Government Debt and Money Printing

That governments issue bonds to finance their activities is news to no one. That bonds represent a claim to future cash flows should also not be news, since that is the nature of a bond. A lends money today to B in exchange for periodic interest payments and eventual principal repayment. B's burden is to generate the cash flow necessary to make the payments. If B experiences a short fall at any time, then technically B is in default and A usually has some special privileges - like taking B's stuff. Or A and B can work together and restructure the bond such that B has a better chance of making interest payments.

In the case of governments, the future cash flows come from at least two sources: taxes or new borrowing. Taxes can be used to discharge the debt fully, but new borrowing would only change the structure of the debt, not discharge the debt. A may be paid back, but now B would be indebted to C. There's nothing inherently wrong with rolling over the debt in such a manner, provided C is willing to lend B money.

Now, if the government is the sole money producer for a nation, a third method of paying back debt is available: seignorage. Seignorage is the process of printing (physically or electronically) new money (which is zero-maturity debt in this case) for revenue purposes. Note that printing money for circulation purposes is not the same as seignorage.

Let us suppose we are at the point that B needs to pay back A, and B is not the money monopolist. If B has the free cash flow from taxes, no problem: B pays back A and the debt is discharged. If B hasn't the cash flow from taxes, but can roll over the debt (either with A or with a new creditor C) still no problem. However, if B is distressed and can't roll over the debt then B is in default and needs to restructure the debt. This typically has long-term consequences for B's growth, and so is rightly feared.

But, what if B is the money monopolist? Well then B can simply print up all the zero-maturity debt needed to discharge the debt owed to A. No need to worry about taxes or finding another creditor. What are the consequences of this action? At the time of debt maturity, B is swapping zero-maturity debt with zero-maturity debt. So it might look like the net effect is nothing. However, A was expecting to be paid dollars of a certain value - dollars from the current stock of money that has a certain purchasing power. But B has not done so - B has increased the stock of money by the amount of the debt owed to A and thus has reduced the purchasing power of money. A has been made worse off than expected because of this. We see also that the debt itself has not been discharged. Rather, the debt has been restructured in just the same way as issuing new bonds. The only difference is that the maturity structure of debt has been shortened, rather than maintained. That moves claims to real assets closer to the present and this is the source of price inflation.

If B does this once or twice, for relatively small amounts, the negative consequences are likely to be minimal. However if B does this frequently, present claims will come to dominate the maturity structure of the debt and one will observe quite a decline in the purchasing power of money. Furthermore, this will hamper B's ability to borrow since the As of the world do not want to lose money on their investments in real terms. Thus the political consequences of, say, the Weimar republic.

Wealth & Life Expectancy

Take a gander at this great little video, which shows a very strong correlation between wealth and life expectancy.  The technology to pull off this eye-dazzling stunt is rather amazing, and is simply another example of the power of free enterprise, individual liberty, and creative entrepreneurialism.  Okay, nuff said.  Just watch the video.  (Thanks to Russ Roberts over at Café Hayek)

A Mountain or Mole Hill

         

                                          Source: www.omb.gov

 I often visit the OMB website as part of my job, as there are loads of good budget data on the federal government.  After reading this quote by the Dear Leader, I couldn’t resist.  The President says to invest in our people without leaving them a “mountain” of debt.

Um, Mr. President, either your definition of “mountain of debt” differs from 99.9% of the population or your budget director is withholding information from you.

The chart below illustrates the CBO and WH estimates on the coming annual budget deficits.  These look like mountains to me.

 

                      Source: http://blog.heritage.org/2009/03/24/bush-deficit-vs-obama-deficit-in-pictures/

Either way, if the situation weren’t so grim, it would be funny.

European Imbalances

This was a little difficult because I didn't want to make a big messy graph (or a few messy graphs) or a whole bunch. So, to generate the graph below I first normalized each country's revenue and expenditure figures to the 2000 values of revenue. So, in 2000, each country had revenue = 100% and expenditure equal to the percentage of revenue generated. Some above, some below 100%. Then, I averaged the figures according to the former groupings: using Euro or own currency, and then within Euro PIIGS and non-PIIGS. If using own currency, then above (bad) average credit spreads or below (good) average credit spreads. Dig it.

Sign Wars

If you live in the Alamo Heights-Terrell Hills area, you have certainly seen these two yard signs.  I am told the “no socialism” sign began appearing in 2009, just as the healthcare debate was heating up.  Not long after the “no selfishness” sign began appearing.  I think that while the signs contain only two words, they convey much more.

 I’m quite sure “no socialism” signs were erected to protest what many feel is a leftward lurch in the country’s direction.  Washington has commenced on a power grab over the past two years and many were deeply concerned.  To counter, the “no selfishness” signs began to appear a short time later.  While their message was in a direct response to the former, the message it bears is much less unclear.

Selfishness is bad, right?  No one likes to be called selfish or to be known as a selfish person.  We teach our children to share, and admonish them when they act otherwise.  However, I would argue that the best way to employ our capital and labor is for each of us to act in our own self-interest, or be selfish.  Here’s but one illustration.  Suppose a farmer decides to be more selfless and give away his crops to the needy.  He starts small, but over time, he eventually gives all he has to the hungry, season after season.  Many would applaud the farmer’s efforts and label his enterprise the perfect business model.  However, a couple of things are working against him. 

How long can the farmer afford to give away the fruits of his labor and remain in business?  At some point, he will exhaust his capital and be forced into bankruptcy.  At a minimum, he will no longer have the necessary capital and labor to grow crops.  His land will now sit idle, producing nothing.  While his initial efforts seemed selfless and noteworthy, acting selflessly lead to his downfall.  Another effect wrought by the farmer’s generosity is dependency.  Folks have come to depend on and expect the yearly handouts.  Now the free food has disappeared, and those who have come to depend on the seasonal giveaway will be forced to look elsewhere for food, and will most likely have to pay for it.  These problems could have largely been avoided had the farmer acted in his own self-interest. 

 A profit-seeking farmer would have produced a much different outcome.  By selling his crops, he would have generated the profit necessary to continue the business, thus feeding the hungry indefinitely.  A non-free price would have incentivized the consumers to seek gainful employment, thus eliminating the dependency problem.   
While we often preach that selfishness is bad, acting in our own self-interest is often the best way to avoid the bigger problems of selflessness.

But perhaps I’m over-reacting and the sign wars is benign.  You be the judge.

Euro Area T-R-O-U-B-L-E

I started looking into government revenue v. expenditure (taxes and spending) for the Euro area as a way of investigating why Ireland is in such big trouble. I see many are calling for Ireland to raise the corporate tax rate as a way of picking up their revenue to cover the expenditure. I wanted to see if the reason certain countries were in trouble were because of imbalances in revenue and expenditure. In other words, were governments spending themselves into trouble? So, I grouped EU countries into four categories: bilaterally by use of the Euro, and bilaterally by being above or below the average 10-year government bond yield for their currency grouping (Euro or non-Euro). So, there are four categories: on the Euro and below average debt yield (non-distressed); on the Euro and above average debt yield (distressed); on own currency and below average debt yield; on own currency and above average debt yield.

I collected data on total government revenue and expenditure for each country from the European Central Bank for 2000 - 2009. The graphs of the data appear below, following the order of the above list.

I think what we're seeing here is that there are move than a few countries that could be in trouble here. Some of these countries' imbalances started going up from 2008, which is clearly a drop in tax revenue due to economic slow-downs. However, some of the countries in trouble saw their imbalances either continuously high (above 1) are pick up prior to 2008. Ireland is one of these.

In a coming post, I'll look at the underlying driver of the imbalance. Mostly, I want to see if governments started spending more, or if tax revenue went down.

One thing is clear - there will be more trouble in the future.

Positive v. Negative Rights

I know... I'm supposed to do a post re: the first chapter of MES. I'll get to it. Many things going on in my head these days.

The purpose of this post is to begin exploring an idea that popped into my head. My proposition is this: a positive right to resources, by its nature, cannot logically exist. In a world of scarce resources, any statement of a positive right must necessarily violate another's negative right. Because negative rights are granted by the Creator (or creator - see earlier discussion esp. Troy Camplin's contribution) and therefore cannot be legitimately violated, a positive right cannot exist.

The above is a syllogism, but I believe I must set about proving the proposition that a positive right to resources violates a negative right. The primary negative right, from which all other negative rights follow, is the property right. This may sound odd, but it must be understood that any person's primary property is the person (body). You own your body and no entity can violate your body legitimately. That is, any violation of a person's body, that is an act against the body without consent, is necessarily a criminal act. From this basic premise flow all negative rights.

That a person can own land flows then from the fact that you own your body and therefore your labor (work). We own land by being the first to work the land - note that this is different from staking a claim. Note this also goes against the idea of state land, or national borders. And, yes, the state has no right to expropriate land from the Indians.

Now, let's take a simple example to begin with, since I don't want to write a journal article here. An example of a commonly asserted positive right these days is the right to a job. In other words, person X has the right to get paid to do some work. Let's break it down further, and assume everyone is the world is self-employed. That same statement under these circumstances would read: I have a right to sell the fruits of my labor to you. That might sound okay, but only because one typically tosses an extra word in there: I have a right to try to sell the fruits of my labor to you. Say I grow pumpkins - I have no right to force you to buy my pumpkins, but I have every right to offer them to you in exchange for something you have (like other goods, or money, or whatever).

Now, let's say you come up to me and offer to help work my land in exchange for some pumpkins. A positive right to a job would state that you can force me to employ you. But this violates my negative right to refuse to exchange with you. My right to exchange only with those I want, and who also want to exchange with me, is a natural outflow from my property right. If your labor isn't worth a pumpkin to me, you have no right to compel me to give you pumpkins in exchange for your labor.

That's only one example, but let's put the challenge out there: what positive right to resources can you come up with that isn't a violation of someone's negative rights?