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June 3, 2012 / 74

Krugman Is Wrong Again

(A response to Paul Krugman – UK Guardian )

Mr Krugman’s solution to the current economic situation?

ditch austerity, kickstart the economy with ambitious government spending, and bring down the deficit when we’re back above water again.

Mr Krugman – government spending is not the solution. It’s the problem.

One of the principle problems with the current structure of the global economy is the unwillingness of “investors” to invest their own capital. So they borrow. You see, if they invest their own capital they can lose it if the investment doesn’t pan out.

If they borrow to invest, and they lose it, what’s the big deal? It was someone else’s money! So the demand for debt grows and grows until the entire economy is built on debt – an unsustainable structure because debt has no substance, no internal value because an economy built on debt that cannot be paid back is essentially built on worthless promises.

A sound economy is built on savings. Savings are the result of the fruits of labor (human capital) set aside for later. Savings are delayed gratification. Savings is the method used by all to spend their lives and provide for themselves and those things they want or need when they can no longer earn. (ie When they become incapable of earning due to age or disability.) Savings is also the way people can spend more in a short term than they can earn in the short term.

No one can save more than they earn. But they can borrow which creates debt against future earnings, which is essentially spending their lives before they’ve lived them. Obviously, if you earn so much a year and spend two years worth of earnings, then you have voluntarily agreed to give up a year’s future earnings. This is why debt is sometimes called voluntary slavery.

When a government consistently spends more than its economy can earn, it creates an imbalance in the monetary system. When there is more government debt than possible earnings through taxes the system is bankrupt and must be adjusted back to fiscal balance or the system will become more and more imbalanced until it collapses.

That is where most of the world is today. The world today is financially out of balance to the point that it cannot pay what it has collectively borrowed and spent.

There are several ways to rebalance a bankrupt system.

The easiest way to rebalance the system is to “declare bankruptcy” which is when the leadership says, “We promised and spent more than we could possible pay for” and re-sets the economic system to zero, aka it defaults. (See Brazil – they are actually quite good at doing this!)

If a government does this, then those who loaned the government money lose it. The lenders in this case would be the central banks and the high-financiers who can afford to buy government bonds. It also includes some of the people who were lied to and told that government bonds are “secure” investments. In my opinion, anyone who is foolish enough to buy government bonds pretty much deserves to lose their savings. And if no one bought government bonds, then the government would be forced to live within its means, which means that the government could only spend the amount that the people would let them collect in taxes. No extravagant promises allowed.

(An aside here – actually, govt bonds/debt are about the worst investments that can be made because governments cannot produce wealth. Would you invest in a factory that never produced a product? Governments can only take what they spend from the people. So if a government bond pays interest, it must take it from the people first. So buying government bonds is not investment – it’s financial theft. And increasing government spending when the government is broke just makes the problem worse!)

Another way to rebalance the system is to inflate the system’s currency. Some who don’t seem to understand inflation hold that this can only be done in a system that uses fiat currency, and that a metal/commodity backed monetary system would prevent inflation. Wrong. See how the Romans did it! (Intro) (Article)

Inflation is a debasement of the currency – a lessening of its value – a tax. So with inflation the government gets more money to pay its debt, or to spend, by raising taxes through the back door – ie hiking taxes without hiking taxes.

If a $10 bill will buy a pair of shoes today, and the government inflates the money by creating twice as much money, then it will take $20 to buy those same shoes. Thus your money is worth only 50% of what it was before – because it takes twice as much to buy the same thing.

So by inflating the currency, the government reduces the value, and the surplus value that has disappeared from the currency accrues to the government. If a government borrows $20, then inflates the money by 100%, it can now afford to pay the $20 face value – ie half of the value it borrowed. If the government owes $10, and it inflates the money by making it worth half as much, then the government only has to pay back half of what it borrowed in terms of value, and in terms of a worker’s saved labor. So inflation is a tax.)

Thus if a government spends twice what it can afford to spend, all it need do is impose 100% inflation and *poof* it is solvent again! Hooray! Easy-Peasey! But the worker who saved the equivalent of a year’s labor in cash now has only 1/2 of a year’s labor saved. That’s why inflation is government theft.

A third way for an over-extended government to restore financial balance (ie pay off the nation’s debt) is to cut spending until it is below what it can receive in taxes, and pay back whoever it borrowed from. Since most of the money governments spend these days is spent on social “welfare” programs (buying the approval of the people by giving them what they think is someone else’s money) cutting these expenditures is looked upon by the people as stealing the people’s “benefits”. Another misconception here is that the government is somehow responsible to take care of individual people. No. The government is not your Mommy and Daddy.

And then if the government has the effrontery to give that spending cut money to those who bought its bonds, ie those who loaned the government the money in the first place, the people scream and cry that some injustice is happening! That the government is taking the people’s money and giving it to the Bankers!

Well… actually yes, that is exactly what they are doing. But overlooked along the way is that before the government gave the banks money, the banks loaned the government money. The People tend to think of “Government money” as FREE money! After all – can’t the government just print the stuff up? How much can paper and ink cost anyway? And according to Ben Bernanke, these days they don’t even have to print it anymore, they just make an entry in a computer somewhere and *poof* there’s more money! It’s just PFM!!!

The ugly word for a government cutting back spending and sacrificing to repay debts is “Austerity” – and there is more involved in today’s application of “austerity” than just cutting government spending. These days, austerity also requires the governments to “privatize” government assets and functions – which means they sell those parts of the nation that they have custody of to private industry and bankers. Usually the bankers and private industry get these assets for pennies on the dollar in value, and get richer by essentially stealing these assets from the people. In my opinion, NO GOVERNMENT SHOULD EVER HAVE THE AUTHORITY TO SELL THEIR NATION’S ASSETS TO ANYONE!!! THOSE ASSETS BELONG TO THE PEOPLE!!!

If you made your living as a dairy farmer, and borrowed money to buy a TV, should the bank be able to take your cows and your farm and your house and throw you out into the street if you can’t pay for that TV? Because that’s essentially what’s happening in the modern application of “austerity.”

Cutting spending or raising taxes, or even a combination of the two, to me, is an acceptable way for a nation to repay a debt. Stealing the wealth of the nation from the people is not.

And finally we come to the real cause of excessive debt. This applies to both nations and to individuals. If there is too much debt, look first at the lenders. If they are loaning people or nations more than they can pay back, then who is the fool? If  you loan me more than I can ever repay, and I spend it on riotous living, and especially if you loan me even more later, then YOU are the fool and you deserve to lose every dime you loaned me… which brings in the current doctrine of “Too Big To Fail banks.” (TBTF) In my mind there is no such thing as TBTF. If a bank or institution is TBTF, then it’s TDTE (too Dumb To Exist) and should be shut down and it’s officers BANNED from the business forever.

Apparently Paul Krugman is unaware of the reality of the international debt problem. Perhaps he can read this and learn something from it.

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2 Comments

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  1. Anonymous / Jun 7 2012 11:40

    >> Another misconception here is that the government is somehow responsible to take care of
    >> individual people. No. The government is not your Mommy and Daddy.

    I get what you are implying (financial) but this is absurd; I hate nanny-states more than anyone, but if the gov. does NOT provide any benefit to individual people, why should it exist? This is not a disagreement with you, so much as a “you seem to want it both ways” and I am curious why you only tell half the story. Why not go all the way then? If gov. does not provide you any good, why do you put up with it? Because it does. Because you do need it. If not, why do you think it deserves to be kept around?

    >> NO GOVERNMENT SHOULD EVER HAVE THE AUTHORITY TO SELL THEIR NATION’S ASSETS >> TO ANYONE!!! THOSE ASSETS BELONG TO THE PEOPLE!!!
    I am curious if you feel the same way about land, air, and water. Should individuals be allowed to “own” land? Or is this another case where you are intentionally leaving things out? Should all land that is claimed by a gov. belong “to the people” (which implies collective “ownership”, not individual “ownership”)? How is this any different?

    >> But overlooked along the way is that before the government gave the banks money, the banks >> loaned the government money.

    Sure. That part of the picture is relevant as well. But show me a bank without a gov.

    I have heard of a few banks that operate outside of gov. but they are not exactly encouraged avenues in most circles. Likewise, most people do not want to invest in entities that a gov.
    cannot (theoretically) go after if they run off with your money.

    This of course is assuming that a gov. is going to protect you if a bank in your own jurisdiction steals from you.

    Although, with gov. not being your mommy and daddy, you should of course rush in with a gun and badge yourself and steal back what they took from you + interest, right? (sarcasm)

    Gov. IS your mommy and daddy, or at least an older sibling. People may differ on how far is appropriate, but the point remains: if gov. is not providing any benefits to you, why keep it around?

    It is ironic that I would ever defend a gov. anytime, anywhere, and even worse that I would ever choose a collective above an individual on any topic under any circumstance.

    But all I see is a person who crossed a bridge and then wants to cut it so no one else can get across.

    Show me your alternative solution that is better, show me your standing army, show me your postal service, show me your public transportation, show me your educational system, and I would love
    to immigrate to your fantasy one-man country. I don’t see it. I don’t think it exists.

    • Michael E Picray / Jun 8 2012 10:03

      “if the gov. does NOT provide any benefit to individual people, why should it exist?”

      Governments exist to GOVERN – which is to say that with the consent of the people, they make the rules that the country operates under, and as in the US Constitution, “promote the GENERAL welfare”. This was clearly understood by the founders, and it was demonstrated when the Constitution made it part of the government’s job to create and maintain post roads and to provide for the COMMON defense. To my recollection, NOWHERE in the Constitution is there an entitlement for individual citizens.

      As to promoting INDIVIDUAL welfare, individual people benefit from the ENVIRONMENT created by government. That function (individual welfare) would be one of the things that the STATES can do with the consent of THEIR citizens. When I was young and poor, where I lived it was the COUNTY that provided medical care and dental care for those who could not pay, and daily maintenance (food, shelters, etc) was provided by religious and social organizations for those unable to do so for themselves. NO GOVERNMENT PAID for these daily maintenance things. We have always been a charitable people, taking care of the less fortunate – UNTIL the government decided that it could buy the gratitude of the people with the money they TOOK from the people. It was all down hill from there. I worked at the county hospital for 2 years and never once saw or heard of anyone being brought in for malnutrition unless they were alcoholics or drug abusers. We also became a less benevolent people after this change – why give to a charity for the poor when the government will take care of it?

      Another reason it is inappropriate for the Federal government to pay for and run (ie be involved with and in) programs benefiting individual citizens is that we are a nation of people from a great many cultures. What may be good for one may not be acceptable for others. (Which is also true of humanity in general.) If the government cannot cater to all, it should cater to none.

      A great example is the government meddling in the school systems. Before the federal Government became involved, the US had one of the highest literacy rates in the world. Now – not so much. (http://en.wikipedia.org/wiki/Literacy_in_the_United_States). And the US literacy rates are dropping. No matter what the NEA and the Federal government claims, when you have cities all over the nation with a 75% HS dropout rate I fail to see how literacy rates can do anything but go down. Which is an argument for local control of schools, and NO involvement from either State OR Federal governments. The brightest spot in US Schooling is the Home School movement. Home schooled people consistently out perform public school people – and to my knowledge, there is absolutely NO government involvement in most home schools.

      “ASSETS BELONG TO THE PEOPLE”

      Okay – I left out a couple of words. Tack “individually or collectively” onto the end of the above. My meaning was that assets (land, etc) held individually by individuals, belong to those people and are not the government’s to dispose of. Assets held in common also belong to the people under a government held trust, and should not be used in anyway that the people object to, and should be preserved for the people for future generations. Eminent domain is a valid concept, but I believe that any attempted exercise of the power should be subject to a vote of the people. the current practice of governments taking private property by eminent domain, then giving or selling it to private developers is outright theft and the people in a government that do such should be arrested and convicted of theft, be imprisoned, and pay for any losses to the original property owners.

      “Banks without government” have existed for thousands of years. Why would banks need governments? To make banking “honest” all that needs to be done is to restore the “unlimited liability” principle to the ownership and governance of banks. The only function for government in such a system would be to ensure that the bank’s collective ownership maintains sufficient capital to cover liabilities. (A historical way of doing banking.) If the banks make risky loans, and the loans default, the bankers pay. If the bankers cannot pay, they go to prison for theft and fraud. Kinda makes a banker more RESPONSIBLE, eh? And also the less willing to make risky loans because it’s ultimately THEIR wealth on the line. The current financial/banking crisis is entirely caused by and is being exacerbated by the total lack of personal liability of those running the banks!

      “Show me your alternative solution that is better, show me your standing army, show me your postal service, show me your public transportation, show me your educational system, and I would love
      to immigrate to your fantasy one-man country. I don’t see it. I don’t think it exists.”

      As above – the collective parts (army/navy, postal system/roads are constitutional mandates of the Federal government, being collective goods. Public transportation in the US is private or local government, (except AMTRAC which as all other things Federal is an abysmal failure that should be privatized – but won’t be because there’s no real demand at cost.), and we’ve already dealt with the educational “system”. (Prior to the late 19th century education was private, with rare instances of local government systems paid for by local users and tax payers, or religious in nature.) IIRC, colonial literacy was near 100%, and the main method of dissemination of information was the written word via broadsheets and newspapers.

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