I noted in that blog that Modern Monetary Theory (MMT) provides a consistent and coherent framework for evaluating the consequences of macroeconomic policy choices taken by government.<\/p>\n
In that sense, policy justifications become more transparent. It is clear that austerity will damage growth and cause unemployment to increase. If the principles of MMT are widely understood, then, in that case, politicians who want to impose austerity cannot hide behind spurious claims that it enhances private confidence because future tax rates will be lower.<\/p>\n
Rather, the austerity proponent is clearly demonstrating a preference for higher unemployment and that opens the public debate to a series of different questions, which conjecture would suggest would also lead to different policy outcomes (for example, a rejection of austerity).<\/p>\n
But we assume that government is elected by the people and becomes an effective agent for the people to accomplish outcomes that individual libertarian action is incapable of achieving.<\/p>\n
I often write that sovereignty means that the nation issues its own currency, sets its own interest rates, floats its currency, and desists from issuing foreign-currency denominated debts.<\/p>\n
That is my emphasis as an economist. But it also requires that governments are not captured by corporations and\/or trapped by multilateral arrangements which compromise their discretion to act in the best interests of their own population.<\/p>\n
We know that often the public has very little influence on policy because governments do become captured by corporate interests and the lobbying capacity of the very wealthy (like the Koch Brothers in the US).<\/p>\n
In the cited blog, I outlined ways in which the population might seek to defend their rights and ensure that policy is advancing general well-being rather than being ‘pro-business’ (which is code for pro profits).<\/p>\n
We need to refine what power we actually have.<\/p>\n
Mainstream microeconomics textbooks tell the students that consumers are sovereign, which is code for saying that what the consumers want, firms will supply unless they want to lose market share. It makes the ‘market’ look like it is the ultimate democratic arena – what we vote for is what we get by way of goods and services.<\/p>\n
There are of course major problems with this conception.<\/p>\n
First, the voting system is highly undemocratic because it is not one person one vote but rather one dollar one vote and the income distribution is so highly skewed in favour of the top-end that voting power is not even remotely distributed in a reasonable manner.<\/p>\n
Second, consumer sovereignty assumes that the final pattern of goods and services produced and sold is demand-determined by consumer preference.<\/p>\n
However, the reality is different. Advertising transcends the state of being pure information and becomes manipulation and brainwashing preying on the weak and vulnerable (which in terms of this mass consumption age is almost all of us).<\/p>\n
That means that the final pattern of goods and services produced and sold is supply-determined and the demand-side is manipulated to accord with the preferences of corporations for profits.<\/p>\n
The truth is somewhere between and it is this netherland that provides progressive activists with scope to really damage lying capitalists like the Time magazine, which produced this cover story (April 14, 2016) – The United States of Insolvency<\/a> – that is tantamount to gross deception of the public.<\/p>\n Here is the front cover:<\/p>\n I recommend those responsible for the magazine and the publication of this particular article be prosecuted under US Code \u00a752<\/a> and be subjected to both the maximum fine and imprisonment allowed for under that code.<\/p>\n If there are stronger violations of US law then they should also be applied.<\/p>\n Almost all inferences in this article including its much-feted calculation are wrong and heiniously so.<\/p>\n Start with the calculation – it divides all the outstanding US public debt by the population to get a per capita ‘debt’. Presumably, this is based on some misleading notion that each person has some tax liability equivalent to that per capita allocation.<\/p>\n But if you followed that logic then the per capita figure would be much higher because children do not pay taxes, retirees do not pay taxes and the top-end-of-town (as the Panama Papers tell us) do not pay taxes.<\/p>\n But I trifle here, really because the rest of the article is so bad that I consider it an example of white collar crime.<\/p>\n Even the introductory drumming up the scare defies its own logic.<\/p>\n We are told – to sensationalise what is just the normal operations of a government – that:<\/p>\n \nWe conjure dollar bills by the trillions-pull them right out of thin air. I won’t insist that this can’t go on, because it has. I only say that it will eventually stop.<\/p>\n I don’t know the date, but I believe that I know the reason. It will stop when the world loses confidence in the dollars we owe. Come that moment of truth, the nation will resemble Chicago, a once prosperous polity now trying to persuade its once trusting creditors that it is actually solvent.\n<\/p><\/blockquote>\n Get the problem. “We” is actually meant to be the US federal government, which is quite different from ‘us’ (‘We’) because the real ‘We” cannot “conjure” dollar bills out of thin air. Duh!<\/p>\n That is the crucial point in all this.<\/p>\n The household budget analogy is false. Households use the currency that the federal government issues under monopoly conditions and must finance their spending.<\/p>\n A sovereign government issues the currency and must spend first before it can subsequently tax or borrow in that currency.<\/p>\n A household cannot spend more than its revenue indefinitely because continuously increasing private debt is unsustainable.<\/p>\n The budget choices facing a household are thus limited and prevent permanent deficits.<\/p>\n A currency-issuing government can never be revenue-constrained in a technical sense and can sustain deficits indefinitely without solvency risk.<\/p>\n The Euro nations are an exception. They surrendered currency sovereignty and thus have to borrow to cover deficits, which make them dependent on bond markets (in lieu of European Central Bank support) and exposes them to solvency risk.<\/p>\n The city of Chicago is not a currency-issuing government and while it might have revenue-raising capacities (tax base) that a typical household doesn’t have, it can still become insolvent – it is financially constrained therefore and not like the federal US government in any way.<\/p>\n And what about the world losing “confidence in the dollars we owe” (we being the US government)? Presumably this would manifest in the bid-to-cover ratio at the bond tenders (that is, the $ volume of bids to purchase US-dollar denominated bonds to the volume to be auctioned) falling such that the authorised bond dealers no longer wanted to purchase the bonds.<\/p>\n What then? Not much. The federal government would just natter with the US Federal Reserve Bank and bank accounts would still be credited to reflect the government spending intentions and the balance sheet of the central bank would just show a new accounting entry reflecting a ‘book’ liability it holds against the Treasury department.<\/p>\n The right-hand of government owing the left-hand hand – not much to write homeabout really!<\/p>\n Of course, the non-government sector’s future income stream would decline as their ‘lack of confidence’ would lead it to surrender an income stream from the federal government.<\/p>\n It would also surrender its access to the only truly risk-free financial asset there is and various segments of the financial sector would have to find a new benchmark asset with which to price their own riskier products against. That is possible but inconvenient and you can imagine the howl from this sector if the government stopped issuing debt.<\/p>\n![\"Time_Debt_Cover_April_2016\"](\"https:\/\/billmitchell.org\/blog\/wp-content\/uploads\/2016\/04\/Time_Debt_Cover_April_2016.jpg\")
<\/a><\/p>\n