Tag: John Mauldin Thoughts from the Frontline

–John Mauldin defines “too much debt”

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

John Mauldin responded to my comment on his post, “Pushing on a String”

“I don’t know why you think I would not respond. Just happened to see this on Google alerts.

I have been quite clear on what is too much debt. I have done whole e-letters on it. It is debt growth above nominal GDP on a consistent basis, which ends up in a Greece like state. In fact, I will have a book out in January called The Endgame which goes into hundreds of pages of detail about the problems with debt and debt crises.

Now, I do not want private businesses or people borrowing beyond their own means or banks lending if they do not think there is reason to believe they will be repaid. And there is a limit to how much countires can borrow. To assert that the US can borrow without limit is rather absurd. You write:
‘And here is the government, which can service a debt of any size, and functionally is incapable of bankruptcy, and the debt hawks want to restrict debt.’

Go read Rogoff and Reinhart. 266 crises in 60 countries over the last few hundred years, from countries that can print their own money to gold standard currencies. Everything was fine until the last moment. There are more than one ways to default on debt, and one way is to print the money and debase the money supply. Inflation ruins pensioners and savers. If that is your ideal future, then by all means, run up that debt!

John”

First John, you have my apology. You responded, and did so without name-calling, which not only is commendable, but a rarity in the debt hawk world. Unfortunately, you didn’t offer any facts, so I will supply one.

Again, you said,“I have been quite clear on what is too much debt . . . It is debt growth above nominal GDP on a consistent basis, which ends up in a Greece like state.”

Here is a graph you might find interesting:

Graph

It shows that in the past 40 years GDP has risen less than 1,400% while federal debt has risen 3,500% — well more than double the rate. I would call that “debt growth above nominal GDP on a consistent basis,” wouldn’t you? Yet, where is the inflation?

The last big inflation was in 1979, at a time when debt growth did not exceed GDP growth.

Also, ” . . . ends up in a Greece like state . . .” makes no sense, whatsoever. The U.S. is monetarily sovereign. Greece is not. It functionally is impossible for a monetarily sovereign nation magically to transform itself into a “Greece like state.”

The debt hawk inflation bogeyman emerges every time deficit spending is mentioned. I’m surprised you didn’t offer pre-war Germany or Zimbabwe as examples. But that bogeyman has hurt the lives of real people. It has prevented universal health care. It has restricted Social Security and Medicare benefits. It has given us a monster, wasteful, unnecessary federal tax system. And all because the debt hawks tell us that eventually — eventually — we will have inflation.

Yet, money debasement is not related only to money supply, but more importantly to money demand (interest rates), which is why in the past 40 years, there has been no relationship between federal deficits and inflation.

Again, I do appreciate your comments and your courage, but because you do not understand monetary sovereignty, you simply are wrong.

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

No nation can tax itself into prosperity.

–Open letter to John Mauldin re. his myths

      John Mauldin is President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states. He also is a registered representative of Millennium Wave Securities, LLC, (MWS) an NASD registered broker-dealer. He is the author of Thoughts from the Frontline, a blog at Mauldin.
      Recently, Mr. Mauldin wrote an article for his blog, and I wrote to him with a critique, as follows:

5/9/10
Mr. Mauldin:

      This note is sent to you in the spirit of helpfulness. Your article titled “The Center Cannot Hold,” quoting G. Cecchetti, M. S. Mohanty, and Fabrizio Zampolli contains several widely quoted, commonly believed myths. For example:

      Myth: “Long before we get to the place where we in the US are paying 20% of our GDP in interest (which would be about 80% of our tax collections, even with much higher tax rates) the bond market, not to mention taxpayers, will revolt. The paper’s authors clearly show that the current course is not sustainable.”
      Fact: Federal borrowing no longer (after 1971) is necessary nor even desirable. See: How to Eliminate Federal Deficits

      Myth: “A higher level of public debt implies that a larger share of society’s resources is permanently being spent servicing the debt. This means that a government intent on maintaining a given level of public services and transfers must raise taxes as debt increases.”
      Fact: Society’s resources do not service federal debt. See: Taxes do not pay for federal spending.

      Myth: “And if government debt crowds out private investment, then there is lower growth.”
      Fact: This also commonly is stated, “Government debt crowds out private borrowing” and government debt crowds out private lending.” There is no mechanism by which federal spending can crowd out investment, borrowing or lending. On the contrary, federal spending adds to the money supply, which stimulates investment, borrowing and lending. See: Why spending stimulates investment

      Myth: “A government cannot run deficits in times of crisis to offset the affects of the crisis, if they already are running large deficits and have a large debt. In effect, fiscal policy is hamstrung.”
      Fact: This is the strangest myth, since running deficits in a time of crisis is exactly what the U.S. government has been doing. It would be true of Greece and the other EU nations, but not of then U.S., Canada, Australia, China and other monetarily sovereign systems. See: Greece’s solution

      Myth: “[…] the current leadership of the Fed knows it cannot print money.”
      Fact: This myth is even stranger than the above “strangest” myth, since printing money is exactly what the Fed does. See: Unsustainable debt.

      Myth: “As frightening as it is to consider public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly aging population.”
      Fact: The famous federal debt/GDP ratio is completely meaningless – a classic apples/oranges comparison – that neither describes the health of the economy, nor measures the government’s ability to pay its bills nor has any other meaningful purpose. See: The Debt/GDP ratio

      If you would like to see more common myths about our economy, go to: Common economic myths

Rodger Malcolm Mitchell