Rand Paul: Federal Debt causes price increases

[TubbaBlubba]

A couple of points:

(1) Where does a govt get the resources to eventually pay off the IOU?

Taxes.

(2) If there is a generally accepted currency in the economy, the nominal value of each unit doesn't matter. If people had twice as much to spend, prices would be twice as high. The currency denomination doesn't matter. Therefore there's no difference (to you) if the price of your desired shoes drops to where you can afford it, or if the govt gives you a convertible IOU to bridge that gap. But in the wider economy, the first case leads is a voluntary exchange that places the cost of the transaction on the parties involved, and the second case is a situation where people that may not have wanted to help you get a pair of shoes (maybe they need the money to eat that day or invest in some great society-helping machines), and they will suffer from higher prices in the long run when the IOUs keep prices for other things higher than they otherwise would have been.

Yes, of course more IOUs mean there's inflation. That's a long-term problem that can be dealt with after the economy is on its feet, people willingly invest or spend their savings, etc.

(3) As to the last "equality of wealth" problem, there is no way to solve it. The knowledge problem and subjective value of material things make it an impossibility. And even making approximations to it through wealth redistribution leads to a society where everyone is equally poor (except the "leaders") because the incentive to improve the structure of production for consumer goods is eliminated.

Yes, I agree, but if it's considered a problem it can be alleviated to some degree.

 

[stevea]

There is also a long, even sadder history of central bank stinginess that caused massive industrial collapse that, when money supply started to recover, caused massive inflation.

1930's Germany is a wonderful example of that.

I suggest you actually STUDY what was happening in 1930s German economy before making these preposterous arguments.

By the treaty of Versailles Germany was require to pay reparations in hard goods or foreign currency, so they had to purchase foreign currency w/ Reichsbank Marks, leading them to be devalued against these other currencies, causing local inflation. They didn't have the ability to raise taxes to offset the inflation, so they printed currency. But the German people recognized the inflation and started spending their money rapidly, increasing the velocity of money and therefore inflation (the vicious cycle of inflation)

Germany had hyperinflation (associated with the onerous war reparations) beginning with the first reparation in payments in the 1921. By 1923 France and Belgium occupied parts of Germany to enforce the further reparations would be made in hard goods and not worthless Reichsbank Marks.

But this wasn't a matter of bald-faces monetary mischief. Once inflation had begun, Germany's only options were to halt the inflation and cause bankruptcies, and unemployment, or to continue and then default on foreign debt (which is tough when there is an occupying army taking your goods). They had no good options.

The inflation was over by 1925 but the currency was replaced at least twice and the inflation in the several years was a factor of about 1 trillion!

Then there were a bunch of ad hoc laws passed to reimburse *some* creditors and to re-establish *some* mortgages that destabilized markets (this should sound familiar). There was popular hatred toward bankers and brokers (this should sound familiar). These facts arguably set the stage for the rise of a demagogic socialist leader who blamed and scapegoated others (...) but that's a different issue.

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After the stabilization, Germany was fairly prosperous till the Great Depression struck in 1929, but primarily based on borrowed money from the USA (which dried up in the Depression). Germany continued to pay reparations, even tho' US loans were halted, and the GD struck German very hard. In 1931 some German and Austrian banks failed ... this was a little later than the US bank failures ~1930. By 1932 the reparation payments were halted, but Germany had only paid a small fraction of the total in that 11 year period.

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A first point should be made crystal clear - this is a productivity or GDP issue. German WWI reparations were just as devastating to GDP as were the post WW2 looting and extraction of all productive value from East Germany by Russia. It doesn't matter greatly that one was enforced by treaty and the other by an army. If your work product and capital is taken then you are necessarily poor, and things cost more in relative terms. So in Weimar the government, by treaty, exported value, and the specific method caused inflation, and poverty and unemployment, and in East Germany the Red Army loaded factories onto rail cars and caused poverty and unemployment (and massive inflation). The lowered GDP or productivity is the proximate cause, it's not fundamentally monetary policy.

First, all the industries were destroyed by imbicilic ideas of austerity and reparations.

There was no internal austerity under way - just the opposite, and reparations were enforced by occupying army, not bankers. Blaming banks is just the sort of scapegoating that occurred then and is occurring now among the unthinking masses.

Then when the money supply grew a tiny bit, inflation went berzerk.

berserk (-1 spelling).
You state the (duh) obvious. When there is significant inflation it is strongly self-perpetuating b/c all the employees and sellers anticipate more and want increasing salaries and prices. And all the holders want to rapidly get rid of cash (and bonds) since they are devaluing. This is absolutely normal for inflation. This causes increased interest rates and increased velocity of money that causes yet more inflation. Same thing in the US in the late 1970s. That is how inflation works.

This is precisely why Central banks have a very hard time stopping inflation.

Anyone who argues for "austerity" is actually arguing for turning their country into 1930's Germany or 2000-era Turkey, or 2013 Greece, Spain, and Italy.

Is that what you want, now?

Your thinking on this topic is wrongheaded.

Every dollar of value government spends eventually comes out of the private sector, either immediately or later via loans. Every dollar the government prints, beyond enough to match GDP increases, results in inflation that detracts from private savings accounts and the value of externally held bonds (increases bond rates) and therefore the cost to taxpayers. All government operations exist at the expense of other private efforts.

So the only question should be - is the government (meaning us all collectively) the most effective provider of a given service or good ? Does it provide the best allocation of resources. The answer is generally "no". No group or committee can decide what 310million people want as well as the 310mllion independent decision makers. And no central committee can provide for these wishes as well as numerous interests seeking to compete and profit. So aside from some serious free-rider situations, like national defense, government services are not an efficient use of resources.

Reducing government spending necessarily means more private spending is possible. The only time Keynes suggested stimulus was during short periods of recession when individuals were too frightened to spend, and preferred to save. That is not the situation today. Today investors and buyers fear the governments spending will distort or topple markets. Government borrowing & banking crisis & re-regulation effectively dried up supplies of venture capital and operating capital for small-mid- sized biz; thus prevented job creation & GDP growth. We are suffering from government, not from a lack of wasteful, and less-productive spending.


Greece austerity was a direct result of their government spending for less-productive ends. As the GDP dropped and debt climbed, the availability of lenders evaporated. Their lack of lenders, therefore money, is the cause of austerity. Greece actually did try to avoid austerity about as blatantly as possible - but eventually they ran out of OPM(other people's money). Even if the EU did bail them out and give them another 'pass' the problem would just recur a little later.

The 1922 Weimar government had to choose between two bad options - 1/ currency collapse vs 2/ poverty&unemployment. Since Greece has no sovereign currency, and no occupying army looking for hard goods, their options are 1/ debt default vs 2/ poverty & unemployment. Weimar & Greece each have gotten BOTH bad outcomes they sought to avoid. Bank policy could not prevent these eventual outcomes. The problem is one of production consumption, NOT of whether the goods are denominated in dollars of gold bars, or quatloos with varying exchange rates.

The US is indeed heading down a similar straight, caught between 1/ eventual currency/bond defaults due to lack of lenders ((eve increased interest rates) or alternatively 2/ a modest hit to GDP & standard of living as we reduce debt. We can see from the past several weeks events that cutting the annual deficit by a tiny amount almost politically impossible w/ the current government. Then we still have a weak economy, but this appears to be the new-normal, and structural in nature.

No - we are living beyond our means - just like Greece did for decades; just like Weimar was forced to do by reduction of means. We can't have trade deficits and government deficits, with large fractions of government debt held externally and hope to not default. That's ridiculous. The alternatives are to be politically weak (like Greece & Weimar) and suffer both bad outcomes, or to take some added pain now in an effort to avoid the even greater pain of default later. We are not too big to fail, and that government INausterity you promote is one of the mains causes of risk of default.

I guess Ill note that government austerity vs profligacy is not directly related to tight/loose money policy. Two different things.

 

[psionl0]

I can't recall seeing a post that I agree more with.

 

[Tippit]

There was no internal austerity under way - just the opposite, and reparations were enforced by occupying army, not bankers. Blaming banks is just the sort of scapegoating that occurred then and is occurring now among the unthinking masses.

Who do you think war reparations were due to, if not bankers? Bankers are hardly "scapegoated" now (how perpetual taxpayer bailouts amount to scapegoating is a mystery to me, perhaps you could explain), although it's worth distinguishing between those who have direct access to cheap central bank credit (glorified counterfeiters), and those who merely profit by the fractional reserve system.

"Austerity" is a noun derived from the adjective austere, which describes physical hardship. It matters not whether the conditions are created by an occupying army, or a sovereign government over its own citizens. Similarly, it doesn't matter whether austerity exists in the form of Greece exporting the wealth of its country via usurious interest payments on illegitimate debts to foreign bankers in 2008, or whether it existed in Germany exporting the wealth of its country in the 1930s. Hardship, is hardship.

This is precisely why Central banks have a very hard time stopping inflation.

Central banks don't "stop" inflation, they cause inflation.

Your thinking on this topic is wrongheaded.

Every dollar of value government spends eventually comes out of the private sector, either immediately or later via loans. Every dollar the government prints, beyond enough to match GDP increases, results in inflation that detracts from private savings accounts and the value of externally held bonds (increases bond rates) and therefore the cost to taxpayers. All government operations exist at the expense of other private efforts.

No, every dollar the government prints results in a dollar's worth of wealth transferred to the government. Whether it "matches GDP increases" is utterly irrelevant. If prices don't happen to go up, it just means we the people were cheated out of what would have otherwise been lower prices.

Greece austerity was a direct result of their government spending for less-productive ends. As the GDP dropped and debt climbed, the availability of lenders evaporated. Their lack of lenders, therefore money, is the cause of austerity. Greece actually did try to avoid austerity about as blatantly as possible - but eventually they ran out of OPM(other people's money). Even if the EU did bail them out and give them another 'pass' the problem would just recur a little later.

Greece's austerity is all about interest paid on illegitimate debts. It's about government services being cut in order to service interest on phony debts to offshore bankers. The fact that socialism is bad has little to do with the fact that Greece's debts are illegitimate. These are two separate issues.

The 1922 Weimar government had to choose between two bad options - 1/ currency collapse vs 2/ poverty&unemployment. Since Greece has no sovereign currency, and no occupying army looking for hard goods, their options are 1/ debt default vs 2/ poverty & unemployment. Weimar & Greece each have gotten BOTH bad outcomes they sought to avoid. Bank policy could not prevent these eventual outcomes. The problem is one of production consumption, NOT of whether the goods are denominated in dollars of gold bars, or quatloos with varying exchange rates.

Bank policy which sought and continues to seek dirt cheap counterfeit credit from crony central bankers in order to lend to corrupt and complicit Greek politicians was most certainly the cause of the outcomes. Once again, just because Greece may be a quasi-socialist hellhole, doesn't justify fraud.

I guess Ill note that government austerity vs profligacy is not directly related to tight/loose money policy. Two different things.

They are two different things, but intimately related. Central banks create credit ex nihilo, lend it to private bank cronies at negligible rates, who then lend it to corrupt politicians all over the world to enable profligate spending (mostly for the benefit of politicians and bankers). Then, the public is held hostage, and we get threats that our roads won't be repaved if we don't pay the usurious interest rates.

So your assertion that profligate government spending is the big problem is myopic, in the context that the global monetary and banking system is utterly broken and inequitable. The former couldn't exist in its current scope without the latter, a concept which seems to be elusive to you, and many others.

 

[daenku32]

Rand Paul didn't say a thing about monetization of debt. Simply that having lots of debt on government books is actively causing inflation:

when he borrows so much money he raises prices and he steals the savings of those on Social Security.