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.
Perhaps a bit late to the party, but welcome anyway, economics Nobel winner Paul Krugman shows signs of understanding the economy.
The following is an excerpt from End This Depression Now!, the recently published book by Nobel Prize-winning economist and New York Times columnist Paul Krugman.
By the fall of 2009 it was already obvious that those who had warned that the original stimulus plan was much too small had been right.
I was one of those, and I didn’t wait until fall of 2009. Here’s what I said in an April 9, 2008 Email to the Chicago Tribune.”
“Every U.S. depression, and the vast majority of recessions,, have coincided with reduced growth in the money supply. Today again, the U.S. economy is starved for money, which no amount of interest rate reductions can cure. To a small degree, interest rate reductions actually reduce the amount of money in the economy, because the federal government is required to pay less interest on its debts.
“There is one cure, and one cure only, for a recession, or depression: Increase the money supply. How? By federal deficit spending.
“The federal government creates money when it pumps more money into the economy than it removes by taxation. The $150 billion stimulus package is an example, albiet too little and too late.
“To prevent a serious meltdown of our economy, the federal government must pump $500 billion – $1 trillion into the economy. The government should reduce or eliminate certain taxes and/or increase spending on certain projects.
“Example: The federal government estimates its 2008 collection of the FICA tax at $821 billion. Were FICA eliminated, workers and business (each of which pays half) would benefit immediately. The recession, would end; a depression would be prevented.
“Contrary to common wisdom, this $821 billion addition to the federal debt would not cause inflation. The Reagan/Bush $6 trillion addition to the debt did not cause inflation, which easily was prevented with interest rate control.
“In summary, this recession, was preventable and now is curable, simply by pumping money into the economy. Cutting interest rates has not, and will not, accomplish anything. Americans should be outraged at the ineptness demonstrated by Congress, the President and the Fed. There is no reason for this disaster, when the prevention and cure so easily could be implemented.
Rodger Malcolm Mitchell”
So there it was, way back in April 2008, not fall of 2009, it was clear to me, that the proposed stimuli were “too little, too late.”
Now continuing with Krugman’s comments:
This was exactly the kind of situation in which White House aides had originally envisaged going back to Congress for more stimulus. But that didn’t happen. Why not?
One reason was that they had misjudged the politics: just as some had feared when the original plan came out, the inadequacy of the first stimulus had discredited the whole notion of stimulus in the minds of most Americans and had emboldened Republicans in their scorched-earth opposition.
There was, however, another reason: much of the discussion in Washington had shifted from a focus on unemployment to a focus on debt and deficits. Ominous warnings about the danger of excessive deficits became a staple of political posturing.
As the opening quotation makes clear, Obama himself got into this game; his first State of the Union address, in early 2010, proposed spending cuts rather than new stimulus. And by 2011 blood-curdling warnings of disaster unless we dealt with deficits immediately (as opposed to taking longer-term measures that wouldn’t depress the economy further) were heard across the land.
Right on target.
The strange thing is that there was and is no evidence to support the shift in focus away from jobs and toward deficits. Where the harm done by lack of jobs is real and terrible, the harm done by deficits to a nation like Americain its current situation is, for the most part, hypothetical. The quantifiable burden of debt is much smaller than you would imagine from the rhetoric, and warnings about some kind of debt crisis are based on nothing much at all.
In fact, the predictions of deficit hawks have been repeatedly falsified by events, while those who argued that deficits are not a problem in a depressed economy have been consistently right. Furthermore, those who made investment decisions based on the predictions of the deficit alarmists, like Morgan Stanley in 2010 or Pimco in 2011, ended up losing a lot of money.
Yes, you go boy! Absolutely correct. Debt-hawk predictions have been wrong, wrong and wrong again.
Yet exaggerated fear of deficits retains its hold on our political and policy discourse. I’ll try to explain why later in this chapter. First, however, let me talk about what deficit hawks have said, and what has really happened.
Back in the 1980s the business economist Ed Yardeni coined the term “bond vigilantes” for investors who dump a country’s bonds—driving up its borrowing costs—when they lose confidence in its monetary and/or fiscal policies. Fear of budget deficits is driven mainly by fear of an attack by the bond vigilantes. And advocates of fiscal austerity, of sharp cuts in government spending even in the face of mass unemployment, often argue that we must do what they demand to satisfy the bond market.
But the market itself doesn’t seem to agree; if anything, it’s saying that America should borrow more, since at the moment U.S.borrowing costs are very low. In fact, adjusted for inflation, they’re actually negative, so that investors are in effect paying the U.S.government a fee to keep their wealth safe. Oh, and these are long-term interest rates, so the market isn’t just saying that things are OK now; it’s saying that investors don’t see any major problems for years to come.
Never mind, say the deficit hawks, borrowing costs will shoot up soon if we don’t slash spending right now. This amounts to saying that the market is wrong—which is something you’re allowed to do. But it’s strange, to say the least, to base your demands on the claim that policy must be changed to satisfy the market, then dismiss the clear evidence that the market itself doesn’t share your concerns.
The failure of rates to rise didn’t reflect any early end to large deficits: over the course of 2008, 2009, 2010, and 2011 the combination of low tax receipts and emergency spending—both the results of a depressed economy—forced the federal government to borrow more than $5 trillion.
And at every uptick in rates over that period, influential voices announced that the bond vigilantes had arrived, that America was about to find itself unable to keep on borrowing so much money. Yet each of those upticks was reversed, and at the beginning of 2012 U.S.borrowing costs were close to an all-time low.
But debt-hawks think the finances of our Monetarily Sovereign federal government are the same as monetarily non-sovereign personal finances, so they simply do not pay any attention to facts.
1. The Wall Street Journal runs an editorial titled “The Bond Vigilantes: The Disciplinarians of U.S. Policy Return,” predicting that interest rates will go way up unless deficits are reduced.
2. President Obama tells Fox News that we might have a double-dip recession if we keep adding to debt.
3. Morgan Stanley predicts that deficits will drive ten-year rates up to 5.5 percent by the end of 2010.
4. The Wall Street Journal—this time in the news section, not on the editorial page—runs a story titled “Debt Fears Send Rates Up.” It presents no evidence showing that fear of debt, as opposed to hopes for recovery, were responsible for the modest rise in rates.
5. Bill Gross of the bond fund Pimco warns tha tU.S.interest rates are being held down only by Federal Reserve bond purchases, and predicts a spike in rates when the program of bond purchases ends in June 2011.
6. Standard & Poor’s downgrades the U.S.government, taking away its AAA rating.
And by late 2011 U.S.borrowing costs were lower than ever.
The important thing to realize is that this wasn’t just a question of bad forecasts, which everyone makes now and then. It was, instead, about how to think about deficits in a depressed economy.
To date, the right wing, Tea/Republican Party, with its anti-spending crusade, has done everything in its power to crush the U.S. economy. I believe this was not out of economic ignorance, but was a deliberate plan, the purpose of which was to create voter dissatisfaction with President Obama.
The plan worked, in part, because Obama himself fell for it. He and his advisers, being ignorant of Monetary Sovereignty, began to parrot the “cut-the-federal-debt” mantra, and that ignorance very well could be his undoing.
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