a straightforward explanation of the us debt trap

12/29/2019

Vince Dhimos answered a question at Quora.

https://www.quora.com/How-can-monetary-policy-instruments-and-fiscal-policy-instruments-be-used-to-increase-country-production/answer/Vince-Dhimos

Q: HOW CAN MONETARY POLICY INSTRUMENTS AND FISCAL POLICY INSTRUMENTS BE USED TO INCREASE COUNTRY PRODUCTION?

Vince Dhimos, Editor-in-Chief at New Silk Strategies (2016-present)

The economic experience of the US ever since the creation of the Federal Reserve in 1913 is solid proof that finance cannot solve economic problems in the long run. Finance attempting to intervene in economic crises has only succeeded in exacerbating the problem, as clearly evidenced by the ballooning US sovereign debt and the fact that the Treasury is no longer finding sufficient buyers of Treasury bonds (due to the low interest rates) — obliging the government to print more money. Billions are now being printed daily to solve the repo (sometimes called “overnight lending”) market crisis, but money printing (quantitative easing) was originally intended only as a temporary stop-gap measure. Now it is a permanent part of US finance and has been since the 2009 crisis.

The Fed has in fact tried to use money printing as a financial policy instrument to revive a wilting economy. The aforementioned repo market is a little-known means of securing quick (often just overnight) loans for cash-strapped companies. Last fall, the supply side of this market fell short of the demand for loans, due mostly to the low interest rates creating a cash shortage in the banks. To “solve” this problem, the Fed – which had caused the problem in the first place – was obliged to resort to quantitative easing (although it refrained from using that now-toxic term so as not to frighten the public). Now it is printing billions of dollars a day to prevent the repo market from collapsing. As I have said many times before, financial instruments do not provide permanent relief to economic problems. This is why the Fed is not an appropriate agency for this solution.

Further, there is now no escaping this debt trap. This is because, if the Fed raises rates to attract bond buyers, it will not be able to afford to pay the service on its debt. But by keeping the rates artificially low, it is stuck in the rut of simply buying its own debt, and the only way to do that is to keep printing more dollars. But this poses the inevitable risk of hyperinflation as in the famous example of the Weimar Republic, where workers had to carry home their cash from the banks in wheelbarrows.

No economy has ever survived such a debt crisis.

The Fed has been busy kicking the debt can down the road for decades, but the wall is now in sight. And then?

3 Comments

John M Stassi

12/29/2019 06:29:40 am

Many if not most of the economic policies that you describe are a direct result the Federal Reserve buying into the gospel of Milton Friedman.

Do you think that the stock market would be as high as it is if it wasn't for these Federal Reserve activities?

Isn't it likely that all or most of the Federal Reserve board members who have installed these policies are personally profiting from the record-setting bull market that they have engineered with their low interest rates?

Friedman's economic philosophy has certainly taken over our country and is aiming for the whole planet.

Here are just a few of his revelations:

When I hear businessmen speak eloquently about the "social responsibilities of business in a free-enterprise system," I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free enterprise when they declaim that business is not concerned "merely" with profit but also with promoting desirable "social" ends; that business has a "social conscience" and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are--or would be if they or anyone else took them seriously--preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.
-- Milton Friedman, The Social Responsibility of Business is to Increase its Profits, The New York Times Magazine, September 13, 1970
http://umich.edu/~thecore/doc/Friedman.pdf

The view has been gaining widespread acceptance that corporate officials and labor leaders have a “social responsibility” that goes beyond serving the interest of their stockholders or their members. This view shows a fundamental misconception of the character and nature of a free economy. In such an economy, there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud. […] Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. This is a fundamentally subversive doctrine.
-- Milton Friedman, Capitalism and Freedom (1962)

John McClain

12/29/2019 07:37:18 am

Long ago, I read the Friedman's, as his wife was as much a part of his work as he was, and while intrigued, I found "the Austrian school of economics", via Ludwig von Mises, and found a rational theory of economics, freedom, and how a real market, un-manipulated, can work.
Libertarian principle is the only means of managing a "truly free market", as we had before the turn of the 20th century, and we had it solely because they wasn't a means to "stretch tentacles of power" over this broad "United States".
An effort was made to amend the Constitution, to install a "central bank", but utterly failed, so congress just ignored the Constitution, and instituted one, a private Corporation, anyway, and stole the whole of our "money supply" in 33, under FDR.
Every effort since, has been to "keep all the gold here", and let everyone else in the world, depend on dollars. When they failed, they somehow, came to believe they could do it by flooding with fiat currency. Such people don't believe in "blow-back, unintended consequences", it's always someone else's fault, they are never guilty of anything, until they die.
As Einstein stated, "God doesn't roll dice". He was considering an entirely different area, but just as full of B.S.
We will fail, and gold will again, insure real money. "a fool and his money are soon parted"; Ben Franklin.
Semper Fidelis,
John McClain
Vanceboro, NC, USA

12/30/2019 07:17:15 am

RE: a "truly free market", as we had before the turn of the 20th century

That "truly free market" was no picnic for African-Americans (Jim Crow), Native-Americans (dispossession & genocide), and immigrants (sweatshops, child labor, & tenement housing).

No society can be truly sustainable if its economic policy does not guarantee social & economic justice and political equality for all of its members unless, of course, that policy is imposed and maintained by force.

ECONOMICS AND FINANCE

a straightforward explanation of the us debt trap

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