–Why the slow recovery? Saturday, Jul 10 2010 

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

Recessions and recoveries ultimately are associated with money, and more specifically with money growth. In general, less money growth = less economic growth. (That actually is something of a tautology, since economic growth is measured in money.)

There are several definitions of money, most differing on the basis of liquidity, the ease of converting to currency. The most liquid form is called M1, which consists of currency and checking account deposits.

The government no longer measures the less liquid forms, M3, L and the most inclusive form: Debt of Domestic Non-Financial Sectors. And for many reasons, the supplies of the various money forms do not move together. For instance, there are periods when M1 goes up or down more than M2, even though M1 is part of M2.

I found an interesting pattern relative to recessions. In the following graph, you see a strong tendency for one form of money, Federal Debt Held by the Public, to grow more slowly before recessions, then grow quickly during recessions, then resume growing more slowly after recessions.

M1 exhibits a similar, though less consistent pattern, and M2 is less consistent yet. One consistency is: Following every recession, at least one of the money forms grows at an increasing rate — every recession except the most recent one:

Here, despite (or because of) worries about deficits, every measured form of money has shown a sharp decline in growth rate. Perhaps this overall decline in money growth is responsible for the slowness of the recovery — yet another bit of evidence that debt fear has hurt our economy, and increased federal spending is desperately needed.

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

No nation can tax itself into prosperity

–A mainstream economist writes about the EU Tuesday, May 18 2010 

An alternative to popular faith

Readers of this blog and Modern Monetary Theory blogs know the mainstream economists have been ignorant about the realities of today’s post-gold-standard economy, and this ignorance has caused untold damage, as ignorance always does.

Here is a perfect example. John Cochrane, professor of finance at the University of Chicago, wrote an article titled, “Greek Myths and the Euro Tragedy,” published in the May 18, 2010 Wall Street Journal. His concluding paragraph read:

”The only way to solve the underlying euro-zone fiscal mess (and our own) is to slash government spending and to focus on growth. Countries only pay off debts by growing out of them.. And no, growth does not come from spending, especially on generous pensions and padded government payrolls. Greece’ spending over 50% of GDP did not result in robust growth and full coffers. At least the looming worldwide sovereign debt crisis is heaving “fiscal stimulus” on the ash heap of bad ideas.”

Let’s examine this amazingly clueless article, sentence by sentence: ”The only way to solve the underlying euro-zone fiscal mess (and our own) is to slash government spending and to focus on growth.” By definition, economic growth requires money growth. There is no known mechanism by which a nation simultaneously can reduce net money creation (aka “deficit spending”), while promoting growth.

”Countries only pay off debts by growing out of them.” Wrong. Countries pay off debt by creating the money to pay the debt. Economic growth does not pay for government debt. Countries do not pay debt with GDP or with taxes on GDP. In a monetarily sovereign nation, as is the U.S., taxes do not support spending. Were taxes to drop to zero, the government’s ability to spend would not be affected by even one penny.

”And no, growth does not come from spending, especially on generous pensions and padded government payrolls.” Federal spending does cause growth, which is why every recession and depression in U.S. history has been cured with increased federal spending. As for “generous pensions and padded government payrolls,” this represents money paid to real people, who will spend this money on goods and services to stimulate the economy. Professor Cochrane must believe there is some strange force that will cause reductions in private spending to stimulate the economy.

”Greece’s spending over 50% of GDP did not result in robust growth and full coffers.” Since when is 50% of GDP a magic spending number? Greece’s problems relate to its inability, caused by EU rules, to create money to service its debt. (Greece is not monetarily sovereign.) Spending as a percentage of GDP is irrelevant to causing or to solving its problems, which only can be solved by an infusion (not a reduction) of money.

”At least the looming worldwide sovereign debt crisis is heaving “fiscal stimulus” on the ash heap of bad ideas.” Here is monetary ignorance at its best. Greece is not a monetarily sovereign nation; the U.S. is. Any blanket statement about national debt, that does not take this difference into consideration, is certain to be wrong. The notion that the U.S. could be emerging from our recession without fiscal stimuli, would be laughable were it not so sad. If anything, the stimuli were too little, too late (See April 9, 2008 LETTER )

In summary, Professor Cochrane merely parrots bits and pieces of things he has heard from various (wrong) sources, and with them created an article, stunning in its inaccuracy, but printed by the Chicago Tribune, probably because he is from the University of Chicago, a hotbed of obsolete, mainstream economics. It is their influence and leadership that has resulted in an average of one recession every five years. Is there any way they could have done worse?

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

No nation can tax itself into prosperity

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