Why not Abolish Taxation and Simply Fire up the Printing Press?

If I have $1,000 in "savings," if a loaf of bread sells for $1, and if I have no other expenses, I can buy one loaf of bread daily for 1,000 days. But if the price of bread increases to $1,000 per loaf, my $1,000 will buy only one loaf of bread.

Donald Trump tells us -- daily, it seems -- that China is "manipulating" its currency to our detriment. But are our president and our Federal Reserve playing an equally clever (cynical?) game?

Traditionally, the Fed has managed our nation's money supply by raising or lowering its interest rate target for the inter-bank interest rate. The Fed generally achieves its target by selling government bonds to banks and other financial institutions, or by buying them back. When the Fed receives payment for these bonds, it decreases the amount of money in the economy, and when it pays for what it buys, it increases the amount of money in circulation -- while simultaneously affecting the price and yield of these government bonds.

But when the nominal interest rate is at zero or near zero, the Fed cannot lower the interest rate further. The Fed is left with its alternative of "last resort:" Quantitative Easing (QE). In that case, the Fed alters the supply of money in the economy without reference to increasing or decreasing interest rates, by buying bonds (or other assets) from the banks and other financial institutions. As it pays for its purchase, the Fed increases the money supply -- for the purposes of stimulating growth in the nation's economy.

Quantitative Easing No 1, or QE1, began on Nov. 25, 2008 when the Fed stated it would buy $600 billion in agency mortgage back securities (MSB) and debt. On March 18, 2009, the Fed advised it would expand the program and buy an additional $750 billion to purchase agency MSBs, and $300 billion to buy Treasury securities. (agencies in question are "Government-sponsored Enterprises," such as Fannie Mae and Freddie Mac).

QE2 was announced on Nov. 10, 2010 when the Fed stated it would buy $600 billion in longer-term treasury securities, at the rate of $75 billion per month.

QE3 was announced on Sept. 13, 2010 when the Fed stated it would make an "open-ended commitment" to purchase $40 billion in agency MSBs per month, until the labor market improved.

QE4 was announced on Dec. 12, 2012. This time, the Fed say it would authorize the purchase of up to $40 billion of agency MSBs per month, and would purchase $45 billion in longer-term Treasury securities per month. Through December 2012, the Fed pumped $2.9 trillion into the U.S. economy. So where did the Fed get that $2.9 trillion? From its printing press. It prints it!

So, is QE all bad? I don't think so. And if I don't, you can bet the president and the members of the Fed don't think so either.

The money that goes into the U. S. economy is spent to buy oil from Saudi Arabia, and manufactured goods from China, etc. In return, they get our money. We get oil. The Saudis get "paper." We get computers and TVs. The Chinese get "paper." Our cars run better on oil than on paper, and I would prefer to write my op-eds on a computer rather than on paper. Therefore, at first glance, what the president and Fed are doing appears to be utterly brilliant.

But there clearly is a downside at present, and in the near future there may be a disastrous downside. When we pay the Saudis and Chinese in paper, they can bring the paper into this country and buy goods, buildings and lands. And then American sellers end up holding the paper!

At present, that is not awful, but as more and more money is put in circulation by the Fed, the value of the money Americans hold in savings declines -- loses its purchasing power. For example, a short while back you could purchase an 18 oz. package of Oreo Cookies for $2.50, or less. Today, a 13 oz package of Oreos commonly runs $3.50. The beauty of that is, that the U.S. dollars that the Saudis and Chinese hold also lose their purchasing power. But it takes more dollars from savings to buy a gallon of Saudi gas.

The Fed is creating a house of cards. And unless the QEs stop, the value of all money in savings will be devalued or virtually wiped out. Of course if that happens, the president will have his "more equal" America -- his "equality of outcome." Everybody will be equally miserable -- just as they were in the old Soviet Union. There are three simple proofs that this can't work much longer.

-- The first is the USSR.
-- The second is today's European financial crisis.
-- The third is this: if the QE can go on forever, why tax Americans at all?

Why just not run the printing presses and print all the money we need to fund the military, Medicare, Social Security, Obamacare and to buy Saudi oil and Chinese manufacturers?

Posted Online:  April 10, 2013, 2:43 pm  - Quad-Cities Online
by John Donald O'Shea

Copyright 2013
John Donald O'Shea

Reducing the Deficit: Government Jobs vs. Private Sector Jobs

President Obama and Gov. Mitt Romney have two very different visions of how the U. S. government should "raise the revenues" it needs to pay the nation's debts, and to provide for the common defense and the general welfare.

Assume for a minute

-- a. That the U.S. government needed revenues in the sum of $2,000 to do all of the above,

-- b. That there were only two American citizens,

-- c. That the "First Citizen" has a salary of $5,000 and pays $1,000 in federal income tax, and

-- d. That the "Second Citizen" is unemployed, has no income and pays no federal income tax.

I use this simple "two citizen" example for ease of understanding because nearly half of the American people (47 percent ) presently pay no federal income tax while the other half (53 percent) do.

So, assuming the government needs $2,000 in revenues to meet its needs. What are the government's options? There are only four:

-- Run the printing presses, and print more money;

-- Reduce government expenses to $1,000;

-- Raise taxes on First Citizen from $1,000 to $2,000;

-- Create a job for Second Citizen that pays him $5,000, and have him pay the same $1,000 in taxes that is already being paid by First Citizen.

Neither the Mr. Obama nor Mr. Romney advocates "running the printing presses." That may be implied in their policies, but neither would dare overtly advocate it. To do so they would also have to espouse "inflation" which always follows "running the presses."

As to "reducing government expenses," the record of the "$1 trillion-plus (!) deficits for the last four years demonstrates that President Obama is less likely to "cut government spending" than the Cubs are to win the pennant.

Mr. Romney may cut some spending, but he is candid enough not to tell the voters that he can eliminate the deficit simply by cutting expenses.

As to the third alternative, "raising taxes on the rich (about 3 percent)," President Obama tells America that this is his plan to eliminate the deficit. Gov. Romney says he will lower federal income tax rates for middle class and wealthy Americans, but eliminate deductions for richer Americans. But the governor states that his tax reforms will be "revenue neutral."

Gov. Romney's honestly admits his tax revision plan will not eliminate the deficit. The president's claim that that he can eliminate deficit by taxing the rich and extra 3 percent is utter nonsense. You can run the numbers yourself.

If the deficit is to be eliminated, it will have to be eliminated by creating good paying jobs, and by getting those who are presently not paying income taxes onto the federal tax rolls.

President Obama's solution seems to be to create more "government" jobs by hiring more teachers, more policeman and more government workers. If you hire a teacher and pay that teacher $50,000 a year, and if he then pays $10,000 a year in federal income tax, you have spent $50,000 in federal revenues (tax dollars) for a return of $10,000! You are merely redistributing tax dollars taken from First Citizens and giving them to the Second Citizens.

This is what Mr. Romney describes as Mr. Obama's plan "Government trickle-down economics." (This does not mean that teachers and policemen are not "necessary;" but it does mean that tax dollars are spent to hire them.)

Gov. Romney's solution is to let the private sector to create the new "good paying" jobs. One example of how he would do it, is seen in his energy policy. He would drill for more gas and oil, and dig for more coal. Under Mr. Romney's plan, the wages of the people who drill for gas and oil, and dig for coal wouldn't be paid by the American taxpayer. They would be paid by private industry. If the oil worker was paid a salary of $50,000, it would come from his employer, without cost to the government. But that individual would still pay $10,000 in federal income tax.

Under Mr. Obama's "government" employment plan, the government loses $40,000. ($50,000 to pay salary generating $10,000 in taxes). Under Mr. Romney's Plan the government has a net gain of $10,000 (no government salary generating $10,000 in taxes.)

If 50 percent of the American people pay $1 trillion in taxes, the goal should be to get 100 percent of the American people paying $2 trillion -- without cost to the government!

Posted Online: :   Oct. 09, 2012, 2:46 pm  - Quad-Cities Online

by John Donald O'Shea

Copyright 2012
John Donald O'Shea