–A 3-sentence parable that explains federal financing

Twitter: @rodgermitchell; Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

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 ultimately 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.


Sometimes a parable can make an idea clearer.

Recently, I read a Bloomberg View article by Jonathan Bernstein, titled: Good Riddance to Taxpayer-Subsidized Conventions

According to Bloomberg:

Bernstein is a Bloomberg View columnist covering U.S. politics. A political scientist, he previously wrote “A Plain Blog About Politics.”

He is co-editor of “The Making of the Presidential Candidates 2012.” Bernstein has also written for the Washington Post, Salon, the American Prospect, Washington Monthly and the New Republic.

After receiving his doctorate at the University of California at Berkeley, he taught at the University of Texas at San Antonio and DePauw University before he began blogging.

The opening paragraph of the article stuck in my mind:

Congress actually got something done this week: It voted to end public financing of the quadrennial national party conventions. The money — $126 million over 10 years — will be shifted to pediatric research at the National Institutes of Health. That’s a wise move.

I don’t know whether it’s sad or frightening that a columnist covering politics, a “political scientist” and a teacher of our young people, could be so clueless about the realities of federal finance and Monetary Sovereignty.

I commented on his article:

The federal government became Monetarily Sovereign on August 15, 1971. Since then, It has had the unlimited ability to create its sovereign currency, the dollar. (See: I just thought you should know: Lunch really can be free)

The federal government now neither needs nor uses tax dollars. In fact, all tax dollars disappear from the money supply, upon receipt. They no longer exist. They are destroyed.

If all federal taxes fell to $0, this would not affect by even one penny, the federal government’s ability to spend. Federal taxes are a relic of the pre-1971 days.

The American public has been brainwashed into believing federal finances are like personal finances. But people (and states, counties, cities, businesses and even euro nations) are monetarily NON-sovereign. We do not have the unlimited ability to create our sovereign currency for one simple reason: We do not have a sovereign currency.

So when the author says the money “. . . will be shifted to pediatric research . . . “ he is wrong, or at least the implication is wrong. The federal government has the unlimited ability to spend dollars on pediatric research or any other initiative.

The government doesn’t “shift” dollars anywhere. It merely decides how much it wishes to spend on something.

I then finished with this short parable:

Visualize you and a friend are sitting on a boat in the middle of one of the world’s largest fresh-water lakes, Lake Michigan.

You both are thirsty.

Would it be correct to say that if you drink less, there will be more available for your friend to drink?

That is the situation with federal financing.

Rodger Malcolm Mitchell
Monetary Sovereignty

Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Federally funded Medicare — parts A, B & D plus long term nursing care — for everyone (Click here)
3. Provide an Economic Bonus to every man, woman and child in America, and/or every state a per capita Economic Bonus. (Click here) Or institute a reverse income tax.
4. Free education (including post-grad) for everyone. Click here
5. Salary for attending school (Click here)
6. Eliminate corporate taxes (Click here)
7. Increase the standard income tax deduction annually
8. Increase federal spending on the myriad initiatives that benefit America’s 99% (Click here)
9. Federal ownership of all banks (Click here)


10 Steps to Economic Misery: (Click here:)
1. Maintain or increase the FICA tax..
2. Spread the myth Social Security, Medicare and the U.S. government are insolvent.
3. Cut federal employment in the military, post office, other federal agencies.
4. Broaden the income tax base so more lower income people will pay.
5. Cut financial assistance to the states.
6. Spread the myth federal taxes pay for federal spending.
7. Allow banks to trade for their own accounts; save them when their investments go sour.
8. Never prosecute any banker for criminal activity.
9. Nominate arch conservatives to the Supreme Court.
10. Reduce the federal deficit and debt

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:
1. Federal Deficits – Net Imports = Net Private Savings
2. Gross Domestic Product = Federal Spending + Private Investment and Consumption – Net Imports

Monetary Sovereignty Monetary Sovereignty

As the federal deficit growth lines drop, we approach recession, which will be cured only when the lines rise. Federal deficit growth is absolutely, positively necessary for economic growth. Period.


19 thoughts on “–A 3-sentence parable that explains federal financing

  1. Another thing that frustrates me is when people talk about how much something costs a government. For example, the headline of this article is “Long Search for Missing Plane Could Cost Hundreds of Millions of Dollars.”


    Let’s assume that this is the United States’ portion of the cost. What does that even mean? It means that additional labor will be performed that otherwise would not be. And that labor will require payment of hundreds of millions of dollars. For a monetarily sovereign government, it does not “cost” anything. And for a country with idle workers and with businesses that want more demand, the income from this labor might turn into that demand.


    1. @ Ian Winograd: Exactly.

      Likewise the words “save,” “profit,” and “return-on-investment” are meaningless for the Monetarily Sovereign US government.

      As RMM has often noted, all money (ALL of it) is in the private sector. The US government has no money at all. So how can the US government have a “cost”? How can the government enjoy a “saving”? Such terms are inapplicable.

      Rodger notes that the USA would be a different nation if a few words in common usage were changed to reflect reality. For example, the “national debt” would become “Fed deposits.” The “national debt clock” would become the “national asset tally.”

      “Deficit spending” would become “federal money creation.”

      “Government savings,” “government profits,” “deficit reduction,” “federal tax revenues,” and “paying back the government” would all become “money depletion.”

      The USA would also be different if we kept the same words, but instead used them correctly. For example, the “debt-to-GDP ratio” is meaningless when “debt” means the so-called “national debt.” However the ratio is crucial when “debt” means private debt.

      The 1% continually seek to increase the private debt-to-GDP ratio. This is one of the purposes for austerity. Reductions in government spending force people to beg for high-interest loans from bankers, from “payday loan” outfits, and so on.

      While the rich seek to increase the PRIVATE-debt-to-GDP ratio (and thus the slavery of the masses) the rich and their toadies distract the masses by focusing only on the meaningless PUBLIC-debt-to-GDP ratio.

      What about “federal government waste”? Can there be such a thing? The answer depends on our definition of “waste.”

      If “waste” means useless spending, then there can be no waste, since no government creation of money is ever useless. Somebody always uses it.

      However, if “waste” means that government dollars go only to the 1%, who do not spend that money into the real economy, but instead use it only to gamble in the financial economy, then from the viewpoint of the 99% it is a waste. It increases the gap between the rich and the rest.

      When a media article mentions “government waste,” we must ask, “Where did the money go?” If it entered the real economy, than it was not a waste. For example, even though the Solyndra company was riddled with corruption, and went bankrupt in 2011, the government money spent on Solyndra was not wasted.

      Nonetheless, when the average person speaks of “government waste,” he points to companies like Solyndra. He demands a reduction in government “waste” (i.e. government spending), and thereby supports austerity for the 99%.

      The REAL waste of government money is bailouts of Wall Street speculators who bring no benefit to society at all. The gamblers don’t even create jobs on Wall Street any more.

      Any government spending that enhances the financial economy is extremely wasteful for the 99% and the real economy. Financial capitalism is a deadly parasite on industrial capitalism.


    1. That article brings up one of the dilemmas of right-wing people who reject the facts of Monetary Sovereignty. They don’t want to raise the minimum wage, but neither do they want to eliminate the FICA tax, since doing so would weaken the Big Lie.

      Therefore, faced with a dilemma, the 1% will eventually agree to a slight increase in the minimum wage.

      EXPLANATION: Since the Big Lie is the source of the One Percent’s power, the Big Lie must be maintained at all costs, even if the rich must give up something to keep the Big Lie going. For example, rich people allow Social Security and Medicare to continue (for now, anyway), since pundits, politicians, and professors use both programs to maintain the Big Lie. Thus the wealth gap continues to widen.

      Now we have one of the rich (Bill Gates) suggesting that tax codes be revised. This causes other rich people to think, “He threatens the Big Lie. It looks like we’ll have to give the peasants a slightly higher minimum wage after all.”

      This is why the rich always win. They are flexible. The rich can adapt. They will make any concession, no matter how huge, so long as the Big Lie keeps going, since it is not really a concession at all. Even if we raise the minimum wage to $20 per hour, we will still have an ever-widening wealth gap, because of the Big Lie.


      Regarding automation and the elimination of jobs, the problem is not automation and technology. The problem is us; namely the desire to widen the gap between ourselves and everyone we deem “inferior” to us.

      Suppose that automation and technology eliminated 75% of all jobs on earth. We could still go to the stars and colonize other planets. But no, we are too busy hating each other and being greedy. (Even if you are poor, you are greedy if you think yourself “better” than others.) We are too busy working to widen the gap between ourselves and our “inferiors.” Rich and powerful people are too busy gambling in the casino known as the “markets.”

      Jobs are not eliminated by automation and technology.

      Jobs are eliminated by rich people, who use automation and technology to widen the gap between themselves and their “inferiors.”

      However economists usually ignore this human factor in their bullshit analyses.

      For example, consider that article in the Business Insider. A sentence reads: “Gates believes that the tax codes are going to need to change to encourage companies to hire employees…”

      This glosses over the human factor. Tax codes do not “need to change,” since tax codes are not human. They are abstractions. It is WE who need to change the codes.

      You may consider this to be a trivial point of rhetoric, but rhetoric is the source of power in society. Rhetoric gives us the Big Lie.

      I see this constantly in the media. Illogical sentences like “tax codes need to change” create the subconscious impression that tax codes are conscious entities. Yet we know they are not conscious entities. Hence we are trapped in a cognitive limbo, and therefore we submit to more austerity. Always more.

      Put more simply, I refer everyone to Mitchell’s Law #7: “Everything in economics devolves to motive.”

      That is, economics must take into account the human factors of greed, hate, and selfishness, or else it is not true economics. It is ideology dressed up as “science.”

      The MMT people are guilty of this nonsense when they refer to austerity being an “innnocent mistake.”

      Their ideology?

      “I don’t deserve to be fired from my job at the university. By ignoring the human factor, and violating Mitchell’s Law #7, I support the Big Lie.”


      1. “Suppose that automation and technology eliminated 75% of all jobs on earth. We could still go to the stars and colonize other planets”

        I like the quoted statement. This is part of the larger argument that human demand changes over time. Technology eliminates jobs that correspond to today’s demands, but nobody knows what demands will be in the future.


  2. — Off topic–


    Rodger, I was impressed with your explanation of why Ukraine has a foreign debt, despite the Ukrainian government having Monetary Sovereignty.

    Along these lines, it seems to me that any nation’s power depends on four factors that are pertinent whether or not a nation has MS. If a nation is weak in one of the four, then the nation had better be strong in the other factors, or its government will have a foreign debt.

    The factors are…

    1. Trade balance
    2. Government stability
    3. Global acceptance of the nation’s currency
    4. Material and technological self-sufficiency

    To repeat, if a nation is weak in one of the four, then it had better be strong in the other factors, or its government will have a foreign debt.

    For example, the USA is the world’s weakest nation in terms of trade balance (#1), since the USA has the world’s biggest trade deficit. However the USA is very strong in the other three categories. Therefore the US government has no foreign debt. (Chinese assets on deposit at the Fed are not “debts” in the usual sense.)

    If a nation is weak in two of the factors, then the nation must be extremely strong in the other two, or it will have foreign debt.

    If a nation is weak in three of the factors (any three), then it will have a foreign debt, no matter how strong the nation is in the remaining factor.

    Ukraine is weak in all four factors. Therefore Ukraine has a foreign debt, despite having MS.

    Germany is strong in all four factors. Therefore Germany has no foreign debt, despite not having MS. Germany has a whopping trade surplus. Germany has a stable government. Germany has a widely used currency (the euro). And Germany has great technological self-sufficiency (although Germany is very weak in raw materials).

    This is MS on a global macroeconomic level. Do you agree with my analysis?

    (Since I live in the USA, most of my comments focus not on the globe, but on the USA and the Big Lie.)


    1. All nations have a foreign debt, but you mean Net Imports, I assume.

      The U.S. could end all its so-called “debt,” foreign or otherwise, in one day. Merely transfer all the dollars in T-security accounts to the holders’ checking accounts, then stop issuing T-securities.

      Unlike personal debt, federal “debt” does not supply the federal government with spending money. It creates its spending money ad hoc, by paying bills.

      There are fundamental differences between large, powerful nations vs small, weak nations. The currency of small, weak nations is not readily accepted internationally.


      1. Thanks Rodger. I bounced that comment off you because I knew you would catch any flubs.

        Clarification was needed.

        By “foreign debt” I meant to say government debt that is …

        [1] Not denominated in the government’s own currency. As you say, the USA has “foreign debt” in the form of accounts at the Fed. However this is trivial, since the debt is denominated in dollars, which are infinite.

        [2] Necessary, and not gratuitous. The US government does not have to sell T-securities, since the USA is strong in three of the categories above. However a country like Ukraine is forced to sell T-securities and to borrow money in a foreign currency, since Ukraine is weak in the four categories above.

        That said, I believe my analysis explains why some government have MS, but nonetheless have “foreign debt” as I have defined the debt just now.


    1. All T-bonds are deposits at the Federal Reserve Bank. Russia may be trying to hide the ownership of these deposits, so their accounts can’t be frozen by the U.S.

      This is meaningless for the U.S. economy, but may be meaningful in case of a new phase in the cold war.


  3. Dear Rodger,
    You said you had been sending letters/emails to lawmakers and public officials to try to make them understand MS. Have you tried sending one to Robert Reich or Elizabeth Warren? It’s so frustrating that many public figures on the progressive side are still unaware of the true nature of federal government’s finances. All too often they would concede that the federal gov’t has debt and deficit problem or that we need to raise enough tax money to sustain SS and Medicare such that the debate against the austerians doesn’t get anywhere.

    Maybe we could get some traction if at least one or two public persona could get a healthy handle on the concept of MS/MMT. Maybe Warren Mosler should give it another try for congress this time instead of going for the Senate. Or how about voting for Rodger Malcolm Mitchell as representative for the 3rd district of Illinois?


    1. Do this: Place ads in newspapers around the country with the following announcement:


      1. I will give $10,000.00 CASH to the first person who can prove that federal income taxes (including FICA) are used by the federal government to support its operations and fund its spending on Social Security and Medicare programs.

      2. I will give $10,000.00 CASH to the first person who can prove that Social Security, Medicare and the federal government are insolvent.

      3. I will give $10,000.00 CASH to the first person who can prove that reducing federal spending stimulates the economy.

      4. I will give $10,000.00 CASH to the first person who can prove that excessive spending by the federal government solely causes hyperinflation.

      5. I will give $10,000.00 CASH to the first person who can prove that the federal government needs to issue or buy treasury bonds in order to fund itself.


      Do you think people would read this and think this is easy money?

      For fun, try doing this in your local paper if you live in a small town – I had thought about actually doing this. It should make for some interesting water-cooler conversations though.


      1. It will help raise consciousness I guess, but it might just end up trivializing the issue of federal finances. If James Galbraith’s 5 year old daughter could understand the concept of modern sovereign money, common folks will have no trouble understanding it as well.

        It’s the policy makers themselves in the legislative and executive branch that need to be straightened out. Some of them could very well have been aware of the concept but chose to ignore it for political and ideological reasons.


        1. The 5 year old has a better chance of understanding it, being unencumbered by “knowledge” from other sources.


  4. The U.S. government has the unlimited ability to create the dollars that pay its bills. Therefore, taxes do not fund spending.

    When the federal government receives tax dollars, they no longer are part of the money supply. In effect, they are destroyed

    Though the government maintains accounting records of what it received, the government creates new dollars, ad hoc, every time it pays a bill.

    Note that this is not the case for state and local government taxes. These tax dollars remain in the money supply. They are deposited in banks, and withdrawn when bills are paid.

    That is one of the differences between Monetary Sovereignty and monetary non-sovereignty.


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