An alternative to popular faith

In the past 100 years, why have we had 20 recessions or depressions, an average of one economic crisis every 5 years. I was thinking about this, when I received a response to one of my posts. The writer criticized a position by quoting Thomas Jefferson. Thomas Jefferson!

Economics is one of the few sciences where someone feels free to correct a hypothesis by quoting two-hundred-year-old statements from a politician. Imagine a physicist or a medical doctor being criticized on the basis of statements by Columbus.

Physics turned with the Relativity and Quantum theories. Medicine changed with the development of the microscope and the discovery of germs. Astronomy changed with the telescope and the realization the sun is just one of myriad stars. Economics has changed, too.

This science, and most of its hypotheses, were turned on their heads with the end of the gold standard. Just as Einstein gave us E = MC2, and told us space and time actually were spacetime, a single continuum, the end of the gold standard told us that debt and money were debt/money, a single entity, and gave us, Money = Debt.

Years ago, money was a physical substance, a barter substance. No debt involved. Later, money represented a physical substance. The merger of debt and money had begun, because the holder of money now was owed the physical substance.

With the end of the gold standard, money became pure debt, in short, debt/money. Yet the public, including the politicians and the media, and sadly even some economists, imagine 1971, the final end to the gold standard, never happened. What they believed before 1971, the greatest change in the history of economics, they still believe. It’s tantamount to basing all your unchanging astronomical theories on a flat world and the earth as center of the universe.

So in the minds of the public, the politicians and the media, debt and money still remain two separate entities. In their minds, the U.S. federal debt is too large, though “federal debt” merely is an accounting term meaning the net money created by the federal government. Those same people, if asked whether the U.S. has too much money, would say, “No,” but they feel the U.S. has too much debt!

In their minds, federal deficits are “unsustainable,” though the federal government now has the unlimited ability to create debt/money.

In their minds, the federal budget should be balanced, even while population growth, the trade deficit and inflation all conspire every day to reduce the per capita supply of real money. With a population annual growth of 1% and a modest 2% inflation, the per capita supply of real money in a balanced budget would fall 26% in only 10 years. Visualize each of us owning $10,000 today. By 2020, we each would own only $7,300 in real money. How could that support even zero economic growth? Add in the needs of growth itself, and the debt/money supply requirement grows further.

In their minds, the current debt should be erased by increased taxes and/or decreased spending, despite acknowledgment that increased taxes and/or decreased spending hurt people and hurt the economy.

In their minds, a federal profit (for instance, on interest coming from loans to industry) is good, despite federal profits being defacto taxes, debt/money coming from the private sector.

In their minds, the federal government is just like you and me, and must live by our rules of fiscal prudence. Yet the federal government is not like you and me, not even like state, county and local governments, not even like corporations. The federal government is unique, for it has the unique power and authority to create unlimited amounts of debt/money.

We first must acquire debt/money in order to spend. The federal government creates debt/money by spending, a wholly different process with wholly different rules.

As a science, economics has not grown from the philosophical beliefs of Everyman. Intuition dominates. It is less a science, than a religion based on personal experience, rumor, authority, faith and desire. Despite close study of endless data (Visualize religious scholars bending endlessly over their bibles), facts are ignored, discounted or twisted, while those who speak facts are ridiculed by the masses.

No politician would dare to say, “Federal debt growth is necessary, forever,” though that is true. The few academics with the courage to speak the truth are shouted down. The repeated failures of the government to prevent inflations, deflations, recessions, depressions and stagflations all are ascribed to normal, inevitable, unstoppable cycles, not to errors of belief and action.

And that is why we have had a recession every 5 years and will continue to do so.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com