●The more federal 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.
●The penalty for ignorance is slavery.
●Everything in economics devolves to motive.
We’ve discussed this before, but since the problem continues to exist, the discussion must continue.
The U.S. federal government is Monetarily Sovereign. The U.S. dollar arbitrarily was created by federal law, and the government has the legal right to do anything it wishes with its arbitrary creation.
In past years, the government had decided to link the dollar to gold. President Nixon, speaking for the government, simply unlinked it. Done.
The U.S. government has the power to pay any invoice denominated in dollars. If you were to send a $999 trillion invoice to the federal government, the Treasury could pay it in an instant. No taxes; no borrowing; no problem. The government is sovereign over its own creation.
Want to pay off China? Again, no problem. Simply debit China’s T-security account at the Federal Reserve Bank and credit China’s checking account, also at the FRB. Easy. No new money needed.
Oh, are you worried about inflation (despite today’s rampant unemployment and a strong deflationary tendency)? Our Monetarily Sovereign government has all the curative tools it needs.
Inflation is a decrease in the value of a currency relative to the value of goods and services. The value of a dollar is based on supply and demand. To cure inflation, the government can reduce the supply (the debt hawk solution, which causes recessions and depressions) or increase the demand.
The demand for the dollar is based on risk (i.e. inflation) and reward. The reward for owning the dollar is interest. So, to cure inflation, the government increases interest rates, the very solution the Fed successfully has used for many years.
The historical proof of the Fed’s success: Inflation has not been caused by federal deficit spending:
See the lack of correlation between federal deficit spending (as shown by annual debt changes) and inflation. That is just one of many facts the debt hawks refuse to acknowledge.
The U.S. dollar is an arbitrary, legal creation of the U.S. government. The government can create, destroy, inflate or deflate dollars — at will. If U.S. laws need to be changed, the government changes those laws, also arbitrarily.
So the lie that somehow the government can run short of the dollars it legally creates, or have difficulty paying its debts, or be in any sort of financial stress, is ludicrous. Dollars are what the government wishes them to be, both in quantity and in value.
It’s our government’s dollar, and our government can do whatever it damn well feels like doing. Our government can make the dollar strong or make it weak, and make as many or as few as wanted, whenever wanted. It’s our government’s dollar.
The debt hawks can’t bring themselves to understand this. They think the dollar somehow is separate from the U.S. government.
For the silly debt hawks, the evidence of Greece isn’t enough to prove austerity is an economic disaster. Nor is the evidence of Italy. Nor of Ireland. Nor of Portugal. Nor of the entire eurozone. Nor of fact and logic.
The Petersons, Kochs et al pretend the U.S. is not sovereign over the dollar. They want the gap between the rich and the rest to widen, and lying about the dollar is their plan.
They brainwash the public into believing our government can’t control its own creations. It’s like saying the federal government can’t control the design of the U.S. flag or the notes to the Star Spangled Banner.
And then there are those who use platitudes to substitute for facts, so they say, “There’s no such thing as a free lunch” and “Neither a borrower nor a lender, be,” and other brilliant reasoning. And, the fact that by definition, austerity (aka deficit/debt reduction) removes money from an economy, doesn’t seem to give pause.
Let’s try simple algebra. Gross Domestic Product is the most commonly used measure of the economy. GDP is composed of four spending measures, plus net imports:
GDP = Personal Spending and Investment + Government Spending and Investment – Net Imports.
Look at the following graph:
The orange bar demonstrates the total of those four spending measures and imports. The purple bar is GDP. They are identical, of course.
What happens to the orange bar if we remove government Spending and investment? Look at following graph:
The difference between the orange bar and the purple bar represents what is lost by eliminating federal spending.
But even that doesn’t tell the whole story. What happens to Personal Consumption and Personal Investment if federal spending merely is reduced and/or taxes increased — i.e., what does austerity do to people’s finances?
Think of what will happen to Personal Spending and Investment if Social Security is reduced. If Medicare is reduced. If Medicaid is reduced. If the myriad aids to poverty, R&D and aids to education are reduced.
What happens to Personal Spending and Investment if federal employment is reduced? Unemployment insurance reduced? And what do FICA taxes do to Personal Spending and Investment? Any numrical answer would be speculative, but let’s see what happens if we reduce spending by a meagre 10%
That modest 10% spending reduction knocks more than $1 trillion dollars from GDP, an economic disaster.
Bottom line: Reductions in federal spending reduce Gross Domestic Product, partly because federal spending itself is a major factor in the GDP formula, and partly because federal spending cuts reduce the other major factor, private spending.
The U.S. dollar, the American flag and the national anthem are creations of the federal government. They exist and have value only because the government says so. The government can make any changes in its creations it wishes.
The U.S. government cannot run short of dollars, nor can it run short of stars for the flag, nor can it run short of musical notes for the anthem. China et al cannot force us into bankruptcy any more than they could change the design of our flag or alter the notes of our national anthem.
There is no pseudo-logic, no lie, no slogan that can change these simple facts. Those who claim otherwise are ignorant or liars.
Rodger Malcolm Mitchell
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