Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Dow Stock Market Trend Forecast Update - 21st Sep 19
Is Stock Market Price Revaluation Event About To Happen? - 21st Sep 19
Gold Leads, Will the Rest Follow? - 21st Sep 19
Are Cowboys Really Dreaming of... Electric Trucks? - 21st Sep 19
Gold among Negative-Yielding Bonds - 20th Sep 19
Panicky Fed Flooding Overnight Markets with Cash - 20th Sep 19
Uber Stock Price Will Crash on November 6 - 20th Sep 19
Semiconductor Stocks Sector Market & Economic Leader - 20th Sep 19
Learning Artificial Intelligence - What is a Neural Network? - 20th Sep 19
Precious Metals Setting Up Another Momentum Base/Bottom - 20th Sep 19
Small Marketing Budget? No Problem! - 20th Sep 19
The Many Forex Trading Opportunities the Fed Day Has Dealt Us - 19th Sep 19
Fed Cuts Interest Rates and Gold Drops. Again - 19th Sep 19
Silver Still Cheap Relative to Gold, Trend Forecast Update Video - 19th Sep 19
Baby Boomers Are the Worst Investors in the World - 19th Sep 19
Your $1,229 FREE Tticket to Elliott Market Analysis & Trading Set-ups - 19th Sep 19
Is The Stock Market Other Shoe About To Drop With Fed News? - 19th Sep 19
Bitcoin Price 2019 Trend Current State - 18th Sep 19
No More Realtors… These Start-ups Will Buy Your House in Less than 20 Days - 18th Sep 19
Gold Bugs And Manipulation Theorists Unite – Another “Manipulation” Indictment - 18th Sep 19
Central Bankers' Desperate Grab for Power - 18th Sep 19
Oil Shock! Will War Drums, Inflation Fears Ignite Gold and Silver Markets? - 18th Sep 19
Importance Of Internal Rate Of Return For A Business - 18th Sep 19
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Government Spending - The High Price of a "Free Lunch"

Economics / Economic Theory Sep 09, 2019 - 01:53 PM GMT

By: Frank_Hollenbeck

Economics

One of the Ten Commandments is “thou shalt not steal,” and theft is generally condemned in most religions, yet our religious leaders and followers have essentially turned a blind eye to government theft.

Based on a policy of envy, Bernie Sanders, for example, has bluntly stated he intends to tax the rich to fund his programs, as though the word rich itself justifies theft. The current crop of other democratic candidates is offering a beehive of free programs without any real discussion on how to pay for them.


Three Ways to Pay for the State

Governments can finance these programs in only three ways: (1) direct taxation of its citizens, (2) borrowing money, and/or (3) printing money. Few citizens understand the nefarious effects these methods can have on their own well-being. None of them provide “free” money.

The first and most obvious way to raise money is by direct taxation. When you pay your income tax or sales tax, you are brutally aware of how much money is being taken out of your own pocket. If the government only uses these taxes to fund itself, it would quickly run into serious taxpayer opposition; would we still be in Afghanistan today if the government took your flat-screen TV or cell phone to pay for soldiers half a world away?

The second way to raise money is by government borrowing. When the government borrows, it takes money from people who are trying to save, promising a seemingly riskless asset: a government bond. The government has displaced money that would normally have been used to invest in a new computer or machines or buildings, or even a consumption good as a new car. When the government borrows, there are real sacrifices today, not in some distant never existing future when the debt is repaid. There are real resources that are extracted from the economy in the now and present. This is a good example of what is seen, what is not seen and what should be foreseen. Government borrowing finances government consumption which crowds out investment spending that would normally have created a more prosperous economy.

Government Crowds Out Other Borrowers

Now, government borrowing is normally also constrained. The more the government borrows, the greater the demand for loanable funds and the higher the rate of interest. Here again, taxpayers who are also trying to borrow to buy a car or a house would soon realize that it’s the government borrowing that is crowding them out of the loan market. Of course, there is a point of no return for government debt, when the markets doubt a country’s ability to repay this debt — as Greece discovered in 2010.

Now, the obvious question is, how can the US or any other country run record budget deficits and have rock-bottom interest rates at the same time? The answer is the third way by printing money, or often called “quantitative easing.” This way also impacts the government’s ability to borrow.

A simple example will make this path of funding clearer. Suppose an economy has $10 to purchase 10 pencils. The price of the pencils will be $1 each. If the price increases (inflates) to $2 each while the supply remains constant, there would be 5 pencils that can’t be purchased, but if the cost of the pencils were reduced (deflated) to only 50¢ each, there would be people holding $5 looking to purchase nonexistent pencils. Supply and demand in the marketplace give us a price of $1 per pencil. Now suppose the economy is growing and is now producing 20 pencils. Because there are now more pencils in the supply pipeline, the price of pencils will drop to 50¢, a deflation rate of 50%. Deflation here reflects society pushing back the constraint of scarcity. It cannot eliminate scarcity or all prices would be zero, but this deflation shows an increase in the standard of living for everyone.

Two of the greatest periods of GDP growth in the US, 1820 to 1850 and 1865 to 1900, had deflations of 50%. Deflation should be hailed instead of being scorned as it is currently by most professional economists and central bankers.

Now, returning to our initial example of $10 and 10 pencils. Suppose the government prints another $10 to buy pencils but our supply of pencils has not changed. The money supply has doubled so we now have $20 chasing 10 pencils. The price for each pencil will inflate to $2, and the government will be able to buy 5 pencils by cutting the purchasing power of money in half. In other words, you have been robbed or taxed 5 pencils because your cash can now purchase less than before.

If at the same time the economy is growing, then we would have $20 chasing 20 pencils and the price of pencils would have remained at $1. There is no inflation but the rise in real income, exemplified by the 10 pencils that would normally have gone to the citizenry, has been siphoned off or stolen by the government. To a large degree, this is what has been happening since we moved to a fiat currency system in 1933. The central bank has been keeping the CPI in check but has created massive asset inflation, a massive redistribution of income from the poor to the rich and has been a major contributor to financing ever-growing government expenditures.

As Lord Keynes said,

By a continuing process of inflation governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but at confidence in the equity of the existing distribution of wealth.

Many in the lower rungs of the economic ladder blame their declining real incomes, and other inequities, on capitalism. They should, instead, be blaming the central bank.

When the government borrows, it increases the demand for loanable funds, and with a fixed supply, interest rates should normally rise. If at the same time the central bank is increasing the supply of loanable funds by printing money to buy government bonds, then interest rates will decline if the increase in supply is greater than the increase in demand. Here, we are basically monetizing the debt. Worldwide, this printing has currently driven interest rates to zero or into negative territory. Using the economy as an excuse, central banks have been monetizing government debt, alleviating any pressure on governments to control their spending.

Continuing from Keynes,

As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Many economists are currently predicting we will experience another devastating recession in the US. Will we repeat the errors of the past by trying to fix a credit crisis with more debt? Or will we find a permanent solution by ending central banking, fractional reserve banking, and the government’s ability to borrow and print money? If we do, any future government spending would require an immediate and clear sacrifice on the part of the citizenry: unlike what politicians would have you believe; there is no free lunch.

Frank Hollenbeck has held positions at international universities and organizations.

Frank Hollenbeck

Frank Hollenbeck is a financial consultant who worked for the State Department as senior economist, Caterpillar overseas as chief economist, and Director of Research at the Banque Eduard Constant in Geneva.

© 2019 Copyright Frank Hollenbeck - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules