Re: Government Debt versus Private Debt
royls_at_telus.net
Date: 09/07/04
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Date: Tue, 07 Sep 2004 23:46:27 GMT
On Mon, 06 Sep 2004 21:04:32 GMT, William F Hummel
<wfhummel@comcast.net> wrote:
>To understand the difference between government debt and private debt,
>we must first understand the distinct roles played by the monetary
>base issued by the Federal Reserve and credit money issued by private
>banks.
No. That is not necessary at all. The particular arrangements for
central banking and currency issue in the USA are idiosyncratic, and
have no relevance to the larger issue of government debt vs private
debt, which does not depend on which country you happen to be living
in or talking about.
>This distinction is of little significance to the average
>person, but it is of crucial importance to the banking system.
>
>Why the Government Borrows
>
>The public borrows from banks in order to acquire credit money to
>spend on investment or consumption. In contrast, the government
>borrows from the public only as needed to recapture its deficit
>spending, all of which is base money.
Ah. So somehow, in contrast to private spending, government spending
is neither investment nor consumption? Fascinating.
>It does so to enable the Fed to
>control the supply of reserves (base money) in the banking system, and
>thereby control the short term interest rate. The ultimate objective
>is to control the inflation rate over the long term.
That seems less than likely, as the average inflation rate has been
far higher since the Fed was created. More likely, the objective is
to provide larger unearned incomes to idle creditors. That objective
has the advantage of actually having been achieved.
>When we adopted a monetary base of intrinsically worthless paper money
>in the mid 20th century, we created a new paradigm that is widely
>misunderstood even today.
Right. And you aren't helping matters.
>The imperatives are quite different from
>those of the earlier gold-based system. Controlling the abundance of
>base money is key to maintaining its purchasing power. It is up to
>the Treasury and Fed, acting together, to do that. Government
>borrowing plays an indispensable role.
Only because the system was designed to ensure that the only
alternative to exponentially increasing indebtedness of working
taxpayers to idle bondholders would be deflation and economic
depression.
>Rolling Over Government Debt
>
>Nothing about government debt in a fiat money system requires that it
>be paid off.
Likewise consumer credit. So? Does that mean the consumer does not
actually owe the money?
>Individual securities must of course be redeemed as they
>mature. But the Treasury can roll over its maturing debt
>indefinitely. Rolling over means selling new securities to pay for
>the redemption of maturing securities. Thus rolling over the debt is
>not dependent on tax revenues.
It depends on creditors' confidence that they will be repaid, though.
>Treasury securities offer an interest-earning alternative to the money
>the government spends into circulation.
IOW, when the government needs money to spend, it can either print it,
steal it, or borrow it, and only the latter alternative increases the
unearned incomes of the rich. Oddly enough, when government asks
working people to fund its operations, it does not even offer to give
the money back, let alone with interest. Only the rich get their
contributions to government back again; and they get them back with
interest.
>When the private sector has
>more non-interest-earning base money in the aggregate than it wishes
>to hold, its only alternative is to buy Treasury securities.
The private sector is not a single agent and therefore cannot "wish to
hold" any amount of currency or securities.
>It is often claimed that government borrowing is in competition with
>private sector borrowing. That is incorrect.
No, it is correct. The competition is just not direct.
>The government borrows
>in base money while the private sector borrows in credit money.
This distinction is financial sophistry.
>Government borrowing has no net effect on the amount of base money
>since its deficit spending matches its borrowing, on average.
Irrelevant.
>The interest rates on short term Treasury securities and on credit
>money are both a function of Fed monetary policy, and not a function
>of each other. The notion that the interest rate on one directly
>affects the other is to misunderstand the causal relation.
>
>Government Debt as Perpetuities
>
>Unfortunately conventional wisdom overlooks the fact that the debt can
>be carried indefinitely at no financial risk to either the government
>or the private sector.
That is of course false, as the numerous historical examples of
inflation and government default prove.
>Individuals can become bankrupt with too much
>borrowing, but the State can never become bankrupt if it borrows in
>the same currency it issues.
Bankruptcy does not apply to the state in any case. But that is cold
comfort to bondholders who have seen their assets either inflated into
worthlessness or defaulted outright.
>Nearly everyone views government debt as a future tax liability of the
>private sector. This is true only in theory. The unique position of
>the State as issuer of the monetary base, enables it to roll over its
>debt continuously. By electing to do so, its securities become the
>functional equivalent of perpetuities, i.e. bonds that have no
>maturity and thus are never redeemed.
But still yield interest.... Who pays that interest? Blank out.
>De facto, there is no net tax
>liability on perpetuities.
The interest presumably being provided by the Tooth Fairy...
>Treasury securities are valuable assets for the holders.
And yet, somehow, they are not a liability for anyone! It's a
miracle!
>They can be
>sold for money or pledged as collateral for loans. Together with the
>monetary base they comprise the net financial wealth of the private
>sector.
Which means nothing other than that the money is owed in particular
amounts to the particular people who hold the securities, but is owed
in undetermined amounts by unidentified taxpayers, and is thus not
recorded as a liability for them, even though it effectively is one.
>By contrast, bank lending does not affect the financial
>wealth of the private sector because all such credit is matched by an
>equal amount of borrower debt.
Right. The individual borrowers owe specific amounts. By contrast,
the taxpayers only owe the public debt in the aggregate, so liars can
pretend there is no liability associated with the assets owned by the
holders of the public debt.
>The value of the Treasury securities is not in the interest payments
>they shed.
ROTFL!! Just try skipping a few of those interest payments, and see
what happens to the value of the securities...
>Those payments are covered by tax revenues, and are
>therefore a wash in the aggregate.
?? Idiocy. By the same "logic," a thief taking $10K from a bank is
"a wash in the aggregate."
>The value is in the principal,
>just as in the case of Federal Reserve notes.
Nope.
>The public trades one
>for the other, depending on degree of liquidity it desires at any
>given time.
Again, by commingling everyone in "the public," it becomes possible to
obscure what is actuallly going on: robbery of working people for the
unearned benefit of the rich.
>If the public holds $X billion in Treasury securities and
>$Y billion in notes, it has greater net financial wealth than if it
>only holds $Y billion in notes.
"Net financial wealth" meaning what will be taken from unidentified
taxpayers and given to specific bondholders.
>Nevertheless it is incorrect to conclude that the larger the national
>debt, the better.
Indeed. Quite the contrary.
>If the net financial wealth of the private sector
>is allowed to grow too large, the penalty will be price inflation,
>even though the amount of base money remains unchanged.
Oddly enough, Hummel makes this claim even though exploding national
debt in Japan has been accompanied by price _de_flation.
But then, when one is engaged in declaring how many monetary angels
can dance on the head of a fiscal pin, actual facts are the very last
things one wants anyone to be considering.
>This is the
>so called "wealth effect" on consumer spending. But as long as the
>debt is viewed as a savings vehicle by the private sector, it is
>benign and a valuable asset for the nation.
Utter garbage. It is nothing but a measure of how much will be stolen
from working people and given to the idle rich.
>The debt/GDP ratio reached an all-time high in World War II. Yet the
>annualized inflation rate was only 2% during the 20 year period,
>1949-1968, following the war.
Gee, I wonder what happened to those years between 1945 and 1948?
>During the Reagan and Bush
>administrations of 1981-1992, the inflation rate trended downward even
>though the debt quadrupled. The evidence suggests that the
>availability of credit money plays a far more important role in price
>inflation than the net financial wealth of the private sector,
>popularly known as the national debt.
Currency is the main determiner of consumer price inflation, M2 the
main determiner of asset price inflation. Nobody said public debt
increases inflation, except to the extent that it is eventually
monetized.
-- Roy L
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