Have you ever considered that our country’s deficit funding is analogous to a badly run bank?
Historically, a bank loans money to qualified borrowers who use the proceeds to grow their assets, perhaps by purchasing equipment which grows their business or buying a car that allows the individual to go to work (grow someone else business) and earn money. The loan is beneficial to the borrower because the extra money allows him to grow assets he would otherwise be unable to attain. He then pays back the loan with interest which enriches the lender. Once the bank begins making a number of loans in which the proceeds are used unproductively, the bank has a problem. For example, the bank might make an unsecured loan of $3,000 to an unemployed person who then buys an HD TV. The borrower makes two or three minimum payments and then defaults. The bank loses.
If you examine the budgetary system in the United States, all expenditures in excess of tax revenue are funded by loans via treasury auctions. The holders of the bonds (pension funds, investment banks, individual investors, foreign countries, etc.) must be paid back with interest. But how is this money used? Are the majority of the funds used to build highways and electricity grids that will eventually prove to be an asset? Are most of the proceeds spent on bureaucracy, entitlement payments, welfare, billion dollar embassies in the desert and other projects practically guaranteed to never generate income? If government spending does not generate growth equal to or greater than the rate of interest paid on the bonds, eventually the government defaults and the bond holders get stiffed.
The above scenario is unfolding. Deficit spending, largely geared toward transfer payments, and other non-productive projects (for an example, see article on Boeing project) does not generate the growth needed to pay off bond holders. But unlike the community bank that has to eat losses when it makes a loan to a deadbeat, holders of US treasuries must be paid back – even if the United States government is the equivalent of a deadbeat.
Before we look at the United States, let’s examine Greece. Other European countries, particularly France and Germany, are large bond holders of Greece debt. Greece has spent massively on various entitlements since joining the European Union. Now, Greece has reached the point they cannot make interest payments on their loans, hence Germany and France have a problem. Greece, with just around 2% of the GDP of Europe, is considered too big to fail. France and most of Europe want to extend more loans to Greece which would allow Greece to be able to continue making interest payments which they currently can no longer make. It’s kind of like a person that has $20,000 on his VISA account, but no longer can come up with the minimum payment. VISA, rather than writing off a loss, extends the borrower another $10,000. Now the borrower owes $30,000, but with the $10,000 in new loans, he will be able to make minimum payments once again; for a while. Germany is reluctant to go along with the arrangement because they realize in the long run Greece will default anyway, and by bailing Greece out with additional loans, the default will only be larger.
The model in America is much the same. Our demographics are such that future entitlement funding will grow year after year and current rates will not generate enough revenue to pay for them. Entitlement expenditures are unproductive in the sense they don’t grow the economy very much (probably zero), and the interest on the bonds sold to fund these entitlements will simply result in raising the ratio of debt to GDP.
Some would argue that the economy is cyclical and will soon turn around, resulting in additional tax revenue which would reduce the amount needed to borrow. This is an incorrect assumption. Debt has saturated the economy to the point it cannot expand. Money is tight, thus personal spending is not going to increase. The rate of housing defaults will continue to accelerate. High paying jobs are being constantly phased out. As part of global wage arbitrage companies continue to outsource production facilities overseas. With government wealth transfers (spending via more debt), the economy might grow more than otherwise, but for each additional dollar of debt spent by the government, the economy will grow proportionately less than one dollar. In other words, the more the government spends to inject life in the economy, the bigger the hole that gets dug.
Europe will now begin austerity measures. Basically, austerity measures are designed to transfer the debt from the public sector to the individual citizens. If successful, the government structure remains, the bond holders continued to get paid, and the standard of living declines for the population.
When the nation began, Thomas Jefferson argued against a Central Bank. Alexander Hamilton wanted a powerful Central Bank. Hamilton eventually won. By the time the 1830’s arrived, the Central Bank was considered a corrupt institution which was beginning to bankrupt citizens. Andrew Jackson successfully dismantled the Bank and the country survived for another 80 years ago until the Federal Reserve system was founded in 1913.
How might a government run without a Central Bank? Theoretically, there would not have to be an income tax. This country did not have an income tax until the early 1900’s. People would keep all of their wages. Government would fund projects (highway systems, defense spending, etc.) by simply printing money. Wouldn’t this be inflationary? Whether the money is printed, or loaned into existence via treasury auctions (debt) as it is now, the money supply would not change. The burden on the public of having to pay back interest would be eliminated. The middlemen (the Central Bank and various bond holders) would be eliminated. If the government wanted to add entitlement programs, then I think you’d develop problems because this would involve printing money for unproductive purposes, resulting in inflation.
For now, we’re stuck with the system we have. If we converted over, bond holders would quickly sell their bonds and we’d experience an hyper inflationary currency collapse.
We should have listed to Thomas Jefferson and Andrew Jackson.
No comments:
Post a Comment