Reduced money growth cannot increase economic growth. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

This might be the single most timely (and important) graph in economics, because it addresses the most current issues:

Federal deficits do not cause inflation

The red line shows the annual percentage changes in federal debt. The blue line shows the annual percentage changea in inflation as measured by official CPI figures. The green line is annual percentage changes in Gross Private Domestic Investment, the key economic measure indicating future, economic, productive capacity.

What makes this graph so important? It demonstrates the falsity of several common debt-hawk myths. These myths have been promulgated by virtually all the newspaper editors, TV correspondents, politicians and old line economists, economics textbooks and Nobel-winning, university teachers. That’s a lot of people spreading the same myths, so of course the public, and even the student economists, believe, too.

Myth 1. Federal debt growth is unsustainable
Except for President Clinton’s ill-fated surpluses (which led to the 2000 recession), the federal debt (red line) has grown (i.e. been above 0) every year for at least 60 years. Being Monetarily Sovereign, the U.S. never has run short of money to pay its bills. Even during the Great Depression, the federal government easily paid all debts. Only misguided actions by a politically driven Congress, not affordability, can limit the government’s ability to service its debt.

So the next time a debt-hawk tells you the federal debt is “unsustainable,” ask him to be specific, then show him this graph.

Myth 2. “Printing” money causes inflation.
Just an tiny fraction of the dollars in circulation are represented by physically printed bills. And even those dollar bills aren’t really dollars. They are receipts for dollars. All dollars all are nothing more than numbers in accounts. There are no physical dollars.

More importantly, the creation of dollars (red line) has had no relationship with inflation (blue line) in at least the past 60 years. If so called “printing” money caused inflation, one would expect peaks in the red line to correspond with peaks in the blue line, while dips in the red line corresponded with dips in the blue line. No such correspondence exists.

It is possible for sufficient money creation to cause inflation (if we have full employment and are using 100% of our production capacity), but that situation almost never arises. Increased world trade makes such situations even less likely. Our inflations have been caused by oil prices.

So the next time a debt-hawk tells you that if the government prints money to stimulate the economy, it will cause inflation, show him this graph.

[By the way, debt-hawks think the mere mention of two hyper-inflated governments, “Weimar Republic and Zimbabwe,” proves deficits lead to hyper-inflation. But Weimar Republic’s hyper-inflation was triggered by the onerous, post-WWI conditions put on Germany by the allies. After two years, the hyperinflation ended, and Germany’s economy proceeded to buy the greatest war machine in history. Zimbabwe’s hyper-inflation was caused by Robert Mugabe, who stole farm land from white farmers, and gave it to blacks who did not know how to farm. The result: A massive, inflationary food shortage.]

Myth 3. Federal deficits do not stimulate the economy.
Notice how when federal deficit growth (red line), declines for years and reaches its nadir, shortly thereafter a recession begins. This repeating pattern fits the fact that every depression in U.S. history began with federal surpluses, which remove money from the economy.

Debt hawks say the stimuli, i.e deficit spending, “didn’t work.” But, federal deficit growth invariably ends recessions. To cure recessions, federal deficit spending is necessary. The next time a debt-hawk tells you the stimuli didn’t work, show him this graph.

Myth 4. Federal deficit spending “crowds out” private investing
Quite the opposite is true. Note how peaks in federal deficit growth (red line) tend to precede peaks in Gross Private Domestic Investment (green line) by about a year, while troughs follow a similar pattern. This indicates that federal deficit spending, which adds money to the economy, provides the basis for private investment spending.

The next time a debt-hawk tells you federal deficits do not help the economy grow, show him this graph.

So there they are: The most common myths expressed by the Tea/Republican and Democrat debt hawks — the rationalizations given for limiting federal spending — exposed in one simple graph as utter nonsense.

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. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings