Tag: debt

–Open letter to John Mauldin re. his myths

      John Mauldin is President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states. He also is a registered representative of Millennium Wave Securities, LLC, (MWS) an NASD registered broker-dealer. He is the author of Thoughts from the Frontline, a blog at Mauldin.
      Recently, Mr. Mauldin wrote an article for his blog, and I wrote to him with a critique, as follows:

5/9/10
Mr. Mauldin:

      This note is sent to you in the spirit of helpfulness. Your article titled “The Center Cannot Hold,” quoting G. Cecchetti, M. S. Mohanty, and Fabrizio Zampolli contains several widely quoted, commonly believed myths. For example:

      Myth: “Long before we get to the place where we in the US are paying 20% of our GDP in interest (which would be about 80% of our tax collections, even with much higher tax rates) the bond market, not to mention taxpayers, will revolt. The paper’s authors clearly show that the current course is not sustainable.”
      Fact: Federal borrowing no longer (after 1971) is necessary nor even desirable. See: How to Eliminate Federal Deficits

      Myth: “A higher level of public debt implies that a larger share of society’s resources is permanently being spent servicing the debt. This means that a government intent on maintaining a given level of public services and transfers must raise taxes as debt increases.”
      Fact: Society’s resources do not service federal debt. See: Taxes do not pay for federal spending.

      Myth: “And if government debt crowds out private investment, then there is lower growth.”
      Fact: This also commonly is stated, “Government debt crowds out private borrowing” and government debt crowds out private lending.” There is no mechanism by which federal spending can crowd out investment, borrowing or lending. On the contrary, federal spending adds to the money supply, which stimulates investment, borrowing and lending. See: Why spending stimulates investment

      Myth: “A government cannot run deficits in times of crisis to offset the affects of the crisis, if they already are running large deficits and have a large debt. In effect, fiscal policy is hamstrung.”
      Fact: This is the strangest myth, since running deficits in a time of crisis is exactly what the U.S. government has been doing. It would be true of Greece and the other EU nations, but not of then U.S., Canada, Australia, China and other monetarily sovereign systems. See: Greece’s solution

      Myth: “[…] the current leadership of the Fed knows it cannot print money.”
      Fact: This myth is even stranger than the above “strangest” myth, since printing money is exactly what the Fed does. See: Unsustainable debt.

      Myth: “As frightening as it is to consider public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly aging population.”
      Fact: The famous federal debt/GDP ratio is completely meaningless – a classic apples/oranges comparison – that neither describes the health of the economy, nor measures the government’s ability to pay its bills nor has any other meaningful purpose. See: The Debt/GDP ratio

      If you would like to see more common myths about our economy, go to: Common economic myths

Rodger Malcolm Mitchell

–Words from 2005

An alternative to popular faith

Sometimes the things you say and the things you predict come back to haunt you. And sometimes they don’t.

Here is what I told a group of economists and economics students on June 5, 2005, at the University of Missouri, Kansas City. Five years is a long time. You be the judge and let me know what you think:

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

No nation can tax itself into prosperity

 

–The EU and the “hair of the dog”

An alternative to popular faith

AP 5/7/2010: “European leaders sought Friday to convince fearful markets that the Greek debt crisis won’t spread to other countries and derail the continent’s hesitant economic recovery. France and Italy approved their share of a euro 110 billion ($140 billion) bailout to keep Greece from imminent default […] EU leaders have insisted for days the Greek financial implosion was a unique combination of bad management, free spending and statistical cheating that doesn’t apply to any other eurozone nation, such as troubled Spain or Portugal.”

As I’ve noted elsewhere, GREECE has problems neither unique nor unanticipated. In a June 5, 2005 SPEECH at the University of Missouri, Kansas City, I said, “I mentioned Germany. They are in trouble, again. Their economy is stagnant. They want to increase their supply of money by cutting taxes. But, because of the Euro, no European nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the Euro.“

We have a similar, though thankfully different situation here in the U.S. Replace “Greece” with “California,” and you have an identical problem. Until 1971, the U.S. was on a gold standard, which limited its ability to create money. Today, Greece is limited by the “euro standard”. California is limited by the “dollar standard.” All standards have the same function: Limit money creation.

Like Greece, California is unable to create money at will. It has borrowed as much as it can, and no sources of money are on the horizon. Now try to imagine the other states, Illinois, New York et al, giving or lending money to California to bail it out of its immediate problems. Obviously, that wouldn’t work:
1) The states can’t afford it.
2) The “solution” would, at best, be temporary. It merely would delay the inevitable, while putting California deeper in debt.
3) It would exacerbate the looming bankruptcies of the other states.

Now, the E.U. proposes a “hair of the dog” solution for Greece. It is asked to commit financial suicide by raising taxes, reducing spending and borrowing even more money, the very thing that got it into trouble. Meanwhile, the other E.U. nations will commit suicide along with Greece, by lending it precious money they can’t spare.

The solution for the U.S states is clear: Federal creation and input of money. The federal government has this power, in fact, gave itself this power specifically to prevent American bankruptcies, and has used this power many times, most recently to end the recent recession.

The solution for the E.U. states is equally clear, and that solution is not loans from wealthier E.U. nations to poorer E.U. nations. The solution is for the E.U. to function just like the U.S. Fed. Create money and supply it to the E.U. states. Until then, the E.U. will live in a dream world, or rather a nightmare world of ongoing financial desperation.

More than 200 years ago, the U.S. was a group of independent nations, each with individual mores and beliefs. Yet for mutual survival, they had the good sense to ignore their differences and come together under one rule. The EU should do the same.

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

No nation can tax itself into prosperity

–The federal debt is unsustainable — still?

The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. If you understand the following, simple statement, you are ahead of most economists, politicians and media writers in America: Our government, being Monetarily Sovereign, has the unlimited ability to create the dollars to pay its bills.
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People who don’t know what they’re talking about, but who want to sound erudite, love to use dramatic terms that can’t be disproved. A classic example is “ticking time bomb,” when referring to the federal debt and deficit.

This blog contains three posts (“Federal debt: ‘A ticking time bomb”; “Debt bomb redux”; “More debt bomb nonsense” ) sampling the thousands of times since 1940 (!), the debt has been called a “time bomb.”

The nice thing about “ticking time bomb”: The users never needed to prove or substantiate anything. They didn’t have to say when it would explode or what would make it explode or what would happen after it exploded. They don’t even feel the need to explain why their dire predictions have been wrong, wrong and wrong, every year. They could just use the expression, then stand back, look wise and bask in the adoration.

Well, another description of the federal debt and deficit can be included in the “I know nothing, but I want to look smart” club. This time the term is “unsustainable.” In a previous post I hoped never to see that trite, meaningless term again (See: Unsustainable), but it was not to be. Here are just a few of the uses in the past 28 years.

–February 7, 1982: Ronald Reagan: “[…]rapid, unsustainable expansion of Federal spending and money growth[…]
–December 11, 1983: The New York Times; Editorial Desk:“[…]large and growing deficits are unsustainable. They have to be reduced […]
–1998: Douglas Elmendorf and N. Gregory Mankiw: “Current patterns of taxes and spending are unsustainable.”
—February 28, 2001: George W. Bush:. “Social Security’s spending path is unsustainable in the long run, driven largely by demographic trends.”
–March 3, 2005: Edmund L. Andrews: “Alan Greenspan, chairman of the Federal Reserve, warned on Wednesday that the federal budget deficits were ‘unsustainable,’ and he urged Congress to scrutinize both spending and taxes to solve the problem.”
–February 13, 2006: Paul Krugman: “Last year America spent 57 percent more than it earned on world markets. That is, our imports were 57 percent larger than our exports. It all sounds unsustainable. And it is.”
–05/15/09: Lita Epstein, DailyFinance, “Anyone who understands the U.S. debt picture won’t be surprised by President Barack Obama‘s statement that U.S. deficit spending is ‘unsustainable.’
–4/27/10: Reuters: By Pedro Nicolaci da Costa: “’In the absence of further policy actions, the federal budget appears set to remain on an unsustainable path,’ Bernanke told the 18-member National Commission on Fiscal Responsibility and Reform.”
–5/20/10:Professor Alan Blinder, former member of President Clinton’s original Council of Economic Advisers, and Vice Chairman of the Board of Governors of the Federal Reserve System: “[…]even though everybody knows that the federal budget deficit is on an unsustainable path toward the stratosphere.”

And now, again: 6/10, 2010 The U.S. economy continues a slow, painful recovery, but Congress must prepare to address an “unsustainable” level of debt in the federal budget, Federal Reserve Chairman Ben S. Bernanke cautioned Wednesday.

And again: 6/28/10: House Democratic Majority Leader Steny Hoyer: “Debt is a national security threat. Unsustainable debt has a long history of toppling world powers.”

And again: 7/8/10: The Committee For a Responsible Federal Budget: “The debt of the United States is rising to unprecedented – and unsustainable – levels.”

And again: 11/11/10: Representative Jan Schakowsky: “. . . we have to do something; the debt and deficit are not sustainable. . .”

–11/26/10: Sheila C. Bair, Chairman of the FDIC: “The Congressional Budget Office projects that annual entitlement spending could triple in real terms by 2035, to $4.5 trillion in today’s dollars. Defense spending is similarly unsustainable . . . “

–12/3/2010:Dick Durbin, senior Senator from Illinois (D): “Borrowing 40 cents out of every dollar we spend for missiles or food stamps is unsustainable.”

–2/21/11: Doug Elmendorf, head of the Congressional Budget Office: “The nation’s fiscal path is unsustainable, and the problem cannot be solved through minor tinkering.” If his name sounds familiar in this context, he, along with noted economist, Greg Mankiw, said almost exactly the same thing way back in 1998 [See above]. When do these gentlemen acknowledge that they repeatedly have been wrong?

–5/13/11: Frank R. Wolf, Republican congressman from Virginia: “It may have surprised some people when Standard & Poor’s warned last month that the United States could lose its coveted status as the world’s most secure economy if lawmakers don’t rein in the nation’s unsustainable debt. I have been sounding a similar alarm for almost five years, trying to get the attention of Congress and past and present administrations that America cannot continue on its debt and deficit track . . . ”

–7/25/11: iMFdirect: By Rodrigo Valdés: “By the end of this year, federal debt held by the public will represent 70 percent of the U.S. economy, almost double the 36 percent it was in 2007. The federal fiscal deficit will be 9.3 percent of GDP this year. That, quite simply, is not sustainable.”

All these years, the debt has grown, while remaining not only a ticking time bomb, but also unsustainable. How is that possible? Easy. No one knows what “unsustainable” means. Does it mean the government can’t pay its bills? Does it mean America will go bankrupt? Is there any data that proves the debt can’t be sustained?

There is no such data. The federal government has the unlimited power to pay any bills of any size. No federal check ever has or ever will bounce, not because we’re big or lucky, but rather because the government creates money to pay its bills by reaching into vendors’ bank accounts and crediting them.

Does “unsustainable mean that large federal deficits cause inflation? No, ever since the end of the gold standard in 1971, there has been zero relationship between large deficits and inflation, which seems to be related mostly to oil prices.

The whole notion of federal debt unsustainability is not in accord with fact or possibility.

For 30 years the gurus have told us the debt is unsustainable, without them having the slightest notion what it means. The next time someone tells you the federal debt is unsustainable, you’ll know they have no idea what they are talking about.

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

No nation can tax itself into prosperity