Tag: deficits

–John Mauldin spreads the old myths

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

You may have heard of John Mauldin, self described “investment writer/analyst.” He distributes an E-letter in which he discusses economics. I assume he has many readers who believe what he tells them. More’s the pity, because Mr. Mauldin seems to know little-to-nothing about economics.

Recently I received one of his E-letters, this one titled, “The Dark Side of Deficits.” Here are some direct quotes: “The research of Reinhardt and Rogoff demonstrates that when the government debt-to-GDP level gets to about 90%, trend growth seems to drop by about 1%. They do not offer an explanation, just an observation. My speculation is that it might be government spending and debt crowding out private savings, not leaving enough for productive private investment.”

Perhaps neither Reinhardt nor Rogoff offers an explanation simply because there is none. As readers of this blog know, the federal debt/GDP ratio is totally meaningless. “Federal debt” is the total accumulation of all federal debt for every year since the beginning of this nation; GDP is a one-year measure. Anyone quoting this ratio should stop, immediately. It is a nonsensical apples/oranges statistic.

At last count, Japan’s debt/GDP ratio was 210%, and according to a June, 2010 Associated Press article, “Earlier in the month, Japan upgraded its economic growth in the January-March quarter to an annualized pace of 5 percent from 4.9 percent in a preliminary report.” That’s with a 210% for the phony debt/GDP ratio!

Further, there is no economic mechanism for “government spending and debt to crowd out private savings.” The exact opposite is true. Federal deficit spending, which adds money to the economy, increases savings. The “crowding out” myth is so outrageously wrong, I never know whether to laugh at the ignorance or cry at the result of such beliefs.

Further quoting Mr. Mauldin, “. . . if we do not get control of our deficit spending, we (in the US) risk putting our growth in jeopardy.” Deficit spending adds money to the economy, and this economy is starved for money, but Mr. Mauldin suggests reducing the amount of money coming into the economy. Talk about putting our growth in jeopardy!

And here is a hint about the fundamental cause of Mr. Mauldin’s confusion. He says, “There are those among us who are like teenagers, wanting to make the easy choice and avoid the pain today, not worrying about the consequences down the road.” He seems to adopt the puritanical belief that anything easy or painless inevitably will have dire consequences. So he opts for the most painful solution to our recession — presumably some combination of painful tax increases and painful reduced federal support for things like Medicare, Social Security, infrastructure, environment, defense and education. I assume he has his teeth filled without novocaine.

Note to Mr. Mauldin: When someone is starving, the easiest, least painful choice is to feed them, not to remove food as you suggest. Money is the food of our economy, and adding money to a starving economy is the only sensible act.

But, of all the foolish comments in Mr. Mauldin’s E-letter, perhaps the most frightening was this one, describing his travels: “. . . back to Dallas for a speech to the local Tiger 21 group. Then, starting September 11, I fly to Amsterdam for the International Broadcasting Conference, then to Malta, Zurich, Mallorca, Denmark (speech open to public), and London, home for one day, and then off for a speech to Cambridge Brokers on the 24th. Then I’m in Houston on October 1 for another public speech.”

Good heavens, the man is going to innoculate and indoctrinate all those people with nonsense, and those people will tell others, who will tell others, and soon a huge number will believe they know something about economics, when in fact, they know less than nothing. They know wrong.

If you read Mr. Mauldin’s writings, just for laughs, then enjoy. But if you read for his economic analyses and his market predictions, be cautious.

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

No nation can tax itself into prosperity

–A wonderful book you will enjoy.

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

Let me tell you about a wonderful book. It’s short, simple and educational. It’s written in an easy, interesting style. It’s sure to be controversial. You can read it in an hour, and you never will forget it.

The title is Seven Deadly Frauds of Economic Policy, by Warren Mosler. Frankly, I’m not too crazy about the title. Sounds a bit dull. But I promise you, the title is the only dull part of this terrific book, that reads more like a novel than a text.

Yes, its an economics book, but not like most economics books. No formulas. No economics jargon. Just straightforward English, rational discussions that clear up some of the biggest, counter-intuitive mysteries about our economy. Learn how to cure the recession, how to save Social Security and Medicare, how to pay for universal health care, how to end federal debt problems — all kinds of good stuff.

You can read it for free, online by going to the above link and clicking: “Seven Deadly Frauds of Economic Policy (June 17, PDF Link).” Go ahead, do it. You absolutely will not regret it.

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

No nation can tax itself into prosperity

–Mr. Felix Salmon quotes popular myths

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

On August 19, 2010, Felix Salmon posted:

“There aren’t many things that the government can do to try to boost the number of jobs in the U.S., but at the top of the list has to be attempts to boost lending to small and medium-sized businesses. . . This morning, a Treasury announcement showed one way that this can and should be done. Treasury’s CDFI Fund has awarded just over $100 million to 180 local financial institutions, including $750,000 to my own credit union. That kind of money, leveraged and lent out to small businesses, can do more for creating jobs than just about any other government program. The CDFI initiative is small beer, however, compared to the Small Business Jobs and Credit Act, which would create a $30 billion fund to be used to encourage small banks to lend to small businesses. Combined with standard bank leverage, that could mean $300 billion in new, job-creating loans.”

Isn’t it odd that people who want the federal government (which cannot go bankrupt) to borrow less, also want the private sector (which is subject to bankruptcy) to borrow more? Mr. Salmon quotes the myth of fractional-reserve banking. It doesn’t exist. A bank’s lending is not limited by its reserves. A bank could have $0 reserves and still lend billions. The federal government lends all banks sufficient money to cover any amount of reserves. Bank lending is limited by capital, not reserves.

Popular wisdom holds that banks are at fault for not lending enough. Nonsense. Rather than trying first to indebt business, the government first should provide business with profits. It does this by buying goods and services, in short, by deficit spending.

Business borrowing is not the first stimulus for business growth. Profits come first; then borrowing. To borrow today in hopes of profits tomorrow, is a dangerous game. It’s exactly what homeowners did and this kind of thinking was the single most important reason for our recession. Small businesses go bankrupt so often, because they borrow without profits to support their borrowing. A loan should leverage profits, not hopes.

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

No nation can tax itself into prosperity

–Britain’s grand experiment: The debt hawk agenda

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

This should be interesting.

Here are some quotes from The Economist:
“The budget, unveiled by George Osborne, the new chancellor of the exchequer, in June: To balance the books, he raised some taxes, notably VAT, but three-quarters of the savings will come from spending cuts. Most government departments will shrink by a quarter, though Mr Osborne excluded the National Health Service from his savagery. In the heated debate between Keynesian economists (who worry that a weak world economy needs more government spending) and fiscal hawks (who believe deficits must be tackled now to stave off Grecian disaster), Britain is the prime exhibit for tough love.”

“Mr Osborne plans to get the job essentially done by 2014-15. If all goes to plan, the deficit will fall from 11% of GDP in 2009-10 to 2.1% in 2014-15. The structural deficit, which strips out the effects of the economic cycle, will drop from 8.7% of GDP to 0.8%. On a similar basis, the government will by then be running a small surplus on the current budget, which excludes net investment (due to be slashed anyway over the next couple of years). This is a much faster retrenchment than the previous Labour government envisaged. It planned to return the cyclically-adjusted current budget to balance in 2016-17. Labour’s fiscal consolidation would have amounted to 4% of GDP by 2014-15; Mr Osborne is aiming at 6.3%.”

Never mind that Britain can’t have a “Grecian disaster.” Britain is monetarily sovereign. Greece is not. Completely different situations. Raise taxes; cut spending. Government runs a surplus. That is the debt hawk mantra. If Britain actually follows through on these steps (doubtful), it will suffer terribly.

All you debt hawks out there; what is your prediction?

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

No nation can tax itself into prosperity