If someone sets a world record, perhaps they could expect applause. In that vein, let’s give a massive round of applause to Veronique de Rugy, who has set a world record for economic myth dissemination.
Her bio reads:
Veronique de Rugy is the George Gibbs Chair in Political Economy and Senior Research Fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist.
Her primary research interests include the US economy, the federal budget, taxation, tax competition, and cronyism.
Her popular weekly columns address economic issues ranging from lessons on creating sustainable economic growth to the implications of government tax and fiscal policies.
She has testified numerous times in front of Congress on the effects of fiscal stimulus, debt and deficits, and regulation on the economy.
Presumably, she believes in using research results to come to her conclusions. Or at least, that is her claim. But what research supports the following nonsense?
Congress and the Federal Reserve Could Be Setting Us Up for Economic Disaster
If lawmakers keep spending like are, and if the Fed backs down from taming inflation, then the government may create a perfect storm.
VERONIQUE DE RUGY | 12.29.2022 12:20 PM
In the final week of 2022, we Americans can foresee two significant economic risks in 2023. The first one is a probability that the Federal Reserve will get weak-kneed and stop raising interest rates before inflation is truly under control.
The second risk is that Congress will continue to spend and borrow money irresponsibly.
The likely mix of these two hazards would all but ensure that our economic misery lasts much longer than necessary.
At this point in the article, we don’t yet know which “misery” she means, especially since she considers not raising interest rates or increased spending “hazards.”
And by the way, the federal government never borrows dollars. It has the infinite ability to create its own sovereign currency, the U.S. dollar. So why would it ever borrow what it has the endless ability to create?
If ever it did borrow, it quickly could pay the dollars back simply by creating dollars.
Let’s start with the first risk.
In theory, to tame inflation, the Fed will need to push real interest rates not only high—as it has already done—but higher than the highest rate that the Fed is now targeting, and in fact much higher than most investors can remember.
Substitute the word “myth” for the word “theory,” and you have a correct statement. In the history of the universe, inflation has never been caused by interest rates that were too low. Anyone so devoted to research as Ms. de Rugy claims to be, should know this.
I challenge her, or anyone else, to provide an example of inflation caused by low-interest rates or cured by high interest rates.
There have been thousands of inflations worldwide, regular inflations and hyperinflations, and eventually, almost all have been cured — but never by raising interest rates.
All inflations in history have been caused by shortages of critical goods and services, and those cured were cured only when the shortages were cured.
It even is possible for high rates to cause shortages, i.e., cause inflations, by interfering with production.
The primary effect of raising interest rates is to reduce demand and supply. These reductions make the de Rugys of the world think that is the way to cure inflation. The reasoning is if demand drops, then people won’t pay higher prices. (If supply decreases, prices will rise, but de Rugy doesn’t consider that.)
What de Rugy et al. don’t understand is that recession is another word for reduced supply and demand.
GDP = Federal Spending + Non-federal Spending – Net Imports. Thus, reduced spending = recession.
In short, de Rugy wants to cure inflation by causing a recession. Not only is that nuts, but it can also lead to stagflation, the worst of all worlds.
Such high rates will have two main effects: popping the stock market and real estate market, along with any other asset bubbles that we’ve witnessed in recent years.
The economic downturn that would follow would increase unemployment rates significantly.
Here she admits she wants to “pop the stock market and real estate market,” aka cause a recession (“economic downturn”, maybe a depression.
She also admits she wants to “increase unemployment rates significantly.” Presumably, her employment is secure, so she feels comfortable increasing other people’s unemployment.
On the other hand, if the Fed stops tightening too early, we will continue to suffer high inflation and slower growth.
When is “too early” to begin curing inflation? She never says.
And why does tightening (raising interest rates) “too early” lead to more inflation? And why does “too early” cause slower growth when “the right time” doesn’t slow growth? She never explains.
Her whole concept is a confusing mess.
The rise in unemployment might be pushed back for a while, but because no inflationary policy can continue forever, it will inevitably arrive.
And the longer we delay its arrival, the worse it will be. Unfortunately, facing such challenges, I worry that Fed Chair Jerome Powell will not make the better (and more complex) choice and hold the line on inflation.
Does anyone understand what the hell she is saying? “Too soon,” “too late,” “hold the line.” What exactly is she suggesting Powell do?
It doesn’t matter because her suggestions are so deviant from reality that trying to understand them would be useless.
First, the pressure that he already faces from, for example, Sens. Bernie Sanders (I–Vt.) and Elizabeth Warren (D–Mass.) to stop raising rates will only intensify as the economy slows down and the unemployment rate increases.
Yes, Sanders and Warren are likely to say, “Stop raising rates” when we start sliding into recession, and people lose jobs. To de Rugy, Sanders and Warren are wrong. She apparently wants full foot on the brakes so we can go into complete depression.
Second, as interest rates increase, the amount of interest payments on the government’s debt will grow.
With no money to pay those interest obligations, the Treasury will increase borrowing—a move that will further raise the budget deficit.
This is beyond ignorant. She believes there will come a time when the government runs out of money. This person supposedly specializes in “the US economy, the federal budget, taxation, tax competition, and cronyism.” Incredible.
She also believes that the Monetarily Sovereign U.S. government, which has the infinite ability to create U.S. dollars, resorts to borrowing U.S. dollars.
What do real experts think?
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.”
Statement from the St. Louis Fed:
“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.”
Get it, Ms. de Rugy? The government cannot become insolvent. It does not borrow dollars (i.e. it does not depend on credit markets). It ca,n produce as many dollars as it wishes.
So there never can be a time when, as you said, the government “will have no money to pay those interest obligations.” It always has money, and you should know that.
When complaints about rising deficits become loud, it won’t be long before President Joe Biden’s administration, and others in Congress demand an end to the interest rate hikes.
This practice is called fiscal dominance and it creates a real risk of further fueling inflation.
Never in history has an end to interest rate hikes caused inflation.
Finally, there is the risk that market actors will also pressure the Fed to protect them against losing the inflated wealth they’ve reaped as a result of two decades’ worth of irresponsible monetary policy.
“Irresponsible monetary policy is Ms. de Rugy’s term for a growing economy. By formula, adding dollars to the economy causes an increase in Gross Domestic Product, not inflation.
In fact, as of now Wall Street investors are showing signs that they believe the Fed may soon abandon its policy of high-interest rates to avoid a recession.
It’s hard to blame them because that’s precisely what the Fed has done in the past.
That’s right. In the past, high-interest rates have led to recessions, which is precisely what Ms. de Rugy recommends.
So, will the Fed blink? Politicians aren’t known for doing the right thing when times get hard, and it would be naïve to assume that Fed chairs are immune from this.
Powell, too, is a politician, as he demonstrated with his unwillingness to acknowledge the surging inflation problem—created by the government’s own spending and stimulus—until it was too late. He could surprise us, of course, by courageously enforcing much-needed monetary discipline.
No, no, no. The inflation was NOT created by the government’s spending. The inflation was created by COVID-related shortages of oil, food, transportation, computer chips, lumber, housing, etc.
The spending and stimulus prevented a depression.
The second threat comes from politicians in Washington, right and left, doing their best to make the mess caused by the Fed just that much worse.
Indeed, just as the Fed is pushing interest rates sharply higher, irresponsible “leaders” are launching a new “spend and borrow” spree to the tune of $1.7 trillion all wrapped in a reckless end-of-the-year omnibus bill.
The Fed is pushing interest rates higher, which will do nothing to cure the shortages that cause inflation.
However, the $1.7 trillion spending bill may defeat inflation if it is directed toward obtaining and distributing the scarce goods and services.
This 4,155-page bill is guaranteed to be inflationary.
No such thing. The bill will not cause inflation. It will grow GDP by $1.7 trillion.
It will make Powell’s job harder and the rate hikes needed to control inflation larger. That will only increase the chance that the Fed will cave to pressure to extend the crisis further into the year 2023.
The Fed may cave to pressure — by raising interest rates and thereby creating more inflation together with a recession.
But that’s assuming the Fed won’t cave to the administration and monetize all that new borrowing, adding more fuel to the inflation fire.
There is no “borrowing” to monetize. The U.S. government does not borrow U.S. dollars. PERIOD.
Contrary to popular misunderstanding, T-bills, T-notes, and T-bonds do not represent federal borrowing. They represent deposits into privately owned accounts.
The deposited dollars never are touched by the federal government. They are owned by depositors.
The government creates its own dollars each time it pays a bill.
The bottom line is this, people: Grab your antacids because if our leaders don’t start thinking differently, 2023 is likely to be painful.
The above statement is the only correct line in Ms. de Rugy’s entire article.
Federal spending increases GDP. The U.S. federal government cannot run short of dollars, so it never borrows dollars. Inflations always are caused by shortages of goods and services and never by federal spending.
Government spending does not lead to shortages. Government spending can cure shortages by aiding the production and obtaining of scarce goods and services.
Ms. de Rugy simply does not understand economics. She advocates causing a recession to cure inflation, like applying leeches to cure anemia.
You are correct if you believe I am angry at Ms. de Rugy. If she does research, she should know that raising interest rates does not cure the shortages that cause inflation.
Ms. de Rugy is in a position to promulgate the truth, yet she spreads a lie that harms America. And yes, that makes me angry. It should make you angry, too.
Rodger Malcolm Mitchell
Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell
The Sole Purpose of Government Is to Improve and Protect the People’s Lives.