Comment 68520

By Freedom seeker (anonymous) | Posted August 28, 2011 at 11:57:06 in reply to Comment 68414

Smith said: ">> "Governments cannot afford to bail out the banks again."
Yes, they actually can. This article... [snip]"

The suggestion is that Government can perform some sort of magic trick whereby they can bail out the banks, car companies, etc., etc. not just "one more time" but forever without limit or negative consequeces. Can this be true?

Some may find the link provided by Smith to be an easy read, most though will I expect be reaching for the Tylenol. Let me try this... When Government wants money, for whatever reason, be it to fund ongoing programs, "bail out" some institution, etc. there are 3 ways it can obtain it:

[1] Taxation
[2] Borrowing
[3] "Print" it (Create it out of thin air)

Option 3 is only available in situations where the money in question is "fiat" money, that is bank notes / account balances stored in computers, rather than "Commodity" money, that is Gold, Silver, or some other scarce physical item. All states these days use a fiat system.

Taxation is straight forward enough: Take money from Peter,and all his fellow taxpayers, under threat of force, and give it to Paul. No magic to be found here, eventually Peter will be driven into destitution, or motivated to revolution.

Borrowing gives the money of savers to Paul, promising in return to repay the savers with the original amount plus interest. This solves Paul's
problem, and leaves the government with the same options that any other borrower has; Repay the savers or default on the loan.
Repeated default is clearly not sustainable, savers will quickly become unwilling to lend to government. Repayment simply pushes the problem into the future, but now a larger problem than would have been the case if taxation had been used because the amount of the interest to be paid to savers has been added. The money necessary to accomplish repayment in the future can only be obtained by options 1, 2 or 3. So again, no magic to be found.
The case in which government borrows from itself should be mentioned. An example of this is "Quantitative Easing" seen recently. Analysis will show that this is in fact simply "printing" papered over with a layer of voodoo bookkeeping.

This leaves us with "Printing". The Government creates money out of thin air and gives it to Paul. It simply prints more bank notes, or in fact types some more digits into a computer.
The purchasing power of money, is a function of scarcity and the total amount of goods and services available for purchase. So, increase the money supply faster than the goods and services available for purchase are increasing (due to economic growth) and the result will be that the purchasing power of a dollar will decrease. This is "inflation". So how does printing help Paul? Because there is a time lag between when the new money enters the economy and it's presence is detected by the actors in the economy Paul, as "first user" of the new money gets the chance to exchange with it at it's uninflated (higher) value but as time passes the value of all money in the money supply will assume it's new lower purchasing power. The effect of inflation is that the actors in the economy have less purchasing power than they did before the inflation occurred, just as they had less purchasing power after they were taxed than before they were taxed. Inflation then can be seen as taxation by another name, and subject to the same limitations as taxation as a long term strategy for government.

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