Everything on this web site begins with this philosophy:
*The measure of an economy is money.
economy needs a larger supply of money than does a small
*Therefore, a growing economy needs a growing supply of money.
*All money is a form of debt.
*Therefore, a growing economy requires a growing supply of debt.
*U. S. Federal Debt is the safest, most controllable form of debt. The federal government, alone among borrowers, never will default.
*Thus, there is no
federal debt or deficit problem, and a
balanced federal budget leads to a
recession or a depression.
Money: Yesterday and today History rules us. What we believed yesterday, we believe today, unless facts drag us, kicking and screaming into new beliefs. And even then, we wonder whether this new thought could be right.
Evolution is today's belief. It is supported by facts. It is a science. Intellegent design is not supported by facts. It is a superstition.
Years ago, people who had stomach ulcers drank milk, forsook spicy foods and took medications to calm themselves, because everyone -- even the experts -- said ulcers were caused by emotional tension and spicy foods. Later, doctors discovered most ulcers were caused by a bacterium. But many people continued to drink milk, avoid spices and take calming medications. They knew this didn't help, but they couldn't get history out of their minds. In essence, superstition ruled them.
President Nixon changed history. No, it was not his visits to China, though at the time, they seemed meaningful. Nor was it his retreat from Vietnam, nor Watergate.
President Nixon changed the world on August 15, 1971, when he ended the Bretton Woods system, which had obligated the U.S. to purchase gold at $35 per ounce. At that moment, for the first time in history, formal links between the major world currencies and physical commodities were severed. It was one of the most important decisions any president ever made.
Gold became just another commodity, neither closer to, nor further from, money than are oil, copper, grain, granite or any of the other myriad commodities in existance. Fort Knox became a commodity warehouse and money was backed only by the full faith and credit of the United States Government. Money had value only because the government said so, not because of any physical assets.
Yet there are those -- even "experts" -- who believe gold is real money, so they use their fake(?) money to purchase, store and insure this metal, thinking gold is a hedge against
inflation. It is -- in the same way silver, iron, copper, diamonds and cement are hedges against
Why do people engage in the costly and futile enterprise of hoarding gold? Because they are ruled by history. Many years ago, gold was money. In the hoarders' minds, it still is.
I mention this to demonstrate the power of history and to show how reluctant people are to surrender their long-held beliefs. And in economics, many such beliefs abound. For instance, which of these statements currently are true? Do you believe?
-The federal government's budget is too large.
-The US national debt and deficit are too high.
-Our children will pay the federal debt through higher
-There is a federal government budget crisis.
-Without an increase in
taxes. or a cut in benefits, Social Security and Medicare will go bankrupt.
-High federal spending, or printing of money, causes
-We can't afford universal health insurance and a good education for everyone.
-Cutting interest rates stimulates the economy and helps prevent a recession.
-The high U.S. National debt uses up investment funds.
-The Fed can prevent
and economic stagnation, aka stagflation, with interest rate control.
You probably believe most, if not all, of these statements are true.
What is your evidence? But why? You have no evidence the federal budget is "too large" (whatever that means). You have no evidence our children and grandchildren will pay the federal debt. (It never has happened, despite massive debt increases). You surely have no evidence there is a budget crisis. (No one knows what a "budget crisis" is.)
You might ask, "What about Social Security? We all have seen those doomsday graphs showing how the money runs out in ten years or twenty years or whatever number of years the graph author wants to frighten us with. Don't they constitute evidence Social Security (and Medicare) will go bankrupt?"
Actually, no. They constitute evidence only that under the current funding system these federal agencies would run out of money.
The current funding system is limited by an earmarked
tax.. When the earmarked
tax collects less money than the program pays out, the program presumably will run out of money.
But is an earmarked
tax the only way federal programs are limited? No, earmarked
taxes are quite rare. Of the hundreds of federal programs, only two are limited by an earmarked
tax: The Federal Insurance Contributions Act (FICA) tax is imposed on both employees and employers to limit payments made by Social Security and Medicare.No other federal agencies or programs are limited by with earmarked
taxes. (Notice that these programs are limited by, rather than funded by FICA, because literally speaking, the government does not use
tax dollars to pay for anything. The government uses tax dollars to reduce the deficit and uses deficit spending to pay for goods and services. We have decided these programs are not allowed to spend more than is collected by a certain
tax. This decision is completely arbitrary. There is no necessary connection between FICA collections and Social Security payments. We just as well could have decided the programs would spend no more than $10 for each cat living on Manhatten. FICA does not pay for Social Security.
Please click the cover to see excerpts from FREE MONEY.
Questions? Ask the author, Rodger Malcolm Mitchell at:
firstname.lastname@example.orgExample: Why taxes do not pay for government spending: Visualize this: You are the Taxpayer Clothing Store and I am your customer, Mr. Government. I already owe you $10,000. I, Mr. Government, would like to buy $3,000 more clothing from your Taxpayer Clothing Store. What shall I do?
I ask you (Taxpayer Clothing Store) to make me a gift of $2,500 (Call that gift, "tax."), which would reduce what I owe you to $7,500. Then I ask you to lend me $3 thousand (Call that, "T-bills."), which I use to buy $3 thousand worth of clothing from you.
Did your $2,500 tax gift "pay" for my clothing? No. Your tax gift merely reduced what I owe you from $10 thousand to $7,500. That is all taxes ever do. Taxes reduce what the government owes you. Taxes do not pay for goods and services. Only if the government had $0 debt, would taxes pay for goods and services. But, all money is debt. So, if the government had $0 debt there would be no federal money.
Taxes are a gift to the government, which serve one purpose: To reduce the amount of federal debt, i.e. reduce the amount of federal money in our economy.
So what paid for that $3 thousand worth of clothing? All federal government spending is paid for by borrowing (issuing T-securities), otherwise known as "deficit spending."
Carrying the analogy further, suppose you discover that I, Mr. Government, own a legal money-printing press. I legally am allowed to print all the money I wish. Wouldn't you wonder why I asked you for that $2,500 gift? In fact, wouldn't you realize that your money gift to me was completely unnecessary?
You now understand the reality of taxation in today's financial world. Why do I emphasize "today's"? Because of President Nixon's action. The fundamental purpose, and the most important effect of Nixon's action: The federal government acquired the unlimited power to create money.
This single act meant federal taxes no longer were necessary. The federal government suddenly had the ability to pay for everything, merely by creating money. It could pay for the Department of Defense, the Department of Homeland Security and 16 other departments. It could pay for the Bureau of Prisons, the Bureau of Census, and the 14 other bureaus. In short, it could pay for everything. All it had to do was print the money, and therein lies the rub.
It widely is believed that printing money causes
Yet, in the 16 year period beginning 1982, the federal government printed six times more money than it had during the first 200 years of our existance. This massive orgy of money printing did not cause inflation. The print money =
belief, like so many superstitions, persists despite ample evidence to the contrary.
Money is a commodity. Inflation is the loss in value of money, when compared to the value of other commidities, i.e. goods and services. What determines the value of a commodity? Supply and demand.
If the supply goes up, and the demand does not, the value goes down. So yes, if the supply of money were to go up, and the demand were to remain constant, the value of money would go down. We would have
What then, affects demand? Risk and reward.
In the case of money, risk is loss of value --
But what is reward? One reward for owning money is the fact that it can be spent. You can use that otherwise worthless, green piece of paper to pay your bills. If you couldn't, the paper would be worthless. This reward is a closed loop. The value of this reward depends on
--> less reward --> greater
--> less reward, and on and on.
The other reward, the critical reward for owning money, is the interest you as the owner receive. The more interest you receive the more valuable is the money. You have many choices for your money. For instance, you can buy stocks with it or you can save it. Your savings account is part of the money supply.
The decision you make will depend in part on reward. If your savings account paid 10% and the stock market was flat, you very well might sell your stock (which is not money) and invest in the savings account (which is money), because the reward was greater. You would rather have money than stock. Because of high interest rates, the demand for money has increased.
In short, high interest rates give money more value than do low interest rates. So if the government prints money, the way to prevent
is to raise interest rates.
"But," you say, "raising interest rates will hurt the economy. Companies will find it more costly to borrow, which will reduce their ability to pay salaries and invest in expansion." That is another common belief, unsupported by facts, i.e a superstition.
History shows there is no relationship between high interest rates and slow GDP growth. This is why the Fed's repeated rate cuts never seem to stimulate the economy. There actually is a slight relationship between high interest rates and fast GDP growth.
For every entity paying interest, another entity receives interest. When rates are high, some companies must pay more while others receive more. If you own bank CD's or U.S. treasuries, you are delighted when rates are high. These high rates give you more money to spend in the economy. Looking at the economy as a whole, high rates neither add nor subtract money -- neither stimulate nor inhibit economic growth -- except for one factor:
When interest rates are high, the federal government is required to pay higher rates, thereby pumping more money into the economy. This explains why, during periods of high interest rates, the GDP tends to grow slightly faster.
Returning to the common beliefs:
-The federal government budget is too large. The more money the government pumps into our economy, the more GDP rises.
-The US national debt and deficit are too high. An entity with the unlimited abilty to create money, never will have difficulty servicing its debts. Even during the Great Depression, no federal check ever bounced.
-Our children will pay the federal debt through higher taxes. Why has this never happened? Because the government can pay its debt without tax money. Taxes often have been cut during periods of rising debt. There is no connection between taxes and debt.
-There is a federal government budget crisis. The only "crisis" is: The government doesn't spend enough on health, safety, infrastructure and growth.
-Without an increase in taxes or a cut in benefits, Social Security and Medicare will go bankrupt. No federal agency can go bankrupt.
-High federal spending, or printing of money, causes
always can be prevented and cured by raising interest rates, thereby making money more valuable.
-We can't afford universal health insurance and a good education for everyone. We have two choices: Either the government pays for it, which it easily can, or no one pays for it and people live without health care and education. The first choice easily is doable. The second choice is unacceptable.
-Cutting interest rates stimulates the economy and helps prevent a recession. Historically, the opposite has been true.
-The high U.S. National debt uses up investment funds. The reverse is true. High debt requires the government to pump more money into the economy, which adds investment funds.
-The Fed can prevent inflation and economic stagnation, aka stagflation, with interest rate control. The Fed can prevent inflation with interest rate control. Only Congress can prevent stagnation, by spending more money.
We already have shown that the federal government has the unlimited ability to produce money by borrowing. Does it have the unlimited ability to produce money without borrowing?
The Solution Visualize this: The federal government will create a checking account called “Money Created.” In the same way Congress creates the debt ceiling, Congress arbitrarily will determine the credit balance of the Money Created account.
When the federal government wishes to spend money on goods and services, it will issue a check from this account. The recipient of the check will deposit it in a bank, and the bank will be credited for the amount of the check – exactly as happens now.
With each check issued, the amount of money in the economy grows, and the economy prospers.
Why eliminate federal borrowing? Because federal borrowing gives the false impression that the government is “in debt.” Those frightening words, as misleading as they may be, have caused endless mischief. When borrowing is ended, the whole concept of federal debt, potential bankruptcy and fiscal imprudence disappears, and the government can take positive steps to grow our economy and improve our society.
But isn’t federal debt a tool against inflation? The Fed raises interest rates to cure or prevent inflation, and these rates are reflected in what federal securities pay.
The Fed adjusts interest rates paid by banks, and these rates are reflected in all debt, personal corporate and state and local governmental. Even without federal debt, there is plenty of debt for the Fed to manipulate in its fight against inflation and deflation.
Because federal debt is unnecessary and harmful, the creation, sale, purchase and servicing of federal debt is a waste of economic resources. The thousands of people occupied with this useless activity could benefit the economy in more productive pursuits.
The Recommendation: In summary, I recommend this three-step formula for prosperity:
1) Eliminate federal taxes. Sending money to the government is “sending coals to Newcastle.” The government is a producer of money. When you send your money to the government, the government simply destroys it.
First to disappear: All Social Security and Medicare taxes. This will be politically popular, as these regressive taxes impact businesses, and low-to-middle income people most. The politician who ends FICA will be a hero.
The federal government will create the money to support retirement and health care.
2) Eliminate federal borrowing. As a producer of money, a sovereign government never needs to borrow money. This is an inefficient, actually harmful, exercise that provides no economic benefit. Federal borrowing provides the semantic impression the government is “in debt,” a concept people find repugnant.
No borrowing; no debt; no wrong-headed hand-wringing about how we citizens owe the debt.
3) Establish a national, money-supply goal. Include in it all the things currently called “debt.” Congress will create a checking account called “Money Created.” It will add money to this account whenever needed. It will write checks and make transfers from the Money Created account to pay for all goods and services.
That will be the system for federal money creation in our economy. Congress will determine how much money should be added to the Money Created account, thus giving Congress control over money creation. The Fed will continue to control interest rates and inflation.
Congress will spend what it deems necessary on retirement, health care, the military, the infrastructure, education, crime prevention and other national needs.
We will have freed ourselves from the tyranny of semantics and the irrational fear of federal debt. We will prosper as no nation has before us.