Tag: depression

–How to fight inflation and how not to.

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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I know this is a strange time to talk about fighting inflation. Recently we struggled up from a minus inflation (aka “deflation”) and now are at a puny 1% level. But too often, when I say that federal deficit spending should increase, a debt-hysteric concern expressed to me, is not just inflation, but the typical debt-hawk exaggeration: hyperinflation!

The debt-hawks seem to be the kind of folks who, upon seeing a starving child, would not feed that child for fear the food would cause obesity. Today, our economy is starved for money, but the debt hawks fear monetary obesity (aka “inflation”) and they warn us of wheelbarrows full of money. They give silly speeches about what they term “fiscal prudence” and what I term, “starving the baby.”

So as long as we must face debt hysteria, and the hysteria has to do with a non-existent though dreaded inflation, we might as well talk about preventing and curing inflation. Inflation is the loss in value of money compared to the value of goods and services.

So, there are two fundamental methods for curing inflation: Reduce the supply of money or increase the demand for money. Both methods increase the value of money vs the value of goods and services. (In theory, increasing the supply of goods and services or decreasing the demand for goods and services also would work, but there is no known method for accomplishing this without changing the money supply.)

Ideally, any anti-inflationary activity should be effective, quick to activate, quick to take effect, incremental, easy to rescind and not damaging to the economy. But while tax increases remove money from the economy, and so can be effective, they fail all the other tests. They are highly political; They are slow to pass through Congress. They take effect slowly, because taxes are collected slowly. They cannot be passed and implemented incrementally. They are difficult to undo. And they damage the economy. The require answers to difficult questions: Exactly which taxes should be increased? By how much? Should we have a tax increase during a stagflation? How do we calibrate an incremental tax increase?

Compare this approach with another approach: Interest rate increases. Interestingly, interest rate increases have both pro-inflation and anti-inflation effects. Pro inflation: Increase in business costs and increase in the money supply due to increased federal interest payments. Anti-inflation: Increase in the demand for money vs the demand for non-money.

On balance, the anti-inflation effects are stronger. One hint is this graph: graph 1that seems to indicate interest rate increases are followed about one year later by inflation decreases.

The other hint is the Fed’s ongoing success in controlling inflation despite massive increases in the money supply. Interest rate increases actually work.

Interest rate increases can be done quickly and in small or large increments — just what is needed for inflation control. And contrary to popular faith, high interest rates do not negatively affect GDP growth. See: Interest

In summary:
–We are nowhere near inflation
–We can control inflation by raising interest rates
–High interest rates do not negatively affect GDP growth

We can and should feed the starving economy without letting unfounded worries about our ability to prevent or cure the economy’s obesity, prevent us from saving the child.

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.”

–Reducing the federal deficit and other forms of national suicide

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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Here is what my local newspaper, the Chicago Tribune, says about the federal debt and deficit:

“First pay attention to Ireland, the latest nation to discover that when no one will take your IOUs, terrible things happen. In exchange for a bailout, Ireland has committed to huge spending cuts and brutal tax hikes that will inflict sever economic pain across the Emerald Isle for years.”

Right you are, Tribune. Tax hikes and spending cuts always cause severe damage to a nation and its people..

“Second, pay attention to Erskine Bowles and Alan Simpson. The dogged co-chairmen of the president’s deficit commission are telling you how difficult it already will be to save the U.S. from reaching the day when no onee will take our IOUs.”

If that’s what Messrs. Bowles and Simpson are saying they are more dog-brained than dogged. The U.S., as a monetarily sovereign nation, does not need anyone to accept our IOUs, for this simple reason: A monetarily sovereign nation never needs to borrow the sovereign money it already has the unlimited ability to create. In fact, when the U.S. “borrows,” it simply exchanges T-securities it creates out of thin air for dollars it already has created, also out of thin air. Monetarily non-sovereign nations do need to borrow, because they do not have the unlimited ability to create money.

“The lesson from Ireland, the lesson from Bowles and Simpson, the lesson that official Washington still doesn’t want to hear: If we don’t make painful choices on spending and taxes right now, we’re going to invite chaos.”

Ireland is monetarily non-sovereign; the U.S. is monetarily sovereign. The Tribune doesn’t understand the difference. And because the Tribune and Messrs. Bowles and Simpson, and indeed the entire political establishment thinks U.S. finances are similar to monetary non-sovereign finances, we most certainly will have chaos. What these people imagine as a problem (deficits) actually is a benefit (money), and they try to cure this supposed problem with solutions that will damage us for decades. It’s like trying to “cure” good height by cutting off a person’s legs.

“(Bowles’ and Simpson’s) plan would raise the retirement age for Social Security [Keep paying FICA, but work ’til you drop], put federal health care programs on a strict budget [i.e. cut Medicare and Medicaid to improve health care], slash defense spending [for a stronger America] . . . It targets everything from federal payments to states reclaiming abandoned coal mines [Goodby environment] to restrictions that stop the Postal Service from shifting to five-day-a-week delivery [What next? Once-a-week delivery?]. Everybody gets gored one way or another.”

Yes, we all will get gored. But aside from worse health care, poorer retirement, more poverty, less national defense, worse education, worse environment and a thousand other reductions in the American life style, not only for us but for our children and our grandchildren, why worry? There is only one small detail. I almost hate to mention it, but: Where is the economic evidence that our federal deficit is too large? Nowhere.

Where do we see that the federal government can’t pay its bills? Nowhere. Where do we find that inflation threatens us? Nowhere. Where do we find that deficits cause recessions, depressions, stagflations, unemployment, poverty or any other form of economic miserey? Nowhere. According to the Tribune et al, the debt is big, ergo bad. Don’t ask for evidence. There is none. Just take your bitter pill on our say so.

Bowles and Simpson will make Osama bin Laden happy. Between them, they propose more damage to America than the Taliban and al-Qaeda together would be able to effect in a century. And all because of brutal ignorance.

“All together, the 16-nation eurozone has less debt and a much lower deficit in relation to its size than the United States has.”

The ignorance just grows and grows. The 16-nation eurozone is composed of both monetarily sovereign nations (which can service any size debt), and monetarily non-sovereign nations, which have limited debt-serving ability. The Tribune treats them as one. This respected paper sees no differences among the U.S., our states, counties, cities, businesses you and me. To the Tribune, whatever applies to one, applies to all.

“We’re not heading into trouble. We’re there.”

With thinkers like Bowles, Simpson, our political leaders and the Tribune editors, we are in desperate trouble, indeed.

But dammit, if they expect us to endure all this misery, and if they expect us to agree to harm our children and our grandchildren, and if they, in their own words, want to “inflict sever economic pain for years,” shouldn’t they at least be required to provide evidence all this is necessary?

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.”

–How the Ignorant Murder the Innocent: Debt-Hysteria Continues to Destroy America

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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How the Ignorant Murder the Innocent: Debt-Hysteria Continues to Destroy America

“NBC, msnbc.com and news services 12/1/10

“Extended unemployment benefits for nearly 2 million Americans begin to run out Wednesday, cutting off a steady stream of income and guaranteeing a dismal holiday season for people already struggling with bills they cannot pay.

“Unless Congress changes its mind, benefits that had been extended up to 99 weeks will end this month.

“Congress has let jobless benefits lapse twice already this year as Republicans insist the cost — $160 billion in the last fiscal year — be offset by cuts elsewhere to prevent the nation’s $13.8 trillion debt from growing further.

“Congressional opponents of extending the benefits beyond this month say fiscal responsibility should come first. Republicans in the House and Senate, along with a handful of conservative Democrats, say they’re open to extending benefits, but not if it means adding to the $13.8 trillion national debt.”

Ah, yes. “Fiscal responsibility.” Please someone remind me again; why did we go off the gold standard and become monetarily sovereign? What was the purpose of having the unlimited ability to create money? What exactly does “fiscal responsibility” mean? And what about human responsibility?

“‘I am not searching for a job, I am begging for one,’ said Felicia Robbins, 30, as she prepared to move out of a homeless shelter in Pensacola, Fla., where she and her five children have been living. She is using the last of her cash reserves, about $500, to move into a small, unfurnished rental home.”

The debt-hawks will tell you that unemployment benefits merely extend the time for lazy people to sit home, collecting checks. Of course, the Senators and Representatives collect their generous paychecks on time, so why worry about the “little” people?

If you are concerned about the gap between the rich and the poor, I remind you that this unnecessary, cruel action takes money from the poorest of us, increasing the gap.

As always, I urge you to contact your Congressperson, and try to educate him/her, before America reenters recession.

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.”

–Ireland demonstrates America’s future, if the debt-hawks have their way

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

Ireland is not Monetarily Sovereign. It cannot pay its bills. The following illustrates what happens to governments that are not Monetarily Sovereign. It also is the prescription the debt hawk have for the United States, despite the fact that we are Monetarily Sovereign, and never can be unable to pay our bills:

11/24/10, Associated Press
Ireland Winces As It Unveils Historic Budget Cuts

“Ireland unveiled the harshest budget measures in its history Wednesday, a four-year plan to slash deficits by $20 billion so it can get a massive bailout from the European Union and the International Monetary Fund.”

Unfortunately, IMF bailouts are in the form of loans. How lending money, i.e. adding debt,, to a nation that is unable to service its current debts, is a mystery.

“The plan seeks to cut $13.3 billion from spending and raise $6.7 billion in extra taxes from 2011 to 2014. It axes thousands of state jobs, welfare benefits, and pension payments while raising university fees and taxes, forcing even Prime Minister Brian Cowen to concede it will hurt the living standard of everyone in the nation.”

It is identical with imposing a depression on Ireland.

“‘This is a road map back to the Stone Age,’ said Jack O’Connor, president of Ireland’s largest union, SIPTU. He noted that Ireland had already suffered nearly euro15 billion in cuts and tax hikes since 2008, gutting economic growth and helping to double unemployment to 13.6 percent.
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Ireland’s 140-page National Recovery Plan proposes to introduce property and water taxes, raise the sales tax from its current rate of 21 percent to 22 percent in 2013 and to 23 percent in 2014, and cut the minimum wage by $10.20. Ireland’s bloated civil service will be particularly hard hit — seeing about 24,750 state jobs lost. Income tax bands will be widened so more lower-paid workers pay taxes, and middle-class workers will see annual taxes rise more than $4,000. A raft of welfare payments will be gradually reduced. Young and old alike face higher bills and less income. University fees will rise, as will the charges on state-funded pensions. But monthly pension payouts will fall up to 12 percent. “

Raise existing taxes. Impose new taxes. More fees. Cut jobs. Reduce welfare. Less income. Ireland is doomed, and all because they voluntarily surrendered their monetary sovereignty. Ireland is on what amounts to a gold standard, except this is a euro standard. The euro limits Ireland’s ability to create money. As taxes increase and income decreases, the money supply will drop precipitously. Businesses will fail. Unemployment will grow. So tax receipts actually will begin to fall and welfare needs will increase. Ireland will be like a dog chasing its tail, never catching up with the desire to balance its budget.

“Ireland’s legendary tax-free existence for authors, musicians and artists is facing a major cutback so that only the first $53,000 of income will avoid tax.

“Left untouched, to the irritation of other EU nations, is Ireland’s exceptionally low 12.5 percent tax rate on business profits. That rate is less than half the EU average and has helped to lure about 1,000 high-tech multinationals to Ireland, far more proportionally than any other European country.”

By lowering taxes on business, Ireland encouraged business. The EU did not like the idea of encouraging business. The EU wants higher, business-discouraging taxes. If business is the horse that carries the economy, the EU wants to tie the legs of the horse.

So there you have it. Ireland gave up its monetary sovereignty, so it is doomed. Portugal and Spain may be next. Eventually all EU nations (except those that remained monetarily sovereign: the UK, Norway and Denmark) will fail.

American politicians, media writers and even many mainstream economists, simply do not understand the difference between monetary sovereignty and monetary non-sovereignty. So under the misguided banner of “fiscal prudence,” they campaign to apply to America the medicine that is meant for Ireland, thereby guaranteeing a long extension of slow or non-existent growth.

Ireland is the model of what the debt-hawks wish for us. And all because of ignorance.

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.”