Inflation and debt I

Dec 2009
59
As of February 2010 the United States Federal government was $12.4 trillion in debt.

http://www.marketoracle.co.uk/Article1571.html

By July 2007 State and local governments owed $2 trillion (and this would be around $5 trillion by now if state and local debt has increased by the same percentage as the federal debt has from July 2007 to now).

Government in America at each level is allowed to rack up financial liabilities that a corporation is bound by law to count as current debt, but which state, local and federal governments don?t count yet. Including what the federal government would owe in the future for things like Social Security and government pensions would put the federal debt somewhere around $60 trillion by July 2007. At the same time the average American household owed $112,043 in mortgage, credit card, auto loans and other consumer debt obligations.

The American economy is hogtied by debt. Our economy cannot get out of recession, let alone grow, as long as Americans carry their current debt load. Other than declaring bankruptcy and allowing our creditors to seize our physical assets, the quickest way to reduce our debt is to inflate the money supply. Printing money would mean more money in circulation so more money would be available to pay off debt.

But, paying off debts with inflated money means that debtors will not pay back as much as they borrowed since the money that was borrowed could buy more than the money that is paid back can because of inflation. Loaning a dollar that could buy an 8 ounce cup of coffee and getting paid a dollar that could only buy a 7 ounce cup of coffee means that the lender has lost money.

Having lenders take a hit wouldn?t necessarily be a bad thing since lenders that have offered easy credit for the past thirty years deserve some of the blame for the economic bubble that burst in 2008. Both lenders and borrowers were equally greedy. They fed off of each other and they took equal advantage of each other.

However, I still have vivid memories of the Carter Administration. What had been an annual inflation rate averaging 6-8% or so under Nixon and Ford became a monthly inflation rate that was often measured in double-digits under Carter. Carter?s economic fiasco was based on printing money (as opposed to the Reagan/Bush/Clinton/Bush/Obama economic fiasco that is based on borrowing). I fear inflation more than I fear any other disaster, natural or manmade short of a WMD attack. Intentionally inflating the money supply to pay off our debt could also increase consumer prices to the point that the economy would be just as bad off.

As a conservative I support sound money, but more and more I worry about what our debt will do to our future. We are in a hard place and it will likely get harder no matter what we do or don?t do. But if our future is to be destroyed, perhaps an inflationary money supply, that we may be able to recover from in time, will be better than being foreclosed on by the likes of the Red Chinese.
 
Dec 2009
59
Some options:

1. Establish a currency ratio by law so that the amount of physical money in circulation is based on the amount of gold and silver owned by the U.S. government, state and local governments, banks and private individuals (that is deposited in banks). This ratio would be set in a way to increase the amount of physical money in circulation, but money would not be redeemable in gold or silver. The government would not restrict the trading of gold and silver so investors would be allowed to bring in gold and silver from overseas and thus add to the money supply by having it converted into currency. Part of the gold and silver in the country would be held in reserve and would not be converted to circulating money except to insure bank accounts as the FDIC and FSLIC now do when banks and S&Ls go belly up.

2. Create a 5% federal income tax bracket for people who earn more than the federal poverty level income but don’t earn enough to be subject to the existing lowest federal income tax bracket- spreading the federal tax burden more evenly would make people that don’t have to pay for federal spending right now less likely to support deficit spending in the future while siphoning off some of the inflated money so it couldn’t fuel consumer spending and consumer prices. In the long run I would support an amendment to the Constitution that would expressly regulate the government’s power to tax (at the federal, state and local levels). I would exempt personal income from taxation, but I would tax wages and salaries with large personal exemptions (tax actors and ball players rather than teachers and waitresses). With the Amendment this 5% income tax bracket would become a 5% wage/salary bracket.

3. Impose a tax on households that own more than one automobile with a tax rate determined by the number of autos that the household owns and eliminate federal money for any state that does not raise its legal driving age to 18- reducing mobility will reduce consumer activity and thus lower consumer prices by restricting consumer demand.

4. Impose a surtax whenever both members of a married or cohabitating couple have an income (or wage/salary) tax liability and base this surtax on the number of children the couple has in their household in order to encourage single income households so we can reduce disposable income that would fuel demand for consumer goods, thus keeping consumer prices in check.

5. Impose a federal tax on consumer and corporate debt- to encourage people to use the inflated money supply to pay off their debts rather than fuel consumer spending.

6. Repudiate all international trade agreements and impose tariffs sufficient enough to re-establish America’s manufacturing economy- this will help reduce our indebtedness to foreign countries (mainly the Red Chinese) while creating relatively high-paying jobs at home.

7. Reduce non-Social Security, non-national defense and non-Medicare welfare payments in order to reduce federal spending and reduce dependency on the federal government so more people become economic producers rather than just consumers.

8. Impose a tax on daycare provided to any child who lives in a two-income household- making it more expensive to have a second income will reduce incomes that can fuel non-essential consumer spending.

9. Require sufficient collateral for all loans and mortgages- at lest something over 100% of the amount borrowed so if the economy tanks creditors will still have a chance of selling the collateral and making back most of what they had loaned out.

10. Put limits on how often a piece of real estate can be mortgaged and how often a share of corporate stock can be sold to reduce speculation.

11. Use newly-printed money to fund public works programs (roads, bridges, schools etcetera) in order to create jobs rather than simply having the Federal Reserve distribute the money to commercial banks.

12. Implement item #10 by creating public-private partnerships in order to give Americans some reasonably safe investment options. Personally I would like to see 1/2 of the lanes in the federal interstate highway system turned over to a high speed railroad company and then expand the rail network to service every U.S. community that has 5,000 or more people. I also want to abolish the Federal Reserve and charter a new national bank patterned after the First and Second National Banks of the U.S.

13. Legally create economic triggers, such as food or energy prices, that would require the government to increase the amount of money in circulation (by changing the currency ratio from #1) to make sure that enough inflated currency is circulated to reduce debt while reducing the amount of money in circulation when necessary to prevent hyper-inflation such as what Weimar Germany saw in the early 1920s.

14. Once debt loads have been reduced by a pre-determined amount the government should replace the inflated currency with a new currency to reduce inflation and allow the economy to expand once again in real terms with some level of stability.

15. Replace the federal food stamp program with coupons that could only be used to buy specific foods to insure that food stamp recipients buy the right foods to maintain a nutritious diet. This way the availability of food stamps would not promote higher prices for all consumers.
 
Dec 2009
119
Canada
I had an accounting teacher from South Africa (so was his wife). When he first came and bought his current home, they looked around (like many people should do, and normally do). He specifically told his wife that he didn't want a house for more than $200,000 (around here, you can barely buy a townhouse for that much), primarily because he didn't want to borrow too much, and also he didn't think he even qualified for more. He talked with a mortgage broker beforehand as he was moving from Toronto, and he didn't have a job previously in Ottawa.

What happened? His wife found a house at $210,000, and just as he was going to beg the broker if he could get a slightly bigger loan, the mortgage broker said, "sure. You're qualified up to $340,000." That threw him off.

Canada wasn't quite as in as much trouble as the US was for the last little while. However, even when our mortgage regulations are tighter than the US (even if it isn't by that much), it's still a lot more loose than nations in Europe or elsewhere. The North American economy has unfortunately been driven by debt. I personally was taught debt was your worst enemy, but I don't get why others see things the same way (I do realize some people get raised differently and usually, nothing's wrong with that).
 
Dec 2009
59
I had an accounting teacher from South Africa (so was his wife). When he first came and bought his current home, they looked around (like many people should do, and normally do). He specifically told his wife that he didn't want a house for more than $200,000 (around here, you can barely buy a townhouse for that much), primarily because he didn't want to borrow too much, and also he didn't think he even qualified for more. He talked with a mortgage broker beforehand as he was moving from Toronto, and he didn't have a job previously in Ottawa.

What happened? His wife found a house at $210,000, and just as he was going to beg the broker if he could get a slightly bigger loan, the mortgage broker said, "sure. You're qualified up to $340,000." That threw him off.

Canada wasn't quite as in as much trouble as the US was for the last little while. However, even when our mortgage regulations are tighter than the US (even if it isn't by that much), it's still a lot more loose than nations in Europe or elsewhere. The North American economy has unfortunately been driven by debt. I personally was taught debt was your worst enemy, but I don't get why others see things the same way (I do realize some people get raised differently and usually, nothing's wrong with that).

The U.S. economy has been driven by debt for pretty much the past 30 years. The government started it with Ronald Reagan?s $200 billion annual budget deficits, but then average consumers joined in with credit card and mortgage debt.

Debt always allows an economy to be bigger than it really is. What we are going through now is just a repeat of the pattern we followed in the 1920s. And when, then as now, the credit dried up the economy has no choice but shrink down to a size that better reflects the actual money (that is coin and currency, not bank account records) that is in circulation. The FED and other central banks can create money by trading bonds for bank accounts records that the bond sellers can circulate like coin and currency. But this is simply trading one IOU for another. When creditors lose confidence in debtors ability to pay back what they borrow (as was the case in 1929 and 2008) the credit goes away and the economy crashes.
 
Dec 2009
59
debt a a rate of GDP jumped 16% from 2008 to 2009 21% from 2008 to 2010

it had been creeping for some time as you note but that jump is pretty spectacular
I saw it claimed a year ago that there is not enough U.S. money in circulation to pay off what government and the private sector in the U.S. owe. The tidal wave of home foreclosures is only the start. The average U.S. household now has something like $10,000 in credit card debt. I expect to have an epidemic of personal bankruptcies within the next 5 years or so.

And now that the Babyboomers are retiring and will have to liquidate their 401Ks to have money to live on the real estate market and Wall Street will crash in the worst possible way because nobody at the other end has money to buy what the Boomers need to sell.
 
Aug 2010
862
I saw it claimed a year ago that there is not enough U.S. money in circulation to pay off what government and the private sector in the U.S. owe. The tidal wave of home foreclosures is only the start. The average U.S. household now has something like $10,000 in credit card debt. I expect to have an epidemic of personal bankruptcies within the next 5 years or so.

And now that the Babyboomers are retiring and will have to liquidate their 401Ks to have money to live on the real estate market and Wall Street will crash in the worst possible way because nobody at the other end has money to buy what the Boomers need to sell.
Not knowledgable on the money in circulation issue to comment

Debt... personal debt... yeah, the 90s saw an oil glut that fueled the economy and it started a trend the stayed in place until late 2008 of massive consumerism. That consumption grew the economy trmendously but as you noted... it became more and more debt financed.

Personal foreclosures vs bankruptcies... there have been many efforts to keep the housing bubble inflated. It makes political sense but not economic sense. The correction still needs to occur. Cetrain markets (FL, CA, Las Vegas etc) will get hit harder. There have been government efforts to help owners reduce mortgage payments with the tax payer subsidizing the shortage for those who afford to do so. Problem with that is that banks are already greatly incentivized to renegotiate notes with borrowers. Foreclosure is a pain in the rear and is in many cases more costly than reworking the note. Which means... most of the people in this program are people who cannot fford the homes that they are in and the program merely delays the inevitable.

Bankruptcy allows for an immediate stay on crediotors efforts. Debtors are allowed to keep certain things in the bankruptcy estate that creditors cannot touch. Amongst them is the family home... up to a certain value. The exact number I'm not sure of.

None of this is meant to disagree with your general point. There's more pain to come.

Large coprporate bankruptcies have recently started to slow but there is a lot of hanging debt out there that could result in the second large wave of filings as part of the worried about W shaped recovery.