What is Monetary Sovereignty?

by David Gerlitz on February 16, 2012

Understanding Monetary Sovereignty (MS) is one of the most critical, if not the most critical, concepts toward an understanding of Modern Money.

A nation having the characteristics of Monetary Sovereignty flips the traditional understanding of the hierarchy of control over the money supply, leaving the Government in control of interest rates (rather than private banks and investors) and ensuring solvency.  For a nation displaying the characteristics of MS, insolvency or bankruptcy is an impossibility, as they are always able to produce the necessary funds to pay or roll over its bills.

A nation with Monetary Sovereignty is described as a currency issuing entity displaying four characteristics:

1. The currency issuer–typically the nation’s central bank– is a monopoly. In other words, no one else (such as another state) can issue the currency.

2. The currency floats on international currency markets. In other words, there is no peg to another currency (such as the dollar) or commodity (such as gold).

3. The Central Bank of that nation-state sets the interest rate. This could be done with long or short term rates or both, although typically this is done with the shortest (overnight) rate.

4. The Central Bank has not borrowed heavily in a foreign currency.

According to these rules, examples of Monetary Sovereignty include the US, the UK, Japan, Canada and Australia.

Conclusions that could be drawn for Monetary Sovereign nations include an inability to go bankrupt or default (except by political choice).  They can always pay or roll over their debts.

US states, firms and businesses are currency users, not issuers.  Therefore, they do not have Monetary Sovereignty.

Euro nations are not Monetarily Sovereign. They have ceded sovereignty to the European Treaty which gives monopoly power of currency issuance to the European Central Bank (ECB).  The ECB could not issue currency at the behest of Greece, just as the Federal Reserve could not issue currency at the behest of California.  This makes Greece more like a US State than a Sovereign Nation.

Consider the case of Greece in contrast to Japan.  The case of Greece is well known of late.  It’s government is having difficulty in acquiring the Euros necessary to fund itself and provide the level of services and support to its economy that it has grown accustomed to.   They are paying interest rates on long-term bonds of upward of 7% to acquire Euros from private banks and investors.  This is because they have broken rule #1:  by joining the Euro, they have given up currency sovereignty.  Japan, however, has a debt to income (GDP) ratio of nearly 200% (considerably higher than Greece) and maintains the lowest bond rates (less than 2% for 10 year bonds) in the developed world.  Only Monetary Sovereignty explains this difference among nations in seemingly similar situations.

Economists, Politicians and Media who conflate Monetarily Sovereign nations with non-sovereign nations  (Such as the US or Japan with Greece) are misunderstanding the dynamics of Modern Money and perpetuating that misunderstanding with the public.

 

King Mo Mo

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