–The federal deficit debate

An alternative to popular faith

THE WELL-KNOWN, ANTI-DEFICIT POSITION
A federal surplus is more prudent than a federal deficit

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
That is the popular faith.* But, a large economy has more money than does a small economy. Therefore, a growing economy requires a growing supply of money. Federal deficit spending is the prime source of that money. All six recessions, since the end of the gold standard (1971), have been introduced with a surplus or a reduction in deficit growth. All six were cured with an increase in deficit growth. When we have insufficient money growth we have recessions or depressions. The Great Depression immediately followed years of surpluses, and ultimately was cured with deficits.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
Large deficits are unsustainable. The interest payments alone will grow to a point where they occupy the entire federal budget.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
Unlike you, me, cities, states and corporations, the federal government uniquely has the power to create unlimited amounts of money, a power it gave itself in 1971. To service a deficit of any size, including interest payments, the government merely creates money ad hoc, by crediting the bank accounts of creditors.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
We cannot keep borrowing forever. Foreign nations will refuse to keep lending us money to support our profligate ways.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
The government does not need foreign nations to lend us money. The federal government borrows by creating unlimited amounts of T-securities from thin air, backed only by full faith and credit, then selling them for the money it previously created. The government just as easily and safely could create money from thin air, also backed by full faith and credit. This would eliminate the borrowing step as well as all concerns about debt. Federal borrowing is a relic of the gold standard days.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
The fact that the government borrows is prima facie evidence that the government needs to borrow.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
Federal borrowing is a relic of the gold standard years, when the government did not have the unlimited ability to create money. Today, borrowing has zero advantages over direct money creation, and many disadvantages, not the least of which is the mistaken belief
federal debts are a problem.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
Federal deficits increase the money supply, which reduces the value of money and causes inflation.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
The value of money is based on both supply and demand. Increasing the demand for money prevents/cures inflation. Demand is determined by risk and reward. The reward for owning money is its utility as an exchange vehicle and interest rates. To fight inflation, the government increases the reward by raising interest rates. Since 1971, there has been no relationship between inflation and federal deficits.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
Raising interest rates to fight inflation will hurt business and the economy.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
Since 1971, there has been no relationship between interest rates and economic growth. Low rates have not stimulated (as Greenspan and Bernanke have learned); high rates have not inhibited. The reason: For every borrower there is a lender. What helps one, hurts the other. It’s zero sum. For example, high rates help holders of CDs, bonds, T-securities. Also, changes in interest rates represent minuscule changes in business costs. Additionally, high rates have had a slightly stimulative effect, because they’ve forced the federal government to pump more interest money into the economy.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
Our children and grandchildren will pay for today’s deficits through higher taxes in the future.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
The government pays its debts by marking a credit in the bank accounts of its creditors, and marking a debit in its own balance sheets. No physical money changes hands. The government can do this endlessly. It does not use tax money to pay its bills. When taxes are received, the government debits the payers’ bank accounts and credits its own balance sheets. Effectively, the tax money is destroyed. The government has no vault or fund of money. It merely makes electronic notations. That is why today’s taxpayers do not pay for the massive Reagan deficits. There is no historical relationship between tax rates and federal deficits.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
There is no such thing as a free lunch. One day, someone will have to pay for today’s federal spending.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
Federal money is, in fact, a free lunch to the federal government. It pays its bills by crediting vendors’ bank accounts. This costs the government nothing other than a few electrons sent to the banks’ records. Nothing collateralizes our money other than full faith and credit.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
When the debt exceeds the value of all government assets, the government will be bankrupt.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
Federal assets, such as the Grand Canyon and Washington Monument do not collateralize our money. As a holder of U.S. bonds, China is a creditor to the government, but China cannot lay claim to such federal assets as Lake Michigan or the Supreme Court building. China’s collateral is the U.S. government’s full faith and credit, nothing more.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
I have to pay my bills and be careful with my borrowing. Otherwise I will go bankrupt. The government is you and me. It must do the same as we do.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
The government is not you and me. It collects taxes; we pay taxes. It can create money at will; we cannot. As a sovereign nation, with the unlimited ability to create money, America cannot go bankrupt. The belief that the government is the same as its citizens gives rise to the myths about deficits.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
As our population ages, and more people collect Social Security, the program will go bankrupt unless taxes are increased or benefits decreased.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
Social security is a federal agency, much like the Department of Defense, Congress, the Supreme Court and 100+ other federal agencies. No federal agency ever has or ever will go bankrupt, simply because the federal government itself, having the unlimited power to create money, cannot go bankrupt.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
Technically, the government already is bankrupt, since it doesn’t have the money to pay all its debts, and must rely on future tax collections.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
The government has no money, yet doesn’t rely on tax collections. It pays its debts merely by changing the numbers in its creditors bank accounts. The government acts like a football scoreboard. When a team scores a touchdown, the scoreboard “owes” it six points. No one asks, “Where is the scoreboard going to get six points?” This is explained in detail at http://www.moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
Many countries – Germany, Italy, Brazil et al – have suffered from hyper-inflation caused by excessive money printing.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
Each instance of hyper-inflation has been caused by unique circumstances, but generally, hyper-inflations have been caused by governments not addressing the root causes of their inflations. They mistakenly printed more money in response to inflation. This exacerbated modest inflations into hyper-inflations.
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THE WELL-KNOWN, ANTI-DEFICIT POSITION
Most prominent economists believe the deficit and debt are too large.

THE LITTLE-KNOWN, PRO-DEFICIT POSITION
That is exactly the way scientific progress is made. The vast majority of prominent scientists have a belief. Then a minority (sometimes just one person) proposes a new hypothesis, which at first is denounced. Eventually the vast majority begins to change its mind, and the new hypothesis becomes the majority. Then the process repeats.

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

–The China trade deficit myth

An alternative to popular faith

For years, there has been increasing concern about our growing trade deficit, especially with China. But do trade deficits really benefit us?

China creates the goods/services we want and sends them here in exchange for dollars. The goods/services are scarce to China. Time, manpower and physical resources are necessary for their creation. By contrast, dollars are not scarce to the U.S. Our government has the unlimited power and authority to produce dollars, without using any resources, whatsoever. The press of a computer key sends billions of dollars from our government to anywhere. Lately, many have gone into our economy as a stimulus.

A trade deficit is an example of one country devoting great effort to creating scarce materials for another country in exchange for something that requires no effort by the other country. In that sense, China is our servant. They work, sweat and strain and use their valuable resources to create and ship to us the things we want, while we, hardly lifting a finger, ship dollars to them. Who has the better deal?

Obviously, for any given individual, the situation is different. None of us has the unlimited ability to create dollars. We have to work hard for our dollars. Dollars are scarce to each of us. But when we talk about trade deficits, we are talking about governments, and there the situation changes. Dollars are not scarce to the U.S. government.

To satisfy our desires, China could ship us every yard of cloth and every ounce of steel in their country; they could burn all their coal and oil; they could employ every man, woman and child in dismal sweatshops; they could empty their nation of all physical resources, and still we would have plenty of dollars to send to them, simply by touching a computer key.

This may be more easily understood by looking at Saudi Arabia, with whom we also have a trade deficit. One day, the Saudis will have sent us every drop of their oil, leaving their country a hollow, empty sand dune, while we blithely will go on producing dollars. Who has the better deal?

Of course, as monetarily sovereign nations, China and Saudi Arabia are able to create as much of their own money as they wish. They don’t need to work so hard to send us their precious resources in exchange for our money. But that’s a discussion for another posting.

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

-How to eliminate federal debt and save the economy

An alternative to popular faith

Here is the solution to the federal debt problem — a solution that involves neither increased taxes nor reduced spending.

The federal debt is caused by deficit spending. Taxpayers do not pay for deficit spending, which by definition is spending above tax receipts. Yet taxpayers find the debt worrisome for two reasons: They incorrectly believe someday, they or their grandchildren will have to pay it, and they incorrectly believe large federal deficits cause inflation.

Those concerns affect efforts to improve our health care system, crumbling infrastructure, bad schools, excessive taxes, bankrupt states, Social Security funding, poverty, joblessness and homelessness, Internet service, NASA funding, military funding, disease research and repeated recessions. The solutions require deficit spending, which debt fear prevents.

Currently the government obtains money for deficit spending by borrowing. It borrows by creating T-securities (T-bills, notes and bonds), then selling them. These T-securities are created in unlimited quantities out of thin air. This method, though still used, actually became obsolete in 1971, when President Nixon took us off the last vestiges of the gold standard. Before then, T-securities were collateralized in part by gold, which limited their issuance. Today, they are collateralized solely by the “full faith and credit” of the federal government, a resource the government has in unlimited supply.

Just as the government now creates T-securities out of thin air, it as easily and prudently could create money directly – also out of thin air and also backed only by full faith and credit.

Ending the creation and sale of T-securities would end the creation of debt. No longer would we suffer over deficits, fears that nations might refuse to lend to us and fears our path is “unsustainable.” Rather than “deficit spending” the process would be called “money-creation,” and what now is called “debt,” would more properly be called “Net Money Created.”

By eliminating debt, we would eliminate taxpayers’ concerns they or their grandchildren would pay it. Further, because the federal government now controls not only the supply, but the demand for U.S. money (via interest rates), large federal deficits have not caused inflation. See chart, below:

Since we went off the gold standard, there has been no relationship between deficits and inflation.

The elimination of T-securities would allow us to create the money to solve our many economic problems and to prevent the negative economic consequences of tax increases or spending decreases.

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

–Federal Debt/GDP– A Useless Ratio

An alternative to popular faith

Lately, we’ve heard a great deal about the federal debt/GDP ratio.

The Investopedia says, “The debt-to-GDP ratio indicates the country’s ability to pay back its debt.” This ratio often is quoted in stories predicting the demise of America if federal debt continues to rise and especially if the debt ever were to exceed 100% of GDP. (Since we are about to hit that level, and we still exist, the debt hawks now have moved the time of Armageddon too 200%. But Japan is there already, so maybe move it to 300%?)

This nonsense ratio is so important, the European Union once required, as a condition of membership, the ratio of gross government debt to GDP not to exceed 60% at the end of the preceding fiscal year.

What would you say if I told you the total number of hits the Chicago Cubs made in 2008 is 47% of the total number of runs the Cubs have scored in all of their 100+ year history?

You might well say, “Huh? What does one thing have to do with the other? One is hits; the other is runs. One is 100+ years; the other is one year. It’s classic apples vs oranges.” And you would be right.

Yet, that is exactly what the debt/GDP ratio represents. Federal “debt” is the net amount of outstanding T-securities created in the history of America. The GDP is the total dollar value of goods and services creating this year. The two are unrelated. The federal government does not use GDP to service its debt.

Actually, federal “debt” is not even related to federal “deficits” by function, though the two are related by law. During the gold standard days, the Treasury was required by law to issue T-securities in the amount of the federal deficit.

It was necessary then, because the Treasury could only produce money in the amount of gold reserves. In 1971, we went off the gold standard, which gave the Treasury the unlimited ability to create money.

The creation of T-securities no longer is necessary; it is a relic of the gold standard days. A government with the unlimited ability to create dollars does not need to borrow those dollars.

The government “borrows” by creating T-securities out of thin air, backed only by full faith and credit. Purchasers of T-securities instruct their banks to debit their checking accounts and credit their T-security accounts at the Federal Reserve Bank.

No dollars are created or destroyed.

Then, to “pay off” its debt, the process is reversed: The government merely transfers dollars from T-security accounts (essentially bank savings accounts) back to checking accounts.

Again, no dollars are created or destroyed.

Today, Japan’s ratio is above 200%. The U.S. ratio is near 100%.

monetary sovereignty

By contrast, Russia’s, Chile’s, Libya’s, Qatar’s and others are below 10% – which tells you nothing about their economies, but says a great deal about the meaningless Debt/GDP ratio.

As for GDP indicating “the country’s ability to pay back its debt,” again we have apples/oranges. The value of goods and services created by the private sector, has no relationship to the federal government’s ability to transfer dollars from T-security accounts at the FRB to checking accounts at private banks.

Finally, Debt/GDP (shown as “FYGFDPUN/GDP”) has no relationship to inflation:

Debt/GDP vs inflation