Tag: federal debt

–Watch Ben Bernanke’s high wire balancing act

An alternative to popular faith

April 14, 2010: By JEANNINE AVERSA, AP Economics Writer; WASHINGTON – “Federal Reserve Chairman Ben Bernanke […] testifying before Congress’ Joint Economic Committee, also once again called on lawmakers and the White House to come up with a plan to whittle down record-high budget deficits.”

Ben Bernanke is a smart man. He knows federal deficits are nothing more than a balance sheet measure of money created by the federal government. He knows the $12 trillion debt merely is a statement that in the history of the United States, the federal government has created $12 trillion net dollars. He knows that to “whittle down record-high budget deficits” is another way to say, the government should create and spend less money.

But also knows the federal government cannot default on debts of any size, and creating and spending money stimulates economic growth. So, he favors continuing federal stimuli (aka deficit spending).

If you think that is a mixed message consider this: He said, “A credible plan to pare the deficit could provide the economy with benefits in the near term, including lower longer-term interest rates and increased consumer and business confidence.” And, “A moderate U.S. economic recovery is likely to warrant very low interest rates for a long time.”

First, he says the deficit should be reduced in order to lower interest rates. Then, he says the Fed will keep rates low for a long time. Question: If the Fed can keep interest rates low for a long time, why does Bernanke need a plan to whittle down deficits?

Is it to avoid inflation? There is widespread belief that large deficits cause inflation, despite history saying otherwise. See: Deficits, inflation and hyperinflation And though raising interest rates prevents and cures inflation, the Fed believes it must keep rates low to “increase consumer and business confidence.”

What’s a guy to do? He keeps rates low and deficit spending high. But, he knows the public believes deficits are too high (This is the same public that wants neither tax increases nor to forgo the benefits stimulus spending buys. It wants a magical deficit decrease.) So Bernanke, by seeming to agree with the public, takes the political route, saying in essence, “Those high deficits aren’t my fault. Blame Congress and the President. I’m just doing what’s necessary to help the economy,” (which, don’t tell anybody, means running big deficits and keeping rates low).

The balance is not between what’s good and bad for the economy. That’s the easy part. The balance is between what’s good for the economy and what’s good politically. They are quite different, and the high wire balancing act is tough.

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


–Are we inflating our way out of debt?

An alternative to popular faith

Some experts tell us the federal government wishes to “inflate its way out of debt.” The theory is this: During inflation, money loses value. For instance if the buying power of tomorrow’s dollar will be worth only 90% of today’s dollar, paying today’s $1,000 debt tomorrow will cost you only $900 in today’s buying power.

That is why, if you positively knew inflation will average 3%, borrowing money at 2% would net you more buying power than you have today. This was part of the lure of home ownership. Real estate inflation would make your house appreciate faster than your interest payments – an automatic profit.

Let’s say you have no money in the bank, but you are able to acquire a $100 thousand, low-interest-only mortgage to buy a house. The house inflates in value 10% a year. Ten years after buying the house, you could sell it for $260 thousand. You could pay off your mortgage principal and have tons of money left over. In essence you have inflated your way out of debt and made a profit, a nice, no-effort game, that millions of people played.

It’s a philosophy that, during inflation, can work for people, companies, and state and local governments, but not for the federal government.

You see, the federal government creates all the money it needs, to pay bills of any size. Unlike state and local governments, the federal government does not rely on taxes or any other income to pay its bills. If all federal taxes ended today, the federal government’s ability to pay its bills would not change by even one penny. No federal check of any size would bounce.

When you receive a federal check, you deposit it in your bank account. Your bank sends the information the government, which unfailingly credits your account. This credit to your account is not related in any way to taxes, inflation, balance of payments, T-securities or to any other economic reality. The federal government does not maintain a stash of dollars from which it pays bills. It merely creates money by crediting bank accounts. This may sound “too-good-to-be-true” or a “free-lunch,” but it’s the way federal financing works.

Further, the government owes virtually all its debts in dollars, which makes inflating useless. One trillion dollars in debt must be repaid with one trillion dollars, neither more nor less, regardless of inflation.

So the question is: If the government can pay any bill of any size, simply by creating all the money it needs and crediting bank accounts, and if no federal check ever bounces, why would the federal government need to “inflate its way out of debt”? The answer: It doesn’t.

Anyone who says the federal government wants to inflate its way out of debt simply does not understand the reality of federal government finance. They probably have confused federal debt with all other debt.

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


–Please help the Wall Street Journal

An alternative to popular faith

Would someone please help the Wall Street Journal. I have serious concerns about those folks, because for a newspaper focused on finances, they seem clueless about . . . well, finances.

Their 4/12/10 editorial said, “[…] Greece’s predicament resembles that of New York and California […] New York. California and Washington are on the same path.” Right, as to New York and California. Dead wrong as to Washington.

Not understanding the difference, between governments on a standard and governments not on a standard, has caused endless problems. You see, Greece is on a “euro standard.” Being on a euro standard, gold standard, or on any standard, prevents a government from increasing its money supply when necessary. President Nixon took us off the gold standard, because we were in danger of becoming what Greece is, today — a debtor with no source of money.

Greece’s “euro standard” is functionally identical with a gold standard. To pay its debts and avoid bankruptcy, it must come begging to the European Union or to the International Monetary Fund for loans. Of course these loans are nothing more than a delaying tactic. They must be paid back, with interest. Long term, they cure nothing.

Just to keep up with inflation, Greece and all governments, national, state, county and city, continuously must increase their nominal money supply. They cannot rely on taxes, for taxes do not add money to an economy. They need money coming from outside — either from exports or as gifts from another source.

Since exports are insufficient and unreliable, eventually all EU nations will need gifts from the EU, which will need to create euros out of thin air, just as the U.S. government creates dollars out of thin air.

New York and California are on a “dollar standard,” and so are similarly unable to create unlimited money. In fact, every state, city and county in America is on a dollar standard, and all eventually would go bankrupt were the federal government not to create and give them money.

The U.S. government, by contrast, cannot go bankrupt. It can create endless money to pay its bills. Now that we’re off the gold standard, no federal check ever will bounce. For the EU nations to survive, the EU must act like the U.S. federal government and supply money to its members. There is no other solution. The Wall Street Journal doesn’t understand this.

The Journal’s editorial also says, “The Obama Administration may quietly assume the U.S. can devalue its way out of debt with easy money, but sooner or later the bond vigilantes will blow the whistle on that strategy and raise U.S. borrowing costs, too.”

Where does the cluelessness end? First, because the U.S. can create unlimited dollars, it does not need to devalue the dollar to pay its bills. Yes, there is an advantage for most borrowers to service loans with cheaper money, but that doesn’t apply to the U.S. government, which can service any size loan, no matter how weak or strong the dollar may be.

Second, the “bond vigilantes” can do what they will. The U.S. can pay any interest of any amount. An no, there is no historical relationship between interest rates and economic growth, as Messrs. Greenspan’s and Bernanke’s 20 futile rate reductions taught us.

Third, the U.S. doesn’t even need to borrow. Rather than creating T-securities out of thin air, it simply could, and really should, just create money out of thin air, and omit the borrowing step. Borrowing is a relic of gold standard days.

The Journal’s recommendation: “[..] stop the spending spree […] stop the tax increases […]” In short, they want a balanced budget, which by decreasing the supply of inflation-adjusted, population-adjusted money, is guaranteed to cause a depression.

So, please, please, someone supply the WSJ with a clue, before it’s too late.

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

–Debt Bomb Redux

An alternative to popular faith

Readers of this blog know the debt hawks have been telling us about the imminent explosion of the “debt bomb” since 1940, seventy (!) years ago. See: Federal debt a ticking time bomb/ and More debt bomb nonsense/.

Year after year, for seventy long years, Henny Penny has predicted the sky was about to fall, then each year has had to say, “Well maybe next year.” How often and how long can one repeat the same wrong prediction and still maintain any credibility?

Here’s the latest:

(CBS)The “Where America Stands” series: WASHINGTON, April 8, 2010; American Debt Threatens Status as World Power; Can America Still be the World’s Greatest Power, as the World’s Greatest Borrower? By Lara Logan
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“James Baker, Former U.S. treasury secretary, and U.S. secretary of state. ‘We’re in a real pickle,’ said Baker. ‘We will not be as important on the world scene if we continue to be a tremendously large debtor nation.’ […] I don’t think [America’s decline is] going to happen provided – one big proviso – that we deal with this debt bomb.’”

Although “debt bomb” is a catchy phrase, no one really knows what it means, nor does anyone supply evidence the federal debt is a “bomb.” Use of that phrase is a sure sign the speaker has no idea how today’s economy operates.

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