Tag: money

–Three misunderstood, economic truths

An alternative to popular faith

        Three economic truths: Federal deficit spending is necessary for economic growth; all money is debt; federal taxes do not pay for federal spending.
        For you and me, running a financial deficit is bad. Deficits can deplete our personal money supply, reducing our ability to pay bills. Similarly, when a corporation or a city, county or state runs a financial deficit, their ability to pay bills is reduced.
        However, despite what the media, the politicians and the economists tell you, when the U.S. government runs a deficit, that is good – in fact, necessary.
        By definition, a large economy has more money than does a small economy. So, a growing economy must have a growing supply of money. Federal deficit spending is the way the government adds growth money to the economy. Because the federal government has the unlimited power to create money, it never can run short of money to pay its bills.
        Every form of money is a form of debt. Bank savings accounts, checking accounts, money market accounts, CDs, travelers’ checks, corporate bonds and T-bills all are types of debt and money. Even the dollar bill is a debt of the federal government, which is why it has “federal reserve note” printed on it. “Bill” and “note” are words describing debt.
        As debt and money are identical, a growing economy must have a growing supply of debt. It can be personal debt, corporate debt, city, county and state debt, and it can be federal debt. All debts, except federal debt, are limited by the debtor’s ability of pay, and excessive debt can lead to bankruptcy. This makes federal debt the safest form of debt. It can grow endlessly, without causing bankruptcy.
        One counter-argument is that foreign countries (especially China) will refuse to lend us money. But, we don’t need to borrow from China or from anywhere else. We borrow by creating T-securities out of thin air, then selling them. This process is a relic of the gold standard days, when the government did not have the unlimited ability to create money. Today, the government does not need to create and sell T-securities. It merely can create money, also out of thin air. The processes are functionally identical. The end of federal borrowing would end concerns about federal debt. Rather than discuss “debt” we would discuss “money created.”
        A second counter argument is that printing money causes inflation. Examples are given of pre-war Germany, China and Brazil, which suffered hyper-inflation, a different process. Hyper-inflation occurs if a government prints money in response to inflation, when the proper response is to raise interest rates. Since WWII inflation has not been caused by excessive money printing, but rather by excessive oil prices. The largest, recent inflationary period came during the modest Carter deficits. The massive Reagan deficits saw inflation decline. Making money more valuable by raising interest rates, prevents and cures inflation.
        The media tell us the federal government spends “taxpayers’ money” or “our grandchildren’s money.” Neither is true. Other governments – city, county and state — do not have the unlimited ability to create money, so they spend taxpayers’ money. The federal government does not. There is no historical relationship between federal deficits and tax rates. The federal government literally destroys incoming tax money, and creates new money to pay its bills. There is no federal “bill-paying” account funded by taxes.
        Federal debt has increased 1400% in just the past 30 years, and the government never has had any difficulty paying its bills. Were taxes to fall to $0, this would not affect by even one penny, the government’s ability to pay its bills.
        In summary, much of what the media, the politicians and the economists tell you about our economy either is obsolete or always has been wrong. The lack of understanding that federal deficits are different from all other deficits has prevented universal health care and improvements in education, pension support, the ecology, the infrastructure, energy, the military and numerous other situations.
        The misguided fear of inflation or taxes, neither of which is exacerbated by federal deficit spending, has paralyzed our ability to solve the most pressing problems of today.

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

–Understanding Federal Debt. Full Faith and Credit

An alternative to popular faith

Why do we have recessions and depressions? Are they inevitable and unavoidable? Why do we have inflations? Are they preventable and curable?

This short post will give you a basis for answering these vexing (especially to the politicians, the Fed and the media) questions.

1. By definition: A larger economy has more money than does a smaller economy. California has more money than does Los Angeles, which in turn, has more money than does Anaheim.

2. Therefore: To grow larger, an economy requires a growing supply of money.

3. All forms of money are debt. Although there are many definitions of money, every form of modern money – bank accounts, money market accounts, traveler’s checks – is a form of debt. Even currency is a debt of the government. That is why a dollar “bill” has “federal reserve note” printed on it. “Bill” and “note” are words signifying debt (as in “T-bill” and “T-note.”)

4. Therefore: To grow larger, an economy requires a growing supply of debt/money.

5. The safest form of debt/money is federal debt/money. There are many types of debt – personal debt, corporate debt, state and local government debt, federal debt – but after 1971, the end of the gold standard, only the federal government has had the unlimited ability to create money to service its debt. All other debtors go bankrupt when they are unable to service their debts. The end of the gold standard marked the biggest change in economics during the 20th century. Most key economic hypotheses became obsolete in 1971; economists who did not change in 1971 are themselves obsolete.

6. All debt requires collateral. The collateral for federal debt is “full faith and credit.” This may sound nebulous to some, but it actually involves certain, specific and valuable guarantees, among which are:
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.

7. The value of debt (money) is based on supply and demand. An increase in supply makes the value go down. An increase in demand makes the value go up.

8. The demand for debt (money) is based on risk and reward. The risk of owning debt (money) is the danger of inflation. The reward for owning debt (money) interest rates. High reward with low risk makes demand go up which makes value go up.

9. Inflation compares the value of debt (money) with the overall value of goods and services. Fighting inflation requires increasing the reward for owning debt (money) and/or reducing the supply of debt (money). However, because a growing economy requires a growing supply of debt (money), reducing the supply leads to recessions and depressions, making supply-reduction a poor choice for fighting inflation.

10. For every borrower there is a lender. To the degree lowering interest rates helps borrowers, it equally hurts lenders, both of whom are part of the economy. The Fed lowers interest rates, believing this helps businesses that are borrowers, neglecting the fact that it equally hurts businesses that are lenders. That is why the 20 rate reductions preceding and during the recession, neither prevented nor cured the recession.

You now know how to begin to answer the questions in the first paragraph.

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

–More “debt bomb” nonsense

An alternative to popular faith

Well, they just keep on doing it. The February 8, 2010 Forbes Magazine’s cover story is titled, “The Global Debt Bomb,” by Daniel Fisher.

It contains the usual scary words, for instance: “The world has issued so much debt in the past two years fighting the Great Recession that paying it all back is going to be hell –for Americans, along with everybody else. Taxes will have to rise around the globe, hobbling job growth and economic recovery.” Etc., etc., etc. You get the idea.

Never mind that this is exactly the same “sky is falling” commentary — even using the words “debt bomb” — we have been hearing from pundits since 1940 (See https://rodgermmitchell.wordpress.com/2009/11/24/federal-debt-a-ticking-time-bomb/). Never mind that “government debt” is an exact synonym for “government money,” which needs to grow if an economy is to grow.

Never mind that “paying it back” is not, and since 1971 (the end of the gold standard) never will be, a problem for a sovereign nation with the unlimited ability to create money. Never mind that using this unlimited ability has not caused inflation, which in any event could be cured by raising interest rates. And never mind that taxpayers do not pay for federal debt and tax rates are not related to federal debt.

In short, never mind history, and just keep making the same old, wrong predictions, using the same old words, because let’s face it, fear-mongering sells magazines, and why make up new words when cribbing the old words is so much easier.

Pick up that issue of Forbes, read Fisher’s article, and wherever you see the word “debt” replace it with the word “money.” That will show you the reality. Also, if you know how to contact Fisher, you might ask him to supply historical proof that, as he says, “. . . the taxpayer will have the devil to pay.”

Rodger Malcolm Mitchell
www.rodgermitchell.com

–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