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

==========================================================================================================================================
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.
====================================================================================================================================================================================================================

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

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.
==========================================================================================================================================================================================

The Great Depression actually began in 1920, though we didn’t know it then. In the next ten years, the U. S. Federal Debt was reduced 36%, causing a series of recessions, and finally the Depression officially began in 1929. It continued to worsen through 1932. Here is why:

Annual Message to Congress, Herbert H. Hoover, December, 1931

I must at this time call attention to the magnitude of the deficits which have developed and the resulting necessity for determined and courageous policies. These deficits arise in the main from the heavy decrease in tax receipts due to the depression and to the increase in expenditure on construction in aid to unemployment, aids to agriculture, and upon services to veterans….

We must have insistent and determined reduction in government expenses. We must face a temporary increase in taxes. Such increase should not cover the whole of these deficits or it will retard recovery. We must partially finance the deficit by borrowing. It is my view that the amount of taxation should be fixed so as to balance the Budget for 1933 except for the statutory debt retirement. Such government receipts would assure the balance of the following year’s budget including debt retirement.
[…]
Even with increased taxation, the government will reach the utmost safe limit of its borrowing capacity by the expenditures for which we are already obligated and the recommendations here proposed.
[…]
We must avoid burdens upon the government which will create more unemployment in private industry than can be gained by further expansion of employment by the Federal Government. We can now stimulate employment and agriculture more effectually and speedily through the voluntary measures in progress, through the thawing out of credit, through the building up of stability abroad, through the home loan discount banks, through an emergency finance corporation and the rehabilitation of the railways and other such directions.

I am opposed to any direct or indirect government role.

And a year later, having learned nothing, while the Depression continued to worsen, President Hoover said:

Annual Message to Congress, Herbert H. Hoover, December, 1932

The first (suggested) action is the continuing reduction of all government expenditures, whether national, state, or local. The difficulties of the country demand undiminished efforts toward economy in government in every direction.

Embraced in this problem is the unquestioned balancing of the Federal Budget. That is the first necessity of national stability and is the foundation of further recovery. It must be balanced in an absolutely safe and sure manner if full confidence is to be inspired.
[…]
In the Budget there is included only the completion of the Federal public works projects already undertaken or under contract. Speeding up of Federal public works during the past four years as an aid to employment has advanced many types of such improvements to the point where further expansion can not be justified in their usefulness to the government or the people.

As an aid to unemployment we should beyond the normal constructive programs substitute reproductive or so-called self-liquidating works. Loans for such purposes have been provided for through the Reconstruction Finance Corporation. This change in character of projects directly relieves the taxpayer and is capable of expansion into a larger field than the direct Federal works.

The reproductive works constitute an addition to national wealth and to future employment, whereas further undue expansion of Federal public works is but a burden upon the future.
[…]
Many of the economies recommended in the Budget were presented at the last session of the Congress but failed of adoption. If the Economy and Appropriations Committees of the Congress in canvassing these proposed expenditures shall find further reductions which can be made without impairing essential government services, it will be welcomed both by the country and by myself. But under no circumstances do I feel that the Congress should fail to uphold the total of reductions recommended.
[…]
The time has come when, if the government is to have an adequate basis of revenue to assure a balanced budget, this system of special manufacturers’ excise taxes should be extended to cover practically all manufactures at a uniform rate, except necessary food and possibly some grades of clothing.
[…]
It is today a matter of satisfaction that the rate of bank failures, of hoarding, and the demands upon Reconstruction Corporation have greatly lessened. The acute phases of the crisis have obviously passed and the time has now come when this national danger and this failure to respond to national necessities must be ended and the measures to end them can be safely undertaken.

In 1935, New Deal federal spending programs such as the Works Progress Administration (WPA) were begun. By June 1937, the economy had begun to recover. Industrial production was greater than in 1929. However, President Roosevelt, himself having learned nothing from history, increased taxes and cut spending in yet another attempt to balance the federal budget. And predictably, the economy again crashed (The “2nd Depression”).

Now comes President Barack Obama, who has learned nothing from the the lessons of the past 80 years:

At certain times -– particularly during war or recession -– our nation has had to borrow money to pay for some of our priorities. And as most families understand, a little credit card debt isn’t going to hurt if it’s temporary.

But as far back as the 1980s, America started amassing debt at more alarming levels, and our leaders began to realize that a larger challenge was on the horizon. They knew that eventually, the Baby Boom generation would retire, which meant a much bigger portion of our citizens would be relying on programs like Medicare, Social Security, and possibly Medicaid. Like parents with young children who know they have to start saving for the college years, America had to start borrowing less and saving more to prepare for the retirement of an entire generation.
[…]
To meet this challenge, our leaders came together three times during the 1990s to reduce our nation’s deficit — three times. . . As a result of these bipartisan efforts, America’s finances were in great shape by the year 2000. We went from deficit to surplus. America was actually on track to becoming completely debt free, and we were prepared for the retirement of the Baby Boomers.

Yes, America’s finances were in such great shape we had a recession that began the end of 2000. And of course, if America were debt-free it also would be money-free.

But after Democrats and Republicans committed to fiscal discipline during the 1990s, we lost our way in the decade that followed. We increased spending dramatically for two wars and an expensive prescription drug program -– but we didn’t pay for any of this new spending. Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts -– tax cuts that went to every millionaire and billionaire in the country; tax cuts that will force us to borrow an average of $500 billion every year over the next decade.

The 1990’s marked one of the longest recession-free periods in U.S. history.

To give you an idea of how much damage this caused to our nation’s checkbook, consider this: In the last decade, if we had simply found a way to pay for the tax cuts and the prescription drug benefit, our deficit would currently be at low historical levels in the coming years.

But that’s not what happened. And so, by the time I took office, we once again found ourselves deeply in debt and unprepared for a Baby Boom retirement that is now starting to take place. When I took office, our projected deficit, annually, was more than $1 trillion. On top of that, we faced a terrible financial crisis and a recession that, like most recessions, led us to temporarily borrow even more.

In this case, we took a series of emergency steps that saved millions of jobs, kept credit flowing, and provided working families extra money in their pocket. It was absolutely the right thing to do, but these steps were expensive, and added to our deficits in the short term.

Hmmm . . . Let’s see. When times are bad, we increase the deficit, which cures the recession. Then when times are good, we cut the deficit, which causes the recession. Could there be a hint buried in that history?

So that’s how our fiscal challenge was created. That’s how we got here. And now that our economic recovery is gaining strength, Democrats and Republicans must come together and restore the fiscal responsibility that served us so well in the 1990s. We have to live within our means. We have to reduce our deficit, and we have to get back on a path that will allow us to pay down our debt.

What more can one say? More than 80 years of doing the same things and seeing the same results, and still our leaders haven’t learned a thing. How is it that the least competent and least knowledgeable seem to rise to positions of power?

That is the great human mystery.

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