Government running out of money. Sell your house now, or anything gov't supports!
- Thread starter wilburbear
- Start date
The last time we had a bout of inflation, we took care of it by 1) raising interest rates rather steeply and, 2)accelerated the process of offshoring and outsourcing (cheaper goods from abroad shifted the effects of inflation from goods to assets).
Today, not much left to offshore and outsource. And raising rates? Well, our debt to gdp is very different than it was in the 1970s - not much wiggle room like we had back then. Interest on debt service is a growing percentage of annual tax revenues.
When constant credit growth is needed to propel an economy, and if each year more credit growth is required to produce an additional dollar of gdp... and if that credit growth is fueled by the federal gov't because the private sector is toast... well, it doesn't take much of an imagination to foresee that one day the annual interest payments on the federal debt will reach 30% of tax revenues... we will inflate, and in a short period of time, the inflation gets completely out of control.
You know why? The Sovereign Bond market will stop functioning, or will demand extremely high rates... we print like crazy to service what's not sold.... higher rates mean higher debt service, bigger and bigger loans to roll over... until KABOOM. We just can't keep up. The debt so overshadows gdp, it becomes unmanageable... think I'm crazy? Look at a chart of federal debt to gdp... it's growing... and it's growing much faster than gdp is.
Only a nonfinancial event like war will stop this.
From Wiki:
Monetizing debt
In the United States, and in many other countries, the government does not have the power to issue new currency to pay its bills[citation needed] â it must instead finance the deficit by issuing new bonds and selling them to the public to acquire the necessary money to pay its bills. However, if these bonds do not end up in the hands of the public, the only alternative is for them to be purchased by the central bank. For the bonds not to end up in the public hands the central bank must conduct an open market purchase. This action by the central bank increases the monetary base through the money creation process. This process of financing government spending is called monetizing the debt.[1] Monetizing debt is a two step process where the government issues debt to finance its spending, the central bank purchases the debt from the public and the public is left with high powered money.
Effects on inflation
When government deficits are financed through this method of debt monetization the outcome is an increase in the monetary base, or the money supply. If a budget deficit persists for a substantial period of time then the monetary base will also increase, shifting the aggregate demand curve to the right leading to a rise in the price level.[2]
To summarize: a deficit can be the source of sustained inflation only if it is persistent rather than temporary and if the government finances it by creating money (through monetizing the debt), rather than leaving bonds in the hands of the public.[3]
http://en.wikipedia.org/wiki/Monetization
maybe it's a misunderstanding of terms. but i wouldn't qualify swapping treasuries for cash monetazation after all the treasuries still exist
monetization is turning something into legal tender. this is what your wiki says
Monetization is the process of converting or establishing something into legal tender. It usually refers to the printing of banknotes by central banks, but things such as gold, diamonds and emeralds, and art can also be monetized. Even intrinsically worthless items can be made into money, as long as they are difficult to make or acquire. Monetization may also refer to exchanging securities for currency, selling a possession, charging for something that used to be free or making money on goods or services that were previously unprofitable.
This was what i was referring too.having the treasury, not the fed create the money. my point was that the government through the power of the constitution can legally pay off it's own debt. Popular belief is that inflation would be out of control. This could be offset by increasing the reserve requirement for banks. banks would have to hold more money and inturn suck up the monetization. Again most if not all banks hold t-bils as there reserve. those newly converted t-bills will stay there because there needed for reserves.not to mention the extra needed for the increase in reserves.
the government has always had the power to create money unfortunately it's been privatized. Article 1 section 8 of the constitution gives the government the right to coin money
Everytime a loan is made in a bank new money is created. how come inflationist's only get alarmed when the government borrows
Don't forget, ours is a debt based system, i.e. money is lent into existence. That's the system, and unless there is a radical change, that is what will likely continue.
Yes, money is created in the private sector - but again thru debt creation - fractional reserve lending. My old assumption of this process is that banks facilitated lending for the real economy to grow. If the economy needed factories, office buildings, or even a restaurant, a bank would use its judgement and decide to lend.
However, after the huge buildout of US manufacturing during the 1950s and 1960s, the productive economy hit a wall, so to speak. I won't go into details - that's an entirely different thread. Nonetheless, banks needed to continue expanding lending despite the slowdown of growth in the real economy. So what did they do?
They went after the consumer market - in a big way. They also got creative with the derivatives market and securitization. They started lending even more on speculation... It was an evolutionary process that I think was not really productive.
That system has collapsed. Anyone that disagrees, please explain to me why the US gov't and Fed needs to backstop Fannie and Freddie and AIG and take on level 3 assets to the tune of trillions.
The gov't has essentially stepped in to continue credit growth, to keep the economy from imploding in a deflationary death spiral. Now that may seem to be a wash, right? One could say that the gov't is combatting deflation and so long as the black hole of deflation is not overfilled with money, so to speak, we'll be OK.
But I don't think so. We have already seen the private sector's results of lending (creating money) for lending's sake, despite the real productive economy's needs. How successful will the gov't be in this endeavor? What will the gov't results be with this new grand experiment?
Credit growth, IMHO outpaces productive growth. There is a widening divergence between how much credit is required to create an additional dollar of gdp. Look at a debt to gdp chart and you will see that every year, more dollars are needed to create one additional dollar of gdp. That's where the system fails.
(We are now closer to 400% debt to gdp)
And as the gov't creates more and more credit (deficit spending) and monetizes (issues new bonds) the servicing of interest grows. And with monetization, it is an open market purchase. How long can rates stay low in that environment? What if no buyers show up?
The cost of servicing the growing debt (paying interest) in my view will continue to grow faster than tax revenues... every year it will consume a larger percentage of tax revenues requiring ever more monetization. It's a vicious cycle... until some say we reach around 30% of total tax revenues, and then there's a breakdown... a collapse.
I'm open to any opinions out there. I may be wrong, but I have discussed this with Economists, and have yet to feel convinced otherwise.
I've studied that situation
debt monetizing about 8 years
hyper inflation extreme start to peak 1 year
Civil war 8 months after hyperinflation
same people in power before and after but country split into more states
length of war about 4 years
electricity and water infrastructure largely untouched, however areas that were combat zones - everything leveled, real estate and infrastructure
in situation like this, odds are your house / properties will be ok, but 20% will be leveled
so its a gamble
the richest are able to escape the country first
the upper middle class escapes second
the lower class is left to survive or die
Yes, there is a difference. Dollar bills are but a tiny fraction of money, and even they are Fed Reserve "Notes"
For a country to start printing money outside of the credit system to just pay off debt would crash the system, in my opinion. You Know why? Because EVERYONE will start doing it and FOREX will go haywire as to valuations and there will be a mad race to the bottom. Global trade would experience a near if not total collapse. Certain Hyperinflation would follow.
The one constraint that Fiat Money has is its requirement to be born of credit. Take that away, then all is lost - there are zero constraints - money is then 100% PURE FICTION and thus, it's worthless value will be obvious to all.