Friday, September 27, 2013

Borrowing Your Way Out Of Debt

The Washington Post had this nifty article:
What if a typical family spent like the federal government? It’d be a very weird family.

In a discussion of it, my brother brought up this oft-used quote:
"You cannot borrow your way out of debt."
It got me thinking.

I think the government knows full well that they can't borrow their way out of debt; however, it's not the intention of this government to get out of debt at all. They very literally do not care. So long as all of our debt is in dollars, and they have the ability to create new dollars by fiat to pay that debt, they very simply DO NOT CARE. In their view the government is immortal, and that's that.

BUT... they have to be very careful about a few things. For starters, this seems intuitively obvious
more dollars + flat economy = inflation. 
There are also obviously some things that are preventing that from happening, since we don't have runaway inflation despite trillions of dollars of stimulus. So what are they? The first is the distinction between "outside money" and "inside money". Outside money is what WE think of as money: cash, physical currency, and our bank accounts which represent such value; purchasing power. Inside money is money created by loans; it is debt. It's inside money that runs the economy; outside money facilitates that. The government doesn't "print money". Lately they've been purchasing bonds in a scheme called Qualitative Easing (QE), which is intended not to adjust interest rates but rather to simply inject money into the economy. They've done it by taking on debt, not printing money. It sounds goofy, but economics always does.

Now, you'd still expect this to cause inflation, because the idea here is that you're dumping money into the economy to increase demand and thus spur production. BUT... the kind of debt they're buying benefits those kind of people who are in those kind of markets... which frankly ain't YOU. Donald Trump, Bill Gates, Warren Buffett... but not YOU.

But the government has also made it very difficult for these folks to want to let go of it. They've disincentivized business investment. They created a hostile business environment and were then surprised that no one wanted to do business. And I think that part of this is because the government is making assumptions on a completely different economic model than the rest of the country. As far as you and I and most businesses are concerned, economics (and by that, WE think "accounting") hasn't changed much since forever. But it's a completely different story for the "money guys" who don't deal in products and services. Economics is not Accountancy.

The plain fact is that the government's scheme exacerbated the huge income disparities that they love to bitch about. You will never hear them admit it though. And I think we're not seeing inflation, not because the government is so damned clever in their implementation, but because of that disparity and the fact that this money isn't available. Imagine what would happen to prices if Bill Gates dumped $50 Billion CASH on the economy tomorrow. It wouldn't be pretty. Meanwhile the government's wondering why the hell this doesn't work. Even Alan Greenspan has calculated that there was "very little impact on the economy" and noted, "I'm very surprised at the data" (seriously, look it up).

Nevertheless, the whole system is predicated on the assumption that the debt will be repaid (eventually) with the same money that was created by assuming the debt in the first place. In other words, the plan is to use the debt to put a lot of cash into the economy, where it gets spent, resulting in increased productivity (magically avoiding inflation), the profits of which pay off the debt. Net cost: zero, because that's the interest rate. And they just knew it would work because they've got spreadsheets that say so. But if you save the capital instead, then you've screwed up the plan. That's their plan, not yours. Now ask yourself this: if you borrowed money at zero percent, would you be in a hurry to pay it back? That money's already "out there" and it's very dangerous, in that it can trigger inflation if it's ever used as originally intended, since the government has already thrown too much money at the problem. How much is too much? Billions PER MONTH. And it's the only tool they've got left after dropping interest rates to the floor.

So what's left? For them, it's demonize the rich and tax the fool out of them to try to get the money back so they can try again. They REALLY think the solution is to tax and spend their way to prosperity. Meanwhile they just float the debt, and they really and truly do not care how long they do it.

No comments:

Post a Comment