Deficits don't matter -- till China says they do

Section:

By Chris Powell
Journal Inquirer, Manchester, Connecticut
Saturday-Sunday, July 30-31, 2011

http://www.journalinquirer.com/articles/2011/07/30/chris_powell/doc4e331...

Convulsed over whether and how to raise the federal government's debt ceiling, Congress, the president, and the public are prisoners of a misapprehension -- that the federal government could run out of money.

But it is the government itself that issues money, and for the many decades since the United States abandoned commodity money -- gold and silver -- there has been no limit on how much money the government can issue. Indeed, the federal government needs neither to tax nor to borrow to obtain money; the government can simply issue it, as it did during the Civil War. A currency not formally convertible to a commodity like gold or silver is constrained only by currency devaluation through over-issuance.

When he was president of the Federal Reserve Bank of New York in 1945, the economist Beardsley Ruml noted that the federal government no longer needed taxes for revenue and that taxes now were important mainly as instruments of social policy. That is, taxes determine not how much money the federal government has but rather who else has money and how much.

... Dispatch continues below ...



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Prophecy Platinum Reports 10.97 Million Ounces Inferred
and 1.04 Million Ounces Indicated PGM+Gold in Yukon

An independent resource report on the Wellgreen project in the Yukon Territory in Canada has just confirmed that it as one of the largest platinum group metals projects in Canada and one of the few outside South Africa, Prophecy Platinum Corp. Chairman John Lee says.

The report, compliant with Canadian National Instrument 43-101, was written by geologist Todd McCracken of Wardrop Engineering Inc., a Tetra Tech company. It incorporated drill data from 701 diamond drill holes (182 surface and 519 underground) totaling more than 53,222 metres. Using a 0.4 percent nickel equivalent cutoff grade, the Wellgreen deposit now contains a total inferred resource of 289.2 million tonnes at an average grade of 0.53 g/t platinum, 0.42 g/t palladium, 0.23 g/t gold (1.18 g/t PGM and gold), 0.38 percent nickel, and 0.35 percent copper. Separately, the deposit also contains an indicated resource of 14.3 million tonnes at an average grade of 0.99 g/t platinum, 0.74 g/t palladium, 0.52 g/t gold (2.25 g/t PGM and gold), 0.69 percent nickel, and 0.69 percent copper.

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The real questions of taxation, Ruml wrote, had become these:

"Do we want a dollar with reasonably stable purchasing power over the years? Do we want greater equality of wealth and income than would result from economic forces working alone? Do we want to subsidize certain industries and economic groups? Do we want the beneficiaries of certain federal activities to be aware of what they cost?"

The federal government long has chosen to obtain money through taxation and borrowing rather than direct issuance. But the borrowing lately has been a bit of a fiction, insofar as the Treasury Department issues and sells bonds in the open market only for the Federal Reserve to buy many of them from intermediaries and turn them into cash, monetizing the debt. While this process now is bumping up against the statutory debt limit, there are ways around it.

U.S. Rep. Ron Paul, R-Texas, notes that the Fed holds more than a trillion dollars in U.S. government bonds for its own account and could just run them through the shredder, suddenly creating a lot of room under the debt ceiling.

Others, like Yale Law School Professor Jack M. Balkin, note the obscure law authorizing the Treasury to mint platinum coins in any denomination and theorize that the Treasury could mint a few, stamp them with the denomination of $1 trillion, deposit them at the Fed, and draw virtually infinite checks against them without affecting the debt ceiling at all. With such a device and others the entire national debt could be closed and the debt ceiling made irrelevant.

Of course that would flood the world with dollars as they were exchanged for U.S. government bonds, and thus risk hyperinflation, the dollar's collapse. That would depend on the reaction of the bondholders, who would become cash holders. And yet the bondholders and world markets generally pretty much treat their U.S. government bonds as cash already and lock them up in central bank and treasury vaults. If the cash exchanged for bonds continued to sit in vaults, not much would change. Things would change only if the cash began to be spent.

At some point over-issuance of bonds and cash likely would cause serious devaluation and induce foreign holders to sell and spend. After all, big holders of U.S. debt like China, having worked for decades to manufacture real goods for sale in the United States, won't really be paid until they exchange their bonds and dollars for real goods. So to a great extent the outcome of U.S. budget policy is now in the hands of foreigners. They are not concerned about easing unemployment and recession here through stimulative money creation; they want to maintain the value of the bonds they have purchased and the dollars they hold, even as the United States would like to devalue its debt and the dollar.

The other important question in the debt ceiling controversy is simply the size and scope of the government. Government and its transfer payments are now about half the economy and crowding out the private sector even as the country becomes impoverished. The economy is steadily less a matter of production and more a matter of political patronage. The rage of the tea party people may be blind and at times hypocritical, but there really is something for the private sector to be enraged about.

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Chris Powell is managing editor of the Journal Inquirer.

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Golden Phoenix Q2 2011 Conference Call Posted at Company Internet Site

The second quarter 2011 conference call of Golden Phoenix Minerals Inc. (GPXM) has been posted at the company Internet site for immediate playback. The call includes updates on the start of gold production at the company's Mineral Ridge gold project in Nevada, the letter of intent to acquire the Santa Rosa gold mine in Panama, and the company's due-diligence efforts to secure a senior stock exchange listing.

The conference call is 18 minutes long and you download an mp3 of it here:

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Golden Phoenix is a U.S. mining company with international exposure to gold, silver, and strategic metals. The company's business model combines project generation and royalty mining that offers the potential for exploration upside, coupled with the backing of production and future royalty streams. View company videos here:

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