The Debt Debate

I've been a fan of the renowned author/debator, Dinesh D'Souza, since watching 'The God Debate' on youtube.  In the new movie 2016 Obama's America Dinesh refers to our National Debt as Obama's "weapon of choice".   The purpose of this post is to WARN you that, although Mr. D'Souza is an expert on Christian apologetics, he does not understand monetary economic theory. 

Mr. D'Souza, the key to growing liberty and growing the U.S. economy so liberty can grow is understanding the difference between a currency issuer and a currency user.

       Because we believe we can become the next Greece we're becoming the next Japan.

"One of these things is not like the others.."

The question is, “How do you turn litter into money?”

Warren Mosler:   The question is,  “How do you turn litter into money?”

So, I take my business cards out here, and these are twenty dollars a piece, if anybody wants to buy any. No? Any takers? No? Okay. [00:00:19]

All right, well if anybody wants to stay after and help clean up the carpet and tidy up the room, I’m going to pay one per hour. Or five per hour, or whatever, one per hour. Anybody want to stay and help? Okay, not a lot of takers. [00:00:30]

Then I add one more thing: Look, there’s only one way out of here and there’s a man at the door with a nine millimeter machine gun. Okay? And you can’t get out of here without five of my cards.

Now things have changed. I’ve now turned litter into money. Now, you will buy these, you will work for these things if you want to get out. The man at the door is the tax man and that’s the function of taxes.

TRANSCRIPT (Thanks to the Volunteer Transcription Team) Read or listen to it in it's entirety

The Sixth of Seven Deadly Innocent Frauds

From Warren Mosler's new book SEVEN DEADLY INNOCENT FRAUDS OF ECONOMIC POLICY

DEADLY INNOCENT FRAUD (DIF) #6

We need savings to provide the funds for investment.

FACT:

Investment adds to savings

Second to last but not least, this innocent fraud undermines our entire economy, as it diverts real resources away from the real sectors to the financial sector, and results in real investment being directed in a manner totally divorced from public purpose.  In fact, it’s my guess that this deadly innocent fraud might be draining over 20% annually from useful output and employment- a staggering statistic unmatched in human history.  And it leads directly the type of financial crisis we’ve been going through.

It begins with what’s called the paradox of thrift in the economics text books, which goes something like this:

In our economy, spending must equal all income, including profits, for the output of the economy to get sold.  (Think about that some to make sure you’ve got it before moving on.) 

If anyone attempts to save by spending less than his income, at least one other person must make up for that by spending more than his own income, or the output of the economy won’t get sold. 

Unsold output means excess inventories, and the low sales means production and employment cuts, and less total income.  And that shortfall of income is equal to the amount not spent by the person trying to save. 

Think of it as the person trying to save by not spending his income losing his job, and not getting any income, because his employer can’t sell all the output.

So the paradox is,

decisions to save by not spending income result in less income and no new net savings.

Likewise, decisions to spend more than one’s income by going into debt cause incomes to rise and can drive real investment and savings. 

Consider this extreme example to make the point:

Supposed everyone ordered a new pluggable hybrid car from our domestic auto industry.  Because the industry can’t currently produce that many cars, they would hire us, and borrow to pay us to first build the new factories to meet the new demand.

That means we’d all be working on new plant and equipment- capital goods- and getting paid.  But there would not yet be anything to buy, so we would necessarily be ‘saving’ our money for the day the new cars roll off the new assembly lines. 

The decision to spend in this case resulted in less spending and more savings.  And funds spent on the production of capital goods, which constitute real investment, led to an equal amount of savings.

I like to say it this way-

‘Savings is the accounting record of investment’ 

Professor Basil Moore

I had this discussion with a Professor Basil Moore in 1996 at a conference in New Hampshire, and he asked if he could use that expression in a book he wanted to write.  I’m pleased to report the book with that name has been published and I’ve heard it’s a good read.  (I’m waiting for my autographed copy.) 

Unfortunately, Congress, the media, and mainstream economists get this all wrong, and somehow conclude we need more savings so there will be funding for investment.  What seems to make perfect sense at the micro level is again totally wrong at the macro level. 

Just as loans create deposits, investment creates savings.  So what do our leaders do in their infinite wisdom when investment falls usually, because of low spending?

They invariably decide ‘we need more savings so there will be more money for investment.’  (And I’ve never heard a single objection from any mainstream economist.)  And to accomplish this Congress uses the tax structure to create tax advantaged savings incentives, such as pension funds, IRA’s, and all sorts of tax advantaged institutions that accumulate reserves on a tax deferred basis.

Predictably, all that these incentives do is remove aggregate demand (spending power).  They function to keep us from spending our money to buy our output.  This slows the economy and introduces the need for private sector credit expansion and public sector deficit spending just to get us back to even. 

That’s why what seem to be enormous deficits turn out not to be as inflationary as they otherwise might be. 

In fact the deficits are necessary to offset these

Congressionally engineered ‘demand leakages’ caused by the tax advantaged savings vehicles. 

Ironically, the same Congressmen pushing the tax advantaged savings programs, we need more savings to have money for investment, are the ones categorically opposed to federal deficit spending.

But it gets even worse.  The massive pools of funds (created by the deadly innocent fraud that savings are needed for investment) also need to be managed, and for the further purpose of compounding the monetary savings for the beneficiaries. 

This is the support base of the dreaded financial sector- thousands of pension fund managers whipping around vast sums of dollars, which are largely subject to government regulation.  For the most part that means investing in publicly traded stocks, rated bonds, and with some diversification to other strategies such as hedge funds and passive commodity strategies.  And feeding on these ‘bloated whales’ are the inevitable sharks- the thousands of financial professionals in the brokerage, banking, and financial management industries.  But that’s another story... 

An Introduction to the Seven Deadly Innocent Frauds of Economic Policy

by Warren Mosler, St. Croix, Virgin Islands

The term “innocent fraud” was introduced by Professor John Kenneth Galbraith in his last book, The Economics of Innocent Fraud, which he wrote at the age of ninety-four in 2004, just two years before he died. ¹ Professor Galbraith coined the term to describe a variety of incorrect assumptions embraced by mainstream economists, the media, and most of all, politicians.

The presumption of innocence, yet another example of Galbraith’s elegant and biting wit, implies those perpetuating the fraud are not only wrong, but also not clever enough to understand what they have been doing.  And any claim of prior understanding becomes an admission of deliberate fraud—an unthinkable self incrimination.

Galbraith’s economic views gained a wide audience during the 1950’s and 1960’s, with his best selling books The Affluent Society, and The New Industrial State. He was well connected to both the Kennedy and Johnson Administrations, serving as the United States Ambassador to India from 1961 to 1963, when he returned to his post as Harvard’s most renowned Professor of Economics.

Galbraith was largely a Keynesian who believed that only fiscal policy can restore “spending power.”  Fiscal policy is what economists call tax cuts and spending increases, and spending in general is what they call aggregate demand. 

Galbraith’s academic antagonist, Milton Friedman, led another school of thought known as the “monetarists.” The monetarists believe the Federal government should always keep the budget in balance and use what they called “monetary policy” to regulate the economy.  Initially that meant keeping the “money supply” growing slowly and steadily to control inflation, and letting the economy do what it may.  However they never could come up with a measure of money supply that did the trick, nor could the Federal Reserve ever find a way to actually control the measures of money they experimented with.

Paul Volcker was the last Fed Chairman to attempt to directly control the money supply. After a prolonged period of actions that merely demonstrated what most central bankers had known for a very long time—that there was no such thing as controlling the money supply—Volcker abandoned the effort.

Monetary policy was quickly redefined as a policy of using interest rates as the instrument of monetary policy rather than any measures of the quantity of money.  And “inflation expectations” moved to the top of the list as the cause of inflation, as the money supply no longer played an active role. Interestingly, “money” doesn’t appear anywhere in the latest monetarist mathematical models that advocate the use of interest rates to regulate the economy.

Whenever there are severe economic slumps, politicians need results—in the form of more jobs—to stay in office. At first they watch as the Federal Reserve cuts interest rates, waiting patiently for the low rates to somehow “kick in.” Unfortunately, interest rates never to seem to “kick in.” Then, as rising unemployment threatens the re-election of members of Congress and the President, the politicians turn to Keynesian policies of tax cuts and spending increases. These policies are implemented over the intense objections and dire predictions of the majority of central bankers and mainstream economists.

It was Richard Nixon who famously declared during the double dip economic slump of 1973 that “We are all Keynesians now.”

Despite Nixon’s statement, Galbraith’s Keynesian views lost out to the monetarists when the “Great Inflation” of the 1970s sent shock waves through the American psyche. Public policy turned to the Federal Reserve and its manipulation of interest rates as the most effective way to deal with what was coined “stagflation”—the combination of a stagnant economy and high inflation.

This book is divided into three sections.  Part one immediately reveals the seven ‘innocent frauds’ that I submit are the most imbedded obstacles to national prosperity.  They are presented in a manner that does not require any prior knowledge or understanding of the monetary system, economics, or accounting. The first three concern the federal government’s budget deficit, the fourth addresses social security, the fifth international trade, the sixth savings and investment, and the seventh returns to the budget deficit.  This chapter is the core message.  Its purpose is to promote  a universal understanding of these critical issues facing our nation.

Part two is a history of how I discovered these seven innocent frauds during my more than three decades of experience in the world of finance.

In part three, I set forward a specific action plan for our country to realize our economic potential and restore the American Dream.

Read 7 DIF in its entirety

Social Security "broke"?

There are a couple of guys that do a 5 minute daily each weekday morning. They're very entertaining and anyway I've been acquainted with them for several months now exchanging questions and comments via email mostly. Today's video can be viewed here http://bit.ly/zfzJg via @addthis . 2 minutes into it I had to stop because anytime someone says "Social Security is broke" or "insolvent" it's like fingernails on a chalkboard!

Below is my response that I just emailed them.

Stop the tape! You're talking nonsense! Social Security "broke"?
Okay. Imagine we're playing Monopoly and we start out with 6 players and a regular Monopoly board. Once all the property is purchased, we've all upgraded homes to hotels and we're having so much fun we decide to add more players so we add a surfing or a MOTORCYCLE :) theme Monopoly game and 6 more players but only 1 at a time. We're growing our player population gradually, say every 2 passes on go we'll add another player – whatever. We could continue on indefinitely with this game. We could start printing money off our HP printer right? We could print it on demand OR, we could make a law that we can only print enough to facilitate one more game board-no more and no less and by decree it has to be printed all at one time. It’s our game and our rules are based on our desire to allow the game to grow and thrive. Does it really matter what Parker Bros has to say about it? Are we “bad” because we’ve modified the game adding and even changing rules to accommodate the goal a productive make believe game that can go on infinitely? We could even incorporating SS benefits if we wanted. If we did could those checks ever bounce? No because the only constraint is our own WILLINGNESS to HONOR our promise to pay. Certainly we could decide to stop adding Monopoly money to the game but assuming each player is thriving and wants to continue playing......... see?
Notice it doesn't matter how much colored currency the "banker" has in reserve unless we make a rule to apply restraints. Notice we are not constrained by the taxes we collect!
Fact: If you decided to pay your income taxes in cash you'd go down to the U.S. Treasury, they'd take your cash, give you a receipt then the cash you brought is shredded. How does that pay for anything?
Seriously! I mean, what else are they going to do with it. Put it in a cash register?

I await their response with much anticipation.

BY WHICH WE SUFFER

From tweetfeed of @LibertarianMike

When I read this I immediately recalled something from 17 years ago.

I had my infant son on a changing table freshly bathed, so soft, so sweet... aaahhhhh baths are so nice surely nothing could ruin this moment. Then, seemingly out of nowhere, WHAAAAAAAAAAAAA!

Giving the situation a closer look I saw his little fingers had found their way behind his head and grabbed a lock of hair, furnishing the means by which he suffered.

(1/3) Society in every state is a blessing, but government even in its best state is but a necessary evil; in its worst state an

14 minutes ago from Perl Net::Twitter

# (2/3) intolerable one; for when we suffer, or are exposed to the same miseries *by a government*, which we might expect in a country

14 minutes ago from Perl Net::Twitter

# (3/3) *without government*, our calamities is heightened by reflecting that we furnish the means by which we suffer." -- Thomas Paine

14 minutes ago from Perl Net::Twitter

HAMMERS FOR FLY SWATTERS

Imagine I'm chasing a pesky fly through my home trying to swat it with a hammer and after many unsuccessful attempts I begin blaming the mess I've made on the "fact" that the fly's behavior is unusually complicated. Perhaps the fly flew around my house undetected for a few days therefore having a head start on navigating it's way around leaving me at some disadvantage. This is my analogy of what our elected officials are doing as they attempt to fix this mess.

The following is a direct copy and paste job from a blog I found last week. You'll find a link below to go to for a full read.

A national government should always aim to to design a budget with a view to the economic effects desired, rather than with a deficit target in mind. In other words, tax and spending reform should be formulated to accomplish economic, social, and political objectives rather than to hit a deficit target.

Further, governments will not be able to achieve their budget deficit target even if it were to cut drastically spending on social services (education, health, etc.) and development expenditures. This is because such draconian cuts would be likely to throw the economy into a deep recession that would reduce tax revenues.

If a country has a chronic and crippling shortage of foreign reserves, then the government should negotiate with the multilateral agencies to develop a program that would allow the country to service its external debt, and gradually reduce its trade deficit until it reaches a more manageable level.

Unilateral default on external obligations following Argentina’s experience is always an option. While it is frequently argued that default on debt is dangerous because future access to credit will be denied, that does not appear to be the case, historically. Indeed, entering formal bankruptcy proceedings often eases access to credit markets for households and firms for the obvious reason that relief from debt burdens makes it easier to service new debt.

While budget deficits are likely to raise living standards which will increase the CAD it should always be noted that all open economies are susceptible to balance of payments fluctuations. These fluctuations were terminal during the gold standard for deficit countries because they meant the government had to permanently keep the domestic economy is a depressed state to keep the imports down. For a flexible exchange rate economy, the exchange rate does the adjustment.

Is there evidence that budget deficits create catastrophic exchange rate depreciations in flexible exchange rate countries? None at all. There is no clear relationship in the research literature that has been established. If you are worried that rising net spending will push up imports then this worry would apply to any spending that underpins growth including private investment spending. The latter in fact will probably be more “import intensive” because most LDCs import capital.

Indeed, well targetted government spending can create domestic activity which replaces imports. For example, Job Guarantee workers could start making things that the nation would normally import including processed food products.

Moreover, a fully employed economy with skill development structure embedded in the employment guarantee are likely to attract FDI in search of productive labour. So while the current account might move into deficit as the economy grows (which is good because it means the nation is giving less real resources away in return for real imports from abroad) the capital account would move into surplus. The overall net effect is not clear and a surplus is as likely as a deficit.

Even if ultimately the higher growth is consistent with a lower exchange rate this is not something that we should worry about. Lower currency parities stimulate local employment (via the terms of trade effect) and tend to damage the middle and higher classes more than the poorer groups because luxury imported goods (ski holidays, BMW cars) become more expensive.

These exchange rate movements will tend to be once off adjustments anyway to the higher growth path and need not be a source of on-going inflationary pressure.

Finally, where imported food dependence exists – then the role of the international agencies should be to buy the local currency to ensure the exchange rate does not price the poor out of food. This is a simple solution which is preferable to to forcing these nations to run austerity campaigns just to keep their exchange rate higher. The IMF would do well to reform its charter and adopt this role instead of the destructive role it currently plays around the world.

Read all of it here Modern monetary theory in an open economy

2012 Presidential Candidate - Warren Mosler

'Job' is probably a word commonly found in a suicide note. But have you ever heard of someone suffering from depression due to inflationary anxiety?

Need and/or lust for money has compelled many a thief, I'm sure. I wonder how many robberies have been perpetrated to satisfy lust or need for a stronger currency.

To say I fear inflation is to say I honor money.

To value the tool, or to value the life that employs the tool. That is the question.