Tag: popular faith

-To: Diane Lim Rogers of Concord Coalition


An alternative to popular faith

        Here is copy of an Email sent to Diane Lim Rogers, the chief economist of the Concord Coalition. We been trying to discover what she does, other than to parrot the Concord, debt-hawk party line. We decided to ask her for some information a real economist would know and, considering her position, want to share.
        (Frankly, we didn’t expect an answer, and as of October 30th, have not received one. Instead, she removed our comments from her blog.)

October 7, 2009

“Hello Diane,
        For the past 17 years, the Concord Coalition has been “dedicated to educating the public about the causes and consequences of federal budget deficits (and) the long-term challenges facing America’s unsustainable entitlement programs.”
        By now, you must have assembled vast amounts of evidence supporting your mission. Can you share some of your evidence showing that our admittedly large and growing deficit has adverse economic consequences and cannot support entitlement programs?
        Thank you for any enlightenment you can provide.”

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

-A prediction about stagflation


An alternative to popular faith

        Next year, the Fed may be faced with stagflation, the simultaneous occurrence of economic stagnation and inflation. Sadly, the Fed cannot cure stagflation.
        You’ll find a more complete discussion of this phenomenon at http://rodgermitchell.com/inflation.html, but here is a quick overview:
        Money is the lifeblood of an economy. During a recession, an economy suffers from “anemia,” a shortage of money. The treatment for anemia is to increase the blood supply. But typically, the Fed tries to cure recession by cutting interest rates and tries to cure inflation by doing the opposite, i.e. increasing interest rates. Since recession is not the opposite of inflation, doing the opposite doesn’t work, and changing interest rates does not fix the money shortage.
        To cure inflation it is necessary to raise interest rates. To cure stagnation it is necessary to treat the anemia, i.e to deficit spend. The former is the task of the Fed. The later is the task of Congress. That’s why the Fed alone cannot cure stagflation.
        Unfortunately, the Fed wrongly believes high interest rates slow the economy, so when stagflation appears, the Fed will urge a reduction in deficit spending (bleeding the anemic), which they consider “fiscally prudent,” while only reluctantly and incrementally raising interest rates.
        This will continue the Greenspan and Bernanke policies, which will extend or worsen the recession.

Rodger Malcolm Mitchell

-What triggers recessions and depressions?


An alternative to popular faith

        Readers of this blog know debt growth is necessary for economic growth. The graphs and data in the various posts, for instance The federal debt and federal deficit are necessary for economic growth, show that surpluses preceded every depression in U.S. history, and reductions in debt growth preceded every recession in the past 50 years.
        While this degree of correspondence transcends coincidence, it leaves a troubling question: What is the trigger? The recession of 2001 was preceded by ten years of deficit growth reductions, while the recession of 2007 was preceded by only three. Other recessions also were preceded by varying periods of reduced deficit growth or surpluses. Similarly, the 1929 Great Depression was preceded by nine years of surpluses, while the 1819 depression was preceded by only two.
        This makes predicting a recession difficult. While running a surplus seems to be a fairly prompt causative agent for recessions or depressions, debt growth can decline for several years before a recession begins. Reduced deficit growth is a necessary detonator of recession or depression, but some other event must serve as a more immediate signal, a trigger. For example:

*The recession of 1960 may have been triggered by the Vietnam war, which began in 1959
*The 1970 recession: Possible trigger: Also may have been the Vietnam war, this time by the protests and the public realization the war was going poorly.
*The 1973 recession: Possible trigger: The first Arab oil embargo
*The 1980 recession: Possible trigger: The Iranian revolution causing another oil crisis
*The 1990 recession: Possible trigger: Desert Storm
*The 2001 recession: Possible trigger: The bursting of the “dot.com” bubble.
*The 2007 recession: Possible trigger: Collapse of the subprime mortgage market
        All recessions and depressions share one factor – reduction in debt growth – but all have had different triggers. It appears if we have only reduced deficit growth without the trigger, no recession or depression will result. And, a trigger event, without reduced deficit growth, will not cause a recession. The recession/depression bomb requires both a detonator (reduced debt growth) and a trigger.
        Triggers are difficult to evaluate (i.e., how serious they are), but as one small step toward predicting recessions we should keep in mind that a recession is far more likely during federal deficit growth rate decreases.

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

-When is a recession?


An alternative to popular faith

        Readers of this blog and of the summary are familiar with the fact that all six depressions in U.S. history immediately were preceded by extreme reductions in federal deficits (aka “surpluses”):

1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

        You also are familiar with the following graph showing that the last nine recessions began with reductions in federal debt growth and were cured with increases in federal debt growth.
Fed debt private investors 50-09

Note how debt growth declines before recessions and increases to cure recessions

In 1996, the prelude to Free Money, titled “The Ultimate America” predicted future recessions would follow decreases in debt growth. Since then it happened again, twice.

        Six depressions and nine recessions — a total of fifteen out of fifteen times at which federal debt growth declined and the economy fell — is an amazing, almost unheard of, correlation in a complex science like economics.
        Even more startling, the first edition of Free Money was published in 1996, and it predicted future recessions would be precipitated by decreases in debt growth. This would be akin to finding it has rained all day in Chicago every June 1st, following sunshine all day every May 30th, for the past fifteen years, and accurately predicting it would happen, again — twice more.
        A sharp-eyed reader, who may be associated with the Concord Coalition, (the group claiming federal debt must be reduced, but which never provides evidence) pointed out two recessions, in 1981 and in 1991, where federal debt growth seemed to move up in advance.
        While even thirteen out of fifteen is a remarkable correlation in a science that seldom sees such correlations, the reader’s concern was understandable.
        As you can see on close inspection, federal debt growth did decline in advance of the 1981 recession – not terribly significant, but a decline nonetheless. (The 1981 recession should be considered a continuation of the recession twelve months earlier — caused by the Iranian Revolution which took place in 1979, with its increased oil prices — from which we didn’t fully recover.)

Debt growth declines in advance of 1981 recession

        With regard to the 1991 recession, we come up against the definition of the word “recession.” The media arbitrarily say a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters, which means you can’t identify a recession until it is more than six months along . Look at the following graph:

        GDP growth (blue line) turned down in 1989, while debt growth was falling. Why did the government say the recession began in 1991? Hard to say. Perhaps it was due to the very slight bump at the end of 1989.
        This graph indicates the increase in federal debt growth was beginning to cure the 1989 recession, and the momentum of continuing increased debt growth finally cured the recession in 1991.
        A strong correlation between federal debt growth and GDP growth seems to exist.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com
P.S. You might try this experiment. Ask Diane Lim Rogers (drogers@concordcoalition.org), the Concord Coalition economist, for evidence to support her claim the debt is too large. I predict she either will not answer you, or she will tell you the debt is too large and “everyone knows” it should be reduced. “Everyone knows” is what passes for evidence at Concord.