Tag: deficits

–John Mauldin, debt hawk pushing on a string

The debt hawks are to economics as the creationists are to biology.

John Mauldin makes a living writing about economics. He posts a blog called “The Big Picture” One of his more recent posts (9/28/10), titled, “Pushing on a string,” contained this observation: “What is needed is fiscal austerity (slowly) before debt spirals out of control. . . “

I entered the following comment to his post:

It’s nice to see that John remains a typical debt-hawk. He never says what “out of control” means, because debt hawks never offer specifics. So let’s speculate:

Does it mean the federal government will be unable to service its debt (the normal meaning for “out of control”)? Nope. Couldn’t be that. As a monetarily sovereign nation since 1971, the U.S. federal government has the unlimited ability to service its debt.

So, does it mean we’ll have inflation? Nope. Since that fateful August 1971 date, there has been no relationship between federal deficits and inflation. Since that time, the cause of inflation has been energy prices.

So, does it mean taxes will be higher or our grandchildren will owe the debt? No, there is no modern (post-1971) relationship between tax rates and inflation or deficits. Our grandchildren actually benefit from federal spending. So what does “out of control” mean. No one knows. I suspect it means something like, “It’s big and I don’t like the word ‘debt.’”

Oh, then there is the “problem” of banks not lending, which is another way of saying, adding to private debt. Does it strike anyone as curious that the pundits want the private sector to borrow more, while these same pundits want the federal government to borrow less? Here is the private sector, where bankruptcies are rampant, and the pundits want more borrowing. And here is the government, which can service a debt of any size, and functionally is incapable of bankruptcy, and the debt hawks want to restrict debt.

And then there is the debt hawk call for less federal spending and more taxes (the only way to get the federal debt down), while being vaguely aware that federal spending is stimulative and taxes hurt the economy.

Oh, you don’t like stimuli because they “don’t work.” Then you will enjoy the story of the man whose roof was on fire. His neighbor showed up with a garden hose and actually was able to reduce the flames, but only somewhat. The neighbor wanted to call the fire department, who would bring out the big hoses, but the man told him to stop, because “The fire still is burning, so obviously, water doesn’t put out fires.” And just as “obviously,” adding money doesn’t cure a recession.

The reason debt hawks continually call for conflicting actions is they begin with a false assumption. The assumption: Federal debt has an adverse effect on the economy. The truth: Federal debt is absolutely necessary for economic growth. Without it, we would have no economy at all.

But try telling facts to a debt hawk.

John has not and will not respond, which is a debt hawk custom. They don’t respond because they have no facts with which to respond. But I’ll give them this: Even with no facts they have managed to convince the world. I’m envious.

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

No nation can tax itself into prosperity.

–How the debt hawks continue to help destroy our nation.

The debt hawks are to economics as the creationists are to biology.

Thank you debt hawks. You have sowed the wind, and we all reap the whirlwind.

September 8, 2010: (AP)“Obama said the struggling U.S. economy can’t afford to spend $700 billion to keep lower tax rates in place for the nation’s highest earners despite a call by House Minority Leader John Boehner and other GOP leaders to do just that.”

Dear Mr. President,

Either you do not understand economics, or your political desire to foment class warfare has trumped your desire to save America. You remind me of a man who does not believe water quenches fires, so you allow the house of America to burn rather than to receive the water (federal spending) it needs to quench the recession fire.

Think of what you’re saying. “The U.S. economy can’t afford . . .”??? Since when is the federal government the same as the U.S. economy? And please explain why the government can’t afford to help the economy. Is there truly a danger our government, which has the unlimited ability to create money, can go broke? Please explain to America how a monitarily sovereign nation, that creates money at the touch of a button, cannot afford to support the economy. Please explain why you are more worried about a federal deficit (which actually benefits America), than about the lives of the Americans who depend on you.

The house is burning, Mr. President. People are suffering. This is no time to play politics or to follow obsolete, debt-hawk, economic theories. Taxes – all taxes – hurt the economy. Always, always, always. Federal spending – all federal spending – helps the economy. Debt-fear is killing helpless, innocent people, who do not understand what is happening to them.

They voted for you. They trusted you. Put out the fire. Cut taxes. Increase spending. Save the economy.

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

No nation can tax itself into prosperity

–A solution for unemployment

The debt hawks are to economics as the creationists are to biology.

The single most contentious subject in our economy is unemployment. Everyone is against it, but there is scant agreement about how to reduce it. Most of the suggested efforts involve federal spending of some sort, but there is widespread agreement among politicians, economists and the media, that the federal deficits and debt should not be increased.

So countless hours have been spent trying to find just the right combination of targeted spending and tax increases, that would reduce unemployment in a “revenue neutral” way, the belief being that some government spending and some tax cuts reduce unemployment while other spending and tax cuts do not.

As to which does which is not known by anyone, though ample, strong opinions are rife. So we offer this graph:

The above graph shows one of the more remarkable correspondences you will find in economics. Most of the time, when deficit growth goes up, unemployment tends to go down, and vice versa. Though one may argue that correspondence does not equal cause/effect, it certainly is suggestive. And what it suggests is this: Increases in federal deficit growth help prevent and cure unemployment, while decreases in federal deficit growth help cause and increase unemployment.

Yes, there are yearly exceptions. Unemployment is complex and there are no perfect correlations in economics, but the tendency is clear. The two lines are almost mirror images, save for recessions, when unemployment rises and federal debt rises to cure the recession.

Importantly, the graph doesn’t differentiate among different causes of deficit growth, nor does it identify where money is spent, nor whether tax decreases (if any) played a role. It merely shows that deficit increases — any deficit increases –reduce unemployment. This tells me that all the conversation about “revenue neutral,” or which taxes can be cut, or where money should be spent are not germane to unemployment, and merely reflect blue sky speculation by self-anointed experts.

In short, the graph seems to say: “Increase federal spending — any federal spending — and decrease federal taxes — any taxes, and stop all the mindless debate about things you know not.” Although I personally favor the immediate end to FICA taxes for Ten Reasons , I would accept seeing personal taxes reduced or eliminated.

And while I favor a simple stimulus in which a total of $1 trillion or more is sent to each state according to its population, I’ll settle for any equally ample spending idea. In short, deficits cure unemployment, so let’s have the deficits, now.

In 1971, we went made ourselves a monetarily sovereign nation, let’s not waste the opportunity this effort gave us.

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

No nation can tax itself into prosperity

–Which is more serious: Inflation or deflation?

The debt hawks are to economics as the creationists are to biology.

Which do you feel is more serious – inflation or deflation? The term “more serious” can refer to frequency of occurrence. Or it can refer to difficulty in prevention or cure. Or it can refer to its affect on the economy.

Stated simply, deflation is the opposite of inflation. As with inflation, deflation is expressed as a comparison of demand vs. supply. It is a reduction in the demand for, vs. the supply of, goods and services compared with the demand vs. supply of money.

Supply is a self evident concept. Demand is based on risk and reward. When applied to goods and services, the risk is further deflation. The reward is the inherent reward for obtaining the goods or services. When applied to money, the risk is inflation and the reward for owning money is interest.

In brief summary, deflation can occur when:
1. Money is perceived as becoming more valuable: The supply of money goes down and/or interest rates (reward) go up, while the perceived risk (of inflation or non-payment) goes down. The more likely combination is reduced money supply together with increased interest rates.

2. Goods and services are perceived as becoming less valuable: The supply of goods and services goes up, while the reward (quality) goes down, and or/the perceived risk (of deflation) goes up.

Put all these possibilities together and the most likely, deflation-causing combination is excess supply of goods and services compared with reduced money supply.

Inflation is fundamentally the opposite of inflation, so most of the causes of each tend to be opposites. The key difference relates to the supply of goods and services. In this world economy, it virtually is impossible for a broad number of goods and services to be in worldwide short supply, if money is available to buy them. For that reason, inflation rarely is the oft-mentioned, “Too much money chasing too few goods” – with one exception. Energy. Because energy costs and availability impact nearly every product and service, there is a modern historical relationship between oil prices and CPI.

All of the above leads to one interesting conclusion: While deflation can be caused by a shortage of money, inflation rarely is caused by an over-abundance of money.

If, in comparing seriousness, we mean frequency of occurrence, clearly inflation would be considered more serious. Deflations are rare, having occurred perhaps three times in U.S. history. Inflation is an annual occurrence.

If, in comparing seriousness, we mean difficulty in prevention or cure, I believe deflation is more serious. Inflation easily can be prevented and cured by raising interest rates, which increases the demand for money. There is no limit to how high interest rates can be raised.

By contrast, trying to use interest rates to prevent deflation runs into the obstacle of zero rates. Though negative rates may mathematically be possible, it is difficult to imagine many borrowers accepting negative rates. Thus, the sole prevention for deflation is increasing the money supply, which the debt hawks have made difficult.

If, in comparing seriousness, we mean affect on the economy, I believe deflation is far more serious. Modest inflation can be stimulative, in that it encourages consumers to buy today, rather than waiting for tomorrow. Deflation encourages delaying purchases, which negatively impacts the economy, and can cause a feedback loop of lower and lower prices, longer and longer delay.

All of the above considered, I suggest deflation is far more serious than inflation.

Interestingly, debt hawk commentators, who are fixated on easily-prevented, easily-cured inflation, seldom mention deflation as a threat. The reason may be that there is no debt-hawk prevention or solution for deflation, as the sole solution (increased federal spending) is considered out of the question. Yet here we are, struggling against deflation, while Congress and the media preach against the one action that can prevent it.

Next time I’ll discuss stagflation, every mainstream economist’s nightmare.

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

No nation can tax itself into prosperity