Tag: Rodger Malcolm Mitchell

–Why the U.S. owns China

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
http://www.rodgermitchell.com

No nation can tax itself into prosperity

–How the debt-hawks would “save” Social Security and Medicare

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

The Committee for a Responsible Federal Budget proposes the following steps to “save” Social Security and Medicare. The CRFB projects the indicated 10-year federal savings (more correctly, “increases in payments by you”). If the numbers are correct (big “IF”), here are the implications:

Medicare:

“Increase Cost-Sharing” Government pays $150 billion less. Americans will pay $150 billion more for our health insurance.

“Enact Medicare Malpractice Liability Reform” Government pays $60 billion less. Americans will be limited as to what we will receive in the event of serious negligence by a doctor or hospital.

“Limit Tax Exclusion on Employer-provided Health Care” Government receives $250 billion more from all employees. This is a $250 billion tax increase for working people.

“Increase Medicare Eligibility Age to 67” $60 “savings” for federal government. We will have to buy private insurance for two additional years – our older years when private insurance is most costly.

“Strengthen the Independent Payment Advisory Board ((PAB).” Government “saves” $30 billion. “Strengthen” is a euphemism. The purpose of PAB is to reduce federal payments for drugs and medical procedures. We Americans will pay $30 billion more.

Social Security:

“Use ‘more accurate’ measure of inflation to calculate cost-of-living adjustments.” Government pays $140 billion less. “More accurate” is a euphemism meaning, “more restrictive.” Result: We’ll receive lower benefits.

“Slow the growth of benefits for middle-and high income earners” Government pays $25 billion less. Remember how the Alternative Minimum Tax was only supposed to affect “rich” people? This proposal eventually would penalize nearly all Americans.

Raise the retirement age to 68, then increase it further, based on life expectancy. Government savings: $? Social Security already pays you nothing if you die before retirement, and not even a living wage if you live after retirement. Now they want to raise the retirement age, so we receive less, and receive it later.

Increase FICA by another 1% for anyone making more that $56,000 per year. Government savings: $? Since you pay 7.65% and your boss pays another 7.65%, that “little 1%” amounts to an 6.5% FICA tax increase.

Thus, does the mistaken belief that Social Security and Medicare will go bankrupt, erode our quality of life. The federal government is a monetarily sovereign nation, which means it cannot go bankrupt. It can produce unlimited money to pay debts of any size. Similarly, Social Security and Medicare never can go bankrupt, nor can the Department of Defense, Congress, the Supreme Court or any other federal agency. No agency of the federal government can go bankrupt.

Debt-hawks wrongly believe FICA pays for Social Security and Medicare. It does not. FICA could be eliminated, and this would not affect by even one penny, the federal government’s ability to support these federal agencies.

Even the most obtuse debt-hawk recognizes the ability of the federal government to create enough money to pay any bill of any size. So what is the concern? It all boils down to fear of inflation. But, since we went off the gold standard, inflation has not been related to federal deficits (See: INFLATION), and inflation easily is prevented and cured by interest rate control. So in brief, debt-hawks prefer the absolute surety of great harm to us today, because they have the unreasoned, unsubstantiated fear that maybe, possibly, perhaps we sort of might have some unknown degree of inflation at some unknown time in the theoretical future.

Organizations like the CRFB do great harm, by supporting unnecessary limitations on Social Security and Medicare. And that’s not all. Their grim calls for austerity, their unreasoned fear of inflation, has limited the government’s ability to cure this recession, costing millions of people their homes, their livelihoods and their happiness. Debt-hawks claim fiscal responsibility, when in fact they are the most irresponsible people imaginable, prescribing bitter snake-oil cures for real economic problems.

My only hope is that when these debt-hawks personally need help from Social Security and Medicare, the limitations they have supported make benefits unavailable to them. And I hope this recession causes them the great grief they have caused the rest of this nation. That would be justice.

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

No nation can tax itself into prosperity

–Failing U.S. transportation system will imperil prosperity, report finds

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

Failing U.S. transportation system will imperil prosperity, report finds
The Washington Post, 10/4/10

Read this article, then ask the Tea Partyers (You know – those clever people who want less taxes and government) how they plan to handle this.

The United States is saddled with a rapidly decaying and woefully underfunded transportation system that will undermine its status in the global economy unless Congress and the public embrace innovative reforms, a bipartisan panel of experts concludes in a report released Monday.

U.S. investment in preservation and development of transportation infrastructure lags so far behind that of China, Russia and European nations that it will lead to “a steady erosion of the social and economic foundations for American prosperity in the long run.”

That is a central conclusion in a report issued on behalf of about 80 transportation experts who met for three days in September 2009 at the University of Virginia. Few of their conclusions were ground-breaking, but the weight of their credentials lends gravity to their findings.

Co-chaired by two former secretaries of transportation – Norman Y. Mineta and Samuel Skinner – the group estimated that an additional $134 billion to $262 billion must be spent per year through 2035 to rebuild and improve roads, rail systems and air transportation.

“We’re going to have bridges collapse. We’re going to have earthquakes. We need somebody to grab the issue and run with it, whether it be in Congress or the White House,” Mineta said Monday during a news conference at the Rayburn House Office Building.

The key to salvation is developing new long-term funding sources to replace the waning revenue from federal and state gas taxes that largely paid for the construction and expansion of the highway system in the 1950s and 1960s, the report said.
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“Infrastructure is important, but it’s not getting the face time with the American people,” Skinner said. “We’ve got to look at this as an investment, not an expense.”

A major hike in the federal gas tax, which has remained unchanged since it bumped to 18.4 cents per gallon in 1993, might be the most politically palatable way to boost revenue in the short term, the report said, but over the long haul, Americans should expect to pay for each mile that they drive.

“A fee of just one penny per mile would equal the revenue currently collected by the fuel tax; a fee of two cents per mile would generate the revenue necessary to support an appropriate level of investment over the long term,” the report said.

Fuel tax revenues, including state taxes that range from 8 cents in Alaska to 46.6 cents in California, have declined as fuel efficiency has grown. President Obama mandated that new cars get 35.5 miles on average per gallon by 2016, and government officials said last week that they are considering raising the average to 62 miles per gallon by 2025.

Facing mid-term elections this fall, Congress has lacked the will to tackle transportation funding. Efforts to advance a new six-year federal transportation plan stalled on Capitol Hill after the previous one expired last year.

If Congress were to do the report’s bidding, the task would be far broader in scope than simply coming up with trillions of dollars in long-term funding to rebuild a 50-year-old highway system.

The experts also advocated adoption of a distinct capital spending plan for transportation, empowering state and local governments with authority to make choices now dictated from the federal level, continued development of high-speed rail systems better integrated with freight rail transportation, and expansion of intermodal policies rather than reliance on highways alone to move goods and people.

But Mineta noted that 42 days after an eight-lane bridge collapsed into the Mississippi River in Minneapolis a survey found that 53 percent of respondents were against an emergency gas tax increase to pay for infrastructure repairs.

“The shelf life of a tragedy like [I-35W] was 42 days,” he said. Thirteen people died in the collapse and more than a hundred were injured.

The report emphasized that federal policy should be crafted to address congestion by providing incentives that encourage land use that reduces single-occupant commutes and promotes “liveable communities.”

“Creating communities conducive to walking and alternate modes of transportation . . . should be an important goal of transportation policy at all levels of government,” the report said.

It also encouraged expansion of innovative public-private partnerships to further transportation goals, citing the high-occupancy toll lane project in Northern Virginia as an example.
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“The one option that’s not in this report is throwing up our hands,” said Jeff Shane, a former Transportation Department official and a member of the panel. “That seems to be the option that Congress chooses.”

Congress does not want to ask for tax money, so the problems do not get solved. But there is a solution: Federal deficit spending without taxes. Sadly, the debt-hawks’ mistaken belief that deficits are harmful to our children and us, prevents curing our problems. There is a long list of problems our children suffer today, and will suffer in the future, because of the debt hawks. (See: Debt Hawk Problems )

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

No nation can tax itself into prosperity

–Does China need to export as much as it does?

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

It widely is believed China must continue to increase its exports to maintain its economic growth and to pay its massive population. The desire for growing exports is what drives China’s reluctance to revalue the yuan upward.

But, does China’s economy really rely on ever-increasing exports? China is a Monetarily Sovereign nation. As such it has the unlimited ability to create its own sovereign currency.

Think of what happens when Chinese Factory “A” exports to the United States. Factory “A” receives dollars, a foreign currency it cannot use to pay its workers. So how does Factory “A” pay its workers? It exchanges these dollars for the yuan China creates from thin air.

This means, for every dollar Chinese Factory “A” receives, the Chinese government creates 6.7 yuan (current exchange rate), which it gives to Factory “A” in exchange for U.S. dollars. Factory “A” pays its workers with yuan, created by the Chinese government, while the Chinese government amasses dollars.

The Chinese government can use some of those dollars for international trade (oil purchases, etc.), but many become T-securities held in China’s account at the Federal Reserve Bank. In short, China’s economic growth requires the Chinese government to create yuan from thin air.

If Chinese factories exported less and received fewer dollars, the Chinese government could continue to create and distribute the same number or yuan as now. The only difference: Instead of giving these yuan to its people in exchange for many dollars, it merely would give those same yuan to the people, while receiving fewer dollars.

There would be less accumulation of T-securities at the FRB, a difference that has scant effect on the Chinese worker or on the Chinese economy.

How would the Chinese government give yuan to its people, if it were not exchanging yuan for dollars? Answer: More domestic deficit spending on things like roads, health care, retirement benefits, etc. A case might be made that the Chinese population would be better off receiving salaries for building domestic roads, providing domestic health care, etc., than receiving salaries for creating toys, clothing and other export items of no domestic value.

Without exports, the Chinese government would create about the same number of yuan as it now creates with exports. The entire domestic process would be affected very little. Yes, China can use U.S. dollars for certain imports, but I suspect it already has stockpiled enough dollars for that purpose to last several lifetimes, so the question becomes: Does China need to export as much as it does?

Monetarily non-sovereign nations like the PIIGS, which cannot produce unlimited amounts of money, need to have a positive balance of payments. So the other question is: Why does the U.S., which is monetarily sovereign, want to increase exports?

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

No nation can tax itself into prosperity