Tag: Economics

–Gold bugs, debt hawks and the EU

An alternative to popular faith

8:55 am ET 03/13/2010 – UPI: European Union ministers are nearing completion of a bail-out package for Greece. . . The package . . . could contain as much as $34 billion in aid with primary backing from France and Germany . . . Options include loans to Greece and a bond issue guaranteed by eurozone countries . . . The deal must be constructed to circumvent EU rules that prohibit a bail-out for a country on the edge of insolvency. . . “

Think of what this really says: EU rules prevent Greece from creating money. So, unlike the United States, Greece legally cannot service its debts. The EU will break its own rules to lend Greece more money, while insisting that Greece destroy money by running surpluses. (Debt creates money; destroying debt destroys money.)

Thus has the debt-growth-restricted world of the debt hawks merged with the money-growth-restricted world of the gold bugs in one currency, the euro. Each day, the euro will encounter problems with reality, problems that will require patches and rule-bending, and will devolve to a jerry-built, recession-prone, Frankenstein currency, eventually to be abandoned in the midst of crisis.

Those who have read this blog, my web site and FREE MONEY will not be surprised by Greece’s and the EU’s problems. The euro is the inevitable result of beliefs by debt-hawks and gold bugs — which are identical.

Debt hawks, gold bugs and the EU all are the same people, though they may not realize it. They all wish to restrict the growth of money, just through different mechanisms. Debt hawks would restrict money growth by outlawing its creation. Gold bugs would restrict money growth by tying it to a commodity with limited growth ability.

The EU nations are hobbled with both. They are tied to a “euro standard” (ala a gold standard) and the growth of the euro is legally restricted. Why does restricting the growth of money have such widespread appeal, when money growth so obviously is needed for a growing economy? Because even sophisticated economists do not seem to understand the three-word sentence the forms the very basis of all economics:

“Money is debt.”

Rodger Malcolm Mitchell

–Economic myths, false beliefs and fairy tales

An alternative to popular faith

The U.S. and the world, lurch from boom to bust in seemingly uncontrollable waves. Popular faith holds that recessions and depressions are an unavoidable part of the natural economic cycle. I suspect these “natural” cycles occur because actions (or lack of actions) are based on false beliefs.

Economics has engendered an amazing number of myths, most based on what some feel is logic. But it’s the same degree of logic that says the earth must be flat, else we would fall off. Here is a list of myths, false beliefs and fairy tales. If you disagree with any item on this list, please let me know, and I’ll explain why it’s there.

• Money and debt are two different things.
• A growing economy does not need a growing supply of money.
• Federal surpluses help the economy grow.
• The federal debt is too large.
• The federal debt is the total of federal deficits.
• The current level of deficits is unsustainable.
• Federal taxes help pay for federal spending.
• Federal borrowing helps pay for federal spending.
• The federal government spends taxpayers’ money.
• Our children and grandchildren will pay for today’s federal deficits.
• A balanced federal budget is more prudent than a federal deficit.
• The federal debt/GDP ratio measures the government’s ability to service its debts.
• Each of us owes a share of the federal debt.
• Federal earmarks, pork barrel spending and waste hurt the economy.
• The single biggest cause of inflation is excessive federal deficit spending.
• Inflation is too much money chasing too few goods.
• Consumer saving helps the economy grow.
• In fractional reserve banking, banks keep a fraction of deposits and lend the rest.
• The best way to cure inflation is to increase taxes or cut federal spending.
• State, county and city governments are financially similar to the federal government.
• FICA taxes pay for Medicare and Social Security.
• The government cannot afford to fund Medicare or Social Security.
• The U.S., like the EU nations, can go bankrupt.
• Without increases in taxes or decreased spending, Medicare and Social Security will go bankrupt.
• Without tax increases, the federal government cannot afford to increase support for education, infrastructure improvements, bailouts for states, counties and cities, the military, research and local police.
• Gold is safer and more prudent than “paper” (fiat) money.
• The federal government needs to borrow to pay for deficit spending.
• Federal borrowing reduces the availability of lending funds.
• The two main reasons for the recent economic collapse were low interest rates and lack of federal credit supervision.
• Low interest rates stimulate the economy; high rates slow it.
• Taxing the rich does not hurt the poor.
• Cutting payments to doctors and/or taxing “Cadillac” health insurance plans, is one good way to help pay for improved health care.
• The federal debt ceiling has a beneficial function.

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

–Does personal saving stimulate the economy?

An alternative to popular faith

Stephen Gandel is a senior writer at TIME, where he covers real estate, economics and Wall Street. He blogs at The Curious Capitalist. In one post at What’s Worse: Stingy Banks or Thrifty Consumers? he said, “Now it is true that for the long term health of the US economy we all need to save more and borrow less.”

Though this passes for popular faith in economics, I see no evidence that personal saving benefits the economy.

saving vs GDP

As you can see there is no relationship between saving and GDP growth. Worse, no one really knows what “saving” is. Here’s an excerpt from Free Money:

Decide which activities you consider “saving.” Develop your own rules about what is “saving.”
Do you “save” when you:
1. Bury your currency in a tin can in your back yard?
2. Deposit your money in your bank savings account or in your money market account?
3. Purchase Treasury bills or bank CDs?
4. Purchase guaranteed-interest, whole life insurance?
5. Purchase stocks and bonds?
6. Purchase real estate?
7. Purchase a business?
8. Purchase your primary residence?
9. Purchase a secondary residence?
10. Purchase a car for your business use?
11. Purchase a car for your personal use?
12. Purchase a television set?
13. Purchase food and clothing?

Study this list. The more you think about it, the more doubts you probably will have about what is saving, what is investing and what is spending — and what part of investing really should be considered saving.

So, between the lack of historical correlation between saving and GDP growth, and the arbitrary and varying definitions of saving, the popular faith that saving benefits the economy seems questionable.

Also, keep in mind the 2nd part of his statement, ” . . . we all need to . . . borrow less.” Since borrowing creates money, borrowing less creates less money, which certainly is not stimulative.

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

–Why the states are in financial trouble

An alternative to popular faith

Most of the states are deeply in debt. Some of them even have stopped paying their bills. I live in Illinois. It is a deadbeat state. Our newspapers run editorials suggesting solutions to Illinois’ huge budget problems. These solutions detail tax increases and spending cuts. Sound familiar?

Neither solution will work. All states, counties and cities should understand why even the most well considered tax increases and spending cuts cannot solve their financial problems.

Yes, Illinois has among the most dishonest groups of political leaders. And yes, Illinois ranks in the upper 10% of the most distressed states. But it’s not entirely the fault of our crooked politicians.

No political entity, whether it be country, state, county or city can prosper and grow, unless it either can create money or obtain money from outside. Spending reductions reduce services and negatively impact the economy, which reduces tax collections in a never-ending downward spiral.

Tax increases merely circulate money within the political entity.Additional money is needed, because even nominal inflation reduces the real value of money. Imagine that together, the state of Illinois, its counties, cities and citizens, owned a total of $100 billion. To balance its budget, Illinois decides to raise taxes, which takes $10 billion from taxpayers and sends it to the state, which then sends the $10 billion back to the taxpayers when it pays its bills.

What has happened? Essentially nothing. There still is a total of $100 billion in the state, except after a year, even with a modest annual inflation of 2%, this money now is worth only $98 billion in purchasing power. After ten years of 2% annual inflation, that same money now is worth less than $82 billion.

Another reason the states, counties and cities cannot survive on taxes alone: Federal taxes remove money from the state every year, and as the money supply declines the state’s economy declines.

Unlike the federal government, Illinois cannot create money at will. It must obtain money from outside its borders. There are but two sources of outside money. One is exporting. We can send goods and services to other locations, which will send us money. But it is quite difficult for any state’s exports to exceed its imports by enough to grow its economy and stay ahead of inflation. An oil-rich state like Alaska and a tourism state like Nevada, both have money coming in from outside. But even these states eventually need a source of additional income.

And that source is the federal government, which in 1971 ended the gold standard, giving itself the unlimited ability to create money, not supported by taxes. By comparison, Greece is not so fortunate. It is limited by the “euro standard.” Illinois is limited by the “dollar standard.” All three standards limit money creation.

Despite fears of “big government,” the federal government must assume more financial obligations. As states, counties and cities continually raise taxes, they find they are in a never-ending, futile cycle, not just because of inefficient management, but also because it is long-term impossible for any political entity to survive, much less grow, without the ability either to create its own money or to receive money from outside its borders.

Rather than pundits calling for ever higher taxes and/or reduced spending, neither of which add to the money supply, they should demand more federal support. Mathematically, that is the only lasting solution.

In summary: The anti-big-federal-government crowd fails to take into consideration the fact that unlike the federal government, the states, counties and cities are unable to create money. When any political entity is unable to create money, its economy will stagnate, unless it receives funds from outside. Worse than stagnate, its economy will decline because inflation makes its own money lose value.

Ongoing economic growth demands ongoing money growth by the federal government.

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