Tag: inflation

-Learn to love the debt

An alternative to popular faith

       Deficits are necessary. They add money to the economy. A large economy has more money than does a small economy. Therefore a growing economy requires a growing supply of money. Quod erat demonstrandum.
       Concern about the federal debt revolves around two beliefs: Someone (often characterized as “our grandchildren”) will have to pay those debts, and large debts cause inflation.
      For us citizens, personal debt is concerning, because our debt must be repaid. People go bankrupt when they can’t repay their debts. But, if you owned a magic printing press, and you had the legal right to print as much money as you wished, your debt never would concern you.
       Received a bill for a million dollars? No problem. Turn on the magic press and poof!, it’s paid. Unfortunately, you and I don’t own a magic press, so we worry about our debt.
       The federal government, uniquely among all U.S. debtors does own that magic printing press. It can pay bills of any size, which is how today, it easily services a gross debt of $12 trillion. Not even during the current recession has any federal check bounced. Not even close.
       Still we worry about federal debt as though it were our own. Why? Partly because so many people tell us we owe the federal debt. How silly. Debt is owed by borrowers. We are not the borrowers. In many cases, we are the lenders, the owners of T-securities. The government is the borrower, and we are not the government. There will be no bill collectors on our doorsteps, demanding that we pay our mythical share of the federal debt.
       But won’t “our grandchildren” have to pay for the debt through higher taxes? For the past 50 years, tax rates actually have gone down, despite massive deficits. There is no relationship between deficits and tax rates, which are political, not financial, decisions.
      What if tax rates were to rise moderately? Let’s do the math. Say in Year One, taxes total $10 trillion and spending totals $11 trillion. Spending exceeds taxes, which causes a $1 trillion debt.
       In Year Two, tax rates rise, so taxes now total $11 trillion, but spending rises to $12 trillion, and now the debt has risen to $2 trillion.
       How much of Year One’s debt did taxpayers pay? Answer: None. Taxes weren’t even sufficient to pay for Year two’s spending, let alone pay for last year’s debt. The only time taxpayers pay for debt is when taxes exceed spending, i.e a surplus.
       That is why surpluses have caused all six depressions in U.S. history. Surpluses, not debt, cost taxpayers money.
       The inflation logic is that federal debt increases the money supply (true), which dilutes the value of money (not true). Money value is based not only on supply, but also on demand.
       Money supply can increase massively, and still not cause inflation, if demand goes up as much. Demand is determined by risk and reward. Risk is inflation (which is a result, not a cause), so the key to money value is reward.
       What is the reward for owning money? One reward is the ability to buy things with it, but in a massive economy like ours, there always are plenty of things to buy. The real reward for owning money is interest. The higher the rates, the more valuable the money. That’s why the Fed raises rates at even the hint of inflation, and that also is why in the past 50 years, there has been no relationship between federal deficits and inflation. None. (See: See Do Deficits cure inflation?
       In conclusion, rather than being concerned about federal debt, we should welcome it. Money growth brings economic growth.

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

–When China will pass the U.S. as the world’s dominant economy


An alternative to popular faith

      When China passes the U.S. as the world’s dominant economy, you can blame the economists, who parrot the popular faith that federal debts are unsustainable and cause recessions, inflations, high taxes and harmful high interest rates. No evidence supports these intuitive beliefs.
Contrary to popular faith:

–Fact: We do not need other nations to buy our debt. We do not even need to create debt. Just as the U.S. government has the unlimited ability to create T-securities and sell them (aka “borrow”), the government has the unlimited ability to create money, thus the unlimited ability to “sustain” any size debt.
–Fact: There is no historical relationship between deficits and inflation (See the blog: “Do deficits really cause inflation,” below). Data indicates inflation is more closely related to energy costs, specifically to oil, than to any other factor.
–Fact: In only 15 years, from 1979 through 1994, taxes were cut and the federal debt grew an astounding 500%. This massive, unprecedented money printing did not cause inflation or high taxes. Instead, we entered a long period of economic growth, low taxes and moderate interest rates. Repeating that 500% debt growth would yield a $72 trillion debt in 2024 and an average deficit of $4 trillion — and if history is a judge, the same economic growth, the same low taxes and the same moderate interest rates.
–Fact: All six depressions in U.S. history immediately followed years of federal surpluses. Every recovery coincided with increases in debt growth.
–Fact: All nine recessions in the past 50 years immediately followed reductions in federal debt growth. Every recovery coincided with increases in debt growth, such as we are seeing, today.
–Fact: There is no historical relationship between high interest rates and slow economic growth. Similarly, low interest rates have not stimulated growth.
–Fact: There is no historical relationship between deficits and tax rates. There is no mechanism for our grandchildren to pay for deficits.

The factually unsupported fear of federal deficits in the U.S., when compared with the lack of such fear in China, is why we will fail and they will succeed.

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

–The low interest rate/GDP growth fallacy

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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       The Fed raises interest rates to fight inflation. To fight recession, the Fed does the opposite. It cuts interest rates.

This may sound logical except for one, very small detail. The opposite of inflation is not recession. The opposite of inflation is deflation. So doing the opposite of what you would do to counter inflation makes no sense when trying to counter a recession.

We could have a recession with deflation. We could have a recession with inflation, which is called “stagflation.” The history of Fed rate cuts, as a way to stimulate the economy, is not a good one. The Fed, under Chairman Greenspan, instituted numerous rate cuts. The result: A recession that President Bush’s tax cuts cured.

The Fed, under Chairman Bernanke, instituted numerous rate cuts. The result: The 2008 recession.

Why does popular faith hold that cutting interest rates stimulates the economy? Because popular faith views only one side of the equation. But, for each dollar borrowed a dollar is lent. $B = $L.

Cutting interest rates does cost borrowers less. A business needing $100 million might be more likely to borrow if interest rates are low than when they are high. Further, consumers are more likely to spend when borrowing is less costly. So making borrowing less costly stimulates business growth and consumer buying. At least, that is the theory.

What seems to be ignored is the lending side of the equation. When interest rates are low, lenders receive less money. And who are the lenders? Businesses and consumers.

You are a lender when you buy a CD or a bond, or put money into your savings account. When interest rates are low, you receive less money, which means you have less money to spend on goods and service — which means less stimulus for the economy.

In short, interest rates flow through the economy, with some people and businesses paying and some receiving. Domestically, it’s a zero-sum game — except for the federal government.*

A growing economy requires a growing supply of money. Cutting interest rates does not add money to the economy. That is why there is no historical correlation between interest rates and economic growth. During periods of high rates, GDP growth is not inhibited. During periods of low rates, GDP growth is not stimulated.

Please review the following graph:

monetary sovereignty

Blue is interest rates. Red is GDP growth. Not only are low interest rates not associated with high economic growth, but the opposite seems to be true. There seems to be a correlation between high interest rates and high GDP growth. How can this be?

*When interest rates are high, the federal government pays more interest on T-securities, which pumps more money into the economy. This additional money stimulates the economy.

This shows why the Fed’s repeated rate cuts do not seem to stimulate the economy. The action has been shown, time and again, to be counter-productive. Cutting interest rates to stimulate the economy is like pouring water on a drowning man.

Do you remember these headlines: “Employers slashed 80,000 jobs in March.” “The U.S. central bank has lowered rates by 3 percentage points since mid-September” “The loss of jobs signals another interest rate cut by the Federal Reserve later this month.” “Federal Reserve Chairman Ben Bernanke acknowledged Wednesday that the country could be heading toward a recession, saying federal policymakers are ‘fighting against the wind’ in combating it.”

Rate cut after rate cut did nothing. So what was the Fed’s plan? More rate cuts. During the previous recession, the Fed also attempted rate cut after rate cut, also to no avail. The recession, finally ended with the Bush tax cuts. The Fed has not learned from experience, but stubbornly adheres to the popular faith that interest rate cuts stimulate the economy.

Rate cuts do not stimulate the economy. They never have. They never will.

“Stimulating” an economy means making it larger. A large economy requires more money than does a smaller economy. Therefore, the only thing that stimulates the economy is the addition of money.

Rate cuts, by reducing the amount of interest the federal government pays, actually reduce growth of the money supply. We are on the edge of a recession, because the economy is starved for money. The coming “stimulus” checks will help, but they are too little and too late. This should have been done months ago, and the amounts should be far larger.

The only way to prevent or cure a recession: Federal deficit spending. There is no excuse for recession or inflation. These problems are not economic failures. They are leadership failures.

Rodger Malcolm Mitchell

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

-Taxing poverty to support health care

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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       It has been estimated 50 million Americans do not have health insurance. Presumably, the vast majority can’t afford it. The U.S. Congress’s solution is to fine each of these people $1,000.
      (Next, we can fine each homeless person $1,000 for not paying rent.)
       The Congressional Budget Office estimates the fines will raise $36 billion over 10 years. Do the math. That $36 billion requires 36 million people to remain uninsured. In short, the government plan requires the program to fail!
       The government claims it would provide subsidies for poor and “some” middle-class families. That will require complex definitions for “poor,” remembering how cost of living varies markedly around the country. A Manhattan resident earning $30 thousand might be poor, while half that income might do very nicely in a rural town. Then there is the question of how to count dependents – children and adults.
      (Next, we can fine each starving person for not buying enough food.)
       And if families are forced to spend money on health insurance, will they be precluded from sending their kids to college or even allowing them to complete high school? Ah, that pesky law of unintended consequences.
      (Next we can fine each jobless person for not working.)
      Part of the plan also includes cutting costs by reducing payments to hospitals. Of course, this would require hospitals to find ways to save money. They can cut nursing staff and equipment, employ fewer doctors and maintenance people and serve cheaper food. And no need to clean the rooms every day. Now that should improve health care.
       If the government can subsidize the poor and “some” middle-class, why not merely subsidize them and forget about the ridiculous tax on poverty and on hospitals? This all is a perfect example of why the government is excellent at supplying money, but truly terrible at managing.

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