We created it. Now how do we get people to forget our legacy?

(Whose dumb idea was this “Unitary Executive” thing?)

The Fed traditionally raises interest rates to counter inflation. But there are opposing forces at work.

Raising rates makes things more expensive, which by definition is inflationary. But raising rates may inhibit borrowing, which can reduce demand, which can ease scarcity. That’s the hypothesis. What is the stronger effect?

That is one of the central unresolved practical questions in macroeconomics: Higher interest rates simultaneously create inflationary forces and disinflationary forces. The issue is which dominates, under what conditions, and with what time lag.

The inflationary side of rate hikes: Raising rates directly raises costs throughout the economy.

Examples:

1. Mortgages become more expensive.
2. Business loans cost more,
3. Credit-card interest rises,
4. Auto loans rise,
5. Landlords face higher financing costs,
6. Companies pass borrowing costs into prices when possible.
7. Government interest payments rise.

Interest payments turn into income for households, banks, and bondholders, all of which boost demand—or in “Fed speak,” heat up the economy.

In the 1970s, the U.S. saw sluggish growth, rising unemployment, and high inflation all at once. This surprised economists, as postwar models assumed inflation and unemployment moved in opposite directions.

Instead, both rose together, driven by factors like oil shocks, energy shortages, supply disruptions, geopolitical tensions, and wage-price spirals.

The Fed responded with very high interest rates under Paul Volcker, but this caused severe recession and unemployment that negatively affected the 95% lower wealth group while growing the fortunes of the 5% greater wealth people.

By contrast, from roughly the 1990s through pre-COVID years, the U.S. experienced a long economic expansion with relatively low unemployment, combined with low and stable inflation, technological productivity gains, globalization,
cheap imports, and strong supply growth.

That period contradicted the simplistic idea that low unemployment produces inflation. In fact, central banks repeatedly underestimated how low unemployment could go without inflation accelerating.

Higher rates therefore increase certain prices mechanically. Numbers 1-6 (ab0ve) reduce GDP, i.e., are recessive. Number 7 increases GDP, therefore, is expansive. Note however that recession is not the opposite of inflation, nor is expansion equal to inflation. We can have inflation together with recession (“stagflation”)

In short, the Fed views inflation as a “too-much-money” problem and so, tries to cure inflation by recessing the economy. The strange idea is that if you make the vast majority of the people poorer, they will buy less food and oil (the main drivers of inflation), while high interest rates make wealthy bond owners richer.

Which effect is stronger? Historically, the answer appears to be that interest rate increases are mostly inflationary, especially for housing, financing costs, and business costs, and do nothing to increase the supply of energy and food.

Inflation is driven mainly by oil shocks, supply-chain breakdowns, war, food shortages, housing shortages,
pandemic disruptions. In those cases, raising rates does not produce more oil, more food, more chips, more housing, or more shipping capacity. 

It may even worsen supply by discouraging investment.

For example, post-pandemic inflation involved major supply disruptions, energy shocks, and logistics problems. Rate hikes could not solve those. That is why Biden successfully fought inflation by passing legislation that would increase the supply of energy (especially renewable), as well as supply chain, infrastructure, and other shortages.

Fossil-fuel shocks repeatedly drive inflation, so reducing dependence on volatile oil and gas markets could reduce future inflation vulnerability.

(Trump has increased, decreased, increased, decreased, and increased tariffs as his whimsical approach to economic planning and inflation.)

Look at this graph:

1. If energy shortages repeatedly precede major inflation episodes, why do we raise interest rates to reduce demand, rather than trying to expand the energy supply?

2. Why has Trump reduced support for renewables like solar, wind, geothermal, and water, and instead focused on coal and oil that pollute our air and water, and will become increasingly expensive as sources dwindle?

3. What are the economic effects of reducing demand (“cooling” the economy)?

Answers:

1. If your only tool is a hammer, every problem looks like a nail to be hammered. The Fed’s primary tool is interest rates, so every supply problem asks for a demand solution.
2. trump’s main considerations are his family’s fortune, votes, and self-aggrandizement. He receives more money from oil interests than from solar interests.
3. Reducing the demand for oil, housing, food (food??), cars, infrastructure, R&D, etc., by definition, is recessive, both short term and long term. Economic growth requires increased spending. (GDP=Total Spending + Net Exports).

Rodger Malcolm Mitchell

Monetary Sovereignty

Twitter: @rodgermitchell

Search #monetarysovereignty

Facebook: Rodger Malcolm Mitchell;

MUCK RACK: https://muckrack.com/rodger-malcolm-mitchell;

https://www.academia.edu/

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A Government’s Sole Purpose is to Improve and Protect The People’s Lives.

MONETARY SOVEREIGNTY

Context matters.

In economics, one key context is Monetary Sovereignty, The U.S. government is Monetarily Sovereign. It controls the dollar, can create unlimited amounts with a keystroke, and can set its value against anything else.

Over the years, the government repeatedly and arbitrarily has changed the dollar’s official value compared to gold and silver.

Along those lines, many words and phrases you hear every day might not mean what you—or even the speaker—think they do. Here are a few:

I. Federal government DEBT (sometimes confusingly called the “national” debt). Ask any politician, and they will tell you, “The U.S. federal debt is the total amount the federal government owes or has borrowed and not yet repaid.”

This is not correct. The U.S. government, being the issuer of the dollar, never borrows dollars.  It creates dollars by spending them. 

The federal government pays for things by instructing banks, via check or wires, to increase the balance in a checking account. When a bank obeys those instructions, new dollars are created.

Federal debt is the total of outstanding Treasury bills, notes and bonds. They represent deposits — not loans — into Treasury accounts, similar to bank savings accounts.

These T-securities do not provide the federal government with dollars, but rather:

1. Provide a safe place to store unused dollars and
2. To help the fed control interest rates by creating a “base” interest rate.

Treasury securities do not represent borrowing by the federal government. Federal “debt” is not a financial burden on the government.

If the federal government wished, it could pay off the entire federal “debt” today simply by returning the dollars held in the T-bill, T-note, and T-bond accounts.

II. A Federal DEFICIT is the difference between tax collections and spending. Because the federal government has the infinite ability to create dollars (by instructing banks to increase balances), federal deficits do not burden the federal government.

In fact, federal deficits benefit America by adding growth dollars to the economy. Gross Domestic Product (GDP) = Federal Spending + Nonfederal Spending + Net Exports. 

When the government fails to run sufficient deficits, the economy goes into recessions or depressions, which are cured by increased deficit spending.

A federal deficit is an economic surplus.

III. A Treasury BILL (T-bill) is about the same as a dollar BILL  Both are backed by the full faith and credit of the U.S. government. There are just two key differences: 

1. The T-bill has a maturity date; the dollar bill doesn’t.
2. The T-bill pays interest; the dollar bill doesn’t.

Issuing trillions of dollars in T-bills is no more a financial burden than issuing trillions of dollars in dollar bills, i.e. none at all. Worries about the size of the federal DEBT are the same as worrying about the number of dollars in existence.

Strangely, you hear that the people own two many T-securities, but never that the people own too many dollars.

IV. Treasury NOTE and Treasury BOND (T-note, T-bond).  In the private sector (which includes businesses and state and local governments) the words “note” and “bond” denote borrowing.

The federal government does not borrow, and the words “note” and “bond” merely describe longer term versions of T-bills. T-notes and T-bonds. Like T-bills, they do not provide the federal government with dollars and are not a financial burden on the federal government.

The current federal DEBT, which is composed of T-BILLS, T-NOTES, and T-BONDS, totals nearly $35 trillion dollars, today, yet it is no greater a risk or burden than it was in 1940, when the federal “DEBT” totaled only about $40 billion dollars.

Every time you hear or read concerns about the size of the federal DEBT, understand this: The source of those concerns either is ignorant about federal finances, or is trying to deceive.  There are no other alternatives.

V. TAXPAYER DOLLARS State and local governments spend taxpayer dollars. The federal government does not spend taxpayer dollars.

That is one fundamental difference between a Monetarily Sovereign government (the U.S., Canada, Australia, Japan, the UK and others) vs. a monetarily non-sovereign entity (state/local governments, euro-using governments, businesses, and individuals).

A monetarily non sovereign government can run short of the money it  uses. A Monetarily  Sovereign government cannot run short. For example, France, Germany, and Spain can run short or euros. The European Union, which is Monetarily Sovereign, cannot run short of euros, and the U.S. cannot run short of dollars.

Keep these facts in mind as you read the following:

VI. The DEBT/GDP ratio. Here is what you falsely are being told by those who are ignorant or lying about federal finances:

“The debt-to-GDP ratio shows a country’s total public debt as a percentage of GDP. The ratio gives an indication of how manageable a country’s debt is given its economic output. A high debt-to-GDP ratio can have several economic consequences: 

• • Crowding out private investment: Government borrowing competes with private sector capital, potentially slowing economic growth Hoover Institution.
  • Rising interest costs: More taxpayer dollars are allocated to servicing debt rather than public investment thepolicycircle.org.
  • Fiscal sustainability concerns: Economists warn that ratios above 90–100% in advanced economies may reduce growth and increase default risk if not managed us-debt-clock.com+1.
  • Policy challenges: Reducing the ratio would require significant deficit reduction, either through spending cuts or revenue increases, potentially over multiple decades.

The above comments are false, and worse than being false, they are misleading to the average person. There is zero relationship between a Monetarily Sovereign government’s ability to “manage” debt, i.e. pay creditors.

Federal “debt” does not “crowd out” anything. The government does not borrow, and it’s deficit spending (which is how “debt” increases) actually adds growth dollars to the economy.

Rising interest costs do not use taxpayer dollars and do not service federal debt. New dollars are created to pay interest, and these new dollars increase economic growth.

The Debt/GDP ratio has no meaning or predictive value for a Monetarily Sovereign government. Whether the ratio is 10%, 100%, or 1000% is meaningless with regards to default risk, economic growth, or any other economic measure.

Reducing the ratio is unnecessary, unwise, and does not require spending cuts. If the federal government chose, it could reduce the ratio to 0%, merely by not issuing any more T-securities. It could do that simultaneously with increased spending.

The following statement also is false and misleading:

The basic premise behind the debt-to-GDP ratio is that a country’s ability to pay off its debt increases as its GDP increases.

This occurs as tax revenues typically increase in line with economic activity. If debt rises faster than GDP, the interest on those debts will consume more tax revenue, leaving less for other spending. Ultimately, this will act as a drag on GDP growth, and eventually, the government may not repay the debt.

The author of the above statement either is ignorant about federal financing or is purposely trying to deceive. There are no alternatives. Federal tax revenue does not pay for interest or for anything else. The purpose of federal taxes is to:

1. Control the economy by taxing what the government wishes to restrict and and by giveing tax breaks to what the government wishes to reward.

2. Assure demand for the U.S. dollar by requiring dollars to be used to pay taxes.

Federal taxes do not fund federal spending; state/local taxes do fund state/local spending. Federal spending is funded by money creation.

If you understand that simple concept, you understand more than most people, including many economists.

VII. Trade deficit A trade “deficit” means a nation’s imports are greater than its exports, based on the currency it uses.

Contrary to popular belief, a trade deficit can be good or bad depending on context.

You run a trade deficit with every retailer you buy from—the grocery store, butcher, cleaner, movie theater, and so on—because you purchase more from them than they do from you. Is that bad?

Not at all; you simply exchange the dollars you’ve earned for goods and services. America’s trade deficits come from giving dollars—created with a few keystrokes—in return for valuable goods and services. 

All Monetarily Sovereign governments should run ongoing trade deficits, the bigger the better. With just a few federal computer keys pressed, we receive food, clothing, cars, energy, and countless other goods and services.

Why would any informed American want to change that? The negative connotations of the word “deficit” confuse those who don’t understand Monetary Sovereignty.

VIII. Trust fund We often are told that the Social Security and Medicare “trust funds” are running low on dollars, so taxes will have to be raised or benefits reduced. This is not true.

Federal “trust funds”  are quite different from their private-sector counterparts, making the name misleading.

While “trust fund” suggests a secure source of funding, in the federal context it’s really just an accounting tool that tracks money coming in and going out for certain programs.

In private-sector trust funds, receipts are deposited and managed by trustees who invest the assets for the benefit of specified recipients. With federal trust funds, the government doesn’t set aside the money or invest it in private assets. Instead, it records receipts as credits in the fund and pools them with other Treasury collections to be spent.

The federal government controls these accounts and can change their purposes, adjust collections, and modify spending through legislation.

It has complete authority over the balances and can determine the funds’ solvency whenever it chooses. Social Security and Medicare “trust funds” are fully under federal control, regardless of FICA tax contributions. Even without collecting any FICA taxes, Congress could ensure their solvency simply by passing a law.

Note that no “trust funds” back the finances of the White House, Congress, the Supreme Court, the military branches, or countless other federal agencies, yet we don’t hear talk of the White House and others becoming “insolvent.”

Although “trust funds” were originally designed to ensure solvency, they actually undermine it by promoting the false notion that taxes need to be raised or benefits cut.

IX. Tariffs. Most Americans do not realize that tariffs, both import and export, are taxes on importers, i.e. sales taxes on consumers.

In America, tariffs are shared between sellers and consumers, adding to the overall cost of sales. Whether for exports or imports, tariffs turn governments into unnecessary middlemen in transactions.

In an untariffed sale, the buyer pays the full selling price to the seller, who then uses it for expenses and profit. In a tariffed sale, a portion of the selling price goes to the government. In both cases, the buyer ends up paying more while the seller takes home less, and dollars are removed from the private sector.

The private economy sacrifices money to the Monetarily Sovereign government, which has the infinite ability to create money. Visualize pouring your drinking water into the Pacific Ocean. That is the effect of tariffs.

Repeated transactions can remove massive amounts of money from the private sector, while causing prices to increase.

Consider the following comment by By Ben Casselman and Ana Swanson

Thank you, Roger.

Fundamentally, Trump’s power is derived from hatred — hatred of all those who are not white, Christian, males, who worship Trump no matter what he does.

And hatred always is derived from fear. You cannot hate someone without some level of fear.

So, Trump is a fear-monger, and the people who follow him best are the people who fear most what he fears most.

It is his paranoia, his fears, his weaknesses, ignorance, his lack of human compassion that makes him evil.

The irony is that his followers fear being “taken over” by the blacks, browns, yellows, reds, gays, liberals, non-Christians, the poor, women, immigrants and “deep state,” and instead have voluntarily given themselves over to a madman.

Talk about leaping from the frying pan into the fire.

Rodger Malcolm Mitchell

Monetary Sovereignty

Twitter: @rodgermitchell

Search #monetarysovereignty

Facebook: Rodger Malcolm Mitchell;

MUCK RACK: https://muckrack.com/rodger-malcolm-mitchell;

https://www.academia.edu/

……………………………………………………………………..

A Government’s Sole Purpose is to Improve and Protect The People’s Lives.

MONETARY SOVEREIGNTY