Tag: federal debt

–What will cause the next inflation?

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

The debt hawks say federal deficit spending will cause inflation. History says they are wrong. There is no post-1971 (end of the gold standard) relationship between federal deficits and CPI. (See: INFLATION) In fact, despite massive deficit spending, the Fed today is most worried about deflation.

Nevertheless, I now believe inflation has become a threat.

In a letter dated October 1, 2010, John Mauldin said:

“John Hofmeister is the former president of Shell Oil and now CEO of the public-policy group Citizens for Affordable Energy. He paints a very stark picture of the future of energy production in the US unless we change our current policies. First, because of the aftereffects of the moratorium. It is his belief that the drilling moratorium will effectively still be in place until at least the middle of 2012. There won’t even be new rules until the end of 2011, and then the lawsuits start.

“Gulf oil production will be down by up to 1 million barrels a day. Imported oil is now 67% of oil usage but will go to 75% by 2012. He thinks crude oil will be up to $125 and gasoline between $4-$5 at the pump. And it will only get worse.

“He describes the problem with the electricity from coal production. The average coal plant is 38 years old, with a planned-for life of 50 years. Our energy production capability is rapidly aging, and we are not updating it fast enough.

“He argues that the fight between the right and the left has given us 37 years without a realistic energy policy, as policy gets driven by two-year political cycles but good energy planning takes decades. There are 13 government agencies that regulate the energy industry, with conflicting mandates that change very two years. There are 22 congressional committees that have some level of involvement and oversight of the energy industry.”

Why is this important for inflation? Because although federal deficits do not correlate with inflation, energy prices do. And if we have the shortages Mr. Hofmeister suggests (a big “if” as oil supply is notoriously difficult to predict), they will translate into higher overall consumer prices. Yes, new oil sources are being discovered daily. And yes, progress is being made in developing alternative energy. But the modernization of huge populations in China, India, Russia and other less developed countries, is sure to increase world oil consumption, massively.

Inflation can be prevented and cured by raising interest rates. But our government is fixated on the false, debt-hawk belief that federal deficits cause inflation. So the political “cure” will be to reduce federal spending and/or to increase federal taxes, either of which, history shows, will devastate our economy.

In summary, the next inflation will come from energy shortages, which the debt hawk government will deal with by causing a recession.

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

No nation can tax itself into prosperity. There is widespread belief the stimuli didn’t work. I am reminded of the man whose house was burning. His neighbor showed up with a garden hose and actually was able to reduce the flames, but only somewhat. The neighbor wanted to call the fire department, who would bring out the big hoses, but the man told him to stop, because “Obviously, water doesn’t put out fires.”

–John Mauldin, debt hawk pushing on a string

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

John Mauldin makes a living writing about economics. He posts a blog called “The Big Picture” One of his more recent posts (9/28/10), titled, “Pushing on a string,” contained this observation: “What is needed is fiscal austerity (slowly) before debt spirals out of control. . . “

I entered the following comment to his post:

It’s nice to see that John remains a typical debt-hawk. He never says what “out of control” means, because debt hawks never offer specifics. So let’s speculate:

Does it mean the federal government will be unable to service its debt (the normal meaning for “out of control”)? Nope. Couldn’t be that. As a monetarily sovereign nation since 1971, the U.S. federal government has the unlimited ability to service its debt.

So, does it mean we’ll have inflation? Nope. Since that fateful August 1971 date, there has been no relationship between federal deficits and inflation. Since that time, the cause of inflation has been energy prices.

So, does it mean taxes will be higher or our grandchildren will owe the debt? No, there is no modern (post-1971) relationship between tax rates and inflation or deficits. Our grandchildren actually benefit from federal spending. So what does “out of control” mean. No one knows. I suspect it means something like, “It’s big and I don’t like the word ‘debt.’”

Oh, then there is the “problem” of banks not lending, which is another way of saying, adding to private debt. Does it strike anyone as curious that the pundits want the private sector to borrow more, while these same pundits want the federal government to borrow less? Here is the private sector, where bankruptcies are rampant, and the pundits want more borrowing. And here is the government, which can service a debt of any size, and functionally is incapable of bankruptcy, and the debt hawks want to restrict debt.

And then there is the debt hawk call for less federal spending and more taxes (the only way to get the federal debt down), while being vaguely aware that federal spending is stimulative and taxes hurt the economy.

Oh, you don’t like stimuli because they “don’t work.” Then you will enjoy the story of the man whose roof was on fire. His neighbor showed up with a garden hose and actually was able to reduce the flames, but only somewhat. The neighbor wanted to call the fire department, who would bring out the big hoses, but the man told him to stop, because “The fire still is burning, so obviously, water doesn’t put out fires.” And just as “obviously,” adding money doesn’t cure a recession.

The reason debt hawks continually call for conflicting actions is they begin with a false assumption. The assumption: Federal debt has an adverse effect on the economy. The truth: Federal debt is absolutely necessary for economic growth. Without it, we would have no economy at all.

But try telling facts to a debt hawk.

John has not and will not respond, which is a debt hawk custom. They don’t respond because they have no facts with which to respond. But I’ll give them this: Even with no facts they have managed to convince the world. I’m envious.

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

No nation can tax itself into prosperity.

–Bank closings from 2008 through 2010

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

I saw these two graphs on a good blog by noted debt-hawk Barry Ritholtz, called The Big Picture. You can see the post at http://www.ritholtz.com/blog/2010/09/fdic-bank-failures-7/comment-page-1/#comment-412084

Bank Failures since June 2008

These graphs brought to mind a few of the questions I’d like to ask those who keep demonstrating for “less government”:

1. How many bank depositors have been saved by FDIC?
2. How much depositor money has been protected by FDIC?
3. Do you feel there is too much regulation of banks?
4. Would you like to deposit your money in a bank that is not insured by FDIC?

Every time you hear someone say there is too much government, ask specific questions about what he/she would like to give up. Less Social Security? Less Medicare? Less military? Fewer roads and bridges, or less maintenance thereof? Eliminate the Supreme Court? Fewer national parks? Less inspection of our food and drugs? Less research? Where exactly should the cuts be made? (And don’t let them get away with “Eliminate waste.” That’s a cop out).

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

No nation can tax itself into prosperity

–Warren Mosler interview: What if China stops buying U.S. debt?

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

Warren Mosler is that rare individual who is both a successful businessman and an economist. He now is running for the Senate from Connecticut.

Warren has the ability to explain abstruse economic subjects in simple, illuminating ways. Here’s one excerpt from a recent interview. You can read the entire interview at Interview.

(Background: The Chinese buy U.S. T-securities by transferring U.S. dollars (not yuan) from their checking account at the Federal Reserve Bank to China’s T-security account, also at the Federal Reserve Bank. Later, when the Chinese redeem those T-securities, the money is transferred back to China’s checking account at the Fed. During the entire purchase and redemption process, the dollars never leave the Fed.)

Interviewer: “Money the Chinese earn by sending merchandise to the United States are credits in the U.S., and these credit units are nonredeemable, so Chinese owners can do nothing with these things unless they use them to buy American products, and if they do, those units become profits for American firms.

But there is also another possibility, which sometimes raises concerns in the larger public, and this is what happens if China should choose to get rid of these dollars by selling the U.S. securities they own.

While the amount of dollars owned by foreigners doesn’t change, the price of the dollar would in fact decline. If China sells off American debt, dollar depreciation may be substantial.”

Mosler: “Operationally, it’s not a problem because if they bought euros from the Deutsche Bank, we would move their dollars from their account at the Fed to the Deutsche Bank account at the Fed.

The problem might be that the value of the dollar would go down. Well, one thing you’ve got to take note of is that the U.S. administration is trying to get China to revaluate currency upward, and this is no different from selling off dollars, right?

So, what you are talking about (selling off dollars) is something the U.S. is trying to force to happen, would you agree with that?”

Interviewer: “Yes.”

Mosler: “Okay, so we’re saying that we’re trying to force this disastrous scenario—that we must avoid at all costs—to happen.

This is a very confused policy. What would actually happen if China were to sell off dollars? Well, first of all, the real wealth of the U.S. would not change: the real wealth of any country is everything you can produce domestically at full employment plus whatever the rest of the world sends you minus what you have to send them, which we call real terms of trade.

This is something that used to be important in economics and has really gone by the wayside.

“And the other thing is what happens to distribution. While it doesn’t directly impact the wealth of the U.S., the falling dollar affects distribution within U.S., distribution between those who profit from exports and those who benefit from imports.

And that can only be adjusted with domestic policy. So, number one, we are trying to make this thing happen that we are afraid of, and number two, if it does happen, it is a demand-distribution problem, and there are domestic policies to just make sure this happens the way we want it to be.”

So there you have it. All the hand wringing about what happens if China were to stop buying T-bills and instead buy some other country’s money is just a bunch of blah, blah, blah.

The relative value of U.S. dollars, compared with other money, would go down, which is exactly what the Federal government has been trying to effect — foolishly, I might add.

When China or any nation buys T-securities (aka “lends us money”), they must use dollars, and the dollars never leave the Fed.

Even if China were to buy another nation’s debt, using dollars it has earned from exports, the dollars still never would leave the Fed.

Think closely about this process and you will see why federal “borrowing” is a meaningless exercise.

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

No nation can tax itself into prosperity