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 = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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The problem with the euro nations is they are monetarily non-sovereign. They can run out of money. The same is true for the U.S. states. New Jersey, New York, all of you are in the same pickle. You’re not monetarily sovereign, so can be insolvent.

But you have one advantage over the euro states: You can get money from the federal government, which because it is Monetarily Sovereign, and has the unlimited ability to create dollars, never can run short of money.

Unfortunately, the debt hawks don’t understand that, so they want the government to reduce its deficit spending.

A reader named Tim, from Iowa, commented on my post about gambling, and observed that Iowa has placed casinos near its border with Illinois, to draw as much money from Illinois as possible. Soon, Illinois will place additional casinos near its border with Iowa, and the two will battle in a zero-sum game.

This reminded me that a monetarily non-sovereign government can survive long term only if it has money coming in from outside its borders. It cannot survive on taxes alone, because the first time it spends a dollar on imports it reduces the total dollars in its economy, which is a prescription for local recession.

At http://www.nemw.org/index.php/iowa you will see that in 2009, the federal government spent about $29 billion in Iowa and took out (in taxes) about $18 billion. So you folks came out about $11 billion ahead.

By contrast, New York received about $195 billion, but paid about $200 billion. So you folks were screwed out of $5 billion.

One state that took a real hosing was New Jersey. You paid the federal government $38 billion more than you received. That’s about $4 thousand dollars for every man, woman and child in your state — gone. And I’ll bet at least half of you think the federal deficit should be reduced!!

Connecticut only lost about $1 billion. But Delaware lost $7 billion; goodbye $7 thousand for each of you. A family of four lost $28 thousand, for no good reason. Maine made $8 billion, and Maryland profited by a nice $45 billion. But Minnesota lost $23 billion.

You can see a list of 18 northeast and midwest states at http://www.nemw.org/index.php/state-economic-profiles

The point is, of course, that all you folks who think the federal deficit is too high — do you enjoy seeing your state slowly go down the tubes?

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. 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

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 = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
==========================================================================================================================================

We long have passed the stage where the debate about casinos and gambling involves morals. State governments all over America have sponsored casinos, lotteries and gambling machines. The question, if one were to speak honestly, is not whether gambling hurts the poor (it does) or seduces the ignorant (it does) or rots our moral fiber (it does) or will be controlled by the seamier elements of our society (it will). Those questions have been answered and the answers have been ignored.

The sole question now is how best to add money to a local governments’ treasuries. And that is why, in my home, Illinois, a state desperate for money, one of our few governors who has not yet been sent to jail, is taking an interesting and possibly clever position.

Chicago Tribune. 1/8/12, Quinn likes odds for Chicago casino deal. But push for slots at racetracks could still prevent accord.
By Monique Garcia

Gov. Pat Quinn says he’s optimistic a deal can be reached this year to bring a casino to Chicago, but negotiations are shaping up to be long a difficult as his stance against slot machines at horse racing tracks hasn’t changed.

Last year, lawmakers passed a gambling expansion that would have added casinos in Chicago and four other locations across the state. The bill also included slots at tracks and would have allowed the city to install slot machines at Midway and O’Hare airports.

Ignore the certainty that Quinn’s objections are strictly political, having to do only with whom of his friends would benefit, and instead innocently think about what would benefit the state of Illinois. Like every state, county, city and village in America, Illinois is monetarily non-sovereign. It does not have the unlimited ability to produce the dollars to pay its bills. In fact, it currently is behind in servicing debt.

Monetarily non-sovereign governments can survive long-term only if they have money coming in from outside their borders. There is no exception to this. They cannot survive on tax money alone, because taxes merely circulate the same money within a state, and even $1 in net imports reduces that state’s money supply, thereby guaranteeing a local recession.

Thus, gambling helps a state only to the degree that it brings dollars in from across its borders. Domestic gambling helps not at all, and in fact hurts, when the casino operators either import anything or pay dividends to outside share holders.

That said, the best place for any casinos and any gambling machines is the place most likely to be frequented by out-of-towners. In Illinois, downtown Chicago would be a great place. It hosts millions of visitors, who carry lots of out-of-town cash. It also is right on Indiana’s border, where Indiana wisely put a casino to steal Illinois’s money.

Chicago’s O’Hare and Midway airport gates would be wonderful for gambling machines, and there currently is a hotel right on O’Hare airport grounds — a terrific location for a casino. O’Hare especially, is a massive transfer point, where the world’s travelers must cool their heels between flights.

Where else? Race tracks? Not so much. Quinn is right (though probably for the wrong reasons.) They surely have “alien” business, but I suspect this is not a big part of their attendance. How about border cities? Illinois already has a casino at East St. Louis, right on the border of St. Louis, MO. I don’t know anything about that casino, but if it’s run properly, it should pull major dollars from Missouri.

Danville, Illinois is on route #74, a gateway to Indianapolis, IN. Southern Illinois isn’t particularly close to any population centers, but Illinois does have a casino in near the southern tip, and it’s close to the (small) Cairo regional airport.

Yes, gambling is the work of the devil, and is subject to all sorts of criminal activity. That’s a given. But if handled properly, it can bring in money from outside a state’s borders — something that is necessary for all monetarily non-sovereign governments. So, all of you who reside in states other than Illinois should look at a map of your state and surrounding states, and you’ll know where gambling would benefit you most.

Now, please don’t ask me what would happen should all states do this.

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. 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

As I frequently make clear, Monetary Sovereignty is a first “kissin'” cousin to Modern Monetary Theory. They agree on virtually everything, with the exception of the prevention and cure for unemployment and the prevention and cure for inflation.

I touch on both of these at: https://rodgermmitchell.wordpress.com/2012/01/01/why-modern-monetary-theorys-employer-of-last-resort-is-a-bad-idea/ and at https://rodgermmitchell.wordpress.com/2012/01/02/a-reminder-about-why-modern-monetary-theory-mmt-is-wrong-about-inflation/

Warren Mosler and I have had several discussions about inflation and its prevention and cure, with him taking the position that money supply is the key, and me taking the position that money value is the key. For a more complete discussion,, You might look at the inflation post listed above and at https://rodgermmitchell.wordpress.com/2011/04/18/how-monetary-sovereignty-differs-from-modern-monetary-theory-simplified/

In summary, Warren believes raising interest rates is inflationary, because it increases costs (true), and I believe the cost increase is relatively small, and raising interest rates is deflationary, because it increases the value of money.

Today, Warren sent me an Email containing a slightly esoteric, 26 page paper titled, Is There a Cost Channel of Monetary Policy Transmission? An Investigation into the Pricing Behavior of 2,000 Firms

Author(s): Eugenio Gaiotti and Alessandro Secchi Reviewed work(s):Source: Journal of Money, Credit and Banking, Vol. 38, No. 8 (Dec., 2006), pp. 2013-2037
Published by: Ohio State University PressStable URL: http://www.jstor.org/

Warren had received the paper from Nathan Tankus, who said: “Attached is a paper showing empirical support for the cost channel view of monetary policy. What’s significant is that it appears in a very main stream journal (Journal of Money, Credit and Banking). Thought you’d like to have a copy of this.
Nathan Tankus”

Warren sent the paper to me, with this comment: “Part of what I’ve been suggesting- rate hikes may cause inflation etc.”

My response:

“What they (Gaiotti and Secchi) said is: ” . . . in the short run an increase in interest rates may cause prices to rise, rather than to Fall. However, empirical evidence in favor of this hypothesis is not abundant and remains controversial. Virtually all of it is based on aggregate-sometimes sectoral-data and, in particular, on the identification of a short-term positive response of aggregate prices to interest rate shocks. It is well known that macro-evidence regarding the effects of monetary shocks is subject to substantial identification and specification problems and, consequently, to considerable uncertainty of interpretation. ”

Lots of “short run” (one day??), “evidence . . . not abundant,” “controversial” and “uncertainty” words in that paragraph.

I understand the notion that higher interest rates add to business costs, though for most businesses, an increase in interest rates would amount to a minuscule addition to overall costs.

However, the most powerful, empirical evidence we have is this: For many years, the Fed successfully has raised interest rates to control inflation. If raising rates actually caused inflation, and the Fed was compounding the inflation problem, surely that effect be obvious by now.

Rodger

Taking the MMT side, unquestionably an interest increase can increase business costs. Even more so when you consider that some businesses sell to other businesses, and if everyone is borrowing, there will be a multiplier effect. Further, increasing interest rates forces the federal government to pay more on its debts, which adds to the money supply. All of this can be inflationary.

On the Monetary Sovereignty side, increasing interest rates increases the value of the dollar vs other currencies and non-money. This makes imports less costly, and because imports continue to be of increasing importance to our economy, their anti-inflationary effect grows. Even for products that are manufactured in the U.S., imports of parts and raw materials are sensitive to the strength of the dollar.

Since all sales really are a form of barter, in which dollars are traded for goods and services, the more valuable the dollar, the fewer will be needed to trade.

As an aside, the Gaiotti and Secchi paper specified “short run,” and one might question whether this is of prime importance, even if it occurs.

Given all of the above hypotheses, I lean toward the empirical evidence that what the Fed has been doing –raising rates to stop inflation — seems to have kept inflation near the Fed’s target. This approach also has the advantage of being fast, effective in tiny increments, and apolitical.

Contrast that with changing the money supply via tax increases and spending decreases (the MMT) approach, which is slow, requires large, uncertain increments, and is highly political, affecting specific groups unfairly.

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. 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

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 = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
==========================================================================================================================================

In the post Federal Debt/GDP – a useless ratio, I described the reasons why it was an apples/oranges ratio that had no descriptive or predictive value for any economist – though it is quoted often. You can read the post to see the argument.

Recently, I had a painful conversation with a 24 year old lad who, based on his vast experience, repeatedly told me I was wrong about nearly everything in economics, while providing zero data to support any of his beliefs – in other words, typical.

At one point, when he didn’t understand a basic graph I showed him, he informed me it was “obscure” and “crankish” (I have no idea), and that “most people use the federal deficit as a % of GDP,” a reference mostly irrelevant to our discussion.

Nevertheless, it occured to me that some of my earlier comments regarding Federal Debt/GDP may not apply clearly enough to Federal Deficits/GDP.

By law, the total of all federal deficits constitute the federal debt. I say, “by law,” because the federal debt, i.e. the total of outstanding T-securities, is not functionally necessary. The U.S., being Monetarily Sovereign, does not need to “borrow” the dollars it previously created and has the unlimited ability to create.

More specifically, federal “debt” is the total of all Treasury security accounts held at the Federal Reserve Bank. Essentially these are savings accounts held at “our” bank. To repay the so-called “debt,” the FRB merely debits the T-security accounts and credits checking accounts — exactly the same procedure as when you transfer dollars from your bank savings account to your bank checking account.

Banks boast about the size of their savings account deposits, and work hard to gain savings account deposits, but for reasons unknown, those deposits are not called “deposits,” when they are in the FRB. There, they are misnamed “debt,” and that misnaming has everyone all atither. T-securities are no more “debt” than are bank deposits, and place no burden on the FRB.

T-securities are optional relics of pre-Monetary Sovereignty days. But for the law, they need not exist today in any correspondence with deficits, which are nothing more than the difference between spending and tax collections.

Tweak the law and we could have infinite deficits with no debt, or we could have infinite debt with no deficits. Think about that, and if it puzzles you, feel free to comment on this post; I’ll go into further detail.

Anyway, there are vast numbers of people who not only fret about the Debt/GDP ratio, but also wring their hands about the Deficit/GDP ratio. Here is a historical graph of that later ratio:

The gray bars are recessions. What generality comes to mind about the relationship between the blue line and the gray bars? My generality is: When growth in Deficit/GDP falls, we eventually reach a recession, at which time growth in Deficit/GDP rises and we come out of the recession. If Deficit/GDP were negative to the economy, we would not expect such a result.

One could say it’s a result of automatic stabilizers or even coincidence, but I suggest there can only one serious explanation for such a dramatic graph: Reductions in Deficit/GDP lead to recessions and increases in Deficit/GDP cure recessions.

This should be no surprise, when we also look at the red line, which is deficit growth itself. It too demonstrates how deficit growth drops year after year (as debt hawks worry about deficits and force “revenue neutral” projects) until we have a recession, at which time the government spends stimulus money to get us out of the recession. Then, when we recover, we fall back on our bad, old “cut-deficits” ways.

Memo to debt hawks: If deficit growth were harmful to the economy, wouldn’t you expect to see at least a few occasions when several years of deficit growth led to recession? But that simply does not happen. Why? Partly because Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports. And, Federal Deficits – Net Imports = Net Private Savings – two fundamental equations in economics.

Federal deficits are an important component of GDP, Private Investment, Private Consumption and Net Savings. Reduce deficits and you reduce them all.

Perhaps this post can close the book, not only on Debt/GDP but also on Deficit/GDP. The next time you see or hear either of these ratios decried, you’ll know whether the writer or speaker understands economics and Monetary Sovereignty, or is just following the popular myth.

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. 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