Going into debt is just plain dumb
No, the government does not have printing presses that it can fire up at a moments notice. That is a misconception that is overly disseminated.
There are two ways that the government can acquire money. The government can bring in money through taxation and simply require citizens to hand over money. Or the government can bring in money through borrowing and agree to give the money back to whoever lent the money.
I want all my tax payments to be treated as borrowed money. I want every single cent that I have ever paid in taxes to be repaid to me. Doesn't that sound a little dumb? Yet, that is exactly what occurs when the government borrows money. The government could simply levy taxes on investors, take their money and agree NOT to repay amounts -- kind of like what happens in my world. Instead, we are seeing monumental debt loads continue to pile up.
Even if you try and make the case that government should repay certain amounts back to its citizens because its overspending, where do you think that the money for such repayments will come from? It will ultimately come from taxation no matter the case. If the government borrows money and then spends it, it no longer has any money left. The so-called repayment of borrowed money is dependent upon tax dollars -- the same tax dollars that I am forced to pay.
It's dumb to think that we can't bring money into the government as taxes because increased taxes will hurt our economy. Instead, we have this strange notion that we must borrow it currently. Either way, money is being handed over to the government and then expended by the government back out into the economy. The only difference exists far into the future when (1) amounts levied as taxes do not have to be repaid and (2) amounts borrowed will have to be repaid. Either way, the source of money is treated all the same by the government currently and has the same impact on current economic conditions.
It does not make a bit of difference currently to our economy whether we borrow money or bring money in through taxation. You can easily make the case that having to repay borrowed money will hurt our economy sometime in the future. But why is the government putting itself in a position where it must repay revenue. It's never going to repay anything I have paid. So why should a wealthy investor benefit from the luxury of repayment, especially when considering that repayment will come from my tax dollars?
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August 31, 2009 |
Jenson Hagen | Comments (27 so far)
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Posted by: Augustus Milverton | Aug 31, 2009 12:05:55 PM
"why should a wealthy investor benefit from the luxury of repayment, especially when considering that repayment will come from my tax dollars?"
First rule of economics: There is no such thing as a free lunch.
Your tax dollars are payment for services: infrastructure, Medicare, Social Security, education, etc, etc...
An investor (who might very well live abroad) pays the government not for services, but for interest. Those investors who live or do business in the United States also pay taxes for these services. (Do you feel they should pay even MORE? Then make a case for graduated income tax brackets going up to ridiculous amounts.)
But just because they have enough money to purchase T-bills in large amounts, it doesn't necessarily mean that they consume vast amounts of additional services. A banker in the UK, for example, isn't gong to utilize Social Security, American public education, or the interstate highway system.
So Mr. Hagen, for WHAT exacty would they be handing over their cash if they didn't expect to get it back?
Your "proposal" to eliminate credit would mean the end of road building, public infrastructure construction projects, etc... unless core services were cut out of public budgets. (Or, alternatively, when we wanted to build something, we'd save up enough money by setting aside what the debt payements would have been for 30 years. Then after 30 years, we could build.)
This is so ill-thought-out I don't know where to begin.
Posted by: Steve Maurer | Aug 31, 2009 1:17:24 PM
Jenson, let me mildly suggest that you need a course in macro-economics. The Fed not only has full control over the M3 money supply, it is one of its chief mechanisms to stimulate the economy or put the brakes on speculation.
Insofar as the rest of your opinion, I find it betraying a striking lack of understanding of our current economic predicament. It is nearly as uninformed as a typical Republican. So in addition to pointing you in the direction of the articles written by Professor Paul Krugman, winner of the Nobel Prize in Economics, let me try to boil it down for you here with an analogy:
Let's say that Uncle Sam runs a business. Instead of the whole government, let's call it a restaurant. He takes money in, he spends money out, and he has some loans. He can also default on his loans and print up a whole bunch of coupons to use in his restaurant that's just like money (because it is). But his creditors don't like that, so he usually doesn't do it.
OK, so he goes off and borrows money. Does this help or hurt his business? The answer is simple: it's not how much he borrows, but what he spends it on.
The economic value of ten grand spent on bunch of ammunition for shooting in a big display of machismo because he likes seeing people cower, literally goes up in smoke. The same ten grand spent paving the driveway to his restaurant, or sending his niece Sally to get a degree in computer science, not only may not cost much in the long term, due to more customers coming in and Sally paying a little extra because she's doing well, he may actually make money.
Republicans say, with the faith of a near religions fanatic, that government can never spend wisely. What has become clear over the last 20 years is a close corollary, When Republicans are in charge of the government, the government never spends wisely. They spend money on things that do not add economic value, and engage in wide scale semi-legalized graft much akin to Uncle Sam cooking the books at his restaurant, instead of meals.
Posted by: joel dan walls | Aug 31, 2009 1:30:41 PM
Forgetting one other mechanism: inflation, which makes those dollars worth less when they're repaid than when they're borrowed.
Posted by: t.a. barnhart | Aug 31, 2009 1:52:28 PM
all money is fake. it's all a matter of what governments (and banks) agree it will be. debt is meaningless unless someone calls in the note or the debtor cannot borrow more (or at bad rates) because of outstanding debts. but still, it's all a big game. the US can get away with big debts because not only are we too big to fail, other countries know we'll be good for -- eventually, in some way.
no, this is not sound (or even informed) economics here. this is me saying that debt is low on my list of concerns. if debt is the price we pay to fix the economy & reform health care, let 'er rip. the money will come back in one day, fake as it is. we need good jobs, a stable housing market and affordable health care for all more than we need a balanced budget.
and if anyone is really serious about sound economic & fiscal policy, the first thing they'll do is whack half the Pentagon's budget. any proposal that does not begin with the military budget is a flat-out joke.
Posted by: Old Ducker | Aug 31, 2009 1:54:06 PM
I always chuckle when progressives try to get their arms around basic economic concepts, especially as they relate to money. Since this venue is inappropriate to elucidating all of the problems with the FED, let me propose a simple solution and let anyone try to shoot holes in it:
All paper money and credit is backed 100% by gold. There are two kinds of banks, deposit and investment. Both are private.
Deposit banks are where your personal gold is stored. The bank issues you a receipt for that gold with is 100% redeemable upon demand. Fractional reserve banking is illegal. The bank charges you a storage and service fee. It cannot make loans.
Investment banks are for loan purposes only. Investors provide it credit (gold) and receive interest. Investment banks do not accept demand deposits.
Now tell me how this system could create bubbles and financial panics? How could inflation and deflation occur?
Its not a left vs right issue that people should have money that actually grows, rather than shrinks in value over time...
Posted by: Rachel | Aug 31, 2009 2:14:11 PM
Government doesn't produce anything - it's a leach that rides on the backs of productive citizens and siphons what it needs in order to maintain itself (and more recently, redistribute wealth).
We've got over 40% of our income going to taxes now (between local, state and federal), and sure as hell don't get our money's worth in return! I understand paying taxes for roads, law enforcement, and the like. What I HATE is being forced to pay taxes to cover bureaucratic pet projects and programs that they use to buy more votes and expand their unconstitutional powers.
I manage my finances wisely. I don't spend money I don't have, I don't wrack up huge debts, I live within my means, and I don't expect other people to pick up the tab for my expenses or any foolish choices I may make.
Government bureaucrats spend as recklessly as they please and then just increase the tax burden to cover their irresponsibility. ENOUGH IS ENOUGH!!
September 7th, @ Pioneer Courthouse Square, 6:00pm.
Together we can collect enough signatures to put these $733 BILLION worth of job-killing tax proposals on the ballot in January, giving Oregon voters a chance to have their voices heard!
http://www.stopjobkillingtaxes.com/
Posted by: Kurt Chapman | Aug 31, 2009 2:18:57 PM
Jenson, your writing becomes more and more obtuse as time goes on. Without a basic understanding of Kenesian Economics you will have to turn in your Progressive Card.
Here is just one way that current deficit spending hurts the economy - China and other nations buy up our short term debt on the open market. AS they see how much we are chruing out as a government, the price goes down and cost to issue debt goes up. These rates transfer to the liquidity market where companies are trying to raise cash to pay for COGS while in the pipeline and then hopefully pay it all off when the good actually sell.
Posted by: Jenson | Aug 31, 2009 2:18:57 PM
Let me try and simplify what I've written.
Money will come in either through taxes or loans. In either case, the money comes out of the hands of one party and into the coffers of government. Government then spends the money. So in either case there is no difference.
The difference occurs on the back end. If taxed, the money is simply not repaid sometime in the future. If borrowed, the money is returned.
Why are we treating incoming money as a loan instead of treating it as a tax that doesn't have to be repaid sometime in the future. In terms of economic activity and government spending, it makes no difference currently.
Borrowing is simply politically expedient. It's easy, but it's dumb. It makes no sense because repayment must come from future taxes. Might as well just treat the incoming money as a tax instead of a loan and forget about repaying it later.
Posted by: Jason | Aug 31, 2009 2:36:25 PM
"It is nearly as uninformed as a typical Republican."
Steve,
You make me laugh. I like it when Dems lift themselves upon a pedestal and act as if they have all the "right" answers. Your attempt at humility only unmasks your prideful arrogance.
Posted by: Old Ducker | Aug 31, 2009 2:46:28 PM
Jason, I do believe you are on the right track. Maybe theres a baby Austrian economist in you yearning to break free. It is the existence of a central bank (the FED) that allows the government to borrow. States don't have that option. The lack of any backing of this "money" has led directly to the present mess. Foreign buyers of US debt only do so because of the confidence the US govt can loot their subjects through taxation to pay them back. It wont happen of course so the dollar will slowly be destroyed, looting instead the hard earned savings of asians. Lila Rajiva, an author and blogger has labeled this "anti-sinitism."
Posted by: Steve Maurer | Aug 31, 2009 2:50:25 PM
Old Ducker: I always chuckle when progressives try to get their arms around basic economic concepts, especially as they relate to money. Since this venue is inappropriate to elucidating all of the problems with the FED, let me propose a simple solution and let anyone try to shoot holes in it: All paper money and credit is backed 100% by gold.
Reading that you are "chuckle" at anything economic, is kind of like reading "amusement" of a flat-earth creationist "chuckling" at a basic biology textbook.
The similarities are dramatic. Like creationism, the gold standard is also a nostrum that was debunked and abandoned in the 19th century.
Gold is not some immutable standard. It is a commodity just like anything else, subject to the vagaries of mining, and other intangibles. When you make anything a "gold standard" not only do you encourage non-economic decision making by artificially inflating the value of the standard, you also make it impossible to actively counter the market's manic/depressive swings.
Abandoning active economic management, as provided by the Fed, only increases the severity of the boom-bust cycle (which was the case in the 19th century). In fact, our current problems come not from over-regulation by the Fed, but by a near abandonment of its effective functioning due to Republican appointees who opposed it on ideological grounds.
The fact that you can't figure this out even after the obvious economic disaster that Republican policies have wrought, shows that you are too wedded to your faith to think rationally. So for me, it's kind of like arguing with a religious nut hooked on the idea that the earth is 5000 years old. So I leave the field to you.
Posted by: Old Ducker | Aug 31, 2009 3:07:19 PM
Steve, you are simply wrong. All you are doing is reciting a litany of lies that is force-fed in government schools. In the 19th century, after the gold standard was re-established in 1871, in the aftermath of the invasion of the Confederacy, the US went on the longest sustained economic boom in history. Im not going to go into the history of the FED here (read Murray Rothhbard if you want to learn the truth), it was only ended because FDR sought to engage on a litany of pointless public works projects. However a partial form of it was restored after WW2, the Bretton Woods system but since it wasn't a true standard, it was doomed to fail, as Henry Hazlitt predicted in 1947. Since Nixon closed the gold window, eliminating any pretense of the dollar, the resulting devaluation and economic bubbles and busts has been unprecedented.
Posted by: t.a. barnhart | Aug 31, 2009 4:53:59 PM
Rachel, govt spending produced a nation. govt spends on behalf of the people, not itself, and the govt of the US has produced education, health, homes, prosperity, mail delivery, the Internet, world order of a sort, an amazing standard of living, and so much more. nothing that has happened on this continent since the Europeans showed up has not been without govt support, intervention or direct manipulation. your ideology may feel as good as a Duke Wayne gunfight, but it's just as false.
Posted by: Old Ducker | Aug 31, 2009 5:13:20 PM
Barnhart, your factless retort to Rachel constitutes a manifesto for secession. There's no compromise possible with those. like you, who live in a different country on a planet where the laws of the universe are fundamentally altered.
Posted by: Dave Porter | Aug 31, 2009 6:19:20 PM
Jenson, I am trying to understand your point of view, but I think it matters in your context where the money comes from. If the government borrows by letting central banks buy up the new bonds with newly printed money, this is new money, not a shift. And it constituted about 70% of the debt financing last year. Ditto for foreign buyers, such as the Chinese and Japanese. It’s new money. That leaves the sale of government bonds to commercial banks, firms and individuals. Under some conditions what you are arguing, as I interpret it, might be true: buying government bonds by commercial banks, firms or individuals would only shift funds from financing some other economic activities to financing the government. But currently much of the system allocating private financing is not functioning, so putting money into treasuries does not take it away from financing other economic activities. Even that mode of public debt financing is bringing new money into the system.
Posted by: Jenson | Aug 31, 2009 6:59:23 PM
Dave,
It's not really new money per se. The fed has been on a massive monetization spree. The act of taking in a Treasury bond, mortgage-backed security or some of the other crap bonds the Fed has taken in only converts those bonds into a more liquid form, i.e. digital cash. The Fed has not created new value for the economy. It has only converted bond certificates into a more liquid form.
With this new digital cash, the Fed is able to increase bank reserves thus allowing the fractional reserve banking process to work its magic and create new money. As seen with Japan over the last 20 years, if no one wants to borrow, except to run arbitrage schemes, then the Feds agenda gets derailed.
Back to my argument. If people have money to lend to the government so that it can spend said money on government services, then those same people obviously have money that they can hand over to the government via taxation. The only difference is that the government does not have to pay back money it received through taxation. It does have to pay back borrowed funds, with interest, and by using future tax revenues.
$100,000 borrowed or taxed is still $100,000 that the government will take and put right back out into the economy. Might as well treat it as taxes so that we don't have to pay it back--that's how it works with money I give the government. I won't see any of my tax dollars back, except through gov't services.
Posted by: Kari Chisholm | Aug 31, 2009 7:45:05 PM
Jenson, your 2:18 comment made more sense than your post, but it's lacking in context.
What, exactly, is the broader conversation that you're piping up in? It feels like we're getting exchange #17 in a late night bull session between you and your friends.
If Maurer's suggestion isn't useful, I'd suggest Bill Greider's Secrets of the Temple, a history of the Fed. There's an excellent explanation of how money supply works in the USA, not to mention why the gold-standard people are off-base.
In addition, I'd suggest asking a friend (who isn't part of the late-night bull sessions) to read and review before you post. Ask for help with clarifying your argument and adding context.
Posted by: JHL | Aug 31, 2009 9:54:34 PM
"If people have money to lend to the government so that it can spend said money on government services, then those same people obviously have money that they can hand over to the government via taxation."
Jenson, I want to send you to an economics class. I really do.
1. Not if "those people" live outside the United States! Your plan (and I use the word "plan very loosely) would reduce the available credit market and essentially nix ALL lending, which I think is your intent. Foreign dollars would be pulled from U.S. banks and our economy would begin to crumble as there would be less money to lend in the private sector.
2. Lending to the government is an investment like any other. By your logic, ANYONE who invested ANY money would "have that money that they could hand over to the government via taxation." Therefore, anyone with enough disposable income to invest should have that money taken away. So bye-bye private investment. Bye-bye stock market. Bye-bye ANY new businesses. Because if you're just capturing money that MIGHT go to federal borrowing, you're going to have to capture money that's used for ANY class of investments -- because no one's going to volunteer to have their money taxed instead of invested.
3. The reason we borrow is to pay for things that outlast the current fiscal year. When I'm taxed in 2009 to pay for police and fire coverage, that money pays for my coverage in 2009. But when we build, say for example, a road... why should old people have to pay for a road that will be in service after they're dead? And why should a baby NOT have to pay for a road that he'll use when he's 25? Bonding is how we amortize these costs over the life of a project so that everyone pays their fair share.
Seriously... You need to learn more about bonding before you say "Hey, let's just not pay it back."
Posted by: Kim | Sep 1, 2009 10:25:35 AM
You left something out. The government can also make money on investments such as giving money out to the financials and getting payment back with interest. In fact, it is happening right now with Bof A.
Posted by: andy | Sep 1, 2009 10:41:31 AM
It is possible to run a large economy such as the USA off of just cash flow but it requires more discipline than the DC crowd has.
Basically cash inflows would need to be prioritized against both short term and long term spending projects. In theory it should all match up in the long run with some years running a surplus and other years a deficit.
It would be better in the long run to maintain the government operations just on tax dollars rather than constant borrowing but it would also be better if people ate right and exercised. People in general are lazy and politicians are no different. It is a lot easier for them to float a bond than it is for them to raise taxes.
Posted by: Nelson | Sep 1, 2009 10:59:36 AM
"Jenson, your 2:18 comment made more sense than your post, but it's lacking in context. " - Kari
Kari, is there anyway you can preview Jenson's posts? So many of them seem to be muddled and off the mark. It would be nice to have an editorial review prior to his posts. Thanks.
Posted by: joel dan walls | Sep 1, 2009 1:16:07 PM
I want to make a contribution to the Old Ducker Library of the Complete Works of Ayn Rand. I would especially like to raise funds to buy a signed first edition of The Fountainhead. Any woman who writes a book in which the hero is a rapist deserves to be more widely read and honored. Visitors to the Library will be greeted by a gilded statue of Ayn Rand and, over the doorway, carved in stone, some of the key aphorisms of the libertarian movement, such as "I've got mine, Jack, now you go fuck yourself."
Posted by: Old Ducker | Sep 1, 2009 6:32:15 PM
Joe, hahahaha! Funny stuff, even though I'm not an objectivist (Randroid). Not sure if I agree with the rapist comment...its not rape if she actually enjoys it. Whatever happened to initiative?
Your parting shot is ironic though. Unlike you, neither Rand nor me would force you to join our respective churches. In my country, Blue Oregon can form a commune and enact every progressive nostrum you choose. Too bad you wont grant us the same option.
Posted by: Jenson | Sep 2, 2009 12:07:02 PM
What is the character of a person that wants nothing more than to tear someone else apart? Will we ever have the ability to look at complex issues and seek understanding without resorting to childish ranting?
Not by everyone's standards here . . .
Posted by: DSS | Sep 2, 2009 3:28:31 PM
"What is the character of a person that wants nothing more than to tear someone else apart?"
Well, you DID title your post "Going into debt is just plain dumb". You kinda went far out onto a limb right off the bat, didn't you? You can't call something "dumb" and not expect people to push back a bit.
"Will we ever have the ability to look at complex issues and seek understanding without resorting to childish ranting?"
Maybe. But the economic concept presented here doesn't seem couched as seeking understanding. There are a lot of logical jumps and concepts taken for granted and the questions that are posed are simply rhetorical.
Basically, you wrote a post criticizing a universally-accepted economic practice (lending), called everyone else "dumb" in the title, and then acted suprised when you got some blowback?
Jenson, you've got some good ideas floating around in your head, but your writing style (deservedly or not) can sometimes come across as preachy. Next time, try leaving the post more open-ended if you're looking to "seek understanding." Ask people what their thoughts and/or prognostications are. Avoid phrases like "obviously..." or "It's dumb to think 'X'".
Just a suggestion.
Posted by: Old Ducker | Sep 2, 2009 6:44:07 PM
The Plan:
If you want to be a great leader,
you must learn to follow the Tao.
Stop trying to control.
Let go of fixed plans and concepts,
and the world will govern itself.
The more prohibitions you have,
the less virtuous people will be.
The more weapons you have,
the less secure people will be.
The more subsidies you have,
the less self-reliant people will be.
Therefore the Master says:
I let go of the law,
and people become honest.
I let go of economics,
and people become prosperous.
I let go of religion,
and people become serene.
I let go of all desire for the common good,
and the good becomes common as grass.
Lao Tsu
Note: The presence of any individual above does not imply an endorsement by BlueOregon. The selection of faces shown is done by Facebook. Visit BlueOregon on Facebook.
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Posted by: Dave Porter | Aug 31, 2009 11:49:56 AM
I disagree. As I see it, there is a difference between borrowing money and increasing tax revenues in the present. By borrowing, that is running a fiscal deficit, in a period when productive capacities are idle and people unemployed, we stimulate the economy, putting those facilities and people back to work. We currently need to do more of this.
Increasing tax revenues to pay for new programs creates no net increase in demand, just shifting our economy from one kind of demand to another. It does not stimulate the economy.
It is, of course, of great significance what the borrowed funds are spent on. And, at some point, borrowing funds (increasing the deficit) will create inflation.