Tag: federal deficits are unsustainable

–Even Paul Volcker doesn’t get it.

An alternative to popular faith

If even Paul Volcker doesn’t get it, how can the man in the street hope to understand — unless the man in the street is willing to look at the facts and Volcker isn’t?

“5/19/2001: STANFORD, California (Reuters) – Europe’s debt crisis shows the risks for the United States if it does not get its budget deficits under control, former Federal Reserve Chairman Paul Volcker said on Tuesday. ‘If we need any further illustration of the potential threats to our own economy from uncontrolled borrowing, we have only to look to the struggle to maintain the common European currency, to rebalance the European economy, and to sustain political cohesion of Europe,’ Volcker said.
[…]The U.S. budget deficit hit $1.4 trillion in 2009, roughly 10 percent of the economy. The White House projects the deficit this year will reach $1.6 trillion. The large deficits have evoked comparisons to Greece. But in a speech to the Stanford Institute for Economic Policy Research in California, Volcker said the United States differs from that country and other small European countries whose credit markets have come under speculative attack. Unlike those countries, the United States benefits from well-established currency and credit markets that are considered safe havens in times of financial turmoil.
[…]’There are serious questions, most immediately about the sustainability of our commitment to growing entitlement programs,’ said Volcker, who heads an outside panel of experts advising Obama on the economy”.

Here is Paul Volcker, who of anyone, should know better, saying the difference between the U.S. and European countries is we have a well-established currency. No, Mr. Volcker, the difference is we are a monetarily sovereign nation and the EU countries are not. And that difference makes all the difference.

Somehow, the fact that we are running trillion-plus deficits, with none of the problems the EU nations are experiencing, doesn’t seem to penetrate Mr. Volcker’s skull. He has the debt hawk’s “It-hasn’t-happened-yet-but-I’m-sure-one-day-it-will” mentality, rather than the scientist’s “It-hasn’t-happened-yet.-I wonder-why” mentality.

Mr. Volcker, the reason “it” (inability to service national debts) happened to Greece, but not to the U.S., is simple: The U.S. has the unlimited ability to pay its bills, merely by crediting creditors’ bank accounts. EU rules prevent Greece from doing this. Either Mr. Volcker truly doesn’t understand the difference, which would be remarkable, or he has been paid to adopt a debt hawk agenda that forces him to close his eyes to basic fact.

Anyone who says Greece’s problems foreshadow similar problems for the U.S. either is ignorant of the facts or a liar.

And by the way, for those debt hawks who keep warning us that deficits cause inflation, we’re running the deficits, but: “5/19/2010: WASHINGTON (AFP) – US consumer prices fell for the first time in 13 months in April, the government said Wednesday as analysts warned of the risk of deflation in the world’s largest economy.” Isn’t it inconvenient the way facts seem to get in the way of wrong opinion?

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

No nation can tax itself into prosperity

–A mainstream economist writes about the EU

An alternative to popular faith

Readers of this blog and Modern Monetary Theory blogs know the mainstream economists have been ignorant about the realities of today’s post-gold-standard economy, and this ignorance has caused untold damage, as ignorance always does.

Here is a perfect example. John Cochrane, professor of finance at the University of Chicago, wrote an article titled, “Greek Myths and the Euro Tragedy,” published in the May 18, 2010 Wall Street Journal. His concluding paragraph read:

”The only way to solve the underlying euro-zone fiscal mess (and our own) is to slash government spending and to focus on growth. Countries only pay off debts by growing out of them.. And no, growth does not come from spending, especially on generous pensions and padded government payrolls. Greece’ spending over 50% of GDP did not result in robust growth and full coffers. At least the looming worldwide sovereign debt crisis is heaving “fiscal stimulus” on the ash heap of bad ideas.”

Let’s examine this amazingly clueless article, sentence by sentence: ”The only way to solve the underlying euro-zone fiscal mess (and our own) is to slash government spending and to focus on growth.” By definition, economic growth requires money growth. There is no known mechanism by which a nation simultaneously can reduce net money creation (aka “deficit spending”), while promoting growth.

”Countries only pay off debts by growing out of them.” Wrong. Countries pay off debt by creating the money to pay the debt. Economic growth does not pay for government debt. Countries do not pay debt with GDP or with taxes on GDP. In a monetarily sovereign nation, as is the U.S., taxes do not support spending. Were taxes to drop to zero, the government’s ability to spend would not be affected by even one penny.

”And no, growth does not come from spending, especially on generous pensions and padded government payrolls.” Federal spending does cause growth, which is why every recession and depression in U.S. history has been cured with increased federal spending. As for “generous pensions and padded government payrolls,” this represents money paid to real people, who will spend this money on goods and services to stimulate the economy. Professor Cochrane must believe there is some strange force that will cause reductions in private spending to stimulate the economy.

”Greece’s spending over 50% of GDP did not result in robust growth and full coffers.” Since when is 50% of GDP a magic spending number? Greece’s problems relate to its inability, caused by EU rules, to create money to service its debt. (Greece is not monetarily sovereign.) Spending as a percentage of GDP is irrelevant to causing or to solving its problems, which only can be solved by an infusion (not a reduction) of money.

”At least the looming worldwide sovereign debt crisis is heaving “fiscal stimulus” on the ash heap of bad ideas.” Here is monetary ignorance at its best. Greece is not a monetarily sovereign nation; the U.S. is. Any blanket statement about national debt, that does not take this difference into consideration, is certain to be wrong. The notion that the U.S. could be emerging from our recession without fiscal stimuli, would be laughable were it not so sad. If anything, the stimuli were too little, too late (See April 9, 2008 LETTER )

In summary, Professor Cochrane merely parrots bits and pieces of things he has heard from various (wrong) sources, and with them created an article, stunning in its inaccuracy, but printed by the Chicago Tribune, probably because he is from the University of Chicago, a hotbed of obsolete, mainstream economics. It is their influence and leadership that has resulted in an average of one recession every five years. Is there any way they could have done worse?

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