–GDP formula: Why China can’t change the design of the U.S. flag

Mitchell’s laws:
●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:

monetary sovereignty

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:

Monetary Sovereignty

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:

Monetary Sovereignty

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%

Monetary Sovereignty

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
Monetary Sovereignty


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


9 thoughts on “–GDP formula: Why China can’t change the design of the U.S. flag

  1. Rodger you say there is a lack of correlation between inflation and federal deficit spending. I think that’s a yes-and-no type situation. There is no demonstrable correlation if we define inflation as demand for dollars. But if we define inflation by prices (e.g. the CPI) then I think there is a loose correlation. I suggest that deficit spending moderates prices by facilitating upgrades, modernization, and competition. This is the opposite of what debt hawks claim. They say that deficit spending causes runaway inflation, and that austerity brings down prices. I say they are liars, and they know it.

    The FRED charts you provided show that the CPI roughly tends to fall as deficit spending increases. The correlation is loose, but the trend is consistent, with one or two rare exceptions.

    This makes intuitive sense. Depressions (always caused by austerity) make people poor, but they do not make prices fall. People buy less, but prices remain high. Reason: when demand falls, prices must remain high for there to be any profit. As a producer, I can cut my prices, but it will not increase my sales or profits, since no one has any money in the first place. In the real world, amid the current depression today, prices have not come down for food, fuel, energy, cars, and so on.

    Contrast this with periods of deficit spending, when the economy is humming, business is strong, and unemployment is low. Now I can cut prices and make a profit by dint of sheer volume. And because I have a stable customer base, I can afford to upgrade, modernize, and finds ways to undercut my competitors. This brings down prices.

    So, once again, what debt hawks claim is the exact opposite of reality. They say that recessions bring down prices, but in reality, recessions keep prices high. Only the rich can afford to buy things.

    Thus, the true purpose of austerity and engineered depressions has nothing to do with prices or inflation. The purpose is simply to shrink the middle class, and thereby widen the wealth gap.


    1. A “corporation” can be public, private or a combination. The Fed is a combination. Wikipedia provides the following explanation and list:

      “The federal government chartered and owned corporations are a separate set of corporations chartered and owned by the federal government, which operate to provide public services, but unlike the federal agencies (Environmental Protection Agency, Bureau of Indian Affairs), or the federal independent commissions (e.g., the Federal Communications Commission, the Nuclear Regulatory Commission, etc.), they have a separate legal personality from the federal government, providing the highest level of political independence.

      They sometimes receive federal budgetary appropriations, but some also have independent sources of revenue. These include:”

      Commodity Credit Corporation
      Corporation for National and Community Service (Americorps)
      Corporation for Public Broadcasting
      Export-Import Bank of the United States
      Federal Agricultural Mortgage Corporation
      Farm Credit Banks
      Federal Crop Insurance Corporation
      Federal Deposit Insurance Corporation
      Federal Financing Bank
      Federal Home Loan Banks
      Federal Prison Industries
      The Financing Corporation
      Government National Mortgage Association
      Legal Services Corporation
      National Consumer Cooperative Bank
      National Fish and Wildlife Foundation
      Neighborhood Reinvestment Corporation
      Millennium Challenge Corporation
      National Corporation for Housing Partnerships (NCHP)
      National Credit Union Administration Central Liquidity Facility
      National Endowment for Democracy
      National Park Foundation
      National Railroad Passenger Corporation (Amtrak)
      Overseas Private Investment Corporation
      Panama Canal Commission
      Pennsylvania Avenue Development Corporation
      Pension Benefit Guaranty Corporation
      St. Lawrence Seaway Development Corporation
      Securities Investor Protection Corporation
      Tennessee Valley Authority


  2. The definition of inflation is flawed. It’s like saying the cause of my headache is a pain in my head…..ahhh… hello? Why… why is the currency evaluations?

    What is demand and supply Mr Mitchell? Does it apply to the supply of dollar too? Or is it another Humpty?

    Was not you that mentioned that inflation is related to energy because energy is limited relative to demand?

    I see, inflation only applies to whatever we want it to mean.

    Could it be that inflation is not a rise in prices, but a rise in the amount of money and currency in the system? I have no doubt that everyone on the board knows it, but it’s to hard to face the reality that nothing is free, that any money printed is fraud, theft of purchasing power. And that my friends is against the laws of the lord, and indefensible for the government to not only allow it, but take part in it?


    1. Flash,

      Maybe you should flesh out your thoughts and write a book. You could call it “The Inebriated Half-wit’s Guide to Austrian Economics!”. You also might look into getting an editor. Cheers!


    2. Flash, you are right that “inflation” originally mean an increase in the quantity of money. But the modern meaning is price inflation. Why care about what word is used? And why on earth should anybody care about money-inflation, if it is not related to price-inflation in the naive way you think must be true?

      What you think is a hard to face reality is simply not true in modern economies except in very rare and unusual circumstances. Could you at least grant that there is nothing immoral, no fraud, no theft of purchasing power if, as we contend is usual, government printing money for sensible purposes, as Rodger proposes, will not cause price-inflation?


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