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posted on 11 February 2018

Good Is Bad. Up Is Down. Other

by Rodger Malcolm Mitchell, www.nofica.com

It takes only two things to keep people in chains:

The ignorance of the oppressed and the treachery of their leaders.

Let us begin with some real truths, after which we can move on to the fake "truths" you have been hearing.


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Real truths:

1. The U.S. federal government, being Monetarily Sovereign, never can run short of dollars. Even if tax collections fell to $0, the federal government could continue spending, forever. It creates dollars, ad hoc, by paying creditors. Federal taxes do not pay for federal spending; dollar creation pays for federal spending.

2. Federal spending stimulates Gross Domestic Product growth by adding dollars to the economy. (Federal Spending is part of the basic GDP formula: GDP=Federal Spending + Non-federal Spending + Net Exports).

3. The federal government has absolute control over the value of its own sovereign currency, which gives it control over inflation.

Now, let us move to an article from 2/9/18 Chicago Tribune, an article typical of what you will see in your own local paper, and see on TV, and hear on the radio:

Budget deal would pour gas on an economy running hot

By Don Lee Washington Bureau

WASHINGTON - If the GOP's $1.5 trillion tax-cut package powers the American economy like rocket fuel as President Donald Trump predicts, the new congressional budget deal could, if passed, become the extra boost that causes the engine to overheat.

"Overheat" means inflation. The prediction, very simply, is that deficit spending will cause inflation.

Image result for time bomb

78 years and the fake bomb still is ticking.

That has been the concern for the past 78 years. In 1940, when the "Debt Held by the Public" was 40 Billion, it was called a "ticking time bomb." Every year since, it has been termed some variation of "ticking time bomb." Yet today, inflation is low and controlled.

Seventy-eight years of being wrong have not taught the economists and pundits humility.

The budget compromise that was struggling late Thursday to win passage provided a bipartisan answer to the latest fiscal crisis. But lawmakers did so by raising spending caps on military and non-defense programs that would add $300 billion to $400 billion to the deficit.

Coming on top of the tax cuts passed late last year, the increased spending caps - plus tens of billions of additional money for hurricane relief - would throw more fuel to an economy that is already perking up.

"Throw more fuel" means to grow the economy. Aside from inflation fears - the same false fears expressed for the past 78 years - why is growing the economy considered a bad thing? I'll tell you later in this post.

Analysts say that raises the odds of higher inflation and interest rates, precisely the concerns that in recent days have stoked investor fears and stock market volatility.

The budget deal also means that the United States probably would be returning to trillion-dollar annual deficits next year - much sooner than expected and under a government controlled by Republicans who traditionally had identified themselves as the party of fiscal probity.

The fear is threefold:

  1. That increased federal deficit is inflationary, and
  2. In response, the Fed will raise interest rates to combat the inflation, and
  3. Higher rates slow the economy, by making borrowing more difficult.

Let's discuss each:

I. Is increased federal deficit spending inflationary?

The formula is Value = Demand/Supply. So if the Supply of money increases and/or the Demand for money decreases, the Value of money will be reduced, which means more money will be required to buy the same goods, i.e. inflation.

That is the formula. Here is the reality:

Blue line = inflation; Red line = deficit

For at least the last 45 years, there has been no relationship between our huge deficits and inflation, but why? Is something wrong with the formula?

Well, actually there is a relationship between deficits and inflation, but that relationship is overshadowed by a far more important relationship:

Blue line = inflation; Orange line = oil prices

The price of oil also is determined by the formula, Value = Demand/Supply. When the Demand goes up and/or the Supply goes down, the price of oil falls, and oil is far more influential on inflation than are federal deficits.

The price of oil affects the prices of nearly every product and service in the world.

That is why federal deficit spending has not caused inflation. Oil prices have, on average, gone down.

II. In response to inflation, will the Fed will raise interest rates?

Although we have shown that federal deficit spending has not caused inflation, even the suspicion of a coming inflation will cause the Fed to increase interest rates. Why?

Because of this formula: Demand = Reward/Risk.

To combat inflation, the Fed wants to make dollars more valuable, and one way to do this is to increase the Demand for dollars. The Reward for owning dollars is interest.

The higher the interest rate, the more people want to own interest paying forms of money - savings accounts, bonds, notes, and bills. The demand for money increases, which increases the value (aka, the "strength") of the dollar, thus reducing inflation.

III. Do higher rates slow the economy, by making borrowing more difficult?

This is widely believed, and this belief alone is one of the reasons why the stock market falls when the Fed raises rates. Traders sell just because they expect a downturn.

The other reason the stock market falls: Raising rates makes bonds more attractive, so investors sell stocks to purchase bonds.

That's how the stock market operates, but what about the economy? Do higher rates slow economic growth?

Green line = Gross Domestic Product growth; Purple line = Interest Rate

There seems to be either no relationship between interest rates and GDP growth, or there actually is a reverse effect, with higher rates coinciding with higher GDP growth.

How can that be?

Two reasons: Federal deficit spending causes the issuance of more Treasury securities, which increases the amount of interest the federal government pays into the economy. And this interest payment increase is compounded by higher interest rates.

All that additional federal deficit spending is stimulative. Therefore:

Far from being a danger or a burden, growing deficit spending grows the economy, and reduced deficit growth is deflationary.

For instance:

Recessions (vertical gray bars) are introduced by reduced deficit growth, while recessions are cured by increased deficit growth.

Recessions are introduced by reduced deficit growth, while recessions are cured by increased deficit growth.

Extreme reductions in deficit growth (i.e. federal surpluses) tend to cause extreme recessions (i.e. depressions):

1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.

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.

When Trump took office about a year ago, the Congressional Budget Office projected that the nation's deficit would run between $500 billion and $700 billion annually for a few years, not breaching $1 trillion until 2022.

With lower tax revenues expected and now additional spending and an accompanying agreement to lift the debt ceiling, some experts reckon the deficit would blow past $1 trillion in fiscal 2019 and keep rising.

Said another way:

"The Congressional Budget Office projected that the federal government would add between $500 billion and $700 billion in stimulus growth to the economy, annually for a few years, not breaching $1 trillion until 2022.

"With lower tax revenues expected and now additional spending and an accompanying agreement to lift the debt ceiling, some experts reckon the federal government will add a $1 trillion worth of economic growth in fiscal 2019 and keep adding growth dollars, thereafter."

The complaint seems to be that growth is a bad thing, though as we have seen (above), economic growth does not cause inflation.

Treasury Secretary Steven Mnuchin has said that the president is concerned about the increasing debt. And on Thursday, deputy press secretary Raj Shah said the budget the White House plans to release Monday will show a "path" toward declining deficits.

A "path" toward declining deficits is a path toward more frequent recessions and depressions.

"Economic growth is essential to cutting deficits," he said. "We are committed to fiscal discipline."

The above is like saying, "Financial growth is essential to lower income," completely senseless. "Fiscal discipline" means to reduce the income of the economy, also senseless.

The U.S. debt held by the public, including foreign investors, is currently about $15 trillion.

"We've already entered a period where we have these structural deficits, and to answer that with a new round of tax cuts that are unpaid for, and a new round of spending that's unpaid for, is just adding insult to injury," said Michael Peterson, president and chief executive of the Peter G. Peterson Foundation, a non-partisan organization focused on the country's fiscal challenges.

First, to say that the Peter G. Peterson Foundation is "non-partisan" is like saying the GOP is non-partisan. It's a right-wing foundation.

Second, the federal government does not use taxes to pay for spending; it uses money creation. Every time the federal government pays a creditor, it does so with newly created dollars, not with tax dollars.

Therefore, neither spending nor tax cuts can be "paid for."

Some Republican lawmakers balked at the budget deal, calling it fiscally irresponsible.

No, "irresponsible" is to cut deficit spending and sink the nation into yet another unnecessary recession or depression.

The Great Recession severely shrank government revenues, and spending surged in 2009 as President Barack Obama and Congress responded with a huge economic stimulus package.

The federal deficit spiked to $1.5 trillion in 2009 and remained above $1 trillion for the next three years, then went back down to an average of around $575 billion a year in Obama's second term through 2016, representing a little over the 3 percent share of gross domestic product that economists consider a maximum sustainable rate.

The politicians agree that deficit spending stimulates economic growth, but ignore that fact when we are between recessions.

The Republican tax cuts and new budget package amount to a similarly massive fiscal stimulus, but it is coming at a time when the economy is not faltering.

We have a recession every five years on average because the politicians drive the "economic car" by switching from gas to brake to gas to brake, forcing the economy to lurch forward in growth, then fall back in recession, again and again, and again.

Economists warn that the rising national debt will choke growth as more public money ends up going to support deficits instead of economically productive uses.

"You already have deficits growing too fast, you cut the (tax) revenue out from under us, you increase the spending, and on top of that you rule out making changes to entitlement programs," said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget (CRFB). "It ultimately spells fiscal disaster."

The CRFB is the ultimate "Debt Henny Penny" organization, continually warning about debt-disaster, that never has come, and never will come. Instead, the disasters come when we cut deficit spending.

For 78 years we have been warned about that "ticking time bomb." That fake bomb still is "ticking," and the Henny Pennys still are warning. Wrong for all these years and still crying "Wolf!"

Why? Notice that phrase "entitlement programs" in the CRFB comment?

The real goal is to widen the Gap between the rich and the rest by cutting Social Security, Medicare, Medicaid, and all poverty aids.

The Gap is what makes the rich, rich. Without the Gap, no one would be rich. (We all would be the same.) And the wider the Gap, the richer they are.

So the rich bribe the politicians (via campaign contributions and promises of lucrative employment later), the media (via ownership and advertising dollars), and the economists (via contributions to universities and lucrative "think tank" employment) to spread "The Big Lie" that federal financing is like personal financing.

But federal financing is unique. Debt is not a burden on the federal government or on federal taxpayers, and it does not force inflation on us.

Our opinion leaders are paid to make you believe that good is bad, and up is down, so they can keep you down and lift the rich up.

And that is what all the "ticking time bomb" lies are about.

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