The myths that stare you right in the face

Economics is a quasi-science that is battered by psychology, philosophy, tenure, reputation, politics, rumor, convoluted jargon, and oh yes, perhaps a touch of actual science.

It is loaded with data, graphs, and charts, all of which tend to be ignored in favor of intuition and prior beliefs. These beliefs constitute the myths that stare you right in the face, so easily seen you only can be astounded that they still exist.

Here is one example from Investopedia:

Debt-to-GDP Ratio
By WILL KENTON, Updated June 30, 2021, Reviewed by JULIUS MANSA

The debt-to-GDP ratio is the metric comparing a country’s public debt to its gross domestic product (GDP). By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts. Often expressed as a percentage, this ratio can also be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment.

You would be forgiven for believing that because a country’s public debt/GDP ratio “reliably indicates that particular country’s ability to pay back its debts,” you would assume that lower ratios indicate a better ability to pay debts.

But no, this being economics, the public debt/GDP ratio does not mean that at all. In fact, the ratio has no meaning.

Well, perhaps that’s a bit strong. It must have some meaning, but no one knows what the meaning is. Clearly, it has no predictive or analytical value with respect to a nation’s ability to pay its debts.

If you want a good laugh, look at the following ratios, and try to use them to decide which nations are best able to pay their debts:

Debt/GDP ratios by country
Japan 237.00% Greece 177.00% Lebanon 151.00% Italy 135.00% Singapore 126.00% Cape Verde 125.00% Portugal 117.00% Angola 111.00% Mozambique 109.00% United States 107.00% Djibouti 104.00% Jamaica 103.00% Belgium 98.60% Dr Congo 98.50% France 98.10% Cyprus 95.50% Spain 95.50% Bahrain 93.40% Jordan 92.40% Canada 89.70% Argentina 89.40% Sri Lanka 86.80% Pakistan 84.80% Gambia 81.80% Suriname 81.40% United Kingdom 80.70% Mauritania 79.00% Costa Rica 77.47% Tunisia 76.70% Brazil 75.79% El Salvador 73.30% Croatia 73.20% Sao Tome And Principe 73.10% Austria 70.40% Belize 69.90% India 69.62% Bahamas 66.80% Hungary 66.30% Slovenia 66.10% Morocco 66.10% Albania 65.90% Qatar 65.80% Mauritius 64.60% Trinidad And Tobago 63.20% Yemen 63.20% Sierra Leone 63.00% Montenegro 62.27% South Africa 62.20% Malawi 62.00% Sudan 62.00% Uruguay 61.30% Israel 59.90% Germany 59.80% Finland 59.40% Ghana 59.30% Zambia 59.00% Ireland 58.80% Bolivia 57.70% Vietnam 57.50% Kenya 57.00% Ethiopia 57.00% Gabon 56.40% Seychelles 55.00% Mongolia 55.00% Kyrgyzstan 54.10% Zimbabwe 53.40% Laos 53.34% Namibia 53.30% Guyana 52.90% Nicaragua 52.50% Malaysia 52.50% Serbia 52.00% Dominican Republic 50.53% China 50.50% Ukraine 50.30% Myanmar 49.41% Ecuador 49.40% Iraq 49.40% Netherlands 48.60% Central African Republic 48.50% Azerbaijan 48.40% Colombia 48.40% Fiji 48.00% Slovakia 48.00% Tajikistan 47.90% Senegal 47.70% Oman 47.50% Chad 46.60% Algeria 46.10% Poland 46.00% Armenia 45.60% Mexico 45.50% Australia 45.10% Honduras 44.05% Equatorial Guinea 43.30% Malta 43.10% Georgia 43.00% Thailand 41.80% Philippines 41.50% Rwanda 41.10% Switzerland 41.00% Lesotho 40.90% North Macedonia 40.70% Norway 40.60% Papua New Guinea 39.80% Panama 39.48% Hong Kong 38.40% Iran 37.90% Tanzania 37.80% South Korea 37.70% Iceland 37.00% Latvia 36.90% Guinea Bissau 36.50% Lithuania 36.30% Romania 35.20% Sweden 35.10% Niger 34.70% Cameroon 34.00% Denmark 33.20% Turkey 33.10% Haiti 33.00% Liberia 32.00% Ivory Coast 31.90% Czech Republic 30.80% Nepal 30.20% Madagascar 30.10% Indonesia 29.80% Togo 29.50% Cambodia 29.40% Turkmenistan 29.30% Bangladesh 29.30% Taiwan 28.20% Chile 27.90% Guatemala 27.88% Peru 27.50% Moldova 27.40% Belarus 26.50% Maldives 24.80% Bosnia And Herzegovina 24.80% Bulgaria 24.50% Comoros 23.60% Uzbekistan 23.60% Botswana 23.00% Venezuela 23.00% Paraguay 22.90% Saudi Arabia 22.80% Burkina Faso 22.60% Luxembourg 22.10% Kazakhstan 21.90% Benin 21.60% Eritrea 20.10% New Zealand 19.00% United Arab Emirates 18.60% Cuba 18.20% Guinea 18.00% Nigeria 17.50% Libya 16.50% Palestine 16.40% Republic Of The Congo 15.70% Burundi 15.20% Kuwait 14.80% Russia 12.20% Bhutan 11.00% Eswatini 10.75% Egypt 9.00% Estonia 8.40% Afghanistan 7.10% Cayman Islands 5.70% Uganda 4.00% Brunei 2.40%

Presumably, Afghanistan, Cayman Islands, Uganda, Libya, and Brunei are more financially secure than such “poor nations” as Japan, the United States, and Canada.

And speaking of the US, we are just a touch “better” than Angola and Mozambique, and presumably not quite as solvent as France and Spain.

Idiocy.

The above data are not hidden. They are public knowledge, easily available for anyone to see. Yet repeatedly we see such incredibly uninformed statements as: “The ratio is used to gauge a country’s ability to repay its debt” and “The higher the debt-to-GDP ratio, the less likely the country will pay back its debt and the higher its risk of default, which could cause a financial panic in the domestic and international markets.

The problem with the Debt/GDP ratio is that it does not consider the differences between Monetary Sovereignty and monetary non-sovereignty, nor does it consider what really is “debt” and what erroneously is termed “debt.”

The US, United Kingdom, China, Canada, Australia and Japan, among others, are Monetarily Sovereign (MS). They never can run short of their own sovereign currencies. By contrast, France, Spain, Italy, Portugal are monetarily non-sovereign. They do not have a sovereign currency.

They are users of the euro, which is the currency of the European Union, not of any one nation. So, euro nations can and do run short of euros, and have difficulty paying euro-denominated debts, no matter what the ratios show.

Further, because an MS nation has the unlimited ability to create its own sovereign currency, it does not borrow that currency. Why would it?

What erroneously is termed “debt” actually is one or both of:

  1. The net of the difference between tax money received by the government and money spent by the government (aka “deficits”) and/or
  2. The total of deposits into government savings accounts.

As for #1, it is just a balance sheet number that has no debt-like inferences, simply because the federal government does not use tax dollars to pay its bills. It creates new dollars, ad hoc.

As for #2, it is not real “debt.” It is caretaker money, that the government does not touch. The accounts are similar to bank safe-deposit boxes, the contents of which are not the financial obligations of banks.

In short, the federal government pays back “debt” with debt. The higher the debt, the more money there is in debt accounts with which to pay back the “debt.” A “debt” of $25 trillion means the federal government has $25 trillion sitting in Treasury security accounts with which to pay off those accounts.

And, even if “Debt” actually referred to a government’s real debt, governments do not pay what they owe with GDP (private sector) money. They pay with government money. No government is able to foist its debts onto the private sector.

Finally, the Debt/GDP ratio is the classic apples/oranges comparison. The first term (“Debt”) has to do with a net historical accounting over the life of the nation, while the second term (GDP) is for one-year only.

For all the reasons mentioned above, the Debt/GDP ratio is meaningless, having zero predictive or analytical use, yet economics, politicians, and the media refer to it continually, as though it had some special power.

Though the myth stares them in the face, they continue to fall for it, like a mouse repeatedly caught in the same trap.

“Deficits” which actually should be called “surpluses,” because they mostly are an accounting of the dollars the central government pumps into the economy.

GDP is a common measure of a nation’s economy, and by formula, the greater the “deficit” (economic surplus), the greater is GDP.

This easily can be seen in the following graph:

Red line indicates deficits. Vertical gray bars indicate recessions.

The graph indicates that:

  1. Recessions are preceded by reductions in federal “deficit” (economic surplus) growth
  2. Recessions are cured by increases in federal “deficit” (economic surplus) growth.

Despite the well-known and obvious positive effect that federal “deficits” (economic surpluses) have on economic growth, economists, politicians, and the media almost universally decry anything that will “increase the deficit” or “increase the debt.”

Why is adding dollars (aka “deficits”) to the economy so disliked, when it is the only way an economy can grow?

Why is the federal government’s infinite ability to create dollars so misunderstood, when it has demonstrated this ability for the past 80 years?

Why is the obvious such a mystery?

There are only two possible answers. Either the vast majority of economists, politicians, and media people are too lazy and stupid to recognize simple fact, or the vast majority of economists, politicians, and media people are too bribed by the rich to admit simple fact.

This ignorance, whether feined or real, truly is disgusting. It hurts you every day as it denies you the benefits you could and should receive from the federal government.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

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THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.

The most important problems in economics involve:

  1. Monetary Sovereignty describes money creation and destruction.
  2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

  1. Eliminate FICA
  2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
  3. Social Security for all
  4. Free education (including post-grad) for everyone
  5. Salary for attending school
  6. Eliminate federal taxes on business
  7. Increase the standard income tax deduction, annually. 
  8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
  9. Federal ownership of all banks
  10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY