Another useful graph

with thanks to www.zerohedge.com

Comments

DBC Reed said…
Never been entirely clear why American Government borrows anyway.
When faced with borrowing to finance Union Army ,Lincoln paid them in his own currency ,Greenbacks.
Martin Meenagh said…
Congress borrows. Lincoln supported money printing in part to appease the industrial side of the Republican party in Thaddeus Stevens' Pennsylvania. This allowed the state to grow, and its steel industries to take advantage of what seemed easy credit and the subsequent destruction of their debt.

But America was not an integrated market, and other parts of the Union could see effective deflation of wages and growth in the incomes of rich investors, with surplus labour moving west.

A 'third' or external investment market which could not look at internal inflation or ratings figures (there were none) helped in this strategy. Bonds in that market were repaid in a gold-linked dollar that in some ways was distinct from the greenback.

US investment from outside grew because the returns from the west and the railroads rose faster than the inflation that hit those using the dollar in the eastern cities. Both government and railroad bonds paid out around 5-6% in Lincoln's time.

Equally, once it became clear that the CSA was neither going to win recognition (in 1862) nor the war (in 1863) and the British were going to take or replace the cotton hit, there was no need to worry. Think of how China continues to attract investment despite the inflation in the special economic regions today.

The upshot? Different banks in different parts of the Union experienced and treated inflation differently, as did different social classes and there was no central bank to regulate the situation or point this out.

Today, money printing on the scale contemplated by the QE3 people is madness.
Martin Meenagh said…
I'd say three things--

1)The money is not shovel ready and not going to businesses, but banks-and then straight out to a foreign market, where it will wash into stock market bubbles (until last week, or commodities) before becoming redundant like the £ in 1948-9;

2)one root of the global crisis is the dichotomy between the use of a dollar and the state of the US. That has to change, but deliberately precipitating an inflationary collapse or an exchange crisis when no other market is big enough to supply bonds and international currency would be madness;

3) massive money printing leads to hyperinflation. Always has, always will-- and, in our case, you can throw in a hyper-stagflation too. This leads to social collapse, whereas deflation could strengthen families and communities and people in the face of the ravages of credit-driven narcissism. Because they might rely on each other to eat, people might actually take those things out of their ears and talk and act as men and women and not spoilt children again--provided we can avoid revolutionary rage on a drug-driven scale.

The Americans have historically borrowed because it makes sense, if you have credit, to roll money at low interest rather than to print money with inflation (future tax or purchasing power loss) attached. This tends to reassure markets and ought, if everything else worked, to encourage saving and help avoid the sort of pile-up we have seen. The British got the point centuries ago, and the French didn't.

But what has happened in the past thirty years has derailed things. Oil and food have been rising because of supply and demand pressures. Technology and derivatives allowed us to avoid or postpone the implications of this. We could, like Canada or Germany, have used the time to build cultures of saving and innovation and exports and redistribution. Instead, we used fiscal sleight of hand and voodoo economics to disguise a monetary spree, a vast transfer of wealth to global oligarchs, and the creation of a vast but economically redundant population across the world afloat on credit and low wages. We've also created ministries and government managerialism out of bullshit social science books which need abolishing, frankly.

Now, the oil and food at viable prices are running down, and in addition we seem to be into a period of global cooling. We will therefore have a depression; a contraction of globalisation and an increase in coal demand that might return industry to us; a global and European currency crisis as suppressed inflation in China and northern Europe meet suppressed collapse in the South; and agricultural protectionism (thankfully, we already have the CAP). The Indian Ocean rim will be colonised by India, Asean and Korea, and the Atlantic countries will have to muddle through, but under vicious and unprecedented strain and without the personal and cultural resources--the toughness--that we had generally before. We may even end up with low tax, smaller, more efficient and fairer (and patriotic)governments at the end, but I wouldn't hold my breath.

The wild ride will be very interesting. But it becomes mental if we pour printed money onto it.

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