A Layman's Explanation of Monetary SovereigntybyRoger Malcolm Mitchell
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. Politicians most academicians, the general public and especially all of main stream media 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.
It is indisputable that a Monetarily Sovereign government has the exclusively unlimited power to create its sovereign currency. Therefore, 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, the UK 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 our Monetarily Sovereign nation has the unlimited power to create its sovereign currency, the dollar, it never needs to ask anyone for dollars. It doesn’t need to tax or 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 when applied to U.S. federal finances. For this reason, your personal intuition about U.S. financing likely is wrong. Those who tell you that the government should manage its money the same way you do are simply lying. You do not create and issue your own currency. If you did you wouldn't need to work to earn revenue/income. Think about it.
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 maliciously, misguided. Even if FICA were eliminated, Social Security and Medicare would not need to go bankrupt and would make benefit payments as long as Congress enacted appropriations.)
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 financial necessity. An example would be Congress’s failure to raise the debt ceiling would mean that Congress didn't want to pay its bills not that it did not have the means to do so. 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, the Concord Coalition or the Center on Budget and Policy Priorities. 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 an international 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 or selling its bonds. 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 as sources for funding the government. Taxes are necessary to manage inflation, income distribution and market incentives and disincentives. "Borrowing", Treasury/Federal Reserve transactions manage the term structure of interest rates and not revenue per se to pay the government's bills.
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.
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