Suggested Answers to the Short Quiz

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johnkarls
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Joined: Fri Jun 29, 2007 8:43 pm

Suggested Answers to the Short Quiz

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Question 1

What is fiscal policy (or Keynesian economics) vis-à-vis regulating the level of economic activity?

Answer 1

If the economy is under-performing, then the government should run deficits so that its excess spending can create sufficient demand to increase economic activity.

If the economy is over-heated in which case demand in excess of capacity produces inflation, then the government should run surpluses so that its reduced spending can reduce demand and thereby reduce inflation and/or economic activity.

[Historically, politicians rarely run governmental surpluses during good times, which is why the federal government has such a high level of accumulated debt.]

Question 2

What is monetary policy (aka The New Testament championed, if not invented, by Prof. Milton Friedman and his U/Chicago boys) vis-à-vis regulating the level of economic activity?

Answer 2

If the economy is under-performing, then the U.S. Federal Reserve should stimulate the economy by reducing interest rates and/or increasing the money supply (i.e., printing money).

If the economy is over-heated, then the U.S. Federal Reserve should dampen economic activity by increasing interest rates and/or reducing the money supply (i.e., withdrawing money from circulation).

Question 3

With regard to monetary policy, how does controlling interest rates relate, if at all, to printing money?

Answer 3

Increasing interest rates discourages businesses and consumers from borrowing to finance investment and consumption, and vice versa.

The impact of increasing the money supply (i.e., printing money) can be illustrated by the U.S. Federal Reserve’s program of buying $85 billion/month of long-term debt for the last 15 months which Chairman Bernanke announced recently would continue for the foreseeable future.

In fact, the Federal Reserve simply printed $1.3 TRillion over the last 15 months and used it to buy up $1.3 TRillion of long-term debt, virtually all of which comprised newly-minted home mortgages.

The purpose of the Federal Reserve’s program, of course, was to revive the U.S. real estate market, including new construction.

But the Federal Reserve can easily stimulate other kinds of economic activity by buying up shorter-term debt.

Question 4

Do countries that do not have their own currencies (e.g., most European countries which, with the notable exceptions of the U.K. and Switzerland, have joined in the Euro as a common currency) fight recessions “with one arm tied behind their backs” because they can’t simply print more money to stimulate their economies?

Answer 4

Of course!!!

Question 5

In trying to balance an economy’s consumption and production at the Nirvana junction of full employment without inflation, what is the impact of each of the following: (A) governmental deficits or surpluses? (B) interest rates? (C) increases/decreases in the money supply? (D) consumer confidence? (E) the velocity of money? (F) a surplus/deficit in foreign trade? (E) oil & gas imports as a special case of Item F? (F) exporting American jobs to low-wage countries such as China and India as a special case of Item F? (G) the TRillions of dollars of profits of multi-national companies that have piled up in their tax-haven subsidiaries as a special case of Item F?

Answer 5

(A) Please see Q&A-1.

(B) Please see Q&A-2.

(C) Please see Q&A-2 & Q&A-3.

(D) Consumer confidence affects their decisions whether to spend more or, alternatively, whether to cut spending in order to save or pay down debt. If the economy is already at an equilibrium of full employment with minimal inflation (i.e., Nirvana), then any changes in consumer confidence and, therefore, consumer spending will have to be offset by fiscal and/or monetary policy.

(E) Changes in the speed at which money changes hands affects economic activity. For example, if all businesses and all consumers suddenly sat on their money for a year (i.e., the velocity of money dropped to zero), economic activity would also be reduced to zero. And if, on the other hand, all businesses and all consumers suddenly decided to spend the same amount of currency twice as fast, economic activity would double (or inflation would result to the extent economic capacity was exceeded). The Federal Reserve has to be “on its toes” to offset changes in the velocity of money with monetary policy (Congress and the President are not attentive and nimble enough to deal with velocity changes using fiscal policy).

(F) A foreign-trade deficit has the same effect as a reduction in business investment or consumer spending because, everything else being equal (the economist’s famous or infamous “ceteris paribus” assumption), a foreign-trade deficit would comprise a deficit in demand as compared to supply. Economic activity would immediately decline to bring demand and supply back into equilibrium. This effect can, of course, be abated to the extent that other countries that are running foreign-trade surpluses (e.g., China, India and Japan) lend their surpluses to the U.S. government which offsets the blow to economic activity through fiscal policy by running huge deficits -- which, of course, can increase economic activity (but most sociologists would say that such an economic equilibrium achieved with massive unemployment and massive deficits is nothing but a powder keg).

(G) AS WE HAVE STUDIED MANY TIMES IN THE PAST, THE TRILLIONS OF DOLLARS OF PROFITS OF MULTI-NATIONAL COMPANIES THAT PILE UP IN THEIR TAX-HAVEN SUBSIDIARIES FROM EXPORTING AMERICAN JOBS BECAUSE THEY DON’T WANT TO INCUR THE 35% U.S. INCOME TAX OF DIVIDENDING THOSE EARNINGS TO THEIR U.S. PARENT COMPANIES DO NOT, REPEAT DO NOT, HAVE A NEGATIVE IMPACT ON U.S. ECONOMIC ACTIVITY BECAUSE THE MONEY IS NOT, REPEAT NOT, STUFFED INTO MATTRESSES IN THE TAX HAVENS. AS WE HAVE STUDIED MANY TIMES IN THE PAST, THE TAX-HAVEN SUBS ARE FORCED BY THE U.S. TAX LAW AS A PRACTICAL MATTER TO LOAN ALL OF THEIR FUNDS AS SOON AS THEY ARE EARNED TO THE UNRELATED CHUMP U.S. COMPANIES THAT HAVE NOT EXPORTED AMERICAN JOBS. ACCORDINGLY, THE MONEY HAS ALREADY BEEN RECYCLED INTO THE AMERICAN ECONOMY AND SPENT ON AMERICAN PAYROLL AND/OR AMERICAN CAPITAL INVESTMENTS ON AN IMMEDIATE AND CONTINUOUS BASIS. IT IS ONLY WHEN CONGRESS IS STUPID ENOUGH TO SUDDENLY GRANT THE U.S. COMPANIES THAT HAVE EXPORTED AMERICAN JOBS A LIMITED-TIME SPECIAL 5.25% INCOME TAX RATE (VS. THE NORMAL 35% RATE) FOR THEIR TAX-HAVEN SUBS TO DIVIDEND THEIR EARNINGS, THAT THE CHUMP COMPANIES THAT HAVE NOT EXPORTED AMERICAN JOBS ARE SUDDENLY FORCED TO REDUCE AMERICAN PAYROLL AND AMERICAN CAPITAL INVESTMENTS BY TRILLIONS OF DOLLARS IN ORDER TO REPAY THEIR LOANS FROM THE UNRELATED TAX-HAVEN SUBS SO THAT THE TAX-HAVEN SUBS CAN PAY DIVIDENDS. AS WE HAVE STUDIED MANY TIMES, THAT IS PRECISELY WHAT CONGRESS DID JUST PRIOR TO (AND, IN OUR OPINION, CAUSING) THE 2008-201? ECONOMIC MELTDOWN. AND PRECISELY WHAT IS CONTAINED IN THE RECOMMENDATIONS OF PRESIDENT OBAMA’S DEFICIT-REDUCTION COMMISSION (EXCEPT THAT A 0% RATE RATHER THAN 5.25% IS PROPOSED UNDER THE NOM DE GUERRE OF “TERRITORIAL TAXATION”!!!)!!!

Question 6

What is the impact, if any, of a failure to fund future governmental obligations such as: (A) social security? (B) Medicare/Medicaid? (C) Defense (NB: although a great deal of fuss is made over Items A and B, nobody fusses that future defense expenditures are not already funded/endowed)? (D) U.S. government pensions (NB: although a great deal of fuss is made over Items A and B, nobody fusses that not a penny’s worth of future USG pension liabilities has been funded, as distinguished from an infinitesimally-small quasi-Sec. 401 plan for USG workers that will supplement the pensions of those who have participated)? (E) state & local governmental-pension under-funding?

Answer 6

(A) Whether Social Security takes in more money than it spends, or vice versa, in any particular year is, since Social Security is part of the U.S. Government’s budget, nothing more than a part of the U.S. Government’s overall Fiscal Policy. If Social Security, instead of being a program since inception under President Franklin D. Roosevelt as current workers funding current retirees, it were suddenly funded like a private-company pension plan, the economic impact of the change would be difficult to manage because the withdrawal of money from the economy to fund the program depresses the economy and ways would have to be found to invest the funds so that they would be spent quickly and sufficiently enough by the entities in which the funds are invested so that the overall impact on the economy is neutral.

(B). Whether Medicare, since inception as part of President Lyndon Johnson’s Great Society, operates at a deficit or surplus in any particular year is subject to the same analysis as Social Security (please see the immediately-preceding paragraph) because it is also part of the overall U.S. Governmental budget. Ditto Medicaid.

(C). Whether future Defense expenditures are endowed like a private-company pension plan or financed from current governmental funding (taxation and/or borrowing) is subject to the same economic analysis as Social Security and Medicare/Medicaid. The economic impact of the method of funding a particular program has nothing to do with the nature of the program.

(D). When we studied the finances of states and localities for our 5/8/2013 meeting, we were appalled to stumble across the fact that the U.S. government has NOT funded a penny of its future liability for pensions for its military personnel and civilian workers!!! This despite all the fuss over funding its future Social Security liabilities!!! However, if the U.S. government were suddenly to begin funding its future pension liabilities, managing the overall economic impact would be similar to what is described in Answer 6(A) above because although the economic impact of the method of funding a particular program has nothing to do with the nature of the program, CHANGES in the method of funding do indeed have an impact which must be carefully managed.

(E) State & local governmental budgets have long since been recognized by economists as comprising a part of the country’s overall Fiscal Policy. Particularly because during economic downturns, state & local governments tend to “tighten their belts” because their tax revenues decline during economic downturns. Which means that the U.S. Government’s Fiscal Policy must run an even greater deficit to offset the effect of the spending reductions of the state & local governments. Thank God the state & local governments can’t print their own money so that they are also running their own Monetary Policies which must also be taken into account!!! [Though the “mossy rock on which to stand” for that sentiment may quickly become a morass because a few years ago during California’s deficit wars, California did run out of money in the form of U.S. dollars so it began printing California IOU’s which it gave to its employees and suppliers and there quickly developed a market in which the California IOU’s were discounted at only a modest interest rate until each particular tranche of IOU’s was scheduled to be redeemed by the State of California with U.S. dollars.]

Question 7

Was the Federal Reserve lending (and printing the money that was lent) $7.7 TRillion to U.S. financial institutions during 2008-2009 which was many times the magnitude of lending to those same institutions under the Troubled Asset Relief Program (TARP) passed by Congress?

Answer 7

Yes, the Federal Reserve program was approximately 10 times the size of the TARP funds used for the same purpose.

Question 8

Was the Federal Reserve lending (and printing the money that was lent) an additional $600 Billion during the first half of 2011 -- this time to purchase U.S. governmental debt which, inter alia, masked the extent of governmental deficits?

Answer 8

Yes.

Question 9

Was the Federal Reserve lending (and printing the money that was lent) to provide untold TRillions of dollars (A) commencing September 2011 to bail out the Italian and Spanish governments through 12/31/2011, and (B) commencing October 2011 to bail out all European banks, not just Italian and Spanish banks, through 2/1/2013?

Answer 9

Yes.

Question 10

Did the Federal Reserve have legal authority to perform Item 9?

Answer 10

No, such action is/was barred by Sec. 2A of the Federal Reserve Act.

Which is why our Six-Degrees-Of-Separation E-mail Campaign following our 12/14/2011 meeting requested President Obama to have Chairman Bernanke and his Federal Reserve Governors prosecuted criminally for malfeasance.

Question 11

Has the Federal Reserve been lending (and printing the money that was lent) $85 Billion/month to purchase long-term debt in general and U.S. mortgages in particular -- for a total of $1.3 TRillion and counting (since Chairman Bernanke announced earlier this week that this program will continue for the foreseeable future)?

Answer 11

Yes. [And such action can be justified under Sec. 2A of the Federal Reserve Act.]

Question 12

The American public has been plagued by the notion perpetrated by the media that the recovery period for a “financial crisis” is much longer than a mere “economic crisis” -- (A) is this true since the only example of a “financial crisis” they cite is the Great Depression which occurred before fiscal policy (aka Keynesian economics) was understood and long before monetary policy was understood so that, of course, President Roosevelt didn’t have a clue what to do? (B) or is this merely an excuse used by the policy makers to excuse their failure to appreciate the severity of the crisis (which, incidentally, was NOT underestimated by Princeton U. Economics Nobel Laureate & NY Times OpEd Columnist Paul Krugman who argued for stronger economic stimuli from the outset!!!)?

Answer 12

Of course the mainstream media has been creating a myth.

And of course the myth is only a "fig leaf" for policy makers to excuse their own failures.

And kudos to Princeton U. Economics Nobel Laureate & NY Times OpEd Columnist Paul Krugman who has argued for stronger economic stimuli from the get go!!! [If you are going to gamble with the American economy, as described in the next two Q&A’s, then any Las Vegas gambler would tell you to go “all in”!!!]

Question 13

Although both Prof. Krugman and Prof. Lawrence Summers (who, until last weekend, had been the leading candidate to become Federal Reserve Chairman early next year) argue in their book reviews that are posted on http://www.ReadingLiberally-SaltLake.org, for more and greater economic stimulus at least in the short term, is there a danger that excessive governmental debt cannot be borne by the U.S. economy?

Answer 13

Yes.

There is a good discussion of the dangers in the materials posted on http://www.ReadingLiberally-SaltLake.org in connection with our 5/13/2013 meeting.

In addition, as we have studied many times in the past, when a country’s currency becomes worthless (such as 1930’s Germany trying to run on the British Pound Sterling and 1990’s Russia trying to run on the U.S. Dollar) there are tremendous economic dislocations during the transition as non-farmers try to grow food in their back yards and/or hope they are related to a sufficiently attractive young woman who can barter sexual favors for food.

Question 14

In other words, with U.S. governmental debt exceeding the level of 100% of annual national output (aka Gross Domestic Product), won’t the debt reach “junk bond” status which would mean interest rates in excess of 20% of national output which is the normal level of U.S. governmental revenue -- which means ALL of the U.S. government’s revenue would have to go toward paying interest and nothing would be available for anything else?

Answer 14

Yes.

Although it is true that the debt of most of Europe’s “problem children” countries (Portugal, Italy and Greece) exceeded 100% of GDP, Spain’s debt was only 68.5% of GDP in 2011 (according to http://www.cia.gov) when its debt came under attack because of the size of its annual deficits which would bring its debt to 83.2% of GDP for 2012.

President Obama and some economists advocate ignoring the total accumulated U.S. governmental debt which now exceeds 100% of GDP and focusing solely on debt that is not held by U.S. governmental agencies such as the Social Security Trust Fund.

But according to the U.S. Treasury, this public debt amounts to $11.9 trillion and, according to http://www.cia.gov, 73.6% of GDP for 2012, and growing at an annual rate of 7.6%.

Accordingly, the U.S. is already at the brink where Spain’s debt came under attack = 73.6% of U.S. GDP for 2012 + 7.6% = 80.2% of GDP currently and, like Spain in 2011, continuing to mushroom.

Moreover, Spain (and Europe’s other “problem children” countries) were saved in mid-2011 by the U.S. Federal Reserve which guaranteed all debt issued (1) before 12/31/2011 by the Spanish and Italian Governments, and (2) before 2/1/2013 by all European banks (not just Spanish or Italian banks).

Unfortunately, no economist (much less President Obama who is not an economist) can predict with any assurance when the “tipping point” will be reached for any particular currency and there is no Celestial Reserve Bank that can guarantee the U.S. government’s debt or currency, the way the U.S. Federal Reserve was able to bail out Europe.

Question 15

Isn’t Prof. Krugman, in his review, being disingenuous in casting in class-warfare terms the effect of austerity (reducing governmental deficits and expenditures) as favoring capitalists over workers? After all, the holders of capital are retired workers, their pension plans, and university endowment funds.

Answer 15

Of course.

Question 16

If interest payments on our national debt become too burdensome (please see Item 14), won’t the Federal Reserve be forced to print money in order to buy up much, if not all, of our national debt? And wouldn’t this mean disaster for any holders of dollar-denominated assets including retired workers, their pension plans, and university endowment funds?

Answer16

Yes. Yes.

Question 17

And, though a small point, isn’t the mainstream media’s constant chatter about record stock-market prices really a classic case of looking through the wrong end of the telescope? In other words, markets usually anticipate the future and the stock markets may only be anticipating how badly the U.S. dollar is likely to plummet as the Federal Reserve continues to print more money to keep interest rates down so that the U.S. government has something left to spend on other items -- so aren’t record-high stock prices really record-low plummeting-dollar values?

Answer 17

Of course!!!

Question 18

And, a major point, isn’t this whole imbroglio, despite the occasional obligatory reference to higher unemployment rates among inner-city residents in general and inner-city youth in particular, a testament to how the U.S. has created a permanent under-caste comprising approximately 30% of our population which is unparalleled in any other developed country in terms of the lack of upward mobility from that permanent under-caste?

Answer 18

Yes!!!

Though it is our moral duty to continue to criticize America’s apartheid society despite our weariness from doing so.

[Please see, for example, sections 3 & 4 of http://www.ReadingLiberally-SaltLake.org regarding “Inner-City Holocaust and America’s ‘Apartheid’ Justice System” (In Honor of Jonathan Kozol and In Memory of John Howard Griffin) as well as the materials posted on the same bulletin board in connection with our meetings on 3/13/2013, 9/12/2012, 1/13/2010, 5/16/2009 and 1/22/2009.]

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