Tag: debt hawk

–Surprise: Federal deficit growth precedes GDP growth by 1-2 years

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.

GDP growth has many causes. One of these causes is federal deficit growth. (By law, federal debt growth = federal deficits, so while the following graphs literally show federal debt growth, they indicate deficit growth).

The following graphs show debt growth and GDP growth 1971 – 2010 PGS (post gold standard). First, here is a graph showing federal debt and GDP growth:

graph

Then, I split the data in two, and offset the graphs. By drawing vertical lines between the two graphs, you will see an interesting effect: Federal debt growth and declines precede GDP growth and declines by about 1-2 years. There are short term exceptions to this — as I said, GDP growth is subject to many causes — but over the past 40 years the “rule” has held remarkably well, and the 1-2 year period is exactly what one would expect in a cause/effect relationship between federal debt growth and GDP growth.

Grtaph 2
      grraph 1

Annual % change:
2007-2009 Federal debt rose from 3% to 33%
2009-2010 GDP rose from -3% to 33%       ↑
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2004-2007 Federal debt fell from 15% to 3%
2006-2009 GDP fell from 6% to -3%       ↓
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2001-2004 Federal debt rose from -11% to 15%
2002-2005 GDP rose from 2% to 6%       ↑
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1993-2001 Federal debt fell from 12% to -11%
1994-2002 GDP fell from fell from 6.5% to 2%       ↓
=================================
1983-1990 Federal debt fell from 28% to 7%
1984-1991 GDP fell from 12.5% to 3%       ↓
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1979-1981 Federal debt rose from 5%-15%
1980-1982 GDP rose from 7% to 14%       ↑
=================================
1976-1979 Federal debt fell from 28% to 7%
1976-1980 GDP fell from 12% to 7% **       ↓
=================================
1974-1976 Federal debt rose from -2% to 28%
1975-1976 GDP rose from 8% to 25%       ↑
=================================
1972-1974 Federal debt fell from 10% to -1%
1973-1975 GDP fell from 12% to 8%       ↓
=================================
1971-1972 Federal debt rose from 1% to 10%
1972-1973 GDP rose from 8% to 12%       ↑

**During this period, GDP rose as high as 14% before falling, while debt continued to fall the entire period.
————————————————————————————————————————————————

The reason for this series of coincidences is outlined at Introduction, but briefly: Money feeds an economy. A growing economy requires a growing supply of money, and deficits are the federal government’s method for adding money to the economy. Whenever the economy is starved for money, we have a recession. When the economy is “well-fed” with money, we have healthy growth.

Yes, it is possible to “overfeed” the economy, in which case we will have inflation. But currently we are nowhere near that point. Economically speaking, we are much closer to starvation than to obesity. In fact, during the past 40 years PGS, our economy never has been obese. It has vacillated between hungry for money and serious starvation.

For a consistently growing GDP, it is necessary not only for debt to grow, but debt must grow by an increasing percentage. For this reason, calls for debt reduction, deficit reduction, balanced budget, etc., are suicidal for the economy.

Discuss these data with your political representatives and your favorite media writers. Although breaking through the intuition-based bias against federal debt is difficult, the only hope is to continue to present fact after fact after fact, until even the most cement-brained debt-hawk finally concedes.

Good luck. The future of America depends on it.

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.”

–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.”

–Another attempt to explain why taxpayers don’t pay for federal spending

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

In my never-ending effort to explain more clearly why federal spending costs taxpayers nothing, here is a new thought that perhaps will make the concept more intuitive. It was precipitated by a question from Mr. Tyler Fairleigh, which is published in the comment section at Monetary Sovereignty.

Imagine John Jones sells something to the federal government for $100. John sends the government a “bill.” A bill is nothing more than a little note containing this instruction: “Please credit John Jones $100.” It costs John nothing to send that note. In fact, John could send such a note (bill) to the government every day for the next ten years, and still it would cost John nothing.

Of course, the government is under no obligation to do as John requests, but the point is, that little note costs John nothing. He need have no money in the bank to send it.

Assume, the government checks its records and finds that indeed it owes John $100, so it sends him a check for $100, which he deposits in his bank. The government’s check is not money; it is an instruction. The check is a little note containing this instruction: “John’s bank. Please mark up the number in John’s account by $100.”

The government has the power to send an unlimited number of instructions (aka “checks”) at any time. These instructions do not require the government to “have” any money. They merely are instructions made by a monetarily sovereign government.

So John’s bank obediently raises the number in his account by $100, then informs the Federal Reserve Bank of what it has done. For accounting reasons, all sorts of accounts are credited and debited, some of which may or may not be related to taxes. But in reality, all that has happened was, John’s bank received an instruction from the federal government and did as it was told.

These instructions also cost taxpayers nothing. Taxpayers are not even involved. Even if no one was paying taxes, our monetarily sovereign government still could send an unlimited number of instructions to banks all over the world, and they all would obey. Why? Because they know the Federal Reserve Bank of the United States will mark up their accounts by the exact amount of the check. Why? Because the U.S. government is monetarily sovereign, meaning it has the unlimited power to mark up accounts.

Compare this with Greece, Spain, Illinois, California, General Motors, Chicago, you and me. None of us in monetarily sovereign, so none of us has the unlimited power to mark up bank accounts. Our power is limited by the number in our own bank account or by what we can borrow.

Yes, you too could send an unlimited number of such instructions, but unless your bank account had a high enough number, your bank would not obey these instructions (aka bounce your check). But no bank bounces the federal government’s instructions. Never has; never will. A monetarily sovereign nation cannot be forced into bankruptcy.

And what about that worrisome federal debt? It is the total of the T-securities (aka IOUs) the government creates from thin air. It can do this forever.

To pay the debt, the federal government merely sends notes to the various T-security holders’ banks, instructing them to mark up accounts. Taxpayers don’t owe the government’s debt, nor do your children nor grandchildren. You aren’t even involved.

And as for the federal deficit, it is just a balance sheet entry, showing the difference between taxes collected and money spent, or more accurately, the difference between the number subtracted from taxpayers’ bank accounts and the numbers added to vendors’ bank accounts. Of course, taxes do not pay for spending. The government could add numbers to vendor’s bank accounts without subtracting from taxpayers’ accounts.

So that’s it. Government spending is just instructions to banks. The debt is just IOUs created from thin air. Paying the debt is just instructions to banks to raise numbers in accounts. The deficit merely is an arithmetic difference. And taxpayers neither pay for, no owe, any of this.

Does that make things clearer?

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.”