Does your neighbor understand the close relationship between federal deficits and economic growth? Do you?

I’m unsure whether to laugh or cry when I read about how the “federal debt” is too high and “unsustainable.” It is amazing how few people seem to understand that Gross Domestic Product growth (economic growth) relies on federal deficit and “debt” growth.

The two are intertwined, with economic growth being the outcome of “federal debt” and deficit growth.

I put “federal debt” in quotes because it isn’t federal, and it isn’t debt. It’s deposits in T-security accounts owned by the depositors, not the federal government.

These accounts resemble bank safe deposit boxes in that the contents remain the property of the depositors, the bank never touches them, and they are not the bank’s debts.

Similarly, the contents of T-security accounts remain the property of depositors; the federal government never touches them, and they are not the federal government’s debts.

The purpose of T-securities is not to provide spending funds to the federal government (which already has infinite spending funds) but to provide a safe, interest-paying storage place for unused dollars. This stabilizes the demand for the dollar.

Here is a graph demonstrating the close relationship between deficit spending and economic growth.

**Federal deficits and economic growth go hand-in-hand.**

The lines parallel because of this formula:

Gross Domestic Product = Federal Spending + Non-federal Spending + Net Exports.

Increases in Federal Spending directly increase economic growth (GDP), but they also increase Non-federal spending by adding dollars to the private sector.

Thus, federal deficit spending is absolutely no-kidding-around necessary for economic growth.

The economy can’t grow without the supply of money growing. The following graph shows the nearly identical tracks of GDP (blue) and both the broad money supply measure (M3) and a narrower money supply measure (purple).

Federal deficit spending grows the supply of money and, thus, the economy.

**Economic growth (blue) parallels the M2 (purple) money supply measure and the M3 (green) money supply measure.**

If you wonder whether economic growth is necessary, consider that the combination of inflation and population growth requires more money just to break even, making a $0 deficit recessionary.

The reality is that even small, insufficient deficit growth has led lead to inflations, which is demonstrated by the following graph:

**Every recession begins after a period of declining deficits.**

Even when “federal debt” growth is above zero, it can lead to recessions (vertical gray bars) when the rate of growth declines.

Recessions are cured by increases in the “federal debt” growth rate.

When your neighbor claims the “federal debt” and deficit are too high and demands a reduction, here’s what he unknowingly (perhaps) is asking for:

U.S. depressions 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.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.

Every depression in U.S. history has been caused by federal deficit reductions (“Federal debt” is the net total of federal deficits because that is how “federal debt” is wrongly defined.)

Does your neighbor understand that in demanding “debt” cuts, he is demanding a depression? Do you?

If you don’t understand it, I can’t blame you. You’ve received wrong information from all sides, even from trusted sources. Consider this startlingly inaccurate information from Investopedia:

What Is Austerity?

Austerity refers to a set of economic policies a government implements to control public sector debt. Governments put austerity measures in place when their public debt is so large that the risk of default or the inability to service the required payments on its obligations becomes a real possibility.

The U.S. government has the unlimited ability to create U.S. dollars. So, large deficits never have and never will force the U.S. federal government to default.

The only way the government can default is if Congress and the President simply decide not to pay what they owe, for instance, because of the extraordinarily foolish “debt ceiling.”

This misguided event could occur even when deficits are small; the size of deficits is irrelevant to the government’s ability to pay what it owes.

The goal of austerity is to improve a government’s financial health.

Austerity never improves the financial health of a Monetarily Sovereign government, i.e., the U.S. government’s infinite ability to create its sovereign currency.

Austerity always worsens the financial health of an economy. Always.

Default risk can spiral out of control quickly. As an individual, company, or country slips further into debt, lenders will charge a higher rate of return for future loans, making it more difficult for the borrower to raise capital.

Here, Investopedia demonstrates abject ignorance about economics. Individuals and companies are monetarily non-sovereign. The U.S. federal government is Monetarily Sovereign. The two are as different as black and white, and Investopedia doesn’t understand it.

If you and your neighbor are confused, that is the reason. You receive bad information from trusted sources.

Individuals and companies use dollars but do not have the unlimited ability to create dollars. You can run short of dollars. You may need to borrow dollars.

By contrast, the U.S. federal government cannot unintentionally run short of dollars. It has the infinite ability to create dollars. Even if the U.S. government didn’t collect a penny in taxes, it and all its agencies could continue spending forever. Congress and the President merely must vote to make that happen.

Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency. There is nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The United States can pay any debt it has because we can always print the money to do that.”

That is why the Supreme Court, Congress, the White House, the Military, Medicare, and Social Security — all federal agencies — cannot run short of dollars unless Congress and the President want them to.

For the above reasons, the federal government never borrows dollars. It creates, ad hoc, all the dollars it ever needs.

While T-bills, T-notes, and T-bonds include the words “bills,” “notes,” and “bonds” — terms often associated with borrowing — T-securities are not borrowing. They are deposits by depositors into their own accounts.

Imagine putting dollars into your bank safe deposit box. The bank has not borrowed those dollars. It only has provided a storage place to deposit things of value. Those things of value are not federal debt. The government does not owe them to you.

When a T-security reaches maturity, the federal government merely returns your dollars to you. It’s a simple transfer of your dollars from one of your accounts to another of your accounts — from your T-security account to your checking account.

If the federal government wished, it could reduce the “federal debt” to $0 simply by returning all your dollars currently residing in your T-security accounts. This would not be a financial burden on the government.

Finally, interest rates on T-securities are not determined by the private sector. They are set by the Federal Reserve in its attempts to control inflation.

Everywhere you turn, some “expert” wrongly conflates “federal debt” with private debt. It’s as wrong as conflating “giving someone the bird” (handing him a parrot) with the same words meaning “showing your middle finger.”

Federal government finances have nothing in common with personal, business, or state/local government finances.

Perhaps you understand this, and maybe even your neighbor does, too. But why do America’s “experts,” the media, the politicians, and the university economists act so gosh darned ignorant about elementary facts?

I suspect the operative word is “act.” Too many of them have been bribed by the rich, who run America, to make you believe the government can’t afford to give you benefits.

You are told that Social Security, Medicare, Medicaid, and all other social benefit programs must be cut, and your taxes must be increased. It’s all a lie, told to widen the income/wealth/power Gap between the rich and you. This is how the rich grow richer.

Did you know all this? If you do, have you complained to your Senator and Representative? It’s not too late. Or you can simply pay the additional FICA and do with less Medicare and Social Security. It’s what the rich hope, sucker.

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

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The Sole Purpose of Government Is to Improve and Protect the Lives of the People.

MONETARY SOVEREIGNTY

Why is inflation so hard to defeat?

I come from Chicago, and so am, by DNA, a Bears fan.

We Bears fans often ask, “Given that they repeatedly have high draft choices, why are their teams so bad, year after year?” (Cleveland Browns fans can empathize.)

The answer can be stated in two words: Bad leadership. And that also answers the title question, “Why is inflation so hard to defeat?” Bad leadership.

Here are quotes from the Committee for a Responsible Federal Budget (CRFB), which usually parrots the propaganda of the very rich:

Inflation is currently surging at the fastest rate in more than four decades, with the Consumer Price Index (CPI) up 8.2 percent over the past year and Personal Consumption Expenditure (PCE) price index up 6.2.

By comparison, the Federal Reserve (“the Fed”) generally targets 2 percent annual PCE inflation.

In general, the federal government has two types of tools available to fight inflation. Monetary policy, conducted by the Federal Reserve, can raise interest rates.

Or fiscal policy, controlled by the Congress and President, can adjust taxes and spending.

Immediately, they limit possible tools to those that impact the “not-rich” and widen the Gap between the rich and the rest. It’s known as “Gap Psychology,” the human desire to widen the income/wealth/power Gap below you and to narrow it above you.

“Raise Interest Rates” Impacts homebuyers who seek mortgages.

Adjust Taxes: “Adjust” is a disingenuous word for “raise.” When taxes are raised, the rule always includes exceptions and loopholes for the rich, not for the rest of us.

Adjust Spending: Here, “adjust” means “cut.” Deceptively, the CRFB uses one word to mean two opposite things.

When federal spending is cut, benefits to the middle and the poor always suffer. The false “need” to cut spending will be reflected in the Big Lie in economics that Social Security and Medicare are “running short of dollars” and that all aids to the poor, students, renters, etc., are “unaffordable.” Utter nonsense.

Specifically, Congress and the President can use their tools to assist the Federal Reserve in its efforts to fight inflation. Using fiscal policy in this situation can:

Ensure all federal actions are rowing in the same direction;

Reduce recessionary pressures and support stronger economic growth;

Diversify and limit the economic pain from inflation-reducing actions; and

Reduce the budgetary cost of fighting inflation.

The CRFB wants everyone to “row in the same direction.” Lovely words. But it also wants to “support stronger economic growth” and “limit economic pain” while raising taxes and cutting spending.

**What the CRFB means by “rowing in the same direction.”**

It is impossible to support economic growth and limit economic pain while raising federal taxes and cutting federal spending. Absolutely, 100% impossible.

Federal Reserve in fighting inflation. Through deficit-reducing tax and spending changes, they can help temper demand, boost supply, and directly or indirectly lower prices in the economy.

Translation of the above sentence: “By taking dollars out of the economy, they can take dollars from consumers, reduce supply, and drive the economy into a recession.

Congress and the President should act soon to pass legislation that helps fight inflation on all of these fronts.

Key to any legislation will be deficit reduction, which 55 of the nation’s top economists and budget experts recently explained is one tool in helping to ease inflationary pressures.

Translation: “55 of the nation’s top economists say to ease inflation, we must plunge the economy into a recession. (And never mind about stagflation, which we have no idea how to fight.) This is known as “austerity,” which was attempted in the euro nations. [From the Harvard Business Review, September 28, 2018]:

Eurozone governments – especially those in struggling Southern European countries (Spain, Greece, or Portugal) – switched dramatically towards austerity in the years 2010-2014.

Most experts now agree that these policies had such damaging and persistent negative effects on growth that they were self-defeating.

Governments were reducing spending in order to bring their debt levels under control. But GDP fell so much that . . . debt became even less sustainable than before the austerity measures were implemented.

Consider that euro nations are monetarily non-sovereign, like you and me. Their debt is like my debt and yours. We are not Monetarily Sovereign, so we don’t have the unlimited ability to create dollars.

They had to cut debt because the Monetarily Sovereign EU wouldn’t support them. The Monetarily Sovereign U.S. doesn’t and shouldn’t cut “debt” (which isn’t real debt) or deficits, and there is no reason for the U.S. to undergo the horrors of austerity.

But that is exactly what the “55 top economists” recommend.

At a minimum, Congress and the President should stop adding to the deficits, so that fiscal policy is not worsening inflation.

Translation: “At a minimum, Congress and the President should stop adding dollars to the private sector so that a recession is assured.”

In addition to helping contain inflation, thoughtful deficit reduction can also help to grow the economy, reduce geopolitical risks, improve fairness and efficiency of the budget and tax code, and put the national debt on a more sustainable path.

Translation: “In addition to helping cause a recession, mindless deficit reduction can also help to shrink the economy, exacerbate geopolitical risks, have no effect on the fairness and efficiency of the budget and tax code, and put the nation on a path to a recession or depression.

**When federal debt growth (green line) shrinks, we have recessions (vertical gray bars), which are cured by federal debt growth increases.**

Inflation in the United States has been elevated for 22 months and shows few signs of abating.

High inflation originated from a mismatch between total demand and supply in the economy – largely as a result of constraints from the COVID-19 pandemic and an aggressive fiscal and monetary policy response.

Translation: Inflation has been growing because COVID caused reductions in the supply of oil, food, computer chips, shipping, labor, and other goods and services. The resultant scarcities caused prices to rise.

The Federal Reserve has already begun to act, raising interest rates by three percentage points since March of 2022, beginning to shrink its balance sheet, and signaling further tightening – with rates headed toward 4.6 percent by the end of 2023 – until inflation is brought under control.

Translation: The Federal Reserve’s massive interest rate increases have done nothing to increase the supplies of oil, food, etc., so they have done nothing to cure inflation.

Economists believe that monetary policy should play the lead role in stabilizing the economy because of the Federal Reserve’s ability to act quickly and effectively to adjust interest rates, using its technical expertise and political insulation to balance competing priorities.

In this case, the Fed can expeditiously and gradually raise interest rates and shrink its balance sheet – based on real-time data – to encourage savings, discourage large purchases, and reduce wealth-driven consumption.

And as we can see, the Fed’s expeditious and gradual interest rate raise has cured inflation. Oh, it hasn’t because it does nothing to remedy shortages?

Would someone please tell the CRFB and the 55 top economists? And by the way, “Encourage savings, discourage large purchases, and reduce wealth-driven consumption” describes a recession.

Yet even as the Fed is better equipped to bring down inflation, doing so is not without its challenges.

Higher interest rates put upward pressure on the unemployment rate and can also lead to financial instability – especially when rates are increased well above the long-term neutral rate (believed to be 2.5 to 3.0 percent).

Indeed, some recent research suggests the inverse relationship between inflation and unemployment described under the Phillips curve might be particularly strong now, suggesting a high “sacrifice ratio” whereby reductions in inflation require large increases in unemployment.

The CRFB has it all backward. High prices don’t cause unemployment. Unemployment occurs because shortages of goods and services discourage hiring. You don’t hire more people when you can’t produce, ship, or service.

In acting alone to fight inflation, there is a substantial risk and perhaps likelihood the Fed’s actions will spur an economic recession.

Finally, one factual statement from the CRFB. More than a “substantial risk. It borders on certainty.

The Federal Reserve has only a limited set of tools to fight inflation, which work by boosting interest rates.

While generally effective in reducing inflation, higher interest rates can also impose substantial pain on the housing and labor markets, reduce investments that promote long-term growth, and take a long time to affect the economy.

Translation: Replace the word “effective” with “ineffective and economically harmful.” The rest of the sentence is correct.

For these and other reasons, economists and policymakers have long supported supplementing monetary policy with fiscal stimulus to fight recessions.

Elemendorf and Furman, for example, argue policymakers should sometimes use fiscal policy even though monetary policy is superior.

Fiscal stimulus (i.e., federal deficit spending) always (not “sometimes”) is necessary. It should be targeted toward reducing shortages: More federal spending to aid oil exploration and production, to aid and encourage food production, and to encourage hiring.

The first step: The FICA tax should be eliminated, a monumental and useless drag on the economy. The federal government neither needs nor even uses FICA dollars for anything. It destroys them upon receipt.

When FICA dollars are sent to the Treasury, they come from the nation’s M1 money supply measure. But when they reach the Treasury, they cease to be part of any money supply measure. They effectively are destroyed.

There is no measure for the government’s money supply because the government has infinite money.

Specifically, spending increases and tax cuts work to boost demand in the near term, while high levels of projected deficits and debt can boost inflation expectations.

One standard measure of an economy is Gross Domestic Product (GDP). It is a measure of spending. The CRFB admits that federal spending increases will increase GDP.

And what will federal spending decreases do? Right, they will decrease GDP.

“Recession” is a decline in GDP for two or more quarters, and a depression is a decline in GDP for two or more years. Unwittingly, the CRFB and the 55 top economists have admitted recommending a recession or depression as the cure for inflation.

This is especially true if markets believe the government will attempt to inflate away a portion of its debt.

The notion of the federal government inflating away its debt is nonsense on several levels.

I. The federal government’s “debt” is nothing like personal or local government debt. It’s deposits into privately owned T-security accounts, which the government pays off upon maturity simply by returning the dollars.

The government neither uses nor even touches those dollars. You, as a depositor, own them.

The government spends using dollars newly created, ad hoc. The federal government never can run short of its sovereign currency.

II. Inflation does not affect the government’s ability to return the dollars in T-security accounts. Federal interest rate increases affect the number of dollars in those accounts, but the number does not affect the government’s ability to return those dollars.

No matter how large the “debt” (that isn’t a debt), the government just returns the dollars. It’s like a safe deposit box. No matter the value, the contents belong to you, and the Bank simply returns them.

III. The CRFB’s comments demonstrate their confusion between federal (Monetarily Sovereign) debt vs. state government and personal (monetarily non–sovereign) debt.

It’s the classic case of using one word with two unrelated meanings.

Personal debt comes from borrowing, wherein the borrower needs the dollars for some use. Federal “debt” comes from the federal government’s desire to stabilize the dollar by providing a safe haven for unused dollars.

The government neither needs nor uses those dollars. It has the unlimited ability to create dollars for any purpose.

Contrary to popular myth, the U.S. federal government never borrows U.S. dollars. Same reason: It has the infinite ability to create new dollars. Additionally, those T-security accounts help the government control interest rates.

Sadly, the CRFB either doesn’t understand economics or deliberately misleads its readers on behalf of the rich. Their hope might be to discourage the “not-rich” from asking for benefits, thereby increasing the Gap and making the rich comparatively more affluent.

Enacting deficit reduction during a period of high inflation can also help to reassure markets that elected officials are committed to responsible policy and won’t attempt to undermine Federal Reserve tightening in the future should inflation persist.

What can one say about the above nonsense? Deficit reduction (aka subtracting dollars from the economy) during high inflation will assure the markets that elected officials are committed to causing a recession or a depression.

While higher interest rates help to fight inflation, they also increase the risk of a recession by weakening labor markets and threatening financial stability.High interest rates also discourage personal and business investment, which in turn slows long-term income and economic growth.

Right, CRFB, except for the false “help fight inflation” part. But what happened to the CRFB’s “row in the same direction” philosophy?

Following their warning about the risk of recession, the CRFB published many word-salad paragraphs that could be summarized thus: “We should increase deficit spending without increasing deficit spending” and do all that to “stimulate the economy without stimulating the economy.”

Got it?

Of course, they had to finish with the Big Lie in economics that the federal government’s spending is constrained by tax income. Like the Bank in a Monopoly game, the federal government doesn’t need tax dollars. It can create all the new dollars it needs.

Even if all tax collections totaled $0, the federal government could continue spending forever.

Given the risks and threats from deficits and debt, substantial deficit reduction is needed even absent high inflation.

Surging prices makes deficit reduction more necessary and urgent while dramatically reducing any macroeconomic risks associated with near-term deficit reduction.

Wha? Surging prices . . . reduce risks of near-term recession?? Where did that idea come from?

Broke Sam Stock Illustration - Download Image Now - American Culture, Bankruptcy, Cartoon - iStock — **The lie they want you to believe.**

It’s almost as wrong-headed as their final paragraph:

Rather than continuing to enact policies that increase deficits and worsen inflationary pressures, Congress and the President should act swiftly to enact deficit-reducing legislation that would help the Federal Reserve fight inflation today, while putting the national debt on a more sustainable path for years to come.

So there it is folks. Allowing the world to deposit dollars into T-security accounts is not sustainable because . . . well, no one knows why.

It’s just what the rich want you to believe, so you will be docile and obedient when they tell you they have to cut Social Security, Medicare, ACA, aid to students, assistance to the poor, and, oh yes, raise your taxes.

The rich become more prosperous by widening the Gap between the rich and the poor.

Why is inflation so hard to defeat? We Bear fans understand the concept perfectly. Bad leadership.

Rodger Malcolm Mitchell

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

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The Sole Purpose of Government Is to Improve and Protect the Lives of the People.

MONETARY SOVEREIGNTY

Why you should contact Steve Chapman

There are important reasons why you should contact Steve Chapman. Let me explain.

Monetary Sovereignty is not a difficult concept. It simply says that the federal government, having created the first U.S. dollars from thin air, continues to have the power to keep creating U.S. dollars from thin air.

You are not Monetarily Sovereign, nor am I. Nor is your city, your county, your state, or your business.

We all can run short of dollars. Even Jeff Bezos and Bill Gates can run short of dollars. The U.S. government cannot run short. Unless it wants to.

Even if the U.S. government didn’t collect a single dollar in taxes, it could continue spending forever.

Some countries are not Monetarily Sovereign. The euro nations are not. They did not create the euro; they merely use it. But the European Union, which did create the euro, is Monetarily Sovereign. Bernanke quote.png

Obviously, there are a lot of other pieces to Monetary Sovereignty, but that is the essence: The U.S. federal government’s infinite ability to create U.S. dollars. Simple. Straightforward. Direct. The U.S. government, being Monetarily Sovereign, can create U.S. dollars endlessly.

You might think that anyone writing about or discussing economics would at the very least, understand that simple “1 + 1 + 2” concept. And yet . . .

I’ve spent more than 20 years trying to teach Monetary Sovereignty to anyone who will listen, and even now I am amazed at the brutal, stone-headed resistance.

Much of it is intentional, because drill down through the facts of Monetary Sovereignty, you discover some things the rich, opinion leaders don’t like — for instance a narrowing of the financial Gap between the rich and the rest.

But some of it is just . . . how can I say this kindly? . . . just plain mental blindness.

During my 20+ years mission, I’ve come across some truly wrong, misleading, and downright misguided articles, but today I found one that must be in the top 3. St louis fed quote.png

It was written by a man who is not stupid; I’ve read other of his articles and found them to be enlightening. But this one is, as the kids like to say, awesome — in how wrong it is!

No, this is not the time for fiscal restraint By Steve Chapman

Steve Chapman is a columnist and editorial writer for the Chicago Tribune. His twice-weekly column on national and international affairs, distributed by Creators Syndicate, appears in some 50 papers across the country. Chapman has been a member of the Tribune editorial board since 1981. A native Texan, he has a bachelor’s degree from Harvard.
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Fiscal discipline was once a durable American practice. But in the 1940s, it went out the window. The federal government embarked on a sudden, unprecedented binge of borrowing that put the nation in hock up to its ears.

WRONG: The U.S. federal government does not borrow. Having the unlimited ability to create dollars, why would it?

What erroneously is termed “borrowing” actually is the acceptance of deposits into Treasury Security accounts (T-bill, T-note, T-bond). When you invest in a T-security, you deposit U.S. dollars into your T-security account.

There your dollars remain, gathering interest, until the account matures, at which time the government returns the dollars in your account. The government never uses those dollars or removes them from your account.

The purposes of issuing T-securities are:

To provide a safe place for unused cash, which stabilizes the U.S. dollar
To assist the Fed in controlling interest rates, which helps control inflation.

The government does not issue T-securities to obtain dollars.

From 1940 to 1945, federal spending rose tenfold. The national debt increased sixfold. The public would have to shoulder the burden of paying down that debt for decades to come.

WRONG: The public has not shouldered, and will not shoulder any burden from the so-called, misnamed “debt.”

First, it’s not “debt” in the usual sense. It’s deposits, and the deposits are NOT paid back with taxes. The “debt” (deposits) are paid off merely by returning the dollars that exist in the T-security accounts.

Second, federal taxes do not fund any federal spending. In fact, all federal taxes (unlike state and local government taxes) are destroyed upon receipt.

When the federal government pays a creditor, it creates new dollars, ad hoc. The process is this:

Upon approving an invoice for payment, the government sends instructions (checks or wires) to the creditor’s bank, instructing the bank to increase the balance in the creditor’s checking account.

At the instant the creditor’s bank does as instructed, new dollars are created and added to the nation’s money supply (M1). This is the federal government’s method for creating dollars. No taxes involved. No burden on anyone.

There was, however, a good excuse for this gross budgetary excess: World War II. For a government, as with a person, there is usually no difference between being frugal and being wise.

But when the nation’s survival is at stake, the risks of underspending are far greater than the risks of overspending.

With the phrase “as with a person,” Chapman reveals abject ignorance of economics, for he equates federal (Monetarily Sovereign) finances with personal (monetarily non-sovereign) finances.

Further, he alludes to “gross budgetary excess,” which may be appropriate to individuals, states, and businesses, but is completely irrelevant to the federal government, which has the unlimited ability to create its own sovereign currency.

Finally, Chapman refers to WWII as needing “overspending” but does not mention any adverse effect from the so-called “budget excess.”

US GDP-Components from 1929 to 2011 — The vertical gray bars show total GDP (right scale). The other lines show *% of GDP (left scale)*. The black dotted line is government spending. The blue dotted line is personal consumption.

In fact, increased federal spending created a dramatic increase in GDP.

A similar imperative exists today, as the new coronavirus endangers lives and causes economic disruption on a scale not seen since — well, since World War II.

Last year, the federal budget deficit soared to nearly $1 trillion , at a time of sustained economic growth and prosperity. It was an atrocious figure, representing the latest fiscal failure by our political leaders.

Chapman does not understand that the “sustained economic growth and prosperity” was a direct result of the federal budget deficit growth.

Deficits pump dollars into the economy, and GDP (the usual measure of economic growth) is a dollar measure.

GDP = Federal Spending + Non-federal Spending + Net Exports

Thus, it makes absolutely no mathematical sense to decry federal deficits while also treasuring GDP growth.

And, in fact, the “economic disruption” demands deficit spending far in excess of the $2 trillion measure recently passed. A spending measure of at least $7 trillion would have prevented the coming recession.

But the spending package forged by Congress and the president to address the fallout of the pandemic will add up to more than double that amount, pushing overall spending to levels never imagined just weeks ago.

The rescue plan is probably only the first of a series of huge spending bills meant to reduce the devastation from a locked-down economy.

Here, Chapman really doesn’t get it. He correctly indicates that “huge spending bills” “reduce the devastation from a locked-down economy.”

Amazingly, he doesn’t understand why that is true.

Of course, the reason is that money grows the economy and federal spending pumps money into the economy. Chapman wants the economy to grow from a “locked-down” position, but he doesn’t seem to want it to grow from a “non-locked-down” situation.

Puzzling.

For more years than I care to remember, under presidents of both parties, I have been a consistent voice — OK, an insufferable scold — on the need for the government to be thrifty and responsible in its budget policy.

I have stressed the importance of living within our means, paying the full cost of what we demand of our government and not piling needless obligations on future generations.

There are many good moments for fiscal restraint. This is not one of them.

He has been insufferable because his scolding has been based on economic ignorance.

The Monetarily Sovereign government has no “means” to live within. It has the infinite ability to pay any bills of any size, instantly.

And with regard to “paying the full cost of what we demand,” Chapman is referring to a balanced budget, or as it alternatively is known, “austerity.”

Here is what austerity looks like:

Vertical gray bars are recessions which begin when federal deficit spending (red line) declines, and are cured by increases in federal deficit spending.

And, if Mr. Chapman prefers federal surpluses (economic deficits), he should look at this:

Every U.S. depression has 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.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.

Today, we face enormous dangers. One is that millions of Americans thrown out of work or otherwise deprived of income will be unable to pay their bills, put food on the table or keep their homes.

Refusing to help them through this crisis, which came about for reasons beyond their control, would exact a horrific human toll.

It would also create general chaos that would stymie economic recovery for months, if not years.

Likewise with businesses. In the absence of prompt federal aid, a wave of bankruptcies could wipe out companies that were healthy and profitable before — and have every prospect of being healthy and profitable afterward.

The businesses would be gone, and so would the jobs they provided. People and companies desperately need a bridge across this troubled water.

In Mr. Chapman’s world, apparently the government should wait until “millions of Americans are thrown out of work or otherwise deprived of income, will be unable to pay their bills, put food on the table or keep their homes” before adding dollars to the economy.

He opposes deficit spending to, for instance, institute the Ten Steps to Prosperity (below), grow the economy and/or narrow the Gap between the rich and the rest

Yes, the necessary measures will be shockingly expensive. Yes, they will have to be paid for with borrowed funds. Yes, they will enlarge a national debt that was already in the neighborhood of $24 trillion.

WRONG. They will not be paid for with borrowed funds. But yes, the so-called national debt — which since 1940 has increased 60,000% (from $40 billion to $24 trillion) while the economy has grown massively — will continue to grow.

And further growth in the “debt” will mathematically be necessary for future economic growth.

How could we afford all this new debt?

Through the robust revenue-generating economic activity that will resume if we successfully navigate the crisis. The larger debt burden will be easier to bear in the long run than a smaller debt would be if we let a brief, severe downturn become a prolonged depression.

Mr. Chapman continues to demonstrate ignorance of the differences between federal financing and personal financing.

The federal government can “afford” any debt, simply by creating dollars. That is the way it pays all its debts.

It neither needs, nor uses “revenue-generating economic activity.” Federal taxes do not fund federal spending.

Debts have to repaid with dollars, and dollars are something the Federal Reserve can create in any quantity needed.

The worst case is that we will have to endure an eventual spell of inflation, which would be far preferable to an immediate and total economic collapse.

And there it is, the inevitable, but wrong, “The government always can print money, BUT this would cause inflation.” Again and again, we hear this from the economically ignorant, but NEVER do we see the evidence to back it up.

Here is evidence to the contrary. It is an article titled, Only 450 words answer the question, “Does printing money cause inflation?”

It contains graphs showing that inflation is caused by shortages, especially shortages of food and/or energy:

Graph I Changes in the money supply M3 are NOT predictive of changes in prices (red).
Graph II Changes in the price of oil (which closely reflect supply changes) ARE predictive of inflation.
Graph III Food and energy inflation IS predictive of overall inflation.

After you look at those graphs, look at this one:

While federal deficit spending has risen dramatically (blue line) inflation (red line) has risen moderately, within the Fed’s target range.

Historically, the scarcity of food and/or oil has been the driver of inflation and hyperinflation. See: The Hyperinflation Myth Explained.

In most cases, our politicians deserve condemnation for spending money with wild abandon. In this moment, it’s the best thing they can do.

Steve Chapman, a member of the Tribune Editorial Board, blogs at http://www.chicagotribune.com/chapman .
schapman@chicagotribune.com
Twitter @SteveChapman13

Steve Chapman is widely read and influential. I urge you to contact him with the facts. Perhaps if he receives enough pokes, he may pay attention.

We desperately need more people of influence to spread the word, or we will have more recessions and wider Gaps between the rich and the rest.

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

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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:

1. Eliminate FICA

2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually.

8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. 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.

MONETARY SOVEREIGNTY

Inflation: The causes and cures

In one sense, inflations (and hyperinflations) must be complex, not only because so many nations have suffered from them and not known what to do, but because so many events can cause inflations.

But in another sense, many nations have figured out how to prevent and cure inflations, and the causes can be boiled down to just two. This post reveals the two causes of, and the two best cures for, inflation.

Inflation does not exist in a vacuum. It is a change in the relationship between the value of a currency and the average value of goods and services. In short, the value of the currency declines relative to the value of the goods and services.

Image result for hyperinflation germany wheelbarrow — Classic example of hyperinflation — wheelbarrow of money.

Popular wisdom holds that government deficit spending or “money creation” causes inflation. Many examples of inflation, particularly hyperinflation (an extreme form of inflation) do seem to correspond with money creation.

Weimar Republic (Germany) and Zimbabwe are perhaps the most cited examples.

Yet, in the U.S., the money supply has increased markedly with only moderate inflation.

The following graph shows indexes of three money measures, M1 (green), M2 (red), and M3 (blue), along with the consumer price index measure of inflation (purple). All indexes are based on January 1980 = 100.

While all three money measures have risen substantially, inflation has been comparatively modest, and within the Fed’s target of 2.5% annually. Why?

Here is another graph comparing the rise of federal debt (total of T-security accounts) with the consumer price index:

Federal debt grew massively while inflation remained moderate.

Again, there seems to be scant relationship between federal debt growth and inflation.

It would be difficult to look at these data and conclude that federal deficit spending (i.e. money creation) causes inflation. In fact, money creation seems to be a government’s response to inflation, not the cause.

Where does that leave us?

Inflation is based on the value of goods and service vs. the value of a currency. The value of goods and services is based on Demand/Supply. The value of a currency also is based on Demand/Supply.

The formula for the value of goods and services (Demand/Supply) is driven mostly by changes in the Supply side of the fraction. When food or energy are in short supply, inflation is inevitable. The Demand for food and oil (today’s stand-in for energy) is far less variable.

In the formula for the value of dollars, Demand/Supply, both Demand and Supply can be quite variable. The Demand for currency is based on Reward/Risk. The Reward for owning dollars is interest. The Risk would be the reduced “full faith and credit” of the issuer.

Because the full faith and credit of the U.S. essentially is perfect, Risk is not an important variable here.

This means that inflation comes when the Reward for owning dollars (interest) declines and/or the Supply of food and/or energy declines.

A larger economy has more money than does a smaller economy. For instance, California has a larger economy and more money than does Los Angeles. Therefore, to grow an economy requires growing the money Supply.

That indicates that trying to fight inflation by limiting the money supply (aka austerity), via reduced deficit spending and/or increased taxation, will lead to recession or depression.

Annual % change in Federal Debt shows that reductions lead to recessions (vertical bars), and increases cure recessions.

As for surpluses (i.e. extreme deficit reductions), they lead to depressions (i.e. extreme recessions):

1804-1812: U. S. Federal Debt reduced by 48%. Depression began in 1807.
1817-1821: U. S. Federal Debt reduced by 29%. Depression began in 1819.
1823-1836: U. S. Federal Debt reduced by 99%. Depression began in 1837.
1852-1857: U. S. Federal Debt reduced by 59%. Depression began in 1857.
1867-1873: U. S. Federal Debt reduced by 27%. Depression began in 1873.
1880-1893: U. S. Federal Debt reduced by 57%. Depression began in 1893.
1920-1930: U. S. Federal Debt reduced by 36%. Depression began in 1929.
1997-2001: U. S. Federal Debt reduced by 15%. A recession began in 2001.

Bottom line: Inflation devolves to two variables: The supply of food and/or energy and interest rates.

The prevention and cure for inflation is to make sure the Supply of goods and services (usually food or energy ) is adequate, and the Reward for owning dollars (interest), remains adequate.

Example: Zimbabwe’s hyperinflation began when its leader, Robert Mugabe stole farm land from white farmers and gave it to black people who had no experience farming.

The resultant food shortage caused inflation. Then, Mugabe’s response was to print currency, which did nothing to solve the fundamental shortage problem. And as the inflation worsened, more and more useless currency printing followed, and it was the currency printing that wrongly was blamed for the inflation.

It was as though someone prescribed wine to cure a cancer. As the cancer progressed, more and more wine was prescribed until the patient died, and the wine was blamed as the cause of the cancer.

In short, to prevent inflation don’t cut federal deficit spending. Rather, make sure the economy has plenty of food and energy and high enough interest rates.

And so, to cure an existing inflation, you must increase your supply of food and energy, and/or increase interest rates.

Printing more currency is an ineffective inflation cure, as is cutting deficit spending (aka “austerity.) Both exacerbate inflation and lead to recessions and depressions. Instituting austerity to grow an economy is like applying leeches to cure anemia.

What should a Monetarily Sovereign country do about inflation? Here are the best steps to take:

Increase interest rates to make the currency more valuable. This is the method the Fed uses to control inflation.
Support farmers by cutting farm taxes, passing farm support bills, support farm research to increase crop yields.
Support energy creation: Oil drilling, renewable energy.

Do not blame federal deficit spending for causing future inflations
Do not begin austerity (reduced deficit spending, increased taxation)
Do not print additional currency.
Do not borrow a foreign currency

What about monetarily non-sovereign nations like the euro countries, which do not have a sovereign currency?

If the EU cannot be convinced to prevent and cure inflations, while supporting economic growth, euro nations must re-establish their own currencies, and become Monetarily Sovereign, again.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereigntyFacebook: Rodger Malcolm Mitchell

The most important problems in economics involve the excessive income/wealth/power Gaps between the richer and the poorer.

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

Ten Steps To Prosperity:

1. Eliminate FICA

2. Federally funded medicare — parts a, b & d, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually.

8. Tax the very rich (the “.1%) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. 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 Gaps between the rich and you.

MONETARY SOVEREIGNTY

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