Tag: government borrowing

–Ireland demonstrates America’s future, if the debt-hawks have their way

The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.

Ireland is not Monetarily Sovereign. It cannot pay its bills. The following illustrates what happens to governments that are not Monetarily Sovereign. It also is the prescription the debt hawk have for the United States, despite the fact that we are Monetarily Sovereign, and never can be unable to pay our bills:

11/24/10, Associated Press
Ireland Winces As It Unveils Historic Budget Cuts

“Ireland unveiled the harshest budget measures in its history Wednesday, a four-year plan to slash deficits by $20 billion so it can get a massive bailout from the European Union and the International Monetary Fund.”

Unfortunately, IMF bailouts are in the form of loans. How lending money, i.e. adding debt,, to a nation that is unable to service its current debts, is a mystery.

“The plan seeks to cut $13.3 billion from spending and raise $6.7 billion in extra taxes from 2011 to 2014. It axes thousands of state jobs, welfare benefits, and pension payments while raising university fees and taxes, forcing even Prime Minister Brian Cowen to concede it will hurt the living standard of everyone in the nation.”

It is identical with imposing a depression on Ireland.

“‘This is a road map back to the Stone Age,’ said Jack O’Connor, president of Ireland’s largest union, SIPTU. He noted that Ireland had already suffered nearly euro15 billion in cuts and tax hikes since 2008, gutting economic growth and helping to double unemployment to 13.6 percent.
[…]
Ireland’s 140-page National Recovery Plan proposes to introduce property and water taxes, raise the sales tax from its current rate of 21 percent to 22 percent in 2013 and to 23 percent in 2014, and cut the minimum wage by $10.20. Ireland’s bloated civil service will be particularly hard hit — seeing about 24,750 state jobs lost. Income tax bands will be widened so more lower-paid workers pay taxes, and middle-class workers will see annual taxes rise more than $4,000. A raft of welfare payments will be gradually reduced. Young and old alike face higher bills and less income. University fees will rise, as will the charges on state-funded pensions. But monthly pension payouts will fall up to 12 percent. “

Raise existing taxes. Impose new taxes. More fees. Cut jobs. Reduce welfare. Less income. Ireland is doomed, and all because they voluntarily surrendered their monetary sovereignty. Ireland is on what amounts to a gold standard, except this is a euro standard. The euro limits Ireland’s ability to create money. As taxes increase and income decreases, the money supply will drop precipitously. Businesses will fail. Unemployment will grow. So tax receipts actually will begin to fall and welfare needs will increase. Ireland will be like a dog chasing its tail, never catching up with the desire to balance its budget.

“Ireland’s legendary tax-free existence for authors, musicians and artists is facing a major cutback so that only the first $53,000 of income will avoid tax.

“Left untouched, to the irritation of other EU nations, is Ireland’s exceptionally low 12.5 percent tax rate on business profits. That rate is less than half the EU average and has helped to lure about 1,000 high-tech multinationals to Ireland, far more proportionally than any other European country.”

By lowering taxes on business, Ireland encouraged business. The EU did not like the idea of encouraging business. The EU wants higher, business-discouraging taxes. If business is the horse that carries the economy, the EU wants to tie the legs of the horse.

So there you have it. Ireland gave up its monetary sovereignty, so it is doomed. Portugal and Spain may be next. Eventually all EU nations (except those that remained monetarily sovereign: the UK, Norway and Denmark) will fail.

American politicians, media writers and even many mainstream economists, simply do not understand the difference between monetary sovereignty and monetary non-sovereignty. So under the misguided banner of “fiscal prudence,” they campaign to apply to America the medicine that is meant for Ireland, thereby guaranteeing a long extension of slow or non-existent growth.

Ireland is the model of what the debt-hawks wish for us. And all because of ignorance.

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

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–Surprise: Federal deficit growth precedes GDP growth by 1-2 years

The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.

GDP growth has many causes. One of these causes is federal deficit growth. (By law, federal debt growth = federal deficits, so while the following graphs literally show federal debt growth, they indicate deficit growth).

The following graphs show debt growth and GDP growth 1971 – 2010 PGS (post gold standard). First, here is a graph showing federal debt and GDP growth:

graph

Then, I split the data in two, and offset the graphs. By drawing vertical lines between the two graphs, you will see an interesting effect: Federal debt growth and declines precede GDP growth and declines by about 1-2 years. There are short term exceptions to this — as I said, GDP growth is subject to many causes — but over the past 40 years the “rule” has held remarkably well, and the 1-2 year period is exactly what one would expect in a cause/effect relationship between federal debt growth and GDP growth.

Grtaph 2
      grraph 1

Annual % change:
2007-2009 Federal debt rose from 3% to 33%
2009-2010 GDP rose from -3% to 33%       ↑
=================================
2004-2007 Federal debt fell from 15% to 3%
2006-2009 GDP fell from 6% to -3%       ↓
=================================
2001-2004 Federal debt rose from -11% to 15%
2002-2005 GDP rose from 2% to 6%       ↑
=================================
1993-2001 Federal debt fell from 12% to -11%
1994-2002 GDP fell from fell from 6.5% to 2%       ↓
=================================
1983-1990 Federal debt fell from 28% to 7%
1984-1991 GDP fell from 12.5% to 3%       ↓
=================================
1979-1981 Federal debt rose from 5%-15%
1980-1982 GDP rose from 7% to 14%       ↑
=================================
1976-1979 Federal debt fell from 28% to 7%
1976-1980 GDP fell from 12% to 7% **       ↓
=================================
1974-1976 Federal debt rose from -2% to 28%
1975-1976 GDP rose from 8% to 25%       ↑
=================================
1972-1974 Federal debt fell from 10% to -1%
1973-1975 GDP fell from 12% to 8%       ↓
=================================
1971-1972 Federal debt rose from 1% to 10%
1972-1973 GDP rose from 8% to 12%       ↑

**During this period, GDP rose as high as 14% before falling, while debt continued to fall the entire period.
————————————————————————————————————————————————

The reason for this series of coincidences is outlined at Introduction, but briefly: Money feeds an economy. A growing economy requires a growing supply of money, and deficits are the federal government’s method for adding money to the economy. Whenever the economy is starved for money, we have a recession. When the economy is “well-fed” with money, we have healthy growth.

Yes, it is possible to “overfeed” the economy, in which case we will have inflation. But currently we are nowhere near that point. Economically speaking, we are much closer to starvation than to obesity. In fact, during the past 40 years PGS, our economy never has been obese. It has vacillated between hungry for money and serious starvation.

For a consistently growing GDP, it is necessary not only for debt to grow, but debt must grow by an increasing percentage. For this reason, calls for debt reduction, deficit reduction, balanced budget, etc., are suicidal for the economy.

Discuss these data with your political representatives and your favorite media writers. Although breaking through the intuition-based bias against federal debt is difficult, the only hope is to continue to present fact after fact after fact, until even the most cement-brained debt-hawk finally concedes.

Good luck. The future of America depends on it.

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

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–Recession redux: The EU bailouts. Digging the hole deeper. Lending to deadbeats.

The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.

Our recession was precipitated by the mortgage loan scandal. Too many banks lent too much money to people who had insufficient resources to service those loans. The banks should have known never to lend money to people who do not have the resources to pay it back. Simple?

Now compare that with the EU. Here are some excerpts from an article in the Telegraph, by By Bruno Waterfield:

“After a humiliating week of denying it needed help, the Dublin government succumbed to pressure from other euro zone countries and asked for a ‘very big’ loan.”

“On Monday Irish and euro zone governments will be watching the markets after Greece, which received a £94 billion bail-out in April, warned that the EU’s debt crisis was not finished yet.”

“Portugal has already warned that there is a “high risk” it might need economic help. If investors are unconvinced by the Irish rescue package, the euro could come under pressure while the cost of borrowing for the Dublin government could rise.”

“George Papaconstantinou, the Greek finance minister, warned that the Irish bailout would not be enough to plug the euro zone’s black hole of debt. ‘Even if Ireland is helped, it cannot prevent the debt crisis from continuing,’ he said ‘[It] will focus on other countries: Spain, Portugal.'”

Sound familiar? The EU, rather than using its own monetarily sovereign powers, and giving money to its monetarily non-sovereign members, it is lending money to these already insolvent countries, thereby adding to their inability to pay their debts — just like the U.S. banks did with their mortgage lending.

So now, the load falls on one of the few monetarily sovereign nations in the EU, the U.K. But wait. The U.K., which wisely did not adopt the euro, and so remained monetarily sovereign, doesn’t realize it’s monetarily sovereign, as witness this statement in the article:

“Douglas Carswell, the Conservative U.K. MP for Clacton, said that British involvement in the bail-out would anger eurosceptics who had voted Tory for a tougher line on Europe. ‘Yet again we see that the people we elected to run the country in May are powerless. All they can do is tell us how unhappy they are about it but they continue to hand out billions to Europe at a time of austerity for the country,’ he said.”

So Britain, which retained the unlimited ability to pay any bills of any size, now has opted instead for austerity, meaning money growth and economic growth will fall, leaving the U.K. headed for a second, easily preventable recession.

And finally,

“Negotiations have been tense as the EU and IMF impose tough conditions to force Ireland to cut public expenditure by £13billion (Â 15bn) and to increase taxation on the vast majority of people. Ireland’s last three budgets have already cut spending by £12billion. Trade unions are warning of ‘civil unrest’ on scale not seen for decades as leaks of the spending plan reveal that there will be sharp tax rises for the low paid and middle class families in order to increase state revenue.

Eamon Devoy, general secretary of the Technical Engineering and Electrical Union, said: ‘I think there is going to be huge civil unrest. When the draconian measures being proposed are heaped on top of cuts already implemented, life in Ireland will be unbearable.'”

Austerity. Civil unrest. Massive increases in unsupportable debt by monetarily non-sovereign governments. All unnecessary and all linked to two false beliefs: The belief that monetarily non-sovereign governments can continue indefinitely without financial support, and the belief that a monetarily sovereign nation needs to institute austerity.

In the U.S., the debt-hawks created such debt hysteria, that the only way to recover from a recession and grow the economy — i.e. with federal deficit spending — was partially blocked in the past, and now seems totally blocked. If the debt hawks have their way, we soon will be, like the EU monetarily non-sovereign nations, wallowing in poverty and civil unrest.

Please contact your Congresspeople and your local media, and tell them to educate themselves on the meanings and implications of monetary sovereignty, before it’s too late.

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

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–Should federal earmarks be ended?

The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics.

On Monday, Senate Minority Leader Mitch McConnell stated support for a moratorium on earmarks. This is in line with GOP conservatives who want to reduce federal spending. Never mind that earmarks are a minuscule part of federal spending. Earmarks have a bad name; many people feel there is something inherently wrong with earmarks, as though they somehow were a form of stealing. They are closely associated in people’s minds with “pork barrel” spending, which also has a bad name.

But what is an “earmark.” It is nothing more than spending directed at a specific project. In one sense, virtually all government spending could be called an “earmark,” though the term usually is more narrowly focused on small projects in a particular Congressperson’s district. Building a road, fixing a bridge, refurbishing a school, providing an ambulance or hiring a fire fighter all can be earmarks.

In common usage, an earmark is an appropriation inserted in a large bill, the appropriation being too small to incur a veto from the President or even a rejection by Congress. Thus, an earmark can bypass both Legislative and Executive branch intent. But does that mean earmarks are bad? Not at all. The vast majority of earmarks are worthwhile. Not only do they buy valuable assets and services, but they provide specific remedies for local problems that otherwise would go unnoticed by Congress and the President. And, just as important, money paid for earmarks adds to the national money supply, which is stimulative.

There are three key arguments against earmarks, all of them suspect:

Argument 1. Earmarks waste money that otherwise would go to worthier projects.
The worthiness of any project is in the eye of the beholder. Is a school in Nevada worth more or less than an equally-priced prison in Oregon? Is a sewer in Illinois worth more or less than a dam in Minnesota? These are discussions in which neither Congress nor the President could or should be involved. That is why each Congressperson serves an individual district, rather than only serving the nation as a whole. Earmarks give voters in individual cities, counties and states the ability to receive funding for important, local projects.

Argument 2. Earmarks add to the federal deficit. I won’t repeat the arguments you can find on virtually every page in this blog. For example, see: https://rodgermmitchell.wordpress.com/2009/09/07/introduction/ A quick summary of the facts. Adding to the federal debt is absolutely necessary for economic growth. Even the notorious “Bridge to Nowhere” in Alaska, would have employed many people, profited many businesses, and even might have provided a slight convenience for a few people. And it would have done no harm to anyone.

Argument 3. Earmarks aren’t fair; some Congresspersons get more than others. The question of “fairness” is similar to the question of worthiness. Who judges what is fair and what is not? Smart voters take into consideration what their representatives can do for their specific area, not only what the representative can do for the entire nation. People who receive less, whether it be earmarks, salary, bonus or just a good place in line, often feel the system is unfair. People who receive more, like it just fine.

When you read that Mitch McConnell has done a sudden U-turn from his previous position of supporting earmarks, and now hates them, you can be sure he is doing it for political, not financial or even logical, reasons. If he and the other politicians were to succeed in ending earmarks (unlikely), I pity all the local cities and counties, the businesses and charities and even the states, whose voices will not be heard and needs not be met. How else can these people receive attention, consideration and federal money, if not for earmarks?

Ending earmarks is like banning cars to prevent auto accidents. Or to use the old cliche, “Throwing out the baby with the bathwater.”

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

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”