–Congress makes astounding discovery: Reducing deficits (aka austerity) causes recessions

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

●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●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.


Congress and the President have just discovered what every awake economist has preached for many years: The more budgets are cut and taxes increased, the weaker an economy becomes.

All the media and political lecturing that the federal government’s “deficit and debt are too high,” and the government should “live within its means,” is mere propaganda by the top 1% income group. The deficit is the federal government’s method for adding dollars to the economy, which stimulates the economy, and the federal government, being Monetarily Sovereign, has no “means” to live within. Unlike monetarily non-sovereign states, business and people, it can service any size debt, forever.

The purpose of this deception: To reduce benefits to the lower 99%, thereby increasing the income gap between 1% and 99%.

Now that Congress and the President have convinced everyone of this nonsense, they wish to take it back, for fear the peasants will rise up angrily.

Washington Post
Congress’s debate on year-end ‘fiscal cliff’ sets stage for fall showdowns

(‘Taxmageddon’ could shock the nation’s pocketbook: Thanks to some new taxes, the expiration of other short-term tax laws and other changes, the country’s economy could be dealt a major blow in 2013.)
By Paul Kane, Published: July 19, 2012

Five and half months before the deadline for potential disaster, Congress broke into heated debate this week over a January fiscal meltdown that could lead to nearly $600 billion worth of tax hikes and automatic federal spending cuts next year.

Translation: “Those tax hikes and spending cuts will reduce the federal deficit and debt. We hope you don’t remember it was we who wanted it. Now we take it all back, because frankly, tax increases and/or spending cuts lead to recessions and depressions.”

Democrats accused the GOP of risking economic calamity to the middle class to protect lower taxes for the rich. Republicans accused Democrats of wanting to raise taxes and being soft on national security.

Translation: “The other party did exactly what we wanted, but we deny it’s what we wanted. Hey, if Romney can criticize Obamacare, when he invented Romneycare, why can’t we criticize the deficit reduction we demanded?”

“The president’s small-business tax hike will hit nearly the same time as our military’s being hit with arbitrary cuts that will endanger our security,” House Speaker John A. Boehner (R-Ohio) said 20 minutes earlier. “Now some of those same Democrats are threatening to drive us off the fiscal cliff and tank our economy, all in their quest for higher taxes.”

Translation: “I want lower taxes. I want more spending. I want a reduced deficit. Please don’t think too hard about how that works.”

The situation is driven by the failure last fall of a specially empowered congressional “supercommittee” that had been tasked with finding $1.2 trillion in budget savings as part of a broader deal cut last August. With the supercommittee’s failure, the law requires the first wave of 10 years’ worth of automatic spending cuts to kick in Jan. 1 — at the same time that the income tax cuts approved during the George W. Bush administration, along with a host of other tax benefits, are set to expire.

Translation: “Our supercommittee failed to cut the deficit, so now the deficit will be cut automatically, which will be a ‘fiscal cliff’ disaster. If only the supercommittee had done its job, we would have had the fiscal cliff, but we could have blamed them.”

The combined effect of those tax hikes and spending cuts would send the already limping economy back into a recession, according to the nonpartisan Congressional Budget Office.

Translation: “Tax hikes are bad. Spending cuts are bad. Deficit cuts are good. Keep repeating that until you actually believe it — unless you already do.”

Obama began last week by restating his support for extending the 2001 and 2003 tax cuts only for the first $250,000 in income, offering such an extension for an additional year to buy time for a broader effort to reform the entire tax code next year.

Translation: “All tax increases are bad, because they remove dollars from the economy, which causes recessions. Except tax increases on those making more than $250,000 are good, because they also remove dollars from the economy, which also causes recessions, but we know the public will agree to cut off their own noses to spite their faces.

“The politics of taxes has changed, and for 30 years Republicans won the argument because they conflated middle-income taxes and wealthy taxes,” Sen. Charles E. Schumer, Dem. (N.Y.), said Thursday. ”And when middle-class incomes were going up, the middle class sort of shrugged their shoulders and said okay. With middle income going down, and with us being a lot smarter about this, we are separating the middle class from the wealthy and for the first time in 30 years winning the tax argument.”

Translation: “I don’t give a damn about the reality that Federal Deficits = Net Private Savings, so are necessary to grow and stimulate the economy. All I care about is blaming the other guy, when we fall over the fiscal cliff.”

In case you’re like Congress and the President, i.e. clueless, here is a brief summary:

1. The federal deficit and debt are too high.
2. Increased taxes and/or reduced spending cut the deficits and debt.
3. But increased taxes and/or reduced spending will send the economy off the “fiscal cliff.”
4. So we want to cut the deficit but do not want to increase taxes and/or reduce spending.

Got it?

Sadly, most of America has no problem whatsoever believing points 1 through 4, and will argue to the death that Monetary Sovereignty and MMT (which say 1 through 4 make no sense) are wrong.

You just can’t make this stuff up.

Rodger Malcolm Mitchell
Monetary Sovereignty

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


20 thoughts on “–Congress makes astounding discovery: Reducing deficits (aka austerity) causes recessions

  1. Rodger,

    Yesterday I posted a comment after watching a segment on RT TV, specifically on the Capital Account show, in response to Lew Rockwell stating that the debt and deficit is too large and that the Government is printing money uncontrollably. I used one of your points in the response that ” a nation cannot grow it’s economy without money growth. The statement led to negative comments, so many, that the post was collapsed. I also used your two key equations and the result was even more negative postings than those about money growth. It’s not just our leaders an representatives who are clueless, it is most everyone. I’m beginning to believe it’s time to get out of Dodge when it comes to living in this country. How often must people be slapped in the noggin’ before they wake up?


  2. Not looking for any argument … I know you guys are not going to be convinced but I am just trying to explain the other side..since I guess I would be one of those clueless folks who would disagree with you.

    Here is the problem…an economy that IS growing needs more “money growth” or needs more money to keep growing.

    Adding too much money to a growing economy or an economy that is not growing at all will not continue to grow the economy further it will just suffocate or drown an economy, for lack of better terminology.

    An economy that is not growing can be stimulated by adding more money but that is only a short term solution and does not address the problem of why an economy is not growing in the first place.

    However if an economy is not growing and there is already too much money in an economy (note the reason an economy may not be growing in the first place is because there is too much money), removing that money will help to heal the economy and set it on a path to growth.

    Think of it this way if you have a car or better yet a lawnmower, you need gas to start it and you continue to need more and more gas to keep it going ie..you need to keep refilling the gas tank in order to keep the car/lawn mower running. But what happens does not start right away or too much gas gets to the engine….it floods the engine and then it will not start.

    Or another way to think of it is this..most of use can handle a car if it is going around 60-80 miles an hour. Some of can handle a car if it is going 80-100 miles an hours. Many of us cannot handle a car if it is going 150-200 miles an hour. If your going from 50-70 miles an hour that might be helpful to pass other cars going slower however if your going over a hundred and you are one of the people who cannot handle it you don’t keep going faster.

    One of the problems with main stream economics is that they see that the car is going to fast and instead of slowing down easily they put their foot on the brakes and end up stopping short and letting the car get out of control. Or better yet instead of just keeping it within the speeding limit to begin with they let the car get up over 100.

    MMT and MS however would say to keep going faster because if you put your foot on the brakes you could stop short and loose control of the car so don’t worry about it keep going faster not realizing that at some point they are going to lose control of the car anyway.

    It is similar with an economy. The thing that MMT and MS’ers forget or do not acknowledge is that money (the broad definition of money if it is digits or physical money ie..dollars) is a medium of exchange which represents goods and services within the economy. If you add money, to a point you can stimulate the economy and create more goods and services but after a certain point just adding more money will not necessarily increase the goods and services within an economy because there is already too much.

    Also MMT and MS’ers forget or do not acknowledge that money (again digits or dollar bills etc) is not wealth and is not in and of itself an economy, it is a proxy for wealth, it is a proxy for the goods and services that do make up the economy and in that way is part of the economy.


  3. However, is it not necessary to create goods and services or is that creation the result of the waving of some magic wand? Why do you make the assumption that the proponents espouse recklessness?


    1. @charles..?? Are you asking me that?? If so then i know i was long winded but that is not what i said. If i was that confusing and you want me to clarify i will but otherwise please reread what i said. If you were not referring to me then my apologies, please ignore this post.


      1. @charles, the first post was for the first part of your question if in fact it was directed to me. For the second part, I don’t think mmt and ms intentions are bad or think they are being reckless intentionally and there is a lot I can learn and take away from them.

        But there are weaknesses.

        In our debt based system where spending creates money from nothing advocating more and more spending and money creation and debt which is not based on the real economy and where the only limit is inflation where knows where that limit is, is kinda reckless.

        One of the problems with mmt and ms that i can see is that it describes the accounting of the nation and uses Keynesian economics to fill in the gaps. Accounting is part of economics but it is not economics and I have not seen or heard anything anywhere to change my opinion of that.

        If you can show me otherwise then I am open to that but I have not heard anything to the contrary.

        For example no one has explained how taxes destroy money. If paying off debt destroys money then how does paying taxes in and of itself destroy money?? Not until the gov pays off the fed,oay off its debt or rolls over its loans does it destroy money. Just saying taxes destroys money does not make it so.

        Or no one in mmt or ms has addressed if the fed is private or is part of the gov. They just assume it is part of the gov but they seem to skip over a very important detail.

        I could go on anyway it is just my opinion..


        1. What I am saying is MONEY is always necessary to create goods and services, goods and services are not created by waving a magic wand. Also, I believe that MS and MMT believe that the government should have the Treasury create our dollars directly, not having it created predominantly by private banks through the issuance of debt. The issuance of US Treasuries is a legislative constraint that is not necessary. You fail to grasp any of the principles of MS or MMT. As for the dollars paid in taxes being destroyed as you say, Mr. Mitchell explains how it works exactly. Read his posts on that particular subject. Paying of Federal taxes is unnecessary with respect to Government spending. Read Mr. Mitchell’s posts relating to Federal taxes again. I believe he explains how it works. You have chosen to disagree just to disagree. If you don’t believe the MMT’ers or MS’ers then read what has been written by various Fed branches and Alan Greenspan with regard to how Government spends. Spending is not revenue constrained, never has been. Finally, they certainly have addressed what the Fed is. Have you actually read the literature?


  4. “The more budgets are cut and taxes increased, the weaker an economy becomes.”

    Is this legitimately your argument? That’s like an over-indebted person saying we can’t cut back our credit card spending because it will reduce our standard of living. I think that’s called a tautology. It’s self-reinforcing circular thinking. In the short-run, it certainly weakens the economy, the point is, the economy is weak in the first place because of deficit spending.

    More precisely both parties have gotten their traditional policy. We got large tax cuts coupled with unprecedented federal spending, and therefore huge fiscal deficits.

    By the way, when all of those dollars added cannot find projects which add value past the rate of interest of the bonds which back them, it results in a net loss for the economy. The only argument then is the politics of what level of social welfare needs to be in the fiscal budget. There’s no way you can argue that any spending past what is considered social welfare is anything but central planning.

    MMT and MS are true up to a point, however, there are some HUGE holes init . Why doesn’t the use of those new dollars seem to matter in this theory? If it was used to spend on say, pet rocks, would that still be stimulative over the long run?

    By the way, private banks create money as well.


  5. Jimmy,

    By comparing the U.S. to an “over-indebted” person, you show that you do not understand Monetary Sovereignty. While you and I and Illinois and Greece can be “over-indebted” (all are monetarily non-sovereign), the U.S. (which became Monetarily Sovereign on 8/15/71 never can be “over-indebted.” It can pay any debt of any size at any time.

    To understand Monetary Sovereignty, you should try to understand this equation, which describes how GDP is calculated:

    GDP = Federal Spending + Private Investment and Consumption + Net exports

    So to increase GDP (left side of the equation), you must increase the right side of the equation. Federal deficit spending does that by increasing the first term (Federal Spending) directly, and the second term (Private Investment and Consumption) indirectly.

    Based on that equation, how would you increase GDP if not by increasing deficits?

    You said, “. . . when all of those dollars added cannot find projects which add value past the rate of interest of the bonds which back them, it results in a net loss for the economy.

    This sentence is wrong from several standpoints.

    1. In a Monetarily Sovereign government, bonds do not back currency. If all T-bonds disappeared tomorrow, this would not affect by even one penny, the federal government’s ability to spend.

    2. Dollars never can fail to find projects. This not only never has happened in history, but it cannot happen. Dollars create projects.

    3. I urge you to read about Monetary Sovereignty at: https://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/ Then you will see why popular intuition about federal financing is wrong.


    1. I understand the GDP equation, but to say that increasing Federal Spending increases GDP is a little short sighted. Is there no limit then.
      If politically feasible, should the government run a deficit of $10t, $20t….? Sounds like there’s no limit. Federal spending is ENTIRELY constrained.

      A better explanation is the use of those dollars. To take your accounting analogy, the basic accounting equation is Assets minus Liabilities equals Equity. So to increase equity, all we need to do is issue more stock, correct? Unfortunately when your cost of equity surpasses your return on equity, you dilute existing shareholders.

      That’s precisely what runaway federal spending does when spent unproductively. The magic of federal deficit spending increases GDP in the short-run, long-run is a different story. Short term spending increases are great for politicians, they artificially increase GDP at the expense of the long-run.
      That’s why I doubt this theory is taken very seriously by any Economist other than those in the political economy.

      1. It’s right that bonds don’t directly back currency, but implicitly they do. Currently in order for the government to spend, it needs to issue treasury bonds. Changes in the government interest rates are a large driver of short term currency moves.

      Too much federal spending creates either higher interest rates, or after central bank intervention, an increased money supply.

      The only reason the U.S. hasn’t turned into any of the other countries that defaulted over the last 20 years with monetary sovereignty like Russia, Argentina, Mexico, Thailand, etc. is the use of dollars being recycled in international trade. Otherwise that’s the constraint on runaway federal spending; either currency devaluation, fiscal default, or an overall lowering of living standards.

      2. Again this is very wrong. To say that dollars always create projects is to say there is no such thing as a liquidity trap. I’d direct you to our current economic situation.

      This theory seems to completely ignore the real and relative and focus on the nominal and the absolute.

      Projects create dollars, the same why private loan demand creates deposits, not the other way around. You can create projects by decree, however, that doesn’t describe a market.

      3. This really isn’t intuition, but is plainly backed by the current state of the economy and history.

      Economics is the only science that doesn’t have to match to the underlying reality which it is trying to predict. We will have a unified field theory before one that combines economics of growth with macro/micro economics.


      1. You read the equation, then ignored it.

        You said, “Federal spending is ENTIRELY constrained.” If federal spending is constrained, why all the concern by the debt hawks and the Tea Party?

        Your shareholder example is completely irrelevant to federal spending. It has nothing whatever to do with a Monetarily Sovereign government.

        You said, “I doubt this theory is taken very seriously by any Economist other than those in the political economy.” I don’t know what “the political economy” means, but are you familiar with Modern Monetary Theory? Lots of economists there.

        You said, “Too much federal spending creates either higher interest rates, or after central bank intervention, an increased money supply.” Yes, federal spending increases the money supply. That’s the whole point. But federal spending does not create higher interest rates. Where did you ever get that bit of false information?

        You said, “The only reason the U.S. hasn’t turned into any of the other countries that defaulted. . . “ A Monetarily Sovereign nation cannot unintentionally default, because it has the unlimited ability to create its sovereign currency.

        You said, ” To say that dollars always create projects is to say there is no such thing as a liquidity trap.” A “liquidity trap” is a theoretical circumstance in which increasing the money supply fails to lower interest rates — which has nothing to do with creating projects, as there is no relationship between low rates and GDP growth and the Fed sets interest rates by fiat. The current rate is exactly, to the point, what the Fed wants it to be.

        By the way, you already said that too much federal spending creates higher interest rates, which is the exact opposite of the liquidity trap hypothesis. You’ve taken two sides of the same issue.

        You said, “Economics is the only science that doesn’t have to match to the underlying reality which it is trying to predict.” I’ll amend that to: Economics is the only science in which lay people, who know little of economics, make outrageous assertions, backed by zero data.


  6. @ Charles, I have read up on mmt and ms and there are a lot of gaps. Both basically use accounting in place of economics.

    If you read what I said (if I was not clear I will restate it, I understand that is one of my short commings) I would agree with a lot of what you said.

    However i don’t think you read what i said or got what i said otherwise you would not have mentioned the part about money being necessary to produce goods and services and instead would have addressed the issue of creating more money to produce more goods and services when the amount of money already in the economy is not creating those goods and services to begin with. It is called supply AND demand for a reason. Or when you reply to the tax question by saying fed taxes are not necessary..ok but what does that have to do with taxes destroying money in which case you ask me to read a link. or the fact that you seem to suggest that I said revenues are spending constraint, which I never said (there are other constraint but I never said revenue was one of then, although I believe it should be).

    When i write a post most of the time the real issues are never addressed and folks refer to the oldie but standard responses but again never addree the real issues.

    So…yes or no am I wrong when I say ms says that the only limit to spending ie. creating money Is inflation and am I wrong when I say ms does not know what that limit is but they go along with the targets of 3%?

    Yes or no is the fed part of the gov or is it an independent quasi gov entity?? also i should have been clearer, right now we do not have truely private institutions and the fed is really quasi gov but is not part of the gov.

    Yes or no does the gov borrow from the fed…as the system is now that isnot how we would like it to be. Is there another way to destroy money outside of repaying debt/borrowed money??

    As for taxes to be honest I am still trying to figure that out. The only thing i keep hearing is that taxes are not needed because the gov can just spend. Ok i get that and if there were no limits to spending and the laws were changed that would be true but how does that destroy money?? The best i can come up with from the readings is that it is based on accounting…debits and credits but that only happen the gov pays of it debt

    Anyway I have not chosen to disagree just to disagree, if you see it that way i apologize, maybe i hit a nerve or something vit the fact is your the one who replied to my post, you could have just let it go.

    In any case it will be interesting too see if any of these questions are directly answered in a couple of sentences or if other issues are brought up.


    1. The question of Fed ownership is a kind of red herring, that is meant to imply something secret and sinister (though I don’t know what). In this unique case, ownership confers no control, so Fed ownership has no significance whatsoever.

      Go to: http://www.factcheck.org/2008/03/federal-reserve-bank-ownership/ for the answer to the question, and then stop obsessing about Fed ownership. No respected economist is concerned about it.

      Bottom line: The Fed is controlled by the President and Congress.


      1. With all due respect it is not a red herring. If the u.s gov is not in control of the fed and if the fed is not part of the u.s
        Gov then the u.s is not monetarily sovereign. It is a little step that has big implications for ms theory.

        As for the second part the congress and pres is not in control of the fed that is just plain wrong. In order to be in control they would need to change the laws unless that is what you mean by being in control.

        As for secrecy when the feds create money and lend it to foreign banks with absolutely no oversight then don’t you think there might be something to that, at least enough to have zn audit of the fed.


        1. Better to worry about the real problem facing the American economy: Congress and the President trying to find ways to reduce the deficit, i.e. reduce savings. (Federal Deficit = Private Sector Savings).

          The Feds actions have a small effect on the economy compared to what Congress and the President do. Mostly, the Fed affects interest rates.


    2. Further, you are confusing the process with the decisions.

      Though the Treasury may “borrow” from the Fed and the Fed may give its “profits” to the Treasury, all of this represent the accounting process that does not reflect this underlying fact:

      Congress creates and destroys dollars in the economy, by spending and taxing.

      Congress and the President decide what will be spent. The federal government agencies, at the direction of Congress, pay their bills by crediting checking accounts, which ultimately are cleared through the Federal Reserve Bank as part of the automatic clearing process. This crediting of checking accounts creates dollars. When your checking account is credited, you have more dollars, which adds dollars to the economy.

      Congress and the President decide tax policy. The IRS collects taxes by debiting taxpayer checking accounts. This reduces the supply of dollars in the economy, i.e. destroys dollars. When your checking account is debited, you lose dollars, which reduces the dollars in the economy.

      You endlessly can examine the accounting flow, i.e. the debits and credits among the myriad federal accounts at the Treasury and the Federal Reserve Bank, but that merely would be a case of not seeing the forest for the trees.

      Bottom line on this question:

      The federal government creates dollars by spending, and destroys dollars by taxing.

      Private banks create dollars by lending, and destroy dollars when loans are serviced.

      Rather than getting lost in the accounting process, look at who makes the decisions.


      1. Again with all due respect your talking about decision making process but why what does that have to do with destroying dollars. Again you are going off on some other issue that I have no problem with.

        You just said that when the gov takes money out of the economy by taxing me it destroys money?? Is that the process?? By taking money from me via taxes it is taking money out of the economy therefore it is destroying money??

        But on the other hand When it spends it creates money by crediting peoples accounts and putting money into the economy??

        So don’t you see a contradiction here?? Where exactly is the money being destroyed especially since the gov spends more then it taxes. Isn’t it just taking money from me by taxing (taking money out of the economy, destroying money) and then putting it right back into the economy through spending (creating money)??

        Also why would you say the gov “may” borrow?? When the gov issues treasuries, it IS borrowing and in reality that is how it “creates”


      1. Thanks.

        Does that measure all the “horizontal” money created by banks or is that not included since it nets to zero.

        I can generally follow sectoral balances, but then I’m thrown by all that bank money. When I see a chart showing NFA equally mirroring each other, I’m assuming that’s excluding bank money (inside money?).


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