“Dr.” Jerome Powell: I am going to cure your anemia by applying leeches to drain your blood.
A medical doctor will tell you, if you want to prevent and/or cure a disease, it helps to understand and address the cause(s) of the disease. But first, do no harm.
And to identify and determine the cause of the disease, look at the symptoms. Today’s economy is diseased, and the symptom is inflation, which can precede a recession.
Inflation is a general increase in prices.
Every price increase can be attributed to scarcity.Barring government interference (i.e,. price controls, taxes, etc.) market prices do not rise on any product when there is a surfeit of that product.
“Dr. Powell’s treatment for inflation are:
Raise interest rates
Reduce money growth.
And he wishes to do this without causing a recession .
Today’s inflation is caused by multiple scarcities: energy, food, supply chain, fertilizer, computer chips, lumber, baby formula, rare earth elements, labor, etc., etc.
Powell believes that the inflation is caused by the federal government’s massive spending to prevent a COVID recession. In that regard, the spending worked.
Because of massive federal spending, COVID was able to cause only the briefest possible recession: Two quarters.
COVID killed almost 1 million Americans and hospitalized many millions more. Yet the federal government was able to limit the drop in GDP to just two quarters. The 4th quarter of 2019 and the first quarter of 2020.
This was an amazing feat, and will be remembered as a great financial success for the government..
Why did federal spending limit what otherwise would have been a long, harsh depression? You might remember that the Great Depression ended in 1941, the same year we entered World War II.
That was not a coincidence. Recessions and depressions are symptoms of shortages, and most shortages are symptoms of a lack of money.
Look again at the partial list of today’s shortages, and see what the causes are:
Energy: Lack of federal money spent on oil drilling and refining, exacerbated by the lack of money spent on the development of alternative energy sources (wind, nuclear, hydro, geothermal, solar. )
America has vast deserts and other areas that receive plentiful sunshine, perfect for solar energy.
Fertilizer and many other products: A big culprit is lack of money to create a safe, viable supply chain. Our current ports, truck lines and other segments of the supply chain all are at the minimum level required for normal times, with no backup. This always was an existential risk for the U.S. economy,
The Midwest and shore areas of America are good locations for wind energy.
and now COVID has disrupted the entire length of the chain. To protect America, the government should help strengthen the chain.
Computer chips: Most are produced in foreign nations. This is too vital a product to rely on foreign production. The federal government should provide money incentives for domestic production to safeguard our economy.
Labor: People won’t work for low salaries. Federal spending FICA and providing Medicare for All would give businesses financial room to raise salaries. Additional tax incentivesfor salaries would encourage businesses to raise pay.
None of the above problems will be addressed by “Dr. Powell’s” prescription of interest rate increases or by federal spending decreases. He is applying leeches to cure anemia.
Chairman Powell thinks the problem is too much money in the economy, when exactly the opposite is true. Too little money is available to cure the shortages that are the real cause of inflation.
The economy is not “overheated,” as Powell claims. Despite trillions having been spent, the current problem is lack of continued spending.
When COVID hit us, the federal government’s spending was good economic medicine that addressed the symptoms and prevented a deep recession, but the underlying shortage “diseases” remain.
Powell wants to discontinue the medicine because he wrongly believes, despite ample evidence, that federal spending causes inflation and recession.
The blue line shows changes in federal deficit spending. Diagonal lines show reduced deficit trends leading to recessions. The vertical gray bars are the recessions caused by reduced deficit growth — exactly what Powell wants to do.
The trend lines show that recessions begin after periods of reduced federal deficit growth. Recessions are cured by increased federal deficit growth.
Inflation (red) vs. federal deficit spending (blue). Data do not indicate that federal deficit spending causes inflation.
Federal deficit spending does not cause inflations or recessions. The opposite is true. The lack of federal spending causes inflations and recessions.
In Summary, Chairman Powell figuratively is applying leeches to cure anemia. He is doing exactly the wrong things to cure inflation and to prevent recessions.
Increasing interest rates will not cure the problem that actually causes inflation: Shortages of key products and services. Nor will cuts to federal deficits prevent a recession.
The Fed cannot do what it was not designed to do. Congress, not the Fed, can and must act to cure the shortages that cause inflation.
Democrats beware: Powell’s policies will worsen the inflation and cause a deep recession, and unless Congress acts to cure the shortages, we will have a depression.
And Democrats will receive the blame.
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[No rational person would take dollars from the economy and give them to a federal government that has the infinite ability to create dollars.]
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:
Here are a few excerpts from a February 11, 2020 article in the Washington Post.
Economy Fed Chair Powell warns Congress that $1 trillion budget deficits are unsustainable Powell also said it is ‘very likely’ the coronavirus will impact the U.S. economy, but it is too early to tell how much or for how long
By Heather Long, an economics correspondent, former senior economics reporter at CNN and a columnist and deputy editor at the Patriot-News in Harrisburg, Pa. Also worked at an investment firm in London.
Federal Reserve Board Chair Jerome H. Powell told Congress on Tuesday that now would be a good time to reduce the federal budget deficit, which is expected to top $1 trillion this year.
Think about it. Powell told Congress two things:
It is ‘very likely’ the coronavirus will impact the U.S. economy. By “impact,” he doesn’t mean “stimulate growth.” He means that to some degree, he doesn’t know how much, the coronavirus will reduce economic growth.
Now would be a good time to reduce the federal budget.
Consider those two opposing ideas coming from one mouth on one day to one audience.
Is it possible the Chairman of the Federal Reserve Board doesn’t know that the only way to overcome the recessionary effects of the virus is with federal deficit spending?
Yes sadly, it is possible.
Equally sad is his repeated use of the 2nd dumbest, most overused word in economics, and that word is “unsustainable,” when referring to federal deficit spending.
(The dumbest word, or rather three words, are “ticking time bomb” also when referring to federal deficit spending. We have discussed these three dumb words on several occasions, most recently on February 14th.)
“Ticking time bomb” and “unsustainable” are proven wrong. The federal debt, a consequence of the federal deficits, has risen more than 50,000% — from $40 Billion to $20 Trillion in the past 80 years, and the government has “sustained” quite well, thank you, and no “ticking time bomb” has exploded.
One might think (hope) the self-anointed Experts would take their prediction failures as clues.
The words are dumb and not explained, coherently. That is, the dire warnings never come with this simple sentence, “If we don’t cut deficits the federal government will run out of dollars.”
Why don’t we see those sentences? Because they would be so obviously and patently wrong, that to proffer them would be to admit stupidity. Better to just stick with vague “bomb” and “sustainability” comments, and let people believe you are an Expert.
Continuing the article:
“Putting the federal budget on a sustainable path when the economy is strong would help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy during a downturn,” Powell said in testimony to the House Financial Services Committee.
Let’s translate, ” . . . have the space to use fiscal policy to assist in stabilizing the economy during a downturn” is mumbo jumbo.
He means, but won’t say, “Have the money to use deficit spending to help grow the economy if it begins to shrink.”
So, this Chairman of the Fed, the world’s most important financial officer, nominated by the President of the United States and approved by the Republican Senate, this financial guru, has wrongly implied (but not said) that the federal government can run short of money, while simultaneously admitting that deficit spending grows the economy.
Back to the article:
In past recessions, the Fed has played a large role in reviving the economy by sharply cutting interest rates.
But Powell has been warning lawmakers that the central bank won’t have much ammunition left to fight the next downturn because interest rates are so low (the benchmark rate is just below 1.75 percent, far below rates above 5 percent in the past).
More government spending is likely to be needed to aid the economy in the next recession.
The effect of interest rate cuts is minimal because it’s a mixed effect. Cuts encourage borrowing, but they discourage lending. Can’t have one without the other. So, mixed.
And while low rates leave dollars in consumers’ pockets, they cause the government to pump fewer T-security interest dollars into the economy. Again, mixed.
The real economic stimulus is federal government spending, and not just spending, but deficit spending. It’s deficit spending that adds net stimulus dollars to the economy.
Very simply:
Federal deficits are stimulative; surpluses are recessive.
The Fed chair’s warning comes as the U.S. federal debt has grown by about $3 trillion since President Trump took office, and the president’s latest budget proposal submitted this week would add another $5 trillion to the debt over the coming decade.
“Add another $5 trillion to the debt” is just another way of saying, “Add 5 trillion growth dollars to the economy” thereby assuring that we won’t have a recession (unless we have a worldwide crisis like a huge meteor impact or the most serious effects of a pandemic),.
Economists worry that so much U.S. government debt can dampen private investment by driving investors to buy public bonds instead of private ones.
The above sentence is short, but it packs into few words a great deal of misinformation The sentence wrongly implies:
The federal government needs to sell T-bonds. NO. Being Monetarily Sovereign, the federal government does not need to sell T-bonds. It never can run short of its own sovereign currency, the U.S. dollar. Who says so?
Greenspan
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.” St. Louis Federal Reserve: “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 will need to raise interest rates to sell its T-bonds. NO. Not only does the federal government not need to sell T-bonds, but when it wants to sell them, the Fed can and does buy them, via regular open market operations or “quantitative easing,” both of which reduce interest rates
Deficit spending dampens private investment. NO. Deficit spending adds investment dollars to the economy, thus stimulating private investment.
The most concerning part of all this is that Powell surely must know it, or at least he should know it.
Yet, he persists in disseminating misinformation. Or could it be intentional disinformation?
“A more sustainable federal budget could also support the economy’s growth over the long term,” said Powell, who spent time before he joined the Fed educating Congress aboutthe debt limit as a Bipartisan Policy Center scholar.
The debt limit?? “Scholar” Powell was educating Congress about the phony debt limit, which not only is harmful, but unnecessary, and it isn’t even a debt limit.
It’s a limit on the federal government paying for its existing debts. The next time you receive a credit card bill, call them to say, “Sorry, but I can’t pay you. I have a debt limit.”
See how well that goes.
Trump blasted Powell, tweeting in the middle of the congressional hearing that the Fed chair was keeping interest rates too high.
“When Jerome Powell started his testimony today, the Dow was up 125, & heading higher. As he spoke it drifted steadily downward, as usual, and is now at -15.
Germany & other countries get paid to borrow money.
We are more prime, but Fed Rate is too high, Dollar tough on exports,” Trump wrote on Twitter.
The Dow Jones industrial average ended the day flat.
Donald Trump doesn’t know what he is talking about. You might think that a rich man would understand finance, but he seems clueless.
He tweeted that the Fed “should get our interest rates down to ZERO, or less,” allowing the federal government to refinance its massive debt at a lower cost.
Why would anyone think the federal government, which creates dollars at the touch of a computer key, needs or even wants to “refinance its massive debt at a lower cost?” It makes no sense at all.
As we discussed earlier, low rates have a mixed effect on the economy.
And as for exports, the supposed benefit is that America gets to trade precious goods and services for dollars. But, the U.S. government has the unlimited ability to create dollars. So what is the purpose of sending precious goods, created by the sweat of American workers, overseas while we create unlimited dollars at the touch of a computer key?
All that exports accomplish is to add dollars to the U.S. private sector, which the federal government can do directly, at no cost, either by eliminating taxes or by direct contribution.
For a Monetarily Sovereign nation like the U. S., exports are unnecessary, and somewhat harmful, and at least dramatically overrated.
Even if U.S. exports totaled $0, the federal government could support the private sector, while not wasting precious resources or adding CO2 to the climate.
The United States has never had a negative interest rate. When asked about that possibility on Tuesday, Powell said that’s “not a tool we are looking at.”
Economists widely view negative interest rates as only worth doing when the economy is in a terrible situation. Trump keeps calling for lower interest rates to further boost growth and the stock market.
A negative interest rate would mean you would pay a bank to store your dollars. The belief is that you would prefer not to pay the bank but instead go out and spend and invest all your dollars, thus stimulating the economy.
Not only doesn’t that work but more realistically, why would any administration want the citizenry to have no cash reserves in the bank, while wildly spending on stocks and “stuff”?
And why would any administration want to cut bank deposits (i.e. reserves) and bank profits against which banks lend?
Any economists who would use negative rates “when the economy is in a terrible situation” are the same boobs who would apply leeches to cure anemia, or who think cuts to deficit spending will stimulate the economy.
In summary:
Chairman Powell acts as though he doesn’t understand the federal government is Monetarily Sovereign.
He acts as though he is the bookkeeper for a monetarily non-sovereign town, wondering where the next dollar will come from and how they can borrow enough to spend. For that bookkeeper, the debt truly might be “unsustainable.”
Not for the federal government.
The next time you read that the federal debt is “unsustainable,” know that the author either is lying or ignorant about federal economics.
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:
#Monetary Sovereignty - Mitchell 