Sunday, April 4, 2010

An observation

Scenario 1:

We borrow and spend; the economy grows; we accumulate debt.

Scenario 2:

We borrow and spend; the economy grows; we do not accumulate debt.


Scenario 1 works until we reach a crisis. Scenario 2 works, and avoids the crisis.


jbpeebles said...

Playing devil's advocate here. What if it were impossible to inflate endlessly? After all, wasn't the government meant to run on a deficit?

I mean couldn't we just arrange a periodic blow-up in asset prices whenever the speculators begin to drive prices higher? If the bubble can inflate, it can re-inflate. So why not let a periodic asset bubble burst keep the borrowing from getting too out of hand (resulting in runaway commodity prices, a scenario like we had in 2008.)

Now I don't know if using more debt to get us out of our problem of borrowing too much can work. I do know the money is debt, as Paul Grignon's video explains so well.

If the speculators can borrow too much, I guess it's inevitable that the prices of real assets will climb. I mean, won't speculators simply borrow huge sums and purchase "paper" commodities, through ETFs like GLD, SLV, etc.. We can't have that or we'll get the inflation, caused not necessarily by the desire to buy/spend as much as the sheer overabundance of debt, which is really a substitute for money.

Restoring control over commodities trading (particularly leverage/margin requirements) is vital, as is limiting the ability of the Fed to lend. As it is, capital which can be synthetically generated through the shadow banking system, independent of tracking, then cycled into derivatives at very low cost.

The Arthurian said...

What if it were impossible to inflate endlessly?

The perfect question, JB. My post ignored inflation in order to emphasize that excessive debt creates problems. But really, we need to avoid excessive debt and we need to avoid inflation.

Borrowing creates money, contributing to inflation. JB, I want to use repayment of debt as a way to destroy money and fight inflation.

If we pay off enough debt to avoid inflation, debt will not accumulate. Ergo, Scenario 2.