GargamelSpaceman's Journal: It's official: We're Japan.

There has been some debate about whether this was going to be a stagflationary recession or whether the US was going to follow the Japanese script.

The US just lost it's AAA credit rating. The result? Today google news shows stocks falling and Treasury Yeilds DROPPING.

The facts don't lie: We're Japan.

What's going on? Here's my basic economic worldview, and my take on things in a nutshell:

Spending money shifts PRESENT resources. You can't eat future porkbellies now. You can only eat pigs in existence at the present time. It doesn't matter how much money you borrow, the money can only obtain presently existing goods. You can spend money for a promise of bricks in the future, but you can not build a brick building in the here and now out of paper promises to deliver bricks in the future.

Money is government debt. The government will accept currency in payment of taxes. You need not deliver chickens, or lumber, or bushels of wheat when you pay your taxes, the government accepts cash. When you pay cash to the government, then you cancel a debt the government owes you.

The government then is free to shred these obligations, or reissue them by spending the notes again.

When the government spends money, it shifts present resources from private ends to public ends.

When the economy is booming, then there is already plenty of demand for resources like materials and labor, but in bust times, the prices of these things fall.

When the government shifts resources to public ends, the public ends are generally worthwhile when they grow the taxable base of the economy in a sustainable ( haha ) way, more than the private ends they would otherwise have been put to.

( Here I have to say that from my point of view almost nothing could be more worthwhile than for Uncle Sam to write me a nice check for 1 BILLION Dollars. Moo ha haa. Worthwhile is a relative concept of course. You would of course disagree. With a Billion dollars, I could buy some island and be coconut-king of it and the US could go to hell if they insisted. But without a billion dollars, I do care about what happens in the US since I live there. )

Big government spending during boom times creates inflation because there is already high demand, at the time the government is shifting resources away from private ends by spending. The competition for goods raises prices.

Big government spending during bust times utilizes idle goods when demand is slack keeping prices from falling in a deflationary spiral.

But how the government comes by the notes it spends becomes important.

Printing money has the effect of a tax on money holders. Conventional taxation gives the government finer control over how resources are shifted. Obtaining notes to spend by issuing public debt gives investors the choice to lend their money to the government rather than to a private enterprise.

When there are safe and attractive private investments, then the yields rise, but in bust times, and for the shortest term debt, yields are close to zero because there is insufficent competition for money. Nobody wants to spend.

But why should the government perpetually roll over short term debt at near zero percent when it could just issue a 0% fixed interest note such as the Federal Reserve Note?

If the government runs a deficit during bust times, then it will be spending more notes than it takes in with taxation. During boom times it would collect more revenue than it spent, possibly helping to cool things down.

Deflation can not take hold if the government commits to always spending sufficient notes to prevent it. Of course people may decide that because the economy is in the dumps, they will wait for the government dole of newly printed notes rather than embark on new enterprise. It's interesting how a crisis due to Fractional Reserve Banking could lead to a pathological concentration of government power.

But this is not likely anytime soon in the US.

LONG before the US was forced to fund any excessive and unproductive welfare dole scheme to spend sufficiently to effectively prevent deflation, there would LOTS of changes.

Repaying the national debt with newly created money would force those who now earn a small but positive interest rate to accept 0% to hold cash. Some would not find this acceptable. US creditors would do one of four things:

1 - Continue to be US Creditors by holding onto their cash and earn 0%.

2 - Invest the money in the US private sector.

3 - Buy US made goods.

4 - Invest the money in foreign private enterprise or foreign government debt.

1 - The US should commit to enough spending to make earning 0% unattractive.

2,3 - Investing in the private sector or buying US made goods will boost the economy. Great!

4 - Investing abroad will weaken the US dollar. This will make exporting easier, and will have the effect of lowering US consumers' buying power with respect to imports. THIS NEEDS TO HAPPEN - BADLY. In fact countries that hold large quantities of US Debt, do so to devalue their own currencies in the moral equivalent of a trade war. This is both a tarriff on imports from the US and a subsidy of exports to the US. The value of the tarriff accues to the government in question in the form of treasuries, while wages in that country are depressed. The skimmed value is ultimately paid for by the workers in the country ( China and Japan are examples ) in the form of wages paid in devalued currency.

China must artificially control foreign investment to maintain a devalued currency. Japan's relatively low yeilds have repelled foreign investment in Japan thusfar.

Though natural resources ( especially fossil fuels ) are destined to become more scarce in the near future, I believe there is easily sufficient room stimulate the economy by replacing interest bearing debt with newly created money to address very near term issues.

Imagine the effect on the US economy of suspending taxation temporarily but continuing to spend as before? If foreign powers insisted on continuing to devalue their currencies by holding excessive US cash, this is the magnitude of expense they might theoretically incur.

It would obviously not actually be necessary to follow through on such a drastic threat as foreign powers are pretty much rational actors.