Saturday, December 10, 2011

HOT TUB SEMINAR

My grandson wants to be an investment banker. A bright young senior at Marquette University, he was here for Thanksgiving dinner and a day of golf with the old judge.

Sitting in the hot tub, we got into a debate about money.

Not his or mine, or even his father’s.

No sir, we got to talking about the national debt, and what can or can’t be done about it.

The premise was a constitutional amendment I advanced in a blog recently:

The treasury of the United States shall issue currency which shall be legal tender for all debts, public and private, in sufficient amount to discharge all obligations of the United States incurred prior to the ratification of this amendment, and, annually thereafter to fund all appropriations of the Congress.

The Congress shall not otherwise have the power to borrow on the credit of the United States.

Joe insists that the plan would be a disaster, would cause hyperinflation, could sound the death knell of the United States as we know it.

I have to confess that’s a possibility, especially if the Congress decides that issuing fiat money is a viable substitute for fiscal integrity.

But if the Representatives and Senators we send to Washington cannot resist the temptation to spend money we don’t have, the federal government is doomed. It will go out of business sooner or later. Better we face up to the crisis and deal with it now, rather than leave it for Joe and his kids.

One thing is for sure: it isn’t getting any better and it’s getting harder to fix every day. Every time the sun goes down, Uncle Sam has borrowed another 4 billion dollars. If we can’t solve a 15 trillion dollar problem, how are our grandchildren supposed to fix a 30 trillion dollar problem?

In the days of the gold standard, there was only so much money because there was only so much gold. The problem with fiat money is that there’s no end to it. At least there’s no end to it unless the law or better yet, the constitution, sets the limit.

Right now, the only limit on our money supply is the decision of the Federal Reserve. Twelve unelected, largely unknown bankers have the financial fate of the nation on their agenda. We have been trusting their judgment for a hundred years, and it doesn’t seem to be working out so well.

Our current money supply is equal to about $7,000 for every American. Our debt burden is over $48,000 for every man, woman and child. Bottom line, there just isn’t enough money to pay off what we owe.

If we expand the money supply to retire the national debt, what would happen?

Wealthy people, big corporations, foreign governments, especially the Chinese, would find themselves with mountains of cash. They buy and hold T bills as a safe place to park their money. Eliminate their parking lot, and they have to invest elsewhere.

There would be no place for them to put their money except in the stock market.

Stock prices would soar. Dividends, as a percentage of stock prices would shrink. Interest rates on corporate and municipal bonds would go down.

Deprived of the safe parking place, money would be forced into riskier investments. Venture capital would become plentiful, as investors look for higher, though riskier returns.

As the market becomes more bullish and volatile, the winners will win less and the losers will lose more. The Occupiers will cheer. Money lost on Wall Street is the quintessential tax on the rich. That’s what the free market does.

My amendment will automatically balance the budget. Since the government won’t be allowed to borrow, it cannot operate in the red. The Tea party won’t be able to complain about government spending. Of course, they may have to start complaining about government printing if and when inflation hits the super market.

But hey, inflation is the free market’s income tax. If we are going to have music, everybody has to pay the fiddler.

3 comments:

  1. Gotta agree with your grandson, the risk of hyperinflation is far worse than our national debt. First much of the debt, is owed to ourselves. And having China holding that much debt improves our national security. Just as a bookie isn't going to kill the bettor who owes him thousands, China is going to think twice, three times, TEN times before instigation hostilities against a nation that could simply pass a bill in Congress and invalidate that debt. Of course the first step towards a solution is to start taxing the ultra rich the way they were taxed before W. pulled the bonehead move of simultaneously starting TWO wars and cutting taxes on the wealthy.

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  2. Curious idea that your creditor is less a threat because you owe him money. I should think China might want to take Hawaii or Alaska instead of another promise to pay what we can't pay.

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