This is the masthead for the online Libertarian magazine, Reason.
These folks boast about having “free minds,” which one might assume means they are open to learning and not locked into a rigid belief.
Sure, they are.
I find it ironic that perhaps the most stone-headed political-economics group in America could claim freedom of mind.
These are anarchists in thin disguise who have no idea how federal financing works, and day after day, they publish proofs of their determined ignorance.
Here is just one of a seemingly endless supply of misinformation and disinformation from the “free minds.”
Rand Paul Asked Senators To Balance the Budget. Only 28 Agreed. Rising interest rates will only make it harder to balance the budget in future years. Eric Boehm
Right off the top, we encounter ignorance. Rand Paul is a hopeless purveyor of nonsense, while Boehm and his fellow Libertarians are clueless about the differences between federal financing vs. state & local government financing, business financing, and personal financing.
The federal government is the creator of the dollar, which is why knowledgeable people say things like this:
Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency.”
Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
Former Fed Chairman Ben Bernanke when he was on 60 Minutes: Scott Pelley: Is that tax money that the Fed is spending? Ben Bernanke: It’s not tax money… We simply use the computer to mark up the size of the account.
Statement from the St. Louis Fed: “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.”
The federal government “cannot become insolvent,” can “produce as many U.S. dollars as it wishes,” does not spend tax money or any other form of income, and does not borrow (i.e., “depend on credit markets”).
In short, the federal government uniquely is Monetarily Sovereign. All the others mentioned above are monetarily non-sovereign.You and I can become insolvent. You and I cannot produce dollars at will. We do rely on income. And we do borrow. Vast difference that Paul, Boehm and the Libertarians don’t seem to get.
The Libertarians essentially think the sun and the moon are the same because, hey, they both are in the sky, aren’t they.
Boehm’s mind seemingly is closed to the fundamental difference between Monetary Sovereignty and monetary non-sovereignty. So he wants to balance the budget as though the federal government was just like you and me.
Here is what happens when the government simply reduces deficit spending growth (not even going so far as to balance the budget; just reduce the growth).
We have recessions when the federal deficits increase less than the previous year. Those recessions are cured when federal deficits increase more than the previous year.
The graph shows deficits increase almost yearly, but we have recessions when they don’t grow enough. Now let’s take a closer look at what happens during those rare times when the federal government runs a surplus.
Here are more historical data showing what happens when the federal government runs 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.
Paul Rand, Eric Boehm, all the Libertarians, and many others do not understand a simple mathematical truth: A growing economy requires a growing supply of money.
A standard measure of the economy is Gross Domestic Product (GDP) which consists of Federal Spending + Non-federal Spending – Net Imports.
GDP can increase only if the net total of those three money measures increases. That’s arithmetic. Further, because Net Exports usually decrease, the burden is on Federal Spending to increase enough to overcome that money loss.
Thus, simple arithmetic demonstrates that for real GDP to grow, the money supply must grow and that money supply growth relies on federal deficits to exceed Imports and inflation.
That is why a balanced budget or a surplus invariably leads to recessions and depressions.
Continuing with the Reason article:
As he pitched his Senate colleagues on a plan to balance the federal budget in 2018, Sen. Rand Paul (R–Ky.) warned that rising inflation would be one of the consequences of a failure to bring deficit spending under control.
Wrong. There is no relationship between deficit spending and inflation.
But, changes in oil prices (green) do parallel inflation (red). Inflation is caused by critical goods and services shortages, generally energy and specifically oil.
Oil price changes are closely related to changes in oil supply, which is determined by changes in oil production.
Here is a graph of total world energy production:
Here is the data in millions of barrels:
As the world’s economies began to recover from COVID-19’s reduced oil usage, renewed oil production did not keep pace. This lack of oil production, not low-interest rates or “excessive spending,” caused today’s inflation.
Today’s critical shortages are food, housing, computer chips, shipping, baby formula, lumber, labor, and other goods. Today’s shortages are not caused by increased demand. Mothers did not suddenly begin to demand more baby formula. The number of people needing shelter did not mysteriously increase.
As with most ailments, you must fix the cause to cure the symptom. Shortages are the cause; inflation is the symptom.
To cure inflation, we must cure the shortages.
Reduced availability of goods and services primarily was due to COVID, global warming, and the Russia – Ukraine war. That is what caused the shortages.
Starving the economy of money, which Paul, Boehm, and the rest of the Libertarians wish to do, does not reduce shortages of oil and other vital goods. Neither does increasing interest rates.
Shortage-caused inflations can be cured only by treating the shortages.
This can be accomplished counterintuitively by increased government spending to improve the cost-availability of scarce goods and services.
At the time, Paul was pushing a bill that would have required a spending cut equal to one penny out of every dollar in the federal budget.
The so-called “Penny Plan” would have balanced the federal budget by 2023, Paul claimed at the time, without requiring serious cuts to any specific programs.
Paul exerted senatorial privilege to force a vote on the package; it failed 21–76.
Taking dollars out of the private sector accomplishes only one thing: Recession if we are lucky, depression if we are not.
Had Paul succeeded, we would have experienced a deep recession or a depression, together with inflation which would have been exacerbated by the Fed’s interest rate cuts.
That was before the federal government borrowed trillions of dollars in the name of combatting the COVID-19 pandemic.
Here again, Boehm reveals his ignorance of federal finance. The U.S. federal government never borrows dollars.
Think, Mr. Boehm: Why would an entity having the unlimited ability to create dollars ever borrow them? It wouldn’t, and it doesn’t.
Boehm is confused by the misleading word, “debt.” He assumes that T-bills, notes, and bonds are loans. They are not. Nor are they owed by the federal government.
T-bills, notes, and bonds are deposits into privately-owned accounts at the Federal Reserve. If you ever bought a T-bill, you owned such an account, which was similar to a safe-deposit box. You put your dollars into your own account. You did not give them to the government.
As with a safe-deposit box, the federal government never used the dollars in your T-security account. To pay you off, the federal government merely returns your dollars to you. No taxes or government dollars are involved.
It simply is a money transfer, similar to transferring dollars from your safe-deposit box to your checking account.
(Unlike borrowing, the purpose of T-securities is not to provide spending money for the government. T-securities provide a safe, interest-paying parking place for unused dollars. That’s why China et al has them. This helps the Fed stabilize the dollar.)
It was before President Joe Biden’s $1 trillion infrastructure package. It was before four more years of bulging federal budgets authorized by a Congress that’s increasingly blithe about borrowing.
“Bulging,” “blithe,” and “borrowing” are words meant to frighten or anger the innocent, but they only reveal ignorance. The budgets do not “bulge.” Congress is not “blithe.” And the government does not “borrow.”
In October 1971, in the greatest act of his administration, Richard Nixon took us off the last gold standard, thus freeing Congress to spend stimulus dollars, which no longer were limited by gold reserves.
With inflation now running seemingly out of control and trillion-dollar deficits being the new norm in Washington, Paul was back on the Senate floor Wednesday to offer another bill to balance the budget in five years.
This time around, however, it would require cutting six cents for every budgetary dollar.
The proposal failed, 29–67.
Thank goodness. Had it succeeded, we would have slipped into a severe depression. We still may if we rely on interest rate increases to cure inflation.
“Washington’s addiction to spending is hurting our economy and depleting our currency. Inflation is stealing every American’s purchasing power and financial security,” Paul said in a statement after the vote.
Paul should have said, “Washington’s spending adds growth dollars to the economy, without which the U.S. would suffer a depression. Spending does not cause inflation. Shortages do. Spending cures inflation when it cures shortages.”
“All this plan does is return to 2019 spending levels. If the federal government spent at 2019 levels this year, we would have a $388 billion surplus.”
That $388 billion federal surplus would have been a $388 billion deficit for the economy.
We have seen what results from federal surpluses. No knowledgeable person takes dollars from the economy and gives them to a federal government that has the infinite ability to create dollars.
The purpose of federal taxes is not to provide the government with spending money. Unlike state and local taxes, which remain in the economy, federal tax dollars are destroyed upon receipt.
They cease to be part of the private sector (aka “the economy”) and disappear into the federal government’s infinite supply of dollars. Add anything to infinity and it remains infinity.
The purpose of federal taxes is to help the government control the economy by rewarding what the government wishes to encourage and by penalizing what the government wishes to discourage.
Indeed, about the only thing that’s changed in the four years since Paul offered the Penny Plan is the size of the numbers involved.
America has piled up an incredible $11 trillion of debt since 2018—that’s more than one-third of the nation’s total credit card bill—as annual budget deficits surged even before emergency pandemic borrowing blew them through the roof.
More non-scientific street language from Boehm, who has yet to provide actual data to prove his point. Why? No data exists to demonstrate that deficit spending causes inflation or harms the economy in any way.
President Donald Trump oversaw an expansion of debt-fueled government spending during his term in office, and Biden has followed suit.
In his first year in office, Biden has added $2.4 trillion to the nation’s long-term deficit—despite the White House’s best efforts to hide that fact.
The White House would not hide adding growth dollars to the economy. It wanted to add even more growth dollars, with its “Build Back Better” proposal but was stymied by a GOP that feared BBB would grow the economy, reduce shortages, eliminate inflation, and assure Biden of a second term.
In the face of this unsustainable fiscal situation, an across-the-board cut of six pennies per every dollar to balance the budget seems like a pretty good deal.
“Unsustainable” is the favorite nonsense word of the budget cutters. That and “ticking time bomb” substitute for data. The “debt” has grown from $400 Billion in 1940 to $30 trillion today, and the government still is “sustaining.” No federal check has bounced.
And what would have been cut? Social Security, Medicare and other benefits for the middle- and lower-income groups.
And things are rapidly spiraling. The Federal Reserve announced a 0.75 percent interest rate hike on Wednesday, just hours before Paul presented his budget plan on the Senate floor.
Those higher interest rates will rebound into the federal budget in the form of higher interest payments on the national debt.
Under the Congressional Budget Office’s (CBO) latest budgetary baseline, interest payments on the debt are expected to triple between now and 2032.
If federal interest payments triple, the economy will receive triple stimulus dollars. Our Monetarily Sovereign government can afford it and our economy can use it.
If interest rates climb higher than the CBO expects, however, the federal government could be paying trillions more simply to finance government spending that already occurred.
Those trillions that Boehm fears actually will be stimulus dollars pumped into the private sector. Growth for the economy; easily affordable for our Monetarily Sovereign government.
Obviously, that will make any future attempt at balancing the budget an even more difficult task.
That’s good news.
The opportunity to balance the budget by cutting a mere penny out of every dollar of federal spending has come and gone. After Wednesday’s vote, the Six Penny Plan’s days are likely numbered too.
That’s even better news.
In Summary, the Pauls and the Boehms of the world do not know (or pretend not to know) the fundamental difference between a money creator and a money user, i.e. the Monetarily Sovereign U. S. government vs. monetarily non-sovereign everyone else who spends and accepts U.S. dollars.
Monetary Sovereignty is the basis for all of economics. Those who don’t understand it simply do not understand economics.
Money is the lifeblood of an economy. The budget-cutters remind one of the quack doctors who apply leeches to cure anemia, thus killing the patient.
Paul and Boehm wish to apply leeches to the economy, starving it of its money lifeblood. That is what ignorance can do.
Rodger Malcolm Mitchell
Twitter: @rodgermitchell Search #monetarysovereignty
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.