Tag: federal debt

–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

–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

–Words from 2005

An alternative to popular faith

Sometimes the things you say and the things you predict come back to haunt you. And sometimes they don’t.

Here is what I told a group of economists and economics students on June 5, 2005, at the University of Missouri, Kansas City. Five years is a long time. You be the judge and let me know what you think:

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

No nation can tax itself into prosperity

 

–Why the crazy stock market fall

An alternative to popular faith

I recently read an article containing wonderment that despite good news (the April jobs report showed payrolls grew by 290,000) the stock market crashed. The author, John Curran, speculated: “One reason is that the Euro crisis in spite of all efforts remains very much a crisis, and that threatens the global economy. The second reason is that Thursday’s stock market blowout pointed up a dangerous vulnerability in the financial markets, one that we’ve known of (high frequency trading) but sort of forgotten. Third, the Labor Department’s jobs report while positive in some respects also contained a bit of negative news […] (increased unemployment).

While the Greek/EU situation is serious, it will not seiously affect the U.S. economy, so long as our government continues to deficit spend. Second, while high frequency, automated trading can cause short term, manic effects on the stock market, the longer term effects are minimal. Finally, the way unemployment is calculated (only those looking for a job are counted), makes it inevitable that when times improve, unemployment statistics rise. People who had given up, start again to look for jobs. So from that standpoint, the stock market is wrong.

There is one other scenario, that could have far greater significance than any of the above: The off shore oil well blowout. Not only will it cause enormous destruction in of itself, but it will prevent further offshore drilling for an unknown time. Weeks? Certainly. Months? Possibly. But weeks and months are no big deal.

Perhaps even years, and that is a big deal for our economy. For the past few decades, inflation has been caused, not by deficit spending, but by Oil Prices.

Even with the worst case scenario, the actual supply loss won’t be felt soon, but if the projected loss of oil production is significant, it will cause oil prices to rise, thus causing inflation. The debt hawks will assume (wrongly) the inflation is caused by deficits, and will demand that taxes be increased and spending decreased — either of which will stall economic growth and move us into a recession.

And that will drop the stock market.

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

No nation can tax itself into prosperity