Tag: deficit

–What can save California?

An alternative to popular faith

California is broke and billions in debt. It’s unlikely California can pay its debts with tax increases and/or spending cuts, either of which could destroy the state’s economy. Tax increases and spending cuts always cause national recessions; the same would likely happen to California.

The best solution for California, and for all the other states in financial trouble, is to have the federal government step in with the necessary billions, which it easily could do. The government merely would credit California’s checking account at the Federal Reserve Bank, and debit its own balance sheet — a step it can take as easily, as repeatedly and as endlessly as the Rose Bowl scoreboard changing a score.

However, that won’t happen under current circumstances. The debt hawk belief that federal deficits are a problem, makes such support politically toxic. There are, however, two events which could force the federal government’s hand: Bankruptcy or disaster.

If California were to announce it planned to declare bankruptcy, businesses world wide would be threatened with ruin. Remember, California is one of the largest “nations” in the world — reputedly the 8th largest ( CALIFORNIA ) ahead of Russia and Spain. The federal government could not ignore such a threat, and would have to pay some or all of the bills, by a direct infusion of money.

Or, it could delay the inevitable, by lending California money ala Greece. (Loans to GM and Chrysler et al do not provide a model, because California cannot lop off large sections of its business and turn away from its citizens as companies can. So such loans, or even loan guarantees, just would put California deeper in debt.)

The other “solution” for California, though having terrible human consequences, would be to undergo a sufficiently large disaster, the most likely being a huge Los Angeles, earthquake, perhaps in the 8.0+ range. The government would declare LA County, perhaps even Southern California, a disaster area, and step in with the billions necessary to rebuild. Many of those billions would spread around the state, allowing the economy to recover.

Yes, FEMA didn’t rebuild New Orleans as it should have, but Louisiana doesn’t have California’s political clout, with only 9 electoral college votes compared to California’s 55.

I don’t know whether Governor Schwarzenegger has begged hard enough for federal support. Perhaps he is waiting for “the Big One.”

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

No nation can tax itself into prosperity

–A mainstream economist writes about the EU

An alternative to popular faith

Readers of this blog and Modern Monetary Theory blogs know the mainstream economists have been ignorant about the realities of today’s post-gold-standard economy, and this ignorance has caused untold damage, as ignorance always does.

Here is a perfect example. John Cochrane, professor of finance at the University of Chicago, wrote an article titled, “Greek Myths and the Euro Tragedy,” published in the May 18, 2010 Wall Street Journal. His concluding paragraph read:

”The only way to solve the underlying euro-zone fiscal mess (and our own) is to slash government spending and to focus on growth. Countries only pay off debts by growing out of them.. And no, growth does not come from spending, especially on generous pensions and padded government payrolls. Greece’ spending over 50% of GDP did not result in robust growth and full coffers. At least the looming worldwide sovereign debt crisis is heaving “fiscal stimulus” on the ash heap of bad ideas.”

Let’s examine this amazingly clueless article, sentence by sentence: ”The only way to solve the underlying euro-zone fiscal mess (and our own) is to slash government spending and to focus on growth.” By definition, economic growth requires money growth. There is no known mechanism by which a nation simultaneously can reduce net money creation (aka “deficit spending”), while promoting growth.

”Countries only pay off debts by growing out of them.” Wrong. Countries pay off debt by creating the money to pay the debt. Economic growth does not pay for government debt. Countries do not pay debt with GDP or with taxes on GDP. In a monetarily sovereign nation, as is the U.S., taxes do not support spending. Were taxes to drop to zero, the government’s ability to spend would not be affected by even one penny.

”And no, growth does not come from spending, especially on generous pensions and padded government payrolls.” Federal spending does cause growth, which is why every recession and depression in U.S. history has been cured with increased federal spending. As for “generous pensions and padded government payrolls,” this represents money paid to real people, who will spend this money on goods and services to stimulate the economy. Professor Cochrane must believe there is some strange force that will cause reductions in private spending to stimulate the economy.

”Greece’s spending over 50% of GDP did not result in robust growth and full coffers.” Since when is 50% of GDP a magic spending number? Greece’s problems relate to its inability, caused by EU rules, to create money to service its debt. (Greece is not monetarily sovereign.) Spending as a percentage of GDP is irrelevant to causing or to solving its problems, which only can be solved by an infusion (not a reduction) of money.

”At least the looming worldwide sovereign debt crisis is heaving “fiscal stimulus” on the ash heap of bad ideas.” Here is monetary ignorance at its best. Greece is not a monetarily sovereign nation; the U.S. is. Any blanket statement about national debt, that does not take this difference into consideration, is certain to be wrong. The notion that the U.S. could be emerging from our recession without fiscal stimuli, would be laughable were it not so sad. If anything, the stimuli were too little, too late (See April 9, 2008 LETTER )

In summary, Professor Cochrane merely parrots bits and pieces of things he has heard from various (wrong) sources, and with them created an article, stunning in its inaccuracy, but printed by the Chicago Tribune, probably because he is from the University of Chicago, a hotbed of obsolete, mainstream economics. It is their influence and leadership that has resulted in an average of one recession every five years. Is there any way they could have done worse?

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

No nation can tax itself into prosperity

–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