Tag: depressions

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.

–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.”

–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.”

–The “impossible” cure for stagflation

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

Stagflation is economic stagnation or high unemployment combined with high inflation. Here is what a Wikipedia author said. “It is a difficult economic condition for a country, as both inflation and economic stagnation occur simultaneously and no macroeconomic policy can address both of these problems at the same time”

This is one statement with which, both mainstream economists and Modern Monetary Theorists (MMT) seem to agree. I disagree with both.

Economic stagnation, high unemployment and recession all indicate the same fundamental problem: The economy is starved for money. Inflation (wrongly) is felt to be caused by too much money, which is why we experience the universal belief that “no macroeconomic policy can address both of these problems at the same time.”

Stagflation is most likely to occur when oil prices spike. A rapid increase in oil prices causes inflation. It also has a negative effect on production and economic growth. U.S. stagflation could occur, even in the near future, were any major oil producing states, for economic or political reasons, decide to reduce production dramatically.

Debt hawks (aka mainstream economists) would address stagflation with increased federal spending, while simultaneously increasing taxes to “pay for” the spending. The benefits of the increased spending would be offset by the damages of increased taxation. The former adds money to the economy; the later removes money from the economy — equal and opposite effects.

Even today, as we try to recover from the worst recession in decades, debt hawks continue to demand increased taxes to “pay for” spending, not realizing that in a monetarily sovereign nation, taxes do not pay for spending. Simultaneously, the Fed, wrongly believing interest rate cuts stimulate the economy, would lower rates, thereby exacerbating the inflation.

The Fed believes this, because raising interest rates does cure inflation, and for reasons known only to the Fed, they believe inflation is the opposite of recession, so for recessions, they do the opposite. Unfortunately for Fed theorists and for us citizens, the opposite of inflation is deflation, not recession, so doing the opposite doesn’t work.

MMT followers also would increase spending (good) and increase taxes (bad), because they believe taxes control inflation.

In short, MMT and debt hawk economists would follow the same path, an irony lost on both groups, each of which correctly claims the other does not understand current economics.

To cure stagflation, one must deal with two distinct problems – recession and inflation – using two distinct solutions. The solution for recession is federal deficit spending. Money is the lifeblood of an economy. During a recession, an economy suffers from “anemia,” a shortage of money. The treatment for anemia is to increase the blood supply. The government’s deficit spending adds money to the economy, curing the stagnation. Deficit spending can be accomplished by cutting taxes, increasing spending or both.

Then, to cure the inflationary part of stagflation, the government must raise interest rates, thereby increasing the reward for owning money, i.e increasing the value of money.

Increase deficit spending while increasing interest rates: The simple solution for taxation. Why will the government not take these easily administered steps? Because the mainstream economists wrongly belief deficit spending causes inflation, while MMT wrongly believes tax increases control inflation, and the Fed wrongly believes raising interest rates slows the economy.

Until these three groups understand economic realities, please pray we don’t encounter a stagflation, because the government will find it incurable.

Summary of how each group would attempt to defeat stagflation:

Mainstream economics (debt hawks):
Reduce taxes to stimulate economy
Reduce federal spending to cut federal debt
Increase interest rates to fight inflation
(Result: Reduction in federal spending nullifies tax reduction and exacerbates recession)

Modern Monetary Theory:
Increase taxes to fight inflation
Increase spending to stimulate economy
Reduce interest rates to fight inflation
(Result: Tax increase nullifies spending increase and exacerbates recession. Reduced interest rates exacerbate inflation)

Mitchell:
Reduce taxes to stimulate economy
Increase spending to stimulate economy
Increase interest rates to fight inflation
(Result: Tax reduction & spending increase cure recession; interest rate increase cures inflation)

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

No nation can tax itself into prosperity