A disproportionate amount of political debate centers around vague abstractions: government spending, deficits, and inflation. The latter two are supposed to be particularly horrible, leading to hyperinflation (and therefore Hitler) or else mountains of debt that are impossible to pay off (and therefore Hitler). Meanwhile, government spending is always at risk of “crowding out” the presumably much more desirable private sector spending.
A moment’s reflection will reveal that these three technocratic abstractions are actually code words for “stuff that makes rich assholes powerful.” Inflation decreases the spending power of hoarded money, and when it is kept at a moderate pace (which does not, as in Weimar Germany, vastly outstrip actual growth in production), it tips the balance of power away from rentiers and toward people who make their money from wages. It’s a way of indirectly decreasing the power of concentrated wealth, and hence moderate inflation is profoundly pro-democratic in its effects.
The same goes for government spending, which designates economic activity that is controlled by democratically accountable representatives rather than by the whims of individual rich assholes. In practice in the U.S., the rich assholes wind up directing some of the flow of this spending, but the bulk of it — such as Social Security, Medicare and Medicaid, and other government benefits — reduces people’s reliance on being exploited by rich assholes. Hence we’ve got to rein in that out of control government spending! Which means: spending that is out of rich assholes’ control and leaves people out of rich assholes’ control.
Government spending at least has the benefit of being tax-financed and hence parasitic on the wealth of rich assholes. Worst of all, however, is deficit spending, where the government creates money over and above its tax revenue in order to spend it in ways not controlled by rich assholes. Our current system requires newly-created money to be matched by a Treasury bond, which I like to think originated as a crafty way of tricking rich assholes into buy into a powerful federal government that would be beyond their effective control. It also has the positive side effect of providing a 100% guaranteed savings vehicle for the general public.
The Treasury bonds that pile up as a result of deficit spending look like “debt,” but it doesn’t work like your credit card, because the government actually creates the currency in which the debt is paid — hence we can always go ahead and “pay off the national debt” by liquidating all our Treasury bonds, and foreign governments who hold our debt can only “punish” us by converting their interest-bearing asset into non-interest-bearing cash. In the last analysis, the federal government’s currency sovereignty can only be controlled by our own elected representatives (and by the need to keep the inflation rate from too greatly outpacing economic growth).
Why the explicit or implicit invocations of Hitler around these abstractions, then? Presumably because it reinforces the message that populism always leads to totalitarianism and disaster. In reality, though, we have plenty of examples of healthy societies that have struck a different balance between the power of rich assholes and the power of democratic deliberation about people’s needs and priorities, and it turns out that none of them are in any danger of producing a Hitler. The only real danger they’re courting is that their rich assholes might wind up being less rich in the long run, and that’s a price I for one am willing to pay.
11 thoughts on “Why are inflation and deficits bad?”
This is of course quite similar to what you are saying, but Krugman has pointed out that low interest rates have also taken a huge chunk out of the income of people in the top 0.01% who derive a significant amount of their income from interest. Preempting the “retirees depend on interest rates for income!” argument, he points out the fascinating statistic that the average senior citizen makes over $3000 a month in interest income… but the median senior makes $255 a month in interest income.
Krugman’s column did partly inspire this post.
I may be mistaken, but i think that bonds are actually also a mechanism that benefits rich assholes (as opposed to “tricking rich assholes into buying into a gov’t outside their control”)
take this passage of marx quoted in doug henwood’s wallstreet book: (most relevant bracketed)
[[The public debt becomes one of the most powerful levers of primitive ac- cumulation. As with the stroke of an enchanter’s wand, it endows unpro- ductive money with the power of creation and thus turns it into capital, without forcing it to expose itself to the troubles and risks inseparable from its employment in industry or even in usury. The state’s creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would.]] But furthermore, and quite apart from the class of idle rentiers thus created, the improvised wealth of the financiers who play the role of middlemen between the government and the nation, and the tax-farmers, merchants and private manufacturers, for whom a good part of every na- tional loan performs the service of a capital fallen from heaven, apart from all these people, the national debt has given rise to joint-stock companies, to dealings in negotiable effects of all kinds, and to speculation: in a word, it has given rise to stock-exchange gambling and the modern bankocracy.
Bonds seem more of a way to use asshole-money to provide the security for gov’t spending, even though the latter in fact provides security for the former. It is then effectively, a bribe of interest to allow assholes to pretend *their* money is more real and a necessary prerequisite to gov’t spending, when probably the opposite is more true.
Yet it still makes sense for rich assholes to be against deficit spending for a number of reasons. I think the most important of which is that some means of money creation– which takes the form either as a public deficit or of private debt resulting from banks making loans– is necessary to prevent deflation as the economy grows. Of course, if you’re in control of the banks, you’d rather be creating money and then demanding interest on it (making private loans), rather than *just* demanding interest on it (buying bonds), while also facing power-competition in the form of a growing public sector.
I think the other major reason, is rich assholes have decided, if we’re not on the gold standard, then *pretending* we’re on the gold standard is the next best thing. Hence, we can’t just “print money.”
But, again, I’m no professional. Testing the plausibility-waters.
come to think of it, bonds seem like a residual institution from metallic-standard currencies, and is v. directly a pointless money transfer to the wealthy under fiat currency. maybe???
Yeah, I’m probably overemphasizing the benefits of government debt, in part to combat fears of it. It definitely has perverse effects even on the most optimistic reading.
well, i think only when it takes the form of bonds, which seem entirely unnecessary under a fiat system.
What if we call gov’t debt and/or deficit spending just total misnomers, and we said (more truthfully) “that’s just a way money can enter the economy,” the alternatives being trade surplus and private banks making loans.
That would be better.
“but i think that bonds are actually also a mechanism that benefits rich assholes”
Michal Kalecki 1943 is considered the classic on this subject
Now back to Bewes, Lucien Goldmann, Pascal, le Dieu caché, Haneke?, Rohmer??, and wondering if I should read Roland Boer.
What about the fact that many democratically “accountable” officials are also rich assholes? ;)
Yeah, we’re mostly fucked.
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