Tag: deficit

–Watch Ben Bernanke’s high wire balancing act

An alternative to popular faith

April 14, 2010: By JEANNINE AVERSA, AP Economics Writer; WASHINGTON – “Federal Reserve Chairman Ben Bernanke […] testifying before Congress’ Joint Economic Committee, also once again called on lawmakers and the White House to come up with a plan to whittle down record-high budget deficits.”

Ben Bernanke is a smart man. He knows federal deficits are nothing more than a balance sheet measure of money created by the federal government. He knows the $12 trillion debt merely is a statement that in the history of the United States, the federal government has created $12 trillion net dollars. He knows that to “whittle down record-high budget deficits” is another way to say, the government should create and spend less money.

But also knows the federal government cannot default on debts of any size, and creating and spending money stimulates economic growth. So, he favors continuing federal stimuli (aka deficit spending).

If you think that is a mixed message consider this: He said, “A credible plan to pare the deficit could provide the economy with benefits in the near term, including lower longer-term interest rates and increased consumer and business confidence.” And, “A moderate U.S. economic recovery is likely to warrant very low interest rates for a long time.”

First, he says the deficit should be reduced in order to lower interest rates. Then, he says the Fed will keep rates low for a long time. Question: If the Fed can keep interest rates low for a long time, why does Bernanke need a plan to whittle down deficits?

Is it to avoid inflation? There is widespread belief that large deficits cause inflation, despite history saying otherwise. See: Deficits, inflation and hyperinflation And though raising interest rates prevents and cures inflation, the Fed believes it must keep rates low to “increase consumer and business confidence.”

What’s a guy to do? He keeps rates low and deficit spending high. But, he knows the public believes deficits are too high (This is the same public that wants neither tax increases nor to forgo the benefits stimulus spending buys. It wants a magical deficit decrease.) So Bernanke, by seeming to agree with the public, takes the political route, saying in essence, “Those high deficits aren’t my fault. Blame Congress and the President. I’m just doing what’s necessary to help the economy,” (which, don’t tell anybody, means running big deficits and keeping rates low).

The balance is not between what’s good and bad for the economy. That’s the easy part. The balance is between what’s good for the economy and what’s good politically. They are quite different, and the high wire balancing act is tough.

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


–Are we inflating our way out of debt?

An alternative to popular faith

Some experts tell us the federal government wishes to “inflate its way out of debt.” The theory is this: During inflation, money loses value. For instance if the buying power of tomorrow’s dollar will be worth only 90% of today’s dollar, paying today’s $1,000 debt tomorrow will cost you only $900 in today’s buying power.

That is why, if you positively knew inflation will average 3%, borrowing money at 2% would net you more buying power than you have today. This was part of the lure of home ownership. Real estate inflation would make your house appreciate faster than your interest payments – an automatic profit.

Let’s say you have no money in the bank, but you are able to acquire a $100 thousand, low-interest-only mortgage to buy a house. The house inflates in value 10% a year. Ten years after buying the house, you could sell it for $260 thousand. You could pay off your mortgage principal and have tons of money left over. In essence you have inflated your way out of debt and made a profit, a nice, no-effort game, that millions of people played.

It’s a philosophy that, during inflation, can work for people, companies, and state and local governments, but not for the federal government.

You see, the federal government creates all the money it needs, to pay bills of any size. Unlike state and local governments, the federal government does not rely on taxes or any other income to pay its bills. If all federal taxes ended today, the federal government’s ability to pay its bills would not change by even one penny. No federal check of any size would bounce.

When you receive a federal check, you deposit it in your bank account. Your bank sends the information the government, which unfailingly credits your account. This credit to your account is not related in any way to taxes, inflation, balance of payments, T-securities or to any other economic reality. The federal government does not maintain a stash of dollars from which it pays bills. It merely creates money by crediting bank accounts. This may sound “too-good-to-be-true” or a “free-lunch,” but it’s the way federal financing works.

Further, the government owes virtually all its debts in dollars, which makes inflating useless. One trillion dollars in debt must be repaid with one trillion dollars, neither more nor less, regardless of inflation.

So the question is: If the government can pay any bill of any size, simply by creating all the money it needs and crediting bank accounts, and if no federal check ever bounces, why would the federal government need to “inflate its way out of debt”? The answer: It doesn’t.

Anyone who says the federal government wants to inflate its way out of debt simply does not understand the reality of federal government finance. They probably have confused federal debt with all other debt.

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


–The old “taxpayers’ money” fib


An alternative to popular faith

4/12/10: “WASHINGTON (AFP) – The US Treasury Department said Monday it would place its remaining holdings in Wells Fargo and five other bailed-out banks on the auction block over the next six weeks. […] ‘The proceeds of these sales will provide an additional return to the American taxpayer from Treasury’s investments in these banks beyond the dividend payments it received on the related preferred stock,’ said the department headed by Secretary Timothy Geithner.”

If someone repeats a lie often enough, they even begin to believe it themselves. You, dear reader, are a taxpayer, and you will not see one cent of that money. It will not lower your taxes. Nor will it lower your children’s taxes. Nor will it enable the federal government to spend more on other projects. Nor will it have any positive effect on you or the nation, whatsoever.

In fact, that auction will cost you money, because whatever money the federal government receives from the private sector is a de facto tax, and taxes do not add to taxpayers’ money. When those millions (billions?) come out of private hands, they will disappear as notations into federal balance sheets, reducing the total money supply, and inhibiting by some degree, economic growth.

Less growth means less money in your pocket. (Remember, this is the same government that added money to stimulate the economy.)

Any time you hear a government official or media hack say that money is going “to taxpayers,” realize this: It’s a great, big, fat lie, and it’s going to cost you.

Wait! I wonder whether Geithner isn’t lying, but really believes that “taxpayers’ money” nonsense.

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

–Debt Bomb Redux

An alternative to popular faith

Readers of this blog know the debt hawks have been telling us about the imminent explosion of the “debt bomb” since 1940, seventy (!) years ago. See: Federal debt a ticking time bomb/ and More debt bomb nonsense/.

Year after year, for seventy long years, Henny Penny has predicted the sky was about to fall, then each year has had to say, “Well maybe next year.” How often and how long can one repeat the same wrong prediction and still maintain any credibility?

Here’s the latest:

(CBS)The “Where America Stands” series: WASHINGTON, April 8, 2010; American Debt Threatens Status as World Power; Can America Still be the World’s Greatest Power, as the World’s Greatest Borrower? By Lara Logan
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“James Baker, Former U.S. treasury secretary, and U.S. secretary of state. ‘We’re in a real pickle,’ said Baker. ‘We will not be as important on the world scene if we continue to be a tremendously large debtor nation.’ […] I don’t think [America’s decline is] going to happen provided – one big proviso – that we deal with this debt bomb.’”

Although “debt bomb” is a catchy phrase, no one really knows what it means, nor does anyone supply evidence the federal debt is a “bomb.” Use of that phrase is a sure sign the speaker has no idea how today’s economy operates.

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