Jay Maynard posted a link to an advert from Moveon.org that illustrates how our children will have to pay off the government’s debt.
The trouble with this argument is that it concentrates on the movement of money instead of the movement of resources. This way of thinking can lead to all sorts of mistakes. If the government borrows a trillion dollars, the argument goes, that is a trillion dollars of taxes our children will have to pay in the future. We are borrowing from the future. Except that we are not, because only Doctor Who can transfer resources from the future, and he is busy with other things.
When the government borrows money it increases its bidding power for resources in the present. Resources move from private control to government control. It is the other bidders for resources who are really paying the price.
The children will not pay back the money because the government will never raise enough taxes to pay it off. Individual bonds mature, but they are replaced with yet more bonds. This will continue as long as there are enough people willing to join the bottom of the pyramid.
Government borrowing is a leetle more complicated than kiting checks. We, today, who are paying taxes that go to government debt service, are in fact paying off yesterday’s borrowing. And those who pay taxes tomorrow will be doing so for today’s borrowing.
To borrow is to take. The taking is done at the time of the borrowing.
In my time a neighbor might borrow a cup of sugar, which she took, then and there – that cup was gone from our house to hers.
Implicit in that kind of taking was an obligation to return either in kind or equivalent from the neighbor’s (taker’s) supplies.
That is why governments’ taking is not borrowing, because, as taker, they do not have and will not have their own “supplies” from which to make make return of what is taken now.
It is similar to the neighbor who borrows a cup from us today, goes to another neighbor for another cup which is brought us, and then on and on from neighbor to neighbor.
Rob, your argument is essentially about disintermediation, and while there is much to it (far more that can be discussed here) it’s not the whole answer. Yes, market borrowing is really deferred taxation, and creates a host of inefficiencies and misallocations, but “borrowing” via money creation (“quantitative easing”) is an entirely different matter. Our children will be paying for that via the hidden tax of inflation (assuming, of course, that they’re lucky and the whole house of cards doesn’t simply collapse first). And all along the way they will be paying the cost (interest on the debt) of our refusal to live within our means.
In a society which pretends to make so much about doing things “for the children” it’s astounding (and shameful) that no prominent voice is making the argument that burdening them with debt is the most harmful thing we could be doing to our descendants. Our profligacy, our refusal to defer gratification, our petulant demand for having everything we want now, is the real legacy of the Baby Boomer generation. History will not remember us kindly.
Laird:
How would it fit your thinking if all U S debt obligations of over 12 months maturity were required to be indexed for inflation.
The treasury would be prohibited from issuing any obligations that did not adjust for decline in the purchasing power of the currency in which denominated.
While I agree with Laird about boomers—we’ve been pretty much a disaster all across the board—the issue is not just generational antipathy, justified or not.
Statism has enormous opportunity costs that occur in the here and now, and, perhaps even more importantly, the pressures of statism, whether external or internal, exert a powerful warping effect on the course of a society’s development.
Walter Meade frequently writes of the “progressive century” or “blue social model” to describe the 20th century, referring to the use of state power to rectify perceived social ills. While I value his insights, whether I agree with him or not on any particular issue, I believe he misses a part of the larger picture.
When the use of coercive state power is the default position for a significant element of society, many, many alternative responses to these same problems are foreclosed, with no attempt to find out if another path might be worth travelling to arrive at the desired destination.
I once argued this point with a professor in relation to the idea of economies of scale. The progressive idea, which she presented so matter of factly that one could conclude there simply was no other method, was that forming large, publicly regulated energy corporations was the best and cheapest way to provide energy for large cities and their metropolitan areas.
I argued that, if smaller, competetive companies had been allowed to operate, various methods of energy production might have been given a chance to develop, and innovations in energy production might hve been forthcoming that were never adequately explored in a non-competetive environment.
We can never know, obviously, how western society, and the US in particular, might have evolved without the constant threats from external statist regimes, and the relentless pressure from internal statist groups to use the power of the state to remedy the endless crises that were used to justify every encroachment on individual liberties.
But, as in this massive debt issue, we are now facing a hazardous crossing over the valley of death on a very rickety, narrow bridge, and the questions we must answer are much more complicated than our name or favorite color.
Opportunities lost create the future every bit as much as opportunities taken. I fear we have have lost much more than we can ever realize, or regain.
RRS, you’re talking about TIPS bonds, and they’re available now. (Interestingly, they are currently trading at a negative yield out to 10 years. I haven’t yet wrapped my head around what that implies.) It’s a start. To finish, though, you’d have to make the inflation adjustment portion tax-free as well. Then you’d have a real inflation-protected bond. But even in that case, and assuming that the bonds were never repaid, but simply rolled over or refinanced at maturity, you’d still be saddling our descendants with the debt service costs. Better, but still not good.
Veryretired, you make a good point. Sort of a variant on Bastiat’s “that which is seen and that which is not seen”. Unknowable.
It’s PersonFromPorlock’s point that I was trying to address, really. You can say that today’s taxes pay off yesterday’s debt, but it’s an abstraction that hides the truth. There aren’t neatly labelled funds and flows of money. Money is fungible. The government gets its income from today’s taxes and today’s lenders. Its expenses are today’s welfare payments and today’s maturing bonds. Why does it matter? Because it affects any analysis of what choices government has and their effects. And I think that in general it might be more helpful to ignore money flow and look at resource allocation.
As for inflation, I’ve been ignoring it. Devaluing parents’ savings is stealing the children’s inheritance for sure.
L –
You missed the all in my question. I have never owned TIPS, only traded the futures (usually short), which lately seem to me something like that poisonous frog that sings in the Amazon.
Right now, the foreign-owned portion of the Fed debt is not taxed here (probably not much at all). But, you have a point on indexing the nominal “gain” for taxation. Can’t “exempt” it. But indexing CGs for inflation has never made it to the catapault.
MoveOn.org strove mightily to hand power to Obama and the Democrats. I don’t want to hear one damned word from them about the debt.
The scale of the situation is what is not understood – perhaps because the human mind revolts against it.
However, the facts are plain – as even works by laymen describe (for example see Mark Steyn’s “After America”) the situation is now beyond cure.
Both “paying off the debt” (15 trillion Dollars Federal debt alone in the United States – and countless trillions in unfunded mandates) and “getting new people to join the bottom of the pyramid” (at de facto zero interest rates) are impossible.
Today the debts both of government and private entities (i.e. the liablities of the big banks and other government pets) are “financed” by the production of new credit money by the Central Bank (in the case of the United States the Federal Reserve).
It is basically the same situation in nations like Britain.
The financial system (not just in America – but just about everywhere) is a credit bubble farce. I keep saying this – but I doubt that normal people fully understand that I mean it literally. The monetary system (the financial system) will fall apart.
And “on the fiscal side” the Welfare States (including the American Welfare State – oh yes, they are one also) are unsustainable.
Again – I mean that literally.
Some people understand all this and, indeed, have understood what is comming a lot longer than I have (veryretired springs to mind) and some people (such as, with respect, Rob) I feel doing not fully understand what is going to happen.
Perhaps one has to have a very odd, perhaps even partly insane, (no disrespect to veryretired, I am speaking about myself)mind, to see what is going on.
Anyway I do not expect to survive what is comming.
But someone with more practical skills, and more positive energy, (such as Rob) just might.
If they prepare now.
As I hope they are.
Civil society may well be restored (I am not saying that it will not be) – but the times that are comming will be truly horrific.
The present situation is unsustainable (utterly so) – and will pass away.
What will be rebuilt out of the rubble remains to be seen.
@ P.M. Organization;
Absolutely!!
Yet, what we do not read and (generally) do not take into account is the other side of debtors – the creditors.
To whom is all this massive (and it is massive) debt owed, and in what terms (let alone possibilities vel non) for repayment?
There is no questioning of how much (most) of the debts were incurred. There is no doubt that many a “cup of borrowed sugar” was poured into the seas, never to be returned, nor made into a cake.
What of those still entitled[?] to return of their sugar, who are they, are they themselves obligated onward, will some of the debt/credit balance out to some degree?
Some creditors (holders of obligations of others) will lose to some greater or less degree to be sure. That is why “banks” which kept the sugar of many are a focus of the problem. They have nothing (well almost nothing of real value) to balance out what they owe.
Still, the aspect of the ultimate “net”creditors and their capacities to absorb a specific degree of losses (e.g., those cups poured into the seas) needs attention. It is not so much the ability to repay that is the underlying issue, it is the capacitity to absorb losses – and – on whom those losses shall ultimatel fall, and in what form.
The answer is obvious: Wall off DC and declare it a sovereign nation, responsible for all the debts it has incurred.
Rally though, I see Rob’s point. Fiat currency is a fantasy and it does do good to look at the actual resources in play. The “powers that be” have used currency inflation and borrowing to allocate resources to themselves and their power structure. This is why there is a growing gap between the rich and the poor. This has been hugely ameliorated by the dividends that technology have brought us but sooner or later (and it’s getting sooner all the time), resource starvation at the lower end will lead to the inevitable outcomes.
No offense taken, Paul. We live in a world dominated by those who believe in ghosts, goblins, spirits, and demons.
Being odd in such a circus of lunacy is hardly an insult.
I agree, Paul, that the money system must collapse, at some point. I wouldn’t want to predict when; I can imagine it might be tomorrow or we might manage to deceive ourselves for another generation. And I am too optimistic to imagine that it will be the end of civilisation as we know it, because at root there are still people and means of production.
I guess the big question is what happens when the US (or the UK) defaults, which I think is the eventual realistic outcome. It’s easy to talk about passing debt down to the grandchildren but what happens when the grandchildren turn around and say “It’s not mine, I’m not paying it”?. Similarly for state pensions/social security which is likely to be an issue sooner (though the collapse of that would likely push back the debt issues by a number of years)
Veryretired – many thanks.
Rob.
The hard left (Comrade Barack and co) have already written the date of the crash (at least the start of it) – 2013 (to give the excuse they need for Emergency rule).
For those who say “paranoid” at this point – wait and see for yourselves.
The only thing that could go wrong with the plan of the hard left is for the crash to start before it is meant to.
Then they may not be in power at all – Comrade Barack could get kicked out in the election of November 2012.
Why do people think I am so desperate for the crash to start NOW?
It is not cruelity or sadism (no matter how nasty I may be) – it is because the crash must come soon, and I want it before the election (not after the election).
It is as crude and basic as that.
With the hard left reelected (and with the plans to make Congress irelevant all written – just needing the Emergency Crises to be put into effect) hope of rebuilding civil society fades.
And it is hard to see the rest of the West standing if America falls.