234 thoughts on “What Is President Obama’s Fiscal Message?”

1. Is Obama making promises again? Must be an election.

   You lost me Democrats. Green? Libertarian? Probably. No way does a Democrat ever get my vote or money again.

   Fool me once, shame on you. Fool me twice, shame on me. No thank you Mr. President.

2. Beyond Orszag criticizing the President, even Robert Reich popped up out of his tea pot to explain what a lousy idea this is…. No one needs this, he wrote.

   In America, *we* don’t look under rocks like *this*, for answers:

   Ireland is to break up the nationalised lender Anglo Irish Bank, hoping to end a disastrous saga that has shattered confidence in Irish finance and left taxpayers with daunting debt.

   By Ambrose Evans-Pritchard, International Business Editor
   Published: 7:35PM BST 08 Sep 2010

   Anglo Irish Bank loss doubles to record ?8.2bn

   The move came after yields on Irish 10-year bonds rose above 6pc for the first time since the launch of the euro. Spreads over German Bunds rose to a record 379 basis points.

   Greek debt was pummelled after National Bank of Greece, the country’s top lender, announced plans to raise €2.8bn (£2.3bn) in fresh capital, raising concerns that Greek lenders are taking precautions against the risk of debt restructuring on their holdings of government debt.

   Credit default swaps (CDS) for Portugal, Spain, Italy, and Belgium have all surged this week. Markit’s stress gauge for the group is now higher than during the debt crisis, when the EU launched its €440bn bail-out fund and the European Central Bank began buying eurozone bonds.

   Joachim Fels, chief global economist at Morgan Stanley, said strains had reached a point where “one or several governments” may soon have to tap soon the rescue mechanism.

   “Neither the European sovereign debt crisis nor the banking sector crisis has been resolved and both continue to mutually reinforce each other,” he said, adding that the EU’s stress tests for banks had failed to restore confidence.

   Investors are bracing for a flood of fresh bond issuance, while concern is mounting that austerity measures in Ireland, Greece, and Spain have left these countries trapped in a downward spiral.

   Brian Lenihan, Ireland’s finance minister, said Anglo Irish would be split between a healthy deposit bank and a bad bank that would sell assets and wind down operations. “In order to restore the reputation of the Irish financial system it is essential to bring finality to the problem of Anglo Irish Bank,” he said, without clarifying the likely cost. The EU greeted the plan as a “positive” step. Default swaps on Anglo Irish jumped 72 points to 785 basis points earlier in the day, reflecting concerns that Dublin may give in to popular pressure and walk away from the bank’s debts – as Iceland’s government did with its trio of Viking raiders.

   A column by Fintan O’Toole in the Irish Times said the problem had become too big for Ireland after rescue costs escalated to €25bn, and possibly higher. “The choice is now stark: do we go on being “good Europeans” at the cost of destroying our own society or do we become “bad Europeans”, lose the trust of our European partners, but save ourselves?”

   “There comes a point of existential crisis when even the meekest of countries has to put its vital national interests (first). We are at that point now,” he said, deeming it the job of the ECB to shore up Anglo Irish if it thinks default poses systemic risk.

   Political doubts are also surfacing in Greece. This week’s cabinet shuffle by premier George Papandreou is a tilt to the populist wing of the PASOK party, hinting at austerity fatigue after the economy shrank 1.8pc in the second quarter. The EU debt agency Eurostat said Athens has not yet provided documents on the country’s hidden debts.

   Off with the heads of those on Wall Street, I say!
   ….Lady in Red

3. Describing the deficit in terms of GDP is a euphemism. It should be descibed as a percentage of the government’s income which is about 2.7 trillion, making the deficit 50% of tax receipts.

   So, if the government were a median American making 45k a year, it would be spending 67.5k a year.

4. Now that’s an analogy I like! More to thw point, if the Government made $50K a year, and spent $100K, approximately $66,666 would go to non-discreationary spending – things in an ordinary household like food, shelter, utilities and medical expenses. The remaining $33,333 would go to discreationary spending, which for our house holders might be a newer car, vacations, hobbies, etc. Just like you can’t run a household for long when your “have to pays” exceed your income, we can’t run our country for long because our have to pays (including debt service and deficits) exceed our revenue.

5. Regarding this:

   “The president should be pushing harder for agreement on medium-term deficit reduction, including by putting forward ideas for comprehensive tax reform. The US system has become complex and quite opaque – people have a hard time figuring out what taxes they are pay and what they get in return. Tax systems elsewhere in the industrialized world are just as (or more) progressive while also being more efficient, i.e., cause less distortion in terms of reducing the incentive to work and to invest per dollar of revenue collected.

   In the context of redesigning the tax system to promote employment and responsible savings, it is entirely appropriate to look for ways to shift the burden of taxation back to relatively high income individuals. This group has had a great run over the past 30 years – while the consequences for most Americans, as seen for example in real median wages (flat), the stability of employment (look around you), or the vulnerability to financial crisis (2008-09 was a wake-up call), have been much less favorable.”

   In two paragraphs you summarized what I’ve been reading over the last few months in books and blogs. Meaning, a complex topic filled with confusing diversions is stated clearly and concluded simply. The wider American public absolutely needs to engage on this issue but of course the public debate will be mediated by crazy-town tv and radio so yet another absolutely essential issue to the well-being of ordinary Americans will be tossed to the lions of America’s tele-communicated food fight and we lose again.

   So. From your perspective as an excellent debater, how can America improve it’s public debate on this complex issue of tax reform? The public conversation about taxes is usually filled with manipulative obfuscation that exploits ordinary sensibilities and feeds on resentments. How can this issue be framed simply to make it clear to ordinary Americans, who have not read economics or who are not accustomed to expressing complex abstract thoughts, that we have a stake in tax reform and we can come out ahead if we push for it? The country is filled with hardworking people who are totally befuddled about almost every aspect of finances in our daily lives. If Suze Orman was an enlightened tax reformer, how would she debate these issues? Meaning, can the approach and style of Suze Orman help on this issue?

   And, how can tax reform be opened up but not have that become yet another opportunity to widen extreme inequalities?

6. It’s not true that “everyone agrees we need to worry about the deficit”. I don’t. Your comments on the deficit show a lack of understanding of the true nature of public debt. How does one understand the concept of society being in debt to itself? The dollar is a fiat currency and the government can create dollars at will. It has no need to access the financial markets in order to spend. In the tradition of Abba Lerner’s Functional Finance, we should spend to the extent that there is unemployment and unused resources. And worries about inflation are pretty groundless as long as we stop spending when we reach capacity restraints.

   I discuss this further at

   http://commentsongpe.wordpress.com/2010/06/23/deficits-dont-matter-2/

   We don’t need to reduce the deficit – we just need to undertand it.

   Jim
   commentsongpe.wordpress.com

7. The liberal politicians and Obama lose the argument because of their definition of rich. Try living in the northeast on a combined income of $250K. When you are finished paying federal, state and local property taxes, you hardly feel rich. Plus, the way capital gains are treated anyone trying to save or invest for their own future are also treated as “rich” by the liberal elite definition. A better definition of “rich” would cast the debate in a more favorable light.

8. Obama’s fiscal message? Yes, now that the poll numbers have delivered the political message, the next step is the PR campaign. Unfortunately, the administration’s ‘credibility card’ has been lost. In less than two years, the fraudulent Obama/Democrat ‘change’ jingle is a genuine mockery. But how to sell an ultra-new-and-improved version of that snake oil?

   http://www.vdare.com/roberts/100831_death_by_globalism.htm

9. I second that. Sure, I don’t want our government to be deep in the hole, but I much more don’t want people thrown out on the street because programs they needed were cut.

   And anyway, history has shown the best way to cut down the deficit is to grow the economy with direct investment. That’s how we paid off World War II.

10. This is a flat out lie from Obama. We know exactly who he is, a Reaganite neoliberal. If he really does ask Democrats to let the tax cuts for the rich expire, it’ll be only under the extreme duress of extreme political desperation. But I don’t expect this to add up to anything more than political theater.

    Everyone agrees that we need to worry about this deficit.

    If that means the deficit should be one of the things we’re worrying about right now, it’s wrong at best, a lie at worst. MMT denies a country controlling its own currency needs to worry about deficits at all so long as there’s underutilization and unemployment. On the contrary the government should run deficits under those circumstances, until we acheive full capacity and full employment.

    But that’s nothing new, of course. It’s really updated Keynes.

11. Oh boo hoo. Here I am, shedding a tear for you. Now excuse me while I go call the unemployment office yet again.

12. Born and raised in Jersey, so don’t try to feed me this BS that you can’t get by on $250k. Sell the McMansion and the Beamer, and maybe start playing at a public course.

13. I am far from schooled in economics – formally, informally, or from having slept in a well known hotel chain which will remain nameless.

    But, beyond a few bloggers and – perhaps – economists outside the darlings of the MSM is ANYONE thinking about how – I dunno it’s frustrating to express when you are relatively “ignorant” – that the experiment that is the US economy (and maybe the world economy) has changed.

    A great number of “economic productive” jobs – inductries – have been offshored so how in the heck do you get back to fuller employment and increased capacity? Do we all become derivative traders?

    I am a “second wave” boomer and there are many more to come – all of which will be throttling back spending, downsizing, and drawing down investments as we hope to be able to retire. And, yeah, I’ll take a Wall Mart Greeter job – to survive and eat – if I have to.

    Seems to me we are at a critical inflection point – at least in terms of demographics – and as a boomer I for one have no interest in taking on any more debt and am shedding it as fast as I can.

    So, why do they want “me” to borrow more?

    Sorry for the rant and inarticulate expression of frustration with current economic policy.

    Pete

14. Perhaps, if instead of calling it “debt,” we more properly named it “net federal money created,” we could end the harmful misinformation. The federal government is not, repeat NOT, in debt, at least not the way you may think.

    The federal government is not like you and me. It has the unlimited power to create money. If taxes were zero and federal borrowing was zero, this would not affect by even one penny the federal government’s ability to spend money and to service all outstanding debt.

    This all came to pass in 1971, when we became a monetarily sovereign nation.

    The only so-called “debt” problem is that the debt is too small to recover us from the recession. The debt hawks are like guys who turn off the fire departments water, because they don’t believe water puts out fires. Meanwhile, your house is burning.

    Rodger Malcolm Mitchell

15. Recently, several small business owners in my state were interviewed for their perspective on the proposed small business tax cut to promote equipment purchase and expansion hence creating employment.

    Of ten interviewed, only one small business indicated they were poised to expand and would do so regardless of the business tax benefit. This business has a gov. contract. ALL others responded that they were not confident to increase anything nor hire more workers without solid evidence of increased consumer demand. Toss the current commercial real estate fiasco into the small business criteria necessary for growth and….

    The bulk of consumers are not in position to substantially increase consumption. Long-term unemployment, flat to deteriorated wages and fear of the future- certainly motivation to consume?

    In my state, the number of small businesses filing for bankruptcy or simply closing their doors continues to slowly rise.

    Precisely how is the President’s proposal supposed to spur growth? Seems more like a short-tailed cat chasing its tail.

    Our tax system is woefully complex, skewed and inefficient. I simply can’t imagine a reasonable solution even coming to intelligent debate in our current political climate. Should this ever seriously occur, the lobbyists on K Street will be in remuneration heaven, as if they already aren’t with their “helping” to “iron out” the details of financial regulatory “reform”.

    I appreciated Prof. Johnson’ interview on PRI the other day; insightful. The above posting seems less worthy in that practically anything coming out of the WH between now and November is to salvage as many democratic seats as possible. Spin to win seems to me to be the WH “battle cry”.

16. You’re right, but it’s actually updated Chartalism.

    Rodger Malcolm Mitchell

17. tax dollars ripped from the working class are subsidizing a con game that privatizes profit and socializes poverty

18. His point has validity in that this is commonly held perception, not that taxes shouldn’t fall in this demographic. Belittling the feeling won’t help because it is widespread. The problem, near as I can tell, is that the influence of Wall Street, and other money in the area, props up the cost of living. I lived in DC area on 80k much better than I live in NYC area on 150k.

19. In a monetarily sovereign nation, taxpayers do not pay for government spending.

    The U.S. is monetarily sovereign. You, as a taxpayer, do not pay for U.S. federal deficit spending. If all federal taxes were zero, this would not affect by even one penny, the federal government’s ability to spend.

    By contrast, Illinois, Cook County and Chicago are not monetarily sovereign. Those taxpayers do pay for their local government’s spending. It’s important to understand the difference.

    Rodger Malcolm Mitchell

20. WSJ has had 2 days of interesting articles on the increase in health care costs, which were not predicted. The WH has looked flat footed in response, and surprised that businesses would raise rates (shocked, shocked, shocked).

    I hope Baseline will comment.

21. Federal deficit spending creates money. All taxes, whether on the rich or on the poor, destroy money. A growing economy requires a growing supply of money. Therefore, any tax, slows economic growth.

    This is not hypothesis. It merely is a factual description of the way the economy works.

    Those who feel it is “O.K. to tax the rich because they can afford it,” simply do not understand that by taxing anyone, they are punishing themselves. You cannot remove water only from the north end of a bath tub.

    Rodger Malcolm Mitchell

22. Typical class warfare. The underclass supports tax increases on the rich, not because the government needs the money (It doesn’t even use tax money, much less need it), but because anything that punishes the rich feels good to the poor.

    The fact is that taxing the rich hurts the poor much more than it does the rich. The reason: All taxes, whether on the rich or on the poor, remove money from the economy, slowing the economy. The poor always are hurt more by a slowed economy.

    Sadly, the poor never seem to understand this.

    Rodger Malcolm Mitchell

23. Don’t be a child. The president isn’t your valet.

24. The Green Party (are they still around) and the Libertarian Party can make promises all day long. They never get elected, though, so they never have to follow through on them.

    Politics is the art of compromise. So is life, really, unless you are an artist (unless you’re an artist that wants to sell your work).

25. The health care plan could have been wonderful, if only the federal government simply had paid for it. But misguided deficit fear prevented that, and gave us a cockamamie, impossible-to-fathom plan, that has marginal benefits at best.

    The same thing happened with the “doughnut hole” in Medicare Part D, and with the age increases in Social Security. The government, now being monetarily sovereign (since 1971) neither needs nor uses tax money to pay for spending. It should pay for universal health care, and not have constructed a convoluted, Frankenstein plan that pleases no one.

    Rodger Malcolm Mitchell

26. The point is, look at the median incomes in your area. Compared to that, people making $250 ARE rich, not matter how you “feel”.

    From http://www.ers.usda.gov/data/unemployment/RDList2.asp?ST=NJ, median household income in NJ is 70,347.

27. Obama’s right: crank up taxes on the rich and give the middle class another break.

    The US middle class has a proven and reliable track record of spending every nickel it has — and a whole lot more.

    Who better to goose the economy?

28. So middle-class people (me) who support raising taxes on the rich are the underclass? What is this, the middle ages?

29. Nick,
    Rather than silly quibbling about whether you’re “underclass” or “middle class,” how about discussing the facts that:
    1. All taxes hurt the economy.
    2. The federal government neither needs nor uses tax money.
    3. Taxing the “rich,” by removing money from the economy, will hurt you, unnecessarily.

    Rodger Malcolm Mitchell

30. The historical fact that everyone in this debate tiptoes around is that taxes on the wealthy were much higher during the most prosperous years of the 20th century.

    How about implementing the Eisenhower tax plan? Remember the Eisenhower years? We were prosperous and we built the interstate system. American industry was doing just fine. Top marginal tax rates approached 90%. Plenty of money in the federal coffers and millionaires managed to live decent lives.

    I’d like to see an ultra simple tax system that recognizes the concept of livable wage – the minimum amount of money an individual needs to live a basic, decent life. It’s different from the poverty level.

    The original income tax in 1913 exempted the first $60k (inflation adjusted 2007 dollars) of income. Let’s give each person a ~$20k exemption, because you need at least that much these days to stay off government assistance, and go for a steeply progressive income tax above that. Ditch all the complex deductions, credits, and loopholes.

    There should be a minimum tax on corporate profits so that ExxonMobil can’t pocket tens of billions, do some accounting magic, and flip off the IRS.

    We could supplement it with a 0.1% Tobin tax on financial transactions and we’d retire the deficit.

    Of course, this would all have to follow campaign finance reform.

31. Canute,

    Why do you want federal taxes on people and on businesses? Do you believe federal spending relies on federal taxes? Do you believe taxes do not harm the economy?

    Rodger Malcolm Mitchell

32. Mr. Simon Johnson wrote:

    “President Obama is… introducing temporary tax breaks that will more directly stimulate business investment and presumably hiring. ”

    In my humble opinion, the message is, they are “stimulating the corpse”, and misleading people.

    http://special.lib.gla.ac.uk/exhibns/month/june2005.html

    “Iacta alea est (The die has been cast).” We need to focus on the end game.

33. You’re right and that was the point of my post above. How can it be that economists who spend years studying the economy (or at least advanced calculus) can’t understand basic facts about money. We’re in a cage and we’re not going to get out unless we change our view on money. How can a society be in debt to itself?

    Jim
    http://commentsongpe.wordpress.com

34. I believe the message goes something like this”=:

    “People need to be put back to work and uhhh…um..bailouts are bad um…uh..but no wait..they’re also necessary for survival! and well..um..we should stop wasting money and be fiscally responsible, but whoops we can’t stop two pointless and ridiculously expensive wars /now/…and well we need stimulus/investment! but uh, well not so much that it’ll actually make a difference..also we love labor! but whoops we’ve never even heard of the WPA and..like..we’d love to do useful stuff but Republicans are mean! Also healthcare should be available for everyone! so like..uh..here’s a half-hearted system that’s also a giveaway to private insurance companies and uh…we got so much stuff done in terms of “line items” even though in practical terms they were weak, milquetoast, near useless half-measures so you should re-elect us because the other guys are even worse!”

    Or something like that. Translation was difficult with my Clinton-era triangulation decoder ring.

35. No, he’s valet to “The Corporations.”

36. I do exactly that. I’m an NYC native (born in Brooklyn, lived in Manhattan for 10 years.) I make 75k (and there have been times I’ve made only 50k). Here’s how you do it:

    Live in a studio or one bedroom apartment.

    Do not own a car. Take public transportation or walk.

    Don’t buy too much junk you don’t need.

    Don’t have any expensive habits: don’t drink, smoke, gamble, or do drugs.

    Don’t have children.

    Very simple if you’re a decent level above the poverty line. If I was making 250k I’d be living
    like a king.

    Those that feel poor on 250k need to fix their standards. This is not a Liberal/Non-Liberal/anything else position. It’s having standards that make economic sense.

37. Re: @ Pete___Ref: http:www.bigeye.com/griffin.htm “The Creature from Jekyll Island, The Federal Reserve, talk by Edward Griffin” I can’t stress enough the simplistic approach the author paints for the layman observer. His insights and analysis are as a cassandra crying in the wind with the “Holy Grail” in the left hand and the “Thunder of Zeus” in his right! His foresight penned…is of a seminal event in prolific economic/financial journalism. Please read pages 24-27/33 starting at paragraph ***”In particular I’d like to have you look with me at three particular objectives which were very well discussed in that period in which the Federal Reserve System was created.”*** Note: This writing is dated material from 1993 but cronologically shows the benefits of “Lowering Rates to Borrow too Enslavement?” PS. It’s a fantastic read even if your not convinced…it sheds light on some intriguing POV’s for you to make up your own mind. Food for thought unmasking these societal psychological madmen/masterminds. Thanks Simon and James :-)

38. Ref: http://www.bigeye.com/griffin.htm

39. nice try but the federal government DIRECTLY subsidizes corporations with TAX revenue and they have been raiding the social security system for years – who do you think you are talking to, turnips?

40. if we don’t escape, they’ll be harvesting our organs as payment for health insurance subsidies…

41. Raising taxes on the rich, say people earning above $300K, from 35% to say 50%, (well below the tax rates under that radical wealth re-distributor, Dwight Eisenhower), benefits the poor, particularly when capital is being hoarded in uncertain economic times. Someone has to start spending when everyone is holding cash, if the government decides to invest money in building out obsolete infrastructure, high speed rail for instance or encouraging alternative energy production, all the better, decades have passed waiting for corporate America to invest in energy solutions other than carbon.

42. LOL. Nice!!!! We’re really neck deep in crisis: Thanks for that ‘no BS’ translation.

43. @ Anonymous___ Stop…I just cracked a rib, and now I’ve punctured a lung…

44. Three more states to sign on and we are going to have a Constitutional Convention, not another “election”.

    Homeland INSecurity has already launched their counter-insurgency media blitz against the CONSTITUTIONAL CONVENTION that “we the people” are DOING to get out of the metaphysical cage that is the INSANITY of the Money God

    with that STUPID story designed to pump up VIOLENCE in Afghanistan – freekin’ book burning in Florida – talk about throwing salaries at USELESS people!

    I had a United Health Care representative quote a passage from the BIBLE accusing me of trying to rip off the health insurer for 21 cents. You cannot make this stuff up – it’s too outside a NORMAL mind like mine. And now that dude is working for HOMELAND SECURITY and continues to have access to all financial and medical records for the sole purpose of coming up with ways to put in his pocket what he stole from me?!

    FIVE YEARS later, the TRUTH comes out thanks to that “traitor” – Mr Potter – that they did that ALL THE TIME to the people slammed into COBRA – said your check (notified via snail mail with NO TIME to meet the due date) was short in PENNIES as a way to DENY COVERING EXPENSES DURING THE TIME YOU WERE TRYING TO FIGURE OUT WHAT SCAM THEY WERE PULLING – you were NOT COVERED the last month of COBRA because of this nefarious scheme!

    Do you HONESTLY for one minute think that anyone is going to FORGIVE and FORGET that kind of sadism that kind of ABUSE? You want a religious war you’ve got one between the bible thumping sadists and EVERYONE else. It is clear NOW who/what the Patriot Act did to the safety and privacy of DECENT PEOPLE. This is Stalin-lite – making use of the same gene pool of sociopaths that keep reproducing among the blue eyes to kill off GOOD AND DECENT PEOPLE. Prove to me it’s not happening.

    Proposed 28th Amendment to the United States Constitution:

    “Congress shall make no law that applies to the citizens of the United States that does not apply equally to the Senators and/or Representatives; and, Congress shall make no law that applies to the Senators and/or Representatives that does not apply equally to the citizens of the United States.”

    For your own safety, I suggest you stop selling the bs about there not being a need for claw backs.

45. So, for the top 2% to pay their fair share is equivalent to hurting them? No one wants to punish them.

46. Damn! but I wish the economists and politicians would
    use “plain speak” like this…

    …but I suppose “plain speak” is, always, to be eschewed.

    sigh… …Lady in Red

47. Voting Libertarian is little different than voting Democrat or Republican. All three are driven by neoliberal economic ideals, the Libertarians only more so.

    In other words, vote Libertarian and you will get even more of what you say you don’t like about Obama and the Democrats.

48. Thank you, Jim. Sanity at last.

49. Myshkin said,
    “Raising taxes on the rich, say people earning above $300K, from 35% to say 50%, (well below the tax rates under that radical wealth re-distributor, Dwight Eisenhower), benefits the poor, particularly when capital is being hoarded in uncertain economic times.”

    You’re missing the point. The government does not use tax money. Its spending has nothing to do with taxes collected.

    Federal spending creates money. Federal taxes destroy money. Eisenhower did not spend tax money. Nobody spends tax money. It disappears the moment you pay it. Taxes have nothing whatever to do with federal spending.

    All federal taxes hurt the economy. All federal spending helps the economy.

    I don’t know how to make it any simpler than that.

    Rodger Malcolm Mitchell

50. Not turnips, just non-economists.

    Think. How has the government managed to spend $13 trillion unsupported by taxes?

    To understand how the government spends, you first must understand monetary sovereignty . The U.S. federal government is monetarily sovereign.

    You and I are not monetarily sovereign. Nor are Illinois, Cook County, Chicago, France and Italy. As a result you and I et al, must have a source of income before we spend.

    A monetarily sovereign nation (Japan, Canada, Australia et al) does not need a source of income. It creates money by spending.

    If all federal taxes were zero, this would not reduce by even one penny, the federal government’s ability to spend. Taxes neither are used nor are necessary for federal spending. In fact, tax money is destroyed upon receipt. Its sole function is to reduce the money supply.

    Rodger Malcolm Mitchell

51. What Rodger baby does not understand is that a lot of rich and wealthy people are for higher taxes on the rich. Warren Buffet has made the point multiple times his secretary pays a higher percentage of her income in taxes than he does.

    A lot of companies are rewarded with lower taxes for putting jobs and factories overseas. A lot of companies almost totally escape adding to our tax base (read government revenues, that is what your tax base is, revenues which could be used to pay back our debt—that’s for all you Glenn “Diotrephes” Beck idiots that haven’t made the connection yet) with tax havens in the Cayman Islands and headquarters in Switzerland.

    Sadly, folks like Rodger Mitchell never seem to understand this.

52. Rodger, forgive my ignorance, but do not the international exchange traders limit the power of a nominally monetarily sovereign nation to arbitrarily spend? A nation can arbitrarily print or destroy money, but this affects their ability to trade on the global stage. In this sense, is this not a similar situation to that of the individual states in the US, who must balance income and outgo streams because they exist wholly within the US monetary and political system?

53. You are right. There are couples making less than 600k who are struggling to keep up appearances. It’s a tough economy for them too.

54. Thanks for making this clear point. It is also well described by other writers. I am still looking for a counter argument to the MMT recognition that a country with a sovereign free floating currency can’t be out of money and that it doesn’t have to fund its spending. We make a political choice to try to match spending with revenue $ for $. Not a very sound choice at that …

55. RayW, you won’t see a counter argument, because there is none. The federal government’s unlimited ability to create money — without taxes or borrowing — is not a hypothesis. It is a fact of federal financing.

    No debt hawk ever will give you a rebuttal. Write to any debt-hawk web site and ask the question. They will not answer.

    Not one of them understands monetary sovereignty and my experience has been that very few have the desire to learn.

    Rodger Malcolm Mitchell

56. Which is irrelevant to the fact that all taxes, whether on the rich or on the poor, remove money from the economy, hurting the economy.

    I don’t mind that cutting your nose to spite your face hurts you. I mind that it hurts me.

    Rodger Malcolm Mitchell

57. The bond traders are buying U.S. Treasury bonds with their current low yields. The U.S. can raise the yield to make them more attractive when it server a useful macroeconomic end. There are no current threats of unwilling buyers even though the yields are low. If a monetarily sovereign nation has a productive capacity to purchase, the country can purchase it. Selling bonds removes money from the system with a tradeoff of a later yield. It isn’t a loan to the government from the private sector. The government owns the money and provided it in the first place.

    The “printing money” concept is supposed to be a wise observation that the value of money is set by the whims of wise traders and that we shouldn’t flood the market. The value is set by the available productive capacity that it represents by proxy. If there is productive capacity to purchase, then the money doesn’t lose value.

58. And talking about households making less than 1 million annually as being wealthy is ABSURD. They constitute the upper middle class, which like the middle class, is also an endangered species. Get rid of the tax code and IRS altogether and impose a value-added tax.

59. I forgive your ignorance. We all are ignorant about some things. What sets you apart is your desire to learn.

    In answer to your question, the U.S. is <a href="http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/monetarily sovereign. The states, counties and cities are not. Nor are France, Italy, Ireland, Germany and Portugal.

    International exchange traders do not affect the federal government’s ability to create money. Nor do they affect American’s ability to trade.

    Look around you. The U.S. government has created trillions of dollars without support from taxes. Do you see any difficulty in trading? Or paying our bills?

    I hope you will click the link to <a href="http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/monetary sovereignty. . You’ll find it educational. It will answer your questions.

    Rodger Malcolm Mitchell

60. Sorry, the link is monetary sovereignty

61. “In the context of redesigning the tax system to promote employment and responsible savings, it is entirely appropriate to look for ways to shift the burden of taxation back to relatively high income individuals.”

    Parsing this sentence is telling. How, exactly, will raising taxes on the wealthy increase employment or savings rate? If someone could cogently answer that question I would (ahem) gladly pay more taxes.

    Instead, everyone, including Simon, assumes there is some magical pass thru bliss machine that takes money from the (relatively) wealthy and creates permanent, meaningful jobs.

    I ain’t buying it, yet.

62. Ted K

    We each have our specialty. You understand sarcastic insults. Rodger understands monetary sovereignty.

    Rodger Malcolm Mitchell

63. Steve, they will not reply. There is no answer to your question, simply because taxing the rich does nothing positive. Debt-hawks never have facts. They only have intuition. They suffer from anthropomorphic economics disease..

    Rodger Malcolm Mitchell

64. ” Working the gap between the promise and the reality.”

    I’m aware of the Bloomberg case. I thought I heard everything till I saw this update – amazing!

    The True Cost Of The Bank Bailout – video

    http://video.pbs.org/video/1581037108

65. Well said, RayW,

    Further, the federal government does not need to create T-securities out of thin air, then exchange them for dollars (aka “borrow”). It merely can and should create the money out of thin air (as it now does), and eliminate the T-security operation. It became obsolete in 1971, with the end of the gold standard.

    I should mention there is no relationship between federal deficit spending and inflation, which actually is related to energy prices. See: Item 8.

    Rodger Malcolm Mitchell

66. Or, because all taxes hurt the economy, and there is no such thing as a FAIR TAX, let’s start cutting all taxes.

    Rodger Malcolm Mitchell

67. “it is entirely appropriate to look for ways to shift the burden of taxation back to relatively high income individuals”

    How appropriate is this really? Over 30 years, the baby boomers have accumulated vast wealth by cutting their _income_ taxes and borrowing. Now they want to shift the debt to the next generation (in their _income_ earning years), and raise taxes on _income_ now that they are retired.

    Don’t you think a more appropriate tax would be on accumulated wealth, not _income_? Of course, wealth can flee the country… Can “discipline” the bond markets.

    Now that the Boomers have moved their assets to cash and retired and are draining Social Security, they want to cut down inflation to zero, increase income taxes, and force younger workers to pay back the accumulated fiscal deficits which were used to pad their own 401Ks.

    Forgive me if I’m skeptical.

68. StatsGuy,

    The “next generation” will not pay the debt. No generation will. Nor will younger workers pay back accumulated fiscal deficits. For a monetarily sovereign nation, taxes do not pay for federal spending.

    Also, Social Security cannot be “drained” any more than the whole federal government could be drained. The government has the unlimited ability to create the money to support Social Security.

    FICA could be eliminated (which I recommend), and this would have zero effect on Social Security solvency. It’s an agency of the federal government, which like other federal agencies — the Department of Defense, the Supreme Court, Congress et al — cannot go bankrupt.

    What can go bankrupt? You and I, if the government doesn’t cut taxes and increase spending.

    Rodger Malcolm Mitchell

69. There has to be some grounding – all spending sprees are not the same.

70. That’s a rather facile analysis.

    Whether taxing the rich hurts the poor depends entirely on what the rich do with the additional funds they keep absent such taxes.

    If the rich decide to take that money and use it to speculate in the secondary markets (yeah, this is usually called “investing” but it really isn’t), then we’re likely to see them leveraging up (a la hedge funds) to chase yield, which has time and again caused financial crises and over the last few decades has forced everybody else to bail the rich out. That’s great for the rich but not good for everybody else, and it is the real reason for the current economic problems.

    If, however, the tax law exists as a stick to drive the rich into truly investing in the economy (i.e., being capitalists instead of speculators) as a way to offset tax liability (this is the carrot), well, that could be a good thing, couldn’t it?

71. but if the “income” is still provided by the same source, – the magic printing press – then what just happened WAS manufactured poverty simply because they could do it

    how sick is that?

72. Can I please have some of what you’re smoking?

    Seriously — to a first approximation, money = labor. Relative wealth distribution determines relative influence on economic activity. Thus, if the rich have relatively more money and they a) spend it on trite leisurely things like yachts or b) use it to invest inappropriately (see: Financial Crisis), then the economy is inefficient. In the case of a) this is because the market-driven improvement in production and commodification of goods is concentrated on products that are not used by the majority of the population. It is for this reason that giving relatively poorer people money that you take from the wealthy is a win-win for the vast majority — it means that consumer goods that the majority employ (e.g., toilet paper) will be produced more efficiently and hence, over time, prices will decline.

    As for b), the classical argument in favor of wealth is that you need concentration of economic power/decision making ability to perform capital intensive tasks like build dams, etc. For one, this can be done by government (though I will concede it can be inefficient when done this way — but then again, it can also be inefficient if it is done by a poorly managed private enterprise). For another, there is a large difference in personal expenditure/speculation and capital investment. One could easily have a world where personal wealth is severely curtailed but corporations are permitted to accumulated large sums of money. In such a world, profit-motivated corporations who have to answer to the consumer either directly or indirectly will to some extent behave in a more democratic manner. There is no such constraint on individuals with large fortunes.

    The idea that somehow taxing takes money away from everyone is frankly idiotic. Taxing always implies spending, which implies redistribution. And rebalancing economies is essential — it is what permitted the growth following WWII, and it is what makes Europe, despite much lower work hours etc., capable of sustaining a relatively reasonable standard of living for most citizens.

    And taxing is essential to allocating capital for large-scale community-benefitting projects such as roads, high-risk R&D and military defense — all things that, in the long run, help everyone.

    So please, stop blathering this nonsense that taxes are always bad. Go read an econ 101 book before you make any of the rest of us invest any more time in replying, in fury, to your ridiculous drivel.

    K Thx.

73. Actually taxing the wealthy is probably the easiest way out of the morass of the last 20-30 years. Basically, most of the byproduct of growth of the last 3 decades has gone to those people, and we could probably solve 75% of our problems by taxing them down to where they were 30 years ago, in terms of relative wealth. This would pay for the debt — get it down to something on the order of 20% gdp — and it would allow us to finance a new wave of investment – r&d, infrastructure, etc. – that we need to maintain solid growth.

    And that’s just on the government side.

    If we redistributed wealth in this manner, it would reduce a lot of the speculation-driven distortions that exist in the present market. So house prices would no longer explode due to too much speculative capital having too few places to go, consumer spending would be income financed instead of debt financed, and things would overall be much more balanced.

    But of course, Mr Moneybags would not have a Hummer and he would have to stop riding his Lambo on the weekends. Wah Wah.

74. “There will be no return to normal because normal got us into the hole in the first place “

75. In a fiat system,in which a country has monetary sovereignty, to lift Rodger’s term, the danger isn’t bankruptcy, it’s the currency becoming worthless.

    So, the government can always cut you a Social Security check, but, the numbers on the check might not buy you a whole lot.

76. You don’t get it Nick. Obama and the Dems didn’t lose because they compromised. They lost me because they simply rolled over.

    1. In the 2006 midterm, Nancy Pelosi promised that if we gave the Dems a majority in the House that she would get us out of Iraq by refusing to the fund war if necessary.

    I’m just curious Nick, what is it 6 or 10 times the Democrats have used their majority to continue this war of choice?

    2. In the 2008 election Obama promised me two things and I sent him money based on these promises,

    a. That he would stand up to the corporations just like TR did. Instead of breaking the monopolies the way TR broke up the trusts; Obama gave ’em all bailouts and bonuses.

    b. That he would create a single payer health system.

    Were it not for public policy immunity I could sue Obama, Pelosi and the Dems for breach of oral contract. Instead my legal remedy is to not vote for them again, ever.

    And you call exercising my rights “childish.”

    Nick you are absolutely cut from the same cloth as that whack minister in Florida hell bent on burning the Koran.

    No wonder this country has gone to hell in a basket. Holding a person to their word is now childish to many.

    You have my deepest sympathy Nick. You are truly lost.

77. Yeah, baby! You said it. Anarchy! I love it. So, who gets to be Mel Gibson?

78. Agreed. But…

    How do we grow this economy? 65% of our GDP, I’m told, comes from four sectors: military, finance, health care, and entertainment. Entertainment is a real product, but just how much of it we can peddle around the world remains to be seen. Finance is purely friction on real productivity and I think it is clear that growth in this sector is anet negative. Military–I suppose that’s where WWII came in. But we won WWII, and the rest of the industrial world lay in ruins. So there was plenty to do re-building the world, and we were the sole source suppliers of almost everything. No wonder we grew out of our debts! Hard to see how to recreate that scenario in the current era.

    That leaves health care. While admittedly there is good potential for health care growth–in fact with the health care reform act, I’d say we may be headaing for a health care bubble; it is unclear how much of its growth will be real. The lowest estimates of waste in health care run at about 1/3. My own opinion is that it’s more like 1/2. As we inject more money into the sector, there are plenty of people who will be able to get real care for real diseases. But also plenty more opportunity for the system to churn useless tests and treatments. Remains to be seen what good will come of it. But I’d hate to think our only economic hope lies in expanding the meat-grinder aspect of the health care system.

    So what else is there? Seriously, where will the economic growth come from? Do we do anything useful anymore?

79. Hello Stats Guy its been awhile since I have seen you here, but then I have been gone also.

    Anyway, my question to you is what do you consider a Baby Boomer in terms of age? I have two time frames 1943 – 1960 and 1946 – 1964 this group is made up of about 72 million. Anyway you look at the group they are just beginning to retire and the largest part of the group is in their 50’s. The Matures might be doing what you are talking about, but then I know quit a few who are still working at 70+. We honestly have just begun to go through this.

    Then we have the Gen X group that starts in 60 or 64 and goes to 80. This group is 30% smaller then the Boomers. I am guessing this is the group you belong to also known as the bitter generation for those who were born in the 60’s. Hey, I am there with you. But what gives with the boomer group gripe? Statistically, they are the ones with the least amount in retirement and many of the pension programs promised are gone or reduced.

    The real issue tax wise is that this country is at the top amount it will make — The boomers are at the most they will make on their job, for the large part of them. Those in the Gen x group since they are smaller then the Gen Y group might luck out in the end for SSI if the Boomers do retire early and open more jobs for the younger workers who tend to spend more setting up families, buying houses, etc. This could be the key to improving the economy — getting the glut of boomers out of the work force.

    I would propose a transitional way for dropping this work force though since Boomers do have good work ethic for the most part and know their jobs well. I would look at split 10 -12 hour days where a boomer is paired with a Gen Y doing the same job. The Boomer can work a six hour shift with four hours by themselves, two hours of overlap with the Gen Y who will be taking their place as a mentor/team member and then four hours on their own.

    The younger person gets to work fresh out of college thanks to the new health care stay on their parents health insureance cutting down on costs to the employer and still have some time to go on for additional education working only a 6 hour day. The government wins as the young worker can pay back Federal Student Loans and not work for $8/hr making donuts at the local grocery store while they wait for a boomer to retire and their skills grow out of date before they ever start working in their field. Plus they get to pay taxes and SSI.

    The older person then gets to pass on knowledge
    that takes a few years to accumulate on the job. Have a back-up person to fill in for vacations, since they are on the top of most vacations earned, which is often converted into income or forfetted. Government can then pass a law saying those who wait until 70 for retirement will be helping their children preserve their SSI. Businesses gain as they are not paying for a full 8 hour day for these older employees and have a younger worker who makes less in the wings with no real benifits to pay. Everyone pays taxes.

    This is ruff and needs working on, but it was what I was looking at in August. YOu can play with the numbers and get back to me. It is only in the idea stage.

    Hopefully you will get back to your usual self as you are usually spot on what gives today?

80. Yes, the government can create as much money as it desires. But this does not come free in real terms. You can get away with it for a while, but eventually all those extra dollars begin to chase the real goods and prices inflate. The horrors of hyperinflation are real, see Argentina, Zimbabwe, Weimar Germany among others.

    As inflation takes hold, interest rates will rise, and that increase the debt service. That will lead to creating yet more money, and the vicious cycle easily spirals out of control. Furthermore, as the currency loses value, foreigners become less accepting of it so that imports become hard to buy. Think about petroleum.

    I’m not saying we have an immediate crisis in terms of the government deficit or national debt. There is no inflation on the horizon now and the bond markets seem to agree with that judgment. But you can’t just ignore the debt by saying you can simply monetize it at will: if you do that you will wreck the real economy.

81. Forgive this drive-by rant – very busy lately.

    I suppose I am frustrated by an emerging trend of “fixing” budget deficits by grandfathering older employees, and cutting current wages and future benefits for younger employees. Illinois is cutting services, because retirement obligations are senior to everything. California is cutting future payouts, but only for those not already in the system. Calpers – underfunded for years – is now ordering the state to supplement its funding through contributions from the general fund. Social Security fund is projected to flatline in 2038, at which point there seems to be a consensus that we’ll just run right off the cliff and cut payouts from 100% to whatever is feasible (70%?) at pay-go rates, rather than shave current payouts by 10% going forward.

    Meanwhile, all of these obligations were incurred from 1980 to 2008, primarily benefiting boomers. And while it’s certainly true many boomers squandered their jackpot, the concentration of wealth in the hands of the age cohort with excess political power is numerically accurate. And yes, the data back this up – it’s not just wild-eyed proclamations.

    

    If we consider the taxable obligations incurred by boomers which are being repaid by children, it’s worse.

    The anti-social security mantra is often claimed by conservatives, but for liberals to pretend the situation is not real – that the pension system in the US is not in fact in dire jeopardy and that we have not in fact witnessed a massive intergenerational transfer of wealth – is shutting one’s eyes. Conservatives want to kill SS completely, liberals want to let it go broke by itself, but proposals to shave benefits for current beneficiaries even slightly have gained no traction at all.

    Meanwhile, we have a Fed that refuses to stabilize employment because it puts priority on near-zero inflation – a policy which primarily protects creditors and fixed-payout investors (largely retirees) at the expense of debtors and labor. In any event, we have pension systems that have indexed payouts to inflation – leaving the primary real wage adjustments to be borne by current employees even if the Fed miraculously commits to a modestly reflationary policy.

    So while inflation is precisely the tax on fixed obligations (and cash wealth) that we need, the political environment makes it unlikely to occur until there’s no other option, and inflation indexing protects retirees in ways that current employees do not enjoy.

    Bitter? I should think so.

82. Scot, count me undecided, except to the extent I won’t support another corporatist in Dem clothing. My history is swing voting. McGovern in ’72, Carter in ’76, Reagan in 80 and 84, Ron Paul in 88, Clinton in 92 and 96, Nadar in 2000, Kerry in 04 and Obama in 08.

    I left the Republicans in the mid-80’s after civil asset forfeiture and being exposed to the Rotary Club of Bel Air, Ca. My business partners thought it would be a good idea to bring me into the club.

    It only took one lunch and I was appalled. I attended another out of professional courtesy but these were just not my kind of people. All the current players were represented in an archetype kind of way. There was a Bull Conner, a “Mr Hughes in Dylan’s shoes,” whack job pastor and even a military man who talked a lot like Gen. Jack Ripper in Dr. Strangelove.

    I don’t know and have never met President Obama or
    Speaker Pelosi. I do know Harry Reid. Senator Reid is a master parliamentarian and a good soldier.

    It wasn’t Senate majority Leader Reid who caved on the Obama agenda. It was the WH.

    Some seek to blame Rahm Emanuel. I don’t. President Obama has always told us to hold him accountable and I do.

    I had hoped Obama was a statesman of the caliber of Jefferson, Lincoln, TR or Kennedy. I was even willing to settle for a Jackson or LBJ who could get things done.

    I didn’t just vote for Obama. I pulled out my debit card for Obama. More than once.

    Boy was I fooled.

    We’ll never know if Hillary might have delivered more. I’d take that do over were it possible.

83. Simon, on the eve of Arianna Huffiington’s new book Third World America hitting the streets, I am sorry, but I grade your effort, at best, a B-. Most of what you said is correct and appropriate, but you really should fill in the blanks. Tell us what you really think. You write to nicely, and I am not talking about politics. You are right that whatever is said by either party is purely intentional electioneering and nothing more.

    Now, to the brass tacks. Let’s talk taxes. First, the 23,000 page tax code (near that at last count) allows for nearly infinite rate arbitrage by the wealthy and their corporations and tragically styled investment vehicles. The top individual rate is now 35%, and letting Bush’s cuts lapse on that end would move it upward a paltry 4.6%. The fact that Republicans even breathe a word about fighting to keep it is absolutely amazing, and won’t appeal to their voting constituancy (since less than 5% actually have qualifying income). If we are to get serious about correcting what has happened to us (plutocratically speaking), the top rate needs to go back to at least 50% (where it was under Ronald “the hero” Reagan). Of course, optionally, it could go back to 91% as it was under Eisenhower, Kennedy and part of Johnson (this is of course how the military continued to grow even after WWII ended). Then we need to look at Capital Gains, now at 20% (What?????). This means that the hedge fund managers, who take most of their billions from capital gains, are able to save lots. We need to bring this rate into parity with ordinary income to eliminate arbitrage. Then we have Federal Estate Tax. There is none (What??????????). So, the wealthy don’t even need to work on estate planning, which actually has benefitted the economy prior to the change. Estates also should be taxed at the ordinary income rate after a healthy exemption (we can argue the amount, but I suggest a million, as it was before the change. The obvious option is to institute a flat tax, which I believe is best, which could probably be set at 20% or so, with an exemption for the first $60,000 for individuals, with no mortgage interest exemption, and no other deductions. This would neatly solve lots of problems. Russia and other eastern European countries have very successfully instituted a flat tax. And, lastly, we should completely eliminate all taxation subsidies for all industries of every kind.

    Lots more needs to be done in many other areas, including trade and immigration notably. The Health Care reform should be trashed in favor of a single payer system which could make amazing adjustments for all kinds of things, but this would eliminate our biggest long term problem, Medicare, and make Medicaid unnecessary. This system works incredibly well in Canada, is simple and straightforward, and would not result in killing Grandma. Even in that system, some rationing would occur, but in the present system rationing is arbitrary, capricious and actually kills lots of Grandma’s before they can even become Grandmas.

    Next time, Simon, be more meaty and less iconoclastic in what you say. We mostly agree with everything, but, you can do more by presenting rational, and non-political suggestions.

    Lastly, I would like to not that I agree with those who commented regarding third parties. But for a rare local race, the two major parties (which are actually only one if we look closely) will win in most areas, although I, for one, believe that it matters not which one does. Either way we’ll have approximately equivalent pain moving forward. However, have said that, I do think that neither the parties, the Congress, or the Administration is likelly to do anything to seriously advance the “recovery ball” in the next two years, and that, during that period the 99% being gamed will tire of it enough to sponsor a separate and powerful mainstream party that will pull all but the most extreme R’s and D’s away from their parties and will completely turn politics upside down. Of course, in lieu of that, there is always the possibility, when “real” unemployment reaches 30%, that we will have an armed and violent rebellion.

84. Hopefully you have acquired or regained a healthy sense of strong cynicism. Post-Obama, being called cynical, pessimistic, and negative are all compliments. Don’t worry, payback’s coming, and it’s a bear.

85. Your comment makes perfect sense. The U.S. is a laughing stock thanks to its red ink.

86. You have just quoted a myth. If you look up the history of Argentina, Zimbabwe and Germany, you will find that their hyperinflations were not caused by money printing, but rather by circumstances specific to these nations.

    Historically, hyperinflation has caused money printing and not the other way around. Meanwhile, America suffers from unemployment, insufficient health care, poor education, bad environment and myriad other ills, simply because people are afraid of the myth of inflation.

    Rodger Malcolm Mitchell

87. The federal government, being monetarily sovereign, neither needs nor uses tax money, and all taxes accomplish is to remove money from the economy, hurting the poor and the rich. Of course, the poor are hurt more, because they don’t have the savings to survive recessions. In short, taxing the rich hurts the poor.

    So, why do you enjoy seeing anyone pay more taxes?

    Rodger Malcolm Mitchell

88. Do you realize that Social Security, being a federal agency cannot go bankrupt, any more than the Department of Defense, the Supreme Court, Congress and the White House (also federal agencies) could go bankrupt.

    Because the U.S. is a monetarily sovereign nation, neither it nor any of its agencies depend on or even use tax money. If FICA were eliminated, (which I recommend), this would not affect SS solvency by even one penny.

    Rodger Malcolm Mitchell

89. Rich S. thinks cutting taxes amounts to anarchy. That truly is sad.

90. Since 1971, when the U.S. became monetarily sovereign, there has been no relationship between inflation and federal deficits.

    Inflation has been associated with energy prices. For the evidence, see: INFLATION

    Rodger Malcolm Mitchell

91. I remember when the government decided to levy a high tax on the very yachts you mention. The yacht industry crashed and many people lost jobs.

    Since 1971, when the federal government became monetarily sovereign, taxes have not paid for federal spending. Today, federal spending creates money and federal taxing destroys money. That is why all taxes, whether on the rich or on the poor, wind up hurting the poor.

    This is different than the situation with California, Los Angeles, General Motors, you and me, which are not monetarily sovereign.

    Rodger Malcolm Mitchell

92. A growing economy requires a growing supply of money. In America, money comes from two sources: Loans and federal deficit spending.

    Ever since we became monetarily sovereign (in 1971), there has been no relationship between federal deficits and inflation. However there has been a strong relationship between reduced deficit growth and recessions (see the above link).

    Rodger Malcolm Mitchell

93. All I think you’re saying is that every citizen of the United States will go bankrupt before their federal government does.

94. Yes, every citizen of the world will go bankrupt before the U.S. government does. It is 100% impossible for a monetarily sovereign nation to run out of money.

    Sadly, the PIIGS gave up their monetary sovereignty to join the EU, so they can go bankrupt. Similarly, Illinois, Cook County, Chicago, General Electric, you and I are not monetarily sovereign so we, along with everyone else in America can go bankrupt. But the federal government cannot.

    Even if all federal taxes and all federal borrowing were eliminated, the federal government still could not be forced into bankruptcy.

    Rodger Malcolm Mitchell

95. While I agree with you about taxes your ideas about inflation are out of wack.

    I read your blog post about inflation vs. deflation. You trot out the tired argument about deflation causing people to delay purchases until a later date. Computer prices have deflated by over 90% in the last twenty years. Have people not bought computers? Are you making your posts from the library?

    In my neck of woods there are many empty storefronts? Why? Because the rents are too high. No one wants to open a store just to give all the proceeeds to a landlord. In this case, deflation, not inflation, would be stimulative. This is why the recession has dragged out and will continue to do so. Prices have not been allowed to fall to where they should be, a product of bailing out the banks, which are now committed to propping up real estate.

96. Are you suggesting the elimination of all federal taxes and replacing tax revenue with the printing press? I have often wondered whether the federal government could plan a budget as some predetermined, fiscally responsible percentage of GDP and then just create the funding.
    Floating this idea to an economist or two draws the response, beyond the initial dismissive incredulity, of apocalyptic currency inflation.
    Please excuse my ingonrance but if this is what you are suggesting, while intriguing, what would restrain the temptations of politicians, once they accepted this revenue font to spend into hyper inflation? You will say they already have embarked on such a course but there is some guideline offered by tax revenue.
    Beyond that problem, local governments would need to tap into the fed stream or resort to taxation. And one other objection; I believe that the extreme disparities of wealth we see today here and elsewhere are destroying the fabric of society. Taxation (and it should be on wealth not just income), is required as a remedy to the creation of an all powerful super oligarchy. We are at that point now, the economic elite, the top 1% that control most of the wealth, have lifted off from the rest of society, most are wage slaves condemned to attend crumbling, inferior schools, rationed medical care etc. while building pyramids for the pharaohs.

97. Thanks. That is the StatsGuy I know.

    You are right and maybe yes you have a right to be bitter, but the only thing set in stone are the 10 commandments (Athiest saying that line who for the last few days has felt like the only sober person at a keg party. Double meaning intended on keg and it goes for both New York and Florida. Wake-up America freedom of speech allows much, but it does not allow shouting Fire when there isn’t one in a crowded theatre nor does it allow freedom to pick and choose who gets to build or not build in a zoned community. There my drive by rant and totally off subject so I will not respond to comments on this.).

    What I have been trying to workout with the above post is a way to keep Boomers working longer and delaying taking SSI and public pensions that were based on a shorter life expectancy then they now have. Yet open jobs for younger workers who ar newly educated. It is a way to not necessarily shore up SSI, but to get it back into persective based on the origanial idea of the program — put limited money into the hands of the retired to spend to go back into the economy to put younger workers to work. SSI was based on the thought that populations would always be larger in the younger/working age groups — just like a pyramid, which is becoming a cylinder or vase with a bulge moving to the top. In short it is a ponzy scheme and it has to be treated as such meaning you have to get fewer people to take out money for a longer period until you have more investers. To do this we have to get the new group of Gen Y working and paying taxes as fast as possible, but not give them free range and play Lord of the Flies, which is what happened in the Financial Sector. Thus the overlap of workers. I failed to mention that in a global economy the longer hours make working with others overseas easier if done right. Being the person I am you cannot “make” anyone work less hours, but you can delay payments from a program based on the overall good of the society, which the government is set up to protect through legislation.

    Below is an additional rant just because Wisconsin is having a primary on Tuesday and having no choice for a candidate I can vote for , but will vote none the less and deals with in part you concerns on boomers….

    Gen X group is under represented in politics with their vote being 30% smaller with about 47 million. Yes we have the First Lady and the Alaskan. One basically keeps quiet while the other appeals more older voters then younger, but few others. As said before the Boomers are at 72 million and not mentioned, the gen X group is even smaller then the Gen Y group with 68 million. Combined though the Gen X and Y has more votes then the matures and older boomers. We just have to find the right candidate. For me though that candidate must understand religion has no place in politics, which leaves many personnal choice social issues moot, the enviornment is something we leave better then we found it for our children global warming or not, social need issues must be handled at a local level based on what is really needed and not mandated programs that may or may not perpetuate the situation. Government spending must be based on actual need and not end of the year Sears Wishbook Spending to keep budgets or give gifts to those who need to find their own way in the world to get what they want (pork). The ability to buy widget x at the local store if it is cheaper then the bid and many others that I think are common sense.

    Anyway the goal is to get all to pay their fair share in taxes, pensions, SSI longer without bankrupting the world creating an even larger depression as this is not just our problem.

    Best wishes to you and yes I do hear you.

98. “Please excuse my ingonrance but if this is what you are suggesting, while intriguing, what would restrain the temptations of politicians, once they accepted this revenue font to spend into hyper inflation?”

    Apparently, Roger doesn’t believe this can happen simply because it hasn’t happened, yet. So, the government is free to deficit spend to its heart’s content without any negative consequences.

    Of course, we recently heard something similar about the housing market: that it never goes down. How has that assumption worked out?

99. Brenda, “For me though that candidate must understand religion has no place in politics, which leaves many personnal choice social issues moot, the enviornment is something we leave better then we found it for our children global warming or not, social need issues must be handled at a local level based on what is really needed and not mandated programs that may or may not perpetuate the situation.”

    If you have reached your 40s, as a generation of CONSUMERS, and all you got now is a whine about unsuitable politicians to channel your belief lists, you are a generation who has already faded from the pages of history, except for a whole lot of extremism, mono-causism, and as you noted, a Lord of the Rings economy which harkens back a value system, a consumerism, that was pre-civilization.

    Sorry, Brenda, hard to forget that long love affair with POWER status symbols, such as those black gaudy SUVs, when you get up on the soapbox to preach to the hippies about “environment” and everything else they produced – up to an including all that computer “stuff”. Most hippies, those who just reached 70, have DEEP regrets about “commercializing” data collection – “put a personal computer in every home in America”.

    And such philosophical inconsistency – it’s okay to target a whole generation of producers for a wealth transfer to the consumers is NOT considered “politically incorrect”,

    but “perception is reality” IS politically correct, even “religious”?

    Yup, good luck with finding someone in your generation who can tick off each item on the list as a requirement…

100. Dearest Rodger Malcolm Mitchell…. I wish it were
     so.

     You are a fool. …Lady in Red

     The Nanny State Has Blown the Bank
     By David Warren

     In France, the legal retirement age is 60. President Sarkozy, who like every other European leader is desperate to balance the books, proposes to raise this to 62. Hence the scene, as strikers work at bringing the country to a halt, and fill the streets in the time-honoured, Parisian fashion.

     Over the Channel, the flashpoint was an attempt by management to lay off 800 employees of the London Underground. Sympathetic unions began an industrial action designed to cripple the city in Monday’s rush hour.

     From what I can see, nothing like the scenes in Athens, recently, but getting there.

     The foreground problem is essentially the same everywhere, and in the stimulating spirit of “yes we can,” Obama’s America is quickly catching up with the European bankruptcy. Here in Canada, we may be feeling rather smug, thanks chiefly to the “no we can’t” attitudes of successive federal governments. But our actual fiscal condition is concealed in the federal-provincial cups and marbles: A country that may be technically solvent, consisting of provinces that are all going bankrupt.

     The background problem is simplicity itself. The Nanny State has blown the bank. She, or it, has done so everywhere. Even after appropriating half of every national income with taxes both direct and indirect, and after offloading the costs of cumbersome do-good schemes onto businesses through convoluted regulations, Nanny is reduced to printing money.

     From the liquidators’ point of view, however, the problem is rather more complicated: the debtors are more hostile than the creditors. Thanks to democracy, and the power of “the people,” under the inspiration of demagogues, to appropriate each other’s wealth, there seems no chance of a smooth disposition.

     Our debts have been rephrased as “entitlements.” They are the fiscal dimension of “human rights.” Everyone has a “right” to a pension, and to much else besides, regardless of whether he put his share into the piggy; or whether Nanny absconded with what he did put in.

     Those who prudently saved against the contingencies of this world, have subtly numbered themselves among “the rich.” And, “tax the rich” is the received solution. For generations now, “progressive” politicians, imposing “progressive” tax systems, have been making an example of the prudent. The cultivation and manipulation of envy is at the heart of all political schemes for income redistribution, and parties of the Left have been building their client base upon it.

     Hence the gradual division of every electorate between the Party of Entitlement, and the Party of Tax Cuts: the one to increase spending, the other to limit revenue, until the gap between income and expenditure has grown to oceanic proportions. In a pinch, the government pulls both ways at once, as poor hapless Obama is now doing because his Party of Entitlement is about to be mooshed in the U.S. midterm elections. In addition to more ruinous “stimulus” spending, he is now promising tax cuts (for everyone but “the rich”).

     There, as here, the chariot of state is driving over the cliff. In every Western polity of which I am aware, the entitlements are backed with the force of law, and cannot be withdrawn with anything like the ease with which a government can cut the police, the military, and essential public services — even on paper. Thus, at the moment when fiscal catastrophe strikes, we find the government has already “downsized” the instruments of public order.

     I’m still trying to imagine the scenario in which this ends well. (Give me more time!)

     The closest thing I can see to hope is currently invested in the tea party movement of the U.S. Notwithstanding the slanders heaped upon it, this movement is good-willed, riot-free, indeed situationally non-urban, and under the leadership of basically sane people. Of course, there is no guarantee that any movement devoted to genuine political change can remain so, under the inevitable provocations.

     But something must be done, and here is the closest thing, anywhere in the West, to a political movement committed to the only measure that can possibly save us from riding over that cliff. Merely slowing down won’t do it.

     That measure is, quite frankly, the complete dismantlement of the Nanny State, and the restoration of the status quo ante — governments focused on the provision of national defence, and domestically on the machinery of law and order. Full stop.

     While that happens to be the only available formula for mitigating our impending economic and social catastrophe — leave people free not only to earn, but to help each other flexibly and directly — the issue of freedom itself lies deeper. For the Nanny State isn’t, and never was, compatible with the organic development of a free society. We do need laws to be enforced against specific, definable evils. But insofar as we are adults, we have never required comprehensive daycare.

101. Federal taxes do not pay for federal spending. So it is not a matter of “replacing tax revenue.” Tax money is destroyed upon receipt. However, I do feel that over time, federal taxes should be eliminated.

     Because federal taxes remove money from the economy, some feel they are a good control for inflation. I disagree.

     The taxing system is too slow, to political, too convoluted, and When inflation begins, something fast is needed. That something is interest rate increases.

     To see what I suggest, go to: DEFICITS AND INFLATION

     As for closing the gap, between rich and poor, taxing the rich doesn’t work. Here are my thoughts: CLOSING THE GAP

     Rodger Malcolm Mitchell

102. I’m not sure what “temptation” worries you. Is it the temptation to improve our schools, pay for universal health care, improve our military, pay for scientific research, support Social Security, build better roads or help the bankrupt states and cities?

     Probably not,though I cannot imagine why you are willing to forgo those things. I suspect you are concerned about two things only:

     1. The myth that our children will pay for today’s debt. Yes, it’s a myth. You can win $1,000 reward for proving it’s not.
     2. Inflation, which can be prevented and cured with interest rate increases.

     Rodger Malcolm Mitchell

103. Re: @ Rodger Malcolm Mitchell___As “popeyed” always says “I’ve heard and seen enough – I can’ts take any more”…what planet are you from? You know a whole lot about nothing. Man where’s my spinach when I need it,…PS. Please, and I seriously mean please do not reply!

104. Brett said, “You trot out the tired argument about deflation causing people to delay purchases until a later date. Computer prices have deflated by over 90% in the last twenty years. Have people not bought computers?”

     People buy computers today, because they are better today. If computers were not getting better, and people expected prices to continued to go down, they would defer purchases, waiting for the lower prices. Wouldn’t you?

     With regard to the empty store fronts you mention, are you saying people are waiting for prices to go down before renting? I’m not opposed to low prices, but the expectation of lower prices causes purchases to be delayed. The department stores discovered this, when their sales became predictable. People waited for the sales.

     It happens in the fall, as people wait for Christmas sales.

     Rodger Malcolm Mitchell

105. It comes down to an issue of democracy versus a dictatorship of the financial elite. Under current orthodoxy, we as society cannot expand purchasing power unless we get permission from those who ‘own’ all the money. If those who own do not feel they can get a ‘return’ on their ‘investment’, then purchasing power doesn’t expand and we have high unemployment. That’s actually the norm outside of bubbles.

     We have control of the currency so there’s no inherent reason we can’t create purchasing power for whatever reason we wish. It would not be inflationary as long as the money supply / spending was reduced as we reached capacity. Money supply can be reduced either through reduced spending, borrowing, or taxing. But the later 2 are NOT means of generating funds since we already can generate dollars at will. They must be seen as just monetary operations.

     Those who oppose this view are wittingly or unwittingly condemning us to a future of needless austerity in the name of maintaining monetary power in the hands of a very few people.

     We are truly becoming serf-like if we don’t demand control of purchasing power.

     Jim
     http://commentsongpe.wordpress.com

106. If I understand correctly, you want less government spending. Here is a list of initiatives the local debt-hawks have suggested. Which of these do you support?

     Rodger Malcolm Mitchell

107. Hey, Duke of Earle in Florida, I am LISTENING and learning because of my personal experience – once a project received approval, poof – there was the funding. Allocation of the numbers was fun – you could pencil in one scheme, erase a mil here and put it there, concoct a new scheme,

     but NONE of that number crunching affected the success of the project because $$$ (budget) was simply there as CURRENCY to document the creation. It was never allowed to screw up the creation! Even worse, what we have now is a bassackward IDEA about the “power” of $$$.

     So Mitchell is not bs-ing,

     “the federal government, being monetarily sovereign”

     is a god who knows no limits when indulging his pet projects

     and when it all goes whoopsie, didn’t know that was going to happen,

     well, god can flap away on quantum particles while everyone else deals with the “limits”…

     I said darn near speechless :-)

     As for holding a grudge about the psychobabble employed by no-limit god to stay behind the curtain playing hide and seek?

     Well, I might need to check into those SECRET Himalayan monasteries to meditate (access quantum particles myself)

     control over that “complex” of “feelings”, “thoughts” and certainly “action”…

     All I have in the way of immediate control is the FACT of all that pollution – what a freekin’ pig pen…guess no Mom around to have taught god to clean up his own mess, eh?

108. It comes down to an issue of democracy versus a dictatorship of the financial elite. Under current orthodoxy, we as society cannot expand purchasing power unless we get permission from those who ‘own’ all the money. If those who own do not feel they can get a ‘return’ on their ‘investment’, then purchasing power doesn’t expand and we have high unemployment. That’s actually the norm outside of bubbles.

     We have control of the currency so there’s no inherent reason we can’t create purchasing power for whatever reason we wish. It would not be inflationary as long as the money supply / spending was reduced as we reached capacity. Money supply can be reduced either through reduced spending, borrowing, or taxing. But the later 2 are NOT means of generating funds since we already can generate dollars at will. They must be seen as just monetary operations.

     Those who oppose this view are wittingly or unwittingly condemning us to a future of needless austerity in the name of maintaining monetary power in the hands of a very few people.

     We are truly becoming serf-like if we don’t demand control of purchasing power.

     Jim
     http://commentsongpe.wordpress.com

109. To Annie. I see you read well. IT is Lord of the Flies and not the wonderful works of Tolkien who was a Medievalist who also wrote excellent non fiction works about Anglo-Saxons.

     As for my age, I will be 47 two hours before our First Lady turns that age and my husband is a retired LTC with a MBA who is turning 55 in November. That makes me a late Boomer or an Early Xer. As an Xer we have no heros and we, like our Depression born parents, have been hounded with recessions and lower wages then the early boomers. Look it up.

     IF you go back to the “Get a Dog” blog here then you know I don’t own an SUV or truck and find power symbols represent the neu veu riche and wanna bes. My family has been college educated in the States since the Civil War, were 1848ers in Germany, my English family side fought for Cromwell as a Captain. I don’t give a fig for status symbols just good conversation based on intellect and not attacks.

     As for consumerism my car is 9 years old and gets 32 miles to the gallon. Most of my furniture is inherited from the grandparents and older generations in my family before owning antiques was popular and I am quite content wearing the t-shirts my sons have outgrown. My work day cloths never go out of style (blue Jeans, turtle neck and blazer with penny loafer type shoes) range in age from 10 to 20 years old and were in natural fibers before that was made popular.

     My lack of religion or belief in a god is based not on being politically correct, but a personnal choice that no one pressured me into making.

     Since you brought up Hippies. My Dad volunteered for Vietnam and my husband was in ROTC while we were pulling out and stayed in for 28 years; they retired him for saying we needed more troops in Iraq before that was the thing to say — service to country has always come first even at the expence of career and not to get the GI Bill. There has not been a war since we moved to the US in 1849 that my line of the family has not been involved with.

     Finally, both my parents work and they are in their 70’s. My mom is a Librarian and my dad for a retirement job that has nothing to do with pre-columbian mississippian culture his field, drives a school bus.

     Not once did I type you and yours in the above nor will I as we are each individuals with different views, life experiences, etc. BUT, whether you like it or not something must be done about SSI and Taxes for the health of the US government.

110. You’re missing the point.

     The stores are empty because people can’t make a living at the current rents. If the rents were doable, the stores would be rented even if the renters thought rents would be lower next year. And computers have only gotten marginally better in last few years and people have still made purchases. The exact same monitor I bought a few year ago for $600 is now about $200. I bought it for $600 because I wanted it and had the money. The future price wasn’t a factor. In fact, I knew it probably would be cheaper down the road.

     With regard to inflation, you say that it can be cured by higher interest rates and that deflation runs into the zero interest problem. There’s a flipside to that argument. There’s a limit to how much you can inflate: to the point where the currency is worthless; whereas, deflation can go on indefinitely.

     You might have a better appreciation of what I’m saying if you lose the euphemism and call inflation what it really is: deterioration of the currency. Conversely, deflation is a strengthing of the currency.

     Of course, Bernanke might not sound as convincing if he were to say, “The Fed has several unorthodox tools it can use to deteriorate the value of the dollar.”

     It basically comes down to a strong dollar/weak dollar argument. I believe in the former; you, the latter.

111. Referencing your origin question to RMM and your Popeye metaphor, I believe RMM may be from planet Wimpy, whose motto, “I’d gladly pay you Tuesday for a hamburger today,” is on the money here.

112. 2. Inflation, which can be prevented and cured with interest rate increases.

     *******

     Considering that the guy in charge of raising those rates didn’t the see the bubble coming and said that sub-prime would be contained, why would we doubt him in the future?

113. Rodger

     Initially I bookmarked some of your other responses because they seemed to make sense but these simplistic statements don’t make any sense to me.

     1. All taxes hurt the economy.

     If all taxes hurt the economy, then the government by definition is only destructive to the economy?? Or the Economy is the only thing that is important for the country?? Or Government, and taxes serve no useful purpose?? Really??

     2. The federal government neither needs nor uses tax money.

     !?!?!?!? What, simply because the government has the power to print money, taxes are useless? Fraudulent?? What can you possibly mean, the government doesn’t use tax money??

     3. Taxing the “rich” by removing money from the economy will hurt you, unnecessarily.

     So taxing the poor, or middle class will not remove money from the economy? Will not hurt “us”? The rich always use their money in ways that benefit the “economy”, never for their own self interest? Or their self interest is synonymous with a good economy?? To paraphrase Bill Clinton, it all depends on what “you” means.

     Rodger, you’re talking non-sense.

114. Brett said, “. . . computers have only gotten marginally better in last few years and people have still made purchases.”

     Only “marginally” better? Really?

     Brett said, “There’s a limit to how much you can inflate: to the point where the currency is worthless; whereas, deflation can go on indefinitely.”

     Not sure what the point is, but prices can range from infinite to zero. So?

     The fact is, inflation is prevented and cured with interest rate control. The reason: Money is a commodity, the value of which is based on supply and demand. Demand, in turn, is based on risk and reward. The reward for owning money is interest. Raise interest rates and money value increases.

     In the past 40 years there has been no relationship between inflation and federal spending. Inflation has been caused by energy prices. See: Item 8.

     Rodger Malcolm Mitchell

115. balanceact asked: “If all taxes hurt the economy, then the government by definition is only destructive to the economy?? Or the Economy is the only thing that is important for the country?? Or Government, and taxes serve no useful purpose?? Really??

     For a monetarily sovereign nation, taxes do not pay for federal spending. Even if federal taxes dropped to zero, the government’s ability to spend would not change by even one penny.

     The government actually creates money by deficit spending, which it must continue to do, because a growing economy requires a growing money supply.

     So the federal government serves useful purposes, but federal taxes do not. When the government sends you money, the government merely credits your bank account and debits its own balance sheets. It can do this endlessly, and is not affected by tax collections.

     Taxing the rich, taxing the middle class and taxing the poor all removes money from the economy, which is harmful to the economy. Five of the six recessions since 1971 (the year we became monetarily sovereign) has been introduced by a series of debt growth reductions. See Item 4. Same with every depression in history.

     Rodger Malcolm Mitchell

116. You keep harping on the relationship between inflation and federal spending, but, in the last forty years there has never been a crisis of this magnitude. So, your argument doesn’t fly.

     The difference between you and me is that your confidence in the goverment’s ability to “cure” inflation and decide where to spend money is greater than mine.

117. Yes, in the 40 years, since we became monetarily sovereign, there has been no relationship between federal spending and inflation. What is your point?

     I don’t trust government any more than the next guy, so what is your non-government solution to inflation?

     Rodger Malcolm Mitchell

118. Are you still here? …Lady, etc.

119. Yes, in the 40 years, since we became monetarily sovereign, there has been no relationship between federal spending and inflation. What is your point?

     I don’t trust government any more than the next guy, so what is your non-government solution to inflation?

     Rodger Malcolm Mitchell

     ________

     My point is that you can’t assume that because something hasn’t happened for the last 40 years; therefore, it won’t happen going forward. We’re entering uncharted territory, here. As I said earlier, that same assumption was applied to housing.

     My answer to inflation is to not inflate. In a monetary sovereign country with a faith based currency, the government needs to keep spending to a minimum order for the currency to maintain value. You seem to think that the printing press is the magic elixir. It might be for a little while, but, eventually the jig will be up.

     The government also needs to get out of the way as opposed to trying to out smart the market with short term gimmicks like cash for clunkers.

120. http://commentsongpe.wordpress.com

     Jim: This is a great stream of comments and takes the “knots” out of some very complex entanglements. Insights are obvious but you also open the door to greater clarity and broader questions that are typically short circuited and blocked by rhetorically divisive obstructionists. Thanks for the link and it is highly recommended to the “streamers” that follow this site.

     It has become very obvious that we are in an election storm, and the “swarm” will get worse. But the Peter Peterson Foundation’s assault on “entitlements” is just another form of degradation to the middle class economy. The process of “3rd world-ing” our own domestic economy is a blow back from outsourcing which will eventually homogenize the “global” economy to assimilate the American demographic labor market.

     Meanwhile, just as we peg international currencies to a float dollar, the American standard of living as represented by stratified wage earnings, is being pegged to a Corporate/CEO competitive salary that simply dominates the entire common denominator. Controlling the money supply is virtual domination and what is left of the surviving middle class will be apologists for the control capture that follows in the power scalar. This felonious capture merges a feudal management as domestic corporate estates in much the same way that conquistadors opened the globe to full scale colonialism. I term this merger “FELONIALISM” and would like to hear your perspective on such a model on the scope of emerging social, economic and political dynamics.

121. Rodger, though this may be strictly logically true, “For a monetarily sovereign nation, taxes do not pay for federal spending. Even if federal taxes dropped to zero, the government’s ability to spend would not change by even one penny.”

     But,it isn’t real.

     You live in a fantasy world of pure logic without any reality check. The “ability” of a monetary sovereign nation to print money doesn’t mean it doesn’t have to raise taxes. Can you show me a country that has not raised taxes, but only printed money that continued as a country??

     Your graph comparing debt growth reductions is interesting, but I’m not sure about the causal relationship that you imply. Correlation doesn’t guarantee causality. Eventually, most natural, human systems oscillate back and forth. I do notice that your graph doesn’t seem to apply to the current recession. We are currently “out” of the recession but not “increasing” debt growth reduction. Or in plan English, the deficit is growing.

122. You said, “. . .you can’t assume that because something hasn’t happened for the last 40 years; therefore, it won’t happen going forward.”

     I agree. But you are assuming something that hasn’t happened in 40 years will happen, an even worse assumption. Meanwhile, based on that worse assumption alone, you seem willing to pay higher taxes while receiving less less federal support for things like universal medical care, Social Security, education, the military, poverty aid, aid to scientific research, roads and bridges, food inspection, drug inspection, bank deposit insurance, the legal system — all the things government pays for.

     I’ve seen no evidence that “In a monetary sovereign country with a faith based currency, the government needs to keep spending to a minimum in order for the currency to maintain value.” Have you?

     Your answer to inflation is not to inflate? That’s your non-government answer?

     President Reagan made it chic to hate big government, but people forget how much government does for them. Typically one hears things like, “Big government should get out of the way, but . . . uh, don’t mess with my Medicare.”

     Given all the evidence, wouldn’t you prefer to believe that taxes could be reduced and federal deficits are beneficial? Or is this a case of Anthropomorphic Economics Disease?

     Rodger Malcolm Mitchell

123. balanceact,

     You said, “Can you show me a country that has not raised taxes, but only printed money that continued as a country??”

     Yes, America has not raised taxes. Since 1970, tax rates (Item 9.) for 80% of Americans actually have gone down somewhat. Tax rates for the upper 20% have declined massively. In total, tax rates are down from 40 years ago. They should be down far more.

     The result: What misleadingly is called the federal “debt” (should be called “money created”), has gone up an astounding 1600%. No unwanted inflation during that period (I say “unwanted,” because the Fed wants some inflation.)

     I find it sad that people have been brainwashed into believing they must pay more taxes and/or accept less federal support, when all the evidence points otherwise. Must be a Puritan mentality, that doing without is good. That’s why we hear so much these days about “austerity,” as though that’s what we all aspire to.

     Why do you think we became monetarily sovereign in 1971?

     To get out of every recession since 1971, deficit growth had to increase. Then when the recession ends, deficit growth decreases, soon to be followed by another recession — one, on average, every five years. Today, deficit growth again is decreasing.

     If deficit growth is beneficial, what evidence says we should end it?

     Rodger Malcolm Mitchell

124. Let’s look at this from the perspective of the real economy, instead of the financial perspective.

     No matter who is holding the dollars, and no matter what we pretend about having “saved” up money, in the real economy, those who still work produce the goods and services consumed by those who are retired (and also themselves and those who are too young to work, or too disabled, etc.) I think economists use the term dependency ratio to refer to the ratio of non-workers to workers in a society. If you assume that most people are going to stop working at or not long after 65, and that people under 18 are generally not able to contribute much productivity, then the demographics our country (and similarly, Europe) faces proclaim that we’re coming into an era where a relatively small group of people are going to be supporting a very large population of non-workers.

     Now, the fact that a lot of us boomers (yes, I am one) have supposedly saved up a lot of money over our careers (though some of us lost a great deal of it recently) doesn’t change that. All it means is that when we start selling off our investment portfolios, it will be a fire sale and we won’t get nearly as much cash for it as their current nominal valuation. Furthermore, whatever cash we do come up with still has to chase after whatever the working generations can produce. So the prices of the goods and services we will consume most will soar. Those who produce those goods and services will be paid handsomely for them. One might even refer to this as the retirement bubble–coming soon to a society near you.

     If we re-arrange the finances through taxation and inflation policies, so the young get to keep more cash and the boomers have to siphon off more of their assets in taxes or through inflation now, the real picture doesn’t change. The workers still produce what we consume. The difference is that prices for them will be lower because there won’t be as many dollars chasing after the same goods and services. The goods and services produced and consumed will be the same. All that will change is the nominal prices.

     Barring a major upheaval in our productive capacities, or a political determination not to produce the goods and services the retired need (seems unlikely given our politics), there will only be minor inter-generational shifts resulting from financial policies. At the end of the day, the boomers will consume what they need and the younger generations will produce it. The dependency ratio is getting very high, which is counter to the interests of the up and coming producing generations: more of their efforts will go into producing things their elders need and less into producing things that they need for themselves and their children. But no amount of financial sleight of hand can change that. Basically the younger generations were cheated at birth by the demographics and there is no financial way to set that right.

     (Non-financially, we could annex a young productive population to augment the size of the productive group. Mexico, the 51st state? Or we could restrict retirement for those still physically able to be productive–fine with me, I want to keep working till the day I die, if I can, anyway. Or we could adopt policies that increase mortality among the elderly.)

     What _is_ inequitable and could be fixed is the distribution of money _within_ the up and coming generation of retirees. That some were given huge defined benefit pensions, while others scrimped out some meager defined-contribution plans is inequitable, and in the chase of dollars for goods and services, evidently the former are greatly advantaged.

125. Bruce E. Woych:

     1st thanks for the positive feedback. Much appreciated.

     I agree totally with your 2nd paragraph. There’s a whole host of institutes and foundations that are laying the academic / intellectual / propaganda groundwork for the 3rd worlding of our society. 3rd worlding is inevitable given the ‘rules’ of globalization. We see more evidence every day that the elites of our society have accepted / want this and their job now is to get the masses to accept it. The crisis is turning out to be quite helpful. I write about it in my blog post today.

     I think your concept of Felonialism is quite good. Gramscian theories of class put a great weight on the middle class – seeing the class as the battle ground between the rulers and the masses. It seems inevitable that the numbers in the middle class will continue to decline. On the surface, I’d think that would be very bad for the rulers as it would reduce the number in the population who had a stake in the game. The power of mass propaganda, not to mention the economics profession (an example is the article we’re commenting on…) is hard to over-estimate though. Just look at today’s politics – we have many low and middle income people arguing that we should cut social security and stop spending. It’s truly amazing.

     I think we’re in a world of power no different than the conquistadors and most of us don’t realize it because of the trappings of formal democracy. The conditions of work and the level of insecurity forced upon the average worker is not too dissimilar to the feudal serf.

     Beyond swaying the population with propaganda, the rulers and the remaining middle class also have access to a military / police / surveillance state that’s never before existed. The combination of the two will be hard to fight. But, evidence from Iraq, Afhganistan, and Vietnam show pretty clearly that a determined population can fight the military.

     I’d like to hear more about your thoughts on Felonialism as it seems pretty fertile. Has the 19th and 20th century experiment in democracy seen its days?

     Jim
     commentsongpe.wordpress.com

126. I have spent some time on your blog, http://rodgermmitchell.wordpress.com/2009/09/07/introduction/ , I have little argument with your facts and respect your opinions. Question: Since U.S.A. is “monetarily sovereign” why must we incur debt or deficit? In my opinion this is a historic practice out of a time when money was commodity with intrinsic worth, sovereigns (not being “monetarily sovereign”) obtained money by taxing those who had it or when that was not wise (or possible) borrowed it from those willing to lend it. If the Nation simply created the money as necessary instead of delegating this “sovereign” right to “the financial establishment” there would be no national debt of deficit. Excess money would be destroyed by taxing it out of existence.

127. But we need to stop the war(s) before we can grow the economy with direct investment. We can’t pay for so many wars and invest in our economy too. In fact, if we believe the rhetoric, we can’t even keep intact our Social Security and a basic welfare system while fighting multiple wars.

     So, see it’s easy. Stop the frickin’ wars.

128. “…restoration of the status quo ante — governments focused on the provision of national defence, and domestically on the machinery of law and order.”

     Aid to the old, poor, and disabled is also status quo for any workable society. And national defense is “defensive”, not the gigantically expensive, perpetual imperialistic wars in multiple countries that we are currently running.

129. Agreed. However, I am a Christian and am not Bible-thumping, and there are lots like me out there. Try not to lump us all in the same bucket that ultra-conservatives lump all of Islam.

130. Why do you believe that the richest 2% constitute ALL people and businesses?

131. In that case, let’s have no taxes at all because the federal government has no need of them to provide services to it’s people. The ultimate of simpleton.

132. Rich:
     1. Taxes only hurt the economy in proportion to the fact that taxes are not used to help the economy.
     2. Ridiculous assumption to say that taxes are not used by the gov’t. That is not all they use, of course, but to say it is not used at all is to be simplistic and rigid in your thinking.
     3. Taxing the rich, who store the majority of their money to make more money, doesn’t hurt the economy but brings that money back down into the system where it is used by people who use ALL their money by participating in the economy.

133. Patricia, I don’t. Why put words in my mouth rather than discuss the issues with facts? I assume you have a background in economics ?

     Rodger Malcolm Mitchell

134. Patricia, I’ll try to explain it.

     Imagine a brand new country. It has no money. There are no taxes, because the people have no money. Further, there is no borrowing, because the lenders have no money.

     How does this new government get money into the hands of the people? Answer. It deficit spends. Deficit spending creates money.

     It does this without taxes or borrowing, because remember, there are no taxes and no lending.

     What is the limit of this new government’s ability to deficit spend? There is none. It can deficit spend forever, and never needs to institute taxes.

     Can you visualize that?

     Rodger Malcolm Mitchell

135. A real stop to the downward slide in most people’s economy would require a complete rework of our trade policy. As long as work is offshored, there’s no way the decline in living standards will stop. Our elected officials would have to start doing their job rather than taking bribes; they would have to start serving everybody rather than just their biggest donors (the big money).

136. Patricia,

     I agree with the sentiment from a humanitarian standpoint, but apparently you are too young to know what happened to our economy during WWII.

     Massive deficit spending yielded massive economic growth.

     Rodger Malcolm Mitchell

137. Pompo, you are 100% correct. I had almost given up hope that anyone on this post would understand. Congratulations. You explained it, perfectly.

     Rodger Malcolm Mitchell

138. “Must be a Puritan mentality, that doing without is good. That’s why we hear so much these days about “austerity,” as though that’s what we all aspire to.”

     We’ve heard nothing about austerity. What we’ve heard is that there’s no need to save. We can get a house or a car with no money down and worry about paying it off later.

     “To get out of every recession since 1971, deficit growth had to increase. Then when the recession ends, deficit growth decreases, soon to be followed by another recession — one, on average, every five years. Today, deficit growth again is decreasing.”

     “If deficit growth is beneficial, what evidence says we should end it?”

     It’s not beneficial. It just creates an endless loop of recessions. The deficit spending simply masked the symptoms and when the spending was removed, the problem resurfaced.

139. “The deficit spending simply masked the symptoms and when the spending was removed, the problem resurfaced.”

     You mean symptoms like recessions, unemployment, bankruptcy and poverty? How does deficit spending “mask” those symptoms?

     Rodger Malcolm Mitchell

140. Massive deficit spending that sent everyone to work producing for the war. We aren’t doing that now. Now massive military expenditure is not produced across the economy, but kept in the upper regions. The broader economy has not been enriched but drained…in this case, I agree with you, by taxation for military.

     In order to make it work today, we have to stop the wars in order to invest in the economy directly.

141. “We’ve heard nothing about austerity. “

     Really? Have you been reading the comments on this blog?

     “What we’ve heard is that there’s no need to save.” Who told you that. Not I.

     I suppose it will make you upset, but are you aware that federal deficit spending, by adding money to the economy, increases savings?

     Rodger Malcolm Mitchell

142. Patricia said,

     “Now massive military expenditure is not produced across the economy, but kept in the upper regions.”

     So that I understand, is it your belief that money spent in one state does not benefit businesses in other states?

     “The broader economy has not been enriched but drained…in this case, I agree with you, by taxation for military.”

     All taxes drain the economy. When you paid your taxes, you did not specify “This is not for the military.” All federal tax money disappears into the same federal black hole.

     Rodger Malcolm Mitchell

143. Yes, I understand. It is good policy to begin a country’s financial base with printed money. It is also good policy to print money as needed, at some various times throughout a government’s history.

     But it is not good policy to fund a government totally on it’s printed money rather than on taxation. It dislocates money from the economy of place, unties vital strings that bind it not only to the life of the nation’s economy but also to the economic life of the rest of the world.

     It is taking the removal of paper money from the gold standard a few steps further, enhancing instability and periodic hari-kari.

     Perhaps I believe less in people’s inherent goodness. I think we need firm checks/balances. Taxes can make that happen, if done correctly.

     Not that our tax system is not corrupted. Not that the printing of money, as we do it now, is not corrupted. It is. But it takes longer to mess it up. But, sheesh, has it ever become a mess!

     I do appreciate your radical thinking. I just think it is an impossible radicality. Impossible much like unadulterated socialism….

     Thanks for responding.

144. How about if we just eliminate FICA? I make an interesting case for this at: http://rodgermmitchell.wordpress.com/2009/09/08/ten-reasons-to-eliminate-fica/

     Rodger Malcolm Mitchell

145. commentsongpe.wordpress.com

     Well Jim, I would say here that we have two questions involving a Leviathan with two heads.

     Backing in to this sequence I would say that the democratic “experiment” has been a convoluted process that has intensified in both nature and technical capacities, but so too have the counter reactionary forces that are historically entwined at different levels. The “democratic” experiment really is a process of resolving conflict and distributing authority, but the process (like markets…) is not self-correcting. It is strategically and technically vulnerable to manipulation. Today, I would say that the pace of democracy is electronically enhanced yet it still falls into the dissent trap, mass mania and misrepresentation of interests.

     When we have heard things from government officials (under Bush) that blatantly state that we don’t necessarily want democracy around the world if it is not going to support our interest, one would be fearful that the democratic ideal is fading from American vision. The truth is, however, that real geopolitical forces have been utilizing “chiefdoms” and despots whenever it was efficient. That practice started with institutional colonialism in this form and continued to this day regardless of democracy.

     When that process is turned on its own population, which monetarism and market labor induces under the selected authority of a priviledged corporate entity as “head” than we have the shadow of what I am referring to as felonialism. It is a process that abstracts the geo-colonial process under corporate rules and extracts resources without commitment to specific regional boundaries. The domestic conglomerate of society runs on money, and that is both the lubricant and the glue to it all. Control Capture of the monetary system through central power control of small groupings by power brokers in finance is a the core of institutionalizing Too Big Too Fail. It is not a matter of “breaking up the Institutions” so much as it is a matter of taking the power structure out of so few hands.

     I am writing off the cuff here, so obviously with space and limitations. I hope this is a fairly clear response. I saw your home page…I will send some items at a later time.

146. Rodger, I do agree that we need to deficit spend now. I also agree that printing money now is appropriate. Occasionally these are the only useful methods.

     Of course, it depends on what we use the deficit spending and for what we print the money. Our gov’t has been secretive and corrupt in it’s use of those privileges.

147. For some reason, you don’t have a reply button on your FICA proposal, so I’m responding from here. My comments:

     We need universal health care. Medicare ridiculously takes the most expensive time in people’s lives, and gives that to government, leaving the less expensive ages/people to be covered by private insurance. That is cutting off your nose… If the government took all ages, evening out the risk, it would actually save a great deal over what the people now spend altogether, much less the portion currently left to the gov’t.

     I think that it would be better to improve FICA rather then dissolve it. Sure, stop taxing both ends and set the caps higher. Although it is notthe most efficient pension plan, it is efficient enough to provide people a modicum of money for old age.

     It provides a baseline for those who lose all their money in the markets and in their homes, as so many have over these last couple years. And for people, like me, who are disabled, it is a way to actually manage, even if severely modestly (!)

     As to the idea of putting “more money in the pockets of salaried consumers”, well, sure, but you see, there it is again, a belief in the innate goodness of people and also a belief in the innate benevolence of the universe, much less the state. People don’t always do what they should do for themselves, and neither does their gov’t/economy, and sometimes people find themselves in unlucky/undeserved spots such as chronic disabling illnesses or complete trash of 401ks and value of home, and then what does a person do for food and shelter? Are we as a society going to let them all push grocery carts along the sidewalks of Detroit simply because we wanted to give consumers more money to spend to help along the economy? Not the best idea, in my opinion.

     In our current condition, you are exactly right that businesses need customers: small businesses need a leg up and big businesses need more trade laws to keep our economy a little more “here”. We need to have more decent jobs to enable spending.

     But the way to do that is not get rid of FICA; rather, print some of that delicious money from those presses you have been talking about, and inject it straight into the economy. Lots of ways to do that, ways other than the ones we have used so far, ways that would actually develop a living economy rather than perpetuating a dead one.

     As to the way we have been spending/printing non-taxed money for our military, our big banks, Freddie/Fannie–meh, those were wretchedly spent expenditures–very little of it has been for the furtherance of our total economy health, which, if properly applied, would have returned that money back into the system quickly enough.

     My opinion, such as it is. And no, I’m not an economist. I am (shudder, shudder) a mere artist, who used to teach at an art college before I found myself too ill to go on. :)

148. A good teacher points in the direction that will help the student correct his own mistakes…Brenda, you defined yourself by what “stuff” you own, a precise listing of stuff that is supposed to say something to me about your values and choices and politics

     but because I have NO CLUE what the “stuff” on your stage is a symbol for, I’m still asking.

     Is your idea of “ask what you can do for your country” something you want to do to Social Security and the Med programs that will knock down, or maybe knock out altogether, retired boomer’s (The Beetle years) prosperity?

     As a first generation American, (not an anchor baby, family was “sponsored”), I like hearing about USA, The EARLY Years, so thanks for sharing. Can you go back to great-great Grandparents…? The people who were the LABOR behind the Industrial Revolution, in contrast to booger-eating IT sociopaths and narcissists, could very well be best studied if present in literature as an “Alien” race, that’s how superior they were in body, mind and spirit. You should learn more about your own DNA from that time if you want to find something to help you see out into a future beyond the noise of today.

     I could provide quite a colorful family tale of “Just War” characters from the Old Country, and do on occasion when I observe a rising evil through a rising political star who channels another self-serving totalitarian “ism”. Here’s one recently made available on the internet – Grandma’s Dad belonged to a secret, only-locally-known “gang” that earned the name “Suicide Squad” for their counter-revolutionary antics – meaning the revolutionaries were getting slowed down on one side, and the precise machine on the other. They did some damage and saved the village. Grandma had a role in that one – drop dead gorgeous natural white blonde, BIG _____, and a wicked, walking-the-line genius for practical jokes that earned her the village job of standing up on the hay barrels to deliver a dramatic reading of the oath of loyalty that first the Bolsheviks asked for and then the Nazis. Biggest danger to the village from allowing Grandma to conduct the Oath Taking On Behalf Of ALL while surrounded by “soldiers” who would, and did, shoot to kill sometimes even after the pledge of loyalty

     (Nazis did that as the war dragged on – must have been a “fix” – that unique type of personal power satisfaction – the same kind of satisfaction that Wall Streeters feel when they lie to someone)

     – the biggest danger to the village was that they would not be able to contain their laughter at Grandma’s performance. So not officially “military”, in the family genes, but not stepping back from truth and THE LAND (farm the size of NJ, not kidding). Economic theory eventually left the land without the care of those who loved it and cherished it for 1000 years of record keeping. You must excuse my skepticism for “economic” theories producing REAL fruit. To be fair, we were told that we could BUY back some of that land after the communist economic theory burnt itself out by consuming and trashing the family farms, but on closer inspection on the map, it was the piece that had the highest radioactive reading – always a catch with “capitalists” eh? Buyer beware :-)

     The hippies had some causes that they got “suicidal” about AS A GROUP. Last ones who did it, no?

     I’ve lived in “neighborhoods” where the welcome committee of women begin from day one to do the Stalin – make it all up – the case against you was written before you even arrived. That’s mostly what I am surprised about in my conversation with you, Brenda.

     USA has become expert at killing off the real leaders even before they’ve arrived. Which means “democracy” is going to have to step up to fill the “moral” void in USA politics. LONG overdue for a “Constitutional Convention” – and why not? It’ll be a musical on Broadway One Day :-)) A colorful cast of characters always do counter-revolutionary best…

149. Patricia, I really wasn’t suggesting we change the Medicare and Social Security benefits (other than to improve them). My main suggestion is simply to eliminate the tax.

     This way, workers would have more money and businesses would have more money — a perfect combination. The FICA tax is a huge drain on the economy, for no reason, as the government neither needs nor uses the money.

     Today, the government is planning how to reduce Social Security and Medicare benefits, all because FICA payments are less than benefits paid — a total misreading of the facts.

     Watch for this: Next step will be to increase the FICA tax.

     Rodger Malcolm Mitchell

150. I agree that there’s a deliberate misreading of the facts and I would also not be surprised if there is an increase of FICA payroll tax.

     So ok, we are back to our central disagreement that money can simply be printed for it, without attachment to the actual economy.

     However, on your site you number many reasons beyond this basic premise. You may need to cut the extra reasons in order to be clear on what you actually mean.

151. you’re trying to shove the toothpaste back in the tube, CBS – the technicians of Wall Street are all in the same age bracket and they went to Wall Street based on hatred, yes hatred, for peace and love

152. Re: @ Annie___Every government in the 21st century (and in the world’s past were monetarily sovereign entities) is “Monetarily Sovereign”…but it is the United States that is unique – “It has a Printing Press that creates Federalist` Money” and we monetize debt at an alarming rate when told (note: Told?). We need taxes to pay for societies upkeep and to reduce our debt, period! Now…getting back to the fed’s printing press…the United States Treasury in unison with the Federal Reserve has been exporting inflation for “three-quarters-of-a-century”. How and why? Simply put – because the citizens in the good-ole USA are “Bloated & Maxed Out”! Next objective on the grand scheme of things is to export our debt to Europe, China, Japan, Saudi’s, and Russia just to name the biggies, and begrudgingly “happily-too” the hundreds of “Other Duel-Currency Nations” of the third world. Life is wonderful when your the monetary hegemony in the known financial universe – approx. eighty-one (~81%) percent of US Federal Currency is exported…if not we’d be toast, literally? Think of it this way – if China’s yaun (chinese currency) is valued at 13-15cents on the Fed’s currency labelled unit “$US Dollar value” one of the two currencies is grossly undervalued or grossly overvalued? Guess which one is…or not of, as it seems so obvious? If you picked the US Federal Dollar you chose correctly. The inborn lynchpin of inflation compounded through decades of negligent oversite has “America’s Hyper-Inflated Currency” Upped by 1,500X % +/+…and suprisingly the chinese yaun is actually, and ironically pegged unfairly to the US Fed Currency. Thus…in all reality, one (1) chinese yaun should purchase one US$$$Dollar! Why is that? The entire world is about to throw-up on the US Federal/Treasury Currency – this “Soverign Monitary System”, realizing their “Ponzi(Federal Reserve via US Treasury via US Government) Scheme has reached its zenith, and is imploding as I write. China…our biggest debtor knows this as do other debtors, but China is the next World Power (forget about India or Brazil?) and certainly isn’t about to be fooled by a system that’s run amuck for a century at the expense of other soverign monetary countries! Please realize that the Fed was/is accustomed to buying back on timely (Recessions every 3-5 years like clockwork in todays locked-n-loaded paradigm) and sometimes unnecessary intervals of (self created?) “Inflationary/Deflationary” measures on its useless currency issued to the foreignors, and all is right with the world! This rationale/ruse however you coin the phrase doesn’t cut it anymore! Lastly and most importantly…a strong balance sheet that shows moderate debt is healthy – but one such as the United States has with off-budget chicanery is surely on the precipice of ruin…for a strong financial nations monetary sovereighty is what creates its strenght! Please note that anarchy, and rebellion are the offsprings of a careless nations fiduciary responsibility, that are soon to follow.

153. “ We need taxes to pay for societies upkeep and to reduce our debt, period!”
     False. If it were true, the government would not have been able to spend $13 trillion dollars unsupported by taxes. It’s important to understand what monetarily sovereign really means, which the author clearly does not.

     “Next objective on the grand scheme of things is to export our debt to Europe, China, Japan,. . .

     False. This conspiracy theory relies on the fact that inflation allows a private borrower to pay debts with cheaper money. However, unlike a private borrower, a monetarily sovereign nation has no reason to pay debts with cheaper money. It can produce money at will. All conspiracy theories have one thing in common: They rely on “secrets” none of the rest of us are privy to.

     “The entire world is about to throw-up on the US Federal/Treasury Currency . . .”

     No timetable is given for this “sky-is-falling” scenario. Next year? Next century? We assume the author hopes we all forget his prediction.

     Rodger Malcolm Mitchell

154. The Patriot Act needs to be repealed and everybody who had “data mining” access to the FINANCIAL RECORDS of every single soul in USA (!!!!)

     MUST be investigated to see how THEY used that data for the penultimate theft.

     It was NEVER about finding terrorist cells. It was Savings and Loan rip off, Part Deux.

     Thanks IT idiots for the software and programming –

     and the “maintenance” portion of the program will be going to those IT people who accept a “global” salary.

155. Simon Johnson wrote:

     “The president’s latest proposals are tinkering at the margins and will likely only have a limited impact.”

     Insanity: “Doing the same thing over and over again and expecting different results.”

     Albert Einstein

156. I suppose it will make you upset, but are you aware that federal deficit spending, by adding money to the economy, increases savings?

     Rodger Malcolm Mitchell

     _________

     You confuse real money with paper printed out of thin air. Real money is a function of something that has been produced.

     If all our problems were so easily solved by just deficit spending, why not do enough of it to end world poverty?

     Another point with regard to your “cure” for inflation. We just had inflation of housing prices beyond their fundamentals. Mr. Bernanke and Co. applied your cure and raised rates. How’d that work out?

157. Entertainment is a real product?

     I suppose we could expand the NFL and NBA to 200,000 teams. What would that do for unemployment? Of course, you’d need a government network to carry the extra games. Perhaps they can be supported by political advertising?

     How do the Chinese feel about football? If you broadcast the games there perhaps Coca Cola and Annheuser Bush would pay the bill?

158. On the other hand, if your percentage figures are correct, what does that say about the invisible hand, except that it is giving us the finger?

     Think less about what GDP is and more about what it could be if we could just once keep government out of the clutches of shyster opportunists.

     Maybe there is room to rebuild the roads, tunnels, bridges, get going on renewable energy, public transportation? Private industry’s idea of business remains weapons systems, beer advertising, football and pornography. Why are we surprised to find ourselves in a black hole?

159. “You confuse real money with paper printed out of thin air. Real money is a function of something that has been produced.”

     Going in circles at ever faster speeds with logic, eh?

     What was produced was a DEREGULATED financial services industry printing paper that became 60% of GDP

     while shipping “production” of “something” to a sovereign run prison (country?) where someone did the math over there and concocted a 35 straight hours work shift. Win-win?

160. When you go to the store, do you spend real money or do you spend paper money printed out of thin air?

     Rodger Malcolm Mitchell

161. That’s why many economists believe that the President should just leave the market as it is, and it let correct itself. With the President making one little change here and there, it seems like it has not worked at all.

162. Rodger,

     My mistake. I didn’t mean “raise taxes” as in “increase” taxes. I meant levy taxes. Essentially what you are saying if I read you correctly is that taxes are completely unnecessary. As a monetary sovereign we can print all the money we need.

     We can print money out of thin air, but this is building a house of cards. (Big hat tip to earle, florida for the link to the bigeye.com/griffin talk on the Federal Reserve System explaining how the Fed was created and how it creates money.)

     People do, and I think rightly so, get nervous about creating huge deficits or as you might say paper assets by “borrowing” i.e. printing money. My gold bug/gold standard friends are terrified of hyper-inflation in the US, and Republicans and Tea Partiers, and even some Democrats are seriously concerned about deficits and potential inflation. I am not. Certainly not at this point in time.

     So let me properly rephrase my question. Can you show me a country that does not levy taxes, (or can’t collect them) but only prints money that continues as a country?? Zimbabwe is the closest example of a country that is trying to solve it’s economic problems by printing money, but I can’t really hold this country up as a sterling example of a stable country. To paraphrase your statement on chart #4, “No nation can print itself into prosperity”.

     And regards the graph (#4) on your website analyzing the relationship of federal debt/money growth to recessions. If I read it correctly it looks like we are heading to a double dip recession as there has been no increase of federal debt/money growth after the 08-09 recession, only a sharp decline. And yet everything I read seems to indicate that the deficit is growing, not declining. What’s the difference between Federal Debt, and Federal Debt Held by Private Investors? I think I’m missing something here..

163. When a government that can print money goes bankrupt it is called “hyperinflation”. Yes, they can always print more, but it does not always do them any good. I have tried to explain hyperinflation, MMT, and hyperinflation in MMT terms below. Any feedback appreciated.

     http://pair.offshore.ai/38yearcycle/#hyperinflation
     http://pair.offshore.ai/38yearcycle/#chartalism
     http://pair.offshore.ai/38yearcycle/#mmthyperinflation

164. Re: @ Anonymous___”You confuse real money with paper printed out of thin air. Real Money is a function of something that has been produced”.— Really? They’re actually both the same animals. Why? The US Gov’t goes to the US treasury and ask them for $50bn…sure says the US Treasury and goes over to the Fed and says give us the money, we want it now”…which the Fed gladly accomodates, and immediately packages the IOU’s Certificates for delivery at the US Treasury. The US Treasury then opens up its borrowing window for the “TBTF” NY Banking Centers Behemoths to take the money and pass it around. Guess what? You got it…the money is now in the system collecting interest for the “TBTF’s”…compounding interest eg. everytime a NY TBTF does a Repo (repurchase agreement deferred to hide debt that caused Lehmans demise, but that’s another story for another time) its gratis, and the deceptive practices go on and on, etc., etc.,- a gift from me and you – not from thin (but from money haven?)air. Lastly… we have Production v. Consumption which in of itself is mysteriously ubiguitous…indeed this very animal spirit that indoxicates the beast (NY TBTF Money Centers)- bequeathing to all blinded consumers the fooly of hope…for without it the Behemoths would be stagnant, and rot from the inside-out. Onward….this year and next are going to be very poor years with GDP coming in at barely $12.5Tn. – $13.2Tn. a far cry from what were used to getting. Remember it has been caused by the Federal Reserves rebalancing act…orchestrated by the Bernanke’s, and Greenspan’s that got us where we are today – tweaking “Interest Rates” is a no-brainer for the “TBTF’s NY Money Center Behemoth’s”, but a desaster for our countries financial well being. Ref: http://www.bigeye.com/griffin.htm PS. Dated material from the late 80’s – early 90’s.

165. It’s important to understand the hyperinflation generally is not caused by money printing. In fact, hyperinflation causes money printing.

     The oft-cited hyperinflations in Zimbabwe and Germany were caused by specific economic circumstances. The money printing chased the inflation.

     The U.S. federal debt has risen an astounding 1,600% in only 30 years, and inflation has remained in the “acceptable” (by Fed standards) range. There has been no relationship between deficits and inflation. A more complete description of this is at http://rodgermmitchell.wordpress.com/2009/09/09/46/

     Rodger Malcolm Mitchell

166. What I find humorous is how every debt hawk today uses Zimbabwe as an example of what money printing could do to America. (Years ago, they cited pre-war Germany). Suggestion: Look up the political situation in Zimbabwe (and Germany and every other hyperinflated country you wish to use as an example), and tell me whether you can understand why they inflated (No, it wasn’t money printing).

     I’ll give you a clue: Hyperinflation causes money printing, not the other way around.

     Had I told you back in 1980 that the federal debt was going up 1,600% in the next 40 years, what would you have predicted? And if I tell you the federal debt will be $208 trillion (a 1,600% increase) by 2050, what is your prediction? Think about it.

     If you want to know what causes inflation in America, go to http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/

     The graph you refer to shows the rate of deficit growth. Historically, after reductions in the rate of deficit growth (not just deficit growth — think of the difference), we eventually have a recession, at which time the government again realizes increases in deficit growth are necessary for economic growth.

     The graph indicates that because of unsubstantiated debt fear, we have a recession on average, every 5 years. So yes, if the rate of deficit growth continues to decline, we will have another recession.

     I cannot show you a country that does not levy any taxes at all. I also cannot show you a country that spends no money, which is a way to avoid deficits. So let’s get real. How do taxes to stimulate economic growth?

     The sole effect of taxes is to destroy money, i.e. to reduce the so-called debt. Taxes do not pay for federal spending. They merely offset, on a balance sheet, federal spending. The government does not spend tax money.

     Your paraphrase is wrong, as America can and should print itself into prosperity, which comes from money growth.

     U.S. depressions tend to come on the heels of federal surpluses. See: http://rodgermmitchell.wordpress.com/2009/09/07/introduction/

     1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
     1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
     1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
     1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
     1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
     1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

     President Clinton’s surplus didn’t last long enough to cause a depression; it caused “only” a recession, which Bush’s tax cuts cured. What do you think is causing the current recovery? Tax increases?

     Rodger Malcolm Mitchell

167. No, the rich are not the merely prudent; the rich are that tiny number who have managed to gather all of the benefits of the productivity gains made in the last 40 years to themselves, while due partly to those productivity gains, now many of us ordinary folk cannot find productive, paying work to do.

     Also, when the “machinery of law and order” includes a military with a trillion dollar or so budget, I think the point of diminishing returns in terms of money spent on that “machinery of law and order” was passed long, long ago. I weep not for the position the “machinery of law and order” may find itself in now that people are beginning to stare more closely at the details of the national budget.

168. I’ve been led to believe, lately, that the rich also remove money from the economy by hoarding it. Has not Ronald Reagan’s tale of the “productive rich” been proven a myth? It is the poor who are productive in terms of recirculating their $$. So take from the rich and give it back to the poor as we did from 1940 to 1980, or so. Everyone will benefit except the very rich. They won’t be hurt materially. Their lifestyles won’t change a whit. It may cause them a deal of anxiety. Let them eat Zanax.

     We don’t want to tax them out of envy, or spite. We just want to be able to pay our !@#$% bills, dude!

169. So this tax in order to spend thing is just a government charade that’s been going on since 1971 so people won’t freak out? And treasury bonds, we just print more $$ as they come due? Hey, I’m all for it. End taxes. Ponies for everyone!

     How about we just have 24 inch pipes coming out of the ground here and there that just blow currency out?

170. It is important to understand that there is a 0.99 correlation between printing money and inflation.

     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=708265##

     The debt held by private investors (in your graph) is not inflationary, it is the debt monetized by the Fed that is inflationary. You are excluding the inflationary part of the debt.

     The specific economic circumstances that lead to hyperinflation are when government deficits are more than 40% of spending. Except for Japan, which was able to borrow from their own citizens for longer, most places end up printing money like crazy after a few years of such large deficits.

     http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100002951/a-global-fiasco-is-brewing-in-japan/

     As long as China, Japan, etc are willing to hold trillions of US debt, the inflation can be small. If, as seems to have started, China cashes in their debt as it comes due and the Fed monetizes it, then we will get big time inflation.

     Given that the money printing and inflation go together, how do you claim that money printing is “chasing” inflation and not causing inflation?

171. Rodger mostly has a Chartalism/MMT world view, but he forgot the part about taxes and bond sales reducing aggregate demand and controlling inflation. It is a twisted view but worth a look:

     http://pair.offshore.ai/38yearcycle/#chartalism

172. jomboinAR,
     It’s difficult to have a conversation with a debt hawk, because their comments degenerate into sarcasm and extreme examples, which means they have no desire to learn or to contribute. One wonders why they take the time to comment.

     Vincent Cate,
     MMT has many faces. I disagree with Warren Mosler and Randy Wray on several issues, one being the use of taxes to control inflation.

     Taxes destroy money so they do reduce aggregate demand; bond sales do not. The problem with using taxes to control inflation is that taxes are too slow, too political and too imprecise.

     The Fed targets inflation at about 3%. If inflation were to go to say, 5%, imagine trying to pass a tax bill that would get inflation back to 3%. Impossible. Instead, inflation can be controlled in tiny increments, by controlling interest rates. I discuss this at
     http://rodgermmitchell.wordpress.com/2009/09/07/introduction/
     http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/
     http://rodgermmitchell.wordpress.com/2009/09/09/46/

     Bond sales do not destroy money; they merely shift it from one bank account to another — actually from your checking account to your savings account (at the Fed). So bond sales do not control inflation.

     Rodger Malcolm Mitchell

173. Vincent,

     You said, “The debt held by private investors (in your graph) is not inflationary, it is the debt monetized by the Fed that is inflationary. You are excluding the inflationary part of the debt.”

     I do not know what the “inflationary part of the debt” means. How much does that total? How much is the non-inflationary part of the debt?

     If Federal Debt Held By Private Investors is not inflationary, (which it is not) what is the problem? This figure represents the total debt the government does not owe itself, and amounts to about $7.5 trillion. It is what worries the debt hawks.

     Because, by law, the Treasury must sell bonds to equal deficit spending, this figure represents the net total of deficit spending, and as such, 100% has been monetized.

     Rodger Malcolm Mitchell

174. Vincent,

     You said, “As long as China, Japan, etc are willing to hold trillions of US debt, the inflation can be small. If, as seems to have started, China cashes in their debt as it comes due and the Fed monetizes it, then we will get big time inflation.

     Given that the money printing and inflation go together, how do you claim that money printing is “chasing” inflation and not causing inflation?”

     The owner of a T-security deposits money with the Federal Reserve Bank, and at some future time, receives that money back, plus interest. In that sense, T-securities are bank savings accounts, with the bank being the FRB.

     To buy a T-security, China et al first must deposit dollars into a checking account at the FRB. Notice those dollars already exist. Nothing new is created.

     Then, those dollars are transferred from China’s checking account at the FRB to China’s savings account, also at the FRB. Again, nothing new is created. It merely is a money transfer, all within the same bank.

     When the T-security matures, the money is transferred back from China’s saving account. Still, nothing new is created or destroyed, which means this entire transaction, from purchase to sale, has zero effect on inflation.

     You’ve mentioned the government “monetizing” its debt. Exactly what is that process? When is federal debt monetized and when is it not?

     Rodger Malcolm Mitchell

175. jonboinAR said,
     “. . . the rich also remove money from the economy by hoarding it.”

     That is a myth, as it is impossible to “hoard” money, unless you bury it in your backyard. Think of what the rich, or anyone does with money. Three options: They either spend it, invest it or put it in a bank.

     If they spend it, the money goes to someone else, with the same three options.
     If they invest it, the money also goes to someone else, with the same three options.
     If they put it in the bank, the bank either will lend it or invest it, meaning the money will go to someone else.

     In short, money never stops. It moves every day, sometimes more than once a day.

     Rodger Malcolm Mitchell

176. Re: @ Vincent Cate___”Given that the money printing and inflation go together, how do you claim that money printing is ‘chasing’ inflation and not causing inflation?”—Inflation correlates proportionally to exponential growth via population…the aggregated anomaly of supply and demand now known today (absract cohesion) as “Inslaved Prosperity”…although ironically – it is the best arbitrage instrument for combating (a classic ‘truth is stranger than fiction’) excess?

177. “If Federal Debt Held By Private Investors is not inflationary,
     (which it is not) what is the problem?”

     “You’ve mentioned the government “monetizing” its debt. Exactly
     what is that process? When is federal debt monetized and when is it not?”

     The amount that the Fed has bought is the monetized debt (I think on the order of $2 trillion). The $7.5 trillion privately owned keeps that much money out of circulation (imagine it was locked up in 30 year bonds). The danger comes if people no longer want to hold that $7.5 trillion and when their bonds come due want cash. At this point the government would have to pay them, by selling bonds to the Fed and getting cash to pay with. If the Fed balance goes from $2 trillion to $9.5 trillion you get lots of new cash in circulation and lots of inflation. Real inflation is higher than interest rates, so holding government bonds is a bad investment. As people realize this, and cash in their bonds, there could be panic selling. This would be “The Bond Bubble” popping. The treasury has no chance to pay these people off, only the Fed could by printing money. Once people see all this money printing, and inflation, nobody will want to hold 10 or 30 year bonds. This is a feedback loop that will crash the world.

     http://en.wikipedia.org/wiki/Monetization

178. Vincent said,

     “The $7.5 trillion privately owned keeps that much money out of circulation (imagine it was locked up in 30 year bonds).

     When the federal government deficit spends, it creates dollars. By law, the Treasury simultaneously must sell T-securities, in the exact amount of the deficit spending.

     If T-security money was “out of circulation” there would be no money “in circulation,” since T-securities = debt.

     Rodger Malcolm Mitchell

179. Rodger: “Taxes destroy money so they do reduce aggregate demand; bond sales do not.”

     In either case the Treasury gets some money. Why do you count them getting taxes as destroying money but them getting money from bond sales as not destroying money? In the real world in either case they will spend the money and not destroy it.

     Now I would agree that bond sales are only a temporary reduction in demand as the government is supposed to pay them back. So we could count it as a method of delaying demand and not destroying demand. The risk now is that most people have moved into short term bonds which could be liquidated fast. So this delayed demand could come back all the sudden.

180. Vincent said,

     “The treasury has no chance to pay these people off, only the Fed could by printing money. Once people see all this money printing, and inflation, nobody will want to hold 10 or 30 year bonds. This is a feedback loop that will crash the world.”

     Vincent, you seem like an intelligent person, and your blog is good. So I advise you to forgo the apocalyptic language. The debt hawks have been telling the world the sky is falling for many decades, and they consistently have been wrong.

     First, the government sells bonds only because that is the law. The government does not need to borrow the money it already has created and has the exclusive right to create in unlimited quantities.

     Second, Americans cannot even stop using dollars, because dollars are required to pay taxes.

     Third, the value of money is based on the reward for owning it, namely the interest it pays.

     All these “end-of-the-world” scenarios, based on money printing, are wild speculations based on zero data. The most likely end-of-the-world scenario involves the government foolishly returning to some sort of standard, like the gold standard. That would put us in the same fragile position as the EU nations.

     Rodger Malcolm Mitchell

181. As in another post, I think the right way to look at government bonds is in delaying aggregate demand. A private person has given his dollars to the government so he can not buy anything for 30 years. So his demand is delayed. Do you agree with saying it this way?

182. No. Every dollar of government debt must, by law, be matched by a T-security. When the government deficit spends $1 billion, it must sell $1 billion in T-securities.

     Thus, according to your “delayed demand” theory, all money would be delayed.

     Rodger Malcolm Mitchell

183. Rodger: “Vincent, you seem like an intelligent person, and your blog is good. So I advise you to forgo the apocalyptic language. The debt hawks have been telling the world the sky is falling for many decades, and they consistently have been wrong.”

     Thanks. I think when the bond bubble pops and the money printing really starts it will be really really bad. Not at all sure that apocalyptic language is wrong.

     Also note that a stopped clock is right twice a day. And hyperinflation has happened many times, twice in US history even though it does not really have that many years of pure fiat money and you can not get hyperinflation in a gold standard. The odds of hyperinflation are far higher than you seem to think.

     “All these “end-of-the-world” scenarios, based on money printing, are wild speculations based on zero data.”

     The best study I know of, looking at 29 cases of hyperinflation, says that when the government gets to where their deficit is over 40% of spending for a few years then they will get hyperinflation. Now “few” is fuzzy, and Japan has lasted an unusually long time (the citizens there were unusual in the amount they saved and their willingness to lend to the government). The US has crossed the 40% line. So I hardly think hyperinflation is wild speculation with zero data.

184. Meant to give sources for this 29 hyperinflation case study:

     http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100002951/a-global-fiasco-is-brewing-in-japan/

     http://www.amazon.com/Monetary-Regimes-Inflation-Political-Relationships/dp/1845427785/ref=sr_1_1?ie=UTF8&s=books&qid=1284042213&sr=8-1

185. “No. Every dollar of government debt must, by law, be matched by a T-security. When the government deficit spends $1 billion, it must sell $1 billion in T-securities.

     Thus, according to your “delayed demand” theory, all money would be delayed.”

     The Federal Reserve can buy these T-securities with newly made fiat money. In this case there is no delayed demand. This is what is called monetizing the debt. This new money is inflationary. If the government could always get private people to buy and hold all their debt (as Japan did for a long time) then there would not be inflationary pressure.

     http://en.wikipedia.org/wiki/Monetization

186. The fed blew up a tech bubble. It ended badly.

     The fed, then, blew up a housing bubble. It ended horribly.

     The fed is now blowing up a treasury bubble.

     What Rodger calls “Zero Data” is simply sane people expecting the same results from the same actions.

187. I think it will be a case of, “Three Bubbles and You’re Out!”.

     http://pair.offshore.ai/38yearcycle/#threebubbles

188. This is a pretty good debate on CNBC between Peter Schiff and James Galbraith, with the latter promoting the “Free Money” side.

     And, as much as she annoys me, Erin Burnett is looking very hot.

189. When the Fed is printing over a trillion dollars each year to hold down interest rates, it is silly to say “interest rates are low so that shows the market is not worried”. The market is not setting interest rates, the Fed is. The free market would not have interest rates at 0%.

190. The Fed does not print a trillion dollars to hold down interest rates. You are correct that the Fed sets interest rates; the market does not.

     The myth that the market sets rates probably comes from the fact that the market sets stock prices, and bonds are traded like stocks. However, the interest rates are set, by fiat, by the Fed.

     Rodger Malcolm Mitchell

191. Vincent,

     What is your evidence that “this new money is inflationary”?

     Rodger Malcolm Mitchell

192. The way the Fed keeps interest rates down is by buying any bond that has a higher effective interest rate. There was a free market and then this guy with infinitely deep pockets showed up and started buying and selling. It is not that the Fed passes a law saying what the new interest rate is. The Fed Open Market Committee decides what they will buy and sell. They also have the rate the Fed loans money to banks at or the rate it pays on “excess reserves”.

     The net of all of this is that to hold interest rates at 0% the Fed has to print lots of new money.

     http://www.federalreserve.gov/monetarypolicy/fomc.htm

193. I think the best evidence that printing new money causes inflation is in the following paper. Download it and read it.

     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=708265

194. “. . . when the bond bubble pops and the money printing really starts it will be really really bad.”

     What does “bond bubble pops” mean? You mean no one will buy our bonds? Wrong for several reasons:

     First, what reason would people have for not buying U.S. bonds? Interest too low? The government can set interest rates wherever they want. So if no one would buy bonds at 1%, the government can set rates at 2%, 5% 10%, 20%, etc. At some level, there is a rate at which people will buy government bonds.

     Or maybe people think we will have inflation? Again, interest rate control solves this, and the Fed has come out very strong for controlling inflation. Or do people think the government won’t be able to print enough money to service the bonds? Impossible.

     In short, there is zero reason for people to refuse to buy T-bonds. But let’s say they did refuse. No problem. The federal government does not need to sell bonds. Creating and selling bonds is a relic of the gold standard days.

     ” . . . when the government gets to where their deficit is over 40% of spending for a few years then they will get hyperinflation.” I’m not sure about the significance of this study, but again, wouldn’t it have the same result if, as I said, political circumstance causes hyperinflation, which causes money creation, not the other way around? Think of what really caused America’s two hyperinflations.

     “. . . you can not get hyperinflation in a gold standard.” Actually, what you get with a gold standard is a depression. Funny how people worry about hyperinflation more than depression, and inflation more that recession.

     In order of probability and frequency in America:
     1. Recession. We have one every five years. Should be easily cured, but in reality, difficult to cure only because of political ignorance.
     2. Inflation. We’ve had one “excess” (well above Feds’ target) inflation in the past 30 years. It came at a time of modest money creation. Easily cured with interest rate control
     3. Depression: Six in our history
     4. Two in our history.

     So what is the greatest threat?

     Rodger Malcolm Mitchell

195. Mr. Evans-Pritchard said, ” . . . Japan is dangerously close to blowing up on its sovereign debts, with consequences that will be felt across the world.”

     I love the debt hawk apocalyptic predictions, because when they don’t come true (which usually is the case), the debt hawks have some excuse and go on making the same prediction. The preacher takes the flock up to the mountain to await the end of the world. When the world doesn’t end, he marches them back down and changes the date.

     Mr. Abrose- Pritchard made his ill-fated prediction several times, the most recently in January of this year. Today, is mid-September. How is Japan doing?

     To a debt hawk, theory trumps reality.

     Rodger Malcolm Mitchell

196. When interest rates are at about 0% you are far better off getting out of bonds 4 years before hyperinflation than 1 month after.

197. Vincent said,
     “I think the best evidence that printing new money causes inflation is in the following paper. Download it and read it.

     Vincent, I get weary of people sending me to read 100-page papers and thinking they have proved something. Why not reveal the evidence in one page.

     On my site I produce a couple of graphs that indicate the lack of relationship between federal deficits and inflation, and the strong relationship between energy prices and inflation. See: http://rodgermmitchell.wordpress.com/2009/09/24/is-inflation-too-much-money-chasing-too-few-goods/

     Your response essentially was, “Well, I didn’t mean those kind of deficits. I meant some other kind of deficits. O.K., fair enough. Show me your research data that proves some other kind of deficits cause inflation.

     Rodger Malcolm Mitchell

198. That 0% rate you mentioned is the Fed Funds rate, unilaterally decided by the Fed. No money creation needed other than what is lent to the banks.

     Anyway, this is just a digression from the real question: Is inflation a danger as a result of federal deficit spending? Answer: No. The greatest inflation in the past 40 years came in 1979, a time of modest deficits. The following decade saw massive deficits and modest inflation.

     Fact trumps theory.

     Rodger Malcolm Mitchell

199. >What does “bond bubble pops” mean?

     When the government has to pay much higher and higher interest rates to get people to buy bonds the value of existing bonds drops fast. So if your bond pays 4% over the next 30 years and there are new bonds paying 20% over the next 30 years your bond is worth around 1/5th what it used to be.

     But now imagine the government is paying 20% interest on their debt instead of 1%. The interest payments would be 20 times larger, and larger than the total taxes. So the only way to pay this is to print more money. But when they are printing money so fast people won’t even want to buy at 20%, so they will go to 30% and 40% etc, all the time having to print more and more to pay this higher and higher interest. But with so much money printing, people won’t want to buy the bonds, so… This is a hyperinflation feedback loop.

     The government can always raise interest rates more, and always print enough money, till it gets to the point that nobody will give them anything real for their pieces of paper.

     I agree that hyperinflation is caused by political circumstance. Something like Republicans not wanting to raise taxes and Democrats not wanting to reduce spending are circumstances that result in money printing.

     The last inflation was not really easily cured. Going to 20% interest rates now would wipe out many many things.

     These 2 hyperinflation happened with only about 50 years of fiat money history. Hyperinflation would wipe someones wealth if they had it in bonds. Many people seem to think that is the safest place to put their money and are piling into the bond bubble.

     Seems hyperinflation is worth at least a little planning, even if you think the odds are only 1 in 25 of it happening in the next year, and I put the odds much higher.

     A real gold standard does not give you booms and busts. The problem in the 20s and 30s was this new thing called the Fed that could print 2.5 paper dollars for every 1 dollar in gold it had. So as it took in gold it multiplied the money supply by 2.5 and you got the roaring 20s. Then as people realized it was a Ponzi scheme where the Fed could not possibly give everyone $1 in gold for each $1 in paper they decided to get their gold out and you got a bust. Like all Ponzi schemes it fell apart, till the government took everyone’s gold.

200. Vincent asked,
     “Why do you count them getting taxes as destroying money but them getting money from bond sales as not destroying money?”

     Well, now we are getting into the definitions of money. Which arbitrary definition do you prefer? M1? M2? M3? L? (Yes, there was a definition called “L.”) The differences have to do with liquidity.

     The definition I arbitrarily use in FREE MONEY is “financial debt.” In my world all bonds, bank deposits, money loans and the like are forms of money, again the differences being liquidity.

     As such, when the government creates a bond out of thin air, it is creating money, and merely exchanging this form of money for another form of money, which it destroys upon receipt.

     Rodger Malcolm Mitchell

201. Are you aware the federal debt went down during the 20’s? See: http://rodgermmitchell.wordpress.com/2009/09/07/introduction/ That is what led to the depression.

     Rodger Malcolm Mitchell

202. “I agree that hyperinflation is caused by political circumstance. Something like Republicans not wanting to raise taxes and Democrats not wanting to reduce spending are circumstances that result in money printing.”

     No, something more like a civil war or the usurping of land as happened in Zimbabwe. Disagreement on tax policy is not a cause for hyperinflation. I suspect you know that, but now are grasping.

     The last inflation was not really easily cured. Going to 20% interest rates now would wipe out many many things. It was cured in about a year. What did 20% interest wipe out?

     These 2 hyperinflation happened with only about 50 years of fiat money history. Hyperinflation would wipe someones wealth if they had it in bonds. Many people seem to think that is the safest place to put their money and are piling into the bond bubble.
     I see no evidence for a bond bubble. Bubbles come when a commodity is vastly overpriced and a surprise, dramatic decrease in price. It is well known that bond prices must go down, because interest rates are 0. This will shock no one.

     Seems hyperinflation is worth at least a little planning, even if you think the odds are only 1 in 25 of it happening in the next year, and I put the odds much higher.

     Plan all you wish, so long as your planning doesn’t cause recessions and depressions. If you think the odds of a hyperinflation next year are 1 in 25, let’s do this. If the U.S. has hyperinflation next year, I’ll give you $1,000. If not, you give me $40.

     Deal? Email me your address, so I can collect on December 31.

     Rodger Malcolm Mitchell

203. When there is a bubble it the government gets more taxes and can reduce the deficit. But what makes the bubble? It is the Fed printing money. The 20s was the Fed’s first big money creation bubble (again 2.5 paper dollars for every 1 in gold by law). Then when the Fed started increasing interest rates and not printing so much money is when things went south.

     Government does well during a bubble. Imagine in the Dot Com bubble or the real estate bubble, all the people thinking they are getting rich and paying all these extra taxes. So you see a bust after government taxes do well, I see a bust after a credit boom.
     But it is the same times.

204. The problem is that your $1,000 will be worthless if there is hyperinflation and my $40 is real money. :-) Are you willing to do my 2 oz of pure silver against your 50 oz of pure silver?. Can we define hyperinflation as at least 3% inflation per month by end of 2011. Deal?

205. Again, it is not that deficits directly cause inflation. It is when the government is not able to get buyers for enough debt to fund the deficit and they make new fiat money to fund part of their spending.

     I can summarize that paper. They looked at many countries and found a 0.99 correlation coefficient between creating new fiat money and inflation.

     Large deficits (like 40% of spending) seem to lead to hyperinflation in a few years because usually people get afraid to keep their wealth in those bonds after awhile. Again, Japan is the exception, those Japanese really liked to save and really trusted their government with their money.

206. War is one way to get to hyperinflation. But many times countries have had hyperinflation without any war. Regular politics can get there. Really.

     In the 70s the government had much more long term debt and nobody had adjustable rate mortgages. This time the government has much more short term debt. So many more bonds come due each month. Which means it has a much bigger problem of either selling new bonds when bonds come due or printing money.

     And people with adjustable rate mortgages could find that their income is not going up as fast as their mortgage is.

     Also, because of the experience of inflation in the 70s there are far more employment contracts with cost of living adjustments today. So the “wage price spiral” is going to go up faster this time.

207. It is not the deficit directly that causes inflation. It is having a deficit and not being able to get people to buy enough bonds. Reagan and Volker made people think that the government was not going to go crazy printing money and so people decided it was safe to buy government bonds again. So the government could run larger deficits with less money printing.

     You count all government debt as money. I only count the debt that is purchased by the Federal Reserve, since they print dollars to buy what they buy.

208. It’s useful to think of monetary orthodoxy as a Return on Investment (ROI) regime. Purchasing power will not expand unless those who own money believe it will be repaid with interest. Views on the future economy are everything. This applies not only to private investment but also to public. All expansions of money are considered to be debt.

     This ROI logic sounds reasonable when we think in terms of an individual but when we view society as a whole, it becomes completely nonsensical. An individual can be in debt to another but how can society be in debt to itself? Why should society require future contractions as a precondition of meeting its needs today? The technology exists now that would largely eliminate insecurity and provide a much better place to live. How can we justify poor or marginal living standards when we have such amazing capabilities?

     This is the topic of my blog post today.

     Jim
     http://commentsongpe.wordpress.com

209. “This time the government has much more short term debt. So many more bonds come due each month. Which means it has a much bigger problem of either selling new bonds when bonds come due or printing money.

     As usual with debt hawk beliefs, theory differs from reality. The government has had, and continues to have, zero difficulty selling bonds. Further, it doesn’t need to sell bonds, as creating bonds from thin air is a gold standard effort. Today, creating money from thin air.

     I won’t be commenting any more on this post, as the debt hawk arguments are tiring me.

     Rodger Malcolm Mitchell

210. “As usual with debt hawk beliefs, theory differs from reality. The government has had, and continues to have, zero difficulty selling bonds.”

     The Fed is monetizing over $1 trillion per year. The Treasury deficit is about $1.6 trillion. So the reality is that most it ends up being covered by new money printing already. It will get worse.

     “I won’t be commenting any more on this post, as the debt hawk arguments are tiring me.”

     I can understand. And we have covered most everything. I imagine you have done this many times before. For me this was a new discussion and I appreciate your time.

     Thanks.

211. Erin Burnett is going to get slapped around one day for being the main Saudi-loving harpy repeating “Not everyone deserves to own a home”.

212. Re: @ Vincent Cate___”This is a feedback loop that will crash the world.”—I doubt very much if it will crash the entire world – perhaps our world (USA) only. Reason being…it’s a new “Paradigm – A Electronically Internet Connected World” where anyone, and everyone can set up shop in cyberspace. The NY Banking Centers have moved from “Brick & Mortar” to Kindlebook Ledger’s? They’ve set up shop in Hong Kong, China where the action is. You must realize by now that the “Wall Street Gang” has no allegience nor country affiliation, accept for money (no matter whose face/country is on it)? America’s had its “Run”…time to move on – pathetic isn’t it! Sadly it seems all to real for me. PS. I hope I’m wrong, but with the President’s being elected (in the not to distant past?) today and in the future in America, there is this unholy/unorthodox vacuum-grab for absolute power, and authority that postulates a synthetic fascist state-of affairs. Thanks Simon and James :-)

213. It may start with the yen or the dollar, but once the dollar crashes many other currencies are in trouble. The average central bank has about 2/3rds of its reserves in dollars. So if the dollar crashes and their other reserves hold steady to their currency could go down by a factor of 3. But if the dollar goes down probably all of their fiat reserves are going down. It may be that only their gold is worth anything and most countries really don’t have that much gold.

     http://pair.offshore.ai/38yearcycle/#hyperinflationreserves

214. It is more accurate to say that the stores are empty because there are no customers to buy the products that the store owners would choose to sell in order to make money. No producer creates (well …) anything to sell when there are no customers. Deflating the price of rents and salaries won’t create customers with money to spend. A customer with an unmet demand and the ability to buy creates the potential for sales, not a brilliant and wise producer filled with certainty and a low tax rate. The very nature of business embraces uncertainty. The current popular uncertainty rant is more prattle …

     The store owner’s rent prices rise and fall in response to demand. If the developers have vendors standing in line to buy, the rents rise. The vendors only stand in line if customer with the capacity to purchase are demanding a product. Customers with no money have no demand for store owner products (cetaris paribus …//smile).

     We as a society have a choice, either leverage the public commons (the fiscal policy part) to provide employment (providing a potential to spend), or wait for the private sector (empty stores with no customers) to do it.

     This prattle about printing money until hyperinflation doesn’t make much sense. It is definitely not what a prudent person would do. It is only useful to continue fiscal stimulus as long as there is productive capacity to purchase. When there is no productive capacity to purchase, a prudent policy maker would seek to drain money from the system and not continue to add money to the system. Yes, prattle fits …

215. You don’t seem to want to let go of the funding deficits position. Perhaps you could provide an explanation of how it is necessary for the U.S and other similar countries to fund its spending.

216. Gold is just a metal that has no intrinsic function within the economy. It functions in the same way as a stack of chips in a casino. It isn’t in anyway feasible to transfer gold throughout the world at a sufficient rate to follow financial transactions in today’s economy. Fiat currency is a much better design solution. It just requires grown ups to think clearly and understand the economic system mechanics while using it.

217. “This prattle about printing money until hyperinflation doesn’t make much sense. It is definitely not what a prudent person would do.”

     I have noticed that MMT types can’t really make sense out of hyperinflation. Hyperinflation is the danger when deficits get high and fiat money creation gets excessive. It has happened more than 100 times so MMT theory should try to explain it. The theory has to do better than saying, “the people in charge were not prudent”. I have tried to write up a “hyperinflation in MMT terms”. Please give me some feedback:

     http://pair.offshore.ai/38yearcycle/#mmthyperinflation
     http://pair.offshore.ai/38yearcycle/#chartalism

218. The point is that the Fed expanded the money supply by 2.5 when they made 2.5 paper tokens for every 1 gold token. Then as people began to worry that there was no way the Fed could give people gold tokens for all the paper tokens they took out their gold, and the money supply got smaller again.

     Gold is very different from other tokens. If you have a 1 oz coin that is stamped by a government that went away 2000 years ago and the intrinsic value of the coin is the same as a 1 oz gold coin just minted today by an existing government. So governments can fail and gold still keeps its value. Also, I can melt down a 1 oz gold coin from the government of the USA and make 10 coins of 1/10th oz in my own name (gold.ai) and the value is still there. This is not the case with paper money.

219. “It isn’t in anyway feasible to transfer gold throughout the world at a sufficient rate to follow financial transactions in today’s economy.”

     You think $10,000 of gold is bulkier and heavier than $10,000 of paper money? Or that it can not move as fast in an airplane?

     You could have ounces of gold in computer accounts the same way we have dollars in accounts. There are even a number of internet services that do this.

220. Fiat currencies usually fail in less than 100 years. For easy arithmetic lets say there is a 1% chance of failing each year. If bonds are paying less than 1% on your fiat money it is not even covering the chance of failure. Much safer to have gold money that does not fail when a government/central bank/currency fails.

221. One more thing. The Fed was creating about $1 billion in new fiat money per year in the 30s and now it is making about $1 trillion per year. The government can’t do this type of trick with gold. So while governments are better off being able to steal value from existing money holders by making more money, the existing money holders are better off using gold than fiat money.

222. Re: @ Vincent Cate___Ref:http://www.blindkat.hedwisch.net/pirates/money.html Note: Reale (real) Money, Gold, and Silver with the 8 Piece Gold Coin the standard for bartering at the time as its name so aptly implies “8 individual piecse” making up the Whole. PS. I’d rather have a few 8 piece gold coins in my amulet than a wheelbarrow around my neck filled with “Toilet Paper”, trotting off to the market.

223. http://blindkat.hedwisch.net/pirates/money.html

224. Deal, although that’s as minimal a “hyperinflation” as one ever could imagine. Generally, hyperinflations show that much increase each week.

     Anyway, that 3% montly comes to a 42.5% increase in the CPI for all Urban Customers, All Items, from Jan 1 2011 to December 31, 2011 . Send me your contact info so I can reach you at the end of 2011.

     Rodger Malcolm Mitchell

225. Hyperinflations start out gentle, but 3% per month is clearly off to a start. You can be sure it will be going up fast. I mean 3% per month by the end of the year, not 42% for all of 2011. So in the latest data available as of Dec 31 2011 it should show 3% or more per month inflation for me to win. Is it still a deal?

     My info is at http://cate.com/vince
     Also, I am the only “Cate” in the phone book in the country “Anguilla”.

226. Are you saying “up 3% in any one month during 2011”? Inflation can go up 3% in any one month and down the next. It does that all the time. It even was up nearly that much in January of this year, as we’re recovering from a recession.

     Typical debt hawks. They make a prediction; then when you try to nail down the facts, it’s “Well . . . uh . . . what I really meant was . . . er . . . uh.”

     You predicted hyperinflation for 2011. I called your bluff. Now you’re trying to weasel out of it. Forget it. My fault. I’ve dealt with enough debt hawks to have learned they have no data; just big talk.

     Don’t respond. I’m off this post for good.

     Rodger Malcolm Mitchell

227. We have only had 3% annual rate, not 3% monthly rate. One definition of hyperinflation, which I like, says that when inflation is measured in periods shorter than a year it is hyperinflation. I am talking about a 3% monthly rate. So if the monthly rate in November is 3% (which as you noted is about a 42% yearly inflation rate) then I say it is hyperinflation. I agree that 42% yearly rate is just the start. It will probably get much worse. But that 42% is far higher than the 3% yearly rate we have seen anytime recently. If you change your mind and want to do the bet, let me know.

228. If you don’t tax anyone…The surplus money in the system will just get added to investment that will increase inflation

229. This popular myth (deficits cause inflation) is not supported by evidence. Since the U.S. became monetarily sovereign, there has been no relationship between federal deficits and inflation. See: http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/ Inflation has been caused by energy prices, not by deficits.

     Rodger Malcolm Mitchell

230. The reality is that making new fiat money causes inflation. Download the following paper for plenty of evidence.

     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=708265

231. The reality is that figures don’t lie, but liars figure. The charts document “narrow money” (aka M1) — a minuscule fraction of total money, not government debt, which is what we were discussing. Also, the graphs blend lots of nations, each with different problems and circumstances, and omit dates, amounts and almost everything else one can analyze.

     Why don’t we stick to what we know: The United States since 1971, the year we became monetarily sovereign, since that is what we were talking about? See: http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/

     There is no relationship between deficits and inflation since we became monetarily sovereign. But there is a powerful relationship between energy prices and inflation.

     Rodger Malcolm Mitchell

232. Re: @ Vincent Cate___When Mr Greespan finished up his disastrous tenure at the “Fed” he eliminated “M3”, and other transparent data from public scrutiny as a benchmark on savings, personal wealth, etc.,etc., via the public. It is all under the watchful eye of the Federal Reserve/Central Banking System with little transparency. PS. No one has any ideal of how much physical “Reserves-N-Gold” the FR/CBS has, or what it loans out to manipulate the market.

233. correct (spelling Check) link: http://blindkat.hedewisch.net/pirates/money.html PS. There are Eight (8) remaining market makers {N.M. Rothschild Bank & AIG have withdrawn mid 2004?)} — “””The London Gold Fix”””” – which sets the price of the metal twice daily;___#1/8 “Bank of NovaScotia”; #2/8___”Deutsche Bank AG”;___#3/8 “HSBC Bank”;___#4/8 “Societe Generale”;___#5/8 “Barclays {of interest to the reader..{(purchased the best (trading/brokerage) half of Lehman Brothers during its collapse/bankruptcy)(9/15/08)} Capital” (*note: 5th fixing member as it purchased the Rothschild seat);….next we have the “Non-Fixing Market Makers”___#6/8 “J. Aron / A Unit of Goldman Sachs”;___#7/8 “J.P.Morgan Chase”;___#8/8 “UBS Bank”…Fini PS. Please note that AIG – yes, “American Int’l Group” was a market maker but withdrew shortly after {note: N.M. Rothschild Bank purchased the “Banking Half” of “Lehman Brothers” 11/08 after collapse/bankruptcy}{(side-note…”Nomura Holdings” purchased small sub-unit of Lehman Brothers in Hong Kong)} “N.M. Rothschild Bank”( May 13,1994)} Bank” in ~ Sept/Oct 2004…strang timing?

234. I love the above discussion. Hope Mr. President is listing to you. Thanks for posting it.

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