Government Safety Nets Are Made With Fiat Money
by Gary North: Ben
Bernanke Sent Me a Letter
For every dollar
of increased debt in the American economy, the gross domestic product
rises by about 8 cents. From 1947 to 1952, GDP rose by over $4.60
for every increased dollar of debt, both public and private. From
1953 to 1984, it dropped to about 63 cents. From 1985 to 2000, it
dropped to 24 cents. So, it is clear that we have reached the point
of diminishing returns, or we are very close to it. The massive
increase in total debt that is required to make even a marginal
increase in GDP is now too high for the government or private agencies
to get any bang for their bucks.
the increase in debt at the federal level continues to escalate.
Even though there will be no payoff in terms of rising productivity,
and in fact will probably be a decrease in productivity, each $1
trillion increase in federal debt is accepted almost without debate
by Congress. Congress has no idea of what the increased debt is
doing to the private sector. Every dollar that goes to the federal
government is a dollar that did not go to increase the nation's
capital base. We are starving the private sector's capital markets,
and this is unlikely to change in the next fiscal year.
We are facing
an international economic slowdown at the same time we are seeing
central banks increase their purchases of government debt. There
is a symbiotic relationship between the governments, by which I
mean national civil governments, and their central banks. The governments
continue to run massive deficits, and increasingly the central banks
are moving into the market, buying up the debt with newly created
money. Investors are buying a decreasing percentage of government
IOUs. Excess reserves by the banks are high, which means that they
are not lending to the general population. Economic growth is therefore
In a recent
article by multimillionaire hedge fund investor Kyle Bass, we learn
that total global credit has grown by about 10% per annum over the
last decade, which is contrasted with global population, which has
grown in about 1.2% per annum. Global real GDP has grown by about
4%, but most of this growth has taken place in China and the underdeveloped
world. It has not taken place in the Western industrial nations.
Over the last
10 years, central banks around the world have increased their monetary
bases by at least $10 trillion worth of currencies. The total was
about $3 trillion 10 years ago; the total is about $13 trillion
today. This is a massive increase of what used to be called high-powered
money. It is no longer high-powered money, because commercial banks
are increasing their holdings of excess reserves at the central
banks, rather than lending the newly created money into circulation.
If they had lent the money into circulation, we would be experiencing
price increases of something in the range of 50% or more per annum.
have become the primary purchasers of new national government debt.
The private sector is no longer gobbling up all the debt which the
government sector produces. The national governments are dependent
upon their central banks to buy their IOUs with newly counterfeited
money. The central banks now serve as lenders of last resort. This
was always the official justification for central banking. This
was the story which the central bankers gave to the national governments.
Of course, the real purpose of central banks is to protect the largest
commercial banks. It is the enforcing arm of the banking cartel.
But that was never what the promoters of central banks told the
politicians who were asked to vote for the creation of a central
bank monopoly in each country.
You have probably
heard the following. From the first year of the United States, which
began in 1789, until 1981, the total increase of debt by the federal
government was about $1 trillion. Of course, a good chunk of this
was from monetary inflation, especially in World War II and then
again in the 1970s. From 1981 until 2001, the government added an
additional $4.8 trillion. Over the last 10 years, from 2001 to 2011,
the debt increased by almost $10 trillion. It is now increasing
by $1 trillion a year. I'm speaking here of on-budget debt, not
the real debt, which is the present value of the unfunded liabilities
of the United States government.
OF NO RETURN
I think it
is clear that we have gone way beyond the point of no return. There
is no possibility that the federal government will be able to repay
these debts, let alone meet the responsibilities of Social Security,
Medicare, and Medicaid. It is statistically impossible.
Congress ignores this, and continues to run massive deficits. The
financial media have ignored this with respect to the unfunded liabilities
of the federal government. The financial media argue that the on-budget
deficits can be taken care of by economic growth. We will somehow
grow our way to such an extent that will be able to meet the interest
payments without suffering reductions in capital investment.
There is no
thought in any place of influence that the federal government should
ever repay all of its debt. It did that in 1837; it never did that
again. The assumption is that the government needs to have a large
debt, and that this is good for the economy. The economic system
needs a constant increase of working capital. But working capital
exists only in the private sector. Increases in the federal deficit
do not fund additional output. On the contrary, they restrict output,
because the money that is used to buy the government's IOUs cannot
be used to make capital investments.
the case, we are now in a situation in which the system of ever-increasing
federal deficits are demanded in order to keep the overall economy
stimulated. It is funded by means of increased counterfeit money
issued by the Federal Reserve. The Federal Reserve keeps creating
money, and it uses the money to buy federal debt. The debt gets
larger, but productivity does not increase. We cannot grow our way
out of the escalating debt, because the rate of growth in the overall
economy is not sufficient to fund each additional dollar of debt.
We have therefore
entered the phase sometimes called "Banana Republic."
The federal government borrows the money that it needs to make interest
payments on the debt. So, the debt keeps getting larger.
economics always has argued that this increased government debt
will lead to increases of national productivity. The whole idea
behind the Keynesian redistribution of wealth is that this government-spent
money would not have been used for productive purposes, but now
that the government has access to it, the government will dutifully
spend, and the spending will jolt the economy into another round
We see that
the deficits since 2008 have been above $1 trillion a year, but
the recovery is anemic. The next fiscal year may bring a recession.
This is what has taken place in both Japan and Europe. We seem to
be heading in that direction.
as investors seek safety, and therefore invest in fixed-income IOUs,
interest rates have dropped to their lowest level in the postwar
period. As a result, pension funds are no longer able to make sufficient
gains on their investments to meet the actuarial responsibilities
of paying off buyers of annuities in the future. They will not begin
in the future, because the pension funds and the insurance company
are making such low rates of return, that all of their assumptions
regarding their possession of sufficient assets to sell in the market
in order to fund their retirements of the policyholders have been
the rest of the article
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 31-volume series, An
Economic Commentary on the Bible.
2012 Gary North
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