Tag: China

–More worries about China’s money

An alternative to popular faith

Again, we are all a-Twitter about China’s money. Our leaders have been hoping, praying, pleading for China to increase the value of the yuan. An increase in its value presumably would increase our ability to export, while increasing our costs for the goods China exports.

Neither of which matters.

From the standpoint of the U.S. as a nation, exports are not beneficial. We trade scarce goods and services, requiring our time and our labor, for money that is not scarce to the U.S. government, requiring no time or labor to produce, and which it has the unlimited power to create in unlimited amounts.

Yes, individual industries benefit from exports, but a nation whose money is not tied to a scarce asset, does not benefit from exports. It creates money, from thin air, as needed.

Further, the U.S. inflation that would be caused by a revaluation of China’s money, easily is cured by our own interest rate control.

Soon, China will revalue its money a bit, and everyone will breathe a great sigh of relief, though you will see that nothing else will happen.

In short, it’s all much ado about nothing. There is a more complete discussion of this at: CHINA money

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

–Debt “unsustainable” no longer.

An alternative to popular faith

        Just when I thought the Chicago Tribune was starting to get it, they ruined everything. For years, the Tribune has told its readers the federal deficits and debt are unsustainable, that China and the other nations would refuse to lend to us, that the government would be unable to service its debts and that federal taxes needed to be increased or spending reduced.
        And because the federal debt is unsustainable, the government is not able to support Medicare, Social Security, Medicaid and universal health care without significant tax increases or benefit cuts.
        Then I saw this in the March 30, 2010 editorial titled, “Debt Dangers”:“But the U.S. is not about to run out of money, even if it keeps overspending. Why not? First it can appropriate more of its citizens earnings through the tax system. Second and most important, it can print money to pay its bills.”
        Wow, is the staid, old Tribune finally starting to understand? Do they realize the government can support Medicare, Social Security, Medicaid and universal health care, even if taxes are reduced? Do they understand we don’t need China and the other nations to lend to us, because we can create money without borrowing?
         Sadly we were not to be so fortunate, for a few sentences later, the editorial said, “The danger is that (the government) would create money to make those debts payable, a course that would lead to much higher inflation.”
        Never mind that today, following the most massive deficits in our history, the government’s chief worry is deflation, not inflation. Never mind that for the past forty years, there has been zero relationship between deficits and inflation, and in fact, the largest deficits have corresponded with inflation reductions. (See the graph, below).

Debt vs inflation

        And never mind that deficits repeatedly have proved stimulative, while reduced deficits are depressive. Intuition and popular faith trump facts every time.
        Then the Tribune editors compounded the crime by stating, “The economy would also suffer as businesses and households scrambled to cope with the disruptive effects of soaring prices. It would suffer again if and when the government decided to curb inflation by driving up interest rates — a step that virtually guarantees a sharp downturn.”
        Never mind that high interest rates have not slowed GDP, nor have low rates stimulated, which is why the Fed’s twenty rate cuts failed to prevent or cure the recession. (See the next graph. If high interest rates slowed GDP, the peaks of the blue line would have to correspond with the troughs of the red line.)

InterestratesvsGDP

         But at least, the Tribune has taken the first step, and perhaps we never again shall see that ridiculous sentence, “The federal debt is unsustainable.”

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

–Three misunderstood, economic truths

An alternative to popular faith

        Three economic truths: Federal deficit spending is necessary for economic growth; all money is debt; federal taxes do not pay for federal spending.
        For you and me, running a financial deficit is bad. Deficits can deplete our personal money supply, reducing our ability to pay bills. Similarly, when a corporation or a city, county or state runs a financial deficit, their ability to pay bills is reduced.
        However, despite what the media, the politicians and the economists tell you, when the U.S. government runs a deficit, that is good – in fact, necessary.
        By definition, a large economy has more money than does a small economy. So, a growing economy must have a growing supply of money. Federal deficit spending is the way the government adds growth money to the economy. Because the federal government has the unlimited power to create money, it never can run short of money to pay its bills.
        Every form of money is a form of debt. Bank savings accounts, checking accounts, money market accounts, CDs, travelers’ checks, corporate bonds and T-bills all are types of debt and money. Even the dollar bill is a debt of the federal government, which is why it has “federal reserve note” printed on it. “Bill” and “note” are words describing debt.
        As debt and money are identical, a growing economy must have a growing supply of debt. It can be personal debt, corporate debt, city, county and state debt, and it can be federal debt. All debts, except federal debt, are limited by the debtor’s ability of pay, and excessive debt can lead to bankruptcy. This makes federal debt the safest form of debt. It can grow endlessly, without causing bankruptcy.
        One counter-argument is that foreign countries (especially China) will refuse to lend us money. But, we don’t need to borrow from China or from anywhere else. We borrow by creating T-securities out of thin air, then selling them. This process is a relic of the gold standard days, when the government did not have the unlimited ability to create money. Today, the government does not need to create and sell T-securities. It merely can create money, also out of thin air. The processes are functionally identical. The end of federal borrowing would end concerns about federal debt. Rather than discuss “debt” we would discuss “money created.”
        A second counter argument is that printing money causes inflation. Examples are given of pre-war Germany, China and Brazil, which suffered hyper-inflation, a different process. Hyper-inflation occurs if a government prints money in response to inflation, when the proper response is to raise interest rates. Since WWII inflation has not been caused by excessive money printing, but rather by excessive oil prices. The largest, recent inflationary period came during the modest Carter deficits. The massive Reagan deficits saw inflation decline. Making money more valuable by raising interest rates, prevents and cures inflation.
        The media tell us the federal government spends “taxpayers’ money” or “our grandchildren’s money.” Neither is true. Other governments – city, county and state — do not have the unlimited ability to create money, so they spend taxpayers’ money. The federal government does not. There is no historical relationship between federal deficits and tax rates. The federal government literally destroys incoming tax money, and creates new money to pay its bills. There is no federal “bill-paying” account funded by taxes.
        Federal debt has increased 1400% in just the past 30 years, and the government never has had any difficulty paying its bills. Were taxes to fall to $0, this would not affect by even one penny, the government’s ability to pay its bills.
        In summary, much of what the media, the politicians and the economists tell you about our economy either is obsolete or always has been wrong. The lack of understanding that federal deficits are different from all other deficits has prevented universal health care and improvements in education, pension support, the ecology, the infrastructure, energy, the military and numerous other situations.
        The misguided fear of inflation or taxes, neither of which is exacerbated by federal deficit spending, has paralyzed our ability to solve the most pressing problems of today.

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

–The China trade deficit myth

An alternative to popular faith

For years, there has been increasing concern about our growing trade deficit, especially with China. But do trade deficits really benefit us?

China creates the goods/services we want and sends them here in exchange for dollars. The goods/services are scarce to China. Time, manpower and physical resources are necessary for their creation. By contrast, dollars are not scarce to the U.S. Our government has the unlimited power and authority to produce dollars, without using any resources, whatsoever. The press of a computer key sends billions of dollars from our government to anywhere. Lately, many have gone into our economy as a stimulus.

A trade deficit is an example of one country devoting great effort to creating scarce materials for another country in exchange for something that requires no effort by the other country. In that sense, China is our servant. They work, sweat and strain and use their valuable resources to create and ship to us the things we want, while we, hardly lifting a finger, ship dollars to them. Who has the better deal?

Obviously, for any given individual, the situation is different. None of us has the unlimited ability to create dollars. We have to work hard for our dollars. Dollars are scarce to each of us. But when we talk about trade deficits, we are talking about governments, and there the situation changes. Dollars are not scarce to the U.S. government.

To satisfy our desires, China could ship us every yard of cloth and every ounce of steel in their country; they could burn all their coal and oil; they could employ every man, woman and child in dismal sweatshops; they could empty their nation of all physical resources, and still we would have plenty of dollars to send to them, simply by touching a computer key.

This may be more easily understood by looking at Saudi Arabia, with whom we also have a trade deficit. One day, the Saudis will have sent us every drop of their oil, leaving their country a hollow, empty sand dune, while we blithely will go on producing dollars. Who has the better deal?

Of course, as monetarily sovereign nations, China and Saudi Arabia are able to create as much of their own money as they wish. They don’t need to work so hard to send us their precious resources in exchange for our money. But that’s a discussion for another posting.

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