Beware The Debt Monster

"As a very important source of strength and security, cherish public credit.  One method of preserving it is to use it as sparingly as possible."

George Washington (1732-1799)

The word "public" in Mr. Washington's day meant gubment and by credit he means borrowing or debt.

Under the Articles of Confederation, the Continental Congress and during the Revolutionary War the country had amassed huge debt by the time Washington was elected president.

The First Report On the Public Credit was issued by Alexander Hamilton.  Its purpose was to analyze the country's financial standing, set up a system to organize the federal debt and to arrange for public credit.  At that point the combined US debt, consisting of domestic, foreign and the states combined, added to a huge $77 million.  

Not getting bogged down in the details of how this was handled, the population at the beginning of the country stood at about 3.5 million.  Dividing that number into the federal debt would leave about $22 per person to pay it off.  A daily wage in those days was much less than $1.  The average hourly wage in 1790 was about 2 cents.  

The debt would also have worked out to about $6 million per state.

The debate on how to pay the debt centered on speculation as regards promissory notes (enriching only a certain class), which Hamilton referred to as "redemption," and a James Madison opposition, which he called "assumption."  Madison's idea was that the gubment should help shield the less powerful, agrarian interests that composed his constituency.  He wanted the IOUs that "battle-worn veterans of the war for independence" had been paid to be honored to allow them better opportunity toward capital development for their farms and plantations.

With the help of Jefferson, a dinner party was arranged between Hamilton and Madison, during which a major concession was made in the restructuring of Virginia's debt.  And Madison acquiesced.  Congress voted in favor or Hamilton's plan.  

Washington was in favor of Hamilton's plan insofar as it paid off the state and federal debts, established a tax system (excise and tariff) to help pay it off and establish a national bank.  He did not want to grow the federal debt.

What would Mr. Washington think about the country today?  

We have operated year after year without a budget, instead relying on "continuing resolutions," designed to hide what monies are spent on, and extended debt limits to "fund" the gubment.  And with this increased borrowing our gubment tells us that doing so does "not increase debt."  Well, okay.  But exactly how is that again?

As the debt has burgeoned interest rates have not.  What if, when interest rates increase, as they surely will, paying only the interest of the debt exceeds our financial ability to do so?  Personal savings is way down now, which has lead to a large decline in capital investment.  No capital investment means no economic growth.  No economic growth means, well, no economic growth.  And that at a time when there are those pressing for increased immigration and national "health" care as an added federal and state debt feature.

If we are borrowing to the point of the inability to pay, at the same time as obligations increase, and capital investment stagnates or continues to decline, what happens to the  

"strength and security" 

that Mr. Washington was pleading we preserve?  Are we stronger and more secure?  Or not?

Think carefully.

What Is Money?

"Money is not an invention of the state.  It is not the product of a legislative act."

Carl Menger (1840 - 1921)
Founder of the Austrian School of Economics

What is money?  We all know that the classic definition of money is something used as a medium of exchange, such as coin and paper.

But those coins and paper can only be used when they are accepted by both parties in the transaction.  If I write "$ One Dollar $ " on a piece of paper and try to spend it, it could act as money only if it was to be accepted by the other party.

In addition to his recognition as the founder of the Austrian School of Economics, he is also known for two other contributions.

First, he developed the "marginal utility of goods" theory.  This is how he resolved Adam Smith's paradox of water and diamonds.  What bothered Smith was why diamonds have greater value than water when water is obviously necessary for life and diamonds are not?

This is where Menger's "subjective theory of value" comes into play.  When water is needed, say to water a garden, the first buckets are more valuable than subsequent buckets.  The more buckets that come into play successively reduces the value of each one.  A thousand buckets will not have equal value as the last many hundreds might not be needed.

Diamonds have value because of what economists call "derived demand."  Diamonds are valuable because of the degree of importance of wants they satisfy.  The derived satisfaction from a beautiful diamond creates value and demand.

Menger used this "subjective theory of value" to propone one of the most valuable insights in economics:  that both sides benefit from an exchange.  People will exchange something of lesser value for something they consider to be of more value.

This led Menger to his second big contribution in money and banking to explain how money came into being.

A man on the corner with a sign that reads, "Will work for food," is offering himself as money to pay for a meal.  He might clean a garage or rake a yard and is fed for his work.  That is a form of money.  It could be considered barter.

But why, considered Menger, does not barter simply become the accepted exchange we call money? 

My wife has a lot of shoes.  You shake your head yes, of course.  But it is unlikely she could trade those shoes straight up for a car.  She might be able to barter those shoes for something else, and that again for something else.  Over time, conceivably she might, after lots of exchanges, actually derive the ability to trade for a car.  But this is tedious!  It is uncertain!  It is very cumbersome, much more so than selling them for a more acceptable means of exchange, like paper money.  If she had enough shoes to sell, perhaps, she could buy that car more easily!

The value of those shoes is "subjective."  What is a car worth?  What someone is willing to pay for it, and what a seller is willing to let it go for.

BOTH PARTIES HAVE TO BENEFIT FROM THE EXCHANGE.

My wife's shoes, LOTS of shoes, become a form of money, insofar as she can sell them for a medium of exchange.

Any good that is widely accepted can become money.  Roman soldiers were paid in salt.  We derive the word "SALary" from the Latin word for salt.  A blog on this concept can be read here:  The Salt Of The Earth.  Indeed, our word "pecuniary," which means relating to money, comes from the Latin word "pecus," meaning "cattle."  In some societies, cattle, for a time, served as money (and accepted as marriage dowries).

What is not money? 

Banks and lending institutions create money through lending.  They have money available to lend and advertise an interest rate which is charged to borrow.  The bank is required to retain a percentage in "reserve" to back the amount being lent.  As this lent money is paid back, more is returned to the bank than was originally lent, and more money has been created over time in the transaction.

Is money created when a central bank pumps huge amounts of money into a stock and bond market?  

When conventional monetary policy became ineffective an idea was created and implemented.  Disingenuously called "quantitative easing," this policy "injects" electronic transfers into the system through the purchase of stocks and bonds.  This has sent the stock market to historic highs.  But it's a house of cards.  As it does so existing stocks and bonds in retirement policies, and the value of the currency itself, are devalued.  It is a back door way of doing to the economy what the government of Greece tried to do front door when they announced their desire to tax bank accounts.  The subsequent uproar forced them to back down.  Quantitative easing does pretty much the same thing, but it is not so in the face and accepted by an economically-ignorant populace.

Remember Menger's quote above - money is not the creation of the state. 

Notice how the stock market has reacted in the past few weeks to the "news" that a "tapering" of such central bank quantitative easing is imminent.

Is money created when the gubment spends itself broke (again and again) and decides, with back door "continuing resolutions," to increase its "ability" to spend outside of any Constitutionally-required budgetary process?

   

Does this "legislative" act to borrow more actually create money?  Or does it simply create more debt which will have to be repaid by future generations via higher taxes and a lower standard of living?  The answer to that is obvious.  Peter is not paying Paul, in this case Peter is robbing Paul.  And of course it's unsustainable.  And intentional.

Remember Menger's quote above - money is not the product of a legislative act.

There would be subjective value to this should both sides benefit from the action.  But they do not.

IN THIS CASE NEITHER SIDE HAS BENEFITED.  THEREFORE MONEY HAS NOT BEEN CREATED.

TRUST IN ITS MARGINAL UTILITY IS BEING DESTROYED.

Intent

"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not."

Thomas Jefferson

So why are deficits of trillions of dollars being taken, from those who are willing to work, every year from last year through the entirety of my grand childrens' lives?

Obviously, it is done with intent. And what would Mr. Jefferson see as the intent?

Cut Spending

"If it is unnecessary to adjust the amount of expenditure to the means available, there is no limit to the spending of the great god State."

Ludwig von Mises (1881-1973)

Ever notice how gubment never gets by with less? There are never cuts in gubment spending, except perhaps for defense. Everything else is a "cut" in the rate of growth. But gubment always grows, always demands more and that can only come from one place. From you and from me.

And the biggest falsehood promulgated upon a people is that the gubment must somehow "pay" for a cut in spending OR a "cut" in taxes! Pay for it?! It can be paid for by simply spending less! What a concept.

A dollar kept in the private sector flows around the economy (called the velocity of money) more fluidly and many dozens of times more than a dollar sent to an inefficient, bloated bureaucracy which doesn't care how much waste occurs. If anyone wanted to "stimulate" the economy, a real cut in gubment spending is one of the best ways to make that happen. Think that'll ever happen?

Dream on.

Generous And Humanitarian

"Liberals love to strike generous, humanitarian poses with other people's lives."

Ann Coulter

One of the most prolific political writers of our time, and most comprehensive researchers, Miss Coulter puts out information that is very hard to debate.

Reading what she has to say on so many myths - like evolution, Senator McCarthy, liberal generosity, stem-cell research, conservative fascism, you name it - her documentation, fact checking, and forceful presentation makes an air-tight case.

Take the current budget battle. Liberalism unchecked has run up debt and taken over debt (housing, student loans) at break-neck speed. During that time, because they didn't want the transparency, no budgets were ever decided upon. Who cares that a lack of a budget is illegal.

What happened instead? Every time they got to the spending "limit" (what's the definition of the word limit?) they simply increased it! Who needs a budget when you can spend without LIMITS?

Of course, laughably, the debt is all blamed on Bush. And it is laughable! But the press will play along.

Now suddenly we must have a budget! Why? Really, why? Why not continue to take generous, humanitarian poses with the lives of our children, grandchildren and the yet to be born? REALLY, WHY NOT?

This is what nobody is saying. Employing the financial 72 rule - at 7% growth the debt doubles every 10 years. That means that the spending up until now, before health care and the rest of it, will QUADRUPLE by the time my grandson, born last October, reaches age 21 and begins his employed life.

At that time, guess who won't be working. A huge, meaning HUGE, sector of the working public now known as The Baby Boomers. This group will want its money, investment, contributions back! Who will provide it all? That's right, a smaller group.

Good luck with that.

THAT is screwing around with other people's lives. And not in a good way. But it is so very generous and humanitarian!

A Lesson From Congressman Davy Crockett

One fine day in the House of Representatives, a bill was taken up appropriating money for the benefit of a widow of a distinguished naval officer. Several beautiful speeches had been made in its support - it afforded the speakers a fine opportunity for display than from the necessity of convincing anybody, for it seemed to all that everybody favored it.

The Speaker was just about to put the question, when Crockett arose. Everybody expected, of course, that he was going to make one of his characteristic speeches in support of the bill. He commenced:

“Mr. Speaker — I have as much respect for the memory of the deceased, and as much sympathy for the sufferings of the living, if suffering there be, as any man in this House. But we must not permit our respect for the dead or our sympathy for a part of the living to lead us into an act of injustice to the balance of the living. I will not go into an argument to prove that Congress has no power to appropriate this money as an act of charity. Every member upon this floor knows it. We have the right, as individuals, to give away as much of our own money as we please in charity; but as members of Congress we have no right so to appropriate a dollar of the public money."

NEED I SAY THE BILL FAILED? DO YOU THINK THE BILL WOULD FAIL TODAY?