Federal debt, myths and facts: What you’ve been told vs. the facts.

Friday, February 3, 2023 11:22

% of readers think this story is Fact. Add your two cents.

Here is what the St. Louis Fed says:

Debt-to-GDP Ratio: How High Is Too High? It Depends
October 07, 2020, By Heather Hennerich

How much federal debt is too much? Is there a tipping point at which it becomes a big problem for a country?

One way to gauge the size of a country’s national debt is to compare it with the size of its economy—the ratio of debt to GDP. (GDP serves as a measure of an economy’s overall size and health, measuring the total market value of all of a country’s goods and services produced in a given year.)

Gross Domestic Product (GDP) is one measure of size, but it is not a measure of health. There is no relationship between the health of an economy and the Debt/GDP ratio.

Heather Hennerich’s claim that “GDP serves as a measure of an economy’s overall size and health” simply is false. In fact, the Debt/GDP ratio signifies nothing, nothing at all.

Yes, it’s a fraction that is quoted all the time by people who should know better. But you might as well quote an apples/Apple phones comparison.

Debt is a cumulative measure of federal government deficits since the beginning of time. GDP is a one year measure of an entire nation’s spending.

If you want a similar comparison try the total amount of water a city has wasted vs. the amount of orange juice the mayor drank, yesterday. Call it the “waste/OJ” ratio, and claim it means something.

Skim the following list of Debt/GDP ratios, and see if you can find any relationship between the Debt/GDP ratio, the population of the nation, and what you know about the health of its economy.

Begin with the fact that wealthy, powerful Japan and weak, impoverished Greece are 1,2 on the list. The United States falls right between Mozambique and Djbouti on the list. Russia has one of the lowest ratios, indicating the “health” of its economy.

NATION — DEBT/GDP RATIO — POPULATION

There is no relationship between federal debt held by the public and inflation. Peaks and valleys do not correspond.

There is no relationship between the Debt/GDP ratio and inflation. Peaks an valleys do not correspond.

It never ceases to amaze that obvious and readily available statistics are ignored by so-called “experts” in favor of hand-me-down beliefs having no basis in fact.

Inflation is not related to federal spending because inflation is caused by shortages of key goods and services.

Some claim that federal deficit spending causes those shortages, but for years and years, we’d seen massive federal spending, with low inflation.

The federal dollars that led to increased demand also facilitated increased supply. That is how capitalism works; supply rises to meet demand.

But suddenly, in 2020, we began to see inflation. What suddenly changed in 2020?

COVID.

The inflation that came suddenly in 2020, an inflation we still endure, was caused by COVID-related shortages of oil, food, computer chips, lumber, steel, shipping, labor, etc.

There is no statistical relationship between federal deficit spending and inflation.

But would you like to see something that does have a relationship with inflation?

Shortages of key goods and services (most often oil) cause inflation. Oil prices are closely related to supply. The peaks and valleys correspond between oil supply and inflation.

Yes, if you’re looking for the primary cause of inflation, start with oil shortages, which then relate to other shortages. COVID was responsible for shortages of oil, food, etc.

It would be hard to make the case that after decades of big deficits, suddenly federal spending caused an increase in oil demand. Inflations are supply-related.

Federal spending actually can cure inflation if the spending is directed toward obtaining the scarce goods and services and distributing them to the public.

Contrary to popular wisdom, restricting federal spending during an inflation is counterproductive.

Hyperinflation is excessive inflation, with very rapid and out of control general price increases. Economists usually consider monthly inflation rates of above 50% as hyperinflation episodes, as noted in a 2018 On the Economy blog post.

Faria-e-Castro explained, countries that are not politically stable and don’t have independent central banks are not going to have very credible institutions. As a consequence, they can’t borrow easily: Investors won’t be willing to lend them that much for fear of future default.

But the debt of countries with strong institutions and independent central banks—like the U.S. and Japan—doesn’t present the same risks, Faria-e-Castro said.

He thinks the difference between countries has to do with a “strong, central bank.” Poppycock.

The central bank of a Monetarily Sovereign nation is strong because Monetary Sovereignty makes it strong. It has the unlimited ability to create its nation’s sovereign currency.

Monetarily non-sovereign nations also have central banks. Sadly, these banks are weak because they do not have the unlimited ability to create sovereign currency: They have no sovereign currency to create.

Few believe, for example, that the Japanese government will ever pressure the Bank of Japan to actually “print” money to pay for the country’s debt, Faria-e-Castro said.

First, the Bank of Japan “prints” (creates) yen all the time. No “pressure” needed. It’s a normal, daily process.

And second, those yen do not pay for the country’s debt. They pay for the country’s purchases. Like the U.S., the Japanese government does not borrow to pay for anything. It creates yen to pay for everything.

“As a consequence, these countries can typically sustain very high levels of debt to GDP,” he said. “Because people really believe that they will be repaid, so they can keep lending.”

There’s that phony Debt/GDP ratio, again. The U.S. doesn’t borrow. It issues Treasury bills, notes, and bonds, and if not enough are issued to satisfy the law, the Federal Reserve Bank simply buys the rest.

The strength of institutions also affects interest rates on the debt, which is another factor in determining the sustainability of high debt-to-GDP ratios.

No, the Fed determines short-term interest rates by fiat. And that meaningless Debt/GDP ratio is infinitely sustainable.

If a country has strong institutions, interest rates on the debt will be low, which means the cost of borrowing will be low, Faria-e-Castro said.

When he talks about the “cost of borrowing,” he mistakenly believes government T-securities represent borrowing. They don’t. They represent deposits.

These deposits are paid off, not with taxes but by returning the dollars that are in the accounts.

And whether interest rates are high or low is irrelevant to a Monetarily Sovereign nation having the infinite ability to create the currency to pay interest.

Because the institutional strength and riskiness of countries varies, there’s no rule of thumb for how high a debt-to-GDP ratio can be before it poses a risk to a country’s economy.

“At the end of the day, it all boils down to strong and independent institutions,” Faria-e-Castro said.

“A lot of economists try to study this. There’s no single measure that we can come up with… Measuring institutional strength is not obvious.”

It’s not obvious because Faria-e-Castro is confusing federal financing with private financing. He doesn’t understand the difference between Monetary Sovereignty and monetary non-sovereignty. And he’s speaking for the Federal Reserve!? Yikes!

He falls in line with the current mistaken belief that fighting inflations requires the pain of recession that cuts in federal spending beget.

That is the kind of leadership that destroys nations.

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

……………………………………………………………………..

The Sole Purpose of Government Is to Improve and Protect the Lives of the People.

MONETARY SOVEREIGNTY

Source: https://mythfighter.com/2023/02/03/federal-debt-myths-and-facts-what-youve-been-told-vs-the-facts/