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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Perhaps, economics isn’t so bad after all. I often have criticized old-line economists for not recognizing the absolute facts that:

1. Federal spending is constrained only by inflation. Taxes and borrowing do not support the spending by a Monetarily Sovereign nation. Even were taxes and borrowing to be completely eliminated, this would not affect the federal government’s ability to spend.

2. The federal government is not, and never can be, “broke.” Neither today’s taxpayers, nor future generations, ever will pay for today’s federal debt.

3. No amount of federal debt is “unsustainable.” The government can service any amount of debt at any time.

4. A growing economy requires a growing supply of money. Federal deficit spending is the government’s method for adding growth money to the economy. Reductions in federal deficit growth lead to recessions and depressions.

I have criticized mainstream economics as being akin to a religion, relying on faith and authority, rather than on fact. Well, perhaps economics is not alone.

Background: Biological evolution relies on natural selection (popularly known as “survival of the fittest”), in which better suited individual entities survive. These better suited entities pass their genes on, while unsuited entities do not.

The sticking point is that natural selection does not explain altruism. Just two examples among humans: Care for the elderly and heroic soldiers. In fact, human morality is based on altruism. But how does this benefit the individual?

One would think that over time, any leaning toward altruism would be bred out, since the altruistic individuals, by giving their lives or even by sharing their food, time or attention, sacrifice some of their chances to pass on their genes. Yet, nature offers numerous examples of altruism — even among unrelated individuals — in species from the lowest bacterium to the highest life forms.

A solution to the problem is called “group selection,” in which entire groups, receiving the benefits provided by altruistic individuals, are more able to pass on their genes. This solution was rejected for many years, by mainstream biologists. Here is an excerpt from the August 6, 2011,New Scientist magazine:

Today, there is near-universal agreement among those familiar with the subject that the wholesale rejection of “group selection” was mistaken and that the so-called alternatives are nothing of the sort. Some, such as William Hamilton, reached this conclusion as early as the 1970’s, but decades were required for others to follow suit.

However, many people who do not directly study the subject, including many biologists, have got the impression that group selection was conclusively disproved and that nothing has changed since. As a result, there is widespread confusion.
[…]
The new consensus states definitively that the individual organism is not a privileged level of the biological hierarchy.

Sound familiar? A long-held belief, by mainstream scientists, many of them Nobel prize winners, now has been disproved. Yet despite massive evidence, the public, and even many of the old-line scientists, cling to the old view.

Change a few words, and this article could be talking about the public and old-line economists not recognizing the truths of Monetary Sovereignty.

Yes, maybe economics isn’t so bad after all. By coincidence, William Hamilton proposed “group selection” in the 1970’s and the U.S. became Monetarily Sovereign in 1971. Now that biologists are coming around to the facts, perhaps economists soon will follow.

Could four decades be the magic number for turning that lumbering ship known as “science”?

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. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings

MONETARY SOVEREIGNTY

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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The June 2010 post, “Is federal money better than other money” showed how recessions come after declines in federal deficit growth (blue line) and increases in all other debt growth [(Total Domestic Nonfinancial Debt) – (Federal Domestic Nonfinacial Debt)] (green line).

You can read the post for a more complete discussion, but to summarize: Federal deficit growth is money growth. A growing economy requires a growing supply of money. This is especially true when the nation has a negative balance of payments (as we do), which pulls dollars out of the domestic economy.

“All other” debt growth also is money growth, but unlike the federal government, the “all other” category is constrained by the payback burden. So as the “all other” debt grows, payback becomes more and more difficult and debtors become more and more burdened — a growing weight on the economy.

Here, for your convenience is a simple visual — the Recession Predictor –you can check periodically. It will update each quarter.

When the blue line (federal deficit growth) is pointing up and the green line (non-federal debt growth) is pointing down, there is a historic tendency for us to recover from recessions. When blue is pointing down and green first points up, then down, we most often head for recessions.

This reflects that fact that:

While deficit spending cures recessions, following recessions, federal deficit growth is allowed to decline. Meanwhile, encouraged by the end of the recession, non-federal debt growth increases until it reaches a point where borrowers feel it is not safely sustainable.

That “not-sustainable” point marks the fundamental difference between federal debt and non-federal debt. The federal government is Monetarily Sovereign, so its debts are infinitely sustainable. It can service any debt of any size at any time.

When both federal and non-federal debt growth, i.e. total money growth, begin to decline, the stage is set for another recession.

Ironically, the Fed has reduced interest rates in an effort to stimulate non-federal borrowing, while trying to reduce federal deficits — the exact opposite of what the economy needs.

Today, as Congressional and Presidential anti-deficit sentiment has us headed for another recession, the only questions are “when” and “how bad”. These questions will be answered by yet another question: How soon will Congress and the President come to their senses, turn away from the counter-productive, Tea Party, austerity philosophy, and recognize the necessity of federal deficit spending for economic growth?

Considering that not one politician, not one newspaper editor or columnist, not one TV commentator, and the vast majority of Nobel economists believe blue (federal deficit spending) should point up, the outlook is very poor, indeed.

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. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings

MONETARY SOVEREIGNTY

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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Read this short excerpt and tell me what you think is its most shocking phrase:

The Telegraph, By Ambrose Evans-Pritchard, in Lindau, 24 Aug 2011
Germany fires cannon shot across Europe’s bows

German President Christian Wulff has accused the European Central Bank of violating its treaty mandate with the mass purchase of southern European bonds.

In a cannon shot across Europe’s bows, he warned that Germany is reaching bailout exhaustion and cannot allow its own democracy to be undermined by EU mayhem. “I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence,” he said.

“This prohibition only makes sense if those responsible do not get around it by making substantial purchases on the secondary market,” he said, speaking at a forum of half the world’s Nobel economists on Lake Constance to review the errors of the profession over recent years.

As readers of this blog know, I long have said there are two, and only two, long-term solutions for the euro mess:

1. Each nation using the euro, return to Monetary Sovereignty by re-adopting their own sovereign currencies ala the UK, Sweden et al,
or
2. Merge financially into a quasi “United States of Europe,” in which the European Union supplies euros to each nation on an as-needed basis. This is similar to the way the American states (which like the euro nations are monetarily non-sovereign) survive on dollar inputs from the federal government.

Long term, a monetarily non-sovereign nation, not having the ability to create sovereign currency, needs money coming in from outside its borders. The current situation, in which each euro nation is monetarily non-sovereign simply has no legs. I said so as far back as June of 2005, in a speech at the University of Missoury, Kansas City: “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.”

So what is the most shocking phrase? Is it, “. . . Germany is reaching bailout exhaustion. . . ”? No, the only shocking part is how long it took Germany, which survives on exports, to realize it cannot be the endless sugar daddy for all the other euro nations.

Is it “. . . Christian Wulff has accused the European central Bank of violating its treaty mandate with the mass purchase of southern European bonds”? No, the euro nations always have been more interested in legal details than in economic reality.

In my opinion, this is the most shocking phrase: “. . . speaking at a forum of half the world’s Nobel economists . . .”

Here, in one room, sit more than half of the world’s Nobel economists, and these people don’t have a clue! Hello sleepy-heads. Wake up. Monetary non-sovereignty is a guaranteed, long-term disaster, unless there is a Monetarily Sovereign entity supporting the whole system. Otherwise, small financial problems force austerity, which leads to bigger financial problems, in an endless downward helix to bankruptcy.

How the heck are these Nobels awarded, anyway?

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. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings

MONETARY SOVEREIGNTY

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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One of our readers named “Pete” said, “There’s a great interview with Yves Smith over on NC today about turning the banks into public utilities. I’m curious what your thoughts on that would be.”

Yves Smith is the pen name of Susan Webber. She is the brilliant author of what may be the best economics blog on the Internet, Naked Capitalism. She also is the founder of Aurora Advisors, Inc., a management consulting firm.

In the interview, which you can see at Interview with Yves Smith, Yves suggests that banks are:

Too economically and politically powerful
Too reckless
Too unregulated and
Too dependent on federal support.

I agree with the first three “toos,” not the last.

She suggests the cure would be to make banks public utilities. I disagree. Public utilities do not have a sterling record for serving the public, because they twist the politicians and regulators, just as the banks do now. Anyone who has gone through voice mail hell, trying to reach the electric company, or waited days for service to be restored after a storm, or suffered a 4-hour window waiting for the service person to arrive, understands that public utilities can be as uncaring about the public as can any private corporation.

Yves does not suggest that banks be owned by the federal government, so in essence, her “public utility” recommendation merely moves banks from their current set of government regulators to a different set of government regulators. I believe more fundamental steps must be taken.

Suggestion #1: Separate the banking function from the rest of the investing/speculating functions, something akin to what savings & loans did, but with broader lending capabilities than S&Ls had. Bank investments would be limited to federal securities.

While we did have an S&L crisis, also involving real estate lending, it was not as economically pervasive and damaging as what we have today, with banks using their massive lobbying power to run Congress and the President. (Anyone who does not think the executive and legislative branches of our government are run by the banks, has not been paying attention, and never has heard the name, Tim Geithner. )

Suggestion #2: Do not allow banks to pay lobbyists or to contribute to political candidates or action groups. Banks would be allowed to spend only on banking operations. Bank employees would retain their rights to make political contributions (freedom of speech), but every dollar would have to be made public, and not reimbursed by the bank.

Eliminate the culture of failed/rescued/rewarded, where bank executives have absolutely nothing to lose by stealing, cheating and criminal speculation. In fact, they have been given with big bonuses. To my knowledge, no banker has been jailed for these transgressions.

Suggestion #3: The top officers of any bank requiring federal support to survive, not only would be fired, but personally liable to reimburse the government for all FDIC payments. Bank officers would be civilly and criminally liable for all customer losses. (No bank customer ever should lose money in a bank).

As the the fourth “too,” I have no problem with banks being dependent on federal support, since federal support adds dollars to the economy, and thereby is economically stimulative. In fact, one approach might be:

Suggestion #4: Limit banks to zero profits before executive compensation, and to receive federal support for profits and executive compensation based on a percentage of deposits. This would focus executive motivation on providing the customer services that build deposits, rather than on investment profits.

As for the value big banks have in supporting big projects, these all could be handled by non-bank organizations.

So that is my quick answer to Pete’s comment. I’d welcome yours.

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

==========================================================================================================================================
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

MONETARY SOVEREIGNTY