Tag: the government creates money

–Warren Mosler interview: What if China stops buying U.S. debt?

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

Warren Mosler is that rare individual who is both a successful businessman and an economist. He now is running for the Senate from Connecticut.

Warren has the ability to explain abstruse economic subjects in simple, illuminating ways. Here’s one excerpt from a recent interview. You can read the entire interview at Interview.

(Background: The Chinese buy U.S. T-securities by transferring U.S. dollars (not yuan) from their checking account at the Federal Reserve Bank to China’s T-security account, also at the Federal Reserve Bank. Later, when the Chinese redeem those T-securities, the money is transferred back to China’s checking account at the Fed. During the entire purchase and redemption process, the dollars never leave the Fed.)

Interviewer: “Money the Chinese earn by sending merchandise to the United States are credits in the U.S., and these credit units are nonredeemable, so Chinese owners can do nothing with these things unless they use them to buy American products, and if they do, those units become profits for American firms.

But there is also another possibility, which sometimes raises concerns in the larger public, and this is what happens if China should choose to get rid of these dollars by selling the U.S. securities they own.

While the amount of dollars owned by foreigners doesn’t change, the price of the dollar would in fact decline. If China sells off American debt, dollar depreciation may be substantial.”

Mosler: “Operationally, it’s not a problem because if they bought euros from the Deutsche Bank, we would move their dollars from their account at the Fed to the Deutsche Bank account at the Fed.

The problem might be that the value of the dollar would go down. Well, one thing you’ve got to take note of is that the U.S. administration is trying to get China to revaluate currency upward, and this is no different from selling off dollars, right?

So, what you are talking about (selling off dollars) is something the U.S. is trying to force to happen, would you agree with that?”

Interviewer: “Yes.”

Mosler: “Okay, so we’re saying that we’re trying to force this disastrous scenario—that we must avoid at all costs—to happen.

This is a very confused policy. What would actually happen if China were to sell off dollars? Well, first of all, the real wealth of the U.S. would not change: the real wealth of any country is everything you can produce domestically at full employment plus whatever the rest of the world sends you minus what you have to send them, which we call real terms of trade.

This is something that used to be important in economics and has really gone by the wayside.

“And the other thing is what happens to distribution. While it doesn’t directly impact the wealth of the U.S., the falling dollar affects distribution within U.S., distribution between those who profit from exports and those who benefit from imports.

And that can only be adjusted with domestic policy. So, number one, we are trying to make this thing happen that we are afraid of, and number two, if it does happen, it is a demand-distribution problem, and there are domestic policies to just make sure this happens the way we want it to be.”

So there you have it. All the hand wringing about what happens if China were to stop buying T-bills and instead buy some other country’s money is just a bunch of blah, blah, blah.

The relative value of U.S. dollars, compared with other money, would go down, which is exactly what the Federal government has been trying to effect — foolishly, I might add.

When China or any nation buys T-securities (aka “lends us money”), they must use dollars, and the dollars never leave the Fed.

Even if China were to buy another nation’s debt, using dollars it has earned from exports, the dollars still never would leave the Fed.

Think closely about this process and you will see why federal “borrowing” is a meaningless exercise.

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

No nation can tax itself into prosperity

 

–What is the American dream?

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

What is the American dream? Does it focus on money, taxes, deficits, debt and government? Or does it focus on people?

Today’s oh-so-chic belief among debt hawks, mainstream economists, some Democrats, most Republicans, all Tea Partyers, the public and the media is: The federal government and the federal debt are too big. The government should get off our backs and allow our John Wayne, American, can-do spirit to take over. We don’t need big government; we would rather roll up our sleeves and do it ourselves. The main problems with big government are: It requires big taxes and it inefficiently does what we-the-people can do better.

Wrong on all counts. You who understand monetary sovereignty already are aware there is no relationship between federal spending and federal taxing. The government can spend endlessly, without taxes. You also understand that federal debt = money, which is necessary to grow our economy. And while big government can be massively inefficient (as can business, for that matter), there are several things big government can give us, that business cannot give us as well or at all.

In another post on this blog, I list some of the government funtions the right wing would like to eliminate. See: Debt hawk proposals.

I believe the American dream should include:

Universal health care: There is no reason every man, woman and child in America, citizen and non-citizen, ever should lack health care – and not just any health care, but the world’s best health care. Medicare not only should be expanded to pay more and for more procedures, but it should cover everyone. It should cover doctors, hospitals, drugs, home care and hospice. There simply is no reason why anyone should suffer health problems for lack of money.

Universal education opportunity: In other posts on this blog, I have made the case for paying students a salary for attending school.

Freedom from poverty: Poverty has many causes. The debt hawks act as though poverty always were the fault of the poor, and are reluctant to provide assistance, “lest it encourage laziness.” There are many reasons for poverty, and laziness is one of them, but surely not a primary one. Most poverty is thrust upon people who either cannot work or cannot find work. No one in America should go hungry. No one in America should be forced into homelessness.

The problem with the high rise, slum housing projects like notorious Cabrini Green in Chicago, was not the concept. The problems were crime and maintenance. Had these buildings been treated like condos, with plenty of police protection and 24-hour maintenance, they could have been as suitable as an upscale, high rise condo. However, the government built them, then walked away from them, and the criminals took over, while the buildings fell apart.

Retirement: It simply is a fact of life that few people are able to amass enough money during their working years, to support themselves during retirement, without a significant loss of life style. Social Security is a good, though inadequate, support system for our senior citizens, and now there is talk about raising the retirement age and reducing benefits in other ways.

FICA should be eliminated and Social Security benefits should be increased. Only big government can do this.

Security: Police and the army: Obviously the responsibility of big government, unless you believe in the vigilante system of justice or wish to fight the enemy with your own hands.

Safety in food, drugs, investments, environment: Another responsibility of big government, unless you prefer eating unsafe food, taking unsafe drugs, having unsafe banks and watching our environment degrade. If anything, more government help is needed, not less, as this most recent recession has demonstrated.

Transportation: Yet another responsibility of big government, unless you and your neighbors plan to take pick and shovel in hand, to build roads, airports, and public (oops, private) transportation.

There are many other irreplaceable functions of big government, and the point is, people who decry big government simply do not know what they are asking for. If anything, the government needs to get bigger, to take care of our unmet people needs. I agree with not wanting federal taxes. The government neither needs nor uses them. But the notion that government should “get off our backs” is misguided at best and suicidal at worst.

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

No nation can tax itself into prosperity

–The “impossible” cure for stagflation

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)

Mitchell:
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
http://www.rodgermitchell.com

No nation can tax itself into prosperity

–The “unsustainable” federal debt lie.

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

You’ll read and hear a great deal now, before the November elections, about how to stimulate the economy. Nearly all of what you will read and hear is nonsense. I’ll quote from a typical article, this by David Kocieniewski, published in the New York Times on September 10, 2010:

“. . . economic research suggests that tax cuts, though difficult for politicians to resist in election season, have limited ability to bolster the flagging economy because they are essentially a supply-side remedy for a problem caused by lack of demand.”

Taxes remove money from the economy. Therefore, tax cuts prevent removal of money from the economy. Functionally, there is no difference between a tax cut and a spending increase. “Supply side” vs. “lack of demand” is economic gibberish.

“The nonpartisan Congressional Budget Office . . . (said) tax cuts for high earners would have the smallest ‘bang for the buck,’ because wealthy Americans were more likely to save their money than spend it.”

This is the “first use” myth – the belief that dollars stop after their first use. What do wealthy Americans (or any Americans) do with money they save? They bank it and invest it. The money instantly goes to such investments as bank accounts, stocks, bonds, real estate, CDs, etc. In short, the money goes to other people and businesses, which borrow from those banks and own those stocks, bonds, real estate, CD, etc.

Then those people instantly either spend, invest or save the money, and it moves into other hands. With every step, a fraction of the money is spent. In one year, an individual dollar may pass through hundreds of hands, which adds up to a great deal of spending. Money never stops moving from hand to hand, a fact the politicians never seem to grasp.

“. . . direct payments to the unemployed and Social Security recipients or reducing the payroll taxes of workers . . . are considered politically untenable with many elected officials reluctant to even utter the word “stimulus” after the $787 billion stimulus.”

Why is “stimulus” a bad word? Because the recession was not completely cured by the stimuli used. Imagine your house is burning. The fire fighters pour water on it. The fire goes down, but not completely out. So the fire fighters stop. “Water” has become a bad word., because the fire still is smoldering. This is the logic that now rules our economy, while your house continues to burn.

“’. . . firms don’t hire based on tax breaks; they hire based on demand,’ said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center. “So a lot of the tax breaks are likely to be rewarding people and companies for that they were going to do anyway.”

Mr. Williams, it’s not a matter of “rewarding people.” It’s a matter of not removing money from the economy. Personal taxes, business taxes, taxing the rich, taxing the poor – all taxes remove money from the economy. One dollar in taxes removes exactly one dollar from the economy, no matter who is taxed.

“(Predicted) surpluses have now become crushing deficits . . .”

Exactly, what is “crushing” about federal deficits? Has anyone noticed any federal difficulty servicing its debts? Today, we are talking about tax cuts, so who exactly is being crushed? This is classic debt-hawk mythology.

“The specter of a ballooning national debt has led even some of the early supporters of the cuts, including the former Federal Reserve chairman Alan Greenspan, to advocate letting them expire.”

Does this man still retain any credibility? Isn’t he the guy who thought interest rate cuts would prevent the recession?

“‘We don’t think taxes ought to be increased in the middle of a recession for anyone,” (said) Senator Mitch McConnell. . .”

Exactly right.

“The Obama administration dismisses that argument, saying that nearly a third of the cost of the cuts — more than $700 billion during the next decade — would go to the wealthiest 2 percent of Americans.”

Are they ignorant or just playing politics – or both? They want to remove $700 billion from the economy, simply because the first people to touch it would be rich?? What about the second, third and fourth people to touch it?

“One curious omission in the Obama plan is the tax cut proposal that many, including the Congressional Budget Office, believe would do the most to spur hiring: a payroll tax holiday. According to various news reports, Obama economic advisers passed on the idea because they feared it would be too expensive or would deprive Social Security and Medicare of crucial revenue. Administration officials declined to discuss their decision.”

Page 149 of my book, FREE MONEY, asks the question, “Which taxes should be eliminated first.” The answer given: “Eliminate Social Security and Medicare taxes.” I discuss this further at “Ten Reasons to Eliminate FICA”

“Edward D. Kleinbard, former chief of staff of the bipartisan Joint Committee on Taxation, said the reliance on tax expenditures had distorted the budget process because it induced the public to overlook the fact that — unless they are accompanied by spending reductions — tax cuts have the same effect on the deficit as additional spending. . . . The debate has become so unrealistic it makes you want to scream.”

No, what really makes you want to scream is the ridiculous, unsubstantiated, totally wrong belief that deficits are a bad thing – so bad in fact, they are worse than recessions and slow economic recovery. So long as politicians do not learn that not only is deficit spending necessary, but an increasing rate of deficit spending is necessary, we will continue to have a recession on average, every five years.

Heaven save us from them.

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

No nation can tax itself into prosperity