tag:blogger.com,1999:blog-5235419263414453422.post3637265951176595801..comments2024-02-23T01:30:06.101-08:00Comments on Early Warning: Thinking about Government DebtStuart Stanifordhttp://www.blogger.com/profile/07182839827506265860noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-5235419263414453422.post-12682920588324366982010-05-07T06:14:15.821-07:002010-05-07T06:14:15.821-07:00“Firstly, debt, for a government, as for any other...“Firstly, debt, for a government, as for any other economic actor, is a promise to provide things of value in the future in exchange for things of value now.”<br /><br />This is not quite true for governments. They promise to pay in their own currency, which is nothing but more debt. A Federal Reserve Note is just that, a note like any other. It is the population as a whole that is required, by law, to give something of value for this note, that is, to redeem it. It is, by law, legal tender. Of course these notes are just passed around, never redeemed, so the one who issues them, the government, gets free money, just as I would if I could write a note for money and never have to redeem it. The government has nothing of value to exchange for a Federal Reserve Note. They will just give you another note or, perhaps, a Treasury Bill. This is just exchanging one form of debt for another. <br /><br />Now we are required by law to accept dollars, but no one can tell us just how much of whatever we will exchange for them. For if this were fixed that would be the end of fiat currency. As long as there is fiat currency the government really doesn’t need taxes. By issuing new Federal Reserve notes it is, in effect, borrowing from its population. And this debt never needs to be paid back. Taxes only serve to limit this debt creation somewhat. <br /><br />Of course in the present situation the population has no possibility of giving, now, or in the foreseeable future, anywhere near the value for the outstanding government debt that people expect. What they expect is roughly what they could get when they obtained the dollar. If inflation (a misnomer) proceeds too rapidly, they won’t accept it at all, or will, if they have too, continually overprice to anticipate future inflation, thus making inflation exponential. Today, the dollar continues to float because other people in other countries, who have no obligation to do so, accept it for things of real value, like oil or manufactured goods. It is dollar hegemony, not taxes, that keeps the dollar afloat.Michael https://www.blogger.com/profile/17596457110530754431noreply@blogger.comtag:blogger.com,1999:blog-5235419263414453422.post-10598703121074825412010-05-05T16:22:28.073-07:002010-05-05T16:22:28.073-07:00I was in Junior High (Middle) School in Texas duri...I was in Junior High (Middle) School in Texas during WWII. I recall some of us worrying about the debt even then what with all the 10 cent war stamps and $25 bonds. I distinctly recall our Civics teacher saying don't worry, we owe it to ourselves. During the 60's some of my professional friends were complaining about the growing debt. I tended to joke - don't worry we can inflate it away. At about the same time I became a fan of Franz Pick who wrote about the WWII turmoil in Europe. I also recall with some nostalgia all of the wonderful things that I could buy with 5 cents. Of course I only made 25 cents an hour mowing yards. There was a time that inflation worked reasonably well as a hidden tax. That day may be gone??Roberthttps://www.blogger.com/profile/13071103776144941751noreply@blogger.comtag:blogger.com,1999:blog-5235419263414453422.post-50087056939261075112010-05-05T13:13:02.771-07:002010-05-05T13:13:02.771-07:00Burk - there are degrees of default too - outright...Burk - there are degrees of default too - outright nada is not the usual situation - rescheduling payments, partial writedowns, negotiated reduction in interest rates have all occurred. Which is worse from the bondholders perspective just depends on the exact numbers.Stuart Stanifordhttps://www.blogger.com/profile/07182839827506265860noreply@blogger.comtag:blogger.com,1999:blog-5235419263414453422.post-60290124682628900422010-05-05T09:11:21.404-07:002010-05-05T09:11:21.404-07:00Thanks- that was a very good discussion. All I'...Thanks- that was a very good discussion. All I'd add is that inflating a debt is a lot less painful (within bounds) than reneging on it for all concerned, so there is a significant distinction. Neither is desirable, certainly. <br /><br />Much of the general confidence required for debt concerns prospects for overall future economic growth. In that regard, Greece is really being hammered by the proposed austerity programs. It's a lose-lose situation right now, since brutal cuts in the (admittedly bloated) public sector are going to reduce overall economic activity for a long time.Burkhttps://www.blogger.com/profile/11158223475895530397noreply@blogger.com