How About Some Free Chocolate With That Free Debt? No? You Say Why Now If it is Free Later? Huh.

polifrog



Gonzalo Lira:

Suppose that I promised to give you free chocolate for the next three years: How much chocolate would you eat today? A pound? Half a pound? A few ounces? Or would you not eat any chocolate at all, once I made the announcement?

...

In point of fact, if the chocolate is free, you might not eat any chocolate at all. Every time you make the decision as to what to eat, you might well find yourself repeating the same mantra: “Chocolate is free—I can have it any time I want. So I won’t have any now.”

...

This is the problem Ben Bernanke and the Federal Reserve currently have—and it’s their own stupid fault: They have promised to maintain interest rates at effectively 0% until at least the end of 2014—they have in fact announced this zero interest-rate policy (ZIRP) as the hallmark of their strategy to reignite the economy—

—but then they’re surprised when businesses aren’t borrowing more. They’re surprised when lending is in fact contracting. They’re surprised when the American economy doesn’t start borrowing—and thus growing—like crazy.

So the American economy obviously doesn’t benefit from ZIRP. In fact, it stagnates because of ZIRP.

Click through to see who actually does benefit.

Pushing strings through Keynesian levers benefits none over the long run and the operators over the short run...





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Are Broke Democracies an Eventual Given?

polifrog


I don't often post links in back to back posts, but there are exceptions to self imposed rules on laziness. Gonzalo Lira forces one of those exceptions today.

Within the comments section he calls his Why Democracies Will Always Go Bankrupt post his most important. I agree.

In his post he offers a proof that explains the genesis of a current conundrum facing the US today. The conundrum? Why do Americans say they want lower taxes while simultaneously wanting more services? He then extends this contradiction to our current debt situation in which politicians, rather than reconciling this difficulty, solve "fiscal incoherence" with debt.

This is entirely readable piece by anyone, as Gonzalo Lira does not seem enamored with the loose-your-audience self flattery normally associated with those overly proud of their educations.

Of course, I have issues with some minor points but they are just quibbles with pinning the start of this in 1975 rather than the 1930's and other tax issues.

A pull:

A democratic regime has to resolve its fiscal incoherence every time it happens—that is, every year a new budget is proposed. If it doesn’t, it will not be able to operate the following year, as it will not have the money to do so. (This of course is assuming an independent Central Bank that will not money-print away the dilemma.)

If the democracy’s government can only spend such revenue as it actually receives (and there is no Central Bank funkiness), then the electorate will be forced to come to grips with the incoherence of its decisions in the chambers of its parliament or congress: The democratic representatives of the electorate, be they MP’s or Congressmesn, will slug it out—proponents of cutting taxes fighting proponents of more government services—until eventually, a service is cut or a tax is raised, so that the budget is fully covered: This way, the democratic fiscal incoherence is solved, year after year.

The only way a democratic regime can avoid having to resolve its fiscal incoherence is by issuing debt.

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Hyperinflation -- The Loss of Faith in a Currency...

polifrog


Coming on the heels of Polifrog's previous post is a post by Ganzalo Lira in which he argues that hyperinflation was not just more inflation, but it is, at its root, a loss of faith in a currency. The piece below is a "hands on" description of the macroeconomic arguments he put forth in this previous post on the same topic. Read them both.

Gonzalo Lira:
What I do know is, One, a hyperinflationary event will happen, following the crash in Treasuries. Two, commodities will be the go-to medium for value storage. Three, all asset classes will collapse in short order. And Four—and most importantly—civil society will not collapse along with the dollar. Civil society will stumble about like a drunken sailor, but eventually right itself and carry on with a new normal.

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