Accountant, Account for Thyself

Norm Singleton, legislative director for Ron Paul, emails to note that the Fair Credit Reporting Act signed in December provides for the creation of a "Financial Literacy Commission" intended to " develop a national strategy promoting basic financial literacy and education at the State and local level." That's just one of several such programs.

As Norm observes, it'd be interesting to see whether the FLC promotes the same sort of "financial literacy" exhibited by fedgov itself. As in: "Well, I've racked up massive credit card debt, and I'm hoping that if I spend even more now, while taking in less income, this will encourage me to spend less in the future. Barring that, I'll borrow against my 'trust fund,' which consists of a note reading 'go hit up my kids for the money.'"

Comments

[Ron Hardin]

Look up the fallacy of composition. Government debt is payed down to increase the money supply, and increased to decrease the money supply.

Increasing or decreasing the money supply is done to keep the economy from trying to do too many things at once; in particular when the government wants to do something instead. The point is to keep the value of the dollar stable.

Borrowing to decrease the money supply and then spending the money gets volunteers to give way to government spending, and so is minimally invasive. Conversely, buying back debt increases the money supply with minimal command effect on where the money goes, volunteers selling their debt back.

So debt is paid off when the government wants to pay it off. It can be rolled over or increased indefinitely. The only actual burden is government spending, which displaces the spending of the public that buys bonds instead.

The actual limit to debt doesn’t happen unless the ability to service the debt becomes doubtful, which we are very far from, both in fact and historically.

[R. C. Dean]

Ah yes, nothing gets results like a commission to develop a national strategy for education managed by state and local bureaucrats.

[joe]

I had to explain to a 30 year old friend of mine what equity is. This might not be such a bad idea.

[mike]

Increasing government debt diminishes the supply of money? And the money the government raised from the sale of its debt goes where? An incinerator? If only. . . .

To JS: the individual debtor analogy works only if the borrowed money is consumed, rather than invested at a return higher than the debt burden. E.g., buying or selling stocks on margin. If I borrow against my house at a cost of 6% and invest that money at a return of 7%, I am neither profligate nor unwise.

Therefore, reversing the analogy, the Supply-Side argument works if the tax dollars left in the pockets of entrepreneurs results in business investments that yield more taxpayers at higher revenues than current.

While that is debatable, Norm’s analogy is too simplistic an argument to include in that debate.

[mak_nas]

ron, i think that’s a simplification of the current condition. one must account for large foreign holders of dollar debt.

the fomc certainly does manage money supply through the debt market, but it is not limited to that tool. in fact, as government debt has skyrocketed over the last three years, money supply has simultaneously expanded incredibly, as the fed pursues the greenspan inflationary policy out of every downturn. when the us was a stock investors nirvana, dollars were in very high demand and this was sustainable. that incentive to be in dollars has ended. and this of course has begun to destroy the dollar — the very opposite of the stability you mentioned.

because our debt instruments are largely owned by other nations, they feel the weight of that currency decline in their portfolios — and inflows of foreign capital are slowing in response to the dollar’s devaluation. this lowered demand for us debt will raise interest rates, making the debt more expensive to service.

in time, the dollar would theoretically strengthen with higher rates. but our current account deficit is so large — meaning we require so much foreign capital to finance our govt, consumer and corporate debts — that this stabilization for the dollar is likely still very far off. that means the conditions are right for a persistent dollar decline/persistently higher rates/persistently higher debt service costs.

such an inflationary condition has historically been met by yet more money supply creation (the politically expedient path out), followed by hyperinflation and the death of the fiat currency. weimar germany is a good example; so is the mississippi scheme. many emerging market disasters unfold similarly.

my point is that, long before you get limited by some percentage of budget devoted to debt service, there is a question of global market confidence. the united states is making its debt and its currency far too common to be valuable — indeed, if not for what remains of bretton-woods, this whole experiment in fiat currency would probably already have ended disastrously. as is, the imbalances have to get much bigger than they ordinarily would before the end comes — and so they are.

[mak_nas]

http://www.lewrockwell.com/englund/englund9.html

[R. C. Dean]

joe – I think that we need a hell of a lot more basic financial education of young folks, as part of their standard curriculum. Sadly, I don’t think a commission to develop a strategy for a state and local program will educate anyone, unless you want an example of how our masters go about their business of wasting our money.

[Ken]

Bottom Line:

The government debt is payable in dollars and the government can print as many dollars as needed.

There may be other ramifications, but the USA will never not be able pay off debts.

This is one differece between the government and an individual with a big credit card debt.

[joe]

“I think that we need a hell of a lot more basic financial education of young folks, as part of their standard curriculum. Sadly, I don’t think a commission to develop a strategy for a state and local program will educate anyone”

You’d rather have them start spending money on a program without figuring out what they’re doing first?

[Russ D]

http://www.mises.org/fullstory.asp?control=1423

[Douglas Fletcher]

Gee, I wonder if they couldn’t use the schools for this.

Yeah, I know, dumb idea. Back to the dunce corner for me.