–If you want to know why the world is so screwed up, look to the IMF

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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The IMF proclaims on its web site: “The International Monetary Fund (IMF) is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”

For an organization with the word “monetary” in its title, it knows nothing about Monetary Sovereignty, and for that reason, it has accomplished none of what it claims. It lends money to troubled debtors (thereby increasing their debt). At the same time, scolds debtors to reduce their debt (i.e. to reduce their money supply), as a way to grow their economies. It’s beyond ignorance. It’s a big reason the world is so screwed up.

They are the classic leech doctors, who bleed patients to cure anemia. Here’s what they say.

FINANCE & DEVELOPMENT, September 2011, Vol. 48, No. 3
By Jiri Jonas and Cemile Sancak

PUBLIC debt has grown rapidly in many advanced economies as a result of the recent severe global downturn. Now those countries will have to undertake unprecedented expenditure and tax (that is, fiscal) adjustments to ensure debt sustainability.

Note to IMF: Monetarily Sovereign nations are different from monetarily non-sovereign nations. The former do not pay debts with tax money. The later do. In a Monetarily Sovereign nation, a government surplus is a private sector deficit.

Earlier attempts at fiscal adjustment provide important lessons to guide policymakers in this effort. We look at efforts undertaken more than a decade ago in Canada and the United States that provide lessons for today’s issues.

Both nations faced growing fiscal deficits and public debt in the 1980s, and the initial attempts to correct them proved insufficient. As deficits and debt mounted in the first half of the 1990s, both countries introduced adjustment plans to restore debt sustainability.

Think about what “debt sustainability” means. Does it mean Canada and the U.S. will not be able to pay their bills? That never has happened, so clearly the debts have been “sustainable.” But IMF never says what “debt sustainability” means. It’s just one of those magic phrases, having no substance, while sounding prudent and knowledgeable.

In Canada . . . the ultimate goal was a balanced budget.

Balanced budget = no money supply growth. Why would any country want to end the growth of its money supply, especially with a growing population (fewer dollars per person), inflation (making each dollar worth less) and the needs of a growing economy?

Here is how Gross Domestic Product is calculated:

Federal Spending
+ Private Investment
+ Private Consumption
+ Net exports
GDP

Three of the four factors comprising GDP require an increased money supply. But IMF wants to cut the money supply. So from where with growth come?

Both countries perceived growing public debt as a threat to economic prosperity, though for somewhat different reasons. The Canadian government stressed the negative implications of high interest payments on growth . . .

Logically, this makes no sense, as increased federal interest payments are identical with every other economic stimulus the government uses. They add dollars to the economy. The U.S. experience is that, contrary to popular wisdom, higher interest rates are, in fact, stimulative.

. . . the importance of intergenerational equity (that future citizens should not pay the bills of living citizens) . . .

In Monetarily Sovereign nations, like Canada and the U.S., taxes do not pay for federal spending. If taxes fell to $0 or rose to $100 trillion, neither event would affect by even $1, the government’s ability to spend. There is no relationship between federal taxes and federal spending.

. . . and the need to maintain the ability to spend on valued public programs such as health care and old age security, without jeopardizing long-run fiscal stability.

Another phrase I love: “fiscal stability.” What is ‘stable” about reduced fedefral spending or increased federal taxes? No on knows, least of which the IMF.

A Monetarily Sovereign government pays bills by instructing creditors’ banks to mark up the creditors’ checking accounts. These instructions are not constrained by, or related to, tax collections.

The U.S. government emphasized the adverse effect of high interest rates on private investment and, through that channel, on economic growth.

History shows no such adverse effects.

In both countries, deficit reduction turned out to be greater than expected. In the United States, the actual deficit was close to zero in 1997, and the budget balance moved to a surplus that exceeded 2 percent of GDP by 2000.

Which led to the recession of 2001. No surprise, though. Every depression in U.S. history has been preceded by a series of surpluses, and nearly all recessions have been preceded by a series of reduced deficit growth.

In Canada, the overall balance moved to surplus during 1997–98.

Which led to the Canadian recession of 1999. After that, Canada’s oil exports rose dramatically, replacing the dollars lost to government surpluses. A government surplus is a private sector deficit.

CIA World Factbook

The U.S. fiscal position deteriorated and the deficit exceeded 3 percent of GDP by 2003.

The years 2002-2007 saw solid GDP growth in the U.S. For the IMF, a successful position is low, or no, money growth, regardless of economic growth — or lack thereof.

In contrast, Canada’s overall balance remained in surplus until the global financial crisis in 2008, and Canada’s net debt-to-GDP ratio is now the lowest among the G7 countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States).

They lump monetarily non-sovereign nations, which do have debt sustainability problems, with Monetarily Sovereign nations, that can service any size debt.

In hindsight, it is clear that the fiscal improvement experienced by the United States in the late 1990s and early 2000s had a less solid foundation, because it was in part driven by temporary factors related to the stock market boom and realized capital gains, as well as by strong economic activity boosted by rapid credit expansion.

And what supported the stock market boom, realized capital gains and rapid credit expansion? The increased money supply. The IMF confuses effect with cause.

In the early 2000s, policymakers debated over what to do with fiscal surpluses. . .

A Monetarily Sovereign government doesn’t do anything “with” surpluses. Unlike you, me, the states, counties and cities, and the euro nations, the U.S. does not save dollars. Why should it? I creates dollars, ad hoc, by paying bills.

Readers of this blog have seen how I have, at various times, awarded dunce cap symbols, clown symbols and traitor symbols to deserving “experts.”. As I am sovereign in these symbols, I maintain no supply. I award them ad hoc. That is how our federal government operates with its sovereign currency.

The IMF simply cannot comprehend Monetary Sovereignty vs. monetary non-sovereignty. If they were doctors, they would prescribe vasectomies for women, and tubal ligation for men.

The main lesson is that fiscal adjustment based on structural reforms is more likely to be sustainable compared with improvements based on temporary factors. Given the size of fiscal imbalances and future fiscal pressures related to population aging, many advanced economies will have to maintain fiscal discipline for several years, if not decades.

Thereby assuring ever deeper and longer recessions and depressions. For the IMF “doctors,” the measure of success is not the patient’s economic health, but rather how much medicine the patient takes.

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

–There is one thing CNNMoney doesn’t appear to understand: Money

They call themselves CNNMoney Perhaps they should change their name to CNNMyth.

National debt: Washington’s $5 trillion interest bill
By Jeanne Sahadi | CNNMoney.com – 4 hours ago

Interest rates on U.S. bonds may be ridiculously low, but that doesn’t mean the country’s future interest payments on the national debt will be. Uncle Sam will shell out more than $5 trillion in interest payments over the next decade, according to the latest projections from the Congressional Budget Office.

That’s more than half of the projected $11 trillion increase in debt held by the public during that period. Those figures assume that a host of expensive policies such as the Bush-era tax cuts are extended.

Over the decade, more than 14% of all revenue the government is projected to collect will be sucked up by interest payments. That’s a lot of money that can’t be used on the country’s other priorities.

Ms. Sahadi (of CNNMoney) doesn’t understand the difference between Monetary Sovereignty and monetary non-sovereignty. She thinks the federal government is unable to continue creating unlimited dollars, as it has been doing for the 40 years since it became Monetarily Sovereign.

How discouraging that even a group with “Money” in its name, doesn’t understand money.

Indeed, between 2013 and 2022, estimated interest costs will be:
higher than Medicaid spending;
equal to half of Social Security spending;
close to what is spent on all of defense.

Translation: The interest payments by the federal government will stimulate the economy more than Medicaid, half of Social Security and close to what is spent on defense. This is a bad thing???

It’s unfortunate the rates are so low. With higher rates, we might be out of this economic slump, and unemployment would be lower.

The (CBO’s) estimated interest costs assume a fairly steady and moderate increase in rates over the decade. If it turns out that rates rise one percentage point higher than CBO projects, that could add roughly $1 trillion to interest costs over the decade.

That will put $1 trillion more dollars in the pockets of bond holders, who will spend those dollars. How else does Ms. Ms. Sahadi (of CNNMoney) think an economy grows?

However things turn out, a lot of the money paid in interest will go abroad, said Charles Konigsberg, president of the Federal Budget Group. That’s because more than 40% of the country’s public debt is owed to institutions and individuals outside the United States.

Agreed, that’s not as good as domestic dollars, but it’s still good. The U.S. federal government has the unlimited ability to create dollars, so those dollars go abroad at zero cost to us. But they do enrich other nations, who then become better trading/tourism partners. A wealthy world is a better world for America.

A recent analysis from the independent Committee for a Responsible Federal Budget estimates that three of the four GOP presidential candidates’ economic plans would increase deficits and interest costs, some substantially.

Newt Gingrich’s economic plan could raise interest costs by $900 billion over the next decade; Rick Santorum’s by $640 billion; and Mitt Romney’s by $40 billion. But that number could rise substantially if he doesn’t find enough measures to offset the costs of his latest tax cut proposals.

Hmmmm . . . Suddenly, I find the GOP more attractive. If only they weren’t hypnotized by the Tea/Limbaugh/religious fundamentalist groups, who seem to have little knowledge and even less concern about economics and the welfare of America.

Bottom line: Interest costs our Monetarily Sovereign U.S. government nothing, because the government pays interest at will, simply by pressing a computer key. But interest does enrich us monetarily non-sovereign people and monetarily non-sovereign businesses by adding dollars to the economy. That’s one of the reasons why, despite much of the interest going overseas, interest rate changes and domestic GDP growth tend to be parallel. .

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

#MONETARY SOVEREIGNTY

–French lobster leaders debate best way to pull their economy down

The following WSJ article brings to mind the old saw about why lobsters never can get out of a pail. As soon as one starts to climb up, the others pull it down.

Wall Street Journal, February 29, 2012
French Front-Runner Pledges 75% Tax Bracket
By Gabrielle Parussini

PARIS—French presidential front-runner François Hollande said taxpayers earning over €1 million ($1.35 million) a year would be subjected to a special 75% tax bracket should he be elected, underscoring heightened interest across Europe in raising taxes on the wealthiest individuals.

“It’s a message of social cohesion….It’s a matter of patriotism,” he told journalists on his way in to Paris’s annual agriculture fair.”

Across Europe, the idea of raising taxes on high-income earners began to burgeon three years ago, when the Continent started to descend into recession. In 2009, the U.K. government increased its top marginal income-tax rate to 50% from 40%. In the U.S., the top 1% of earners have been the target of widespread protests under the umbrella of the Occupy Wall Street movement.

Mr. Sarkozy’s government has already slapped a 3% temporary levy on high revenue to be applied to those with a taxable income exceeding €500,000 a year.

Revenue disparity, which has been on the rise in most industrialized economies since the 1980s, has remained relatively contained in France, according to an Organization for Economic Cooperation and Development study published in December. The top 1% taxpayers in France earn less than half the average earned by the top 1% in the U.S.

The Monetarily Sovereign U.S. destroys tax money upon receipt. The monetarily non-sovereign France spends tax money. French tax money flows through the government’s hands, back out into the economy.

While the U.S. government is a creator and destroyer of its sovereign currency, the dollar, the French government is only a conduit for its non-sovereign currency, the euro. Few people, including most economists, politicians and media writers understand this difference.

Hypothetically, raising the tax rate on the rich could be an effective way for a monetarily non-sovereign government to close the gap between the 1% and the 99%. (A Monetarily Sovereign goverenment could do it simply by giving money to the 99%.)

However, to the degree French debt is owned by outsiders, debt service reduces the nation’s total money supply, negatively affecting GDP growth. France cannot overcome this the way the U.S. does – by creating money ad hoc as it pays its bills.

When any government takes from its citizens to pay foreign debt, those taxes temporarily mask a serious problem: Domestic money loss. The government can appear to be prudent, while its economy suffers austerity.

Seemingly, this is what the EU leaders want: Support the public sector at the expense of the private sector. That is why they urge the PIIGS to reduce government debt by increasing private debt (i.e. raising taxes), while offering to lend more euros to the “offending” nations.

The combination of more taxes and more outside borrowing, leads to recessions, while giving the false appearance of a government being financially wise. Whether the euro nations’ leaders want this consciously – these leaders are, after all, creatures of the public sector – or do it out of ignorance, the effect is the same: Deeper and deeper recession, with the reason hidden, thus preventing positive efforts to cure the recession (“We already are doing everything we can.”)

If France is to remain monetarily non-sovereign (a terrible, but likely, path), it never should borrow from outsiders. If 100% of France’s debt were domestic, all tax increases to support debt service, merely would recirculate euros within France, thus delaying the inevitable bankruptcy all monetarly non-sovereign governments face, if their balance of payments is negative.

Of course, the above begs the question: Is it economically wise or morally fair to take away 75% of anyone’s marginal income? The rich are not stupid, you know.

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

#MONETARY SOVEREIGNTY