Sunday, October 18, 2009

Redistribution of wealth on a grand scale, the present solution (and there was much rejoicing)

For those of you in doubt of the veracity of my last post, take the approach the government is currently using.

I found this to be enjoyable, but I am afraid slightly more technical than the audience I aim my little, oh what shall we call them... stories, at.

Debt monetization means literally printing dollars to buy back the national debt (which has been issued in various bonds, bills and notes) so, for example, if your grandparents bought you a federal savings bond for college, that was a part of the national debt. The government is going to print some dollar bills and hand them to you in return for that bond. (this is again an oversimplification but still on the point, in actuality they create bank reserves which has the same effect).

Debt monetization or as it can be called on a smaller scale, quantitative easing (adjusting interest rates). Is one way to create inflation/stimulate the economy as I discussed in my last post. Is it bad? It is redistribution of wealth on a grand scale. To understand this you need to understand how the government works.

The government can pay for its operations and expenses wars, healthcare etc, in three ways.

First, they can tax people and businesses and goods to get dollars and then expend those dollars right back for people (employees), businesses (the army, navy, department of human services) and goods (artillery shells, fighter jets, concrete for roads, iron for buildings). This is non-inflationary it cannot create inflation because the money supply does not change. HERE IS A SUPER SECRET: It can create deflation if we tax people but don't spend the money, for example if we try to repay the national debt to china. This could be deflationary in our market. Irrelevant for our current discussion, but something to keep an eye on.

Second, they can borrow money. The government can issue government debt, in the form of treasury bills, bonds, and notes (they are different, it depends on when they mature). This is actually semi-deflationary, (if you view the world from a perspective of a private and public economy, which most people don't) since it tends to pull money out of the private sector and give it to the government to spend, which does not always make its way back into private sector enterprise. But lets not go there today.

Third and finally, they can simply print money. This is called debt monetization because, in practice, the way it works is that rather than taxing money for revenues to repay their issued debt instruments they simply print and repay. They "monetize" the debt. This is a dangerous game. The trouble with debt monetization is that it is fundamentally unfair. Or so some would argue. You can decide for yourself later. The government is weakening the dollar by printing more. So If I saved money my whole life in a cookie jar and now have a million dollars. and the government doubles the money supply (the term for the total amount of "dollars" real or imaginary extant, my million dollars is worth half as much when I try to exchange it for goods) This is the same thing as inflation but on a grand scale. It is called hyper-inflation and tends to spiral out of control. This is what won a certain african nation the ignoble prize for "in one year printing denominations of currency between .01 and 100,000,000,000,000; for those who don't like counting zeros thats one hundred trillion dollars. It is also what led to a Germany where a loaf of bread costs a wheel barrow full of Deutsch Marks.

What are we arguing about then? Well, you cant have deflation (bad) and hyper inflation (really really bad). What we are aiming for is inflation, somewhere in between. So the trick is, as always to print THE RIGHT AMOUNT OF MONEY. This will solve our current economic problems, or so say the people in Washington who are in charge and charged with solving it. Now its time to learn something.

What are we trying to do again? Create inflation. Why? Well, what did we learn last week? Oh yeah, I remember, people have things, they think they are worth allot, it turns out that no one can afford to buy them (tune in next time for a discussion of purchasing power and intergenerational equity). But they don't want to drop the price cause they are convinced it is worth allot. (I got this thing and it is f#$%ing golden). But the only way to get out of this recession is to redistribute wealth by affecting a lower price across the market. This would be deflation right so that is bad? So what is the government right now actually trying to do?

Rather than letting you sell your house for less we are going to print more money so that everyone has more of it, of course it is worth less, but you will get for your house what you think it is worth. And coincidentally, what your bank thinks its worth because that is how many dollars they loaned you for it. So you can repay your mortgage. Everybody's happy. (and there was much rejoicing).

It all works out in the end...

So whose the patsy?

"If you don't know who the patsy is, odds are, you're the patsy!"

"Its all about the Benjamin's." If I have $50,000 and you do what you want to do. I will still have $50,000 but it will only get me half as much. Guess what, YOU'RE THE PATSY. You, yes you out there, anyone who has money. Note... not anyone who has things. People who have money. Becuase things maintain their relation to each other just about no matter what inflation or deflation does. (simplification) Its money we are trying to control.

So why does that matter to most of us? Start dancing all you college educated debt laden money wasting fools. You see If I borrowed say, for a nice round number. $250,000. For an education, car, house, anything. And I get the thing. Then I have to pay back what I paid for it. I have the thing which (remember the house) is now worth $500,000 but I only have to pay back what I borrowed. "Only now, in the end, do you understand." YAY!

So those who have money are punished because their money loses half its value and those who have debt are rewarded because their debt loses half its value. Twisted right. This is our solution to the current economic problem. Inflation baby... redistribution of wealth. We will take those who have money and we will give it to those who have debt, without moving a bill. Oh this is where you going to get mad. THIS IS WHERE YOU MIGHT SCREAM OR CRY. Because guess where allot of peoples "money" is.

Have you ever heard of a defined benefit plan? Work at GM... PERS? What about social security? So let me get this straight. I gave you dollars my entire life, and now you are going to give me back my dollars for the next 30 years. Only wait a minute, you've got my dollars? And whats happening to them?

I don't want to wax poetically any more than necessary. So I think I will stop there. Do you get me. This is the kind of massive redistribution of wealth I was talking about. Anyone who has been wise and prudent and saved money in any liquid assets, bank account etc. Is going to have that money taken away and anyone with debt is going to have that debt taken away. Robin of the Hood, you prince of thieves you.

Tune in next time and remember only you can prevent forest fires.

So what is the difference between debt monetization and quantitative easing. It is in fact a semantic one, the idea behind quantitative easing is that it is an adjusting game, some times we print money and buy government debt but other times we are selling government debt and "destroying" money. So overall its a wash, but when we start talking real monetization of the national debt (or just giving trillions of dollars of new money to banks) well...... see above.

No comments: