–Did TARP (Troubled Asset Relief Program) work? Thursday, Oct 7 2010 

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

If you’ve joined the millions who believe TARP (Troubled Asset Relief Program) didn’t work, you’ll enjoy these excerpts from a NY Times article, titled, “Bailout Loss Estimated at $29 Billion,” by Louise Story, October 5, 2010. The article quotes from a Treasury Department report:

“The Treasury Department expects to lose $29 billion on the federal bailouts . . . the cost is far below the $350 billion the Congressional Budget Office once estimated. ‘Because of the success of the program, TARP will likely cost a fraction of this amount,’ the report said.”

This means the federal government actually pumped only $29 billion TARP money into the economy. This “too little-too late” approach explains much of the reason why the recovery has been so slow.

“Recently, the Congressional Budget Office put the cost at $66 billion. […] The Treasury arrived at its figure by adding in profits that it expects to receive on shares of A.I.G. stock.- – – a $22 billion profit. Without those shares, the Treasury would have reported a $51 billion loss, rather than a $29 billion loss, the report said. “In total, the Treasury has received back about $204 billion of the bailout funds, or just over half of the money it doled out.”

Federal profits are identical with federal taxes. They represent money taken from the economy. Taxing the economy $204 billion is a poor way to stimulate the economy, and again shows why the recovery has been slow.

“Nearly 80 percent of the money given to banks has been paid back. The Treasury also received $26.8 billion from banks through interest payments . . . The report did not break down the sources of the automobile losses. The government gave the most money to General Motors and is seeking to recoup some through an initial public offering.”

This should read, “Nearly 80 percent of the money given to the banks has been taxed back.”

“The Treasury plans to give A.I.G. $22 billion more. That money will help A.I.G. pay down its debt to the Federal Reserve of New York.”

The federal government will give AIG $22 billion, then AIG immediately will give it back. Only in Washington could this be considered an economic stimulus. So did TARP work? What TARP?

Rodger Malcolm Mitchell

No nation can tax itself into prosperity

–Why the U.S. owns China Thursday, Oct 7 2010 

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

Despite all appearances, we own China. China has sold its soul to the U.S. By focusing on export, and accumulating dollars and T-securities, China has strengthened the dollar. Now, what can China do with its enormous cache of T-securities? If it stops “lending” to us, i.e. stops using its dollars to buy more T-securities, it simply will accumulate more dollars.

So, what else can China do with its dollars? Three bad choices: It can trade more dollars for other currencies. This would flood the market with dollars, weakening the dollar, and making export to the U.S. more difficult (while making our export easier). Or, it can increase its worldwide purchase of assets – real estate, hard and soft goods, etc. – which in addition to being politically risky, also would flood the world with dollars. Or it simply can keep more dollars in it’s checking account at the Federal Reserve Bank.

So aside from purchasing T-securities, which effectively locks up (actually destroys) dollars, China is stuck. If they wish to keep exporting to us, they are forced to keep accepting dollars, which in turn, forces them to purchase T-securities. All those pundits who worry about “What will happen if China stops lending us money?” do not understand that China cannot stop buying T-securities.

China does not lend us yuan; it cannot use yuan to buy T-securities. It lends us only dollars, the dollars we previously created. The U.S. does not need China to lend us dollars; we are a monetarily sovereign nation with the unlimited ability to create dollars. We don’t need China’s.

Previously, we discussed the China trade deficit myth, when we said:

”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?”

“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.”

So, we own China. By emphasizing export rather than internal money creation (aka deficit spending), China has dug a deep pit for itself. Yes, China has had strong economic growth, but at what price? It has received in return for its exports, an asset it cannot use – U.S. dollars. These dollars are unusable, not because they are worthless. On the contrary, dollars are quite valuable. The problem is that in using the dollars, China would depreciate their value, which would destroy China’s export-based economy.

Of course, China knows this. Sadly, U.S. pundits, who fret about our so-called “debt” to China, don’t understand it. And the debt-hawks, who believe exporting is more prudent than deficit spending, really don’t understand that for a monetarily sovereign nation, deficit spending is the most prudent, controllable way to grow an economy.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity

–What will cause the next inflation? Saturday, Oct 2 2010 

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

The debt hawks say federal deficit spending will cause inflation. History says they are wrong. There is no post-1971 (end of the gold standard) relationship between federal deficits and CPI. (See: INFLATION) In fact, despite massive deficit spending, the Fed today is most worried about deflation.

Nevertheless, I now believe inflation has become a threat.

In a letter dated October 1, 2010, John Mauldin said:

“John Hofmeister is the former president of Shell Oil and now CEO of the public-policy group Citizens for Affordable Energy. He paints a very stark picture of the future of energy production in the US unless we change our current policies. First, because of the aftereffects of the moratorium. It is his belief that the drilling moratorium will effectively still be in place until at least the middle of 2012. There won’t even be new rules until the end of 2011, and then the lawsuits start.

“Gulf oil production will be down by up to 1 million barrels a day. Imported oil is now 67% of oil usage but will go to 75% by 2012. He thinks crude oil will be up to $125 and gasoline between $4-$5 at the pump. And it will only get worse.

“He describes the problem with the electricity from coal production. The average coal plant is 38 years old, with a planned-for life of 50 years. Our energy production capability is rapidly aging, and we are not updating it fast enough.

“He argues that the fight between the right and the left has given us 37 years without a realistic energy policy, as policy gets driven by two-year political cycles but good energy planning takes decades. There are 13 government agencies that regulate the energy industry, with conflicting mandates that change very two years. There are 22 congressional committees that have some level of involvement and oversight of the energy industry.”

Why is this important for inflation? Because although federal deficits do not correlate with inflation, energy prices do. And if we have the shortages Mr. Hofmeister suggests (a big “if” as oil supply is notoriously difficult to predict), they will translate into higher overall consumer prices. Yes, new oil sources are being discovered daily. And yes, progress is being made in developing alternative energy. But the modernization of huge populations in China, India, Russia and other less developed countries, is sure to increase world oil consumption, massively.

Inflation can be prevented and cured by raising interest rates. But our government is fixated on the false, debt-hawk belief that federal deficits cause inflation. So the political “cure” will be to reduce federal spending and/or to increase federal taxes, either of which, history shows, will devastate our economy.

In summary, the next inflation will come from energy shortages, which the debt hawk government will deal with by causing a recession.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity. There is widespread belief the stimuli didn’t work. I am reminded of the man whose house was burning. His neighbor showed up with a garden hose and actually was able to reduce the flames, but only somewhat. The neighbor wanted to call the fire department, who would bring out the big hoses, but the man told him to stop, because “Obviously, water doesn’t put out fires.”

–The “impossible” cure for stagflation Tuesday, Sep 14 2010 

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

Stagflation is economic stagnation or high unemployment combined with high inflation. Here is what a Wikipedia author said. “It is a difficult economic condition for a country, as both inflation and economic stagnation occur simultaneously and no macroeconomic policy can address both of these problems at the same time

This is one statement with which, both mainstream economists and Modern Monetary Theorists (MMT) seem to agree. I disagree with both.

Economic stagnation, high unemployment and recession all indicate the same fundamental problem: The economy is starved for money. Inflation (wrongly) is felt to be caused by too much money, which is why we experience the universal belief that “no macroeconomic policy can address both of these problems at the same time.”

Stagflation is most likely to occur when oil prices spike. A rapid increase in oil prices causes inflation. It also has a negative effect on production and economic growth. U.S. stagflation could occur, even in the near future, were any major oil producing states, for economic or political reasons, decide to reduce production dramatically.

Debt hawks (aka mainstream economists) would address stagflation with increased federal spending, while simultaneously increasing taxes to “pay for” the spending. The benefits of the increased spending would be offset by the damages of increased taxation. The former adds money to the economy; the later removes money from the economy — equal and opposite effects.

Even today, as we try to recover from the worst recession in decades, debt hawks continue to demand increased taxes to “pay for” spending, not realizing that in a monetarily sovereign nation, taxes do not pay for spending. Simultaneously, the Fed, wrongly believing interest rate cuts stimulate the economy, would lower rates, thereby exacerbating the inflation.

The Fed believes this, because raising interest rates does cure inflation, and for reasons known only to the Fed, they believe inflation is the opposite of recession, so for recessions, they do the opposite. Unfortunately for Fed theorists and for us citizens, the opposite of inflation is deflation, not recession, so doing the opposite doesn’t work.

MMT followers also would increase spending (good) and increase taxes (bad), because they believe taxes control inflation.

In short, MMT and debt hawk economists would follow the same path, an irony lost on both groups, each of which correctly claims the other does not understand current economics.

To cure stagflation, one must deal with two distinct problems – recession and inflation – using two distinct solutions. The solution for recession is federal deficit spending. 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. The government’s deficit spending adds money to the economy, curing the stagnation. Deficit spending can be accomplished by cutting taxes, increasing spending or both.

Then, to cure the inflationary part of stagflation, the government must raise interest rates, thereby increasing the reward for owning money, i.e increasing the value of money.

Increase deficit spending while increasing interest rates: The simple solution for taxation. Why will the government not take these easily administered steps? Because the mainstream economists wrongly belief deficit spending causes inflation, while MMT wrongly believes tax increases control inflation, and the Fed wrongly believes raising interest rates slows the economy.

Until these three groups understand economic realities, please pray we don’t encounter a stagflation, because the government will find it incurable.

Summary of how each group would attempt to defeat stagflation:

Mainstream economics (debt hawks):
Reduce taxes to stimulate economy
Reduce federal spending to cut federal debt
Increase interest rates to fight inflation
(Result: Reduction in federal spending nullifies tax reduction and exacerbates recession)

Modern Monetary Theory:
Increase taxes to fight inflation
Increase spending to stimulate economy
Reduce interest rates to fight inflation
(Result: Tax increase nullifies spending increase and exacerbates recession. Reduced interest rates exacerbate inflation)

Reduce taxes to stimulate economy
Increase spending to stimulate economy
Increase interest rates to fight inflation
(Result: Tax reduction & spending increase cure recession; interest rate increase cures inflation)

Rodger Malcolm Mitchell

No nation can tax itself into prosperity

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