Tag: cause inflation

–Recession redux: The EU bailouts. Digging the hole deeper. Lending to deadbeats.

The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.

Our recession was precipitated by the mortgage loan scandal. Too many banks lent too much money to people who had insufficient resources to service those loans. The banks should have known never to lend money to people who do not have the resources to pay it back. Simple?

Now compare that with the EU. Here are some excerpts from an article in the Telegraph, by By Bruno Waterfield:

“After a humiliating week of denying it needed help, the Dublin government succumbed to pressure from other euro zone countries and asked for a ‘very big’ loan.”

“On Monday Irish and euro zone governments will be watching the markets after Greece, which received a £94 billion bail-out in April, warned that the EU’s debt crisis was not finished yet.”

“Portugal has already warned that there is a “high risk” it might need economic help. If investors are unconvinced by the Irish rescue package, the euro could come under pressure while the cost of borrowing for the Dublin government could rise.”

“George Papaconstantinou, the Greek finance minister, warned that the Irish bailout would not be enough to plug the euro zone’s black hole of debt. ‘Even if Ireland is helped, it cannot prevent the debt crisis from continuing,’ he said ‘[It] will focus on other countries: Spain, Portugal.'”

Sound familiar? The EU, rather than using its own monetarily sovereign powers, and giving money to its monetarily non-sovereign members, it is lending money to these already insolvent countries, thereby adding to their inability to pay their debts — just like the U.S. banks did with their mortgage lending.

So now, the load falls on one of the few monetarily sovereign nations in the EU, the U.K. But wait. The U.K., which wisely did not adopt the euro, and so remained monetarily sovereign, doesn’t realize it’s monetarily sovereign, as witness this statement in the article:

“Douglas Carswell, the Conservative U.K. MP for Clacton, said that British involvement in the bail-out would anger eurosceptics who had voted Tory for a tougher line on Europe. ‘Yet again we see that the people we elected to run the country in May are powerless. All they can do is tell us how unhappy they are about it but they continue to hand out billions to Europe at a time of austerity for the country,’ he said.”

So Britain, which retained the unlimited ability to pay any bills of any size, now has opted instead for austerity, meaning money growth and economic growth will fall, leaving the U.K. headed for a second, easily preventable recession.

And finally,

“Negotiations have been tense as the EU and IMF impose tough conditions to force Ireland to cut public expenditure by £13billion (Â 15bn) and to increase taxation on the vast majority of people. Ireland’s last three budgets have already cut spending by £12billion. Trade unions are warning of ‘civil unrest’ on scale not seen for decades as leaks of the spending plan reveal that there will be sharp tax rises for the low paid and middle class families in order to increase state revenue.

Eamon Devoy, general secretary of the Technical Engineering and Electrical Union, said: ‘I think there is going to be huge civil unrest. When the draconian measures being proposed are heaped on top of cuts already implemented, life in Ireland will be unbearable.'”

Austerity. Civil unrest. Massive increases in unsupportable debt by monetarily non-sovereign governments. All unnecessary and all linked to two false beliefs: The belief that monetarily non-sovereign governments can continue indefinitely without financial support, and the belief that a monetarily sovereign nation needs to institute austerity.

In the U.S., the debt-hawks created such debt hysteria, that the only way to recover from a recession and grow the economy — i.e. with federal deficit spending — was partially blocked in the past, and now seems totally blocked. If the debt hawks have their way, we soon will be, like the EU monetarily non-sovereign nations, wallowing in poverty and civil unrest.

Please contact your Congresspeople and your local media, and tell them to educate themselves on the meanings and implications of monetary sovereignty, before it’s too late.

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

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–What should the U.S. do next? Hunt like a lion

The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics.

A reader, KK Tipton, asked what I suggest our government actually do, since being monetarily sovereign, it has the unlimited power to create money, without support from taxes or borrowing. First a little background:

Yes, the spending by a monetarily sovereign government is constrained neither by tax receipts nor by borrowing. So with no financial constraints, it could, as KK humorously suggests, build “ . . .two walls of aircraft carriers, end to end tomorrow, to protect our shores. Why not?”

Well, the “why not?” has to do with the only constraint on federal spending: Inflation. There is a point at which federal spending could become so massive as to cause inflation. Pump $100 trillion into the economy next month and I can guarantee a great big inflation.

However, we are nowhere near that point, and have been nowhere near that point since 1971, the year in which the U.S. federal government became monetarily sovereign. Even the inflation of 1979 was not caused by federal deficit spending, but rather by oil prices.

Graph 1

The above graph shows that inflation (red line) generally reached its peak at a time when federal deficit spending (blue line) was reaching a trough, and that inflation peaks correlated most closely with peaks in energy prices (green line).

Because federal deficits stimulate the economy and are constrained only by inflation, the goal is to maximize stimulation while keeping inflation at an acceptable level, perhaps 2% – 3%. Modern Monetary Theory (MMT) holds that inflation can be cured by increasing taxes. This is true, but it’s like preventing facial acne by cutting off your head. Increasing taxes removes money from the economy, which is anti-growth, causing recessions and depressions. (See: A quick summary of the facts )

I prefer to prevent and cure inflation by increasing interest rates, which increases the reward for owning money. This increases the demand for money and makes money more valuable. MMT followers say high interest rates increase business costs, thereby actually causing inflation. Nice theory, but not in accord with the facts. Contrary to popular wisdom, there is no relationship between high rates and slow growth, or low rates and fast growth. See: Interest Rates . Both Chairmen Greenspan and Bernanke may have learned this after 20 rate reductions accomplished nothing.

Given all of the above as a background, here’s what I suggest we do:

1. Eliminate T-securities. A monetarily sovereign nation does not need to borrow the money it created earlier – money it can create without limit. This would end all federal debt along with the misguided concerns about federal debt – concerns that have helped destroy our economy..

[All of the next suggested activities would be done incrementally, the way a lion stalks its prey. Make a small move, then stop to see what happens, then make another move, always getting closer and closer to your goal of maximum growth with acceptable inflation.]

2. Eliminate the FICA tax. This is a tax collected weekly or monthly, so it neatly allows for the “lion stalking” approach. A more complete discussion is at Ten reasons to eliminate FICA, but briefly, this would put about $1 trillion (See: Budget of the United States Government 2011) into the economy next year, exactly where it is needed most: Half in the hands of business; half in the hands of employees.

3. Eliminate taxes on business. These are projected to be about $300 billion next year, less than 12% of total federal projected receipts of $2.6 trillion. Business is the engine of our economy. Pulling money out of the engine is the worst way to grow an economy.

4. Gradually reduce personal income tax collections, which are projected to be $1.1 trillion next year, by increasing the standard deduction. We could begin by freeing from taxes, anyone earning less than $50,000 a year. Then we could incrementally raise the amount, until the last people in America paying personal income tax would be Bill Gates and Warren Buffet. (Of course, we would have to find jobs for all those accountants, tax lawyers, IRS employees, prosecutors and federal prison guards, whose livelihoods depend wholly or partly on income taxes. But a healthy growing economy should take care of that.)

As you can see, I would begin by slowly but persistently eliminating taxes, and putting the money back in the hands of the people. After the tax situation was resolved, I would begin to increase spending, on humanitarian things like Social Security, universal health care insurance and unemployment insurance. I would fund the states by providing a per-capita allowance. Being monetarily non-sovereign, they cannot create money, and so require outside support (See: “–Here is the financial solution for your state, county and city”).

So there you have a quick summary. Like a lion, creeping up on a covey of ignorant debt hawks, I first would reduce/eliminate taxes, then increase federal spending.

What are your thoughts?

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

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–Letter sent to National Public Radio re: “The U.S. is broke”

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
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Yesterday (11/9/10), I sent the following letter to the people at National Public Radio. I’ll let you know in the unlikely event they respond. Even this self-styled, independent, “open-minded” medium, funded primarily by private donation, simply cannot bring itself to consider the possibility that the federal debt is not too high, and in fact, is necessary for economic growth. If NPR can’t handle the facts, what hope is there the for-profit media, which solely are interested in ad dollars fueled by popular wisdom, will understand?

You pride yourself on balance, but there is one area in which you are completely out of balance. Day after day I hear your interviewers talking to people who claim the U.S. is “broke,” and the federal debt is “unsustainable” and needs to be reduced. Entire radio programs are devoted to debating about which spending initiative should be cut. Interviewees tell us whether payments to doctors should be reduced. Or Social Security cut. Or can we afford health care?

Day after day your programs tell listeners the government can’t afford this and can’t afford that. Today, on one of your programs, I heard someone say the federal budget for Public Radio should be eliminated — a delicious irony, since you helped bring this on yourself by never presenting the other side of the story.

In 1971, the end of the gold standard, the federal government became monetarily sovereign. This changed everything in economics. Suddenly, the federal government had the unlimited ability to create money and to service any size debt. It is 100% impossible for any monetarily sovereign nation to be “broke.” There is nothing the government cannot afford.

Additionally, in a monetarily sovereign nation, federal spending is not constrained by taxes or borrowing. If taxes and borrowing both fell to $0, this would not change by even one penny, the federal government’s ability to spend any amount on any initiative.

The only thing that constrains federal spending is inflation, and as you can see, we are nowhere near inflation; in fact, deflation is the current worry. Meanwhile, millions of Americans suffer for lack of federal spending on health care, Medicare, Social Security, roads, bridges, poverty, affordable housing, education, etc. — all because of the incorrect belief the government is “broke.”

I would be glad to present the other side of the story. It’s time your audience heard a balanced presentation of this critical issue. If it’s a debate, my first question will be, “If America is broke, as you say, exactly when did it become broke? After that, my questions will become harder.

It’s time for a little balance

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

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–The Fed’s $500 billion bond purchase

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
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Rumor has it the Fed soon will announce approximately $500 billion in Treasury bond purchases, with possibly more purchases in the future. The effect of the Fed buying government bonds will be to add dollars to the economy.

This is in recognition of two realities:

1. The economy has been starved for dollars by the economically suicidal, debt-hawk mantra of “lower federal deficits and less federal debt.” Bernanke and the Fed now will officially have acknowledged the economy needs more dollars and the federal government has to supply them.

2. Congress and the President either are ignorant of this economic fact or, more likely, are too afraid of the debt hawks to add dollars to the economy via deficit spending, and instead have passed that hot potato to the Fed.

The question now is whether adding $500 billion is sufficient to pull us out of this economic funk. I suspect it is not, and that something north of $1-2 trillion in actual spending will be needed.

Rather than relying on the indirect effect of bond purchases by the Fed, and hoping that somehow the dollars will find their way into the hands of business and consumers, Congress and the President should use a direct approach. They should reduce all tax rates and specifically eliminate FICA. That would provide both an immediate and long-lasting economic stimulus, resulting in stronger business and more jobs.

Yes, that would add to the dreaded and much maligned federal deficit and the debt, which is exactly what a growing economy needs. It also might bring the debt hawks to their senses, and finally we could stop, for instance, cutting Medicare payments to doctors and reducing Social Security benefits.

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

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind one of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”