Tag: government borrowing

–The EU and the “hair of the dog”

An alternative to popular faith

AP 5/7/2010: “European leaders sought Friday to convince fearful markets that the Greek debt crisis won’t spread to other countries and derail the continent’s hesitant economic recovery. France and Italy approved their share of a euro 110 billion ($140 billion) bailout to keep Greece from imminent default […] EU leaders have insisted for days the Greek financial implosion was a unique combination of bad management, free spending and statistical cheating that doesn’t apply to any other eurozone nation, such as troubled Spain or Portugal.”

As I’ve noted elsewhere, GREECE has problems neither unique nor unanticipated. In a June 5, 2005 SPEECH at the University of Missouri, Kansas City, I said, “I mentioned Germany. They are in trouble, again. Their economy is stagnant. They want to increase their supply of money by cutting taxes. But, because of the Euro, no European nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the Euro.“

We have a similar, though thankfully different situation here in the U.S. Replace “Greece” with “California,” and you have an identical problem. Until 1971, the U.S. was on a gold standard, which limited its ability to create money. Today, Greece is limited by the “euro standard”. California is limited by the “dollar standard.” All standards have the same function: Limit money creation.

Like Greece, California is unable to create money at will. It has borrowed as much as it can, and no sources of money are on the horizon. Now try to imagine the other states, Illinois, New York et al, giving or lending money to California to bail it out of its immediate problems. Obviously, that wouldn’t work:
1) The states can’t afford it.
2) The “solution” would, at best, be temporary. It merely would delay the inevitable, while putting California deeper in debt.
3) It would exacerbate the looming bankruptcies of the other states.

Now, the E.U. proposes a “hair of the dog” solution for Greece. It is asked to commit financial suicide by raising taxes, reducing spending and borrowing even more money, the very thing that got it into trouble. Meanwhile, the other E.U. nations will commit suicide along with Greece, by lending it precious money they can’t spare.

The solution for the U.S states is clear: Federal creation and input of money. The federal government has this power, in fact, gave itself this power specifically to prevent American bankruptcies, and has used this power many times, most recently to end the recent recession.

The solution for the E.U. states is equally clear, and that solution is not loans from wealthier E.U. nations to poorer E.U. nations. The solution is for the E.U. to function just like the U.S. Fed. Create money and supply it to the E.U. states. Until then, the E.U. will live in a dream world, or rather a nightmare world of ongoing financial desperation.

More than 200 years ago, the U.S. was a group of independent nations, each with individual mores and beliefs. Yet for mutual survival, they had the good sense to ignore their differences and come together under one rule. The EU should do the same.

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

No nation can tax itself into prosperity

–Europe and the welfare-entitlement state

An alternative to popular faith

Today, the Wall Street Journal’s editors managed to pack one sentence with more misleading inferences than I thought possible. The sentence was: “Greece’s problems are familiar across Europe: a welfare-entitlement state that is unaffordable given the country’s anemic economic growth.”

First, Greece’s economic problems are familiar across Europe, because most of Europe is in the European Union, an ill-conceived, economically doomed arrangement. These nations have essentially the same problem, and it has nothing to do with a welfare-entitlement state. It has to do with each EU nation’s inability to control its own money supply — a charter requirement for belonging to the EU. So when one nation encounters its individual economic crisis, it is prohibited from creating the money necessary to save and rebuild its economy.

The EU nations are on a “euro standard,” similar to a gold standard, in that the supply of their money is controlled by the EU. In this, the EU nations resemble California, Illinois, Cook County and Chicago, which are on a “dollar standard.” None can create the money needed to rebuild its economy.

Because a political entity on a “standard” cannot arbitrarily create money, it eventually will need to receive money from outside, either in the form of export payments, or payments from the owner of the money. For Greece, the owner is the EU. For California et al, the owner is the U.S. government.

For Greece to survive, it must receive money from the EU. It cannot survive on taxes alone, because taxing does not add money to the state. California, to survive, must receive money from the federal government.

The so called “welfare-entitlement” state merely is description of what every nation is and must be: A source of funds for the common good. Since all countries are “welfare-entitlement states, to greater or lesser degree, at what point does the state offer too much welfare?

–When the government pays for its army?
–When the government pays for roads, bridges, levees and docks?
–When the government pays for police and fire protection?
–When the government pays unemployment benefits? Food stamps? Medicaid? Housing?
–When the government pays for primary education? Secondary education? Advanced education?
–When the government pays to rebuild parts of a city that has flooded or hit by a hurricane or volcano?
–When the government provides FDIC insurance?
–When Social Security and Medicare benefits are provided to people over the age of 95? 55? 35? 10? All?
–When the government pays for vaccines? Inspects food? Supervises investments? Makes medical expenses tax deductible? Creates and enforces laws?

Where should a welfare entitlement state begin and end? I’d guess the WSJ editors, who criticize the “welfare-entitlement” state, have no idea. But, the term makes for a handy whipping boy, like “socialism” and “bailouts” and “big government” and “activist judges,” that everyone dislikes in general, but wants in the specific.

Finally, the “welfare-entitlement” state is not unaffordable because of the nation’s anemic economic growth. The government doesn’t pay its bills with Gross Domestic Product. Of course, some argue that increased GDP growth begets increased taxes, making government spending more affordable. But high taxes cause anemic economic growth, so in essence you have a circular argument and a self-fulfilling prophesy.

What makes EU governments’ spending unaffordable is the EU system, which prevents unilateral money creation. By contrast, no amount of U.S. spending is unaffordable for the U.S. government.

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


No nation can tax itself into prosperity

–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