Tag: inflation

-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/

-A prediction about stagflation


An alternative to popular faith

        Next year, the Fed may be faced with stagflation, the simultaneous occurrence of economic stagnation and inflation. Sadly, the Fed cannot cure stagflation.
        You’ll find a more complete discussion of this phenomenon at http://rodgermitchell.com/inflation.html, but here is a quick overview:
        Money is the lifeblood of an economy. During a recession, an economy suffers from “anemia,” a shortage of money. The treatment for anemia is to increase the blood supply. But typically, the Fed tries to cure recession by cutting interest rates and tries to cure inflation by doing the opposite, i.e. increasing interest rates. Since recession is not the opposite of inflation, doing the opposite doesn’t work, and changing interest rates does not fix the money shortage.
        To cure inflation it is necessary to raise interest rates. To cure stagnation it is necessary to treat the anemia, i.e to deficit spend. The former is the task of the Fed. The later is the task of Congress. That’s why the Fed alone cannot cure stagflation.
        Unfortunately, the Fed wrongly believes high interest rates slow the economy, so when stagflation appears, the Fed will urge a reduction in deficit spending (bleeding the anemic), which they consider “fiscally prudent,” while only reluctantly and incrementally raising interest rates.
        This will continue the Greenspan and Bernanke policies, which will extend or worsen the recession.

Rodger Malcolm Mitchell

-Peter Schiff and the money-supply myth

The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. If you understand the following, simple statement, you are ahead of most economists, politicians and media writers in America: Our government, being Monetarily Sovereign, has the unlimited ability to create the dollars to pay its bills.
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         Peter Schiff, who is running for one of Connecticut’s Senate seats and is president of Euro Pacific Capital, writes: “Almost every dictionary defines inflation as an expansion of the money supply, not rising prices.”
         Untrue. I have no idea what dictionary this guy is using, but he probably is using the libertarian “inflation is monetary inflation,” meaning supply = inflation.

        Money is a commodity. It is a surrogate in what otherwise would be a barter transaction.
         Inflation is the loss of money’s value compared with the value of goods and services. Like all commodities, the value of money is based on supply and demand. Increasing the supply does not cause inflation if the demand (interest rates) increases proportionately.

        [Note: Schiff may be influenced by the widely discredited and essentially worthless Austrian school of economics definition for inflation, a definition that has no real-world value, in that it does not include actual price changes.]
         Schiff also says, “Although more money may not immediately translate into rising prices, over time the correlation is extremely reliable.”

monetary sovereignty

        There is no historical relationship between M3 (green) or M2 (red) growth and inflation (blue). The reason: Money supply is only half the demand/supply story.
        When the Fed gets a whiff of inflation it raises interest rates, which by increasing the demand for money, increases the value of money (i.e. prevents/cures inflation).

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


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No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetary Sovereign, , and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.

Remember that the next time you’re tempted to ask a dopey teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it screwed up my future.”

MONETARY SOVEREIGNTY

-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