Economics Questions

Re: Could we monetize the national debt

meambobbo — Wed, 22 Jul 2009 15:28:43 GMT

From what I have read, reparations couldn't be made in paper Marks. They had to be paid in foreign currency or physical gold. To this end, Germany may indeed have tried to run the printing presses to pay off the debt, by first putting the freshly printed paper Marks into circulation by spending them at foreign exchange markets. This is far different than paying off a debt denominated in the printed currency. This situation relies on the printing presses being able to run faster than prices rise on the foreign exchange.

This brings about the distinguishing feature of hyperinflation - where prices increase faster than monetary inflation occurs. This is due to two reasons, which are more or less the same thing. As the purchasing power of the currency diminishes more and more quickly, it becomes less and less demanded, as merchants find it favorable to barter, and there is less demand to hold cash for any sizeable period of time. The other is the expectation of continued dimunization of purchasing power.

Re: Could we monetize the national debt

bearing01 — Wed, 22 Jul 2009 00:32:36 GMT

start reading around page 56

http://mises.org/books/causes.pdf

Reparations weren't the cause of depreciate of the German mark. If I remember correctly, in this book Mises discusses the methods Germany could go about repaying its debt to the world. They chose the printing press. I don't remember the fine details. It's been a while since I read this.

Re: Could we monetize the national debt

krazy kaju — Tue, 21 Jul 2009 16:03:29 GMT

IF we allowed banks to fail and IF the federal government would rein in its spending, taxing, and regulating, we COULD monetize a portion of the national debt without too many consequences. Hopefully, deflationary pressures from bank and other business failures would keep down inflation initially while later economic growth could suppress inflation later down the road. A more responsible way of ending our national debt crisis would be to have the federal government to declare bankruptcy. This would effectively prevent the government from ever running deficits again, since nobody would want to lend to Congress after the default.

Re: Could we monetize the national debt

meambobbo — Tue, 21 Jul 2009 16:00:16 GMT

bearing01:
This is what Weimar Germany didn after WWI, to pay their debts / reparations to the rest of the world for WWI.

I disagree. The war debts were denoted in "Gold Marks", which were actually simply a measure of actual gold.

Re: Could we monetize the national debt

bearing01 — Tue, 21 Jul 2009 15:51:00 GMT

inquisitiveteenager,

This is what Weimar Germany didn after WWI, to pay their debts / reparations to the rest of the world for WWI. It created hyper-inflation, which broked down the division of labor and therefore the economics of society itself. It created anarchy and the people demanded a dictator, Hitler, to restore order.

The USA has far too much debt to just print money and buy it all up. It is a form of debt default considering there are no additional goods produced in the economy which to buy with this new money, and citizens will not forego the consumption of the things we do produce so the creditors can buy it instead using the dollars we earn. This is how you truely pay back debt. The borrower refrains from consumption and transfers his money or goods he produces over to the creditor which he owes wealth to (that was borrowed). We are just better off telling our creditors it's their fault for being stupid enough to lend money to our government. Now we refuse to pay them with real wealth and therefore we are defaulting. This is pretty much the same as printing money to pay them back. The only difference, in the former case, those who receive the printed money first can quickly go buy up whatever remaining wealth/goods remaining in our economy before prices rise to the point where the money buys less and less.

Re: Could we monetize the national debt

meambobbo — Tue, 21 Jul 2009 15:13:04 GMT

I think it is very presumptuous to believe that a government is trying to act in the best interest of its people in the first place. In reality, government wants to piss off neither its tax base (domestic citizens) or loan base (bond market - all foreigners in your example). It tries to balance these two.

If your presumptions were correct, it'd be better for the government to simply declare default on its debt. Then there is no currency collapse with the same results. A currency collapse would stifle local economy and diminish the tax base. The only people who can force a government to honor its debts are other governments. Generally, the only debts that must be honored by governments are war debts to other governments.

Of course, any form of default is not wise in the long term. Governments generally need to borrow not to fund day to day activities but to fight wars or other emergency situations requiring short-term financing. A history of dishonor in this regard will lead to a lack of funding when it is most needed.

But we also have to take into account the printing presses. The printing presses can be used as a virtual default, as well as a source of emergency funding. This makes debt another day to day means of funding. Where interest payments rise faster than the tax base, resort to mild inflation - this lowers the ultimate cost of servicing the debt, while providing immediate funding. In that inflation lowers interest rates and supposedly leads to higher paper profits and higher taxes, it is also believed to be helpful.

So, it's more of a juggling act. Governments rarely declare a full default these days, either outright or by resorting to paying off their entire debt load at once via the printing presses. Both would seriously harm their ability to raise money through the bond market. Rather they simply attempt to tax and inflate and borrow in such a manner that they maximize their spending power without losing power tomorrow.

Could we monetize the national debt

inquisitiveteenager — Tue, 21 Jul 2009 13:56:52 GMT

Let's assume the govt owes nothing to its own people and only owes money to foreigners.

I'm not saying this is something I would do, I'm just asking whether it is theoretically possible and if so what

are the consequences.

Here goes the scenario:

If a govt had a huge debt to foreigners, couldn't it monetize the debt. Now the currency will crash but couln't

the country then go on a gold standard immeidately. In a way you have paid off your debt and avoided calamity

at home.

you guys missed an important thing i said, i know the currency will crash, I'm saying can't they then go onto a gold standard immediately after they have

monetize the debt

assume the country has a fiat money system