Tag: the government creates money

–Why a recession every 5 years?

An alternative to popular faith

In the past 100 years, why have we had 20 recessions or depressions, an average of one economic crisis every 5 years. I was thinking about this, when I received a response to one of my posts. The writer criticized a position by quoting Thomas Jefferson. Thomas Jefferson!

Economics is one of the few sciences where someone feels free to correct a hypothesis by quoting two-hundred-year-old statements from a politician. Imagine a physicist or a medical doctor being criticized on the basis of statements by Columbus.

Physics turned with the Relativity and Quantum theories. Medicine changed with the development of the microscope and the discovery of germs. Astronomy changed with the telescope and the realization the sun is just one of myriad stars. Economics has changed, too.

This science, and most of its hypotheses, were turned on their heads with the end of the gold standard. Just as Einstein gave us E = MC2, and told us space and time actually were spacetime, a single continuum, the end of the gold standard told us that debt and money were debt/money, a single entity, and gave us, Money = Debt.

Years ago, money was a physical substance, a barter substance. No debt involved. Later, money represented a physical substance. The merger of debt and money had begun, because the holder of money now was owed the physical substance.

With the end of the gold standard, money became pure debt, in short, debt/money. Yet the public, including the politicians and the media, and sadly even some economists, imagine 1971, the final end to the gold standard, never happened. What they believed before 1971, the greatest change in the history of economics, they still believe. It’s tantamount to basing all your unchanging astronomical theories on a flat world and the earth as center of the universe.

So in the minds of the public, the politicians and the media, debt and money still remain two separate entities. In their minds, the U.S. federal debt is too large, though “federal debt” merely is an accounting term meaning the net money created by the federal government. Those same people, if asked whether the U.S. has too much money, would say, “No,” but they feel the U.S. has too much debt!

In their minds, federal deficits are “unsustainable,” though the federal government now has the unlimited ability to create debt/money.

In their minds, the federal budget should be balanced, even while population growth, the trade deficit and inflation all conspire every day to reduce the per capita supply of real money. With a population annual growth of 1% and a modest 2% inflation, the per capita supply of real money in a balanced budget would fall 26% in only 10 years. Visualize each of us owning $10,000 today. By 2020, we each would own only $7,300 in real money. How could that support even zero economic growth? Add in the needs of growth itself, and the debt/money supply requirement grows further.

In their minds, the current debt should be erased by increased taxes and/or decreased spending, despite acknowledgment that increased taxes and/or decreased spending hurt people and hurt the economy.

In their minds, a federal profit (for instance, on interest coming from loans to industry) is good, despite federal profits being defacto taxes, debt/money coming from the private sector.

In their minds, the federal government is just like you and me, and must live by our rules of fiscal prudence. Yet the federal government is not like you and me, not even like state, county and local governments, not even like corporations. The federal government is unique, for it has the unique power and authority to create unlimited amounts of debt/money.

We first must acquire debt/money in order to spend. The federal government creates debt/money by spending, a wholly different process with wholly different rules.

As a science, economics has not grown from the philosophical beliefs of Everyman. Intuition dominates. It is less a science, than a religion based on personal experience, rumor, authority, faith and desire. Despite close study of endless data (Visualize religious scholars bending endlessly over their bibles), facts are ignored, discounted or twisted, while those who speak facts are ridiculed by the masses.

No politician would dare to say, “Federal debt growth is necessary, forever,” though that is true. The few academics with the courage to speak the truth are shouted down. The repeated failures of the government to prevent inflations, deflations, recessions, depressions and stagflations all are ascribed to normal, inevitable, unstoppable cycles, not to errors of belief and action.

And that is why we have had a recession every 5 years and will continue to do so.

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

— Government’s gain = economy’s loss

An alternative to popular faith

On 4/7/10, The New York Times wrote: “G.M. reiterated a commitment to pay off the balance of its debt to the American and Canadian governments by June. It made payments totaling $2.8 billion, including interest, in December and March toward an initial balance of $8.3 billion.”

That’s $8.3 billion leaving the U.S. economy and disappearing into the American and Canadian governments’ maws, never to be used or even seen, again. Financially, this is an $8.3 billion invisible tax increase – about $28 taken from the pockets of every man, woman and child in America.

The New York Times article continued, “Most of the $50 billion G.M. borrowed was converted to a 61 percent equity stake held by the Treasury Department. The only way the Treasury can recover that debt is through the sale of its stock. (Chief Financial Officer Chris) Liddell said a public stock offering would occur ‘as soon as it makes sense,’ but only “when the markets and the company are ready.”

The private sector will lose whatever the government receives for its stock – another invisible tax increase. The $50 billion will amount to $166 in stealth taxes taken from each American. In addition, the stock sale will depress the value of privately held stock, a loss for American shareholders.

Question: What is the difference between a federal government profit and a tax increase? Answer: Essentially none, if the profit comes out of the U.S. economy.

Moral: The federal government, as the creator of money, never should take money from the private sector. Ask your Congressperson: “If the deficit spending, for which you voted, stimulates the economy, what will be the effect of taking all those billions back out of the economy?”

Amazingly, the media and the politicians, and even some economists, will ignore the pain experienced by people in the private sector and cheer the government’s not taking a loss.

And that is why we have a recession every five or six years, in America.

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

–Debt “unsustainable” no longer.

An alternative to popular faith

        Just when I thought the Chicago Tribune was starting to get it, they ruined everything. For years, the Tribune has told its readers the federal deficits and debt are unsustainable, that China and the other nations would refuse to lend to us, that the government would be unable to service its debts and that federal taxes needed to be increased or spending reduced.
        And because the federal debt is unsustainable, the government is not able to support Medicare, Social Security, Medicaid and universal health care without significant tax increases or benefit cuts.
        Then I saw this in the March 30, 2010 editorial titled, “Debt Dangers”:“But the U.S. is not about to run out of money, even if it keeps overspending. Why not? First it can appropriate more of its citizens earnings through the tax system. Second and most important, it can print money to pay its bills.”
        Wow, is the staid, old Tribune finally starting to understand? Do they realize the government can support Medicare, Social Security, Medicaid and universal health care, even if taxes are reduced? Do they understand we don’t need China and the other nations to lend to us, because we can create money without borrowing?
         Sadly we were not to be so fortunate, for a few sentences later, the editorial said, “The danger is that (the government) would create money to make those debts payable, a course that would lead to much higher inflation.”
        Never mind that today, following the most massive deficits in our history, the government’s chief worry is deflation, not inflation. Never mind that for the past forty years, there has been zero relationship between deficits and inflation, and in fact, the largest deficits have corresponded with inflation reductions. (See the graph, below).

Debt vs inflation

        And never mind that deficits repeatedly have proved stimulative, while reduced deficits are depressive. Intuition and popular faith trump facts every time.
        Then the Tribune editors compounded the crime by stating, “The economy would also suffer as businesses and households scrambled to cope with the disruptive effects of soaring prices. It would suffer again if and when the government decided to curb inflation by driving up interest rates — a step that virtually guarantees a sharp downturn.”
        Never mind that high interest rates have not slowed GDP, nor have low rates stimulated, which is why the Fed’s twenty rate cuts failed to prevent or cure the recession. (See the next graph. If high interest rates slowed GDP, the peaks of the blue line would have to correspond with the troughs of the red line.)

InterestratesvsGDP

         But at least, the Tribune has taken the first step, and perhaps we never again shall see that ridiculous sentence, “The federal debt is unsustainable.”

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

–Another attempt to explain the positive effect of deficits

An alternative to popular faith

I’m searching for a way to explain that contrary to intuition and to what the media and politicians say, large federal deficits are good, not bad. Please read this and tell me whether you believe its clear enough for non economists.

The federal government is unique, far different from you, me, businesses and local governments. Its finances, particularly its deficits may seem counter-intuitive. You may have three fundamental questions about federal deficits:

1. Are large deficits unsustainable? Is there a time when the government will not be able to service its debts?

2. Do large deficits have an adverse effect on the economy?

3. Are large deficits beneficial?

Unsustainable: Visualize a scenario where there are zero federal taxes. The federal government has no income, yet sends you, “Mr. Lucky,” a check for $10 trillion dollars. You will deposit the check in your bank.

Will the check bounce? No. Your bank will credit your account for $10 trillion, then send the check to the Treasury, which will credit your bank and debit its own balance sheets for $10 trillion. You now have $10 trillion in your account, allowing you to buy a few thousand Rolls Royces or the State of Montana, whichever you prefer.

The government can debit its balance sheet and credit your bank, endlessly. The balance sheet is just a score sheet with a number. Whether that number is $10 trillion or $100 trillion makes no difference to the score sheet. The only limit is the artificial “debt limit,” on which Congress votes periodically. There is no functional limit on what any balance sheet can read. The government can write a check of any size, despite zero taxes.

Taxes may be levied for several reasons, but supplying the government with spending money is not one of them. The government creates money by spending. It does not use tax money. Therefore, all federal debt is sustainable.

Adverse effect: One possible adverse effect often mentioned is taxes. (“My children and grandchildren will have to pay for today’s deficits.”) But, we just saw that taxes do not pay for deficit spending. We are the children and grandchildren of the Roosevelt and Reagan eras. We never have paid for those monster deficits. The mantra about children and grandchildren is a myth.

A second possible adverse effect is inflation. Contrary to popular faith, inflation is not “too much money chasing too few goods.” That is an obsolete slogan. Today, we live in a world economy. Given sufficient money, there never can be too few goods in the world to sell. Instead, inflation is loss of perceived money value compared to the perceived value of goods and services.

The phrase, “too much money chasing too few goods,” addresses only supply. Inflation however refers to supply and demand, for money and for goods and services. The demand for money can change without a change is supply, and is related to interest rates. The demand for goods and services can change similarly, but generally increases when money supply increases.

Since we went off the gold standard, in 1971, there has been no relationship between deficits and inflation. In fact, the largest deficits have corresponded with the lowest inflation. See the graph, below:

Instead, inflation has corresponded with oil prices. See how inflation and oil prices move in concert, but oil moves much more, indicating oil prices are “pulling” inflation. (See the chart, below) Oil is the one “good” that can be in short supply and affect the prices of all other goods and services.

Oil prices and inflation

Despite the fact that large deficits have not caused inflation, I suspect there may be a point at which truly gigantic money supply growth could lead to inflation. We’re just nowhere near that point, as witness the current deflationary concerns.

At any rate, if inflation ever did crop up, the government would increase interest rates to increase the demand for money.

Beneficial: New York, a large economy, needs more money than does Peoria, a smaller economy. In fact, by definition, large economies need more money than do smaller economies. So for an economy to go from smaller to larger, its money supply must grow.

If you feel economic growth is beneficial, you also must feel money growth is beneficial. Federal deficit spending is the way the government adds money to the economy to make it grow. Federal deficits are beneficial.

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Does this seem like it would be clear to the average person? What are your suggestions?

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