Europe is now haunted by the specter of debt. All European leaders quail before it. To exorcise the demon, they are putting their economies through the wringer.
It doesn’t seem to be helping. Their economies are still tumbling, and the debt continues to grow. The credit ratings agency Standard & Poor’s has just downgraded the sovereign-debt ratings of nine eurozone countries, including France. The United Kingdom is likely to follow.
To anyone not blinded by folly, the explanation for this mass downgrade is obvious. If you deliberately aim to shrink your GDP, your debt-to-GDP ratio is bound to grow. The only way to cut your debt (other than by default) is to get your economy to grow.
The only way to cut the debt is to have GDP grow faster than the debt does (or, if GDP is shrinking, debt must shrink more)
Here’s the problem in a nutshell — we’ve not done that for 30 years:
Or, if you prefer this in 5-year “chunks” to average it all out…
Here’s the theoretical curve that fits that second chart quite-closely, don’t you think?
That latter one by the way is right out of the book Leverage. It illustrates what ultimately must happen when you try to run this scheme — eventually interest payments exceed the total amount of GDP available and then you must default.
Of course actual default happens long before the theoretical limits, because whether you’re a government, a company or a household there are things you have to spend money on besides interest. As such you cannot continue this charade to its mathematical conclusion.
First, governments, unlike private individuals, do not have to “repay” their debts. A government of a country with its own central bank and its own currency can simply continue to borrow by printing the money which is lent to it. This is not true of countries in the eurozone. But their governments do not have to repay their debts, either. If their (foreign) creditors put too much pressure on them, they simply default. Default is bad. But life after default goes on much as before.
This is the mother and father of all frauds and those who suggest it should be taken to town square where they are flogged, drawn and quartered with their remains used to feed feral cats. The reason is that when you emit more “money” you are increasing the denominator of currency in the system. When you increase the denominator the value of every unit of currency decreases. That is, you are directly and immediately taxing everyone in the economy that uses that currency by stealth — an intentional and malicious act of fraud.
You are stealing from each and every one of those people and when a common man does such a thing we call it what it is: Counterfeiting.
This, incidentally, under the original Coinage Act (of 1792) was punishable by death. That was a proper punishment as it was literal theft from the body politic by stealth. We should bring back such a penalty and impose it upon those who try to demand that the public be robbed through counterfeiting, which is exactly what this “policy” amounts to.
The actual problem is that governments love to make political promises they cannot find the money to pay for with current taxes. That is, they promise what they cannot deliver as they are making promises to spend more than the economy is expanding on a percentage basis. This in turn leads them to “borrow” money they have no intention of ever paying back.
Then, having committed this sin, they go looking for a Unicorn that crap out pretty colored candies so they do not have to admit that they defrauded the voters who put them in office by uttering bald-faced lies with the full knowledge and intent of screwing the citizenry down the road — after, of course, they’ve gotten rich and left office.
But Unicorns are mythical creatures and that thing you’re about to bite into is not candy.
These promises are a classic Ponzi Scheme. They’re felonious when put into practice by anyone in the private sector and invariably (and justly so) lead to long prison sentences. The law in the United States once recognized that this crime when committed by government officials was even more severe than that executed by private parties, because the “remedy” that people would propose (as Robert has done) would inherently be to screw literally everyone through debasement.
As such the penalty for such an offense was set as death.
Bring back the Coinage Act of 1792 and harness the horses.
The feral cat population is hungry.
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