The measure of an economy is money. A large economy needs a larger supply of money than does a small economy. Therefore, a growing economy needs a growing supply of money. All money is a form of debt. Therefore, a growing economy requires a growing supply of debt. U. S. Federal Debt is the safest, most controllable form of debt. The federal government, alone among borrowers, never will default. Thus, there is no federal debt or deficit problem, and a balanced federal budget leads to a recession or a depression.
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Why cutting interest rates never stimulates the economy
October 9, 2008


      On my web site, I wrote early this year, "The Fed seems to operate under the theory: If something doesn't work, do it again; if something absolutely doesn't work, do it again and again. Chairman Greenspan repeatedly cut interest rates to stimulate the economy, without effect. Chairman Bernanke again repeatedly has cut rates, but this time there has been an effect: Inflation."
      Today (10/8/08), the Associated Press reported, "Wall Street extended its huge decline Wednesday as an emergency interest rate cut failed to alleviate investors' fears that the paralysis in the credit markets will set off a global recession." Apparently, nothing has changed.
      The above chart [chart was attached] demonstrates that high interest rates do not and never have impeded the economy, while low interest rates do not and never have stimulated the economy. There is, in fact, a small correlation between high rates and stronger economic growth. How can that be?
      When the federal government is forced to pay more interest, additional money is pumped into the economy, which stimulates the economy.
      The current stagflation (Inflation plus stagnation), and indeed all recessions, stem from the same problem: The economy is starved for money.
      Contrary to popular wisdom, low interest rates do not stimulate the economy, because low rates do not add money to the economy.
      When an economy is starved for money, as ours is, only one thing can help it recover: Adding money. The federal government is uniquely qualified for the job.
      In 1971, our money still was connected to gold. Because gold is a scarce commodity, the government was unable to create the money our economy needed. Our economy was starved for money. So, President Nixon removed the connection between gold and money. This gave the federal government the unlimited power to create money.
      Unfortunately, the Fed still lives in the past, and prefers to cut interest rates, rather than to use the tools President Nixon gave them. So the Fed cuts interest rates, which not only doesn’t work, but causes inflation, rather than using the proved system of pumping money into the economy, which stimulates the economy and doesn’t cause inflation.
      Of course, pumping money into the economy requires adding to the federal debt, an anathema to many. Common wisdom holds that large deficits cause inflation and that our grandchildren will have to pay the debt. As is so often the case, common wisdom is wrong.
      Presidents Carter and Reagan proved there is no relationship between deficits and inflation. Carter ran modest deficits with high inflation. Reagan ran huge deficits with modest inflation. As for our grandchildren paying the debt, this bogeyman is disproved every year, when no one pays for the debt. Our grandchildren will be taxpayers. They will pay taxes. If taxes are not raised, our grandchildren never will pay for anything.
      The government claims it will implement an $800 billion bailout of the economy, but the numbers lie. Much of the money is in the form of loan guarantees, which add no money to the economy. Some of the money is loans, which temporarily add money, but must be repaid -- with interest (thereby removing money from the economy). Despite the economy being starved for money, the Fed remains miserly, and tries to feed the nation with a teaspoon.
      Using the $150 billion stimulus (too little, too late) as a model, the government immediately should pump at least $1 trillion cash into the economy, as a stimulus, and raise interest rates to cure inflation.


The Myth of Too Much Government Debt
October 8, 2008

      “Anthropomorphize” means to attribute human characteristics to a non-human. It’s something like saying your cat loves you. But despite some cat-owners’ beliefs, cats are not people, so they may not have the same of emotions we do.
      I was reminded of the word “anthropomorphize” when I heard a radio commentator say, in essence, “If you and I have too much debt, we could be in financial trouble, maybe even go bankrupt. In the same way, if the federal government has too much debt, it will be in financial trouble.”
      The commentator was telling us, the federal government is the same as we are, and so must have the same kinds of financial limitations we have.
      Is that really true?
      My local county politicians have managed to outspend their already oversized budget. The county had reached its borrowing limit, and had no way to pay for its profligate spending other than to increase its income by raising taxes. Were you and I to engage in similar spending sprees, we would need to increase our income by finding better-paying jobs or second jobs, so our income could more closely manage our outgo -- or we would go bankrupt.
      The federal government never seems to have such a problem. It, alone among every financial entity in America, does not need to raise income (i.e., taxes) to match outgo. This year, the government mailed $150 billion to taxpayers and spent an extra $150 billion for the troop surge -- three hundred billion in extra spending. No extra taxes were collected.
      Though the government’s debt has increased massively in the past few years, and though tax rates actually have declined, the government is not in financial trouble. No federal check has bounced, nor is likely to. Not even during the darkest days of the Great Depression did a federal check bounce. Despite the dearth of tax income then, federal spending actually increased as the Depression wore on..
      Today, while the economy endures financial difficulties, the federal government’s finances remain fine. No lack of liquidity, there. The government even proposes to spend an additional $800 billion (or is that $1 trillion?) to help the economy, while Presidential candidates Barack Obama and John McCain talk about further tax cuts. It remains unlikely the extra spending combined with tax cuts will, for the first time, bankrupt the government.
      By every measure, the federal government is not like us. It neither follows the same financial rules, nor has the same financial limitations. In the science of Economics, history is the best teacher, and if we are smart enough to learn from history, we must conclude there is no limit to the amount the federal government can spend, safely and prudently.
      That being so, what is the concern about federal debt? What causes us to fear for our government’s financial safety? Is it the memory of hyper-inflationary economies, like Brazil and pre-WWII Germany, whose failure seemed to have some vague relationship to debt? Is it all the media warnings of impending doom if the government spends “too much” (whatever that is)? Is it Lord Polonius’s warning in Hamlet, “Neither a borrower nor a lender be”? Perhaps, the fear of debt is based on the word “debt” itself. Saying someone is “in debt,” casts an ominous shadow over them, bringing to mine people forcibly being evicted from their homes, belongings scattered over the lawn.
      Whatever the reasons, when given the choice between stimulating the economy and cutting the federal debt, many people with opt for debt cutting, despite all evidence showing debt growth is necessary for economic growth. This demonstrates the power of misguided anthropomorphism.


To Cure the Economy, Should Federal Taxes Be Eliminated?
October 8, 2008

      With the concerns about the financial bailout, the use of "taxpayers’ money," the nearly $10 trillion dollar federal debt, and the possible need to raise taxes, one question is not being asked. Perhaps the answer is so obvious no one feels the need to ask it, but those kinds of questions often lead to the most revealing discoveries.
      The question is, "Should we eliminate federal taxes?"
      Through history governments have levied taxes, because money and the backing for money were scarce. This ended for the U.S. in 1971, when President Nixon eliminated gold as collateral for the dollar.
      At that moment, our government acquired the unlimited power to create all the money it needed, which was the reason for Nixon’s action. Suddenly, our government did not need to tax, though we still act as though 1971 never happened.
      Imagine the economic advantages in not having to calculate and pay taxes. Imagine the time and money saved for businesses and individuals. If just one tax – FICA – were eliminated, you and your employer would have much more to spend and save, providing a powerful economic stimulus.
      The federal tax system is complex, unfair, onerous, capricious and unpredictable. Long-range planning is impossible. No sane person, starting from scratch, would create our tax system. Universal dissatisfaction has spawned repeated attempts to improve it, resulting in even more byzantine and unfair taxes.
      We’ve heard proponents for unit taxes, flat-rate taxes, sales taxes, progressive taxes and value-added taxes. All have failings, including the inevitable Congressional tinkering and yielding to special interests. No matter the tax, it will be unfair to some, and will not last in its original form. If we could find a way to eliminate taxes, we all would benefit.
      The question, "Should we eliminate federal taxes?," really becomes, "Can we eliminate federal taxes?" Clearly, we should if we can.
      The phrase, "Eliminate taxes," is another way to say, "Run a big deficit." We know we can run a big deficit, because Ronald Reagan did it. We also know, if we look at history, federal deficits correspond with economic growth. For the same reasons, federal surpluses correspond with economic failure:
      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.
1998-2001: U. S. Federal Debt reduced 9%. Recession began 2001

      Deficits add money to the economy, which stimulates the economy. All six depressions in American history, including the Great Depression, corresponded with federal surpluses, which removed money from the economy. Each recovery corresponded with a deficit. President Clinton’s surpluses led to a recession, which was cured by President Bush’s tax cuts.
      This article is too short to detail the vast evidence linking deficits to economic growth, but assuming the evidence is compelling, we are left with the question, "How much deficit is too much?" or specifically, "At what level would the deficit and debt be so large as to negatively impact the economy?"
      To date, no federal deficit or debt of any size, has caused inflation, recession or any other negative economic effect. Historically, the larger the deficit, the healthier the economy.
      A good first step would be to reduce FICA, and to pay for Social Security and Medicare the same way we pay for all other federal agencies -- out of the general fund. In 2007, FICA cost taxpayers about $1 trillion, coincidentally similar to the current economic bailout.
      History says this tax cut would provide a massive economic stimulus that does not use "taxpayers’ money." Tax cuts save taxpayers’ money. History also says the government can service any size debt, without raising taxes. Finally, history shows, our children and grandchildren never have and never will pay for deficits.
      When that first tax cut is successful, we can begin to cut other federal taxes, until we rid ourselves of this outdated, unnecessary, harmful process.
      The large, potential benefits are worth a serious investigation of the facts.


How to Save the Economy
October 6, 2008

      What do these problems have in common?
–Credit “crunch”
–Rising bankruptcies
–Failing mortgages
–Negative balance of payments
–War money sent overseas
      They are symptoms of an economy thirsty for money. Economists know, though the general public does not, every form of money is a form of debt, and financial debt is money. When you deposit money in your savings account, you actually lend money to your bank. Creating that loan creates money. Your bank then lends the money, which creates more money.
      Money markets, travelers’ checks, T-bills, notes, bonds and mortgages are forms of debt and money. The debt = money equivalence is what has characterized our economy since 1971, when President Nixon removed gold from the equation.
      You yourself can create money and you can destroy it. If you default on your mortgage, take money from your bank account, redeem a bond or pay taxes, you reduce the debt/money in our economy.
      Large economies require more money than do small economies, which is why a growing economy requires a growing supply of debt/money. But our economy cannot rely solely on private debt growth. We need a growing supply of government debt.
      In recent years, the supply of federal debt growth has slowed, reducing economic growth. Real estate prices began to fall. The sub-prime mortgage market, which relied on continuing price growth, failed. As each mortgage disintegrated, a bit of money was removed from the economy, slowing growth further. Irresponsible deregulation acerbated the situation.
      The domino effect had begun: Money supply growth slows. Economic growth slows. Real estate prices fall. Mortgages fail, which causes money supply growth and economic growth to slow even more.
      To break the cycle requires pumping money into the economy. The $150 billion stimulus plan was the right approach, though far too little and too late. At the time, I predicted $500 billion to $1 trillion would be needed.
      Now the situation has worsened, and because an ounce of prevention is worth a pound of cure, I suspect our needs have risen to perhaps $2 trillion or more. The federal government, alone among all money creators, has the safe ability to create debt/money. It must cut taxes and/or increase spending. In short, it must increase the deficit.
      From an economic sense, it hardly matters where the money is spent first. It can go to rich people, poor people, large corporations, small businesses. It can go to states, counties or cities. It can go to failing companies or to prosperous companies. Political reasons may favor one destination over another -- helping poorer people, for instance -- but the economy simply wants debt/ money.
      Some refer to this extra deficit as “taxpayers’ money.” It isn’t. Taxpayers’ money is what the government collects from taxpayers. But if the government doesn’t collect extra taxes, no taxpayer money is involved.
      Some think large deficits cause inflation. They don’t. This is counterintuitive, but historically our largest deficits have coincided with low inflation.
      The government should re-regulate the financial industry, and pump money into the economy, not by lending but by giving. Ignore misleading concerns about “taxpayers’ money,” “corporate welfare” and “rewarding the incompetent.” The government should not ask for interest payments, corporate ownership, executive punishment or increased taxes.
      Above all, ignore “revenue-neutral” proposals. They are the last thing this economy needs.
      The economy is a drying lake, thirsty for money. The federal government has an unlimited supply of water. It should pour water into the lake, and not ask for water back, nor spend excessive time worrying about which part of the lake will get the money first.
      Yes, in the short term help the poor, help the homeowners, help small business, help everyone who needs help. But in the long term, the rising tide will lift all boats.


The Myth of Rewarding Executives or Companies for Failure
October 3, 2008

      The struggle to find a solution to the economic downturn was complicated by the question of rewarding failing companies and their executives for ineptness and possible chicanery. It offended our sense of fairness to give millions of dollars to so-called “fat cats,” who caused all the problems.
      We felt the wrong message was being sent: “Be stupid. Drive your company into the ground and cost your employees their jobs, while you milk your company for millions. Then receive millions more, and go unpunished, when the government steps in and saves you from your own ineptness.” Does this make sense?
      When the U.S. invaded Iraq, one of our first acts was to eliminate Baath party members from the government, industry and the military. The argument was made: “Keeping Baath party members in the government and military would be like keeping Nazis in the German government, after World War II.”
      But, Baath party members were the most experienced politicians business people and military people Iraq had. Our desire to punish the bad guys left Iraq without its best and brightest people, making our job considerably more difficult. Only after we began to allow these people back into public and private life, were we able to begin turning Iraq around.
      Would the same thing happen to American industry if many top executives and/or their companies were punished with a ceiling on their wages or profits, or even with being fired? The reward/punishment question involves three issues:
1. What is the benefit to our government?
2. What is the benefit to our economy?
3. What is the benefit to Americans
      Neither rewarding nor punishing sick companies and bad executives benefits the U.S. government. Unless the companies or executives have committed a crime, it would be wrong, morally and legally, for the government to engage in any punishment activities. Rewarding the executive and their companies does not have negative implications for the government, which has the unlimited ability to create money. Whether that money goes to heroes or to scoundrels has no effect on the government.
      Rewarding companies and their executives does benefit the economy.


How to pay for universal health care
October 4, 2008

      Our health care is in crisis. Fifty million Americans do not have health insurance. John McCain would tax workplace health benefits and provide tax credits — $2,500 for individuals and $5,000 for families -- not enough to pay the average health insurance policy. Barack Obama would offer a Medicare-like plan to more people, while raising taxes on those he considers rich.
      Neither plan provides what a civilized society needs: Free health care for all. After years of hand-wringing, has Congress been unable to develop a universal health care plan.
      The federal government pays for military protection, highways, dams, a banking system, three branches of government, crime prevention, food inspection and the services of 400+ federal agencies. Can the government afford to pay for universal health care, without raising taxes and without causing inflation?
      Congress voted to spend an additional $200 billion for wars, $150 billion for a stimulus, many billions to rescue Fannie Mae, Freddie Mac et al, and $800+ billion to rescue the economy. None of this extra spending cost taxpayers one cent, because no additional taxes were levied. If there is a limit to government spending, we have not found it.
      As important as highways, dams, the branches of government, food inspection and crime prevention are, health care is at least equally important. Yet, the federal government pays relatively little for America’s health care. Taxpayers directly pay for Medicare and, through state taxes, for much of Medicaid. Employers pay most health insurance premiums, and insureds pay the balance. The government even pushes the cost of uninsured health care onto hospital emergency rooms.
      This is a poor solution. Emergency rooms do not provide preventative or dental care. Emergency room visits cost more than visits to a doctor’s office. Hospitals pass uninsured costs to insured patients, who pass them to their insurance companies and to Medicare.
      Insurance companies then charge higher premiums to insureds and/or their employers. Medicare passes part of its cost to doctors, hospitals and other health care providers, by reducing payments, often unfairly. Doctors pass the cost of lost fees to the public by refusing to accept Medicare patients or by becoming “boutique” doctors, who charge separate fees.
      Don’t think sick people aren’t costly. Because they don’t receive preventative care, they wind up in hospitals for expensive, extended stays, all paid for by the hospitals, who pass the costs on. And sick people, being less productive and more likely to need help from charities, drag down our economy.
      Lacking health care has a huge human and dollar cost.
      Several countries offer forms of universal health care, with varying success. Where it has been unsatisfactory, the reason always is the same: The government skimps on payments.
      Medicare is our toe-in-the-water experiment at a universal program. It will begin to fail as the government continues to underpay providers and more doctors opt out. Medicine will lose the best and the brightest. Fewer students will enter the medical field. Medicare will require endless, complicated patches to survive.
      Every problem with our health care system boils down to money.
      Underlying the crisis is the belief the government can’t afford universal health care. So, politicians devise convoluted, expensive plans, trying to wring two dollars worth of service out of one dollar in payment -- an exercise in futility.
      Ultimately, we must understand that:
1. America, as a civilized society, must provide health care to all our people.
2. Taxpayers cannot afford pay for it, nor should they.
3. The federal government has demonstrated it can spend vast sums of money, without additional taxes and without inflation.
      In the past thirty years, the federal debt has grown 900%. The years of greatest debt growth were the most prosperous. Taxes have not increased, so taxpayers have not paid for this debt growth. Inflation has been controlled, despite repeated interest rate cuts.
      Today, the debt approaches $11 trillion. Continuing the same 900% growth, the debt would reach $100 trillion by year 2038, an average deficit of $3 trillion per year. Medicare costs less than $400 billion and covers 40 million people.
      If we continue the same debt growth for the next thirty years, the economy would continue to grow; inflation would continue to be controlled; taxpayers would continue not to pay for the debt; and the government could pay for universal health care.
      In summary, we should abandon the disastrous “revenue-neutral” concept of federal support for health care. It has not worked and cannot work. Instead, the government should eliminate Medicaid and cover everyone with Medicare, while offering better benefits.
      America, of all nations, must provide health care for its citizens. The government has proved it can afford the cost. All things considered, not buying universal health care is more expensive than paying for it.


To learn more about a balanced federal budget, read FREE MONEY.

Review Rodger Malcolm Mitchell's book, FREE MONEY. CLICK HERE
 
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FREE MONEY: THE ANTIDOTE TO POPULAR WISDOM ABOUT SOCIAL SECURITY, MEDICARE, THE FEDERAL DEFICIT AND DEBT, TAXES AND THE ECONOMY.
.When the obvious answers don't work, the real answers will be counterintuitive.

E-mail: phyllisrgarber@yahoo.com

Medicare: A Solution to the Problem

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US National Debt is $9 Trillion!

For those who want a balanced budget, here is a history lesson:*
          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.
          1998-2001: U. S. Federal Debt reduced 9%.    Recession began 2001


CONTENTS OF THIS WEB SITE:
  1. Stagflation
  2. Federal Budget Deficit
  3. Social Security and Medicare Solutions
  4. National Debt Letters
  5. Federal Deficit Solution
  6. Concord Coalition.
  7. Balanced Federal Budget
  8. Federal Deficit Problem
  9. Federal Government Budget
  10. US National Debt
  11. National Debt Solution
  12. A Child In Arms
  13. Inflation and Stagflation
  14. Glossary of Economic Terms Debt, Money, Deficit, Spend, Owe
  15. U.S. National Debt
  16. US National Debt Clock

    What does this logical progression tell you?
    *A large economy needs a larger supply of money than does a small economy.
    *Therefore, a growing economy needs a growing supply of money.
    *All money is a form of debt.
    *Therefore, a growing economy requires a growing supply of debt.
    *U. S. Federal Debt is the safest, most controllable form of debt, because the federal government, alone among borrowers, never will default.
    *Thus, there is no federal debt or deficit problem, and a balanced federal budget guarantees recession, and depression.


    The Interest Rate Fallacy | Social Security Solutions | Medicare Solutions | Economic Solutions | Recession | Federal Debt of the U.S. | Federal Budget Deficit | Stagflation | National Debt Letters | Federal Deficit Solution | Balanced Federal Budget | Federal Deficit Problem | Federal Government Budget | US National Debt | National Debt Solution | A Child In Arms | Glossary of Economic Terms Debt, Money, Deficit, Spend, Owe | US National Debt Clock | Inflation and Stagflation | Pseudoeconomics   | Money supply and the weather | The Relationship Between Gold and Money | Social Security Reform | Does Federal Debt Cause Inflation? | The 5 Myths That Damage Our Economy | 10 Reasons to Eliminate FICA | GETROYS | Rodger M. Mitchell -- Ideas |