Tag: depression

Are there good deficits and bad deficits?

The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
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While Congress struggles with plans to cut federal deficits (i.e. cut federal money creation), and simultaneously tries to encourage banks to lend (i.e increase private money creation), it might be instructive to see why this is exactly the wrong approach. Please go to a post I wrote last June (since updated), titled, Is federal money better than other money?

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

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

–Am I MMT? Are you?

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
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People often ask me whether I am part of MMT (Modern Monetary Theory), and my answer is, “No, I agree with MMT on its factual bases, but disagree with certain areas of opinion.

For instance, it is absolute, undeniable, historical fact that in 1971, the federal government gave itself the unlimited ability to create money, i.e. to spend dollars. This point cannot be argued. And because the government has the unlimited ability to create dollars, it needs neither taxes nor borrowing to support its spending. If taxes and borrowing were zero, this would not affect by even one penny, the government’s ability to create and spend dollars, which means that taxpayers do not pay for federal spending. The federal government does not spend taxpayers’ money. This too is undeniable fact.

If every federal lender (China et al) were to demand payment for all outstanding debts tomorrow, the U.S. government simply could say, “No problem. I’ll push this computer key, which will credit your bank account for the amount of the T-securities you own. All debts will be extinguished.”

Evolving from this is the fact that the federal government cannot be forced into bankruptcy, and evolving from this is the fact that no agency of the federal government can be forced into bankruptcy – not Congress, nor the Supreme Court, nor the Department of Defense, nor the other 1,000 federal agencies, including Social Security and Medicare. All those people who tell you Social Security will be bankrupt in “X” number of years, do not understand that the federal government supports all federal agencies the same way: By federal money creation. And none can be forced into bankruptcy.

Where I depart from MMT is where facts are lacking, i.e. in matters of opinion. MMT believes:
1. Taxation is necessary to give value to money
2. Inflation should be prevented/cured by reducing the money supply.

1. Taxation

Originally, MMTers said federal taxes were necessary to give value to dollars. I pointed out if taxes were necessary, there existed. sufficient state and local taxes to do the job. That belief now has been adopted by MMT.

As I have stated elsewhere in this blog (“Ignorance: Why you will pay more taxes and receive less service in the coming years.”) I do not accept the idea that taxes are necessary for money demand. People accept dollars because:

-They are handier than barter.
-Everyone else accepts them.
-The government has made dollars legal tender in payment of all bills.
-There is no other governmentally authorized form of money.
-If you sell a product or service to the government, it will pay you in dollars.
-If you receive Social Security, Medicare, Medicaid or any other federal benefit, you and your service providers will receive payment in dollars.
-If you receive food stamps, your grocer will be paid in dollars
-Your army pay will be in dollars
-Federal stimulus payments, to cure recessions, will be in dollars
-In 2010, the federal government spend $3.7 trillion, all in dollars. The state governments spent trillions more, also in dollars.

Then there are non-tax payments to the government:
*Fines and Fees (for instance, in court)
*Fees (for instance, garbage pickup)
*Licenses (hunting, fishing, driving)
*Services (real estate registration)
*Tolls

(*Admittedly, these could be eliminated by a Monetarily Sovereign government and could be considered taxes)

Millions of people in America did not pay taxes last year, but they accept dollars. Of course, taxes are not going to disappear, so in practical essence the question is moot.

2. Inflation

I believe inflation can and should be prevented/cured by raising interest rates. MMT holds that rather than curing inflation, raising interest rates actually exacerbates inflation. Their logic is: Raising interest rates, by increasing the cost of borrowing, increases the cost of production, which results in inflation. I suggest that interest payments are a minuscule part of most company’s costs, and increases in interest payments are even less important — not enough to cause significant price increases.

Instead, we should consider money to be a commodity, the value of which is determined by supply and demand. Yes, increase the supply, and the value goes down – unless you also increase the demand, which is influenced by the reward for owning money – i.e. interest. The higher the interest, the greater the demand for money. That is why, when interest rates go up, the demand for non-money (stocks, real estate) declines, while the demand for money (bank CDs, savings accounts, money market accounts) goes up.

MMT believes inflation can and should be prevented/cured by reducing the money supply, i.e by spending reductions and/or tax increases. However, history shows that every depression in U.S history, and most recessions, have coincided with reductions in debt growth or with actual reductions in debt. While recessions and depressions can stop inflation, they certainly are a bad medicine.

So in summary, I agree with the factual basis of MMT, and argue (without proof) against certain opinions held by MMT. If you want to give what I believe a name, call it “Monetary Sovereignty.” I’m not MMT. Are you?

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

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–Fed profits. You lose.

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
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When the Fed profits, you lose.

1/10/11: WASHINGTON (Reuters) – The Federal Reserve is turning over a record $78.4 billion to the U.S. Treasury Department after its swollen securities portfolios generated big profits in 2010, the central bank said on Monday.
The remittance to the Treasury for 2010 is $31 billion more than a year earlier.
“The increase was due primarily to increased interest income earned on securities holdings during 2010,” the Fed said in a reference to portfolios that have been fattened by buying aimed at stimulating a slow-paced recovery.

That’s $78.4 billion taken from the economy and lost forever. Last year $47 billion was lost. True, much of this money was interest on T-securities, which was paid by the government, so the money merely recirculated. But had that money been paid to private holders, rather than to the Fed, it would have stimulated the economy.

The Fed turns over profits to the Treasury annually and has never posted a loss.

In short, every year the Fed removes money from the economy, an annual anti-stimulus action. While many people will cheer the Fed’s “profits,” this money is identical with a tax on the private sector.

No, these so-called profits do not reduce your taxes. No, these so-called profits do not increase the federal government’s ability to pay its bills. No, these so called profits do not have a positive effect on our economy. They are a dead loss to the money supply — exactly the opposite of the stimulus spending. They are the worst financial news of the day.

When it comes to federal financing, “profit” is bad and “deficit” is good. That has been true since 1971, when we became Monetarily Sovereign. One day, the government and the mainstream economists will get it.

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

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–News: China must control inflation, exports and GDP growth. But how?

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
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On December 17, 2010 Columnist Michael Schuman published an online article saying:

Chinese inflation hit 5.1% in November, the fastest clip since the pre-crisis boom months of 2008. Though much of the increase is in food (up 11.7% from a year earlier), the inflationary pressures are spreading to more aspects of the economy.

By hiking interest rates, the central bank would be increasing the interest burden on borrowers. That, in turn, could intensify a bad loan problem at China’s banks that many economists believe is an inevitable result of the lending boom.

So the Chinese have instead turned to an old favorite, price controls on certain staple foods.

Inflation is the loss in value of money compared to the value of goods and services. The cure for inflation is to increase the value of money and/or to decrease the value of goods and services.

The later is difficult for any government to accomplish, other than with price controls. Sadly, price controls have serious defects. They lead to reduced supply, while allowing demand to increase, which invariably causes pent up demand and black markets.

A second approach is for the government to buy, store then mete out supplies of oil, when prices rise. Because oil is the prime mover of inflation, this can be an effective anti-inflation plan, if the government has the discipline to do it. The plan falls apart when the government becomes reluctant to part with any of its suddenly-more-precious oil.

In all, increasing the value of money seem to be the best prevention/cure for inflation. That can be accomplished by decreasing the supply of money or by increasing the demand for money. Reduced government spending or increased taxation can reduce the supply. However, reducing the money supply not only leads to recessions and depressions, but involves very slow, uncertain and cumbersome processes.

In addition to the difficulty of knowing how much to increase taxes or to reduce spending, the even more difficult question is which taxes to increase and/or which spending to decrease. By the time politicians finish debating and voting on these highly political questions, the situation either may have passed or more likely, worsened appreciably.

Preventing/curing inflation requires agility and incremental response, for which interest rate modification is ideal. Raising interest rates can be done instantly and in tiny increments. It increases the demand for money, which increases the value of money – perfectly anti-inflationary.

China’s reluctance to strengthen its currency probably is tied to its false belief it must continue to build its export business, which relies in part on the weakness of the yuan. The function of exports is to bring money into an economy, but China, being Monetarily Sovereign does not need additional money coming in from outside its borders. It has the unlimited ability to create money.

China also may subscribe to the popular belief that low interest rates stimulate its economy. American history shows this belief to be false. See: Low interest rates do not help the economy. China also may believe high rates increase business costs, and so actually could foster inflation. However, in America at least, high rates have not corresponded with inflation. (See Item 12,) probably because interest is a minuscule part of most companies’ costs..

The Chinese government has the ability to be its nation’s own best customer. It does not need to rely on exports. This is a fact for all Monetarily Sovereign nations. China has the means to prevent/cure its inflation by raising interest rates. It needs only to understand its own powers.

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

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”