03.27.2012 9

The ‘new’ normal, part 1

Monopoly MoneyBy Bill Wilson — The “new” normal is actually not so new.

The practice of printing money or inflating a currency to “pay” for a national debt has been around for at least as long as the practice of governments borrowing funds to pay for their unsustainable obligations.

Economist Adam Smith noted this sort of trickery by governmental authorities in 1776 in his tome, The Wealth of Nations: “The raising of the denomination of the coin has been the most usual expedient by which a real public bankruptcy has been disguised under the appearance of a pretended payment.”

Which is exactly what countries are doing today. In the U.S., the Federal Reserve holds $1.66 trillion, or 10.6 percent of the $15.6 trillion national debt.  That is an increase from about 7.5 percent of the debt in 1996.

Throughout the rest of the world, things are not much better. The Bank of Japan (BOJ) holds about ¥66.1 trillion ($797 billion) of its country’s ¥958.6 trillion ($11.6 trillion) debt, or about 6.8 percent of the total.

That’s slightly misleading, however, because Japan’s debt is already more than twice the size of its ¥468.4 trillion ($5.65 trillion) economy. BOJ’s holdings of Japanese debt as a 14.2 percent share of Gross Domestic Product (GDP) is actually larger than the Fed’s of U.S. debt at 10.8 percent.

BOJ is continuing to expand its pot of government debt with even more programs, including a new purchase this year of ¥10 trillion ($120 billion). This comes in addition to its regular purchases of about ¥21.6 trillion ($260.7 billion) every year. “It looks like they have crossed the Rubicon,” said Eiji Hirano a form BOJ executive director of international affairs from 2002 to 2006. That’s putting it mildly.

In Europe, continental authorities there too have increasingly resorted to unadulterated, outright monetization of its debts. Previously thought to be prohibited by the Lisbon Treaty, the European Central Bank (ECB) too has crossed its own Rubicon to deal with the budding sovereign debt crisis in Portugal, Ireland, Italy, Greece, and Spain (PIIGS).

Total eurozone debt is about €10.2 trillion ($13.6 trillion), of which the ECB already holds €218 billion ($290.8 billion), or only about 2.1 percent. But they’re just getting warmed up. That does not include more than €1 trillion of kick-the-can low interest refinance loans to banks so they have the money to continue to lend to bankrupt governments.

We do the same thing here, where the Fed lends to financial institutions at near-zero interest rates, allowing them to participate in treasuries auctions, currently earning 2 percent on 10-years. The difference with Europe is it has just gotten in on the act after swearing it never would when the eurozone was founded.

It may not be enough. Italian Prime Minister Mario Monti is warning that systemic risk on the continent may be spreading to Spain, saying, “It doesn’t take much to recreate risk of contagion… [Spain] hasn’t paid enough attention to its public accounts.” He’s not kidding.

The slightest surprise — in this case Spain announcing at the end of last year its deficit would be larger than expected — increases the continent’s funding needs by hundreds of billions of euros.  Since that gap is not being filled by private funding, it must be filled by the ECB.

Again, none of this is certainly new, but on a large scale this is the future of governmental fiscal policy. It will increasingly be financed through credit expansion by central banks.

But this poses a serious challenge to fiscal reformers in any nation that partakes in such a scheme. Namely, what need is there to cut spending or balance budgets if central banks can just print new money to refinance existing obligations?

It’s more of a vexing problem than at first glance. One can argue that the larger government debt becomes, the slower the economy grows, as economists Carmen Reinhart and Kenneth Rogoff have recently. Or, anyone can plainly see the chaos in Europe and know what might happen here if there is ever a funding crisis on a large scale.

But the financial elites have a trump card. If the central banks ever were to stop printing money to refinance governmental (and other) debts, the entire global financial system would collapse like the house of cards that it is, inflicting massive pain on all parties. It’s mutually assured destruction.

All of which leaves reformers — and taxpayers responsible for making interest payments on ever-larger sums of debt — in a proverbial no-man’s land. Governments dare not cut spending.

When one asks why the House Republican fiscal plan, which would not balance the budget until 2040 according to the Congressional Budget Office, is so tepid, this is why.

It’s the “new” normal.

Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.

  • pduffy

    And ancient Rome started to mix cheap metals with gold and silver coins to inflate the value of their coin-based currency before it collapsed due to this corruption when their government couldn’t sustain its spending. Oh…. wait a minute….., we did the exact same thing when we started putting copper centers into our coins, and when that was not enough, we decided to just dispense with the precious metals altogether and just print the money!  Hmmm…… Rome fell…… I wonder if we will fall?  Hmmm….. I wonder. I just wonder if the exact same collapse will happen to us? No, it can’t be, we are DIFFERENT than them! We are a world super power! Oh…. wait a minute….. so was Rome.

  • Gjthuro

    Looks like the whole damned world is going down in a sea of debt…wonder what happens when the world defaults on its interest payments to itself

  • Jmortensen

    Maybe the Government will collapse and we get to start over ,..Do you think we’ve learned anything in the last 300 years or howabout 7000 years

  • JanZizka

    This has been around as long as money has been in any form, even back in the days of gold, silver, and copper coinage it was commonplace for the government to start ‘cutting’ coins, whether by actually reducing the size and weight of the coinage or by mixing in base metals to dilute it.  I suspect you will find this sort of thing in any monetary system in any point in history.  Paper play money (or, more accurately these days, computer blips) just makes it all the easier as they no longer even pretend its backed by anything but the blood they can suck out of you.

    Funny, if we do this it is rightly condemned as counterfeiting, if the Satanic tin-god known as the ‘state’ does it, why, its ‘easing’, ‘ZIRP’, ‘increasing liquidity’, ‘credit expansion’, or whatever lie they prefer for the moment.

  • Michaellaborde

    If this government collapses, it will become kayos, every man for himself, murder killings the likes you have never seen, no law, no order, no food, no money, gangs of hoodlums, death and destruction; then will come slavery and tyranny. No man, woman, or child will be safe.

  • Michaellaborde

    China won’t.

  • Steven

    I just can’t let it go, today the cuban leadership are saying something like, we are looking
    at a plan “to create a sustainable socialism” for cuba!

    That’s the one impossible thing in the universe!

    Socialism is in point of fact, communism. The only difference is, One is run by a tyrannical cabal elected by a indoctrinated electorate and the other by a committee of little dictators under a bigger more ruthless one.
    Both over inflate their currency and their economy is in ruins,Protests,riots, looting are all a result of excess spending and borrowing. Europes economy is falling apart because they ran out of everyone elses money.


    Capitalism is the only sustainable economic model that works for everyone!!

    Is there anyone out there that can offer a better one?
    If you think you think you can, Then show me where and when in human history, your system existed!  



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