The only two elements in economics you need understand

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It takes only two things to keep people in chains: The ignorance of the oppressed and the treachery of their leaders..

Economics is complex, arguably more complex than any other science, if indeed, it is a science at all. In its essence, economics is the study of human psychology — complex in its own right — multiplied by the study of money.

Move over quantum mechanics and rocket science; economics is the big boy of intricacy.

And yet all of economics boils down to two, very simple, and very fundamental elements. And because these elements seldom are taken into consideration by economists, problems in economics become even more intractable than they otherwise would be.

Imagine a discussion of cooking without taking meat, vegetables, or flavor into consideration, and you approach comparability.

The first element is Monetary Sovereignty, which is discussed in many posts on this site, most specifically here and here.

Briefly, U.S. Monetary Sovereignty means the U.S. government created the first dollars, and still today retains absolute control over the dollar. It creates dollars at will (by spending); it destroys dollars at will (by taxing); and it regulates the Demand for the dollar and the Reward for owning dollars at will (via interest rates), thus regulating the Value of a dollar.

Having total control over the dollar U.S. government can pay any invoice denominated in dollars, and unlike state and local governments, the U.S. government neither needs nor uses taxes to fund its spending.  Even if all federal taxes were $0, the U.S. government could continue spending, forever.

The federal government never can run short of dollars.

You wouldn’t know these absolute facts from all the articles you read bemoaning the spending of federal “tax dollars” (though federal tax dollars are not spent; they are destroyed upon receipt), or a cost to future taxpayers (though future taxpayers will not pay for today’s spending), or the need for the federal government to save money (though an entity with the infinite ability to create dollars need not save dollars).

You wouldn’t know the federal government, unlike state and local governments, does not “waste” money in the usual meaning of “waste.”  Every dollar the government spends on anything is stimulative. Even so-called “helicopter money” (mythical dollar bills dropped from a helicopter) would not be wasted.

You wouldn’t know the universal question applied to all federal spending — “Who’s going to pay for it?” — is nonsensical. The answer always should be the same: The federal government.

The second element is psychological, Gap Psychology, which also is discussed in many of the posts on this site, most specifically here and here.

A characteristic of human psychology is for those in any class to Image result for autograph hunterswish to distance themselves from those in a “lower” class, while coming closer to those in a “higher” class.

Briefly, Gap Psychology recognizes that people self-divide into classes according to income, wealth, power, fame, and other arbitrary segments, in which some classes generally are considered “superior” to others.

Those two elements, Monetary Sovereignty and Gap Psychology, explain everything in economics.

Yet amazingly, you seldom, if ever, hear either of those basic elements, much less both of them, mentioned in a discussion of any economic issue.

Consider U.S. healthcare insurance. Every solution put forth by any politician, any economist, or any medium attempts to minimize federal funding and deal with the sloth of the poor.

Yet, in reality, neither is a problem at all. The federal government can afford anything (Monetary Sovereignty), and contrary to popular myth, the poor work as hard or harder than do the rich (Gap Psychology).

The only real health care problem is how to provide the best health care to everyone.

The solutions involve creating better and more doctors, nurses, hospitals, treatment methods and drugs, not where to obtain the money or how to restrict the services.

The same two elements — Monetary Sovereignty and Gap Psychology — involve problems in education, food, housing, jobs, immigration, poverty, voting rights, infrastructure, etc.

Everywhere we turn we unknowingly confront those issues, “unknowingly” because they seldom are mentioned.

And that is the irony. The two primary elements of economics seldom are mentioned in any discussion involving economics.

Worse, the two primary issues in economics — Monetary Sovereignty and Gap Psychology — seldom, if ever, are taught in college economics curricula.

Imagine curricula in medicine not teaching anatomy, germs, or drugs. Imagine curricula in physics not teaching mathematics, relativity or quantum dynamics.

Is it any wonder that economics fails us at every turn? Is it any wonder that people can create the disasters known as the eurozone or the American federal tax system.

Economics is not a physical science like physics or chemistry. In economics, such predictions as, “If this, then that,” are difficult to quantify, though there is a branch of economics, econometrics, attempting to do just that.

“This” may be a complex of events that never are repeated exactly, and a lack of precise repetition makes prediction suspect.

In the physical sciences, the lack of repetition is evidence a hypothesis is wrong. Economics, however, accepts it as normal.Image result for avoiding the poor

If you are a stock or commodity investor, you have seen the work of “chartists,” people who look at historical graphs to predict the future.

Their work has the smell of science, but it’s sheer guesswork, having scant value — though it does keep a large number of people employed and an even larger number of people investing poorly.

Even this website has used graphs to predict the future — but while those graphs may be indicative, they are not proof.

Why show data that don’t prove anything? Because they lend credibility to the point we wish to make.

And that is all economics can do. Sans proof, economics can supply only credibility. And whenever you read any article, or hear any talk, involving anything in economics, ask yourself one simple question:

“Did this properly take into account Monetary Sovereignty and/or Gap Psychology?”

If the answer is,”No,” the article has no credibility.

That will be the best BS detector you ever will own.

Rodger Malcolm Mitchell
Monetary Sovereignty


The single most important problems in economics involve the excessive income/wealth/power Gaps between the have-mores and the have-less.

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of The Ten Steps To Prosperity can narrow the Gaps:

Ten Steps To Prosperity:
1. ELIMINATE FICA (Ten Reasons to Eliminate FICA )
Although the article lists 10 reasons to eliminate FICA, there are two fundamental reasons:
*FICA is the most regressive tax in American history, widening the Gap by punishing the low and middle-income groups, while leaving the rich untouched, and
*The federal government, being Monetarily Sovereign, neither needs nor uses FICA to support Social Security and Medicare.
This article addresses the questions:
*Does the economy benefit when the rich can afford better health care than can the rest of Americans?
*Aside from improved health care, what are the other economic effects of “Medicare for everyone?”
*How much would it cost taxpayers?
*Who opposes it?”
3. PROVIDE A MONTHLY ECONOMIC BONUS TO EVERY MAN, WOMAN AND CHILD IN AMERICA (similar to Social Security for All) (The JG (Jobs Guarantee) vs the GI (Guaranteed Income) vs the EB (Guaranteed Income)) Or institute a reverse income tax.
This article is the fifth in a series about direct financial assistance to Americans:

Why Modern Monetary Theory’s Employer of Last Resort is a bad idea. Sunday, Jan 1 2012
MMT’s Job Guarantee (JG) — “Another crazy, rightwing, Austrian nutjob?” Thursday, Jan 12 2012
Why Modern Monetary Theory’s Jobs Guarantee is like the EU’s euro: A beloved solution to the wrong problem. Tuesday, May 29 2012
“You can’t fire me. I’m on JG” Saturday, Jun 2 2012

Economic growth should include the “bottom” 99.9%, not just the .1%, the only question being, how best to accomplish that. Modern Monetary Theory (MMT) favors giving everyone a job. Monetary Sovereignty (MS) favors giving everyone money. The five articles describe the pros and cons of each approach.
4. FREE EDUCATION (INCLUDING POST-GRAD) FOR EVERYONE Five reasons why we should eliminate school loans
Monetarily non-sovereign State and local governments, despite their limited finances, support grades K-12. That level of education may have been sufficient for a largely agrarian economy, but not for our currently more technical economy that demands greater numbers of highly educated workers.
Because state and local funding is so limited, grades K-12 receive short shrift, especially those schools whose populations come from the lowest economic groups. And college is too costly for most families.
An educated populace benefits a nation, and benefitting the nation is the purpose of the federal government, which has the unlimited ability to pay for K-16 and beyond.
Even were schooling to be completely free, many young people cannot attend, because they and their families cannot afford to support non-workers. In a foundering boat, everyone needs to bail, and no one can take time off for study.
If a young person’s “job” is to learn and be productive, he/she should be paid to do that job, especially since that job is one of America’s most important.
Businesses are dollar-transferring machines. They transfer dollars from customers to employees, suppliers, shareholders and the federal government (the later having no use for those dollars). Any tax on businesses reduces the amount going to employees, suppliers and shareholders, which diminishes the economy. Ultimately, all business taxes reduce your personal income.
7. INCREASE THE STANDARD INCOME TAX DEDUCTION, ANNUALLY. (Refer to this.) Federal taxes punish taxpayers and harm the economy. The federal government has no need for those punishing and harmful tax dollars. There are several ways to reduce taxes, and we should evaluate and choose the most progressive approaches.
Cutting FICA and business taxes would be a good early step, as both dramatically affect the 99%. Annual increases in the standard income tax deduction, and a reverse income tax also would provide benefits from the bottom up. Both would narrow the Gap.
There was a time when I argued against increasing anyone’s federal taxes. After all, the federal government has no need for tax dollars, and all taxes reduce Gross Domestic Product, thereby negatively affecting the entire economy, including the 99.9%.
But I have come to realize that narrowing the Gap requires trimming the top. It simply would not be possible to provide the 99.9% with enough benefits to narrow the Gap in any meaningful way. Bill Gates reportedly owns $70 billion. To get to that level, he must have been earning $10 billion a year. Pick any acceptable Gap (1000 to 1?), and the lowest paid American would have to receive $10 million a year. Unreasonable.
9. FEDERAL OWNERSHIP OF ALL BANKS (Click The end of private banking and How should America decide “who-gets-money”?)
Banks have created all the dollars that exist. Even dollars created at the direction of the federal government, actually come into being when banks increase the numbers in checking accounts. This gives the banks enormous financial power, and as we all know, power corrupts — especially when multiplied by a profit motive.
Although the federal government also is powerful and corrupted, it does not suffer from a profit motive, the world’s most corrupting influence.
10. INCREASE FEDERAL SPENDING ON THE MYRIAD INITIATIVES THAT BENEFIT AMERICA’S 99.9% (Federal agencies)Browse the agencies. See how many agencies benefit the lower- and middle-income/wealth/ power groups, by adding dollars to the economy and/or by actions more beneficial to the 99.9% than to the .1%.
Save this reference as your primer to current economics. Sadly, much of the material is not being taught in American schools, which is all the more reason for you to use it.

The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.


19 thoughts on “The only two elements in economics you need understand

  1. Two questions, Rodger 1] your UBI payment to everyone. Have you or anyone else worked out how affordable it is? In other words the increase in spending power that results, will that lead to excessive inflation?
    2] the Constitution empowers the Federal government to do whatever it chooses with its currency. This means it can do it well and /or it can be stupid, both legally. It’s stupid to borrow its own currency to fund its spending, but not illegal. But where does the notion that the government can only buy its debts and not make a saving account for future use which is what we read in the mainstream? Why cannot it recycle taxes? it’s not denied by the constitution.
    What say you about these MS and MMT ‘laws’?


    1. 1) Increasing the Supply of dollars can cause excessive inflation if Demand for dollars also is not increased. The limit to federal deficit spending is an inflation that cannot be controlled with interest control. (Interest creates a demand for dollars.)

      The Fed wants inflation to be between 2% and 3%. If inflation threatens to go above that, the Fed raises interest rates.

      2. Federal taxes (unlike state and local taxes) are not “recycled,” nor can they be. Dollars received by the Treasury cease to be a part of the money supply. They disappear.

      In essence, the Treasury has no dollars. When the government spends, it creates brand new dollars, ad hoc. It neither needs nor uses income.

      This contrasts with state and local governments, business, you, and me, all of which do need and use income. That is a fundamental difference between Monetary Sovereignty and monetary non-sovereignty.


      1. I obviously didn’t explain myself well. I already know those answers you just repeated. But where are the laws themselves sourced? They don’t directly come from the constitution. It’s too generalised. Who said originally that taxes are not recycled? Who made that rule? You didn’t create the rule. You quote it. The constitution doesn’t spell it out. So who did decide? See what I am getting at? Someone initially said that treasury would be like a cemetery, nothing leaves. Treasuries were not like that in the past.

        As toQ1- will it or will it not cause inflation?Any statistics one way or the other?
        I hope I make myself clear.


        1. Re. question 1: Inflation depends on this equation: [(Demand for Goods & Services / Supply of Goods & Services) x Cost of producing Goods and Services] / [(Interest / Risk) / Supply of Money]

          See: Inflation

          As you can see there are many variables. At any given point in time, the numbers would be different. So, unless one knows all those variables, it is impossible to answer your question. UBI would be only a tiny part of one variable: Supply of Money.

          It’s almost like asking, “Can a person having an unknown income and an unknown amount of wealth and unknown expenses, afford a million dollar house?

          As to the laws, there is no law explicitly stating that taxes are not recycled. The entire body of laws that describe the Treasury and the Federal Reserve and especially the multitude of definitions of the money supply (M1, M2, M3, etc.) all result in tax dollars not being part of the money supply.

          If dollars are not part of the money supply, the do not exist. They have been destroyed. If they do not exist, they cannot be recycled.

          By contrast, state and local taxes are part of the money supply, and are recycled.


          1. Yes but it’s a choice for the fed to destroy tax dollars and its a choice for the non sovereign states etc to not destroy dollars. I’m not picking on you. I’m hoping your superior knowledge can answer such questions. Mostly so we can be armed to counter such arguments by non believers in MS/MMT.
            The whole construct is a choice, or a succession of choices made at some time, and the internal log is sound, but if there are no laws, how did it happen?


        2. It’s not a choice…it’s defined by the rules of accounting as best I can tell-the process is summarily described by MNE’s editor & chief MMT guru, Tom Hickey:

          ‘When the federal government spends, a non-government bank account
          is credited. This adds currency in the form of settlement balances to the payments system. The central bank credits the account of the bank of the recipient with settlement balances, whereupon the bank credits the deposit account of the customer.

          M1 increases, and the monetary base also.

          When a customer pays taxes, the draft is cleared through the central bank, whereupon the central banks debits the account of the bank of the customer in the payments system and the bank debits the customer’s deposit account. M1 decreases and also the monetary base.

          As a matter of accounting the taxes are credited to the Treasury account at the central bank in form of settlement balances. This is booked as an asset of the Treasury and a liability of the Fed. NET ZERO. The federal government has gained nothing. Nor does it need anything since it can issue its own liabilities without limit, the constraint being an unacceptable level of inflation.

          A currency issuing government never needs to obtain funding elsewhere to spend because it spends only its own liabilities, which it alone issues.

          The issue here is simple. Taxes can only be paid with something that only the government issues, which is called “currency.” In a modern system, currency includes cash and settlement balances which are equivalent. Thus, to pay taxes it is necessary to obtain the currency that only the government issues.

          Currency can only be obtained from government either 1) from government spending, which is handled by the Treasury and cleared through the central bank. Modern Treasuries direct the central bank to credit accounts rather than the Treasury distributing cash, or 2) by central banks lending to institutions that are members of the payments system run by the central banks. There is no alternative.’-Tom Hickey, MNE, 07/22/2015


          1. Steve, Tom Hickey is not quite right. Central banks don’t lend to institutions as he writes. They buy debts, or pay for government expenses, same thing.
            We know the constitution empowers the government with total control over the currency, from which one can deduce that it has no need to borrow or save, nor raise a profit.
            However my query cannot be deduced from the constitution. That is, why is the Treasury a money ‘cemetery’? Thing is we have to convince the mainstream that taxes are not used for federal revenue. The constitution says naught about that, nor why Treasury is not a source or even a reserve store of money. every dollar that ends up there is lost forever. Traditionally that was not the case. Treasury meant what it said. So where did this decision come from to turn it inside out?


  2. Question: When you say ” .. Treasury neither needs nor uses income…” how is Monetary Sovereignty explicitly accounted for on the federal balance sheet especially when creating billions from thin air by simply spending ad hoc?


  3. ejhr2015,

    There is a difference between the specific wording of laws and the results of laws.

    There are no laws that specifically say to the Treasury, “When you receive tax dollars, destroy them.”

    But that is the result of Monetary Sovereignty.

    Imagine a box. In one end go 100 red balls and out the other end come 150 blue balls.

    What happened in the box?

    1. Were the red balls somehow repainted blue, and additionally 50 more blue balls created?

    2. Or were all the red balls destroyed, and 150 new blue balls created?

    3. Meanwhile, how many balls are in the box?

    If you can answer those three questions, you will have the answers to your questions.


  4. O.K., ejhr2015, one last time.

    Have you played the game, Monopoly?

    There are four players and the Bank. The Bank is supposed to dole out the “money.”

    But, if you were to open the box and discover there was no Monopoly “money” in there, you still could play.

    Simply draw a four-column table on a sheet of paper, and put each player’s name at the top of a column.

    Then under each name, write an amount of money, say $1000.

    As the game progresses, add or subtract from each player’s column, an appropriate amount.

    Note, that the Bank never runs short of Monopoly dollars, because it only is adding and subtracting numbers. The Bank is Monetarily Sovereign.

    There are times when a player is supposed to pay the Bank a certain amount. So you deduct that amount from that player’s column. But the Bank has no column, nor does it need one.

    So the dollars the player pays to the Bank simply disappear. They are destroyed. That is the inevitable result of Monetary Sovereignty.

    Nowhere in the instructions (aka the “Constitution”) does it say Monopoly dollars are destroyed when they go to the Bank, but that is the inevitable result of Monetary Sovereignty.


    1. I haven’t played Monopoly since I was 16. Even then rarely. But I know about its money creation analogy.
      However not convinced monetary sovereignty answers the question. Monetary sovereignty goes back hundreds of years. Anyway it gives the government choices.


  5. ejhr2015, there has been a lot of history, monetary history, since the Founding Fathers sat down in Phili and cranked out the Constitution. Here’s a good summary of that history –

    Click to access crs-brief-history-of-gold-standard-in-us.pdf

    Key events include what happened during the Civil War, what FDR started, and perhaps most importantly what Nixon finished regarding the end of a metal standard and the emergence of a true fiat currency. The laws and procedures that allowed that emergence are not specified in the Constitution, but how those laws and procedures came about are within its framework – otherwise they would have been declared non-Constituional and we would have a different system than we do today.



  6. For a broader understanding of how economics works in the world, I would add a third element – very few people understand the first two elements, particularly monetary sovereignty, and act accordingly – greatly impacting the economy. The most obvious place this plays out is in the markets. It is also why most people who grasp Monetary Sovereignty, MMT or something similar appear most often to be clueless and frustrated about politics and government policies.


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