If someone sets a world record, perhaps they could expect applause. In that vein, let’s give a massive round of applause to Veronique de Rugy, who has set a world record for economic myth dissemination.
Her bio reads:
Veronique de Rugy is the George Gibbs Chair in Political Economy and Senior Research Fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist.
Her primary research interests include the US economy, the federal budget, taxation, tax competition, and cronyism.
Her popular weekly columns address economic issues ranging from lessons on creating sustainable economic growth to the implications of government tax and fiscal policies.
She has testified numerous times in front of Congress on the effects of fiscal stimulus, debt and deficits, and regulation on the economy.
Presumably, she believes in using research results to come to her conclusions. Or at least, that is her claim. But what research supports the following nonsense?
The Fed applies leeches to cure anemia. Ms. de Rugy agrees.
In the final week of 2022, we Americans can foresee two significant economic risks in 2023. The first one is a probability that the Federal Reserve will get weak-kneed and stop raising interest rates before inflation is truly under control.
The second risk is that Congress will continue to spend and borrow money irresponsibly.
The likely mix of these two hazards would all but ensure that our economic misery lasts much longer than necessary.
At this point in the article, we don’t yet know which “misery” she means, especially since she considers not raising interest rates or increased spending “hazards.”
And by the way, the federal government never borrows dollars. It has the infinite ability to create its own sovereign currency, the U.S. dollar. So why would it ever borrow what it has the endless ability to create?
If ever it did borrow, it quickly could pay the dollars back simply by creating dollars.
Let’s start with the first risk.
In theory, to tame inflation, the Fed will need to push real interest rates not only high—as it has already done—but higher than the highest rate that the Fed is now targeting, and in fact much higher than most investors can remember.
Substitute the word “myth” for the word “theory,” and you have a correct statement. In the history of the universe, inflation has never been caused by interest rates that were too low. Anyone so devoted to research as Ms. de Rugy claims to be, should know this.
I challenge her, or anyone else, to provide an example of inflation caused by low-interest rates or cured by high interest rates.
There have been thousands of inflations worldwide, regular inflations and hyperinflations, and eventually, almost all have been cured — but never by raising interest rates.
All inflations in history have been caused by shortages of critical goods and services, and those cured were cured only when the shortages were cured.
It even is possible for high rates to cause shortages, i.e., cause inflations, by interfering with production.
The primary effect of raising interest rates is to reduce demand and supply. These reductions make the de Rugys of the world think that is the way to cure inflation. The reasoning is if demand drops, then people won’t pay higher prices. (If supply decreases, prices will rise, but de Rugy doesn’t consider that.)
What de Rugy et al. don’t understand is that recession is another word for reduced supply and demand. GDP = Federal Spending + Non-federal Spending – Net Imports. Thus, reduced spending = recession.
In short, de Rugy wants to cure inflation by causing a recession. Not only is that nuts, but it can also lead to stagflation, the worst of all worlds.
Such high rates will have two main effects: popping the stock market and real estate market, along with any other asset bubbles that we’ve witnessed in recent years.
The economic downturn that would follow would increase unemployment rates significantly.
Here she admits she wants to “pop the stock market and real estate market,” aka cause a recession (“economic downturn”, maybe a depression.
She also admits she wants to “increase unemployment rates significantly.” Presumably, her employment is secure, so she feels comfortable increasing other people’s unemployment.
On the other hand, if the Fed stops tightening too early, we will continue to suffer high inflation and slower growth.
When is “too early” to begin curing inflation? She never says.
And why does tightening (raising interest rates) “too early” lead to more inflation? And why does “too early” cause slower growth when “the right time” doesn’t slow growth? She never explains.
Her whole concept is a confusing mess.
The rise in unemployment might be pushed back for a while, but because no inflationary policy can continue forever, it will inevitably arrive.
And the longer we delay its arrival, the worse it will be. Unfortunately, facing such challenges, I worry that Fed Chair Jerome Powell will not make the better (and more complex) choice and hold the line on inflation.
Does anyone understand what the hell she is saying? “Too soon,” “too late,” “hold the line.” What exactly is she suggesting Powell do?
It doesn’t matter because her suggestions are so deviant from reality that trying to understand them would be useless.
First, the pressure that he already faces from, for example, Sens. Bernie Sanders (I–Vt.) and Elizabeth Warren (D–Mass.) to stop raising rates will only intensify as the economy slows down and the unemployment rate increases.
Yes, Sanders and Warren are likely to say, “Stop raising rates” when we start sliding into recession, and people lose jobs. To de Rugy, Sanders and Warren are wrong. She apparently wants full foot on the brakes so we can go into complete depression.
Second, as interest rates increase, the amount of interest payments on the government’s debt will grow.
With no money to pay those interest obligations, the Treasury will increase borrowing—a move that will further raise the budget deficit.
This is beyond ignorant. She believes there will come a time when the government runs out of money. This person supposedly specializes in “the US economy, the federal budget, taxation, tax competition, and cronyism.” Incredible.
She also believes that the Monetarily Sovereign U.S. government, which has the infinite ability to create U.S. dollars, resorts to borrowing U.S. dollars.
What do real experts think?
Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency.”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.”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.”
Get it, Ms. de Rugy? The government cannot become insolvent. It does not borrow dollars (i.e. it does not depend on credit markets). It ca,n produce as many dollars as it wishes.
So there never can be a time when, as you said, the government “will have no money to pay those interest obligations.” It always has money, and you should know that.
When complaints about rising deficits become loud, it won’t be long before President Joe Biden’s administration, and others in Congress demand an end to the interest rate hikes.
This practice is called fiscal dominance and it creates a real risk of further fueling inflation.
Never in history has an end to interest rate hikes caused inflation.
Finally, there is the risk that market actors will also pressure the Fed to protect them against losing the inflated wealth they’ve reaped as a result of two decades’ worth of irresponsible monetary policy.
“Irresponsible monetary policy is Ms. de Rugy’s term for a growing economy. By formula, adding dollars to the economy causes an increase in Gross Domestic Product, not inflation.
In fact, as of now Wall Street investors are showing signs that they believe the Fed may soon abandon its policy of high-interest rates to avoid a recession.
It’s hard to blame them because that’s precisely what the Fed has done in the past.
That’s right. In the past, high-interest rates have led to recessions, which is precisely what Ms. de Rugy recommends.
So, will the Fed blink? Politicians aren’t known for doing the right thing when times get hard, and it would be naïve to assume that Fed chairs are immune from this.
Powell, too, is a politician, as he demonstrated with his unwillingness to acknowledge the surging inflation problem—created by the government’s own spending and stimulus—until it was too late. He could surprise us, of course, by courageously enforcing much-needed monetary discipline.
No, no, no. The inflation was NOT created by the government’s spending. The inflation was created by COVID-related shortages of oil, food, transportation, computer chips, lumber, housing, etc.
The spending and stimulus prevented a depression.
The second threat comes from politicians in Washington, right and left, doing their best to make the mess caused by the Fed just that much worse.
Indeed, just as the Fed is pushing interest rates sharply higher, irresponsible “leaders” are launching a new “spend and borrow” spree to the tune of $1.7 trillion all wrapped in a reckless end-of-the-year omnibus bill.
The Fed is pushing interest rates higher, which will do nothing to cure the shortages that cause inflation.
However, the $1.7 trillion spending bill may defeat inflation if it is directed toward obtaining and distributing the scarce goods and services.
This 4,155-page bill is guaranteed to be inflationary.
No such thing. The bill will not cause inflation. It will grow GDP by $1.7 trillion.
It will make Powell’s job harder and the rate hikes needed to control inflation larger. That will only increase the chance that the Fed will cave to pressure to extend the crisis further into the year 2023.
The Fed may cave to pressure — by raising interest rates and thereby creating more inflation together with a recession.
But that’s assuming the Fed won’t cave to the administration and monetize all that new borrowing, adding more fuel to the inflation fire.
There is no “borrowing” to monetize. The U.S. government does not borrow U.S. dollars. PERIOD.
Contrary to popular misunderstanding, T-bills, T-notes, and T-bonds do not represent federal borrowing. They represent deposits into privately owned accounts.
The deposited dollars never are touched by the federal government. They are owned by depositors.
The government creates its own dollars each time it pays a bill.
The bottom line is this, people: Grab your antacids because if our leaders don’t start thinking differently, 2023 is likely to be painful.
The above statement is the only correct line in Ms. de Rugy’s entire article.
SUMMARY
Federal spending increases GDP. The U.S. federal government cannot run short of dollars, so it never borrows dollars. Inflations always are caused by shortages of goods and services and never by federal spending.
Government spending does not lead to shortages. Government spending can cure shortages by aiding the production and obtaining of scarce goods and services.
Ms. de Rugy simply does not understand economics. She advocates causing a recession to cure inflation, like applying leeches to cure anemia.
You are correct if you believe I am angry at Ms. de Rugy. If she does research, she should know that raising interest rates does not cure the shortages that cause inflation.
Ms. de Rugy is in a position to promulgate the truth, yet she spreads a lie that harms America. And yes, that makes me angry. It should make you angry, too.
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 People’s Lives.
With public debt at an all-time high, the government should do the same.
Immediately, Veronique de Rugy reveals her abject ignorance of economics. She equates federal financing with personalfinancing.
The two are diametrically different. The federal government is Monetarily Sovereign. It has the unlimited ability to create new dollars. It never can run short of dollars and never can be unable to pay any debts denominated in dollars.
The public is none of those things. It is monetarily non-sovereign. It has a limited ability to create new dollars. It can, and often does, run short of dollars. It can, and often is, unable to pay its debt denominated in dollars.
Recessions (gray bars) are caused by reduced debt growth and are cured by increased debt growth. By mathematical formula, Gross Domestic Product growth requires federal spending growth and federal debt growth.
GDP = Federal Spending + Non-federal spending + Net Exports.
This feat isn’t that hard now that the Congressional Budget Office (CBO) has released a series of budget options showing Congress how to do it.
In Libertarian terms, “how to do it” invariably requires reducing benefits to the public — specifically, the part of the public that is not rich.
It’s worth repeating that maintaining spending at the current level is not a viable option.
Given the dramatic increase in annual federal government spending over the next 30 years—from 22.3 percent of GDP to 30.2 percent—combined with federal tax revenues that have remained fairly constant at around 19 percent, CBO projects that future deficits will explode.
It’s forecasted to triple from 3.7 percent of GDP today to 11.1 percent in 2052. Over the next 10 years, primary deficits (deficits excluding interest payment on the debt) amount to $7.7 trillion. Meanwhile, deficits with interest payments total $15.8 trillion—roughly $1.6 trillion a year.
You’ll notice that Veronique never says why maintaining spending is “not a viable option.” All she does is quote large numbers to shock you.
In effect, she claims that Monetary Sovereignty is not a viable option, because it allows the government to create dollars.
The “not a viable option” claim resembles the “ticking time bomb” claim about the federal debt, that has been wrong for more than 80 years. In that time, the federal debt has grown more than 55,000%, yet the nation survives quite well, thank you.
Sadly, Libertarians refuse to learn from actual experience. They cling to the myth that a Monetarily Sovereign government should impose austerity, despite the repeated and inevitable failures of such a system.
Note, by the way, that half of our future total deficits will be driven by interest payments on the debt. This fact isn’t surprising considering the size of our deficits and the rise in interest rates.
Federal interest payments, which the government has the infinite ability to make, add growth dollars to the economy.
The U.S. federal government daily demonstrates that interest payments pose no burden on a government having the infinite ability to create the dollars with which it makes the payments. And for the same reason, interest payments pose no burden on federal taxpayers.
Given these realities, no one will be surprised that the ratio of debt to GDP, now roughly 100 percent, will, under the most conservative estimations, jump to 110 percent in 10 years.
In the next 30 years it will likely double. More realistically, in 2052 debt as a share of GDP will be 260 percent. And that’s assuming no major recessions or emergencies.
As we have seen here, and other places on this blog, the debt / GDP ratio is meaningless. Neither a low nor a high ratio indicates the health of an economy. The ratio predicts or demonstrates nothing.
Any time you read or hear about the “dangers” of a high debt / GDP ratio, you will know you are reading ignorance and lies.
GDP does not fund debt. Further, GDP is one-year figure while debt is a cumulative-over-many-years figure. No comparability at all.
Low ratios and high ratios can be seen equally among the world’s most and least healthy economies.
Despite these awful numbers, legislators in both parties are currently debating how best to add trillions more to the country’s credit card balance.
The federal government does not have anything comparable to a “credit card balance.” Libertarians use that term to trick you into believing that the federal government is about to go bankrupt. It isn’t and it can’t.
Many, for instance, want to add a new entitlement program in the form of the extended child tax credit.
The rich hate entitlement programs like Medicare, Medicaid, and Social Security because such programs benefit the poor and the middle, thereby closing the Gap between the rich and the rest.
Libertarians argue for the rich by feigning a brand of frugality that widens the Gap.
It is in this setting that the CBO published its report on budget options. The two-volume document highlights options for deficit reduction.
One volume details large possible spending reductions while the other lays out small ones—so the options are plenty. They include important reforms of some of the major drivers of future debt: Medicare, Medicaid, and Social Security.
The misnamed “reforms” actually are reductions in benefits to the poor and middle classes. The rich love cutting Medicare, Medicaid, and Social Security, while boosting dollars for the military and cutting taxes on the rich.
And heaven forbid there be a new benefit for the not-rich, extended child tax credit.
Ms. de Rugy, as a tool of the rich, dishonestly calls these cuts “reforms,” to dissuade you from objecting.
All told, it’s possible to achieve deficit reduction of $7.7 trillion over 10 years.
The mathematics are clear: A deficit reduction of $7.7 trillion will reduce GDP by about $7.7 trillion and lead to a recessionif we a lucky, and a depression if we are not.
That’s enough to accomplish what some people mistakenly believe to be out of reach: balancing the budget without raising taxes.
While “balancing the budget” is prudent for people, businesses and local governments, it is a disaster for the federal government. Sadly, Ms. de Rugy, being ignorant of economics, doesn’t understand this.
There are also a few options to simplify the tax code by removing or reducing unfair individual tax deductions and by cutting corporate welfare.
Lest you believe the previous sentence indicates the Libertarians are willing to crack down on the rich, read the next sentence.
For instance, it’s high time for Congress to end tax deductions for employer-paid health insurance. This tax deduction is one of the biggest of what we wrongly call “tax expenditures.”
Get it? First Ms. de Rugy wishes to cut Medicare and Medicaid. Then, to further “balance the budget,” she wishes to cut employer paid health insurance.
See the pattern? Starve the poor and middle classes to achieve a recession or depression. The very rich couldn’t be happier. They love widening the Gap between the rich and the rest. The wider the Gap, the richer they are.
It’s responsible for many of the gargantuan distortions in the health care market and the resulting enormous rise in health care costs.
The CBO report doesn’t eliminate this deduction; instead, it limits the income and payroll tax exclusion to the 50th percentile of premiums (i.e. annual contributions exceeding $8,900 for individual coverage and $21,600 a year for family coverage).
The savings from this reform alone would reduce the deficit by roughly $900 billion.
Why the limit? Why 50th percentile? No reason other than perhaps it seems more “generous” than eliminating the entire deduction.
A second good option is to cap the federal contribution to state-administered Medicaid programs.
Ah, more cuts to programs that help the poor. Ask Ms. de Rugy why not simply eliminate Social Security, Medicare, Medicaid, and all poverty aids. That would really “balance the budget.”
That federal block grant encourages states to expand the program’s benefits and eligibility standards—unreasonably in some cases—since they don’t have to shoulder the full bill.
CBO estimates that this reform would save $871 billion.
There is no reason for a Monetarily Sovereign nation to save $871 billion of the same dollars it has the infinite ability to create.
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.”
The states are monetarily non-sovereign and are supported by taxpayers. The federal government is Monetarily Sovereign and is not supported by taxpayers.
Ms. de Rugy wishes unnecessarily to balance the budget by punishing the poorest Americans. One wonders about the kind of person who would recommend such cruelty.
CBO also projects that Uncle Sam could reduce the budget deficit by $121 billion by raising the federal retirement age.
CBO’s option would up this age “from 67 by two months per birth year for workers born between 1962 and 1978.
As a result, for all workers born in 1978 or later, the FRA would be 70.” Considering that seniors today live much longer than in the past and can work for many more years, this reform is a low-hanging fruit.
In yet another disgrace, Ms. de Rugy wishes to cut Social Security by raising the retirement age. This has scant effect on the rich, but would be a hardship for the poor.
Her “solution” involves moving retirement three years away for working people, in short to keep them working ’til they drop.
The rich, of course, can retire at will.
Congress could save another $184 billion by reducing Social Security benefits for high-income earners. I support a move away from an age-based program altogether since seniors are overrepresented in the top income quintile.
Social Security should be transformed into a need-based program (akin to welfare).
Nevertheless, the CBO’s option would be a step in the right direction.
A not-so-clever suggestion by Ms. de Rugy to make Social Security “akin to welfare.” The political right hesitates to cut Social Security directly, but would do it by making it “welfare,” and then cutting welfare.
As right wingers “know,” people accepting welfare are lazy takers, not worthy of help.
Further, with inflation, the need-based option falls ever more heavily on the poor, exactly what REASON wants.
There are so many more options for long-term deficit reduction. All Congress needs is a backbone. Considering the end-of-year spending bill going through Congress right now, I am not holding my breath.
SUMMARY
The article, which appeared in Reason.com, is a breathtaking litany of anti-poor, anti-middle, pro-rich recommendations to widen the Gap between the rich and the rest.
It is disgusting in its ignorance and cruelty, it’s lack of facts and its dissemination of false beliefs.
The sole purpose is to make the rich richer by widening the Gap between them and the rest of us.
Lacking any recognition of Monetary Sovereignty, the author promulgates the usual right-wing austerity that punishes all but the rich. It is an inexcusable exercise in dishonor and immorality by Ms. de Rugy and her Libertarian accomplices.
Reason.com, a mouthpiece for the Libertarian Party, bills itself as “free minds, free markets.” More accurately, it should be called “closed minds, closed markets, and free lies.”
Here is the latest post from Eric Boehm, Reason.com’s economic policy reporter. As expected with Libertarian economic “thought,” it is loaded with wrong inferences, misunderstandings, and/or outright lies.
November’s $249 Billion Federal Budget Deficit Set a Record. Now, Congress Is Preparing To Spend Even More. The government spent $501 billion in November but collected just $252 billion in revenue, meaning that about 50 cents of every dollar spentwere borrowed. ERIC BOEHM | 12.16.2022 1:00 PM
The article comes with the photo and caption shown above.
Boehm doesn’t realize that his photo undermines his claim that “about 50 cents of every dollar spentwere borrowed.”
The photo shows someone (presumably representing the government) creating dollars from thin air using a copy machine. This immediately demonstrates the senselessness of the Libertarian economic claims because it illustrates why the federal government has no need to borrow dollars.
In fact, the government does create dollars from thin air simply by pressing computer keys, so it never borrows dollars.
Boehm claims that T-bills, T-notes, and T-bonds represent borrowed money. Completely false. They represent dollars deposited intoprivately held accounts, similar to safe deposit boxes. The government never touches the contents of those accounts.
The dollars are the property of the depositors, not of the government, and remain inviolate until the accounts mature when the contents are returned to the owners. The dollars never are borrowed or used by the government or by anyone else.
Though those dollars often incorrectly are termed federal “debt,” the government does not owe the money any more than a bank owes the contents of a safe deposit box.
As the St. Louis Federal Reserve Bank has said:
“The U.S. government can never become insolvent, i.e., unable to pay its bills . . . the government is not dependent on credit markets to remain operational.
“Not dependent on credit markets” is government-speak for, “does not borrow.”
Further, even if the T-securities were debt, the federal government pays all its debt by creating new dollars ad hoc. It does this by the simple expedient of passing laws and pressing computer keys, both of which it has the infinite ability to do.
Debt never is a burden on the U.S. government or on taxpayers.
As for those taxes you are forced to pay, they are destroyed upon receipt by the Treasury. You take dollars from your checking account — dollars that are part of the M2 money supply measure — and when they reach the Treasury, they cease to be part of any money supply measure.
There is no measure of the Treasury’s money holdings because the Treasury has infinite money. Thus, your tax dollars disappear, effectively destroyed.
So much for all that talk about falling deficits.
The federal government ran a $249 billion deficit during the month of November—that’s the largest total ever posted for that month, and a staggering $56 billion increase over the deficit from November 2021.
The economy is measured by Gross Domestic Product (GDP). The formula for GDP is:
GDP = Federal Spending + Non-federal spending + Net Exports
Thus, by simple algebra, federal spending always grows the economy. Boehm may not realize that he is complaining about economic growth.
Nearly 50 cents of every dollar spent were borrowed and added to the national debt. That’s utterly unsustainable.
“Unsustainable” is the favorite word of deficit liars, who never explain why any size deficit cannot be sustained.
In what year did the federal “debt” become “unsustainable”?
The gross federal “debt” (deposits) totaled $51 billion in 1940. It now totals about $30 trillion, nearly a 600-fold increase, and here we are, sustaining.
For over 80 years, the debt whiners have claimed the debt is “unsustainable.” Year after year after year, they have been proven wrong, and still, they learn nothing. Truly pitiful.
And now Congress is gearing up to spend even more.
Though the final details of a lame-duck session omnibus bill won’t be known until next week (likely not until just before lawmakers are asked to vote on it), it’s a near certainty that the final agreement will add to this year’s budget deficit and the ballooning national debt.
Translation: The final agreement will add to the budget deficit which will grow GDP.
Congress passed a short-term spending deal on Thursday night to avert a government shutdown and give lawmakers another week to hammer out a more comprehensive deal to fund the government through the end of the current fiscal year.
Where did the dollars to fund the government come from? The government merely created them from thin air by creating laws and pressing computer keys, something they can do forever.
That larger omnibus bill could include billions of dollars in additional military and humanitarian aid for Ukraine, as well as emergency funds for hurricane relief, The Washington Post reports.
The final price tag is likely to be about $1.7 trillion, according to Politico.
That will be $1.7 trillion added to Gross Domestic Product.
Depending on what else ends up in the final version of the end-of-year omnibus, the package will add between $240 billion and $585 billion to this year’s budget deficit, according to an analysis by the Committee for a Responsible Federal Budget (CRFB), a nonprofit that advocates for balancing the books.
It says much about your lack of economics knowledge when you resort to the CRFB for your ideas. Here is what happens when the government balances the books:
1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807. 1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819. 1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837. 1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857. 1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873. 1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893. 1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929. 1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.
Balancing the books is a good idea for monetarily non-sovereign entities like cities, counties, states, euro nations, businesses, and individuals. They do not have the unlimited ability to create their own sovereign currencies.
In fact, they have no sovereign currencies.
But the U.S. government is Monetarily Sovereign. It can create infinite dollars and the legal ability to make those dollars worth anything it chooses.
Over the 10-year budget window used by the Congressional Budget Office and other number crunchers to assess the federal budget, the damage could exceed $5 trillion.
Recessions (vertical gray bars) follow reductions in federal deficit growth.
Translation: Exchange the words “economic growth“ for the term “damage” and you will see the truth.
“Not only would these policies increase deficits, but they would also worsen inflation,” the CRFB warns in its analysis.
“With inflation surging and debt approaching record levels, policymakers should avoid passing costly end-of-year policy changes.”
As always, the CRFB spouts nonsense. Inflation is not caused by or “worsened” by federal deficits. All inflations through history have been caused by shortages of important goods and services.
Changes in federal debt, i,e, deficits (red), do not correspond with changes in inflation (blue).
If federal deficits “worsened inflation,” one would expect the peaks and valleys of the above graph to correspond. They do not.
Inflations are not caused by federal spending. Today’s inflation was caused by COVID-related shortages of oil, food, shipping, lumber, computer chips, labor et al.
For much of the past year, the Biden administration has been touting falling deficit figures as evidence that the economy was picking upand, implicitly, as a signal that government spending could increase without adding to the nation’s tenuous fiscal situation.
If true, that would be incredibly uninformed by the Biden administration.
Mathematically, it is not possible for falling deficit figures to be evidence of growing Gross Domestic Product. That would be like falling food supplies being evidence of growing nutrition.
That was always misleading, as the falling deficit was entirely the result of one-time, emergency COVID-19 spending coming off the books.
The underlying figures showed all along that the deficit situation was continuing to worsen, and that President Joe Biden’s policies were adding trillions of dollars to the deficit over the long term.
Wait, Mr. Boehm. You say emergency COVID-19 spending came off the books, yet now we have inflation. What happened to your claim that increased federal spending causes inflation?
November’s spending and revenue figures should put an end to these silly games. We’re only two months into the fiscal year, but the federal government is now on pace to run a deficit of about $1.9 trillion, which would be the largest nonpandemic budget deficit ever and a huge increase from the $1.38 trillion deficit in the fiscal year that ended on September 30.
That spending has helped reduce the likelihood of a recession, which by the way, is defined as two consecutive quarters of reduced GDP — a reduction which is exactly what you want to do.
A major driver of November’s rapidly expanding deficit was something else that fiscal hawks have been warning about for a while: higher borrowing costs created byhigher interest rates.
The Wall Street Journal notes that the federal government spent 53 percent more on borrowing costs last month than it did in November 2021.
The higher borrowing costs were foolishly and arbitrarily created by the Fed. They do nothing to prevent/cure inflation. They do nothing to cure the shortages that cause inflation.
In fact, higher interest rates exacerbate the shortages and thus, exacerbate inflation. In essence, the Fed is applying leeches to cure anemia.
Higher borrowing costs are not the result of federal deficits. They are the result of Fed ignorance.
The best time to stop borrowing heavily was yesterday (or several years ago), but the second-best time would be today. Instead, Congress is likely to make this problem even worse—again—by continuing to spend like there’s no tomorrow.
SUMMARY
The entire Boehm article is based on commonly held myths. The facts are:
Federal deficits are necessary for economic growth. (That is simple mathematics.)
The U.S. federal government never borrows dollars. (Why would it, given its infinite ability to create dollars).
Reduced federal spending causes recessions and depressions. (Again, this is simple mathematics.)
Inflations are caused by shortages of key goods and services, not by federal spending. (As demonstrated by history).
Inflations are cured by federal spending to acquire and distribute the scarce goods and services. (Again, as demonstrated by history.)
Increasing interest rates does not help prevent or cure inflations.
Increasing interest rates exacerbates the shortages that cause inflations. (That is why raising interest rates is recessionary.)
I recently received an Email from you, which I will quote in its entirety.
Congress has until December 16th to fund the government and avoid a federal shutdown. If they avoid that, they’ll likely have done so with the same tired Washington tactic of promising billions in new deficit-funded spending or tax cuts, driving the national debt even higher.
We have asked Congress not to borrow any new money for the rest of 2022.
With our Debt Fixer interactive tool, you have the opportunity to craft a national budget that puts America on a sustainable fiscal course heading into 2023.
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If you’re a teacher and would like to use the Debt Fixer in your class, please let us know by e-mailing debtfixer@crfb.org.
We can provide additional resources for your classroom including guest speakers and a customizable link where you can compare your classes results. If you enjoy Debt Fixer, we encourage you to check out our other interactive resources: Budgeting for the Future, Is It Worth It, and the Social Security Reformer.
Here you’ll be able to test your budget knowledge, compare the costs of proposals and policies, and choose the options to stabilizing the debt at 90 percent of Gross Domestic Product (GDP) for future generations.
I have bolded the following phrases from your Email: “driving the national debt even higher,” “not to borrow,” “not to borrow,” “sustainable fiscal course,” “stabilizing the debt at 90 percent of Gross Domestic Product (GDP), and “stabilizing the debt at 90 percent of Gross Domestic Product (GDP).”
As I suspect you know, the U.S. federal government is Monetarily Sovereign, i.e., it has the infinite ability to create its own sovereign currency, the U.S. dollar. This ability sometimes (incorrectly) is referred to as “printing” dollars.
The infinite ability to “print” dollars means the U.S. government never unintentionally can run short of dollars.
THE CHALLENGE
Given the fact that the U.S. government cannot run short of dollars, I challenge you to answer the following questions:
DRIVING THE NATIONAL DEBT EVEN HIGHER:Given the federal government’s infinite ability to “print” (create) dollars why should anyone be concerned about the size of the “national debt”?
NOT TO BORROW: Given the federal government’s infinite ability to create dollars why should the federal government need to borrow dollars?
DEBT FIXER: Given the federal government’s infinite ability to create dollars, why does the federal debt need fixing?
SUSTAINABLE FISCAL COURSE:Given the federal government’s infinite ability to create dollars, and the fact that it has sustained its fiscal course for the past 80+ years while the federal debt has increased 62,500%, why do you believe it’s current fiscal course suddenly has become unsustainable?
STABILIZING THE FEDERAL DEBT AT 90 PERCENT OF GROSS DOMESTIC PRODUCT (GDP): In what way does the ratio of federal debt / GDP affect the economy?
I have followed your Emails for several years, during which time you repeatedly have voiced the same concerns about federal deficit spending. Yet, you never have answered the above questions.
Here are the facts you continually ignore:
The government’s infinite ability to create dollarsmeans it never needs to be concerned about any debt. It has a greater ability to pay its debts than Elon Musk’s ability to pay a 1 cent debt.
The federal government does not borrow, nor will it ever need to. As the St. Louis Fed reported: ““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.” The U.S. government provides T-security accounts into which other governments and private citizens are allowed to deposit dollars for safekeeping. The purpose of these accounts is not to provide the federal government with dollars, but rather to provide the world with a safe place to store unused dollars. This helps stabilize the dollar. To pay off these deposits, the federal government merely returns the dollars that are in those accounts. Returning existing dollars is no burden on the federal government or on U.S. taxpayers.
The federal debt is not a real debt. It is deposits that are owned by other governments and private citizens. It does not need “fixing.” If the federal government stopped issuing T-securities tomorrow, that would have no effect on the government’s ability to spend dollars and to pay its bills.
The federal government has proved, year after year, that its course is sustainable. Despite a massive increase in the so-called “debt,” the government has no difficulty funding every expenditure.
The ratio of federal “debt” to GDP is economically meaningless. It has no effect on the government’s ability to spend or on inflation, or on any aspect of economic health. GDP dollars do not pay for federal debt. The ratio also is ludicrous because it compares a multiyear figure (debt) to a one-year figure (GDP). One easily could ask, “Why not compare debt to the six-month GDP or the one-month GDP, or even the ten-year GDP?”
There is no relationship between the Debt/GDP ratio (blue) and inflation (red).
There is a strong relationship between reductions in federal debt and recessions or depressions. Most recessions have resulted from periods of declining deficits.
U.S. depressions tend to come on the heels of federal surpluses.
1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807. 1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819. 1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837. 1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857. 1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873. 1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893. 1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929. 1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.
America’s debt /money supply growth parallels America’s GDP growth
Using the tables below, see if you can determine which economies are “healthiest.”
(You won’t succeed, because the debt/GDP ratios tell you nothing about the health of a nation’s economy:
SUMMARY The CRFB never has and never will accept my challenge. They never will answer the questions, because the true answers would eliminate their reason for existence.
The CRFB is worse than useless. It is harmful to America. I believe they know they are harmful, in which case that would make them traitors.
I believe they are paid by the rich in America to widen the income/wealth/power Gap between the rich and the rest of us, in which case that would make them paid traitors.
I am angry at them. They hurt America.
If you believe they have answers and can meet the challenge, feel free to contact them. I’d be interested in seeing how they try to squirm out of this. Contact Maya MacGuineas at MacGuineas@crfb.org and find her on Twitter @MayaMacGuineas.
If you think I am angry at the CRFB, you’re right. I believe they have done, and continue to do, irreparable harm to America by giving aid and comfort to politicians who vote against benefits.
The claim that Medicare and Social Security can run short of money is absurd, especially so when the federal government, at the touch of a computer key, can provide all the money these agencies need.
The claim that the federal debt is too high also is absurd, when it isn’t even debt and it could be paid off entirely simply by returning the dollars in storage.
Even more absurd is to worry about the debt/GDP ratio, which compares a multi-year figure to a one-year figure, and is indicative or predictive of nothing.
