Econintersect: Occasional Global Economics Intersection contributor Rodger Malcolm Mitchell makes a very simple point in a blog post today (07 October 2013): The connection between federal deficits and federal debt is a political choice, defined by law. There is no economic connection between U.S. deficits and U.S. debt.
Mitchell is incessantly writing about the monetary operational functions available to a country which is monetarily sovereign like the United States (and UK, Japan, China, India, Brazil, Russia) but not available to countries which cannot create their own currency such as the 17 member countries of the eurozone.
Any country that is sovereign in its own currency can create money without creating debt at any time it so chooses. The U.S. and others have chosen to create laws that “sub-contract” the money creation authority to the private sector (the banks) and in return the governments must pay interest to the banks to use the “sovereign” currency.
Banks and other supporters of this “sub-contracting process” claim that the government is paying for the service provided by the banks because it is a way of controlling inflation.
The fact: Over the 100 years of the current system in the U.S. inflation has been over 2,000% (more than 20x). That number is just the average. A survey of prices in Morristown, NJ from July 1-15, 1913 reveals prices for many items at that time, some of which are selected below:
Hat, Panama style, 2.90-5.90/each |
Men’s shoes, working, 2.50/pair |
Men’s suit, serge, 2 piece, 9.90-14.90/each |
Beef, rib roast, .15/lb |
Coffee, Premier, .35/lb |
Eggs, .24/dozen |
Peanut butter, .11/lb |
Below are 2013 prices for the same or comparable items:
Panama hat: J.Crew $58, Fedora $50,Nordstrom (felt) $20,Valdez Otavalo $75, Anthony Peto $175 Google |
Men’s work shoes: Famous Footwear $50-$130 |
Men’s suit: Ralph Loren (sale) $150-$400, Perry Ellis $350-$400, Kenneth Cole $650 Macy’s |
Choice round roast ave retail $4.75 BLS |
Coffee $5.21 BLS |
Eggs Grade A Large $1.84 BLS |
Peanut butter $2.71 BLS |
Econintersect has constructed a table comparing prices using an average to represent a range of prices.
If stability of the currency is a task sub-contracted by the government to the banks it could be argued that the banks have not done a very good job.
Mitchell is arguing for an alternative process for creating money that does not require by law that money created by a federal deficit cause an equivalent debt instrument to be created.
Mitchell argues that we have a national debt only because we chose to have one.
What isn’t covered in Mitchell’s discussion is the question of what inflation might have been under a debt-free money regime.
Sources:
- How to have a deficit without a debt, and a debt without a deficit (Rodger Malcolm Mitchell, Monetary Sovereignty, 07 October 2013)
- Long Term U.S. Inflation (Tim McMahon, Inflation Data.com, 15 April 2013)
- Other sources linked in the article.
