Second Short Quiz – Modern Monetary Theory vs. The Law of Gravity

[johnkarls]

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A. Basic Economics

1. What is the Law of Supply and Demand?

2. Is economics largely a study of scarcity?

3. In other words, do you have to pay for air? [NB: not compressed air at a gas station to fill your tires.]

4. But if something is not so plentiful that you can have all you want for free (e.g., diamonds), can’t the owners command a price?

5. If they sell to the highest bidders, isn’t this an example of how the diamonds were rationed since not everybody can have all they want?

6. If the supply of diamonds suddenly became much greater, would you expect the price to fall? And if the population increased so that the demand became significantly greater, would you expect the price to rise?

7. Is there any reason why the Law of Supply and Demand should NOT apply to a nation’s currency???

8. If a nation prints more money (“quantitative easing” in Washington speak), wouldn’t you expect, everything else being equal (every economist’s famous “ceteris paribus” assumption), the value of the money to go down???

9. ISN’T THIS REALLY THE “LAW OF GRAVITY” WHEN IT COMES TO CURRENCY???

10. And would we be foolish to think for a minute that the value of everything is going up (inflation), because we are attempting to measure those values WITH A SHRINKING YARDSTICK (the U.S. dollar) – when it is really the value of the dollar that is plummeting rather than the value of everything else increasing???


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B. Disaster For Those on Fixed Incomes

1. Do workers whose pay is not subject to a “COLA” (aka, automatic Cost of Living Adjustment) suffer because they have to fight for pay raises that might or might not cover the increase in the Cost of Living?

2. Does anyone who is stupid enough to have a savings account suffer because interest never covers inflation? And isn’t the interest subject to income tax which makes the “robbery” even worse?

3. Isn’t this true for anyone who is stupid enough to enter into ANY KIND OF CONTRACT that is geared to the plummeting dollar?

4. Do retired people who depend on pensions suffer from inflation eating away at the value of their pensions?

5. Is Social Security subject to a COLA?

6. BUT was the average Social Security payment in 2021 only $1,551/month or $18,612/year?

7. AND is $18,612/year below the U.S. Government’s official “poverty line” for a single person, much less a married couple trying to live on the Social Security of the retired “bread winner”?

8. BTW, if a nation’s currency collapses completely (NB: inflation is only a partial collapse), doesn’t it mean STARVATION for anyone who can’t grow/catch/shoot her/his own food, or isn’t lucky enough to become a whore for someone who can???


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C. Disaster For The U.S. Government

1. Has the over-arching goal of the Federal Reserve been historically 2% inflation/year?

2. If inflation reaches an undesirable level, does the Federal Reserve have to raise interest rates in order to bring inflation back to a tolerable level?

3. For example, as noted in Q&A 32 & 33 of the First Short Quiz, didn’t inflation under President Jimmy Carter reached 11.3% in 1979 and 13.5% in 1980, compelling the Federal Reserve in order to avoid a COMPLETE COLLAPSE of the U.S. Dollar, to cause the Prime Rate (the interest rate banks charge their most-credit-worthy customers) to balloon to 20.0% on 4/2/1980?

4. Is the U.S. itself immune from increases in interest rates?

5. Isn’t the U.S. National Debt more than $29 TRillion???

6. And isn’t the U.S. Gross Domestic Product (the value of everything we produce) only $21.5 TRillion?

7. According to the U.S. Treasury Department, aren’t interest payments on the U.S. National Debt only running at $0.56 TRillion for FY-2021? In other words, approximately 1.9%?

8. What would happen if the Federal Reserve IN ORDER TO AVOID A COLLAPSE OF THE DOLLAR, was forced to let the Prime Rate balloon to 20.0% as it did on 4/2/1980?

9. Without quibbling over whether the U.S. Government pays the Prime Rate or something a bit less, doesn’t simple math indicate 20% on the U.S. National Debt of $29 TRillion would be $5.8 TRillion/year – less the current interest payments of $0.56 TRillion/year = a net increase in interest payments of $5.2 TRillion???!!!

10. Per the U.S. Government, weren’t FY-2021 revenue only $4.05 TRillion and FY-2021 expenditures $6.8 TRillion???

11. And looking at a Pre-COVID year, per the U.S. Government weren’t FY-2019 revenue only $3.4 TRillion and FY-2019 expenditures $4.4 TRillion?

12. SO THE OBVIOUS – if the U.S. Government only raises $3.4 - $4.1 TRillion/year and NOW SUDDENLY HAS TO RAISE AN ADDITIONAL $5.2 TRillion/year TO MEET ITS INTEREST OBLIGATIONS, THEN DOESN’T IT HAVE TO MORE-THAN-DOUBLE ITS TAX RATES AND FEE SCHEDULES???

13. Or if the U.S. Government FAILS to raise its tax rates and fee schedules, wouldn’t its interest expense VASTLY EXCEED ITS REVENUE, leaving nothing for ANYTHING ELSE such things as the Department of Defense, the Dept. of Education, etc., etc.???


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D. When Will The Dollar “Hit The Wall”???

1. Didn’t the “Rule of Thumb” used to be (for the obvious implications outlined in Sec. C above) that a government’s national debt and, if it has one, its currency (which we have always posited is infinite-maturity zero-interest debt) are subject to collapse if that national debt exceeds Annual GDP (the value/year of everything the country produces)?

2. In 2011, were Europe’s “problem children” – Greece, Italy and Spain – facing bankruptcy (worthlessness of its debt and, therefore, an inability to finance its operations) because the national debt of each exceeded its Annual GDP?

3. In an 8/26/2011 speech at Jackson Hole, did Federal Reserve Chair Bernanke promise that there would be no more “quantitative easing” (a third round of PRINTING MONEY known as QE-3)?

4. A mere two weeks after that speech, did The Federal Reserve commit to print enough Dollars for sending to the European Central Bank for the ECB to keep Italy and Spain afloat through the end of 2011? Was this called “Stealth QE-3” by the New York Times and Wall Street Journal?

5. Did (and does) The Federal Reserve have legal authority to print Dollars for such a purpose???

6. In November 2011, did European banks effectively stop lending to each other because of uncertainty about how much each bank owned of the governmental bonds of Europe's "problem children" countries (Greece, Italy, Spain, Portugal, etc.) which might cause the bankruptcy of that bank -- and, in addition, how much that bank owned of the bonds of other banks that may soon be bankrupt???

7. On November 30, 2011, did six central banks [the U.S. Federal Reserve, Bank of England, European (Euro-Zone) Central Bank, Bank of Japan, Bank of Canada and Swiss National Bank] announce "their intention to coordinate action to ease liquidity conditions in financial markets. The Fed will increase its dollar lending to other central banks who will do the same to other financial institutions, and all will reduce the cost of dollar borrowing. The aim is to defuse the growing trouble banks have had borrowing to finance their operations."???

8. SO THE OBVIOUS – At what point will a country’s ratio of debt to GDP send it into bankruptcy??? And at what point will the U.S. in particular reach that point???