–Why federal debt is not debt, and federal borrowing is not borrowing

Mitchell’s laws: Reduced money growth never stimulates economic growth. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity breeds austerity 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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On June 20th, 2011, this blog published a post titled “Why a dollar bill is not a dollar, and other economic craziness.” I hope you had a chance to read it, because it is something of a prelude to today’s post.

Monetary Sovereignty is dead simple. It can be expressed in one short sentence: A Monetarily Sovereign government has the unlimited ability to create its sovereign currency. That’s it. Everything else derives from that.

Many people find Monetary Sovereignty to be counter-intuitive, because some seemingly identical words mean different things, depending on whether they reference Monetarily Sovereign entities or monetarily non-sovereign entities.

If I told you a man has made a lot of “hits,” your understanding of that phrase would depend on whether I was talking about baseball or organized crime. There is no relationship between a baseball hit and a crime hit.

Similarly, the words “debt,” “owe,” “borrow,” and “lend” have totally different meanings, depending on whether you’re talking about the federal government or an individual person. Unfortunately, this difference often is not recognized by the media, the politicians or even by old-line economists.

Imagine you are the only person in the world and your bank is the only bank in the world. Your checking account has a balance of $1,000, which represents all the dollars in the world. For whatever reason, you now wish to borrow $2,000 from your bank. Can you do it?

Yes, if your bank has a 20% fractional reserve lending limitation, it can lend up to $5,000, in a series of steps described at Fractional Reserve Banking.

Where will the bank get that $2,000? From nowhere. Money does not exist in any physical form. All your money – all anyone’s money – is just numbers on a bank statement. Changing those numbers changes the amount of money you own. When a bank lends money, it creates those dollars, by marking up checking accounts. Personal borrowing creates dollars.

Then, when you pay down the loan, you destroy the dollars your bank previously created.

Contrast that with the way our federal government “borrows,” i.e. creates “debt.” Federal “debt” is nothing more than the total of all outstanding Treasury securities, among which are T-bills, T-notes and T-bonds.

Anyone can “lend” to the federal government. If you wish to lend $1,000 to the government, you purchase a T-bill. The process is this: First, you deposit $1,000 in your checking account, i.e. your bank marks up the numbers in your checking account by one thousand. Then, the federal government instructs your bank to mark down the numbers in your checking account by one thousand, while simultaneously marking up the numbers in your T-bill account by one thousand (ignoring, for the sake of illustration, interest).

The simultaneous mark down of your checking account and markup of your T-bill account creates no new dollars. “Lending” to the federal government does not create dollars. And when the government pays down its “debt,” no dollars are destroyed. The whole process is an equal exchange.

[Banks create dollars by lending, and dollars are destroyed when these loans are paid down. The federal government does not create or destroy dollars by borrowing. It creates dollars by spending and it destroys dollars by taxing.]

In summary, the words “debt,” “owe,” “borrow,” and “lend,” when describing personal (monetarily non-sovereign) finances, involve the creation and destruction of money. Those identical words, when describing federal finances, involve nothing more than an equal exchange. No money is created or destroyed.

Just as saying a man has a lot of hits to his credit can give an entirely wrong impression, saying the government has a lot of “debt” or “owes” a great deal, gives the wrong impression. The words are wrong. Federal debt is not debt as we commonly think of the word.

A crime “hit” really should be called “murder,” to differentiate it from a baseball hit. So should federal “debt,” “owe,” “borrow,” and “lend,” be changed to differentiate them from personal “debt,” “owe,” “borrow,” and “lend.”

You may have some thoughts on this, but my suggestions are:

Debt (of the federal government): Total T-securities outstanding
Owe (by the federal governemnt): Has T-securities outstanding
Borrow (by the federal government): Sell T-securities
Lend (to the federal government): Buy T-securities or, exchange dollars for T-securities
Pay down (federal T-securities): Exchange dollars for T-securities

Yes, I know this never will happen. But perhaps thinking of things in those terms will help people better understand Monetary Sovereignty, and why federal “borrowing is not a burden on us or our children, nor is it a threat to, or an imprudence by, the federal government. It’s just an equal exchange, that no longer is financially necessary.

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

–The tax cut that wasn’t and the tax increase that was.

How do you empty a lake? One drop at a time:

Chicago Tribune: Mass transit commuters’ tax breaks falling
Next year, federal rules will shield only $125 a month from taxes
By Jon Hilkevitch and Richard Wronski, December 23, 2011

The amount of income that commuters who use mass transit will be eligible to shelter from taxes to pay their fares drops on Jan. 1 to $125 a month from the current $230 a month, while the tax-free parking benefit for drivers will increase from $230 to $240 a month, officials said Thursday.

The steep reduction in the transit provision is due to Congress’ failure to renew the higher limit in the Commuter Benefits Equity Act</strong, officials said, adding that they are hopeful lawmakers will approve a higher limit sometime in 2012.

Regional Transportation Authority Executive Director Joseph Costello called the pending cut in pre-tax transit benefit dollars “a clear inequity that is not good for our cities.”

The cut in benefits will have a similar effect as a fare increase because riders whose employers participate in the transit benefits program will only be able to shield a maximum of $1,500 in income from taxes in 2012, down from $2,760 this year.

Actually – a worse effect. A fare increase would circulate dollars within the economy. But reducing tax breaks sends more dollars to the federal government, where they are destroyed.

Drip, drip drip. Remember (it happened only yesterday) how Congress “saved” salaried taxpayers an average of $1,000 per year by renewing the 4.2% level for FICA tax collections. Notice, this highly publicized action did nothing. It wasn’t a tax cut. It merely continued the current tax level for another (whoopie!) two months. Nothing really changed.

What did change is, now they take about $225 a year from commuters’ pockets, and hardly anyone notices. So on balance, after all the smoke has settled, commuters will be a drop poorer.

The transit benefit is intended to serve as an incentive to ride trains and buses instead of driving.

But who cares about energy saving and the ecology, when the real debt-hawk concern is the inflation that federal deficit spending (aka “money printing”) supposedly causes? I refer to the currently “outrageous” 2% inflation caused by the massive federal spending of the past few years.

Listen to the politicians and the media, and you’ll be convinced not just inflation, but hyperinflation, is just around the corner, if we don’t become “financially prudent,” meaning, cut benefits to the less affluent 99%. And pay no attention to the man behind the curtain, who denies the undeniable fact that for 40 years, there has been no relationship between federal deficit spending and inflation.

Each day, drip, drip, drip, the federal government empties the lake, urged on by the Tea/Republicans, the media and even by some Democrats. And whose lake does it empty? The poor- and middle-classes’s, who already live on parched land.

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

#MONETARY SOVEREIGNTY

–Why it was the Democrats who lost this skirmish

As Democrats pop the bubbly, and celebrate their “victory” in the payroll tax / pipeline / doctor reimbursement skirmish, let me tell you why they lost a far bigger battle.

They had the Tea/Republicans on their knees. America clearly could see the Tea/Republican position was indefensible, politically, morally and economically. It favored the rich (no increase on taxes for the 1%), slammed the middle and poor (increase FICA), and was anti-stimulus, anti-employment and anti- common sense (reduce doctors’ pay).

In essence, the Tea/Republicans had gathered all their troops in the bottom of a well and declared war. The Democrats had but to cover the well, and those crazy right-wing debaters nobody sees every night, would have been gone.

Instead, the Democrats helped pull them up and out by agreeing to just a two-month extension of reduced FICA, agreeing to no millionaire surtax and agreeing on a fast decision on the Keystone XL pipeline. This is a victory?

In two months, FICA, surtax and pipeline once again will be on the table. The Democrat’s Champagne won’t yet have gone flat, before the skirmish will begin anew. In fact, the skirmish never will end. Call this a victory?

If recent history is a judge, the Obama Democrats probably feel a victory is anything that isn’t an outright defeat, and this wasn’t an outright defeat – only a partial defeat. So what would have been a victory? Politically, a victory is anything that will help grow the economy in advance of the 2012 elections – anything that defeats the Tea/Republicans plan to create another recession or depression, and cause voter dissatisfaction with President Obama.

The lack of a wealth surtax actually actually was a Democrat victory, though they don’t understand why. Any tax, even a tax on the 1%, is anti-stimulus, so the Democrats backed into that one. And the pipeline is yet to be resolved, though my guess is it will be approved, which will be another “backed-in” economic victory for the Dems. If anything, the pipeline will be more a plus than a minus economically, if not ecologically.

And that brings us to the payroll tax. Let’s begin with the fact that FICA is unnecessary. Worse than unnecessary, FICA is downright harmful. Contrary to popular wisdom, FICA does not pay for Social Security and it does not pay for Medicare. Like all federal taxes, it doesn’t pay for anything. It is 100% anti-stimulus, every dollar of which comes directly out of private savings.

Remember the formula: Federal Deficits – Net Imports = Net Private Savings. There is very little in America that is worse for our economy, and especially worse for working people, than FICA. Yet, the Democrat “victory” is a two month extension of a tiny decrease in a terrible, regressive tax, that should have been eliminated years ago.

O.K., presumably, this two-month extension will lead to a 1-year extension – enough to help the economy prior to November, but gee whiz, is this the best the Democrats could get today? A two-month extension of a tiny decrease?

As long as the Tea/Republicans were on their butts, revealed as anti-growth, anti middle-class, anti-poor and pro wealth-gap, the Dems should have demanded some real concessions. For instance:

1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D — for everyone
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Free long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction by $10,000, annually
9. Increase federal spending on the myriad initiatives that benefit America

Begin to institute #1-#9 today, in the order shown. That would grow our economy and guarantee Democrats the White House and Congress. Oh, worried about spending causing inflation? Though for the past 40 years there has been https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/ no relationship between federal deficit spending and inflation, if/when excessive inflation did begin, we would institute the first inflation-fighting program the Fed successfully uses: Raise interest rates.

Now that would be a victory – for the poor, for the middle, even for the rich, for the Democrats and for America.

No Democrat Champagne today. A bottle of warm beer will do.

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

#MONETARY SOVEREIGNTY

–Rich man’s newspaper laments the sad truth of trying to fool the voters

Over the years, the ultimate rich man’s newspaper, the Wall Street Journal, has demonstrated or feigned total ignorance of Monetary Sovereignty, and repeatedly has spread the myth of fiscal “prudence,” aka “government finances are like personal finances.”

I say “feigned,” because the myth enables lawmakers to cut middle- and lower-income class benefits like Medicare, Medicaid, Social Security, housing, aid to the poor, etc. So one wonders whether the WSJ editors are ignorant or clever when espousing their nonsense.

In either event, WSJ now laments the petard upon which the Republicans have hung themselves. In the previous post, I discussed how the Grand Old Party had sold its soul to the Misinformed New Party, the Tea Party. Here is the WSJ take on this sad, hilarious situation:

Wall Street Journal The GOP’s Payroll Tax Fiasco
How did Republicans manage to lose the tax issue to Obama?
By Felicia Sonmez

GOP Senate leader Mitch McConnell famously said a year ago that his main task in the 112th Congress was to make sure that President Obama would not be re-elected.

That tells you all you need to know about the Tea/Republicans. Curing the recession, reducing unemployment and helping those without health insurance simply were not on the agenda. Only power mattered.

Given how he and House Speaker John Boehner have handled the payroll tax debate, we wonder if they might end up re-electing the President before the 2012 campaign even begins in earnest.

The GOP leaders have somehow managed the remarkable feat of being blamed for opposing a one-year extension of a tax holiday that they are surely going to pass. This is no easy double play.

It’s an easy double play when you try to position yourself as anti-deficit-spending and pro-voter, when 99% of the all voters rely in some way on federal deficit spending. Think of what happens when you straddle a fence and slip.

Republicans have also achieved the small miracle of letting Mr. Obama position himself as an election-year tax cutter, although he’s spent most of his Presidency promoting tax increases and he would hit the economy with one of the largest tax increases ever in 2013. This should be impossible.

Right. Obama is ignorant of economics, but the Tea/Republicans have proved even more ignorant.

House Republicans yesterday voted down the Senate’s two-month extension of the two-percentage-point payroll tax holiday to 4.2% from 6.2%. They say the short extension makes no economic sense, but then neither does a one-year extension. No employer is going to hire a worker based on such a small and temporary decrease in employment costs, as this year’s tax holiday has demonstrated. The entire exercise is political, but Republicans have thoroughly botched the politics.

WSJ misses the entire point — or points:

Point 1: The economic sense is not one of employment but of money supply. Not collecting the tax leaves more money in consumers’ pockets, which is stimulative.

Point 2: Yes, the exercise is political, but when your sole goal is to win the Presidency — and your strategy is to extend and worsen the recession, and make life as miserable as possible for voters — what can you expect but a political exercise?

Their first mistake was adopting the President’s language that he is proposing a tax cut rather than calling it a temporary tax holiday. People will understand the difference—and discount the benefit.

These are the same guys who derided Obama’s inclusion of military savings from the end of the Iraq occupation, as not really a savings but rather some sort of fakery.

Republicans also failed to put together a unified House and Senate strategy. . . . Senate Republicans say Mr. Boehner had signed off on the two-month extension, but House Members revolted over the weekend and so the Speaker flipped within 24 hours.
[…]
If Republicans didn’t want to extend the payroll tax cut on the merits, then they should have put together a strategy and the arguments for defeating it and explained why. But if they knew they would eventually pass it, as most of them surely believed, then they had one of two choices. Either pass it quickly and at least take some political credit for it.

How cynical can you get? If they wanted to call it a “temporary tax holiday,” how could they pass it? And therein lies the problem. What is the strategy that cuts benefits for the 99%, defends tax benefits for the 1%, and pretends not to do either?

Or agree on a strategy to get something in return for passing it, which would mean focusing on a couple of popular policies that would put Mr. Obama and Democrats on the political spot. They finally did that last week by attaching a provision that requires Mr. Obama to make a decision on the Keystone XL pipeline within 60 days, and the President grumbled but has agreed to sign it.

Or, heaven forbid, a strategy of reducing unemployment and stimulating the economy. But of course, that is exactly what the Tea/Republicans don’t want in advance of the 2012 elections. It would make Obama look good. Better to have us sink into depression, so you can blame Obama. To hell with human suffering. Right?

One reason for the revolt of House backbenchers is the accumulated frustration over a year of political disappointment. Their high point was the Paul Ryan budget in the spring that set the terms of debate and forced Mr. Obama to adopt at least the rhetoric of budget reform and spending cuts.

Notice how WSJ makes no mention of benefits for America. Their lament is wholly about how to fool the voters, with political tricks.

But then Messrs. Boehner and McConnell were gulled into going behind closed doors with the President, who dragged out negotiations and later emerged to sandbag them with his blame-the-GOP and soak-the-rich re-election strategy.

Hmmm . . . Eliminating the Bush tax cut for the rich is “soak-the-rich,” but eliminating the FICA tax cut for workers is a getting rid of a “temporary tax holiday”? What with causing all those federal workers to lose their jobs or accept a wage freeze, shall we call the Tea/Republican strategy “soak the poor”?

At this stage, Republicans would do best to cut their losses and find a way to extend the payroll holiday quickly. Then go home and return in January with a united House-Senate strategy that forces Democrats to make specific policy choices that highlight the differences between the parties on spending, taxes and regulation.

O.K., I get it. The FICA reduction isn’t a “temporary tax holiday” after all. It’s a political strategy. And the idea is not to benefit America, but to force Democrats to make specific policy choices (as opposed to the Republicans making specific policy choices.)

I award the WSJ two traitor images, for their incredibly cynical approach to politics. At some point, one would have hoped the phrase “good for America” or “good for the working person” or “good for taxpayers” would have found room in the article.

But, it never even occurred to them.

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

#MONETARY SOVEREIGNTY

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