The big argument of the day has to do with federal deficit spending. The Republicans say they don’t like it because increasing the federal “debt” causes inflation.
The Democrats agree that increased federal “debt” is inflationary, but that their proposals are “paid for” by increased taxes. So, according to the Dems. the federal debt wouldn’t increase enough to cause inflation.
In total, both parties and all their hired economists wrongly agree that federal deficit spending leads to inflation, a false belief demonstrated in the following article:
It’s unclear whether moderate Senators Joe Manchin and Kyrsten Sinema will agree to some of the provisions included by the House.
“The Build Back Better Act is fiscally responsible,” Mr. Biden said in a statement. “It reduces the deficit over the long-term. It’s fully paid for by making sure that the wealthiest Americans and biggest corporations begin to pay their fair share in federal taxes.
“Leading economists and independent experts on Wall Street have confirmed that it will not add to inflationary pressures. Instead, it will boost the capacity of our economy and reduce costs for millions of families.”
The CBO said it would increase the deficit by more than $367 billion over 10 years.
But the estimate did not include the revenue that could be generated from increasing IRS enforcement, which the CBO suggested would be $207 billion.
Treasury Secretary Janet Yellen noted that the Treasury Department estimates that the crackdown on tax evaders would raise $400 billion, and her own department’s analysis “make it clear that Build Back Better is fully paid for, and in fact will reduce our nation’s debt over time by generating more than $2 trillion through reforms that ask the wealthiest Americans and large corporations to pay their fair share.”
The White House, which estimated its framework would cost $1.75 trillion, claims it would reduce the deficit over time, generating more than $2.1 trillion over 10 years.
Sounds great, doesn’t it? The spending is “fully paid for,” and increased tax collections would “reduce our nation’s debt” and “reduce the deficit.”
Thank heavens it’s all a lie, a Big Lie.
Despite all the chest-thumping by Biden and friends, the bill will be “fully paid for” simply because all federal spending is fully paid for by federal money creation, never by taxes.
The federal government uniquely is Monetarily Sovereign. Unlike state and local taxes, which do pay for state and local government spending, federal taxes pay for nothing.
That is a fundamental difference between monetarily non-sovereign state and local governments vs. the Monetarily Sovereign federal government.
State and local taxes are M1 (money supply) dollars that remain in the private sector, even after they are received by state and local governments. (The state/local governments deposit their tax dollars into private sector banks.)
By contrast, Federal taxes are M1 dollars that are removed from the economy and destroyed when they hit the Treasury, where they no longer appear in any money measure.
Anyone not understanding that fundamental truth simply doesn’t understand economics, and has no business voting on or commenting about federal spending.
(In all probability, most of the federal politicians do understand, but don’t want you to understand, lest you ask for more benefits. Rich political benefactors want the Gap between the rich and the rest to widen, an event which makes the rich richer.)
Worse yet, if in fact, the increased federal taxes equal or exceed spending (which is what the Dems claim will happen) then the removal of money from the private sector (aka “the economy”) will lead to a depression, as has happened so often n the past.i
We only can pray the Dems are lying about reducing the debt and deficit.
The other issue, perhaps the biggest issue currently, is whether increased deficits and debt will cause inflation.
This is the one the GOP harps on, because they can’t complain about deficits, as they recently gifted the rich with major deficit-causing tax decreases (which by the way, increased the deficit and debt, but didn’t cause inflation).
So what causes inflation? Is it the money supply, as so many economists claim?
Do you see any relationship between the M2 money supply and inflation?
No, there doesn’t seem to be any relationship between the M2 money supply and inflation.
But wait. Some economists claim it isn’t just the increased money supply that causes inflation, but rather increases in the velocity of money that causes inflation.
The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. (per the Federal Reserve of St. Louis)
No, there is a massive difference between the two lines. The velocity of money doesn’t seem to be a cause of inflation.
So what about federal debt? That’s one that many economists claim causes inflation.
No, the peaks and valleys are completely different. Despite the bleating by Republicans and Libertarians, there doesn’t seem to be any relationship between federal debt and inflation.
Here’s another thought. Some folks worry that the world (China especially) won’t “lend” us enough dollars. It’s a ridiculous concern, because the federal government does not borrow dollars from anyone, and further, it never can run short of dollars.
But ridiculous concerns are part of what constitutes today’s economics. So, when the federal government doesn’t sell enough “debt” (Treasury Securities) to meet legal (though not financial) requirements, the Federal Reserve jumps in with its infinite supply of dollars.
So, is there a relationship between inflation and the Federal Debt held by Federal Reserve Banks?
Nope. No relationship there, either.
So, what does cause inflation?
Here’s one hint:
That’s more like it. Notice how the peaks and valleys of inflation generally match up with the peaks and valleys of oil prices.
Of course, the match is not perfect because oil prices, which closely are related to oil shortages, are not the sole cause of inflation.
Today’s inflation is related to the shortages not only of oil, but also of food, labor, shipping, computer chips, and other vital resources. And that gives you the answer to the question, “What causes inflation?”
Inflation always is caused by shortages of key commodities, most often food and energy, along with other supplies. Inflation never is caused by “too much money,” never by federal spending, and never by federal deficits and debt.
Not only do shortages, not money supply, always cause inflation, but inflation can be cured by federal deficit spending to cure shortages and to distribute the scarce items.
Currently, the federal government is trying to ease inflation by distributing oil from the Strategic Petroleum Reserve. This is an example of government spending, because the government previously had deficit-spent to acquire that oil.
The government can reduce the shortages of food and shipping by strategic spending to aid growers and shippers. The government can spend to bring more computer chip manufacturing to our shores.
If the government would eliminate the nonsensical, useless FICA tax, (and act that would increase the federal deficit and debt) that would effectively raise salaries and encourage more people to come to work, thus easing the labor shortage.
In summary, all the worries about federal deficit spending causing inflation are completely misplaced and in most cases, dishonest. They are nothing more than an attempt to widen the Gap between the rich and the rest.
Finally, if federal deficit spending does not cause inflation, what does federal deficit spending do?
Federal deficit spending helps prevent and cure recessions:
When federal deficit growth declines we have a recession, which is cured by a deficit growth increase.
The federal government, unlike state/local governments, cannot run short of U.S. dollars. It can pay any debt denominated in dollars, simply by creating dollars.
Though state/local government taxes fund state/local government spendinng, federal taxes do not fund federal spending. Unlike state/local tax dollars, federal tax dollars are destroyed upon receipt by the Treasury.
No evidence supports the belief that “too much” federal deficit spending causes inflation. On the contrary, federal deficit spending can prevent and cure inflations.
Additionally, federal deficit spending can prevent and cure recessions and depressions.
There is no financial reason ever to restrict federal spending. The false belief that federal finances are similar to state/local government finances and personal finances is fostered by the very rich, who strongly influence the government via bribery.
The rich wish to widen the Gap between them and the rest of the citizenry. The wider the Gap, the richer are the rich. It is the fundamental reason why the rich bribe the politicians, the media, and the economists.
Rodger Malcolm Mitchell
Facebook: Rodger Malcolm Mitchell
THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.
The most important problems in economics involve:
- Monetary Sovereignty describes money creation and destruction.
- Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”
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 Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:
Ten Steps To Prosperity:
- Eliminate FICA
- Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
- Social Security for all
- Free education (including post-grad) for everyone
- Salary for attending school
- Eliminate federal taxes on business
- Increase the standard income tax deduction, annually.
- Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
- Federal ownership of all banks
- Increase federal spending on the myriad initiatives that benefit America’s 99.9%
The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.