What is the complex relationship among inflation, deficits, interest rates, oil prices, tax cuts, and GDP? Saturday, Mar 17 2018 

It takes only two things to keep people in chains:
.

The ignorance of the oppressed
and the treachery of their leaders.

——————————————————————————————————————————————————————————————————————————————————————————–

To answer the title question, we begin with three questions:

  1. What is the primary cause of inflation?
  2. What is the primary cure for inflation?
  3. What do high interest rates do to Gross Domestic Product?

If you ask the media, most economists, and the public to answer question #1, you probably will receive an answer something like the following:

Should we worry about inflation?
The Week, March 3, 2018

“Until recently, inflation seemed to be dead or, at least, in a prolonged state of remission,” said Robert Samuelson at The Washington Post.

Thanks to cautious companies holding down wages and prices in the aftermath of the recession, annual inflation between 2010 and 2015 averaged just 1.5 percent, “often too small to be noticed.” 

Apparently. Mr. Samuelson believes that prior to the “Great Recession,” companies were not cautious, and so were willing to pay employees more. But, having been frightened by the recession, they now refuse to pay employees more — and that has prevented inflation.

Utter nonsense. Caution has nothing to do with it.

Employers are buyers of talent. Like all buyers, employers try to pay as little as possible to obtain the employee quality they want. Isn’t that what you do when you buy anything?

Companies cannot “hold down” wages at will.

And as for prices, they are a reflection of each company’s market analysis. Companies try to set prices at levels that will provide the highest short- and long-term profits, volume, and share-of-market.

While Robert Samuelson wrongly seems to believe that business “caution” has prevented inflation, most people wrongly believe that federal deficit spending causes inflation.

The green line is inflation. The blue line is federal deficit spending.

Federal deficit spending does not parallel inflation. 

Inflation is a general increase in prices, and if there is one thing that generally increases (or decreases) prices it’s oil.

The green line is Inflation; the silver line is the price of Oil.

Oil prices parallel inflation.

No other factor so closely parallels inflation as does oil — not food, not housing and certainly not wages:

The green line is Inflation; the violet line is Wages

Contrary to popular wisdom, wage increases do not parallel inflation increases. 

In January, the Consumer Price Index, which tracks everything from the price of groceries to education costs, surged 0.5 percent; at that pace, annualized inflation would hit 6 percent by the end of the year.

It almost certainly won’t go that high, but it leaves newly installed Federal Reserve chairman Jerome Powell “facing a tricky task”: to contain inflation “without killing the economy.”

Traditionally, the Fed would respond by raising interest rates, said  The Wall Street Journal in an editorial.

Yes, while inflation primarily is caused by rising oil prices, inflation is controlled by increasing the value of the dollar, which is accomplished by raising interest rates.

(Value of the dollar = Demand/Supply; Demand=Reward/Risk; Reward=Interest)

But the corporate tax cut and President Trump’s deregulatory agenda could rapidly accelerate economic growth.

That could further fuel inflation, prompting the Fed to raise rates faster than anticipated. In the worst-case scenario, this will severely roil markets and darken the economic outlook.

Contrary to popular wisdom, economic growth does not cause inflation:

The green line is inflation. The orange line is GDP growth.

GDP growth does not parallel inflation.

The Fed’s most potent tool in fighting downturns is cutting interest rates. “Total cuts of 5 to 6 percentage points have been the norm in recent recessions.”

Wrong, again. Low interest rates do not stimulate economic growth:

The blue line is GDP growth. The red line is interest rates.

As interest rates fall, economic growth falls. There are several reasons for this, but the point is that low rates are not stimulative. In fact, by increasing the amount of interest money the government pumps into the economy, high rates can be stimulative.

Goldman Sachs expects the Fed to raise interest rates eight times over the next two years, largely to head off higher prices.

Each time the Fed raises rates, the stock market will respond negatively, only to rebound within a few days.

The negative response will be due to traders’ predictions that the market will respond negatively, not to any fundamental factors.  It is a self-fulfilling prophecy.

Finally, we come to tax cuts. Although business tax cuts ostensibly help businesses grow, by cutting business costs, tax cuts actually help shareholders profit. The real, net effect of business tax cuts is to widen the gap between the rich and the rest. 

BUSINESS The news at a glance
Taxes: Firms spend tax windfall on buybacks
The Week (US)

U.S corporations are spending most of their (tax cut) windfall not on higher wages or investment but on “buying their own shares,” said Matt Phillips in The New York Times. Over the past month, nearly 100 U.S. corporations have announced more than $178 billion in share buybacks—“the largest amount unveiled in a single quarter.”

Cisco is devoting $25 billion to buybacks; PepsiCo has announced $15 billion for shares; and Alphabet, home-improvement company Lowe’s, and chip equipment maker Applied Materials are each devoting between $5 billion and $9 billion.

“Such purchases reduce a company’s total number of outstanding shares, giving each remaining share a slightly bigger piece of the profit pie.”

“If the buyback frenzy continues, the administration is going to have some explaining to do,” said Jennifer Rubin in The Washington Post.

Part of the problem is that the Trump administration predicted that tax reform would boost U.S. household income by at least $4,000 a year.

Business tax cuts will stimulate the economy and will boost total household income, because tax cuts add dollars to (or remove fewer dollars from) the economy.

However, the benefits will go primarily to the upper-income groups.

In summary, contrary to popular opinion:

  1. Inflation has not been related to federal deficit spending but rather to oil prices.
  2. Wage increases have not been associated with inflation
  3. Inflation and economic growth have not been related
  4. Interest rate cuts have not stimulated economic growth, nor have interest rate increases slowed economic growth
  5. While business tax cuts do stimulate overall economic growth, the benefit primarily goes to the upper-income groups, thereby widening the gap between the rich and the rest.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell; Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..

THOUGHTS

•All we have are partial solutions; the best we can do is try.

•Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

•Any monetarily NON-sovereign government — be it city, county, state or nation — that runs an ongoing trade deficit, eventually will run out of money no matter how much it taxes its citizens.

•The more federal budgets are cut and taxes increased, the weaker an economy becomes..

•No nation can tax itself into prosperity, nor grow without money growth.

•Cutting federal deficits to grow the economy is like applying leeches to cure anemia.

•A growing economy requires a growing supply of money (GDP = Federal Spending + Non-federal Spending + Net Exports). Federal deficit spending grows the supply of money

•The limit to federal deficit spending is an inflation that cannot be cured with interest rate control. The limit to non-federal deficit spending is the ability to borrow.

•Until the 99% understand the need for federal deficits, the upper 1% will rule.

•Progressives think the purpose of government is to protect the poor and powerless from the rich and powerful. Conservatives think the purpose of government is to protect the rich and powerful from the poor and powerless.

•The single most important problem in economics is the Gap between the rich and the rest.

•Austerity is the government’s method for widening the Gap between the rich and the rest.

•Everything in economics devolves to motive, and the motive is the Gap between the rich and the rest..

MONETARY SOVEREIGNTY

Oil prices, deficits, inflation, the Fed and baking a cake Tuesday, Aug 29 2017 

It takes only two things to keep people in chains: The ignorance of the oppressed and the treachery of their leaders.
………………………………………………………………………………………………………………………………………………………………………………

As everyone knows, deficit spending is a primary cause of inflation — except it isn’t.

Back on April 6, 2010, we published an article titled, Federal deficit spending doesn’t cause inflation; oil does, where we demonstrated there is no measurable relationship between deficit spending and inflation — there seems to be somewhat of a reverse relationship — plus a strong relationship between oil prices and inflation.

The peaks and valleys of federal deficit spending do not match the peaks and valleys of inflation.

The reasons are straightforward:

  1. Price Inflation = (Supply of Money/Demand for Money) * (Demand for Goods & Services/Supply of Goods and Services). In plain English, increasing the Demand for Money more than the Supply of money reduces inflation.
  2. The Demand for Money = Reward/Risk. The Reward for owning money is interest. Bottom line: The Fed fights inflation by increasing interest rates, which it can do arbitrarily, instantly, and incrementally.
  3. In theory, inflation also could be fought by reducing the Supply of money, via federal deficit spending and/or increasing taxes. However, this method could not be done by any federal agency arbitrarily or instantly. (Both parties in Congress would have to debate it.) And it could not be done incrementally because Congress would need to debate how much to cut the supply incrementally, and be prepared to keep cutting, on a weekly or even daily basis, if necessary.
Monetary Sovereignty

The peaks and valleys of energy prices match closely to the peaks and valleys of the Consumer Price Index.

The cost of oil is baked into the cost of Goods & Services for almost every Good and every Service. Thus, oil price increases affect the prices of almost everything.

Though the Fed has the unfettered ability to prevent/cure inflation by raising interest rates, it always is reluctant to do so, because of the (false) belief that higher interest rates are economically recessive and lower rates are stimulative.

The peaks and valleys of the Fed Funds rate (blue), closely match the peaks and valleys of Gross Domestic Product changes (red).

Contrary to popular wisdom, raising interest rates actually stimulates the growth of the economy. One reason is higher rates require the federal government to pay more interest on its T-securities, which increases the Supply of money, which is stimulative for the economy.

All of the above constitutes a prelude to the real subject of this post: The effect of predicted increases in oil prices.

Oil demand is ‘absolutely soaring’ and the price will rise, analyst warns.
*Analyst says oil market has tightened in last 3 months
*Inventories said to be drawing at “phenomenal pace”
*This month the IEA raised demand forecast for 2017

As the market wrestles with the fallout from Hurricane Harvey, at least one analyst says the wider picture for oil is for prices to grind higher.

Last month the International Energy Agency (IEA) said global demand will outpace previous estimates in 2017.

Amrita Sen, chief oil analyst at Energy Aspects said, “Particularly if you adjust for global oil demand growth, demand is absolutely soaring right now,” she told CNBC Tuesday.fun

The analyst added that despite strong supply levels, the oil price should move higher.

“It should be going up because inventories have been drawing at a phenomenal pace over the past few weeks and months,” she added.

The Fed now is hung on its own petard. Rising oil prices will cause rising inflation, which in turn, would call for higher interest rates to control inflation.

But the Fed also is sensitive to stock market prices. And stock market prices are based less on actual sales and profits than on traders’ predictions about what the market will do in the coming weeks and months.

And because of the widespread, but false, belief that interest rate increases are functionally recessive, the Fed may be tempted not to raise rates, lest the market fall.

Here is my prediction: The Fed will be forced to raise rates as inflation pressures grow. Many stock prices will fall, due to predictions that they will fall. But, there are certain companies that benefit directly from higher stock prices.

(Disclosure: I own a few shares of a company called AGNC, which “invests in residential mortgage pass-through securities and collateralized mortgage obligations (CMOs) for which the principal and interest payments are guaranteed by a government-sponsored enterprise.”)

AGNC earns money from interest and so, reacts well to interest rate increases. But, as the old line goes, “Nothing is harder to predict than the future.” There are colliding forces at work with regard to this particular security, and indeed, to every security.  For instance:

  • The predicted Fed’s interest response to oil price changes
  • The actual Fed’s interest response to oil price changes
  • The predicted profit effect of interest rate changes
  • The actual profit effect of interest rate changes
  • The predicted profit effect of oil price changes
  • The actual profit effect of oil price changes
  • The company’s predicted response to interest rate changes
  • The company’s actual response to interest rate changes.
  • The company’s predicted business response to oil price changes
  • The company’s actual business response to oil price changes

So we have at least ten variables, and if these were the only variables, and if each variable had only two outcomes, there still could be more than 3.6 million results.

But, in fact, each variable has a multitude of outcomes, mostly having to do with the words, “How much.” (i.e. “how much” will the Fed raise interest rates; “how much” profit will each rate increase provide, etc.)

So, there can be trillions of outcomes, and this is the difficulty with prediction in economics. I can tell you why reductions in deficit spending growth lead to recessions (By definition, GDP growth requires overall spending growth, which comes from money growth, which is facilitated by federal deficit growth).

But the enormous number of variables and the differing weights of each variable make economic prediction a very, inexact endeavor.

More than ten years ago, I predicted that disaster awaited nations adopting the euro, simply because they were giving up the most valuable asset any nation can have: their Monetary Sovereignty.

But I didn’t know how much or how fast, and as it turns out, that train wreck has been different for each nation.

So, I’m guessing there will be some oil shortage, which will add some inflationary pressure, which will cause the Fed to raise interest rates some, and that will reduce most security prices some, but will increase the prices of certain interest-related securities some, so I own some AGNC.

It’s like baking a cake without measuring any ingredients.

And that could turn out wrong, but the security is trading at less than 5 times price/earnings ratio and pays a 10% annual dividend monthly.  So maybe that cake will taste good.

Rodger Malcolm Mitchell
Monetary Sovereignty

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..

THOUGHTS

•All we have are partial solutions; the best we can do is try.

•Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

•Any monetarily NON-sovereign government — be it city, county, state or nation — that runs an ongoing trade deficit, eventually will run out of money no matter how much it taxes its citizens.

•The more federal budgets are cut and taxes increased, the weaker an economy becomes..

•No nation can tax itself into prosperity, nor grow without money growth.

•Cutting federal deficits to grow the economy is like applying leeches to cure anemia.

•A growing economy requires a growing supply of money (GDP = Federal Spending + Non-federal Spending + Net Exports)

•Deficit spending grows the supply of money

•The limit to federal deficit spending is an inflation that cannot be cured with interest rate control. The limit to non-federal deficit spending is the ability to borrow.

•Until the 99% understand the need for federal deficits, the upper 1% will rule.

•Progressives think the purpose of government is to protect the poor and powerless from the rich and powerful. Conservatives think the purpose of government is to protect the rich and powerful from the poor and powerless.

•The single most important problem in economics is the Gap between the rich and the rest.

•Austerity is the government’s method for widening the Gap between the rich and the rest.

•Everything in economics devolves to motive, and the motive is the Gap between the rich and the rest..

MONETARY SOVEREIGNTY

–The failure of common sense in economics. How the President and Congress ignore economic facts and play Russian roulette with our lives. Thursday, Jul 21 2011 

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
=================================================================================================================================================================================================================

There is something of a rule in problem-solving that questions beginning with “How” are to be preceded by a thorough examination of questions beginning with “Should.” President Bush II failed to do that when he asked his advisors questions like, “How do we fight a war in Iraq and Afghanistan” and “How do we arrest Saddam Hussein.” The correct questions were “Should we fight a war in Iraq and Afghanistan” and “Should we arrest Saddam Hussein.”

A football coach does not begin with “How can we increase our passing yardage?” He begins with “Should we increase our passing yardage?” A company does not begin with, “How can we increase the number of our stores?” It begins with a thorough examination of “Should we increase the number of our stores?”

Sadly, President Obama, Congress, the media and the old-line economists work feverishly to answer the question, “How can we reduce the federal deficit?” They believe a thorough examination of “Should we reduce the federal deficit?” is unnecessary. They already “know” the answer, despite massive evidence to the contrary.

When you ask the wrong question, you find the wrong answer. Congress and the President can’t agree on an answer, because the question is wrong. It’s akin to asking, “How should we sail a ship without falling off the edge of the world?”

The correct question is, “Should we reduce the federal deficit?” Many people give perfunctory, knee-jerk answers, such as, “The deficit is not sustainable” or “Our children will pay for it.” But no answers have been based on the one, overriding, undeniable fact:

Federal deficits = net non-federal saving

Cut deficits and you cut saving. Cut saving and you cut economic growth. Cut economic growth and you enter recessions and depressions and the unemployment that accompanies them. The facts are that simple and undeniable. But, the President and members of Congress do not work from facts; they work from what each believes is common sense.

Common sense consists of beliefs most people consider obvious and sound, things “everyone knows.” Yet, your common sense may be different from my common sense, because it is affected by our different personal experiences, as well as by analogy, religion, social mores, history, logic, teaching, folklore, aphorisms, leaders and every form of information transfer, all of which vary from person to person.

The earth must be flat, not round, else the oceans would pour out. Nothing can be in two places at the same time – except in Quantum Mechanics. Running fast does not make your watch run slower – except in Relativity. If a roulette wheel lands on red five times in a row, it is more likely to land on black the next spin. Common sense.

Because common sense does not require research, it allows for fast decisions and is powerfully built into our genes. We have great difficulty departing from our common sense beliefs, because they are evolutionarily valuable. We experience and use common sense every day of our lives. We do not need research to tell us to avoid walking blindly into a street or reaching into a fire. Anyone who intentionally does these things is a “fool.”

So powerful is common sense, we angrily consider all those who depart from of our visions of common sense to be fools. Here are examples of common sense for most Americans:

1. Debt is a burden on the debtor; the more debt, the greater the burden. Debtors can be forced into bankruptcy by creditors.
2. A deficit is worse than a surplus. Outgo requires income. Taxes and borrowing pay for government spending.
3. Everything has a cost and a limit. Nothing can be created from nothing. Nothing goes on forever. There is no such thing as a free lunch. No pain; no gain. If it sounds too good, it is.
4. The greater the supply, the less the value. “Printing” money causes inflation. You can have too much of a good thing.
5. Dollars are real and scarce. They can be held, stored and moved.

Every one of these common sense beliefs either is always false or often false, when applied to the U.S. federal government, because:

1. Federal debt is not a burden. Unlike state and local governments, the federal government cannot be forced into bankruptcy (except by Congress). It can service any debt of any size, any time.
2. Federal deficits stimulate the economy while surpluses cause recessions and depressions. The federal government, being Monetarily Sovereign, neither needs nor uses taxes or borrowing to pay its bills.
3. The federal government creates money by marking up the bank accounts of creditors, in a cost-free, pain-free, limit-free process. To the federal government, money is a “free lunch.”
4. Increasing the supply does reduce value, unless demand increases more. Money demand is increased by interest rates. Since we went off the gold standard, there has been no relationship between federal deficit spending and inflation.
5. Dollars have no physical reality. They are nothing more than numbers in bank accounts. Even dollar bills are not dollars; they are receipts or titles for dollars. Dollars are not scarce to the federal government.

These truths are counter to intuition, counter to common sense and counter to the beliefs of most Americans, yet they are truths, nonetheless.

Very soon, Americans will face the cold reality of recession or depression, caused by Congress’s and the President’s following their “common sense,” rather than economic fact. Federal spending for Social Security, Medicare, Medicaid, and many other vital federal services will decline. We will suffer “invisible” pain from the loss of scientific and medical research, declining infrastructure, a weaker military, poorer schools, less food and drug inspection, and worse investment protections. Our standard of living will decline. Unemployment will worsen. Destitution will increase. Our children and our grandchildren will lead meaner lives. Their futures will be impoverished.

And most Americans will not realize what has been done to them.

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


==========================================================================================================================================
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia.

MONETARY SOVEREIGNTY

–The single, most misunderstood fact in all of economics. It will blow your mind. Tuesday, Jul 19 2011 

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
====================================================================================================================================================================================================
When you ask the wrong question, you get the wrong answer. Congress and the President are asking, “How should we reduce the federal deficit?” The correct question is, “Should we reduce the federal deficit?” And the answer is “No.”
=================================================================================================================================================================================================

Sometimes, something is so simple it can be hard to understand, as though “It just couldn’t be that easy.” This is one of those times.

The media don’t understand it. The columnists don’t understand it. The Tea Party, the Republicans, the Democrats and the debt hawks don’t understand it. For sure, President Obama doesn’t understand it. The old-line economics professors do understand it, but they’re afraid to admit it, because it makes them look like boobs for not telling you, all these years.

It is the single most important equation in economics. It’s so simple as to be laughable, yet it will amaze you (unless you are among the one-in-ten-thousand who already understands it). And once you understand it, you will look at the politicians in wonderment at their incredible ignorance.

Are you ready? Here it is:

Federal Deficits – Net Imports = Net Private Saving

This is not a hypothesis. It’s not a theory. It’s not my opinion or anyone else’s opinion. It is an accounting fact. In a closed economy (where money exports equal money imports), your annual savings, plus my annual savings, plus everyone else’s annual savings equals annual federal deficit spending, to the penny. In such an economy, Federal Deficits = Net Private Savings.

This means, if the federal deficit is reduced $1, our combined savings will be reduced by exactly $1 — not $.99; not $1.01 — exactly $1.00.

Today, the politicians in Washington are talking about a $4 trillion (!) deficit reduction. That means our savings will be reduced by $4 trillion. There are about 310 million people in America. A deficit reduction of $4 trillion will reduce the savings of each man, woman and child in America by an average of $12,900.

That’s $12,900 out of your pocket, another $12,900 out of the pockets of your spouse, each of your children and each of your grandchildren. A four-person family will lose $51,600 in savings. If both your parents are alive, they’ll lose another $25,800 in savings.

Why do the politicians want to reduce your savings? Sheer ignorance of Monetary Sovereignty. They think “deficit” is a bad word and want to eliminate it. But a federal deficit is money in your pocket. And a federal surplus? That’s money taken out of your pocket.

How can this be? Again, simple. When federal spending exceeds federal taxes, it’s called a “deficit.” When the federal government spends, its payments for goods and services enter the economy. When you pay taxes, the money leaves the economy. So federal deficits add money to the economy, and where does that money go? Into your pocket as savings. Similarly, federal taxes take money out of your pocket.

(If you want to see a longer, more erudite explanation, you might try Deficit = Savings, or Mosler letter to the President but I think you get the picture.)

Now tell me, how much would you like the federal deficit to be reduced? That is, how much of your savings would you like to lose? Tell your Congressperson.

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


==========================================================================================================================================

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


==========================================================================================================================================
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia.

MONETARY SOVEREIGNTY

Next Page »

%d bloggers like this: