Tag: money

–Economic disaster: Congress in agreement

The debt hawks are to economics as the creationists are to biology.

By Z. BYRON WOLF ABC News; July 27, 2010; “Debt Commission: Dealing With Federal Debt Likely To Require Tax Hikes, Spending Cuts. On both sides of the aisle, lawmakers are coming to terms with hard political fact: services are going to have to be cut and taxes are going to have to go up to keep the $13 trillion-plus national debt from skyrocketing into infinity and beyond.”

Our leaders have no idea what they are talking about. Cutting services and raising taxes is not a “hard political fact.” These are the absolute worst steps we could take, not just unnecessary, but massively harmful to our economy. The infamous DEBT COMMISSION, whose assignment it is to reduce the economy’s money supply, is akin to a “blood commission,” whose job it is to reduce the blood supply. Money is the lifeblood of an economy.

The same people who complain there are not enough jobs, also want to reduce money creation, the very thing that creates jobs. Our leaders act like doctors, who apply leeches to cure anemia. The country needs lower taxes, not higher. The country needs more federal spending, not less. These politicians, totally ignorant about economics, make economic decisions with the expected result.

And don’t be fooled by statements that taxes only will be increased on the rich. That simply is not true. All taxes destroy money. Period. Destroying any money, whether currently owned by rich or poor, decreases the total money supply, which hurts the entire American economy. You cannot drain water from only one end of a bathtub. A tax on Bill Gates hurts us all. It benefits no one.

And what are the “unnecessary” services that will be cut? See: SERVICES, and decide what we should eliminate — remembering that eliminating any federal spending reduces the money supply.

I cannot express in stronger terms how outrageously harmful this all will be. I urge you to contact your Senators, your Representatives and your media, and tell them to learn economics before making these terrible economic decisions that absolutely, positively will injure us all.

If Congress were employed by Al-Qaeda, they could not hurt America more than they now wish to do. If someone told you, “I have a plan to destroy billions or even trillions of American dollars,” you rightfully would brand him a traitor. More countries die from enemies within than from enemies without.

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

No nation can tax itself into prosperity

–Less debt . . . oh, wait. More debt.

An alternative to popular faith

The 6/30/10 editorial in the Chicago Tribune, titled, “Enough debt, already,” had me confused. At first I thought they meant private debt. After all, consumers now deal with mortgages they can’t handle and credit cards charging 20% or more interest. And business profits, or lack thereof, won’t support much more debt without increased consumer buying. Consumers and businesses are going bankrupt in droves, so at this stage of the recession, “Enough debt, already” seems like good advice for the private sector.

But no, that is not what the Tribune meant. They wanted less federal debt and more private debt. The federal government has the unlimited ability to pay any debt of any size. It is a government that neither needs nor uses tax money to pay its debts. Yet the editors say, “. . . the U.S. has gone way, way down the path toward unsustainable debt . . .”

Will the government be unable to service its debts? No, that cannot happen. So, what makes federal debt “unsustainable”? The Tribune editors never say. However they call for more lending to business, despite the fact that growing business debt can be unsustainable. To make matters worse, the Tribune cheers the restriction on unemployment checks to those people who would have used those checks to buy things from businesses, thereby stimulating business. (“Unemployment checks extending up to 99 weeks instead of the usual 26 add more indebtedness.”)

The editors correctly say, “The U.S. economy is hungry for credit,” not realizing this means the U.S. economy is hungry for money, and federal deficit spending is the government’s method for adding money to the economy. The editors lament, “Washington already has bequeathed to our descendants a nation debt of $13 trillion,” – an untrue statement – and simultaneously wants to bequeath to our descendants added business debt. (Who do they think pays for business debt?)

To summarize: The Tribune editors oppose debt creation by the one entity that can afford unlimited debt service, but advocate more debt for the over-extended private sector. They support looser lending standards, so that less qualified businesses can go deeper into debt. They oppose increasing regulations on lenders, the same lenders whose unsupervised, profligate lending triggered the recession. They favor the end to federal stimulus plans, which would add the money they say the economy needs. And they hope the economy will recover — somehow.

Clearly, economics is not the Tribune editors’ forte.

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

No nation can tax itself into prosperity

–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