Tag: Free Money

-What triggers recessions and depressions?


An alternative to popular faith

        Readers of this blog know debt growth is necessary for economic growth. The graphs and data in the various posts, for instance The federal debt and federal deficit are necessary for economic growth, show that surpluses preceded every depression in U.S. history, and reductions in debt growth preceded every recession in the past 50 years.
        While this degree of correspondence transcends coincidence, it leaves a troubling question: What is the trigger? The recession of 2001 was preceded by ten years of deficit growth reductions, while the recession of 2007 was preceded by only three. Other recessions also were preceded by varying periods of reduced deficit growth or surpluses. Similarly, the 1929 Great Depression was preceded by nine years of surpluses, while the 1819 depression was preceded by only two.
        This makes predicting a recession difficult. While running a surplus seems to be a fairly prompt causative agent for recessions or depressions, debt growth can decline for several years before a recession begins. Reduced deficit growth is a necessary detonator of recession or depression, but some other event must serve as a more immediate signal, a trigger. For example:

*The recession of 1960 may have been triggered by the Vietnam war, which began in 1959
*The 1970 recession: Possible trigger: Also may have been the Vietnam war, this time by the protests and the public realization the war was going poorly.
*The 1973 recession: Possible trigger: The first Arab oil embargo
*The 1980 recession: Possible trigger: The Iranian revolution causing another oil crisis
*The 1990 recession: Possible trigger: Desert Storm
*The 2001 recession: Possible trigger: The bursting of the “dot.com” bubble.
*The 2007 recession: Possible trigger: Collapse of the subprime mortgage market
        All recessions and depressions share one factor – reduction in debt growth – but all have had different triggers. It appears if we have only reduced deficit growth without the trigger, no recession or depression will result. And, a trigger event, without reduced deficit growth, will not cause a recession. The recession/depression bomb requires both a detonator (reduced debt growth) and a trigger.
        Triggers are difficult to evaluate (i.e., how serious they are), but as one small step toward predicting recessions we should keep in mind that a recession is far more likely during federal deficit growth rate decreases.

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

-When is a recession?


An alternative to popular faith

        Readers of this blog and of the summary are familiar with the fact that all six depressions in U.S. history immediately were preceded by extreme reductions in federal deficits (aka “surpluses”):

1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

        You also are familiar with the following graph showing that the last nine recessions began with reductions in federal debt growth and were cured with increases in federal debt growth.
Fed debt private investors 50-09

Note how debt growth declines before recessions and increases to cure recessions

In 1996, the prelude to Free Money, titled “The Ultimate America” predicted future recessions would follow decreases in debt growth. Since then it happened again, twice.

        Six depressions and nine recessions — a total of fifteen out of fifteen times at which federal debt growth declined and the economy fell — is an amazing, almost unheard of, correlation in a complex science like economics.
        Even more startling, the first edition of Free Money was published in 1996, and it predicted future recessions would be precipitated by decreases in debt growth. This would be akin to finding it has rained all day in Chicago every June 1st, following sunshine all day every May 30th, for the past fifteen years, and accurately predicting it would happen, again — twice more.
        A sharp-eyed reader, who may be associated with the Concord Coalition, (the group claiming federal debt must be reduced, but which never provides evidence) pointed out two recessions, in 1981 and in 1991, where federal debt growth seemed to move up in advance.
        While even thirteen out of fifteen is a remarkable correlation in a science that seldom sees such correlations, the reader’s concern was understandable.
        As you can see on close inspection, federal debt growth did decline in advance of the 1981 recession – not terribly significant, but a decline nonetheless. (The 1981 recession should be considered a continuation of the recession twelve months earlier — caused by the Iranian Revolution which took place in 1979, with its increased oil prices — from which we didn’t fully recover.)

Debt growth declines in advance of 1981 recession

        With regard to the 1991 recession, we come up against the definition of the word “recession.” The media arbitrarily say a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters, which means you can’t identify a recession until it is more than six months along . Look at the following graph:

        GDP growth (blue line) turned down in 1989, while debt growth was falling. Why did the government say the recession began in 1991? Hard to say. Perhaps it was due to the very slight bump at the end of 1989.
        This graph indicates the increase in federal debt growth was beginning to cure the 1989 recession, and the momentum of continuing increased debt growth finally cured the recession in 1991.
        A strong correlation between federal debt growth and GDP growth seems to exist.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com
P.S. You might try this experiment. Ask Diane Lim Rogers (drogers@concordcoalition.org), the Concord Coalition economist, for evidence to support her claim the debt is too large. I predict she either will not answer you, or she will tell you the debt is too large and “everyone knows” it should be reduced. “Everyone knows” is what passes for evidence at Concord.

-New thinking from the New America Foundation


An alternative to popular faith

        Here is the text of an Email I sent to Steve Coll, President and CEO of the New America Foundation (http://newamerica.net/) (Offices in Washington, DC and San Francisco, CA). According to their web site, “The New America Foundation is a nonprofit, nonpartisan public policy institute that invests in new thinkers and new ideas to address the next generation of challenges facing the United States.” They publish 12 “Principles” by which they live.
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Dear Steve;
        Your principle #10, “Do not perpetuate budget myths” is excellent. In that regard you might wish to reconsider certain statements on your web site:

“In reality, the availability of debt financing is far from unlimited; in fact Japan and China have already begun to slow their purchasing of U.S. debt.”
        A myth. The federal government does not need to sell U.S. debt to Japan, China or to any other country or person. The government creates debt (T-securities) out of thin air, collateralized only by full faith and credit. It just as easily could create money out of thin air, also collateralized by full faith and credit, and eliminate the debt creation and sales step. Debt creation and sales is a relic of the gold-standard days.
See: How to eliminate federal debt, deficits and interest payments

        “While deficits can spur consumption and thus improve the immediate economic situation when there is slack in the economy, they lead to slower growth in living standards over the long run.”        
A myth. Federal deficits are necessary both for short term and long term growth. A growing economy requires a growing supply of money. Where else will the money come from to grow our economy?
See: I believe

        “Moreover, high deficits increase interest payments, which crowd out important tax and spending priorities and leave the budget with far less flexibility than it would otherwise.”        
Partly true, partly a myth. High deficits can increase interest payments. However the conclusion is circular reasoning. Interest payments can “crowd out” spending priorities only if the government is precluded from running deficits. To date, despite massive deficits for the past 30 years, interest payments never have crowded out anything.

        “Lastly, deficits shift the burden of paying for today’s spending to future generations, which may cause over-consumption by present generations at the expense of consumption by future generations.”
A myth: Today’s deficits are paid by future generations only if the future generations decide to run surpluses. When any generation runs a deficit, it’s tax payments do not even cover its current expenses, let alone past expenses. Deficits do not cost taxpayers money. Only surpluses cost taxpayers money.
See: It isn’t taxpayers’ money

        I have suggestions for a 13th and 14th principle:
13. Base all suggestions on supporting data, not on popular faith.
14. To accept new thinkers and new ideas, be prepared to let go of old thinkers with old ideas.”

Rodger Malcolm Mitchell

-Peter Schiff and the money-supply myth

The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. If you understand the following, simple statement, you are ahead of most economists, politicians and media writers in America: Our government, being Monetarily Sovereign, has the unlimited ability to create the dollars to pay its bills.
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         Peter Schiff, who is running for one of Connecticut’s Senate seats and is president of Euro Pacific Capital, writes: “Almost every dictionary defines inflation as an expansion of the money supply, not rising prices.”
         Untrue. I have no idea what dictionary this guy is using, but he probably is using the libertarian “inflation is monetary inflation,” meaning supply = inflation.

        Money is a commodity. It is a surrogate in what otherwise would be a barter transaction.
         Inflation is the loss of money’s value compared with the value of goods and services. Like all commodities, the value of money is based on supply and demand. Increasing the supply does not cause inflation if the demand (interest rates) increases proportionately.

        [Note: Schiff may be influenced by the widely discredited and essentially worthless Austrian school of economics definition for inflation, a definition that has no real-world value, in that it does not include actual price changes.]
         Schiff also says, “Although more money may not immediately translate into rising prices, over time the correlation is extremely reliable.”

monetary sovereignty

        There is no historical relationship between M3 (green) or M2 (red) growth and inflation (blue). The reason: Money supply is only half the demand/supply story.
        When the Fed gets a whiff of inflation it raises interest rates, which by increasing the demand for money, increases the value of money (i.e. prevents/cures inflation).

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


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No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetary Sovereign, , and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.

Remember that the next time you’re tempted to ask a dopey teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it screwed up my future.”

MONETARY SOVEREIGNTY