Mitchell’s laws:
●The more budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity is the government’s method for widening the gap between rich and poor, which leads to civil disorder.
●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.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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Here we are talking about the economics of tomorrow, while mainstream economists have not yet caught up with the economics of today.
For new readers of this blog, the economics of today recognizes that the U.S. government has the unlimited ability to create its own sovereign currency. The government never can run short of dollars; it doesn’t need to ask you or me for dollars.
The U.S. is Monetarily Sovereign. Illinois, Chicago, Cook County and Greece are not. But, mainstream economics has not progressed past August 15, 1971, when the U.S. went off the gold standard. Today’s economists, media and politicians still claim the U.S. must “live within its means,” and that the federal deficit is “unsustainable” and the debt must be reduced.
In short, the economics taught in most college and universities does not recognize the fundamental differences between Monetary Sovereignty and monetary non-sovereignty. Ignorance is passed down the generations.
Like a traveler who relies on connecting flights, if you miss the first flight (today’s economics) you will miss the next flight. An article in the November 10, 2012 issue of NewScientist magazine provides a few hints at what will be tomorrow’s economics:
It’s Thursday morning and 7-year-old Devon Carrow-Sperduti is meant to be starting school in 5 minutes. His mum is getting impatient. Devon is like any child his age – in all but one respect.
When Devon gets to Winchester Elementary School in West Seneca, New York, he chats with his friends between his classes, he sometimes gets told off by his teachers for not paying attention and, occasionally, he bumps into walls. It is an inevitable consequence of attending school as a robot.
Devon has allergies that prevent him from physically being at school. Instead, he stays at home and logs into a two-wheeled, 1.5-metre-tall Segway-like robot called VGo, which is waiting in the school grounds. He navigates between classrooms by peering through a camera, and talks with classmates and teachers via a real-time video screen displaying his face. “He’s treated the same as everyone else,” says his mum.
Devon attends school by proxy. The children view Devon’s robot as Devon himself. One day, another child also might attend Devon’s school by proxy. Then presumably, the two robots, or rather, the two children, will talk and play, face to face, video screen to video screen.
Devon isn’t the only one routinely transporting himself to another location like this. He joins surgeons, soldiers and an increasing number of other workers who are turning to an army of surrogates often hundreds of kilometres away. These virtual travellers can hold down nine-to-five jobs, fight wars and perform life-saving operations.
This year, you’ll be able to buy one for the same price as a laptop, and eventually they will be controlled by thought alone and will transmit a sense of touch back to their pilot. It means our senses will become immersed in another location like never before. Researchers, legal experts and ethicists are realising that the way this technology will be used over the next decade and beyond is not only going to affect the way we live and work, it is also going to disrupt economies, challenge laws and may even transform social norms.
Today’s economics describes today. But tomorrow’s will be far different. Yesterday’s economics already has caused, extended and worsened the Great Recession, by limiting GDP growth. Try to imagine what will happen as economists and politicians, steeped in obsolete beliefs, try to cope with the future.
Marvin Minsky, one of the pioneers of robotics, coined the term “telepresence”. He used it to refer to the suite of technologies that allow a person to feel as if they are present at a place other than their true location. In his futuristic vision, these robotic systems would pave the way for a “remote-controlled economy” and would transform society.
If you’re in the US and need part of your prostate removed, for example, it is likely you will experience the skills of a telepresent surgeon using a robotic manipulator – 90 per cent of these operations are now performed this way.
Scalpels have even been wielded across oceans: in 2001, surgeons in New York removed the gall bladder of a woman in Strasbourg, France. Meanwhile, soldiers today routinely control aerial drones and robots for surveillance, bomb disposal and even attacks.
In fact, their use is now so common in the US army that some commentators argue that remote-controlled warfare could come to be seen as a defining trait of Barack Obama’s presidency.
Today’s economics is based on the inefficiencies of human output and wealth creation. We spend much of our working lives preparing for work, traveling to work, traveling for work and traveling from work. We search for information, file information, convey information to someone else, forget information and die with our information.
So far, the signs suggest that people have been using telepresence to visit family and friends, tour buildings like museums, work remotely with distant colleagues or, for doctors and nurses, to check on patients from afar.
The next wave of telepresence under development in laboratories suggests the technology will become significantly more immersive. For example, a team led by Mel Slater at University College London (UCL) has built a surrogate robot whose actions mirror a person’s body movements. Hold out your arm for a handshake, and the robot’s arm follows suit.
Early this year, a student called Tirosh Shapira controlled a robot using only his thoughts – he was at Bar-Ilan University in Israel, inside an fMRI brain scanner, and the robot was in France.
“It was mind-blowing,” [Shapira] says. “I really felt like I was there. When the guys in France surprised me by placing a mirror in front of the robot I was like ‘oh I’m so cute, I have blue eyes’, not ‘that robot is cute’.”
The line between “me” and “it” and between “here” and “there” is blurring. If all your senses tell you you’re in a remote location, and if you can move your arms and legs in that remote location, where are you, really?
Many researchers have begun to explore the looming economic, legal and social impacts. What might be the consequences of it becoming easier for everybody to move about remotely?
For a start, telepresence could disrupt labour markets. One plausible scenario for the technology is to allow low-wage foreign workers to be employed for jobs that were impossible until now.
After all, it has happened before – more than a decade ago, improved internet speeds and coverage meant nations like India became prime targets for Western companies to outsource online and telecommunication services at lower cost.
Consider how a retail business like Home Depot or Tesco might use telepresent workers. It could stop employing as many local assistants to do jobs like directing customers to products in-store, or potentially even operating machinery, and hand those tasks to employees overseas instead.
“One remote worker could be responsible for 10 stores and 30 robots,” says Matt Beane at the MIT Sloan School of Management, who has also been investigating the impact of telepresence technology. “I’d be very surprised if in 10 years, 10 per cent of that kind of work wasn’t being performed by remote workers.
Or take the implications of medicine continuing on its path towards remote procedures. It is bound to trigger legal and regulatory headaches if it spurs a new wave of medical tourism, for example.
What happens when a dentist in Cuba offers cheaper procedures through teleoperation to people in England? “Where is the service taking place, and who regulates it?” If something goes wrong during a procedure, or if an unqualified doctor practises remotely, for example, it is unclear which court or medical board would be responsible for investigation or punishment.
“If I throw a punch in England and it hits someone in another country, is the offence committed here or there, and which country’s law should take precedence?”
In economics, Gross Domestic Product is a common measure of economic growth or shrinkage. But what if the word “Domestic” loses its meaning?
Modern economics is based on pay-for-work. The faith is that wealth is created by people, and that those who do no work, deserve no wealth.
But what if telepresence machines not only do your job, but almost everyone’s job? What happens to economics when most of the workforce is composed of machines?
The makers of telepresence technology ultimately aim to fully immerse our senses in a location far from our own. And this may inevitably raise the question of how we anchor ourselves in reality. When we can walk, talk and work in a distant land while our body resides at home, where do we exist at that moment in time? In the world that holds your body, or the one that holds your mind?
I ask Devon a similar question: when he uses VGo, does he feel more like he’s at school or at home? He answers with the matter-of-fact simplicity of a 7-year-old. “Oh yeah, I’m definitely at school,” he says, before running off to brush his teeth.
Many people believe reward should be based on work, and that government provided benefits actually reduce the desire to work, as witness the sneering references to “food stamp mother.”
Today, unemployment is seen as a problem for the individual, because it reduces his monetary income, and as a problem for society, because the individual does not contribute work.
The role of government is seen today as encouraging a working society. Tomorrow, unemployment will be acceptable, even normal, as fewer people work. What then will be the role of government?
I believe the government will assume a more socially supportive role. Today, the government punishes work (via income taxes), while it encourages work (via project spending. Can that continue in a world where the implications of work change dramatically?
If you go to the bottom left-hand corner of this blog, you will find a search function. Use it to search “Watson” and you will find seven posts describing the possible futures of economics. All ponder the possible roles of government and of economics, itself.
We are at the proverbial fork in the road. To the right lies a government whose primary purposes are to protecting the haves from the have-nots. To the left, a government whose primary purposes are to protect the have-nots from the haves.
Will the government provide Medicare for everyone, Social Security for everyone, housing and clothing for everyone, justice for everyone – or will these be allocated to the strongest and those judged most valuable?
Today’s governments lean to the right, focusing on productivity. They frets over “dis-employment,” as being deflationary if too high and inflationary if too low.
Governments anguish over money creation (aka “deficits); they war over national borders. Economics lags behind, encouraging needless anguish and excusing needless wars.
The world will change in ways we cannot even imagine. And economics will change with it. But, the economists, the politicians, the media and the public, first must begin understand the reality of today’s economics.
The world is racing at us like a high speed train, as blithely we ride old Dobbin across the tracks.
Rodger Malcolm Mitchell
Monetary Sovereignty
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Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D — for everyone
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction annually
9. Increase federal spending on the myriad initiatives that benefit America’s 99%
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 Imports
#MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 
We are not there yet and work is relative…
For work that takes 8 hours today, you can complete in 2 in a few years.
Not sure why MMTers and MSers want this to be implemented today when we are clearly not even close. You cannot survive without producing and if you are not producing (be it morally right or wrong) you are a drag in society.
The issue goes beyond just productivity – from a supply perspective, care for everyone appropriately today? Can we provide water, food, clothing, housing, education, healthcare.
The clear answer is no. 500 years from today, sure, we may have the automation and the resources to provide these things. Today, we do not.
Focusing on doing a good deed while forgetting if there is enough resources and while kicking the middle class in the face is moving backwards. The limit is not in the amount of dollars you can print, it is in the supply of goods and services you can provide and the willingness of supplier to supply them.
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Additionally,
The decision is not only between defending the haves from the have nots. The decision should be to allow producers, be it have or have not, to keep their purchasing power. Haves and have nots spend their savings should the government stop shifting purchasing around.
This is the right decision.
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Rodger writes, “The world will change in ways we cannot even imagine.”
Yes, but society can always create new lies to maintain the human food chain. The human craving for power over others may continue, no matter what kind of economy we have.
On the other hand, Rodger has noted (and I agree) that general altruism and general selfishness tend to occur in historical cycles. Maybe we will actually cycle into a Golden Age, for a while anyway. Or maybe we will enter a dark age, for a while anyway.
Too little cynicism is foolish, and too much is deadly, but in confronting the unknown future, I think it is more productive to err on the side of optimism, until we have proof that our optimism is misplaced. We don’t know what’s outside our dungeon, but let’s open the door and find out. Most people don’t want to do that, as evidenced by their refusal to consider the objective facts of Monetary Sovereignty.
@ DANNY – Your first and second comments flew by me. I didn’t understand them. I interpret Rodger’s post to mean that economists are not equipped to understand the economics of today, let alone the economics of tomorrow. Their blindness is truly total. And if we who understand Monetary Sovereignty are not looking ahead with an open mind, then we too have blindness issues.
Regarding your third comment, this blog is not “leftist,” unless you think that describing the objective facts of money mechanics is “leftist,” in which case you might as well classify all the hard sciences as “leftist.” And yes, they are objective facts, unless you think that basic algebra (A+B+C=D) and hard data from the St Louis Fed are opinions.
Regarding the moderation of comments, the objective facts of Monetary Sovereignty tend to infuriate people who cling to their brainwashing. Rodger has dealt with insults and obtuseness for at least 15 years, and he will banter with you as long as you are genuinely willing to participate with him in the mutual education process. If not, then you are wasting his time and yours. Besides, the moderation function flags him that there is a new comment. Thus, if you comment on something that Rodger wrote months ago, he will be able to see it and respond.
Regarding the Austrian school of economics, it has a few things that align with the objective facts of Monetary Sovereignty, but in many respects its adherents live in a dream world. Indeed, they are fond of using imaginary scenarios to “prove” their hypothetical claims. They tend, for example, to focus only on the credit cycle and business cycle, while they often ignore the role of government spending and fiat money mechanics. In a Monetarily Sovereign nation like the USA, the State determines what is “money” and what unit of account will be used (e.g. dollars). The State can issue limitless fiat money, and pay whatever interest rate it chooses on its bonds. Or it can choose to stop selling bonds altogether. The Austrian school is helpless to understand this, and is inapplicable to the euro-zone crisis. It is not even fully applicable to today’s banking, since it assumes that fractional reserve banking is still common.
For a Monetarily Sovereign nation, money gets into the economy by bank lending and government spending. The Austrian school can be applied to some aspects of the former, but is oblivious to the latter. It appeals to Tea Party types and Libertarians who insist that government is always bad, and therefore State-issued fiat money is always bad. When we examine these people closely, we find that they only think government is bad if it
helps anyone else in addition to themselves. If government helps them at the expense of others, then government is “good,” no matter how “big” it is.
Thanks for visiting and for commenting. Please continue to do so.
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Question of the Day from Danny’s hero.
“If Republicans are not in favor of deficit spending and Democrats are not either, then how the Hell do we have trillion dollar deficits?
The answer is vast majority of politicians are liars, with no backbone to stand up and tell the truth to US citizens: “the country is broke”.
We cannot afford wars. We cannot afford to keep troops in 140 countries. We cannot afford to be the world’s policeman.
We also cannot afford Davis-Bacon and prevailing wage laws. We cannot afford the pension promises we have made. We cannot afford collective bargaining of public unions. We cannot afford all kinds of entitlements that have been promised.”-Mish Shedlock
Read more at http://globaleconomicanalysis.blogspot.com/2012/11/ron-paul-american-hero-his-farewell.html#6z2gzVWqSqERUWPk.99
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Does “we cannot afford” mean the U.S. federal government is running short of dollars?
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Hi Rodger: I am perplexed by Shedlock’s comments too. Certainly he , and the “retiring” Ron Paul know how fiat currency works. There is plenty of stuff at the local and state level “we can no longer afford”, but at the federal level? No way!
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Danny writes, “Not sure what makes you think we don’t have a fractional reserve lending system, but that is exactly what we have.”
Excellent example. Thank you. Like I said, Austrian school proponents live in a dream world.
Danny has read the words “fractional reserve banking” so many times that he takes it as reality. The fact is, fractional reserve banking is a popular myth. (Rodger has discussed this too.) Any time a bank needs more reserves, it can get them from the government or from other banks. Bank lending is not limited by deposits or reserves. It is limited only by vague and shifting capital requirements, and the capital no longer consists of deposits, since banks put their deposits outside their balance sheets, because they think deposits are too great a liability. If that strikes you as bizarre, hang on. It gets worse.
With old style fractional reserve banking, a bank had a dollar in deposits, and issued ten dollars in loans. (Or ten dollars, and issued nine dollars in loans.) But that’s not the way it’s done anymore. Today, banks make loans endogenously from nowhere, thereby creating a Ponzi scheme of multiple layers of debt. And they’ve going even deeper into their Ponzi schemes with this “re-hypothecation” thing, like we see at JP Morgan. When banks have no reserves to make loans, they steal people’s money out of their customers’ accounts (off the banks’ balance sheets) as “collateral” to make loans in a desperate attempt to extricate themselves from their own fraud. Strange? Bizarre? Corrupt? Absolutely!
This is the trend going forward. It is not fractional reserve banking. It is not even zero-reserve banking. It is negative reserve banking.
Google the words fraction+reserve+myth and start reading.
Danny writes, “With regards to government ‘helping,’ governments are a zero sum game. Irrespective of which side you are on, a gain or benefit to someone means a loss to someone else. If the rich are not paying, than guess who is?”
Wow. So Danny still believes that fiat money is limited, and tax revenue pays for government.
I give up.
By the way, I did NOT say it does not matter how big government is. I said that for most Libertarians and Tea Party types, “They only think government is bad if it helps anyone else in addition to themselves. If government helps them at the expense of others, then government is ‘good,’ no matter how ‘big’ it is.”
If you are going to try and argue against a point, then please try reading the point first. Just a suggestion.
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One more thing..
As you say, FRL is a Ponzi scheme because it is based on debt. Meaning, banks use their reserves to borrow increasing amounts of debt from the Fed. People than borrow the newly created debt and pay off as they receive income. But at a certain point the debt out runs incomes and debtors cannot pay back. This is the exponential growth curve that I mentioned on the other comment. When it reaches the apex, it flat lines and reverts to the mean.
It is also a Ponzi scheme because the Fed can create money out of thin air and charge interest on it. It’s essentially the same thing Madoff was doing. Take money from people and pay off interest as it came due. Until you no longer could.
This is happening at a systemic level in the US. The debt can no longer be paid back with current incomes, and it wont. Taking on more debt when you no longer can pay off existing debt is not going to help.
Note that incomes are also stagnant due to the debt itself. If you can only spend income to purchase goods and services, prices will reflect incomes across the board. However, when debt grows exponentially, incomes will remain stagnant while debt skyrockets taking prices higher with them. You may feel richer, but you are actually poorer as your income stays flat, but your debt load (due to higher prices) shoots higher.
So don’t complain about no jobs and stagnant incomes if you want more deficit spending. Blame it on yourselves.
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A Ponzi scheme is a program in which investors receive money from subsequent investors, ending when there are not enough new investors.
Bank lending differs from a Ponzi scheme, because it is lending, not investing. Loans must be repaid. There is no need for “subsequent investors.”
Though banks have certain reserve and capital requirements, these are not the dollars lent by the banks. They merely are safety requirements.
Even with no reserve and capital requirements, the banks could lend, which they do by crediting depositors’ accounts, which they later will debit. Although banks can become insolvent, this is not due to the lending process or to any “Ponzi scheme,” but rather to poor management.
That said, economics does offer something resembling Ponzi schemes: Spending by monetary non-sovereign governments. They tax citizens, then spend the same money back into the local economy.
If a monetarily non-sovereign government runs a trade deficit, its citizens eventually will run out of tax dollars, and the government will become insolvent. In America, this is prevented only by infusions from the Monetarily Sovereign U.S. government.
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Danny, rather than pull numbers out of your you know where, try some of these:
1.During the past 11 years we’ve rolled over $437 Trillions in debt. We’ve rolled over $38 Trillions thus far in Fiscal 2012 alone.
We’ll always be able to roll over our public debt if that’s what we choose to do because a debt instrument is the functional equivalent of a savings account, and frequently those who hold USD including foreign nations have the effective choice of keeping their USD in a reserve account or buying a debt instrument. They’d rather buy the debt instruments because they earn interest. However, low the rate of interest is, it’s better than the rate they’ll get if they keep their USD in their reserve account, unless the Fed decides to pay Interest-On-Reserves (IOR).
Can our national debt increase indefinitely? The short answer is: yes it can. The reason is that a Government like the United States with a fiat non-convertible currency, a floating exchange rate, and no debts in any other nation”s currency, has no solvency risk because it can always create money to pay its obligations. Its debt instruments therefore are nearly risk-free. They’re a safe harbor for investors who’d rather earn a return on the USD they hold, than content themselves with keeping it in a reserve account, that typically earns no interest.-Joe Firestone
2.Total government (state/local/federal)spending as a % of GDP (2011)=41%
3. US Government Spending as a % of GDP (2011)=24%
4. Some “money printing” fun facts for you Danny:
Here are some “money printing” fun facts to share with your friends, Danny.
Dollar Index on 9/19/2011: 77.14
Gold price on 9/19/2011: $1803 per ounce
Dollars “printed” in past year according to US Treasury: $65 TRILLION
Dollar Index today: 79.05
Gold price today: $1770 per ounce
Dollar is up.
Gold is down.
But don’t worry.Danny,..dollar debasement and inflation are
coming soon! -Mike Norman
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Danny’s entire fantasy world of Austrian Economics rests on the false premise that in an economy that is operating at less than full capacity, if the government deficit spends through direct purchases of output, or by distributing money to soldiers, the poor and elderly to purchase output, that output WILL NOT increase. This contradicts what is seen in the real world, where people will produce more if you offer them more money. It helps to remember that in the MV=PQ equation, all four variables are variables. Austrians lose their way believing that only 3 of the 4 variables (M, V & P) are variables. When the economy gets to full capacity, then you can worry about overall prices rising. We’re not there yet.
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Six,
Full capacity??? are you for fairness or not. Are you for equality of not…
My statement has nothing to do with what you MMTers call inflation. If inflation is a rise in prices, than a drought can cause higher prices by cutting supplies, can it not? If inflation is a phenomenon that tend to lead to higher prices, than inflation is an increase in the money supply… knowing this is what opened my mind to the truth.
My worry is theft, not naturally rising prices. When the government, with the help of the Fed, emits new debt and increases the money supply, it devalues existing money stock (this is the root cause of the phenomenon called inflation, nothing else). This is what I am worried about.
Output will not decrease? So why has our output stalled after 2000, yet debt has grown over 300%.. wouldn’t all this debt cause our economy to be humming? Not sure what prove you are talking about, but this should be prove enough. When the government collects taxes, it removes purchasing power from you and places it in their hands. When the government creates money out of thin air via the Fed, it removes purchasing power from you and places it in their hands. It’s the same thing, except that people get feisty about taxes while they are ok with a phenomenon called inflation. It’s worst than theft.
The funny thing is that I have gotten arguments from the same proponents of MMT saying the opposite, that we are at full capacity. But nevertheless, let’s say we are not, and I do agree.
Is the solution to pay people for doing nothing (that for sure will not grow your output, would it)? Or is it to leave capital with producers who can deploy it by hiring the ones not working and have them build things, produce food, houses, etc?
Thanks for the equation though, you should pick up a book from Irving Fisher (master Austrian), he’s got a few of those and can articulate extremely well.
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based on all the articles i read daily, i’m convinced that very advanced technology which would radically change our lives is available either at this very moment or within the very near future (like, within a few years or so), but it’s being held back b/c it would destroy the business model, namely eliminating the need for most jobs (labor), businesses and, therefore, money.
i think the 1% understandably do not want to end the reason for their existence, let alone deal with the radical changes in culture that would ensue, which could lead to total loss of their control over most of humanity.
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Very good post. Perhaps The Age of Abundance will help people understand also the concept of Monetary Sovereignity. Or pethaps first we need to grasp that money is no (longer) an object to progress before we get to progress…
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Actually austrians are a huge part of the problem as they seem to get way more press than is deserved either from predictive or solutions perspectives. They largely do not cut it. Mish is a bit better than most Austrians in that he got the inflation/deflation debate correct where most of them get it flat out wrong (hyperinflation ). But on the solutions side Mish is totally wrong unless he has changed his tune in the 3 years since I quit reading his JUNK. At that point Mish was basically about killing unions and gutting union pensions and how government is largely the problem yada yada ZZZZZZ tune out.
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gf,
Read your post again and tell me how this is suppose to help anyone…
What do you mean by “not cutting it”?
In terms of the Austrians getting it “wrong”, I invite you use the rule of 72 and tell me how long it takes prices to double at 3% per year. Is that 24 years? What about if by a slip of the hand we push it to 6% a year… 12 years?
You are mis-stating the Austrian position or the Austrians you’ve read about are explaining what has happened, not what will happen. Inflation has been extremely high as I point above.
Here is the deal. For every new unit of credit you emit, the less it purchases. We are not too far of the point where we run out of space to kick the can.
With regards to unions, I do NOT get it… I thought socialists were big proponents of fairness, equality… than how can you be for the bullying of the 60% for the benefit of the 36% (gov dole) and 3% (unions)? Is it fair that an average Chicagoan makes 32k a year with jack benefits while the teacher union is pushing 85k with paid healthcare, pension, etc? Is that fair? IF Mish is wrong, please explain how this is not extortion..
Instead of calling people names why can’t socialists/leftists articulate why unions, government spending are good for the 96%.
Unfortunately, Mish is pretty lenient on the government. The government is full of thugs and bullies.
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Rodger, please help me with something. This is not an idle question for me. On the contrary, it vexes me more than any other, because I do not have an answer. I’ve been meaning to ask you this for some time now.
You write, “The issuance of T-securities are no longer necessary and could be eliminated tomorrow.”
One question I have not yet found a satisfactory answer to is: “Why can’t the government simply write checks, so that the public can mentally get past this ‘national debt crisis’ nonsense, and understand that government spending = money creation?”
If I go on the Internet, I find that, “the government sells debt to finance its operations,” but this is like saying that the government relies on tax revenue.
As far as I know, this game started when the USA was still on the gold standard, and sold Liberty Bonds to help pay for the USA’s involvement in the First World War. After the war, the government sold more bonds to roll over the debt from the previous bonds. What I don’t understand is why this still continues today, long after the USA ended the gold standard. I’m not saying I disagree with it. I’m saying I don’t understand it. I know that by U.S. law (dating from the gold standard days) the government must sell T-securities whose aggregate value is roughly equivalent to the deficit. But why is this law still on the books? Is there any logical reason?
Some MMT-ers say that Treasury instruments are sold so that the Fed can control the money supply (specifically bank reserves) in order for the Fed to hit its target for the overnight (Fed funds) interest rate, thereby controlling inflation. I need to study that.
I just received two books by Randy Wray (plus your own book) via Amazon. Maybe my answers will be in there. Why sell Treasury instruments? Is there a reason that makes sense, or is the process political, like the silly “debt ceiling”? Could you please direct me to any of your past articles where you have discussed this matter?
Many thanks.
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I wish I could answer your question. T-securities serve no purpose relative to federal funding.
If all T-securities were liquidated tomorrow (which the federal government could do by crediting T-security accounts and debiting checking accounts), the government’s ability to spend would not change.
The federal debt limit also serves no purpose, yet it exists. The fraction, GDP/Debt, also serves no purpose, yet it is quoted often. Alan Greenspan serves no purpose, yet he too is quoted often.
The world is not a logical place.
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Mark,
T securities is how our government, and other governments around the world, fund themselves.
This is on the Fed website and our government also confirms this is true.
The money that the government spends comes from a variety of places. 1) It collects taxes (which is essentially a transfer of purchasing power to the government), 2) it borrows from private investors as well as other governments, and 3) it sells t securities to primary broker dealers (aka, the Fed). The banks also create money by borrowing from the Fed and lending to the private industry and consumers.
Options 1 and 2 are unlikely to result in inflation as the government is simply recycling purchasing power from the economy to the government. #3 however, is synonymous with creating money out of thin air. The sad state of affair is that the government has to pay interest for this new debt although it has been created by the stroke of a key. Note that the Fed collects the interest and after paying themselves a hefty salary, it returns the rest to the treasury. Also note that the government as well as banks can pick and chose who receives the newly created funds. For the most part, it is their rich buddies, unions (vote buying) and themselves who then use the funds to bid up asset prices and make themselves richer. It is extortion in it’s finest form. You think government deficits are for the poor? think again…
As per the Fed act of 1913, the Fed issues most of our money with the exception of a small subset of debt free money issued by the treasury. I do believe the government can pass a law and issue as much debt free money as it wants, but this has major repercussions. You do not want this, trust me. Based on the current track record, it’d probably take a week for the jackals to collapse the dollar.
As I mentioned on my previous post, the Fed has ZERO control over rates. It merely follows the market, it’s a mirage to make people think they are in control. But when the fed only owns a tiny piece of all the debt it has issued, how can it be in control? The answer is simple, it is not.
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As I could not directly respond to you above Danny, I went ahead and listed some COL/inflation figures here.
For Oct, 2012, from USDL Website:
(THEY INCLUDE food & energy prices)
The Consumer Price Index for All Urban Consumers (CPI-U) increased 2.2 percent over the last 12 months to an index level of
231.317 (1982-84=100). For the month, the index was unchanged prior to seasonal adjustment.
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 2.2 percent over the last 12 months
to an index level of 227.974 (1982-84=100). For the month, the index decreased 0.1 percent prior to seasonal adjustment.
The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) increased 1.9 percent over the last 12 months.
Mike Norman can ruffle some feathers, but generally his predictions and observations are pretty much right on. The Mike Norman Economics blog is certainly somewhere that would appreciate some alternative feedback from such a curious sort as yourself. Their house critic, one Bob Roddis, has grown tiring and way too predictable. Please, go there and try your best shot with Matt Franco, Roger Erickson or Tom
Hickey-good luck!
As I;’m certain you are aware of Danny, a little inflation is an economic stimulus, making folks :”buy today:” rather than putting off purchases until :”sometime in the future:”
One thing that kind of bugs me Danny, is why do you obsess over inflation? One guy who really knows his stuff on this topic is Cullen Roche and he covers it from a historical perspective thoroughly on his website :”Pragmatic Capitalism:”
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One other thing.
In terms of debt limit, perhaps Roger is right and it does serve no purpose.
However, be aware that the current money system is reliant on exponential growth of the debt. Now, go an do a little bit of Calculus homework and tell me what happens to all exponential equations. You want the answer?? There is a point they rich an apex and than collapse.
The ceiling is irrelevant as Roger says. But by it’s own definition, all exponential equations collapse. This is mathematical truth. Is this what we are waiting for?
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Money is not a real thing, so the numbers actually can continue to grow exponentially.
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Danny, you are totally mixed up. Look at what you write…
I asked: Why does the government use T-securities to “fund itself,” when the government could simply write checks?
You answer: “The government uses T-securities to fund itself. This is on the Fed website and our government also confirms this is true.”
Translation: The government does it because, well…ah…it just does.
Then Danny says that the federal government gets its money from taxes, T-securities sales, and borrowing from other governments. Wrong, wrong, and wrong. This is largely what Rodger’s blog is all about.
Danny writes, “I do believe the government can pass a law and issue as much debt free money as it wants, but this has major repercussions. You do not want this, trust me. Based on the current track record, it’d probably take a week for the jackals to collapse the dollar.”
Danny, the government already issues as much money as it wants, and most politicians want to issue less, in order to increase the gap between rich and poor, and to further empower Wall Street. By decreasing government spending, the politicians keep the public dependent on banks, private corporations, and Wall Street. Politicians do this for strictly political reasons. I presume that you agree with them, and you want to cut deficit spending, thereby worsening the depression.
Danny writes: “In terms of debt limit, perhaps Roger is right and it does serve no purpose.”
Danny, EVERYONE agrees that the debt limit serves no purpose, except to give the minority party in Congress some leverage to get what they want. Even the mainstream corporate media admits this. Many Treasury officials and OMB officials have long called for it to abolished. Tim Geithner says it must be abolished immediately.
Every fiscal year, Bernanke is forced to lobby Republicans to raise the debt ceiling. Bernanke knows that Republicans will vote to raise it, once Republicans get the cuts in social programs they want. But it’s still a headache for Bernanke, who must keep his bondholders happy (i.e. pay them their interest). In fact, if Republicans push their charade too far, there is a danger that the public might wake up and realize that the U.S. government does not need to sell bonds at all. The government could simply write checks. The “debt and deficit crisis” would be gone, along with Bernanke’s job.
Congress agrees on a budget. Then, in a separate process, Congress votes on whether to increase the debt ceiling to accommodate the budget that Congress just agreed on. Republicans vote ‘no’ until Democrats agree to cut social programs. A ‘no’ vote means the government will not pay interest on T-securities that have already been sold. Thus, Republicans force everyone to go back and start the budget process all over again. In FY 2012 (1 Oct 2011 to 30 Sep 2012) Republicans used a ‘no’ vote on the debt ceiling to get a $2 trillion reduction in federal spending over ten years, plus a $2 trillion increase in taxes on the middle and lower classes, for a deficit reduction of $4 trillion. This created the “fiscal cliff.” (Not all Congressmen went insane. 95 House Democrats and 66 Republicans voted against this madness.)
A number of Congressmen (almost always Democrats) have tried to get rid of the stupid debt ceiling, but Republicans always checkmate them, because it is the only way that Republicans get cuts in social programs. The Republicans succeed because the masses have been brainwashed to think the USA has a “debt and deficit crisis.” If it were not for this brainwashing, Americans would never agree to austerity. Americans would never agree to give Social Security to Wall Street gangsters.
On 14 Sep 2011, Rep. Jerrold Nadler [Democrat-NY] introduced H.R. 2931: Full Faith and Credit Act of 2011 to abolish the debt ceiling. Almost all Democrats support this bill, but it was referred to the House Ways and Means Committee, whose Republican chairman, Dave Camp (Michigan) refuses to let it move forward. Therefore H.R. 2391 will die when the 112th Congress ends on 3 Jan 2013. The Republicans win again.
At one time, the Democrats ACTUALLY SUCCEEDED in getting rid of the debt ceiling. Richard Gephardt had just arrived in Congress for the first time, and was dismayed at the madness of the debt ceiling. Speaker Tip O’Neill told him to work on other Congressmen to get rid of it. Gephardt did so, and succeeded, because Democrats controlled both houses. For the next 16 years we were mercifully spared the debt ceiling charade until Republicans took back control of Congress in 1995. Republican criminals like Newt Gingrich and Tom DeLay, along with the notorious John Boehner, developed their “Contract With America” to cut social programs. They re-introduced the second vote (on the debt ceiling).
Meanwhile Treasury Secretary Robert Rubin prevailed upon Bill Clinton to start cutting the deficit to the point where it reached almost zero. It was not actually a “surplus” as most people believe. There was still a deficit of about $55 billion, but it might as well have been a surplus. The only thing that kept the USA from plunging into a depression was the dot.com bubble, followed by the housing bubble and W. Bush’s spending on his wars. Now those bubbles are gone, and we are in a depression after all.
And because of Republicans like Boehner, we still have the debt ceiling madness.
THE QUESTION, as Rodger has pointed out again and again, is what Obama will do. Will Obama develop a moral conscience and a bit of courage, or will he let Republicans impose austerity in the middle of a depression? Obama talks as though he will cave in, but if he actually does it regarding the “fiscal cliff,” then Obama will go down as one of the worst betrayers in U.S. history. The ball is truly in Obama’s court.
Danny writes, “Be aware that the current money system is reliant on exponential growth of the debt. Now, go an do a little bit of calculus homework and tell me what happens to all exponential equations. You want the answer?? There is a point they rich an apex and than collapse.”
Solution: stop selling T-securities. Change “government debt” into “government money creation.”
I don’t expect you to understand that, since you still believe that U.S. government finances are the same as private household finances, that tax revenue pays for the government, and that the U.S. government relies on borrowing money from other nations.
You will not convince anyone here, and no one here will convince you.
Let me ask a sincere question: why do you visit Rodger’s blog?
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Just wanted to bring an issue to everyone’s attention..
The unemployment rate will remain high until the following occurs:
– The government stops deficit spending (increasing exponentially) which:
– Will stabilize the money supply
– Will drive down costs until consumers can afford prices
– The economy will plateau and employers will begin to hire employees for lower wages (please note that lower wages are not bad if you can buy more with it) as well as lower input prices.
– This is how the economy shares the wealth. It lowers labor wages, but hires more people, essentially sharing the wealth.
– Labor costs and input prices do go up in a natural economy, but salaries are 40 years behind debt growth. Real wages have not gone up since 1970s. For purchasing power to match that of 1970, either wages would have to go up as much as the debt or the debt will have to collapse to match 1970s salaries. Now, you tell me how likely is it that employers will increase salaries by over 4000%. And this is not because they are evil, their input costs wont allow them either. Government deficits have squeezed both consumers and producers. We are starved and need the government to back off tomorrow.
If the government refuses to do the above, the following will occur:
– Prices will remain high, including wages and input prices
– Prices will remain high for consumers
– Since input prices and labor remain high, employers cannot higher more. They can hire more if labor costs and input costs were lower.
– The banksters, the rich, the unions, the politicians and the well connected will remain filthy rich and will continue to benefit, while people like me continue to scream.
– This will last until we blow our faces off, sort of like Japan will shortly.
These are the 2 options. Either we stop the BS or we allow the economy to normalize. Please note that either MMTers fall under the benefited few or they have no clue what they are preaching for. Let’s stop this nonsense and get back to working again. America is the land of the hard workers, not the land of the lazies.
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