Forum Post: Inflation increases the GNP : DEBT ratio.
Posted 12 years ago on March 28, 2012, 8:36 a.m. EST by FriendlyObserverB
(1871)
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Inflation makes the DEBT look smaller in comparison to the GNP.
Inflation is what we need.
Inflation will in fact shrink the value of the national debt over time, but deliberately courting it, especially in times like these, is a pretty risky proposition. A certain amount of printing and spending by the US government will have a one-two punch effect, in which spending will stimulate demand from the bottom up and printing money will result in just enough inflation to shrink our debt-to-GDP ratio somewhat. On top of that, if our dollar devalues enough in comparison to other currencies it will lead to a better export market and higher import prices (which allows us to practice protectionism without actually violating any treaties).
On the other hand, too much inflation too soon could in fact be highly dangerous for the economy and we need to take pains to avoid that risk. If the dollar devalues too quickly and the price of imports shoots up before increases in demand lead to corresponding wage increases then you run the risk of screwing the poorest among us. Furthermore, it is entirely possible that deliberately courting inflation during a time of economic stagnation and high unemployment could lead to stagflation, which is highly dangerous.
Yes , I agree with the risks. But we must realize what the suppression has done along with the double- debt effect. We should not be in this mess if we were more careful. Getting out will not go easy.
Very technical issue (not really amenable to a rigid rule one way or the other). Inflation can cause asset appreciation, but conversely, it can cause dollar depreciation. So suddenly it becomes more expensive for us to borrow (but those higher interest rates eventually reduce inflation, increase dollar value, and at least in theory, it evens out in the long run). So it's hard to say there's any real (much less predictable) long term advantage gained by playing with our with monetary policy like that.
However, there are some possibly desirable (and understood) effects (the price of imports increase, and with any luck, domestic manufacturing steps in to fill that demand). I would say, if we decided to just print money (and the hell with inflation), we should use that money in the most productive ways possible. Spending money on things like energy, infrastructure, forgiving college loans, a homeowner bailout, expansion of state colleges, etc., are all good ways to spend that money.
It's the debt: GNP ratio that I am considering. GNP is measured in dollars, and with the suppression of the currency we have inadvertently lowered the GNP side of the ratio.
But I'm not sure how making it more expensive for people to buy food, gasoline, and everything else, helps matters (even if it were technically possible to reduce our debt to GNP ratio in this way)?
First things first. I see you understand the improvement in ratio would ease the debt burden. (After all you taught me about the ratio and GNP. )
But the ratio is only one aspect. of the economic system.
If we were to pay off the bonds, it would be best to do this in conjunction with a profit cap. This will ensure protection for the consumer. As money inflates within the economy.
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I'd say one of the best things we could do is enact a loan program enabling workers to purchase and reopen closed down manufacturing facilities (under an employee owned model). Then, invest in thorium reactors for electricity production, modernize our electrical grid, airports, and bridges. Also, expand state colleges, replace public school facilities that are in disrepair, increase the Pell Grant, student loan forgiveness, and a homeowner bailout. Also, increase spending on scientific research, our space and physics programs, energy department research (and facilities), etc.
These sort of initiatives would certainly provide a better return than growing our money supply to merely pay down our debt. We also need a value added tax (that exempts "cottage industries") to help our manufacturing and export sectors, we need more doctors in this country (the best way to accomplish this is to expand public medical universities), and we need to provide universal medical coverage (and we should do that in the most effective way possible, using empirical evidence rather than political ideology as our guide in determining effectiveness).
After WWII and the New Deal, we were able to grow our way out of debt (or at least significantly reduce our debt to GNP ratio), because we had a newly expanded industrial base, a newly built modern infrastructure, programs that promoted college education (like the GI Bill), programs that helped homeowners (or aspiring homeowners), we enacted rational regulations that insured the stability of our financial sector (like Glass Steagall), etc.
You're hired !
We can do all that too.
I have a question:
During ww2. Did the government print money to fund the war, or was it borrowed?
It was borrowed. All American currency is borrowed. Abraham Lincoln was the last President to initiate the printing of debt-free currency (to fund the civil war) and about $400 million dollars of that currency -- the greenback -- remained in circulation until the mid-1970s. But no new greenbacks were created after 1863. (That is, the amount was never increased but notes were replaced, of course.)
Every dollar created in the United States is a borrowed Federal Reserve Note, which we owe interest and a printer's fee on every time. The greenback -- the proper term is United States Note -- is often described as fiat currency because it isn't backed by anything. But being backed by future taxes is a far worse form of fiat money. Where debt-free fiat currency is created out of today's thin air. Debt-backed fiat currency is created out of tomorrow's thin air.
So, whenever anyone talks about stealing from future generations, understand that that is precisely what the function of the Federal Reserve is -- to steal from both current AND future generations. This is the one issue Ron Paul has partially right. But where he's wrong is insisting on a return to the gold standard. That would empower the bankers even more. What we need is the system that builds economies, and that's debt-free fiat money.
Those who say fiat currency causes inflation are ignoring the double inflation built into the Federal Reserve system -- the interest on the bonds AND the fee taken by the Fed. Three distinct periods of fiat debt-free currency serve as guide: America during the Civil War with the greenback, pre-revolutionary America with colonial scrip, and further back, Great Britain for the six hundred years that saw them rise to world dominance until the middle of the 19th century (which is widely considered to be the time of the beginning of the decline).
Fixing this one issue would solve so many of our money and resource problems it makes me weep for the time we've lost in this regressive, usury, utterly exploitative system. Thanks to OWS, the conversation is finally getting started but we're nowhere near where we need to be yet.
I'd still shy away from the "profit cap," though. With debt-free money and progressive taxation, even the inequities leftover in the system would be easily managed.
Thanks for sharing. I read a recent post about Britain using a ' measuring stick ?
There are a lot of components we are using that need to be thrown out. Although they have served their time / run their course, I feel no animosity towards our past methods. It is how we evolved. It is what it is. We have today to consider and the whole world ahead of us. (And perhaps thankful for rights we have been given by our ancestors. )
The debt system strongly holds us back. As I mentioned in a recent post, we earn it why pay it back!
I also have developed an " hour-coin credit system that allows to print unlimitd/ indebted currency. Something similar to your dreams and aspirations. It's a component worth considering. The hour-coin provides jobs, education and opportunity for everyone. The catch ? Equal hourly pay for everyone across the board. Civilization is just not ready for such peace. We still have the dog eat dog mentality living in isolation and greed.
Thanks for your thoughts. You encourage me ;-)
It was called the "tally stick" and it was in use for more than 600 years. There's a fairly good description and references on Wikipedia:
http://en.wikipedia.org/wiki/Tally_stick
One thing I'm against is defaulting on our national debt obligations. It's not just bankers but retirees and pension and sovereign funds that depend on those investments. But it's not a problem if we nationalize the Fed and pay off the bonds with debt-free U.S. Notes. The investors would still get their investment returned, plus interest, but the new money minted would be debt free and no new bonds would ever have to be issued. We could even accelerate the payment timeline to retire debt-backed currency in just a few years. It's a no-brainer to anyone not milking the current system.
While I don't agree with some of your proposals, I do like the fact that you're being very creative in your thinking. It's really refreshing to have a real discussion about real things instead of the histrionics we're subjected to most often. Thanks for your kind words and keep up the good work!
Can you explain the tally stick.
I also heard roman soldiers were paid with salt.
An hour- coin system has many benefits.
The tally stick was essentially an elaborate I.O.U. I can't describe it much better than the wikipedia article I linked to above. The main thing to remember, though, is that the King accepted tally sticks as a form of payment for taxes. The fact that tally sticks could be used to pay taxes made them instantly valuable as a form of currency. As time passed, they were supplemented with gold coins, like the British Gold Sovereign.
It's no mistake that the sovereign bore that name -- sovereignty is best defined as having control over one's economy and control of the economy depends on controlling the minting of currency. The sovereign was both currency and a gold bullion coin with a prominent relief of the king on one side and a double Tudor rose on the other. Everything about that coin said the king was in charge. Any part of the world that used the sovereign was under the influence of the British monarchy. The entity that controls the currency is the sovereign.
And now you know why Ron Paul is so apoplectic about the Federal Reserve. His remedy (return to gold standard) is even worse than the affliction but his distaste for allowing the Fed to have sovereignty over the American economy is spot on.
interesting indeed. long before the tally stick , was the "raiding party" . Stronger villages began raiding neighboring villages .. to the point it became known as a tax and the neighboring village simply bowed down and handed over the tax without a fight.. and that evolved into the "tally stick" . Imagine , a crook comes into your home and you sign an IOU / tally stick .. !
It amazes me that here in the twenty first century we still use a tax / raiding party system. We have freedom and democracy .. but the tax system has to go.
I'm not sure the tally stick evolved quite that way. Paying a tribute to more powerful tribes does indeed have a long, rich history. But the King was going to collect taxes to fund his wars no matter what. The tally stick enabled the free enterprise system and the accumulation of private wealth on a scale not seen before. So, even though the king was a prick who used the tally stick for his own benefit, it had the unintended silver lining of building a robust economy.
okay, I see where you are going , and I agree. the tally stick gave civilization a giant leap forward.
As would an hour-coin .. [ couldn't resist :-]
Thank you right back.
I have to ask, debt-free us notes ? Is this an option ..?
Only by an act of Congress by most accounts. However, I believe the Federal Reserve Act of 1913 is unconstitutional and a strong executive could nationalize it by executive fiat, make it a fact on the ground and challenge the courts and Congress to force America to go back into debt for every dollar printed. In the court of pubic opinion, it's a slam dunk.
Is not all debt an act of congress ?
we are already in debt for every dollar printed , and with the "double-debt effect" we are actually in more debt than what was printed.
Absolutely right. All debt is originally an act of Congress but the Fed requires no Congressional action to exercise its power over the currency. The issue is the Federal Reserve Act of 1913. Do away with that and we're done with debt-backed currency.
I think for the most part our government aggressively marketed war bonds to the American public (and Americans purchased those bonds in large numbers), so I think we financed our industrial largess with debt (although, disclaimer, I'm not 100% certain regarding the finer points of the history).
Okay. A thought occured to me. The growth after the war may have been contributed to newly printed money.
I would also ask in correlation to GNP and debt during the past three decades, was there an increase in treasuries sold. And decline in new money?
But these are questions related to other thoughts.
We could pay off the bonds with printed money , add a cap on profits , and watch the economy recover. And as the wealth redistributes itself evenly due to the cap, and lives begin to reach equalityamongst the people, we will consider alternative methods of economic structure and fundamentals. ie. Loans for people owned business. Would make for even retirement planning.
francismjenkins FriendlyObserverB,
Sorry to interrupt.
But look at it this way and see what you think.
What if profit and price caps were placed on Essentials like Tele-communications,Gasoline, Food, Clothing, Energy, water, garbage, Rent/Housing, health care. Keeping them all stable and affordable.
Then let luxuries like junk food, jewelry, entertainment, cars, vacation resorts etc etc find their own balance as to what the market will bear. The upper end individuals could pay also compensating taxes as providing non-essential services. They could then decide if they want to stay in business by providing to a wide economic base or if they would like to stay small by supplying only niche markets.
Sorry. This was a spur of the moment thought.
I mean, profit caps seems wrought with incentives for manipulation. We might place a cap on how much a company can deduct (for tax purposes) for executive compensation (and use the ratio of executive compensation to average employee pay in the formulation), but going much further than that would probably just create dysfunctional incentives. Moreover, trying to regulate prices has never worked during peacetime.
But even more importantly, I think we're better off (in the long run) trying to change our underlying system, rather than tweaking it to serve us better. It's not that some tweaking isn't necessary or advisable (in the short term), but I would much rather focus on creating something closer to genuine democracy, in all aspects of life (the masquerade of political liberty without accompanying economic liberty, is at best, half liberty).
Food is dirt cheap. Gasoline s cheaper than bottlled water! Clothing is dirt cheap. Energy is dirt cheap. Rent and housing are dirt cheap. Health care is truly expensive but mostly due to Americas horribly unhealthy lifestyles. I bet most of the people on this forum are grossly overweight and that leads to diabetes.
If you knew any economics or cared to look at the data you would not make such a statement. But then what else can one expect of you.
Using inflation to get out of debt has never worked. In fact inflation is positively correlated with high govt debt ratios.
here , look at this chart http://av.r.ftdata.co.uk/files/2009/08/11756.jpg
It shows YOY levels of inflation on the x-axis and change in government debt (as a per cent of GDP) over one year on the y-axis. The two axes cross each other at the 5 per cent inflation level (considered a point of shock for the US economy)
As you can see there aren’t many instances in the lower right-hand quadrant, which would coincide with relatively high levels of inflation and a decline in government debt as a proportion of GDP.
The fundamental obstacle to governments eroding their debt through inflation is the duration of the government debt portfolio. If all outstanding debt had ten years before it matured, then governments could inflate their way out of the debt burden. Inflation would ravage bond holders, and governments (with no need to roll over existing debt for a decade) could create inflation with impunity, secure in the knowledge that existing bond holders could do nothing to punish them. In the real world, of course, governments roll over their debt on a very frequent basis. As a result, governments are vulnerable to higher debt service costs if market interest rates change. If markets move to price in the consequence of higher inflation by raising nominal interest rates, then the debt service cost will rise and increase the debt. Thus a period of high inflation will tend to raise both the numerator and the denominator of the debt:GDP ratio.
The idea that governments can readily inflate their way out of their debt problems is a misnomer — arising, perhaps, from confusion between the fate of the individual bondholder and the response of the collective market. An individual holder of a long duration bond will lose out as a result of inflation. However, modern governments can not rely on markets to remain collectively indifferent to inflation. Inflation will raise the nominal cost of borrowing (of course) but through the inflation uncertainty risk premium it will also add to the real cost of borrowing.
Hope this helps. And may be next time you will do some basic reading before making sweeping statements. Can that much be expected of you?
No its not. A small level of inflation can be positive, 2-3% but rampant inflation is very destructive. The Fed generally doesnt want to crush inflation, just keep it at the above level.
A cap on profits would prevent runaway inflation as money is poured into the economy.
So if we both started counterfeiting money it would be good for the economy?