–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

–The federal deficit debate

An alternative to popular faith

THE WELL-KNOWN, ANTI-DEFICIT POSITION
A federal surplus is more prudent than a federal deficit

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
That is the popular faith.* But, a large economy has more money than does a small economy. Therefore, a growing economy requires a growing supply of money. Federal deficit spending is the prime source of that money. All six recessions, since the end of the gold standard (1971), have been introduced with a surplus or a reduction in deficit growth. All six were cured with an increase in deficit growth. When we have insufficient money growth we have recessions or depressions. The Great Depression immediately followed years of surpluses, and ultimately was cured with deficits.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
Large deficits are unsustainable. The interest payments alone will grow to a point where they occupy the entire federal budget.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
Unlike you, me, cities, states and corporations, the federal government uniquely has the power to create unlimited amounts of money, a power it gave itself in 1971. To service a deficit of any size, including interest payments, the government merely creates money ad hoc, by crediting the bank accounts of creditors.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
We cannot keep borrowing forever. Foreign nations will refuse to keep lending us money to support our profligate ways.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
The government does not need foreign nations to lend us money. The federal government borrows by creating unlimited amounts of T-securities from thin air, backed only by full faith and credit, then selling them for the money it previously created. The government just as easily and safely could create money from thin air, also backed by full faith and credit. This would eliminate the borrowing step as well as all concerns about debt. Federal borrowing is a relic of the gold standard days.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
The fact that the government borrows is prima facie evidence that the government needs to borrow.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
Federal borrowing is a relic of the gold standard years, when the government did not have the unlimited ability to create money. Today, borrowing has zero advantages over direct money creation, and many disadvantages, not the least of which is the mistaken belief
federal debts are a problem.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
Federal deficits increase the money supply, which reduces the value of money and causes inflation.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
The value of money is based on both supply and demand. Increasing the demand for money prevents/cures inflation. Demand is determined by risk and reward. The reward for owning money is its utility as an exchange vehicle and interest rates. To fight inflation, the government increases the reward by raising interest rates. Since 1971, there has been no relationship between inflation and federal deficits.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
Raising interest rates to fight inflation will hurt business and the economy.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
Since 1971, there has been no relationship between interest rates and economic growth. Low rates have not stimulated (as Greenspan and Bernanke have learned); high rates have not inhibited. The reason: For every borrower there is a lender. What helps one, hurts the other. It’s zero sum. For example, high rates help holders of CDs, bonds, T-securities. Also, changes in interest rates represent minuscule changes in business costs. Additionally, high rates have had a slightly stimulative effect, because they’ve forced the federal government to pump more interest money into the economy.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
Our children and grandchildren will pay for today’s deficits through higher taxes in the future.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
The government pays its debts by marking a credit in the bank accounts of its creditors, and marking a debit in its own balance sheets. No physical money changes hands. The government can do this endlessly. It does not use tax money to pay its bills. When taxes are received, the government debits the payers’ bank accounts and credits its own balance sheets. Effectively, the tax money is destroyed. The government has no vault or fund of money. It merely makes electronic notations. That is why today’s taxpayers do not pay for the massive Reagan deficits. There is no historical relationship between tax rates and federal deficits.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
There is no such thing as a free lunch. One day, someone will have to pay for today’s federal spending.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
Federal money is, in fact, a free lunch to the federal government. It pays its bills by crediting vendors’ bank accounts. This costs the government nothing other than a few electrons sent to the banks’ records. Nothing collateralizes our money other than full faith and credit.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
When the debt exceeds the value of all government assets, the government will be bankrupt.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
Federal assets, such as the Grand Canyon and Washington Monument do not collateralize our money. As a holder of U.S. bonds, China is a creditor to the government, but China cannot lay claim to such federal assets as Lake Michigan or the Supreme Court building. China’s collateral is the U.S. government’s full faith and credit, nothing more.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
I have to pay my bills and be careful with my borrowing. Otherwise I will go bankrupt. The government is you and me. It must do the same as we do.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
The government is not you and me. It collects taxes; we pay taxes. It can create money at will; we cannot. As a sovereign nation, with the unlimited ability to create money, America cannot go bankrupt. The belief that the government is the same as its citizens gives rise to the myths about deficits.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
As our population ages, and more people collect Social Security, the program will go bankrupt unless taxes are increased or benefits decreased.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
Social security is a federal agency, much like the Department of Defense, Congress, the Supreme Court and 100+ other federal agencies. No federal agency ever has or ever will go bankrupt, simply because the federal government itself, having the unlimited power to create money, cannot go bankrupt.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
Technically, the government already is bankrupt, since it doesn’t have the money to pay all its debts, and must rely on future tax collections.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
The government has no money, yet doesn’t rely on tax collections. It pays its debts merely by changing the numbers in its creditors bank accounts. The government acts like a football scoreboard. When a team scores a touchdown, the scoreboard “owes” it six points. No one asks, “Where is the scoreboard going to get six points?” This is explained in detail at http://www.moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
Many countries – Germany, Italy, Brazil et al – have suffered from hyper-inflation caused by excessive money printing.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
Each instance of hyper-inflation has been caused by unique circumstances, but generally, hyper-inflations have been caused by governments not addressing the root causes of their inflations. They mistakenly printed more money in response to inflation. This exacerbated modest inflations into hyper-inflations.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
Most prominent economists believe the deficit and debt are too large.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
That is exactly the way scientific progress is made. The vast majority of prominent scientists have a belief. Then a minority (sometimes just one person) proposes a new hypothesis, which at first is denounced. Eventually the vast majority begins to change its mind, and the new hypothesis becomes the majority. Then the process repeats.

*Faith is belief without evidence. Science is belief from evidence.

-Is inflation too much money chasing too few goods?


An alternative to popular faith

In the post “Do deficits cure inflation?” we saw that contrary to popular faith, deficit spending (i.e., too much money) has not caused inflation. We also saw that inflation can be cured by increasing the reward for owning money, i.e. by increasing interest rates.

Now we question another piece of popular faith: Is inflation caused by too much money chasing too few goods?

Begin with the notion of “too much money.” We already have seen that federal deficits are not related to inflation. What about another definition of money: M3? Please look at the following graph:

Clearly there is no immediate relationship between money supply and inflation. What about a subsequent relationship. Could “too much money” today, cause inflation later?

The graph indicates no such cause/effect relationship, with M3 peaks preceding inflation peaks by anywhere from 2 years to 10 years. It is difficult to imagine a graph revealing less relationship.

What about “too few goods”? If too few goods caused inflation, this would manifest itself with GDP moving opposite to CPI. Again, that does not seem to happen:

There seems to be no regular pattern, with GDP and CPI sometimes rising together and sometimes separately. In today’s international economy, it is difficult to substantiate the idea of a wide-spectrum commodity shortage when sufficient purchasing power exists.

Individual nations can experience shortages of individual commodities. Individual poor nations can experience shortages of a broad basket of commodities. But can a wealthy nation, with plenty of money to spend, suffer a shortage of a broad basket of commodities, thereby causing inflation? Has it recently happened?

Seems unlikely these days as products are made in multiple nations and shipped to multiple nations, with easy international shipping and instantaneous money convertibility. Your cotton shirt may have been grown in Egypt, woven in India, assembled in China, labeled in Italy and sold in the U.S. Clearly, a cotton shirt shortage would be rare, as any of these steps could occur in various countries, and that’s just one product. A nationwide “too-few-goods” situation, coincident with “too much money,” seems impossible.

There is however, one exception: Oil.

The graph below compares overall inflation with changes in energy prices, which are dominated by oil prices.

Oil is the one commodity that has worldwide usage, affects prices of most products and services, and can be in worldwide shortage. That is why, when oil prices rise or fall steeply, inflation rises and falls in concert.

The large oil price moves “pull” inflation in the same direction. When oil prices increased or decreased the most, inflation came along for the ride.

In summary, inflation is not caused by deficit spending or by “too much money chasing too few goods.” Inflation is caused by a combination of high oil prices and interest rates too low to counter-balance the oil prices.

The high oil prices can be caused by real shortages and/or by price manipulation.

Hyperinflation is a different beast, altogether. Every hyperinflation has been caused by shortages, most often shortages of food.

Zimbabwe, Weimar Republic, and Argentina had food shortages that created hyperinflations.

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

-Do you believe President Obama is gay ??


An alternative to popular faith

       If a reporter were to come to his editor with a proposed article titled, “President Obama is gay,” the editor would demand supporting evidence, before that article ever saw daylight.
      However, if the same reporter submitted an article titled, “Federal deficit is too high,” history says the editor would ask for no supporting evidence, nor would the article contain any. The media merely assume, as a matter of faith, that revenue neutrality is more prudent than deficits.

      Economics is rare, perhaps unique, among sciences, most of which demand evidence for their hypotheses. Only in economics can intuition and popular faith obviate facts or even the desire for facts. Thus, I have had editors, columnists and reporters tell me it is “obvious” that large deficits are unsustainable, crowd out lending funds, lead to recessions, depressions, inflations and hyper-inflations. When I ask for evidence to support these views, I seldom hear from them again, probably because they feel scientific evidence is unnecessary in a science, but more importantly, they don’t have any.
      Even the Concord Coalition, an organization that for seventeen years, has collected vast amounts of money to preach for federal deficit reduction, unashamedly offers no evidence to support its views. Check its website, http://www.concordcoalition.org, or write to them and you will see they neither offer, nor have, evidence.
      Because our leaders parrot the economic beliefs promoted by the media, lack of evidence has contributed heavily to the government actions that yield repeated recessions. Until the media learn to ask, “What is your evidence?” we will continue to suffer periodic, economic traumas. These traumas may seem inevitable and unavoidable, but in reality they are caused by beliefs lacking evidence.
      If you don’t believe President Obama is gay, unless you see solid evidence, don’t believe the federal deficit is too high, unless you see solid evidence.

Rodger Malcolm Mitchell
For more information, see http://www.rodgermitchell.com