Tag: money supply

–The End of the Euro

An alternative to popular faith

Greece is criticized for secretly borrowing. The fault is not with Greece. The fault is with the euro.

The European Union wants Greece to cut its debt, either by raising taxes, reducing expenditures or both. If Greece does any of the above, it will dive into a depression and pull the other members down with it.

The current situation exposes the fundamental flaw with the euro: It is a gold standard in fancy clothes. Like the gold standard, the euro precludes any member nation from controlling its own finances. The solution to a recession, and indeed, the requirement for economic growth, is government deficit spending. Yet no member of the European Union has the unlimited power to do this. They are restricted by the covenants of the Union.

The grouping of countries under the euro banner is akin to a gold standard, whereby every country is required to peg its currency to a value over which it has no control.

The gold standard failed, and always must fail, because it prevents countries from taking the necessary steps toward economic growth. A growing economy requires a growing supply of money, and deficit spending is the system by which a government increases its money supply.

In 2005, noted economist Professor Randall Wray invited me to speak at the University of Missouri, Kansas City. In this speech I said, “Because of the Euro, no European nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the Euro.”

The Euro will fail, just as the gold standard failed, and for the same reason. To attain the modest convenience of easier intra-European trade, the European countries surrendered control over their individual financial destinies. Only a total merger of national governments — a United States of Europe — could make the euro viable.

Rodger Malcolm Mitchell
www.rodgermitchell.com

–Robin Hood Obama takes from rich and poor

An alternative to popular faith

        You have been led to believe recessions are an unavoidable part of the natural business cycle. Like bad weather, there is nothing we can do to prevent them, and when they come, we simply must deal with them.
        Wrong. Recessions neither are unavoidable nor natural. They always occur because of mistakes, both innocent and deliberate, by our political leadership.
        Today we experience a classic example. For the past two years, the economy has experienced a money shortage, also known as a recession. In belated response, the government properly has pumped stimulus money into the economy via deficit spending. This addition of money to a money-starved economy is beginning to help (though the stimulus has been too little and too late — but that’s another story.)
        Where did the government obtain the stimulus money? Not from taxpayers. The definition of “deficit spending” is money spent without taxes. The government created the money simply by crediting bank accounts and debiting its own balance sheets. Despite what the media say, tax payers and tax money, which never pay for federal spending, were not involved.
        Read this article — wording in green:

“1/15/10: WASHINGTON — President Barack Obama told banks Thursday they should pay a new tax to recoup the cost of bailing out foundering firms at the height of the financial crisis.”
        If stimulus spending helps the economy grow, what will new taxes do? Right. Help the economy shrink.

“‘We want our money back,’ he said.”
        He neglected to indicate who “our” is. Surely not the American public, who have paid, and will pay, nothing for the bank bailout funds. And why does the government want the money? It has no use for it. In fact, money sent to the government immediately is destroyed when federal balance sheets are credited. The government has the unlimited ability to pay bills by crediting bank accounts. Unlike you, me and every other U.S. entity, the government does not use income to pay its bills.

         “In a brief appearance with advisers at the White House, Obama branded the latest round of bank bonuses as ‘obscene.’ But he said his goal was to prevent such excesses in the future, not to punish banks for past behavior.”
        Typical populist rhetoric, fomenting class warfare. He’s a benevolent Robin Hood, taking from the rich and, oh yes, also taking from the poor by removing money from the economy. Taxing banks does punish them, but President Obama doesn’t want to punish banks. Sure. Believe that and I have some costume jewelry I want to sell you.

        “The tax, which would require congressional approval, would last at least 10 years and generate about $90 billion over the decade, according to administration estimates. ‘If these companies are in good enough shape to afford massive bonuses, they are surely in good enough shape to afford paying back every penny to taxpayers,’ Obama said.”
         That’s $90 billion to be ripped out of the economy and destroyed. Does anyone really believe they will see one penny of that $90 billion? Does anyone believe that will put even one nickle in their pockets? If so, contact me about that jewelry.

         “Advisers believe the administration can make an argument that banks should tap their bonus pools for the fee instead of passing the cost on to consumers.”
         Instead of paying bonuses and salaries to living people, who then will pass the money on by spending and saving, the government wants the money extracted from the economy, then sent to the government, where it will be destroyed. (If you don’t believe the government destroys all money sent to it, tell me where the government stores the tax money it receives.)
        By the way, did I mention that President Obama has other populist taxes in store for you? Think about the tax on what he calls “Cadillac” health plans.
         And this is why future recessions are certain. They neither are normal nor unavoidable. They are caused by politicians who either through ignorance or populist electioneering, actively cause recessions.
        If banks don’t want to pay this extra tax, and unions don’t want the “Cadillac health plan” tax, they will have to bribe Democratic legislators to vote “properly.” This is the old political trick of proposing something onerous, so the prospectively injured party pays up. Cynical, but effective, and no one ever said President Obama is not an effective politician.

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

–Why the real estate collapse?

An alternative to popular faith
        Why did we endure a real estate collapse? (Some call it a bubble.) There is a difference between a boom and a bubble. A bubble is a boom that gets pricked. So first, why did we have the boom?
        The price of any commodity, including real estate, is based on supply and demand. The question is, why did demand for real estate rise faster than the supply for more than 60 years, then suddenly fall?
        Fed haters will tell you the reasons for the collapse were low interest rates and lack of federal credit supervision. I suggest this is somewhere between overly simplistic and just plain wrong. There were many reasons for the boom, and several for the collapse:
        As for the boom, one reason may be that too many people believed unaffordable housing was affordable. The ongoing idea was: Buy a house you really can’t support today, but rely on your future income growth to make it affordable tomorrow. The notion that tomorrow’s income increase will cover today’s unaffordable expenses might sound familiar. It’s a first cousin to a Ponzi scheme, and it’s what many young couples subscribed to.
        Add to that the “safe,” insured profits lenders made, and there was strong encouragement on the credit side.
        Add to that the ridiculous tax law that gave advantages to owners, but not to renters. This was part of the governments historical efforts to help everyone own a home and live the American dream.
        Add to that the history of home value growth since WWII. Experience said, owning real estate was a “sure” way to make money. Think tulip bulbs.
        Add to that the notion that poor minorities should not be prevented from buying houses (Remember Jesse Jackson’s criticisms of the banks for redlining certain neighborhoods). A bank that refused a loan could be accused of racism. This created an influx of “entitled” home owners who not only could not afford their houses today, but never would be able to afford those houses.
        Add to that population growth that in itself increased demand.
        Add to that foreign investors, who saw the U.S. real estate boom as a great place to invest money.
        Add to that the introduction of condominiums, which made renting financially less prudent than owning.
        So there were plenty of reasons for the 60+ years boom. But then, what turned this boom into a pricked bubble? The tipping point may have been the reduced federal deficit growth rate which exacerbated all of the above factors. Because the real estate boom was a long-running Ponzi scheme, it depended on continuing increases in money flow. Ask Bernie Madoff’s investors.
        Yes, low interest rates may have had some recent effect by making property seem more affordable, but this real estate boom had continued for 60+ years, through low rates and high rates.
        Yes, lax supervision of lenders and insurers made everyone feel “bullet proof” when it came to risk. But trying to point at interest rates and supervision as the only factors making for the housing bubble, seems to miss the point.
        If you’re looking for a one-word description of what could have burst the bubble after all these years, that word may be “leverage.” Real estate was purchased with mortgage leverage. These mortgages then were leveraged by being bundled with many mortgages, that leverage being a version of the law of large numbers. (The failure of a small and predictable number of mortgages is distributed harmlessly over a large number of mortgages.)
        The next layer of leverage came from the belief that such organizations as Fannie Mae and Freddie Mac really were government sponsored, and so were absolutely safe.
        An additional layer of leverage was insurance, which fundamentally is a leveraged product (A small number of failures is distributed harmlessly over a large number of insureds.)
        Still one more layer of leverage was added when massive futures trading of insurance was adding to the mix.
        Ultimately, the leverage became so great, that a few billion dollars of real estate supported many trillions of investment. Every change in real estate supply and demand became magnified exponentially.
        In 2004, Federal Debt held by private investors increased 14% from the previous year. Subsequent annual increases declined to about 4% in 2007. The government pumped money into the economy too slowly to support a real estate demand that depended on faster growth.
        Those whose investments relied on greater growth in real estate values, began to feel a pinch, and the massively leveraged house of cards swayed more and more until it tumbled down.
        Previous reductions in federal debt growth almost always had led to recessions, but now the leverage was too great for just a small recession. After a series of smaller economic earthquakes, each caused by reduced deficit growth, this was (as they say in California) the big one.
        In short, the real estate bubble didn’t grow and burst because of something that happened recently. It grew and burst because of many policies that, beginning with the end of WWII, built leverage higher and higher, until a cause that previously had warned us with a series of small recessions, now collapsed into a big recession.
        This leaves us with the question, what has the government now done to reduce the fundamental cause of the bubble burst, leverage? The government has added money. Adding money does provide a temporary solution, but to prevent future bubble bursts, the government also must reduce the various sources of leverage.
        Requiring larger down payments, eliminating the sale of bundled mortgages, eliminating underfunded insurance and eliminating futures trading of mortgages, might be worthwhile for discussion.

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

–How the federal budget really works

An alternative to popular faith

A parable about the Fed budget:

We shall call him “Mr. Fed.” He has an unruly daughter named “Taxpay,” whom he wishes to encourage toward goodness, while teaching her basic budgeting. So Mr. Fed tapes two sheets of paper to the refrigerator.

One sheet is titled “Taxpay Savings.” The other sheet is titled “Deficit Scoresheet.” Each day when Taxpay is good, Mr. Fed will draw a checkmark on her Savings sheet, and because he is teaching her double-entry accounting, he also will draw a checkmark on his Deficit Scoresheet.

Taxpay wants these checkmarks, because Mr. Fed will allow her to use them to buy things like staying up late or having friends for a sleepover. She trusts Mr. Fed to exchange these goods and services for checkmarks (In some quarters this trust is known as “full faith and credit.”) Also, if she is bad, Mr. Fed will tax her, so she needs checkmarks to pay any “bad girl” taxes she might incur.

All of the first week, little Taxpay is good, so by the end of the week she has accumulated 7 checkmarks on her Savings sheet. Similarly, Mr. Fed has drawn 7 checkmarks on his Deficit Scoresheet.

The system works so well, Mr. Fed tells Taxpay that from now on, he will give her 2 checkmarks for every day she is good, which of course requires that he also draw 2 checkmarks on his Deficit Scoresheet.

This is no problem for Mr. Fed who has plenty of pencils to draw checkmarks. But it outrages a visiting busybody named “Debthawk,” who asks Taxpay the nonsensical question, “Who is going to give Mr. Fed checkmarks to reduce the number of checkmarks on his Scoresheet?”

Puzzled, little Taxpay asks, “Huh? Why does Mr. Fed’s Deficit Scoresheet need to be reduced? It’s just a scoresheet for accounting purposes. The checkmarks don’t cost Mr. Fed anything. They are free, backed by nothing. They merely are arbitrary symbols that Mr. Fed can draw in unlimited quantities. They are exactly like the dollars the federal government produces, now that we are off the gold standard – arbitrary symbols, free and backed by nothing other than full faith and credit.”

Taxpay is pretty smart for a little girl, obviously smarter than Debthawk, who keeps insisting that one day Taxpay’s children and grandchildren will have to give Mr. Fed checkmarks to offset those on the Deficit sheet. Debthawk calls this “inter-generational transfer.”

In short, Debthawk wants a “balanced budget,” aka “deficit neutral” which means every time Mr. Fed gives Taxpay a checkmark, she should give it back. Think about the sense of that.

The first day of the next week, Taxpay is bad, so Mr. Fed taxes her. He erases a checkmark on her Savings sheet, and also erases a checkmark on his Deficit Scoresheet, reducing the Deficit Score to 6 checkmarks. Debthawk is thrilled, failing to notice the reduction on Taxpay’s Savings sheet.

Taxpay then decides to spend all her remaining checkmarks for permission to have a dozen friends at a sleepover. Mr. Fed erases all her Savings checkmarks and simultaneously erases all the checks on his Deficit Scoresheet. At first elated to see the Deficit Scoresheet having no checkmarks, Debthawk belatedly realizes that Taxpay now has no checkmarks left to pay for future goods and services. This puts everyone into a Great Depression, at which time Debthawk says, “I always knew that in emergencies like this one, Mr. Fed would have to add to his Deficit Scoresheet so Taxpay would have checkmarks.” (Of course he did.)

But, the minute Mr. Fed started to give Taxpay more checkmarks, Debthawk again complained about there being too many checkmarks in the Deficit Scoresheet. Poor little Taxpay. Debthawk wants to take away her precious checkmarks, and because his mind is closed, she can’t seem to convince him that is unnecessary.

And that is the way the federal budget really works.

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

Faith is belief without evidence. Science is belief from evidence.