If the newly elected budget “hawks” really wanted to impress us, they could refuse to raise the debt ceiling. Then they and their colleagues would have no choice but to start slashing. FULL ARTICLE by Robert P. Murphy
Source link: http://archive.mises.org/15453/should-congress-raise-the-debt-ceiling/
Should Congress Raise the Debt Ceiling?
Previous post: FTC Resorts to Carjacking
Next post: Disney’s EPCOT and the Dream of Freedom
{ 47 comments }
They shouldn’t increase it, but sadly they will. We’re headed towards a fiscal day of reckoning that cannot be ignored, if it doesn’t happen by not raising the debt ceiling it will happen at a later date.
The interesting thing to watch is what price the GOP will extract for allowing the debt ceiling to be raised. I can’t believe they haven’t made repeal of the welfare healthcare bill the price for raising it. They can tell Obama that he can either repeal the welfare healthcare bill to get the debt ceiling raised or he will not be able to borrow the money to implement the healthcare bill. So he can either repeal it or else they will de facto repeal it by not allowing him to borrow the funds needed to implement it.
Bob,
I am amazed that respected economists do not understand this. Recently I posted on a Keynesian/monetarist blog that we should not confuse the difference between the national debt and the deficit. One economist I do respect actually posted that there was no difference in the two. I quoted academic definitions of both and pointed out that the national debt was defined as what the bonds and similar instruments that the Treasury has sold, but that the deficit is revenue minus all government expense such as salaries, grants, and other things plus the national debt. We could easily service the national debt if we just stopped paying all the other commitments.
Now I know that we could not totally stop paying salaries but the amount of waste and duplicate effort in the bureaucracy could cover any shortfall if there were the commitment to address it.
Thanks for this. No one seems to be making this case allowing the mercantilist rent seekers to spin their webs.
It’s not “we”, it’s “them”. It’s not “waste”, it’s their jobs and incomes.
2 people doing the same thing is waste, even if it is someone’s job and income.
Who cares. It’s “their” money. It should not surprise anyone they defend it.
The establishment GOP position seems to be this: we can raise the debt limit to avoid controversy, but refuse to spend up to that limit, pleasing the 3rd party “Tea Party” faction.
Memo to GOP establishment–You are the 3rd Party now. The Tea Party, from what I have witnessed personally, is comprised of some Democrats, non-allied citizens, and mostly conservative Republicans. Their commonality lies in their collective disillusion of endless spending, and the results thereof: a growing class of squatters, bloated unions, and nothing concrete to show for the mounting taxation.
Even if the U.S. does reach the brink of default in the nest two decades, it’s important to draw a line today, and attempt to ratchet down the spiral of unfathomable debt. It’s a start.
If we don’t bite the bullet now, it will bite us eventually, when it is bigger and has larger and sharper teeth.
Do not underestimate the effects of default.Almost all private banks (and so on) would go bankrupt (either at once – or by the bankruptcy of others) and almost all private (not just government) pension schemes would collapse – as a lot of their money is in government debt (local, State and Federal). Also other nations would retalitate by defaulting on their debts – in relation to American individuals and companies.Basically the entire structure of the economy would collapse and people would have to start again – so we had better hope the Glenn Beck is correct about the moral character and respect for private property among most ordinary Americans (I know that the Institute does not much like Beck, as he would have been in blue not gray in 1861, but he does seem to be trying to prepare the public for the inevitable pain past and present folly will lead to).HOWEVER – if the United States is going to default in the future it would indeed be less terrible to default now, rather than when the debt is even bigger.Also, as you say, “if default is so bad then do not default”, just SPEND LESS ON OTHER THINGS.This would (of course) both mean an end to the wars abroad (at least to unwinnable and endless wars – such as Afghanistan) and to the Welfare State in the United States itself. A more radical option (to the mind of a politician) than default.
The only thing worse than default followed by a financial systemic collapse, would be hyper-inflation followed by a systemic collapse. Severe mal investments were made, a painful end game in unavoidable. At least with default, it wouldn’t favor the current overlords, and much of the capital structure would would still be intact to be taken over by stronger hands.
The Constitution for the United States of America
The Fourteenth Amendment provides in relevant part: “The validity of the public debt of the United States, authorized by law . . . shall not be questioned” (emphasis added).
If the people take the Constitution seriously, we must also take this provision of the Fourteenth Amendment seriously, and insist that the Congress honor its existing obligations.
What can we do to avoid the seemingly inevitable collapse of the dollar and the American financial system if default is taken off the table as an option? SELL. We could sell government-owned corporations like the Commodity Credit Corporation and the Export-Import Bank. We could privatize and sell existing government agencies like the Food & Drug Administration, thereby eliminating their recourse to the coercive powers of the state, and making it clear that these organizations exist to serve their constituencies (e.g., the pharmaceutical companies).
I would argue that it would be perfectly proper for the Department of Treasury to sell such assets if Congress were to refuse to raise the debt ceiling. The Department should make good on the obligations of the United States, even if Congress refuses to make additional appropriations.
The thing is, the Executive Branch does not have to sell those assets to function. The only way the debt obligations would default is if the tax revenues are less than the interest to service the debt. As it stands, the debt is only 1/6 of actual tax revenues. The Federal Government can easily cover obligations right now even if the debt ceiling is not raised. In fact, not raising the debt ceiling is the way to maintain solvency as adding additional debt pushes the interest payments ever closer to that point where debt servicing takes up too much of the tax revenues. Maturing debt can be rolled over into new Treasury products. All the ceiling impacts is the ability to take on new debt. The Treasury is not borrowing money to pay off interest payments (they aren’t THAT stupid…yet), it’s borrowing to fund social programs and wars.
The only thing that shutting down new borrowing would do is force the government to prioritize spending, with debt servicing at the top, and apply the next tax dollar toward the next highest priority item and continue down the funding line until all the money is gone. Everything below the line doesn’t get funded.
Your credit rating doesn’t take a hit because you don’t take on new debt. That’s what Geither is attempting to convince us will happen. Refusing to borrow more money isn’t a bad thing. It’s a good thing.
Although I agree with your general point that the Congress needs to stop issuing debt, I disagree with the notion that debt servicing is all that matters.
The United States has statutory obligations to the Social Security Administration and other administrators of entitlement programs, which include state governments. Until those statutory obligations are changed, any unilateral cuts of those payments by the executive branch would represent a default. It may not be a bond default, but it is a default nonetheless.
Not really. The Supreme Court has already held that no one has a right to Social Security, alive or otherwise. They wouldn’t be defaulting on it because it’s not an actual promise.
Whoa there, FICA federal insurance contribution act. Federal, National, United States and America have different meanings. I stick with America when I’m talking about landmass. The United States Inc. is a corporation. National generally refers to parks, monuments and ocean shores. Now, Federal -as in D.C. having its own flag. Not a part of the other three words. Insurance -were we 21 when this scheme started? Not. No capacity to contract. Then, contribution – what can I say? The root of the truth would be – we are Creditors in Commerce. We can’t pay a debt with a debt (FRN’s), however, there is a safe and sane way thru this – Set-Off. Don’t take a debtor’s position. Come from a place of ‘abundance’. Passing pretend value between us is kinda nuts anyway. You got your health? That’s the important ‘worth’.
Yes, the pretend debt ceiling will have to be raised – the 2% of critical thinkers need more time for the transition. Many communities are and have been devising their own ‘item’ to exchange between themselves, no interest added. The people who have jobs in the community gets paid with their tokens that are recognized in their local shops and businesses. With no interest, their tokens retain their worth. This is co-existing with the FRN’s – gotta hang in there as long as the FRN’s are still accepted as ‘good’ in most countries. When China starts the shift, well, let’s intention a ‘soft-landing’.
Here is a very weird story that I think is somewhat related to Prof. Murphy’s article. The bad spelling, grammar and logic are in the original:
If they’re fake, and they only “could have” been used to defraud someone, then how can someone be charged with “receiving stolen goods”. It is interesting that the only other news source which so far has the story is the Croatian Times, which notes that the arrest happened in Fermo near the Adriatic coast. This makes me think of former Yugoslavia, specifically Kosovo, the so-called Gangster State (but don’t get me wrong, they’re all gangsters). Note that the names and nationality of the suspects are not revealed.
Perhaps the story is true and the bonds are fake. It must mean that so many countries and banks are dumping US bonds, it is now feasible to counterfeit them and slip the fakes into the flood of paper winging its way back to America. This indicates USD devaluation, possibly drastic, and maybe hyperinflation.
Since $500m is far too much for the bonds to be redeemed without detection, either they were intended to be used to dupe some kind of middlemen who have taken on the job of helping foreigners dump their US paper, or else they were to be handed to corrupt US officials who would redeem them and cover up their tracks. This reminds me of a story from the time of Edward III of England, under whom palace insiders operated a scam in which they bought up the English king’s debt at a fraction of its nominal value from despairing creditors, then used their control of the treasury to redeem the debt to themselves at full value.
But if a torrent of US bonds are being redeemed, in what currency or specie are they being redeemed, and where is this money going? Gold seems to have a lid on it for the last month or so. Is there any large movement lately of cash into things like foreign stock markets, non-precious metal commodities markets (oil, wheat), etc.?
Or it could be that the US Treasury has been counterfeiting its own bonds, printing them with duplicate serial #s and passing them off to unsuspecting foreigners. Italy did this around the end of WWII in order to borrow money secretly without triggering a currency crash too quickly.
See also the infamous Japanese bond smugglers. Pondering these two events, I don’t see how it’s possible to conclude that there is not some kind of financial disaster looming for the USA. Are the USD and USD-denominated debt some kind of poison in the market? But it would seem to be a poison which the poisoners cannot stop producing and marketing, for fear of bringing the roof down on their heads prematurely.
I say let them go ahead and raise it. The reason I say this is that the question posed reminds me of a quote from the television series “I, Claudius” where Claudius is sitting there drunk and writing his memoirs and saying to himself, “Let all the poisons that lurk in the mud…HATCH OUT!”
He knew the terrible truths he was writing would boil the filth out of the system.
I always wonder why they call it “raising the ceiling” when what they’re talking about is going deeper into debt.
“Raising the ceiling” somehow doesn’t sound as bad as “digging a deeper hole” — which is probably the point. A higher ceiling leaves us feeling less cramped. A deeper hole leaves us wondering if we’re ever going to be able to climb out of it.
Something tells me SS will get the shaft again – if the debt ceiling stays, defaulting on that debt specifically will free up trillions that could be used to blow up Arabs and grope fliers; heck, they could even sell it as government being honest.
For all the US Default doomsday prediction artists, let’s make something clear…We’re the US to default there would be no change in real wealth in the US. There would be large changes to individuals’ claims to future real wealth, but I find it unlikely there’d be mass starvation or anthing like that. As it stands, we currently possess the real wealth to feed, house, and clothe more or less everybody. A default would not implode any factories, or set fire to any farmland, or topple any houses. A lot of this real wealth may change hands, but if free-exchange is still permitted in the post-default dystopia, I’d bet everyone will get what they need to survive. Furthermore, owners of productive real wealth or owners of assets without liabilities (gold, houses without mortgages, cars without loans, etc.) should find their real wealth largely unchanged.
You are confusing ‘wealth’ and ‘value’. Both words are from the Inquisition years. I suppose I place less emphasis on the 13th century words. Gold always has the same worth – an ounce will always buy an exquisite suit of clothes, complete with the best made shoes, belt, and hat. The $1300 ‘value’ of today’s gold amount, is only in relation to other current currencies. The true wealth of gold is in its levitation ability when it is transformed by an alchemist into white powder. Small gold balls were fed to the Pharohs for longevity. I’ve read that if we were to roll in gold, we would be healed of all physical defects. Also, that gold and mushrooms are the two things that can re-enter from outer space. We can live much longer with a lack of vitamins than we can with a lack of minerals -about 80.
Congress is not behaving differently than any individual facing the prospect of bankruptcy. The numbers are so far out of whack that there is virtually nothing that can be done to rectify the situation. The cash-basis deficit is $1.5 trillion. The GAAP-basis deficit is so high that nobody will publish it. The GOP seems to be adopting a “lets pretend and extend strategy”.
To put thing in perspective, if the US Government was an individual we would have something like the following scenario.
Income: $50,000
Last year’s Expenses: $80,000
This years expected expenses: $83,000
Debt: $325,000 – maxed out
Retirement savings: $0
Years to retirement: 5
Income Growth Potential: None – business opportunities are being outsourced overseas.
So, an individual in this situation would keep making credit card payments and try to get the credit limits increased, then max out the cards again. The only difference between the individual and the US Government is that the credit card companies will recognize the fact that the individual is going bankrupt and not extend any more credit.
If you think that the Federal Government is in trouble, many States are on life support from the Federal Government. What is more, the biggest problems are in blue States. Here the GOP has no political incentive to save California . As soon as stimulus package hand outs to California are stopped, the State will become insolvent. Unlike, the Federal Government, the State of California can not print money, or issue more debt. The State IOU’s are only worth anything while banks will cash them.
One correction to your scenario may be in order… of “this year’s expected expenses” only 1/6th are debt payments. The person in your example would owe less then $700 per month in debt payments, which is not the end of the world for someone making $50000 ($4100+ per month). The situation could easily be salvaged IF the person were willing to cut their expenses to a minimum. In personal terms that would mean avoiding fancy restaraunts, buying a cheaper car, cutting down on hookers, etc.
In governmental terms that would mean spending fewer resources on the destruction of wealth and property and paying down the debt instead. If enough voters (and politicians) were libertarian the solution would be simple.
Point to consider: What is the marginal productivity of an additional dollar of US Govt. debt?
Second, from corporate finance, what is the state of the Government’s short term liabilities and assets? As Bob mentioned, the US can currently meet it’s current obligations with current assets. However, what would happen to the current ratio if interest rates were to revert to more historical levels? How long would it take, and at what new interest cost, for the US Govt to be unable to meet it’s current obligations? Porter Stansberry has some interesting commentary on this.
I recommend that the US Gov’t. issue as much debt as possible at the longest maturities possible up to the debt ceiling. It should also rollover existing debt at the longest maturities possible. This includes buying back short-term debt and reissuing the longest durations possible while rates are so low. The effect is to lock in low interest costs for as long as possible. The effect is the same as refinancing your mortage from a variable rate loan to a 30 year fixed rate loan.
Once this is completed, then Congress must not raise the debt ceiling. The Treasury has only a few months to do the reissuance before hitting the debt ceiling. Now Congress must make the hard decision to reduce spending.
These actions would give improve the cashflow and avoid a default.
“Point to consider: What is the marginal productivity of an additional dollar of US Govt. debt?”
Across which timeframe is this analysis to occur? What is the maturity of the debt instrument? Also, how do you define productivity? An increase in GDP? An increase in revenues to the U.S. Treasury, which is perhaps more relevant within the context of this discussion?
In the long-term (and I think much, much sooner), the marginal productivity of an additional dollar of U.S. Government debt is negative; that is, one additional dollar of U.S. debt will reduce future wealth by more than one dollar, not simply because of the interest paid on the dollar, but because of the malinvestment that necessarily occurs when government borrows money that would otherwise be used in private exchanges. The effect is worsened when that additional dollar is purely fiat, having no basis in real wealth.
Besides, if the specter of default is simply one of cashflow management, then Congress can always address it by substantially reducing spending. It is conceivable to chop $1.5 trillion from the federal budget, thus eliminating the need to borrow any more money at all.
“In the long-term (and I think much, much sooner), the marginal productivity of an additional dollar of U.S. Government debt is negative; ”
How dare you let this secret out !
“Would that involve extreme cuts in government spending? Certainly.”
Not necessarily. It would be easier and much simpler to simply raise taxes to something close to the OCED average. To make this politically more palatable, we could structure the increases such that most of the burden falls on the wealthiest 20%. A five percent tax on all assets after the first million, for example. Easy.
The whole discussion is rather humorous in the context of this blog, however. Who is going to take the advice of a Misesian about preventing a government default and the attendant economic collapse? You may as well hire neo-nazis to provide security at Israeli airports. C’mon. Your hearts aren’t in it.
You’re assuming that a tax hike will generate sufficient revenues. Doubling the tax rate will *NOT* double the tax revenues. Not even close. Even at 94% tax rates, the US Government has never been able to breach a 20% GDP tax collection rate. That’s the maximum reality that Congress has to deal with, 20% of the total private sector GDP. Higher tax rates dramatically increases the incentives to hide income.
Greece and Ireland would have been bankrupt without an ECB bailout and several other European states are on the verge of economic collapse. Yet you contend the way to keep the U.S. solvent is to make it more like Europe.
Of course if you actually had an idea with merit you wouldn’t have to resort to name calling.
As a middle class 65-year-old who will attain my full retirement age this coming October, and having been legally required to pay into Social Security since at least my first job in 1964, I am perfectly prepared to exchange my Social Security benefits for a return of all of my contributions paid in to date, adjusted for inflation to the date of reimbursment, and added to by a reasonable statutory rate of interest for each year’s “contribution,” the latter representing what an average investor might have expected to earn tax-free (i.e., as if they had been in an IRA or 401K) on those funds had they been prudently invested. Anything less than that I would consider theft, most particularly because one of architects of the Social Security System, Prof. J. Douglas Brown, admitted to a Washington Post interviewer that the panel of which he was a member was fully aware that the system would go bankrupt, even without the increase in the rate of change in life expectancies which was experienced in the intervening decades. Professor Brown asserted that “the only error (they) made” was to underestimate the future rate of change in average life expectancies–they didn’t see that rate of change accelerating. So, the panel knew from the outset that it was a Ponzi scheme and proposed it anyway.The profile of Brown was published in the Sunday Washington Post either one or two Sundays before his death on January 19, 1986, a Sunday, so the article was in the Sunday Washington Post on either January 5th or January 12th 1986. I specifically recall this because I was stationed in the DC area at that time, had a subscription to the Sunday WaPo, and remember reading the article, as well as being astounded by his openness concerning what logically can only be considered complicity in a criminal act.
Keith Töpfer, LCDR, USN [ret]
Does this mean that you are also willing to stop receiving Social Security benefits when you reach the equivalent amount of “all of my contributions paid in to date, adjusted for inflation to the date of reimbursment, and added to by a reasonable statutory rate of interest for each year’s “contribution,” the latter representing what an average investor might have expected to earn tax-free (i.e., as if they had been in an IRA or 401K) on those funds had they been prudently invested. ” ?
My parents say things similar to this statement, though their statements are more about what they are owed than numerical equivalences as you have presented here. But both share a common flaw: a belief that a state-sponsored tax is or ever could be an investment. I do not understand any reasoning in which people expect money confiscated by force of law to be returned by the entity that confiscated it. It is ridiculously inconsistent with the nature of the state, invariable across epochs, continentes, and cultures; therefore, the problem exists within the mind of the individual who misinterprets the state’s nature. To believe that a tax was actually an investment is gross naivete.
Also, there is a certain irony here. On the one hand, we are to hold Social Security as a criminal enterprise not because it forcibly removes money from one person to give to another, itself an immorality, but because they have squandered all the money — spent by the politicians you yourself elected. On the other hand, your remedy is to forcibly take wealth from others (mostly younger people) to make you whole, but somehow, this is not a criminal enterprise. It seems that your remedy is an extension of the injustices you decry.
What *is* the remedy here? The remedy is to abandon socialization of retirement and health care. There are no political solutions to a problem rooted in a lack of individual freedom and property rights. The plaintive cry of those who feel shafted by this solution (such as my parents) should not be an impediment to its implementation. The crime has been committed; the wealth is already squandered; nobody is going to be made whole. Let us correct the fundamental problems going forward so that future generations dont have the opportunity to complain of their own gullibility in believing that state-sponsored socialization was ever NOT a Ponzi scheme.
SSI is a tax, it isn’t a premium or an investment.
Also consider that you’ll effectively be paying yourself back. Where do you think those refunds will come from? Some other source, be it taxed, borrowed, or printed.
What you put in is gone. It vanished decades ago. There is no going back. You could do like my Grandfather, a 94 year old WW2 vet, and continue employment. He worked up to his death with congestive heart failure, colon cancer, a colostomy bag, arthritis so bad he could barely move, yet he still rolled into the small business he owned every day to do work. This is to dispel the “too old to work” excuse and “retirement is a right” excuse.
@Dick Fox,You wrote
Unfortunately, you are sadly in error about being able to cover the shortfall by eliminating waste and duplicative effort. The magnitude of the debt is greater by far than even the sum of waste, duplicate effort and fraud. Mr. Murphy is correct that “a government default would be a good thing for the American people.” The exceptions are those of us who have had our money confiscated throughout the overwhelming portion of our earning years for the Ponzi scheme that is Social Security and are now too old to effectuate adequate remedial measures, cf. my comment at 4:02pm, above.Keith Töpfer
Martial,
Go back and read the article. Bob does demonstrate that there would be no need to raise the debt limit if the budget were cut. I oppose raising the debt limit. My point is that even if the debt limit is left alone the US has no reason to default on its t-bills and bonds.
I believe that it may be dangerous for us to default on our debt. This should be avoided… through spending cuts.
What’ll likely happen is that the debt ceiling will be raised with modest spending cuts. Hopefully I’m wrong, and instead we’ll get drastic spending cuts.
1) The US government should never borrow in the first place.
2) Without some deficit spending then where shall new money come from to pay the interest on existing loans?
The problem is not deficit spending but legal tender laws for private debts and other means that allow the government to stealthy tax us via inflation. Fix that and we need not care how much the government spends.
“The moral argument for repudiation is easiest to follow although by itself [it] says nothing about the practical results. Treasury securities represent a stream of future tax revenues, and investors have no more just claim to those returns than to any investment in a criminal enterprise. I favor total repudiation of all government debt for the same reason I favor abolition of slavery without compensation to slaveholders.The economic argument depends on whether Ricardian Equivalence holds.[1] Repudiating government debt eliminates future tax liabilities. To the extent that people correctly anticipate those liabilities, the value of private assets (including human capital) should rise over the long run by the same amount that the value of government securities falls. Thus, people will gain or lose depending how closely their wealth is associated with the State. If on the other hand, people underestimate their future tax liabilities, they suffer from a fiscal or “bond illusion” in which Treasury securities make them feel wealthier than they actually are. Debt repudiation will bring their expectations into closer alignment with reality, which should increase saving.”This argument is very close to the statement that U.S. bonds owned by U.S. citizens is not really net debt because it is owed to ourselves. That’s fine, if one totally disregards the redistributive wealth effects from bondholders to general taxpayers that debt repudiation would bring. How is it moral to force such a transfer of wealth? Saying that the U.S. government is a criminal enterprise is simply a rationalization for debt-repudiation wealth theft.
Alex,
You have it backwards.
How is it moral to force me to pay back money that you lent to the government? When the government pays interest on bonds it is transferring money from taxpayers to bondholders. If the government defaults then that transfer of wealth will stop… absolutely no wealth will be transferred from bondholders to taxpayers.
Unless you believe the government has no right to bind its taxpayers to financial contracts, then the default on these contracts robs those on the other end of the contracts.
“where shall new money come from”
This is a fundamental misunderstanding of what money is, and I suspect you are mixing up money with capital.
A progressing economy produces new capital goods but the existing money supply represents these new capital goods through a lower market price for capital goods. When the money supply fluctuates it distorts the signals sent by market prices and results in inefficient allocation of existing capital goods. The money to pay interest on loans is already in the money supply. Production lowers prices because the money supply represents more goods, so a unit of a particular good is a smaller percentage of the total supply of goods.
Money is a medium of exchange. One receives it for production and then trades it away for consumption. Inflation of the money supply (what you call creating “new money”) does not increase the wealth or purchasing power of an economy (how in the world could it? If it did, why not print ourselves into utopia?), it results in redistribution and a distortion of price signals.
“other means that allow the government to stealthy tax us via inflation.”
You just identified the “other means” (there is in fact only one means). They stealthily tax *via inflation*. They are able to do that because the money supply can be easily inflated (and only by them). Therefore, the problem is that the government print “new money”.
“Fix that and we need not care how much the government spends.”
What situation could possibly allow the government to spend endlessly without anyone else caring? Where is this abundant supply of *real* goods (what money represents) coming from? How could it not matter to the people who supply the government with money (the tax payers) how much that government spends. The only way for them to really spend more is to tax more. If you spend more than you make you go bankrupt and can’t spend anything.
Also note that the Federal Government cannot inflate the debt away if it cannot purchase new debt instruments. The only way the Federal level can utilize new money for expenses is to borrow it from the Federal Reserve. No new borrowing = no new money for inflation. This problem can be further solved by repealing a single law that allows the Federal Reserve to add money to the system beyond using Treasury instruments. By this single action, we destroy inflation by eliminating the only vehicle the Fed has to put money into circulation.
All that’s left is a massive tax hike, and whoever does that will find themselves unemployed the next election cycle.
“where shall new money come from” FB
This is a fundamental misunderstanding of what money is, and I suspect you are mixing up money with capital. sweatervest
No. Capital is such things as talent, industrial processes, skills, land, energy, etc. Money is a medium of exchange that can buy or rent capital but it is not itself capital.
A progressing economy produces new capital goods but the existing money supply represents these new capital goods through a lower market price for capital goods. When the money supply fluctuates it distorts the signals sent by market prices and results in inefficient allocation of existing capital goods. sweatervest
So you are arguing for a fixed money supply? Then if we move to a gold standard then gold mining should be banned lest it distort the market? If fact, new finds of gold have distorted markets.
The money to pay interest on loans is already in the money supply. sweatervest
False. Assuming that all existing money is “put to work” by collecting interest then obviously new money is required to pay that interest or defaults are guaranteed to occur.
Production lowers prices because the money supply represents more goods, so a unit of a particular good is a smaller percentage of the total supply of goods.
Money is a medium of exchange. One receives it for production and then trades it away for consumption. Inflation of the money supply (what you call creating “new money”) does not increase the wealth or purchasing power of an economy (how in the world could it? sweatervest
The question you should ask yourself is “How in the world DOES it?” The answer is that asset backed money is sound. The problem is that it is not done ETHICALLY currently.
If it did, why not print ourselves into utopia?), sweatervest
Your concern should not be money printing per se but that it is done ethically. If we are forced by legal tender laws etc to use a currency whose value is declining then that is obvious taxation by inflation. Note that this could occur with gold too in case of a big find or a more efficient mining process. So literally, in an ideal world, it would be none of your business how much money was printed since you would be completely free to reject it and use another.
But let’s take an ideal private money form, common stock. On one hand the stockholders might desire to avoid diluting their stock by new issue but OTOH they might wish to buy new assets that would increase the demand for their money in the longer run.
it results in redistribution and a distortion of price signals. sweatervest
Because we are forced to use a common currency.
“other means that allow the government to stealthy tax us via inflation.” FB
You just identified the “other means” (there is in fact only one means). They stealthily tax *via inflation*. They are able to do that because the money supply can be easily inflated (and only by them). Therefore, the problem is that the government print “new money”.
The problem is that we are forced to use the government’s money even for private debt.
“Fix that and we need not care how much the government spends.” FB
What situation could possibly allow the government to spend endlessly without anyone else caring? sweatervests
That would depend. If you were a government worker you would be upset at the loss of your purchasing power unless you happened to be the recipient of the new money, If you were in the private sector you would be happy that your taxes were now EASIER to pay since government money was cheaper.
Where is this abundant supply of *real* goods (what money represents) coming from? sweatervest
From an economy with ethical money creation among other things.
How could it not matter to the people who supply the government with money (the tax payers) how much that government spends. sweatervest
Government money is provided by the government, not the people. It enables the population to pay its taxes; that should be its only purpose.
The only way for them to really spend more is to tax more. sweatervest
Bingo! With the stealth inflation tax abolished then tax increases would have to be EXPLICIT.
If you spend more than you make you go bankrupt and can’t spend anything. sweatervest
Government spending would have to closely match government taxation + average economic growth or else the government would lose purchasing power, not the private sector.
How come the people worry about not enough money for SS but I have NEVER heard anyone worry about insufficient funds for invading small, harmless countries?
I can see you have never met a conservative…
The last time the US Federal government spent fewer dollars than the year before was 1954, according to the St Louis Federal Reserve website.
6. Pretty nice post. I just stumbled upon your weblog and wanted to say that I’ve really enjoyed surfing around your blog posts. After all I will be subscribing to your rss feed and I hope you write again soon!
Nice post here.
The blog you have posted Should Congress Raise the Debt Ceiling? is too good and qualitative . I think all should have obey it.
Garden Lanterns
they shouldn’t, but they will. We need Ron Paul for president!!
Comments on this entry are closed.