Tag: money supply

–Open letter to John Mauldin re. his myths

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

5/9/10
Mr. Mauldin:

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

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

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

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

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

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

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

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

Rodger Malcolm Mitchell

–Nonsense from the Committee for a Responsible Federal Budget

An alternative to popular faith

Demonstrating the bankruptcy of the typical debt-hawk position, here are excerpts from a long Email I just received from the Committee for a Responsible Federal Budget, a leading anti-debt advocate.

“The current fiscal path of the United States government is unsustainable. For the past forty years, our debt-to-GDP ratio has averaged around 40 percent. This year, it is projected to exceed 60 percent, the highest point since the early 1950s. […] By the end of the decade, debt is projected to be 90 percent of GDP, approaching our record high of around 110 percent after World War II. Things will deteriorate further as the Baby Boom retirement accelerates. Ten years later, the debt is expected to be well over 150 percent of GDP. By 2050, it is projected to be over 300 percent and still heading upward.” Though they claim the “fiscal path is unsustainable,” they project all the way to 2050. The lowest (since WWII) Debt/GDP ratio of about 35% came 70 years earlier, at 1979-1980, the end of the Carter administration, which also was the time of the highest inflation

 

Deficits vs inflation thru 09

[…]It is not at all clear how exactly such a crisis would unfold – what would prompt it or how it would play out. A crisis could occur as soon as this year, or decades from now. It could begin inside or outside the country. The crisis could be dramatic or gradual. It could come from an economic or another financial shock, or even a political surprise.” In short, “We don’t know when; we don’t know how; and we don’t know what. Otherwise, we’re sure.”

“Experts agree that we will be in a crisis when we can no longer service our debt obligations. However, we will probably never face this scenario.” This is the first time I ever have heard a debt hawk make this admission, which the author repeatedly forgets, later in the Email.

“There are a number of different crisis scenarios: Scenario 1: The Gradual Crisis – We stay the current course and try to muddle through. Our massive borrowing leads to less capital available for productive private investment, which lowers economic growth.“ Federal deficit spending adds money to the economy. There is no mechanism by which added money can reduce the supply of capital.

“Increasing debt service payments – particularly when interest rates return to normal – squeeze out other areas of the budget. The steady crowding out of government spending on programs that boost the economy, such as spending for education, infrastructure and innovation, will hurt our competitiveness.” This crowding out only can happen in a debt-hawk world, where deficits are restricted, either by tax increases or by reduced spending – a self-fulfilling prophecy.

“Scenario 2: The Political Risk Crisis – Political calculations trump risk threats. […] As a result, more budget resources are shifted from children to seniors, and from investment in programs boosting future growth. […] creditors lose confidence in U.S. fiscal management. Our creditors increasingly demand large risk premiums on purchases of their debt, sharply lower their purchases of our debt, or, in the worst case, stop buying our debt if the shift occurs suddenly. Credit ratings agencies lower our sovereign credit rating.” This neglects the simple fact that since the end of the gold standard, in 1971, the federal government no longer has needed to borrow its own money. Rather than borrowing by creating T-securities out of thin air, then selling them, the government can and should create money directly, and omit the borrowing step.

“Scenario 3: Catastrophic Budget Failure – An abrupt crisis occurs. […] at some point financial markets or foreign lenders decide we are no longer a good credit risk, possibly due to debt affordability concerns.” Debt affordability? Didn’t you just say,” Experts agree that we will be in a crisis when we can no longer service our debt obligations. However, we will probably never face this scenario.”

“[Creditors] stop buying our debt securities or demand dramatically higher interest rates due to increased perceived risk. […] In the extreme case, the U.S. may not be able to borrow at any interest rate.” Creditors concerned with hyperinflation or even default will not buy U.S. debt.” As we said, the U.S. no longer needs to sell debt. Issuance of Treasury securities could end today, and this would not change by even on penny, the government’s ability to spend.

“Scenario 4: Inflation Crisis – Higher debt is managed through inflation. […] Under strong political pressure, the Fed […] does not raise interest rates despite signs of increasing inflationary pressures. […] Fiscal consolidation will require spending cuts that will hurt safety net programs. Business investment incentives will disappear and tax rates will rise, as policymakers search for revenue. Household taxes rise and government services are reduced.” Wait. Isn’t that exactly what you are preaching – spending cuts and tax increases?

“Scenario 5: External Crisis -A dollar or trade crisis leads to a fiscal crisis. When the economy recovers in a few years, our current account deficit (which had narrowed during the recession) resumes widening to record levels. […] Capital inflows slow abruptly as investors see better risk-return opportunities elsewhere, decide the risks of the U.S. market are too high […] A sudden stop in lending lowers the dollar, increases inflation and interest rates[…]” A widening of the current account deficit means dollars leave the U.S., which if anything, would be anti inflationary.

“Scenario 6: Default Crisis – A series of events lead to a default.” Once again, you already have said the U.S. will not default.

“[…] Our need to pay higher interest rates increases debt service and crowds out public and private spending. […]” Higher interest rates increase the amount of money in the economy which facilitates private spending.

“[…}A new administration defaults or attempts to renegotiate our debts. Burned creditors stop buying U.S. debt or demand onerous interest premiums.[…]” Again, defaults? You’ve already discussed this impossibility.

“Countries that have sufficient domestic savings to finance their debt are less vulnerable than those that must attract considerable foreign capital – such as the United States. ” Totally false. The U.S. does not service its debt with savings. It creates money, ad hoc, to pay its debts.

“[…] Our large trade deficit outlook is considered unsustainable and a likely crisis flash point.”You already have admitted U.S. has the unlimited ability to service its debts. So what do you mean by “unsustainable”?.

“Some top economists argue that the U.S. can “afford” even more debt awhile longer because its debt service will still remain quite manageable. They also expect that the United States can avoid adjustment longer than fiscal policy norms might suggest because the dollar is the world’s reserve currency.” The debt service is manageable, not because the dollar is the world’s reserve currency, but rather because the government has the unlimited ability to pay its bills, and does not need to borrow.

“While certain countries are often cited to show that high sovereign debt ratios can be sustained without crisis (Italy, Belgium, Japan now), these countries – unlike the United States – can finance their debt through their substantial domestic savings.” Government debt is not financed through private savings. You and I do not pay federal debt with our savings.

“Many governments facing similar circumstances to the United States over the next generation have tried to avoid fiscal adjustment by running higher inflation to reduce their debt burden. Though appealing, this strategy hurts the economy and its citizens (particularly those on a fixed income).” There ever is a reason for a sovereign nation, in control of its money, to reduce its debt through inflation.

The entire premise of the Committee for a Responsible Federal Budget is that buyers of T-securities control the fate of the U.S., when in fact, the U.S., as the creator of dollars, no longer needs anyone to buy T-securities. This lack of understanding would be amusing were it not for the fact that the government acts on these beliefs.

One of the reasons we have been so slow to exit recession, is the government’s timid stimulus responses. The too little / too late, initial $150 per person mailing two years ago was restricted by debt fear. A $1,000-$2,000 per person mailing at that time, would have ended the recession.

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

–What does the Tea Party want? Ask Sarah Palin

An alternative to popular faith

It’s a peculiarity of the human species, that if you speak from the pulpit of patriotism or religion, you can spew almost any kind of nonsense, and gather followers.

Take Sarah Palin, perhaps the nation’s leading demagogue. She shouted this irrationality to a cheering Tea Party crowd, “Is this what their ‘change’ is all about? I want to tell them, nah, we’ll keep clinging to our Constitution and our guns and religion – and you can keep the change.” The mob screamed in ecstasy, without bothering to wonder what she meant.

Does “they” just refer to Democrats, or is “they” the whole U.S. government? Hard to tell. Ironic, how hating the government now equates with patriotism and the Constitution.

According to Mrs. Palin, “they” have violated the Constitution in some unexplained way. And she indicates “they” will take Tea Party guns and religion away. She doesn’t explain how “they” will do that, but so long as she wraps herself in the flag and religion, her worshipers won’t remind her she has no idea what the hell she’s talking about.

I empathize with Tea Party folks, because one thing they want, I also want: Lower taxes. But I would be embarrassed to allow a hate-mongering, anti-everything, nitwit like Sarah Palin be my guide.

Really folks, is this the best you can do? There are excellent, economic ways to reduce taxes (which you will see if you comb through this blog site). But knock it off with the American flags, the Constitution, guns and religion, none of which have anything to do with lowering taxes.

Unfortunately for Tea Party “logic,” they not only want lower taxes, but lower deficits and less government. At the same time, they want a stronger army, better schools, federal supervision of banks and other financial firms, better roads, defense of our borders, defense against terrorism, safer food, better retirement, better unemployment insurance, police, health care, rescue from hurricanes and other disasters, more jobs and a better environment.

Hey, Tea Party. The things you want cost money. So if you want both lower taxes and a reduced deficit, where will the money come from? Cutting both taxes and the deficit requires dramatically reduced government spending. So, how will that get you the things you want? It won’t. All it will get you is a Sarah Palin.

Sure, raw, mob emotion can make you feel strong. Look what it did for Joseph Goebbels. But eventually, morning will come and you will realize your torches, pitchforks and white sheets were silly. Only then, can we have the rational discussions that will help us create and take the steps to improve our nation.

Sadly, the “T” in Tea Party does not yet stand for “Think.”

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


–Watch Ben Bernanke’s high wire balancing act

An alternative to popular faith

April 14, 2010: By JEANNINE AVERSA, AP Economics Writer; WASHINGTON – “Federal Reserve Chairman Ben Bernanke […] testifying before Congress’ Joint Economic Committee, also once again called on lawmakers and the White House to come up with a plan to whittle down record-high budget deficits.”

Ben Bernanke is a smart man. He knows federal deficits are nothing more than a balance sheet measure of money created by the federal government. He knows the $12 trillion debt merely is a statement that in the history of the United States, the federal government has created $12 trillion net dollars. He knows that to “whittle down record-high budget deficits” is another way to say, the government should create and spend less money.

But also knows the federal government cannot default on debts of any size, and creating and spending money stimulates economic growth. So, he favors continuing federal stimuli (aka deficit spending).

If you think that is a mixed message consider this: He said, “A credible plan to pare the deficit could provide the economy with benefits in the near term, including lower longer-term interest rates and increased consumer and business confidence.” And, “A moderate U.S. economic recovery is likely to warrant very low interest rates for a long time.”

First, he says the deficit should be reduced in order to lower interest rates. Then, he says the Fed will keep rates low for a long time. Question: If the Fed can keep interest rates low for a long time, why does Bernanke need a plan to whittle down deficits?

Is it to avoid inflation? There is widespread belief that large deficits cause inflation, despite history saying otherwise. See: Deficits, inflation and hyperinflation And though raising interest rates prevents and cures inflation, the Fed believes it must keep rates low to “increase consumer and business confidence.”

What’s a guy to do? He keeps rates low and deficit spending high. But, he knows the public believes deficits are too high (This is the same public that wants neither tax increases nor to forgo the benefits stimulus spending buys. It wants a magical deficit decrease.) So Bernanke, by seeming to agree with the public, takes the political route, saying in essence, “Those high deficits aren’t my fault. Blame Congress and the President. I’m just doing what’s necessary to help the economy,” (which, don’t tell anybody, means running big deficits and keeping rates low).

The balance is not between what’s good and bad for the economy. That’s the easy part. The balance is between what’s good for the economy and what’s good politically. They are quite different, and the high wire balancing act is tough.

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