Tag: economy

-When is a recession?


An alternative to popular faith

        Readers of this blog and of the summary are familiar with the fact that all six depressions in U.S. history immediately were preceded by extreme reductions in federal deficits (aka “surpluses”):

1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

        You also are familiar with the following graph showing that the last nine recessions began with reductions in federal debt growth and were cured with increases in federal debt growth.
Fed debt private investors 50-09

Note how debt growth declines before recessions and increases to cure recessions

In 1996, the prelude to Free Money, titled “The Ultimate America” predicted future recessions would follow decreases in debt growth. Since then it happened again, twice.

        Six depressions and nine recessions — a total of fifteen out of fifteen times at which federal debt growth declined and the economy fell — is an amazing, almost unheard of, correlation in a complex science like economics.
        Even more startling, the first edition of Free Money was published in 1996, and it predicted future recessions would be precipitated by decreases in debt growth. This would be akin to finding it has rained all day in Chicago every June 1st, following sunshine all day every May 30th, for the past fifteen years, and accurately predicting it would happen, again — twice more.
        A sharp-eyed reader, who may be associated with the Concord Coalition, (the group claiming federal debt must be reduced, but which never provides evidence) pointed out two recessions, in 1981 and in 1991, where federal debt growth seemed to move up in advance.
        While even thirteen out of fifteen is a remarkable correlation in a science that seldom sees such correlations, the reader’s concern was understandable.
        As you can see on close inspection, federal debt growth did decline in advance of the 1981 recession – not terribly significant, but a decline nonetheless. (The 1981 recession should be considered a continuation of the recession twelve months earlier — caused by the Iranian Revolution which took place in 1979, with its increased oil prices — from which we didn’t fully recover.)

Debt growth declines in advance of 1981 recession

        With regard to the 1991 recession, we come up against the definition of the word “recession.” The media arbitrarily say a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters, which means you can’t identify a recession until it is more than six months along . Look at the following graph:

        GDP growth (blue line) turned down in 1989, while debt growth was falling. Why did the government say the recession began in 1991? Hard to say. Perhaps it was due to the very slight bump at the end of 1989.
        This graph indicates the increase in federal debt growth was beginning to cure the 1989 recession, and the momentum of continuing increased debt growth finally cured the recession in 1991.
        A strong correlation between federal debt growth and GDP growth seems to exist.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com
P.S. You might try this experiment. Ask Diane Lim Rogers (drogers@concordcoalition.org), the Concord Coalition economist, for evidence to support her claim the debt is too large. I predict she either will not answer you, or she will tell you the debt is too large and “everyone knows” it should be reduced. “Everyone knows” is what passes for evidence at Concord.

-New thinking from the New America Foundation


An alternative to popular faith

        Here is the text of an Email I sent to Steve Coll, President and CEO of the New America Foundation (http://newamerica.net/) (Offices in Washington, DC and San Francisco, CA). According to their web site, “The New America Foundation is a nonprofit, nonpartisan public policy institute that invests in new thinkers and new ideas to address the next generation of challenges facing the United States.” They publish 12 “Principles” by which they live.
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Dear Steve;
        Your principle #10, “Do not perpetuate budget myths” is excellent. In that regard you might wish to reconsider certain statements on your web site:

“In reality, the availability of debt financing is far from unlimited; in fact Japan and China have already begun to slow their purchasing of U.S. debt.”
        A myth. The federal government does not need to sell U.S. debt to Japan, China or to any other country or person. The government creates debt (T-securities) out of thin air, collateralized only by full faith and credit. It just as easily could create money out of thin air, also collateralized by full faith and credit, and eliminate the debt creation and sales step. Debt creation and sales is a relic of the gold-standard days.
See: How to eliminate federal debt, deficits and interest payments

        “While deficits can spur consumption and thus improve the immediate economic situation when there is slack in the economy, they lead to slower growth in living standards over the long run.”        
A myth. Federal deficits are necessary both for short term and long term growth. A growing economy requires a growing supply of money. Where else will the money come from to grow our economy?
See: I believe

        “Moreover, high deficits increase interest payments, which crowd out important tax and spending priorities and leave the budget with far less flexibility than it would otherwise.”        
Partly true, partly a myth. High deficits can increase interest payments. However the conclusion is circular reasoning. Interest payments can “crowd out” spending priorities only if the government is precluded from running deficits. To date, despite massive deficits for the past 30 years, interest payments never have crowded out anything.

        “Lastly, deficits shift the burden of paying for today’s spending to future generations, which may cause over-consumption by present generations at the expense of consumption by future generations.”
A myth: Today’s deficits are paid by future generations only if the future generations decide to run surpluses. When any generation runs a deficit, it’s tax payments do not even cover its current expenses, let alone past expenses. Deficits do not cost taxpayers money. Only surpluses cost taxpayers money.
See: It isn’t taxpayers’ money

        I have suggestions for a 13th and 14th principle:
13. Base all suggestions on supporting data, not on popular faith.
14. To accept new thinkers and new ideas, be prepared to let go of old thinkers with old ideas.”

Rodger Malcolm Mitchell

-Another reason deficits are necessary

An alternative to popular faith

Here is one of the many reasons federal deficit spending is absolutely necessary — even more so, now — and why trying to reduce the deficit is dangerous and imprudent.

Note how debt growth declines before recessions and increases to cure recessions

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock – Business Insider, September 9, 2009

Economic growth requires spending by consumers, businesses, local governments and the federal government. When consumers aren’t spending, businesses also spend less. The federal government must spend even more to take up the slack.

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

-Learn to love the debt

An alternative to popular faith

       Deficits are necessary. They add money to the economy. A large economy has more money than does a small economy. Therefore a growing economy requires a growing supply of money. Quod erat demonstrandum.
       Concern about the federal debt revolves around two beliefs: Someone (often characterized as “our grandchildren”) will have to pay those debts, and large debts cause inflation.
      For us citizens, personal debt is concerning, because our debt must be repaid. People go bankrupt when they can’t repay their debts. But, if you owned a magic printing press, and you had the legal right to print as much money as you wished, your debt never would concern you.
       Received a bill for a million dollars? No problem. Turn on the magic press and poof!, it’s paid. Unfortunately, you and I don’t own a magic press, so we worry about our debt.
       The federal government, uniquely among all U.S. debtors does own that magic printing press. It can pay bills of any size, which is how today, it easily services a gross debt of $12 trillion. Not even during the current recession has any federal check bounced. Not even close.
       Still we worry about federal debt as though it were our own. Why? Partly because so many people tell us we owe the federal debt. How silly. Debt is owed by borrowers. We are not the borrowers. In many cases, we are the lenders, the owners of T-securities. The government is the borrower, and we are not the government. There will be no bill collectors on our doorsteps, demanding that we pay our mythical share of the federal debt.
       But won’t “our grandchildren” have to pay for the debt through higher taxes? For the past 50 years, tax rates actually have gone down, despite massive deficits. There is no relationship between deficits and tax rates, which are political, not financial, decisions.
      What if tax rates were to rise moderately? Let’s do the math. Say in Year One, taxes total $10 trillion and spending totals $11 trillion. Spending exceeds taxes, which causes a $1 trillion debt.
       In Year Two, tax rates rise, so taxes now total $11 trillion, but spending rises to $12 trillion, and now the debt has risen to $2 trillion.
       How much of Year One’s debt did taxpayers pay? Answer: None. Taxes weren’t even sufficient to pay for Year two’s spending, let alone pay for last year’s debt. The only time taxpayers pay for debt is when taxes exceed spending, i.e a surplus.
       That is why surpluses have caused all six depressions in U.S. history. Surpluses, not debt, cost taxpayers money.
       The inflation logic is that federal debt increases the money supply (true), which dilutes the value of money (not true). Money value is based not only on supply, but also on demand.
       Money supply can increase massively, and still not cause inflation, if demand goes up as much. Demand is determined by risk and reward. Risk is inflation (which is a result, not a cause), so the key to money value is reward.
       What is the reward for owning money? One reward is the ability to buy things with it, but in a massive economy like ours, there always are plenty of things to buy. The real reward for owning money is interest. The higher the rates, the more valuable the money. That’s why the Fed raises rates at even the hint of inflation, and that also is why in the past 50 years, there has been no relationship between federal deficits and inflation. None. (See: See Do Deficits cure inflation?
       In conclusion, rather than being concerned about federal debt, we should welcome it. Money growth brings economic growth.

Rodger Malcolm Mitchell
For more information, see http://www.rodgermitchell.com