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Economics is complex, so complex that we often do not know how to identify either cause or effect with much confidence.
The central reason is because economics is intermingled with such complex subjects as psychology, meteorology, Artificial Intelligence, game theory, and mathematics.
Even the language of economics is uncertain. Just by way of example, what exactly are “federal debt,” “federal deficit,” “austerity,” “wealth,” and “progressive”? You will hear many definitions, often contradictory.
But economics is simple, so simple that its entire structure rests on the answers to just two questions:
- Can the U.S. federal government unintentionally run short of U.S. dollars?
- Can the U.S. federal government control the value of the U.S. dollar?
I. Can The U.S. Federal Government Unintentionally Run Short of U.S. Dollars
The first question leads us to a discussion of Monetary Sovereignty (and monetary non-sovereignty).
“Monetarily sovereign” means absolutely sovereign over the currency the nation primarily uses.
The U.S. government and the governments of such other nations as the UK (pound), Canada (Canadian dollar), Australia (Australian dollar), Japan (yen), and China (Yuan Renminbi) are Monetarily Sovereign.
Each of these nations uses a currency it created and over which it is sovereign.
By contrast, the governments of Germany, France, Italy, and other members of the eurozone use the euro, a currency none of them created, and over which they have no control.
Similarly, Illinois, Los Angeles, and Idaho use a currency, the dollar, they did not create and over which they have no control.
So, the euro nations can run short of euros, and American states and cities can run short of dollars. They are monetarily non-sovereign.
The U.S. government created the first U.S. dollar more than two centuries ago, by creating laws. The laws, written by men, not by God, specified:
a) the number of dollars to be created and
b) the value of those dollars relative to precious metals.
Note that the U.S. dollar never actually was backed by precious metals. “Backed” implies collateral, but when the debtor has the unconditional power to change the collateral, one cannot say the dollar was backed by metals.
Those who pine for a gold-“backed” dollar must understand that even were we on a gold standard, the federal government has the uncontested power to change the dollar-price of gold at any time.
In short, a gold-“backed” dollar is impossible for our Monetarily Sovereign government. The only thing that backs the dollar — the only thing that ever has backed the dollar, even during gold standards — is the full faith and credit of the federal government.
It would be far more accurate to say the U.S. is on a “full faith” standard than ever on a gold standard.
Both a) and b) above were wholly optional. The men could have used any numbers they chose.
As federal laws are under the control of the federal government, the number of U.S. dollars, the way dollars are created, and the value of dollars can be changed at will, by the federal government.
Because all laws are created from thin air, dollars too are created from thin air. And because laws have no physical existence — they are ideas only — dollars too, have no physical existence. They are nothing more than numbers in balance sheets.
Just as pages in law books in of themselves are not laws — they merely represent laws — so too are dollar bills not dollars. They merely represent dollars. And just as you never have seen, heard, tasted, smelled, or touched
And just as you never have seen, heard, tasted, smelled, or touched a law, you never have seen, heard, tasted, or touched a dollar. Dollars are notations on balance sheets, ultimately controlled by the federal government.
So in answer to question #1, “Can the U.S. federal government unintentionally run short of U.S. dollars?, we respond, “can the U.S. federal government unintentionally run short of laws to create dollars?
Imagine an unlikely scenario, in which the U.S. government finds that current law somehow restricts its ability to create dollars, but needs to create more dollars to pay its bills. What would the government do?
Obviously. It simply would pass new laws that permit creating more dollars. The U.S. federal government never can be prevented from creating more of its own sovereign currency.
Dishonest websites and pundits that warn you the federal “debt” is unsustainable, or simply too high, must explain how our Monetarily sovereign government ever could find any dollar debt to be “unsustainable.” It never has; it never will.
II. Can the U.S. federal government control the value of the U.S. dollar?
Usually, when we describe the impossibility of the U.S. government running short of its own sovereign currency, or finding any debt denominated in U.S. dollars to be “unsustainable,” we are asked, “What about inflation.”
Then we are given examples of nations that have had hyperinflation: Weimar Republic, Zimbabwe, Argentina, et al.
The first answer is that despite massive deficit spending, wars, depressions, recessions and various natural disasters, the U.S. never has experienced hyper-inflation. So it seems odd that anyone would make the possibility of an event that never has happened the focus of financial concern.
Second, there has been no correlation between federal deficit spending and inflation. See: “Deficit Spending Doesn’t Cause Inflation; Oil Does”
Third, deficit spending in Weimar Republic, Zimbabwe, etc. did not cause hyper-inflations. In fact, the inflations caused the deficit spending.
Weimar’s hyperinflations were caused by the onerous financial punishments the allies put on the Germans after WWI.
The Zimbabwe hyperinflation was caused by Robert Mugabe, who stole farm land from farmers and gave it to non-farmers, which resulted in a food shortage. Argentina’s hyperinflation was caused by government criminality, leading to shortages of goods and services.
In each case, a desperate (and foolish) attempt to keep up with inflation by the government created additional money, which exacerbated the inflation.
Fourth, the belief that federal deficits cause inflation is based on a simple misunderstanding of algebra.
Inflation is the loss of value of money compared with the value of goods and services. The basic formula for value is: Value = Demand/Supply.
If Demand goes down, and/or Supply goes up, Value goes down. But those who fear deficits because of inflation, unknowingly use this formula: Value = 1/Supply.
In short, they view Demand remaining static, when dollars are pumped into the economy. But this is seldom the case. Think of what happens to those Social Security, Medicare, Medicaid, military, infrastructure and education dollars the government spends.
They are received, then spent by the public on food, housing, schooling, clothing, travel, etc. And the providers of those goods and services, upon receiving more dollars, spend them for payroll, equipment, real estate, etc.
So the very increase in dollars helps increase the demand for goods and services, which increases the demand for dollars.
But let’s say that the increase in Demand is not sufficient to balance against Supply, and inflation begins. What else can the government do to increase the demand for dollars?
The dollar is an investment medium, and as an investment, its Demand is based on this formula: Demand = Reward/Risk.
Further, Reward = Interest; Risk = Inflation.
To increase the Demand for dollars (and thus reduce inflation), the government must increase interest rates, and that is exactly what the Fed does, any time it gets even a sniff of impending inflation.
So for question #2, “Can the U.S. federal government control the value of the U.S. dollar?” the answer is “Yes, as a Monetarily Sovereign government, the U.S. can control the Risk, Reward, Supply, and the Demand for the dollar, and even specify the exchange value of the dollar against other currencies.
Therefore, whether or not you agree with all Ten Steps to Prosperity you should understand this: There is no financial reason not to implement them.
You might argue about whether “Medicare for all,” “free school for all” or “Social Security for all” are good economic ideas, but there is no rational reason to claim they are “unaffordable” or “unsustainable.”
Economics is complex. The science is filled with abstruse concepts, formulae, and opinions. But it all boils down to two facts:
- The U.S. federal government cannot unintentionally run short of U.S. dollars. Without collecting even one dollar in taxes, the U.S. government still could pay its bills, forever.
- The U.S. federal government has complete control over the value of the U.S. dollar? It not only can prevent excessive inflation, but it can set inflation at any level it chooses.
Keep these two facts in mind whenever you read an article or hear anyone say that some federal agency could be insolvent, or some expense is “unsustainable,” or the federal government cannot “afford” some spending.
Those comments all are part of “the Big Lie.”
The often-asked question about any proposed federal government initiative, “Who will pay for it,” should be answered by just three words: “The federal government.”
Rodger Malcolm Mitchell
The single most important problems in economics involve the excessive income/wealth/power Gaps between the rich and the rest.
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 (Ten Reasons to Eliminate FICA )
Although the article lists 10 reasons to eliminate FICA, there are two fundamental reasons:
*FICA is the most regressive tax in American history, widening the Gap by punishing the low and middle-income groups, while leaving the rich untouched, and
*The federal government, being Monetarily Sovereign, neither needs nor uses FICA to support Social Security and Medicare.
2. FEDERALLY FUNDED MEDICARE — PARTS A, B & D, PLUS LONG TERM CARE — FOR EVERYONE (H.R. 676, Medicare for All )
This article addresses the questions:
*Does the economy benefit when the rich can afford better health care than can the rest of Americans?
*Aside from improved health care, what are the other economic effects of “Medicare for everyone?”
*How much would it cost taxpayers?
*Who opposes it?”
3. PROVIDE AN ANNUAL ECONOMIC BONUS TO EVERY MAN, WOMAN AND CHILD IN AMERICA, AND/OR EVERY STATE, A PER CAPITA ECONOMIC BONUS (The JG (Jobs Guarantee) vs the GI (Guaranteed Income) vs the EB) Or institute a reverse income tax.
This article is the fifth in a series about direct financial assistance to Americans:
Why Modern Monetary Theory’s Employer of Last Resort is a bad idea. Sunday, Jan 1 2012
MMT’s Job Guarantee (JG) — “Another crazy, rightwing, Austrian nutjob?” Thursday, Jan 12 2012
Why Modern Monetary Theory’s Jobs Guarantee is like the EU’s euro: A beloved solution to the wrong problem. Tuesday, May 29 2012
“You can’t fire me. I’m on JG” Saturday, Jun 2 2012
Economic growth should include the “bottom” 99.9%, not just the .1%, the only question being, how best to accomplish that. Modern Monetary Theory (MMT) favors giving everyone a job. Monetary Sovereignty (MS) favors giving everyone money. The five articles describe the pros and cons of each approach.
4. FREE EDUCATION (INCLUDING POST-GRAD) FOR EVERYONEFive reasons why we should eliminate school loans
Monetarily non-sovereign State and local governments, despite their limited finances, support grades K-12. That level of education may have been sufficient for a largely agrarian economy, but not for our currently more technical economy that demands greater numbers of highly educated workers.
Because state and local funding is so limited, grades K-12 receive short shrift, especially those schools whose populations come from the lowest economic groups. And college is too costly for most families.
An educated populace benefits a nation, and benefitting the nation is the purpose of the federal government, which has the unlimited ability to pay for K-16 and beyond.
5. SALARY FOR ATTENDING SCHOOL
Even were schooling to be completely free, many young people cannot attend, because they and their families cannot afford to support non-workers. In a foundering boat, everyone needs to bail, and no one can take time off for study.
If a young person’s “job” is to learn and be productive, he/she should be paid to do that job, especially since that job is one of America’s most important.
6. ELIMINATE CORPORATE TAXES
Corporations themselves exist only as legalities. They don’t pay taxes or pay for anything else. They are dollar-transferring machines. They transfer dollars from customers to employees, suppliers, shareholders and the government (the later having no use for those dollars).
Any tax on corporations reduces the amount going to employees, suppliers and shareholders, which diminishes the economy. Ultimately, all corporate taxes come around and reappear as deductions from your personal income.
7. INCREASE THE STANDARD INCOME TAX DEDUCTION, ANNUALLY. (Refer to this.) Federal taxes punish taxpayers and harm the economy. The federal government has no need for those punishing and harmful tax dollars. There are several ways to reduce taxes, and we should evaluate and choose the most progressive approaches.
Cutting FICA and corporate taxes would be a good early step, as both dramatically affect the 99%. Annual increases in the standard income tax deduction, and a reverse income tax also would provide benefits from the bottom up. Both would narrow the Gap.
8. TAX THE VERY RICH (THE “.1%) MORE, WITH HIGHER PROGRESSIVE TAX RATES ON ALL FORMS OF INCOME. (TROPHIC CASCADE)
There was a time when I argued against increasing anyone’s federal taxes. After all, the federal government has no need for tax dollars, and all taxes reduce Gross Domestic Product, thereby negatively affecting the entire economy, including the 99.9%.
But I have come to realize that narrowing the Gap requires trimming the top. It simply would not be possible to provide the 99.9% with enough benefits to narrow the Gap in any meaningful way. Bill Gates reportedly owns $70 billion. To get to that level, he must have been earning $10 billion a year. Pick any acceptable Gap (1000 to 1?), and the lowest paid American would have to receive $10 million a year. Unreasonable.
9. FEDERAL OWNERSHIP OF ALL BANKS (Click The end of private banking and How should America decide “who-gets-money”?)
Banks have created all the dollars that exist. Even dollars created at the direction of the federal government, actually come into being when banks increase the numbers in checking accounts. This gives the banks enormous financial power, and as we all know, power corrupts — especially when multiplied by a profit motive.
Although the federal government also is powerful and corrupted, it does not suffer from a profit motive, the world’s most corrupting influence.
10. INCREASE FEDERAL SPENDING ON THE MYRIAD INITIATIVES THAT BENEFIT AMERICA’S 99.9% (Federal agencies)Browse the agencies. See how many agencies benefit the lower- and middle-income/wealth/ power groups, by adding dollars to the economy and/or by actions more beneficial to the 99.9% than to the .1%.
Save this reference as your primer to current economics. Sadly, much of the material is not being taught in American schools, which is all the more reason for you to use it.
The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.