–Joe Firestone’s excellent post regarding Moody’s stupid threats.

Mitchell’s laws:
●The more budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity is the government’s method for widening the gap between rich and poor, which leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
==========================================================================================================================================

Here are the introductory paragraphs to an excellent post that should be mandatory reading for every politician and everyone at Moody’s — and every voter.

Alan Grayson’s Right; But He Misses the Larger Point
Posted on September 14, 2012 by Devin Smith
By Joe Firestone

Alan Grayson’s e-mail on Moody’s warning that it might reduce the US’s AAA rating, suggested that Moody’s was either threatening a downgrade because it wants to get the Bush tax cuts for the rich extended, or, alternatively, that “Moody’s is living in what Aristophanes called “Cloud Cuckoo Land.””

He says this because Moody’s is upset about the possibility that the US may go over the so-called “fiscal cliff,” even though if it did, it would theoretically result in $560 Billion of deficit reduction annually, without further legislative changes, and it makes no sense on the surface for a ratings agency to think that the risk of US bond default is greater when the annual deficit is being reduced by $560 B per year, than by some lesser amount, which is likely to happen if Congress doesn’t take us over that “cliff.”

Grayson was right to call attention to this seeming contradiction and the possibility that Moody’s is just pressuring Congress to do more for rich people; but I think he should also have made the larger and more important point, that Moody’s warning, just like the one it delivered in January of 2010, is an empty threat without significant consequence, even if it were carried out. How do we know that? For a number of reasons.

I urge you to click to the full post. Well worth the few minutes.

Rodger Malcolm Mitchell
Monetary Sovereignty

====================================================================================================================================================

Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D — for everyone
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction annually
9. Increase federal spending on the myriad initiatives that benefit America’s 99%

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption – Net Imports

#MONETARY SOVEREIGNTY

–Is it possible for the federal budget process to get crazier?

Is it possible for the federal budget process to get crazier? Here is the latest on Congress’s attempt to make the easy impossible and widen the income gap.

Washington Post
Defense a big winner in spending talks
By Walter Pincus, Published: September 12, 2012

A first step to deal with the nation’s budgetary problems began Tuesday with the introduction of a bipartisan fiscal 2013 Continuing Appropriations Resolution, which would provide funds to continue running the government at least through March 27.

The CR (Continuing Resolution) for the most part continues spending at the fiscal 2012 level, but based on an agreement among the House, the Senate and the White House, it contains an across-the-board increase of 0.6 percent.

Gross Domestic Product = Federal Spending + Non-federal Spending – Net Imports. So, if nothing else changes, a 0.6% increase in federal spending would push GDP up only 0.6% next year — pretty close to recession. Of course, if Net Imports go up or Non-federal spending goes down, we will be in a full blown recession.

Can it get any crazier? Yes.

Overall discretionary spending is $26.6 billion less than this year. That’s primarily because of a $32 billion reduction in fiscal 2013 projected costs for Afghanistan and other overseas military-related operations.

The country, however, is far from out of the woods. Beyond the CR looms sequestration, the across-the-board reductions of some 10 percent a year in all discretionary spending if Congress — by the end of this year — does not come up with a plan for $1.2 trillion in deficit reductions over the next 10 years. That could be done by program cuts or increased revenue, or a mixture of both. That’s the law approved by a bipartisan vote in Congress and signed by President Obama last year with the passage of the Budget Control Act (BCA).

And who created the sequestration that Congress and the President pretend they are so desperately trying to avoid? Congress and the President. Can it get any crazier? Yes.

How Congress handles sequestration depends on who wins the November presidential election. Take defense spending. Obama’s plans are laid out in the Pentagon budget delivered to Congress and in testimony before congressional committees.

Romney and congressional Republicans, meanwhile, accuse Obama of reducing defense spending by $1 trillion over the next 10 years. Here’s the math for their claim: They add the congressionally approved $487 billion from the BCA with $500 billion more that would emerge if sequestration happens.

Translation: Romney, the leader of the Tea/Republican party, blames Obama for the sequestration that the Tea/Republican party insisted on. Can it get any crazier? Yes.

But forget reducing spending when it comes to the Romney plan for defense. Obama has called for reducing U.S. troop levels by 100,000 over five years as U.S. combat forces leave Afghanistan. But Romney wants to increase force levels by 100,000. That could cost an additional $20 billion a year, or $200 billion over the next 10 years.

Isn’t Romney the titular head of the “cut-spending” party? But it gets crazier:

He also has said that he wants to increase U.S. Navy shipbuilding, from nine vessels a year to 15. It costs roughly $18 billion for the current pace of nine ships a year. The Romney plan would add an additional $12 billion, or more than $120 billion to defense spending over the next 10 years.

And crazier:

On Saturday, he threw another costly item into his Pentagon shopping cart. During an interview with WAVY television in Virginia Beach, he raised the idea of reopening the F-22 Raptor fifth-generation stealth fighter production line.

Saying he opposes Obama’s “defense cuts in addition to the sequestration,” Romney said: “Rather than completing nine ships a year, I would complete 15. I would add more F-22s and add more than 100,000 active-duty personnel to our military team.”

And crazier:

He was not asked why he wanted more of what currently is the most expensive fighter ever built or what that would mean for the F-35 Lightning II Joint Strike Fighter now being flight tested.

And crazier:

Meanwhile, an $11.7 billion Air Force program is underway to upgrade the F-22, a cost that “more than doubled” since 2003, when the first estimates were made, according to a Government Accountability Office report. When that is concluded, the total cost for 188 F-22s would reach $80 billion.

Romney did not indicate how many more F-22s he might want. Like many of the former Massachusetts governor’s plans, serious details are missing.

One thing is certain: No matter who wins the election, the Defense Department budget will continue to grow — assuming sequestration is headed off. That growth would be less under Obama, but who knows how high it would go with Romney.

And then, when you think it can’t get any crazier, it gets crazier. Check this excerpt from another article in the Washington Post:

Fed announces new mortgage bond-buying plan, keeps interest rates low

Rep. Spencer Bachus (R-Ala.), chairman of the House Financial Services Committee, alluded to the fiscal cliff in a statement Thursday: “Chairman Bernanke has repeatedly – and rightfully – warned Congress and the Administration that without action, growing deficits and debt will erode our prosperity and leave the next generation of Americans with less opportunity. To avoid this fate, we must tackle the necessary long-term reform of the spending programs that drive our debt.

So while Romney, the head of the Tea/Republican Party, tells the world he wants to spend, spend, spend, Republican Bachus says deficits and debt must be reduced.

Each time a politician opens his/her mouth, the craziness just grows and grows. But the ultimate craziness is the fact that all of this is unnecessary. The deficit and debt should not be reduced. For GDP to grow, federal deficits must be increased. The calculation of GDP demands it.

And because the U.S. is Monetarily Sovereign, meaning it is sovereign over the dollar and can create all it needs, there are zero reasons to reduce the deficit.

Oh yes, there is one reason. If you want to establish a false rationale to fool the voters, so you can cut spending for social programs — Social Security, Medicare and Medicaid — this is the way to do it. Emphasize the need for more defense spending and to “pay for it” cut Obamacare and increase FICA.

Obamacare, Social Security and Medicaid benefit the lower 99% income group and FICA penalizes the same people. The upper 1% could not ask for a better outcome than increased defense spending and reduced social services, along with a tax that is aimed at the middle and lower classes. Perfect.

So, the politicians, are crazy like foxes. They have executed the ideal plan to increase the income gap, and the voters have fallen for it.

So who is crazy, now?

Rodger Malcolm Mitchell
Monetary Sovereignty

====================================================================================================================================================

#MONETARY SOVEREIGNTY

–Low interest rates: The sneak tax on you.

My friends at MMT (Modern Monetary Theory), with whom I agree on the vast majority of issues, long have declared that 0% is the “natural rate of interest.”

JOURNAL OF ECONOMIC ISSUES, Vol. XXXIX No. 2 June 2005
The Natural Rate of Interest Is Zero
Mathew Forstater and Warren Mosler

Conclusion: Under a state currency system with floating exchange rates, the natural, nominal, risk free rate of interest is zero . . . Furthermore, there are a number of reasons why allowing the rate of interest to settle at its natural rate of zero makes good economic sense.

Notice that Forstater and Mosler did not declare that 0% is the optimum or even best rate of interest. They said it makes “good economic sense.” And they said it is the “natural” rate, which seems to mean, if rates are not set by the government, rates “naturally” will settle at zero. So?

Whether or not their conclusion is correct, their point and recommendations are lacking, since:

1. The U.S. government does set rates, and
2. The government has set the rate at 0%, and
2. That “natural” rate of 0% has no discernable economic benefit, and does not “make good economic sense” — unless you’re in the upper 1% income group. I’ll explain why.

Here are excerpts from an article in the New York Times.

As Low Rates Depress Savers, Governments Reap Benefits
By CATHERINE RAMPELL, Published: September 10, 2012

A consumer complaint is ricocheting around the world: Low interest rates are eating away at savings.

Bill Taren, a retiree near Orlando, Fla., discovered in August that his credit union would pay only 0.4 percent annual interest on his saving account, even though inflation averaged 2.8 percent over the last year.

Jeanne and André Bussière, in Annecy, France, have a stable pension and a bank account that pays 2 percent interest — “almost nothing,” they say — even though the consumer price index rose an average of 2.5 percent over the last year.

Jiang Rong, an information technology professional in Xiamen, China, decided to dive back into the speculative real estate market rather than watch his savings wither at the bank.

The fact that interest yields are so low in so many parts of the world is no coincidence. Rates are determined not only by markets, but also by government policy. And right now many governments say they have good reason to keep their own borrowing costs as low as they possibly can.

One can understand why a monetarily non-sovereign nation like France wants low borrowing rates. As a user of the euro, France has no sovereign currency. It needs to pay its debts in a currency it cannot create. Low interest rates reduce its practically unpayable debt.

But the U.S. and China are Monetarily Sovereign, which means they use their own sovereign currency. They have the unlimited ability to pay their debts, by creating their sovereign currency as needed.

Though bad for people trying to live off their savings, low interest rates happen to be quite good for anyone borrowing money, like governments themselves. Over time, interest rates below the inflation rate allow governments to refinance, erode or liquidate their debt, making it easier to live within their budgets without having to resort to more unpalatable spending cuts or tax increases.

True of monetarily non-sovereign governments. Not true of Monetarily Sovereign governments. So what is going on, here?

“If you ask a central banker is that what you’re doing, and why you’re doing it, they’ll say ‘No, we’re just trying to get the economy going by making it easier for the private sector to borrow,’ ” said Neal Soss, chief economist at Credit Suisse.

“But I have a syllogism for you: The government makes the rules. The government needs the money. So why should it surprise if the rules encourage you to lend the government money?”

Wait a minute! Low rates discourage the purchase of government bonds. Bit of confusion about the real motive.

This (low rates) helped Europe, the United States and Japan slowly whittle away much of their war debt as their economies grew faster than their debt burden.

To whom did the U.S. owe “war debt”? Answer: To the private sector. In short, the U.S. government benefited from the private sector’s loss — in reality, a sneak tax.

Many major economies are already slowing down, if not outright contracting. And the actions taken by governments to keep interest rates low can restrain how much savers have to spend and force fragile banks and pension funds to take on more risk.

Amen, brother. And here is why the government keeps rates low. It’s not for the phony reason given, i.e. to stimulate the economy by easing borrowing. Low rates don’t stimulate the economy. The government keeps rates low as a way to reduce the federal deficit.

And as we have learned, reduced deficits lead to recessions, which hurt the lower-income 99% more than the upper 1%, and so increase the gap between rich and poor. Interest rate reduction reduces federal spending.

Gross Domestic Product = Federal Spending + Non-federal spending – Net Imports

Reduce federal spending and you reduce GDP. Period.

Ireland and France, for example, have required or “encouraged” pension funds to invest in more government debt.

In Spain, fragile banks have been arm-twisted into lending to the government, which forces down the interest rates that the banks can pay to depositors. The Spanish government also capped the amount of cash that could be withdrawn from bank accounts, which prevented people from seeking higher yields elsewhere.

Now we’ve returned to the monetarily non-sovereign Ireland, France and Spain, which do need to reduce deficits, but politically can’t raise taxes much, so they use the sneak tax of low interest rates.

And in the United States, the Federal Reserve is buying up government debt to keep interest rates even lower than what markets would otherwise pay. In the nearly four years that the Fed set its benchmark interest rate at zero, the government has saved trillions of dollars in interest payments.

If interest rates today were what they were in 2007, the Treasury would be paying about twice as much to service its debt.

Translation: The federal government has reduced GDP by trillions of dollars.

Inflation in the United States is very low by historical standards, but interest rates are so paltry that savers are losing money anyway.

Of course, any economic policy will produce winners and losers, and it seems unlikely that policy makers are deliberately sacrificing retirees either to stimulate the economy or to grind down government debt.

More likely, older Americans and other savers are just unintended casualties of policies aimed at other economic targets, particularly the policy making it easier for consumers and companies to borrow.

“Unintended” casualties? The Fed, loaded with economists, doesn’t understand what’s happening?? Gimme a break!

“If you care about the distribution effects of these policies, and being fairer to the elderly or other people, that seems to argue for carefully designed fiscal stimulus,” said Robert J. Shiller, an economics professor at Yale.

But, he added, “the whole reason we like using monetary policy is that it avoids those very political discussions of who gets taxed.”

Absolutely, 100% correct. It goes like this:

1. Low interest rates are the federal government’s method for reducing the federal deficit without the political danger of raising taxes.
2. Reducing the deficit is recessionary.
3. Recessions hurt the lower income classes the most, thereby increasing the gap between rich and poor.

In summary, low rates hurt the entire private sector. Although the rich are hurt by low rates, the poor are hurt more, because they not only suffer from reduced interest income, but also from the recession — a double whammy.

The rich are perfectly happy to see their income reduced so long as the gap is increased.

The notion that the Fed, which is owned by the 1%, doesn’t understand this is ludicrous. It’s the perfect sneak tax on the 99%. It’s the perfect way to increase the income gap between rich and poor.

Rodger Malcolm Mitchell
Monetary Sovereignty

====================================================================================================================================================

#MONETARY SOVEREIGNTY

–How much should the rich pay in taxes?

Recently, CNNMoney.com published an article titled, “How much should the rich pay in taxes?”

The data in the article are interesting, but the fundamental premise of the article is nonsense. Here are some excerpts:

How much should the rich pay in taxes?
By Jeanne Sahadi | CNNMoney.com – Thu, Aug 30, 2012

It’s a heated question these days. President Obama and his Republican challenger, Mitt Romney, spar over it bitterly. And the taxes Romney pays on his own vast wealth have become the subject of massive press attention. But the question is not so easily answered and depends on a number of hard-to-nail-down factors — starting with how you define rich.

“Virtually no one thinks of themselves as wealthy,” said Joseph Henchman, a policy analyst at the Tax Foundation. “They’re thinking about what others should pay in taxes.”

One frequently used definition of rich is the top 1% of federal tax filers — those with adjusted gross incomes of at least $343,927 in 2009.

They earned nearly 17% of all AGI in the country and paid more than a third (37%) of all federal income taxes collected by the government. The group’s average effective tax rate — AGI divided by income taxes paid — was 24%, more than twice the national average.

The top 0.1% — had an AGI of at least $1.43 million. They paid 17% of income taxes collected. But, some wealthy individuals pay little or nothing in federal income taxes because their income is from sources not included in AGI such as tax-free municipal bonds.

Federal income taxes, meanwhile, don’t reflect a household’s total federal tax burden. That leaves out things like payroll taxes, estate taxes and corporate taxes. The Tax Policy Center incorporates these broader views of income and tax burdens in its calculations. And it found that in 2009, people making more than $1 million in total income paid roughly 16% of all federal taxes in 2009.

Ultimately, there is no right answer about how much the rich should pay. A majority of Americans simply say “more.”

My guess: Most people would describe “rich” as anyone earning significantly more than they themselves earn, and “soaking the rich” always has been a great populist agenda, fueled by envy. Everyone enjoys seeing the rich get their comeuppance.

Policymakers will have to decide not only on a definition of rich, but also consider broader questions about the federal budget and economy. Questions such as: What do Americans want from their government and how much will it cost?

Here is where the article veers off track, because what Americans want from government has absolutely nothing to do with its cost. Apparently the author, Jeanne Sahadi, wrongly believes federal taxes pay for federal spending.

Yes, state taxes pay for state spending, and county taxes pay for county spending, and city taxes pay for city spending. The states, counties and cities are monetarily non-sovereign. But, federal taxes do not pay for federal spending. Even if federal taxes fell to $0, our Monetarily Sovereign federal government easily could double or triple its spending.

So if federal taxes don’t pay for federal spending, what purposes do they have? I can think of four:

1. To force social change. Cigarette and liquor taxes help reduce the purchase of cigarettes and liquor — a bit. Maybe.

2. To help close the gap between rich and poor, though this form of gap-closing would not help the poor; it only would hurt the rich. So at best, it’s a questionable strategy.

3. To force demand for U.S. dollars, which are necessary for paying taxes. However, there are sufficient state and local taxes to produce that effect. Federal taxes would be unnecessary.

4. To prevent/cure inflation, though this would be a very last resort in case no other prevention/cure worked. (I discuss this in more detail at Preventing and Curing Inflation: Modern Monetary Theory vs. Monetary Sovereignty. Using taxes to fight inflation trades one disaster for another, i.e. recession for inflation.)

In summary, #1 and #2 have some slight merit; #3 is unnecessary and #4 is unmanageable and dangerous.

What is the fair level of taxes on the rich relative to everyone else? And should the more than 40% of households with no federal income tax liability — thanks largely to tax breaks — be asked to pay something in income taxes as well?

“Fairness” always is an issue for which there can be no resolution. We discuss this at: “Which Taxes Are Fairest? Which Taxes are Least Fair?” (Summary: No taxes are fair; all are unfair; some are more unfair than others.)

In the end, any decision Washington makes about taxing the rich could affect the economy.

That actually is the central issue, though it is the least discussed. Economic growth, and measured by Gross Domestic Product (GDP) is calculated this way: GDP = Federal Spending + Non-federal Spending – Net Imports.

If we increase taxes on the rich, we reduce Non-federal spending, but do not increase Federal Spending. So increasing taxes on the rich absolutely, positively will result in a reduction in GDP growth, which will impact the non-rich more than the rich.

Any tax increase of any kind always, always, ALWAYS must have a negative effect on the economy. Period.

To stimulate the economy, and to reduce the gap between the rich and the poor, the first tax step is to reduce taxes on the non-rich. And that begins with eliminating the worst, most harmful, most useless tax America ever has known: FICA (see “Ten Reasons to Eliminate FICA”)

Increasing taxes on the rich is the classic, “Cutting off your nose to spite your face.” The right wing claims that raising taxes on the rich taxes the “job makers,” and to some degree they are correct. But the real problem is not in raising taxes on the rich; it is in raising taxes anyone.

Rodger Malcolm Mitchell
Monetary Sovereignty

====================================================================================================================================================

#MONETARY SOVEREIGNTY

Share this:

Share this:

Share this:

Share this: