Yet another economics writer who doesn’t understand the fundamentals. Monday, Mar 4 2019 

A fundamental truth of economics: A Monetarily Sovereign nation never unintentionally can run short of its own sovereign currency.

The nation does not need to tax and does not need to borrow. It creates its sovereign currency at will.

To not understand that fact is to not understand economics, for it is the absolute foundation of economics.

THEWEEK Magazine recently published the article, “The big question about Modern Monetary Theory everyone is missing,” by Ryan Cooper.

Modern Monetary Theory (MMT) and Monetary Sovereignty (MS) share many characteristics regarding money in today’s economies.

Here are a few excerpts from the article, together with my comments.

Economists are in the midst of one of the periodic debate flare-ups over Modern Monetary Theory.

On the pro-MMT side we have economists like Stephanie Kelton and Randall Wray, while on the other we have the odd bedfellows of The New York Times’ Paul Krugman and the People’s Policy Project’s Matt Bruenig.

Professor Kelton has been a “pen pal” of mine for several years. I met Professor Wray years ago, when I gave a talk to his class at UMKC.

This intricate debate is about the main merits of MMT, an economic school of thought which has received wide attention for its dismissal of the need for taxes to pay for new spending.

Both MMT and MS agree that unlike state and local taxes, which do pay for state and local government spending, federal taxes do not pay for federal spending.

The reason is that the U.S. federal government is Monetarily Sovereign. It is sovereign over U.S. dollars, which it creates ad hoc, every time it pays a creditor.

Even if the U.S. government collected zero taxes, it could continue spending, forever.

However, there is an important question which has to this point not been raised. The MMT advocates say that inflation should be controlled through fiscal policy, instead of monetary policy conducted by the central bank as is current practice.

In other words, if prices start rising, we can keep them in line by raising taxes.

But does that actually work?

No, it doesn’t work, cannot work and never will work.

Raising taxes is too slow and too political (waiting for Congress), too undirected (which taxes?), not incremental enough (raise taxes how much?), and too damaging to economic growth (taxes reduce the money supply). 

Unfortunately, MMT takes incompatible positions. It says correctly, that federal taxes do not fund federal spending, but incorrectly that federal taxes are necessary to cause demand for U.S. dollars.

During times of recession and economic slack, a state borrowing in its own currency has unlimited capacity to spend, because printing money or borrowing to spend on public works and so on will not cause inflation so long as there are unemployed workers and idle capital stock.

Think, Mr. Cooper. If a state has the unlimited capacity to spend and to “print” money, why would it need to, or even want to, borrow? Think.

Contrary to popular wisdom, the U.S. does not borrow dollars. Instead, it accepts deposits into T-security accounts, the purpose of which are:

  1. To provide the world with a safe place to park unused dollars. This helps stabilize the dollar.
  2. To assist the Fed in controlling interest rates, which control inflation.

But if there is full employment, taxes are needed for new programs — to fund them for the former, or to stave off inflation for the latter.

Here, Cooper reveals he doesn’t understand the differences between monetarily non-sovereign state and local government financing (where borrowing is necessary), vs. Monetarily Sovereign federal financing (that requires no borrowing).

The federal government levies taxes, but not to obtain dollars. It freely produces all the dollars it needs.

The purpose of federal taxes is to control the economy by discouraging certain activities with higher taxes and by encouraging others with tax reductions.

The effect of federal taxes (as opposed to the purpose), is to reduce federal deficit spending which reduces the money supply.

All federal taxes do this — income taxes, FICA, sales taxes, import duties, etc. They all reduce the money supply. Just as tax cuts are economically stimulative, tax increases are recessionary.

And just as increased federal deficit spending helps cure recessions, decreased federal deficit spending causes recessions, and worst case, depressions.

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.

Now, it should be noted that MMT’s style of argumentation seems to have dented the brainless pro-austerity mindset that dominates much of elite discourse, which is very much to its credit.

Remember the above comment, because later in his article, Cooper unknowingly supports the very austerity he calls “brainless.”

He discusses the key objection to MMT (and MS), inflation:

The way tax-side inflation control is supposed to work is through supply and demand.

Since taxation will leave buyers with less money in their pockets to spend, market competition will force suppliers to cut prices and workers to accept lower wages.

But if markets have become dominated by a few big firms, then business can resist this pressure, because buyers have nowhere else to go.

Taxation reduces the supply of money. Though taxation can support the demand for money, it is not necessary for that purpose.

Interest is a more effective device for supporting the demand for money. While taxes depress an economy, interest stimulates the economy by increasing federal dollar interest input.

Money growth grows an economy.

A good test of this prediction came in the late 1970s, when inflation was at its postwar peak.

Economist John Kenneth Galbraith argued for price controls, but conservative “monetarists” like Milton Friedman argued that (with) a steep hike in interest rates, inflation would come down quickly and easily.

The Fed tried Friedman’s policy, but it turned out Galbraith was right.

The Fed hiked interest rates to an eyewatering 20 percent, creating the worst recession since the Great Depression up to that time.

But inflation only came down very slowly — partly through Keynesian-style spending effects, but partly by badly damaging the labor movement, which cut unionization.

In the past 50 years, since President Nixon took the U.S. off a gold standard, inflation has not been caused by America’s massive federal deficit spending. See: Inflation has been caused by the price of oil.

The Fed wisely has not recommended controlling the price of oil, an action that would lead to an oil shortage, and a recession, if not a depression. That is what price controls do: Lead to shortages.

And what do shortages lead to? Hyperinflations.

So, Cooper writes that Galbraith was right about price controls?? Where did that come from? He provides no evidence.

The true effect of price controls is to reduce economic growth by reducing supply and profits — the economic necessities for growth.

Price control is a feature of the “brainless, pro-austerity mindset” that Cooper properly criticized a few paragraphs ago.

And do increased interest rates really lead to recessions? Or is it simply that recessions lead to decreased interest rates?

Interest rates (red); deficit spending increases (blue); recessions (vertical gray bars)

The above graph shows that sometimes interest rates peak at the start of recessions, sometimes they peak in the midst of economic growth, and sometimes they decline at the start of recessions.

One cannot say that increased interest rates historically have caused recessions.

The real pattern is that decreased deficit spending causes recessions and increased deficit spending cures recessions.

Why? Because a growing economy requires a growing supply of dollars, and deficit spending adds stimulus dollars to the economy.

Federal deficit spending and debt don’t cause inflation.

Since the U.S. went off the gold standard in 1971, the federal debt (blue) has risen massively, while inflation (red) has been moderate.

Most inflations and nearly all hyperinflations are caused by shortages, usually shortages of food, and often shortages of oil.

For instance, Zimbabwe, an oft-mentioned hyperinflation victim, had its hyperinflation begin with a food shortage. (Farmland was stolen from farmers and given to non-farmers.)

One reason inflation control is delegated to the central bank is that it can work quickly, adjusting interest rates in response to economic conditions several times per year.

Congress works extremely slowly at the best of times, and control is usually split between the two parties.

The Fed may have performed poorly over the last decade, but do we really want Mitch McConnell having to sign off on inflation policy?

Exactly. Now that Cooper belatedly has confirmed why price controls and tax increases don’t work and can’t work, we come to the:

SUMMARY

Modern Monetary Theory (MMT) and Monetary Sovereignty MS) describe the realities of economics similarly.

They agree that a Monetarily Sovereign nation, such as the U.S., cannot run short of its own sovereign currency, and neither needs nor uses tax dollars to fund spending.

They differ in many other areas however, one of which has to do with controlling inflation:

Three inflation controls were discussed, only one of which is effective:

  1. Price controls which cut profits and thus cut economic growth, lead to recessions and ultimately cause inflations by causing shortages. They don’t work, and neither MMT nor MS supports this approach.
  2. Tax increases, which are too slow, too political, not incremental, and cause recessions by decreasing the money supply. They don’t work, though MMT supports this approach.
  3. Interest rate increases, which actually increase the money supply (by causing the federal government to pay more interest into the economy, and work by increasing the value of dollars (by increasing the demand for dollars). Works, and has been working since the end of WWII. MS supports this approach.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereigntyFacebook: Rodger Malcolm Mitchell

…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..

The most important problems in economics involve the excessive income/wealth/power Gaps between the richer and the poorer.

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

2. Federally funded medicare — parts a, b & d, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.

MONETARY SOVEREIGNTY

 

Ten answers that are contrary to popular wisdom Monday, Aug 27 2018 

We could have begun each answer with the words, “Contrary to popular wisdom . . .” for much of economics differs from what you, the public, are being told.Image result for popular wisdom

The federal government uniquely is Monetarily Sovereign. It invented and rules all the laws that create and regulate its sovereign currency, the U.S. dollar.

Federal financing is substantially different from your personal financing, your business’s financing, and your state’s, county’s, and your city’s financing.

If ever you have attempted to explain (or understand) Monetary Sovereignty, you probably have encountered these 10 questions:

1. “Is federal debt unsustainable? (I.e., can we continue running deficits forever. If you and I need to live within our means, must the federal government live within its means?)

A Monetarily Sovereign government never can run short of its own sovereign currency, so it has no “means” to live within.

Having the unlimited ability to create new dollars, the federal government can pay any obligation denominated in dollars, no matter how large. The federal government doesn’t even need to levy taxes.

The very act of paying its bills is the method by which the government creates new dollars. To pay a creditor, the federal government sends instructions (in the form of a check or a wire) to the creditor’s bank, instructing the creditor to increase the balance in the creditor’s checking account.

The moment the bank does as instructed, brand new dollars are created and added to the money supply called “M1.” No tax dollars are involved.

There are two ways dollars are created and two ways they are destroyed:

Dollars Are Created By:
A. Federal bill paying
B. All forms of dollar lending

Dollars Are Destroyed By:
A. Federal Taxing
B. Repayment of loans

2. “If the federal government doesn’t need tax dollars, why does the federal government levy taxes?”

There are two primary reasons:Image result for gap between the rich and the poor

A. To control the economy.  The government taxes things it wishes to rein in, and cuts taxes on things it wishes to encourage.

B. To fool the public. The very rich, who run the government, want the 99% to believe federal spending must be limited. This discourages the populace from asking for benefits and thereby widens the gap between the rich and the rest.

(The Gap is what makes the rich rich. Without the Gap, no one would be rich; we all would be the same. The wider the Gap, the richer they are.)

3. “If the government doesn’t need to obtain tax dollars in order to pay its bills, why does the government borrow dollars?”

Unlike state and local governments, the federal government doesn’t need to borrow, and indeed, it doesn’t borrow. The misnamed federal “borrowing” and “debt” is the total of deposits into T-security accounts.

When you buy a T-bill (or T-note or T-bond), you instruct your bank to take dollars from your checking account and deposit them into your T-bill account.

Because the federal government has no need for your dollars, it simply leaves your dollars in your account until your T-bill matures. It even adds dollars in the form of interest.

Then it “pays off” your T-bill by sending your dollars back to your checking account. Sending your dollars back to you is no burden on the federal government, and because no tax dollars are used, it is no burden on taxpayers, either.

4. If the federal government doesn’t need to borrow, why does it issue T-bills, T-notes, and T-bonds?

The purpose of T-securities accounts is not to acquire spending money. The purposes are to:

A. Provide a safe place for dollar-users to hold dollars. This safe-haven availability increases the demand for dollars and stabilizes the dollar.

B. To help the Fed control interest rates.

5. “If we just print money won’t we be like Zimbabwe and Argentina?”

Those sick economies not only have dysfunctional governments, but are in the midst of hyper-inflations, which are caused by shortages, most often shortages of food.

In fact, all hyperinflations are caused by shortages. Money “printing” is a wrong-headed government response to hyperinflations, much like pouring gasoline on a car fire.

Government money “printing” is a response to hyper-inflations, not a cause.

Decreases in deficit growth (red line) lead to recessions (vertical, gray bars). Inflation (blue line) does not correlate with deficit spending.

Deficit growth adds dollars to the economy, which increases Gross Domestic Product

GDP = Federal Spending + Non-federal Spending + Net Exports

All three of the above variables add dollars to the economy, which is necessary for economic growth.

Not only do decreases in deficit growth lead to recessions, but federal surpluses lead to depressions:

1804-1812: U. S. Federal Debt reduced 48%. Depression began in 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began in 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began in 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began in 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began in 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began in 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began in 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began in 2001.

It functionally is impossible to grow an economy while reducing the money supply. This would be like trying to cure anemia by applying leeches.

6. If federal “debt” growth is economically beneficial, why is my state (or county, or city) broke? 

Your state (or county, or city) is monetarily non-sovereign. It does not have a sovereign currency. It uses the dollar, which is the sovereign currency of the federal government.

Monetarily non-sovereign entities (like you and me), can run short of dollars and be unable to pay our bills. The federal government cannot run short of dollars, or be unable to pay its bills. Federal finances are different from non-federal finances.

Your state, county, or city are broke because their outgo exceeds their income, and they cannot create dollars at will, the way the federal government can.

7. So why doesn’t the federal government merely give everyone a million dollars and make us all rich?

The Ten Steps to Prosperity,” recommends that the federal government give more money to Americans (via deficit spending) than it currently does.

There, of course, is a limit.

The limit to federal deficit spending is an inflation that cannot be managed via interest rate control.

Inflation is a reduction in the value of a dollar vs. the value of goods and services. The value of a dollar is: Value = Demand/Supply. So if we increase the Supply, without increasing the Demand enough, the dollar Value goes down, and we have inflation.

The formula for the Demand for dollars is: Demand=Reward/Risk. The government increases the Reward for owning dollars by raising interest rates. That is why raising rates is said to “strengthen” the dollar.

In short, the government should give more dollars and dollar-denominated benefits to the people. This would grow the GDP and narrow the Gap, so long as the Fed can control inflation by increasing the Demand for dollars.

8. Which is better for the U.S. economy: Exports or imports?

Imports of goods and services have more value to the U.S. economy than do exports.

Exports of goods and services actually means “importing dollars in exchange for labor and scarce materials.” But because our Monetarily Sovereign nation has the unlimited ability to create dollars, importing dollars has no value to the nation as a whole.

Imports of goods and services (i.e. “exports” of goods and services) add valuable and scarce assets to the economy while requiring less labor and scarce materials than would products and services created here.

The question can be restated: Which is better: Importing something that we have the unlimited ability to create and at no cost (i.e. dollars), or exporting something that costs effort and valuable raw materials (i.e. goods and services) to create?

9. Are illegal aliens a danger to, and a burden on, America? 

This question usually devolves to several concerns, none of which have anything to do with the legal status of immigrants.Related image

Concern 1. Illegal aliens cause crime. This repeatedly has been shown to be false. The crime rate for illegal aliens is lower than the crime rate for citizens. The reasons probably relate to the fear of being apprehended and deported, and to the reasons why desperate people elect dangerous illegal immigration.

Concern 2. Illegal aliens don’t work and don’t pay taxes, but use our benefits. This too has been shown to be questionable. These people made the hazardous trip to the U.S. in order to create better lives for their children and themselves. Though the federal government doesn’t need tax dollars, illegal immigrants tend to be hard-working, tax-paying people, who often are precluded from using most social services.

Concern 3. Illegal aliens bring drugs. The vast majority of drug smuggling is not done by illegal aliens. Drugs come in through legal entrances, via boats, trains, trucks, buses, and cars, rather than via the piddling amounts mothers and children could sneak through.

Concern 4. Illegal aliens steal jobs from American citizens. These people are consumers, who via their spending, actually create jobs. They themselves accept the lowest paid, most physically difficult jobs, that are not popular with U.S. citizens.

On balance, illegal aliens provide a huge benefit to the U.S., by being highly motivated to succeed, and by purchasing products and services from American businesses.

10. Even if the federal government never can run short of dollars, and can afford Medicare for All, won’t we run out of resources, like doctors, hospitals, and medicines?

We address this question in “A concern about ‘Medicare for All.'” Briefly summarizing that article:

A. Every major change, from cars, to phones, to planes, and to high-rise buildings leads to shortages of labor and materials that previously were not used.  Medicare itself created a shortage of medical personnel, so today hospitals all over the country have been expanding to provide more services.

B. Personnel shortages lead to higher pay which draws more people into the profession.

In summary, everyone has strong intuitions about economics, though economics realities are not intuitive. The reason is: Our federal government is Monetarily Sovereign, which is very unlike the personal experiences of the populace.

The people have been given the mistaken belief that federal finances are like personal, state, and local finances.

The above questions illustrate the common misunderstandings about our nation’s economy.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell; Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..

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
2. Federally funded medicare — parts a, b & d, plus long-term care — for everyone
3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)
4. F
ree education (including post-grad) for everyone
5. Salary for attending school
6. Eliminate federal taxes on business
7. Increase the standard income tax deduction, annually. 
8. Tax the very rich (the “.1%) more, with higher progressive tax rates on all forms of income.
9. Federal ownership of all banks
10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.

MONETARY SOVEREIGNTY

%d bloggers like this: