–Understanding Federal Debt. Full Faith and Credit

An alternative to popular faith

Why do we have recessions and depressions? Are they inevitable and unavoidable? Why do we have inflations? Are they preventable and curable?

This short post will give you a basis for answering these vexing (especially to the politicians, the Fed and the media) questions.

1. By definition: A larger economy has more money than does a smaller economy. California has more money than does Los Angeles, which in turn, has more money than does Anaheim.

2. Therefore: To grow larger, an economy requires a growing supply of money.

3. All forms of money are debt. Although there are many definitions of money, every form of modern money – bank accounts, money market accounts, traveler’s checks – is a form of debt. Even currency is a debt of the government. That is why a dollar “bill” has “federal reserve note” printed on it. “Bill” and “note” are words signifying debt (as in “T-bill” and “T-note.”)

4. Therefore: To grow larger, an economy requires a growing supply of debt/money.

5. The safest form of debt/money is federal debt/money. There are many types of debt – personal debt, corporate debt, state and local government debt, federal debt – but after 1971, the end of the gold standard, only the federal government has had the unlimited ability to create money to service its debt. All other debtors go bankrupt when they are unable to service their debts. The end of the gold standard marked the biggest change in economics during the 20th century. Most key economic hypotheses became obsolete in 1971; economists who did not change in 1971 are themselves obsolete.

6. All debt requires collateral. The collateral for federal debt is “full faith and credit.” This may sound nebulous to some, but it actually involves certain, specific and valuable guarantees, among which are:
A. –The government will accept only U.S. currency in payment of debts to the government
B. –It unfailingly will pay all its dollar debts with U.S. dollars and will not default
C. –It will force all your domestic creditors to accept U.S. dollars, if you offer them, to satisfy your debt.
D. –It will not require domestic creditors to accept any other money
E. –It will take action to protect the value of the dollar.
F. –It will maintain a market for U.S. currency
G. –It will continue to use U.S. currency and will not change to another currency.
H. –All forms of U.S. currency will be reciprocal, that is five $1 bills always will equal one $5 bill and vice versa.

7. The value of debt (money) is based on supply and demand. An increase in supply makes the value go down. An increase in demand makes the value go up.

8. The demand for debt (money) is based on risk and reward. The risk of owning debt (money) is the danger of inflation. The reward for owning debt (money) interest rates. High reward with low risk makes demand go up which makes value go up.

9. Inflation compares the value of debt (money) with the overall value of goods and services. Fighting inflation requires increasing the reward for owning debt (money) and/or reducing the supply of debt (money). However, because a growing economy requires a growing supply of debt (money), reducing the supply leads to recessions and depressions, making supply-reduction a poor choice for fighting inflation.

10. For every borrower there is a lender. To the degree lowering interest rates helps borrowers, it equally hurts lenders, both of whom are part of the economy. The Fed lowers interest rates, believing this helps businesses that are borrowers, neglecting the fact that it equally hurts businesses that are lenders. That is why the 20 rate reductions preceding and during the recession, neither prevented nor cured the recession.

You now know how to begin to answer the questions in the first paragraph.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

–More “debt bomb” nonsense

An alternative to popular faith

Well, they just keep on doing it. The February 8, 2010 Forbes Magazine’s cover story is titled, “The Global Debt Bomb,” by Daniel Fisher.

It contains the usual scary words, for instance: “The world has issued so much debt in the past two years fighting the Great Recession that paying it all back is going to be hell –for Americans, along with everybody else. Taxes will have to rise around the globe, hobbling job growth and economic recovery.” Etc., etc., etc. You get the idea.

Never mind that this is exactly the same “sky is falling” commentary — even using the words “debt bomb” — we have been hearing from pundits since 1940 (See https://rodgermmitchell.wordpress.com/2009/11/24/federal-debt-a-ticking-time-bomb/). Never mind that “government debt” is an exact synonym for “government money,” which needs to grow if an economy is to grow.

Never mind that “paying it back” is not, and since 1971 (the end of the gold standard) never will be, a problem for a sovereign nation with the unlimited ability to create money. Never mind that using this unlimited ability has not caused inflation, which in any event could be cured by raising interest rates. And never mind that taxpayers do not pay for federal debt and tax rates are not related to federal debt.

In short, never mind history, and just keep making the same old, wrong predictions, using the same old words, because let’s face it, fear-mongering sells magazines, and why make up new words when cribbing the old words is so much easier.

Pick up that issue of Forbes, read Fisher’s article, and wherever you see the word “debt” replace it with the word “money.” That will show you the reality. Also, if you know how to contact Fisher, you might ask him to supply historical proof that, as he says, “. . . the taxpayer will have the devil to pay.”

Rodger Malcolm Mitchell
www.rodgermitchell.com

–Improving health care, Obama style

An alternative to popular faith

Today, 2/18/10, the Obama plan is to improve America’s health care by cutting Medicare payments to doctors and hospitals. This is like improving America’s education by cutting teachers’ salaries.

So, who should pay for universal health care? The only one who can afford it: The federal government. How? Via deficit spending.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

–The End of the Euro

An alternative to popular faith

Greece is criticized for secretly borrowing. The fault is not with Greece. The fault is with the euro.

The European Union wants Greece to cut its debt, either by raising taxes, reducing expenditures or both. If Greece does any of the above, it will dive into a depression and pull the other members down with it.

The current situation exposes the fundamental flaw with the euro: It is a gold standard in fancy clothes. Like the gold standard, the euro precludes any member nation from controlling its own finances. The solution to a recession, and indeed, the requirement for economic growth, is government deficit spending. Yet no member of the European Union has the unlimited power to do this. They are restricted by the covenants of the Union.

The grouping of countries under the euro banner is akin to a gold standard, whereby every country is required to peg its currency to a value over which it has no control.

The gold standard failed, and always must fail, because it prevents countries from taking the necessary steps toward economic growth. A growing economy requires a growing supply of money, and deficit spending is the system by which a government increases its money supply.

In 2005, noted economist Professor Randall Wray invited me to speak at the University of Missouri, Kansas City. In this speech I said, “Because of the Euro, no European nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the Euro.”

The Euro will fail, just as the gold standard failed, and for the same reason. To attain the modest convenience of easier intra-European trade, the European countries surrendered control over their individual financial destinies. Only a total merger of national governments — a United States of Europe — could make the euro viable.

Rodger Malcolm Mitchell
www.rodgermitchell.com