What do you get when you blend economic incompetence, laziness, and malevolence? Ignorance of Monetary Sovereignty

Imagine you were in charge of the advanced mathematics department at a university. You would be expected at least to understand arithmetic.

Similarly, if you were the Secretary of the U.S. Treasury, Chair of the Federal Reserve, or President of the United States, you should understand what former Chairs seem to know, i.e., the difference between a Monetarily Sovereign entity and a monetarily non-sovereign one. 

It’s that basic.

Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency. There is nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The United States can pay any debt it has because we can always print the money to do that.”

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

Alas, we are not so fortunate with our leadership’s knowledge:

In 2016, (former President) Trump said he could pay down the national debt, then about $19 trillion, “over a period of eight years” by renegotiating trade deals and spurring economic growth.

In 2018, he said, “We have $21 trillion in debt. When this [the 2017 tax cut] really kicks in, we’ll start paying off that debt like it’s water.

“Because of Tariffs we will be able to start paying down large amounts of the $21 trillion in debt that has been accumulated, much by the Obama Administration.”

Fed Chair Powell Warns Of ‘Unsustainable’ US Debt Path: “The level of debt we have is not unsustainable, but the path that we’re on is unsustainable,” Powell stated. 

He urged policymakers to prioritize fiscal sustainability, warning that running large deficits during good economic times cannot continue indefinitely.“

In the longer run, we’ll have to do something sooner or later, and sooner will be better than later,” he added.

Notice that Powell uses the favorite word of debt fear-mongers: “Unsustainable.” (See here and in many other posts on this blog). Despite false claims since 1940 that the debt and deficits are “unsustainable,” we have sustained it.

The debt fear-mongers never learn from experience.

In 2022, President Biden said, “My Treasury Department is planning to pay down the national debt this quarter, which never happened under my predecessor.” 

Every U.S.  depression has come on the heels of federal surpluses.

1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.

Treasury Secretary Janet Yellen agrees that the federal debt is too high, but when a simple, non-recession solution was presented to her, she preferred austerity, i.e., the mathematical certainty of a recession or depression.

The solution demonstrated the federal government’s total sovereignty over the U.S. dollar:

Is minting a $1 trillion platinum coin the answer to the debt limit crisis?
Treasury Secretary Janet Yellen shot down the idea, calling it a “gimmick.”

By Michelle Stoddart
October 7, 2021, 11:27 AM

Legislation enacted in 2001 allows the treasury to mint platinum coins of any value without congressional approval.Under that law, the coin’s value could be anything, but it would have to be platinum, not gold or silver, nickel, bronze or copper, which are under Congress’ control.

President Joe Biden could order Treasury Secretary Janet Yellen to have a coin with the value of $1 trillion be minted and deposited into the Treasury, giving the government an extra trillion dollars to cover debts and prevent default.

The idea was floated before in 2011 when the government faced another debt ceiling crisis. Former President Barack Obama said in 2017, on the podcast “Pod Save America,” that he and his advisers discussed use of a trillion dollar coin as a safety valve.

“There were all kind of wacky ideas about how potentially you could …. have this massive coin.” Obama said in the 2017 interview. “I mean … it was some primitive — it was like out of the Stone Age or something and I pictured rolling in some coin.”

Thus, as usual, President Obama demonstrated his abject ignorance about federal finance. Remember, he was the one who created the Simpson/Bowles Commission that labored to create these recommendations:

1. 1. Reduce the deficit by $4 trillion over ten years
   2. Cap government spending at 21% of GDP
   3. Reduce discretionary spending to 2008 levels, adjusted for inflation
   4. Raise the retirement age and reduce Social Security benefits
   5. Reduce Medicare benefits.

Fortunately, none of this was done; otherwise, we would have had the worst depression since the Great Depression. However, it reflects Obama’s economic ignorance (or intent?).

Getting back to the platinum coin solution to the debt ceiling idiocy:

Treasury Secretary Janet Yellen said Tuesday in an interview with CNBC that she is “opposed” to the idea, and doesn’t believe it should be considered seriously.

“It’s really a gimmick and what’s necessary is for Congress to show that the world can count on America paying its debts,” Yellen said Tuesday on CNBC’s “Squawk Box”.

And there you have it. Janet Yellen, Secretary of the U.S. Treasury, thinks there is a danger the Monetarily Sovereign U.S. government might not be able to “pay its debts” unless something is done about the federal debt (which isn’t federal and isn’t debt.

See: “Debt fear-monger takes opposite sides of the same issue.”

Yellen also raised concerns about how using a trillion dollar coin would affect trust in and independence of the Federal Reserve and treasury.

“The platinum coin is equivalent to asking the Federal Reserve to print money to cover deficits that Congress is unwilling to cover by issuing debt, it compromises the independence of the Fed conflating monetary and fiscal policy, and instead of showing that Congress and the administration can be trusted to pay, to pay the country’s bills, it really does the opposite,” Yellen said.

OMG, Secretary of the Treasury Yellen just gets worse and worse. She doesn’t seem to realize that U.S. dollars are debt, and every debt requires collateral.

The collateral for U.S. dollars is the full faith and credit of the United States government. This may sound nebulous to some, but it actually involves certain, specific, and valuable guarantees, among which are: 

1. The government will accept only U.S. currency in payment of debts to the government
2. It unfailingly will pay all its dollar debts with U.S. dollars and will not default
3. It will force all your domestic creditors to accept U.S. dollars if you offer them to satisfy your debt.
4. It will not require domestic creditors to accept any other money
5. It will take action to protect the value of the dollar.
6. It will maintain a market for U.S. currency
7. It will continue to use U.S. currency and will not change to another currency.
8. All forms of U.S. currency will be reciprocal, that is five $1 bills always will equal one $5 bill and vice versa.

As economist Hyman Minsky said, “A government that can issue Treasury bills can issue dollar bills.”

Look at the dollar bill in your wallet. At the top, it says, “Federal Reserve Note“, and it is signed by — that’s right — the Secretary of the Treasury and the Treasurer.

Janet Yellen complains that “the platinum coin is equivalent to asking the Federal Reserve to print money,” while she has her signature on dollar bills, which are Federal Reserve Notes!

Many experts are unsure about what the economic effects of the move would be given that it is unprecedented.

But experts cite concerns about inflation, saying that creating more money would weaken the value of existing money circulating in the economy.

We have been “creating more money” for 84 years. In some years, inflation was above the Fed’s target. In other years, it was below. Just before COVID, inflation was quite low. Then COVID created shortages and, thus, inflation.

The platinum coin’s economic effects would relieve uncertainty about the extraordinarily ignorant Debt Limit. Economies don’t like uncertainty because it hinders investment in the future.

That would mean that existing dollars would have less buying power, which could affect American consumers.

I wonder why America hasn’t suffered that fate so far. Perhaps because it isn’t real??

Still, some Democratic lawmakers backed the idea. House Speaker Nancy Pelosi said that Rep. Jerod Nadler, D-N.Y., brought up the coin during a closed policy meeting last week as one of other “options” to prevent government default without congressional action.

And in case you miss your daily dose of debt fear-mongering about something that never happens, here’s a bit more.

US National Debt Hits $35 Trillion Milestone

In a historic fiscal milestone for the federal government, the national debt rose to $35 trillion for the first time, according to the latest Treasury Department data. Current debt levels are equal to $105,000 per person and $266,000 per U.S. household.

Washington accumulated $1 trillion in debt in less than seven months. Over the past year, the national debt has spiked by nearly $2.35 trillion, an average of about $6.4 billion per day.

The immense growth of red ink flooding the nation’s capital has captured the attention of public policymakers. Federal Reserve Chair Jerome Powell in February conceded that the federal government is “on an unsustainable fiscal path.”

Two of the big three credit agencies downgraded their outlook on the U.S. debt, citing fiscal deterioration, persistent debt ceiling negotiations, and ballooning interest payments. When these updates were released last year, the White House disagreed with the firms’ outlooks.

The two credit agencies referred to are likely Fitch Ratings and Moody’s. Fitch recently downgraded the U.S. government’s credit rating from AAA to AA+ while Moody’s has changed its outlook on U.S. debt to negative.

It’s ironic that two companies should downgrade the U.S. dollar. If the U.S. fails to pay it’s bills, not only will the dollar be worthless, but so will every business on earth, including Fitch and Moody’s.

But Yellen doesn’t want a simple solution to the crazy Debt limit, because “it’s a gimmick”  that might (but almost sure will not) cause some inflation.

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The National Debt Hit $35 Trillion. Why This Matters

Economists told the Daily Caller News Foundation that persistent government spending under the Biden administration propped up U.S. economic growth in the second quarter of 2023.

Real gross domestic product (GDP) grew 2.8% in the second quarter of 2024, far higher than economists’ expectations of 2.1%,

However, a significant portion of the recorded growth in the quarter was driven by government spending, both directly through a rise in government expenditures and indirectly through growth in sectors that benefit heavily from taxpayer dollars.

Apparently, some economists believe that when the government spends, it is not true economic growth, but when the private sector spends, that is true growth.

However, exactly the opposite is true. When the government spends, new stimulus growth dollars are created and added to the economy. By contrast, when the private sector spends, dollars are just moved from one hand to another. 

Private sector spending that is not financed by borrowing creates no money.

“Government spending has played a large role in much of the economic growth seen over the past few years,” Peter Earle, a senior economist at the American Institute for Economic Research, told the DCNF. 

“The problem with that, of course, is that government spending is redistribution: taxing certain citizens or floating more trillions of dollars in debt to send those dollars to other citizens.

It’s not innovative entrepreneurship or other productive commercial undertakings.”

Peter Earle has it exactly backward. Federal spending is done with newly created money, not with tax money. 

The crazy part of Earle’s comment is that the debt fear-mongers take both sides of the same issue.

They claim that federal deficit spending adds to the money supply, and so, is inflationary.

Then they claim federal deficit spending is redistribution — i.e., doesn’t add to the money supply.

And they ardently believe both opposing  statements.

E.J. Antoni, a research fellow at the Heritage Foundation’s Grover M. Hermann Center for the Federal Budget, told the DCNF that even the increase in consumer spending, which totaled 2.3% in the second quarter — up from 1.5% in the previous quarter — was also partially driven by government expenditures.

That is exactly what federal spending is supposed to do. It puts spending money into consumers’ pockets. Why that is a bad thing is beyond all comprehension.

“Government purchases do not include all of government spending. When the government takes money from one person and gives it to another in the form of welfare, for example, it gets counted as consumer spending,” Antoni told the DCNF.

Trust the extreme right wing to come up with nonsense opposing welfare. No comments opposing the tax breaks given to the wealthy, however.

In any event, the federal government doesn’t give tax money to anyone. It destroys all the tax dollars it receives and creates new dollars to pay its bills.

“Currently, about $4.2 trillion of annual consumer spending is government transfers, illustrating how total government spending is much larger than the GDP report indicates.”

No federal spending is “transfers;” all state/local government spending is “transfers.”

That’s the difference between Monetary Sovereignty and monetary non-sovereignty. The former creates new dollars to pay its bills, while the latter uses borrowed money and taxes. 

“What were the big things that contributed to the GDP number? You have a big increase in health care spending, which is consistent with all the jobs we’ve seen in health care, and a lot of that is paid for by government,” Faulkender told the DCNF.

“You have money going into transportation investment, which is deficit-funded [Inflation Reduction Act] money [and] you had the increase in government spending.”

Healthcare spending was responsible for approximately 16% of GDP growth in the second quarter, according to the BEA. In 2022, government sources accounted for just over 45% of healthcare spending, according to the Congressional Research Service.

The healthcare industry has also underpinned recent U.S. job gains, accounting for 49,000 of the 206,000 nonfarm payroll jobs added in June, and approximately 29% of all jobs added in the last twelve months, according to the Federal Reserve Bank of St. Louis (FRED).

In short, the government is spending heavily on transportation and healthcare, which in addition to helping people be healthy and get around, is creating jobs in these fields.

Is that supposed to be a problem?

“All — or nearly all — the apparent growth in the economy has really just been pulling future growth forward to today, at the expense of future growth,” Antoni told the DCNF. “It’s like when a consumer goes deeply into credit card debt to get a higher standard of living today, only to be drowning in debt payments tomorrow.”

No, Mr. Antoni, federal finances are  not like personal finances. Not one word of the above paragraph is true. And really, how does today’s growth pull growth from tomorrow? It is nonsensical.

The federal government has been “drowning” in so-called “debt” since 1940, and here has been the result of all that deficit spending:

Americans as a group, are wealthier in real terms than ever. If this is what our government “drowning in debt” produces, please toss me in the pool.

The trick is to narrow the Gap between the rich and the rest, which the debt worriers seem to forget when they talk about cutting benefits and increasing taxes.

SUMMARY

Everything in economics eventually devolves to understanding Monetary Sovereignty. Our leaders either don’t understand the difference between Monetary Sovereignty and monetary non-sovereignty, or they don’t want you to understand.

In the latter category are those who want to widen the income/wealth/power Gap between the rich and you.

Rodger Malcolm Mitchell

Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell; MUCK RACK: https://muckrack.com/rodger-malcolm-mitchell; https://www.academia.edu/

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The Sole Purpose of Government Is to Improve and Protect the Lives of the People.

MONETARY SOVEREIGNTY