Posts Tagged ‘Public Spending’

Debt As Tax Deferred, Or Why Public Debt For Public Interest Works Boosts The Economy

January 17, 2019

In A Way No Private Spending can replace

ECONOMIC ACTIVITY BOOSTED BY PUBLIC SPENDING FROM GOVERNMENT DEBT:

IN THE LAST decade, the US has happily run massive deficits. Under Obama, deficits were often around 10% of GDP, or more. Obama deficits peaked at 15% of US GDP. Meanwhile, the US economy grew so much, it overtook the entire, growing, European GDP output (UK included). In 2017 US nominal GDP was 19 trillion dollars, just above the EU GDP (which is still higher at PPP, $23 T). US yearly GDP, charging ahead at a Chinese like clip, has passed $20 trillions as these lines are written.

The Obama spirit of deficit was happily pursued by Trump… And now the new Democratic controlled Congress, wisely enough, has not uttered a peep about this (it prefers to distract its audience with the notion of billionaire Trump as an agent of Putin).

Each three months of 2018 America’s federal government borrowed nearly $320 billion, or about 6% of quarterly GDP. The deficit was 1.5 percentage points higher than in the same quarter the year earlier, despite the fact that unemployment fell below 4% in the intervening period (and thus borrowing more was just because the Trump government is embarked on increasing spending).

The USA borrowed as much in a single quarter as it did in all of 2006, towards the peak of the previous economic cycle.

That debt Graph would look very different if one incorporated EXTINGUISHED debt

Orthodox economists have traditionally been self-assured, arrogant, and idiotic about debt. “Government spending must be paid for now or later,” wrote Robert Barro, of Harvard University, in a seminal paper published in 1989. “A cut in today’s taxes must be matched by a corresponding increase in the present value of future taxes.”

“Must”? Why? How much more idiotic can one get? Governments can default on debt, and can do it soft, or hard. They can even make default look like an act of God: consider the Russian default when the Soviets took power, in 1917, leaving millions of French investors the poorer for it (yet also leaving Russia with a much improved industrial basis and better trains).

The USA also defaulted twice during the Twentieth Century (under presidents FDR and Nixon). A way to default is devaluation of the currency, another way to sneakily default is inflation.

The late 1920s bull mania was a deliberate attempt by the US Fed and the bank of England, to extinguish debt from World War One. So was the inflation of the 1930s (Paris, against it, argued with Washington, for it; the US was right, France wrong; of course Hitler inflated beyond reason, encouraged by Washington…)

Once again, a traditional, but misleading graph: it contains violently extinguished debt

Inflation is not just a way to extinguish excessive debt: I have argued that it is a way to accelerate the economy, making it more technological.

So why would a Harvard professor say such a stupid thing? Do I need to ask? Even rhetorically? Because it pleased the US plutocratic class at the time, which probably rewarded him handsomely.

Looking around history, one can see big differences between the economy of the last four decades, and the period 1935-1975. The first period was characterized by massive expansion of economy and education (in spite of the 100 million directly killed by generalized fascism). For example air travel, universal higher education and universal health care appeared and became dominant. After that, pretty much stagnation… except for the increase of inequality.

And what do we also see since the Glorious Thirties (the 1945-1975 period when Western economies saw a wealth expansion of the 90%; after that, all the growth in income went to the 1%…)? Public spending on infrastructure, educational, or industrial, collapsed, throughout the West, thanks to the Trickle-Down plutocratic ideology.  

Reciprocally, a return to massive public spending might raise the activity, hence the returns to private investment, generating more the latter. (Calling that “populism” worked for a while as an insult, but should be now backfiring… as We The People realizes that there is nothing wrong with We The People… contrarily to what the insulting elite keeps on claiming…)

Eurocrats and their masters, the Europlutocrats, brandish the scare of public debt. However, japan with a more elderly population, is roaring back thanks to Abenomics… And a 230% of GDP public debt.

Economists out France or Germany say that Japanese public debt is a terrible thing. Why? If worse came to worst, the Japanese government would have to tell those who bought Japanese debt: ’Sorry, we can’t pay you back. At all.’ What would then have happened? A tax! Like in Europe! In other words, should the Japanese government 100% default, those wealthy enough to have lend to the Japanese government would then have to pay… a tax! They would be reduced to the status of French taxpayers, horror of all horrors!

Except, of course, in France, taxes, being mostly indirect, strike the poor and the poorest of the poor… whereas a Japanese default (which will not happen) would strike the wealthy (including a few wealthy foreigners…). The same is a fortiori true for US debt.

If the US defaulted on its debt (and it will not happen), lots of wealthy foreigners may cry… Meanwhile the US economy will have roared ahead… thanks to foreign money. What will the foreigners do, if the USA default, to get even? Invade? (No, the US military, paid by aforesaid foreigners, is too strong…) Refuse to lend some more? Not necessarily: when you can’t beat up the strong, you may as well join it. That’s exactly what happened when the US defaulted… and the USA defaults all the time…

There are many ways to default: first one can default on the interest only, or part of it.

Inflation also extinguishes debt. The CPI (the inflation measurement) in the San Francisco Bay Area, the biggest tech engine of the US and world economy, reached nearly 5% last year (2017). Such a healthy dose of inflation will absorbs lots of debt. Meanwhile, among many other things, said Bay Area fabricated for more than twelve billion dollars of electric cars in 2018…. While Apple Inc. based a few miles away, generated more than 200 billions in revenue…  

So the SF Bay Area is a perfect illustration that a roaring economy goes well with roaring inflation, thus roaring debt, etc. Looking in detail within the machinery of some major tech companies (say Oracle) show lots of debt at major points of development…

When the pace of economic (GDP) growth exceeds the rate of interest on a country’s public debt, managing indebtedness is a shrinking business: debt incurred in the past shrinks steadily as a share of GDP without any new taxes needing to be levied.

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Public Debt Helps The Public In General, and the Poor First of All:

Some are sure to whine that debt might nonetheless rise if annual deficits are sufficiently gigantic, as they are in US America now. Even so, at prevailing interest rates and growth rates, and with deficits continuing at 5% of GDP, it would take more than a century for America’s ratio of gross public debt to GDP to reach the current Japanese level…. And then, as I pointed out, so what? A tax? A 2018 French-like situation? Overtaxation? No, not really: remember, only the wealthy lend. So debt will reduce inequality. Actually MASSIVE debt reduces inequality in two ways:  it potentially taxes the wealthy, in the future, and, in the meantime, it feeds countries and the poor (who are the first to profit from public infrastructure)…

Hypocrites will come, and suggest inflation hurts the poor… However, although inflation extinguishes debt, there are other ways to extinguish debt, and thus rampant debt doesn’t mean rampant inflation…

Olivier Blanchard, long chief economist of the IMF, pointed out that since 1870, the average nominal interest rate on one-year US government debt has been 4.6%, though the average annual growth rate of nominal GDP has been 5.3%. Growth rates have surpassed interest rates in every decade since 1950, except the 1980s…. And guess what happened in the 1980s? Plutocratization! (Much admired by all too many “democrats”, including Barry Obama…)

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The Rise Of Evil Power, aka, Plutocracy was tied in to debt extinction:

(Perhaps unwittingly, and hopefully witlessly) Evil US president Carter launched a secret war in Afghanistan, using Muslim Fundamentalist and the Muslim Fundamentalist ISI of Pakistan… On July 3, 1979, and immediately afterwards, Reagan, helped by the evil Democratic Congress, led by fellow Irishman Tip O’Neil, launched officially trickle-down economics: instead of making everybody wealthier through public debt, Reagan and his “democratic” little helpers claimed that, the economy would do better by making the wealthiest wealthier…

Nicholas Crafts of the University of Warwick observed that the difference between growth and interest rates did more to reduce British debt loads in the 20th century than budget surpluses. Indeed, austerity-induced deflation in the 1920s frustrated attempts to pay down war debts (that was followed by the attempt of inflating out, which was too brutal, and helped bring the 1929 crash…)

Inflating out of debt was successful after World War Two. At the same time, the uppermost margin rates were pushed by Republican president Eisenhower up to 93% (nobody has accused Eisenhower to be a socialist… yet) Similar rates applied in Britain and high taxes on the wealthy also applied in throughout Europe…

In the past decade our great leaders have listened to their future benefactors, and sponsors, the wealthiest. The wealthiest want the poor ever poorer, so that wealth, power, can be worth having, ever more. So our great leaders, who are great servants of the wealthier, have done as ordered, and have stimulated public economies too little. (To make the lowest people feel good enough about themselves, while they undermined them, they have paid them with PC speech, and “identity politics”, that is, racism…)

Result? Rich countries have spent ever more time below their productive capacity than above it—at grave economic cost: while French, German, British and US  politicians explained to We The people that they cost too much, China, India and their satellites (population three billions) roared ahead, spending on the public as needed by the public. This is how Europe, its colonies and the US did it in the Nineteenth Century (and even in centuries prior, following the dominant economic theory known as “Mercantilism”)

An overdeveloped fear of public debt, invented by plutocrats, nurtured by prostituted economists, is to blame. But now a new class of “populist” leaders have appeared, who call a lot of it, for what it is. So some government economists have been ordered to acquaint themselves with reality.

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The 3% Deficit Limit Is Killing the European Union:

And guess what? Experience suggests that governments face much looser budget constraints than once was claimed on every rooftop. So governments enjoy more freedom to support struggling economies than previously believed. Economists, happy to get orders less debasing to themselves, are taking note, that, indeed, yes, governments can borrow more…..

“Neoliberalism” is fundamentally a lie. “Neoliberalism” is a creed, a faith, and a conspiracy for the gullible. “Neoliberalism” asserts that the economy does best, when left to private enterprise. This is a lie, just there, and propaganda. Indeed it always omits a detail: how money is created.

In the “Neoliberal” creed, the (private) banks create money by lending. To whom do they lend? The wealthiest. So the wealthiest privates get more and more money, and the poor, less and less, augmenting inequality, year after year, as observed: the color of the skin of the president has nothing to do with it.

The only way to cut that vicious circle is having the Treasury create money and use said created money for public work. The Treasury can do this by creating bonds. That will spur the economy.

Should a crisis arise, a sovereign government can grab the debt and extinguish it.

In 1790, Secretary of the US Treasury Alexander Hamilton did just that: he took all the debt, from all the states, and extinguished it, by making it into Federal Debt (hint to the European Union… do the same…).

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When Not Sovereign Debt To Foreigners Means Loss of Independence: the Case of Dauphiné

The French Crown had done exactly the same extinction of debt with the state of Dauphiné in 1349 CE. Long an independent republic in the Roman empire, that region, named after an altruistic sea mammal, found itself with crushing debts in the Fourteenth Century. In exchange Dauphiné lost its independence inside the Roman Empire, becoming instead subject to the kingdom of France, “empire in its own kingdom” (don’t ask: a consequence of the Frexit of the Tenth Century; France by then had discovered that it would be better to make one with the region east of the Rhone-Saône).

Dauphiné has a very long independent history, all the way back to before Hannibal. The Dolphin was selected as a symbol of the altruism of that Alpine quasi-republic. Differently from fellow Switzerland, debt enslaved it… But France was the superpower of the time… Switzerland solved the ownership problem by fighting its owners, the Habsburg, to death…

The kingdom of France, empire onto itself had debts, of course, but when it so pleased. Otherwise, it could always send the army to visit lenders with too much of an inappropriate attitude (as the soon to be ex-Republic of Florence found out…)

Sovereignty and debts are bound together. The EU should do as the US did in 1790 CE. Meanwhile, the present European situation is not sustainable: whereas the USA can grow debt as big as it wants, and the notion of debt doesn’t even exist in China, Europe is reducing its economic activity to profit its plutocrats.  

At least US politicians are not so treacherously corrupt, that they will stoop that low. 

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Conclusion: Debt is tax deferred. Public debt for public interest works boosts the economy, in a way no private spending can replace. Indeed, private spending is motivated by profit, but serving the public is serving the public, not profiting from the public.

The “Neoliberal” creed, truly the power of evil, has insisted human beings know just one motivation: greed. But humanity, in full, know many other motivations, including that of serving public good. Servicing public good is more deeply anchored in human psychobiology, because, prehistorically speaking, the individual couldn’t exist without the collective (the tribe).

We need more public spending, thus, to not overtax the economy, more debt.  

Patrice Ayme

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Even “The Economist” has noticed. Consider: Economists reconsider how much governments can borrowThe profession is becoming less debt-averse”

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Dauphiné lost its independence to Paris in 1349 CE… But not its Parliament. However, in 1788 CE, one year before well known events in Paris, the French Revolution started, for real, south of Grenoble in the city of Vizille, encircled by mighty mountains. A consequence of the Revolution would be the loss of regional parliaments, including that of Grenoble…

 

Will To Destruction

July 4, 2014

The West rots in a crazy political crisis propelled by carefully engineered ignorance, misunderstanding and herd like behavior. It has drastic economic, social, and even ecological consequences. None of this is an accident. Instead, it’s the expression of a will. And no, it’s not just a Will To Power, as Napoleon and Nietzsche would have it, in their simplicity, and general lack of cynicism.

Before taking flight above the morass of commonality, let’s roll out Krugman in “Build We Won’t” (07/ 3/ 2014):

“You often find people talking about our economic difficulties as if they were complicated and mysterious, with no obvious solution. As the economist Dean Baker recently pointed out, nothing could be further from the truth. The basic story of what went wrong is, in fact, almost absurdly simple: We had an immense housing bubble, and, when the bubble burst, it left a huge hole in spending. Everything else is footnotes.

From Obama To O Blah Blah

From Obama To O Blah Blah

Krugman pursue, playing naïve: “And the appropriate policy response was simple, too: Fill that hole in demand… In prosperous times, public spending on roads, bridges and so on competes with the private sector for resources. Since 2008, however, our economy has been awash in unemployed workers (especially construction workers) and capital with no place to go (which is why government borrowing costs are at historic lows). Putting those idle resources to work building useful stuff should have been a no-brainer.

But what actually happened was exactly the opposite: an unprecedented plunge in infrastructure spending. Adjusted for inflation and population growth, public expenditures on construction have fallen more than 20 percent since early 2008…an almost surreally awful wrong turn…

And it’s about to get even worse.”

Krugman explains that public spending is evil, because that would increase the deficit. Deficits are evil, when there’s a Democratic government that can borrow at incredibly low interest rates. We can’t raise gas taxes: that would be a tax increase, and tax increases are even more evil than deficits. So public infrastructure can decay.

Krugman does not know if this is politics or madness: “If this sounds crazy, that’s because it is… The collapse of public investment was, therefore, a political choice… how self-destructive that political choice has become. It’s one thing to block green investment, or high-speed rail, or even school construction… But everyone… thinks we need good roads. Yet the combination of anti-tax ideology and deficit… means that we’re letting our highways, and our future, erode away.”

In simple terms:

Trillions of dollars are sitting idle, a huge amount of work needs to be done, around 40% of the working age cohort is not employed. Crazy? Not at all. It’s the logic of the plutocratic phenomenon. Gut the People. We have seen this before, when the Roman empire entered its terminal decay (which took more than two centuries).

Here is my explanation:

Public investments are those made for the common good, because they are too large, or too much about public property, or too unprofitable, short term (fundamental research in science and philosophy).

No capitalist can buy the air, for example. The air is a public good. No private individual ought to be allowed to possess the atmosphere. Thus it’s public investment that has to take care of the air.

And so on.

Of course, civilization has decided that what is the most precious: free will, freedom, life, cannot be owned any more. They used to be, at occasional, crazy points of history, never sustainable: in this country, nearly four centuries ago, slavery was reintroduced, and human beings, and their children could be owned, and abused (the slave trade was unlawful in the Empire of the Franks since 655 CE, in the Seventh Century, the great conceptual, and technical break with Greco-Roman Antiquity).

As the most precious cannot be owned, and traded privately, they can only be taken care of publicly. By cutting down on public investments, the powers that be have decided that what was the most precious was not worth investing into.

So the economy, society, and civilization itself go down.

You may wonder: what usage are the powers that be pursuing, by smothering the most precious values? Are they not suffering too? Well, by making ever more life into a living hell, the plutocrats who lead our politicians feel ever more at home.

Who needs roads, or trains, when one can private jet around? This is exactly the reasoning that was made when plutocrats destroyed the tax base of the Roman Empire: plutocrats did not need roads, they could live in their villas. They did not even need a public army: they had their own private armies. Nor did they need public schools, they had private schooling. It is the same now!

What drives this Will To Destruction?

Something deep in the genus Homo. The Will of Homo To Destroy… Homo.

This is what the plutocratic phenomenon taps into, that Will To Destruction. It is its reason of being.

Patrice Ayme