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, and the motive is the gap.
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Among the groups of people who cannot be taught, there are those who know the facts but do not want to acknowledge the facts
That is why it is impossible to teach Monetary Sovereignty to mainstream economists, the media and politicians. They know the facts but have been paid not to acknowledge the facts.
So, we have been left with trying to educate the public, the only people in America who seemingly don’t know the facts. Or do they?
How do we teach people that the government never can run short of money, the federal debt is meaningless and that the federal deficit is necessary for economic growth? Perhaps an new analogy?
Until recently, I’ve been a shareholder in Google. A couple weeks ago, Google had a stock split. Those who owned Google stock received one additional share for every share they owned. At the press of a computer key, Google doubled the number of Google shares in the world.
And that gave me a thought.
Have you ever bought one or more shares of stock? If so, what does one share look like? What do 100 shares look like? How much do they weigh? How do they feel? How do they smell and taste?
Actually, you never have seen a share of stock. No, it doesn’t look like this:
This is just a certificate saying you own a share of stock. This piece of paper was pre-printed by the thousands. Until it was issued, that is, until a secretary typed in a name a number to show how many shares it represented, it had no value.
Very few shareholders possess even one of these certificates. I personally have been trading stocks for more than 60 years and so far as I recall, I have seen but a half dozen of these certificates.
If you’ve been reading about High Frequency Trading (HFT) lately, you know that computers make millions of trades each second, and no one ever sees a stock certificate.
The shares themselves are just numbers in accounting balance sheets. They have no physical existence. No one can see, hear, taste, feel or smell shares of stock.
Google, the issuer of the above pictured certificate, never can run short of shares. It is sovereign over Google shares. It can create as many shares as it wishes. If Google wished, it could offer a 10-for-one stock split or a million-for-one.
Having the unlimited ability to create Google shares, Google never needs to borrow shares, and if it issues more Google shares than it receives (i.e runs a deficit in Google shares), that’s just normal. That stock split I mentioned was Google running a deficit in its shares.
Not only do you know all the above, but virtually everyone knows all the above. So, I find it surprising that we find it difficult to think of money as an invisible concept rather than as a physical thing.
Google is sovereign over Google stock; Google can create infinite amounts at will, never needs to borrow any, and can run a “deficit” (issues more than it takes in) in Google stock forever. If Google has a debt denominated in Google stock (i.e. owes stock), there is no burden on Google. It could issue a trillion shares tomorrow, at the touch of a computer key.
So too does the federal government have the ability to create infinite amounts of dollars, just as Google can issue infinite numbers of shares. The federal government never needs to borrow dollars, and can run deficits in dollars forever.
Google is “God” of Google stock; the federal government is “God” of the dollar.
And just as a stock certificate is not a share of stock, neither is a dollar bill a dollar.
THIS ISN’T A DOLLAR. IT’S A CERTIFICATE SHOWING THE BEARER OWNS A DOLLAR
In summary, America understands the basic concepts of Monetary Sovereignty — that the government has the unlimited ability to create dollars, so never needs to borrow dollars, never relies upon or uses taxes, and easily can pay any debts denominated in dollars.
All the concerns about federal deficits and debts are as silly as worrying about whether Google will run short of shares of its own stock.
Americans know this. They just don’t know they know it.
Rodger Malcolm Mitchell
Monetary Sovereignty
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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
THE RECESSION CLOCK
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.
#MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 
All quite true, but everyone also knows what happened to the value of a share of Google when the number of shares was doubled. And they know what has happened to the value of the dollar over time, as more of them have been issued.
Everyone knows that the US can issue as many dollars as it wants, and most Americans are very afraid of that.
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Yes but if we didn’t borrow and tax that money we would end up printing less than we are now. Right?
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You are partly right.
Borrowing is irrelevant, partly because it really isn’t borrowing — at least not in the sense most people think.
However, if federal taxes were reduced, less federal spending would be necessary to grow the economy. In short, more deficit spending is necessary, and that is achieved by more spending, less taxing or a combination of the two.
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OK. Here’s another opportunity for me to understand things better. I pretty much understand the central concepts of monetary sovereignty. They make sense to me. I even ALMOST grok the point that borrowing isn’t really borrowing. BUT…even if borrowing IS irrelevant (we’re talking Federal borrowing here), most people don’t understand or believe that, and the Austerity folk don’t WANT them to understand or believe that. Also, even though it’s irrelevant, it still produces income for T-security holders without any attendant productivity.
So here’s my question. Given the above, why continue borrowing (selling T-securities)? Why not have the Treasury create the dollars and spend them directly into the economy, al la HR2990?
This would make monetary sovereignty VERY clear to the average person.
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just to piggyback, federal taxes also should be understood as creating space for the government to spend, which in turn controls inflation (of course t-securities are another means). the inflation question invariably comes up first when one tries to explain ms/mmt…
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Borrowing is irrelevant, because Treasury securities are essentially perfect substitutes for cash.
If we lowered taxes and maintained spending, the deficit would grow, which I think you would call “printing more” not “printing less”. However, a cut in taxes would also cause an increase in GDP growth, which would, through automatic stabilizers, affect both spending and tax receipts in a way that would reduce the deficit, partially offsetting the immediate reduction in revenues, and over time conceivably resulting in lower deficits than would have been the case. That is the “supply side” argument. The experience of the US in the 1960’s and 1980’s are strong evidence for it, but one can never know what “would have been the case”.
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That is such a crap excuse and logic to live by.
“should we increase private sector income by increasing the deficit by 10%?”
“No, because when google doubled the number of shares the price declined”
So what? What does one have to do with the other? Sure, you can issue too many dollars and have problematic inflation.
When has that ever happened in the USA?
How big a deficit will cause problematic inflation?
Why does the size of the national “debt” a running tally of deficits have no relationship to inflation?
Why do you think if we ever issued too many dollars that resulted in inflation we couldn’t reverse that trend very easily by unmaking those dollars?
Whats wrong with inflation anyway as long as wages are increasing faster real standards of living still go up, so whats so important about nominal prices?
Why does it matter whether milk costs $10 or $100 if its still only 1% of your income?
How bad must living standards be in japan when bread costs 1000 yen? Oh thats right, nominal prices are completely irrelevant and Japan has one of the highest living standards in the entire world.
John, you can’t possibly be serious.
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Auburn, as far as I know, you’re the first to say that doubling the number of dollars in circulation (i.e., a deficit this year on the order of $16T) would not affect prices.
Maybe that’s not what you meant. If not, what would be the effect on prices if the dollars were doubled? What is the threshold at which the effect takes place? Would a 20% increase have no effect, but 22% would cause a 2.5% increase in prices? If not linear, starting at stable prices when money increases exactly as fast as production – just like stock splits and dividends – then what is the relationship?
Sure, the deficit is too small for optimum management of the economy, but not by $16T. OTOH, A 10% increase in the size of the deficit is a rounding error. The deficit is projected to go down more than 30% this year, with no tax hikes or spending cuts. Offsetting that would be a good start, but still not enough.
The last time? I’ve seen some MMT scholars mention the 1960’s.
But, Auburn, the value of the dollars in your savings account have been cut in half since 1988. Why? Not by excessive deficits, I agree, but if not then what? Just saying that inflation is not caused by creating more dollars is not enough. You must offer another explanation for reality, or the one everyone “knows” will remain the accepted explanation. Rodger says oil, and that perhaps explains the 1970’s inflation, but not the 1980’s inflation (oil prices went down in the 1980’s while everything else went up).
If you have an income that increases along with prices, good for you. I don’t. Not many do. In my last job, none of my co-workers had seen a raise in over 4 years, while prices went up every year and benefits went down.
Inflation transfers real wealth from savers to debtors. That’s great if you have no savings and a mortgage that is a few times your annual income, but in macro terms the government is the debtor and the private sector is the creditor. Inflation transfers wealth out of the private sector. Is that your aim?
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“Auburn, as far as I know, you’re the first to say that doubling the number of dollars in circulation (i.e., a deficit this year on the order of $16T) would not affect prices.”
I never said that. You cant provide the quote. I said that mere notion of doubling the supply of money is complete nonsense. You and many others have implied that doubling the amount of Google shares has halved their price. Inferring that if we doubled the money supply ($60T) or at least Govt money ($17T) we would have 100% inflation. Who cares? How much inflation would be created if we gave everyone $1 million? Who cares, the concept is so silly its not worth considering. You start your response by being intellectually dishonest, not good.
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Furthermore, you have not addressed seriously a single point that I made. You are better than this John.
Lets keep this real simple. I wont make a string of points in order to weave a broader narrative. Maybe if I keep it this simple you will be able to answer in an honest fashion. So here it goes:
Real income matters, nominal income does not
Yours and everyone else”s paranoid obsessions about inflation are almost completely unfounded.
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Lets do another one. In one of your comments below you asked where the supply would come from to satisfy the increased demand a larger deficit would create at full employment.
Here is my two sentence claim that maybe you can answer:
“Do you think more or less people around the world would like to earn a living selling things to Americans? Do you think that because we are at full employment domestically that China will stop employing people to satisfy our increased demand?”
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Don’t get hung up on the size of the increase. Google did a 100% stock split because that was a convenient size for them. That caused a 50% reduction in price. If they did a 10% stock split, it would have been a 10% reduction in price.
100% is not a realistic number for money. Today, I think the output gap is a bit less than $1T, so an increase in the deficit of $1T, gradually, over the course of a year, would probably be absorbed by increased production, with very little impact on prices. $2T, probably not. There is not that much idle capacity or idle workers or enough time for them to be brought online. Imports would increase, but imports are only about 3% of GDP, so maybe 3% of the $1T would go to imports. Once we get to full employment, additional spending can only increase demand for resources, including employees, that are already in short supply.
you can quibble with my numbers if you like, but even you have said:
“Sure, you can issue too many dollars and have problematic inflation.”
So the only dispute we have is what constitutes “too many”.
Who cares about inflation? As I pointed out, only a lucky few have their incomes indexed to inflation. For the rest of us, inflation reduces our standard of living. It’s not as sudden as unemployment, but it is just as sure. Inflation can be very painful. It is quite arrogant and insensitive of you, I think, to dismiss that pain so lightly.
Someone once wrote “Real income matters, nominal income does not”.
The Chinese who sell to us sell as much as they can at the price they set. They don’t care if we are at full employment or not. The Chinese government hoards as many dollars as it needs to in order to maintain its currency exchange rate policy. They don’t care either. If we are at full employment, and the Chinese are happy, and our government increases its deficit, it will have no effect on their behavior. It will only increase the demand for resources that are, by definition, already fully employed. The only effect that can have is to increase the price of those resources.
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Roger,
“Google is “God” of Google stock; the federal government is “God” of the dollar. And just as a stock certificate is not a share of stock, neither is a dollar bill a dollar.
YES, but as you have already stated, “You are a Monetarily Sovereign nation, with two major assets: The unlimited power to create your own sovereign currency, and the unlimited power to determine your economic fate.
Obviously, you don’t want such a burden. You’d rather be a slave nation. So what do you do? You voluntarily surrender those most valuable assets, and you put your nations fate into the hands of some unelected, foreign bureaucrats called the EU.
Surprise! That hasn’t worked out so well:…”
May I paraphrase:
America ,you are a Monetary Sovereign nation…..
(read above)…SO what do you do ? You give to the Private For Profit Banks the sovereign rights to CREATE SOVEREIGN CURRENCY and the POWER TO TAX that currency giving the PFPBanks unlimited power to determine your fate!
How is that working for you.
The great USA mystery solved. We have LIED as printed on our currency:
“In God We Trust” The truth is : “We Now Trust The Private For Profit Banks”
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golfer,
Every dialog with a Denier of Monetary Sovereignty is the same:
Denier: We can’t afford the debt and the deficit. Our children will have to pay the debt. The deficit is destroying America.
MS: The facts are: The deficit is necessary to grow the economy, and the debt is meaningless, and will not be paid for by our children.
Denier: OK, but WHAT ABOUT INFLATION AND HYPERINFLATION AND WEIMAR AND ZIMBABWE AND ARGENTINA?
Get it? The Denier first says that the debt and deficit are killing us and will be paid by our children. Then, when the facts show that is a load of hogwash, the Denier falls back to inflation. Always inflation, inflation, inflation — the last refuge of the economics Denier.
Yes, over time, we have had inflation — intentional inflation — unrelated to federal government deficit spending.
The Fed believes a little inflation (2%-3%) is stimulative and is better than risking deflation. So by juggling interest rates, the Fed achieves its goal. If the Fed wanted deflation, it could accomplish that, too. But it doesn’t.
So while the Deniers moan and groan about excessive debt, excessive deficits and excessive inflation, the debt is meaningless, the deficits are too low, and inflation has been averaging about 2.5 % for the past 30 years.
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And if the denier points out that in Google’s 2 for 1 stock split, the share value was also reduced in half, we can explain that dollars are being created (“split” when the government spends) and destroyed (“reverse split” when taxes are paid) constantly. Economic conditions dictate whether dollars should be created or destroyed. During periods of high unemployment and excess capacity (businesses can produce more of the product at the same cost if demand increased), more dollars should be created. If inflation exceeds a threshold, dollars should be destroyed.
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“Economic conditions dictate whether dollars should be created or destroyed.”
That’s in an ideal world.
In the real world, what drives decisions on federal spending and taxing is not economics, but politics.
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But you’re not trying to persuade deniers, you’re trying to persuade understanders. That was the gist of this article, I thought.
Your analogy is apt for illustrating the concept of monetary sovereignty, but unless you can explain how it is that Google’s share price responds to the quantity of shares, and the value of the dollar does not respond to the quantity of dollars, the analogy will not support a policy of simply creating dollars faster. Quite the opposite, the Google stock split supports the Monetarist theory of inflation, not your interest rate theory.
(I think you have too high an opinion of the Fed’s capabilities. Even after 21% interest rates, inflation continued above the Fed’s target for many years. In fact, it has been only during the periods of falling interest rates (or recessions) that inflation has declined. And now, with interest rates at 0, and QE 4ever, inflation is consistently below the Fed’s target. If they are capable of causing 2% inflation, and they say they want to do it, and they’re trying their best with every tool they have, and making up new ones all along, why have they failed? As I’ve pointed out previously, FRED data shows that the Fed has failed to hit their target more often than they have succeeded. The average of 2.5% is meaningless when the rate is outside the target range more than half the time. It could be outside the target range 100% of the time, and still average 2.5% )
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During a two-for-one stock split, the value of the stock falls almost, but not quite, in half. The reason for the “not-quite” is that the formula for price is not Price = 1/Supply. The formula is Price = DEMAND/Supply.
For reasons unknown, the Inflation Henny Pennies (IHP) consistently forget Demand and focus only on supply. They also consistently ignore the fact that for the past 45 years (since the U.S. went off the gold standard), there has been zero relationship between inflation and deficit spending.
I’ve mentioned this dozens of times to no avail, and continue to try to explain it to IHPs also to no avail. So let me ask you: Why has there been no relationship between money supply and inflation?
Yes, yes, I know: Weimar, Zimbabwe and Argentina, oh my!
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?, ” Why has there been no relationship between money supply and inflation?”
Ans. Because of your definition of what is “money supply” and what is inflation.
If ‘money supply’ were to be a stated number then even 1 added would be an inflation, or for that matter if 1 subtracted that would be a deflation.
But “Economists speak with a forked tongue, their words have different meaning depending upon ‘their theory’.
There is over $12 trillion of mortgages. Real money paid to real sellers.
Is that money shown in the money supply ?
When the borrowers pay off those notes, does the $30 trillion needed to be paid to the banks show up as $12trillion removed from the supply and $18 trillion TRANSFERRED from the lower 90% to the highest 10% ?
Surely you are all aware that ALL of the increase in income since 1976 has gone to the top 10%. How do you think it got there?
Any reply ?
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The monetarist explanation is that Price = f(demand,supply), just like stocks. That’s not “zero relationship”, but it is also not linear.
Most economists accept the idea of “stickiness” in prices, a resistance to lowering prices when demand contracts. It is even more prevalent in wages, where it is very difficult to impose across-the-board cuts, and much easier to have across-the-board raises, even in non-union shops.
My own theory is that land operates much like oil in causing a cost-push inflation. Like oil, land is an input to almost every other price in the economy. As population grows, the demand for land also grows, but there is no additional production of land. Additional supply comes from using less productive land, farther away from population centers, thus at higher cost.
Clearly we have much policy space today to increase deficits without causing excessive demand and price increases. But whatever is causing our background inflation rate of about 1-2% even when demand is grossly inadequate, the question remains: if and when we ever do get close to full employment again, would an increase in the deficit also cause an increase in inflation, or not? If not, then where does the additional supply of goods and services come from to keep prices stable, when production is already max’ed out? Or is there no relationship between the amount of money and its value?
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” ALL of the increase in income since 1976 has gone to the top 10%. ”
Stated that way, it is a little bit misleading. Entry-level workers in 1976 got a great deal of increased income during their working lives. The overwhelming majority did not spend their entire careers in the same pay grade. Entry-level workers of today can expect the same progression through the ranks, as their elders leave the workforce. The top 10% of today will be replaced by workers from today’s 90%, as has always been the case.
It’s not Lake Wobegone. There will always be 49% who are below the median, no matter what you do. The real question is what the standard of living is for the poorest today, compared to 1976.
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And by the way, the reason inflation is not in the target range is because inflation (i.e the supply and demand for dollars) is a function of many variables, not just interest rates.
The Fed uses interest rates to aim for its target, but on a daily or even annual basis, it can overshoot or undershoot, due to other variables affecting supply and demand.
The average of 2.5% is quite meaningful. Given the one tool allotted to the Fed, it’s an excellent result.
I fully expected the analogy would be an exercise in futility, because the non sequitur of inflation, which has absolutely nothing to do with the analogy, would, as usual, rear its ugly head.
At least, however, you agree that the federal government cannot run short of money, does not need taxing or “borrowing,” and that economic growth relies on deficit growth, which is all one can expect to accomplish.
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[1] Actually Rodger there are at least two other refuges of the economics denier, and they are just as intractable as the “national debt” bogeyman.
One refuge is the silly claim that all fiat money is “funny money,” and that only gold is “real money.”
Another refuge is the delusion that private banks levy US government taxes, have sovereign power over the dollar, and issue all the dollars in existence by lending them. This delusion causes people to prefer that the US government issue Civil War-style “greenbacks” — which the US government already does by issuing instructions to banks.
[2] @ Golfer: inflation is not caused by the amount of dollars alone. (In the USA, inflation is caused by the ever-increasing demand for energy, or by changes in the Fed’s key interest rates, and so on).
Inflation can go up or down even if the “amount” of dollars in circulation remains unchanged. Likewise, hyper-inflation can occur (i.e. a loss in the public’s “faith and credit” in a currency) even if the “amount” of dollars in circulation remains unchanged.
THE POINT is that the cause of inflation or hyper-inflation is not deficit spending alone. The cause also involves the supply and demand for goods and services.
For example, during World War II, consumer goods were scarce, but employment was high. Everyone had cash, but little to spend it on. This caused the prices of consumer goods to inflate, which threatened the economy, and thus the war effort. The government’s solution was to remove money from the economy by urging people to buy War Bonds, and by withholding taxes from everyone’s paycheck.
Again, the cause of inflation was not the amount of dollars alone, but the ratio of dollars to the supply of (and demand for) consumer goods.
Since the end of WW II there has been no serious shortage of consumer goods in the USA. Hence there has been no connection between deficit spending and inflation. What mainly drives inflation is the demand for (and scarcity of) energy such as oil and gas.
Today we have a shortage of dollars in circulation, caused by gratuitous austerity, whose sole purpose is to increase the gap between the rich and the rest.
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Straw man: Nobody ever said it was the amount of dollars alone.
What do you think would be the result of doubling the amount of money in circulation tomorrow, just like Google’s stock split? I think it is reasonable to expect that the demand for goods and services would rise dramatically (MMT and MS policy prescriptions depend on that), and that there would be a significant rise in prices and instant shortages of many items before the supply of goods could react. I think it would be ludicrous to assume no effect on prices, or an instant doubling of real GDP.
Oil was important in the 1970s inflation, but oil prices are volatile and have experienced multi-year periods of decline since then, while inflation has continued throughout.
Hyperinflations in Zimbabwe, Argentina, etc. have been caused either by debts in foreign currencies or supply disruptions. No government has ever goosed demand enough to cause hyperinflation. That is another straw man.
Changes in the Fed’s key interest rates? Please explain. Do you agree with the Fed that lower interest rates promote demand and tend to raise prices, while higher interest rates suppress demand and prices? Or do you agree with MMT that higher interest rates cause higher private sector income, with the opposite effect of what the Fed thinks?
And how effective has the Fed been recently, lowering rates to zero and adding QE and still not getting inflation up to their target range after 5 years of trying?
But something has caused the US dollar to lose value fairly consistently since 1913, whereas it had fluctuated up and down from 1791 to 1913. We had deficits from 1791 to 1913, almost every year, just like from 1913 to 2013, with a few exceptions during both periods. But one was a period of (to use Rodger’s metric) 0% average inflation, perfect price stability, and the other is a period of 2.5% average inflation.
Could it be, just maybe, that the growth of dollars has, on average, outpaced the growth of goods and services by about 2.5%? And if not, then what?
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Just to clarify, World War 2 was a rather unique situation. There was very high employment because of the war effort. Therefore the government had to put money into circulation in order for workers to get paychecks, but also had to suck the money back out of the economy (via payroll taxes and savings bonds) in order to control inflation.
Normally it is recessionary to suck money out of the economy, as we are painfully experiencing today. However WW II was an exception, because of the very high employment rate.
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Oh…and the newly introduced payroll taxes were not popular. Hence the government’s preferred way to remove money from the economy was to sustain a massive publicity campaign that urged all Americans to buy war bonds. There were signs and posters everywhere. “BUY WAR BONDS.” It was on postage stamps. It was on any letter the federal government mailed to citizens. It was on banners inside banks and across major boulevards. It was on animated billboards in Times Square. It was in most newspapers every day. Before every movie in every cinema there came a brief feature urging the audience to buy war bonds. Disney made several animated cartoons urging people to buy. And so on.
I know this because I often enjoy looking at old photos online, and I noticed that during WW II in the USA, there was the “buy war bonds” message everywhere.
I mean EVERYWHERE.
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Rodger, I’m not sure you addressed golfer’s point. At least the question it brings up is not answered for me. Perhaps it’s just that the analogy breaks down? To wit: when the stock splits, say, 2 for 1, the value of each share is halved. If this is what happens to the dollar, then we DO have a problem. If it’s not what happens to the dollar, in terms of the analogy, what does happen?
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It just doesn’t work that way. The google example is just not dynamic enough to be a realistic analogy to the dollar.
The entire money supply, as defined by all bank deposits + Fed deposits, is currently around $60T.
First of all, why would we even consider the effects of doubling the money supply? What possible good could that do in the short term? Its just not a serious thought experiment. Would prices double? who knows?
But say we increase the money supply growth by 10% in one year, so $6T new dollars.
Who made the dollars? If we have congress deficit spend $6T then what would happen to private debt levels and thus the net effect?
Would the private sector use alot of the $6T to pay down bank debt thus cancelling out that much money supply growth?
Would people save most of it and thus not drive up prices? to what extent?
How much unemployment and unused capacity is there in the economy at the start of the period? $6T in 2009 probably wouldn’t have resulted in as much inflation as 10% in 2000.
What’s the ability of the world to increase its sales and exports to America? If inflation is best understood as MQ = PV then theoretically, the supply of goods and services is incredibly elastic in that the entire world could effectively be mobilized to make goods and services to sell us.
Its not more money and the same supply, the demand drives increases in supply as capitalists seek to profit off the increased demand.
So after asking all those questions, would a $6T increase (10%) in the money supply this year cause 10% inflation? Which is the analogy to Google, a 1% increase in the supply leading to a 1% decrease in value (inflation). Who knows? But one thing is for sure, the Google stock example is a poor analogy.
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To all my friends who don’t know the purpose of an analogy, the Google analogy was to demonstrate why the federal government has the unlimited ability to create dollars and why taxes and borrowing are unnecessary.
Suddenly, however, we got into a discussion of doubling the money supply and whether that would cause inflation, which is a fool’s response to this analogy and completely off subject.
For example:
Analogy: “A best friend is like a four leaf clover, hard to find and lucky to have.”
Fools response: “Yes, but a four leaf clover is green. Do you want a green friend?”
I was trying to make it simpler, but when dealing with debt hawks, nothing is simple. Now we’re into a discussion of analogies! Yikes!
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Americans are completely ignorant of how fiat currency and the modern money system works. Economics is not even being taught in the public school system. To the blog readers who have kids (or are kids) in middle or high school, what economics are they being taught in school? Even the learned academics and expert professionals apparently aren’t even getting it right.
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The ignorance is global. Seven billion people on the planet, and most reject the facts. Even in China the government is imposing severe austerity (i.e. “market-based reforms”) to widen the gap between the rich and the rest.
Or consider Europe, where the masses whine about having their blood drained (i.e. about austerity) but they love the leeches (i.e. the euro).
Last week the Greek parliament agreed to a new wave of austerity — including the firing of another 11,000 public sector workers — in exchange for another debt bomb from the Troika. Tomorrow in Greece (April 9) there will be nationwide strikes against austerity, but not against the euro. Hence the masses will get more austerity. Always more. Wages and pensions will continue to be slashed, public services gutted, and poverty, inequality and unemployment will continue to increase.
It’s what the masses want.
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This may sound stupid, but most of my professors in high school and college had beards. Why do you think that is?
Anyway, most professors are socialists – not right wing nuts like it’s being portrayed.
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When you say “most professors,” you might want to specify which area of academic study you refer to.
Among economics professors, 99% of them are ultra-radical-hyper-flaming right wingers. They champion austerity, and they deny the facts of MMT and MS. They are forced do this because their jobs depend on it. They know that if they speak the truth, they will be dismissed.
Even in rare cases where economics professors do speak the truth (e.g. some of the professors at the University of Missouri – Kansas City) they do so behind a façade of bullshit. Example: “Austerity is simply misguided, and there is no proof that rich people pay politicians to impose austerity.”
Today this situation worse than ever, since most professors in all topics are now adjuncts, meaning they live in poverty (literally) and they can be dismissed at any time for any reason, or for no reason at all.
Universities are all about PROFIT. This means cost-cutting, which means professors have been reduced to slaves who dare not displease their superiors in the university, nor displease rich people.
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Gee, do you really think the noble profession of economics has been contaminated by the wealthy?
Charles Koch Money and Polluted Science in Florida State University Economics
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Professors live in poverty?
Yet home prices are the most expensive around university areas. See for yourself, go to Zillow and look around any University in the nation and I bet home prices are more expensive on those areas. So expensive that an average salary would not be able to handle in 100 years.
What kind of salary do you think would be required to support a 600-700k mortgage because that’s what I have seen. In my estimation, I would say the person is likely pulling in around 200k a year. Otherwise, you would not be able to afford such a mortgage.
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At least three quarters of all professors in the USA are adjuncts, who live in poverty (literally).
Who lives in those houses around universities? Not adjunct professors, but fully tenured ones (which are a shrinking number) plus administrators who get six-figure salaries for keeping the universities profitable by boosting tuitions and enslaving the adjuncts.
I could give many links for articles to prove this, but I doubt you’d read them. Google the words “adjunct professors” and start reading about their nightmares.
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” . . . most of my professors in high school and college had beards. Why do you think that is?”
Uh, because they were men? Or did the women have beards, too?
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They also had bears, take a look at Yellen. She has the same beard as Bernanke.
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Beaker: Economics is not even being taught in the public school system. Not true. And that is a big problem. Economics is taught much more nowadays than it used to be, with standardized exams like AP exams. The problem is the content of these courses. Have people looked at textbooks for such courses?
Especially when it comes to money and macro, such instruction spreads negative knowledge. The untutored intellect understands money and economics much better than the victims of such brainwashing. It is atrocious to inflict it on students in a period of their lives when however boring or alienated they might be from the rest of the curriculum, kids do & should believe in it because their other teachers are basically telling them the Truth. 2 + 2 does = 4. The Civil War was from 1861-1865, Water is H2O. But it in high school econ class they just don’t know that they are being taught stuff that makes astrology look honest, logical and scientific.
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What happened to the price of google shares after the split?
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1. How was Google able to create millions of shares out of thin air (i.e. run a Google share deficit) — without borrowing shares and without taxing Google share holders?
2. Does Google now have a Google share debt?
3. Will future Google share owners and their children, be required to pay for a Google debt?
Answer those 3 questions, and you’ll understand the point of the article.
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Rodger, one can answer these questions and understand the point of the article, but the metaphor you’ve chosen, as good as it is, falls apart IF you ignore the fact that the shares after the split become a fraction of their pre-split value. Not addressing this in the metaphor opens the validity of the metaphor to questions. Can you reconcile this? I’m not sure I can.
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Oops. Auburns comments helps me accept the analogy as it stands, even though the weakness remains.
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Rodger,
Tell me – what has Google achieved in issuing double the number of shares other than make the price “look” cheaper?
Today, you have to buy double the shares to have what one share represented before.
1) By simply issuing the new shares.
2) Google is one of the few companies that actually has more cash than debt. Issuing shares is not the same as issuing debt.
3) A stock split is not issuing debt, it’s a useless exercise. There is zero benefit, the existing owners get double the shares. Repeat – the same people that owned Google before the split own Google after the split. There was no deficit in the first place – if you wanted Google shares you could have bought them any time before and after the split. Now, if Google accumulated more debt than cash – than the share owners would likely pay for it via a lower price for their shares. And as I stated on the other post, unlike Google shares, existing dollar holders do not get a penny.
Again, how would you feel if google left you with your old shares and did not give you any more to compensate for the devaluation? I bet you would be calling the Justice department in a heart beat. Yet the same happens every single day. It’s truly sad…
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The Google split is an unfortunate example as regards the nit-picking of the analogy because of an unusual feature:
The new shares are non-voting shares, so they actually trade at a slight discount to the old shares, which are about half the price they used to be. Both types of shares (they’re called Class A and Class C) will continue to be traded as separate issues. In a typical stock split all the newly issued shares are of the same type as the old shares, and are indistinguishable from each other.
Normal stock splits are often done to keep the share price in a range that enables more small investors to buy and sell the stock in round lots of 100 shares. Because the lower “sticker price” enables more people to buy, the stock price sometimes rises slightly just before and just after the split, in anticipation and realization of the increased demand for the shares. But it often goes down, as well, if the stock price was already in a downtrend for some other reason, or if the market was just down that day.
On the day after the split, both GOOG and GOOGL dropped about 35 points.
The effect of the split on the market capitalization is considered to be zero, and can’t really be isolated from other factors. Stock dividends, issuance of smaller amounts of new shares to existing shareholders, function just like splits. A 10% stock dividend works just like an 11-for-10 stock split.
Government operations with the currency are a lot more like issuance of stock or options as compensation to employees, and share repurchase plans, than they are like stock splits.
Issuances of stock or options to employees as compensation are quite analogous to government spending, issuing dollars to employees or vendors or recipients of so-called “entitlements”. Share repurchases, removing shares from circulation, are often done to prevent such share issuances from diluting the value of the shares held by the existing stockholders, exactly like government taxing to prevent inflation from diluting the value of the existing dollars in circulation.
Those operations, share issuances and repurchases in small amounts compared to the number of shares outstanding, are just as good an example of share sovereignty as is the split, they correspond more accurately to real government operations, and they illustrate the responsible exercise of sovereignty that we all wish our government were capable of.
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Since I now seem to have confused rather than enlightened, I’ll try to explain the analogy (without using another analogy). It was supposed to show:
1. Google was able to create millions of shares out of thin air (i.e. run a Google share deficit)
2. Google did this without borrowing shares.
3. Google also did not tax Google share holders.
4. Google does not have a share debt, and future Google share holders will not have to pay for the non-existent share debt.
5. This is all possible because Google is sovereign over Google shares, just as the U.S. is sovereign over the dollar.
If you can understand Google’s ability to create shares out of thin air, without taxing or borrowing, you also can understand the federal government’s ability to create dollars out of thin air, without taxing or borrowing.
That was the purpose of the analogy.
Now some wish to add inflation to the analogy. They ask, what happened to the value of the Google shares after the split? Answer: Each Google share was worth about 50% of the previous Google shares, but because, as a shareholder, I now owned double the number of shares, I didn’t lose money.
Now let us say the U.S. government decided to do a “money split.” Each owner of a dollar would receive a dollar, so each “new” dollar would now be worth the equivalent of 1/2 “old” dollar.
All products now would cost about double the number of new dollars as they formerly cost in old dollars.
Is this inflationary?
Think about all the implications before you answer.
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Well played, Rodger. Thanks.
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I’d say it depends on the definition of inflation. Many countries have revalued their currencies that way, but I expect economists studying prices during those times would have factored the devaluation out of their analysis, just as people who chart stock prices have factored it out of their Google charts.
The purpose of my original comment was not to start the discussion that has followed, but about what ordinary people understand, or think they understand, about money, and why they may intuitively understand and accept the fact of monetary sovereignty, and may still remain frightened of its implications, and opposed to the thrust of its policy proposals.
There has to be something to get them out of their paradigms, and the stock split analogy includes more than just what you intended, and that “more” is not helpful to your cause.
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LOL….
You kind of answer your own question.
Are the overall number of shares worth more than half the shares?
Here is the answer: Not a penny more…
1 million Google shares are worth the same as 2 million after the split. Exactly the same – to the penny. Now, when Google issues more shares it issues them for the holders of existing shares. So if you have 100 shares, now you have 200. With me so far?
When the government issues new currency, (unlike the Google case) the existing holders don’t get a penny.
Rodger, how would you feel if Google doubled the number of shares and left you with your (now less valuable) shares?
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And to answer your question, yes it’s inflationary. Well, not just inflationary – hyperinflationary.
The only way the dollars would maintain their purchasing power is if out also increases at the same pace as the dollar split (in your example in a second). How likely is it that tomorrow we will have double the amount of food, double the amount of clothing, double the amount of homes, etc…
Answer: zero
Although I disagree with the notion that the US can print at will, there is no sense in arguing that point. The US is pretty much printing all it wants at the moment.
What’s missing from your point is that someone worked for that old dollar which is now now worth half – is that it impacts those that depend on labor and those on fixed incomes (retirees). After all, laborers don’t get a 100% raise with a keystroke. Retirees savings don’t double with a keystroke. I’m sure that those receiving the funds are pretty happy, but I doubt the folks working to produce what the beneficiaries get are not. Not only is it not fair, stealing is a crime. Fraud is a crime – and that’s exactly what issuing more dollars is. Fraud.
How is that for implications?
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None,
In Rodger’s example, it might be hyperinflation from a definition standpoint, but so what. The only change is that what we used to call a dollar, we now call a half-dollar. Wages are instantaneously doubled, as well as prices, savings and everything else.
You say that the government creating money is fraud, but you don’t consider that when taxes are paid, the money is destroyed. No claims of “Anti-Theft” or “Anti Fraud”.
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“Wages are instantaneously doubled, as well as prices, savings and everything else.”
Does “everything else” include debts? Rodger’s example did not. If I owe $100,000 on my house, do I now owe $200,000? Wages may double, but do pensions and annuities double? If my former employer (a German company) is paying me $100 a month, can the US government now oblige them to pay me $200?
Inflation doesn’t work that way. Debts and other nominal obligations remain at their same nominal levels. Intentionally reducing the real value of them, however suddenly or gradually, if not a fraud is at least heinous behavior, if done by the debtor.
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At the end of today’s column by Dean Baker:
“…it’s not as though there is any reason to believe that printing the money to finance the deficits would create inflation”
I have known Dean for being a liberal economist, but now it appears that he has been reading this blog.
http://www.cepr.net/index.php/blogs/beat-the-press/krugman-greider-and-the-continuing-saga-of-sustained-secular-stagnation
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Bottom line: A growing economy requires a growing supply of money. Trade deficits reduce the money supply, and so are recessive. Federal deficit spending increases the money supply, and so is stimulative.
The debt hawks will not admit that simple truth.
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Not only that. Krugman himself is “wondering in particular whether there is a possibility of sustaining the economy with permanent fiscal expansion.”
May wonders never cease.
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How would permanent economic growth be accomplished without permanent fiscal expansion?
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Again, it depends on your definitions. If you cut taxes, the economy picks up, and automatic stabilizers cause spending to also go down, is that “fiscal expansion”?
The encouraging thing is that it sounds like Krugman is considering a change from deficit dove to deficit owl.
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If the economy “picks up,” is that not “fiscal expansion”? Or are you saying that tax cuts cause fiscal contraction?
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He didn’t say explicitly, but I gathered he was talking about government policy action, not the economy itself. If he meant the economy, then economic growth and fiscal expansion are synonyms, and there is nothing to wonder about.
And by calling it “expansion”, I infer that he means a bigger budget (more spending), not a smaller one (less taxing).
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golfer,
So are you saying that cutting taxes is not economically expansionary?
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“So are you saying that cutting taxes is not economically expansionary?”
No, quite the opposite. But it shrinks the size of the Federal budget.
I believe that when Krugman says “fiscal expansion” he means growing the size of the Federal budget by increasing spending (which would also increase tax receipts, via automatic stabilizers).
Cutting taxes is how economic growth is accomplished by shrinking, not growing, the Federal budget.
Which is all theoretical anyway, even Paul Ryan wants to grow the Federal budget. Reagan wanted to shrink it, but couldn’t do it. It’s probably not possible.
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Cloward and Piven also advocated a national guaranteed income:
http://en.wikipedia.org/wiki/Cloward–Piven_strategy
This strategy was to overload state and local welfare agencies that would then induce the federal government to provide funds to them for their own agencies and therefore bring about a national guaranteed income.
They also talk about the collapse of the system, which I would think would be impossible since the federal government is monetary sovereign (MS) and can provide all of the needed funds being a currency issuer. They also talk about income redistribution, which with MS is not applicable.
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— Off topic —
HOORAY!
Today the U.S. House approved a 10-year spending-and-tax plan that will privatize Medicare, cut another $5.1 trillion in federal spending, and bring the federal budget into balance by 2024. It will also change programs like food stamps and Medicaid into block grants to the states, making it much harder for the poor to qualify for them. It will lower the top income tax rate, increase handouts to military contractors, and reduce social programs to their lowest levels since modern government accounting began.
The vote was led by Paul Ryan, chairman of the House Budget Committee, and will become a central theme in this coming November’s mid-term campaigns, as Republicans seek to reassure us that they are tough on fiscal matters, and that austerity is forever.
Every Democrat in the House voted no. Paul Ryan called them, “paternalistic, arrogant and downright condescending” (his words). Ryan calls his suicidal new budget the “path to prosperity.” He said on the House floor that, “We owe the country an alternative that actually grows the economy, pays off the deficit, and moves to lower the national debt.”
(Ryan can’t even get his lying terminology correct. How do you “pay off the deficit”?)
John Boehner calls the job-killing budget, “Our vision for getting Americans back to work.”
Ryan’s budget will cut social programs by $791 billion, but will increase spending on military contractors by $483 billion. The latter is called “military spending,” but the extra billions will not go to military personnel, who are now being laid off en mass. No, the extra billions will go to weapons makers, and to the surveillance community, plus organizations likes the CIA. The USA has switched from using armies to using drones and special ops teams, plus coups (e.g. Ukraine).
Twelve Republicans did not vote for Ryan’s budget, since their districts have a lot of poor people. Although everyone is hurt by austerity (except the rich), only the poor understand that their personal suffering increases with each new wave of austerity. Therefore, if a Republican has many poor people in his district, he cannot get away with screaming for more austerity, and will explain himself by claiming that there is not enough austerity. “I can’t vote for these cuts, since the cuts are not severe enough.” Examples include Thomas Massie (Kentucky), Paul Broun (Georgia) and Raul Labrador (Idaho) who did not vote for Ryan’s budget, saying it was not draconian enough.
Meanwhile more fortunate Americans love austerity because they think it only hurts “inner city people” (i.e. Blacks, or Mexicans, or the poor.) That’s why average Americans keep voting themselves into being poor. Indeed, Paul Ryan wants to run for US President in 2016. He’s only 44, but so was John F. Kennedy when he became President. This coming November, Ryan must run for re-election, and will have no competition in Wisconsin, and yet he has already raised nearly $1.4 million in the first three months of 2014. (Gifts from the rich for pounding the austerity drum.)
Ryan’s budget in its current form has no chance of passing the US Senate, but it is still part of the austerian strategy. If you want to cut $500 billion from social programs, then you scream for $1 trillion in cuts, and then you finally agree to a “compromise” of $500 billion. Then you repeat the process until social programs are completely annihilated or privatized. (Meanwhile you continually increase federal spending on programs that help only rich people.)
The beauty of austerity is that the more suffering it causes, the more we “need.” If doubling the amount of leeches does not cure anemia, then the obvious solution is to quadruple the leeches, and quadruple them again and again. Forever. The only reason why austerity has not created jobs is that there has not been enough austerity. For example, the CBO projects significantly larger budget deficits over the next 10 years than it did a year ago, largely because of weaker economic growth projections, caused by austerity. The CBO’s recommended solution is more austerity (i.e. an increase in taxes, plus additional cuts in social programs). The cure for leeches is more leeches. Always more.
Meanwhile average Americans defend their suicide by claiming that “liberals” have “no alternative plan.” (How about removing the leeches? Is that not a “plan”?)
Anyone who does not favor more inequality is a “Marxist.” Anyone who does not favor suicide is a “terrorist.”
Thus, average Americans continue to fall into poverty. They find it more enjoyable to condemn “inner city people” than to have prosperity.
Why have a better life when it’s more fun to hate?
Bring in more leeches!
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golfer1john says, “It (cutting taxes) shrinks the size of the federal budget.”
Question: How does cutting taxes shrink the size of the federal budget?
golfer1john says, “Cutting taxes is how economic growth is accomplished by shrinking, not growing, the Federal budget.”
Question: How is federal growth accomplished by shrinking the federal budget?
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Not “federal growth”, “economic growth”.
Maybe an example with numbers would help.
The budget is $3.8T spending, $3.5T of taxes.
Let’s say we reduce FICA taxes by $500B, and leaving that money in the hands of the people will cause them to spend it, and that will cause employers to hire 500,000 unemployed people, reducing the government’s spending on unemployment insurance and other programs by $50B. Also, taxes on the $500B of new income will be $100B.
Net net, spending is now $3.75T and taxes are $3.1T.
I call that a smaller budget than $3.8T and $3.5T. I call that change “shrinking the Federal budget”. Even if you assume no change in spending, $3.8 and $3.1 is still smaller than $3.8 and $3.5.
I call the $500B of new spending and production “economic growth”.
For simplicity, I’ve left out any multipliers or other complications. I don’t think they would change the substance of the example.
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Please share:
Justaluckyfool ( http://bit.ly/MlQWNs ), a more recent read:
“We must realize that we have the potential to change things — a scientific deterministic view militates against this idea. Wrong theories cause a huge amount of damage, leading to famines, and death by interest payments on loans by the poorest countries. Correct theories and actions guided by these theories can help feed the hungry, and bring hope and happiness to thousands if not millions or billions. Given that this is possible (which most people do not realize) we cannot choose to be bystanders. We must learn how to act together in ways that will help change things for the better.”,
By Asad Zaman “A Pedagogical Paradox”
http://weapedagogy.wordpress.com/2014/04/11/a-pedagogical-paradox/
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