Read my lips, no new tax cuts: PM

[caesar]

Stoker and August; you may be willing to pass on OUR debt to your children but us responsible people prefer to pay our own way. We like to share our resources with others but we do want to pay our own bills. Us older people did not leave a large debt for you younger people(20 to 45 or so) pay for your own share of the debt; don't be a deadbeat.

[Guest eureka]

Stoker, are your opinions based on ignorance or something else?

[Stoker]

Stoker and August; you may be willing to pass on OUR debt to your children but us responsible people prefer to pay our own way. We like to share our resources with others but we do want to pay our own bills. Us older people did not leave a large debt for you younger people(20 to 45 or so) pay for your own share of the debt; don't be a deadbeat.

I'm in favour of debt reduction, what would make you think otherwise? I'm also in favour of stimulating the economy, which in turn will afford us more money.......is leaving a healthy economy a bad thing for your children?

Stoker, are your opinions based on ignorance or something else?

Something else, but I feel it far to complex for you to understand.........common sense.

[Guest eureka]

I rather thought so. Commom Sense: the lowest intellectual common denominator. Try going beyond it to arguing from informed opinion.

[Hugo]

Those who have advocated paying down the debt first are correct. This is what the government should do.

Government usually doesn't borrow real money, it borrows fake money. When the state borrows from a lending institution, it borrows from the excess reserve rather than from actual capital reserves, which is merely the legal limit the government has placed on credit expansion. Therefore, government debt is currency inflation. Taxation leads to economic slowdown, however, inflation leads to economic recession or crash. It's important to pick the lesser of two evils and I would prefer slower economic growth to economic shrinkage (recession). Taxation is ugly, but it's the only method of funding government that doesn't give the nation a ticking economic timebomb.

[Guest eureka]

How true, Hugo.

[August1991]

Those who have advocated paying down the debt first are correct. This is what the government should do.

How wrong, Hugo.

Consider the issue of paying for government expenses. (I will ignore the issue of new money.)

In fact, it makes no difference, as you imply Hugo, whether the government taxes now, or borrows and taxes later. Except in this way: If the government borrows now, it guarantees that it will repay any debt by coercive future taxes.

As a result, lenders today offer a better (lower) interest rate to the government than individuals could obtain on their own. (The lenders know there is less risk and a greater likelihood of repayment if jail time is a penalty.)

Broaden this idea, Hugo, and you'll understand the argument for government.

[Guest eureka]

How partly true, August.

[Hugo]

Consider the issue of paying for government expenses. (I will ignore the issue of new money.)

That's like saying "consider astronomy (I will ignore the issue of heliocentrism)." Silly.

In fact, it makes no difference, as you imply Hugo, whether the government taxes now, or borrows and taxes later.

Assuming no interest was charged, no. But nobody loans without interest (except friends and family, of which government has none). But the difference is taxing $100 now, or $110 later.

Hopefully that cleared things up for you.

[August1991]

Consider the issue of paying for government expenses. (I will ignore the issue of new money.)

That's like saying "consider astronomy (I will ignore the issue of heliocentrism)." Silly.

Governments can pay for their expenses by issuing new money, taxes or borrowing. To simplify, I chose to ignore teh issuance of new money to focus on taxing and borrowing. What's silly about that?

Assuming no interest was charged, no. But nobody loans without interest (except friends and family, of which government has none).

Hugo, of course interest is taken into account. It still makes no difference (at least in the sense you imply) whether the government taxes now or taxes later.

Why? Well, you forget about government's coercive power to tax.

In fact, borrowing through the government gives us the lowest interest rate possible.

[Hugo]

To simplify, I chose to ignore teh issuance of new money to focus on taxing and borrowing. What's silly about that?

What's silly about that is that no Western democratic government has actually done that since 1914. The US government has been inflating their currency as a method of financing themselves since 1860. Your hypothesis deals with a fictional world, not the real world. You might as well argue about economics based on a world with flying cars.

In any case, if government debt entirely took the form of bonds or loans issued out of capital funds rather than out of fractional reserves, that would not pose a major economic problem. But that has not happened in the lifetime of any poster on this forum.

It still makes no difference (at least in the sense you imply) whether the government taxes now or taxes later.

Yes, it does. I can either pay the government $100 today, or $110 a year from now because they borrowed the $100 today. If you don't want $10, then send it to me. I'll give you my Paypal details.

[August1991]

Yes, it does. I can either pay the government $100 today, or $110 a year from now because they borrowed the $100 today. If you don't want $10, then send it to me. I'll give you my Paypal details.

IOW, I can either pay $100 in taxes now or save/have the money for other uses now and then pay $110 in taxes next year.

For example, if I currently owe $100 on my credit card at 20%, I would rather have the money now and then have to pay $110 next year in taxes.

Hugo, I am surprised that you of all people would not see this feature of government. Its coericive taxing powers extend to the future.

Or, if you prefer, the government has the power to use either your credit card or your debit card to make its purchases. If you are solvent, and you can lend/borrow at as good an interest rate as the government, it makes absolutely no difference to you which card it uses.

What's silly about that is that no Western democratic government has actually done that since 1914. The US government has been inflating their currency as a method of financing themselves since 1860. Your hypothesis deals with a fictional world, not the real world. You might as well argue about economics based on a world with flying cars.

The US government does not solely finance itself from inflating the currency. Furthermore, the Fed now decides independently how much new money to print and this has been arguably the case since 1979.

In the case of modern Europe, which specific country would you be referring to? The ECB decides monetary policy.

IOW, both the US and Europe are well on their way to privatizing money. In any case, private financial paper is used in the vast majority of transactions.

[Hugo]

IOW, I can either pay $100 in taxes now or save/have the money for other uses now and then pay $110 in taxes next year.

Assuming, for instance, you could get more than 10% APR on that $100.

Hugo, I am surprised that you of all people would not see this feature of government. Its coericive taxing powers extend to the future.

Oh, I do see it. I also know something about economics and I know that taxation is a lesser evil than inflation.

The US government does not solely finance itself from inflating the currency.

I never said it did. But the US government has been inflating the currency to finance itself ever since 1860. It got particularly loose with the money supply in the 1920s, with obvious (and terrible) results.

In the case of modern Europe, which specific country would you be referring to? The ECB decides monetary policy.

All of them. Any country with a central bank that sets an interest rate is in the business of currency inflation. How do you think a central bank can set an interest rate? The prime rate is altered by expanding or contracting the money supply.

IOW, both the US and Europe are well on their way to privatizing money. In any case, private financial paper is used in the vast majority of transactions.

Only because government fiat says it can (much as various crimes are not seen as crimes when committed by government). Banks can inflate currency because the government has given them permission. Without government intervention, any fractional reserve bank would be fraudulent.

[August1991]

IOW, I can either pay $100 in taxes now or save/have the money for other uses now and then pay $110 in taxes next year.

Assuming, for instance, you could get more than 10% APR on that $100.

The government debt grows more slowly than the mortgage on my home since the government borrows at a lower interest rate than I do.

So, PM PM should not pay down the debt but rather cut taxes and let me pay off my mortgage sooner.

Hugo, I am surprised that you of all people would not see this feature of government. Its coericive taxing powers extend to the future.

Oh, I do see it. I also know something about economics and I know that taxation is a lesser evil than inflation.

Inflation is taxation - albeit a particularly inefficient way to tax. But the question here is whether the government should tax more efficiently now (through GST for example) or borrow.

Any country with a central bank that sets an interest rate is in the business of currency inflation. How do you think a central bank can set an interest rate? The prime rate is altered by expanding or contracting the money supply.

The ECB is not a country. It is not even under the control of one government. For all intents, it acts as an institution independent of any single government.

But the US government has been inflating the currency to finance itself ever since 1860. It got particularly loose with the money supply in the 1920s, with obvious (and terrible) results.

The US Fed was created in 1911 (our Bank of Canada dates from 1935).

The Fed was loose in the 1960s. The terrible results of the 1930s were due to what Friedman has called the Great Contraction, hardly evidence of being loose.

----

The US Fed has been independent of government for only 25 years with only two governors in that time. But that represents about 25% of its history. The history of money is short and the involvement of the State in money issuance is shorter. I reckon we are still in the learning stages. (Heck, we have only had credit cards for about 35 years and debit cards for about half that. Many countries are just now discovering the benefits of credit card transactions.)

I consider two watershed events in recent history: the failed coup of August 1991 in the Soviet Union and the Fed's independence starting with Paul Volcker. Both indicate clearly the limits of government as a useful institution.

[Hugo]

The government debt grows more slowly than the mortgage on my home since the government borrows at a lower interest rate than I do.

Assuming all government debt comes from bonds. It doesn't, of course, and if it did this very discussion would be moot since government can't really demand to pay a bond back before its maturity date without an interest penalty, in which case there's no difference when it's paid.

The trouble with government debt is principally that the temptation to inflate in order to pay it off is omnipresent. Inflation is actually more likely in a democratic government. If government owes $20m in bonds, it's very easy just to print $20m rather than raise it. No extra taxes, the government stays popular and someone else will become unpopular when the recession starts.

Inflation is taxation - albeit a particularly inefficient way to tax.

In a way. It's a very random way to tax, because the effects aren't predictable. The question economists are always asked is, "when's the crash coming?" and they can't predict it with any certainty. The only certainty is that it is coming. It's also a tax that hits working people hardest. The rich can cushion themselves somewhat from the effects of inflation, but working people have to watch their pensions and their retirement funds evaporate before their very eyes.

The US Fed was created in 1911 (our Bank of Canada dates from 1935).

The Fed was loose in the 1960s. The terrible results of the 1930s were due to what Friedman has called the Great Contraction, hardly evidence of being loose.

They contracted because they had recklessly expanded. Because of the reckless expansion, a depression was absolutely inevitable. The only question was when and how it would start, and they settled that when they contracted the money supply.

Inflation has been government policy since the Civil War, when the Union started inflating the greenback to pay for the astronomical cost of the war. The American Civil War debt remains unpaid to this day.

Von Mises records that 1914 was the time at which most countries that had not already abandoned the gold standard did so. After the war, the rise of Keynesianism quickly claimed the rest.

[caesar]

So, PM PM should not pay down the debt but rather cut taxes and let me pay off my mortgage sooner.

So you want those younger than you to assume your debt so you can pay off a mortgage. hmmmmmm.

Let me know where you can get 10% interest on money. I would be VERY interested.

[August1991]

So you want those younger than you to assume your debt so you can pay off a mortgage. hmmmmmm.

My kids are certainly interested in knowing whether they'll inherit a debt-free house or a mortgaged house.

Let me know where you can get 10% interest on money. I would be VERY interested.

Let me know where I can borrow at 2%, like the government of Canada.

Inflation is taxation - albeit a particularly inefficient way to tax.

In a way. It's a very random way to tax, because the effects aren't predictable.

Inflation is not a tax "in a way". It is a tax - as you note, Hugo. Governments can print money and buy stuff with it, or pay off debts.

It is an inefficent tax because people will do all kinds of things to avoid such taxation. This is quite predictable so I don't know if it's as random as our current taxation system. (Have you heard of Loto-Québec? How about Impôt-Québec?)

They contracted because they had recklessly expanded.

No, the Fed contracted because, faced with the collapse of a financial bubble, it wanted to have "sound"money. The UK went into recession in 1925 when it returned to a gold standard at a pre-war level and in effect applied a restrictive monetary policy.

The evidence now is that the sonner countries left the gold standard in 1930s, the sooner they got out of recession.

In 1987, Greenspan took an entirely different approach (he applied a loose monetary policy) and the stock market crash that year is now a footnote.

Von Mises records that 1914 was the time at which most countries that had not already abandoned the gold standard did so. After the war, the rise of Keynesianism quickly claimed the rest.

Many European countries attempted to return to gold after WWI. Keynesian ideas only became popular after WWII.

-----

I don't want to lose sight of two main points.

First, the base money supply is increasingly in the hands of individuals independent of government. Around the world, people can choose to denominate much financial paper in which ever currency they choose. In effect, base money has been privatised. This is a major limit on the power of government.

Second, whether governments borrow or tax makes little difference. What matters is what governments buy.

[Hugo]

Governments can print money and buy stuff with it, or pay off debts.

For a while. Eventually, they're going to have to deflate and pay it all back, or they're going to have to continue inflating and literally destroy the currency.

It is an inefficent tax because people will do all kinds of things to avoid such taxation. This is quite predictable so I don't know if it's as random as our current taxation system.

If it's predictable, when's the crash coming, August? Inflation is a random "tax", because the government doing the inflating does not know who is going to pay, how much they will pay and when they will pay.

This is why I say it is like a tax. It's not actually a tax in the true sense of the word. A tax is a levy, inflation is a very risky and uncertain debt.

The UK went into recession in 1925 when it returned to a gold standard at a pre-war level and in effect applied a restrictive monetary policy...Many European countries attempted to return to gold after WWI.

That's right. As I have said, once you inflate, you have to have an economic bust. It's inevitable. If you return to the gold standard, obviously there is going to be a recession because all the economic expansion fueled by monetary expansion will have to be reversed. What goes up must come down, in this case.

In the 1920s they did return to gold, at inconsistent and irrational parities. The pound was overvalued, the dollar and franc undervalued, and combined with French and American attempts to block imported gold you have a recipe for disaster. Then the Feds started to expand the money supply in 1927, the Brits started to contract it in 1928, then Austrian and German banks failed causing further contraction and voila, the Great Depression is born. The British were able to postpone their depression from 1925 until 1929, and make it far worse, of course.

Basically, in the 1920s we had an attempt to return to the pre-war monetary game, with different rules.

The evidence now is that the sonner countries left the gold standard in 1930s, the sooner they got out of recession.

What evidence?

Keynesian ideas only became popular after WWII.

Actually, Hohenzollern Germany was practicing Keynesian economics long before WWI. Study their history. They believed in a statist/socialist economy and inflation to finance government. Hence their economic collapse during WWI, which ended up losing them the war. Keynes, like Marx, didn't have a single original thought. He just made the ideas of others popular.

I don't want to lose sight of two main points.

I think you don't know a lot about economics, which is lamentable in a capitalist. Ironically, when it comes to government and to monetary policy, you're a socialist. You seem to be arguing for inflationary monetary policy.