Topic: The Economics of Debt, Deterioration, Deflation, Depression, and Disorder

[Glock32]

The Economics of Debt, Deterioration, Deflation, Depression, and Disorder, by Robert Gore


I found this link at WRSA, and I would say it has been an illuminating read for an economic ignoramus such as myself.  I particularly enjoyed a new analogy which I will have to remember.  He describes the combination of ZIRP and QE-Infinity as "holding a lit match to a thermometer to heat up the room."  See!  The mercury is rising!  Everything is awesome!

Economies are analogous to ecosystems. Environmentalists’ base state is an ecosystem in a state of nature, unsullied by man. Economists’ base state is an economy in which, other than establishing and maintaining essential conditions—protection of property and contracts rights and physical security—the government is absent. Both systems rely on the autonomous actions of their constituent elements, organically adapting to the myriad stimuli and signals around them. Analyzing the changes and distortions caused by humans on ecosystems is a big part of environmental science. Similarly, much of economics analyzes the changes and distortions caused by governments in economies.

Money can be broadly defined as whatever enjoys widespread acceptance as a medium of exchange and store of value—a means of saving—within an economy. Demonstrably more efficient than barter, money plays a central role in any advanced economy. A distortion virtually every government has introduced into their economies has been the production of fiat money—money not backed by and therefore not exchangeable into a set weight of a metal or other good—whose acceptance is compelled by legal tender laws.

The ostensible reasons advanced for fiat money are mostly specious; governments do it because it is to their benefit to do so. If government is the source of money, it has an issuer’s advantage. While monetary depreciation eventually leads to price inflation, the government is ahead of the curve. It purchases goods and services with the money it is debasing before the resultant inflation sets in (this issuer’s advantage is known as seignorage).

Fiat money has another benefit for governments, dwarfing seignorage: it supports deficit financing. A government that cannot borrow must extract taxes or fees from its populace, which is never popular and often resisted. Monetary depreciation allows the debtor to repay with money that is worth less than it was when the debt was incurred. If government is a debtor, it realizes that benefit, which is why inflation has been called a hidden tax.

More insidiously, a government can either issue its debt directly as money, or, the more modern approach, a central bank can “monetize” the government’s debt by buying that debt with money it creates. The central bank buys debt either with currency it produces or by increasing the selling counterparty’s account with the central bank (the latter practice is far more prevalent). With fiat money, a government’s debt represents a promise of repayment with either more debt or fiat money, and nothing more.

Read the rest here:  http://straightlinelogic.com/2014/11/17/the-economics-of-debt-deterioration-deflation-depression-and-disorder-by-robert-gore/

[Libertas]

Obviously, a Libertarian...you won't get this kind of thinking out of a Democrat or out of very many Republicans.  He starts out with a bang - base state unsullied by man?  Heh, protection of property...contract rights...physical security...all free from government (progressive/statist) meddling?  Heh, strike three, we're out!  Kind of sets the tone for the rest of the article quite nicely. 

Fiat, it was never meant to be decoupled an anchor of value, that anchor being gold and silver...look up the US Coinage Act of April 2, 1792 and you will clearly see the Founders intent to secure currency to a proper anchor of tangible value.  Seignorage (good term, that!) is the link between the debasement of the past to the debasement of the now.  With seignorage it is easier to debase than it was in the old mostly fuedal/imperial days whereby rulers had to collect all the gold and silver from their people and promise to return the same face value of new coinage to them, during which process the monarch extracted some pure and replaced it with some cheap alloy...thus the debasement was physical, and for the savvy, harder to get away with after a couple attempts...which usually resulted in a war of acquisition to obtain new sources of wealth.  With uncoupled fiat the wizards of Neo-Keynesianism are free to print and monetize at will.

By monetizing you make it easier to promote more deficits, more deficits equate to more spending, more spending equates (so they think) into government produced growth.  But that latter part is a specious argument by Neo-Keynesians because a real Keynesian knows government deficit spending should be only temporary and in case of national emergency (like war), it was never meant to be continuous and most economists of the time knew the private sector is a much more efficient and productive force and the economic multiplier effect much more impactful than government-driven stimulus, but the Neo-Keynesian's junked all that because they saw the government as a short cut to action and soon realized the potential to bring capitalists into line through de facto bribery and thus emerged the crony-capitalist spoils system that keeps the state engine chugging along.  Meanwhile all the consumers/citizens/taxpayers get is screwed, glued and tatooed!  Inflation, debasement, theft...oh yeah.  We're being sh*t on every second of every day and told to like it.  Meanwhile the Grand Poohbah's of Neo-Keynesianism just keep printing and monetizing deficits and they have been destroying savings for the past 30-40 years...LIRP to ZIRP to NIRP...pumping more and more combustible gas into asset classes (primarily equities) and ensuring the next pop will be bigger until the last devastating civilization-ending one ends it all. 

And wait till ObamaCare (if not repealed) or illegal alien amnesty (if illegally decreed) or Enviro-Nazi climate change crap (is illegally imposed) and you will see that Stockman "Breadwinner Economy" collapse.  Any one of those will help kill us quicker, all three would be immediate and unrecoverable.  The Poohbah's are fueling our destruction at the same time they are robbing us blind (inflation, taxation, confiscation) at every opportunity.  They are literally doing everything backasswards, everything wrong, but they are cornered and there is no escape which will allow them a graceful skin-saving exit.  They stop QE, it crashes.  They increase rates, government spending gets cut off at the knees because of increased debt service burden.  They should slash tax rates for individual and corporations, it would immediately boost growth in more real terms, but then it could overheat the economy and muck up everything.  They are playing with fire with every variable while pushing the balloon out further and further. 

He's right about debt write offs too, we see it when banks fail or a business goes bankrupt.  Do those surviving assets ever go to the next owner at cost or at a premium?  No, they go at steep discounts.  So when governments fail, when their debt goes to liquid poop...

Yeah, everything melts.  How do you put a value on nothing?  How does the legal tender of a failed sovereign matter?  What is the value of a good if there is no medium of exchange?  Welcome to Bartertown, what do you have?

But hey, we have the chimera of democracy and wise people leading us, what's the worry, all will be fine, right?