–A truly outstanding summary of Monetary Sovereignty for those who want to understand economics Thursday, May 17 2012 

Mitchell’s laws: The more budgets are cut and taxes inceased, the weaker an economy becomes. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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A reader directed me to the following site: http://neweconomicperspectives.org/2012/05/playing-monopolis-monopoly-an-inquiry-into-why-we-are-making-ourselves-so-miserable.html

Somehow, through the magic of the Internet, I lost the reader’s comment, but the site he sent me to is so outstanding I ask that everyone read it.

Reader, whoever you are, please accept my apologies and send me another comment, so I can thank you by name.

Oops, just found it. You can to, in the comment section of the previous post.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com


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No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports

#MONETARY SOVEREIGNTY

Why do you believe what you believe? Wednesday, Jan 17 2018 

It takes only two things to keep people in chains:
.

The ignorance of the oppressed
and the treachery of their leaders.

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Why do you believe what you believe?

You believe a great deal. Some of what you believe is based on facts. Some is flat-out wrong. Some you have invented. Some exists because you want it to exist. Some comes from a trusted source.

Veronique de Rugy would be considered a “trusted source.” The Mercatus Center says:

She is a Senior Research Fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist. Her primary research interests include the US economy, the federal budget, homeland security, taxation, tax competition, and financial privacy.

De Rugy is the author of a weekly opinion column for the Creators Syndicate, writes regular columns for Reason magazine, and she blogs about economics at National Review Online’s the Corner.

Her charts, articles, and commentary have been featured in a wide range of media outlets, including the Reality Check segment on Bloomberg Television’s Street Smart, the New York Times’ Room for Debate, the Washington Post, the Wall Street Journal,CNN International, Stossel,20/20, C-SPAN’s Washington Journal, and Fox News.

In 2015, she was named in Politico Magazine’s Guide to the Top 50 thinkers, doers and visionaries transforming American Politics. 

Outstanding credentials. You can’t get much more trusted than that.

And yet . . . well, you decide. Here are excerpts from one article she wrote for Reason Magazine:

Start Saving Now, Because Social Security Is Screwed
If Congress doesn’t address its insolvency issues, payouts will need to be slashed by a quarter starting in fewer than 20 years.

The single largest government program in the United States will soon have an annual budget of $1 trillion a year. Yet even that amount isn’t sufficient to fulfill the promises it has made.

If Congress doesn’t address its insolvency issues, payouts will need to be slashed by a quarter starting in fewer than 20 years.

The program is Social Security, and our national pastime seems to be turning a blind eye to its dysfunctions.

The U.S. federal government (unlike you and me, and unlike state and local governments), is Monetarily Sovereign.  As such, it has the unlimited ability to create its own sovereign currency, the U.S. dollar.

It created the very first dollar 240 years ago, by creating laws from thin air, and since then these laws have created many billions of dollars, also from thin air. 

The federal government never, unintentionally, can run short of dollars.

For the same reason, no agency of the U.S. government can run short of dollars, unless Congress and the President want that to happen. Social Security is an agency of the U.S. government.

Congress has no “insolvency issues.” Even if all federal tax collections fell to $0, the federal government could continue spending unlimited amounts, forever.

So, even if the FICA tax were $0, the federal government could fund Social Security and Medicare, too, for every man, woman, and child in America — forever.

The article continues:

The problems with this entitlement aren’t unique. Obamacare is also a mess, while cumulative government spending on Medicare and Medicaid is growing at a faster rate than Social Security is, and eventually will consume a larger share of the economy.

Obamacare indeed is “a mess,” but not because it is short of money. It is a mess because it is based on the lie that it is limited by federal tax collections.

Obamacare (and Medicare and Medicaid and all other similar programs) should be replaced by a federally funded Medicare for every man, woman, and child in America.

Federal spending for Obamacare, Medicare, Medicaid, and any other program does not “consume” a share of the economy. Federal spending adds growth dollars to the economy.

Gross Domestic Product = Federal Spending + Non-federal Spending + Net Exports

The more the government spends, the more dollars become available to you, me, and the rest of the economy.

But that’s no reason to ignore the serious fiscal issues with America’s main retirement program. Since 2010, it has been running a cash-flow deficit—meaning that the Social Security payroll taxes the government collects aren’t enough to cover the benefits it’s obliged to pay out.

To get by, the program started tapping into the assets set aside beginning in the 1980s for rainy days.

Prior to 2010, the program collected more in payroll taxes than was needed to pay the benefits due at the time. The leftovers were “invested” into Treasury bonds through the so-called Old Age Trust Fund, which is now being drawn down.

Ms. de Rugy, seems not to understand the differences between a Monetarily Sovereign entity (the U.S. government) and a monetarily non-sovereign entity (you, me, businesses, cities, counties, states, euro nations.)

Payroll taxes do not “cover” benefits. Payroll taxes aren’t used for benefits. When your federal tax dollars reach the Treasury, they cease to be part of any money supply measure (M1, M2, M3, L, etc.)

In other words, your tax dollars are destroyed upon receipt.

To pay its financial obligations, the federal government creates brand new dollars, ad hoc. It sends instructions (not dollars) to each creditor’s bank, telling the bank to increase the creditors checking account numbers.

When the bank does as it is instructed, new dollars are added to the nation’s money supply. That is the method by which the federal government creates dollars.

In fact, the Treasury bonds are nothing but IOUs.

When you so-called “lend” to the federal government, you take dollars from your checking account and deposit them into your Treasury bond (or Treasury bill or Treasury note) account, which is quite similar to an interest-paying bank savings account.

There, your dollars remain, until the bond matures. Meanwhile, the dollars never are removed from your account to pay bills or for any other purpose. 

Upon maturity, the Treasury pays you back by transferring the dollars that still exist in your Treasury bond account back to your checking account. No new dollars required.

When it’s time to disburse benefits they can’t afford, Social Security administrators turn in those paper promises in exchange for hard cash from the Treasury Department.

Very few Treasury bonds are represented by paper, and there is no such thing, in all the world, as “hard cash.” A dollar bill is not cash.

A dollar is a balance sheet number, having no physical existence. A dollar bill is a title to a dollar, but in of itself is not a dollar, just as a car title is not a car and a house title is not a house.

The federal government can “afford” any payment, no matter how large.

But Treasury also doesn’t have the money: It has already spent it on wars, roads, education, domestic spying, and much more.

So when Social Security shows up with its IOUs, Treasury has to borrow to pay the bonds back. That adds to the debt that future generations will be on the hook for via higher taxes.

The federal government cannot run short of dollars, so the phrase “already spent it . . . ” makes no sense, whatsoever.

Further, the government has no need to borrow, and indeed, does not borrow. It simply accepts deposits, the purpose of which are not to fund government spending. (They help control inflation, provide a basis for safe worldwide investment, and secure the dollar’s position as a world reserve currency.)

 Past generations of workers paid extra payroll taxes to bulk up the Social Security system.

But the government spent that additional revenue on non-retirement activities, so now your children and grandchildren will also have to pay more in taxes to reimburse the program.

Totally false. Payroll taxes do not “bulk up” anything. They are destroyed upon receipt. The federal government never can run short of its own sovereign currency. That is what “sovereign” means. The federal government has infinite “bulk.”

The federal government does not spend tax dollars. It creates brand new dollars, ad hoc, every time it spends. So your children and grandchildren will not “reimburse” the program.

You may be tempted to wave away this problem. After all, there’s more than $2.3 trillion left in the trust fund.

The so-called “trust fund” is a fiction. Of what meaning is a “trust fund” for an entity that has the unlimited ability to create its sovereign currency? Answer: None.

The Social Security trustees have calculated that the cash-flow deficit over the next 80 years will amount to a staggering $44.2 trillion, and that’s after adjusting for inflation.

Under current projections, the make-believe assets in the fund will only be enough to pay full benefits until 2034.At that point, the system will have to revert to paying out only the amount taken in through annual taxes.

And that means benefit cuts across the board of 25 percent.

The federal government’s “deficit” is the economy’s income. The $44.2 trillion projected deficit (if correct) simply means $44.2 trillion in stimulus dollars added to the economy.

That is the way the economy grows. It’s a good thing, not a bad thing.

It will be especially hard on lower-income Americans, who are more likely to depend entirely on the program during their later years.

Yes, it will be hard on lower-income (and middle-income) Americans, and that is exactly what upper-income Americans, the rich who run America, want.

The goal of the rich is to become richer. This requires widening the Gap between the rich and the rest. Without the Gap, no one would be rich (We all would be the same.) And the wider the Gap, the richer they are.

To widen the Gap, the rich need to gain more for themselves and/or to take from the rest. Either will do.

That is the reason the rich employ people like Ms. de Rugy to spread the Big Lie, that the federal government needs tax dollars to pay its bills, and so can’t afford to support social programs.

Options for reform at that point will be limited. With the national debt projected to be 105 percent of GDP, or $39.1 trillion, in 2034—and with Medicare and Medicaid facing even bigger long-term problems—Congress will be too broke to restore full benefits for all.

The ratio of federal “debt” (i.e. deposits in T-security accounts) to Gross Domestic Product is meaningless. Contrary to popular myth, the ratio is supposed to indicate the “affordability” of debt. Utter nonsense.

The so-called “debt” is not paid off with Gross Domestic Product. Japan’s ratio is about 250%. Haiti’s is about 15%. Which economy would you prefer?

The most likely scenario is that higher-income earners will see their benefits disproportionately reduced, their taxes disproportionately hiked, or both. To them I have but one piece of advice: Start saving now.

No, the most likely scenario is that the Gap between the rich and the rest will widen, particularly with a conservative government.

Given this predicament, Congress should make it easier for all Americans to save. One way to do that is through the creation of Universal Savings Accounts, or vehicles that allow people to invest money without all the complicated rules that now apply to IRAs and 401(k)s.

In addition, Congress should boost the maximum contributions people can make to Health Savings Accounts, so that more Americans can afford the medical expenses most of us inevitably incur in our old age.

More broadly, Congress should shift away from Social Security into a “funded” system based on real savings, much as Australia and others have done. The libertarian economist Daniel J. Mitchell notes that, starting in the ’80s and ’90s, that country has required workers to put 9.5 percent of their income into a personal retirement account.

As a safety net—but not as a default—Australians with limited savings are guaranteed a basic pension.

Reason Magazine is Libertarian. Libertarians, who are kissing cousins to anarchists, have little credibility when discussing government spending. To libertarians, any government spending seems to be too much.

Congress should not ask people to pay for their health care, their retirement, their children’s education, etc., thus reducing what people have, today.

The federal government should do it, via the Ten Steps to Prosperity (below).

Summary: The title question, “Why do you believe what you believe?”  leaves open the question, why does “The Mercatus Center of George Mason University, promulgate such false information?”

We find it difficult to imagine that Ms. de Rugy really doesn’t understand the facts.  We are left only to speculate, and perhaps this article provides a clue:

George Mason Students Sue For Records On Koch Donations
By David Halperin

Today, students at George Mason University sued their school and a private foundation tied to the school in a Virginia state court, seeking records related to donations from the billionaire Koch brothers.

The students are concerned that Koch donations to GMU, a state university, come with inappropriate conditions; they launched their campaign on this issue in 2014 after learning that the Charles Koch Foundation, GMU’s biggest donor, had sought influence over faculty hiring and teaching curriculum, for example through a grant agreement with Florida State University.

Charles and David Koch, heirs to the $100 billion energy and chemicals corporation Koch Industries, have for decades sought to push a conservative agenda, seeking to influence politics but also investing heavily in academic programs that conform nicely with the brothers’ financial interests.

The rich want to widen the Gap by taking from the poor and middle classes and giving to themselves. They to promulgate the false notion of federal insolvency by:

  1. Bribing politicians via campaign contributions and promises of lucrative employment, later
  2. Bribing media via advertising dollars and media ownership
  3. Bribing university economists via donations to schools, and lucrative employment at think tanks.

Draw your own conclusions.

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

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The 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.
2. FEDERALLY FUNDED MEDICARE — PARTS A, B & D, PLUS LONG TERM CARE — FOR EVERYONE (H.R. 676, Medicare for All )
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 (Economic Bonus)) 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.
5. SALARY FOR ATTENDING SCHOOL
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.
6. ELIMINATE FEDERAL TAXES ON BUSINESS
Businesses are dollar-transferring machines. They transfer dollars from customers to employees, suppliers, shareholders and the federal government (the latter 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.
8. TAX THE VERY RICH (THE “.1%) MORE, WITH HIGHER PROGRESSIVE TAX RATES ON ALL FORMS OF INCOME. (TROPHIC CASCADE)
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.

MONETARY SOVEREIGNTY

 

Regarding the economy, what is the Fed’s most important job? Monday, Jan 15 2018 

It takes only two things to keep people in chains:
.

The ignorance of the oppressed
and the treachery of their leaders.

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Regarding the economy, what is the Federal Reserve’s most important job?

Trump picks Jerome Powell to succeed Yellen as Fed chair
Jeff Cox, JeffCoxCNBCcom

President Donald Trump nominated Jerome Powell to run the Federal Reserve once current Chair Janet Yellen’s term expires.

The move follows an extended period of speculation over who would be named to head the central bank, whose aggressive policies have been considered crucial to a climate of low interest rates, surging job creation and booming asset prices.

Today is an important milestone on the path to restoring economic opportunity to the American people,” Trump said.  “The Fed requires strong, sound and steady leadership” and Powell “will provide exactly that type of leadership.”

Yellen’s term has been marked by a mostly uninterrupted bull market run in stocks that began in March 2009.

The central bank has taken the first steps in unwinding the $4.5 trillion balance sheet built up during the efforts to spur growth through bond purchases.

Yellen is “a wonderful woman who’s done a terrific job,” Trump said.

In short, Trump fired a “wonderful woman who’s done a terrific job,” and who has seen a “mostly uninterrupted bull market.” In her place, he hired a man who, so far as Trump knows, will do exactly the same thing. The difference: He will be Trump’s, not Obama’s.

Aside from snuggling up to the President, what is the real job of the Fed Chairman? If I were President, and about to hire a new Fed Chairman, I’d tell him/her something like this:

You have two tasks: Run the banking system efficiently and control inflation by controlling interest rates.

Don’t try to stimulate the economy; that’s Congress’s and my job.

Don’t worry about federal deficits or debt or unemployment. Those all belong to Congress and me.

Keep your focus on the banking system and inflation.

Why would I stress that focus? Recently, an article in The Week said otherwise:

Could this policy tweak revolutionize the Fed?
Jeff Spross

John Williams, the president of the Fed’s San Francisco branch, and one of the officials who regularly votes on monetary policy, is suggesting a move to something called “price level targeting.”

The Fed manages the economy by adjusting interest rates up and down in order to meet its dual mandate: to maximize employment and to keep prices stable.

The problem is the so-called “dual mandate,” which is really a triple mandate, or more: Not only maximize employment and keep prices “stable” (i.e. 2% inflation), but grow the economy, prevent & cure recessions, prevent & cure “bubbles,” and generally be responsible for the entire economy.

Note how Janet Yellen was given tacit credit for the 9-year recovery from the “Great Recession.

Thus, Congress and the President (C&P) are not at fault for anything that goes wrong; it’s all the Fed. How very convenient.

Never mind that C&P determine all federal spending, all federal taxing, all federal regulations and all supervision of financial laws.  We are supposed to believe that none of that affects employment, prices, or economic growth.

No, it’s the Fed that supposedly is responsible for the economy.  Can it get more ignorant than that?

Actually, it can, because of the underlying belief that cutting interest rates is stimulative and raising rates is recessive. This belief is based on the idea that high rates make borrowing easier, and borrowing is stimulative.

There are two problems with that belief, one theoretical and one factual.  The theoretical goes like this: Low interest rates stimulate businesses and individual borrowing, and borrowing is stimulative. Therefore low interest rates stimulate the economy.

But facts from history do not show that low rates stimulate borrowing:

If low interest rates stimulate borrowing, you would expect to see the blue line (Fed Funds Rate) move opposite to the red line (Household borrowing) and the orange line (Business borrowing). We see no such relationship.

More facts: History also does not show that low rates stimulate hiring:

If low interest rates stimulate hiring, you would expect to see the blue line (Fed Funds Rate) move opposite to the red line (Employment/Population ratio). Again, we see no such relationship.

With the 2008 crisis, the Fed found itself cutting interest rates all the way to zero, and it still didn’t stimulate the economy nearly enough.

If cutting interest rates all the way to zero didn’t stimulate the economy enough, doesn’t that provide a strong clue that cutting rates simply doesn’t stimulate the economy?

And let’s not forget that cutting rates reduces the number of dollars the federal government pumps into the economy in the form of interest on T-securities.

And the final nail in the “low-rates-stimulate” coffin, here is a comparison of interest rates with Gross Domestic Product:

If low interest rates stimulate the economy, you would expect to see the blue line (Fed Funds Rate) move opposite to the green line (Gross Domestic Product). Yet, again, we see no such relationship.

The central bank likely won’t have nearly as much room to cut interest rates and boost the economy when the next recession arrives.

Correct. The central bank won’t be able to “boost” the economy by cutting rates below zero. Why would anyone think a below zero — or any other low rate — would be stimulative?

But if the Fed can’t cut rates any lower, it might still be able to boost the economy by credibly promising to keep them at 0 for longer.

Strangely, the author (and most policy “experts”) believes cutting rates down to zero is stimulative, but cutting rates below zero is recessive.

So for instance, if the rate is at 5%, and the Fed cuts five percentage point all the way down to zero, that will stimulate the economy, but if instead, the Fed cuts 5.1 percentage points, that will be recessive???

Folks, if that makes sense to you, you also might be interested in what a Nigerian prince has to offer.

In summary: The Fed controls interest rates, which in turn, partly control inflation. That’s it. Economic growth is controlled by Congress and the President.

America is a business; a very, very big business. Never ask a bank to run a business.

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

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THOUGHTS

•All we have are partial solutions; the best we can do is try.

•Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

•Any monetarily NON-sovereign government — be it city, county, state or nation — that runs an ongoing trade deficit, eventually will run out of money no matter how much it taxes its citizens.

•The more federal budgets are cut and taxes increased, the weaker an economy becomes..

•No nation can tax itself into prosperity, nor grow without money growth.

•Cutting federal deficits to grow the economy is like applying leeches to cure anemia.

•A growing economy requires a growing supply of money (GDP = Federal Spending + Non-federal Spending + Net Exports)

•Deficit spending grows the supply of money

•The limit to federal deficit spending is an inflation that cannot be cured with interest rate control. The limit to non-federal deficit spending is the ability to borrow.

•Until the 99% understand the need for federal deficits, the upper 1% will rule.

•Progressives think the purpose of government is to protect the poor and powerless from the rich and powerful. Conservatives think the purpose of government is to protect the rich and powerful from the poor and powerless.

•The single most important problem in economics is the Gap between the rich and the rest.

•Austerity is the government’s method for widening the Gap between the rich and the rest.

•Everything in economics devolves to motive, and the motive is the Gap between the rich and the rest..

MONETARY SOVEREIGNTY

What will cause the end of the bull market Thursday, Jan 11 2018 

It takes only two things to keep people in chains:
.

The ignorance of the oppressed
and the treachery of their leaders.

——————————————————————————————————————————————————————————————————————————————————————————–

You have been invested in the stock market for the past nine years. You now view yourself as a financial genius. Calm down. It would have taken exceptional “skill” for an investor not to have made money, lots of it, in this bull market.

And the market still bulls upward, newly propelled by the anticipation of stimulative federal tax cuts.

Why do tax cuts simulate? Very simply, because they leave more dollars in the economy.

Think of yourself as a car and the gas station as the federal government. When you pump gas into your car, the gas station runs a gas deficit and you run a gas surplus.

The station’s gas deficit is a good thing, just as the federal government’s money deficit is a good thing for you.

But if for some strange reason, you are forced to give the gas station more gasoline than you receive (i.e. the station runs a gas surplus), your driving will be limited.

Now, you begin to see articles by pundits, who tell you the end is nigh, or surely must be nigh, because all bull markets end, sometime. The January/February issue of MONEY Magazine contains just such an article. It is titled, “3 Ways This Bull Market Could End.”

The “3 ways” are interesting, and each contains a grain of truth, but they don’t include the real way this bull market will end.

First, MONEY’s “3 ways”:

Scenario #1: The Economy Did It
What bull markets fear most isn’t the shock of war or political crisis, but recessions.

Two-thirds of all bull markets since World War II have ended in anticipation of an economic contraction. Still, most traditional indicators are signaling that the economy is doing just fine and isn’t likely to shrink in the next year or two.

Historically, real estate construction has been a terrific indicator of the economy because it takes months to construct a new home. Every recession since 1960 was preceded by a double-digit decline in housing starts.

Yet in October housing starts rose by double digits—13.7%, to be exact—indicating that construction firms aren’t betting on a slowdown in the economy in 2018.

There’s another concern. “The economy typically slips into a recession four years after the first Federal Reserve rate hike,” says John Lynch, chief investment strategist for LPL Financial.

The central bank actually started lifting rates in late 2015. Four years after that would put a possible recession start date in late 2019. And if stocks foreshadow recessions up to a year before, that means a bear could be lurking at the end of 2018.

The stock market is the world’s business-prediction method. With hundreds of millions of investors inputting their beliefs, it is the ultimate “Wisdom of the crowd” device.

But, a problem with this “wisdom,” it that not only does the “crowd” try to predict the overall market, and not only does it also try to predict the effect of individual stocks, but the crowd also tries to predict the actions of the crowd, and then act on these predictions.

Thus the crowd becomes a self-referential, self-fulfilling prophesy machine.

Further, federal interest rate hikes are not, in of themselves, recessive. On the contrary, to the degree a rate hike forces the federal government to pay more interest dollars into the economy, the increased rates are stimulative.

Rate hikes always are a prevention and cure for excessive inflation, and excessive inflation is a cause of business downturns.

It is the disease (inflation), rather than the cure (higher interest), that causes the symptom: Recession. 

Scenario #2: The Fed Did It
Central bankers at the Fed have publicly stated that they believe there will be around two or three more rate hikes in 2018, bringing the so-called Federal funds rate, which banks charge one another on overnight loans, to around 2% or so next year.

The markets have a knack for testing newly installed Fed chairmen.

It happened to Alan Greenspan, who became chairman in August 1987, at the end of an economic cycle. The Greenspan-led Fed proceeded to raise interest rates just before the October 1987 crash.

Similarly, Ben Bernanke assumed the Fed chairmanship in 2006 toward the end of another economic cycle as the central bank was hiking rates—and just before the 2007–2009 bear market.

The Fed doesn’t even have to make a big error—for instance, by raising rates too aggressively—to spook the markets. Simply raising rates unexpectedly or communicating their intentions poorly “could create volatility as rates rise.”

Although functionally, interest rate increases are not recessive, the mere belief that they introduce recessions can be sufficient to cause recessions.

The 2007-2009 bear market, which corresponded to the “Great Recession,” was caused by flagrantly illegal lending by big banks, not by interest rates.

Scenario #3: The Market Has a “Minsky” Moment
A “Minsky moment,” named after the late economist Hyman Minsky, who studied boom-and-bust cycles in the financial markets and argued how unstable bull markets can be after a long run.

[Investors take on additional risk during prosperous times or bull markets. The longer a bull market] lasts, the more risk is taken in the market. Eventually, so much risk is taken that instability ensues.

A Minsky moment was blamed in part for the global financial crisis, when investors took on ever more debt to make speculative investments in houses and mortgage securities without worry until it eventually reached a tipping point when every investor did start to worry.

To be sure, Rob Arnott, chairman of Research Affiliates, notes that “the temptation in a bull market is to buy more.”

Not only does a bull market tempt investors to buy more, but the bull market itself automatically rebalances an investor’s portfolio toward more speculative, higher-flying investments.

Market action alone could take a very conservative portfolio consisting of 50% stocks and 50% bonds, into a new, aggressive ratio of 75% stocks and 25% bonds.

And now, The Real Reason for Recessions:

A large economy contains more money than does a smaller economy. The U.S. economy contains more dollars than does the California economy, which in turn contains more dollars than does the Los Angeles economy.Related image

Gross Domestic Product, the typical measure of a nation’s economy, consists of three, basic measures: Federal Spending + Non-federal Spending + Net Exports.

All three are money measures. Federal Spending pumps dollars into the economy. Non-federal spending is done with dollars that are in the economy. Net Exports add dollars to the economy.

While Federal Spending adds dollars to the economy, federal taxes take dollars out of the economy. The difference between spending and taxing is Federal Deficit Spending, the net amount of dollars the government adds to the economy.

When net dollars are added to the economy, this stimulates economic growth. When net dollars are taken from the economy, this is recessive.

When the federal government runs a deficit, the economy receives dollars, and when the federal government runs a surplus, the economy runs a deficit.

If the normal federal deficit instead becomes a federal surplus, the economy will have a Depression or at “best,” a recession.

U.S. depressions tend to come on the heels of federal surpluses.
1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Great Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.

Even reductions in deficit growth can lead to recessions:

Monetary Sovereignty

Federal Deficit — 1955 – Present. Vertical Bars are recessions

As the federal deficit growth line drops, we approach recession. Recessions are cured only by deficit increases.

Federal deficit growth is necessary for economic growth.

Recently, the Republican-dominated Congress passed a tax law that included reductions in business and personal taxes, predicted to add $1.5 Trillion to the federal debt.

That represents $1.5 Trillion added to the economy, which is stimulative — or would be stimulative but for this:

Ryan says Republicans to target welfare, Medicare, Medicaid spending in 2018.

“House Speaker Paul D. Ryan (R-Wis.) said Wednesday that congressional Republicans will aim next year to reduce spending on both federal health care and anti-poverty programs, citing the need to reduce America’s deficit.”

Because deficits add stimulative dollars to the economy, deficit reductions lead to recessions. If Ryan cuts federal spending for social programs, we will have a recession, the severity of which will be related to the size of deficit cuts.

Starve consumers of their purchasing dollars, and businesses will experience reduced sales and profits.

In summary, interest rates are not a true point of concern. Rather, deficit growth cuts, or worse yet, federal surpluses, will drag us down to recession or depression, and only massive deficit spending will cure the disease.

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

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The 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.
2. FEDERALLY FUNDED MEDICARE — PARTS A, B & D, PLUS LONG TERM CARE — FOR EVERYONE (H.R. 676, Medicare for All )
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 (Economic Bonus)) 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.
5. SALARY FOR ATTENDING SCHOOL
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.
6. ELIMINATE FEDERAL TAXES ON BUSINESS
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.
8. TAX THE VERY RICH (THE “.1%) MORE, WITH HIGHER PROGRESSIVE TAX RATES ON ALL FORMS OF INCOME. (TROPHIC CASCADE)
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.

MONETARY SOVEREIGNTY

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