Analysis of the Myths Regarding Government Debt Pt 1

Anthony Davies, Phd has taken the time to make a video regarding the Myths regarding Government Debt. As promised, I will provide some deeper insight on some of the points that Dr. Davies makes in his video. My insights will not be in order of the listing that he provides in the video, I will simply touch on some of them.

The Printing of More Money

Some individuals will state to solve the multi Trillion dollar debt issue, the solution of prininting more money will suffice. Albiet it may sound reasonable, it will actually make matters worse. The inflationary effects of the expansion of the money supply are well documented, on this blog as well in the video done by Dr. Davies. As prices rise, due to the devaluation of the currency, the illusion of increased tax revenues will occur. Public Policy analysts will remark a record number of tax revenues have flowed into the treasury. Yet, this is misleading. The tax rates will be based upon the PRICES of goods(this also includes the WAGES of labor). The inflationary impact, as stated in the video, impacts both PRICES AND WAGES. The impact of the increase of the money supply creates this effect, along with the depreciation of capital(savings). As an aside, this is why politicians love lower interest rates for monetary policy–this action encourages consumption in the present, and discourages savings for future consumption.

Since the revenues will increase to the treasury, politicians will spend more money, creating a wider short fall(deficit). This deficit will be “balanced” by the sale of Government securities or debt. Once those securities are sold, this action also expands the money supply, creating more inflationary impact on prices and wages, while concomitantly wiping out individual savings. More could be stated about his effect on savings, but that shall wait for another blog entry. In short, the debt will be never balanced by simply “printing more money”.

Raising Taxes

This battle cry is highly popular with politicians and their supporters: ” We can simply raise taxes on the rich, and this will help us balance the budget.” Like many of these proposals, they *sound* reasonable, at first. Once deeper analysis is performed, it is revealed these sort of proposals are meaningless and fallacious. A thought exercise: Suppose your local grocery story raises its prices on your favorite name brand cereal. Let us suppose it raises it by $10. Before the price was $5 for a box of Raisin Brand, now the retail price is $15. Will you continue to purchase this cereal? In most cases, the answer is no. You will seek alternatives to paying $15 for cereal. Yes, I know cereal is not the same as paying taxes, but the underlying human behavioral concept is the same: Price elasticity. Humans will purchase goods relative to their price elasticity–if the price of that good rises too high, actors in the free market will seek other means to satisfy their wants that were normally fulfilled from that particular good. If tax rates are raised up too high, individuals will seek out means to offset the tax risk or avoid paying on the tax increase. This economic phenomenon will occur if taxes are raised: Tax payers will seek alternatives(price elasticity) to paying the higher tax rates. Since this is the case, tax revenues will not increase when tax rates are increased. Historically, this has been proven to be true. When tax rates are lowered, tax revenues are increased. Also, regardless of what the tax rates are, taxes collected typically are around 17% of GDP.

More will be covered on another blog entry…

The US Dollar Collapse Is Greatly Exaggerated

The US Dollar Index has lost 10 percent from its March highs and many press comments have started to speculate about the likely collapse of the US dollar as world reserve currency due to this weakness.

These wild speculations need to be debunked.

The US dollar year-to-date (August 2020) has strengthened relative to 96 out of 146 currencies in the Bloomberg universe. In fact, the US Fed Trade-Weighted Broad Dollar Index has strengthened by 2.3 percent in the same period, according to data compiled by Bloomberg.

The speculation about countries abandoning the US dollar as the reserve currency is easily denied. The Bank of International Settlements reports in its June 2020 report that global dollar-denominated debt is at a decade high. In fact, dollar-denominated debt issuances year-to-date from emerging markets have reached a new record.

China’s dollar-denominated debt has risen as well in 2020. Since 2015, it has increased 35 percent while foreign exchange reserves fell 10 percent.

The US Dollar Index (DXY) shows that the United States currency has only really weakened relative to the yen and the euro, and this is based on optimistic expectations of European and Japanese economic recovery. The Federal Reserve’s dovish announcements may be seen as a cause of the dollar decline, but the evidence shows that the European Central Bank (ECB) and the Bank of Japan (BOJ) conduct much more aggressive policies than the US while economic recovery stalls. Recent purchasing manager index (PMI) declines have shown that hopes of a rapid recovery in Europe and Japan are widely exaggerated, and the Daily Activity Index published by Bloomberg confirms it. Furthermore, at the end of August, the balance sheet of the ECB stood at more than 54 percent of the eurozone GDP and the BOJ’s at 123 percent versus the Federal Reserve’s 33 percent.

What we have witnessed between March and August has just been a move back from an overbought exposure to the DXY index due to the severity of the crisis, with investors increasing positions in safe havens in February and March, only to reverse as markets and the economy recovered.

The lesson most governments should learn is that economies do not become more competitive or deliver stronger growth and exports with a weak currency. Emerging markets have shown in the past years how a weak currency does not help, and the eurozone has had a weak euro versus the US dollar for years just as its economy delivered disappointing growth.

The reason why the US dollar’s world reserve currency status is not at risk is simple: there are no contenders. The euro has redenomination risk, and the constant political and economic concerns about the union’s solvency weaken the currency, as historical performance has shown. It tends to strengthen relative to the US dollar when investors place unjustified hopes on the eurozone growth only to weaken afterward, when poor growth adds to an overly aggressive ECB policy, with negative rates and massive money supply growth. The yuan cannot become a world reserve currency if the country maintains capital controls and concerns about legal and investor security remain. The Chinese central bank (PBOC) is also extremely aggressive for a currency that is only used in 4 percent of global transactions according to the Bank of International Settlements.

We are living a period of unprecedented financial repression and monetary expansion. The US Dollar reserve status grows in these periods where countries ignore real demand for their domestic currency and decide to copy the Federal Reserve policies without understanding the global demand for their currency. When the tide turns, most central banks find themselves with poor reserves and lower demand for domestic currency risk, and the position of the US dollar as reserve currency strengthens.

This is not a year of US Dollar weakness or the end of its supremacy as reserve currency, what we are witnessing is a generalized fiat currency debasement through extreme monetary policy. That is the reason why gold and silver continue to rise despite hopes of an economic recovery that seems to be stalling. The US Dollar will likely remain the most demanded fiat currency, but the excessive monetary stimulus will ultimately damage the confidence in most fiat currencies.

Author:
Daniel Lacalle

Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020), Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014).

He is a professor of global economy at IE Business School in Madrid.

Sound Money Is Key to Defending Our Liberties

By Thorsten Polleit from: Mises Institute

The title of this article epitomizes what the Austrian economist Ludwig von Mises (1881–1973) called the “sound money principle.” As Mises put it:

The sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.

And further:

It is impossible to grasp the meaning of the idea of sound money if one does not realise that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of right.

Mises tells us that sound money is an indispensable line of defense of people’s liberties against the encroachment on the part of the state and that sound money is a kind of money that is not dictated by the state but is chosen by the people in the free marketplace. The world we find ourselves in is a rather different place. Our monies—be it the US dollar, the euro, the Chinese renminbi, the yen, or the Swiss franc—represent fiat currencies, monopolized by the state.

Fiat money is economically and socially destructive—with far-reaching and seriously harmful economic and societal consequences, effects that extend beyond what most people would imagine. Fiat money is inflationary; it benefits a few at the expense of many others; it causes boom-and-bust cycles; it leads to overindebtedness; it corrupts society’s morals; and it paves the way toward the almighty, all-powerful state, toward tyranny.

Central Banking Is Marxist
It is certainly no coincidence that “the state” has been expanding ever since the world adopted an unfettered fiat money regime back in the early 1970s, and that as a result individual liberties and freedoms have been under pressure ever since. The state feeds itself on fiat money. It simply issues new debt, which is then monetized by the its central bank, which is at the heart of the fiat money regime.

Perhaps you will find it surprising that I believe that the concept of central banking is truly a Marxist concept. (I am not saying that central banking is only favored by Marxists. Not at all! There are also many other ideologies which approve of central banking.)

In their Communist Manifesto of 1848, Karl Marx (1818–83) and Friedrich Engels (1820–95) compiled a list of measures necessary to establish communism. Measure number 5 reads as follows:

Centralisation of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly.

Against this backdrop there should be no doubt that once the state has become the absolute ruler of fiat money, the door is open for it to grow bigger and bigger, eventually turning into the dreaded deep state. And the deep state, as we know well from history, has little regard for individual freedoms and liberties.

Making Money Great Again: Returning to Sound Money
What needs to be done? Well, the challenge at hand is “Making Money Great Again”! This requires, first and foremost, ending the state’s money production monopoly and opening up a free market in money. A free market in money means that people have the freedom to choose the kind of money they wish to use and that people have the freedom to provide their fellow men with alternative goods that may serve them well as money.

As things stand, however, a final solution to the “money problem” has not arrived yet—even considering the emergence of the cryptocurrency space. This is because the financial intermediation problem is still unsolved in the cryptocurrency ecosystem; we will come back to this issue in a moment.

But first let us address the question: How can we get from a state-controlled fiat money regime to a free market in money?

The first strategy is monetary enlightenment—informing the widest possible audience about the evils of fiat money and how it affects their personal lives, families, and communities. This also includes explaining to people that there is a superior and practicable alternative to a fiat money regime, namely a free market in money.

The second strategy is making progress in the field of alternative currencies and payment systems, especially in terms of technological disruptions and their economic profitability. This is the activity space for those among us who are propelled by entrepreneurial spirit.

The Limits of Cryptocurrency
The cryptocurrency community, the bitcoin community in particular, and also precious metals–based payment system providers have been making some headway in this area in recent years, but unfortunately victory has not yet been achieved.

For instance, bitcoin still has some scalability and performance issues. Currently, the bitcoin network settles a peak of around 350,000 transactions worldwide every day, and given its present configuration, it is presumably running at almost full capacity. By comparison, the German fiat money payment system alone processes more than 75 million transactions on average every business day. From the payment processing viewpoint, bitcoin cannot outshine fiat currencies yet.

What is more, a currency in a modern economy must provide for the possibility of financial intermediation (an issue I mentioned earlier). People typically demand payment or storage services for their money, or they want to lend and borrow money—irrespective of the kind of money they actually use. Often peer-to-peer is not enough, a third party is required.

Providing intermediation services outside existing state regulation is difficult. In fact, it would put an upper limit on the financial sophistication of any cryptocurrency. This is a heavy drag on their competitiveness compared to fiat currencies. And if a cryptocurrency comes out into the open space, it will have the state breathing down its neck, drowning it in business-destroying regulations and restrictions. Because the financial intermediation problem is still unsolved, one has reason to remain skeptical that—given the current circumstances—existing cryptocurrencies will succeed in pushing aside the state and replacing its fiat currency just like that.

Precious metals suffer from similar problems. In many countries, the state subjects gold and silver to value-added taxes and/or capital gains taxes. This makes them uncompetitive versus fiat currencies in terms of using them in daily transactions.

The Key to Free Market Money Is Deconstructing the State
In fact, is it possible that a free market in money can ever emerge as long as there is the kind of state we know today? The state is, as most of you probably know, the territorial monopolist of ultimate decision-making with the right to tax its citizens. We can rightfully expect that this kind of state will do its best to crush any competitor to its fiat money and prevent a free market in money from emerging.

So if we want a free market in money, the sobering logical conclusion is this: we need to reform, to deconstruct, the state (as we know it today).

Now the uncomfortable truth is out, because the state is possibly the fiercest adversary you could choose. How can we hope to achieve victory?

Well, there is certainly no magic spell. One possible and straightforward strategy might be appealing to people’s inner self, and that is their right to self-determination.

The right to self-determination is inalienable and it is an indisputable truth. Each and every individual is the owner of his or her body and the owner of goods acquired in nonaggressive ways (without violating the physical integrity of someone else’s property). We cannot dispute these words without causing a logical contradiction.

The right to self-determination implies that the citizens of a state have the right (1) to make it known, by a freely conducted plebiscite, that they no longer wish to be members of the state and (2) to form an independent state or to attach themselves to some other state. In other words: the right to self-determination includes the right of secession, that is, people’s right to break up the big state and to deconstruct it into smaller units.

Smaller political units are less powerful, more peaceful, and free market oriented. They keep taxation low, or may even go without it and become wealthier. Just think of, e.g., Shanghai, Hong Kong, Switzerland, Liechtenstein, or Monaco. This is because small political units must compete for capital and talents with other political units. They must behave themselves nicely. Otherwise, people and capital will leave their territory. Given a great number of small political units, there is a good chance that some of them will allow for, even encourage, a free market in money, setting an example that creates emulators.

Conclusion
It is hard to say which route would be the most effective in “Making Money Great Again.”

Perhaps the cryptocurrency community will somehow succeed in ending the state (as we know it today), leaving a truly free market in money in its place.

In the meantime, however, it certainly would not hurt if we (1) kept educating the wider audience about what good money is and what bad money is and also (2) kept unmasking the state (as we know it today), showing that it is incompatible with and a violation of the inalienable right to self-determination of each and every human being.

In any case, it is of the utmost importance to wrest the money monopoly out of the hands of the state. Otherwise, there is indeed little hope that the free society (or what little is left of it) can survive.

(The complete article, with footnotes, is located here)

10 Myths About Government Debt

Antony Davies, Phd goes through a listing of 10 Myths about Government Debt. For future blog posts, I will attempt to expand on each of these 10 myths. This growing debt is a huge issue, not only for current generations, but for those to come in the future. As mentioned in the video, Dr. Davies does provide a “solution” to handle the Government Debt. It is a must see. Take copious notes.

Cheers,

Robert