What is the complex relationship among inflation, deficits, interest rates, oil prices, tax cuts, and GDP? Saturday, Mar 17 2018 

It takes only two things to keep people in chains:
.

The ignorance of the oppressed
and the treachery of their leaders.

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To answer the title question, we begin with three questions:

  1. What is the primary cause of inflation?
  2. What is the primary cure for inflation?
  3. What do high interest rates do to Gross Domestic Product?

If you ask the media, most economists, and the public to answer question #1, you probably will receive an answer something like the following:

Should we worry about inflation?
The Week, March 3, 2018

“Until recently, inflation seemed to be dead or, at least, in a prolonged state of remission,” said Robert Samuelson at The Washington Post.

Thanks to cautious companies holding down wages and prices in the aftermath of the recession, annual inflation between 2010 and 2015 averaged just 1.5 percent, “often too small to be noticed.” 

Apparently. Mr. Samuelson believes that prior to the “Great Recession,” companies were not cautious, and so were willing to pay employees more. But, having been frightened by the recession, they now refuse to pay employees more — and that has prevented inflation.

Utter nonsense. Caution has nothing to do with it.

Employers are buyers of talent. Like all buyers, employers try to pay as little as possible to obtain the employee quality they want. Isn’t that what you do when you buy anything?

Companies cannot “hold down” wages at will.

And as for prices, they are a reflection of each company’s market analysis. Companies try to set prices at levels that will provide the highest short- and long-term profits, volume, and share-of-market.

While Robert Samuelson wrongly seems to believe that business “caution” has prevented inflation, most people wrongly believe that federal deficit spending causes inflation.

The green line is inflation. The blue line is federal deficit spending.

Federal deficit spending does not parallel inflation. 

Inflation is a general increase in prices, and if there is one thing that generally increases (or decreases) prices it’s oil.

The green line is Inflation; the silver line is the price of Oil.

Oil prices parallel inflation.

No other factor so closely parallels inflation as does oil — not food, not housing and certainly not wages:

The green line is Inflation; the violet line is Wages

Contrary to popular wisdom, wage increases do not parallel inflation increases. 

In January, the Consumer Price Index, which tracks everything from the price of groceries to education costs, surged 0.5 percent; at that pace, annualized inflation would hit 6 percent by the end of the year.

It almost certainly won’t go that high, but it leaves newly installed Federal Reserve chairman Jerome Powell “facing a tricky task”: to contain inflation “without killing the economy.”

Traditionally, the Fed would respond by raising interest rates, said  The Wall Street Journal in an editorial.

Yes, while inflation primarily is caused by rising oil prices, inflation is controlled by increasing the value of the dollar, which is accomplished by raising interest rates.

(Value of the dollar = Demand/Supply; Demand=Reward/Risk; Reward=Interest)

But the corporate tax cut and President Trump’s deregulatory agenda could rapidly accelerate economic growth.

That could further fuel inflation, prompting the Fed to raise rates faster than anticipated. In the worst-case scenario, this will severely roil markets and darken the economic outlook.

Contrary to popular wisdom, economic growth does not cause inflation:

The green line is inflation. The orange line is GDP growth.

GDP growth does not parallel inflation.

The Fed’s most potent tool in fighting downturns is cutting interest rates. “Total cuts of 5 to 6 percentage points have been the norm in recent recessions.”

Wrong, again. Low interest rates do not stimulate economic growth:

The blue line is GDP growth. The red line is interest rates.

As interest rates fall, economic growth falls. There are several reasons for this, but the point is that low rates are not stimulative. In fact, by increasing the amount of interest money the government pumps into the economy, high rates can be stimulative.

Goldman Sachs expects the Fed to raise interest rates eight times over the next two years, largely to head off higher prices.

Each time the Fed raises rates, the stock market will respond negatively, only to rebound within a few days.

The negative response will be due to traders’ predictions that the market will respond negatively, not to any fundamental factors.  It is a self-fulfilling prophecy.

Finally, we come to tax cuts. Although business tax cuts ostensibly help businesses grow, by cutting business costs, tax cuts actually help shareholders profit. The real, net effect of business tax cuts is to widen the gap between the rich and the rest. 

BUSINESS The news at a glance
Taxes: Firms spend tax windfall on buybacks
The Week (US)

U.S corporations are spending most of their (tax cut) windfall not on higher wages or investment but on “buying their own shares,” said Matt Phillips in The New York Times. Over the past month, nearly 100 U.S. corporations have announced more than $178 billion in share buybacks—“the largest amount unveiled in a single quarter.”

Cisco is devoting $25 billion to buybacks; PepsiCo has announced $15 billion for shares; and Alphabet, home-improvement company Lowe’s, and chip equipment maker Applied Materials are each devoting between $5 billion and $9 billion.

“Such purchases reduce a company’s total number of outstanding shares, giving each remaining share a slightly bigger piece of the profit pie.”

“If the buyback frenzy continues, the administration is going to have some explaining to do,” said Jennifer Rubin in The Washington Post.

Part of the problem is that the Trump administration predicted that tax reform would boost U.S. household income by at least $4,000 a year.

Business tax cuts will stimulate the economy and will boost total household income, because tax cuts add dollars to (or remove fewer dollars from) the economy.

However, the benefits will go primarily to the upper-income groups.

In summary, contrary to popular opinion:

  1. Inflation has not been related to federal deficit spending but rather to oil prices.
  2. Wage increases have not been associated with inflation
  3. Inflation and economic growth have not been related
  4. Interest rate cuts have not stimulated economic growth, nor have interest rate increases slowed economic growth
  5. While business tax cuts do stimulate overall economic growth, the benefit primarily goes to the upper-income groups, thereby widening the gap between the rich and the rest.

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

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THOUGHTS

•All we have are partial solutions; the best we can do is try.

•Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

•Any monetarily NON-sovereign government — be it city, county, state or nation — that runs an ongoing trade deficit, eventually will run out of money no matter how much it taxes its citizens.

•The more federal budgets are cut and taxes increased, the weaker an economy becomes..

•No nation can tax itself into prosperity, nor grow without money growth.

•Cutting federal deficits to grow the economy is like applying leeches to cure anemia.

•A growing economy requires a growing supply of money (GDP = Federal Spending + Non-federal Spending + Net Exports). Federal deficit spending grows the supply of money

•The limit to federal deficit spending is an inflation that cannot be cured with interest rate control. The limit to non-federal deficit spending is the ability to borrow.

•Until the 99% understand the need for federal deficits, the upper 1% will rule.

•Progressives think the purpose of government is to protect the poor and powerless from the rich and powerful. Conservatives think the purpose of government is to protect the rich and powerful from the poor and powerless.

•The single most important problem in economics is the Gap between the rich and the rest.

•Austerity is the government’s method for widening the Gap between the rich and the rest.

•Everything in economics devolves to motive, and the motive is the Gap between the rich and the rest..

MONETARY SOVEREIGNTY

–The lessons Sweden taught us — misinterpreted. Wednesday, Jun 29 2011 

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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Sweden survived the recession better than most countries, and now the economists try to explain why (also known as predicting the past). Here are excerpts from an article in the Curious Capitalist blog.

STOCKHOLM — Almost every developed nation in the world was walloped by the financial crisis, their economies paralyzed, their prospects for the future muddied. And then there’s Sweden, the rock star of the recovery.
[. . . ]
The overarching lesson the Swedes offer is this: . . .

1. Keep your fiscal house in order when times are good, so you will have more room to maneuver when things are bad. In 2007, before the recession, the U.S. government had a budget deficit equivalent to 3 percent of its economy, as did Britain. Sweden, meanwhile, had a 3.6 percent surplus.

So when the recession hit, that surplus gave its government a cushion in the downturn and it didn’t run up the huge debts that in other advanced nations have now created the risk of a future crisis.

Sweden is Monetarily Sovereign. Surpluses do not provide a cushion to a nation with the unlimited ability to create money. Surpluses only destroy money. But there is an important point here. I often have pointed out that surpluses lead to depressions (See: Introduction) So how did Sweden not only survive its surpluses, but thrive. The answer: A positive current account balance.

If you go to list of countries and territories by current account balance, based on the International Monetary Fund data for 2007 you will see that little Sweden had a $21 billion positive balance, while the U.S. had a $561 negative balance.

When money flows into a nation, that nation can destroy money (aka “run a surplus”) and still grow. When money flows out of a nation, that nation must create money (aka “run a deficit”) in order to grow.

2. Fiscal stimulus can be more effective when it is automatic. Sweden didn’t do much in terms of special, one-off efforts to spend money to combat the downturn. There was some extra infrastructure spending and a well-timed cut to income tax rates, but the most basic response to the government was to do what the nation’s social welfare system — lavish by American standards — always does: Provide income, health care and other services to people who are unemployed.

Yes, these are the very things the Tea (formerly Republican) Party objects to. These oh-so-patritic folks do not believe needy people should be rewarded for “indolence,” nor should the sick receive special help, just for being sick. The Tea/Republican Party’s cold-hearted ignorance has worsened and lengthened everyone’s pain from the recession.

In the United States, the battle over whether to use government spending to cushion the blow of the downturn became a divisive one. Whether to try to stabilize the economy became one more battle in the longer term war over the proper role of government.

And because the $800 billion fiscal stimulus that Congress and the Obama administration enacted in early 2009 consisted mostly of special, one-time programs, it took months for many of them to begin pumping money into the economy, thus kicking in months or even years after the economy had collapsed, and the spending expired without regard to whether the need remained.

Exactly correct. The smartest stimulus we did was the first one – those $500 checks sent directly to taxpayers. Perfect. Give people money, and they will spend or save it. Either way, the economy is stimulated. At the time I said it was too little, too late, and that proved correct. Had the government sent $5,000 rather than $500, the recession would have ended. The unfounded fear of debt (federal money creation) trumped concern about the real recession.

3. Use monetary policy aggressively. The Federal Reserve has won both plaudits and criticism for responding aggressively to the financial crisis, pumping money into the financial system in epic fashion. But by one key measure, the Swedish central bank was even more aggressive.

Like the Fed, the Riksbank lowered its target short-term interest rate nearly to zero. But it also expanded the size of its balance sheet more than the Fed did relative to the size of its economy, flooding the financial system with even more cash during the height of the crisis.

In summer 2009, the Riksbank had assets on its balance sheet equivalent to more than 25 percent of the nation’s gross domestic product. For the Fed, that level never got much over 15 percent.

Fortunately for the Swedish, they do not suffer from the Tea/Republican Party’s erroneous views.

The Scandinavian nation of Sweden has accomplished what the United States, Britain and Japan can only dream of: Growing rapidly, creating jobs and gaining a competitive edge. The banks are lending, the housing market booming. The budget is balanced.

Should have read, “Despite the balanced budget.”

4. Keep the value of your currency flexible. Sweden has declined to adopt the euro currency, and in hindsight that looks wise. The changing value of the Swedish krona was a helpful buffer against the economic downdraft of the past few years.

In the depths of the financial crisis, the krona fell in value against both the dollar and the euro, as global investors sought the safety of putting their money in the most widely circulated currencies. That helped make Swedish exporters more competitive at a time when global demand was collapsing, working as a sort of pressure valve.

And now that the Swedish economy is looking up, the free-floating nature of the Swedish krona could hold a different advantage: Neighbor Finland, which also is experiencing solid economic growth, uses the euro. With other parts of Europe in deeper economic distress, it could face inflation, because the European Central Bank sets policy based on the whole of the 17 nation currency zone. By contrast, Sweden’s monetary policy is based only on Swedish economic conditions.

While most of Europe committed financial suicide by adopting the euro, Sweden kept the single most valuable asset any nation can have: Monetary Sovereignty.

There is a lesson here for the United States as well: Maybe being the global reserve currency isn’t all it’s cracked up to be. During the crisis, the value of the dollar skyrocketed as world investors sought a safe place to put their cash.

That put American exporters at a distinct disadvantage in the global marketplace at the very moment the economy was at its weakest.

I long have told doubting debt-hawks that being the world’s reserve currency was not an advantage, but actually was meaningless. As the author states, under some circumstances, it even can be a disadvantage.

5. Bankers will always make blunders; just make sure they don’t doom the economy. Swedish banks didn’t make it through the 2008 crisis without major losses. To the contrary, they had lent heavily in the Baltic nations of Lithuania, Latvia and Estonia, which suffered an economic collapse.

Swedish financial officials don’t point to any single magic bullet in their regulatory approach. Rather, the Swedish banking system seems to have held up okay because the pain of the early 1990s was severe enough as to scar both bank executives and regulators, leaving them with little temptation to go into risky real estate lending in the mid-2000s, even when the rest of the world was doing just that.

In other words, although bank bailouts might be necessary to save an economy, it’s also important that bankers not be so cushioned from the consequences of their unwise decisions as to go straight back to the old ways as soon as it’s over. They need to at least have their mouths burned.

Actually, it’s the old-time economists who should have their mouths burned, for it was their ignorance that has led to the every-five-year recessions and the slow recovery. The facts sit right before their eyes, but these respected folks refuse to learn – and the world suffers.

The author of the article attributes Sweden’s success to “keeping the fiscal house in order,” i.e. to running a surplus. Nothing could be further from the truth. Sweden survives the same way Germany survives (though the former is Monetarily Sovereign and the later is monetarily non-sovereign). It survives by having money come in from outside its borders.

In short, a growing economy requires a growing supply of money. The key is not whether that money comes from government deficit spending or from a positive current account. The key is money growth, whatever the source — and not listening to the debt hawks. They are leech doctors, who apply leeches to bleed an anemic patient.

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


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No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetary Sovereign, , and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.

Remember that the next time you’re tempted to ask a teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it ruined my future.”

MONETARY SOVEREIGNTY

Ron Paul and the gold maniacs. How ignorance trumps fact in our political world. Tuesday, Jun 28 2011 

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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The Curious Capitalist posted the following article:

Fort Knox: What to Do with Old Yeller
Posted by Roya Wolverson Tuesday, June 28, 2011

Should the U.S. sell off its gold reserves to pay down debt? That’s the latest idea being tossed around by gold bug Ron Paul. Not only would selling Old Yeller help the U.S. pay its bills, says libertarian Paul, but it would put more gold in the hands of the American people and pull back the reins on the Federal Reserve, which is printing money like mad and debasing the value of our currency.

So insistent is Paul about this strategy that he challenged the government to a gold audit to make sure its stash of bullion at Fort Knox is really all there. (According to the Treasury’s inspector general, it is.) So is selling it a good strategy, or is Paul just a crazy kook?

Wonderful idea. The federal government exchange gold for dollars the federal government already has the unlimited ability to create??? What is his next suggestion – Hawaii exchange pineapples for salt water?

And as for “debasing” the value of our currency, the other word for that is inflation. So where is the inflation?

I see no relationship between “printing money like mad” and inflation, not for the short term (above graph) nor for the long term. Paul is just mouthing popular belief, with zero supporting data.

Can there be any doubt? The man is certifiable. Or just doesn’t give a damn about America in his hunger for political gain.

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


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No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetary Sovereign, , and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.

Remember that the next time you’re tempted to ask a teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it ruined my future.”

MONETARY SOVEREIGNTY

–A true United States of Europe is the best, long term solution Monday, Jun 27 2011 

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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John Mauldin, a popular blogger and financial advisor, published an article about a dinner he had with those whom he called “. . . 16 money managers and investors. All very well-informed.” He said,

Charles Gave sat across from me at the middle of the table, and we talked and debated as the rest asked questions and offered opinions for 3-4 hours. . . I was asked if I still thought the euro was going to parity with the dollar, and I said I did, although I was not sure what the euro would look like in three years, or who would be in it. There was some pushback from people who thought the dollar would be the weaker currency.

Clearly, these “very well-informed” people do not understand that the euro is a failed concept – or at least failed in its current form, as all euro nations are monetarily non-sovereign. Because monetarily non-sovereign nations have little control over their money supply, they always are in danger of bankruptcy.

So I asked for a show of hands as to how many people thought the euro would be higher in one year’s time. There were 6 hands raised, but one gentleman said he was actually abstaining. So I asked how many thought the euro would fall, and we got 12 hands. Yes, that is 19 votes for 16 people. Clearly there were at least three economists in the group who voted both ways!

Classic old-line economists. They understand neither the past nor the present, so they vote two ways about the future. That way they always can say the predicted correctly.

Then someone asked Charles about the issue. Now, for those who have never had the extreme pleasure of time with Charles, he is a powerful, white-haired French patrician, and one of the better economists I know. Quite a brilliant thinker and not afraid to express his mind forcefully with a voice that sounds like God talking, with about the same assurance . . . .

“The question is entirely irrelevant” – punctuating the air for added emphasis. “The euro will not exist in a year. The whole thing was dysfunctional from the beginning.”

I suggested that was a tad bearish.

“Not at all. I think it is extremely bullish. The demise of the euro and the return of national currencies will allow for proper allocation of investments and resources. It is the best thing that could happen for the markets.”

Finally, an economist who knows what he is talking about. Welcome to Monetary Sovereignty and Modern Monetary Theory, Mr. Gave.

At some point, Europe needs to realize that the problem with Greece, Portugal, et al. is not illiquidity, but that they are insolvent and have few prospects for economic growth anywhere close to what is needed to solve their problems.

Europe would be better off just taking the money they are giving to Greece and using it to recapitalize their banks. Let Greece go. Give it up. Let them enter a 12-step program or whatever it is that insolvent nations do. That is harsh, but it is also the truth.

Close, but no cigar. Rather than letting Greece go, the EU should let the euro go. For the minor expedient of making trade a bit more convenient, the EU nations surrendered the single most valuable asset any nation can have: Monetary Sovereignty.

Later in his article, Mauldin discusses the possibility of a military coup in Greece. I agree. I also believe other euro nations face the same coup possibility, unless there is a drastic revision in the way the euro is handled. All monetarily non-sovereign governments, being unable to create their currency, need an inward flow of currency from outside their borders. So, keeping the euro requires either an ongoing, positive balance of trade or ongoing support by the EU. The problem is identical to what the U.S. states (also monetarily non-sovereign) face, with one exception. They can have a positive balance of trade with the U.S. federal government.

A true “United States of Europe” would be the best long term solution, but there is too much hubris, hatred and history for that to happen. As I predicted in 2005,


“Because of the Euro, no euro 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.”

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


==========================================================================================================================================
No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetary Sovereign, , and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.

Remember that the next time you’re tempted to ask a teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it ruined my future.”

MONETARY SOVEREIGNTY

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