The measure of an economy is money. A large economy has a larger supply of money than does a small economy. Therefore, to grow an economy requires a growing supply of money. Every form of money is a form of debt. Therefore, a growing economy requires a growing supply of debt.
Federal government budget, government federal budget
Discussions with the Concord Coalition

      The Concord Coalition, an anti-deficit group headquartered in Marist College, is a strong advocate not only for balancing the federal budget, but for running a federal surplus. Concord's leaders say the federal government should elimininate the federal deficit and federal debt, and even should become a net lender.
     Members of Congress helped found this group.
     I joined their E-mail discussion list, because it opposes everything Free Money stands for. The purpose was to check my theories against the most antagonistic group -- sincere, intelligent people, who have given thought to the problem, and who disagree with me.
     Here is a sampling of the hundreds of E-mail messages, sent and received. You’ll see the Concord views opposing Free Money. Perhaps you hold some of these views. If so, you'll have a chance to see your ideas expressed, and my comments.
     The letters have been edited for space, not for context. The names of the list members have been disguised. I am, of course, RMM.

Click the cover to see excerpts from the book
October 19, 1997
C:      [Re. his statistics disagreeing with the Free Money concept.] There are methods for establishing validity which are quantitative and are in between intuitive rhetoric and rigorous proof.
RMM:      Between intuitive rhetoric and rigorous proof is pure intuitive, since one small variable in a formula can change the results.
     Experts have massive statistics available to them, yet are puzzled about the lack of inflation. Top economists -- PhDs all -- thought the scarcity of labor forces inflation. They have been proved wrong.
     Low unemployment is not a necessary cause for inflation. Neither is high debt. So long as inflation is prevented through interest rate control, we could have 0% unemployment and ten times the debt, and no inflation.

October 19, 1997

WBV:      Quantitative data exists, which refute some of your ideas about the advisability of the U.S. to support ever-increasing Federal debt.
RMM:      The analyses to which you refer, showed federal debt changes did not always parallel GDP changes. I agree, and have said it myself. Total Debt growth is necessary for GDP growth, and federal debt is but one component of Total Debt.
October 20, 1997
R:      Challenge to Rodger: Take an open poll and see if you can get a majority of the people on this list to agree with your all money is debt/all debt is money assertion.
RMM:      I don't believe all debt is money. All financial debt is money. There are forms of debt that are not money. If you owe me a bushel of wheat, that's not money. If you owe me $1,000, that is money.
     Please tell the group to name one form of money in America that is not debt.
     If a majority of the people on this list agreed that all money is debt I wouldn't have needed to write FREE MONEY.

October 20, 1997
     B: Debt is a condition of owing. I have $23 in my wallet. I am not in debt to anyone for that $23 . . . I have money in savings and a number of other investments for the kid's college and our retirement. These amounts do not put me in the red. I owe the accumulated amounts to no one (as I would if they were debt). To the question, Is all money debt? NO.
     RMM: The owner of debt is called a creditor. As the creditor, you do not owe. The debtor owes. As for the money you have in savings, the bank is the debtor. It owes you the money you lent to it (deposited).
     As for the $23 in green printed paper, the federal government is the debtor. It owes you what gives the $23 its value, namely full faith and credit.

Click the cover to see excerpts from FREE MONEY

October 22, 1997
     M: The gold in Fort Knox offers implicit support for the dollar. That would dispel your argument that all money is debt, since the full faith and credit is supported by a substance which is not debt.
     RMM: If gold really did back our dollar (which it doesn't), money still would be debt. The government would owe gold to the bearer of a dollar. To owe is to be in debt.
      However, gold is a minor asset in our economy. It does no more to support our full faith and credit than does any other asset. Some people feel gold has a special security, beyond what aluminum, steel, oil reserves, real estate, Mount Rushmore, the great lakes or any other U.S. assets offer. It doesn't. It's just a commodity, whose price is based on supply and demand, and has no relationship to money. Our money is not backed by gold, in Fort Knox or elsewhere.
{I have had this discussion a thousand times. Most people have great difficulty understanding that in today's economy, all money is a form of debt.}

October 23, 1997
     D: I would consider a $5 loan to a friend to be financial debt, but I certainly wouldn't consider it money.
     RMM: Do you agree that a note for $500 million constitutes money? If so, do you believe that the amount of the loan decides the difference between money and non-money?
     Do you agree that a $5 debt to a bank is money? What is your dividing line between money and non-money? The $500 million note, the $5 debt to the bank and the $5 debt to your friend all are money, though their liquidity and current market value differ.
     D: I would be curious as to whether this assertion and the five conclusions you draw from it have been expressed by others in the public arena and, if so, where? I am willing to look at anybody's arguments but am willing to spend more time looking at those that have survived some degree of public scrutiny.
     RMM: Many other people oppose the notion of a balanced federal budget. If that were not true, there would be no need for a Concord Coalition. Even Concord has stated that if we entered a recession or depression, deficit spending would be necessary to cure it.

October 24, 1997
     W: I own a bank. High interest rates inhibit refinancings and new purchases of capital goods: notably, cars and homes.
     RMM: In the very short term, a few months at best. Very few people, who want a home or a car, would decide never to buy until rates come down. Typically they wait a bit, but if rates stay up, they'll adjust to the new rates. I bought my first house with a 5% mortgage. Today mortgages are around 8% and houses are selling as fast as ever.
     W: Businesses will borrow less if the economy is weakened by low consumer demand.
     RMM: True in the very short term, but business will not decide against borrowing, just because rates are high. Interest is one of the lowest costs most businesses encounter. While a business that wants to build a plant or buy a machine may delay a short time, if the need remains, it will borrow..
     W: Mr. Mitchell, please supply us with your time-series so I can put it in my econometrics model and I will confirm or deny your proposition (that high interest rates don't hurt business).
     [Interest rate and GDP data given for the years 1957 through 1996]
     RMM: Since the GDP almost always rises from year to year, your theory would be that high interest rates should cause the GDP to rise less, and low interest rates should cause the GDP to rise more. Correct?
     Not only is there no correlation between high interest rates and low GDP growth, but surprisingly, there is somewhat of a reverse correlation. It may relate to the extra interest the government pays to the economy.

Click the cover to see excerpts from the book

October 25, 1997
     K: The government is not some ethereal, virtual-reality construct. It's you, me and every other American taxpayer.
     RMM: You are not the government and the government is not you. You pay taxes. The government receives taxes. You can go bankrupt. The government cannot.
     K: John Q. Investor (or foreign investors) will be repaid with funds taken from the wages of taxpayers without regard to the benefits they may derive from the indebtedness.
     RMM: That's the problem with taxation. It never can be fair. It always hurts the poor. And it never can be beneficial. It destroys money. Instead of eliminating the benefit (money), why not eliminate the problem (taxes)?
     K: No taxes. Unlimited money to satisfy unlimited human desires. No worries about ever repaying indebtedness . . . just print more money. It seems we're back to the free lunch theory.
     RMM: The government takes a worthless piece of paper, prints it green and declares it is worth $1, $5, $10, etc. There is no backing for this piece of paper except full faith and credit. The government creates money out of nothing. Money is a free lunch.
     K: Do you honestly believe that any legitimate government can function and retain a credit worthy status, while operating under a tax-free system whose stated purpose is to print enough money so that every member of its population may have their every want and desire satisfied?
     RMM: The federal government has printed trillions of paper dollars, backed by nothing and accepted by everyone. Why do we accept those paper dollars? We can't redeem them for anything except more dollars.
     The federal debt exceeds $5 trillion, so clearly taxes are not supporting the debt. We've already mentioned a great deal of evidence that taxes are harmful, especially to poor people. Why do we want to continue a harmful practice if there is no evidence it's necessary?
     K: Although every one of us would dearly love to see it, one doesn't have to reference the Weirmar Republic, Brazil or Mexico to blow such wishful thinking out of the water.
     RMM: Merely reciting a list of history's economic failures proves nothing. But regarding Germany how could that destitute country, whose money became so worthless, people carried it in wheelbarrows, build a huge and powerful war machine?
     How did they pay millions of soldiers, and build planes, tanks and guns, etc.? Answer: They printed the money to do it. Those soldiers and industrialists didn't work for nothing.
     K: Do you seriously believe global investors will continue to pull our chestnuts out of the fire by purchasing debt instruments, which they know will be repaid with money which has no basis in value other than full faith that we will print even more money?
     RMM: That's what global investors do. What other kind of money do they get? You have just described the real world.
     K: If the purpose of printing ever-increasing piles of paper is to satisfy unlimited societal demand, what motivation will there be to require any effort or work to produce the goods and/or services being demanded? In other words, why should I go to work on the assembly line today to produce a Cadillac . . . if I can simply express my wish for one and expect the government to print the money for it?
     RMM: If the government merely gave money to everyone, there would be little need for work. With no work, nothing would be produced, and nothing would be imported.
     We would have to let foreigners come into our country to produce or import goods. We would have a society similar to Saudi Arabia's.
     That's a dangerous situation. The Saudis are rich in money, but economically and militarily at risk, because their citizens rely too much on non-citizens.
     I do not envision most of the money, being used as gifts for the indolent. Rather, I see the government continuing to pay for goods and services, which would stimulate business. I also see the government decreasing its appetite for taxes, which again would stimulate business.
     We already have come $5 trillion in that direction, and I want to continue the trend.
     K: How long can such a Ponzi scheme survive?
     RMM: Paper money is a sort of Ponzi scheme. The problem with a Ponzi scheme is it eventually runs out of money. Since the federal government can print money without limit, the scheme can continue indefinitely. It has done rather well so far. I'm sure the people of 20 years ago would have predicted disaster at the thought of a $5 trillion debt.
     Our economy would collapse like a Ponzi scheme however, if the government were precluded from creating more money -- that is, a forced balancing of the budget.
{I recommend you read this dialog, again. "K" expresses most of the objections to Free Money--most of what passes for popular wisdom.}

October 25, 1997
     S: I used to develop econometrics models for [K] Securities. Time Magazine referenced one of my papers: Deficits and Interest Rates in which I studied the relationship between deficits and interest rates (i.e., there is none.)
     RMM: You’re correct. There also is no relationship between high interest rates and slow GDP growth.
     S: What is in your theory to support the claim that deficit spending tends to boost an economy?
     RMM: The deficit spending of WWII lifted us out of the 10-year Depression. Reagan's deficit spending helped cure Carter's famous malaise. Further, since deficit spending is one of the factors that creates money, even the Concord people found a correlation between Total Debt and GDP growth..
     S: Government does not produce anything.
     RMM: Except money for roads, armies, health care, retirement, millions of jobs, medical care, education, social services, etc.
     S: Government is a deadweight loss on the economy. Don't let short-term effects fool you. Deficit spending eventually takes a big toll -- debt service strangles the economy just like a person on a credit card binge.
     RMM: So the bigger the debt, the more strangled we should be. Look around. The debt has grown enormously, and so has the economy. There is absolutely no mechanism for government debt service to strangle an economy. The reverse is true. Government debt service pumps money into the economy.
     S: As a banker, I see this syndrome in borrowers more often than I would otherwise expect.
     RMM: Differentiate between the federal government and all other borrowers. You and I can be strangled by debt. The federal government cannot. It is the one borrower that can create all the money it needs.
     S: With this larger debt load, how will we keep inflation in check through 2000?
     RMM: Did you ask that question during the early days of Reagan, when the debt was less than $1 trillion? Now its almost $6 trillion. Where's the inflation? How have we done it? Answer: Interest rate control.
{"S" probably is astounded that federal debt has continued to grow since 2000, spurred by the Bush tax cuts, and still inflation is under control. How is this possible? If "S" is typical, he would say "Eventually we'll have the inflation I've been predicting. Eventually." Debt hawks never admit defeat.}

Click the cover to see excerpts from FREE MONEY

October 29, 1997
     C: [A means test for receiving Social Security benefits was proposed by the Concord Coalition] All the means­ test does is eliminate the windfall payments for the upper brackets.
     RMM: According to the Law of Unintended Consequences, it does other things.
1. It discourages working productively after 65.
2. It discourages 401k and other retirement plans, since they would be considered in a means test.
3. It encourages retired people to transfer income from their assets to their kids, plus other clever tricks, to defeat the means test.
4. It encourages establishment of another bureaucracy to monitor the means test and to catch people who cheat.
5. It encourages the hiring of prosecutors to track down the people who cheat.
6. It encourages building jail cells to deal with those malfeasors.
      While we strive for tax simplification, the last thing we need is yet another complication. By the way, did you really intend to call it a means test? One can have a good income, but limited means. (What if at the age of 70, you owed ten million dollars and earned $200,000 a year? Are you in the upper brackets?)
      As to Social Security's windfall payments, you are referring to after­tax money, that was invested in an extremely poor investment no one would voluntarily make (you get nothing if you die before 65), the income from which already is taxed at inordinate rates. I imagine if you live to 100, you come out pretty well, though, you'd have to live in poverty to satisfy the means test..
      Consider an insurance annuity into which you paid all your life and received nothing if you died before 65, and didn't break even until you were in your 90's. Would you buy it?

October 29, 1997
     C: People much smarter than me have thought this idea (federal surplus) through and figured out that it can work.
     RMM: Smart people created the Great Depression. Smart people created the original Social Security program, and smart people created all the changes that have come since. Smart people created the current debt. The question is, whom do you follow?

October 31, 1997
     K: Compare the increase in the standard of living since 1947 with the increase in federal debt and you'll find that in the first 25 years (1947-­1972) we had a successive string of balanced budgets/ surpluses or very small deficits. And what happened to the standard of living during these 25 years? Answer: it doubled.
     RMM: Selected data. What about the years prior to 1929, when we ran a budget surplus, which led to the Great Depression? What about 1939 ­ 1945, when we had a huge deficit, which finally brought us out of the Depression?
     During the years 1947-­1972, Total Debt increased enormously, which meant that consumers and businesses were borrowing furiously, and took the money creation burden off the federal government. Now consumers are up to their eyeballs in debt. So who is going to create the money for future expansion?
     Also, that phrase, standard of living, has been interpreted more ways than a Casey Stengel speech. No one knows which of the thousands of economic numbers represent the real American standard of living. Actually, I prefer GDP and inflation as most representative.
     Others may prefer % of people below the 'poverty line' (another imaginary number), the difference between wealthy and poor (two more imaginary numbers). Or do you like median wage, median wage for the principal breadwinner, total unemployed, total unemployed but not seeking work, median hours worked, median vacation days, median value of job­supplied benefits or median value of government supplied benefits?
     How about median education, median car ownership, median age of 1st car, median home ownership, or median value of median home owned (including or not including condos)?
     Or, there's median value of 2nd home and 2nd home ownership, average savings (but we don't know what savings are), average spending for nonessentials, average ownership of major appliances and average cost of those appliances and average entertainment expenditures.
     And, don't forget average calorie intake (to demonstrate the hunger factor), average calorie intake by the lowest income quadrant.
     And, what standard of living analysis would be complete without discussing health. We can consider average # of doctors per capita, average specialists (of various kinds) per capita, and there's the all-important demonstration of standard of living: average life span.
     What is the mechanism that would cause a tax increase to increase our standard of living? Are you saying, if we had kept raising taxes during the Depression, we wouldn't have had to wait for the wartime deficits to get us out?

Click the cover to see excerpts from FREE MONEY

October 31, 1997
     K: Of all the factors that led to the Great Depression, the facts that the Federal Reserve did not lower interest rates and did not pump money into the financial system were much larger factors. The Fed allowed the money supply to shrink by one­ third from late 1929 until 1932. As we know, that's the wrong reaction.
     RMM: You are right.
     K: Hoover pushed through the Smoot­Hawley Tariff in the spring of 1930. This action completed a 1928 campaign promise, but it resulted in a collapse of world trade and USA exports.
     RMM: True. Tariffs are taxes. They destroy money.
     K: Then, Andrew Mellon, in one of his last acts as Secretary of the Treasury, asked Congress to raise taxes significantly (a 55 percent rate on the richest) ­­ which slowed the economy still further. A contracting money supply, a horrible tariff, and tax increases. Rodger, you want to blame budget surpluses? Please!
     RMM: There are only two ways to achieve Concord's budget surplus: Increase taxes and spend less.
     A contracting money supply? That's the definition of a budget surplus. A horrible tariff? That's taxation. And tax increases? Well, we know what they are. What the government did was exactly what Concord wants done, again.
     K: The federal government ran substantial deficits from 1931­ to 1940 without stopping the Depression. How do you account for that? How do you account for the second wave of the Depression hitting after 1936 ­­ after five years of large deficit spending? Under your proposal, does that make sense?
     Also, the deficits of the 1930's were, for the most part, at least twice as large as the surpluses of the 1920's. How do you account for that? Shouldn't the Depression have ended in 1935 or so under your guidelines?
     RMM: It's true that from 1930 to 1940, Federal debt rose from $17 billion to $54 billion. However, the key figure, Total Debt, did not rise at all. In 1930, Total Debt was $214 billion. In 1935, Total Debt had fallen to $200 billion, which accounts for the second wave of depression. By 1940, Total debt was only at $216 billion.
     The reason we couldn't recover from the Depression is that Federal debt did not increase enough to overcome the drop in all other forms of money creation. In 1941 however, Total Debt began to rise, which ended the Depression.
     It doesn't matter what kind of money is created, so long as the total supply increases significantly.
     C: You are right: the Second World War ended the Great Depression. It forced full employment through the military and industrial processes. Saying federal deficits ended the Depression is incredibly disingenuous.
     RMM: Wars do not force employment. Wars just kill people. There have been wars in Angola, Pakistan, India, Russia, all through Africa, Viet Nam, Korea, etc. that did not force employment in these areas.
     Employment is forced by government spending. Federal deficits ended the Depression. Had there been no war, and the government spent as much, the Depression would have ended, and without all the killing.
     G: Also, as you know, many of us in the Concord Coalition agree that deficit spending can be a useful economic stimulant when necessary.
     RMM: Who decides when it's necessary? When is improving the economy not necessary? The poor of America think its necessary now.
     What about the people, whose Social Security and Medicare are cut? Wouldn’t they think stimulating the economy is necessary? Is improving our infrastructure, education, police, etc., necessary now?
     C: The problem is that we have run huge deficits during good times since 1981. Now, if we need to fight a war or deal with a major economic problem, we find ourselves in a situation where we have already spent that money.
     RMM: The amount of money in the world is not fixed. Spending money doesn't destroy it.
{Note that this correspondence took place in 1997. Concord believed we "already had spent (the) money" to fight a war. Think of what has happened since, and how wrong Concord was}

Click the cover to see excerpts from the book

January 24, 1998
     CCC The Concord Coalition's position is that if budget surpluses occur, they should be strategically deployed to reduce the level of public debt.
     RMM: To reduce the level of public debt means, to reduce the amount of money in circulation.
     CCC: This is more likely than any other use of surpluses to help the entire nation build a strong economy and at the same time ensure that entitlement benefits for seniors are consistent both with their needs and the ability of younger generations to finance them.
     RMM: There is no mechanism by which reducing the amount of money in circulation will build a strong economy and pay entitlement benefits.
     CCC: The late 1990s mark a point when the federal budget should be substantially in surplus, not barely in balance.
     RMM: A federal budget substantially in surplus means the total amount of money in our economy would decline substantially. This will cause a depression as it has in the past.
{I was wrong. It caused only a recession, not a depression. The surpluses lasted only a few months.}
     CCC: The public debt should decline during favorable circumstances in order to allow the debt to increase when necessity arises.
     RMM: This assumes there is some ceiling on what the government can borrow. I know of no such ceiling.
     CCC: The fiscal climate is more favorable today than it has been for many decades or is likely to be for many decades to come.
     RMM: This favorable fiscal climate has come during one of the largest run­ups in federal debt in our history.
     CCC: Generational equity requires some correspondence between how much a generation pays to government and how much it gets back in return.
     RMM: Running a surplus means that everyone pays to the government more than they get back.
     CCC: Simple generational fairness to our kids requires today's workers and owners of capital to build budget surpluses today to pay for their own retirement and health insurance benefits tomorrow.
     RMM: Generational fairness? Is this related to tax fairness which means whatever the speaker wants, and therefore impossible to achieve.
     Every political act in history has been done in the name of fairness, from Hitler's "living space," to Marx's communism, from the New Deal to the Great Society, from school busing to separate but equal, from racial preferences to equality.
     In Chicago we have the debate between those who want to promote police on the basis of test scores vs. those who want merit promotions. Both espouse fairness.
     CCC: Budget surpluses by definition increase national savings and free funds for investments that will increase productivity and raise economic growth rates.
     RMM: If the government raises your taxes and/or spends less in our economy (the two mechanisms for creating a surplus), how will this free funds for investments? If I pay more taxes, and/or my business receives less money from the government, how does that free my funds for investment?

January 25, 1998
     MP: You suggest that because the ratio of workers to retirees has declined in the past without creating serious problems, future declines can also occur problem­ free. In a pay­as­you­go system, such as ours, where workers' payroll taxes (as well as general revenues, for that matter) provide the wherewithal to pay for retirees' Social Security and Medicare benefits, the scale of how many workers there are for every retiree does indeed matter.
     RMM: Workers’ payroll taxes do not pay for SS or Medicare. All taxes -- income, FICA and Medicare -- go into one big pot. When there isn't enough in the pot, the government borrows.
     It makes no more sense to call SS and Medicare pay­as­you­go than it does to call payments for defense, infrastructure, education, housing, food stamps or any of the other thousands of government programs pay­as­you­go.
     Nothing has been pay­as­you­go for many years. That's one reason why the government has debt. (The other reason is: if the government didn't have debt, there would be no government money in existence.)
     MP: What if there were eight or six retirees for every worker? Don't you think this would be a problem? How about three retirees or two for every worker? Extreme examples but they make the point.
     RMM: Not extreme at all. There would be no problem if there were a hundred retirees for every worker.
     MP: There would be no way that workers could comfortably fork over enough tax dollars to support benefits for this many retirees and still have enough to raise their own families and meet their own needs.
     RMM: Correct, there is no way. So why try to do it? The ratio of workers to retirees will continue to fall, so any tax-­based solution will be temporary, and meanwhile, will hurt the workers.

January 30, 1998
     MP: Without investments in tools, research and development, communications and transportation infrastructure, education and training, we will not be able to continue to increase the output per unit of work.
     RMM: True.
     MP: And, of course, to make investments, there must be resources (usually money).
     RMM: Absolutely true.
     MP: And to come up with the resources, people must save rather than consume.
     RMM: Absolutely true ­­ or absolutely false ­­ depending on what you define as saving and what you define as consuming. A common form of saving is the purchase of T­-Bills, which Concord wants to reduce.
     On the other hand, you probably consider the purchase of a home PC to be a form of consumption. Yet it provides computer manufacturers with the resources to conduct research and develop new methods and products. If not for that consumption, we wouldn't see the amazing advances in computer technology.

Click the cover to see excerpts from FREE MONEY

January 31, 1998:
     MP: I agree it is very hard to know what investments will yield how much increase in productivity. But as we look ahead to a labor force that will almost stop growing, if we want to see continuing increases in our economic well being, we will have to increase our efforts to boost productivity.
     RMM: Private investors do not consider what is best for the country, but rather, what investment will yield the best return. They already invest as well as they can. Therefore, private investment will not increase its efforts to boost productivity.
     Only government has the means to expend money and energy to improve the overall good of the nation, without expecting a dollar return.
     Any increase in efforts must come from government, not from the private sector. Government can increase its efforts in two ways: by offering incentives (usually tax incentives) or by spending directly. When the government wanted more returning soldiers to go to college, it instituted the G.I. Bill, which paid for hundreds of thousands of ex­G.I.s to get schooling. Private industry would not and could not have accomplished this.
     When the government wanted to foster the American Dream of owning a house, it provided tax incentives to individuals and to the real estate industry.
     Note that both the G. I. Bill and tax incentives lead to deficits, not surpluses. The only way to increase our efforts, is for the government to run deficits.

February 6, 1998
     RD: As best as I can gather, you believe there is no limit to the debt at any point in time.
     RMM: I had a pleasant phone conversation with a member of this list who said, There must be some limit to the amount of debt the government safely can issue. I had to agree. There must be some limit.
     Everything has a limit, even the universe. However, Concordians use the there­must­be­some­limit argument to say, "Therefore, let's balance the budget."
     The notion that there may be a limit doesn't logically mean we have reached that limit. When the man asked me what I thought the limit was, I said, At least $36 trillion within the next 18 years. Where did I get that figure? The debt has grown 6-­fold in the past 18 years and the economy is doing well.
     Based on that test, another 6­-fold increase would seem to be the minimum level of safe increase.
     RD: I have never heard you admit that debt can be negative. This saves you from having to judge where the limit might lie or that types of debt may have what types of negative effects.
     RMM: Debt can be negative if you are the debtor, and you don't have the unlimited ability to create money to service the debt. That includes every entity except the federal government.
     RD: You say that balanced budgets/ paying down the debt contracts the money supply, and that an expanding money supply is an essential precursor, catalyst, or key ingredient for economic growth. But, unless I've missed it, I've seen little discussion by you about the role of productivity rate growth and/or investment as they relate to economic growth or increasing the money supply.
     RMM: One thing I feel certain about: Decreasing the money supply will not help productivity or investment or economic growth. Certain kinds of investments do increase the money supply, specifically investments in debt.

February 10, 1998
     BA: If interests rates do not affect economic growth, then why does the Fed lower rates when the economy is headed for recession and raise rates if economic growth is thought to be too high and will result in inflation?
     Obviously there is a lag in the effects of rate changes; rates are raised when the economy is booming and later the economy slows. Conversely, when the economy is slowing, rates are lowered and later the economy improves.
     However, interest rates are only one of many factors that affect the economy. Reagan significantly lowered the tax rates that resulted in more money in the private sector, which tends to use that money more efficiently than the government.
     RMM: If you saying that tax decreases help the economy by adding money to the economy, I agree.
     BA: Assume the government borrows $100,000 to pay 10 people on welfare a $10,000 a year annual benefit. These people spend the money on food, etc. but produce no additional goods or services to spur the economy.
     RMM: The money spent on food, etc. goes to the businesses that sell food,­­ canners, freezers, packers­­ who produce additional goods and services.
     Then it goes to the farmers and fishermen, who spend it on tractors, plows and barns. From there it goes to other businesses, all of which produce additional goods or services to spur the economy. Money doesn’t stop with its first use. All money is equally beneficial to the U.S. as it travels through the economy.
     BA: Not many got upset with government debt, as Reagan expanded the military and the Democratic Congress expanded the welfare state. However, many became concerned when the federal government seemed to be getting out of control with an ever accelerating rate of spending.
     RMM: Actually, government debt is the most in-­control money creation we have. Congress has the power to determine it to the last dollar. Congress has little control over private debt creation, and that is why we cannot depend on private debt to support the nation if federal debt declines.
     BA: There needs to be a balance between the private sector and the government sector in not only debt, but in the control of our lives!
     RMM: Federal debt as a percentage of Total Debt has declined. So what balance do you like? 50/50? 70/30? 80/20? Which of these ratios is superior to any other?
     Speaking of federal control over our lives, people have been concerned about big business controlling our lives, and demanded that the government do something about it. Standard Oil, AT&T, Microsoft, to name a few.

Click the cover to see excerpts from the book

February 16, 1998
     RD: I do not see the obvious lack of any relationship (between interest rates and GDP growth) that you claimed to see. The uncorrected GDP seems to generally trend up until 1977 and then down while the discount rate seems to trend up until 1982 and then down.
     However, the short term ups and downs still tend to move in opposite directions for interest rates and the GDP. I have never claimed to have proven that there is a relationship. But I think the graph definitely showed that your claims of showing no relationship are totally unfounded.
     RMM: When I look at the 40­ year period 1957­-1997, I see the discount rate ranging from about 3% to about 14%, and the median at about 6%. During the same period, the annual % change in GDP is about 7%.
     The discount rate was below 6% 23 times. During that same time span, the GDP % increase was below 7% 23 times. If interest rates have an adverse effect on GDP % increase, you should expect that the low GDP % increases should occur at times of high interest rates.
     Exactly the opposite occurs. The vast majority of low GDP % increases occur in years that had the low interest rates. The vast majority of high GDP increases occur in years that had the higher interest rates.
     You considered a 3% interest rate as high if the previous year were only 2%. And you considered an 11% rate as low if the previous year were 14%. I disagree. If interest rates decline from 14% to 11%, they're still high and, if common wisdom were correct, should correspond with low GDP growth.
     But higher interest rates corresponded with high GDP growth, and certainly did not contribute to low GDP growth.

February 28, 1998
     BB: There are two major problems with polls. First, the way the questions are worded and asked can have a major impact on the results. . . . Unless the press assures that the public gets truthful information, it will be difficult for Congress to pass effective legislation on SS and tax reform.
     RMM: Words such as reform and deficit are among the most misleading words. Reform simply means change (re­form), but it has such a positive cachet, virtually everyone favors reform, no matter what the subject. If you ask, Are you in favor of tax reform, a majority will answer, "Yes," despite lack of knowledge regarding the form the reform would take.
     Deficit is used to describe the situation in which the economy receives more money from the government than the economy sends to the government,­­ in other words, an economic surplus. However the word deficit has such a negative cachet, virtually everyone is opposed to any type of deficit.
     If you ask, Do you want to see our economy run a deficit, (a federal government budget surplus), a majority will say, No.

March 2, 1998
     RMM: Today's Chicago Tribune included an article saying that budget considerations soon will force us to decide who should receive dialysis and who should die the painful, nausea­ridden death of acute kidney failure.
     The author seemed to lean toward two solutions: (1) An age limit, whereby people older than 55 (!) would be refused treatment, and/or (2) A financial test whereby people who could afford it would be required to pay for this treatment.
     Solution (1) is not worthy of consideration, since it arbitrarily condemns people to death, when lifesaving treatment is available. Most Americans would find this solution repugnant.
     Solution (2) likely would find adherents among some, for there seems some belief that elderly people are rich. Yet, dialysis is so expensive as to impoverish all but the wealthiest. Further, it would force families to make decisions resembling solution (1) ­­ that is shall I condemn my family to debt, or shall I allow my mother to die?
     Finally, solution (2) would require yet another intrusive and expensive bureaucracy to determine who would be driven into abject poverty and who would merely be injured financially by having to pay.
     So the budget ­balancers face yet another human reality. Shall we run a federal surplus (an economic deficit), which never in our history has proven necessary or even beneficial, and force thousands of people to decide between financial ruin and death?
     Or shall we continue to allow the government to create money, which history shows has benefited the economy as well as the health and longevity of our people?
     Place a human face on the economic deficit (a.k.a. federal surplus), and it looks quite unattractive.

Mon, 23 Mar 1998 09:31:50
     You have been removed from the CONCORD­L list (The Concord Coalition Discussion List) by Craig Cheslog
{This was at once, one of the saddest and also most humorous Emails I ever had received. It demonstated the complete bankruptcy of Concord's ideas and their unwillingness to discuss facts. Rather than face the truth, they put their head in the sand, and sent the truth away.}

     Sadly, nothing has changed. As recently as 2/1/01 Ellie Fink, of the Concord Coalition wrote:
     Dear Mr. Mitchell: The money to grow the economy comes from private savings. When government debt is paid down, private savings is freed up for investment in training, plant, and equipment. More investment means more jobs and a growing economy. Government investment in education and infrastructure, for example is an investment in the country's future that makes the economy and the country stronger, too.
Sincerely, Ellanor S. Fink, Member Relations, The Concord Coalition, 2/6/01:
     RMM: Thanks for your response, Ellanor: Paying down government debt requires taxes to increase and/or government spending to decrease. In a surplus, the economy sends more money to the government (taxes) than the government returns to the economy (spending). Therefore, paying down the debt removes money from the economy.
     How do increased taxes free up private saving?
     How does a reduction in government spending increase government investment?
     How does removing money from the economy help the economy grow?
Rodger Malcolm Mitchell
Of course, Ms. Fink did not respond.

     To: The Economist Magazine from Rodger Mitchell, 2/15/99: When discussing additional loans to Russia, your Feb 6th editorial says, ". . . any further western money is likely to be squandered."
     This is the classic "first use" misunderstanding.
     Once money enters an economy it circulates endlessly, spent repeatedly on worthwhile and not-so-worthwhile projects. If the first use of money lent to Russia would be squandered into politicians’ pockets, what would the politicians do with it?
     Spend it on food, aiding food store owners and then farmers and farm suppliers? Or would they buy clothing, aiding retailers and clothing manufacturers and button makers? Or would the money be put in the politicians' banks, allowing the banks to lend and create more money, enriching the entire society?
     After its first use, all money is equal and will continue to do good for an economy until it is destroyed by taxation.
     For an economy, it is not possible for money to be squandered. It only can be created or destroyed.
     A growing economy requires a growing supply of money. Where will Russia find this growing supply? From the same source the U.S. has used. We created $6 trillion in debt (money), fueling our successful economy. Russia must create much more debt by printing money, while protecting the value of this debt through interest rate control.
     Russia should use newly-minted rubles to buy dollars and to service its external debt. Would you trade dollars for rubles if you could get a 20% return in dollars? Would you do it for 50%? 1,000%? At some level of interest, your answer will be Yes.
     Does endlessly creating debt build an economy? During the years immediately preceding the Great Depression, the U.S. government ran surpluses (destroyed money). The country began to emerge from the depression, only when the government borrowed heavily (created lots of money) to finance WWII. Reagan’s massive money creation set the stage for our current boom.
     In short, Russia should print rubles, raise interest rates, buy dollars and service its debts.
Rodger Malcolm Mitchell, Wilmette, IL

Click the cover to see excerpts from FREE MONEY

     From: Edward Lucas, Moscow Bureau Chief, The Economist, Subject: Fwd.: How Russia Can Save Itself; Date: Tue., 16 Feb. 1999 14:46:28: Thanks for your letter. It is important not to overlook that Russia is a very open economy. In the past, money lent has gone to offshore bank accounts very quickly (any rubles created have had a negligible effect because of the corrupt banking system).
     Printing rubles and raising interest rates as you describe would lead to a hyper-inflationary crash which would make our current problems seem like a picnic. Don't forget the horrible effects of high interest rates on the economy (especially in late payments of wages and other bills)
Regards, Edward Lucas

To Edward Lucas:

     You expressed legitimate concern about increasing the supply of rubles as inflationary. Yet, to grow, an economy absolutely requires an increased supply of money.
     Question: Given every economy's need to increase the supply of money, how does one accomplish that without inflation?
     Answer: Money is a commodity, the value of which is determined by supply and demand. Increase the supply and indeed you will have inflation . . . unless you also increase demand.
     What determines the demand for money? Risk and reward. Reward means interest on government issued debt. Risk means the likelihood of debt default and/or inflation. Thus, raising interest rates prevents or cures inflation, depending on whether inflation already exists, by increasing demand.
     Contrary to common belief and short-term stock market movements, high interest rates do not adversely affect an economy. For every interest payer there is an interest earner. The interest money circulates within the economy, neither enriching it nor impoverishing it over time. I
     If high interest rates are combined with an increase in the supply of money, the economy will be stimulated without inflation. Consumers, having more money, will spend more and business will earn more; there will be no late payments of salaries, because there will be no inflationary motive for delay.
     You also expressed concern about deposits in offshore bank accounts, which presumably would decrease the domestic supply of money. Thus you have expressed concern about both increasing and decreasing the supply of money. I do not know which category corrupt banking system would fall into.
     Depositing money in a bank creates money, for banks always use money as the basis for loans. In America, $1 deposited in a bank, creates $10 of new money, the effect of which is identical to the government printing $10 of new money. (Those who advocate increased bank savings while deploring increased printing of money, are taking opposite sides of the same question -- sometimes called cognitive dissonance, the ability to believe opposite positions simultaneously.)
     Again, thank you for your comments,
Rodger Malcolm Mitchell

To: Terry Savage, Business Columnist for the Chicago Sun Times
April 11, 1999
     Hi, Terry. When last we spoke, you were leaving for travel, and I hope had a pleasant trip. Perhaps you will find this thought-provoking:
     There seems widespread belief that once a dollar is spent it ceases forever to exist in our economy. How else can you explain this headline on your competitor's business page (Saturday, April 10, 1999)?: Judge awards S&L $909 million -- Precedent could cost taxpayer $50 billion more. The writer, Stephen Labaton of the New York Times News Service, goes on to say, The huge bailout of the savings and loan industry . . . has already cost taxpayers $165 billion and administration officials estimate that every $1 billion in judgments will cost each American household $10.
     Labaton seems to believe that when the government spends $50 billion, this money instantly disappears, the result being a net loss to taxpayers. Yet where has this $165 billion cost to the taxpayers gone? Labaton answers the question: Prominent businessmen who hold big stakes in savings associations and thousands of smaller investors.
     Who are these businessmen and investors if not taxpayers? The $165 billion that came from taxpayers, went to taxpayers. The money merely recirculated.
     What Labaton refers to as the most expensive financial debacle in American history, merely was a massive recirculation of money. It didn't cost the taxpayers a dime.
     In truth, the most expensive financial debacle in American history is a federal surplus. By definition, surplus means the federal government takes in more tax money than it sends back into the pockets of taxpayers. While the S&L bailout cost taxpayers nothing, the surplus will cost taxpayers many billions -- just as a federal surplus did during the years immediately preceding the 1929 depression.
Rodger Malcolm Mitchell

April 21, 1999
To: Rodger Malcolm Mitchell

From: Terry Savage
     Sure, Roger. The money came FROM some taxpayers, and went TO other taxpayers. I'd rather decide where my money is going TO, than letting Uncle Sam re-route it! Terry Savage

April 22, 1999
To: Terry Savage
From: Rodger Malcolm Mitchell

     Me too, Terry. Yet, the point remains: The bailout of the S&Ls didn't cost taxpayers a dime. Government spending does not cost taxpayers money. Social Security, Medicare, welfare, infrastructure, housing, the police and the courts, etc. -- all are recirculations of money.
     Some individuals benefit; others lose. (If you and I live long enough, we will benefit big-time). But as a group, taxpayers break even.
     Media people inadvertently have misled the public, and you would do your readers a service by revealing these widely misunderstood points.
     By the way, you say would rather decide where your money is going rather than letting Uncle Sam re-route it. There is only one way. Cut taxes.
Kindest regards, Rodger Malcolm Mitchell

April 24, 1999
From: Terry Savage:

     Roger, I don’t have time to get into a long debate, but don't be an old Keynesian, who really believes that all the govt. has to do is spend less in good times, and more in bad times. The real problem with deficits happens when the govt. monetizes the debt -- creates new money via the Fed which purchases the debt and pays for it with newly created reserves -- which cheapens the value of all we have worked and saved for.
     Aside from that, if I want to redistribute the money I've worked for I don't need the government to decide who it should go to! Terry

April 25, 1999
To: Terry Savage:
     Terry, you said, The real problem with deficits happens when the government monetizes the debt . . . The word monetize means to turn into money. The vast majority of the debt is in the form of short term (less than one year) liabilities, like T-bills. These liabilities already are considered money (L) by the government. It is impossible to monetize money.
     Green paper can be monetized. But federal debt already is money and cannot be monetized.
     You also said, . . . the Fed purchases the debt and pays for it with newly created reserves -- which cheapens the value of all we have worked and saved for. By cheapens the value, you mean inflation. From the Reagan administration until today, the debt has risen a remarkable 6-fold, from less than $1 trillion to $6 trillion. This is the largest debt increase in America's history.
     According to the cheapens-the-value theory, we should have had significant inflation. Yet we have not. Conversely, we've had inflation when federal debt has risen slowly or not at all.

If you'd like to discuss any of these points with Rodger Malcolm Mitchell, Email


More Articles by Rodger Mitchell:
Medicare: The Solution to a Consumer Problem
US National Debt is $9 Trillion!
Read Letters to the Media

Please click the cover to see contents and ordering information.

          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

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
The Interest Rate Fallacy | Social Security Solutions And Reform | Medicare Solutions And Reform | Solutions To Our Economic Problems | Recessions, Depressions, Inflations, Stagflations: Causes and Cures | Federal Debt of the U.S. | Why We Need The Federal Budget Deficit | Stagflation: What It Is And How It is Prevented And Cured | Interesting Letters To The Media | Is There A Federal Deficit Solution? | Should We Have A Balanced Federal Budget? | What Is The Federal Deficit Problem? | How The Federal Government Budget Affects The Economy | A Discussion Of The US National Debt | The National Debt Solution | Short Stories: A Child In Arms | Glossary of Economic Terms Debt, Money, Deficit, Spend, Owe | US National Debt Clock | The Solution to Inflation and Stagflation | What Is Pseudoeconomics?   | How Is Money Supply Like The Weather? | Do Low Interest Rates Help The Economy? | The Solution to Federal Tax Reform | What Is The Relationship Between Gold and Money? | Why Do You Pay Taxes? | 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 |

Remember: A growing economy requires a growing supply of money. All money is debt.