Tag: debt

–Economic myths, false beliefs and fairy tales

An alternative to popular faith

The U.S. and the world, lurch from boom to bust in seemingly uncontrollable waves. Popular faith holds that recessions and depressions are an unavoidable part of the natural economic cycle. I suspect these “natural” cycles occur because actions (or lack of actions) are based on false beliefs.

Economics has engendered an amazing number of myths, most based on what some feel is logic. But it’s the same degree of logic that says the earth must be flat, else we would fall off. Here is a list of myths, false beliefs and fairy tales. If you disagree with any item on this list, please let me know, and I’ll explain why it’s there.

• Money and debt are two different things.
• A growing economy does not need a growing supply of money.
• Federal surpluses help the economy grow.
• The federal debt is too large.
• The federal debt is the total of federal deficits.
• The current level of deficits is unsustainable.
• Federal taxes help pay for federal spending.
• Federal borrowing helps pay for federal spending.
• The federal government spends taxpayers’ money.
• Our children and grandchildren will pay for today’s federal deficits.
• A balanced federal budget is more prudent than a federal deficit.
• The federal debt/GDP ratio measures the government’s ability to service its debts.
• Each of us owes a share of the federal debt.
• Federal earmarks, pork barrel spending and waste hurt the economy.
• The single biggest cause of inflation is excessive federal deficit spending.
• Inflation is too much money chasing too few goods.
• Consumer saving helps the economy grow.
• In fractional reserve banking, banks keep a fraction of deposits and lend the rest.
• The best way to cure inflation is to increase taxes or cut federal spending.
• State, county and city governments are financially similar to the federal government.
• FICA taxes pay for Medicare and Social Security.
• The government cannot afford to fund Medicare or Social Security.
• The U.S., like the EU nations, can go bankrupt.
• Without increases in taxes or decreased spending, Medicare and Social Security will go bankrupt.
• Without tax increases, the federal government cannot afford to increase support for education, infrastructure improvements, bailouts for states, counties and cities, the military, research and local police.
• Gold is safer and more prudent than “paper” (fiat) money.
• The federal government needs to borrow to pay for deficit spending.
• Federal borrowing reduces the availability of lending funds.
• The two main reasons for the recent economic collapse were low interest rates and lack of federal credit supervision.
• Low interest rates stimulate the economy; high rates slow it.
• Taxing the rich does not hurt the poor.
• Cutting payments to doctors and/or taxing “Cadillac” health insurance plans, is one good way to help pay for improved health care.
• The federal debt ceiling has a beneficial function.

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

–Why the states are in financial trouble

An alternative to popular faith

Most of the states are deeply in debt. Some of them even have stopped paying their bills. I live in Illinois. It is a deadbeat state. Our newspapers run editorials suggesting solutions to Illinois’ huge budget problems. These solutions detail tax increases and spending cuts. Sound familiar?

Neither solution will work. All states, counties and cities should understand why even the most well considered tax increases and spending cuts cannot solve their financial problems.

Yes, Illinois has among the most dishonest groups of political leaders. And yes, Illinois ranks in the upper 10% of the most distressed states. But it’s not entirely the fault of our crooked politicians.

No political entity, whether it be country, state, county or city can prosper and grow, unless it either can create money or obtain money from outside. Spending reductions reduce services and negatively impact the economy, which reduces tax collections in a never-ending downward spiral.

Tax increases merely circulate money within the political entity.Additional money is needed, because even nominal inflation reduces the real value of money. Imagine that together, the state of Illinois, its counties, cities and citizens, owned a total of $100 billion. To balance its budget, Illinois decides to raise taxes, which takes $10 billion from taxpayers and sends it to the state, which then sends the $10 billion back to the taxpayers when it pays its bills.

What has happened? Essentially nothing. There still is a total of $100 billion in the state, except after a year, even with a modest annual inflation of 2%, this money now is worth only $98 billion in purchasing power. After ten years of 2% annual inflation, that same money now is worth less than $82 billion.

Another reason the states, counties and cities cannot survive on taxes alone: Federal taxes remove money from the state every year, and as the money supply declines the state’s economy declines.

Unlike the federal government, Illinois cannot create money at will. It must obtain money from outside its borders. There are but two sources of outside money. One is exporting. We can send goods and services to other locations, which will send us money. But it is quite difficult for any state’s exports to exceed its imports by enough to grow its economy and stay ahead of inflation. An oil-rich state like Alaska and a tourism state like Nevada, both have money coming in from outside. But even these states eventually need a source of additional income.

And that source is the federal government, which in 1971 ended the gold standard, giving itself the unlimited ability to create money, not supported by taxes. By comparison, Greece is not so fortunate. It is limited by the “euro standard.” Illinois is limited by the “dollar standard.” All three standards limit money creation.

Despite fears of “big government,” the federal government must assume more financial obligations. As states, counties and cities continually raise taxes, they find they are in a never-ending, futile cycle, not just because of inefficient management, but also because it is long-term impossible for any political entity to survive, much less grow, without the ability either to create its own money or to receive money from outside its borders.

Rather than pundits calling for ever higher taxes and/or reduced spending, neither of which add to the money supply, they should demand more federal support. Mathematically, that is the only lasting solution.

In summary: The anti-big-federal-government crowd fails to take into consideration the fact that unlike the federal government, the states, counties and cities are unable to create money. When any political entity is unable to create money, its economy will stagnate, unless it receives funds from outside. Worse than stagnate, its economy will decline because inflation makes its own money lose value.

Ongoing economic growth demands ongoing money growth by the federal government.

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

–Three Equivalent Standards: Gold, Euro and Dollar

An alternative to popular faith

A gold Standard, indeed any Standard, consists of two parts: An asset (gold) and a system. Of the two, the system plays the leading role.

In any Standard, the system requires that for every unit of currency a country issues, that country must own a fixed amount of the chosen asset. The fundamental purpose and effect of a gold Standard, or of any Standard, is to restrict the ability of a nation to issue money.

Gold has been a popular asset with attractive attributes. It’s consistent, malleable, permanent, pretty and scarce. But, other assets can be part of a Standard, for instance: silver, platinum, copper, wheat, the euro. The euro?

Yes, nothing says the asset in a Standard must be a physical substance. The only necessary attribute is some degree of scarcity. Today, much of Europe is on a “euro Standard.” This means that to spend money, each nation first must obtain euros. The fact that the money and the euros are identical is irrelevant. Rather, the necessity of owning euros restricts each nation’s issuance of money. This restriction is the key to any Standard.

The United States abandoned the gold Standard in 1971 because it restricted the issuance of dollars. The U.S. found itself unable to obtain enough gold to fund its growing economy. It easily could have been unable to service its debts, i.e. gone bankrupt. With the elimination of the gold Standard, the U.S. government demonstrated it is able to service any size debt, while creating unlimited money to fund economic growth.

Today Greece finds itself in the same restricted position. Being on the euro Standard, Greece is now unable to create sufficient currency to fund its growth, and having been forced to borrow, now faces the (unlikely) prospect of bankruptcy. The EU has ordered Greece to reduce its debt supply (aka money supply) by raising taxes and reducing expenditures – a prescription for recession and depression.

Any political entity that cannot create money eventually will be unable to service its debts, and faces economic stagnation and ultimately, bankruptcy. American states, counties and cities are on the “dollar Standard.” Unlike the federal government, they cannot spend money without obtaining dollars. Over time, all must obtain money by raising taxes and/or cutting expenditures, both of which have a depressing effect on their economies.

To save the state, county and city economies, the U.S. federal government increasingly must support local spending. Roads, bridges and dams are local initiatives, once the financial responsibility of local governments, that will need to be funded by the federal government. Education, local transportation, infrastructure, health care and anti-poverty programs also will require federal support to prevent local economic disaster or bankruptcy.

The federal government, because it can create unlimited money without taxation, ultimately will fund the vast majority of local programs, the key political question being: Who will have the power to direct these programs, local agencies or the federal government? The anti-“big government” people do not take this reality into consideration.

Just as the American states, counties and cities can, must and will be supported by the U.S. government, the members of the EU can, must and will be supported by the only entity with the unlimited power to create money: the EU itself.

Eventually, it will become apparent that forcing EU nations to raise taxes and reduce spending only will serve to make economic growth impossible. At that point, the EU will assume the money-creation role for the euro. Thus, the euro will force a de facto “United States of Europe,” well before formal treaties are ratified.

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

–Jim Bunning and the populist health care position

An alternative to popular faith

In a March 4, 2010 editorial titled, “Bunning had a point,” the Chicago Tribune wrote: “Bunning had a very good point. Congress won’t pay for what it spends.” What the writer meant is, Congress doesn’t levy as much in taxes as it spends — the old balanced-budget theme. The editorial goes on to criticize President Obama: “‘Congress can only spend a dollar if it saves a dollar somewhere,” ‘President Obama proclaimed.’ But here Congress was spending $10 billion without saving a dime elsewhere.”

If there is one statement that is the uncontested bedrock of truth in economics, it’s this: A growing economy requires a growing supply of money. That statement actually is a tautology, for the very definitions of economic growth are measured in terms of money. Big economies have more money than do small economies, so for any economy to go from small to big, it has to increase its money supply, and for real growth, it has to increase its per capita money supply.

What is money? Every form of money is a form of debt. Bank accounts are bank debts. Credit card accounts are card-holder debts. Money market accounts are money market debts. Travelers’ checks are debts of the issuer. T-bills are federal debts. All are money and all are debt. There is no form of money that is not a debt. Even dollar bills (which have the words “Federal Reserve Note” printed on them) are debts of the U.S. government. ( “Bill” and “Note” are words signifying debt.)

So, to grow the economy, we must increase the money supply, i.e. increase the debt supply. But whose debts should we increase? We can select from personal, bank, business, state or local government and federal debts.

Shall we increase personal debts? That often is part of economic growth, though it can get to dangerous levels, at which time the frequency of bankruptcy increases and the economy suffers. So there is a limit to personal debt. Further, increases in personal debt usually are the result of economic growth, seldom the cause. And finally, what action could America’s politicians take to force increases in personal debt?

Shall we increase bank debt, also known as “savings accounts”? Increased saving sometimes is thought (wrongly) to be beneficial to the economy. Of late we have seen complaints that saving instead of spending slows the economy.

Shall we increase business or state and local government debt? Like personal debt, this can be dangerous debt. Many state and local governments already are over-borrowed, and are trying to reduce their debt.

That leaves the federal government as the safest source of increased debt/money. The federal government has the unlimited ability to create money; it cannot run out of money; it cannot go bankrupt; it has complete control over its debt-creation; it even can control the inflation some feel results from money creation. In short, the federal government is the ideal source of additional money to grow our economy

But the Chicago Tribune wants a balanced budget, meaning the federal money supply does not grow. Worse yet, in a balanced budget, the real money supply shrinks. Say in year 1 the money supply is $10 trillion and inflation is only 2% annually. By year 2, the real value of that $10 trillion has shrunk to $9.8 trillion. By year 10, with the same ongoing inflation, that balanced budget money supply has shrunk in real value to only $8.2 trillion. A balanced budget, with only 2% annual inflation, will cause our real (inflation adjusted) money supply to shrink almost 20% in ten years.

To achieve economic growth, the per capita money supply growth must exceed inflation, the trade deficit (which sends money overseas) and population growth, combined.

So yes, President Obama deserves criticism, but not for wanting to spend too much or tax too little. He deserves criticism for his populist, balanced-budget pronouncements, which by disparaging money growth, hurt America.

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