–Monetary Sovereignty: The key to understanding economics Friday, Aug 13 2010 

Mitchell’s laws:
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
●The more federal budgets are cut and taxes increased, the weaker an economy becomes. .
●Liberals 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 rich and poor.
●Austerity is the government’s method for widening 
the gap between rich and poor.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Everything in economics devolves to motive,
and the motive is the Gap.
●Only two things keep people in chains: The ignorance of the oppressed and the treachery of their leaders

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Perhaps no words more accurately and succinctly illustrate the confusion about economics than “Monetary Sovereignty.” It is not a theory or a hypothesis or a philosophy. In its essence it merely is a description of the way federal financing actually works.

A Monetarily Sovereign government has the exclusive and unlimited power to create its sovereign currency. Monetary Sovereignty is the foundation of economics. The United States is Monetarily Sovereign. It has the exclusively unlimited power to create the dollar. China, Canada, Australia, the UK and Japan are Monetarily Sovereign. They have the exclusively unlimited power to create their sovereign currencies.

The U.S. government created the dollar from thin air, by creating from thin air, all the laws and rules that made the dollar possible. Being sovereign over the dollar, the U.S. can do anything it wishes with the dollar. It can make the dollar equal to three euros, two pumpkins or one partridge in a pear tree. The federal government’s power over the dollar is unlimited.

Illinois, Cook County and Chicago are monetarily NON-sovereign. The dollar is not their sovereign currency, and they do not have the unlimited power to create dollars. France, Germany and Italy are monetarily non-sovereign. They do not have the exclusively unlimited power to create their currency, the euro.

You, your business and I also are monetarily non-sovereign. Even Bill Gates and Warren Buffet do not have the unlimited power to create dollars. They are monetarily non-sovereign.

Because our Monetarily Sovereign nation has the unlimited power to create its sovereign currency, the dollar, it never needs to ask anyone for dollars. It doesn’t need to tax or borrow, and it never can be forced into bankruptcy. It can pay any dollar-denominated invoice of any size at any time.

In fact, the federal government creates money by paying its bills. The U.S. has created many trillions of dollars, simply by pressing computer keys, and will continue to do so. It does not “owe” anyone for creating these dollars.

The U.S. government cannot live beyond its means; it has no means to live beyond.

By contrast, if the debts of France, Germany et al, exceed their ability to obtain euros they, as monetarily non-sovereign nations, could be forced into bankruptcy. They did not create the euro, nor do they have the unlimited ability to pay bills.

Everything you believe about your personal finances — debts, deficits, spending, affordability, saving and budgeting — are inappropriate to U.S. federal finances. For this reason, your personal intuition about U.S. financing likely is wrong.

Because the U.S. cannot be forced into bankruptcy, none of this nation’s agencies can be forced into bankruptcy. The U.S Supreme Court, the Department of Defense, Congress, Social Security, Medicare and any of the other 1,300 federal agencies cannot go bankrupt unless the federal government wishes it.

(All the talk about Social Security or Medicare going bankrupt is misguided. Even if FICA were eliminated, Social Security and Medicare would not need to go bankrupt, unless Congress wished it. They could pay benefits, forever.)

The unlimited ability to create money is an uncontested fact for Monetarily Sovereign nations, although at any given time,economic growth, inflation, deflation, recession, depression and social factors may influence a nation’s decision to create money.

A Monetarily Sovereign nation even can choose to declare bankruptcy, for various reasons, but this would be an arbitrary matter of choice, not a forced necessity. An example would be Congress’s failure to raise the debt ceiling. This could force the U.S. into bankruptcy.

Debt hawks do not (or do not wish to) understand the implications of Monetary Sovereignty. You never will see that term on such debt hawk web sites as The Committee for a Responsible Federal Budget” or the Concord Coalition.

If you go to those sites you will see federal debt described in the same terms as personal debt – as an unsustainable obligation. While debt can be unsustainable for you, me, businesses, states, cities, counties and the monetarily non-sovereign EU nations, no debt is unsustainable for the U.S. government.

Debt hawks suffer from Anthropomorphic economics disease — the false belief that federal finances are like yours and mine.

The U.S. was not always completely Monetarily Sovereign. Prior to 1971, the U.S was on a gold standard. It had a sovereign currency, but did not have the unlimited ability to create that currency, since every dollar needed to be backed by an arbitrary amount of gold. No gold; no dollars.

The amount of gold needed to back the dollar was determined by Congress, and could be changed at any time by Congress, a fact often forgotten by gold lovers. In effect, even while on a gold standard, the dollar was backed by Congressional fiat, not by gold.

Similarly, the EU nations are on a euro standard. Their ability to create euros is limited by law. Our states, counties, and cities are on a dollar standard. Their ability to create or obtain money by borrowing or taxing is limited by local law, by voters, and by lenders.

The financial problems of Portugal, Ireland, Italy, Greece and Spain (The PIIGS), are due not to deficits and debt. They are due to these nations having surrendered the single most valuable asset any nation can own — their Monetary Sovereignty — thus preventing them from servicing their debt by creating money.

Some debt hawks say that a Debt/GDP ratio exceeding 100% puts a nation on the brink of bankruptcy. Yet today, Japan has a Debt/GDP ratio above 200%, and this Monetarily Sovereign nation has absolutely no difficulty servicing its debt.

The debt hawks, as usual, having learned nothing from this, continue to wail about the meaningless Debt/GDP ratio, which because it is a classic apples/oranges comparison, is devoid of significance (the numerator is a 200-year measure of cumulative T-securities outstanding; the denominator is a one-year measure of productivity. The two are unrelated).

So-called federal “debt” is the nothing more than the total of dollars deposited in T-securities accounts at the Federal Reserve Bank. These accounts essentially are savings accounts.

To “pay off” the federal debt, the Federal Reserve Bank merely debits these T-securities accounts and credits holders’ checking accounts, the same way your personal bank transfers dollars from your savings account to your checking account. No new dollars needed.

Thus, all federal debt easily could be eliminated tomorrow.

That would require pressing a few computer keys. This would be a simple asset exchange, with no new money created and no inflation consequences.

Because a Monetarily Sovereign nation has the unlimited ability to create its sovereign currency, that nation needs neither to tax nor to borrow. Why would it?

Further, that nation does not use tax money or borrowed money to pay for spending. Federal income has no relationship to federal spending and so, taxes and borrowing are unnecessary.

When the states, counties, cities, you and I spend, we transfer dollars from our checking accounts to some other checking accounts. When the federal government spends, it creates dollars.

To pay its bills, the government sends instructions (not dollars) to creditors’ banks, instructing the banks to increase the dollar amount in creditors’ checking accounts. These instructions are in the form of checks or wires.

At the moment the bank obeys those instructions, dollars are created, and the money supply is increased. This is how the federal government creates dollars — not by “printing,” but by sending instructions.

If U.S. federal taxes and borrowing fell to $0, or rose to $100 trillion, neither event would reduce by even one penny, the federal government’s ability to create the money to pay any size bills.

Although Monetarily Sovereign nations need neither to tax nor to borrow, they may choose to do so for reasons unrelated to financial need. The spending by Monetarily Sovereign nations is constrained only by inflation.

However, since 1971, the end of the gold standard and the beginning of Monetary Sovereignty, there has been no relationship between federal deficit spending and inflation. More about this at Inflation and at SUMMARY.

At some level, deficit spending could cause inflation. For instance, if the government were to give every American $1 trillion, I am confident we would have inflation. But we are nowhere near that point.

Because taxes do not pay for federal spending, FICA does not pay for Social Security benefits. FICA could (and should) be reduced to zero, and benefits could be tripled, and this would not affect by even one penny the federal government’s ability to pay Social Security benefits.

Recently, the federal government made a profit on its purchase and sale of corporate stock (GM et al). All such profits came out of the economy, and therefore were recessive — harmful to the economy and useless for the federal government.

By reducing the money supply, federal profits = losses for the economy. Federal surpluses = economic deficits.

The federal government has “saved” money by firing, or reducing the pay of, federal employees. Those so-called “savings” would be money not sent into the economy, and therefore, are recessive. The federal government, having the unlimited ability to create dollars, does not need to “save” dollars.

Politicians and the press do not yet seem to understand Monetary Sovereignty. However, no one intelligently can discuss national deficits and debt without acknowledging the implications of Monetarily Sovereignty. The concept is the basis for all modern economics. Monetary Sovereignty is to economics as arithmetic is to mathematics.

The next time you go to any economics blog or web site, see if the contributors understand Monetarily Sovereignty and use it in their discussions. If they do, it might be a good site. If they don’t, the site is worthless.

All debt hawk objections revolve around just two questions:

1. How much money can the federal government create? Answer: Infinite

2. How much money should the federal government create? Answer: Up to the threat of uncontrollable inflation.

Despite an astounding 3,500% increase in debt since 1971, we are not anywhere near the point where deficits cause uncontrollable inflation (which is controlled via interest rates). As of this writing, we are fighting deflation.

In short, most of our economic problems are caused by the politicians, the media and the public not recognizinging the implications of Monetary Sovereignty. By crippling the federal government’s ability to grow the U.S. economy, the Tea/Republicans have injured more Americans than Al Qaeda.

I suggest you next read the data at Summary, for detailed answers to your questions.

Question of the day: How does a tax increase or spending decrease reduce unemployment or grow the economy?

Answer: When the federal government taxes, dollars are removed from the economy. When the federal government spends, dollars are added to the economy.

A federal deficit is a surplus for the economy.

Therefore, both a tax increase and a spending decrease reduce money growth in the economy. Because GDP = Federal Spending + Non-federal Spending + Net Exports, a reduction in money growth reduces economic growth.

Money is the lifeblood of an economy. Cutting the federal deficit to cure a recession is like applying leeches to cure anemia.

[For more on this subject, see: Free Lunch]

Rodger Malcolm Mitchell

Monetary Sovereignty

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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.
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 AN ANNUAL ECONOMIC BONUS TO EVERY MAN, WOMAN AND CHILD IN AMERICA, AND/OR EVERY STATE, A PER CAPITA ECONOMIC BONUS (Social Security for All) (The JG (Jobs Guarantee) vs the GI (Guaranteed Income) vs the EB) 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 EVERYONEFive 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 CORPORATE TAXES
Corporations themselves exist only as legalities. They don’t pay taxes or pay for anything else. They are dollar-transferring machines. They transfer dollars from customers to employees, suppliers, shareholders and the government (the later having no use for those dollars).
Any tax on corporations reduces the amount going to employees, suppliers and shareholders, which diminishes the economy. Ultimately, all corporate taxes come around and reappear as deductions from 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 corporate 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.

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10 Steps to Economic Misery: (Click here:)

1. Maintain or increase the FICA tax..

2. Spread the myth Social Security, Medicare and the U.S. government are insolvent.

3. Cut federal employment in the military, post office, other federal agencies.

4. Broaden the income tax base so more lower income people will pay.

5. Cut financial assistance to the states.

6. Spread the myth federal taxes pay for federal spending.

7. Allow banks to trade for their own accounts; save them when their investments go sour.

8. Never prosecute any banker for criminal activity.

9. Nominate arch conservatives to the Supreme Court.

10. Reduce the federal deficit and debt

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia.

Two key equations in economics:

1. Federal Deficits – Net Imports = Net Private Savings

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

THE RECESSION CLOCK

Monetary Sovereignty

Monetary Sovereignty

Vertical gray bars mark recessions.

As the federal deficit growth lines drop, we approach recession, which will be cured only when the growth lines rise. Increasing federal deficit growth (aka “stimulus”) is necessary for long-term economic growth.

#MONETARYSOVEREIGNTY

–How President Obama’s National bipartisan Commission on Fiscal Responsibility and Reform could destroy America Monday, Jul 5 2010 

The debt hawks are to economics as the creationists are to biology.

Parade Magazine, in its 7/4/10 “Intelligence Report”, printed an interview by Steven Beschloss and Janet Kinosian titled, “Can These Men Fix the Deficit?” The men are Erskine Bowles, a former White House chief of staff, and Alan Simpson, a former Republican Senate whip. Today, Messrs. Bowles and Simpson are co-chairs of President Obama’s National bipartisan Commission on Fiscal Responsibility and Reform.

Here, with my comments, are what they said:

BOWLES: “If we don’t solve the (federal) debt problem, we will be paying $1 trillion in interest in 2020. That’s money we can’t spend on Social Security, Medicare, education, infrastructure or innovation to make sure America is competitive in a global economy.”

RMM: “Of course, he’s dead wrong. America is a monetarily sovereign nation. Future spending is restricted neither by past spending, by debt, by deficits nor by tax collections. That $1 trillion in interest will function as an economic stimulus. This is classic cognitive inconsistency. Mr. Bowles believes the government cannot do what he sees with his own eyes, the government actually doing, i.e spending trillions on stimulus plans, despite debt that has grown more than 1,500% in only 30 years. In addition to cognitive inconsistency, he suffers from anthropomorphic economic disease – the mistaken belief that the government’s finances are like yours and mine.

BOWLES: “We’re looking at how we can reduce discretionary spending – things like education, transportation, the military, homeland security – and mandatory spending which includes Social Security, Medicare and Medicaid. We also need to raise revenue.”

RMM: He believes that cutting back on education, transportation, the military, homeland security, Social Security, Medicare and Medicaid, while raising taxes, will “make sure America is competitive in a global economy.” The notion would be laughable if it weren’t so dangerous.

SIMPSON: “We’re not going to cut Social Security – we’re going to stabilize it. None of the ideas that have been presented will affect anyone over the age of 58.”

RMM: “Stabilize” is political double talk for, “We are going to cut Social Security for everyone 58 and younger.”

SIMPSON: “As it is, it (Social Security) can’t sustain itself.”

RMM: Ah, the old (and false) “unsustainable” claim.

BOWLES: “We’re going to work our hearts out succeed.”

RMM: In their world, “Fiscal Responsibility and Reform” are code words for austerity, which always causes recessions and depressions. Heaven help us from those who have power, yet cannot learn.

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

No nation can tax itself into prosperity

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