Tag: depression

–Recession redux: The EU bailouts. Digging the hole deeper. Lending to deadbeats.

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.

Our recession was precipitated by the mortgage loan scandal. Too many banks lent too much money to people who had insufficient resources to service those loans. The banks should have known never to lend money to people who do not have the resources to pay it back. Simple?

Now compare that with the EU. Here are some excerpts from an article in the Telegraph, by By Bruno Waterfield:

“After a humiliating week of denying it needed help, the Dublin government succumbed to pressure from other euro zone countries and asked for a ‘very big’ loan.”

“On Monday Irish and euro zone governments will be watching the markets after Greece, which received a £94 billion bail-out in April, warned that the EU’s debt crisis was not finished yet.”

“Portugal has already warned that there is a “high risk” it might need economic help. If investors are unconvinced by the Irish rescue package, the euro could come under pressure while the cost of borrowing for the Dublin government could rise.”

“George Papaconstantinou, the Greek finance minister, warned that the Irish bailout would not be enough to plug the euro zone’s black hole of debt. ‘Even if Ireland is helped, it cannot prevent the debt crisis from continuing,’ he said ‘[It] will focus on other countries: Spain, Portugal.'”

Sound familiar? The EU, rather than using its own monetarily sovereign powers, and giving money to its monetarily non-sovereign members, it is lending money to these already insolvent countries, thereby adding to their inability to pay their debts — just like the U.S. banks did with their mortgage lending.

So now, the load falls on one of the few monetarily sovereign nations in the EU, the U.K. But wait. The U.K., which wisely did not adopt the euro, and so remained monetarily sovereign, doesn’t realize it’s monetarily sovereign, as witness this statement in the article:

“Douglas Carswell, the Conservative U.K. MP for Clacton, said that British involvement in the bail-out would anger eurosceptics who had voted Tory for a tougher line on Europe. ‘Yet again we see that the people we elected to run the country in May are powerless. All they can do is tell us how unhappy they are about it but they continue to hand out billions to Europe at a time of austerity for the country,’ he said.”

So Britain, which retained the unlimited ability to pay any bills of any size, now has opted instead for austerity, meaning money growth and economic growth will fall, leaving the U.K. headed for a second, easily preventable recession.

And finally,

“Negotiations have been tense as the EU and IMF impose tough conditions to force Ireland to cut public expenditure by £13billion (Â 15bn) and to increase taxation on the vast majority of people. Ireland’s last three budgets have already cut spending by £12billion. Trade unions are warning of ‘civil unrest’ on scale not seen for decades as leaks of the spending plan reveal that there will be sharp tax rises for the low paid and middle class families in order to increase state revenue.

Eamon Devoy, general secretary of the Technical Engineering and Electrical Union, said: ‘I think there is going to be huge civil unrest. When the draconian measures being proposed are heaped on top of cuts already implemented, life in Ireland will be unbearable.'”

Austerity. Civil unrest. Massive increases in unsupportable debt by monetarily non-sovereign governments. All unnecessary and all linked to two false beliefs: The belief that monetarily non-sovereign governments can continue indefinitely without financial support, and the belief that a monetarily sovereign nation needs to institute austerity.

In the U.S., the debt-hawks created such debt hysteria, that the only way to recover from a recession and grow the economy — i.e. with federal deficit spending — was partially blocked in the past, and now seems totally blocked. If the debt hawks have their way, we soon will be, like the EU monetarily non-sovereign nations, wallowing in poverty and civil unrest.

Please contact your Congresspeople and your local media, and tell them to educate themselves on the meanings and implications of monetary sovereignty, before it’s too late.

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.”

–1937 Redux: How our leaders have learned nothing from history

The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics.

For those of you who don’t remember the Great Depression (almost everyone, now), it began in 1929, after several years of federal surpluses ( Item 3.), but by the early-1930’s we already were on our way to recovery – something like today. Then, the government decided to reduce the federal deficit with increased taxes and reduced spending — something like today. So we had four more years of depression (something like tomorrow?)

According to Wikipedia: “The Recession of 1937–1938, sometimes called the Roosevelt Recession, was a temporary reversal of the pre-war 1933 to 1941 economic recovery from the Great Depression in the United States. Economists disagree about the causes of this downturn. Keynesian economists tend to assign blame to cuts in Federal spending and increases in taxes at the insistence of the US Treasury, while monetarists, most notably Milton Friedman tended to assign blame to the Federal Reserve’s tightening of the money supply in 1936 and 1937.”.

Hmmm. Let’s think about that. “Cuts in federal spending . . . and increases in taxes” = federal deficit reduction. “Tightening of the money supply . . .” also = federal deficit reduction. So here you had two different schools of thought, both saying essentially the same thing. The 1937 recession was caused by what we today refer to as “austerity.”

So what do our political leaders favor, now that we are creeping out of the latest recession. Yes, that same austerity. Republicans hate federal spending. They stand ready with dozens of proposals to slash the federal budget. Reportedly, they want to cut $260 billion (25%) from the federal budget. Now that should be stimulative.

Republicans also do not believe their proposed cuts in education, Medicare, unemployment compensation and many other worthy federal projects will hurt anything or anyone.

The Democrats are no smarter. They have to be dragged kicking and screaming, to retain (not even cut, just retain) the Bush era tax levels. They do not believe taxes, which remove money from the economy, slow the recovery. They want to tax the “wealthy,” because . . . well, because that is what Democrats, with their eternal class warfare strategy, do.

Then we have the media. My hometown newspaper, the Chicago Tribune repeatedly rails against the federal debt. They never explain why. They don’t provide data. They just don’t like it. The Tribune is typical of the media, which almost universally hate the debt, and almost universally don’t provide data supporting their position.

And then there is Fed Chairman Bernanke, who feels we must “act to bring down long-term fiscal deficits.” He too, has no clue about why and never gives a coherent reason.

Finally, we have the mainstream economists – all those Nobel winners – none of whom seem to understand monetary sovereignty, and all of whom call for less deficit spending.

Put them all together and things look very bad for this fragile economy. With leaders like these, who needs enemies?

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.”

–Which adds to federal debt — federal spending or federal borrowing?

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

Which adds to the federal debt — federal spending or federal borrowing? Before you read further, think about this question and your answer.

The federal government’s finances are nothing like yours and mine, which is why the economy is so counter-intuitive. Most people worry about the federal debt. They are influenced by the media and the pundits, who also worry about the federal debt. And in turn, they are influenced by mainstream economists, who as college students, were taught to worry about the federal debt. This “debt-worry” translates into “spending-worry,” so we hear continual calls for less government spending. But does federal spending really add to federal debt?

You and I cannot print money. So, before we spend, you and I must have sources of money. We either must have money in hand or we must have a ready source of borrowing, the most popular of which is a credit card. Without a source of money, you and I cannot spend. The states counties and cities are in the same predicament. Without a source of money, they cannot spend.

The federal government is different. Or it can send you a check, and when you deposit that check, your bank will mark up your account and the federal government will mark up the bank’s account, and it can do this endlessly, without having any source of money.

When the federal government spends, money is created from nothing. But no debt is created, at least not the federal debt referred to in “debt clocks” or by media editors.

So what does create the federal debt? The creation and sale of T-securities. The federal government not only has the unlimited power to create money from thin air, it also has the unlimited power to create T-securities from thin air, and then exchange these T-securities for dollars it previously created from thin air.

There are two separate processes, unrelated by function, though related by law. Process #1 is federal spending, which requires the creation of dollars by printing currency or by crediting bank accounts. Process #2 is federal borrowing, i.e. the creation and sale of T-securities. Functionally, either of these processes can take place without the other. The federal government can spend without borrowing, and it can borrow without spending.

While federal spending leads to the Deficit (the difference between spending and tax receipts), federal borrowing leads to the Debt (the total of outstanding T-securities). In this way, the federal debt would not necessarily be the total of federal deficits, except for an obsolete law that requires it.

By law, the U.S. Treasury must sell enough T-securities to equal the deficit – the difference between federal spending and federal tax receipts. This law is a relic of gold standard days, when the federal government did not have the unlimited ability to create money. Back then, dollars had to be matched by gold, and so were limited by gold supplies.

But for this law, there would be no need for federal borrowing and there would be no federal debt. The government simply would spend by creating money, i.e. by crediting bank accounts.

In summary, federal spending does not add to the much feared, often maligned federal debt. Instead, the federal debt is created by an obsolete law, which requires T-security creation to equal federal deficits. So debt-worriers, there is no need to cut federal spending. Merely change that needless law. No law; no debt.

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

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind 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.”

–Do you know what you want? Deficits vs. exports vs. stronger dollar vs. inflation

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

Here is a little test for you. Check all you believe will help the U.S. economy:
|__] 1. Reduced federal deficits
|__| 2. Increased exports (positive balance of trade)
|__| 3. Stronger dollar
|__| 4. Low inflation

Actually, it’s not so “little” a test. Many lay people, including most politicians and media people, would check all four. But you, being smarter, realize that #2 and #3 are incompatible. A stronger dollar makes our exports more expensive, while making imports cheaper. So to achieve increased exports or even a positive balance of trade, the dollar must weaken. This comes as a great disappointment to those who equate “stronger” with better. Sorry.

Now we get to the tricky pair: #1, reduced federal deficits vs. #2, increased exports. Who doesn’t want those?

Federal deficit spending increases the number of dollars in the economy, which many people reject because of fears about inflation. Ironically, these same people want increased exports – a positive balance of trade – which also increases the number of dollars in the economy. In short, federal deficit spending and exporting essentially are identical.

In the first case, the federal government buys, and pays with dollars, for goods and services. It is the customer. In the second case, foreigners buy, and pay with dollars, for goods and services. Foreigners are the customers. In both cases, dollars are added to the U.S.economy.

Admittedly, there is are differences. First, unlike exports, federal deficit spending adds to the federal debt, which most people mistakenly believe adds to our tax burden. However, because spending by a monetarily sovereign nation is not constrained by taxes, or any other income, there has been no historical relationship between tax collections and deficits, no will there be. See: Summary, numbers 9 and 9a. Your grandchildren will not, and actually cannot, pay for deficits. So this supposed “difference” amounts to a non-difference.

Second, while federal deficit spending adds to the world’s supply of dollars, our positive balance of trade does not. So, which is better? A growing economy requires a growing supply of money. So, any amount of inflation, plus population growth requires increases in the nominal supply of currency, just for GDP to remain level, let alone grow. Because the dollar is the world’s reserve currency, world GDP growth requires ongoing growth in the world’s supply of dollars. So, on balance, federal deficit spending is more beneficial to America and to the world, than is U.S. exporting.

Returning to the four questions, above, I suggest that this would be the ideal mix for America and the world:

1. Increased federal deficits, for world economic growth
2. Reduced exports (negative balance of trade), to supply the world with dollars.
3. Stronger dollar, for more imports, providing us with better goods and services at lower prices
4. Modest inflation, to stimulate present demand for goods and services.

Sadly, the U.S. federal government wants to do the opposite –reduce deficits, increase exports and reduce the value of the dollar — and that is just a sampling of reasons why we fall into a recession, on average, every five years. With a record like that, why do Americans believe what their leaders tell them?

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

No nation can tax itself into prosperity