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.
On June 20th, 2011, this blog published a post titled “Why a dollar bill is not a dollar, and other economic craziness.” I hope you had a chance to read it, because it is something of a prelude to today’s post.
Monetary Sovereignty is dead simple. It can be expressed in one short sentence: A Monetarily Sovereign government has the unlimited ability to create its sovereign currency. That’s it. Everything else derives from that.
Many people find Monetary Sovereignty to be counter-intuitive, because some seemingly identical words mean different things, depending on whether they reference Monetarily Sovereign entities or monetarily non-sovereign entities.
If I told you a man has made a lot of “hits,” your understanding of that phrase would depend on whether I was talking about baseball or organized crime. There is no relationship between a baseball hit and a crime hit.
Similarly, the words “debt,” “owe,” “borrow,” and “lend” have totally different meanings, depending on whether you’re talking about the federal government or an individual person. Unfortunately, this difference often is not recognized by the media, the politicians or even by old-line economists.
Imagine you are the only person in the world and your bank is the only bank in the world. Your checking account has a balance of $1,000, which represents all the dollars in the world. For whatever reason, you now wish to borrow $2,000 from your bank. Can you do it?
Yes, if your bank has a 20% fractional reserve lending limitation, it can lend up to $5,000, in a series of steps described at Fractional Reserve Banking.
Where will the bank get that $2,000? From nowhere. Money does not exist in any physical form. All your money – all anyone’s money – is just numbers on a bank statement. Changing those numbers changes the amount of money you own. When a bank lends money, it creates those dollars, by marking up checking accounts. Personal borrowing creates dollars.
Then, when you pay down the loan, you destroy the dollars your bank previously created.
Contrast that with the way our federal government “borrows,” i.e. creates “debt.” Federal “debt” is nothing more than the total of all outstanding Treasury securities, among which are T-bills, T-notes and T-bonds.
Anyone can “lend” to the federal government. If you wish to lend $1,000 to the government, you purchase a T-bill. The process is this: First, you deposit $1,000 in your checking account, i.e. your bank marks up the numbers in your checking account by one thousand. Then, the federal government instructs your bank to mark down the numbers in your checking account by one thousand, while simultaneously marking up the numbers in your T-bill account by one thousand (ignoring, for the sake of illustration, interest).
The simultaneous mark down of your checking account and markup of your T-bill account creates no new dollars. “Lending” to the federal government does not create dollars. And when the government pays down its “debt,” no dollars are destroyed. The whole process is an equal exchange.
[Banks create dollars by lending, and dollars are destroyed when these loans are paid down. The federal government does not create or destroy dollars by borrowing. It creates dollars by spending and it destroys dollars by taxing.]
In summary, the words “debt,” “owe,” “borrow,” and “lend,” when describing personal (monetarily non-sovereign) finances, involve the creation and destruction of money. Those identical words, when describing federal finances, involve nothing more than an equal exchange. No money is created or destroyed.
Just as saying a man has a lot of hits to his credit can give an entirely wrong impression, saying the government has a lot of “debt” or “owes” a great deal, gives the wrong impression. The words are wrong. Federal debt is not debt as we commonly think of the word.
A crime “hit” really should be called “murder,” to differentiate it from a baseball hit. So should federal “debt,” “owe,” “borrow,” and “lend,” be changed to differentiate them from personal “debt,” “owe,” “borrow,” and “lend.”
You may have some thoughts on this, but my suggestions are:
Debt (of the federal government): Total T-securities outstanding
Owe (by the federal governemnt): Has T-securities outstanding
Borrow (by the federal government): Sell T-securities
Lend (to the federal government): Buy T-securities or, exchange dollars for T-securities
Pay down (federal T-securities): Exchange dollars for T-securities
Yes, I know this never will happen. But perhaps thinking of things in those terms will help people better understand Monetary Sovereignty, and why federal “borrowing is not a burden on us or our children, nor is it a threat to, or an imprudence by, the federal government. It’s just an equal exchange, that no longer is financially necessary.
Rodger Malcolm Mitchell
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports