The Smart Bunny’s Guide

To Debt, Deficit and Austerity

By Arliss Bunny

Illustrated by Melissa Irwin

Table of Contents

Title Page

Copyright Statement

Dedications

Preface

What No One Told Us About Money

Fiat Money - What is Money?

Debt-pocalypse

Debt-pocalypse is a Unicorn - What is Debt?

A Fist Full of Carrots - How Government Spending Really Works

The Great Train Robbery - Why Lying Liars Lie About Debt

On Golden Pond - Old Economists vs. the New Economy

Mommie Dearest - Sometimes Power Trumps Greed

The Last Days of Pompeii...NOT - Inflation Reality Check

They Aren’t Us! - Europe Etc.

Deficit Spending

Austerity

Opps! - Reinhart & Rogoff Go Splat!

Chicken or Egg? - The Causation Argument

Wussing, Wussie, Wusses - Business Confidence

Get Mad and Get Involved

Read More About It...

For more information on these essential topics check out the following websites:

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About Us

About the Author

About the Illustrator

Copyright Statement

Copyright © 2013 by Melissa Irwin . All rights reserved on behalf of Arliss Bunny by Melissa Irwin. No part of this e-book publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the author, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, write to the rabbit at the address below.

ArlissBunny@gmail.com

Dedications

For Luke, Joey and Clover, my three loving bunny boys

and for Amy who usually did my bidding respectfully.

-AB

To Cadbury, still missed, and to Arliss

for bestowing this honor upon me.

-MI

Preface

As a Rabbit American I generally opt to remain apart from human affairs because, well, watching you people carry on your lives is like one enormous episode of “Real Housewives of Stupid-fornia.” Honestly, there are days when I am equally torn between staging a rabbit revolt and just going down a rabbit hole and staying there. This is never more true then when I hear politicians and pundits talk about money, debt, deficits and austerity. It is hard to imagine anything which is more important yet as badly or purposefully misunderstood.

I heard that cringe. (What–you think these ears are just decorative?) I know that most of you don’t really follow economic theory and don’t understand why you should. Hey! You need to believe me when I tell you that given where our country is today, there is nothing that is more essential to our collective life, liberty and the pursuit of carrots/ happiness/whatever. My bet is that those of you who don’t currently follow economics fall into one of three categories….

The Frightened Bunnies

“I don’t do math and no matter what Arliss says I’ll never understand it. I’m going to quit before I am forced to admit that the wildly inaccurate phrase ‘dumb bunny’ applies to me.” - Hear me when I say, “This just isn’t that hard!” Oh, it’s completely different then what you have probably been taught. Still, once you take that old stuff and flush it out of your mind you will be ready to discover something that is simple and is going to make a whole lot of sense to you. The only problem is that you will no longer be able to hear a story about the economy without finding yourself yelling at the television. You see, while you can easily learn how money really works, apparently, politicians, pundits, and a stunning number of economists are impervious. Yes, it’s true. We are being led by greedy idiots. Try to contain your shock.

The Deferential Bunnies

“Hey, I’m not an economist or a financial wiz so I have to trust the experts.” - To this I respond with two little words, “Lehman Brothers.” You remember them (note the past tense.) They were the massive investment bank that went completely bankrupt, in September of 2008, right along with that giant popping sound which was the result of the bursting of the housing bubble. People, you need to know that vaunted financial experts have been getting it wrong and playing chicken with your economy since 1971. You need to get a grip on what is going on and take the steering wheel away from them. Seriously, get out of the backseat and take charge. They can not be trusted to drive this economy. In order, however, for you to counter all that Wrong, you are going to have to summon the strength to use your own brain. (Remember, when the going gets heavy, lift with your knees.) Stick with me, baby. We’ll get there together.

The Busy Bunnies

“Are you kidding! Read about economics! I barely have time for another cup of coffee, let alone to absorb a whole different understanding of money. Arliss may be quick-like-a-bunny but me, not so much.” - Listen up. If you care about any of the following things, you better make the time. You better make time NOW because Washington, D.C. is hopeless and we are all going to have to work together before they make it any worse.

If you care about...

•achieving full employment,

•maintaining and even increasing Social Security,

•maintaining and improving Medicare,

•improving services for veterans,

•health care,

•climate change,

•developing clean energy,

•modernizing national and state infrastructure,

•improving education,

•reducing or eliminating debt for college students, and

•supporting developing countries without impoverishing them,

...you need to know that the things above are well within reach and none are subject to imagined limits of what we can or can not afford. In this current economy what we do, as citizens, and what Congress does is limited by politics, knowledge and will. Nothing else.

Now what could possibly be more important than finding out why I’m not just pulling your paw? Get comfortable, it’s going to be a bumpy ride.

Carrots!–Arliss

What No One Told Us About Money

I don’t know you but I’m going to take a guess that like about 99.99999% of the American public and about 99.99998% of economists and financial “experts,” you don’t spend any time thinking about where money comes from and how it works. Why would we? We all think know what we need to know about how money works.

Fiat Money - What is Money?

For the sake of simplification, I’m going to lump the following into what I call “Us”:

•individuals and families,

•all of private domestically owned business both large and small,

•and state governments.

I am lumping all of these very different groups in bed together because we all have one thing in common, none of Us are the federal government. All of Us, known as the private sector, behave in the same way in terms of money. In order to spend it we have to bring it in. Those of us who are individuals, families and small businesses we usually earn it. If we are big business we either earn it or steal it. If we are a state government we tax for it. Regardless, with money, it is all the same, everyone in the private sector has to have money in order to spend it and (here is the important part) if we do not have enough to cover our expenses then we must either earn more, borrow some or cut back on our expenses. Individuals, families, business and states are certainly strange bedfellows but we are all the same because we all are at the mercy of our checkbooks and those checkbooks teach us that debt is bad and balance is good. For Us that is all absolutely true.

...but it is NOT TRUE AT ALL for the federal government.

I know, you think that as far as money goes the federal government is just like the private sector only with the power to raise an army and to impose taxes. Well, it’s not. When we are talking about money the federal government is nothing at all like Us. Even though almost no one understands this, including Congress, money at the federal level is a whole different species.

Ever since 1971, when President Nixon took the United States, and therefore most of the world, off the gold standard, the US, and every sovereign government that prints its own currency, operates something called “fiat” money. (And here you thought “Fiat” was just a vehicle for putting the children of auto mechanics through college).

Fiat money means that it isn’t worth anything. It has no intrinsic value, meaning that, unlike gold, it really is just paper. The value of the US dollar is created by how the US government sets specific monetary policy and by certain market forces. Fiat money only exists because the federal government says it does and for no other reason. Lots of people mistakenly think that money exists as an outgrowth of a historical trade economy. This isn’t true. Fiat money is intended, built and utilized by the government as one of the ways to gate the economy. Modern money isn’t a conspiracy or inherently evil, it is a nonpartisan management tool for the behemoth that is the US economy.

Okay, here I am going to pause for a public service announcement. STOP PANICKING! Fiat money is a good thing. It is a powerful thing. It just isn’t at all what you thought it was. For those of you easily prone to panic attacks I’ll let you take a minute or two to stop breathing into that brown bag. Take slow, steady breaths. You are going to be just fine and so is the whole economy.

Changing the Conversation - It IS the Economy, Stupid!

Let’s start by doing one simple thing. Let’s set the whole conversation about money aside for a moment and think about something else. All this time, all these years, legislators, economists and financial “experts” have had it backwards. All this time they have been talking about budgets and debt and spending when what they should have talking about is the economy.

The economy has three legs, like a three legged stool. If one of those legs is short, then the others have to be long. The stool top won’t be level but the stool will still be standing. For any sovereign economy (one that has control over its own currency, meaning not the countries in the European Union) the three legs are:

•the private sector (“Us,” as described above),

•the public sector (the federal government) and

•international investors (both public and private).

Another way to look at the very same thing is that each of these three sectors is associated with a lever that can be used to control the economy:

•unemployment level (private sector leg),

•Inflation (public sector leg) and

•the currency exchange rate/trade deficit (international leg).

WAIT!!!

I just heard you stop reading because you think you either don’t care or won’t understand. Stick with me another minute and I will make it more clear. Here is a handy drawing of the current economy stool to help you picture what I mean.

What I am saying is that in any functioning sovereign economy, the stool looks like some version of this illustration. And, critically, in any sovereign economy the three sectors are controlled by three levers, unemployment, inflation and the currency exchange rate. Period.

Here is the most important sentence in this whole book.

The economy is not driven by anything except unemployment, inflation and the exchange rate.

Nothing else. Nada. Zip. Zilch.

Did you see it? Did you notice? The word “debt” is nowhere in there. Nowhere is mentioned the hyperbole of a supposed debt crisis. Do you know why...because it doesn’t matter even one little itty bitty bit. Federal debt IS a unicorn. It does not exist as a real constraint for an economy with high unemployment, massive under-utilization of resources, ultra-low inflation and a trade deficit that is held in US dollars. In other words, for our current economy, federal debt is not a legitimate constraint. Federal debt is a number on a piece of paper in an office somewhere in Washington. It is also part of how we interact with other economies. Beyond that it exists primarily on the TelePrompTers of Glenn Beck, Rush Limbaugh and every member of the FOX “News” team...oh, and (if you could see me you would know I am shaking my head with deep sadness) President Obama.

*sigh* People, federal debt does not matter very much at all (I will explain more about this later) because of the way fiat money works. Fiat money means that the government does not need to take in any money in order to spend money. It does not need to collect ANY taxes except as a lever by which to control the economy and exert a change in employment or inflation. For a country with a fiat currency, spending is not related to money collected. At all. Ever. Period.

For the advanced beginners you can think of fiat money like this, federal spending is the creation of new money while taxation is the destruction of money. This is the hardest lesson in this whole book. Spending more or less is how the government heats up the economy and taxing more or less creates a constraint and cools down an economy. Not all spending and taxing are equal though. Money that is spent into the top of the economy or taxes that are reduced on the highest tier of the economy serve to leverage the economy the least because the money does not circulate and, in fact, frequently leads to said money being sequestered outside of the US economy by being moved offshore. Whereas, money that the federal government spends into the lower tiers of the economy circulates so much that a multiplier factor is created such that one dollar created or not taxed by the federal government ends up being spent and re-spent so many times it is worth more to the overall economy then its face value.

Think about that whole idea for a minute. The US government does not need to collect taxes in order to have money to spend because the US government can always print the (fiat) money it needs. Taxes are only used to control overall spending within the economy.

I’ll say it again. For a fiat currency-based economy, all that is needed for spending, of any amount, is to print it or to credit it electronically.

Oh, come on. STOP PANICKING!!!

Of course it is possible to go off the deep end with this but not for the reason you are thinking. Before I started explaining all this, you thought that the federal government had the same limitation that you do. You thought that it could only spend what it had in its account or what it could borrow. As I have been saying, that is absolutely and completely wrong. The federal government is limited but it is limited, primarily, by inflation.

Now look back at the stool. The federal government can spend as much as it wants on whatever it wants all the way until the economy reaches full employment. If the government was stupid* and it kept spending then the federal government/inflation stool leg would get longer/higher and the Us/unemployment leg would go past full employment and get too short. Once again the stool would be out of balance. So here is the second most important lesson in this book. (*I’m going to let this slide because it is just too easy.)

The job of the federal government is NOT to balance a BUDGET. The job of the federal government IS to balance the ECONOMY.

If the inflation leg on the stool is too short and the unemployment leg is too long then too many people are out of work and suffering. If the inflation leg is too long and the employment leg is too short (meaning we have gone past the point of full employment) then goods cost more. This is what it means to balance an economy. Who gives a flying flip about what any numbers anywhere on a federal budget balance sheet say.

Even if you are a Nervous Nelly and you do care about federal debt, federal debt is eased by prosperity. Debt falls naturally when the economy is healthy. Debt is not a lever by which to control the economy. Debt is the result, a symptom, of the balance or lack there of between unemployment, inflation and the trade deficit. Trying to use debt to leverage an economy is like believing you can stop the virus of a cold by not sneezing.

Also, realize that if you or I go into a reasonable amount of debt in order to purchase a house or a car, that is good for the economy. The same is true for business debt. “Debt” is, in fact just another way of saying “investment.” They are two sides of a coin. This is no different for the federal government. If the government is in “debt” then that means it has invested in the economy somewhere. I’ll say that again, federal debt means that the value of the economy is resting in the bank accounts of corporations, citizens and some international investors. Conversely, so-called “surplus” means that value has been taken away from companies and individuals. Shockingly, this means precisely what you just now realized that it does, a federal surplus is not good at all unless you are intending to slow down the economy.

And here is the last important thing I am going to ask you to notice about all of this.

What should be important to a government about an economy is not numbers, it is PEOPLE.

When the employment leg of the stool is too short, millions of citizens are in crisis. When they can’t afford proper medical care or housing or food or education their lives are damaged and even lost. It is not an over-statement to say that our current economy is killing people every day. An unbalanced economy has social costs–human cost.

I’m also going to share an idea which has been growing. An unbalanced economy has a major psychological cost and a political one as well. When people are uncertain they often have a greater tendency to be afraid and when they are afraid they have a greater tendency to become more extreme. Now, ask yourself if there are more extreme and scared people around now then there were, say, fifteen years ago. Ask yourself if this correlates with the rise of extremism in this country. Perhaps you might want to get yourself a cup of TEA while you ponder that.

Economies are not about budgets, they are about people–or, at least, they should be. When governments lose sight of that, people can easily become afraid and that may be the biggest social cost of all.

Now you know more about money then, basically, everyone you have ever met. So why are you still so worried? In the next chapter I will explain that you didn’t get there by yourself.

Debt-pocalypse

So you have to be asking, “Arliss, if debt isn’t something I should be worried about, why am I so terrified?” Good question and, frankly, the answer is that you are terrified because someone told you the sky was falling and that idea really scared you.

Debt-pocalypse is a Unicorn - What is Debt?

If you or I or a business or a State has debt then it is just what you have always thought it was because for any of Us, debt is something to be avoided if at all reasonably possible. For all of Us, debt is a horse. It is solid, real and significant. But, for the United States Federal Government debt is a unicorn. United States federal debt is a tool used to regulate the economy and to support foreign trade. Because our debt is held in US dollars and we will never run out of dollars, debt is not a delimiter to spending. Fear of federal debt turns a realistic horse into a unicorn.

People worry about federal debt because they worry about their own debt. They transfer the worry about themselves onto the worry about the government. I understand why this happens. It’s wrong but I understand it. You are only human and I forgive you. … … ….

Well, let’s say I’m trying to forgive you. (Even you have to admit you are making it difficult.) Still, as a Rabbit American I expect more. I expect you to rise to meet the responsibility placed upon you by having those opposable thumbs and that (supposedly) large frontal lobe. I expect you to let go of the unicorn and learn something new.

A Fist Full of Carrots - How Government Spending Really Works

Most people don’t know how government spending works so if you do please snack on a carrot while I give everyone else a brief crash course. (If you want more detail on how the government creates, allocates and spends money watch for my upcoming book, The Smart Bunny’s Guide to Congressional Purse Strings, the Treasury and the Federal Reserve. It’s going to be a real page turner.)

Close your eyes and imagine a world in which there are only ten carrots. You live in this world as does a weasel Congressman named Lyle and a sheep from the country of Andorra named Ramon. You three are the only inhabitants of this place. In the beginning Lyle has all the carrots but Ramon has wool and you have soup. Lyle decides to spend some carrots to buy wool and a bowl of soup. Now you have a carrot and Ramon has a carrot. You and Ramon can trade among yourselves if you like but there are still only two carrots until Lyle spends more carrots to buy more soup and more wool. Eventually, you and Ramon end up with all of the carrots and Lyle doesn’t have any. Now you and Ramon are actively trading and have all of the wealth in the economy. The two of you are healthy and your lives are good. Lyle, on the other hand, needs to go into debt if he is going to buy more wool or soup, so he does and now you and Ramon have IOU’s from Lyle for carrots plus carrot interest.

The big question is why is this a problem? Think about it. Re-read it if you aren’t sure. It’s just common sense, because Lyle has spent all his carrots, the economy between you and Ramon is doing well. Lyle, meanwhile, is in debt. What does this mean? It’s simple, all Lyle has to do in order to pay off his IOU’s and have more carrots to spend into the economy is to plant carrot seeds and grow more carrots. Since Lyle is the only one with seeds, he is the only one who can add more carrots into the economy.

Did you catch all that? If Lyle spends carrots they appear as a loss on his ledger, a debit, but they are a gain on either the ledger of you or of Ramon. I will say this again slowly. Any and every carrot that you have originally came from Lyle. You did not create that carrot, Lyle did.

Here is another thing I don’t want you to miss. Instead of thinking about Andorra–oh, come ON, it’s in the Pyrenees Mountains between Spain and France, look it up! Instead of thinking about Andorra, think about China. Ask yourself, in the real world how much of the US debt do you think is held by China? The answer is 7.6% but, critically, all of that debt is in US dollars. (I will explain later why that is important.) What will really be shocking to a lot of you will be the fact that only 2.7% of our economy is represented by goods purchased from China. I know it seems like everything is made in China these days but think about it, most of what you spend your money on each month goes into goods or services that are part of US domestic economic production including food, property, health care and education.

So here is the summary of what you have just learned.

•If Lyle doesn’t have carrots because you and Ramon have all of them, that is not a bad thing.

•Ramon doesn’t really have very many carrots no matter what country he is from.

•Lyle can always grow more carrots.

I know you think I have over simplified but when you hear someone like Congressman Paul “Super Weasel” Ryan making alarmist statements about debt, what he is really saying is that all of the wealth of the economy is sitting in the private and international sectors instead of the public (federal) sector. (If you aren’t seeing that money in your bank account that is another whole problem that has to do with corporations and the top 1% of the citizenry holding a huge percentage of their money in savings instead of pushing it back into the economy.) Federal debt means that the money is out in the public sector. When you only look at the federal debt and not at the public sector assets, you are only looking at one side of the ledger and you are only seeing half of the story. Because, again, the real job of the federal government is to balance the economy. Eliminating federal debt for its own sake is unicorn-based nonsense.

Now watch as I masterfully tie two sections of this book together. As long as the unemployment leg of the economy stool is long, the federal government can and should keep planting carrots and spending them into the economy in order to drive economic strength and growth. The careful regulation of carrot spending by the federal government can heat up the economy when it is slow and cool it off, by taxing carrots out of the economy, if the economy heats up too much. The federal government never needs to have carrots in order to spend carrots because, unlike everyone else, the federal government can always make more carrots. In terms of the federal government, the sole and entire purpose of carrots is as a lever to propel or slow the economy, nothing more, nothing less.

The Great Train Robbery - Why Lying Liars Lie About Debt

So how is it that so many people think debt is such a big problem? Well, first of all, people like Glenn “Hair on Fire” Beck and and Pete “Pants on Fire” Peterson and the “Soon to be Lodged Deep in the Fire Pits of Hell” Koch brothers have been lying to all of us about the supposed Debt-pocalypse because it is to their personal advantage to do so. Fancy that, someone is misleading you for the glory of greed! Who would have thunk it!

Here is an example of the things their kind has to gain by fooling you. Wall Street honcho Pete Peterson and business magnates like the Koch brothers have been screaming about debt and pushing the privatization of social security as the answer to to our economic woes. How does this help them? Think about it, if people suddenly have to invest their money in a place other then social security, they turn to… … ...? They turn to Wall Street, of course. Every lobbyist these guys hire, every pundit they underwrite, every politician they buy are all working for the same goal—to put money in the pockets of their masters by taking it away from you. It’s no great mystery. For the bottomless greed mongers among us, Debt-pocalypse is just another way to make a few billion bucks on the backs of the middle class and the working poor.

On Golden Pond - Old Economists vs. the New Economy

Another kind of getting it wrong comes from people like Erskine Bowles and Alan Simpson, of the so-called Simpson-Bowles Commission fame. (Which, you are going to love this, was changed from the “Bowles-Simpson Commission” because, no joke, the abbreviation, “B-S Commission” wasn’t working out for them.) Also grouped into the same kind of thinking are most of Congress, many older economists and even President Obama. The basic problem with this group really is that they are old. By this I mean that they formed their ideas about money and how the economy works back in the days when the gold standard, and all its many limitations, was still in place.

What they have not adjusted to is the fact that when the gold standard was dropped and fiat money came into being, it changed everything and the limits of the gold standard no longer applied. In other words, these guys are still afraid they are going to fall off the edge of the world in a giant torrent of debt because they don’t realize that the very nature of money is no longer based upon the old set of self-imposed constraints and the scarcity of gold.

Basically, when we were on the gold standard, our economy did have a checkbook. We had the very same kind of limitations as families, businesses and state governments. When the United States was on the gold standard the federal government elected to only spend as many paper dollars as it had gold in Fort Knox. (Actually, it is more complex then this but for simplicity sake I’m going to leave it alone.) That is the very reason that President Nixon, in a move that is now called the “Nixon Shock,” took the country off gold and changed us to a pure fiat currency. In one fell swoop the US Federal Government no longer had a checkbook-based economy. It is the same as waking up one day in a world that was round—only no one realized it and nearly everyone kept operating with most of the original constraints including avoiding the non-existent “edge of the world”. Another way to think of it would be like wearing a straightjacket for no reason what-so-ever.

Here is a quick and easy method to recognize out of date so-called experts. Whenever you hear anyone talk about federal debt being any kind of a limitation or concern, that is gold standard-based thinking. When the GOP shriek about balancing the budget, that is gold standard-based thinking. It is even gold standard-based thinking when Democrats crow about budget surplus. All of that is gold standard-based thinking because none of it is about balancing the economy and balancing the economy is the only thing that matters.

Here’s something I bet you didn’t know. The United States is still paying off its debts from the Civil War. Today we often hear about the horrors of passing debt on to future generations so you have to ask yourself, “Self, how much has that Civil War debt crimped my style?” Since federal debt is unimportant and is just a number on a piece of paper, who cares how much of it we push forward? Future generations will still have the population and industrial capacity needed to generate goods. They will still have the jobs they need to buy those goods. Federal debt, different from every other kind of debt, is just numbers on a ledger in some musty room.

What makes debt dangerous for future generations is if we allow it to impinge upon the services we provide to people or the amount of money that is spent into the economy so that we can generate employment. Debt is dangerous if we treat it as a limitation and if we allow that limitation to hurt people.

When we allow debt to limit the federal government, we are allowing the government to hurt people just so we can try to capture a unicorn.

Mommie Dearest - Sometimes Power Trumps Greed

Then there are the guys like Ben Bernanke. Ben is currently the Chairman of the Federal Reserve Bank (aka the Fed) and I should say quickly that you do not need to know anything about the Fed in order to keep reading. I am assuming that most people have heard the word but have absolutely no idea what the Fed really does. Don’t worry, I’ve got your back. I cover the Fed in my next book and you don’t need the details to keep reading here.

Above I have talked to you about Debt-pocalypse prognosticators who are motivated by greed and I have mentioned the not small problem of those who don’t recognize the change in the economic world since the Nixon Shock. Now I’m going to talk to you about those who don’t change because it serves them not to as a matter of personal power. Ben Bernanke is chief among these.

I’m going to make it easy for you to remember Ben. He looks like this…

The President of the United States is often said to be the most powerful man in the world. Well, regardless of what you think about that, the Chairman of the Fed is at least the second most powerful man and he is never elected, has vast power with no oversight, makes decisions that impact every economy in the world bar none, oh, and this is my favorite part, contrary to popular understanding, the Fed is not fully a part of the government, it is a semi-private bank! Yeah. I’m going to snack on a couple of blueberries while you consider how it is that the central bank of the US economy is not fully controlled by the US government. Back in a sec… … … ….

Ready? I could explain by giving you a whole bunch of technical information but I’m not going to do that today. (If you really are interested you will have to wait for my next book, The Smart Bunny’s Guide to Congressional Purse Strings, the Treasury and the Federal Reserve. I know. The anticipation is going to kill you. It’s like waiting for the next Avengers movie only with math.) What I am going to do here is tell you something that is going to make you shake your head but will not surprise you one bit. The reason the Fed is not really a fully Federal bank is so that it can be controlled by Wall Street. Oh, that’s not what the theory was and it certainly wasn’t in any of the speeches but everyone in the know knew then just as they do now. The Chairman of the Fed is, effectively, the Chief Operating Officer of Wall Street. He (it has always been a “he”) usually comes from Wall Street and *gasp* he almost always returns to Wall Street at the end of his term. The same is true of all the members of the Board of Governors of the Fed. Imagine that, Wall Street controlling the bank that controls the US economy! The shock! The horror! The...yawn…. I know, it’s hard to get excited anymore because learning that the public is being screwed again just isn’t news.

So, back to the question of debt. You see, when the US government issues a Treasury bond, the monetary value flows from the private sector and into what we commonly think of as a federal savings account. This is not a loan and interest is paid to the private sector as is typical of any savings account. What is interesting is that the value does not flow from the Fed into an account at Treasury. Instead, it is used to strike value from the ledger. Just like taxes, selling a Treasury bond serves to lever the economy. This is done instead of using internal accounting functions to spend money into the economy and it is done in such a way that Wall Street makes money. In fact, Wall Street makes a mountain of money and while some business leaders may be carping about “Fix the Debt,” none of them are suggesting that it be fixed in any way which reduces the profitability of Wall Street.

As it is right now, the Fed is separated from the government when, in reality, it should be under the complete control of the Department of the Treasury. (A few Fed operations can be vetoed by the Secretary of the Treasury but that option is not exercised.) It also has to be said that Chairman Bernanke has had a steady hand on the wheel of the economy in terms of what is called the “overnight interest rate” and this has kept interest rates predictable and low for quite some time now. That’s a good thing but what the Fed has not done is back the Treasury to quell the nearly universal perception that there is anything at all dangerous or of concern about having debt. Why, you ask? Because the US Federal Government has to compete with Wall Street for influence in the Fed.

Of course, many more people than Ben Bernanke gain position and personal power from the way in which the US government presently handles debt. The debt hysteria that surrounds us brings the nation groveling to the feet of Wall Street like beggars. These financial overlords set aside the good of the nation in favor of their own ego and personal gain. I’m not going to try to be funny here because, frankly, there is no funny to be found. It is shameful, immoral and unpatriotic. Period.

The Last Days of Pompeii...NOT - Inflation Reality Check

We have all heard the freakishly overblown fears about debt causing inflation. It has been predicted as many times as the second coming of Christ and, when associated with an economy in recession, is just about as common. Even during the George W. Bush years of extreme debt, inflation was nowhere to be seen.

Want to know why? Remember that whole thing called supply and demand? Well, inflation happens when there is more demand than there is supply. Supply shortages happen when there are too few people to fill jobs needed to drive more output or when companies have reached their maximum industrial capacity. In short, inflation happens because we can’t make more stuff* so the prices for stuff go up. (*Note the use of the technical term.)

It doesn’t take a rocket scientist to see that in an economy where unemployment is high and industrial capacity has plenty of room, inflation will be low–no matter how high the government’s debt load.

One of the things economist have lost sight of, or never knew is that, since the end of the gold standard, debt and inflation are not related to one another. There is no significant linear correlation. The levers of the economy are unemployment, inflation and the currency exchange rate. Debt does not leverage inflation and inflation is not a volcano just waiting to erupt without warning or cause. Inflation is not going to sneak up on an economy that still has millions of people out of work and factories working well below capability. Inflation does not come on cat’s paws. It has gigantic, steel-toed boots and when it is on the march, we will know well before it gets going. My recommendation? Have a blueberry cocktail and relax. We have lots of problems but inflation is not one of them.

They Aren’t Us! - Europe Etc.

I swear to the Great Bunny that if I hear one more pundit, politician or even cretin economist (for whom there is absolutely no excuse) liken the economy of the United States of America to the economies of Greece, Spain, Italy, Ireland or, my personal favorite, Zimbabwe, there is going to be a bunny-shaped mushroom cloud over Indiana. I’m not kidding. Of all the forms of stupid which are related to conversations about debt, anything that includes any country inside the European Union or ZIMBABWE is just stupid-on-a-stick. Fortunately, because you are clever and you and I have already talked about this, you are going to understand when I say that the European Union is nothing like the United States because the individual countries have no control over their currency. They still have the equivalent of checkbook-based economies because their currency comes from the austerity worshipping European Central Bank* and they have to go crying to mommy to get more. So repeat after me, “We are not like Greece. We are not like Greece. We are not like Greece.” Got it? If you still need more practice take a moment for yourself. (*Who just figured out, in May of 2013, that austerity is not such a great idea. Derp!)

Then there is the total lunacy of pundits comparing the United States, with its vast, deep and diverse economy to the African nation of Zimbabwe. I mean, I’m sure Zimbabwe is nice and all but if you glance at the head of a pin and then imagine the size of the planet we are sitting on, that is the approximate size difference between the GDP of their economy and ours. On top of that, the debt held by Zimbabwe, before their inflation went into astronomical overdrive, was not debt in their own currency. Zimbabwe held debt in the currency of other countries. Whereas ALL of the US debt held is in US dollars. All of it. The United States can always, always, always make any necessary debt payments because we never, ever, ever run out of dollars—unless the Congress is ignorant enough to set a debt ceiling. Oh...wait…. *facepalm*

Deficit Spending

You already know about how deficit spending works because you know that all Lyle had to do was to plant more carrots in order to have additional carrots to spend into the economy. When speaking about the federal government, however, the term “deficit” is usually used in conjunction with talking about the big steaming pile of what we graciously call the federal budget. A so-called “deficit” is when the government spends more into the economy than it receives (or, if you have been paying attention destroys) in taxes.

This is where the real crazy begins.

You have to have been living under a rock somewhere or limiting yourself to exclusively watching television masterpieces like “Here Comes Honey Boo Boo” to not have heard some pinhead somewhere say something about “balancing the federal budget.” These people say things like this because they are thinking that the US Federal Government is a checkbook based, gold standard based system. Arrrrgggghhhhh!!!! Honestly, it is almost more stupid then one rabbit can be expected to bear.

First of all, who the flip cares if the budget is balanced because being balanced makes no difference since debt is unimportant in the current economy. But beyond that, the only factors that leverage the economy are employment level, the rate of inflation and the exchange rate. Why? Come on, you know the answer to this….

Because the job of the federal government is not to balance a budget, it is to balance the economy.

The budget is just a piece of paper. Well, it is 1360 pieces of paper but you get my point. Who cares if it balances?!?! What does matter is achieving full employment, keeping inflation down and maintaining a solid exchange rate. If all those things are present and in balance, all is well in the economy and numbers on paper or glowing on a computer screen are just that.

So, in the future whenever you hear some pundit sputtering about the subject of balancing the budget, change the channel to Honey Boo Boo. You are more likely to hear intelligent commentary there.

Austerity

In April of 2013 there was big news that shook those who worship in the Church of Austerity to their core. The empirical foundation upon which they had built their modern church crumbled to the ground. Really, it is a story best told with pictures or milk and cookies. I’m going to do both so keep reading.

First however, let me run this little jewel past you. The definition of austerity is the deliberate reduction of wages and prices through cuts to government spending. Yeah, how’s that workin’ out for you? Not well I take it. I’ll bet that even if some of the most influential economists in the world (oh, and the crew from the University of Chicago) can’t figure it out, you can.

When the government cuts back on spending, how much does your mortgage go down? Your medical expenses? Your college loans? Did gas get cheaper? No! Huh, imagine that. The things most people spend most of their money on do not get any less expensive when the government is spending less money into the economy. When the economy is strong, who cares because there is plenty of money to be had but when the economy is weak it matters BIG.

My thinking is this, when you see protesters out with mis-spelled signs promoting cuts to government spending, maybe they should have learned to spell before they made decisions about the economy which primarily hurt them.

Opps! - Reinhart & Rogoff Go Splat!

Now I’m going to tell you a little bedtime story. Yes, milk and cookies are entirely appropriate.

Once upon a time, also known as 2010, two Harvard economists named Carmen Reinhart and Kenneth Rogoff, published a paper called, Growth in a Time of Debt. This paper turned out to be very important because conservative politicians, who had long been calling for hurting the working poor and the middle class while still giving lots and lots of money to Wall Street, also known as “austerity,” latched onto the Reinhart-Rogoff (RR) paper like it was a life boat in heavy seas. What the RR paper purported to prove was that when debt got to a specific level, as a percentage of Gross Domestic Product (GDP), it was like coming to the edge of a cliff. They said that once debt got to 90% of GDP, the economy would drop immediately and dramatically. In other words, contrary to the well established and repeatedly proven Keynesian economic principles, the RR paper seemed to prove that debt had a specific tipping point.

This paper was quoted by almost all of the Very Important People and even provided cover to Congressman Paul Ryan when he released his much touted Ryan Budget titled “Path to Prosperity” or, more correctly, “Path to Prosperity for the Stinking Rich”. Often, I find, publishers seem to leave off that last part. I wonder why? Anyway, conservative politicians and pundits quoted the RR paper chapter and verse, like they were citing the Bible. This one paper, that no other economist was able to replicate, became the foundation for the Conservative debt religion.

And then a funny thing happened.

One day, in 2013, a young graduate student named Thomas Herndon (who was eventually supported in writing his paper by economists Michael Ash and Robert Polin) was finally able to get Reinhart and Rogoff to give him the data they had used as the basis for their paper. Immediately Herndon, Ash and Polin recognized four huge, massive, gaping, undeniable holes in the RR paper.

The first was the funniest. You see, when Reinhart and Rogoff had filled in one of the formulas on the Excel spreadsheet, which they were using to calculate their results, they made a mistake and left off a bunch of cell rows that should have been included. It’s such a whopper of a mistake it is hard to understand how they missed it but miss it they did.

Not only that but for his second act, the hero of our story, young Thomas, found that essential data had been purposefully removed from the RR data set for no reason that can be justified by any sane or reasonable person.

For his third act, Thomas and his professors showed that due to something called a weighting error, the RR paper pretended that nineteen years of data from the economy of the United Kingdom (UK) was just as important as one year of data from New Zealand. Now sure, I’m just as big a fan of Peter Jackson as the next rabbit but the UK is one of the biggest economies in the world and New Zealand is full of sheep. As they say on Sesame Street, “One of these things is not like the other.”

The fourth and final act was the discovery of a simple but definitely impactful transcription error. Apparently, Reinhart and Rogoff did not even bother to foorp (*wink*) one other’s work.

After making all the corrections to the Excel formulas, re-including the excluded data, weighting all of the data properly and making sure that all the numbers were turned the right way around, it turns out that the RR conclusions were entirely incorrect and that, in fact, there is no debt cliff.

Now our hero is famous, you know...for an economist...while Reinhart and Rogoff are trying to stutter through an explanation as to how they could have been so wrong about something that turned out to be so important. In the meantime, all the conservatives who were clinging to the RR life boat are left floundering but are still claiming that austerity is the answer because they say so, dammit!

And the moral of this story is peer review, people! Peer. Review. Oh, and austerity is not the damn answer.

Chicken or Egg? - The Causation Argument

When economists and scientists want to be really confusing, they talk about something called, “causation.” Ignore them. Causation is nerd for, “HE did it!” Here is the Reader’s Digest version of causation as it applies to austerity. Conservatives say that debt causes the economy to slow down and austerity will cure debt. What you need to know about that is that there is no evidence in history, anywhere, ever, that austerity has ever cured macroeconomic (big systems, like countries) debt during a slow economy.

What history, including recent history in Europe, clearly shows is that austerity does not cure debt, it causes it. There are a hundred examples of this going back decades but I’ll stick to countries with recent failed austerity policies: Australia, Bulgaria, Canada, Cuba, the Czech Republic, Denmark, Estonia, France, Greece, Ireland, Israel, Italy, Latvia, Lithuania, the Netherlands. Portugal, Romania, Spain and the United Kingdom. Only a truly dumb bunny would keep pushing a policy that has failed so often and so dramatically.

So, on one paw we have austerity as a cure for debt, which has never been proven, and on the other paw we have debt as a result of austerity, which has been repeatedly demonstrated all through history.

The causation issue is not a question. We have the answer. Austerity is not a cure for debt.

Wussing, Wussie, Wusses - Business Confidence

If you read or listen to any news anywhere, you have been steeped in the phrase “business confidence” or “investor confidence.” People talk about it like it’s a real thing. Let’s put it this way, the Easter Bunny has a better shot at getting her own reality show than an economy has of relying upon the mythical creature, Business Confidence. (I’ll call it “Busi” in the same way the Loch Ness Monster is referred to as “Nessy.”)

What Very Important People mean when they talk about Busi is their sixth sense that when an economy is slow, austerity inspires business confidence and that business confidence matters. Ignoring the fact that Wall Street is populated by the largest collection of wusses found anywhere in nature...and this from a RABBIT...it is clearly crazy talk. In fact, recent events in the US economy have disproven the myth of Busi more than ever before because when the government spent money into the economy, both through the bank bailout (TARP) and through the Obama stimulus, some of that money served to stop the free-falling US economy by being re-spent and circulating through the economy in general but a huge proportion of that money ended up being sopped up into savings accounts. Individuals and companies alike refused to spend. Even as the economy was climbing back and color was returning to its cheeks, money stayed frozen.

Busi also purports that the general public takes government policy into consideration in day-to-day spending as in, “I will be paying less in taxes in two years so I will spend more now.” Uh huh, and coming to a television near you this Fall, “My Year Painting Eggs” featuring the Easter Bunny and all her furry friends.

What Very Important People will never admit is that business does not LEAD economic strength, it follows it. No business hires more people BEFORE demand for its product rises. No bank lends money in an environment of high risk because they think things will get better soon. No individual spends more money out of their pocket when there is no more money in their pocket. Business, banks, investors and individuals are sheep. (Apologies to all my sheep friends.) All of these elements of the economy follow the trend. Only the government is in a position to lead a trend. This, by the way, is what is meant by “leadership.” If you are in the US House of Representatives you might want to look it up.

Get Mad and Get Involved

Here’s one of those little factoids that seems just too unbelievable to be true but is all the same. Since the 1970’s graduate students studying for their PhD’s in economics rarely have to take any classes on how money works. In many universities, such classes are not even available and it is a subject that is actively discouraged as a topic of discussion. I don’t know the answer to this but one has to wonder how the subject of money got to be so dirty for economists? Is that why some of them proceed to go out into the world and loudly profess such counter-factual notions regarding money? (You know who you are.) Has understanding how money works become economist porn? Something only to be read with a flashlight under the covers and never to be discussed in polite company? Still, the widespread and endemic lack of knowledge about money by economists has cost the economies of the world dearly.

To borrow a thought from Dale Pierce, when biologists get something wrong there is a crisis in a petri dish. When economists get something wrong economies crash and, in the worst cases, empires fall. The economists of the Weimar Republic lit the match for World War II. We, the little people, ought to be involved in the conversation about economic policy because there is little that will affect our lives more.

As I said at the beginning, if the environment matters to you–get involved in economic policy. If education matters to you–get involved in economic policy. If unemployment matters to you–get involved in economic policy. If health care matters to you–get involved in economic policy. If social security matters to you–get involved in economic policy. If clean energy matters to you–get involved in economic policy. If national infrastructure matters to you–get involved in economic policy.

I get that lots of different advocates are motivated by different things but one thing will be the big thing that effects us all and that is economic policy. Read more. Get better informed. Get hoppin’ mad and get involved.

Read More About It...

For more information on these essential topics check out the following websites:

http://NewEconomicPerspectives.org (start with the tab “MMT Primer”)

http://www.CorrenteWire.com

http://bilbo.economicoutlook.net/blog

If you are into books, the not-to-be-missed titles are:

•The 7 Deadly Innocent Frauds of Economic Policy by Warren Mosler (Start with this book. It is available via free pdf download or through Kindle)

•Modern Money Theory: a Primer on Macroeconomics for Sovereign Monetary Systems by L. Randall Wray (currently only available in hardcopy format)

•Soft Currency Economics II by Warren Mosler (available through Kindle and hardcopy)

•Austerity: the History of a Dangerous Idea by Mark Blythe (available through Kindle and hardcopy)

•End this Depression Now! by Paul Krugman (available through iBooks, Kindle and hardcopy)

•Fixing the Debt Without Breaking America: Austerity, the Trillion Dollar Coin and Ending Debt Ceiling, Sequester and Budgetary Crisis by Joe Firestone (available through Kindle)

•(For those who are ready to dive into the weeds) The General Theory of Employment, Interest and Money by John Maynard Keynes (available everywhere wonks can be found)

About Us

About the Author

Arliss Bunny was a thirteen year old lop rabbit with a degree in Disapproval from the University of New All Bunny (SBUNY). Though Arliss hopped over the Rainbow Bridge in February of 2013, she continues to communicate from the great beyond and has every intention of returning to us just like Dr. Who. Arliss became focused on economics when she realized that humans were never going to figure it out by themselves. She blogs, very occasionally, at DailyKos.com (look for bunnygirl60) and at ArlissBunny.WordPress.com. The latter has far fewer interesting comments but contains all of her blog posts going back to the beginning. Arliss had a devoted, subservient staff who provided care and secretarial services. Any mistakes in the content of this book are surely the fault of Arliss’ secretary. Comments can be sent to ArlissBunny@gmail.com. Arliss also has her own Facebook page–obviously. Arliss may or may not elect to respond. If she does not, you can assume she disapproves of you. If this is the case, don’t let it get you down, you are in good company.

About the Illustrator

Melissa Irwin’s greatest love, after her husband and her house full of pets, is illustration. She was selected for this project in no small part because she long worshipped Arliss and Arliss almost* approved of her. Melissa started drawing at a young age and some people think she’s not all there. They are probably wrong.

(•Arliss would have fully approved of Melissa were it not for one unfortunate “dust mop” remark.)