Sunday, April 28, 2019

An informative article on government finance, foreign trade, and inflation.

There is only one way a government funds the excess of spending over tax revenue without it being inflationary, and that is to borrow money from savers. There is a downside to this. The government bids for existing savings, including those held in pension and insurance funds, diverting them from other borrowers. In the 1980s this was described as “crowding out” other borrowers and had the effect of increasing interest rates to the point where these other borrowers stop borrowing. In the post-war years, this has been the consequence of spendthrift socialism.

The other two sources of finance for high-spending governments are simply inflationary. Bank credit is expanded to finance short-term treasury bills and treasury bonds. Before 2008, a combination of savings and bank credit expansion was used to cover government funding requirements. But since the great financial crisis, money-printing by central banks through quantitative easing has opened a new avenue for government funding. It is this last financing mechanism which future historians are likely to attribute to the beginning of the end for fiat currencies.[1]

My title doesn't do Mr. Macleod's article justice. While I'm a long way from understanding this stuff, I commend his article to you as an exceptionally clear take on government and central bank fiscal, monetary, and debt problems. He does a good job in trying to lay out the various cause and effect relationships in this area. Suffice it to say, the outlook isn't good for fiat currencies and sound economic policy.

At one time, I used to pale at the mention of the words "Federal Reserve Bank," as it just seemed too arcane and technical for me. It still is but I want to do better than I do.

So far, I have profited from the insight that low interest rates harm savers and drive people, who in earlier times could rely on interest on their money to fuel or supplement their retirement, to move their money into equities.

All the more so if deliberate Fed inflationary policies make it exceptionally unwise to leave funds sitting in bank accounts subject to alarming diminution in value. At two per cent inflation, the value of your stash is reduced by 50% in 25 years. More if inflation is higher than the lying United States government figures would lead you to believe. And given how this is indistinguishable from theft, I am rather torqued to know that the Fed publicly admits to trying to achieve a certain level of inflation every year.

Goodbye to any notion that those clever people who run things in our country have any intention of helping individual citizens. We get an elegant middle finger in any area you want to mention. We need to do a lot more than just audit the Fed.

The other insight I find useful is that increases in the interest rate increase government debt servicing costs. This it cannot allow. The government is thus locked into a position of wanting to avoid a return to savings-fueled investment in productive enterprise (because saving is profitable with higher interest rates), thus punishing savers and artificially goosing the market in equities (and real estate and other hard assets). AKA stimulating a bubble economy.

Add in the fact that deficits needing to be funded this way are the result of government investment decisions, and those include funding for Yolanda's eight chirren, stupid regime-change military operations, and innumerable, lunatic bear-poking adventures. You don't need me to detail official American economic profligacy and idiocy.

Anyhoo. Macleod's article is worth your time even if it requires studying it in some detail. Our fiscal and monetary policies affect us more than we know and we all need to know how this is being handled.

PS – I still don't understand bonds.

[1] "The US Government Is Ensnared In A Debt Trap.. And There's No Escape." By Alasdair Macleod, ZeroHedge, 4/26/19.

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