Tag: modern monetary theory

–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

–Why the crazy stock market fall

An alternative to popular faith

I recently read an article containing wonderment that despite good news (the April jobs report showed payrolls grew by 290,000) the stock market crashed. The author, John Curran, speculated: “One reason is that the Euro crisis in spite of all efforts remains very much a crisis, and that threatens the global economy. The second reason is that Thursday’s stock market blowout pointed up a dangerous vulnerability in the financial markets, one that we’ve known of (high frequency trading) but sort of forgotten. Third, the Labor Department’s jobs report while positive in some respects also contained a bit of negative news […] (increased unemployment).

While the Greek/EU situation is serious, it will not seiously affect the U.S. economy, so long as our government continues to deficit spend. Second, while high frequency, automated trading can cause short term, manic effects on the stock market, the longer term effects are minimal. Finally, the way unemployment is calculated (only those looking for a job are counted), makes it inevitable that when times improve, unemployment statistics rise. People who had given up, start again to look for jobs. So from that standpoint, the stock market is wrong.

There is one other scenario, that could have far greater significance than any of the above: The off shore oil well blowout. Not only will it cause enormous destruction in of itself, but it will prevent further offshore drilling for an unknown time. Weeks? Certainly. Months? Possibly. But weeks and months are no big deal.

Perhaps even years, and that is a big deal for our economy. For the past few decades, inflation has been caused, not by deficit spending, but by Oil Prices.

Even with the worst case scenario, the actual supply loss won’t be felt soon, but if the projected loss of oil production is significant, it will cause oil prices to rise, thus causing inflation. The debt hawks will assume (wrongly) the inflation is caused by deficits, and will demand that taxes be increased and spending decreased — either of which will stall economic growth and move us into a recession.

And that will drop the stock market.

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

No nation can tax itself into prosperity

–The federal debt is unsustainable — still?

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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People who don’t know what they’re talking about, but who want to sound erudite, love to use dramatic terms that can’t be disproved. A classic example is “ticking time bomb,” when referring to the federal debt and deficit.

This blog contains three posts (“Federal debt: ‘A ticking time bomb”; “Debt bomb redux”; “More debt bomb nonsense” ) sampling the thousands of times since 1940 (!), the debt has been called a “time bomb.”

The nice thing about “ticking time bomb”: The users never needed to prove or substantiate anything. They didn’t have to say when it would explode or what would make it explode or what would happen after it exploded. They don’t even feel the need to explain why their dire predictions have been wrong, wrong and wrong, every year. They could just use the expression, then stand back, look wise and bask in the adoration.

Well, another description of the federal debt and deficit can be included in the “I know nothing, but I want to look smart” club. This time the term is “unsustainable.” In a previous post I hoped never to see that trite, meaningless term again (See: Unsustainable), but it was not to be. Here are just a few of the uses in the past 28 years.

–February 7, 1982: Ronald Reagan: “[…]rapid, unsustainable expansion of Federal spending and money growth[…]
–December 11, 1983: The New York Times; Editorial Desk:“[…]large and growing deficits are unsustainable. They have to be reduced […]
–1998: Douglas Elmendorf and N. Gregory Mankiw: “Current patterns of taxes and spending are unsustainable.”
—February 28, 2001: George W. Bush:. “Social Security’s spending path is unsustainable in the long run, driven largely by demographic trends.”
–March 3, 2005: Edmund L. Andrews: “Alan Greenspan, chairman of the Federal Reserve, warned on Wednesday that the federal budget deficits were ‘unsustainable,’ and he urged Congress to scrutinize both spending and taxes to solve the problem.”
–February 13, 2006: Paul Krugman: “Last year America spent 57 percent more than it earned on world markets. That is, our imports were 57 percent larger than our exports. It all sounds unsustainable. And it is.”
–05/15/09: Lita Epstein, DailyFinance, “Anyone who understands the U.S. debt picture won’t be surprised by President Barack Obama‘s statement that U.S. deficit spending is ‘unsustainable.’
–4/27/10: Reuters: By Pedro Nicolaci da Costa: “’In the absence of further policy actions, the federal budget appears set to remain on an unsustainable path,’ Bernanke told the 18-member National Commission on Fiscal Responsibility and Reform.”
–5/20/10:Professor Alan Blinder, former member of President Clinton’s original Council of Economic Advisers, and Vice Chairman of the Board of Governors of the Federal Reserve System: “[…]even though everybody knows that the federal budget deficit is on an unsustainable path toward the stratosphere.”

And now, again: 6/10, 2010 The U.S. economy continues a slow, painful recovery, but Congress must prepare to address an “unsustainable” level of debt in the federal budget, Federal Reserve Chairman Ben S. Bernanke cautioned Wednesday.

And again: 6/28/10: House Democratic Majority Leader Steny Hoyer: “Debt is a national security threat. Unsustainable debt has a long history of toppling world powers.”

And again: 7/8/10: The Committee For a Responsible Federal Budget: “The debt of the United States is rising to unprecedented – and unsustainable – levels.”

And again: 11/11/10: Representative Jan Schakowsky: “. . . we have to do something; the debt and deficit are not sustainable. . .”

–11/26/10: Sheila C. Bair, Chairman of the FDIC: “The Congressional Budget Office projects that annual entitlement spending could triple in real terms by 2035, to $4.5 trillion in today’s dollars. Defense spending is similarly unsustainable . . . “

–12/3/2010:Dick Durbin, senior Senator from Illinois (D): “Borrowing 40 cents out of every dollar we spend for missiles or food stamps is unsustainable.”

–2/21/11: Doug Elmendorf, head of the Congressional Budget Office: “The nation’s fiscal path is unsustainable, and the problem cannot be solved through minor tinkering.” If his name sounds familiar in this context, he, along with noted economist, Greg Mankiw, said almost exactly the same thing way back in 1998 [See above]. When do these gentlemen acknowledge that they repeatedly have been wrong?

–5/13/11: Frank R. Wolf, Republican congressman from Virginia: “It may have surprised some people when Standard & Poor’s warned last month that the United States could lose its coveted status as the world’s most secure economy if lawmakers don’t rein in the nation’s unsustainable debt. I have been sounding a similar alarm for almost five years, trying to get the attention of Congress and past and present administrations that America cannot continue on its debt and deficit track . . . ”

–7/25/11: iMFdirect: By Rodrigo Valdés: “By the end of this year, federal debt held by the public will represent 70 percent of the U.S. economy, almost double the 36 percent it was in 2007. The federal fiscal deficit will be 9.3 percent of GDP this year. That, quite simply, is not sustainable.”

All these years, the debt has grown, while remaining not only a ticking time bomb, but also unsustainable. How is that possible? Easy. No one knows what “unsustainable” means. Does it mean the government can’t pay its bills? Does it mean America will go bankrupt? Is there any data that proves the debt can’t be sustained?

There is no such data. The federal government has the unlimited power to pay any bills of any size. No federal check ever has or ever will bounce, not because we’re big or lucky, but rather because the government creates money to pay its bills by reaching into vendors’ bank accounts and crediting them.

Does “unsustainable mean that large federal deficits cause inflation? No, ever since the end of the gold standard in 1971, there has been zero relationship between large deficits and inflation, which seems to be related mostly to oil prices.

The whole notion of federal debt unsustainability is not in accord with fact or possibility.

For 30 years the gurus have told us the debt is unsustainable, without them having the slightest notion what it means. The next time someone tells you the federal debt is unsustainable, you’ll know they have no idea what they are talking about.

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

No nation can tax itself into prosperity

–Europe and the welfare-entitlement state

An alternative to popular faith

Today, the Wall Street Journal’s editors managed to pack one sentence with more misleading inferences than I thought possible. The sentence was: “Greece’s problems are familiar across Europe: a welfare-entitlement state that is unaffordable given the country’s anemic economic growth.”

First, Greece’s economic problems are familiar across Europe, because most of Europe is in the European Union, an ill-conceived, economically doomed arrangement. These nations have essentially the same problem, and it has nothing to do with a welfare-entitlement state. It has to do with each EU nation’s inability to control its own money supply — a charter requirement for belonging to the EU. So when one nation encounters its individual economic crisis, it is prohibited from creating the money necessary to save and rebuild its economy.

The EU nations are on a “euro standard,” similar to a gold standard, in that the supply of their money is controlled by the EU. In this, the EU nations resemble California, Illinois, Cook County and Chicago, which are on a “dollar standard.” None can create the money needed to rebuild its economy.

Because a political entity on a “standard” cannot arbitrarily create money, it eventually will need to receive money from outside, either in the form of export payments, or payments from the owner of the money. For Greece, the owner is the EU. For California et al, the owner is the U.S. government.

For Greece to survive, it must receive money from the EU. It cannot survive on taxes alone, because taxing does not add money to the state. California, to survive, must receive money from the federal government.

The so called “welfare-entitlement” state merely is description of what every nation is and must be: A source of funds for the common good. Since all countries are “welfare-entitlement states, to greater or lesser degree, at what point does the state offer too much welfare?

–When the government pays for its army?
–When the government pays for roads, bridges, levees and docks?
–When the government pays for police and fire protection?
–When the government pays unemployment benefits? Food stamps? Medicaid? Housing?
–When the government pays for primary education? Secondary education? Advanced education?
–When the government pays to rebuild parts of a city that has flooded or hit by a hurricane or volcano?
–When the government provides FDIC insurance?
–When Social Security and Medicare benefits are provided to people over the age of 95? 55? 35? 10? All?
–When the government pays for vaccines? Inspects food? Supervises investments? Makes medical expenses tax deductible? Creates and enforces laws?

Where should a welfare entitlement state begin and end? I’d guess the WSJ editors, who criticize the “welfare-entitlement” state, have no idea. But, the term makes for a handy whipping boy, like “socialism” and “bailouts” and “big government” and “activist judges,” that everyone dislikes in general, but wants in the specific.

Finally, the “welfare-entitlement” state is not unaffordable because of the nation’s anemic economic growth. The government doesn’t pay its bills with Gross Domestic Product. Of course, some argue that increased GDP growth begets increased taxes, making government spending more affordable. But high taxes cause anemic economic growth, so in essence you have a circular argument and a self-fulfilling prophesy.

What makes EU governments’ spending unaffordable is the EU system, which prevents unilateral money creation. By contrast, no amount of U.S. spending is unaffordable for the U.S. government.

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


No nation can tax itself into prosperity