Rand Paul: Federal Debt causes price increases

[daenku32]

Reading into the whole--I suppose libertarian narrative--arguments over debt and inflation, which was Rand Paul's arguments on his NPR interview, I could only conclude that the man is truly an idiot.

These comments were immediately after he was asked to explain Obama's re-election victory, as that was entirely 'irrational' from his point of view, and which he attempted to explain as Obama giving the feel-good solutions to the economy et al, and skipping over the harder solutions.

So that left me with two inklings:
1) I don't think there is a single economic principle that connects Federal Debt to price of goods.

2) Rand Paul was saying the inflation was bad for the retirees... But if hard solution must be considered, then the economics I have read explain that devaluing a currency can boost the economy, even if it eats at the savings of the retirees. Now that's a "hard solution". But R.P. isn't going to make it. Wonder why?
Linky:
http://www.npr.org/2013/02/14/17203...a-friend-to-those-who-are-trying-to-get-ahead

 

[Tippit]

Reading into the whole--I suppose libertarian narrative--arguments over debt and inflation, which was Rand Paul's arguments on his NPR interview, I could only conclude that the man is truly an idiot.

These comments were immediately after he was asked to explain Obama's re-election victory, as that was entirely 'irrational' from his point of view, and which he attempted to explain as Obama giving the feel-good solutions to the economy et al, and skipping over the harder solutions.

So that left me with two inklings:
1) I don't think there is a single economic principle that connects Federal Debt to price of goods.

Except for the obvious fact that in 2012 80% of US Federal Debt was simply monetized by the Fed, which amounts to nothing more than glorified counterfeiting and a regressive tax on dollar-holders (savers), and those on fixed income. This makes prices higher than they otherwise would have been, even given a decline in demand caused by high unemployment and other economic problems.

2) Rand Paul was saying the inflation was bad for the retirees... But if hard solution must be considered, then the economics I have read explain that devaluing a currency can boost the economy, even if it eats at the savings of the retirees. Now that's a "hard solution". But R.P. isn't going to make it. Wonder why?
Linky:
http://www.npr.org/2013/02/14/17203...a-friend-to-those-who-are-trying-to-get-ahead

Inflation is bad for anyone on fixed income, or for whom cash at any time makes up a significant proportion of their net worth, which includes the poor. Devaluing a currency, depending on how the proceeds are distributed, generally benefits politicians or bankers which is certainly a "boost" for them.

 

[daenku32]

Monetizing government debt is not the same as government debt causing inflation. Even if the Federal Government had somehow ran a balanced budget through the crisis, the Federal Reserve could have still monetized just as much as they have done now. And those policies are independent of fiscal policy in the first place.

 

[Tippit]

Monetizing government debt is not the same as government debt causing inflation. Even if the Federal Government had somehow ran a balanced budget through the crisis, the Federal Reserve could have still monetized just as much as they have done now. And those policies are independent of fiscal policy in the first place.

You don't understand. Monetizing government debt is essentially legal counterfeiting. It doesn't necessarily result in general price inflation, but it necessarily results in a transfer of wealth. If demand falls off of a cliff because the real unemployment rate is 30%, and prices don't fall because the demand was picked up by wealthy bondholders and politicians who have benefitted from the Fed's perpetual subsidy of bond prices, then it represents a massive transfer of wealth regardless of what happens to the general price level.

 

[lomiller]

Deficit spending can add to the total demand for goods/services in an economy. At some point the economy will no longer be able to meet these demands and there will be inflation. Naturally this only happens in an overheated economy not one that is lagging so what Rand Paul was, in effect, saying is that economic recovery would be bad because at some point that will bring about inflation.

The Fed could and would put the brakes on the economy should there be signs of that occurring, which there is not. The current risks all revolve around too little economic activity, not too much.

 

[daenku32]

You don't understand. Monetizing government debt is essentially legal counterfeiting. It doesn't necessarily result in general price inflation, but it necessarily results in a transfer of wealth. If demand falls off of a cliff because the real unemployment rate is 30%, and prices don't fall because the demand was picked up by wealthy bondholders and politicians who have benefitted from the Fed's perpetual subsidy of bond prices, then it represents a massive transfer of wealth regardless of what happens to the general price level.

You are right. I don't understand your logic. Demand both falls off a cliff, and it doesn't fall off a cliff because of "wealthy bondholders and politicians". That's just a contradiction.

If real unemployment jumps to 30%, quite clearly the demand drop is not being picked up by the government.

 

[Tippit]

You are right. I don't understand your logic. Demand both falls off a cliff, and it doesn't fall off a cliff because of "wealthy bondholders and politicians". That's just a contradiction.

If real unemployment jumps to 30%, quite clearly the demand drop is not being picked up by the government.

So the concept of aggregate demand being composed of spending by unemployed people with meager savings and people with first crack at counterfeit money eludes you, then.

 

[stevea]

We expect money supply increase by monetization of debt is inflationary, but also repayment of foreign held debt is inflationary as it reduces gov spending and therefore GDP. I have no clue why you think this isn't aligned to theory.

The Fed could and would put the brakes on the economy should there be signs of that occurring, which there is not.

"could" is an expression of hubris. There is a long sad history of Central bank failed attempts to control inflation. I'm not convinced by the 20-20 hindsight interpretations.

 

[jj]

Monetizing government debt is essentially legal counterfeiting.

Such assertions do not make what they claim a fact.

 

[jj]

There is a long sad history of Central bank failed attempts to control inflation. I'm not convinced by the 20-20 hindsight interpretations.

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. First, all the industries were destroyed by imbicilic ideas of austerity and reparations. Then when the money supply grew a tiny bit, inflation went berzerk.

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?

 

[Tippit]

Such assertions do not make what they claim a fact.

I've been looking for someone on this forum to describe what the difference is, other than legality. So far, everyone has failed.

 

[The Central Scrutinizer]

I've been looking for someone on this forum to describe what the difference is, other than legality. So far, everyone has failed.

I think we've been too busy laughing.

 

[Tippit]

"could" is an expression of hubris. There is a long sad history of Central bank failed attempts to control inflation. I'm not convinced by the 20-20 hindsight interpretations.

I don't really understand this logic. The central bank hasn't failed at all. It is in more or less full control of the supply side of money and credit, and thus rises in the general price level (inflation as conventionally defined). Its virtually perpetual policy of financial repression has contained a lot of the inflation to financial assets, namely bonds, and much of the rest has been exported. I would say that's mission accomplished.

I guess it just seems odd to use the word "control" when describing something that they are almost entirely responsible for. On the other hand, I suppose you could say they have failed in their so-called "dual-mandate".

 

[lomiller]

We expect money supply increase by monetization of debt is inflationary, but also repayment of foreign held debt is inflationary as it reduces gov spending and therefore GDP. I have no clue why you think this isn't aligned to theory.

This falls under the category of not even wrong.

First

We expect money supply increase by monetization of debt is inflationary,

Your notion that the Fed is trying to monetize debt is utterly unfounded and you have cause and effect completely backward and your assumptions about what’s happening to the money supply are simply wrong.

The M2 money supply is growing at a rate fairly consistent to what it’s been for the last few decades. I.E. There is no extraordinary growth in the money supply.

If there were, this would be expected to cause inflation, but as things stand we don’t expect inflation and indeed inflation is quite normal.

If there were inflation it would have the effect of monetizing debt, but since there is no inflation and no extraordinary growth of the money supply there is no sign of this happening, and the market for US government debt reflects this reality in the form of historically low yields.

Second

but also repayment of foreign held debt is inflationary as it reduces gov spending and therefore GDP.

A reduction in government spending would reduce demand and therefore reduce inflation.

Any repayment of foreign held debt would necessarily mean a cash flow coming back in the other direction. Most likely in the form of increased exports or of increased investment in the US economy.

If debt is being monetized as per your unsupported assertion above, any repayment would be less in real terms than was lent in the first place.

"could" is an expression of hubris. There is a long sad history of Central bank failed attempts to control inflation. I'm not convinced by the 20-20 hindsight interpretations.

What you are saying amounts to “if the Fed ignores the all the economics developed in the last 70 years they could screw up and mismanage the money supply.

Could it happen, I guess maybe it could, but it seems very unlikely and certainly doesn’t support your notion that the Fed should deliberately mis0manage the money supply in order to remove the possibility.

 

[iawai]

You are right. I don't understand your logic. Demand both falls off a cliff, and it doesn't fall off a cliff because of "wealthy bondholders and politicians". That's just a contradiction.

If real unemployment jumps to 30%, quite clearly the demand drop is not being picked up by the government.

If we have two buckets containing each containing 3 gallons of water, we can redistribute the water so that there is 1 gallon in one bucket and 5 gallons in the other.

From your point of view, there are still 6 gallons of water in the system, so nothing has changed. But from a point of view that recognizes a difference in the buckets, say that they are owned by two different people with different goals for that water, then there is a difference in the new distribution.

The "libertarian" (more precisely, the "Austrian Economic") point of view is that each individual has their own desires, wants, and needs, and things like "demand" or "monetary supply" cannot be aggregated.

Central banking looking only at the aggregate levels of these abstract measures of a society's economics doesn't care WHO gets newly created money or what they want to do with it. And the fact is that the largest bankers and the most politically connected big players in favored industries get the money first. When that happens, the products and services that these big players demand (individually, not in the aggregate) get bid up. As those prices rise and as the second-tier suppliers get their prices met, then third-tier suppliers can raise their rates. And so it goes, as those on fixed incomes and those earning wages are left spending the same amount that has less purchasing power compared to the earlier receivers of the newly created money.

As far as your vague "unemployment = demand" claim goes, let's imagine a scenario where 30% of workers have been laid off in one fell swoop. If this represents a monthly loss of $100 million available for spending on the part of the newly unemployed consumers, then you might expect that the govt creating/spending $100mil would "correct" the economy, giving employers that amount to hire more employees. But if the govt gave that money to someone that burned it, horded it, spent it on unfruitful research, or otherwise invested it in projects that were not productive, then certainly employment levels would not rebound.

On the MOST optimistic side, lets say they gave it to someone who could directly hire those people. Without going into a whole discussion of productive capacity of those laborers, structure of production, and the incentives created by such a program - we can ask where the VALUE of that money comes from. Even if the money was created/borrowed and not directly "taxed" from the rest of the economy, the non-subsidized portion of the labor force would begin to suffer, as their wages are still at the level they were when these 30% were unemployed.

They will be out-bid on the market for the goods and services they used to be able to afford, and the labor market would need to adjust by either cutting investment profits to be less competitive to the subsidized business and thus marginal employers will close, or by laying off some workers to compensate the remaining workers at a level that they are willing to work for to compete against the subsidized laborers. In either case, more unemployment will be created in a new part of the economy.

 

[TubbaBlubba]

The "libertarian" (more precisely, the "Austrian Economic") point of view is that each individual has their own desires, wants, and needs, and things like "demand" or "monetary supply" cannot be aggregated.

I know very little of macroeconomics, but this reasoning looks silly. Aggregate levels of things are just sums of the same things on the individual level (or constructs meant to approximate the aforementioned). I want a pair of bespoke shoes, and you may not. This doesn't change the fact that somewhere in the economy there's at least one person who wants a pair of bespoke shoes, and I might very well have some skill I could sell to the government. If the government decides to buy my skill, and hand me an IOU, I could give the IOU to Foster & Sons and they could make me a pair of shoes that I'm happy with. They can then spend the IOU somewhere else and so on. Things get made, wealth is created, and everyone is happier.

Saying that "government can increase aggregate demand by spending" is just saying that if the government decides to hand out more IOU:s in general, people like me would be able to demand more things, and more economic activity would occur.

As long as one can assert that individuals would spend IOU:s thereby creating wealth if they happened to have them, one can clearly say that the population as a whole would spend IOU:s thereby creating wealth if the average person had more IOU:s.

And, obviously, if one class of people can satisfy many desires with IOU:s while others suffer due to government spending, that's a problem. But that's a separate problem that would need to be dealt with in its own right - it sounds like a problem with equality, which is in part fiscal policy, in part social. Generally wealth equity is something that concerns socialists or social liberals of various kinds, not Austrian ultralibertarians...

 

[psionl0]

If there were inflation it would have the effect of monetizing debt, but since there is no inflation and no extraordinary growth of the money supply there is no sign of this happening, and the market for US government debt reflects this reality in the form of historically low yields.

By definition, monetizing debt is just the government (Fed) creating money to buy back government debt. Whether this results in inflation or not is not germane to the definition.

but also repayment of foreign held debt is inflationary as it reduces gov spending and therefore GDP.

A reduction in government spending would reduce demand and therefore reduce inflation.

Any repayment of foreign held debt would necessarily mean a cash flow coming back in the other direction. Most likely in the form of increased exports or of increased investment in the US economy.

I think stevea got that bit wrong too. However, I don't see the link between repaying foreign debt and exports/foreign investment.

 

[lomiller]

By definition, monetizing debt is just the government (Fed) creating money to buy back government debt.

IMO you are taking too narrow a view on what constitutes monetizing debt. The real value the outstanding government debt decreases whenever there is inflation and therefor decreases whenever the central bank expands the money supply.

When purchasing bonds investors factor in a certain amount of inflation, which is what makes them a good indicator of expected inflation.

 

[psionl0]

IMO you are taking too narrow a view on what constitutes monetizing debt.

It's just a simple definition. If you decide that the definition is going to be something else then you only make communication more difficult.

I realize that monetizing debt is not necessarily inflationary. If it causes GDP to rise then it could even be deflationary.

 

[iawai]

I know very little of macroeconomics, but this reasoning looks silly. Aggregate levels of things are just sums of the same things on the individual level (or constructs meant to approximate the aforementioned). I want a pair of bespoke shoes, and you may not. This doesn't change the fact that somewhere in the economy there's at least one person who wants a pair of bespoke shoes, and I might very well have some skill I could sell to the government. If the government decides to buy my skill, and hand me an IOU, I could give the IOU to Foster & Sons and they could make me a pair of shoes that I'm happy with. They can then spend the IOU somewhere else and so on. Things get made, wealth is created, and everyone is happier.

Saying that "government can increase aggregate demand by spending" is just saying that if the government decides to hand out more IOU:s in general, people like me would be able to demand more things, and more economic activity would occur.

As long as one can assert that individuals would spend IOU:s thereby creating wealth if they happened to have them, one can clearly say that the population as a whole would spend IOU:s thereby creating wealth if the average person had more IOU:s.

And, obviously, if one class of people can satisfy many desires with IOU:s while others suffer due to government spending, that's a problem. But that's a separate problem that would need to be dealt with in its own right - it sounds like a problem with equality, which is in part fiscal policy, in part social. Generally wealth equity is something that concerns socialists or social liberals of various kinds, not Austrian ultralibertarians...

A couple of points:

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

(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.

(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.