Recently, I read an article about one of my less favorite subjects, sewage, and it had me thinking about one of my most favorite subjects, federal spending.
Brief background:
The U.S. federal government, being Monetarily Sovereign, has the infinite ability to spend U.S. dollars. It is not limited by tax collections, so-called “debt,” or anything but government whim. It could pay a $100 trillion invoice tomorrow simply by pressing a computer key.
Federal spending never causes inflation. Scarcities lead to all price increases. The cure for inflation is to cure scarcities, which the government can accomplish by funding and distributing the scarcities causing inflation.
Here are excerpts from the article that stoked my thinking:
The solution, it turns out, includes thinking about the water system as a whole: tackling sewage pollution is also about fixing flooding and drought problems. Tougher governance is essential, too.
The UK isn’t alone. Australia and the US have similar issues.
In the UK, much of the blame has been leveled at privatized water companies. They have run up enormous debts while giving away billions to shareholders. They have also failed on many metrics, including poorly-maintained pipes.
However, the real culprit is the government, which has failed to give water companies stringent enough targets or enforce those that have been set.
It is a pattern we have seen over and over, from banking crashes to nuclear power accidents.
Hmmm.
Question: What do banking crashes, nuclear power accidents, and sewage pollution have in common? Answer: The same thing global warming, health care, retirement care, food and housing scarcities, water shortages, and a myriad of other problems that bedevil us: Money.
We intellectually know how to address, if not solve, many of our most important problems, but in many cases, ignorance limits funding.
Read the “The truth about British rivers and how to clean them up” article, and you’ll see solutions: Stop using combined (water and sewage) systems, send rainwater to storage and treatment plants, construct artificial wetlands, etc.
The problem: Money. The article says, “Hundreds of billions of pounds.”
But, like the U.S. government, the British government doesn’t seem to realize it is Monetarily Sovereign.It already has those “hundreds of billions of pounds” at its fingertips — the fingertips that can tap a computer key and instantly pay any bill without resorting to taxation.
Let’s visualize some of the other problems we can address or even solve:
Problem: Sickness. Address the problem via federal funding of:
Comprehensive, no-deductible Medicare for every man, woman, and child in America, regardless of age, income, or health
All forms of medical research, mainly research unlikely to be addressed by the private sector because of limited profitability potential.
Healthcare facilities like hospitals and long-term care facilities.
Doctors, nurses, and other health workers.
R&D into the causes and cures for all human, animal, and plant illnesses.
Problem: Global warming. Address the problem via federal funding of:
Non-carbon energy creation — solar, geothermal, wind, water, nuclear (fission and fusion), hydrogen, and fuel cells.
Electric cars, trains, trucks, and planes
Roadways specifically designed to accommodate electric vehicles
Home and business heating and cooling structural improvements, including insulation and reflective materials
R&D methods of climate control.
Problem: Poverty and crime. Address the problems via federal funding of:
Social Securityand retirement benefits for every man, woman, and child in America, regardless of age and income/wealth.
Free education, through postgraduate, for everyone who wants it.
Reduce employeres’ costs associated with paying employees. Eliminate the FICA tax and business-funded health care and retirement programs.
Greatly reduce or eliminate the federal taxes paid by all but the wealthiest Americans. Alternative methods: Tax deductions for rent paid and for home-owning costs.
R&D methods of control.
Problems: Inflation, hunger, degradation of the environment. Address the problems via federal funding of:
(Short term) Oil drilling and refining, plus biofuels.
All aspects of farming, including education and efficient land use, R&D of more efficient farming tools and methods
Current construction materials and methods plus R&D of new materials.
Current storage and distribution systems plus R&D of new systems.
Current and new computers, including quantum computers, chips, and algorithms.
R&D of maintenance of the environment plus support for all the sciences.
The potential for federal spending is limitless, but fortunately, the federal government’s ability to spend is unlimited. Our collective imagination is the only thing that limits our ability to address and cure all our ills.
Think of any problem facing humanity, and you soon will imagine how federal spending could address or even cure that problem.
Monetary Sovereignty shows that we humans were given the tools to create a paradise on Earth. Our brains open the universe to us, and our invention of money provides us with motivation.
Most Americans, even in “red” states, even die-hard MAGAs recognize the above-mentioned problems and want solutions.
But whether via ignorance or intent, the false claims that federal spending is “unaffordable,” “unsustainable,” “socialism,” “inflationary,” or requires tax increases, have held us back.
Federal spending is none of those. Federal spending by our Monetarily Sovereign government is infinitely affordable and sustainable. We never can run short of dollars.
Federal spending is not socialism, which is government ownership and control, not financial support.
And, of course, the federal government neither needs nor uses tax dollars. It created new dollars to pay all bills.
We need only to understand that we have the necessary tools, money and brains, then to use those tools and stop fighting each other.
Sadly, we also have been given hatred, greed, and ignorance, so our Janus personalities have held us down, and I fear, eventually will destroy us.
Rodger Malcolm Mitchell
Monetary SovereigntyTwitter: @rodgermitchellSearch #monetarysovereigntyFacebook: Rodger Malcolm Mitchell
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The Sole Purpose of Government Is to Improve and Protect the Lives of the People.
The author of the following article, Veronique de Rugy, may need help understanding federal government finance, for she has written several articles in the same misleading vein.
The question: Is it ignorance or is it an agenda? Perhaps she needs to be more knowledgeable about federal finance. No problem. Most laypeople, and even many economists, suffer from that form of ignorance.
I suspect, however, that Ms. de Rugy is feigning ignorance and has an agenda, a pro-rich, pro-right, anti-poor agenda. You decide. Here are excerpts from her article:
Fitch Ratings just downgraded the U.S. government’s credit rating due in part to Congress’ erosion in governance.
Indeed, year after year, we see the same political theater unfold: last-minute deals, deficits, and, all too often, the passage of gigantic omnibus spending bills without proper scrutiny, repeated debt ceiling fights and threats of shutdown.
The blue line represents a standard measure of the economy, Gross Domestic Product (GDP). The red line represents what too often (and misleadingly) is termed “federal debt,” the “red ink” to which Ms. de Rugy refers.
We say “mistakenly termed debt” because it is unlike private debt. Federal “debt” is the total of deposits into privately owned, T-security accounts.
When you invest in a T-bill, T-note, or T-bond, you deposit your dollars into your T-security account at the U.S. Treasury.
This account is similar to your safe deposit box, where you deposit valuables. The bank does not touch the box’s contents, and they are not considered bank “debt,” though the bank owes you those contents in one minor sense.
Similarly, the federal government never touches the dollars held in your T-security account. Although some mistakenly refer to the dollars as borrowing, the federal government never borrows dollars.
Why would it? Given the federal government’s infinite power to create dollars at the touch of a computer key, borrowing dollars would be a ridiculous exercise:
Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency.”
Alan Greenspan: “There is nothing to prevent the federal government from creating as much money as it wants and paying it to somebody.”
Alan Greenspan: “The United States can pay any debt it has because we can always print the money to do that.”
Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
Quote from former Fed Chairman Ben Bernanke when he was on 60 Minutes: Scott Pelley: Is that tax money that the Fed is spending? Ben Bernanke: It’s not tax money… We simply use the computer to mark up the size of the account.
Statement from the St. Louis Fed: “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.”
“Not dependent on credit markets” is Fed-speak meaning, “We don’t borrow.”
So what is the purpose of T-securities, the total of which erroneously is called “debt”? T-security accounts”
They allow holders of unused dollars to store them in a safe, interest-paying account, which stabilizes the dollar
They help the Fed control interest rates.
That’s it. The purpose is not to provide the federal government with spending dollars. The government creates all it needs. All federal spending is done with newly created dollars. No spending uses the dollars in T-security accounts.
For this reason, the size of the misnamed “debt” is irrelevant. Whether total deposits equal $100 or $100 TRILLION, the government has the same real ability to return them to depositors.
That is why the debt ceiling is so outrageously foolish. Why limit the amount of deposits that will be accepted if the dollars neither are used nor scarce to the government?
The confusion comes with the word “debt.” Federal “debt” differs from personal debt as an ink pen is a pig pen. Different meanings for the identically spelled and pronounced word “pen.”
If someone thought they could write with a pig pen, that would be equivalent to someone thinking the federal government was burdened by its federal debt.
Since 1940, there never has been a time when the government has not had Ms. de Rugy’s “red ink.” The lines essentially parallel, which should be no surprise to anyone because the formula for GDP is:
GDP = Federal Spending + Nonfederal Spending + Net Exports.
Federal Spending adds dollars to the economy, as do Net Exports, and those added dollars stimulate Nonfederal Spending. The three terms work in concert to create economic growth.
Sadly, “debt” confuses some economists, who wrongly equate it with private sector or state/local government debt.
But while the private sector and state/local governments are monetarily non-sovereign (i.e. they do not have the infinite ability to create U.S. dollars), the federal government is Monetarily Sovereign (it does have that limitless ability).
The difference is that the private sector and state/local governments unintentionally can run short of dollars, the federal government cannot unintentionally run short. That is a huge difference.
Imagine you had the federal government’s ability to create dollars at will. Why would you ever worry about debt? You wouldn’t.
A billion dollars in debt. No problem. A trillion? Still fine. A trillion trillion. Again, no problem.
So why is Ms. de Rugy worried about the “debt” if it’s no problem for the federal government? Does she understand that the federal government pays all its debts by creating dollars? Here is what she wrote:
Fitch Ratings just downgraded the U.S. government’s credit rating due in part to Congress’ erosion in governance.
Indeed, year after year, we see the same political theaterunfold: last-minute deals, deficits, and, all too often, the passage of gigantic omnibus spending bills without proper scrutiny, repeated debt ceiling fights and threats of shutdown.
In the above two paragraphs, Ms. de Rugy properly explains the reason for the rating downgrade: Political theater, debt ceiling fights and threats of shutdown.
It isn’t that the federal “debt” is too high. The reason for the downgrade is the political theater, the debt ceiling fights, and the shutdown threats. The federal government politically has become an unreliable payer.
It always can pay, but it might not choose to pay.
But, having expressed the truth, Ms. de Rugy goes off the rails.
But these are just symptoms of a budget-making process that desperately needs reform. In a world where politicians are rarely told no when it comes to creating or expanding programs, most simply refuse to have their hands tied or behave as responsible stewards of your dollars.
The lack of oversight and the general absence of a long-term vision is creating inefficiency, waste, and red ink as far as the eye can see. Without fundamental reform, no one can stop it. So, let’s have some real reform.
Inefficiency, waste, and red ink have nothing to do with the federal government’s ability to pay. I suspect Ms. de Rugy knows this because here comes what I believe to be her agenda.
We need a comprehensive budget process under which programs like Social Security, Medicare, and Medicaid can no longer grow without meaningful oversight.
Combined with other mandatory, more-or-less automatic spending items, they comprise over 70 percent of the budget.
Thus, they must be included in the regular budget process and subjected to periodic review.
Only then will our elected representatives be forced to stop ignoring the side of the budget that requires their attention the most.
Her solution to the federal credit rating cut is to cut Social Security, Medicare, and other spending items (like Medicaid and anti-poverty initiatives).
In this, she has become a shill for the Republican Party, which is a shill for the rich people of America.
The GOP has tried to eliminate the popular ACA (aka Obamacare) for many years, but it’s a program that helps the less affluent, a significant voting bloc.
This is the party that gave massive tax cuts to the rich, falsely complains about the Social Security and Medicare “trust funds”supposedly running short of dollars, and consistently votes against anything that would help the poor (whom they deem “lazy takers.”)
Federal “trust funds” differ from private trust funds as federal debt differs from personal debt.
A federal trust fund is an accounting mechanism the federal government uses to track earmarked receipts (money designated for a specific purpose or program) and corresponding expenditures.
The largest and best-known funds finance Social Security, Medicare, highways and mass transit, and pensions for government employees.
Federal trust funds bear little resemblance to their private-sector counterparts.
In private-sector trust funds, receipts are deposited and assets are held and invested by trustees on behalf of the stated beneficiaries.
In federal trust funds, the federal government does not set aside the receipts or invest them in private assets.
Again, the public and many economists are confused about the words “trust fund.” A federal trust fund is not a real trust fund and cannot run short of dollars unless Congress and the President want it to.
So all the bleating about the Social Security and Medicare trust funds running short of money is nonsense. Congress and the President could add $100 trillion to those trust funds or eliminate them completely at the touch of a computer key.
Medicare and Social Security could be funded directly like the military, Congress, SCOTUS, and the White House, none of which are burdened with fake trust funds.
This would also help deal with the fact that entitlement spending is, as every serious observer knows, unsustainable. Unless reformed, these programs will drain wealth from the government and the economy.
Ensuring their sustainability must be part of any serious budget process reform.
The above statements to too wrong to be accidental. They are outright lies. The government has proved it has the infinite ability to pay for things. It has been sustaining federal deficit spending since 1940, and the economy has continues to grow.
And federal spending, which adds dollars to the economy, certainly does not “drain wealth” from the economy, nor does it drain wealth from a government with infinite dollars.
Since 1940, people like Ms. de Rugy have complained that the federal “debt” is an unsustainable, ticking time bomb. Year after year, the same complaint and the lies are proven wrong year after year.
But the de Rugys of the world never stop.
Enter a “Base Closure and Realignment Commission (BRAC)”-style fiscal commission, an idea promoted by the Cato Institute’s Romina Boccia.
This commission would be “tasked with a clear and attainable objective, such as stabilizing the growth in the debt at no more than the GDP of the country, and empowered with fast-track authority, such that its recommendations become self-executing upon presidential approval, without Congress having to affirmatively vote on their enactment,” Boccia explains.
Go to the Cato Institute’s website and you’ll be greeted with more misinformation like the above.
Besides the fact that the economy has grown faster than the “debt” (see the graph above), what is the purpose of this objective?
The federal government cannot run short of dollars. And think of the reality: CATO and de Rugy want a group of unelected political bureaucrats to determine how much Social Security and Medicare should be cut.
It’s unimaginably ignorant.
And think of the result. By formula, cutting federal spending cuts GDP,so we would enter an endless spiral of spending cuts, GDP cuts, spending cuts, GDP cuts ad infinitum.
The euro nations, Greece, Italy, and France tried this. It’s called “austerity,” a process that dooms a nation to recessions, to borrow Ms. de Rugy’s phrase, as far as the eye can see.
Cutting federal spending cuts GDP, and cuts to GDP are, by definition, a recession. Why do the rich-loving Republicans want recessions?
Because recessions actually make the rich richer. Here is how that works.
“Rich” is a comparative.A person with $100 is rich if everyone else has $1, but that person is poor if everyone else has $1,000—the Gap between the richer and the poorer measures how wealthy a person is.
Recessions widen the Gap between the rich and the rest. During recessions, desperate people will accept menial, low-paying, demanding jobs, while wealthy business owners continue to profit by paying low salaries.
Here is what happens to an economy when the federal “debt” doesn’t increase substantially:
“Debt” doesn’t need to fall for us to have a recession; even when debt GROWTH falls, we have recessions (vertical gray bars).
Not just reduced debt but reduced deficits cause recessions. Imagine what would happen to the economy if de Rugy’s bureaucrats started making cuts. The idea is so screwball that even de Rugy is unsure about it:
I’m uneasy about delegating the president’s power to appoint “experts.” But, Congress would retain some veto power.
If they disapprove of the proposal, the House and Senate can reject it through a joint resolution within a specified period. Whether it’s the best solution to address our fiscal problems remains to be seen, but it’s worth considering.
No, Ms. de Rugy, it’s not “worth considering” any more than economic suicide is worth considering.
There are many more budget reform ideas out there. I’ll leave you with one more. For years, Congress has failed to pass a budget, bringing the country to the brink of a government shutdown by fighting over the need for a continuing resolution.
This temporary measure extends previous funding levels for a few months.
Making continuing appropriations automatic in case of a lapse could remove the threat of shutdowns.
As explained in one senator’s proposal, if appropriations work isn’t done, “implement an automatic continuing resolution (CR), on rolling 14-day periods, based on the most current spending levels enacted in the previous fiscal year.”
Further, to avoid over-relying on CRs, “all Members of Congress must stay in Washington, D.C., and work until the spending bills are completed.”
The problem is the nutty debt limit law.Just eliminate that law and Congress could not easily bring the economy to its knees.
It’s time to completely rethink how we approach the federal budget, grounding our efforts in transparency, accountability, and fiscal responsibility.
Yes, it is time to rethink how we approach the federal budget. First, learn Monetary Sovereignty. By learning how federal financing works, we could help our poor, retired, sick, homeless, and hungry.
Economics is a remarkable science. In most sciences, exceptions to a hypothesis invalidate the hypothesis. For example, If a mineralogist said, “All diamonds are hard,” finding a soft diamond would invalidate the claim.
Not so with economics.
Rent controls have often been promoted and adopted to aid affordability, have failed in this mission. Yet, here they are again being proposed.
While it’s good news that some more economists have started incorporating “real world dynamics,” we’ll have to see what “Bidenomics” models say. That’s not looking promising. (By Jake Johnson, a staff writer for Common Dreams.)
More than 30 U.S. economists have signed a letter expressing support for strong federal tenant protections and rent control as housing costs remain sky-high, even amid broadly cooling inflation.
The profound economic and social consequences of government intervention in the nation’s housing markets have been documented in study after study over the past twenty-five years.
Due to this hard-earned experience, states and local jurisdictions from Massachusetts to California have banned or greatly constrained rent control.
Nevertheless, a number of communities around the country continue to impose rent controls, usually with the stated goal of preserving affordable housing for low- and middle-income families.
Rent control does not advance this important goal.
On the contrary, rent control has reduced both the quality and quantity of available housing in many communities.
Rent control falls under the broad category of “government price controls.”
Most prices for most things are market controlled. In a capitalist economy, a seller or owner charges an amount that will maximize his/her profits.
This takes into consideration the number of customers each price level will attract. For example, an apartment renting for $1o million a month will entice few, if any, renters, while the same apartment renting for $1 thousand a month might attract thousands of renters.
Many factors are involved, among which are: Number and size of rooms, number of full or partial bathrooms, location, condition, views, furnishings, and other lease terms.
By their very purpose, government price controls create prices that not only don’t consider these elements realistically but largely ignore the owners’ need for profits.
Since the whole purpose is to cut rents below market rates, which squeezes landlord’s profits, the landlord can’t set prices according to the number and size of rooms, bathrooms, condition, etc., so to remain profitable, he must set those criteria to the price — exactly backward of everyday capitalism.
While he can’t change the location, he often can subdivide the rooms’ sizes and bathrooms and primarily cut back on condition. Rather than improving or even maintaining condition to obtain higher rents, he now must allow condition to deteriorate to allow for lower rents.
Government rent controls comprise the Communist approach to housing with predictable results. The slumification of available housing, in which poorer condition and lower prices attract poorer and poorer residents, willing to accept degraded condition in exchange for too-low prices.
The economists note in their letter, released Thursday, that the median rent in the U.S. “has surpassed $2,000 for the first time, and there is not a single state where a worker earning a full-time minimum wage salary can afford a modest two-bedroom apartment.”
“We have seen corporate landlords—who own a larger share of the rental market than ever before—use inflation as an excuse to hike rents and reap excess profits beyond what should be considered fair and reasonable,” the letter continues. “Renters are struggling as a result.”
This is the classic economists’ “cart-pulling-the-horse” scenario.
Problem: Apartments are unaffordable for lower-income people. Solution: Cut the rental cost of apartments.
That this never has worked and cannot work does not deter the economists who seemingly view Socialistic control as a reasonable strategy for aiding the poor.
A more reasonable, Capitalistic solution would be:
Problem: Apartments are unaffordable for many lower-income people. Solution: Increase their net income.
This can be accomplished by reducing the amount of money people must give to the government while increasing the amount of money people receive from the government.
The federal government is Monetarily Sovereign. It cannot run short of dollars. Even if all federal tax collections dropped to $0, the federal government could continue spending, or even triple its spending, forever.
So rather than taking dollars from landlords, who are monetarily NON-sovereign, the same dollars should be taken from the government.
Rather than cutting rents by XX dollars, increase renters’ net income by those same XX dollars. The net affordability result would be the same, but landlords would not be forced to skimp on the things that make apartments more attractive.
Here are some ways in which net income can be increased:
Eliminate the FICA tax. It comes out of workers’ pockets.
Provide comprehensive, no-deductible health care insurance to every man, woman, and child in America.
Provide Social Security to every man, woman, and child in America.
Provide tax deductions to renters similar to the mortgage tax benefits homeowners receive.
All of these would allow low gross-income renters to afford heretofore unaffordable apartments while allowing the market, not the government, to determine rents.
And none of them requires the socialistic government control that rent controls demand.
Although nothing that economists do surprises me, I am astounded to see the name James K. Galbraith in the misguided list.
He fully understands the power of Monetary Sovereignty to solve the rent problem. I plan to contact him to get his responses; if he responds, I’ll print them.
The letter’s signatories—including Mark Paul of Rutgers University, James K. Galbraith of the University of Texas at Austin, and Isabella Weber of the University of Massachusetts Amherst—call on the Federal Housing Finance Agency (FHFA) to require rent regulations as a condition for federally-backed mortgages and reject the “economics 101 model that predicts rent regulations will have negative effects on the housing sector,” likening it to typical arguments against raising the minimum wage.
Yes, the arguments against raising the minimum raise are similar in that they require the private, for-profit sector to pay for a net-income problem that the no-profit-needed federal government easily can and should solve.
And if the problem is “corporate landlords” controlling vast swaths of rental apartments, anti-monopoly laws could include local rental properties.
“Empirical research on local rent control policies in San Francisco, CA and New York, NY found that rent regulations lower housing costs for households living in regulated units,” the economists wrote.
“In Cambridge, MA, empirical research showed that the repeal of rent stabilization laws resulted in an average rent increase of $131 for tenants.”
Yes, of course, prices went down. That is the whole purpose and the whole problem. The economists’ “solution” makes the tacit assumption that all landlords are price gougers who should be punished or, at least, seriously controlled.
Given that “Fannie Mae and Freddie Mac mortgages on the secondary market support nearly half of the rental units in the U.S.,” they argued, “Government Sponsored Entities (GSEs) have the influence needed to meaningfully change the trajectory of the housing crisis.”
The “housing crisis,” like inflation itself, is almost entirely due to a lack of supply, exacerbated by price controls. Shall we also cure the “food crisis” by forcing farmers to receive less for their crops?
The economists’ letter is part of a broader push by tenant rights groups and housing justice organizations to secure federal protections against egregious rent hikes and wrongful evictions.
Rent controls don’t differentiate between “egregious rent hikes” and reasonable rent hikes. They are a huge knife that slices through rents, regardless of egregiousness.
Earlier this week, 17 U.S. senators wrote to the FHFA that “renters also have too few protections, making them vulnerable to steep rent increases and deteriorating housing conditions—factors that are out of their control.”
While rent increases can be prevented by rent controls, have these same economists even considered what will happen to “deteriorating housing conditions.”
More than 140 academics, over 70 climate researchers, and dozens of local elected officials have joined the call for nationwide rent regulations.
Perhaps these “academics” need a refresher course in supply and demand.
Tara Raghuveer, director of the Homes Guarantee campaign at People’s Action, said Thursday, “Tenants are coming for rent regulations, and everyone from senators to economists agrees: tenant protections are common sense.”
Tenants don’t understand the relationships among income, profits, supply, and condition, but senators and economists should.
“Due to lack of regulation, affordable housing is lost quicker than it can be built,” said Raghuveer. “Corporate landlords call the shots with federal financing through Fannie Mae and Freddie Mac. That’s why tenants spent this summer organizing to win what we need: federal tenant protections like caps on annual rent increases.”
Builders and landlords go where the money is. Give renters more money, and more housing units will be built. No one wants to build a housing unit that will receive government-limited rent.
In late May, the FHFA requested public input on tenant protections at multifamily properties with mortgages backed by GSEs.
Tenants with the Homes Guarantee campaign responded by knocking on more than 4,000 doors at GSE-backed properties and organizing more than 2,000 comments supporting tenant protections and rent regulations.
Next, shall we knock on 8,000 doors and ask eaters whether farmers should cut their food prices??
“The system as we know it today has failed everyday people, many of whom make impossible choices between rent and food, their homes or their medications,” said Raghuveer.
“The status quo is not working for the people, it is only working for the profiteers, and it is time for change. It is time for the federal government to change that system, correct the imbalance of power between landlords and tenants, protect tenants, and stabilize the American economy.”
Isn’t this exactly what the purveyors of Communism promise? “We, the government, will protect you from those greedy business owners charging you too much.”
It simply is nonsense that punishes the people it’s supposed to help.
The purpose of credit ratings is to assess the likelihood that an issuer of a debt document will adhere to the terms of the document.
The U.S. debt documents consist of Treasury bills, bonds, and notes, including the Federal Reserve Notes you carry in your wallet, aka “money.”
The value of U.S. debt/money is determined by the U.S. government’s full faith and credit,which includes:
A. –The government will accept only U.S. currency in payment of debts to the government
B. –It unfailingly will pay all its dollar debts with U.S. dollars and will not default
C. –It will force all your domestic creditors to accept U.S. dollars if you offer them to satisfy your debt.
D. –It will not require domestic creditors to accept any other money
E. –It will take action to protect the value of the dollar.
F. –It will maintain a market for U.S. currency
G. –It will continue to use U.S. currency and will not change to another currency.
H. –All forms of U.S. currency will be reciprocal; that is, five $1 bills always will equal one $5 bill and vice versa.
The key to the downgrade is item “B,” the “not default” claim.
The following article from Investor News attempts to explain why federal Treasuries were downgraded from AAA to AA+.
Credit Rating Alert: Why Did Fitch Downgrade U.S. Debt?Story by Josh Enomoto
Primarily, the negative reassessment focuses on “the expected fiscal deterioration over the next three years,” a matter worsened by increasingly bitter political infighting.
The matter was not “worsened” by political infighting. The matter was entirely political infighting.
As you will see, that was the sole reason for the downgrade.
Per the agency’s official statement, a “steady deterioration” in standards of governance during the past two decades imposes a dark cloud as policymakers struggle to navigate the extraordinarily difficult post-pandemic environment.
Specifically, “[t]he repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”
“Standards of governance” is the polite way to say that the GOP has become Trump-nuts, with such stellar brains as Matt Gaetz, Marjorie Taylor Greene, Lauren Boebert, Marsha Blackburn, et al leading the way.
Really, would you lend to those people?
The debt limit is 100% political. It is how the party not holding the Presidency exerts political power over the competing party. It has no other purpose.
As well, the combination of economic shocks and initiatives involving tax cuts and spending programs spiked the overall debt load.
Tax cuts and spending programs are irrelevant to the federal government’s ability to pay all its dollar debts.
Even if the total “debt,” which stands at about $30 trillion, were instead only $1, that would have no effect on the federal government’s ability to pay.
As the creator and issuer of the U.S. dollar (aka Monetarily Sovereign), the government has the infinite ability to create enough dollars to pay all its dollar-denominated debts.
If, for instance, you sent a $50 trillion, or $100 trillion, invoice to the U.S. government today, it could pay that invoice today simply by passing laws and pressing computer keys.
Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency.”
Alan Greenspan: “There is nothing to prevent the federal government from creating as much money as it wants and paying it to somebody.”
Alan Greenspan: “The United States can pay any debt it has because we can always print the money to do that.”
Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
Quote from former Fed Chairman Ben Bernanke when he was on 60 Minutes:Scott Pelley: Is that tax money that the Fed is spending?Ben Bernanke: It’s not tax money… We simply use the computer to mark up the size of the account.
Statement from the St. Louis Fed:“As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.”
This infinite power is true not only of the U.S. federal government but also other Monetarily Sovereign entities. Consider the European Union, which is monetarily sovereign over the euro:
Question: I am wondering: can the ECB ever run out of money?Mario Draghi: Technically, no. We cannot run out of money.
No Monetarily Sovereign entity can run short of its sovereign currency unless it wishes to.
Some elements of today’s Republican Party would like to see the U.S. economy fail, so they can claim, before elections, that the economic failure is the Democrat’s fault.
In addition, Fitch took into account the Federal Reserve’s efforts in combating historically high inflation into account regarding its latest credit rating decision.
“While headline inflation fell to 3% in June, core PCE inflation, the Fed’s key price index, remained stubbornly high at 4.1% yoy,” wrote the agency. As a result, this framework will likely preclude benchmark interest rate cuts until March of next year.
All inflations are caused by shortages of crucial goods and services, most often oil and food. So-called “core inflation” refers to this:
“Inflation is based on the consumer price index (CPI), covering the inflation of all the goods and services except the volatile food & fuel prices, excise duties, income tax, and other financial investments.
It guides the government in forecasting long-term inflation trends for a country.
Using “core inflation” as a forecasting tool is nonsensical because the primary causes of inflation are those “food & fuel prices, excise duties, income tax, and other financial investments.”
It’s like predicting a baseball team’s wins while omitting runs-scored-and-allowed to get “core victories.”
In a possible reality check, the Fitch downgrade also incorporated recession risks. Based on the aforementioned tighter credit condition and a projected consumer spending slowdown, the U.S. economy may slip into a mild recession in the fourth quarter of 2023 and Q1 of 2024.
The predicted “mild recession and consumer spending slowdown have absolutely nothing to do with the federal government’s ability to service its Treasury paper. Zero.
The only thing that affects debt service is the federal government’s willingness to service its debt.
As The Wall Street Journal pointed out, the Fitch downgrade represents the first by a major credit rating agency in more than a decade. In theory, the unfavorable reassessment clouds the outlook for the global market for Treasurys, which stands at $25 trillion.
Indeed, the WSJ states that “America’s reputation for reliably making good on its IOUs has cast Treasury bonds in an indispensable role in global markets: a safe-haven security offering nearly risk-free returns.”
The U.S. dollar is a safe-haven security only if the government wants it to be a safe-haven security. All those other factors — total debt, spending, inflation, taxes, etc. — are meaningless to that safe haven.
There is but one question: Will the Republican party refuse, for political reasons, en masse, to authorize future payment. Period.
Treasury Secretary Janet Yellen blasted the Fitch downgrade as “arbitrary.” Yellen noted that the agency demonstrated deteriorating U.S. governance since 2018 but didn’t say anything until now. “The American economy is fundamentally strong,” she emphasized.
The downgrade was not arbitrary. The crazies have taken over the GOP, and Fitch merely is allowing for that craziness by, in effect, saying, “You have a political party that cares nothing about America’s credit rating, and instead, will do everything it can to destroy it.
If I were Fitch, I too would have downgraded the U.S. credit rating, not because of any economic problems but solely because of the political situation, notably the craziness of the Trump-led GOP.
The New York Times op-ed writer and Nobel laureate Paul Krugman chimed in, calling the credit rating decision “bizarre.” Also, former Secretary of the Treasury Larry Summers, in an interview with Bloomberg, stated, “I can’t imagine any serious credit analyst is going to give this weight.”
Sorry, guys, it’s not bizarre. It’s legitimate and will continue to be legitimate so long as the Republicans are enslaved to their MAGA wing.
On paper, the credit rating falling appears rather ominous. However, Axios — while not dismissing the relevant concerns leading to the decision — stated that the Fitch downgrade is “largely symbolic.”
It’s symbolic but also a warning. If you invest in a T-bill, T-note, or T-bond, buy U.S. dollars, or sell something to the U.S., and will be paid in dollars — and if the crazies decide not to raise the so-called “debt ceiling” — you will lose money.
Also, it’s important to remember that credit rating agencies don’t always issue accurate prognostications. For instance, in October of last year, Fitch stated that it expected a mild recession to materialize in Q2 2023.
However, CNN recently reported that the economy picked up steam in Q2 “despite punishing rate hikes and still-high inflation.”
The wrong prediction of a mild recession may have been based on “core inflation,” which is irrelevant. If it was based on predicted shortages of oil and food, and those didn’t materialize, Fitch should have stated that.
Bottom line: People are discouraged from buying the obligations of a crazy debtor. Wouldn’t you be?
That unpredictable craziness, and not the size of the so-called “debt,” “core inflation,” or any other factor, are solely responsible for the value loss of the federal government’s full faith and credit.
Eliminate the useless — no, harmful — debt limit, and/or get rid of the crazies, and the U.S. credit rating instantly will be AAA again.
Rodger Malcolm Mitchell
Monetary SovereigntyTwitter: @rodgermitchellSearch #monetarysovereigntyFacebook: Rodger Malcolm Mitchell
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The Sole Purpose of Government Is to Improve and Protect the Lives of the People.
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