I’ve discussed all of the above in previous posts. Click the links to read why each common belief is false.
These false beliefs result in curtailing federal deficit spending, which grows the economy and prevents inflation. The so-called “debt ceiling” law is a notorious example, but many others are daily occurrences.
Occasionally, I enjoy conversing with artificial intelligence (AI) like Copilot or ChatGPT to learn the latest common beliefs on any subject. Here is a discussion about one of the false beliefs: Number 5 (Excessive federal spending causes inflation) and its close relative, 6 (Inflation is too much money chasing too few goods.)
This is what CHAT GPT said:
CHAT GPT: A crucial distinction between Monetary Sovereignty (MS) and Modern Monetary Theory (MMT):The MS model holds that inflation is not primarily caused by excessive federal spending, as some traditional economic theories might suggest. Instead, MS argues that inflation is generally driven by shortages of key resources, such as Oil, food, shipping, raw materials, andlabor.MS’s Rodger Malcolm Mitchell asserts that prices increase when key goods or resources become scarce—due to supply chain disruptions, natural disasters, geopolitical factors, or other bottlenecks—leading to inflation. The price increases are a natural response to the scarcityof goods and services rather than an overabundance of money or federal spending.Interestingly, Mitchell argues that federal spending can help cure inflation, but only when that spending alleviates resource shortages. For example:Government spending can increase the availability of scarce resources, such as investing in energy infrastructure (e.g., renewable energy sources), food production, transportation networks, or manufacturing capacity. By directing spending to increase supply, the government can reduce the constraints that cause inflation in the first place.MMT generally views inflation as the result of too much money in circulation relative to the economy’s productive capacity. According to MMT, the government must balance its spending with the available resources (labor, capital, etc.), and excessive government spending could lead to inflation if it exceeds the economy’s ability to produce.The Zimbabwean hyperinflation crisis is often misunderstood in the context of the traditional view of inflation. In fact, the case of Zimbabwe illustrates Monetary Sovereignty (MS) principles quite well and highlights how resource scarcity (not just printing money) can drive inflation.The land reform program in Zimbabwe, particularly in the early 2000s, led to the forced redistribution of land from white farmers to Black Zimbabweans. Many of the new land recipients had little experience in commercial farming, leading to a collapse in agricultural production, especially food crops.This food shortage was a key driver of the economy’s inflationary pressures. As basic food staples became scarcer, prices skyrocketed, leading to the classic symptoms of hyperinflation.The government responded to the economic crisis by printing more money to finance its expenditures, such as paying public sector workers and funding other projects. This led to the devaluation of the currency and worsening inflation, which spiraled out of control.However, traditional economic analysis often blames currency printing as the sole cause of inflation. The government’s money creation exacerbated the situation but wasn’t the root cause. The actual driver was the scarcity of food, which caused demand-pull inflation (more money chasing fewer goods) and cost-push inflation (rising production costs due to shortages).The Monetary Sovereignty approach would argue that the government should have spent money to address the food shortage by helping farmers improve production, securing food imports, or providing subsidies to reduce food prices. By resolving food scarcity, inflation could have been mitigated and controlled.If the Zimbabwean government had used its control over its currency and focused on producing or importing food rather than printing money as a catch-all solution, inflation could have been reduced, and the country could have avoided the worst hyperinflation.The Monetary Sovereignty model suggests that the government can effectively use its monetary power to respond to shortages. If Zimbabwe had directed its spending toward increasing food production and resolving supply-side constraints (such as infrastructure, farming skills, and food security), inflation could have been curbed without the need for drastic currency printing.This example illustrates how inflation is not always caused by excessive government spending or money creation but rather by the scarcity of key resources essential for economic stability. In such cases, targeted government spending to alleviate resource shortages can help resolve inflationary pressures.
While MS and MMT agree that inflation occurs when demand exceeds supply, the question of the fundamental cause remains. Does increased government spending increase demand and cause inflation? Or do certain factors — weather, disease, strikes, legislation, etc. — reduce supply to cause inflation?
In Zimbabwe, the fundamental cause was reduced supply, resulting in government currency printing.
It can be argued that America’s most recent inflation was caused by COVID-related shortages of oil, food, shipping, labor, metals, wood, computer chips, and virtually every other supply source.
GRAPH I
From 2012, federal spending (red) rose an average of 5% a year, while inflation (blue) remained mostly below the Fed’s 2% (horizontal black line) target.
The sudden rise in federal spending around 2019 can be largely attributed to the onset of the COVID-19 pandemic in early 2020.
To combat the economic fallout and public health crisis, the U.S. government implemented a series of unprecedented fiscal measures, including stimulus packages, unemployment benefits, and support for businesses.
The stimulus packages were partially effective. According to the National Bureau of Economic Research (NBER), the COVID-related recession lasted only two months, from February to April 2020. This makes it the shortest recession in U.S. history.
However, the stimuli did not directly address the COVID-related shortages,so prices suddenly rose as the stimulus fell. Without the stimuli, the recession would have lasted much longer but had the stimuli addressed the fundamental causes of the inflation—shortages—inflation could have been moderated or even avoided.
The COVID-19 pandemic provides another important example of inflation being driven largely by supply-side shortages rather than simply an excess of money creation. The inflationary pressures seen in the wake of the pandemic were not caused by massive money creation during the pandemic but rather by a series of supply-side shocks that disrupted global supply chains and reduced the availability of key goods and services.The pandemic caused widespread disruptions to supply chains. Factories shut down, shipping routes were interrupted, and workers became unavailable due to illness or lockdowns. These disruptions made producing and distributing goods more complex, creating scarcity in many sectors.Shipping costs also skyrocketed, with container shortages and delays affecting the global movement of goods. As a result, the cost of goods increased significantly due to increased production costs and shipping costs.The pandemic caused significant labor shortages, especially in agriculture, manufacturing, retail, and healthcare industries. In many cases, workers had to stay home due to illness, quarantine measures, or childcare needs, while others left their jobs in search of better pay or conditions.These labor shortages reduced the supply of goods and services, which also contributed to higher prices as businesses struggled to maintain production and service levels.Prior to the pandemic, central banks (especially the Federal Reserve) had already undertaken massive money creation through quantitative easing and low interest rates, trying to stimulate the economy after the 2008 financial crisis. This led to a substantial increase in the money supply (in the form of bank reserves), but we didn’t see the inflationary spike that many had predicted.In fact, despite these high levels of money creation, inflation remained relatively low because the economy was still underperforming in terms of demand, and plenty of idle resources (like unemployed workers) kept inflation in check.However, COVID-19 changed the dynamics:The money supply wasn’t the primary driver of inflation during the pandemic. The money was already in the system, and inflation didn’t surge until the COVID-related supply shocks started to hit.The inflation we saw during and after the pandemic was caused by disruptions in the supply of key goods—like food, energy, and raw materials—along with labor shortages, not an excess of money.According to Rodger Malcolm Mitchell’s Monetary Sovereignty model, the inflation we saw was caused by resource shortages, not excessive government spending or money creation.Federal spending and money creation during the pandemic were responses to the economic collapse caused by the shutdowns. Governments around the world increased spending to support workers and businesses, but this spending did not directly cause inflation.If the U.S. government (or any sovereign nation) had spent its resources on addressing the supply shortages—for example, by improving manufacturing capacity, addressing supply chain issues, and incentivizing workers to return to work—this could have helped mitigate inflation.Summary:The COVID-19 inflation crisis mirrors what happened in Zimbabwe, where inflation was driven by scarcity of key resources (not just excessive money creation). In both cases, the real cause of inflation was resource shortages—whether in food, labor, or manufacturing—and not the amount of money in circulation.
The Zimbabwe and COVID inflations were not unique. Historically, they were typical of inflations because they were caused by shortages, especially oil and food shortages, not by the money supply.
Here is a comparison of America’s money supply vs. inflation.
GRAPH II
The peaks and valleys of changes in the M3 money supply (red) do not match with the peaks and valleys of inflation (blue).
A common mantra is that inflation is “too much money chasing too few goods.” Given the above graph, the “too much money” phrase would be difficult to substantiate.
Then, we look at the question, does federal deficit spending cause inflation?
GRAPH III
Deposits into Treasury Security accounts (purple) do not match up with inflation (blue).
Deposits into T-Security accounts (so-called “government borrowing”) do not match up with inflation.
Compare it to this graph:
GRAPH IV
The peaks and valleys of oil prices (green) closely match those of inflation (blue).
The above graph shows a very close relationship between changes in oil supply (as reflected in its price) and inflation, substantiating the “too few goods” part of the mantra.
This refutes the common belief that inflation is caused by “excessive” federal deficit spending. The past 50 years demonstrate otherwise.
Sadly, by acting on this false belief, the federal government repeatedly has cut federal deficit spending, which repeatedly has resulted in recessions that are cured by increased federal deficit spending, as shown in the following graph:
GRAPH V
Recessions (gray vertical bars) are preceded by periods of reduced federal debt (gold) and are cured by increased federal debt. SUMMARY
Economics is not alonein promulgating false narratives; it is undoubtedlyguilty. The facts are:
The primary cause of inflation is shortages of crucial goods and services, most commonly oil and food.
Federal deficit spending is not a significant cause of inflation.
Increased money supply is not an essential cause of inflation.
Reduced federal spending is a significant cause of recessions.
Increased federal deficit spending can cure inflations by addressing shortages of crucial goods and services.
Increased federal deficit spending cures recessions.
WITHIN TWO YEARS, THE PEOPLE WHO VOTED FOR TRUMP WILL DENY IT. BY THEN IT MAY BE TOO LATE.
First, he’ll deport the criminals. Then, the innocent but undocumented. Then, the birthright citizens and the Dreamers. Then, everyone who criticizes Trump. Hitler never stops.
DOD Working on Guantanamo (Trump’s Auschwitz)White House press secretary Karoline Leavitt confirmed that the Department of Defense (DOD) is working on increasing the bed capacity at the U.S. Guantanamo Bay Naval Base in Cuba for housing illegal immigrants arrested by U.S. Immigration and Customs Enforcement (ICE) agents.
WHAT KIND OF NATION APPROVES OF CRUELTY TO CHILDREN?
The action will allow the United States to use Guantanamo in its “full capacity to provide critical extra detention space for high-priority criminal illegals” because U.S. immigration officials continue to make more arrests across the country, she said.Earlier this week, Trump said in a memorandum that he is instructing the DOD to prepare Guantanamo to detain illegal immigrants with criminal records. In a speech at the White House, he said the facility at Guantanamo will hold 30,000 individuals, whom he described as the “worst criminal illegal aliens threatening the American people.”
The cost of finding, arresting, transporting, feeding, and housing the immigrants will be enormous, not to mention the economic cost of losing that many workers and consumers.
Many are parents of young children. What will become of those children? WHAT WILL BECOME OF THOSE CHILDREN?
Meanwhile, Trump is trying to cancel the student lunch program because of the cost. Plenty of money to catch, feed, and shelter Guantanamo, but not enough to feed innocent school children.
“This will double our capacity immediately,” he said, adding that Guantanamo is a “tough” place to escape from.The detention facility at Guantanamo Bay was set up in 2002 by President George W. Bush to detain foreign militant suspects following the Sept. 11, 2001, terror attacks on the United States. There are 15 detainees left in the prison.Trump’s predecessors, Presidents Barack Obama and Joe Biden, sought to shut down the Guantanamo prison and were only able to reduce its inmate population, but Trump has said he would keep it open.Leavitt said that 97 percent of people who were deported from the United States in recent days “had a removal order from the previous administration that the previous administration refused to act on” and that the Trump administration is “following the law.”
Absolute guarantee: Trump soon will begin removing all undocumented immigrants–not just criminals– and shipping them to Auschwitz. MAGAs laugh.
Does America’s cruelty never end?
Rodger Malcolm Mitchell
Monetary SovereigntyTwitter: @rodgermitchellSearch #monetarysovereigntyFacebook: Rodger Malcolm Mitchell;MUCK RACK: https://muckrack.com/rodger-malcolm-mitchell; https://www.academia.edu/
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The Sole Purpose of Government Is to Improve and Protect the Lives of the People.
Ask the “man in the street” where money comes from, and he will describe a “circular economy”:
We pay taxes to the federal government to fund federal spending.
When there are not enough tax dollars, the federal government borrows dollars via Treasury bills, notes, and bonds.
As employees of businesses, we receive payment, part of which goes to the federal government in taxes to fund government spending.
And around and around she goes: Federal spending — > federal taxing and borrowing —> more federal spending.
It’s widely believed, even by some economists, and may be what you were taught in school. But it is wrong.
The federal government creates dollars. It does not use tax dollars. It destroys tax dollars. And the federal government does not borrow dollars. Not ever.
Here are some facts to ponder: In 1940, the total M2 money supply (M1 plus savings deposits, small-denomination time deposits, and other near-money assets like money market funds) was approximately $49.27 billion.
Huh? If the entire U.S. economy had only $49 billion in 1940, how could it lend or pay taxes of $22 trillion in 2024?
Where did the additional $21 trillion come from?
Clearly, that amount couldn’t come from you and your taxes, and you surely would not be able to lend that amount to the government. It would be like asking an impoverished child to give or lend you a few trillion dollars.
You can’t get blood from a turnip, and you can’t get trillions and trillions from the American public that had $49 billion.
The answer, very simply, is that the money came from thin air, or more correctly, from federal money creation via deficit spending.
BEN BERNANKE, former Fed Chairman: “It’s not tax money. We simply use the computer to mark up the size of the account.”
The federal government merely pressed a few computer keys, and the dollars came into existence.
Fed Chairman Alan Greenspan: “There is nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The United States can pay any debt it has because we can always print the money to do that.”
Fed Chairman Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. It’s not tax money… We simply use the computer to mark up the size of the account.”
Fed Chairman Jerome Powell: “As a central bank, we have the ability to create money digitally.”
The St. Louis Fed: “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.”
“Not dependent on credit markets” is Fedspeak for “We don’t borrow money.”
Would you borrow money if you could create as much as you needed simply by pressing computer keys? Of course not.
And if you borrowed money, you’d have to pay it back, which would reduce your spending ability
So why would anyone think the federal government would borrow dollars and then pay them back? Yes, the government can do some stupid things, but not that stupid.
When anyone lends money, they create temporary money that increases the money supply. However, this borrowed money is destroyed when loans are paid back, resulting in no long-term increase in the money supply.
Long-term growth in the economy is driven by federal deficit spending. When the government spends more than it collects in taxes, it injects additional money into the economy. This spending is financed by creating new money — not by taxing or borrowing — which leads to a permanent increase in the money supply.
Rather than providing funds for federal spending, taxing destroys dollars and hinders economic growth.
In short, the U.S. economy cannot create the money for its economic growth, much less support the federal government’s growth. The economy relies on the federal government’s money creation ability to grow.
Think about that the next time you hear or read someone complaining about the federal deficit. Without federal deficit spending, the economy would be incapable of growth.The federal deficit and debt are not too high; they are too low.
Federal Tax Dollars Are Destroyed
Here is how federal tax dollars are destroyed: When individuals and businesses pay taxes, they use M2 money (which includes savings deposits and other near-money assets). Once these taxes are collected, they are credited to the Treasury’s account. Since the U.S. government issues its own currency, it doesn’t need to hold a finite amount of money.
Instead, it can create money as needed. Therefore, the concept of the government “having” a certain amount of money becomes irrelevant. The federal government has infinite dollars.
When tax dollars are collected, they are removed from the private sector, reducing the money supply (M2) in circulation. This aligns with the idea that these dollars are effectively “destroyed” in they are no longer part of any money supply.
Federal taxes do not fund government spending; rather, they ensure demand for the dollar and help the Fed control the economy. This is achieved by taxing activities that the government wants to discourage and providing tax breaks for those it wishes to reward.
The Federal Government Does Not Borrow
Federal Treasury accounts (T-bills, T-notes, and T-bonds) have names that sound like borrowing. That’s why the so-called federal “debt” confuses people into wrongly believing the federal government borrows dollars. It should be called “Treasury deposits,”not debt or borrowing.
Those Treasury accounts are similar to bank safe deposit boxes. The bank doesn’t owe those deposits; it never takes ownership of them. Similarly, the federal government never takes ownership of the T-security deposits. It takes possession but not ownership.
A loan requires a transfer of ownership. When you borrow dollars, you can spend them as you please. It never uses the funds in T-security accounts. It just holds them for safekeeping.
If it were a borrower, it would take ownership. Therefore, T-securities do not represent borrowing. They represent “holding.” Further, for every dollar the federal government would borrow, it would have to pay back a dollar plus interest. So how would borrowing ever finance federal spending. The math doesn’t work.
If you had a weak-willed friend who said, “I don’t want to go into this casino with so much money in my pocket, so would you hold this $500 for me?” that would not be lending or borrowing. It would just be “holding,” and is what a T-security is.
SUMMARY
1 The federal government cannot run short of dollars. It has the infinite ability to create dollars.
2 Federal taxes do not fund federal spending.The purpose of taxes is to assure demand for the dollar and to control the economy by taxing what is to be discouraged and by giving tax breaks to what is to be rewarded. All federal taxes are destroyed upon receipt by the Treasury.
3 No agency of the federal government is funded by taxes. FICA does not fund Social Security or Medicare. All federal agencies are funded by federal money creation. No agency of the federal government can run short of dollars unless that is what the government wishes.
4 Federal taxes destroy dollars by removing them from the economy, so rather than funding economic growth, federal taxes hinder growth.
5 The federal government never borrowsdollars. The purpose of T-securities is to provide a safe storage place for unused dollars —safer than any bank. That is why China, for example, would not trust any bank with billions of U.S. dollars, but it trusts the U.S. Treasury.
5 Any borrowing creates temporarydollars. Loans must be repaid, which destroys dollars. Permanent growth dollars are created by federal deficit spending. The economy can grow only when the federal government deficit spends. To grow the economy, the federal deficit must be increased.
WHAT KIND OF NATION APPROVES OF CRUELTY TO CHILDREN?
#Monetary Sovereignty - Mitchell 