An alternative to popular faith
When China passes the U.S. as the world’s dominant economy, you can blame the economists, who parrot the popular faith that federal debts are unsustainable and cause recessions, inflations, high taxes and harmful high interest rates. No evidence supports these intuitive beliefs.
Contrary to popular faith:
–Fact: We do not need other nations to buy our debt. We do not even need to create debt. Just as the U.S. government has the unlimited ability to create T-securities and sell them (aka “borrow”), the government has the unlimited ability to create money, thus the unlimited ability to “sustain” any size debt.
–Fact: There is no historical relationship between deficits and inflation (See the blog: “Do deficits really cause inflation,” below). Data indicates inflation is more closely related to energy costs, specifically to oil, than to any other factor.
–Fact: In only 15 years, from 1979 through 1994, taxes were cut and the federal debt grew an astounding 500%. This massive, unprecedented money printing did not cause inflation or high taxes. Instead, we entered a long period of economic growth, low taxes and moderate interest rates. Repeating that 500% debt growth would yield a $72 trillion debt in 2024 and an average deficit of $4 trillion — and if history is a judge, the same economic growth, the same low taxes and the same moderate interest rates.
–Fact: All six depressions in U.S. history immediately followed years of federal surpluses. Every recovery coincided with increases in debt growth.
–Fact: All nine recessions in the past 50 years immediately followed reductions in federal debt growth. Every recovery coincided with increases in debt growth, such as we are seeing, today.
–Fact: There is no historical relationship between high interest rates and slow economic growth. Similarly, low interest rates have not stimulated growth.
–Fact: There is no historical relationship between deficits and tax rates. There is no mechanism for our grandchildren to pay for deficits.
The factually unsupported fear of federal deficits in the U.S., when compared with the lack of such fear in China, is why we will fail and they will succeed.
Rodger Malcolm Mitchell
For more information, see http://www.rodgermitchell.com
#Monetary Sovereignty - Mitchell 
I really liked your blog! great
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“We do not even need to create debt.”
Rodger I theoretically agree with much of this but constantly wonder why the Government sells Treasuries if it doesn’t need to. Can the answer possibly be that only the 50 people in the world who seriously espouse MMT get it and no one else does? Why the kabuki?
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I can only speculate:
1. Many of the opinion leaders were educated before 1971, or were educated by people who were educated before 1971, and they stopped thinking.
2. It’s politically incorrect to announce that the government should print money, even though that’s exactly what the government already does.
3. It often takes many years for an idea to be accepted by the establishment.
4. Economics is a religion, not a science. Religions are slow to change.
What are your thoughts on this?
Rodger Malcolm Mitchell
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Should Bernanke continue to keep interest rates low?
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MMT says “yes.” I say, “no.”
Rodger Malcolm Mitchell
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Mosler argues that Volcker prolonged a recession by raising interest rates in the early 80s. Nevertheless, I don’t suspect you advocate raising interest rates so high right now that a recession ensues.
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Tyler, I disagree with Warren on this. I see no relationship between high interest rates and low economic growth. See: https://rodgermmitchell.wordpress.com/2009/09/09/low-interest-rates-do-not-help-the-economy/
In fact, there is good reason to believe high rates stimulate growth.
Rodger Malcolm Mitchell
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Thanks, Rodger. Krugman issued his opinion in July:
The key point here is the difference between raising the economy’s long-run growth rate, which is very hard, and increasing demand when the economy is operating below potential, which isn’t hard at all.
Look: under normal conditions, when interest rates are well above zero and there’s room for conventional monetary policy to operate, we actually take it for granted that the Fed can produce dramatic acceleration of short-run growth. When Paul Volcker decided in 1982 that the economy had suffered enough, he loosened the reins — and it was Morning in America.
Now, of course,the Fed funds rate is already zero, so Bernanke can’t just slash the rate. But the same logic through which looser monetary policy can produce a rapid economic turnaround now applies to fiscal expansion.
Stroking your chin and saying, well, I don’t believe in magical solutions because experience shows that raising growth is hard sounds serious, but it’s actually silly. It’s like saying that it’s really hard to extend the human lifespan, so it’s foolish to believe that an infection can be quickly cured with a dose of antibiotics.
But haven’t we tried a huge fiscal expansion? No, we haven’t. The ratio of spending to GDP is up because GDP has fallen and safety net programs like unemployment insurance and Medicaid are covering more people — that is, what we’re looking at isn’t stimulus, it’s the consequences of the slump.
The point is that realizing that there’s a lot you can do to reverse a short-term slump isn’t magical thinking — it’s what basic macroeconomics, what we learned through hard thinking and hard experience, tells us. Rejecting all that may sound judicious, but it’s actually an act of intellectual amnesia.
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No room for monetary policy? Use fiscal policy. The data I see indicates the economy grows when:
1. The rate of deficit spending increases, adding dollars to the economy.
2. Interest rates are higher than average, adding federal interest dollars to the economy, while creating demand for dollars.
In short, up to the point of full employment and full use of resources, money supply and demand is the key to economic growth. Beyond that point lies inflation.
Rodger Malcolm Mitchell
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