Tag: Economics

–What’s the deal with professional economists?

An alternative to popular faith

I probably shouldn’t generalize, but what’s the deal with professional economists? Why are so many blind to the obvious? Economics is a difficult, complex field, requiring substantial brain power to understand even the basics. There are no unintelligent professional economists. They are exposed to consumption theory, capital theory, the theory of economic growth, and the analysis of labor markets. Yet, many don’t understand the simple truths that all money is debt, and a growing economy requires a growing supply of debt.

They are taught such esoteric lessons as producer theory, consumer theory, choice under uncertainty, welfare analysis and mechanism design. Yet, many believe an expanded health care system is unaffordable for the government.

Professional economists learn general equilibrium analysis, social choice and welfare economics, cooperative, noncooperative game theory and repeated games and economics of information. Yet, many believe federal borrowing reduces the availability of lending funds.

They immerse themselves in time series analysis, ARMA models, VARs, and detrending, dynamic stochastic general equilibrium models of business cycles, and New Keynesian theories. Yet, many say a balanced federal budget is more prudent than a federal deficit.

They author and publish papers on linear/non-linear regression theory on estimation, consistency, asymptotic properties and hypothesis testing. Yet, many believe federal taxes pay for federal spending, our children and grandchildren will pay for federal deficits, and the US will have difficulty finding lenders.

They critique writings on panel data regression, maximum likelihood estimation for tobit, logit and probit estimations, generalized method of moment estimation, least absolute deviation estimation, quantile regression method, nonstationary time series, cointegration, UAR and Kalman filtering for the time-varying parameter estimation. Yet, many neither recognize that debt/GDP is a useless, highly misleading, apples/oranges ratio, nor that low interest rates do not stimulate the economy.

They speak on neoclassical growth model, endogenous growth theory, models of product variety, and Schumpeterian models. Yet, many do not understand the crucial differences between a monetarily sovereign government vs. Greece or Illinois.

Why do so many smart people closely examine minutia, while ignoring abundant, overwhelming and widely available evidence? In effect, professional economists seem to spend lifetimes examining and expounding on one dot in a pointillist work, while ignoring the Sunday Afternoon on the Island of la Grande Jatte?

What’s the deal with professional economists? Why are so many blind to the obvious?

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

No nation can tax itself into prosperity

–Open letter to Pat Widder of the Tribune

An alternative to popular faith

Ms. Patricia Widder is on the editorial board of the Chicago Tribune. For 15 years I have been trying to educate the Tribune about the realities of federal financing. To date, I have failed. Here is my latest attempt.

Dear Ms. Widder

Your 5/12/10 editorial, “Greece and us” makes a false comparison. The U.S. is a monetarily sovereign nation; Greece is not.

All nations borrow in their own currency and pay back in their own currency. Monetarily sovereign nations (Canada, Australia, China et al) have the unlimited ability to create their currency, to pay their debts. Greece and the other EU nations do not have this ability. That lack of ability to create money, not the amount of their debts, is the cause of their financial problems.

Every nation that lends to the U.S. has two accounts with the Federal Reserve Bank: a checking account and a savings account. To begin the lending process, the nation first must put U.S. dollars (not any other currency) into their checking account. Then, they use those dollars to buy T-securities, which are kept in their savings account. That is when the Fed debits their checking account and credits their savings account.

When the T-securities mature, the Federal Reserve merely debits the nation’s savings account and credits its checking account, plus some extra for interest. The Fed can do this endlessly.

Greece, not being a monetarily sovereign nation, resembles not the U.S., but Illinois and California, which also are not monetarily sovereign. To make a comparison between U.S. and Greece is as misleading as comparing the U.S. with Illinois and California. The states can go bankrupt; the U.S. cannot.

Your call for less federal spending and higher taxes, under the euphemisms, “[…]scale down what they demand from the government and accept the need to pay for what they get” repeatedly has led to recessions and depressions.

You are confusing U.S. federal financing with personal financing. We, the people, also are not monetarily sovereign.

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

No nation can tax itself into prosperity

–If you like gold, you’ll love . . .

An alternative to popular faith

I’m not sure why you like gold. It has minimum utility, and it is not backed by any government (unlike the dollar which is backed by the U.S. government). See: Fool’s Gold Or, perhaps you like paying for storage, insurance and shipping, as your generous contribution to the world’s economy. Or maybe you just like the shiny color.

But, for whatever the reasons, if you already own that virtually useless metal, how about owning some useful metals? Copper has a nice color as does nickel. Aluminum can be shiny like silver. You might enjoy them more, and you still would have the pleasure of paying for storage, insurance and shipping, along with an even better hedge against inflation than gold.


Gold up about 180%


Copper up about 1200%


Nickel up about 1500%


Aluminum up about 700%

Gold is a “greater fool” play, and one day someone will point out that the gold emperor has no clothes. Then, the price will drop like a useless gold bar, and the gold bubble will take its rightful place among other those notable bubbles for tulip bulbs, beanie babies and real estate.

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

No nation can tax itself into prosperity

–Open letter to John Mauldin re. his myths

      John Mauldin is President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states. He also is a registered representative of Millennium Wave Securities, LLC, (MWS) an NASD registered broker-dealer. He is the author of Thoughts from the Frontline, a blog at Mauldin.
      Recently, Mr. Mauldin wrote an article for his blog, and I wrote to him with a critique, as follows:

5/9/10
Mr. Mauldin:

      This note is sent to you in the spirit of helpfulness. Your article titled “The Center Cannot Hold,” quoting G. Cecchetti, M. S. Mohanty, and Fabrizio Zampolli contains several widely quoted, commonly believed myths. For example:

      Myth: “Long before we get to the place where we in the US are paying 20% of our GDP in interest (which would be about 80% of our tax collections, even with much higher tax rates) the bond market, not to mention taxpayers, will revolt. The paper’s authors clearly show that the current course is not sustainable.”
      Fact: Federal borrowing no longer (after 1971) is necessary nor even desirable. See: How to Eliminate Federal Deficits

      Myth: “A higher level of public debt implies that a larger share of society’s resources is permanently being spent servicing the debt. This means that a government intent on maintaining a given level of public services and transfers must raise taxes as debt increases.”
      Fact: Society’s resources do not service federal debt. See: Taxes do not pay for federal spending.

      Myth: “And if government debt crowds out private investment, then there is lower growth.”
      Fact: This also commonly is stated, “Government debt crowds out private borrowing” and government debt crowds out private lending.” There is no mechanism by which federal spending can crowd out investment, borrowing or lending. On the contrary, federal spending adds to the money supply, which stimulates investment, borrowing and lending. See: Why spending stimulates investment

      Myth: “A government cannot run deficits in times of crisis to offset the affects of the crisis, if they already are running large deficits and have a large debt. In effect, fiscal policy is hamstrung.”
      Fact: This is the strangest myth, since running deficits in a time of crisis is exactly what the U.S. government has been doing. It would be true of Greece and the other EU nations, but not of then U.S., Canada, Australia, China and other monetarily sovereign systems. See: Greece’s solution

      Myth: “[…] the current leadership of the Fed knows it cannot print money.”
      Fact: This myth is even stranger than the above “strangest” myth, since printing money is exactly what the Fed does. See: Unsustainable debt.

      Myth: “As frightening as it is to consider public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly aging population.”
      Fact: The famous federal debt/GDP ratio is completely meaningless – a classic apples/oranges comparison – that neither describes the health of the economy, nor measures the government’s ability to pay its bills nor has any other meaningful purpose. See: The Debt/GDP ratio

      If you would like to see more common myths about our economy, go to: Common economic myths

Rodger Malcolm Mitchell