Tag: recessions

–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

–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

-Warren Mosler for president


An alternative to popular faith

“Warren Mosler, economist, perturbed by the misunderstanding of monetary policy by the current and past administrations, is running for President in 2012. He has been speaking at the Tea Parties, explaining to taxpayers that Washington is either at best ignorant of economic policy or at worst deceptive.” By Barry Ritholtz – The Big Picture, October 7th, 2009, 11:00AM

Warren Mosler has a better understanding of the economy than almost anyone I have known. If you want to see the real facts, in plain, clear English, go to http://www.moslereconomics.com/ and click the “7 Deadly Innocent Frauds” box on the left side of the page. I promise, you will learn something important.

In 2008, Warren helped edit an article I had written earlier. The article, endorsed by a number of eminent economics professors, is as follows:

Is It Time For a FICA Holiday?

Traditional thinking has produced an economic disaster, which the same traditional thinking cannot solve. As the U.S. and world economies slip into recession, we must remember this ultimately is a bookkeeping crisis. The housing “market” was destroyed, but not the actual houses. They still exist. Nothing real has been destroyed. Instead, we are starved for money.

This problem should be easier to remedy than a food shortage, water shortage or wartime destruction, because a money shortage can be cured by the simple expedient of adding money – something the federal government is uniquely empowered to do.

We propose a FICA payroll tax “holiday,” whereby the U.S. Treasury will make our Social Security and Medicare payments for us. This will add about $10 billion per week to our take-home pay, and another $10 billion to business income, both of which urgently are needed. When we eliminate this partly double, severely regressive tax, we will give consumers the income they need to make mortgage payments, to pay bills, and to do the shopping American business craves. The FICA holiday also will provide business with money for jobs and investment.

In contrast, the “top down” approach (saving Fannie Mae, buying toxic mortgages), while necessary, does not directly address consumer/business money needs, and has had only modest effect.

Common knowledge holds that Social Security and Medicare will face bankruptcy even with FICA. So proposed fixes invariably include benefit cuts, reducing consumer incomes, or tax increases, cutting consumer and business spending power – the opposite of what our economy requires.

Many people fear federal deficit spending when it supports Social Security and Medicare, but not when it supports the military. Social Security spending for 2008 is approximately $600 billion, about equal to the defense budget. Ironically, both candidates for President believed Social Security will run out of money and the military will not. The $1 trillion in “stimulus” spending was authorized without increased taxes. Both candidates advocated tax cuts.

Even during the darkest days of the Great Depression, the federal government never ran out of money. Massive government spending, before and during World War II, helped lift us from the Depression.

In 1971 President Nixon eliminated any risk of government insolvency by ending the last vestiges of the gold standard. At the stroke of a pen, he assured that neither the government, nor any of its agencies, could run short of money. Social Security and Medicare, being two of those 400+ agencies, are immune from bankruptcy.

If Congress authorizes the Treasury to make our Social Security and Medicare payments for us, thus allowing our take-home pay to rise, the economy will begin to recover. The elimination of FICA deductions would provide consumers and business with more than a trillion additional dollars annually, exactly what a healthy economy needs.

Won’t this increase the federal deficit? Yes, but President Nixon’s signature guaranteed the government never will run short of money to service its debts. This act removed taxes as a necessary source of federal money. Together with federal spending, taxation became a mere tool to create optimal output and employment. Whatever deficit accomplishes that goal is the right size.

Doesn’t a large deficit cause higher interest rates? No, interest rates are set by the Federal Reserve. The government can set rates at any level it wishes.

Doesn’t a large federal debt create a shortage of lending funds? No, the more money the government pumps into the economy, the more lending funds are created.

Won’t our children have to pay for the increased deficit? No, the government owes the debt and easily services a debt of any size. Our children are not the debtors. (In many cases, they even are the creditors.) Because the “right” size debt will continue to grow forever as our economy grows, it never should be reduced or paid back.

Meanwhile, each year the increased debt will help keep output high and unemployment low, benefiting our children with additional income, goods and services.

Won’t increasing the deficit by eliminating FICA, cause inflation? President Carter had modest deficits and high inflation. President Reagan had the highest deficits in American history and modest inflation. Contrary to popular faith, federal debt has not caused inflations, recessions, high interest rates or any other negative economic effects. On the contrary, large deficits have been associated with economic growth.

In summary, we offer new thinking – an accounting fix to an accounting problem: Eliminate FICA and pay for Medicare and Social Security the same way we pay for Congress, the military, the Supreme Court and every other federal agency, by functionally folding these two agencies into the general fund. The economic crisis has presented us with the rare opportunity to accomplish two important goals: Permanently fix the seemingly intractable Social Security and Medicare problems, and energize our economy.

Rodger Malcolm Mitchell