Inflation has been government’s primary monetary objective since the Civil War. It’s merely a matter of self-interest. Government went deeply into debt to fight the Civil War. (Some say that debt actually, ultimately, but secretly, bankrupted the government.) Clearly, the Civil War changed our government into a persistent debtor. To this day, insofar as government must borrow to raise revenue, government will naturally favor inflation since it allows government to “repay” its debts with cheaper/inflated dollars.
The deeper government goes into debt, the more determined government should be to cause inflation.
If you want to stop or slow inflation, stop government borrowing. Enforce a pay-as-you-go fiscal system wherein government can only spend the revenue it has actually collected in taxes and can’t borrow more against future generations.
A pay-as-you-go fiscal system won’t, by itself, stop inflation. But it will remove government’s incentive to inflate and thereby help slow or stop inflation.
• If government stops or slows borrowing, we should expect to see a tendency towards less inflation and perhaps towards deflation and depression. Insofar as today’s private producers/creditors have become wary of lending to our overly-indebted government, government’s capacity to borrow has been restricted. Result? We’ve been sliding towards deflation and/or economic depression.
Even if government were allowed to borrow mo’, mo’, mo’ “money,” could the National Debt be increased without limit, forever?
Certainly not. There’ll inevitably come a time when it’s finally admitted in public that the national and private debts can’t be repaid in full or by even 25%. Many believe that time is close at hand.
If that belief is correct, then, when the world faces the fact that most debts can’t be paid, we could see a couple of consequences:
1) Most consumers/debtors who depend on borrowing to fund their lifestyle, will be plunged into poverty when they can’t borrow another nickel; and
2) Most creditors will be also be impoverished when they lose whatever wealth they’d loaned out in return for paper-promises-to-pay (paper debt-instruments) that can’t be kept (paid)..
How will the economy sustain itself if, when the debts are repudiated, consumers can’t borrow any more currency and the creditors have lost most of their purported “paper” wealth since the debts can’t be repaid? Where will our “paper capital” come from if borrowers can’t borrow and creditors can’t collect existing debts?
The only “capital” that will remain will be tangible wealth like land, resources, tools and equipment. The only remaining “liquid capital” will be gold and, perhaps to a lesser extent, silver.
Those who have real capital may be able to survive and even prosper. Those who don’t have real capital may starve.
• Once it’s publicly admitted that the debt can’t be paid, the people most likely to survive will be:
1) Savers who are neither debtors nor creditors, but who have saved their wealth in tangible forms like land, tools, gold and/or silver that can’t be destroyed by the admission that debts are unpayable; and,
2) Producers who have sufficient intelligence, knowledge, tools and work ethic to produce goods and services the world needs (like food, water, clothing and shelter) and spend less than they earn doing so. By spending less than they earn, producers become the only real source of savings. Those savings become the foundation for new credit that can be loaned and used to restart the economic engine.
Until the remaining producers produce enough new products and generate enough new profits to be saved and then used as capital for new credit, the economy will lie mired in an economic collapse of the sort that plagued Russia for a decade after the fall of the Soviet Union.
This suggests that a “chain” of sorts exists between productivity, savings and credit.
First, you must have productivity to generate savings.
Second, you must have savings to generate credit.
Third, credit may be used to advance the economy.
Credit is important; savings are more important; productivity is most important. Without productivity, there can be no savings and therefore no real credit.
• Modern economics has sought to break that “chain” by allowing increased credit to be created without increased savings or even increased productivity. Today, in order to create the fiat currency used for credit, all we need is someone to promise to repay a debt. No proof of savings or productivity is required—only a promise to repay.
Government is presumed to be credit-worthy because it can seemingly extort unlimited taxes from its subjects to repay its debts. Therefore, whenever government needs to spend more currency, it can borrow more based on nothing but its promise to repay. But, government is not productive. Government doesn’t save anything. Government can’t unilaterally issue classical credit—based on: 1) productivity; and 2) savings. Therefore government argues that the need for productivity and savings is passé. Instead, government argues that all we need for credit in our brave, new debt-based monetary system is government’s (or someone’s) promise to repay a debt.
A better example of credit being issued without regard for the borrower’s savings or productive capacity is seen in the “liar loans” that funded many mortgages in the early 2000’s and are now funding many auto loans.
Written by Alfred Adask – Adask’s Law