Mitchell’s laws: To survive, a monetarily non-sovereign government must have a positive balance of payments. Economic austerity causes civil disorder. Reduced money growth cannot increase economic growth. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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Washington Post: BERLIN — The economy of Germany, Europe’s headline performer, slowed to a virtual standstill over the past three months . . . The discouraging news came just hours before German Chancellor Angela Merkel and French President Nicolas Sarkozy called for closer European coordination in setting economic policy and new steps to discipline governments whose lax budget practices prompted the debt crisis.
No, the crisis was caused by the euro-zone nations being monetarily non-sovereign. They cannot control the supply of their currency, the euro. I predicted this on June 5, 2005: “Because of the Euro, no euro nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the euro.”
. . . Merkel and Sarkozy . . . proposed that countries harmonize their tax policies, adopt a new tax on financial transactions and commit to balancing their budget . . .
Balancing their budgets assures a recession or depression, by eliminating euro supply growth. A growing economy requires a growing money supply.
The abrupt slowdown in Europe’s largest economy comes at a time when Germany is expected to fund a major portion of the emergency loans extended to struggling neighbors such as Greece, Ireland and Portugal. . . . The new figures call into question whether Germany can remain the economic engine that officials in the United States and elsewhere have been counting on to power Europe’s recovery.
Germany’s economy was strong because it was a net exporter, i.e. a net importer of euros. That was the only way a monetarily non-sovereign nation could increase its money supply.
“Trend growth is not that high,” said Thomas Mayer, chief economist for Deutsche Bank. “It would have been false to think that Germany would turn into a loco-motive for Europe. That is not a viable proposition.”
Right. It’s asking the blind to lead the blind.
According to a release from the Federal Statistical Office of Germany, flagging investment and household consumption were behind the slowdown — particularly disappointing for those, including U.S. officials, who have urged Germany to stoke local demand. . . .
Investment and household consumption “flagged,” because Germany now is short of the euros it formerly had acquired via exports.
Also discouraging were new figures released Tuesday for the entire region that uses the euro. Growth for the second quarter was only 0.2 percent, reflecting government austerity programs and slowing global economic activity.
If you want to kill a nation, austerity is the way to do it. (Hello, Tea/Republicans. Are you watching?)
Although the crisis in Europe is ostensibly driven by high levels of government debt and annual deficits, it is also rooted in slow growth, with nations such as Italy and Spain struggling to expand fast enough that their tax base keeps up with their commitments to citizens and bondholders.
Visualize trying to bail a rowboat having a big hole in the bottom.
Germany’s growth in the past few years offered an example to weaker economies. . . Germany revised its labor and tax rules to become globally competitive. Its stable of large multinationals benefited as China and other fast-growing developing nations snapped up German capital goods and high-end products.
Right. Exports were the key, because they brought in euros.
Figures released last week, however, showed that German exports in June were down significantly from the month before and manufacturing dropped to its lowest level since October 2009.
In a country that has been spared the riots and demonstrations of Greece and Spain, the slowdown may reinforce a public sentiment — reflected in some opinion polls — that Germany should go no further in risking its own financial health to help its weaker neighbors.
Now, visualize bailing your neighbors’ sinking boats, and tossing the water into your own boat.
Merkel and Sarkozy . . . called for what Sar-kozy termed “a true economic government for the euro zone” . . . Compared with some of the more dramatic steps that European officials have taken to address the debt crisis, such as establishing a trillion-dollar bailout fund last year, the proposals offered Tuesday were more evolutionary, Merkel said. By bringing the economic and social policies of the euro nations into sync, the region could “regain confidence step by step,” she said.
The proposals were short on details, and some analysts said they had heard similar ideas before. Over the years, European leaders, particularly from Germany, have offered various ways to control euro-zone spending, but to little effect. National parliaments would still have to approve the proposed measures, such as constitutional amendments to require a balanced budget, and governments would still have to live up to them.
“. . . bringing economic . . . policies into sync . . .” almost sounded like they understood the problem, and were going to combine the euro nations into one Monetarily Sovereign United States of Europe. That would have been one of the two possible solutions (the other being to disband the EU. Unfortunately, they still are talking about non-solutions like balanced budgets. Visualize using leeches to cure anemia.
“They have not given any details on what they feel economic governance should look like,” said Daniela Schwarzer, an expert on European integration at the German Institute for International and Security Affairs. And if the new economic council meetings amounted to no more than the latest in a long series of summits, she said, “that is nothing substantially new.”
They are as clueless as the U.S. Congress and President. Our sole advantage: We are Monetarily Sovereign (though our leaders have not figured that out.) So we can’t go bankrupt, unless our government wants it.
The monetarily non-sovereign euro nations can go bankrupt, and that grim future unnecessarily will drive down the U.S. economy. “Unnecessarily,” because a Monetarily Sovereign nation has complete control over its economic growth, if it is wise enough to use that control.
Recessions are unnecessary in a Monetarily Sovereign nation. Tell that to Congress.
========================================================================================================================================== 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. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings
Economic austerity causes civil disorder. Reduced money growth cannot increase economic growth. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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How soon will we suffer the Tea/Republican/Obama riots in the streets?
An interesting article ran on Washington’s Blog. I’ll quote from parts of it, but I can’t do it justice here. I urge you to go there to read the entire article.
The essence is that austerity combined with a large gap between the wealthy few and the rest of the population, an inevitable result of “cut-deficit” preaching by the Tea/Republicans and President Obama, will lead to riots in the streets, sabotage and other forms of serious civil unrest.
Guest Post: Austerity and Runaway Inequality Lead to Violence And Instability
By Washington’s Blog
A study this month by economists Hans-Joachim Voth and Jacopo Ponticelli shows that – from 1919 to the present – austerity has increased the risk of violence and instability:
From the end of the Weimar Republic in Germany in the 1930s to anti-government demonstrations in Greece in 2010-11, austerity has tended to go hand in hand with politically motivated violence and social instability. In this paper, we assemble cross-country evidence for the period 1919 to the present, and examine the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between fiscal retrenchment and instability.
[…]
Studying instances of austerity and unrest in Europe between 1919 to 2009, Ponticelli and Voth conclude that there is a “clear link between the magnitude of expenditure cutbacks and increases in social unrest. With every additional percentage point of GDP in spending cuts, the risk of unrest increases.”
“Expenditure cuts carry a significant risk of increasing the frequency of riots, anti-government demonstrations, general strikes, political assassinations, and attempts at revolutionary overthrow of the established order. While these are low probability events in normal years, they become much more common as austerity measures are implemented.”
[…]
The relation between austerity and riots is so clear that former IMF chief economist and Noble prize winning economist Joseph Stiglitz coined a phrase to describe what happens after the International Monetary Fund demands austerity in return for loans to indebted countries: “The IMF Riot”.
[…]
The military must be prepared . . . for a “violent, strategic dislocation inside the United States,” which could be provoked by “unforeseen economic collapse,” “purposeful domestic resistance,” “pervasive public health emergencies” or “loss of functioning political and legal order.” . . . “widespread civil violence,” the document said, “would force the defense establishment to reorient priorities in extremis to defend basic domestic order and human security.”
As I suggested, read the entire post, the essence of which can be summarized: Civil unrest occurs when:
1. The government cuts spending and 2. The gap between rich an poor grows.
As we have said throughout this blog, the drive to reduce the federal deficit is a combination of ignorance about Monetary Sovereignty and madness, supported by zero data, and based on faulty, obsolete assumptions about economics. Congress and the President have not created a deficit reduction committee. They have created a Riot Production and America Destruction Committee.
Sadly, the politicians’ response will be to call out the military, and ruthlessly suppress the population even further, rather than to solve the fundamental problem by federal deficit spending to stimulate the economy, create jobs and lift the lives of the underclasses.
Thus, do all great nations fall at the hands of their leaders. America is no exception.
========================================================================================================================================== 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. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings
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.
Kermit the frog famously said, “It isn’t easy being green.” It also isn’t easy convincing people that traditional economics not only is hypothetically wrong, not only is factually wrong, but is wrong to such a degree it is extremely harmful to our economy.
The more extreme debt hawks believe the U.S. federal government should run a balanced budget or even have no debt at all. The more moderate debt hawks feel some debt may be necessary at times, but to them, federal debt is like bitter medicine you take only when absolutely necessary.
All debt hawks, whether extreme or moderate, are long on twisted “facts” but short on evidence.
Their “facts” inevitably include federal deficit and debt measures, projections for the future, debt/GDP ratios, and spending on Medicare and Social Security.
However, when they interpret the facts, they provide no evidence that their interpretations reflect reality.
By contrast, here are facts and a few opinions, which you may interpret for yourself.
1. Fact: Money is the way modern economies are measured. By definition, a large economy has a larger money supply than does a small economy. Therefore, a growing economy requires a growing supply of money. QED
The graph below shows the essentially parallel paths of GDP vs. perhaps the most comprehensive measure of the money supply, Domestic Non-Financial Debt:
One could argue that money begets production or that production begets money, and both would be correct. The point is that money supply (i.e. debt) and GDP go hand-in-hand. Reduced debt growth results in reduced economic growth.
Gross Domestic Product = Federal Spending + NonFederal Spending + Net Exports.
Thus, by formula, a cut in federal spending cuts GDP.
2. Fact: All money is debt and all financial debt is money. In addition to being state-sponsored, legal tender, there are four criteria for modern money:
–Monetarily Sovereign money must be defined in a standard unit of currency.
–MS money has no, or limited, intrinsic value.
–The demand for money is determined by its risk (danger of default or devaluation, i.e., inflation) and its reward (interest rates).
–To have value, money must be owned by an entity other than the entity that created it.
The above criteria describe many forms of money, including currency, bank accounts, T-securities, corporate bonds, and money markets. All forms of money are debt, and a growing economy requires a growing supply of debt/money.
2.a. Fact: Federal “deficit” is a statement of the net amount of money the federal government has created in one year. Opinion: The word “deficit” is pejorative. A more neutral description would be money “created” or “added,” as in, “The government has created $1 trillion,” or “The government has added $1 trillion to the economy.”
Compare the psychological meaning of those statements with the current phrasing, “The government has run a $1 trillion deficit.”
3. Fact: 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%. Depression began 1929. 1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.
4. Fact: Recessions tend to follow reductions in federal debt/money growth (See graph below), while debt/money growth has increased when recessions are resolving.
Taxes reduce debt/money growth. No government can tax itself into prosperity, but many governments tax themselves into recession.
Recessions repeatedly come on the heels of deficit growth reductions, and are cured with deficit growth increases.
5. Fact: On August 15, 1971, the federal government gave itself the unlimited ability to create debt/money by completely abandoning the gold standard. This ability is called Monetary Sovereignty.
Because the federal government now has the unlimited ability to create dollars, it neither taxes or borrows in order to obtain dollars. It simply creates them ad hoc. Tax dollars are destroyed upon receipt.
When you pay your taxes, you take dollars from your checking account. These dollars were part of the M2 money supply measure.
When they reach the Treasury, they cease to be part of any money supply measure. They effectively are destroyed. To pay its bills, the federal government creates new dollars, ad hoc.
6. Fact: Federal “debt” is the total of outstanding Treasury Securities. Here is how Treasury Securities, incorrectly termed “borrowing” come into existence.
–You tell the government to debit your checking account and credit your Treasury security account by the same amount. The process is similar to transferring money from your checking account to your bank savings account.
To “pay off” the Treasury Security, the government simply debits your T-security account and credits your checking account.
Thus, the government could pay off all its so-called “debt” tomorrow simply by debiting all T-security accounts and crediting the T-Security owners’ checking accounts.
The entire process neither adds nor subtracts money from the economy (but for interest paid).
Our Monetarily Sovereign government does not borrow the money it has already created but rather exchanges one form of U.S. money (T-securities) for another (dollars). The entire “borrowing” process is nothing more than an asset exchange.
Do T-securities have any benefit? Yes, federal interest payments add to the money supply, an economically stimulative event. Federal interest payments help the government control interest rates and the dollar’s value. (The higher the interest, the greater the value of the dollar, and the more the economy receives in growth dollars.)
The most important purpose of T-securities is to provide a safe place to store unused dollars. This stabilizes the dollar while increasing its value.
T-securities (debt) are not functionally related to the difference between taxes and spending (deficits). They are related only by laws requiring the Treasury to create T-securities in the amount of the deficit.
The Treasury can create T-securities (debt) without a deficit, and the government can run a deficit without creating T-securities. Federal debt is not functionally the total of federal deficits.
The federal government could pay off the entire so-called “debt” today, merely by returning the dollars to the T-security depositors.
7. Fact: Federal taxes, as a money-raising tool, are unnecessary, harmful and futile:
— unnecessary because since 1971 (when the U.S. government became fully Monetarily Sovereign), the government has had the unlimited ability to create money without taxes,
— harmful because taxes reduce the money supply, which reduction leads to recessions and depressions, and
–futile because tax money sent to the government is destroyed upon receipt by the U.S. Treasury.
When you send taxes to the government, you are sending M2 dollars, but when they reach the Treasury, they cease to be part of any money supply measure. They effectively are destroyed.
Our Monetarily Sovereign government does not store dollars for future use. It can create unlimited dollars ad hoc by paying bills.
The so-called “debt” merely accounts for the total outstanding T-securities created out of thin air by the federal government.
The government decides to create T-securities equal to the deficit, but this requirement became obsolete in 1971 when we went off the gold standard and became Monetarily Sovereign.
Today, the federal government creates money by spending, i.e. it credits checking accounts to pay its bills. This crediting of checking accounts adds dollars to the economy.
The federal “deficit” is the net money created in one year and the federal “surplus” is the net money destroyed in one year. In short, deficit spending creates money and taxing destroys money. If taxes fell to $0 or rose to $100 trillion, this would not affect by even one dollar, the federal government’s ability to spend.
Further, (opinion)all tax (money-destroying) systems are unfair. See: http://rodgermitchell.com/FairTaxes.html. For a country with the unlimited power to create money, spending is not related in any way to taxing.
8. Fact: Contrary to popular myth, there is no post-gold standard relationship between federal debt and inflation. (See graph, below)
Also, contrary to popular myth, inflation is not caused by “excessive federal spending.” Inflation is caused by shortages of crucial goods and services, most often oil and/or food. (See the graph, below)
In this regard, hyperinflations are not caused by “money-printing,” but rather by shortages. So-called “money printing” (ala Zimabwe and Germany), were the governments’ response to hyperinflation, not the cause.
The Zimbabwe inflation was caused by food shortages. (The government stole land from farmers and gave it to non-farmers.) Money “printing” was the faulty response to inflation, not the cause.
The most recent inflation was caused by COVID-related shortages of oil, food, shipping, computer chips, metal, housing, lumber, and labor, among other things. As the shortages have been reduced, so has the inflation.
WWII Context: During World War II, many consumer goods were in short supply because production was focused on the war effort. When the war ended, the supply of goods resumed, and the previously unmet demandwas suddenly able to be fulfilled.
Oil Crises: Similarly, during the oil crises of the 1970s, the reduced supply of oil caused prices to spike, not because of a sudden increase in demand, but because the existing demand couldn’t be met.
COVID-19 Pandemic: Supply chain disruptions and production bottlenecks during the pandemic created shortages in various goods, leading to price increasesonce supply constraints eased and the pent-up demand was met.
While the underlying demand might have been consistent, the ability to fulfill that demand was constrained by supply issues. When supply bottlenecks were removed, the previously suppressed demand could finally be expressed, leading to price increases.
Latent Demand: The concept of latent demand suggests that consumers’ desire for goods remains constant, but it is the availability of those goods that fluctuates.
Supply Constraints: Supply-side constraints create temporary mismatches between demand and supply, leading to inflationary pressures once those constraints are lifted.
Observing changes over time can reveal the true causes of economic phenomena. By examining what happens just before and during an inflationary period, we often find that supply-side disruptions are the primary drivers.
Gradual Demand Changes: Demand usually changes slowly, giving the economy time to adjust. This gradual change rarely leads to significant price fluctuations on its own.
Sudden Supply Changes: Supply-side shocks, such as natural disasters, geopolitical events, or production bottlenecks, can occur rapidly and unpredictably. The economy struggles to adjust quickly to these disruptions, leading to price increases as a balancing mechanism.
9. Fact: There is no post-gold standard relationship between federal debt and your taxes.
Unlike state/local governments, which are monetarily non-sovereign, the federal government does not use tax dollars to pay its bills. It creates new dollars, from thin air, every time it pays a creditor.
The sole purposes of federal taxes are:
–To control the economy by taxing what the government wishes to discourage and by giving tax breaks to what the government wishes to reward.
–To assure demand for the U.S. dollar by requiring all federal taxes to be paid in dollars.
Taxes do not pay for federal spending. Federal spending creates dollars.
9.a. Fact: Federal deficit spending does not use “taxpayers’ money.” Federal spending creates money ad hoc.
When the government spends it credits bank accounts. No taxes involved. By definition, deficit spending means taxes do not equal this year’s spending let alone previous year’s spending. Only surpluses use taxpayers’ money, by causing recessions.
For the above reasons, our children and grandchildren will not pay for today’s money creation. Still, they will benefit from today’s deficit spending — better infrastructure, army, education, R&D, safety, security, health, and retirement.
Any time you hear or read about the federal government spending “taxpayers’ money,” know that the person is ignorant about Monetary Sovereignty. The federal government doesn’t spend taxpayers’ money. Period.
10. Fact: There is no post-gold standard relationship between low interest rates and high GDP growth. Opinion: The opposite seems true:
The interest rate and economic growth lines move in opposite directions.
Why do high interest rates stimulate? Opinion: High rates force the federal government to pay more interest, pumping more money into the economy.
The Fed increases interest rates to fight inflation. But increasing interest rates increases the prices of goods and services, i.e. causes inflation.
The Fed, in a sense, is using leeches to fight anemia.
11. Fact: The Federal debt/GDP ratio is a meaningless fraction, because it measures two, mathematically incompatible pieces of data. It’s an apples/oranges comparison. GDP is a one-year measure of output; federal debt is the net outstanding T-securities created since the nation’s birth.
The T-securities created years ago affect this year’s debt in the debt/GDP ratio, while even last year’s GDP does not affect this ratio. See: Debt/GDP
Because federal debt is the total of T-securities, and the federal government has the functional ability to stop creating T-securities at any time, the Debt/GDP ratio easily could fall to 0, depending on federal law.
11.a. Fact: The debt/GDP ratio does not measure the federal government’s ability to pay its bills. The government does not pay bills with GDP; it creates the money ad hoc to pay its bills.
Were GDP to be $0, the government still could pay bills of any size, simply by crediting the bank accounts of its creditors.
12. Facts: In 1979, gross federal debt was $800 billion. In 2009 it reached $12 trillion, a 1400% increase in 30 years. During that period, GPD rose 440% (annual rate of 5.5%>) with acceptable inflation. The same 1400% increase would put the debt at $180 trillion in 2039, a mean annual deficit of $5+ trillion.
This calculates to a 9.5% annual debt increase for the past 30 years. Repeating that growth rate would put the 2010 deficit at about $1.14 trillion, and the 2011 deficit at about $1.25 trillion. The deficit for year 2039 would be about $15.8 trillion.
Opinion: I know of no reason why the results would not be the same as they have been in the past 30 years. However, increasing the debt growth rate above 9.5% might show even better results:
In the 10 year period, 1980 – 1989, federal debt grew 210%, from $900 billion to $2.8 trillion (a 12% annual debt increase), while GDP grew .96% from $2.8 trillion to $5.5 trillion (a 7% annual increase). During that same period, inflation fell from 14.5% in 1980 to 5.2% in 1989. See graph, below.
The peaks and valleys of federal deficits (blue) generally correspond to the peaks and valleys of real (inflation adjusted) Gross Domestic Product growth. The reason: GDP = Federal Spending + Nonfederal Spending + Net Exports
Facts: In summary, large deficits have coincided with real (inflation adjusted) GDP growth
12. Facts: Any health insurance proposal that covers more people will cost more money. Extracting that money from doctors, hospitals, pharmaceutical companies, by necessity, would reduce the availability of health care.
Increasing taxes on any individuals (even the wealthy) or on businesses, will depress the economy by removing money from the economy. Only the federal government can supply additional money while stimulating the economy.
13. Fact: Social Security is supported neither by FICA nor by a trust fund. Were FICA eliminated, and benefits doubled, Social Security still would not go bankrupt unless Congress decided to make this happen.
In June, 2001, Paul O’Neill, Secretary of the Treasury said, “I come to you as a managing trustee of Social Security. Today we have no assets in the trust fund. We have promises of the good faith and credit of the United States government that benefits will flow.“
Yet, SS continues to pay benefits. Your Social Security check comes from a mythical trust fund that contains no money and receives no money.
Social Security (and Medicare) benefits are paid ad hoc by the U.S. government, not from a trust fund, and are not dependent on FICA taxes. which (opinion:) can and should be eliminated. See: FICA
14. Fact: The finances of the federal government are different from yours and mine and businesses’ and state, county and city government finances.
Unlike the federal government, which is Monetarily Sovereign, we cannot create unlimited amounts of money to pay our bills. We first need to acquire money, either by borrowing or by saving, to spend.
The federal government does not acquire money. It creates money by spending. As an accounting principle, the tax money you send to the government is destroyed upon receipt. Then the federal government creates new money to pay its bills. The government has no fund from which it pays bills.
Fact: Were taxes to decrease to zero, this would not change by even one penny, the federal government’s ability to spend.
Opinion: The failure to recognize the difference between the Monetarily Sovereign federal government and all other entities, which are monetarily non-sovereign, is the primary reason for recessions and depressions.
15. Fact: The federal government has the unlimited ability to create the dollars to pay any bill of any size. It never can run short of dollars; it never can go broke.
Opinion: The federal government should distribute dollars to each monetarily non-sovereign state, on a per capita basis.
The states would determine how they distribute the dollars (to counties, cities and/or taxpayers). I suggest a distribution of $5,000 per person or a total of $1.5 trillion.
Fact: In 1971, the U.S. went off the gold standard, thereby becoming a Monetarily Sovereign nation, and at that moment, all economics textbooks became obsolete. Sadly, mainstream economists, the politicians and the media have not yet caught up.
Summary: So there you have a list of facts, plus a few opinions, which I have noted. Read the facts and draw your own inferences.
You can find a great number of debt-hawk sites (i.e. Concord Coalition, Committee for a Responsible Federal Budget), which in essence are privately funded think tanks, paid to influence popular belief, with propaganda masquerading as data.
There, you will see data showing the size of the federal debt. These data are presented in a way designed to imply that the debt (money created) is too large.
But you will find no proof of these ideas. You will see no historical graphs equating debt with any negative economic outcome, simply because such graphs do not exist. Debt hawks believe federal deficits are so obviously bad, no proof is needed.
Yet, despite lacking proof, debt-hawks have foisted their opinions on the media, the politicians, weak-minded economists, and the public, much to the detriment of our economy.
#Monetary Sovereignty - Mitchell 
