Tag: recession

–Understanding Federal Debt. Full Faith and Credit

An alternative to popular faith

Why do we have recessions and depressions? Are they inevitable and unavoidable? Why do we have inflations? Are they preventable and curable?

This short post will give you a basis for answering these vexing (especially to the politicians, the Fed and the media) questions.

1. By definition: A larger economy has more money than does a smaller economy. California has more money than does Los Angeles, which in turn, has more money than does Anaheim.

2. Therefore: To grow larger, an economy requires a growing supply of money.

3. All forms of money are debt. Although there are many definitions of money, every form of modern money – bank accounts, money market accounts, traveler’s checks – is a form of debt. Even currency is a debt of the government. That is why a dollar “bill” has “federal reserve note” printed on it. “Bill” and “note” are words signifying debt (as in “T-bill” and “T-note.”)

4. Therefore: To grow larger, an economy requires a growing supply of debt/money.

5. The safest form of debt/money is federal debt/money. There are many types of debt – personal debt, corporate debt, state and local government debt, federal debt – but after 1971, the end of the gold standard, only the federal government has had the unlimited ability to create money to service its debt. All other debtors go bankrupt when they are unable to service their debts. The end of the gold standard marked the biggest change in economics during the 20th century. Most key economic hypotheses became obsolete in 1971; economists who did not change in 1971 are themselves obsolete.

6. All debt requires collateral. The collateral for federal debt is “full faith and credit.” This may sound nebulous to some, but it actually involves certain, specific and valuable guarantees, among which are:
A. –The government will accept only U.S. currency in payment of debts to the government
B. –It unfailingly will pay all its dollar debts with U.S. dollars and will not default
C. –It will force all your domestic creditors to accept U.S. dollars, if you offer them, to satisfy your debt.
D. –It will not require domestic creditors to accept any other money
E. –It will take action to protect the value of the dollar.
F. –It will maintain a market for U.S. currency
G. –It will continue to use U.S. currency and will not change to another currency.
H. –All forms of U.S. currency will be reciprocal, that is five $1 bills always will equal one $5 bill and vice versa.

7. The value of debt (money) is based on supply and demand. An increase in supply makes the value go down. An increase in demand makes the value go up.

8. The demand for debt (money) is based on risk and reward. The risk of owning debt (money) is the danger of inflation. The reward for owning debt (money) interest rates. High reward with low risk makes demand go up which makes value go up.

9. Inflation compares the value of debt (money) with the overall value of goods and services. Fighting inflation requires increasing the reward for owning debt (money) and/or reducing the supply of debt (money). However, because a growing economy requires a growing supply of debt (money), reducing the supply leads to recessions and depressions, making supply-reduction a poor choice for fighting inflation.

10. For every borrower there is a lender. To the degree lowering interest rates helps borrowers, it equally hurts lenders, both of whom are part of the economy. The Fed lowers interest rates, believing this helps businesses that are borrowers, neglecting the fact that it equally hurts businesses that are lenders. That is why the 20 rate reductions preceding and during the recession, neither prevented nor cured the recession.

You now know how to begin to answer the questions in the first paragraph.

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

–More “debt bomb” nonsense

An alternative to popular faith

Well, they just keep on doing it. The February 8, 2010 Forbes Magazine’s cover story is titled, “The Global Debt Bomb,” by Daniel Fisher.

It contains the usual scary words, for instance: “The world has issued so much debt in the past two years fighting the Great Recession that paying it all back is going to be hell –for Americans, along with everybody else. Taxes will have to rise around the globe, hobbling job growth and economic recovery.” Etc., etc., etc. You get the idea.

Never mind that this is exactly the same “sky is falling” commentary — even using the words “debt bomb” — we have been hearing from pundits since 1940 (See https://rodgermmitchell.wordpress.com/2009/11/24/federal-debt-a-ticking-time-bomb/). Never mind that “government debt” is an exact synonym for “government money,” which needs to grow if an economy is to grow.

Never mind that “paying it back” is not, and since 1971 (the end of the gold standard) never will be, a problem for a sovereign nation with the unlimited ability to create money. Never mind that using this unlimited ability has not caused inflation, which in any event could be cured by raising interest rates. And never mind that taxpayers do not pay for federal debt and tax rates are not related to federal debt.

In short, never mind history, and just keep making the same old, wrong predictions, using the same old words, because let’s face it, fear-mongering sells magazines, and why make up new words when cribbing the old words is so much easier.

Pick up that issue of Forbes, read Fisher’s article, and wherever you see the word “debt” replace it with the word “money.” That will show you the reality. Also, if you know how to contact Fisher, you might ask him to supply historical proof that, as he says, “. . . the taxpayer will have the devil to pay.”

Rodger Malcolm Mitchell
www.rodgermitchell.com

–Robin Hood Obama takes from rich and poor

An alternative to popular faith

        You have been led to believe recessions are an unavoidable part of the natural business cycle. Like bad weather, there is nothing we can do to prevent them, and when they come, we simply must deal with them.
        Wrong. Recessions neither are unavoidable nor natural. They always occur because of mistakes, both innocent and deliberate, by our political leadership.
        Today we experience a classic example. For the past two years, the economy has experienced a money shortage, also known as a recession. In belated response, the government properly has pumped stimulus money into the economy via deficit spending. This addition of money to a money-starved economy is beginning to help (though the stimulus has been too little and too late — but that’s another story.)
        Where did the government obtain the stimulus money? Not from taxpayers. The definition of “deficit spending” is money spent without taxes. The government created the money simply by crediting bank accounts and debiting its own balance sheets. Despite what the media say, tax payers and tax money, which never pay for federal spending, were not involved.
        Read this article — wording in green:

“1/15/10: WASHINGTON — President Barack Obama told banks Thursday they should pay a new tax to recoup the cost of bailing out foundering firms at the height of the financial crisis.”
        If stimulus spending helps the economy grow, what will new taxes do? Right. Help the economy shrink.

“‘We want our money back,’ he said.”
        He neglected to indicate who “our” is. Surely not the American public, who have paid, and will pay, nothing for the bank bailout funds. And why does the government want the money? It has no use for it. In fact, money sent to the government immediately is destroyed when federal balance sheets are credited. The government has the unlimited ability to pay bills by crediting bank accounts. Unlike you, me and every other U.S. entity, the government does not use income to pay its bills.

         “In a brief appearance with advisers at the White House, Obama branded the latest round of bank bonuses as ‘obscene.’ But he said his goal was to prevent such excesses in the future, not to punish banks for past behavior.”
        Typical populist rhetoric, fomenting class warfare. He’s a benevolent Robin Hood, taking from the rich and, oh yes, also taking from the poor by removing money from the economy. Taxing banks does punish them, but President Obama doesn’t want to punish banks. Sure. Believe that and I have some costume jewelry I want to sell you.

        “The tax, which would require congressional approval, would last at least 10 years and generate about $90 billion over the decade, according to administration estimates. ‘If these companies are in good enough shape to afford massive bonuses, they are surely in good enough shape to afford paying back every penny to taxpayers,’ Obama said.”
         That’s $90 billion to be ripped out of the economy and destroyed. Does anyone really believe they will see one penny of that $90 billion? Does anyone believe that will put even one nickle in their pockets? If so, contact me about that jewelry.

         “Advisers believe the administration can make an argument that banks should tap their bonus pools for the fee instead of passing the cost on to consumers.”
         Instead of paying bonuses and salaries to living people, who then will pass the money on by spending and saving, the government wants the money extracted from the economy, then sent to the government, where it will be destroyed. (If you don’t believe the government destroys all money sent to it, tell me where the government stores the tax money it receives.)
        By the way, did I mention that President Obama has other populist taxes in store for you? Think about the tax on what he calls “Cadillac” health plans.
         And this is why future recessions are certain. They neither are normal nor unavoidable. They are caused by politicians who either through ignorance or populist electioneering, actively cause recessions.
        If banks don’t want to pay this extra tax, and unions don’t want the “Cadillac health plan” tax, they will have to bribe Democratic legislators to vote “properly.” This is the old political trick of proposing something onerous, so the prospectively injured party pays up. Cynical, but effective, and no one ever said President Obama is not an effective politician.

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

-Richard Koo–If you don’t believe me, believe him

An alternative to popular faith
Listen to Richard Koo’s tape at http://www.ritholtz.com/blog/2009/11/richard-koo-great-recessions-lessons-learned-from-japan/comment-page-1/#comment-233008. He says some of what I have been saying for the past 15 years. Federal deficit spending is absolutely, positively necessary for economic growth.

I hope our government leaders listen to him, though I doubt they will. They sure haven’t listened to me. The reason: The debt hawks have the nation worried, because they equate federal debt with personal debt. So you hear that your grandchildren will have to pay the debt, and large deficits cause inflation, and surpluses are more prudent than deficits — none of which are true.

So, we struggle with trying to provide universal health care, which the government can and should provide, while debt fear negatively impacts the physical and financial health of millions.

Deficit spending grows the economy and can provide health care, too — and it never needs to be paid back. Never. But Congress, the President and most of the economists simply don’t get it. They don’t even look at our economic history, which repeatedly shows long-term deficit spending is necessary for long-term economic growth.

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