Might be a simple answer to a simple question, but sometimes I can’t readily get the simple things in life.
Can it be accurately stated that government debt is a reflection or correlation of inflation (how much currency is penned up or held in the system in one form or another)?
Is this always the case (the correlation), sometimes therefore there are exceptions to this, or a flat out answer of no? If the answer is no, then it would help to include an explanation on why it is no.
Currently, the government is merely one of the borrowers (albeit a pretty large one) to whom fiat (fractional reserve supported by a central bank) money is being lent. Without fractional reserve/central bank, any entity can assume any amount of debt as the market would allow without causing any inflationary effects. So in the current system, there can conceivably be inflation even with zero government debt. In a 100% reserve system, there would be no inflation even if the government was in debt up to its eyeballs.
In the current predicament, though, the government being such a large borrower and, at the same time, controlling the entity which affects its ability to repay (the Fed) there would inevitably be a large correlation between inflation (devaluation of the currency as the government’s means for getting out of debt) and the size of that debt.
If the gov’t only spends money from taxes, I can see that. But I thought the federal reserve, though not always, prints money (computerizes it) by buying up gov’t treasury bonds which thereby puts the gov’t into debt for the federal reserve to even operate, yet, you might be stating a system with a central bank that doesn’t do this and simply lends money to borrowers that are not gov’t institutions and doesn’t buy treasury bonds or what have you. I say this because this because central banks are institutionalized by gov’ts for the purpose of being able to lend out money based on credit that the gov’t offers in the form of treasury bonds, meaning, a central bank wouldn’t be in place if the gov’t couldn’t or didn’t find it useful for the gov’t. And that use of the gov’t thereby makes the current system always based on debt. If a gov’t would form a central bank, yet, never use it, then I see what you’re saying above. Yet that’s not why gov’ts form central banks, they form them to use them. Bu it is conceivable as you say.
But a government doesn’t default and close it’s doors as it doesn’t go by the same rules of the market so this wouldn’t happen because if a gov’t did go into debt and, this is my addition which you didn’t mention but I am thinking, if the gov’t was in debt up to its eyeballs and couldn’t pay it off (1) gov’t becomes a business like any other business and defaults but therefore wouldn’t be a gov’t (2) gov’t enacts a fractional reserve system to pay off its debts (3) simply ignores its debts and other business foot the bill and might even go bankrupt.
Also in a 100% reserve system new gold, silver discoveries inflate the currency as this higher amount of currency entering the market would be an exception to this.
Large correlation, but is it match for match. Debt dollar to inflation (devaluation). A direct correlation without any other factors, with the exception of new gold/silver (etc…) entering the market or gov’t considered illegal activities of counterfeiting by parties that are not of the federal reserve system/gov’t mints?
The debt itself is the inflation, as it creates the illusion that there is more wealth than truly exists.
When the bubble bursts, one of two things can happen: the debts are wiped out, resulting in deflation, or the currency is devalued following a central bank intervention.
ok. But how does that equate deflation if the debt is wiped out when that debt is tied to an asset or credit and those assets or the credit, I assume, are being used? I can see the malinvestments, those assets not fully implemented simply get their credit dried up and so the building or what have you can’t be finished, but those investors used their loaned money/credit already to pay off people that constructed the building even if part way. What I’m saying is the loaned money is still in circulation. I don’t see the deflation aspect..?
I think, for the most part, we have similar understanding of the processes involved, and of the factors that would affect the strength of this correlation.
What makes it deflation is precisely that the loaned money has to be taken out of circulation to pay back the depositors, otherwise it is the depositors who have been expropriated.
Simply put, if depositors think they have 100$, debtors think they have 100$, and the bank only has 100$ in actual currency, someone is going to lose 100$ they thought they had.
ah. that’s what i didn’t see in what you said the first time. So the bottom line is yes, debt correlates with inflation as no counter-arguments to that assertion has been given and it makes sense that it is. So the gov’t creates inflation and then it’s whole game thereby seems to be from then on, an effort to stop it’s own inflation. All that management, time, and energy to stop it’s own doing.
I found this to be amazing, which is an extension of what is said in this thread:
“While there will be a market tendency to equate loan rates of interest and
interest returns on investment, loans tend to be a less risky form of channelling
savings. Thus investment in risky enterprises will only be made if entrepreneurs
expect that their profit will be greater than the loan rate of interest.
Turgot also pointed out that government bonds will tend to be the least risky
investment, so that they will earn the lowest interest return. He went on to
declare that the ‘true evil’ of government debt is that it presents advantages
to the public creditors but channels their savings into ‘sterile’ and unproductive
uses and maintains a high interest rate in competition with productive
uses (or, as we would say nowadays, public debt ‘crowds out’ productive
private uses of savings).”
Taken from Rothbards History of Economic Thought
If this is still true, as it seems to be from the context of the writing and I don’t know if there is a counter-argument to Turgot’s point here, then not only is debt correlated with inflation but gov’t debt (which is assumed to be first off Treasury bonds then Fed. conversion to dollars or other countries buying up of bonds too), to repeat to reassert where I was at, but gov’t debt correlates with an erosion of productivity. It’s a double whammy blow to prosperity.