This is a wonderful article and serves as an excellent introduction to issues of tax and public debt. Why Taxes Don't Matter Much Anymore
Fiat money has been in existence for quite sometime now after the gold standard was abolished. In the hands of responsible policy makers, it does have its advantages of allowing flexibility in monetary policies. But on the other hand it gives the power to create money out of thin air and to abuse it at the hands of the not so responsible. Today's political problems are similar to the CEO problems we have in the financial world. Their terms are short and the rewards are normally based on what you see and what you enjoy now. The future is someone's else problems. The same with creating debt in government, rebates or bonuses or whatever the government call it can be issued at will, reason being the current administration will not be around when it is payment time. I guess this is when the question lies in whether the policy makers should be given such unlimited freedom as they enjoy with fiat money. IMHO, sad to say this, it seemed that despite the few hundred years in government, the policy makers still aren't matured enough to handle their finances properly. Gold standards despite its restrictions may be useful to bridle those free spenders who spend as if there is no tomorrow. We are now at the crossroads of a recession, the specter of the liquidity crunch caused by a gold standard implementation is something I doubt any politicians will be willing to take on. Looking at McCain and Obama I don't think they will be going on the gold standard anytime soon. We have to be into some serious recession or disruptions before anyone would contemplate such a move.
Very good article Guerilla. Thought provoking to say the least. Reminded me something that I read from one of Dave Ramsey's books. He was talking about how Americans need to start saving more for retirement. He basically asks: "would you want to give the government all your money after seeing how wonderfully they can manage it?" Hell no....
Nice post WT. The trick here, is that it is inevitable that paper money will collapse. We just can't say when. 5 years, 20 years, 50 years, at one point, it will be generally worthless in trade and people will dump it ala Gresham's law, creating a hyper inflationary storm. We have to be ready if that happens to help shape policy away from another paper currency or digital money (both of which can be counterfeited at will) and demand the end of legal tender laws. It's one thing if legal tender is a fixed commodity, but I fear that reinforcing the notion that the state should decide what is money, will eventually lead to paper or fiat money again. Everyone should want "honest" "sound" money. It's in our best interest, because it encourages saving and the accumulation of capital, which is the way out of poverty and creates upward class mobility. If your savings are constantly eroding in value, it is impossible to get ahead without taking on debt, which is usually not available to people on the bottom rungs of society.
Thanks FG. People should save for their retirement, but the problem is, every time the government increases the money supply, it devalues the purchasing power of those savings. So saving is actually counter-productive. What you want is for the money supply to stay stable. Then $10 saved now, could buy $10 worth of goods when you retire. Unfortunately, an inflationary monetary policy pushes people to take on debt, instead of saving because the debt will be a little easier to pay back in the future. If you borrow $100 today, it will be cheaper to pay it back later because we know $100 ain't going to be a lot in 10 years. The problem is, this forces everyone onto a cycle of not owning any property or capital, and paying interest on everything they do, which is almost like another tax but this time to your creditors (Wall Street and the Banks) I'm not anti-bank, but I understand that the money supply is controlled through the banks, and that was one of Thomas Jefferson's concerns. And he was quite prophetic because it is becoming true. Today, people are waking up homeless as they lose their properties that they bought during inflation, but have now lost through deflation. The Founders were pretty smart about economic theory.
It will be a collapse rather than an orderly financial reorganization because no politicians are charismatic enough to implement this. Sad to say, a collapse will be far more painful to the general population than a reorganization.
Right, well when the USSR collapsed, there were some reforms. I fear this will be a bigger collapse, but hopefully people all around the world will push for lots of reform, for a new, more honest and transparent system.
I have to admit, I see these things written continuously, especially here, as Guerilla spends a lot of time introducing Libertarian/Misian--whatever you want to call it arguments into the discussions--and it stuns me. I come from a background of studying economics then finance and accounting and have worked in business environments for years. I like to see hard facts and direct tie ins between relationships of numbers. I can't understand why the article's author didn't address the question about taxes and debt directly by keeping the topic to taxes and debt. There are various mechanisms to address this. Clearly the US government is avoiding them and politicians in Congress and the White House are dancing around tying tax revenues to government expenses. They simply aren't addressing this issue directly. US government debt started to grow at an alarming rate during the Reagon administration. It has soared again during the Bush administration. There is a semi famous quote from within the administration that in discussing financial concerns, Cheney said something like "debt doesn't matter". Of course it matters to individuals, businesses, states and municipalities and other government entities required by law to balance budgets. The federal government has debated so called "line item vetos" and argued about "pay as you go programs" wherein expenditures for programs have to be matched either by cutting elsewhere or taxing more to meet new programs. This and past administrations and congress have not addressed these issues. Normally governments and businesses, let alone families don't address these difficult issues until "the sh!t hits the fan" It is afterall painful. On a government basis below the fed level within the US I see the issue being addressed on many fronts. There is public awareness of it. I live in the Washington DC region. In Virginia, two Dems became governor fairly recently, (one in office now). Both had expansionary expenditure programs upon which they campaigned. Regardless of the "attack and spend" characterisations in campaigns they got elected. Both faced difficult financial situations. In both cases they dropped the "expansionary programs" and kept the budget in line, cutting expenses. In New Jersey now, even as the state was required to balance budgets, prior governors (both Dems and Reps) borrowed from state accounts to do so and played terrible financial games. Jersyey is in terrible financial state, and the current governor, a Dem, is slashing expenses in a way the state has never experienced. His popularity rating is dropping like a rock, btw. Wall Street rating companies (they rate the credit worthiness of state bonds) are saluting his actions as they maintain the credit worthiness of the bonds. A final example I can cite is a wealthy county in Virginia, Fairfax, is addressing current or anticipated shortfalls in its budget by inviting citizens to go through the budget with the government officials to address cuts. That will be interesting. It will be controversial and difficult I'm sure, but it might focus attention on items that are both expensive and deemed unneccessary. I hope citizens get involved. I don't live in that county, but I've got a line item expense that pisses me off (and I've used it). The county owns and operates "health facilities" that are IMV, the equivalent of "top quality" private gyms in the region. They are both very nice and they are relatively cheap. Amazingly cheap. They compete with the private gyms in the region. To the extent they are used, people who might spend their money on private gyms are using government subsidized "superior gyms" paid for by the citizens of the county. The final straw is that citizen awareness of these facilities isn't even that great. (crappy marketing-) So its a horrendous subsidy. Relative to everything else they spend money on its probably not a big item.....still I hope they slash it. I find it offensive. In the above situations the financial "sh!t hit the fan" and responsible managers are dealing with it, however painful. (and it is painful). Guerilla, you should relish the fact and news that the tough economy is sparking an aggressive look at privatizing government roads and other infrastructure. This is being caused by "market factors". States and municipalities are seeing drops in revenues because of the recession and drops in real estate values. They need other cash resources. The sources of cash, the investor world sees an opportunity. The funds are mixed (domestic funds and foreign funds through investment groups, foreign funds exclusively, and domestic funds exclusively (ie state pension funds). The process in addressing this is slow and time consuming, but it is progressing. It is a deal making process with which I have familiarity in some ways. The volume of funds available for these potential and other investments addresses this move toward the authors discussion about the FED, creating money, etc. There is an enormous amount of liquidity in the world. I am startled by its size. It is very international, but likewise there are aggregate trillions within a vast array of resources. This past recessionary period large volumes of foreign funds invested major amounts of money in American and other financial institutions that took huge losses. The purchases were made at steep discounts and were accordingly "great purchases" (at the time) for the foreign funds. That is the way funds move though. They look for great value increasingly around the world. Btw, the purchases of American resources made by foreign funds are not unique. In the mid 1980's "strong" Japanese currency and investment sources bought up huge volumes of American resources. At the time of the investments the American resources were relatively cheap to the Japanese investors. The Japanese economy tanked. The yen lost all sorts of relative value and what were great buys by Japanese investors at one time became problematic for them later. World wide liquidity is so large that should the American economy independently from the rest of the world, establish a "gold standard" or any type of hard currency standard, upon which American credit availability would instantly and dramatically drop, (money wouldn't be being created and flowing out of the American spigot) there is no guarantee that credit would dry up within America. I think its not only highly unlikely, I think there would be virtually little impact. There is that much liquidity floating around the world. I am not aware if people who Guerilla references have addressed world wide liquidity in so far as its impact upon the US, vis a vis the issues of creating money, stimulating inflation, and its effect upon the economy. It would be worthwhile to see and to have measured. All economies around the world work through measurements and hard numbers. They make decisions based upon data. Large businesses of course do likewise. Theories without data are generally considered worthless within real world decisions. Politicians may like them and political theorists may like them but they often don't play out. I'm covering a lot of territory here so I'll get back on topic. If you want to write an article about the Fed, don't mush it up by talking about budgets and debt. Budgets and debt DO NOT necessarily relate directly to the FED. They are only related when creative writers mesh them together. The disconnect between what the government spends and how much it takes in is a topic in and of itself, and should be dealt with accordingly. 2. Theoretically economists declare that increasing the money supply causes inflation. It is clearly not the only cause of inflation. Worldwide inflation that is occurring right now, is a direct result of huge increases in the last year in oil prices and those of other commodities. In that it is world wide, and in that these specific commodities have risen in cost so much, are there theoriticians who can tie this world wide inflation to the rises in commodities AND the increases in money supply. How much of an impact has money supply had on this inflation? Is it uniquely tied to increases in American money supply? Is it tied to increases in money supply from many nations and currencies. It is a FACT that as Americans have increased the supply of liquidity in its currency so too have a MYRIAD of nations and currencies around the world. As each year moves forward and the aggregate of other economies grows faster than that of the US, the impact of the US economy, money supply, the value of the dollar should have less effect on world wide inflation. The clearly visable inflation of this past 12 month period is dramatically worldwide though. Can someone place a value on it that reflects growth in money supply by the US FED? Can someone place a figure on it that reflects the inflationary impact within the US alone? Those would be figures that back up the writings of the author. Theories alone don't suffice. 3. The writer attributes all economic problems to the destruction of the gold standard, and the resultant endless printing or creation of endless money. The writer suggests that it started with the creation of a US central bank in the decade of the 1910's and then everything fell apart in the 1970's when Nixon totally eliminated the gold standard. The author writes.... First of all, there were wild economic swings and specifcally financial crises that hit the US on a consistent basis before the development of a central bank. They appeared every decade or so. All these "negatives" were occurring before any element of a market free of a central bank, and using a "gold standard" or frankly any item that has a specific value as a standard for creating American money were utilized. A Central bank was established SPECIFICALLY to deal with these wild swings and periodic financial crises. Secondly, what the writer declaims as the "wild swings of business activity" and attributes to the existance of the FED and the lack of a gold standard, are in fact not that at all. These are the results of market bubbles and the results of markets in real terms in the real world. That is how markets work. The US recession of the end of the 1990's and early 2000's personifies such a "wild swing of business activity" It was result of a decade or more of US and worldwide explosion in all manners of telecom activity, including at the tail end of the explosion the development of the internet. During that 10 year or possibly 20 year period all types of telecom activity grew exponentionally. During the long growth period, new businesses, products, and services begat spin offs and competitors with more new businesses. Businesses developed domestically and internationally with international competitors competing on US soil and vice versa. Interestingly the growth included privately owned businesses and nationally owned businesses (in part or in whole) as many nations had total or partial ownership of portions or all of their telecom industries. Between the start of that period and by the end of that period it did become a helluva lot cheaper and communications quality was dramatically better in simply calling or sending data overseas. By the time the recession hit, total employment within this industry had multiplied many many times over what had existed when the growth spurt started. Products and services were being sold to buyers in every way possible and the buyers were provided with innumerable choices because of the explosion of business providers and choice. Supply was simply outstretching demand. The operating nail in the coffin was the development and laying of high data speed and (internet quality) cable around the nation and in other nations, under oceans, and efforts to bring cable into "the last mile" in highly concentrated business areas. Total investment costs for cable were huge and the great number of providers were all competing and laying cable. Again, the capital that financed this was world wide and not unique to American funds. With funds coming from everywhere it would be difficult to blame it on "easy credit" available in just the US system. In the immediate aftermath or once sufficient cable was layed not the actual traffic itself, but the "lighting of cable" or the actual capacity turned on for usage represented about 5% of cable investment. It became an economic debacle. People lost jobs in great quantities, businesses failed, and the relative size of the industry that had exploded in the last decade, but basically started when AT&T was deregulated, was of such size that its crash led into a recession. That is all business cycle activity. It has nothing to do with controlling the money supply. In fact significant elements of the business were foreign financed and controlled. I find the article misleading. It starts on one topic, I believe as a teaser, and moves into discussions supporting dissolution of the FED and urging a return to the gold standard, or a standard similar to the gold standard. It attributes economic problems to a lack of a gold standard (used for simplicity of description). It doesn't account for the impact of world wide liquidity. I'd relish seeing hard data that backs up the author's claims.
Actually, the article was about why taxes are no longer necessary. The issue of debt is part of that, but the primary focus was how, from a technical standpoint, the government is able to spend without increasing taxes, and known consequences/resolutions to that system. I do relish it, I just wish it wasn't a big deal, but natural that the market would provide for individuals (individuals conducting trade with one another), rather than relying on the state. The market is generally more efficient and more innovative than the state. Well, the Japanese economy tanked because it's monetary policy was mismanaged, and it went into a Depression. http://tampub.uta.fi/econet/wp44-2005.pdf It's very important to discuss monetary policy. It's not an article about the FED. It is an article about taxes. However, the FED facilitates unbalanced budgets and national debt as the lender of last resort, so debt and budgets definitely are related to the FED. The disconnect, is explaining to people how the government spends more than it takes in, without having to raise taxes. Guys like you and me that are into this stuff, may take for granted that everyone understands monetizing the debt and open market operations. But for every one of us, there are thousands who probably do not understand it. It's not theory. It's proven fact, and it is easy to arrive at as a conclusion, if one uses some basic deductive reasoning. It is the only cause. That's because it is impossible for inflation to occur without a growth in the monetary supply. You cannot have an increase in aggregate pricing if there is not more money in circulation. Yes, the price of eggs may go up, but the price of bacon and milk will fall to compensate unless the monetary supply grows. So if one is wondering if it is possible to have a chicken and egg with regards to the inflation, the answer is no. The money supply must always increase before aggregate pricing inflates. If I have missed some other sort of inflation you may have been addressing, I'd be interested to read about it. Theoretically, you are correct, but the US is the world's largest debtor nation, as well as provider of the global reserve currency. This keeps the the dollar strong, as no one wants a collapse and then their securities are irredeemable, and post-Bretton Woods, many banks and sovereign wealth funds are loaded with dollars to satisfy their own domestic currency reserve requirements. No, no one can provide a precise formula, because there are too many variables, as you pointed out in the Depression thread, in an "imperfect" market. But that's not relevant anyway. If everything conformed to mathematical models, then we could truly have planned economies without crisis. Obviously we do not, and that doesn't diminish observable and rational phenomenon like inflation.
This is a great YouTube showing Ron Paul over the last year or so, how he was out front on the Housing crisis, how he was out front on the current recession, etc. He's able to be out front economically, because he understands the Austrian Theory of the Business Cycle. It's also why investors like Peter Schiff and Jim Rogers are so successful. http://www.youtube.com/watch?v=k-likGrMGHA Also, this section got messed up in my previous post. Well, technically the FED has defaulted twice. Once when FDR confiscated all of the bullion held by private citizens, and again when Nixon closed the gold window and defaulted on the dollar. All Mises articles are posted to their blog (http://blog.mises.org) and you can comment on them. This article has 22 comments. Usually a lot of very smart people chime in on these articles, and they don't pull many punches. It's common to run across Austrians, Objectivists, Keynesians, Neo-Classical economists etc. Also, if you look up Jeffrey Tucker at LewRockwell.com, I bet his email address is at the bottom of his articles there. You could always email him your comments, I wouldn't be surprised if he responded as long as your critique is worthwhile. He's the webmaster at Mises, and you can catch him in the blog and forums every now and then.
The issue of inflation: Per EarlPearl: referencing increases in the money supply Per Guerilla, in response: [/QUOTE] Guerilla: I assume you are referring to the dictionary definition. I am referring to price increases. I am referring to the increases in the price of oil, the price of gas at the pump, the resultant increases in goods that rely upon transportation costs. Most of the American population and writers would reference it in a similar fashion. The government reflects it in its publications on cpi. These costs have gone up around the world, as you well know. The increases have been so severe as to have created riots in India, strikes in Europe, etc. These are real costs that hit people in their pocketbook. This is how I define and look at inflation. In fact in that this impact is worldwide, I can't see any attribution to US increases in money supply.
Earl, classically, the definition of inflation related to an increase in the monetary supply. That is because it is a root definition for the phenomenon of inflation, observable in rising prices. The reason why the supply of money cannot be divorced from price levels, is that in the aggregate, prices cannot rise without more money to price them at those higher levels. For example, most everything was cheaper 20 years ago. Ok, there may be some specific industries where efficiency has driven down prices, but generally speaking, people made less nominally per hour, the federal budget was nominally lower, and the price of property, food, gas, etc was nominally lower. So how did most of, (for all intents and purposes, all of) the everyday prices reflected in the CPI rise? Well, let's assume the monetary supply is fixed. If all prices rose, people would be able to buy less. The standard of living would be compromised. They would have less vacations, less vehicles, smaller houses and simpler meals, because everything is more expensive, but they don't have more money to pay the higher prices. Think about supply and demand. If the price of goods goes up, then demand will fall. So this is where our diminishing standard of living comes in. But I don't believe the standard of living has fallen or frozen (well, I do in some ways, but that's another discussion). So obviously, in order for the "economy to keep growing" and for people to continue to eat steak and go on vacation, there had to be more money, to accommodate all of those higher prices, and the higher wages to suit. I was going to write an essay length piece, but I wanted to be sure we are on the same track before going any further. And yes, most people and journalists mistakenly refer to inflation as an increase in prices, but I doubt many of them know the difference between core and headline CPI (if they even know there are two measures), let alone what core and headline represent. Generally, most people are not very well educated in basic economics or finance.
As we have discussed in the past, I believe the definition you follow and the dictionary definition is worthless in real life. Further. The price of oil exploded around the world. The US is not an importer of oil. US monetary inflation had no effect on this phenomena.
As we have discussed in the past, I believe the definition you follow and the dictionary definition is worthless in real life. Further. The price of oil exploded around the world. The US is not an importer of oil. US monetary inflation had no effect on this phenomena.
I'm not sure how you can argue my definition when yes, it is in the dictionary, and it is impossible for prices to rise in the aggregate without it. When you talk about an increase in the price of oil, that's a price fluctuation, not inflation. The higher price cannot sustain itself, unless it has zero elasticity. We've already seen that high prices leads to falling demand, leads to falling prices again with oil. But what we have both been talking about is the CPI which is a year over year measure of aggregate price changes. When aggregate prices rise, year over year, as measured by the CPI, the supply of money has to have also increased, or eventually people would not be able to buy anything as their standard of living shrinks. There is a reason why it is in the dictionary and has been for decades. Because it is fact, not theory.
When I studied Engineering Management in college, y professor stated only 2 reasons for inflation 1. Cost-Push inflation: Increase in Operating costs or cost of raw materials causes rise in the cost of final product 2. Demand-Pull inflation: Increase in demand without any increase in supply gives rise to inflation. No one talks about monetary inflation, because few people know or understand it. Text books hardly talk about it. Inflation tax is just not mentioned. I studied from a book "Management" - written by James Stoner. It is really shocking to know that money does not have to be physically present in order for the politicians to spend. The FED can create money out of thin air. This is not real wealth, but a dilution of existing wealth... Billions are spent on pork spending, billions more on maintaining the military-industrial complex, which also happens to be one of the largest employers in America. We now hear that the Bank for International Settlements, Switzerland, which has loaned billions of Dollars to the US government, wants to audit the Federal Reserve. The real extent of the mess created by Keynesians will be exposed soon...
Those are both New Keynesian BS terms meant to confuse people. Inflation in the macro sense is not an upward price fluctuation. Cost Push - Obviously if one good goes up in cost, people will buy less, or switch to another good. Cost Push doesn't explain the rise in aggregate (total) prices year over year. Demand Pull - Is totally contrary to Say's Law. There can be no demand without supply. Well, some people will argue that monetary inflation isn't the driver of price inflation, which is not only contrary to what we see measured over hundreds of years, but logically it is impossible for prices to rise in the aggregate without an increase in the monetary supply. Of course it is kept hidden from people, just like the confusing core and headline CPI. Most people don't realize that the TV reports CORE, which omits energy and food, the two places that inflation shows up first! It's my personal opinion, that if we had a sound global currency, war and famine would be wiped out in a couple generations. Unfortunately, we don't, and the global financial cartels keep skimming off the top when they inflate, so it is getting harder and harder for people to have upward class mobility. People will be assassinated before that happens. No one can find out that the emperor's clothes are not clothes at all. Ron Paul has been trying to get an audit of the FED's gold for 20 years, and the banks always block it. I posted recently about how the banks collude with the FED to block oversight and regulation and the bastards actually have the gall to admit it publicly that they are happy they defeat Congress (the people's representatives). What balls.