Tag: Concord Coalition

–Which is more serious: Inflation or deflation?

The debt hawks are to economics as the creationists are to biology.

Which do you feel is more serious – inflation or deflation? The term “more serious” can refer to frequency of occurrence. Or it can refer to difficulty in prevention or cure. Or it can refer to its affect on the economy.

Stated simply, deflation is the opposite of inflation. As with inflation, deflation is expressed as a comparison of demand vs. supply. It is a reduction in the demand for, vs. the supply of, goods and services compared with the demand vs. supply of money.

Supply is a self evident concept. Demand is based on risk and reward. When applied to goods and services, the risk is further deflation. The reward is the inherent reward for obtaining the goods or services. When applied to money, the risk is inflation and the reward for owning money is interest.

In brief summary, deflation can occur when:
1. Money is perceived as becoming more valuable: The supply of money goes down and/or interest rates (reward) go up, while the perceived risk (of inflation or non-payment) goes down. The more likely combination is reduced money supply together with increased interest rates.

2. Goods and services are perceived as becoming less valuable: The supply of goods and services goes up, while the reward (quality) goes down, and or/the perceived risk (of deflation) goes up.

Put all these possibilities together and the most likely, deflation-causing combination is excess supply of goods and services compared with reduced money supply.

Inflation is fundamentally the opposite of inflation, so most of the causes of each tend to be opposites. The key difference relates to the supply of goods and services. In this world economy, it virtually is impossible for a broad number of goods and services to be in worldwide short supply, if money is available to buy them. For that reason, inflation rarely is the oft-mentioned, “Too much money chasing too few goods” – with one exception. Energy. Because energy costs and availability impact nearly every product and service, there is a modern historical relationship between oil prices and CPI.

All of the above leads to one interesting conclusion: While deflation can be caused by a shortage of money, inflation rarely is caused by an over-abundance of money.

If, in comparing seriousness, we mean frequency of occurrence, clearly inflation would be considered more serious. Deflations are rare, having occurred perhaps three times in U.S. history. Inflation is an annual occurrence.

If, in comparing seriousness, we mean difficulty in prevention or cure, I believe deflation is more serious. Inflation easily can be prevented and cured by raising interest rates, which increases the demand for money. There is no limit to how high interest rates can be raised.

By contrast, trying to use interest rates to prevent deflation runs into the obstacle of zero rates. Though negative rates may mathematically be possible, it is difficult to imagine many borrowers accepting negative rates. Thus, the sole prevention for deflation is increasing the money supply, which the debt hawks have made difficult.

If, in comparing seriousness, we mean affect on the economy, I believe deflation is far more serious. Modest inflation can be stimulative, in that it encourages consumers to buy today, rather than waiting for tomorrow. Deflation encourages delaying purchases, which negatively impacts the economy, and can cause a feedback loop of lower and lower prices, longer and longer delay.

All of the above considered, I suggest deflation is far more serious than inflation.

Interestingly, debt hawk commentators, who are fixated on easily-prevented, easily-cured inflation, seldom mention deflation as a threat. The reason may be that there is no debt-hawk prevention or solution for deflation, as the sole solution (increased federal spending) is considered out of the question. Yet here we are, struggling against deflation, while Congress and the media preach against the one action that can prevent it.

Next time I’ll discuss stagflation, every mainstream economist’s nightmare.

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

No nation can tax itself into prosperity

–John Mauldin spreads the old myths

The debt hawks are to economics as the creationists are to biology.

You may have heard of John Mauldin, self described “investment writer/analyst.” He distributes an E-letter in which he discusses economics. I assume he has many readers who believe what he tells them. More’s the pity, because Mr. Mauldin seems to know little-to-nothing about economics.

Recently I received one of his E-letters, this one titled, “The Dark Side of Deficits.” Here are some direct quotes: “The research of Reinhardt and Rogoff demonstrates that when the government debt-to-GDP level gets to about 90%, trend growth seems to drop by about 1%. They do not offer an explanation, just an observation. My speculation is that it might be government spending and debt crowding out private savings, not leaving enough for productive private investment.”

Perhaps neither Reinhardt nor Rogoff offers an explanation simply because there is none. As readers of this blog know, the federal debt/GDP ratio is totally meaningless. “Federal debt” is the total accumulation of all federal debt for every year since the beginning of this nation; GDP is a one-year measure. Anyone quoting this ratio should stop, immediately. It is a nonsensical apples/oranges statistic.

At last count, Japan’s debt/GDP ratio was 210%, and according to a June, 2010 Associated Press article, “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.” That’s with a 210% for the phony debt/GDP ratio!

Further, there is no economic mechanism for “government spending and debt to crowd out private savings.” The exact opposite is true. Federal deficit spending, which adds money to the economy, increases savings. The “crowding out” myth is so outrageously wrong, I never know whether to laugh at the ignorance or cry at the result of such beliefs.

Further quoting Mr. Mauldin, “. . . if we do not get control of our deficit spending, we (in the US) risk putting our growth in jeopardy.” Deficit spending adds money to the economy, and this economy is starved for money, but Mr. Mauldin suggests reducing the amount of money coming into the economy. Talk about putting our growth in jeopardy!

And here is a hint about the fundamental cause of Mr. Mauldin’s confusion. He says, “There are those among us who are like teenagers, wanting to make the easy choice and avoid the pain today, not worrying about the consequences down the road.” He seems to adopt the puritanical belief that anything easy or painless inevitably will have dire consequences. So he opts for the most painful solution to our recession — presumably some combination of painful tax increases and painful reduced federal support for things like Medicare, Social Security, infrastructure, environment, defense and education. I assume he has his teeth filled without novocaine.

Note to Mr. Mauldin: When someone is starving, the easiest, least painful choice is to feed them, not to remove food as you suggest. Money is the food of our economy, and adding money to a starving economy is the only sensible act.

But, of all the foolish comments in Mr. Mauldin’s E-letter, perhaps the most frightening was this one, describing his travels: “. . . back to Dallas for a speech to the local Tiger 21 group. Then, starting September 11, I fly to Amsterdam for the International Broadcasting Conference, then to Malta, Zurich, Mallorca, Denmark (speech open to public), and London, home for one day, and then off for a speech to Cambridge Brokers on the 24th. Then I’m in Houston on October 1 for another public speech.”

Good heavens, the man is going to innoculate and indoctrinate all those people with nonsense, and those people will tell others, who will tell others, and soon a huge number will believe they know something about economics, when in fact, they know less than nothing. They know wrong.

If you read Mr. Mauldin’s writings, just for laughs, then enjoy. But if you read for his economic analyses and his market predictions, be cautious.

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

No nation can tax itself into prosperity

–Britain’s grand experiment: The debt hawk agenda

The debt hawks are to economics as the creationists are to biology.

This should be interesting.

Here are some quotes from The Economist:
“The budget, unveiled by George Osborne, the new chancellor of the exchequer, in June: To balance the books, he raised some taxes, notably VAT, but three-quarters of the savings will come from spending cuts. Most government departments will shrink by a quarter, though Mr Osborne excluded the National Health Service from his savagery. In the heated debate between Keynesian economists (who worry that a weak world economy needs more government spending) and fiscal hawks (who believe deficits must be tackled now to stave off Grecian disaster), Britain is the prime exhibit for tough love.”

“Mr Osborne plans to get the job essentially done by 2014-15. If all goes to plan, the deficit will fall from 11% of GDP in 2009-10 to 2.1% in 2014-15. The structural deficit, which strips out the effects of the economic cycle, will drop from 8.7% of GDP to 0.8%. On a similar basis, the government will by then be running a small surplus on the current budget, which excludes net investment (due to be slashed anyway over the next couple of years). This is a much faster retrenchment than the previous Labour government envisaged. It planned to return the cyclically-adjusted current budget to balance in 2016-17. Labour’s fiscal consolidation would have amounted to 4% of GDP by 2014-15; Mr Osborne is aiming at 6.3%.”

Never mind that Britain can’t have a “Grecian disaster.” Britain is monetarily sovereign. Greece is not. Completely different situations. Raise taxes; cut spending. Government runs a surplus. That is the debt hawk mantra. If Britain actually follows through on these steps (doubtful), it will suffer terribly.

All you debt hawks out there; what is your prediction?

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

No nation can tax itself into prosperity

–Why Medicare and Social Security are not “adequately financed”

The debt hawks are to economics as the creationists are to biology.

Soon you will read about this new report:

2010 Social Security Trustees Report, August 6, 2010: “. . . the Medicare HI Trust Fund is adequately financed until 2029, and the Social Security OASI and DI Trust Funds are adequately financed until 2040 and 2018, respectively. . . significant longer term financial imbalances of the programs still need to be addressed .”

By:
Timothy F. Geithner, Secretary of the Treasury, and Managing Trustee
Hilda L. Solis, Secretary of Labor, and Trustee
Kathleen Sebelius, Secretary of Health and Human Services, and Trustee
Michael J. Astrue, Commissioner of Social Security, and Trustee

For Mr. Geithner et al, “adequately financed,” means tax revenues will equal or exceed spending. When, spending exceeds taxes, Medicare and Social Security will be “inadequately financed,” i.e insolvent.

To put it gently, Mr. Geithner et al do not know what they are talking about.

Visualize a scenario where there are zero federal taxes. The federal government has no income, not even any money, yet sends you a check for $10 trillion dollars. You deposit the check in your bank. Will the check bounce? No. Your bank will send the check to the Treasury, which will credit your bank and debit its own balance sheets for $10 trillion. The bank now has $10 trillion, which it credits to your account, allowing you to buy a few thousand Rolls Royces or the State of Montana, whichever you prefer.

The government can send you checks endlessly, in any amount. With each check, the government merely debits its balance sheet and credits your bank account. The government balance sheet is just a score sheet, though it misleadingly is called “debt.” Whether that score sheet reads $10 trillion or $100 trillion makes no difference to the score sheet. The only limit is the artificial “debt limit,” on which Congress votes periodically. There is no functional limit on what any balance sheet can read. The government can write a check of any size, despite zero taxes, credit your account for any amount, and enter any amount into its score sheet.

Taxes may be levied for several social reasons (cigarette and liquor taxes are examples), but supplying the government with spending money is not one of them. The government creates money by spending. It does not use tax money. Therefore, all federal debt is sustainable, endlessly.

Because Social Security and Medicare are federal agencies, the government can support them endlessly, without any FICA taxes at all, merely by mailing checks. Sadly, the wrongheaded beliefs of Mr. Geithner et al have led to the deterioration of Social Security and Medicare benefits.

At one time, the “normal retirement age for Social Security benefits was 65. Today, it is age 67 for people born after 1969. Mr. Geithner’s kind of reasoning has cost Americans two years worth of benefits. Further, these benefits are subject to income tax. Thus, you pay tax on your FICA payments and pay tax again on your benefits – a double tax. Finally, despite paying FICA taxes for years, the day you die all benefits cease. You could pay FICA for 40 years, and if you die at age 60, your estate will receive nothing – all because of the false belief that taxes pay for federal spending.

Medicare payments also are so restricted many Americans purchase supplementary insurance to cover what Medicare does not – all because of the false belief that taxes pay for federal spending.

We pay penalties for believing taxes support federal spending. We pay penalties for believing Medicare and Social Security could go bankrupt unless FICA is increased or benefits reduced. We pay penalties for believing the federal deficits are “unsustainable.” We pay penalties for the misinformation coming from our leaders. We pay penalties for believing them.

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

No nation can tax itself into prosperity