Mitchell’s laws: The more budgets are cut and taxes inceased, the weaker an economy becomes. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
Debt hawks have a predictable argument. First they say the deficit and debt are “unsustainable” (a favorite word). When you challenge them to define “unsustainable,” they say the federal government will not be able to continue servicing a growing debt “forever’ (another favorite word).
When you tell them a Monetarily Sovereign nation has the unlimited ability to create its sovereign currency, so can service any debt of any size, they switch positions. They then claim that money “printing” (yet another favorite word) causes inflation. Finally, they mention Weimar Republic and Zimbabwe, two nations whose hyper-inflation caused money creation and not the other way around.
Let’s ignore the fact that the federal government does not “print” money. It creates dollars by the act of paying its bills. The Treasury does print dollar bills, but they aren’t money; they are evidence of dollar ownership.
Instead, let’s get to the point, which can be summarized in three questions:
1. Will federal dollar creation cause inflation?
2. Are low interest rates stimulative?
3. Is inflation a greater threat than recession?
The first question can be addressed by the following graph.
The red line shows the federal deficit; the blue line shows the Consumer Price Index. As you can see, for at least the past sixty years (!) there has been zero relationship between federal deficit spending and inflation. This is discussed in greater detail at: Oil causes inflation.
As for whether inflation is a greater threat than recession, we already are in, and have been in, a recession. Millions of people are suffering from joblessness and poverty. By contrast, inflation remains about what the Fed wants it to be: 2% – 3%. So you tell me which is the greater threat.
I mention this because of an article that appeared in today’s Washington Post. Here are some excerpts:
Fed Inflation Hawks Warn More Stimulus Could Fuel Prices
By Sam Gustin
Are inflation hawks preparing to take flight? That’s the sense one gets reading comments made by two U.S. central bank officials Tuesday, including Dallas Fed President Richard Fisher, who said that corporate chiefs have been sounding the alarm about an increase in prices thanks to the Fed’s easy money policy. Fisher’s latest remarks are sure to fuel a growing debate about whether the Fed should embark on another round of monetary stimulus, especially in light of last month’s lackluster jobs report.
Fisher said that he’s heard from business leaders who are concerned that the Fed’s easy money policy could raise inflation, which would increase prices for companies just as they’re trying gain a solid footing. “I’m just reporting what I hear on the street, which is a real concern that with our expanded balance sheet, we are just a little bit in an ember of what could become an inflationary fire,” Fisher said in comments cited by Bloomberg. He said business leaders are telling him, “Please, no more liquidity.”
This is economics? What he’s heard on the street? And are business leaders really begging for no more stimulus? Gimme a break. It’s total BS.
Separately, Minneapolis Federal Reserve Bank President Narayana Kocherlakota said that the threat of inflation means that the central bank will likely have to begin to reverse its easy money policy as early as the end of the year. “Conditions will warrant raising rates some time in 2013 or, possibly, late 2012,” Kocherlakota said in comments cited by Reuters. That puts Kocherlakota at odds with the policy-making Federal Open Market Committee, which has said since January that it plans to keep interest rates low through 2014.
Confused nonsense. Low interest rates are not stimulative. (See: The low interest rate/GDP fallacy) In fact, the opposite is true. Low rates hinder economic growth. Ask anyone holding CD’s, bonds or Treasuries.
So yes, by all means, raise interest rates.
Fisher and Kocherlakota are well-known inflation hawks, which means they tend to worry more than other policy-makers about the risk that inflation poses to the economy. So it’s not surprising that Fisher, in particular, would voice business leaders’ concerns that inflation could make buying the materials — or inputs — they need to run their companies more expensive.
And that answers it. These guys mistakenly fear inflation more than recession (Think of what affects them personally, with their guaranteed, recession-proof salaries.) And they mistakenly believe federal spending is the cause of inflation. And they mistakenly believe low interest rates are stimulative. And they mistakenly base policy on what someone says on the street. Considering these are “experts,” is it any wonder the public is confused?
Fisher is the more hawkish of the pair. He’s called the idea of more monetary stimulus a “fantasy of Wall Street,” while Kocherlakota has allowed that “if the outlook for inflation fell sufficiently and/or the outlook for unemployment rose sufficiently, then I would recommend adding accommodation.”
Here’s where the real confusion emerges. Yes, monetary policy, (usually focused on interest rates), is a fantasy for economic growth, although interest rates do control inflation. But fiscal policy (usually focused on deficit spending), is reality. Deficits are stimulative and the lack of deficits is recessionary and deflationary.
1. Low interest rates are not stimulative; high rates are stimulative.
2. High rates fight inflation.
3. Federal deficit spending has not caused inflation for 60 years, though deficit spending is stimulative.
So to grow the economy without inflation, raise interest rates and increase deficit spending. And by all means, don’t listen to debt-hawks. They hate the word “debt,” without knowing why; they don’t understand Monetary Sovereignty; and they ignore economic reality.
Rodger Malcolm Mitchell
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports