The wrongheaded dependence on the Fed. The real (only) way to prevent a recession.

From CNN and “Before the Bell”

The Federal Reserve’s decision to cut interest rates by half a percentage point outside of a scheduled meeting — the first time it’s made such a move since the 2008 financial crisis — was aimed at easing financial conditions and restoring confidence as the coronavirus outbreak spreads globally. Investors weren’t impressed.CNN BUSINESS - BEFORE THE BELL

The S&P 500 closed down 2.8%, while the Dow shed 786 points, or 2.9%. The yield on benchmark 10-year US Treasury notes fell below 1% for the first time in history as investors rushed into safe haven assets. Those are big slides on a day that was meant to be about reassurance.

What happened: Traders saw the move and wondered if the Fed Reserve knew something that everyone else didn’t. Instead of assuaging fears about how the virus would hit economic growth, it amplified them.

“Confidence matters in volatile times. It would have been better for the Fed to cut by 25 [basis points] and let markets hope for more,” Holger Schmieding, chief economist at Berenberg Bank, told clients on Wednesday.

The Fed’s primary job is to run the banking system and to stabilize the value of the U.S. dollar via interest rate control.

The Fed’s primary job is not to stimulate economic growth, prevent and cure recessions, prevent or cure large inflationary moves, or to eliminate poverty. Those are the jobs of Congress and the President.

Remember that as you continue reading.

US Treasury yields plummet chart

Some observers are also concerned that the Fed is prematurely running down its already depleted arsenal.

The central bank could still cut interest rates four times, assuming each cut is a more standard 25 basis points, before reaching zero.

But it has far less powder than investors would generally like to see in uncertain times.

Other central banks are in even worse positions.

The European Central Bank and the Bank of Japan, for example, have already pushed their benchmark interest rates into negative territory.

Central banks can still help: Satyam Panday, senior US economist at S&P Global Ratings, points out that while interest rate cuts don’t directly address some of the problems caused by the coronavirus, such as snarled supply chains, they could still prove useful.

The cuts could “offset some of the tightening that has occurred in financial markets” and keep credit flowing, while helping to speed up an economic recovery in the second half of the year, he said.

Cutting interest rates weakens the U.S. dollar, which is mildly inflationary. Inflation and economic growth are not the same thing. So trying to use one tool for two completely different effects will not work.

In short, don’t use a screwdriver to set nails.

What is the right tool to prevent and cure market slumps? What should Congress and the President do?

The Answer: Identify and cure the problems. Right now, many industries are suffering. Anything related to travel — and not just airlines and cruise ships, but anything related to traveling will be hurt — and that includes most businesses to some degree.

When businesses are hurt, what do they do? They lay off workers, and not the top-level executives, but the mid- and low-level workers, who cannot afford to take a hit to their incomes.

These are the great mass of American consumers who make the American economy run.

The fundamental problem is that American consumers will run short of money, so the fundamental solution is to provide them with money. It’s that simple.

Who should implement that solution, and how?

The Answer: Congress and the President should begin to pump dollars into the economy by instituting the Ten Steps to Prosperity (below). Put dollars into people’s pockets, so that the impoverishment caused by the loss of jobs will be softened.

Start with step 1: Eliminate FICA. That would put billions of dollars into the pockets of consumers.

That would help consumers, who don’t lose their jobs, to keep spending, which would help more businesses stay open and not need to lay off people.

Step 2. Free medical care, which would prevent economic disaster, especially for people who lose their jobs.

Step 3. A monthly bonus to everyone, really important for those who lose their jobs.

Go down through all the steps and you’ll see that the Ten Steps to Prosperity can help prevent a recession or a  depression — something the Fed simply does not have the tools to address.

In the near term, investors aren’t satisfied, with markets now clamoring for the Fed to cut rates again at its scheduled meeting later this month.
“The Fed seems committed to frontloading cuts, acting aggressively and forcefully,”

“The market is also pressuring the Fed by pricing in over a 70% probability of a March cut; the Fed won’t fight it.”

The above follows the failed philosophy, “If it doesn’t work, do it again, and if that doesn’t work, keep doing it.”

Sorry “market,” but interest rate cuts, even (God forbid) negative interest rates, will not prevent a recession or a depression.

Only the kind of money supply increases offered by the Ten Steps to Prosperity can do that.

But for investors, the moderate Biden’s surge was a welcome event.

“Investors fear Bernie because he wants to cut off the head of capitalism by raising taxes significantly on the rich and using the funds to provide free everything to everybody else.

He also wants to regulate everyone,” Ed Yardeni, president of Yardeni Research, told clients on Wednesday.

Should Sanders secure the nomination, analysts have predicted that health care, energy and financial stocks would take a hit.

“The policy proposals outlined primarily by Senator Sanders could have negative implications for a significant section of the equity market,” Mislav Matejka, JPMorgan’s head of global and European equity strategy, told clients this week.

Investors understand that if it’s bad for business, it’s bad for the economy. The economy is business.

To grow the economy, we must help grow business, and to grow business we must help consumers consume.

Unfortunately, Ed Yardeni doesn’t understand federal financing. He believes that federal government spending relies on federal taxes. It doesn’t.

The federal government, being Monetarily Sovereign, could institute the Ten Steps to Prosperity without collecting a penny in taxes, and that is exactly what the government should do.

We must not rely on the Fed to prevent/cure a recession or depression. That job belongs to Congress and the President.

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



The most important problems in economics involve:

  1. Monetary Sovereignty describes money creation and destruction.
  2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

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 Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and 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 the rest.


The dumb and dumber of negative interest rates

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


On their face, negative interest rates seem dumb.  Are you really going to pay your bank interest for holding, and using, your money?

If so, I’d be glad to hold and use your money for free. I won’t charge you a penny. Just send it to me.

But negative interest rates actually are happening, and the reasons are explained in the following article — and they are the “dumber” part of this post’s title.

Negative Interest Rate Conundrum
Posted on March 17, 2016 by Yves Smith

Across the developed world the persistence of a phenomenon that was initially seen as a freak occurrence—negative interest rates—is now a cause for concern. One form the tendency takes is for central banks to set their policy rates, which signal their monetary stance, below zero.

The process was triggered by the European Central Bank (ECB). Under pressure to forestall deflation in the region, the ECB reduced its deposit rate to (minus) 0.1 per cent in June 2014.

Since then, according to the Bank for International Settlements (BIS), till January 2016 four national central banks, from Denmark, Sweden, Switzerland and Japan, have moved the interest ‘paid’ on part of their deposits with them to negative territory.

“Deflation,” i.e. a general reduction in prices — the opposite of inflation — might seem to be a welcome event. After all, doesn’t everyone like lower prices?

But the threat of deflation causes panic in financial quarters, and the philosophy is this: If consumers of any product know that tomorrow’s prices will be lower than today’s, these consumers will delay purchases, waiting for the lower prices.

And we’re not talking just about traditional “consumers,” people buying food, clothing and shelter. We’re talking about all consumers: Businesses buying raw and processed materials for subsequent process and sale.

So if everyone waits until tomorrow to buy things, and when tomorrow comes, they wait until the next tomorrow, and the next, what happens to Gross Domestic Product?

Right. GDP falls, and by definition, falling GDP is called “recession.”

What does that have to do with interest rates?

Inflation is the loss in value of money compared with the value of goods and services. In the U.S. that would mean more dollars are necessary to purchase any given amount of those goods and services.

The Fed, and other central banks, control inflation by raising interest rates. Higher rates increase the Demand for dollars, making dollars more valuable, aka “strengthen” the dollar.

Investors are more likely to invest in dollar-based investments: Bonds, notes, interest-paying bank accounts, and less likely to invest in goods and services (which brings down their price).

The formula is Value = Demand / Supply. When Demand goes up more than Supply, Value goes up.

There is a banking corollary to this:

The motivation for negative deposit rates is clearly to pressure or persuade banks to lend rather than hold on to reserves with the central bank.

For a bank, lending is a form of investing. Banks continually look for the “best” (safest and most remunerative) investments.

Banks earn money by lending, and by depositing reserves with the Federal Reserve Bank, and by purchasing T-securities. (The obscene, illegal, and so-far unpunished earnings that come from selling worthless mortgages to suckers, are not part of this discussion).

Even Fed Chairman Janet Yellen told a Congressional hearing that the US Fed would consider this (negative interest rates) option if it found it to be necessary.

Clearly, negative interest rates are an extreme, rarely considered, much less used, option — an option that only would be used when no other option is available. Right?

Well, maybe. Remember the formula Value = Demand / Supply?

The Value of a dollar is based not only on Demand but on Supply. Reduce the Demand, by lowering interest rates, and you reduce the Value, thereby fighting deflation.

But increasing the Supply of dollars would accomplish the same thing.

And how does the federal government increase the supply of dollars? By federal deficit spending.

And herein lies a gigantic absurdity.

Governments have succumbed to the pressure not to use debt-financed fiscal spending as a means of stimulating recovery.

America’s debt and deficit scare-mongers shriek that the federal debt and deficit are too high because they are “unsustainable” (the favorite debt scare-monger word.) The fiction goes like this:

Debt scare monger: “The debt is so high, America will not be able to pay it off, so we have to cut spending (on social benefits) or raise taxes (on the middle class). Like you and me, the federal government should live within its means (As spoken by President Barack Obama and numerous politicians, economists and the media).”

Voice of fact and reason: “But the federal government, being Monetarily Sovereign never can run short of dollars.”

Debt scare monger: “Oh sure, the government always can print money, but that would cause inflation. Remember the Weimar Republic and Zimbabwe.”

See the absurdity? Central banks say they must cut interest rates below zero to prevent and cure deflation, but nations cannot use deficit spending because that would cause inflation.

Never mind that national deficit spending primarily funds such social services as Social Security, Medicare, Medicaid, aids to education, and food and housing for the lower income groups. Helping the lower income groups is the last thing the rich bankers wish to do.

And that is not the only problem with negative interest rates:

The movement of rates to negative territory reflects the desperation that has overcome governments, as they find that deep rate cuts have not had the desired effects of stalling the downturn and ensuring recovery.

What a surprise. Those below-zero rate cuts don’t don’t even work. They don’t stimulate an economy.

Who could have guessed — other than any thinking person. Rate cuts reduce the amount of interest money a central bank pays into the economy.

The interest on T-securities (T-bills, T-bonds, T-notes) adds dollars to the economy. Dollars are the lifeblood of our economy. Adding dollars is stimulative; subtracting dollars is recessive.

So negative interest rates, in theory used for fighting deflation (which causes recessions), actually cause recessions, the very thing that deflation causes and the reason deflation is so feared.

Thus the title of this post, “Dumb and dumber”: Doing “A” to prevent “B” despite the fact that “A” causes “B.”

Increased deficit spending not only would:
1. Prevent deflation and
2. Grow the economy and
3. Pay for science, education, infrastructure and myriad other benefits, but also
4. Pay for benefits to the lower income groups, thereby narrowing the Gap between the rich and the rest.

So expect Janet Yellen to continue worrying about deflation and hinting at negative interest rates “if necessary,” while saying nary a word about increased deficit spending.

Like her predecessors, she’s a bought-and-paid-for politician, owned by the rich, who want the Gap widened.

And as for us, the public. We can’t seem to figure it out. So I guess that makes us dumb, dumber, and dumbest.

Rodger Malcolm Mitchell
Monetary Sovereignty

Ten Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Federally funded Medicare — parts A, B & D plus long term nursing care — for everyone (Click here)
3. Provide an Economic Bonus to every man, woman and child in America, and/or every state a per capita Economic Bonus. (Click here) Or institute a reverse income tax.
4. Free education (including post-grad) for everyone. Click here
5. Salary for attending school (Click here)
6. Eliminate corporate taxes (Click here)
7. Increase the standard income tax deduction annually Click here
8. Tax the very rich (.1%) more, with higher, progressive tax rates on all forms of income. (Click here)
9. Federal ownership of all banks (Click here and here)

10. Increase federal spending on the myriad initiatives that benefit America’s 99% (Click here)

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

10 Steps to Economic Misery: (Click here:)
1. Maintain or increase the FICA tax..
2. Spread the myth Social Security, Medicare and the U.S. government are insolvent.
3. Cut federal employment in the military, post office, other federal agencies.
4. Broaden the income tax base so more lower income people will pay.
5. Cut financial assistance to the states.
6. Spread the myth federal taxes pay for federal spending.
7. Allow banks to trade for their own accounts; save them when their investments go sour.
8. Never prosecute any banker for criminal activity.
9. Nominate arch conservatives to the Supreme Court.
10. Reduce the federal deficit and debt


Recessions begin an average of 2 years after the blue line first dips below zero. A common phenomenon is for the line briefly to dip below zero, then rise above zero, before falling dramatically below zero. There was a brief dip below zero in 2015, followed by another dip – the familiar pre-recession pattern.
Recessions are cured by a rising red line.

Monetary Sovereignty

Vertical gray bars mark recessions.

As the federal deficit growth lines drop, we approach recession, which will be cured only when the growth lines rise. Increasing federal deficit growth (aka “stimulus”) is necessary for long-term economic growth.


Mitchell’s laws:
•Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
•Any monetarily NON-sovereign government — be it city, county, state or nation — that runs an ongoing trade deficit, eventually will run out of money.
•The more federal budgets are cut and taxes increased, the weaker an economy becomes..

•No nation can tax itself into prosperity, nor grow without money growth.
•Cutting federal deficits to grow the economy is like applying leeches to cure anemia.
•A growing economy requires a growing supply of money (GDP = Federal Spending + Non-federal Spending + Net Exports)
•Deficit spending grows the supply of money
•The limit to federal deficit spending is an inflation that cannot be cured with interest rate control.
•The limit to non-federal deficit spending is the ability to borrow.

Liberals think the purpose of government is to protect the poor and powerless from the rich and powerful. Conservatives think the purpose of government is to protect the rich and powerful from the poor and powerless.

•The single most important problem in economics is the Gap between rich and the rest..
•Austerity is the government’s method for widening
the Gap between rich and poor.
•Until the 99% understand the need for federal deficits, the upper 1% will rule.
•Everything in economics devolves to motive, and the motive is the Gap between the rich and the rest..