Tag: inflation

–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%       ↓
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2001-2004 Federal debt rose from -11% to 15%
2002-2005 GDP rose from 2% to 6%       ↑
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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.”

–How the Republican strategy won

The debt hawks are to economics as the creationists are to biology. Those, 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.
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If the Democrats take a beating this coming election, as is predicted, they have only themselves to blame. The Republicans want the economy to stay weak, giving them the opportunity to remove the recession blame from President Bush and to hang it on President Obama. So they have directed their efforts toward reinforcing the myth that federal deficits are bad, the federal debt is worse, and anything that is not austerity is worst of all.

This wonderful, though cynical strategy guaranteed a weak recovery, hurting the Democrats, while hurting the American people, worse. But hey, who cares about that?

The Democrats, rather than educating the public about federal finance, allowed the Republicans to stigmatize any recovery effort that required deficit spending. Either through ignorance or spinelessness, they fell right into the Republicans’ trap, thereby guaranteeing not only a continuation of economic weakness, but a loss this coming Tuesday. They now suffer, and we the people, suffer, though most of the people don’t know why.

The only thing that can create a recovery is deficit spending, the more the better, but the Democrats never tried to get that message across. They even agreed with the Republicans about the evils of federal debt. Talk about slashing your own throat.

The Republicans have succeeded. Deficit spending has been too little, too late, as I predicted way back in Letter dated April, 2008. The Democrats struggled to spend while not spending, the Republicans threatened to filibuster everything that smacked of deficit, the Democrats cowered in terror, and the economy languished.

What should the Democrats have done? Simple. Tell the truth. Rather than believing the voting public is too stupid to understand facts, the Democrats should have instituted a two-year educational program, starting immediately after the Obama election. Yes, at first the public would have rejected the counter-intuitive ideas that deficit spending is absolutely necessary for growth, our children and grandchildren will not pay for federal spending, and inflation is not a serious threat. But over time, these fact-based ideas would seem less radical, more acceptable and ultimately, desirable, because well . . . they’re fact-based.

That would have allowed the Democrats to improve Social Security, enhance Medicare, provide universal health care, save the economy and win the election. Oh well, there’s another election in two years. Maybe the Democrats will smarten up or “courage-up” in time.

On second thought, doubtful.

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

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind 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.”

–Here is the financial solution for your state, county and city

The debt hawks are to economics as the creationists are to biology.

Illinois is broke. Your state either is, or soon will be, broke, too. Illinois’s 13 million population owes $13 billion. Like all states, counties and cities, Illinois is not monetarily sovereign, so unlike the federal government, which is monetarily sovereign, states cannot create money to pay their bills. Illinois is far behind on payments to the many vendors who supply services to its citizens. The state has no hope of continuing its “borrow now, pay later” system.

Yes, Illinois may be the most dishonest state in America. Several of its recent governors have gone to jail, and the government is run by swindlers. Although the reprehensible head of the Democratic party in this traditionally Democratic state, Mike Madigan, can be blamed for much of the financial chaos, there is plenty of blame spread around.

We can begin with the voters, who inexplicably continue to vote solid Democratic, despite the astounding record for corruption this party has amassed. Not only is Illinois thoroughly crooked, but so is Cook County and Chicago, also Democratic strongholds. Chicago aldermen traditionally go to jail after a few years in office, and Mayor Daley is the classic Sgt. Schultz, the guy who repeatedly said, “I know nothing, I see nothing.”

Daley sold income-earning city assets, then spent the money, putting Chicago ever deeper in the hole. (Pity the next mayor). And don’t ask about Cook County Board President Todd Stroger, who was appointed by his father after his father died (really), and instituted a “friends and family” system of patronage hiring. With all this, voters march to the polls, like little automatons, pull the Democratic lever, and march back out to complain. (In all fairness, Illinois has had its share of venal Republican governors, too, though these guys were mere minnows in a sea of sharks.)

Nevertheless, though the state, its largest county and its largest city all are run by criminals, even a theoretically honest state cannot survive on tax receipts alone. Because monetarily non-sovereign governments cannot create money, inflation forces them all to obtain money from outside their borders.

“Outside” earnings can come exports of goods and services. Example: Salaries earned by Evanston, Illinois residents, paid by Chicago firms. Or outside earnings can come from government support. Example: Illinois pays some Chicago Transportation Authority expenses. And this later approach demonstrates the only way to save Illinois and all the other states.

If the U.S. federal government would give Illinois just $1,000 for each resident, the state debt would disappear. And if the federal government continued to give Illinois an ongoing $500 for each resident, Illinois could pay its cities and counties enough to achieve better schools, better roads, better transportation and other improvements in human benefits, while reducing the onerous property, income and sales taxes, that hurt Illinois’s economy.

Yes, Illinois’s crooked politicians will continue to steal, and Illinois voters will continue to elect them, but state poverty hasn’t stopped the politicians, anyway. And though Illinois politicians uniformly promise to reduce the debt, this requires self destructive taxes and spending cuts. Austerity is a path to disaster. So, the sole financial solution for Illinois and for all states, a solution that will improve the lives of its residents and of all America’s residents, a solution easily affordable by the federal government, is per capita support for all states.

Without increased support to states, America’s quality of life will decline, as schools, roads, health care, nursing homes, housing, courts, police and fire protection, parks and businesses all disintegrate. There is no other solution. Mathematically, America’s states, counties and cities cannot do it themselves. The federal government must do it.

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

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind 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.”

–Do you know what you want? Deficits vs. exports vs. stronger dollar vs. inflation

The debt hawks are to economics as the creationists are to biology.

Here is a little test for you. Check all you believe will help the U.S. economy:
|__] 1. Reduced federal deficits
|__| 2. Increased exports (positive balance of trade)
|__| 3. Stronger dollar
|__| 4. Low inflation

Actually, it’s not so “little” a test. Many lay people, including most politicians and media people, would check all four. But you, being smarter, realize that #2 and #3 are incompatible. A stronger dollar makes our exports more expensive, while making imports cheaper. So to achieve increased exports or even a positive balance of trade, the dollar must weaken. This comes as a great disappointment to those who equate “stronger” with better. Sorry.

Now we get to the tricky pair: #1, reduced federal deficits vs. #2, increased exports. Who doesn’t want those?

Federal deficit spending increases the number of dollars in the economy, which many people reject because of fears about inflation. Ironically, these same people want increased exports – a positive balance of trade – which also increases the number of dollars in the economy. In short, federal deficit spending and exporting essentially are identical.

In the first case, the federal government buys, and pays with dollars, for goods and services. It is the customer. In the second case, foreigners buy, and pay with dollars, for goods and services. Foreigners are the customers. In both cases, dollars are added to the U.S.economy.

Admittedly, there is are differences. First, unlike exports, federal deficit spending adds to the federal debt, which most people mistakenly believe adds to our tax burden. However, because spending by a monetarily sovereign nation is not constrained by taxes, or any other income, there has been no historical relationship between tax collections and deficits, no will there be. See: Summary, numbers 9 and 9a. Your grandchildren will not, and actually cannot, pay for deficits. So this supposed “difference” amounts to a non-difference.

Second, while federal deficit spending adds to the world’s supply of dollars, our positive balance of trade does not. So, which is better? A growing economy requires a growing supply of money. So, any amount of inflation, plus population growth requires increases in the nominal supply of currency, just for GDP to remain level, let alone grow. Because the dollar is the world’s reserve currency, world GDP growth requires ongoing growth in the world’s supply of dollars. So, on balance, federal deficit spending is more beneficial to America and to the world, than is U.S. exporting.

Returning to the four questions, above, I suggest that this would be the ideal mix for America and the world:

1. Increased federal deficits, for world economic growth
2. Reduced exports (negative balance of trade), to supply the world with dollars.
3. Stronger dollar, for more imports, providing us with better goods and services at lower prices
4. Modest inflation, to stimulate present demand for goods and services.

Sadly, the U.S. federal government wants to do the opposite –reduce deficits, increase exports and reduce the value of the dollar — and that is just a sampling of reasons why we fall into a recession, on average, every five years. With a record like that, why do Americans believe what their leaders tell them?

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

No nation can tax itself into prosperity