The case against Monetary Sovereignty

At long last, Monetary Sovereignty is being derided in some universities. In science, derision can be the first step toward acceptance.

Here are a few excerpts from one typical article, together with my comments:

Rethinking Monetary Sovereignty: The Global Credit Money System and the State
Published online by Cambridge University Press: 29 August 2022
Steffen Murau and Jens van ’t Klooster

Abstract
We propose a new conception of monetary sovereignty that acknowledges the reality of today’s global credit money system.

As you will see, most of the criticism of Monetary Sovereignty (MS) has to do with the fact that the focus is on a nation’s own finances.

In one sense, this criticism is warranted because every nation affects, and is affected by, the finances of other countries.

But while predicting the effects of our government spending can be daunting, including other nations in the mix adds many levels of complexity.

It can be akin to predicting next year’s traffic accidents at one city corner by including each car model’s auto sales last year, in each other city, everywhere.

It is faux attempt at precision when an economist does not even acknowledge that MS government taxes don’t fund MS government spending.

Today, the concept is predominantly used to denote states that issue and regulate their currency. We reject that Westphalian understanding of monetary sovereignty.

The words “predominantly” and “states” may indicate the writers Murau and van ’t Klooster aren’t aware that MS refers exclusively (not predominantly) to entities (not only “states”) that issue and regulate their own currencies.

The term “Westphalian” refers to what happens in one’s own country without consideration of other countries.

Instead, we propose a conception of effective monetary sovereignty that focuses on what states can do in the era of financial globalization.

The conception fits the hybridity of the modern credit money system by acknowledging the crucial role of central bank money and money issued by regulated and unregulated shadow banks.

These institutions often operate “offshore,” outside a state’s legal jurisdiction, making monetary governance more difficult.

Monetary sovereignty consists of the state’s ability to effectively govern these different segments of the financial system and achieve its economic policy objectives.

We agree that vast amounts of money are created and spent offshore of any nation. Even the mighty United States dollar is only a small part of the world’s economy.

We also agree that vast amounts of money are created by non-federal entities within the U.S., as witnessed in the formula for Gross Domestic Product: GDP =Federal Spending + Nonfederal Spending + Net Exports.

Finally, we agree that the world’s economy profoundly affects the U.S.  economy.

But today’s economists are ill-prepared to play 3-dimensional chess against multiple opponents. Until quantum computers are programmed to evaluate all the inter-nation effects of every monetary event worldwide, a good start would be to consider the intra-nation impact of a nation’s governmental spending.

In short, MS tells quite a bit about how U.S. federal spending can provide benefits to the American public.

Even though monetary sovereignty remains an important reference point in academic discourse and international politics, it has repeatedly been declared dead throughout the past decades.

How did MS supposedly die? Because of:

“Creeping dollarization, globally active megabanks, asset managers, hedge funds global bond markets and the realpolitik of the IMF and the World Bank, cryptocurrencies, stablecoins, shadow banking instruments, and Basel’s Bank for International Settlements.”

This merely states the obvious. No nation is an island unto itself. The MS government does not have absolute control over GDP, inflation, deflation, poverty, unemployment, productivity, education, etc.

Similarly, no person is an island unto himself. To deride MS for not providing absolute financial control is like criticizing someone for improving his financial position, though he can’t consider everyone else’s efforts.

And here we arrive at the following evidence for ignorance about MS:

Lacking the ability to control money within their borders, states have increasing difficulties raising taxes and funding critical expenditures.

 In what sense, if any, can states still be described as monetary sovereigns?

Apparently, the authors, not understanding MS, do not realize that:

1. MS nations have no difficulty “raising taxes” should they so choose, and
2. MS nations neither need nor use tax money to “fund critical spending.”

Today, the concept of monetary sovereignty is typically used in a Westphalian sense to denote the ability of states to issue and regulate their own currency.

This understanding continues to be the default use of the term by central bankers and economists in fields ranging from modern monetary theory to international political economy and international economic law.

As we argue in this article, the Westphalian conception of monetary sovereignty makes it unsuitable for the realities of financial globalization.

Sadly, the rest of the rather long-winded article is devoted to debunking a claim no one is making: That other currencies don’t exist, and that a MS government can control the financial effect of these other currencies.

The article brushes past the fact that government spending moves a country in specific directions despite the effect of other currencies. So yes, an MS government can fight poverty by giving people money and by paying for things.

An MS government can support industries, medical care, the infrastructure, the environment, the sciences, education, and a host of other benefits.

Then, after all the sound and fury, comes the conclusion that MS really isn’t dead. No MS still lives; just the definition supposedly is wrong.

We propose considering monetary sovereignty as states’ ability to use financial governance tools to achieve economic policy objectives.

Monetary governance involves controlling pure public money, regulating private-public money, and managing private money within the state’s monetary jurisdiction.

Using “tools for monetary governance” is what all nations do, whether or not they are Monetarily Sovereign.

The entire article boils down to an incorrect, inappropriate, meaningless definition of MS.

The article does clarify that a nation pegging its currency to another currency is not MS, which seemingly has not been understood by someone, somewhere. Also (OMG!), euro nations are not MS!

And that is it. I have given you the link (twice) to their article. Nothing in it changes the sad fact that:

1. Most economists don’t teach Monetary Sovereignty
2. Most economists don’t even understand Monetary Sovereignty.
3. Monetary Sovereignty is the foundation of economics, and if understood, taught, and applies, it could make for a better world.
4. Economics is where astronomy was during the popularity of the geocentric model, 2,500 years ago.

IN SUMMARY

The main problem “exposed” by the article is that an MS government does not have absolute control over the results of its spending because other forms of money have offsetting effects. The government “only” has partial control.

My concern is that the federal government’s infinite ability to spend is not understood by the masses because economists, journalists, and politicians have failed to provide that information.

Thus, people have been led to believe many benefits to every man, woman, and child are not easily affordable for the federal government. So we continue to do without:

1. A comprehensive, no-deductible, no-cost form of Medicare, regardless of health
2. Long-term care
3. Social Security, regardless of age
4. College and post-grad for everyone who wants it
5. Reduced federal taxes, with support for state and local governments

The people have been led to believe these benefits require tax increases, are unsustainable, and would cause inflation. All untrue.

Instead of informing their students and the populace, and providing solutions based on Monetary Sovereignty, the economists dither about the exact definition of MS, focus on what MS doesn’t do, and argue in esoteric terms about how many angels could dance on the head of a pin.

As a result, the people live without easily provided benefits.

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

……………………………………………………………………..

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

MONETARY SOVEREIGNTY