Tag: gold standard

–Three misunderstood, economic truths

An alternative to popular faith

        Three economic truths: Federal deficit spending is necessary for economic growth; all money is debt; federal taxes do not pay for federal spending.
        For you and me, running a financial deficit is bad. Deficits can deplete our personal money supply, reducing our ability to pay bills. Similarly, when a corporation or a city, county or state runs a financial deficit, their ability to pay bills is reduced.
        However, despite what the media, the politicians and the economists tell you, when the U.S. government runs a deficit, that is good – in fact, necessary.
        By definition, a large economy has more money than does a small economy. So, a growing economy must have a growing supply of money. Federal deficit spending is the way the government adds growth money to the economy. Because the federal government has the unlimited power to create money, it never can run short of money to pay its bills.
        Every form of money is a form of debt. Bank savings accounts, checking accounts, money market accounts, CDs, travelers’ checks, corporate bonds and T-bills all are types of debt and money. Even the dollar bill is a debt of the federal government, which is why it has “federal reserve note” printed on it. “Bill” and “note” are words describing debt.
        As debt and money are identical, a growing economy must have a growing supply of debt. It can be personal debt, corporate debt, city, county and state debt, and it can be federal debt. All debts, except federal debt, are limited by the debtor’s ability of pay, and excessive debt can lead to bankruptcy. This makes federal debt the safest form of debt. It can grow endlessly, without causing bankruptcy.
        One counter-argument is that foreign countries (especially China) will refuse to lend us money. But, we don’t need to borrow from China or from anywhere else. We borrow by creating T-securities out of thin air, then selling them. This process is a relic of the gold standard days, when the government did not have the unlimited ability to create money. Today, the government does not need to create and sell T-securities. It merely can create money, also out of thin air. The processes are functionally identical. The end of federal borrowing would end concerns about federal debt. Rather than discuss “debt” we would discuss “money created.”
        A second counter argument is that printing money causes inflation. Examples are given of pre-war Germany, China and Brazil, which suffered hyper-inflation, a different process. Hyper-inflation occurs if a government prints money in response to inflation, when the proper response is to raise interest rates. Since WWII inflation has not been caused by excessive money printing, but rather by excessive oil prices. The largest, recent inflationary period came during the modest Carter deficits. The massive Reagan deficits saw inflation decline. Making money more valuable by raising interest rates, prevents and cures inflation.
        The media tell us the federal government spends “taxpayers’ money” or “our grandchildren’s money.” Neither is true. Other governments – city, county and state — do not have the unlimited ability to create money, so they spend taxpayers’ money. The federal government does not. There is no historical relationship between federal deficits and tax rates. The federal government literally destroys incoming tax money, and creates new money to pay its bills. There is no federal “bill-paying” account funded by taxes.
        Federal debt has increased 1400% in just the past 30 years, and the government never has had any difficulty paying its bills. Were taxes to fall to $0, this would not affect by even one penny, the government’s ability to pay its bills.
        In summary, much of what the media, the politicians and the economists tell you about our economy either is obsolete or always has been wrong. The lack of understanding that federal deficits are different from all other deficits has prevented universal health care and improvements in education, pension support, the ecology, the infrastructure, energy, the military and numerous other situations.
        The misguided fear of inflation or taxes, neither of which is exacerbated by federal deficit spending, has paralyzed our ability to solve the most pressing problems of today.

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

–Understanding Federal Debt. Full Faith and Credit

An alternative to popular faith

Why do we have recessions and depressions? Are they inevitable and unavoidable? Why do we have inflations? Are they preventable and curable?

This short post will give you a basis for answering these vexing (especially to the politicians, the Fed and the media) questions.

1. By definition: A larger economy has more money than does a smaller economy. California has more money than does Los Angeles, which in turn, has more money than does Anaheim.

2. Therefore: To grow larger, an economy requires a growing supply of money.

3. All forms of money are debt. Although there are many definitions of money, every form of modern money – bank accounts, money market accounts, traveler’s checks – is a form of debt. Even currency is a debt of the government. That is why a dollar “bill” has “federal reserve note” printed on it. “Bill” and “note” are words signifying debt (as in “T-bill” and “T-note.”)

4. Therefore: To grow larger, an economy requires a growing supply of debt/money.

5. The safest form of debt/money is federal debt/money. There are many types of debt – personal debt, corporate debt, state and local government debt, federal debt – but after 1971, the end of the gold standard, only the federal government has had the unlimited ability to create money to service its debt. All other debtors go bankrupt when they are unable to service their debts. The end of the gold standard marked the biggest change in economics during the 20th century. Most key economic hypotheses became obsolete in 1971; economists who did not change in 1971 are themselves obsolete.

6. All debt requires collateral. The collateral for federal debt is “full faith and credit.” This may sound nebulous to some, but it actually involves certain, specific and valuable guarantees, among which are:
A. –The government will accept only U.S. currency in payment of debts to the government
B. –It unfailingly will pay all its dollar debts with U.S. dollars and will not default
C. –It will force all your domestic creditors to accept U.S. dollars, if you offer them, to satisfy your debt.
D. –It will not require domestic creditors to accept any other money
E. –It will take action to protect the value of the dollar.
F. –It will maintain a market for U.S. currency
G. –It will continue to use U.S. currency and will not change to another currency.
H. –All forms of U.S. currency will be reciprocal, that is five $1 bills always will equal one $5 bill and vice versa.

7. The value of debt (money) is based on supply and demand. An increase in supply makes the value go down. An increase in demand makes the value go up.

8. The demand for debt (money) is based on risk and reward. The risk of owning debt (money) is the danger of inflation. The reward for owning debt (money) interest rates. High reward with low risk makes demand go up which makes value go up.

9. Inflation compares the value of debt (money) with the overall value of goods and services. Fighting inflation requires increasing the reward for owning debt (money) and/or reducing the supply of debt (money). However, because a growing economy requires a growing supply of debt (money), reducing the supply leads to recessions and depressions, making supply-reduction a poor choice for fighting inflation.

10. For every borrower there is a lender. To the degree lowering interest rates helps borrowers, it equally hurts lenders, both of whom are part of the economy. The Fed lowers interest rates, believing this helps businesses that are borrowers, neglecting the fact that it equally hurts businesses that are lenders. That is why the 20 rate reductions preceding and during the recession, neither prevented nor cured the recession.

You now know how to begin to answer the questions in the first paragraph.

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

–Fool’s gold

An alternative to popular faith

I always am puzzled by the mystical faith in gold.

First, gold has minimal utility. Yes, some is used for jewelry and a bit for dentistry and electronics, but essentially gold is useless. At one time, its value was based on the same faith that supports the dollar bill. Today, its value is based on less faith than that, because the dollar at least, is supported by the U.S. government’s full faith and credit. Gold is backed by nothing.

Second, the Great Depression occurred while we were on a 100% gold standard. Some have argued that was one cause of the Depression. In any event, gold did not prevent that Depression, nor did it prevent any of the prior depressions.

Third, the current recession is being cured by the government’s unlimited ability to pump money into the economy, something that would be impossible if we were on a gold standard or on any other standard based on a physical product or “basket of products” as has been suggested.

Fourth, the U.S. government can control both the supply of, and the demand (interest rates) for, the dollar. That control over supply and demand gives the U.S. complete control over the value of the dollar. The U.S. would have little to no control over the value of gold, a serious problem when trying to control our economy.

In short, gold is one of those commodities, the value of which is based solely on faith. Just as there have been real estate bubbles, stock market bubbles, oil bubbles, tulip bulb bubbles, sugar bubbles, coffee bubbles and diamond bubbles, there have been gold bubbles, the biggest coming in 1980 and perhaps again, today.

Gold Price Chart 75-09
                        Is this the picture of another gold bubble?

The fact that people traditionally have coveted gold is irrelevant to today’s world economy. It also is irrelevant to the future safety of gold, which could disappear with the discovery of, for instance, a massive undersea or antarctic gold vein.

Because gold is supported by no nation, it is less safe than the dollar. Worse yet, it is expensive to own. While saving a dollar will earn you interest, saving gold will cost you for storage, insurance and shipping. In essence it is a wasting asset, the value of which is based on the “greater fool” theory (“A fool buys it because he expects to sell it to a greater fool.”).

We finally went off the gold standard in 1971 for a good reason: A growing economy requires a growing supply of money, and basing money on gold prevents that money growth. Had we stayed on the gold standard, the U.S. today would be bankrupt – unable to pay its bills.

Those who yearn for the good, old, gold standard days, should be careful what they wish for.

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

-Debt hawks — Economics’ Chicken Littles

An alternative to popular faith

Are you too young (or too old) to remember the fable about Chicken Little, who believed the sky was falling down when an acorn fell on her head? She ran around in a panic, screaming “The sky is falling,” a now common idiom denoting an hysterical or mistaken belief that disaster is imminent.

Thus, have the debt hawks, aka Chicken Littles, been telling us for 30 years that the sky is falling, and that federal deficits will create disaster. Neither has occurred, or is likely soon, but failure of prediction neither embarrasses nor educates debt hawks.

We have arrived at a deficit of $1.4 trillion. In the past 30 years, the gross federal debt has grown an astounding 1,400%. The economy has grown, inflation has not been a problem, federal borrowing has not replaced private borrowing, countries have not refused to lend to us and because federal tax rates actually have gone down, no one’s grandchildren have paid for the $12 trillion gross debt.

The problem with debt hawks is they don’t understand money. They think of money as a scarce physical substance. It may be scarce to you and to me, but it no longer is scarce to the federal government, which since 1971, has created money at will, simply by creating T-securities from thin air, then exchanging them for the dollars it created earlier — also from thin air.

Visualize this. You go to a football game and the scoreboard reads 14 – 7. You might say one team “has” 14 points and the other team “has” 7 points. But in reality, the scoreboard merely has credited one team with 14 points and the other team with 7 points. The points are not physical things. No one “has” them.

Why is this important? Because in the economy, you and I are the teams and the government is the scoreboard. Points are not a real substance. Teams are merely credited with points. Money no longer (after we went off the gold standard) is a real substance. You and I, or more specifically, our bank accounts, merely are credited with money.

The scoreboard (government) never runs out of points. The government never runs out of the ability to credit you with dollars. The scoreboard does not need to ask either team to return some points so it can credit more points. Crediting a team with points does not reduce the scoreboard’s ability to credit more points. Crediting people or companies with money does not reduce the government’s ability to credit more money.

The scoreboard does not need to borrow points. The government does not need to borrow dollars. It as easily, safely and prudently can create dollars directly, rather than by creating and selling T-securities.

Imagine you decide to start a country from scratch. What is the first thing you will do? The people in your country need money, so you, as the government, will credit them with money. How? Perhaps by buying things from them. The people will give you material things and services; you will credit their bank accounts.

Debt hawks will call this exchange “deficit spending,” and they will demand that the people credit you, the government, back with some of the money. That’s called “taxation.” It is identical with giving the scoreboard back some points.

The scoreboard neither has nor needs points. The federal government neither has nor needs money. It never needs to be credited with money. It never needs to borrow money. It is the scoreboard. It can credit, endlessly.

The debt hawks continue to use obsolete, gold-standard thinking, from when money was a substance and was scarce to the government. Today, if the government wanted to give you $1 trillion, it simply would credit your bank account for $1 trillion, and debit its own balance sheets. Nothing physical would happen except the movement of a few electrons. The government can do this endlessly. In fact, last fiscal year, it did.

The government does not have a stash of money from which it spends. The government has no money at all. It merely credits bank accounts — yours, mine, foreign governments’.

Some may fear this can cause inflation, but the government now has absolute control over the value of its money through its control over both the supply and the demand (interest rates) for money.

The world changed in 1971, and the debt hawks have not yet understood that. Perhaps “hawk” is the wrong bird. More appropriate might be “Chicken Little.”

Rodger Malcolm Mitchell
http://www.rodgermitchell/