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 breeds austerity 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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Let me begin with a message to debt-hawks: No, I do NOT suggest the government should create infinite amounts of money, or give everyone $1 trillion. So please withhold your straw-man arguments, and attempt to understand what you are about to read.
Perhaps no words more accurately and succinctly illustrate the confusion about economics than “Monetary Sovereignty.” It is not a theory or a hypothesis or a philosophy. In its essence it merely is a description of the way federal financing actually works.
A Monetarily Sovereign government has the exclusively unlimited power to create its sovereign currency. Monetary Sovereignty is the foundation of economics. The United States is Monetarily Sovereign. It has the exclusively unlimited power to create the dollar. China, Canada, Australia and Japan are Monetarily Sovereign. They have the exclusively unlimited power to create their sovereign currencies.
Illinois, Cook County and Chicago are not Monetarily Sovereign. The dollar is not their sovereign currency, and they do not have the unlimited power to create dollars. France, Germany and Italy are not Monetarily Sovereign. They do not have the exclusively unlimited power to create their currency, the euro. You, your business and I also are not Monetarily Sovereign. Even Bill Gates and Warren Buffet do not have the unlimited power to create dollars. They are not Monetarily Sovereign.
Because a Monetarily Sovereign nation has the unlimited power to create its sovereign currency, it never needs to borrow and it never can be forced into bankruptcy. It can pay any bill of any size at any time. In fact, the federal government creates money by paying its bills. The U.S. has created many trillions of dollars, simply by pressing computer keys, and will continue to do so. It does not “owe” anyone for creating these dollars. The government cannot live beyond its means; it has no means to live beyond.
By contrast, if the debts of France, Germany et al, exceed their ability to obtain euros they, as monetarily non-sovereign nations, could be forced into bankruptcy.
Everything you believe about your personal finances — debts, deficits, spending, affordability, saving and budgeting — are inappropriate to U.S. federal finances. For this reason, your personal intuition about U.S. financing likely is wrong.
Because no Monetarily Sovereign nation can be forced into bankruptcy, none of that nation’s agencies can be forced into bankruptcy. The U.S Supreme Court, the Department of Defense, Congress, Social Security, Medicare and any of the other 1,300 federal agencies cannot go bankrupt unless the federal government wishes it. (All the talk about Social Security or Medicare going bankrupt is misguided. Even if FICA were eliminated, Social Security and Medicare would not need to go bankrupt.)
The unlimited ability to create money is an uncontested fact for Monetarily Sovereign nations, although at any given time,economic growth, inflation, deflation, recession, depression and social factors may influence a nation’s decision to create money. A Monetarily Sovereign nation even can choose to declare bankruptcy, for various reasons, but this would be an arbitrary matter of choice, not a forced necessity. An example would be Congress’s failure to raise the debt ceiling. This could force the U.S. into bankruptcy.
Debt hawks do not (or do not wish to) understand the implications of Monetary Sovereignty. You never will see that term on such debt hawk web sites as The Committee for a Responsible Federal Budget” or the Concord Coalition. If you go to those sites you will see federal debt described in the same terms as personal debt – as an unsustainable obligation. While debt can be unsustainable for you, me, businesses, states, cities, counties and the monetarily non-sovereign EU nations, no debt is unsustainable for the U.S. government.
Debt hawks, and others ignorant of Monetary Sovereignty, suffer from Anthropomorphic economics disease — the false belief that federal finances are like yours and mine.
The U.S. was not always Monetarily Sovereign. Prior to 1971, the U.S was on a gold standard. It did not have the unlimited ability to create dollars, since every dollar needed to be backed by a fixed amount of gold. No gold; no dollars. Similarly, the EU nations are on a euro standard. Their ability to create euros is limited by law. Our states, counties and cities are on a dollar standard. Their ability to create or obtain money by borrowing or taxing is limited by local law, by voters and by lenders.
The financial problems of Portugal, Ireland, Italy, Greece and Spain (The PIIGS), are due not to deficits and debt. They are due to these nations having surrendered the single most valuable asset any nation can own — their Monetary Sovereignty — thus preventing them from servicing their debt by creating money.
Some debt hawks say that a Debt/GDP ratio exceeding 100% puts a nation on the brink of bankruptcy. Yet today, Japan has a Debt/GDP ratio above 200%, and this Monetarily Sovereign nation has absolutely no difficulty servicing its debt. The debt hawks, as usual, having learned nothing from this, continue to wail about the meaningless debt/GDP ratio, which because it is a classic apples/oranges comparison, is devoid of significance (the numerator is a 200-year measure of cumulative T-securities outstanding; the denominator is a one-year measure of productivity. The two are unrelated).
Because so-called federal “debt” is the total of T-securities outstanding, all federal debt easily could be eliminated tomorrow, if the federal government merely credited the bank accounts of T-securities holders. That would require pressing a few computer keys, which would increase the checking accounts and decrease the T-security accounts of federal creditors. As this would be a simple asset exchange, no new money would be created and there would be no inflation consequences.
Because a Monetarily Sovereign nation has the unlimited ability to create its sovereign currency, that nation needs neither to tax nor to borrow. Why would it? Further, that nation does not use tax money or borrowed money to pay for spending. Federal income has no relationship to federal spending and so, taxes and borrowing are unnecessary.
When the states, counties, cities, you and I spend, we transfer dollars from our checking accounts to some other checking accounts. When the federal government spends, it creates dollars, because to pay its bills, the government instructs banks to increase the dollar amount in suppliers’ checking accounts. If U.S. federal taxes and borrowing fell to $0, or rose to $100 trillion, neither event would reduce by even one penny, the federal government’s ability to create the money to pay any size bills.
Although Monetarily Sovereign nations need neither to tax nor to borrow, they may choose to do so for many reasons unrelated to financial need. The spending by Monetarily Sovereign nations is constrained only by inflation. However, since 1971, the end of the gold standard and the beginning of Monetary Sovereignty, there has been no relationship between federal deficit spending and inflation. More about this at Inflation and at SUMMARY.
At some level, deficit spending could cause inflation. For instance, if the government were to give every American $1 trillion, I am confident we would have inflation. But we are nowhere near that point. (Debt hawks love to propose extreme circumstances, like the $1 trillion gift to each American, as “proof” deficit spending is unsustainable. But that is no more proof than the other extreme circumstance — tax every American $1 trillion — demonstrates taxes are unsustainable.)
Because taxes do not pay for federal spending, FICA does not pay for Social Security benefits. FICA could (and should) be reduced to zero, and benefits could be tripled, and this would not affect by even one penny the federal government’s ability to pay Social Security benefits.
There had been some question about whether the federal government would or should make a profit on its purchases of corporate stock (GM et al). Any such profits come out of the economy, and therefore are anti-stimulative. By reducing the money supply, federal profits = losses for the economy. Federal surpluses = economic deficits.
There also has been talk about the federal government “saving” money by firing, or reducing the pay of, federal employees. Those so-called “savings” would be money not sent into the economy, and therefore, anti-stimulative.
Politicians and the press do not yet seem to understand Monetary Sovereignty. However, no one intelligently can discuss national deficits and debt without understanding the implications of Monetarily Sovereignty. The concept is the basis for all modern economics. Monetary Sovereignty is to economics as arithmetic is to mathematics.
The next time you go to any economics blog or web site, see if the contributors understand Monetarily Sovereignty and use it in their discussions. If they do, it might be a good site. If they don’t, the site is worthless.
All debt hawk objections revolve around just two questions:
1. How much money can the federal government create? Answer: Infinite
2. How much money should the federal government create? Answer: Up to the threat of uncontrollable inflation. Despite an astounding 3,500% increase in debt since 1971, we are not near the point where deficits cause uncontrollable inflation (which is controlled via interest rates). As of this writing, we are fighting deflation.
In short, most of our economic problems are caused by the politicians, the media and the public not understanding the implications of Monetary Sovereignty. By crippling the federal government’s ability to grow the U.S. economy, the Tea/Republicans have injured more Americans than Al Qaeda.
I suggest you next read the data at Summary, for detailed answers to your questions.
Question of the day: How does a tax increase or spending decrease reduce unemployment or grow the economy? Money is the lifeblood of an economy. Cutting the federal deficit to cure a recession is like applying leeches to cure anemia.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
No nation can tax itself into prosperity
All money is backed by nothing other than the full faith and credit of something. By definition, money has no intrinsic value. So are you opposed to money?
As for a Ponzi scheme, the very fact that the federal government has the unlimited ability to pay any bill is what makes the U.S.dollar NOT a Ponzi scheme — the opposite, in fact. Maybe you should learn what that term means before you use it again.
And as far as screwing the next generations, that’s exactly what happens when the debt hawks reduce federal spending for Social Security, Medicare, Medicaid, medical research, roads, bridges, food inspection, financial regulation and every other federal initiative you can think of.
Who do you think benefits from that spending and who do you think will suffer when it’s reduced? The next generations.
So why do you want to screw the next generations by reducing the deficit, and why do you want to reduce the money supply in America?
Rodger Malcolm Mitchell
WHY?
So that we are no longer able to pay our Masters (read the 1%),go into servitude,have nothing,then have a real revolution in order to start all over again.
Why is it that a simple consept such as,”the most powerful force in the universe” (Einstein) compound interest is
greater “than standing armies” (Thomas Jefferson).
Read Michael Hudson,”Comments on Interest”,
This most powerful force can be used as a Weapon of Mass Destruction, or Means to Prosperity for All.
PLEASE CHALLENGE,OR ENDORSE.
Please post “–Monetary Sovereignty: The key to understanding economics.”
Perhaps, we can arrive at a solution before the end of 2012,OR THE MAYA’S MAY BE “JUSTALUCKYFOOL”
One that attemps to fortell a future event is a fool,if by chance;correctly,then he is justaluckyfool.
Sadly Rodger, I’m not trying to argue with you, yet you keep acting like an arrogant intellectual. I’m trying to understand your rational, which I believe is “keep printing more money”. As long as other countries are willing to take our money then we can just keep printing it forever and not worry about inflation, debt, taxes, etc.
It sounds to me like that’s what you’re saying. The dollar is king and everyone will accept it forever regardless of how much of it we print, with no risk of inflation. If that’s the underlying principle then you’re right, debt, taxes, spending are all irrelevant. In fact, why even have a gov’t budget. Just let gov’t spend whatever they want and pay for it by printing more money. Is that what you’re advocating?
I understand that we can “debit & credit” and how the process works, I’m wondering what China’s response would be if we told them that we were printing an extra 15 Trillion and crediting them 5 Trillion to wipe out our debt?
Again, I’m not against your ideas, just trying to understand the process and equate it to the real world. If you’re right, then the Fed gov’t doesn’t need a budget. Taxes, debt, and spending are irrelevant. As long as gov’t spends as much as they want during times of hi-unemployment and low productivity and cuts back when it hits full employment then we don’t have to worry about inflation. Is this accurate?
China’s response would be what it always has been, because that is exactly what we always have done: Create dollars and credit their account.
Taxes and “borrowing” do not support spending, which is limited only by inflation. We need budgets to determine where to spend. The answer to your “As long as . . . ” question is: We always have to be concerned about inflation, but it easily is controlled via interest rates. If we had an inflation that interest rates could not control, then we could cut back.
You’re now on the edge of understanding the difference between federal finances and your own kitchen-table finances. Good job. Keep at it.
Rodger Malcolm Mitchell
Patronizing tone aside, I appreciate the information. Assuming we can print money indefinitely,I still don’t understand why we need a budget? Spending would still have to be appropriated. In fact, we don’t have a budget today, Congress keeps passing appropriations bills where spending far exceeds taxes. Assuming you’re right and debt is irrelevant, do we need any type of restraints on Congress? In a time where politicians only care about the next election and will do everything in their power to buy votes and grant special favors what would stop politicians from passing every single pet project they wanted? At least today, there is a pretense of restraint but under your theory, why wouldn’t Congress just baseline SS at 8% per year and spend Trillions on everything else? I bet that would get them all re-elected. If inflation hits they could just adjust interest rates?
As another example, why wouldn’t Congress invest in a 1000 Solyndras and keep pumping money into them indefinitely or at least until unemployment reached full employment? Of course the moment that happened and Congress stopped funding these companies they would all go bankrupt, increasing unemployment and starting the cycle over again.
To take this even further, if Congress can print money forever, I could easily see them pass a guaranteed living wage law, where every person would be guaranteed enough money to pay all their basic necessities. If that’s the case then why work? Productivity would go down, unemployment would go up and Congress could just keep printing money?
Please don’t take this the wrong way. I know you think that I’m just trying to prove my own preconceived opinions, but I’m not. I’m actually curious how your theory would work in the real world. For example, I was born in Russia and my family escaped in the late ’70s. In theory, Socialism is great, but, as my family experienced first hand, in practice it doesn’t work (I’m not equating Monetary Sovereignty with Socialism just making an analogy where a theory sounds great on paper but due to human nature, doesn’t work in the real world).
Max, you’ve got to read more closely. MMT doesn’t advocate infinite money creation, and does say that excessive money creation can lead to inflation.
So, how much would be excessive? $10T in a year, yes. $3T this year, with 9% unemployment? Hmm, maybe, maybe not. $1.3T this year, our current budget deficit? Definitely not enough to cause even an adequate recovery, never mind enough to be “excessive”.
A growing economy requires a growing money supply. As long as the economy grows “indefinitely”, the money supply (and the federal debt, if the law continues to require debt for deficits) must grow “indefinitely”. That means deficits every year, large enough to offset the money removed each year by saving (including foreign sector saving, aka the trade deficit) and the additional money needed to purchase the expanding production.
Indefinitely. Without limit. Forever, or at least until the nation no longer exists, or is no longer monetarily sovereign.
I’m with you on the size of government issues. I prefer to do it with tax cuts, starting with payroll taxes, and increased revenue sharing to the states, rather than more hair-brained projects like Solyndra.
I recommend http://neweconomicperspectives.blogspot.com/p/modern-money-primer.html and http://moslereconomics.com/mandatory-readings/
Hi again,
The government could and should create all money without inflation. Today a fraction of the money is created by the federal reserve and the rest by the commercial banks through fractional reserve lending. The ratio is set to 10% but, as was revealed through a recent audit, the commercial banks have not followed this law and created from the lawful 9/10′ths, all the way up to 30 times more than that.
But the problem does not stop at the private banks creating 95% of the money supply. The federal reserve is also not under government control. It is instead controlled through mandate by local federal reserves, which are all in turn controlled by the biggest commersial banks in each sector. Your constitution clearly states that the power to coin money, and regulate the value thereof, belongs to the peoples congress, not to a private corporation.
Best regards
What if international does not use dollar as their reserve?
What if China does not want your t-bills anymore?
What if the world come to realize that their dollar is worthless because you guys are printing monies while you can?
What if the world have a new currencies as a reserve?
Would you still print monies like now?
Yes.
China, Canada, Australia, Japan are not the world’s reserve currencies, and they seem to be doing fine.
The U.S., being Monetarily Sovereign, does not need to borrow its own sovereign currency. T-bills could be eliminated tomorrow.
All money is worthless, in that is has no intrinsic value.
“All money is worthless”
Isn’t “money” a form of a record of what is owed from a transaction?A receipt ?
$100 worth of drinking water will always have a value.Even if today it may be 100 galloons,but in the future only 1 single drop.
Money would have the intrinsic value of what it is a receipt for,namely “the good faith,and material,and intellectual benefits of the one that issues that money.
ADD TO COMMENT:
Modern money that is created by fractional reserve banking,may indeed be absolutely worthless because it is created from zero.Nothing is actually owned,its base is
“money” that is held for safety (deposit). ZERO of which
is owed by the reserve issuing lender (who incidently owes interest on it.).
Max, if Congress spent on all those projects, the economy would grow and unemployment would drop, and poverty would all but disappear.
If Congress spent so much as to cause an inflation that could not be controlled by interest rates, the public would protest and the politicians would cut spending then to reduce inflation, rather than cutting spending now because of a misunderstanding about economics.
As for “why work?” the answer would be: “To get more money.” You’ll notice that the 1% work, and I see no reason why the 99% wouldn’t, too.
Realize of course, you are presenting some “what if’s” that ignore the current reality: Unemployment and an economy starved for money. So my question is, why are you more concerned about a possibly distant future than a current disaster?
Think of the lady who lets her house burn down, because she’s afraid her neighbor might get mad if she wakes him to borrow his hose.
Take care of today’s real and urgent problems before you worry about tomorrow’s highly theoretical, possible problems.
My concern is being short-sighted. If you are wrong and we continue to print money then we’re creating the mother of all bubbles. Meaning are we really solving the problem or kicking the can down the road?
I remember listening to an economist during the housing bubble argue that it wasn’t a bubble. They provided economic data showing the dynamics of US families were changing and multiple generations were living in the same house. They showed how poor people with no income or credit were buying houses then creating “wealth” by refinancing, taking money out and pumping it back into the economy. And they claimed that as long as someone else was willing to buy the house for more it could go on indefinitely. It all sounded great until someone else was no longer willing to buy the house for more.
In addition, I remember sitting in my college Econ class which was taught by an adjunct professor who was the head of some gov’t economic department. She brought in an expert economist who argued that deficits were good and we needed higher deficits and more spending. He argued that as long as Japan (back then we were all worried about Japan taking over the world) was willing to sell us their goods for paper we should increase our trade deficit as much as possible. I actually asked, what would happen if Japan decided to no longer take our paper and keep their own goods or sell them to other countries and he said that would never happen.
It seems to me that the only way Monetary Sovereignty works is if everyone plays along.
PS. With regards to people working to make more money, I would point you to the reality of welfare and social programs. How many people are not working today because the gov’t provides enough for them to live on. Look at Greece? How many of their citizens aren’t productive and live on gov’t social programs? Look at nearly every Socialist country out there and I guarantee you will see a large portion of the population NOT working, regardless of how much extra money they could make. Finally, if the people get accustomed to the gov’t providing everything they need and we can print money forever, what real incentive is there to make more money? Instead, just get the gov’t to increase your living wage or healthcare benefits or cell phone minutes?
“It seems to me that the only way Monetary Sovereignty works is if everyone plays along”
And throughout history, everyone (that matters) has always “played along”. If other people don’t want a currency, they exchange it for something else, some goods from the currency owner’s country, or another currency. With floating exchange rates, an “unwanted” currency will drop in price. So what? What does it mean to not “play along”?
To MaxP : I find ” if the people get accustomed to the gov’t providing everything they need and we can print money forever, what real incentive is there to make more money?Justaluckyfool would answer,”None,but what government COULD OR WOULD PROVIDE EVERYTHING THE NEED?
“we can print money forever”
I would answer according to “The All Inclusive Solution.The Federal Bank of America” would only occasionally print (read put in circulation) more money.
Simply because the money initially put into circulation carries a penaly (tax) (compound interest) which is used to fund the congressional appropriations.
To Anton Dahr:…
“Your constitution clearly states that the power to coin money, and regulate the value thereof, belongs to the peoples congress, not to a private corporation.”
ABSOLUTELY.
Today the US Treasury could by law passed by Congress ask the US MINT to make a “COIN” of Platinum with a face value of $1 Quadrillion (how I love that word),with the instructions that they are to deposit any profit from that coin into the US treasury,that being $1 Quadrillion minus $2,500 the cost to make one really nice coin.
Crazy but true.(The money would be electoniccally deposited with the Magnificent “coin” placed on display next to the Liberty Bell.Could you even begin to imagine what congress could do with a profit (interest) made from that amount for WELFARE,EDUCATION,HEALTHCARE,”PURSUIT OF HAPPINESS?
To RMM, please, CHALLENGE or ENDORSE
http://www.justaluckyfool.wordpress.com-“The all inclusive solution.The Federal Bank of America”
I once again apologize for taking up so much space.
(read could you imagine if I really knew how to write and type?)
I understand the concept, I’m just concerned about the implementation. All these theories are great but do they take into account greed and human behavior. The Federal gov’t could mint a coin made of plastic, stamp a Google on it and it would be “worth” 1 Google dollars. I get that and I’ve gotten that from the beginning, but what happens next? The gov’t deposits the coin and credits its account by 1 followed by 100 zeros. Where do you think that money will go? Will it actually go to help the people or does each politician’s bank account suddenly get a bump of Google/535 (Pres, other cabinet members and special interest groups excluded)? It’s like when we give a 3rd world country a Billion dollars in aid. All the sudden 999 million ends up in a foreign bank account under the name of whoever rules that country and a million is inefficiently spread out amongst the people?
Maybe what I don’t understand is, is it just the creation of money and hence the increase in the monetary supply that causes economic growth or is the proper use of that newly created money that creates economic growth? In other words, is just creating 3 Trillion and having it sit in a bank account somewhere enough, or does that 3 Trillion actually have to stimulate the economy and really help the people?
Max,
Your house is burning down. What are you going to do?
If the reason my house is burning is because I played with matches and gasoline in the garage, the first thing I would do is NOT fill the rest of my house with matches & gasoline. I would then put out the fire in my garage using a standard, proven method such as a hose and water. I realize that I would have to park my car outside for a couple months and wait for the garage to be rebuilt. It will be inconvenient, maybe even painful but at least I would’ve saved the rest of my house.
Of course I could always drop a bomb on my house. It would explode, suck up all the air and put out the fire. In the short run, the fire would be out, but in the long run, I would not only have no garage but also no house.
Another question? How much more money do we need to print? The gov’t has printed 5 Trillion dollars in about 3 years and we’re still at 9% unemployment. Do we just keep printing until we get the result we want or is there actually some mathematical equation or economic formula we can follow.
I realize that the gov’t is not run like a business but in the business world, if I want to invest in a new project, I put together the business plan. I include all the financials and define measurable metrics to gauge my success. In other words, if I invest 1 million then in 6 months I should be at 20 new customers averaging 20,000/yr. 6 months later I can actually measure my success or failure and adjust accordingly.
According to MS, the gov’t can’t fail because it can always print more money, so what happens if we print another 5 Trillion tomorrow and unemployment still stays around 8%? Do we consider that a failure or do we just print more money?
To MaxP:
” How much more money do we need to print? The gov’t has printed 5 Trillion dollars in about 3 years and we’re still at 9% unemployment.”
Correction: According to “FED Audit” as per US SEN. Bernie Sanders,it is been shown to be $16 trillion and that is only which has been “revealed”.
To RMM,Thank you,
” I understand the concept, I’m just concerned about the implementation. All these theories are great but do they take into account greed and human behavior.”
Thank you again,for this challenge.
The answer will mow be written into “The All inclusive Solution”
With the Federal Bank of America having so much power,we must be on guard against unintended consequences such as fraud, deception, greed,and on and on,especially knowing “that power corrupts,absolute power absolutely”.
The Federal Bank Of America must be designed with a transparency in place like no other before.
**RMM-”Maybe what I don’t understand is, is it just the creation of money and hence the increase in the monetary supply that causes economic growth or is the proper use of that newly created money that creates economic growth?”
The answer.The Federal Bank of America will become the only source for newly created money and have the money to enable the people to charge interest on that money which then becomes income to the US Treasury,thereby taking away “the most powerful force in the universe” from private lenders.Private lenders will only be allowed to make loans,make investments from already existing money with 100% margin.
888Must post this part,please read next post.The very essence of The FBA is to control the quality and quantity of money .k
The essence of The Federal Bank of America is ;It becomes the institution that places the money into circulation.It the loans the money for real estate ,businesses,states,countries,whoever has a need for money and especially banks.The Federal Bank of America must charge an interest rate,”the most poewerful force in the universe”.This rate will be the profit that is earned from the money and by law must be turned over to the US Treasury.Simply stated if $1 Quadtrillion were to be deposited in the FBA,it would first BUY ALL LOANS on American Real Estate,thereby immediately ending the housing crisis.It would make new loans at 3% for 48 years.
All loans of American dollars made by anyone must have a 100% reserve..no more fractional lending.Any institution wishing to make a loan may borrow from the FBA if needed to have a 100% reserve.
The essence of the FBA is to take away the WMD as it is presently used and return that massive power back to the people.
Try to imagine ,what properity we would have if we were able to lend to people,busines’,other countries that $1 quadrillion at an average of 3% for 24 years.
Income tax ? What lousy income tax, we would be earning
$30 trillion a year for CONGRESSIONAL APPROPREATIONS.
Inflation ? What lousy inflation,the borrowers would be paying back $333 trillion a year and if we do not return the $30 trillion we earned back ,they would never be able to pay the full note and be forced into servitude.
Because of unintended consequences (fraud ,greed,and other things) a budget would be required but I would suggest it be one stated in percentages ,for example 10% for welfare,10% for education,etc.
TAXPAYERS,and borrowers paying revenue for the betterment of its own people instead of for the personal enrichment of 1%.
PLEASE CHALLENGE,OR ENDORSE.
“The All Inclusive Solution.The Federal Bank of America.” justaluckyfool@aol
Hi Rodger,
I appreciate the clarification and it is starting to make sense (see I was actually trying to learn), though I can’t say I’m still 100% bought in but I do understand the principles behind it. The obvious next question is, how does the country go about implementing this plan?
- Max
Sorry, but I just thought of another question. The underlying argument for MS is that the economy grows based on the money supply and as you mentioned earlier Roger, the reason we’re in this mess is because of “Unemployment and an economy starved for money”. Is the economy really starved for money? Corporations are flush with cash and making record profits. They are not investing because of uncertainty, and the current anti-business climate and rhetoric coming out of the gov’t (this is not partisan, this is coming from business leaders from both sides of the aisle). If the gov’t prints another couple Trillion why wouldn’t corporations just hoard that money and effectively remove it from the economy? Doesn’t printing money also have to be coupled with pro-business legislation and rhetoric?
How does a corporation “hoard money”? Think of the money flow.
“How does a corporation “hoard money”?”
Like what google did. http://online.wsj.com/article/SB10001424052748703509104576327233056601082.html
They issued bond because it was cheap, too much unproductive money out there that they could collect, although they still sit on their billion cash.
Isn’t that the definition of a bubble? We keep printing currency out of thin air and as long as others take it, we’re good, but once someone else stops taking it the bubble bursts? I realize that everyone could “always play along”, but regardless, isn’t this essentially what MS is, an ever expanding bubble?
My question is do you think that just by printing another 3/5/10 Trillion that would be enough to cure unemployment and the recession or does it have to be coupled with pro-business legislation & rhetoric. In other words, is it just pumping more and more money into the economy until we get the result we want or does there have to be some pro-business, pro-consumer component?
BTW, I read your article on Greece? I grew up in Russia which was a MS country. At that time Russia dictated exchange rates of 1 ruble = 1 Dollar (or something along those lines). However, on the street 1 dollar was the equivalent of 20-100 rubles. Street vendors wanted to deal in dollars not rubles, so the more rubles the Russian gov’t printed the less they were worth. So again, doesn’t this mean that ALL nations would have to play along?
Interesting, I reread my entire comment and there wasn’t a “what if” statement anywhere? What I did notice is that your response did not answer my question, which I think is valid. Is it just the process of pumping money into the economy that will get us out of the recession or does that have to be coupled with pro-business, pro-consumer policies?
What’s my plan? My plan is to empower the private sector and allow them to create jobs without gov’t constraint. The first thing I would do is take the repatriation tax to 0%. There’s an estimated 11 Trillion dollars legally stored overseas to avoid paying US repatriation taxes*. Let’s bring that money back. An 11 Trillion stimulus of private not public money free to be invested in the US economy. I think we would both agree that increasing the available money supply by 11 Trillion is a good thing for the economy.
I would then lower the corporate tax rate to 0%. Corporate taxes are an illusion, only consumers pay taxes. Let corporations make decisions based on business policies not tax policies. Every company wants to be in the US but can’t be because of our noncompetitive tax system. I would then eliminate the payroll tax, which is the most regressive tax system we have and the highest tax that most people pay. Finally, I would eliminate the income tax (and others) and replace it with a temporary progressive national sales tax (often called the FairTax). Once I did all this, I would slowly shrink the size of gov’t and bring it back to the powers enumerated in the Constitution. Once that’s done I would get rid of the national sales tax and go back to the Constitution again and only impose indirect taxes, such as excise taxes.
But that would all be in a perfect world and I don’t have any illusions that shrinking the gov’t would be easy. Regardless I would still pass the FairTax and eliminate payroll, income, repatriation, corporate, capital gains, inheritance, and AMT and replace it with a single, transparent, 1 time point of sale tax.
*John Linder states an estimated $11 trillion is held in foreign accounts (largely for tax purposes), which he states would be repatriated back to U.S. banks .., becoming available to U.S. capital markets, bringing down interest rates, and otherwise promoting economic growth in the United States.
Max, how is your plan different from “printing money”? A deficit is a deficit. It means spending more than taxing. Reducing taxation by $1 does the exact same thing to the deficit, and to the economy, and to the exchange rate and the interest rate and everything else it affects as raising spending by $1 would have done.
The reason the numbers required are so large, by historical comparison, is that the bursting of the housing bubble destroyed such an enormous amount of household wealth. It is up to government deficits to replace what has been lost, if we are to return to the same level of spending and production. Anything less will have an effect, but if it is not sufficient then it may well be viewed as “not working”.
John,
You misunderstood my question. How does a corporation “hoard” money? What does Google do with its billion in cash?
They don’t put paper dollars in a big, iron box and bury it in the back yard. So what do they do with it? Remember what money is, and think about the money flow. You will see it is impossible for them to “hoard” it.
Rodger Malcolm Mitchell
It’s not impossible to hoard it, they could put cash in a safe deposit box, but they don’t. If they have no immediate use for it, they would ordinarily buy treasury debt, or highly-rated corporate debt, easily convertible to cash and counted as “cash and marketable securities” in a single line on the balance sheet. Or, as WSJ points out, they may have plans or want to be prepared for an acquisition. Google doesn’t pay dividends, but others might, and they might be getting ready to do a stock buyback.
Rodger could have been clearer in saying that any of these typical corporate actions return the dollars back into the economy, one way or another, even thought they remain as “cash” on the Google balance sheet. They don’t disappear from circulation in the same way that taxes do.
Yep, lets hope those monies go into a real productive asset, not to create another asset bubble. Because as far as i know, increase to much money supply without increase in productivity will create either inflation or assets bubble.
I got your point. Economy is simple, what you made and others made, and then trade it.
“Hey China, produce any kind product that you can manufactured, and US, keep on high on consuming, give service to the rest of the world.” Who needs money?
If it doesnt work, just use the ultimate tools, create war, so that world economy spins. hehe…
First an apology to Rodger Malcolm Mitchell with the hope for understanding that in answering questions it should be understood that JUSTALUCKYFOOL is not answering solely on your behalf,let alone with your authority.
I am a firm beleiver in ” Monetary Sovereignty: The key to understanding economics.” Friday, Aug 13 2010 .
I do not yet know if or how much RMM has endorsed my opinion of “Where and How America Went Wrong and How to fix It.”
With that said,I wish to answer Max P’s question.
“I appreciate the clarification and it is starting to make sense (see I was actually trying to learn), though I can’t say I’m still 100% bought in but I do understand the principles behind it. The obvious next question is, how does the country go about implementing this plan?
The people must get those elected to Congress that will:
- Max
enact legislation that will:THE FEDERAL BANK OF AMERICA (FB A) will be a fully taxpayer owned bank. It will be operated by the people,of the people and for the people.
ONE SHARE FOR EACH AND EVERY CITIZEN.
THE FEDERAL BANK OF AMERICA will operate openly with full disclosure .The FBA will be the source for the American borrower to acquire funds and the interest paid shall be revenue income for the funding of their government.
The Federal Bank of America will be the maker of all loans,not guarantee them for others, they will be the maker of these loans and will retain all profits. Profits which by law will be turned over to the US Treasury,as funds for Congress for government expensive’s.
The Federal Bank of America:
-Will no longer allow the paying of interest for the use of its own money.
-Will not take deposits from anyone other then the US Treasury.
-Will not be involved in any financial investment services.
The Federal Bank of America will be the sole lender of legal tender. Any financial institution that wishes to loan American Dollars must acquire any legal tender that it may need from the Federal Bank of America,as all loans must be backed with a 100% reserve (Either dollars on hand or borrowed from the FB of A)
The Federal Bank of America may raise or lower rates of interest to insure the quality and quantity of the American Dollar.
The Federal Bank of America shall be funded by the US Treasury
The bottom line is,The evil lies in who is getting the compound interest and what they are doing with that income.
We the people need to take charge of that WMD and turn it into a way and means to the pursuit of happiness.
I have another question as a point of clarification.
We currently have 15 Trillion in debt. If the federal gov’t instructed the treasury to pay off that debt with a swipe of the keyboard, would we really see any inflation? Is that 15 Trillion already priced into the economy? In other words, we call it debt, but that’s money that has already been spent, so will clearing it out make any difference? Hope this question makes sense.
It would not increase the money supply, but temporarily would increase liquidity somewhat, which could have a temporarily inflationary effect. Remember, billions of T-securities are redeemed every day, so within a decade, virtually all have been replaced, anyway.
So is all of that 15 Trillion sitting in T-Bills?
No, T-notes are the most common. See: http://www.treasurydirect.gov/govt/charts/principal/principal_debt.htm
Rodger Malcolm Mitchell
That’s what I meant. So essentially all this money is already in the economy. In other words, China bought bonds, we spent the money and China is holding an IOU. If we just print up the money and give them back what they gave us, it shouldn’t make that much of a difference on inflation, correct?
You could create new money and pay of that debt in two ways, either by minting coins of that worth or, as JF Kennedy did, re-issue Lincolns Green-backs. However, this would put all that money and buying power in the hands of those who hold the loans. The better alternative would be to call that entire debt fraudulent by court rule and then start a new economy by printing green-backs or similar together with government controlled electronic money. All you got when taking these loans were dollars that you should have created yourselves. Same situation here in Sweden.
The Chinese got their bonds by
1. Selling us stuff they made
2. Vendors depositing their dollars in their bank in China
3. The Chinese Central Bank depositing their dollars at the Fed, and finally,
4. Exchanging them for T-Bills.
If we take back their T-Bills and give them dollars, what will they do with them? Or, in a macro sense, if they trade them on the FX market or buy oil or gold or whatever for dollars, what will the ultimate holder do with them, assuming that we will not be selling any more T-Bills? The only thing they can do is buy US goods and services, or US real assets. That will raise aggregate demand in the US, but it’s a one-time shot not an ongoing thing. The ongoing thing is that our trade deficit will disappear and there would be a corresponding reduction in the Federal budget deficit.
It’s probably not a good thing to do all $15T in one day, because we would not have enough stuff on the shelves to sell. If we did $1T a year for 15 years, in addition to wiping out the trade deficit of about $600B a year, that would turn the economy around pretty well, and maybe not cause all that much inflation, because our taxes are too high to allow for full employment.
And foreigners don’t own all $15T. The Fed owns a lot of it, and Americans own some.
But why? If we don’t sell any T-Bills, and buy up all the available supply, there is no way for foreigners to save $US, and therefore no trade deficit. Imports are a real benefit, exports a real cost.
Rodger, in the 5th paragraph you state: “the federal government creates money by paying its bills” UNTRUE. Money is created when (the private) Federal Reserve buys Treasury bonds with NEWLY created monies. Voilá !
This is because the USA is not monetary sovereign. It borrows from the Fed. All must be paid back: principa + interest. Yhe interest coverage has never been created. Therefore there is more debt than money and this system has no other future but a grand crashhhhhhhhhhh.
Rodger, in the 5th paragraph you state: “the federal government creates money by paying its bills” UNTRUE. Money is created when (the private) Federal Reserve buys Treasury bonds with NEWLY created monies. Voilá !
This is because the USA is not monetary sovereign. It borrows from the Fed. All must be paid back: principal + interest. The interest coverage has never been created. Therefore there is more debt than money and this system has no other future but a grand crashhhhhhhhhhh.
100% wrong. Clearly you have no background in economics, and are just making stuff up.
The Fed was created in 1913. According to your hypothesis, there should have been no money possible before then.
Here are the facts: When you submit an invoice to the federal government, the government instructs your bank to mark up your checking account. That markup creates dollars.
Prior to August 15, 1971, the U.S. was not Monetarily Sovereign. It was on a gold standard and so, did not have the unlimited ability to create its sovereign currency. Today, the government has that ability.
T-bonds (i.e. “borrowing”) are completely unnecessary for a Monetarily Sovereign nation, because a government with the unlimited ability to create its own currency does not need to borrow.
I suggest you read the above post, carefully.
Rodger Malcolm Mitchell
Lots of people with background in economics believe that. It’s what they were taught by economics professors.
I hope you’re right. He can go back to his professor and show him what I said. Then the professor can contact me, and I can discuss with him, what he teaches his students.
Yah, sure.
The false premise in all this argument that sovereign debt is not the same as personal debt is the belief that sovereign debt has no impact on real resources. But it does, just like personal debt.
Debt is borrowing real resources from the future to consume in the present. To compensate for this and to ensure the supply of real resources will continue, the borrowing has to ensure that it is not pure consumption and that it is investment that will continue to deliver real wealth creation. Otherwise any economy is in a downward spiral of lesser and lesser growth and productivity.
Don’t be deluded by the veil of money. Bankers have made every effort to perpetuate that illusion by creating instruments of increasing complexity.
But reality will tell in the end. Economic stagnation and falling living standards.
Federal debt has nothing to do with “borrowing real resources from the future.” Our Monetarily Sovereign government does not borrow in the classical sense, and has no need for “borrowed” funds, anyway.
Here’s how we “borrow” from, for instance, China:
1. China adds U.S. dollars to their checking account at the Federal Reserve Bank.
2. China instructs the FRB to mark down their checking account and mark up their T-security account, also at the FRB.
3. When the T-securities mature, the FRB marks down China’s T-security account and marks up China’s checking account.
That’s it.
All of the above is a relic of the pre-August 15, 1971 days, when the U.S. was not monetarily sovereign. Today, the U.S. has no need to “borrow.” It has the unlimited power to create dollars. Why would the U.S. ever borrow dollars it previously created and can create at will.
Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
Rodger Malcolm Mitchell
Rodger wrote,
“Because so-called federal “debt” is the total of T-securities outstanding, all federal debt easily could be eliminated tomorrow, if the federal government merely credited the bank accounts of T-securities holders. That would require pressing a few computer keys, which would increase the checking accounts and decrease the T-security accounts of federal creditors. As this would be a simple asset exchange, no new money would be created and there would be no inflation consequences.”
This is wrong. Checking account balances are money and T-securities are not money. They are interest bearing assets that you can buy with money, little different than buying an apartment building for the rental revenue. Whoever owns a T-security has “spent” money to buy it. Whoever has sold a T-security now “has” money to spend.
A checking account balance *is* money. M1 is checking account balances and cash held by the public (i.e. not including cash held by private banks in their vaults). So if the government created $15 trillion of new checking account deposits to pay for their purchase of all the T-securities outstanding, that would indeed be the *addition* of $15 trillion of new money into the M1 money supply.
That money is immediately available for spending or investing. The fact that the $15 trillion had previously been “invested” in interest bearing Treasury debt suggests that the parties who now have $15 trillion of new money in their checking accounts will be looking for new assets to buy, rather than looking for ways to blow the money on consumption, which means the new money will almost certainly add to demand for investments which will cause asset price inflation.
T-securities are government “debt” (not “money”), which debt is “paid” when Treasury gives the holders “money” in exchange for the Treasuries. Discharging or extinguishing a debt means paying the money you owe to the party you owe the money to, the party who owns your T-security, which is your promise to pay interest and your promise to repay the money when the debt matures. Despite MMT Orwellianspeak which shouts out, “Treasury debt is not debt!”, Treasury securities are “debts”, payable in “money”, and the debts are owed by the government/taxpayer to whoever lent the government money to spend by purchasing the Treasuries.
When a primary dealer (PD) bank buys a new T-security at auction, the bank pays by creating a new deposit in Treasury’s account at that bank. The bank created the money, and exchanged the money for Treasury’s promise to pay interest and to repay the principal when the debt matures.
Treasury then transfers the new money from its PD bank account to its accounts in the regional Federal Reserve banks, which are the bank accounts that Treasury uses as its checking accounts to deposit its income (taxes, etc) and its loan proceeds from selling T-securities, in order to have “money” to cover the checks that Treasury “spends”. As the checks come in for payment, the regional Fed bank debits Treasury’s account and credits the check recipient’s account in the private banking system (i.e. not a Fed bank: the Fed is only banker to the government and to the private “commercial” banking system; the Fed can create loans for banks but not for the government; only commercial banks with “primary dealer” status are allowed to create loans for the government).
Treasury has no overdraft privileges at its Fed bank accounts, and the Fed is not allowed to buy T-securities from the government or otherwise directly lend money to the government. Unlike North Dakota and other “public banks” in Japan and Germany, Treasury does not have its own bank where it can create deposits for itself and clear its own checks by “marking up accounts”. All of the debiting and crediting of accounts takes place in the BANKING SYSTEM (I can shout too), not ‘in the government’, as MMT absurdly insists.
When a PD bank created new money by buying a new Treasury security, Treasury then spent that borrowed money into the economy. Two years later when the security matures, Treasury needs to get “money” to redeem its security, to “repay its debt” of the money it borrowed. Any inflation was caused when Treasury spent the new money into the economy. If Treasury now gets money to repay the loan by taxing money out of the economy, that causes an equal amount of deflation. If Treasury gets the repayment money by selling a new Treasury security to a PD bank, then the original spending inflation stands and using the new loan money to repay the old loan has no further impact on inflation or deflation.
Like all banks in our money system, the PD bank who bought the T-security did so by creating a new credit of bank deposit money in Treasury’s account, and the PD marked the deposit as a liability on its balance sheet, and accounted Treasury’s interest bearing debt as an asset on its balance sheet. Two years later Treasury makes a deposit in the same PD bank in order to repay its loan, and the PD joins the asset to the liability, uses the deposit to write down its asset (the expired T-security) to zero, which simultaneously reduces the deposit to zero. The bank’s purchase of the security created the money that was deposited to Treasury’s account; and Treasury’s repayment of the money discharges or extinguishes or reduces to zero both the asset and the liability, the debt and the money. From the borrower’s (the government) perspective the new deposit is its “asset”, its “money”, and the T-security it sold is its “liability”, because the government will have to repay the money in order to buy its security back when the debt matures. But from the bank’s perspective the government’s interest bearing debt is its money earning “asset” and the money it loaned is its “liability”, because the bank is legally responsible for ensuring the debt is repaid and if the borrower defaults and fails to pay, then the bank has to make up the loan loss out of it profits or its capital.
Treasury securities and money are an “asset swap” in the same way apartment buildings and money are an asset swap. But Treasury securities are not spendable money any more than apartment buildings are money. Maybe somebody who has money will trade it for your “assets”, but until you convert your building or your government dent instrument into money, those assets ARE NOT MONEY.
The government legally COULD create its own money by organizing itself as a public bank, or by exercising its authority to mint platinum coins or print US Notes. But the government DOES NOT do any of these things. And until government actually does start behaving as a money issuer, rather than behaving like just another severely indebted user of bank credit money, all of the virtuous money mechanics of MMT are moot, pie in the sky dreaming of what could be “if only” the government started issuing its own money.
Derryl,
Your long, long comment really is about the definitions of money, of which there are many. M0, M1, M2, M3, L. I prefer “Debt Outstanding Domestic Non-financial Sectors” (DODNS)
“L” includes T-bills and DODNS includes all T-securities. M3 includes demand deposits, which are debts of banks. M2 includes money market accounts, which are debts of money markets.
Every form of money is a form of debt. Even a dollar bill represents debt. It is an IOU. On its face is printed, “Federal Reserve Note.” The words “bill” and “note” describe debt instruments (as in “T-bill”and “T-note”). These instruments are held by creditors to demonstrate debt. See: http://rodgermmitchell.wordpress.com/?s=%22full+faith%22
Many forms of money earn interest — bank savings accounts, some bank checking accounts, money market accounts to name a few. A distinguishing characteristic of all U.S. money is that it has no physical presence and is backed only by the U.S. government’s full faith and credit. That is why an apartment building is not money.
As for spending, all money is spent the same way: Ownership is transferred. That is how dollar bills and Treasury bills are spent.
MMT and Monetary Sovereignty do not describe what could be, but rather what is. The federal government creates dollars by spending and destroys dollars by taxing.
Example: When you receive a Social Security payment (federal spending), the government instructs your bank to mark up your checking account, which adds dollars to the economy. When you pay taxes, the government instructs your bank to mark down your checking account, which removes dollars from the economy.
Rodger Malcolm Mitchell
Rodger,
MMT often uses the term “financial assets” or “Net financial assets”.
In MMT, I think, NFA (of the non-government sector) are limited to their holdings of obligations of the US government: currency and treasury debt.
However, ordinary people think of things like ownership of stocks or corporate bonds as their financial assets as well, and as distinct from things like their cars and houses, which they would consider “real assets”.
Would you comment, please, on some common assets (e.g., demand deposits, time deposits, various derivatives, etc.) and whether they are “real” or “financial”, and why the distinction is important to policy? For instance, how would his help us to interpret the recent housing bubble and collapse, and the appropriate policy response both during the bubble and after the collapse (unless appropriate policy would have prevented the bubble and/or the collapse)?
Rodger wrote, “When you receive a Social Security payment (federal spending), the government instructs your bank to mark up your checking account, which adds dollars to the economy. When you pay taxes, the government instructs your bank to mark down your checking account, which removes dollars from the economy.”
This is no different than when I get a bank loan then write a check to you. My bank makes the loan by creating a new deposit in my bank account, which “adds dollars to the economy”, as you say, when I spend the money. Then when I earn the money back out of the economy and deposit it in my account to repay the bank loan, the bank writes down both my deposit and my loan balance to zero, which “removes dollars from the economy”, as you say. Government borrowing and spending, and taxing and repaying loans, is no different in principle and in effect.
But my bank loan (and the government’s) also adds a deposit to the banking system. The banking system is a balance sheet equation with the economy’s (and government’s) interest bearing debts in its “assets” column, and the economy’s money (bank account deposit balances) in its liabilities column. The equation is A=K+L; assets = capital plus liabilities; and the balance sheet must always balance so that positive number assets on the left side are exactly = negative number liabilities on the right side, so the equation sums to zero. This is a simple corporate balance sheet equation, as anyone who files their own corporate taxes will recognize.
As long as I keep the deposit in my account, my bank has no need to attract another deposit to keep its balance sheet balanced. My new “debt” of $1000 on the bank’s asset side is exactly offset by my new deposit on the bank’s liability side. If I write a check to you, and you bank at my same bank and deposit the check in your account, then the deposit goes from my account to your account and our bank’s balance sheet remains balanced. If you deposit the check in a different bank, then your bank will have excess deposits and my bank might borrow the deposits from your bank to balance its balance sheet; or a borrower’s deposit from the other bank might end up being deposited in my bank to balance things out.
When I make a payment to you I am instructing my bank to mark down my checking account balance by the check amount, and my bank instructs your bank to mark up your account by that amount. The US government, just like you and me, first has to deposit money in its bank accounts BEFORE it can spend the money, before the government’s bank (the Fed regional banks where the government keeps its checking accounts) can “instruct my bank” to mark up my account.
The government has to fill its accounts with money it gets from taxing or borrowing, or else it has no money in its Fed bank accounts, and it has no money to spend. That is what the debt ceiling debacle was all about. The government bank accounts at the regional Fed banks were running dry, and unless Congress authorized Treasury to “borrow” more money by selling Treasury securities to the PD banks, Treasury’s power to “instruct its bank to credit other people’s accounts” would be exhausted, just like when you spent all the money in your bank account and your bank bounces the next check you write because you have no money and no overdraft privileges.
My argument is not about the definition of money, as you claim. I only brought up M1 to show that checking account balances are considered spendable money equivalent to cash; and I brought this up because when a PD bank buys a Treasury security it pays by creating a checking account deposit in Treasury’s account at that bank; and Treasury then transfers the credit into its checking accounts at the regional Feds; THEN Treasury can direct debit/direct deposit, or write checks, that instruct its bank (the regional Feds) to “mark up” other people’s accounts by drawing down Treasury’s checking account balances.
Treasury’s orders to its bank will only be honored if Treasury has FIRST filled its accounts with money, that it gets by taxing and borrowing. Treasury has no mechanism by which it can reach into the banking system and “mark” people’s accounts, any more than you or I have that power. We can give “instructions” telling our banks to move our money, but we cannot directly move money around in the banking system.
Treasury has no banking powers. Treasury’s spending power is limited, just like your and my spending power is limited, by the amount of money we earn/tax, or borrow, and deposit in our bank accounts. If this does not “prove” to your satisfaction that BANKS are creating the money and Treasury is BORROWING that money just like every other bank loan customer, then I suggest that your beliefs about how Treasury gets the money that it spends are not built from knowledge of actual financial operations but are preconceived by some theory that is immune to the empirical evidence of reality.
I don’t mean to be offensive. But the persistent MMT delusion that Treasury ‘spends money into existence’ without borrowing that money from banks and incurring meaningful, expensive to taxpayers, and politically dangerous “national debt” in the process, is blocking progress toward understanding the nature of what ails us and blocking development of real workable solutions to our current monetary system problems.
Darryl, visualize a brand new nation, just getting started. No money yet exists. It can’t borrow any, because none exists. Where does this nation get money?
That’s where the U.S. gets money.
Do you see the illogic of the U.S. having to borrow the dollars it previously created?
Rodger Malcolm Mitchell
Rodger,
We don’t have to visualize a brand new nation getting started, because we have a historical brand new monetary system getting started with the Bank Act and Federal Reserve Act of 1913. The Federal Reserve Act gave the Fed exclusive authority to distribute US$ currency (Federal Reserve Notes, banknotes) to the commercial banks. The Treasury controlled Bureau of Engraving and Printing actually prints the banknotes, then Treasury sells them to the Fed at the cost of printing (currently about 10 cents per banknote), so Treasury earns no seigniorage from printing banknotes.
And the Bank Act gave the commercial banks exclusive authority to create the economy’s circulating money supply as bank deposits that are loaned into existence. Commercial banks have to borrow currency (the Fed’s banknotes) from the Fed, and the economy only gets banknotes by converting a deposit balance into cash through their bank. So aside from the, by today’s reckoning, miniscule number of dollars that preexisted 1913 and became the first bank deposits in the new system, all of the bank deposit money is created as loans by the commercial banks. And a bank customer only gets cash by converting some of his deposit balance money into cash money, so cash adds no additional money into the economy beyond the bank deposits that are created as loans. The only way to increase your cash holdings is to decrease your bank deposit holdings, i.e. “withdraw” cash from your bank account.
The 1913 system intends to prevent a recurrence of Lincoln’s printing of government money, United States Notes, that circumvents the banking system in the creation of US dollars. The government hasn’t given up its power to print US Notes (Kennedy printed some; and arguably the constitution demands that the government retain this money power) and spend them into the economy without borrowing or taxing to “get” the money; and in 1996 Congress passed legislation authorizing the executive to mint proof platinum coins of “arbitrary” face value, so the government could mint trillion dollar coins and deposit them into Treasury’s bank accounts at the Fed then spend the new deposit balances, getting the money by coin seigniorage without borrowing or taxing to get the money.
But outside of printing and spending US Notes, or minting platinum coins and spending the new money, Treasury has no options for getting money except taxing and borrowing from the banks. The gold standard and fractional reserves are smoke and mirrors. The commercial banks create ALL of the money that the economy and the government uses (except net export earnings, in which case the Fed would convert the excess yuan or yen or euros into dollars that add to the US$ money supply, but the US is a large net importer and so gets no additional dollars in this way) by making loans of bank deposits, which the banking system creates on its balance sheet.
There is no government money in circulation. There is only banking system money, all of which is always owed as a debt by the borrower (private or government) who borrowed it from a bank and spent it into the economy.
The Fed’s own balance sheet, which expands when the Fed creates additional new money to buy government debt in the secondary market (i.e. from the commercial banks who are members of the federal reserve system, which banks act as dealers for “the public” in their transactions with the Fed) in QE and other “open market operations”, comprises a tiny fraction of the total US$ money supply.
MMT imagines that somehow the Fed or the Treasury creates “net financial assets”, “vertical money”, beyond what is created by the commercial banking system as loans of bank deposits. But in fact the $15 trillion in outstanding Treasury debt is all owed to banks and institutional investors (including foreign central banks like the Bank of China) and hedge funds and other private parties who buy Treasury debt. All Treasury debt is initially sold to a primary dealer bank who pays for it by creating a bank deposit, no different than any other bank loan customer.
In the secondary market, after a commercial bank has created the initial money to buy somebody’s debt instrument (the commercial banking system is where the debt instrument is created in the “primary” market), the Fed can buy corporate and municipal debt in addition to Treasury debt. The Fed pays for these purchases of debt just like commercial banks pay for their purchases of our debt: it creates a deposit in the seller’s account at the Fed; except deposits at the Fed are called “reserves” instead of simply calling them what they are, which is “deposits”.
Only commercial banks who are members of the federal reserve system can have accounts at the Fed, so Fed open market purchases add reserves into the banking system, and none of this money necessarily makes it into circulation in the real economy (“pushing on a string”, where the banks have no good lending opportunities so they sit on their excess reserves). Treasury debt is considered “zero risk”, so PD banks (and non-PD banks who buy this debt from the PDs in the secondary market) can buy Treasury debt and add it to their balance sheets without incurring any additional capital or reserves requirements (Treasury debt and cash ARE “reserves”).
Nowhere in this picture is “the government” creating and spending any money into existence. The Fed creates bank reserves in its open market operations, to the tune of, what, $2 trillion? Which is a fraction of the US$ money supply and a fraction of total national debt of $15 trillion. The Fed does not create the money that Treasury borrows for its deficit spending. PD banks create all this new money. And Treasury has to pay it back (roll it over by borrowing new money to repay its old loans as its bonds, bills and notes “mature”).
When Lincoln printed US Notes and spent them into the economy, the government never had to “pay back” anything, because the government “issued” that money as “money”. When Geithner sells a trillion$ of bonds at auction the PD banks who buy the debt instruments create the money and pay it to Treasury on condition that Treasury pay the interest and repay the principal on maturity of the debt.
Geithner has to “pay back” the money he borrows from the banks. It doesn’t matter that bid to cover ratios are high, that there is an ongoing “market” to fund Treasury debt. Geithner still has to scramble to borrow the money he needs to cover his deficit spending, whereas Lincoln “issued” his deficit spending money. He didn’t “borrow” money.
So unlike all subsequent administrations, Lincoln created his own government money and spent it into the economy without adding anything to total debt that US taxpayers ultimately have to service (pay interest on) and repay if national debt is ever to be paid down rather than rolling it over to infinity. Geithner COULD create United States money and use it to redeem Treasury debt as it comes due. But so far nobody is talking about that. Treasury sells debt and banks create money to buy it, just like they create money to buy the promissory notes we sign when we get a bank ‘loan’. There is no “government money issuance” happening. Since 1913 all money issuance is private, by the commercial banking system, covered and obfuscated by the Federal Reserve Bank that the private banks own and operate for their benefit.
John,
A caveat: Although I agree with much of MMT, Monetary Sovereignty and MMT do differ, so when you ask me about MMT, there may be times when I cannot speak for them.
That said, the word “financial” can be confusing. Financial assets generally are assets based not on a physical backing, for instance real estate, gold, diamonds, etc., but rather on money. Bank accounts are financial assets. Similarly, the word “real” can be confusing, because it often means “inflation adjusted.” I usually don’t use those words to differentiate among assets.
That said, I do use the term “Debt Outstanding Domestic Nonfinancial Sectors” (DODNS) as a measure of the total domestic money supply — more inclusive than even M3 or “L.”
The housing bubble resembled a Ponzi scheme in which later investors pay earlier investors. And it collapsed in the same way. The housing loans depended upon continually increasing home prices, so that mortgages could be financed and re-financed by ever larger home values. A person owning essentially $0 could buy a home and pay the mortgage by continually refinancing against increased home value.
This process worked for about 60 years, as prices continued to rise. However, the growth rate of DODNS – Federal Governement Sector declined from 2004 – 2008, and this decline combined with overly aggressive bank lending polices, led to the recession, which could have been delayed if:
1. The federal deficit growth rate continue to increase
and/or
2. Banks had been less aggressive in their lending.
60 years? You don’t see a major difference in the housing market between 1950-1990, for example, vs. 2003-2006?
There were ups and downs before, but not the frenzy that immediately preceded the crisis.
Should the bursting of the housing bubble have been delayed? Or should the bubble itself have been prevented? If so, should the more moderate increases of the 20th century have also been prevented?
In terms of the Ponzi aspect, is that (partly?) a demographic consequence of the baby boom – the 1950-1990 part, I mean -, and maybe unpreventable?
Darryl, you’re adding apples to telephones and coming up with planets.
Yes, every form of money is a form of debt. Always has been that way, by necessity. So all dollars are debt. But the notion that somehow the Fed controls federal spending and money creation is just plain false.
Congress and the President control the deficit and the entire economy, by spending and taxing. The technical flow of money, whether from a federal bank or from the corner loan shark, is meaningless economically meaningless. When Congress spends more money than it taxes, money is created. The Fed does not determine this; Congress does.
The Fed has no power to increase the debt, reduce the deficit or do anything else that creates Debt Outstanding Domestic Nonfinancial Sectors — the best measure of money. The Fed didn’t create the $15 trillion deficit. It didn’t determine federal spending. It didn’t determine federal taxing. It is little more than a conduit, executing Congressional demands.
And as for printing money, this too is meaningless, because no money is “printed.” A dollar bill is not money, nor is it a dollar. It is a title to a dollar. An actual dollar has no physical presence. It can be created only as an accounting notation. You and I never have seen a dollar, held a dollar or smelled a dollar. It is just a number.
When you receive a check from the Treasury, and deposit that check in your bank account, you actually have received a set of instructions from the Treasury. The instructions tell your bank to mark up your bank account. At that instant, dollars are created. Treasury instructions create dollars.
The Treasury does not need to borrow anything to send those instructions. Nor does it need to tax. It can send instructions endlessly. If borrowing and taxing totaled $0, the Treasury still could send instructions. Borrowing is currently a legal (not functional) mandate, which is why I write this blog. To get the law changed.
Functionally, federal borrowing is unnecessary, and people should understand why that aspect of the law became obsolete in 1971.
In that same sense, the federal debt is legally, but not functionally, the total of deficits. We could have deficits without debt and we could have debt without deficits. The two are not functionally connected.
Anyway, the Fed is little more than a bookkeeper. It most important job is interest rate fixing. All those QEI, QEII, QEIII were meaningless PR stunts, having no economic impact.
And by the way, the most important economic event in your lifetime occurred on August 15, 1971, when the entire world of economics changed. How has your philosophy changed with it?
JUSTALUCKYFOOL’S COMMENTS… TO THE HOUSING CRISES USING Rodger Malcolm Mitchell OWN WORDS:
——————————————————————————–
September 13, 2008
To: Chicago Tribune, New York Times, Seattle Post Intelligencer, Newsday, St. Louis Post Dispatch, Washington Post, Miami Herald
To save Lehman Brothers, and indeed, to save the economy, the government should pump money into the largest, most troubled financial and commercial (Ford, GM) institutions. ((read and now in particular holders of MBS’s..N.B. justaluckyfool believes that Bernanke may be onboard when QE3 is announced in late Jan 2012,or at least for $545 billion.Quesion,How do you “print $16 trillion and not be a believer in MONETARY SOVEREIGNTY ??))))
The man-in-the-street will find this unfair (“Why should big companies be saved?” “Where do we draw the line?”). But saving the biggest companies will prevent a domino effect that would roll downstream and injure us all. ((We simply must get off the idea that we should only help “the good” people and leave the “reckless” ones to their own ends. Whether the foreclosed house next to me was owned by a good guy or a reckless flipper doesn’t matter.. my home value goes down either way due to the foreclosure.
We simply have to set aside moral judgments and fix the problem.}}
The government has the unlimited ability to create money. Now, it must use this ability to pump money into an economy that is starved for money. The $150 billion stimulus package was a too-little, too-late attempt. Today, about $1 trillion(( or more)) is needed.
When President Reagan cut taxes and increased spending, the massive deficits saved the economy from the Carter “malaise” and inflation, and gave us growth and prosperity.
No, the deficits didn’t cause inflation. Deficits never have. And no, our grandchildren never paid that debt and never will.
The government should use its money-creating power to save our economy by saving the largest companies in it. The longer the government delays and dithers, the worse the situation will become. Today, about $1 trillion is needed. Tomorrow, it will be far more.((IF THE MONEY IS LENT AS AN INTEREST BEARING LOANs,justaluckyfool would hope that at least $100 trillion is needed and maybe even throw in the $800 trillion in deviratives.AT 3% for 24 Years,we would have to end Income Taxes and for that matter ALL TAXES.Also to make matters “WORSE” The FEDS would have to “spend” many trillions each and every year just so the loans can be mathematically paid back ! !))
Act now or face a depression.
Letter sent by R.M. Mitchell ,comments in (( )) by justaluckyfool.
I find Mr. Mitchell’s beliefs a source of the problem our country finds itself in today and not a solution to the problem. As I will not try to change his economic beliefs (as he is in denial), I will instead give him some examples of people who either do not believe in his theory or did believe in his theory and went bankrupt anyway.
First of all, the European Union decided to create the Euro and thereby eleminatede the possibility of creating unlimited amounts of money. They had to be either very stupid or Mr. Mitchell’s theory is incorrect regarding the advisibility of printing as much money as you need.
The second example that I will mention is the old USSR. They had the ability to print as much money as they wanted and to control exchange rates, etc. and yet they went down the tubes.
The botton line is that you can not continue to print money without there being production of goods and services. All the money in the world does you no good if we are not producing anything. In a perfect world where people are motivated, it MIGHT work. But in reality there are too many people who will choose to receive money for nothing rather than work. And for you bleeding heart liberals, I do not mean the people who truely need help. I am talking about the folks who choose to do nothing. Just one of many examples is that we have large numbers of single, white, teenagers getting pregnant and our government pays them to do this. These people have no skills, no jobs, and a 90% chance that they will remain below the poverty line for the rest of their lives. We actually encourage this behavior. This is why you can not simply continue to print all the money you want. Too many people will simple choose to take the money rather than make good choices with their lives.
I’m with John on this. The THEORY of Monetary Sovereignty sounds great, much like how the Theory of Socialism sounds great, but eventually Socialism fails and so will MS. Why? because it fails to take into account two major factors, human nature and greed. If you give the gov’t the unlimited power to print money then that money starts getting funneled to all the wrong places, for all the wrong reasons (aka Solyndra, Evergreen solar, Fister, Alice in Wonderland parties, bridges to nowhere, 85 overlapping and unproductive gov’t programs, social welfare, entitlements, etc). The power to print money is enormous and I prefer to subscribe to the Theory of Spiderman which is “With great power comes great responsibility” and I have ZERO faith in any gov’t agency acting responsibly.
Max, there is no THEORY of Monetary Sovereignty. It is a factual description of the way things are.
The government has the unlimited ability to pay any bill. You may not like it, but the government has had that ability since August 15, 1971.
By contrast, Greece, Italy, France et al do not have that ability. They are monetarily non-sovereign.
You can call it whatever you want but the idea of Monetary Sovereignty falls apart with the implementation. As long as humans (especially politicians) are the ones who get to decide how much money to print, it will be fraught with corruption and waste. How many special programs will be created in order to buy votes? We have a Treasury Secretary who didn’t pay his taxes. We have a President who refused to release his birth certificate, his college records or explain how he got a SS# from Connecticut when he never lived there. We have a company who received special trading privileges with the FED, was run by a former governor, Senator and someone who was rumored to be next in line for the Fed and that company mysteriously lost 1.2 Billion in customer funds. Remember, “With great power comes great responsibility” and I am hard pressed to find any gov’t that acts responsibly.
Bottom line is that I don’t have a problem with Monetary Sovereignty, I have a problem with the people who implement it.
” . . . the European Union decided to create the Euro and thereby eleminatede the possibility of creating unlimited amounts of money. They had to be either very stupid or Mr. Mitchell’s theory is incorrect regarding the advisibility of printing as much money as you need.”
Yes, the EU is a wonderful example of financial acumen.
“. . . you can not continue to print money without there being production of goods and services.
What you erroneously call “printing money,” is the federal government purchasing goods and services.
“Too many people will simple (sic) choose to take the money rather than make good choices with their lives.”
When you’re out of a job, and “simple” can’t find one, I’d guess you gladly will accept unemployment compensation from the government, just like the “bleeding heart liberals” you sneer at.
In 1848 John Stuart Mill published Principles of Political Economy, and Marx/engels published the Communist Manifesto. Both of these books advocate shifting from a focus on economic growth to a focus on distributing the fruits of the massively productive industrial economy. Mill advocated a “steady state” but still capitalist economy, where Marx/Engels advocated the end of profit-seeking economics. Already hy the mid 19th century serious economists believed industrialization had solved the problem of economic scarcity. With fossil fuel powered machines doing so much of the work, full employment of humans was no longer economically necessary. Work may be psychologically and socially necessary, but all economic needs can be provided for with only a fraction of the population actively engaging in productive work. Economists wondered how to deal with the coming “age of leisure”. In the 1920s and 30s CH Douglas invented his “social credit” monetary system that featured payment to all citizens of a “social dividend”. He reasoned that any individual’s personal productivity, amplified as it was by centuries of social development of machines and technologies and socioeconomic infrastructure, was more due to the worker’s “cultural inheritance” than to his personal contribution. This justified distributing the fruits of his work to people whose work is not needed via the social dividend. But Douglas also knew that private bankers owned and operated the world’s money systems, and they would fight to the death with all the mighty power that unlimited money can buy, to maintain their exorbitant privilege. I agree with MMT about what a monetarily sovereign nation “could” do. But as Douglas’ ideas spread higher up the monetary policy foodchain during the Depression, he found out who is really in control of national money systems. It is NOT the democratically elected governments. And in today’s US, even the elections are bought and paid for political theater staged by the plutocrats to justify putting their guys in the big white house. Just like they recently did in Greece and Italy. So insofar as MMT claims any kind of democratic monetary sovereignty of the kind that would serve the interests of the people and their economy vs the interests of the money changers and their plutocratic corporatist allies, MMT is living in fantasyland. There will be no “age of leisure”, because money will be arbitrarily kept scarce, kept out of the hands of people who need to consume even though we don’t need them to produce, because artificial scarcity supports the value of money, and the banksters who own and operate the world enjoy a private monopoly on the creation and distribution of money, just as Jefferson et al warned would happen if we allowed private banks the power to create bank deposit money.
Thanks for the history lesson, but what do you suggest?
Thanks Hermanutz, nicely put! Why is it so hard to get people to see the whole picture?
Just wanted to make a quick comment about your last statement regarding being out of a job and taking gov’t assistance. When the gov’t provides more assistance than what can be made working, NO ONE will work. I have a retail store in SC. The true unemployment rate in SC is around 20%. I’ve been trying to hire someone for nearly 2 years, I pay $10/hr (notice that’s a decent amount more than minimum wage), and I’ve had no success. No one wants to work because they would have to give up their gov’t compensation. Actually, to be clear, no one wants to work above board. They are happy to work for cash and continue to take advantage of the 99+ weeks of unemployement but I won’t pay cash. So please don’t tell me that people will rather work than take gov’t assistance.
You said, ” No one wants to work. . . ”
But you work. I worked for 55 years. 150 million people in America work. I don’t know why you can’t find an employee for two years (!), but please don’t tell me no one wants to work.
If you can’t find an employee for two years, the problem may be with the job, the wages or the boss.
Please read what I wrote before responding in your condescending tone. I said that NO ONE will work if the gov’t provides them the same amount of money as they would get for working. If someone is receiving unemployment, WIC, food stamps, Section 8, gov’t cell phone, transportation vouchers, disability, and everything else the gov’t prints money on, they will not give that up for a $10/hr job.
MaxP
Right. Given the same amount of money for not working as for working, many, if not the majority of, people, will not work. So what is your point? Where does that obvious conclusion lead?
Chaos.
Max, you keep complaining about the system. So what is your suggestion?
One suggestion is to get back to sound money possibly backed by commodities.
Another suggestion is for the gov’t to stop spending 43 cents more than every dollar it takes in (I know, according to you that 43 cents doesn’t matter because we can just print it but it does seem to matter to credit reporting agencies, business, and the general public).
Max, wonderful ideas. A gold standard and eliminating the deficit. That should do it.
What makes any commodity “sound money.” What backs, for instance, gold? Dollars are backed by the full faith and credit of the U.S. government. Who backs gold?
As for credit reporting agencies (you mean the ones that gave AAA ratings to worthless securities?), businesses and the general public, if they understood Monetary Sovereignty, I wouldn’t have to write this blog.
Historically, eliminating, or even reducing deficits, has led to every depression and most recessions in U.S. history. If you care about facts, you can see them HERE .
I’ve found it’s almost impossible to argue rationally about the four great mythologies in the modern world: Astrology, Theology, Psychology and popular Economics. People just know what they know, and by gosh, don’t bother them with facts.
Rodger Malcolm Mitchell
Rodger, let me reiterate. I don’t disagree with the Theory, Principles, Ideas or whatever you want to call it of MS. I disagree with the implementation. Like I said earlier, MS is like Socialism, it sounds great but never works. Who will be responsible for printing this unlimited money, politicians? We have a Treasury Secretary who didn’t pay taxes. We have a President who didn’t reveal his birth certificate, college records or explain how he got a Connecticut SS# without ever living in Connecticut? We have a former Senator and Governor who was granted special trading privileges with the FED and yet his company stole (as in can’t find) 1.2 Billion dollars of client’s money. We have an entire Congress that for years was exempt from Insider Trading rules and that vote themselves raises in a down economy. These are the people you want to give unlimited money printing power to (and yes, I understand they already have it, which is why a new scandal erupts on a regular basis). Greed and self-interest will prevail. Money will be printed for the benefit of the individual and not the nation. How do you stop human nature from abusing MS?
Got it. Politicians are crooked. Business people are crooked. So tell me, how will a commodity-based money system and austerity (the other name for reduced deficts) cure this historical problem?
By the way, we have been Monetarily Sovereign only since August 15, 1971. No problems before then?
Shutdown their motor. The way things are headed they will shutdown it down all by them selfs.
No fair Rodger, you didn’t answer my question. How do you stop human nature from abusing the unlimited power to print money or is this just an acceptable by-product of MS?
You can’t. Nor can you stop human nature from abusing the limited power to run deficits, as witness the PIIGS. So the question becomes: Given the realities of human nature, which is better, Monetary Sovereignty or monetary non-sovereignty?
I like the the growth potential of the U.S., Canada, Australia, China and Japan better than the austerity of the euro nations — if the Monetarily Sovereign nations begin to understand what happened in 1971..