Tag: Free Money

–China buying bonds. Who cares.

An alternative to popular faith

5/17/2001: WASHINGTON (AFP) – China boosted its massive US Treasury bond holdings in March for the first time in six months as foreign buying of long-term US assets set a new record high, official data showed Monday.

So, as always, the debt hawks have been proven wrong. Here we are, running huge deficits probably for many years into the future, and despite debt hawk predictions, other nations continue to buy our bonds.

Why? Are they being charitable? Just nice guys? No.

The interest rate is good, considering the U.S. never will default, and we will fight inflation. In short, our bonds are a good investment (although as a monetarily sovereign nation, China does not need to profit from investment), which is the sole reason countries ever buy them.

Of course, none of this really matters, since the U.S. does not need to create and sell T-securities, nor should we. The U.S. can create dollars at will, without bonds. Creating and selling bonds does not help the economy, nor does it affect inflation or any other economic problem.

The notion that we need to borrow the money that we exclusively can create, is obsolete — as dead as the gold standard.

But, for a while, at least, we won’t have to listen to uninformed pundits worrying that nobody will buy our bonds.

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

No nation can tax itself into prosperity

–What’s the deal with professional economists?

An alternative to popular faith

I probably shouldn’t generalize, but what’s the deal with professional economists? Why are so many blind to the obvious? Economics is a difficult, complex field, requiring substantial brain power to understand even the basics. There are no unintelligent professional economists. They are exposed to consumption theory, capital theory, the theory of economic growth, and the analysis of labor markets. Yet, many don’t understand the simple truths that all money is debt, and a growing economy requires a growing supply of debt.

They are taught such esoteric lessons as producer theory, consumer theory, choice under uncertainty, welfare analysis and mechanism design. Yet, many believe an expanded health care system is unaffordable for the government.

Professional economists learn general equilibrium analysis, social choice and welfare economics, cooperative, noncooperative game theory and repeated games and economics of information. Yet, many believe federal borrowing reduces the availability of lending funds.

They immerse themselves in time series analysis, ARMA models, VARs, and detrending, dynamic stochastic general equilibrium models of business cycles, and New Keynesian theories. Yet, many say a balanced federal budget is more prudent than a federal deficit.

They author and publish papers on linear/non-linear regression theory on estimation, consistency, asymptotic properties and hypothesis testing. Yet, many believe federal taxes pay for federal spending, our children and grandchildren will pay for federal deficits, and the US will have difficulty finding lenders.

They critique writings on panel data regression, maximum likelihood estimation for tobit, logit and probit estimations, generalized method of moment estimation, least absolute deviation estimation, quantile regression method, nonstationary time series, cointegration, UAR and Kalman filtering for the time-varying parameter estimation. Yet, many neither recognize that debt/GDP is a useless, highly misleading, apples/oranges ratio, nor that low interest rates do not stimulate the economy.

They speak on neoclassical growth model, endogenous growth theory, models of product variety, and Schumpeterian models. Yet, many do not understand the crucial differences between a monetarily sovereign government vs. Greece or Illinois.

Why do so many smart people closely examine minutia, while ignoring abundant, overwhelming and widely available evidence? In effect, professional economists seem to spend lifetimes examining and expounding on one dot in a pointillist work, while ignoring the Sunday Afternoon on the Island of la Grande Jatte?

What’s the deal with professional economists? Why are so many blind to the obvious?

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

No nation can tax itself into prosperity

–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

–If you like gold, you’ll love . . .

An alternative to popular faith

I’m not sure why you like gold. It has minimum utility, and it is not backed by any government (unlike the dollar which is backed by the U.S. government). See: Fool’s Gold Or, perhaps you like paying for storage, insurance and shipping, as your generous contribution to the world’s economy. Or maybe you just like the shiny color.

But, for whatever the reasons, if you already own that virtually useless metal, how about owning some useful metals? Copper has a nice color as does nickel. Aluminum can be shiny like silver. You might enjoy them more, and you still would have the pleasure of paying for storage, insurance and shipping, along with an even better hedge against inflation than gold.


Gold up about 180%


Copper up about 1200%


Nickel up about 1500%


Aluminum up about 700%

Gold is a “greater fool” play, and one day someone will point out that the gold emperor has no clothes. Then, the price will drop like a useless gold bar, and the gold bubble will take its rightful place among other those notable bubbles for tulip bulbs, beanie babies and real estate.

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

No nation can tax itself into prosperity