Tag: cause inflation

–Japan: Debt/GDP = 218%. So?

An alternative to popular faith

In a previous post, I told you the Federal Debt/GDP ratio was an apples/oranges statistic, often quoted, but completely meaningless. (See: Debt/GDP). According to debt hawks and old-line economists, a high ratio portends inflation, recession and any number of other terrible economic outcomes. Of course, there is no evidence for this; it’s just popular faith unsupported by facts.

Read this article:

Associated Press; 6/22/10: TOKYO – “Japan’s economy, the world’s second largest, will expand at a faster pace in the current fiscal year than previously forecast as robust exports to Asia and improving corporate earnings are underpinning a broadening recovery.

“The Cabinet Office said Tuesday that Japan’s gross domestic product will rise 2.6 percent in the year to March 2011. “The upward projection was due to brisk growth in exports, especially to Asia. The forecast was also upbeat thanks to a recovery in capital spending and improving corporate earnings,” said Takashi Hanagaki, an official from the Cabinet Office.

“Earlier in the month, Japan upgraded its economic growth in the January-March quarter to an annualized pace of 5 percent from 4.9 percent in a preliminary report. But the encouraging figures, including Tuesday’s upward GDP revision, are tempered by persistent deflation and other negatives, including a lackluster labor market.

“Japan is also one of the most indebted countries in the world. Its public debt reached 218.6 percent of GDP last year, according to the International Monetary Fund.”

So here is Japan, with its 218% Debt/GDP ratio. It’s growth is anywhere between 2.6% and 5%. It’s large national debt has not caused the inflation debt hawks predict. On the contrary, Japan is fighting deflation. Further, the large national debt has not taken the place of capital spending as debt hawks also predict, but actually has facilitated capital spending as well as earnings.

Those are the facts, all of which will be disregarded by the debt hawks, the traditional economists and the media, who just know in their hearts that debt is bad, facts be damned. In fact, the AP article ended with this amazing sentence:

“Tackling the ballooning national debt is among most pressing tasks for Japan’s new Prime Minster Naoto Kan.”

Wrong. And that is why economics is a religion, not a science.

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

— Let’s blame China

An alternative to popular faith

Here we go, again. The typical beggar-thy-neighbor approach to international trade.

————————————————————————————-
6/10/10: By David Lawder; WASHINGTON (Reuters) – Treasury Secretary Timothy Geithner said on Thursday that reform of China’s exchange rate is “critically important” to the U.S. and global economies and a more flexible yuan was in China’s interest.
[…]
In his testimony, Geithner said the Obama administration wanted China to change policies that disadvantage American companies and to provide a more level playing field for U.S. products and investments. He vowed the administration would “apply forcefully” all remedies available under U.S. law to curb China’s unfair trade practices, including anti-dumping and countervailing duty complaints.
[…]
“A stronger yuan would benefit China because it would boost the purchasing power of households and encourage firms to shift production for domestic demand, rather than for export,” he said. “[…]which is particularly important now, with China’s economy facing a risk of inflation in goods and in asset prices.”
————————————————————————————-

Think of it this way. When two nations each have the unlimited ability to create money, which nation benefits from a positive balance of trade? That is, which nation benefits when one sends more of its goods and services to the other?

In CHINA TRADE we saw that the nation exporting fewer resources (i.e. exporting more, easily created money), has the advantage. The Obama administration seems to believe international trade is a zero-sum game, where for every “winner” (net goods and services exporter) there is a “loser” (net goods and services importer). So in their minds, for the U.S. to be a winner, we must make sure there are enough nations that are losers – as I said, the beggar thy neighbor approach to international trade.

The technical truth is, the U.S. could we wealthy without exporting a single dollar’s worth of goods and services. Visualize that our exports were zero and the U.S. government were the sole “export” customer. Rather than exporting steel, sausage and services, the government would buy all this output. No, don’t get excited. I don’t suggest we stop exporting. I’m just trying to demonstrate a point.

Could the government afford it? Yes, the government has the unlimited ability to create the money to afford anything. Would our industries suffer? No, they would receive the same money as if they actually had exported. Would this increase the money supply to inflationary levels? No, the total money within the economy would be the same as if it had come in from other nations.

Yes, we’d have to solve the problem of what we do with all the goods and services we produce (Create new industries for this purpose??), but the U.S. literally could survive and prosper with no exports at all – as though it were the only nation on earth.

The Obama administration merely has set up China as a straw man, to take the blame for our economy’s failure to grow as fast as it should. But, the real blame should go to the debt hawk belief that federal deficit spending should be minimized. For years, our stimulus efforts have been too-little, too-late, and even today, while growth is painfully slow, and millions are out of work, there is more concern about so-called debt (i.e. money created) than about economic success.

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

No nation can tax itself into prosperity

–David Malpass: Less money = more money

An alternative to popular faith

On May 26, 2010, the Wall Street Journal published an article by David Malpass*, which began : ”When Ronald Reagan became president, the world had too much inflation, i.e. too much money chasing too few goods. Economists argued for higher taxes to sop up extra demand. Instead Reagan chose to cut tax rates to encourage more output and pursued an strong dollar policy. The result was more goods and better balance between the supply and demand for the dollar. The malaise ended 18 months into his administration, with inflation declining gradually for nearly 20 years. We now face a different, equally severe problem – too much government spending and debt.”

See anything wrong with this? Forget, for a moment, the inaccurate definition of inflation (“Too much . . . too little . . .” See: INFLATION ) and think about the overall substance of the paragraph. He begins at the right place (Cutting tax rates) and ends at the right place (encourages more output), but wanders aimlessly and illogically in between.

First, there is no way cutting tax rates can end inflation, simply because cutting tax rates increases the supply of money, and increasing the money supply never has been considered disinflationary by any economist. However, because cutting tax rates increased the money supply, this did encourage output. So, all right, Malpass may have been a bit confused, but at least he arrived at the right conclusion. More money = more production.

But then, in the article, he wanders off again, claiming: “[…] too much government spending and debt.” Huh? After WWII, the Reagan administration began the greatest debt growth in U.S. history, and it was this debt growth that created the mighty engine of economic growth in the 1980’s.

Malpass spends the rest of his article decrying the federal deficit and debt he helped create (“nosebleed levels,” “debt the size of the Grand Canyon”), and even throws in a couple of non sequiturs about bill length (“health care reform . . . a whopping 2,700 pages,” “financial reform . . . 2,000 pages”), while as usual with debt hawks, not providing any evidence whatsoever that federal debt and deficits have an adverse effect on our economy.

He claims the debt and deficit are “starving small business of capital” without telling how an increase in federal money creation could starve anyone of money, and he finishes with this telling statement: “[…] true leadership requires . . . reducing government spending substantially enough to convince the private sector to invest again.”

So, he wishes us to believe that if the government pays less money to soldiers, military equipment manufacturers, doctors, nurses, hospitals, road and bridge and dam builders, farmers, poor people, teachers, home builders, railroad personnel, security-related firms and to all the other businesses selling to the government, the private sector somehow will have more money for investment.

And once again, this is the way our leaders have managed to guide us into an average of one recession every five years.
———————————————————————————————————————————————–
*David Malpass was deputy assistant treasury secretary in the Reagan administration, and is president of Encima global LLC, and a Republican candidate for U.S. Senate in New York.

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

No nation can tax itself into prosperity

–Giving life to a lie

An alternative to popular faith

The May 15, 2010 issue of NewScientist Magazine included an excellent piece by James Giles, titled “Giving life to a lie.” I strongly recommend you read it. (See: LIE for the full article.)

It tells how a statement by John Houghton, former chair of the Intergovernmental Panel On Climate Change – “Unless we announce disasters, no one will listen” – supposedly was repeated in three books, 100 blogs and 24,000 web pages.

Despite this widespread circulation and belief, the statement never was made. It was created by conservative columnist Piers Akerman. It was a lie.

The article, with its subtitle, “In the battle for hearts and minds, a plausible falsehood too often trumps the truth,” goes on to explain how a lie can acquire almost universal acceptance. Here are a few quotes: “. . . a falsehood has to have at least a shred of believability.” “Any falsehood can acquire currency … so long as there are enough people inclined to believe it . . . Falsehoods can come to be believed simply because others believe them. . . This is an information cascade, a process described by the economist DavidHirshleifer . . .” “The mainstream media often participates in the cascade … the more often you hear something, the more likely you are to believe it is true.”

Today, the big lie in economics is, “The federal debt is unsustainable” (See: UNSUSTAINABLE ).

The word ‘unsustainable,” means unable to endure. What is the evidence the federal debt cannot endure? That is, what evidence shows the debt cannot continue, cannot continue to grow, cannot continue to be serviced by the federal government, or will cause economic hardship? Amazingly, no such evidence exists. It all is myth.

That is why you never will see such evidence provided by any of the newspaper or magazine articles making the claim, nor will economists provide such evidence. They all merely will make the claim and support it with other claims, also unsupported by evidence (i.e., “The debt is unsustainable. It will cause inflation. It will reduce the availability of lending funds. Our children and grandchildren will pay for it through higher taxes. Nations will refuse to lend to us. Eventually, we’ll be like Zimbabwe.”) As each lie begets additional lies, the entire package becomes impervious to fact. More and more believe it, until it seems to become solid truth – all without supporting evidence.

The U.S. is 225 years old, yet the federal debt has grown about 1500% in just the past 30 years – a truly amazing increase. Despite this unprecedented debt growth, the federal government never has trouble servicing its debt, nor do we have inflation beyond what the government specifically wants (about 2%-3%), nor is there any mechanism by which the federal debt, which actually is the main source of dollars, can reduce the availability of lending funds. Nor do taxes pay for debts, which is how the debt managed to grow so much. In fact, tax rates are lower today than 30 years ago. And, nations do not refuse to lend to us. Nor do we even need nations to lend to us.

Why does this lie, which the most easily obtainable evidence shows to be wrong, have such widespread following and persistence? First, it has the requisite “shred of believability.” We think of the federal government as being like us – an anthropomorphic misunderstanding. If my debts grow too large, they are not sustainable. I might not be able to obtain the money to service them, and I even can go bankrupt. The same can be said of you, your business, your city, county and state. It even can be said of the European Union nations. But it cannot be said of the U.S. government.

I cannot create unlimited amounts of money to pay my bills. Nor can you, businesses nor local governments. Even Greece and Spain cannot, for they are constrained by EU rules. The U.S. government however, has no such constraints, as it proves every day. It can pay any bill of any size, immediately, simply by crediting the bank account of any creditor.

Then there is the collection of taxes. Local governments use taxes to pay their bills, which is why local governments can go bankrupt if taxes do not support spending. The federal government does not use taxes to pay its bills, because it alone has the unlimited power to create money. For that reason, our children and grandchildren will not pay for the debt. No one will. The government pays its debts by creating money, ad hoc.

The notion that federal borrowing replaces private borrowing has a quasi-arithmetic logic about it. “There is only so much money to lend, and if the government borrows it all, the funds will be used up and there will be none left for the private sector.” In reality, lending facilitates more lending. When you lend to the bank, by depositing in your bank account, this does not reduce the bank’s ability to lend. When the government borrows, it merely exchanges one form of money for another. It does not “use up” lending funds. And when the government spends, it creates lending funds.

Many nations often are used as an example of what excessive debts cause: Zimbabwe, WWII Germany, Brazil, Italy et al. But, each had special circumstances, that were unlike those in the U.S. and not directly related to excessive deficits. For instance, in the case of Zimbabwe, wars, corrupt leadership (Robert Mugabe), stealing farm land from owners, loss of exports and other problems caused its economic disaster.

As the media broadcast the lie, and more people came to believe it, the lie became a cascade. It became a truth unto itself, a self evident statement requiring no supporting evidence.

Are you old enough to remember when “Stomach ulcers are caused by emotional stress” was such a self-evident statement. No one doubted it, and no one asked for evidence, until one day it was discovered the vast majority of stomach ulcers are caused by a bacterium (Helicobacter pylori). Even today, some people cling to that original lie about ulcers.

In summary, when someone tells you the federal deficit and debt are too large, ask for factual evidence in the form of data. They will not provide factual evidence. They merely will give you more opinions (inflation, taxes, children, eventually, etc.) also unsupported by data. If you would rather depend on facts than on myth, read through the various posts on this blog, beginning with SUMMARY, and do read that article.

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

No nation can tax itself into prosperity