that. without mentioning the actual reasons, it leaves people to think that it was just done on a whim.
i honestly think if people would explain how, on a gold standard, the US Dollar was “held hostage by int’l money speculators” as nixon put it, then the public would be more accepting of fiat currency.
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that’s very interesting. Nixon says, “But, if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.” It seems this is Rodger’s point in a nutshell, that a sovereign currency is absolute within its boundaries. I wonder though, what are the limits of sovereign (untethered) currency as to foreign exchange. They say, nations like Imperial Germany inflated their currency so they could pay their war reparations with essentially worthless if legal tender.
Sorry to be so lazy, but I’ll bet someone here could set me straight ten or a hundred times faster than I could ferret it out myself.
thanks in advance.
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John,
A Monetarily Sovereign nation has no need to inflate its currency. It has the unlimited ability to create its sovereign currency, no matter what the exchange value.
If the U.S. owes $1000 dollars, it credits the creditor’s checking account for exactly $1000. No problem. The whole notion of paying debt with cheaper dollars is a myth. The creditor might suffer, but the Monetarily Sovereign nation doesn’t care what its exchange rate is.
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Rodger — thank you kindly for the reply. You draw a sharp distinction between creation and inflation. I must investigate that difference. I’m a detail-oriented type. When I study programming, I want to see where each byte is stored and what is done to it, for example. Only then do I “get it”. Abstractions let me down, but real objects don’t.
Now you say, “The creditor might suffer . . .”, but “The whole notion of paying debt with cheaper dollars is a myth.” I beg your indulgence, but I see this as a contradiction.
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In that case, why is counterfeiting illegal? Per your theory, the counterfeiter would only be hurting himself.
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It’s illegal, because if everyone created dollars, there would be no scarcity, and dollars no longer would function as money.
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Imagine that…. printing money devalues it…..
But you said the creditor may suffer if paid in money that was merely minted instead of collected. Why would they suffer? They would receive $1,000 US, which would have the exact same value as any other $1,000 US in the world. It’s the same to them.
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There has been no relationship between federal dollar creation (i.e. deficits) and inflation, since we became Monetarily Sovereign. See: https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/
The creditor suffers if he receives less valuable dollars, but the debtor nation does not profit. It has the unlimited ability to create dollars, at no cost to itself, so the exchange value of the dollars is meaningless to the debtor nation.
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I have to learn not to type a long question and then log in because it erases all my typing.
What I wanted to ask was, you say “The creditor suffers if he receives less valuable dollars”. Doesn’t that imply that the purchasing power of the currency is diminished, and that the creditor will “pass along” the increased effective cost per unit of product vis-à-vis the diminished buying power? How does this comport with “the exchange value of the dollars” being “meaningless to the debtor nation”?
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Exactly. The creditor receives the exact same dollars you and I use. It debases the entire currency, not just the few dollars the creditor is holding, because they have the same buying power to any third party you are paying them with.
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Your comment is irrelevant to the question at hand, which is whether it benefits a Monetarily Sovereign nation to debase its currency. It doesn’t. If the nation owes $100, it creates $100 and pays the bill — regardless of the trading value of that $100.
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John,
A Monetarily Sovereign government does not benefit from inflating its currency to pay bills with “cheaper” money. It can pay any bills of any size, any time.
The businesses in that nation may benefit, because exports will be cheaper. Many nations do that intentionally to improve their balance of payments. This is an unnecessary step for a Monetarily Sovereign nation, because the nation can supply its businesses with all the money they need.
Inflation disadvantages the people in a nation, because of the increased cost of imports, although if the government gives them additional money, that can outweigh the cost of inflation.
Bottom line: Our Monetarily Sovereign government is the absolute ruler (sovereign) over our dollar supply. It can have as many or as few as as it wishes. It can buy anything it wishes at any time. Price is no object.
Unfortunately, the U.S. government has not yet understood the reality of Monetary Sovereignty, so acts as though it were monetarily non-sovereign, like you and me, by wanting to cut expenses.
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Buster,
I see you still are unable to understand anything but the most extreme extensions of any idea. If someone told you blueberries are healthful, I imagine you’d try to eat two tons of blueberries. Water nourishes, but too much water drowns.
Creating (not printing) too much money can devalue it, but that has not happened during the time since we became Monetarily Sovereign. If you read the post I referred you to, you will see there has been no correlation between federal money creation and inflation.
As for the creditor, inflation causes him to receives dollars that each are worth less in trade than the dollars he lent. The federal government doesn’t need to worry about that, because it has the unlimited ability to create dollars.
Rodger Malcolm Mitchell
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Alright… I see where you are coming from. I will can the sarcasm for now. But in your other posts I have read, you very explicitly give the impression that it is impossible for the government to print too much money. I will accept for the sake of argument that some inflation is not harmful. As you noted, it is an opinion either way and neither of us knows if it is actually harmful, and it is beside the point at any rate.
Yet by your style of writing, you make it sound as if a person can arrive safely at the conclusions I presented. Some quotes from your posts:
“dollars are limitless and free to the U.S. government.”
This may be technically true, but this style of writing abounds on your blog, and you leave out the critical detail that there is some limit to the amount of money the government can print without opening up a can of “insta-flation”. You admitted as such to me, that printing enough will in fact devalue the currency, which is why counterfeiting is illegal, and why giving everyone $100,000 is a bad idea.
Perhaps they can print 1% extra money every year, without inflation. Perhaps 5%. Heck, maybe 20%. But they cannot print a truly infinite amount of money without inflation. Your writing style promulgates this idea when you make grand pronouncements such as the idea that the government could buy every exported product, print money to cover the cost, and stash the goods away for safekeeping.
The number of US dollars in circulation is around $830 billion, and the value of US exports every year is ~$1.5 trillion. The government would have to increase the number of US dollars in circulation by this amount to cover the cost, and that is just for one year, on top of everything else they would need to pay for. This should decrease the buying power of the dollar significantly, as the money supply would have to increase by 150%. In your economic stimulus plan, you said you didn’t think giving everyone $10,000 would be bad for the economy. $10,000 X 350 million people is another $3.5 trillion dollars that would have to be printed and given out. The health care sector is worth $2.5 trillion, and you said the government should take that whole cost on alone. Social security outlays are a little less than a trillion every year, and you said that FICA should be ended and the program paid for in printed money. These number together are 8.5 trillion dollars. Do you really think that increasing the money supply in one year by a factor of ten would not be detrimental? If all taxation was ended (not that you support that idea, but if) the number would be close to ten trillion.
I am not doubting that some money creation is good, but you do not even imply that there is an upper limit in your posts. Only when I mentioned it to you with my absurd “A lot must be better” exaggerations, do you put in the asterisk that a lot is not better. I am sure this excites people and sells books, but it is hardly telling the whole story.
Surely you agree that increasing the money supply by 1000% or more every year would be harmful to the buying power of the dollar, no?
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The nature of a individual blog post, being short, is to focus on one issue at a time. So, in various posts, I address various issues and make various proposals. It’s not feasible to refer back to all of them, each time I write a new post.
So yes, in the unlikely if the government suddenly did everything I’ve proposed over the years, all at one time, we probably would have an inflation the Fed couldn’t control with interest rates.
Often through this blog, I’ve mentioned that the sole limit to federal spending is inflation. In fact, it’s in the very first post at item #12.
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Even without taking on these costs all at once, your proposal of giving everyone 10 grand to stimulate the economy alone would require quadrupling the amount of cash in the economy. Do you maintain that this would not be detrimental? Maybe I am missing something.
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The total money supply exceeds $38 trillion. (http://research.stlouisfed.org/fredgraph.png?g=6AM)
I think we could handle an additional $3 trillion.
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Are you willing to bet the future on it?
Okay, so we are both off. I counted the M0 money supply in my 830 billion figure, which is low. The MZM is about what we are looking for, which is 11 trillion. We can’t count debt at face value as in your graph, because debt is not valued at face value. If you owed someone 10,000$, payable in yearly installments of $2,500, and I offered to buy that debt from whoever you owed it to, I would not be able to pay $10,000 for it, due to inflation, among other factors, and still make money after four years. We can’t value debt at face value.
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Buster, I’d rather bet the future on debt growth than on non-growth. I’d have all the facts on my side.
As to debt not being money, you are just making this stuff up. The total money supply is the total debt supply. That’s what money is: Debt. All money is debt. Every form of money is a form of debt. There are no exceptions.
The federal debt equals the number of dollars the government has pumped into the economy. It’s called “Federal Debt Held By Private Investors,” which essentially is the same as “Debt Outstanding Domestic Non-financial Sectors — Federal.” (See: http://research.stlouisfed.org/fredgraph.png?g=6AO )
I’ve tried to be good about answering your questions. Unfortunately, you have joined the ranks of those whose zero background in economics is combined with a pathological desire, not to learn, but to prove me wrong — perhaps to demonstrate their own brilliance.
So I’m giving up on you. You neither understand nor wish to. You can learn your economics elsewhere.
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