Not really true either. The people holding bonds still get their money back albeit in currency that is less valuable than it otherwise would have been. Nothing of real value, i.e. factories, machinery, companies, etc. are being destroyed. So the total wealth is still the same. The end result is that real assets (i.e. factories, land, etc.) become relatively more valuable than currency assets (bonds, bank accounts, etc.).
All of those nations borrowed in currencies they didn’t control.
And certainly the US during the Great Depression suffered terribly due to the lack of debt. Or I suppose more accurately, the unwillingness to take on sufficient debt.
It’s enormously different. Germany can’t make goods or gold out of thin air. They need to buy it on the open market. That makes two big differences. If the debt was denominated in marks then the amount of marks created to pay back the loan is limited to the size of the debt. If it’s in gold, then the amount of marks that will be created is whatever the spot price of gold is times the payment amount. That means there is no real limit on the amount of marks created to pay back the loan.
The second is that it is a vicious circle. Germany needs to buy gold and prints enough marks to do so. The money supply increases and the value of the mark goes down. When they go to do it again, the currency is less valuable so they need to print more marks to buy the same amount of gold. Now the money supply increases even more, the value of the mark goes down more than the first time. Which leads them to having to print more marks to buy gold this time…
That is exponential growth and done long enough the number of marks approaches infinity. End result is hyperinflation. It is an immediate effect as well. As soon as people figure out what is going on, no one in their right mind is going to trade anything for a mark.
Oh, my. Let me repeat my earlier advice. *If *you’re unclear on basic economics, then forget whatever you think you know about money and …
Let’s hear from someone who admitted upthread that he didn’t know what “real economy” means:
Wrong. A country which produces and consumes 100 widgets priced at 10 shillings each has the same GDP (100 widgets) as a country which produces 100 widgets priced at 1000 shillings each. The economic troubles of Weimar Germany weren’t caused by their inflation; they were caused by the fact that they weren’t producing enough widgets to meet their onerous obligations.
Inflation does cause secondary ill effects (though “Gresham’s Law” is the wrong way to delve into that discussion) but let’s first grasp the basics.
Lets say they sold 100 dollars worth or bonds at 20% over ten years. Then in ten years in order to pay it off they will need to issue 120$ in bonds. In ten years they need to issue 144$ in bonds, etc. Overtime more and more of the budget is eaten up by interest on the bonds. The only way out of this is to either have the economy grow faster than the interest rates or start paying down the debt.
Social Security is the US government, in the trust fund it has a bunch of bonds sold by the government. You bought an annuity for retirement. That is a promise for someone else to pay you money later in exchange for money today. Very similar to buying and selling bonds. What if you had sold yourself the annuity? Would you still feel good about your retirement? Because of your savings you have a pot of money to live on for retirement. When Social Security starts spending more than it takes in there is no pot of money to tap into.
We are at least five years into the recovery and have recovered full employment. These are the good times and quiet years. We should be saving up for the next recession.
I don’t know what you are opposed to, the selling of bonds in general or SS buying them. I’m all for decreasing the deficit by taking some of the money the 1% has made from the improvement in the economy (most of the improvement in wealth) and using that for deficit reduction and other necessary expenses.
If you are against SS buying the bonds, where would you put the difference between SS tax income and payments? US bonds are the safest investment out there, why not there? That just keeps the bonds in the family.
I’ve taken the liberty of highlighting your blunders above. “Investment” refers to, e.g., the production of capital goods, not to “investing” money in a bond.
So are you abandoning the position that it doesn’t matter if loans are denominated in a currency the country controls?
As to your new contention, Gresham’s law has nothing to do with wealth. Nor does inflating a currency directly affect an economy’s total wealth. If the US prints a trillion dollars today, we still have the same number of factories, companies, natural resources, etc. as we did before. Of course there will be knock on effects of excessive inflation, but strictly speaking inflation doesn’t damage affect a country’s wealth.
I think the selling of the bonds is fine as long as the money is used for investments or because of a temporary downturn in tax receipts. The SS buying them is a horrible idea. Putting the money in actual private investments like sovereign wealth funds is probably a bad idea because the sums involved are too high and too likely to be politicized. My preferred solution would have been to cut the amount of payroll taxes to more closely match the expenditures and to return money to the taxpayers when forecasting difficulty made that impossible.
Keeping the bonds in the family is a bad idea. It is not really a family the government is one entity. Say you have a checking account and a safety deposit box. Every month your paycheck goes in the checking account to pay expenses and you tell your banker to put whatever is left over into the safety deposit box in cash for retirement. At the end of every month you then take the cash out of the safety deposit box, spend it, and put in an IOU for that amount. How much money have you saved? The answer is zero.
Do you mean expenditures in that year? in the long run we’re a bit underfunded now, so I assume so. While that would return money in surplus years, what about in the upcoming years where the system will be in an anticipated deficit situation? Would you increase payroll taxes, regular taxes, or cut benefits? And are any of these options politically feasible.
Yes I know we will have to pay to redeem the bonds, but these bonds would have been issued anyway, and if there was no surplus we’d have to redeem them and pay for the shortfall in SS due to expenditures being greater than income.
A. The government is not a family. Are you spending the money in the safety deposit box on necessary expenses, or for the hell of it? Say you need to buy a car. You can use the money in the safety deposit box and decide to pay it back with 5% interest, or you can keep it there and pay the car company finance arm 5% interest. Which is better?
We actually did kind of this. Some of our mortgage came from my father-in-law. I paid it off with interest for years. Since my wife is an only child, the interest I paid goes into his estate where we’ll eventually get it back. That’s a far better deal than if we paid that interest to a bank.
Spending frivolously is always a bad idea, but that is not the issue here.
Well, you may be right. But interest rates are still very low, so we can get away with some debt. But yes, we need to raise marginal taxes and get ahead of things at some point.
Oh?