The persistence of myths: The federal “debt” myth

It takes only two things to keep people in chains:
The ignorance of the oppressed and the treachery of their leaders.
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Some myths will not die. You can throw facts at them, stomp on them, refute them, and still they persist, like weeds in an untended lawn.

Here are excerpts from an article that ran in the Bozeman Daily Chronicle, describing one such myth: The federal “debt” myth.

Budget office projects growing deficits and massive debt during Trump administration
By Cathleen Decker Los Angeles Times (TNS) Apr 9, 2018

WASHINGTON — Propelled by the GOP tax-cut plan and increased government spending favored by both parties, the nation’s deficit will top $1 trillion by 2020 and its debt burden within a decade will approach rates not seen since the aftermath of World War II, the Congressional Budget Office said Monday.

Fact: There is no “debt burden” —  no burden on the government and no burden on future taxpayers —  simply because what is described as federal “debt” actually is the total of deposits in Treasury security accounts — very similar to savings accounts.

The dollars used to make those deposits remain in those accounts until the T-securities (T-bills, T-notes, T-bonds) mature, at which time the dollars are returned to the depositors, the owners of those T-securities.

(If ever you ask the Treasury, “How much is in my T-bond account?” you will be told the number of dollars that remain in your account. These are the minimum dollars you will receive when your account matures.)

The dollars are not removed from the accounts, because the U.S. federal government is Monetarily Sovereign. It has the unlimited ability to create its own sovereign currency, the dollar, at the touch of a computer key.

Thus, it has no need to borrow your dollars. Instead, the government simply is providing a safe place for people, companies and businesses to store dollars and earn interest. This safe storage facilitates demand for the dollar.

(By contrast, when cities, counties, and states issue bonds, the money is used. These governments are monetarily non-sovereign. They do not issue dollars as their sovereign currency, so do not have the unlimited ability to create dollars.)

The national debt will rise from nearly $16 trillion at the end of 2018 to almost $29 trillion by 2028, the nonpartisan office said.

“The bigger the debt, the bigger the chances of a fiscal crisis,” CBO Director Keith Hall warned Monday, noting that debt as a percentage of the gross domestic product in 2028 will be the highest since 1946.

Here, Hall expresses two myths in one short paragraph:

1. No matter how large the debt, it never causes a fiscal crisis. Quite the opposite. When the Monetarily Sovereign U.S. encounters a fiscal crisis — a war, a recession, a depression — the federal government combats that crisis with increased deficit spending, which increases the so-called “debt.”

  Thus, curing a fiscal crisis demands a debt increase, rather than a debt increase causing a crisis.

2. There is no relationship between Gross Domestic Product and federal “debt.” GDP is all domestic spending in any one year; the “debt” is the net total of outstanding T-security deposits made within the past 30 years.

Further, the “debt” is not paid off with GDP; it is paid off by the deposits that exist in T-security accounts. The Debt/GDP ratio is the classic apples-and-oranges comparison.

3. In truth, we aren’t sure what sort of “fiscal crisis” Mr. Hall means, but the U.S. government never can run short of dollars, so if Hall’s “fiscal crisis” refers to the government’s ability to pay off any obligations denominated in dollars, the U.S. can’t inadvertently have such a crisis.

To demonstrate the lack of relationship between the debt/GDP ratio and the health of an economy, here are some recent national ratios. See if you can answer a simple question about them:

Russia 14%
Libya 17%
Iran 35%
Canada 99%
United States 105%
Singapore 112%
Japan 253%

The question: Based on Debt/GDP ratios, can you tell which economies are healthiest and which are in a “fiscal crisis”?

Of course you cannot. The Debt/GDP ratio is the least meaningful number in all of economics though it is quoted frequently.

He said that the expansion of debt was particularly troublesome during a time of economic growth, rather than in response to a recession, such as after the 2008 financial collapse.

“We’re quite a few years off a recession and we have very high deficits,” Hall said.

Right. When we have a recession, the federal government deficit spends to grow the economy.

Why? Deficit spending grows the economy by adding dollars to the economy, and deficit reduction shrinks the economy by reducing the number of dollars added to the economy.

Hall understands this, yet he still promulgates the “fiscal crisis” myth.

The new CBO report said the shortfall will now hit $12.4 trillion over the span ending in 2028, after breaking the $1 trillion mark in 2020. That’s three years earlier than expected, because of the tax cut and spending plans.

Why is the increase in T-security deposits referred to as a “shortfall” when there is no shortfall? The federal government, being Monetarily Sovereign, cannot run “short” of dollars.

Neither Republican congressional leaders — who railed against President Barack Obama’s deficit spending — nor Trump, who once vowed to balance the budget, had any immediate comment on the report.

Balancing the budget would cause a recession or a depression:

U.S. depressions tend to come on the heels of federal surpluses.
1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

While deficit growth cures recessions, reductions in deficit growth lead to recessions.

 

 

The CBO also confirmed earlier estimates that despite Republican promises that the tax cuts would pay for themselves through economic growth, the plan would actually increase the deficit about $1.9 trillion over 11 years.

That’s 1.9 trillion stimulus dollars (less foreign spending) that will be pumped into the U.S. economy. This will grow the economy.

Ironic, isn’t it, that the one good thing the GOP Congress and President Trump have accomplished — increasing federal deficit spending — is the only thing Trump doesn’t boast about.

Democrats said the report rebuked Republicans’ claims to be fiscal conservatives.

“In their craven haste to give corporations and the wealthiest 1 percent massive tax breaks, Republicans saddled our children and grandchildren with trillions of dollars of debt,” House Minority Leader Nancy Pelosi of California said in a statement.

Here, Pelosi joins in the lie. Our children and grandchildren will not pay one penny of the “debt.”

Federal taxes do not pay for the federal deposits; in fact, federal taxes pay for nothing. They cease to be a part of any measure of the nation’s money supply, as soon as they are received. Functionally, taxes are destroyed upon receipt.

(Think about it. There is no way to measure the number of dollars the federal government has. If you own a dollar-creating machine, how many dollars do you have? Either zero or infinite, depending on how you wish to count.)

Democrats warned that Republicans may next try to slash Social Security and Medicare in an effort to pare back the deficit they’ve made worse.

Some House Republicans have floated the idea of a balanced budget amendment, which would require huge cuts to discretionary programs and those that support older and sick Americans.

It is unlikely to pass the Senate.

Yes, that is the usual GOP plan: Cut social spending for the poor and middle-income groups, and give more to the rich.

“From Day One, the Republican agenda has always been to balloon the deficit in order to dole out massive tax breaks to the largest corporations and wealthiest Americans, and then use the deficit as an excuse to cut Social Security and Medicare,” said Senate Democratic leader Charles E. Schumer of New York.

Right. The fact that many poor and middle-income people vote Republican is proof that H.L. Mencken was correct when he wrote:

“No one in this world, so far as I know — and I have searched the records for years, and employed agents to help me — has ever lost money by underestimating the intelligence of the great masses of the plain people. Nor has anyone ever lost public office thereby.”

Democrats, however, contributed to the deficit’s additional rise by supporting the March spending measure, which gave Republicans higher military spending and Democrats a boost in domestic funding.

Increased deficit spending is economically stimulative.

The CBO estimated that by 2027 the national debt would comprise 88.9 percent of the gross domestic product, just below the level at which economists say its load would harm the economy.

Any economists who say that are damn fools.

The CBO is the nonpartisan agency charged with delivering independent analysis of the economy, budget bills and other legislation.

Being supposedly “nonpartisan” does not mean they know what they are talking about.

Last year, congressional Republicans and the Trump administration criticized the CBO as lacking credibility after it delivered negative assessments of GOP health care bills.

Historically it has been considered a dependable source of fiscal predictions, even as legislators have ignored its increasingly heated warnings about the national debt.

The CBO has been reasonably accurate in predicting the amount of deficits, but is completely incompetent regarding the effect of those deficits.

Trump has routinely ignored the debt and deficit when it has come to advancing programs that are popular among his voters.

During the campaign he advocated protecting numerous expensive programs — including Social Security and Medicare — and never explained how he would finance them.

Contrary to popular myth, Social Security and Medicare are not paid for by FICA taxes. They are paid for by federal spending. Even if FICA were eliminated (which it should be) the government could continue paying benefits, forever.

While the report offered Democrats substantial ammunition in a campaign year, it offered the president some limited good news.

The average economic growth will rise 0.7 percentage points as a result of the tax plan, and about 1.1 million jobs will be added, the report said. That, in turn, will also boost the gross domestic product.

Huh?  All those warnings about the supposed negative effect of increased “debt,” and now we are told economic growth will increase, jobs will be added, and GDP will grow.

Strikingly, the CBO report underscored how the options ahead for legislators and the president are narrowing.

Over the next 10 years, for example, Social Security spending will rise to 6 percent of GDP and health care costs to 6.6 percent — both the outgrowth of the retirements of baby boomers and factors whose curtailment would be politically difficult.

The options have not changed.

Since it is functionally impossible for the U.S. federal government ever to run short of its own sovereign currency, the government always has the same payment options.

Social Security and Medicare payments benefit the economic growth. The federal government simply funds these programs without any tax increases.

But they do not represent the fastest-growing segment of federal spending. That would be interest on the debt, which will double to 3.1 percent of GDP over the next 10 years.

“Interest on the ‘debt’ (deposits) are dollars that stimulate economic growth.

Bottom line:

1. The federal deficit is necessary for economic growth.
2. The federal debt is the total of deposits, similar to saving account deposits.
3. The Debt/GDP ratio is meaningless.
4. The GOP wants to cut benefits to the poor and middle, while increasing benefits to the rich. 
5. Most politicians, most of the media, and most economists are lying to you because they have been bribed by the rich. The politicians are bribed with campaign contributions and promises of lucrative employment. The media are bribed with advertising dollars and owners’ money. The economists are bribed with university contributions and employment in “think tanks.”

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell; Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

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The most important problems in economics involve the excessive income/wealth/power Gaps between the have-mores and the have-less.

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of The Ten Steps To Prosperity can narrow the Gaps:

Ten Steps To Prosperity:
1. ELIMINATE FICA (Ten Reasons to Eliminate FICA )
Although the article lists 10 reasons to eliminate FICA, there are two fundamental reasons:
*FICA is the most regressive tax in American history, widening the Gap by punishing the low and middle-income groups, while leaving the rich untouched, and
*The federal government, being Monetarily Sovereign, neither needs nor uses FICA to support Social Security and Medicare.
2. FEDERALLY FUNDED MEDICARE — PARTS A, B & D, PLUS LONG TERM CARE — FOR EVERYONE (H.R. 676, Medicare for All )
This article addresses the questions:
*Does the economy benefit when the rich can afford better health care than can the rest of Americans?
*Aside from improved health care, what are the other economic effects of “Medicare for everyone?”
*How much would it cost taxpayers?
*Who opposes it?”
3. PROVIDE A MONTHLY ECONOMIC BONUS TO EVERY MAN, WOMAN AND CHILD IN AMERICA (similar to Social Security for All) (The JG (Jobs Guarantee) vs the GI (Guaranteed Income) vs the EB (Economic Bonus)) Or institute a reverse income tax.
This article is the fifth in a series about direct financial assistance to Americans:

Why Modern Monetary Theory’s Employer of Last Resort is a bad idea. Sunday, Jan 1 2012
MMT’s Job Guarantee (JG) — “Another crazy, rightwing, Austrian nutjob?” Thursday, Jan 12 2012
Why Modern Monetary Theory’s Jobs Guarantee is like the EU’s euro: A beloved solution to the wrong problem. Tuesday, May 29 2012
“You can’t fire me. I’m on JG” Saturday, Jun 2 2012

Economic growth should include the “bottom” 99.9%, not just the .1%, the only question being, how best to accomplish that. Modern Monetary Theory (MMT) favors giving everyone a job. Monetary Sovereignty (MS) favors giving everyone money. The five articles describe the pros and cons of each approach.
4. FREE EDUCATION (INCLUDING POST-GRAD) FOR EVERYONE Five reasons why we should eliminate school loans
Monetarily non-sovereign State and local governments, despite their limited finances, support grades K-12. That level of education may have been sufficient for a largely agrarian economy, but not for our currently more technical economy that demands greater numbers of highly educated workers.
Because state and local funding is so limited, grades K-12 receive short shrift, especially those schools whose populations come from the lowest economic groups. And college is too costly for most families.
An educated populace benefits a nation, and benefitting the nation is the purpose of the federal government, which has the unlimited ability to pay for K-16 and beyond.
5. SALARY FOR ATTENDING SCHOOL
Even were schooling to be completely free, many young people cannot attend, because they and their families cannot afford to support non-workers. In a foundering boat, everyone needs to bail, and no one can take time off for study.
If a young person’s “job” is to learn and be productive, he/she should be paid to do that job, especially since that job is one of America’s most important.
6. ELIMINATE FEDERAL TAXES ON BUSINESS
Businesses are dollar-transferring machines. They transfer dollars from customers to employees, suppliers, shareholders and the federal government (the later having no use for those dollars). Any tax on businesses reduces the amount going to employees, suppliers and shareholders, which diminishes the economy. Ultimately, all business taxes reduce your personal income.
7. INCREASE THE STANDARD INCOME TAX DEDUCTION, ANNUALLY. (Refer to this.) Federal taxes punish taxpayers and harm the economy. The federal government has no need for those punishing and harmful tax dollars. There are several ways to reduce taxes, and we should evaluate and choose the most progressive approaches.
Cutting FICA and business taxes would be a good early step, as both dramatically affect the 99%. Annual increases in the standard income tax deduction, and a reverse income tax also would provide benefits from the bottom up. Both would narrow the Gap.
8. TAX THE VERY RICH (THE “.1%) MORE, WITH HIGHER PROGRESSIVE TAX RATES ON ALL FORMS OF INCOME. (TROPHIC CASCADE)
There was a time when I argued against increasing anyone’s federal taxes. After all, the federal government has no need for tax dollars, and all taxes reduce Gross Domestic Product, thereby negatively affecting the entire economy, including the 99.9%.
But I have come to realize that narrowing the Gap requires trimming the top. It simply would not be possible to provide the 99.9% with enough benefits to narrow the Gap in any meaningful way. Bill Gates reportedly owns $70 billion. To get to that level, he must have been earning $10 billion a year. Pick any acceptable Gap (1000 to 1?), and the lowest paid American would have to receive $10 million a year. Unreasonable.
9. FEDERAL OWNERSHIP OF ALL BANKS (Click The end of private banking and How should America decide “who-gets-money”?)
Banks have created all the dollars that exist. Even dollars created at the direction of the federal government, actually come into being when banks increase the numbers in checking accounts. This gives the banks enormous financial power, and as we all know, power corrupts — especially when multiplied by a profit motive.
Although the federal government also is powerful and corrupted, it does not suffer from a profit motive, the world’s most corrupting influence.
10. INCREASE FEDERAL SPENDING ON THE MYRIAD INITIATIVES THAT BENEFIT AMERICA’S 99.9% (Federal agencies)Browse the agencies. See how many agencies benefit the lower- and middle-income/wealth/ power groups, by adding dollars to the economy and/or by actions more beneficial to the 99.9% than to the .1%.
Save this reference as your primer to current economics. Sadly, much of the material is not being taught in American schools, which is all the more reason for you to use it.

The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.

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MONETARY SOVEREIGNTY