How to prevent and cure inflation. (It’s not what the “experts” tell you.) Thursday, Sep 19 2019 

Two related philosophies about federal finances are MMT (Modern Monetary Theory) and MS (Monetary Sovereignty). You now are reading an MS blog.

MMT and MS agree on the following principle that was expressed by MMT’s L. Randall Wray in his paper “WHAT ARE TAXES FOR? THE MMT APPROACH” 

“Taxes are not needed to ‘pay for’ (federal) government spending. The logic is reversed: government must spend (or lend) the currency into the economy before taxpayers can pay taxes in the form of the currency. Spend first, tax later is the logical sequence.”

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The U.S. government cannot run short of dollars.

U.S. federal taxes are not needed. The U.S. government, being Monetarily Sovereign, has the unlimited ability to create its own sovereign currency, the U.S. dollar.

The U.S. government never unintentionally can run short of dollars. Even if all federal tax collections totaled $0, the federal government could continue spending, forever.

The articles you read about the “unsustainable” federal debt are, very simply, wrong. There is no level of U.S. dollar obligations the federal government cannot easily sustain.

Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

Alan Greenspan: “Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit. A government cannot become insolvent with respect to obligations in its own currency.”

St. Louis Federal Reserve: “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets (borrowing) to remain operational.

Professor Wray’s paper continues:

Some who hear this for the first time jump to the question: “Well, why not just eliminate taxes altogether?” There are several reasons.

First, it is the tax that “drives” the currency. If we eliminated the tax, people probably would not immediately abandon use of the currency, but the main driver for its use would be gone.

We disagree with the “taxes drive the currency” notion. Contrary examples abound. Professor Wray’s own “Roobucks” are not “driven” by taxes. They are driven by the discounts they provide. Bitcoin is not “driven” by taxes.

However, the real point is contained in the following paragraphs from Wray’s paper:

Further, the second reason to have taxes is to reduce aggregate demand. If we look at the United States today, the federal government spending is somewhat over 20% of GDP, while tax revenue is somewhat less—say 17%.

The net injection coming from the federal government is thus about 3% of GDP. If we eliminated taxes (and held all else constant) the net injection might rise toward 20% of GDP.

That is a huge increase of aggregate demand, and could cause inflation.

Ideally, it is best if tax revenue moves countercyclically—increasing in expansion and falling in recession.

That helps to make the government’s net contribution to the economy countercyclical, which helps to stabilize aggregate demand.

The implicit assumption of the above paragraphs is that the private sector’s money supply drives inflation, and the way to control inflation is to reduce the private sector’s money supply.

In a similar vein:

A Wikipedia article says, “Low or moderate inflation may be attributed to fluctuations in the real demand for goods and services, or changes in available supplies such as during scarcities. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.”

We disagree with Wray and with the Wikipedia author. A “long sustained period” of money supply growth cannot exceed a “long sustained period” of economic growth.

The money supply cannot grow faster than economic growth. The two are interdependent in the formula for GDP:

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

A decrease in taxes would increase the “Non-federal Spending” factor and GDP by the same amount. By formula, tax decreases increase GDP.

Inflation usually is defined as a general increase in prices. Another way to say it is, “Inflation reduces the purchasing power of each unit of currency.”

There are two levels of inflation: Intentional and unintentional. The intentional form is the amount that the central bank believes is helpful for a growing economy. The U.S. Federal Reserve has as its target rate, 2% inflation.

When annual inflation drifts above or below the 2% target, the Fed quickly raises and lowers interest rates, i.e. raises to rates combat inflation; lowers rates to stimulate inflation.

(The Fed also lowers interest rates to stimulate economic growth, which follows the common myth that stimulating growth and stimulating inflation require the same actions.)

The Fed’s target rate of inflation is maintained by interest rate control, which controls the demand for, and purchasing power of, U.S. dollars. Increasing the demand for dollars reduces inflation; decreasing the demand for dollars encourages inflation.

But what about high inflation, say of 50% or 50,000% annually or more. Such hyperinflations always are caused by shortages of food and/or energy (oil).

The famous Zimbabwe hyperinflation is a typical example. The government took farmland from white farmers and gave it to blacks who did not know how to farm. The inevitable food shortage caused hyperinflation.

In response, rather than trying to cure the food shortage, the Zimbabwe government began printing more currency.

This provided the illusion that currency printing caused the hyperinflation, when in fact, the hyperinflation caused the currency printing.

Think of a typical scenario this way: The inflation-adjusted money supply goes up. Where does the additional real money go? The vast majority goes to spending, which by definition, increases real GDP.

One might argue that some is saved, but since saved dollars are not spent, they cannot contribute to aggregate demand.

All increases in the real money supply increase real GDP.

Further, and most importantly, all decreases in the real money supply (because of taxes) decrease real GDP. Thus taxes, rather than being effective moderators of inflation, actually are recessive.

Recession is not the opposite of inflation. The two can occur simultaneously. The opposite of inflation is deflation. Taxes do not cause deflation. Deflation, i.e. price decreases, is caused by excess supplies of goods and services.

Thus, removing currency (via taxes) from the economy would have done nothing to cure the inflation, though it would have reduced real (inflation-adjusted) GDP economic growth, while it impoverished the populace.

There are several ways to prevent or cure inflation, but taxation is not one of them. Taxation merely takes dollars from the private sector and delivers them to the federal government, where your tax dollars are destroyed.

Taxation does nothing to address the fundamental cause of inflation: Shortages.

Imagine an inflation caused by a food shortage, and the automatic response is an increase in taxes. How would leaving fewer inflation dollars in the pockets of the people eliminate the food shortage?

It wouldn’t, of course.

Consider again, Zimbabwe: Rather than taxing, designed to reduce the currency supply (while impoverishing the people), or printing currency to increase the currency supply (thereby reducing the already diminished value of Zimbabe’s money), the Zimbabwe government should have taken steps to increase the food supply.

This might have included paying to educate Zimbabwe’s farmers and/or paying experienced farmers to manage farms or paying to import food from other nations.

These steps would have required the Zimbabwean government to spend more money to correct inflation — a counterintuitive response, but the only one based on financial reality.

In Summary
Any time a nation experiences an unwanted level of inflation, the correct early step is to increase interest rates, thus increasing the demand for, and the value of, the nation’s currency.

If the inflation has grown beyond interest rate increases as a sole solution, additional steps are needed:

  1. Determine what exactly is causing the inflation
  2. If the cause is a shortage of food or energy the government must either import the needed food or energy, or fund ways to increase the domestic production of food or energy.
  3. If the government is monetarily non-sovereign (a euro nation, for instance), and cannot afford to fund imports or fund domestic production of the scarce commodities, it immediately should begin the process of issuing its own sovereign currency, i.e. it should make itself Monetarily Sovereign.

Raising taxes is exactly the wrong step since that will worsen the inflation problem, while adding recession to the burden.

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

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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.

MONETARY SOVEREIGNTY

–The failure of common sense in economics. How the President and Congress ignore economic facts and play Russian roulette with our lives. Thursday, Jul 21 2011 

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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There is something of a rule in problem-solving that questions beginning with “How” are to be preceded by a thorough examination of questions beginning with “Should.” President Bush II failed to do that when he asked his advisors questions like, “How do we fight a war in Iraq and Afghanistan” and “How do we arrest Saddam Hussein.” The correct questions were “Should we fight a war in Iraq and Afghanistan” and “Should we arrest Saddam Hussein.”

A football coach does not begin with “How can we increase our passing yardage?” He begins with “Should we increase our passing yardage?” A company does not begin with, “How can we increase the number of our stores?” It begins with a thorough examination of “Should we increase the number of our stores?”

Sadly, President Obama, Congress, the media and the old-line economists work feverishly to answer the question, “How can we reduce the federal deficit?” They believe a thorough examination of “Should we reduce the federal deficit?” is unnecessary. They already “know” the answer, despite massive evidence to the contrary.

When you ask the wrong question, you find the wrong answer. Congress and the President can’t agree on an answer, because the question is wrong. It’s akin to asking, “How should we sail a ship without falling off the edge of the world?”

The correct question is, “Should we reduce the federal deficit?” Many people give perfunctory, knee-jerk answers, such as, “The deficit is not sustainable” or “Our children will pay for it.” But no answers have been based on the one, overriding, undeniable fact:

Federal deficits = net non-federal saving

Cut deficits and you cut saving. Cut saving and you cut economic growth. Cut economic growth and you enter recessions and depressions and the unemployment that accompanies them. The facts are that simple and undeniable. But, the President and members of Congress do not work from facts; they work from what each believes is common sense.

Common sense consists of beliefs most people consider obvious and sound, things “everyone knows.” Yet, your common sense may be different from my common sense, because it is affected by our different personal experiences, as well as by analogy, religion, social mores, history, logic, teaching, folklore, aphorisms, leaders and every form of information transfer, all of which vary from person to person.

The earth must be flat, not round, else the oceans would pour out. Nothing can be in two places at the same time – except in Quantum Mechanics. Running fast does not make your watch run slower – except in Relativity. If a roulette wheel lands on red five times in a row, it is more likely to land on black the next spin. Common sense.

Because common sense does not require research, it allows for fast decisions and is powerfully built into our genes. We have great difficulty departing from our common sense beliefs, because they are evolutionarily valuable. We experience and use common sense every day of our lives. We do not need research to tell us to avoid walking blindly into a street or reaching into a fire. Anyone who intentionally does these things is a “fool.”

So powerful is common sense, we angrily consider all those who depart from of our visions of common sense to be fools. Here are examples of common sense for most Americans:

1. Debt is a burden on the debtor; the more debt, the greater the burden. Debtors can be forced into bankruptcy by creditors.
2. A deficit is worse than a surplus. Outgo requires income. Taxes and borrowing pay for government spending.
3. Everything has a cost and a limit. Nothing can be created from nothing. Nothing goes on forever. There is no such thing as a free lunch. No pain; no gain. If it sounds too good, it is.
4. The greater the supply, the less the value. “Printing” money causes inflation. You can have too much of a good thing.
5. Dollars are real and scarce. They can be held, stored and moved.

Every one of these common sense beliefs either is always false or often false, when applied to the U.S. federal government, because:

1. Federal debt is not a burden. Unlike state and local governments, the federal government cannot be forced into bankruptcy (except by Congress). It can service any debt of any size, any time.
2. Federal deficits stimulate the economy while surpluses cause recessions and depressions. The federal government, being Monetarily Sovereign, neither needs nor uses taxes or borrowing to pay its bills.
3. The federal government creates money by marking up the bank accounts of creditors, in a cost-free, pain-free, limit-free process. To the federal government, money is a “free lunch.”
4. Increasing the supply does reduce value, unless demand increases more. Money demand is increased by interest rates. Since we went off the gold standard, there has been no relationship between federal deficit spending and inflation.
5. Dollars have no physical reality. They are nothing more than numbers in bank accounts. Even dollar bills are not dollars; they are receipts or titles for dollars. Dollars are not scarce to the federal government.

These truths are counter to intuition, counter to common sense and counter to the beliefs of most Americans, yet they are truths, nonetheless.

Very soon, Americans will face the cold reality of recession or depression, caused by Congress’s and the President’s following their “common sense,” rather than economic fact. Federal spending for Social Security, Medicare, Medicaid, and many other vital federal services will decline. We will suffer “invisible” pain from the loss of scientific and medical research, declining infrastructure, a weaker military, poorer schools, less food and drug inspection, and worse investment protections. Our standard of living will decline. Unemployment will worsen. Destitution will increase. Our children and our grandchildren will lead meaner lives. Their futures will be impoverished.

And most Americans will not realize what has been done to them.

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.

MONETARY SOVEREIGNTY

–The single, most misunderstood fact in all of economics. It will blow your mind. Tuesday, Jul 19 2011 

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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When you ask the wrong question, you get the wrong answer. Congress and the President are asking, “How should we reduce the federal deficit?” The correct question is, “Should we reduce the federal deficit?” And the answer is “No.”
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Sometimes, something is so simple it can be hard to understand, as though “It just couldn’t be that easy.” This is one of those times.

The media don’t understand it. The columnists don’t understand it. The Tea Party, the Republicans, the Democrats and the debt hawks don’t understand it. For sure, President Obama doesn’t understand it. The old-line economics professors do understand it, but they’re afraid to admit it, because it makes them look like boobs for not telling you, all these years.

It is the single most important equation in economics. It’s so simple as to be laughable, yet it will amaze you (unless you are among the one-in-ten-thousand who already understands it). And once you understand it, you will look at the politicians in wonderment at their incredible ignorance.

Are you ready? Here it is:

Federal Deficits – Net Imports = Net Private Saving

This is not a hypothesis. It’s not a theory. It’s not my opinion or anyone else’s opinion. It is an accounting fact. In a closed economy (where money exports equal money imports), your annual savings, plus my annual savings, plus everyone else’s annual savings equals annual federal deficit spending, to the penny. In such an economy, Federal Deficits = Net Private Savings.

This means, if the federal deficit is reduced $1, our combined savings will be reduced by exactly $1 — not $.99; not $1.01 — exactly $1.00.

Today, the politicians in Washington are talking about a $4 trillion (!) deficit reduction. That means our savings will be reduced by $4 trillion. There are about 310 million people in America. A deficit reduction of $4 trillion will reduce the savings of each man, woman and child in America by an average of $12,900.

That’s $12,900 out of your pocket, another $12,900 out of the pockets of your spouse, each of your children and each of your grandchildren. A four-person family will lose $51,600 in savings. If both your parents are alive, they’ll lose another $25,800 in savings.

Why do the politicians want to reduce your savings? Sheer ignorance of Monetary Sovereignty. They think “deficit” is a bad word and want to eliminate it. But a federal deficit is money in your pocket. And a federal surplus? That’s money taken out of your pocket.

How can this be? Again, simple. When federal spending exceeds federal taxes, it’s called a “deficit.” When the federal government spends, its payments for goods and services enter the economy. When you pay taxes, the money leaves the economy. So federal deficits add money to the economy, and where does that money go? Into your pocket as savings. Similarly, federal taxes take money out of your pocket.

(If you want to see a longer, more erudite explanation, you might try Deficit = Savings, or Mosler letter to the President but I think you get the picture.)

Now tell me, how much would you like the federal deficit to be reduced? That is, how much of your savings would you like to lose? Tell your Congressperson.

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


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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.

MONETARY SOVEREIGNTY

–Is NPR in league with the Tea Party, or simply clueless? Monday, Jul 18 2011 

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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It was at 11:00 AM Central time, today, that I heard a discussion on National Public Radio, station WBEZ. The participants claimed the media are hamstrung by the need to present both sides of each issue.

They lamented the fact that “fairness” required them to give equal weight to opposing opinions, even when one opinion was far more persuasive than the other — and shouldn’t the media have more leeway in exercising their judgement on this?

Aside from the fact that columnists and editorials do exercise a form of censorship (aka “judgement”), there is one other aspect to the conversation that troubled me. The specific subject was the federal deficit. Both participants agreed the deficit must be reduced, so the “two sides” were: Raise taxes or don’t raise taxes.

As readers of this blog know, those are not both sides of the deficit issue. Those “two sides” are mere details in the real issue: Increase the deficit or don’t increase the deficit.

The media, including public radio, have been derelict in not presenting the “increase the deficit” side. And its not as though they don’t know or can’t find out. They easily can access such sources as this web site, Warren Mosler’s The Center of the Universe), Bill Mitchell’s Billyblog ), almost the entire faculty at the University of Missouri, Kansas City (far ahead of traditional Nobel winners like the University of Chicago and Harvard) and many,many others, to see powerful arguments, substantiated by facts, about why the federal deficit should be increased.

Why do they never broadcast these opinions and facts? It’s yet another puzzle surrounding the entire Monetary Sovereignty subject. Because “everyone” agrees the world is flat, the media don’t consider the possibility it may be round, so nothing is said.

There is only one solution. I’m following it and I urge you to follow it: Contact your local NPR station (www.mpr.org) and ask them to do as they claim to do: Broadcast both sides of the issue – the real both sides. If enough people request it, NPR finally may realize they are missing an important part of the economics debate.

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.

MONETARY SOVEREIGNTY

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