Tag: popular wisdom

The antidote to popular wisdom

–Does personal saving stimulate the economy?

An alternative to popular faith

Stephen Gandel is a senior writer at TIME, where he covers real estate, economics and Wall Street. He blogs at The Curious Capitalist. In one post at What’s Worse: Stingy Banks or Thrifty Consumers? he said, “Now it is true that for the long term health of the US economy we all need to save more and borrow less.”

Though this passes for popular faith in economics, I see no evidence that personal saving benefits the economy.

saving vs GDP

As you can see there is no relationship between saving and GDP growth. Worse, no one really knows what “saving” is. Here’s an excerpt from Free Money:

Decide which activities you consider “saving.” Develop your own rules about what is “saving.”
Do you “save” when you:
1. Bury your currency in a tin can in your back yard?
2. Deposit your money in your bank savings account or in your money market account?
3. Purchase Treasury bills or bank CDs?
4. Purchase guaranteed-interest, whole life insurance?
5. Purchase stocks and bonds?
6. Purchase real estate?
7. Purchase a business?
8. Purchase your primary residence?
9. Purchase a secondary residence?
10. Purchase a car for your business use?
11. Purchase a car for your personal use?
12. Purchase a television set?
13. Purchase food and clothing?

Study this list. The more you think about it, the more doubts you probably will have about what is saving, what is investing and what is spending — and what part of investing really should be considered saving.

So, between the lack of historical correlation between saving and GDP growth, and the arbitrary and varying definitions of saving, the popular faith that saving benefits the economy seems questionable.

Also, keep in mind the 2nd part of his statement, ” . . . we all need to . . . borrow less.” Since borrowing creates money, borrowing less creates less money, which certainly is not stimulative.

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

–Danger sign?

An alternative to popular faith

Do we see the first hint of another recession?

In other posts, I have called to your attention the coincidence of reduced federal deficit growth and the start of recessions. History shows this repeated coincidence dates back even to the 1800’s, which arguably indicates a cause/effect relationship.

I also have noted that reduced deficit growth can continue for several years before a recession begins. I searched for a factor, that, when added to reduced deficit growth, would trigger the recession. One such factor seems to be rising energy prices, perhaps more specifically, rising oil prices.

Economics, like meteorology, is complex, so perfect correlations seldom are found, but this correlation is striking:

Debt and energy

The graph shows that when reductions in deficit growth are added to oil price increases, there is a strong incidence of recession.

An exception might be in 1981, though this may have more to do with the arbitrary definition of “recessions.” The recessions of 1980 and 1982, may more realistically be considered one long downturn.

I mention this, because today (Feb., 2010) we see the first hints of reduced deficit growth accompanied by increased energy prices, a possible danger signal. If these mini-trends continue, we may find ourselves on the cusp of yet another recession.

The U.S. government may have two options for preventing the next recession: Keep oil prices from rising, or increase deficit growth. The former might temporarily be accomplished by executing a release from the Strategic Petroleum Reserve. The later can be accomplished in myriad ways, though I tend to favor the elimination of the FICA tax as described at http://rodgermitchell.com/reasons-to-eliminate-FICA.html.

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

-New thinking from the New America Foundation


An alternative to popular faith

        Here is the text of an Email I sent to Steve Coll, President and CEO of the New America Foundation (http://newamerica.net/) (Offices in Washington, DC and San Francisco, CA). According to their web site, “The New America Foundation is a nonprofit, nonpartisan public policy institute that invests in new thinkers and new ideas to address the next generation of challenges facing the United States.” They publish 12 “Principles” by which they live.
—————————————————————————————————————————————-

Dear Steve;
        Your principle #10, “Do not perpetuate budget myths” is excellent. In that regard you might wish to reconsider certain statements on your web site:

“In reality, the availability of debt financing is far from unlimited; in fact Japan and China have already begun to slow their purchasing of U.S. debt.”
        A myth. The federal government does not need to sell U.S. debt to Japan, China or to any other country or person. The government creates debt (T-securities) out of thin air, collateralized only by full faith and credit. It just as easily could create money out of thin air, also collateralized by full faith and credit, and eliminate the debt creation and sales step. Debt creation and sales is a relic of the gold-standard days.
See: How to eliminate federal debt, deficits and interest payments

        “While deficits can spur consumption and thus improve the immediate economic situation when there is slack in the economy, they lead to slower growth in living standards over the long run.”        
A myth. Federal deficits are necessary both for short term and long term growth. A growing economy requires a growing supply of money. Where else will the money come from to grow our economy?
See: I believe

        “Moreover, high deficits increase interest payments, which crowd out important tax and spending priorities and leave the budget with far less flexibility than it would otherwise.”        
Partly true, partly a myth. High deficits can increase interest payments. However the conclusion is circular reasoning. Interest payments can “crowd out” spending priorities only if the government is precluded from running deficits. To date, despite massive deficits for the past 30 years, interest payments never have crowded out anything.

        “Lastly, deficits shift the burden of paying for today’s spending to future generations, which may cause over-consumption by present generations at the expense of consumption by future generations.”
A myth: Today’s deficits are paid by future generations only if the future generations decide to run surpluses. When any generation runs a deficit, it’s tax payments do not even cover its current expenses, let alone past expenses. Deficits do not cost taxpayers money. Only surpluses cost taxpayers money.
See: It isn’t taxpayers’ money

        I have suggestions for a 13th and 14th principle:
13. Base all suggestions on supporting data, not on popular faith.
14. To accept new thinkers and new ideas, be prepared to let go of old thinkers with old ideas.”

Rodger Malcolm Mitchell

-The debt ceiling illusion

An alternative to popular faith

      Sometime in October, the federal debt will touch the legal ceiling of $12.1 trillion, and Congress will decide whether or not to raise it. Surely, the debt ceiling law is among the nation’s silliest.
      Visualize this: All year, you recklessly spend more than you earn, and at the end of the year you announce that you will not pay your bills because you are frugal.        That’s Congress.
      Congress authorizes federal spending and federal taxing. So Congress already has control over the federal debt. It is Congress that has created the $12 trillion debt. Now, Congress will decide whether to pay for what Congress has authorized.
If Congress doesn’t increase the debt, several bad things could happen. The U.S. could default on its debts, thereby removing forever the trust other nations and our own citizens have in our money. Borrowing would become much more difficult and the world would begin to dump its T-securities – a financial calamity. Would Congress be that stupid? Well, it’s Congress.
      Or, the recovery from this recession could end, and we could plunge into a depression of unprecedented magnitude. Would Congress be that stupid? Well, it’s Congress.
      Or, the Treasury could implement some accounting tricks like redeeming government employee retirement funds, now invested in T-securities. Or the Treasury could stop paying interest on government trust funds. Both actions are internal devices without substance, merely delaying the inevitable, as does the vote on the debt ceiling.
      No responsible person, who cares about America, would vote against raising the debt ceiling, but we’re talking about Congress, a group that often embraces style over substance. The debt ceiling has two results. First, it is a shameful admission by members of Congress they know or care little about the bills they vote for, and focus on the individual, pork-barrel amendments they can sneak in. Generally, Congress is a “You-vote-for-mine-and-I’ll-vote-for-yours” club.
      Second, the debt ceiling gives members of Congress political cover — the ability to vote for spending for their constituencies, while voting against spending as a whole, thus to demonstrate how frugal and disciplined they are.
      There should not be a debt ceiling. If Congress wishes to be frugal, it should do so when authorizing, not when paying, its debts. Any Congressperson who speaks against raising the debt ceiling is a phony. Or is that statement a tautology?

Oh, and by the way. Limiting the creation of debt limits economic growth, but that is a subject discussed in many posts on this blog.

Rodger Malcolm Mitchell
For more information, see http://www.rodgermitchell.com