That is where the primary danger lies. The market may require a yield high enough to compensate the private holder for inflation and fiscal risk at precisely the moment the sovereign cannot comfortably afford to pay it. Yet if policymakers prevent yields from rising to the level required to clear the market voluntarily, they have not eliminated that required return. They have merely created an incentive for private capital to leave government debt for foreign assets, commodities, property, gold or anything else expected to preserve purchasing power more effectively. The monetary danger examined later in this article begins when there is no politically tolerable yield at which both the government’s financing needs and the private investor’s required real return can comfortably be satisfied.
One plausible macroeconomic consequence of such a divergence is stagflation, in which both inflation and weak growth coexist. Persistent supply shortages and increasingly expensive capital would weigh on real growth, while the fiscal and monetary response required to prevent financial liquidation would make it difficult to extinguish inflation completely. This is the central problem examined in this article.
This is why I hate macroeconomics. All this talk of bond yields upside down, and sovereign debt as a percentage of GDP, or words like “stagflation” — it is all just smoke and mirrors to hide a basic fact — you can’t spend more than you’ve got. What is stagflation? Where inflation is high and growth is low. But saying that as if inflation is a force of nature outside of our control rather than simply the result of printing too much money to cover the fact that you (the government) is spending more than they take in.
It is all just fancy words to hide the fact that the government spends WAY too much money, and when they spend it they do so in a SHOCKINGLY inefficient way. In any household or corporate budget, when you are in the red, you have a choice between reducing spending or increasing revenues, but that simple stark choice, something that is politically very difficult to face up to, is in fact instead just disguised with an avalanche of jargon and baloney, enough to intimidate people into thinking that the choice is far more complex than their naive layman’s analysis of “spend less or raise taxes”.
I also want to say for Britain as for the United States, the true debt is VASTLY higher than the reported bond debt figures. Both governments have massive unfunded liabilities outside of that bond debt for the social programs they have promised: social programs people paid for by people for their own future, and where that capital which should have been invested has been frittered away on current spending and the latest political fad of the day. It is enough to make Charles Ponzi blush.
As for the long term — the only solution is new technology that will allow massive growth to overcome the stupidity of government. And by some miracle of God at the very time the crisis is at boiling point, just such a new technology has come along. America can save itself if we don’t put idiots like Bernie “Luddite” Sanders in charge, but in Britain, you have no chance because Net Zero, which has become, next to the NHS, the religion of the state, makes your ability to participate vanishingly close to zero. Which is a particular shame because the roots of this modern AI revolution are found in one British man, Demis Hassibis, a graduate of the University of Cambridge. A guy who was so unsupported by the British state and institutions that he had to bugger off to California to make it work.
Except he is not saying inflation is a force of nature outside of our control
I broadly agree with the first three paragraphs of Fraser’s comment, I do not have the technnical knowledge to make a judgement about his fourth paragraph.
On government borrowing – they no longer borrow gold or silver, they borrow fiat money that they, the governments – directly or via their Central Banks – create.
It would create no more inflation to just spend the money directly – rather than create the money (from nothing), lend it out to the banks (and other such) and borrow it back again – at a higher rate of interest.
I must stress that I do NOT support such a policy – I want governments to cut government spending and balance the budget, but if you are going to have fiat money (again I do NOT support fiat money) spending, there is no good reason why Wall Street or the City of London (or some other “financial centre” – depending on which country you are talking about) should get to “wet their beak”.
If you have fiat money – there is no need for government borrowing, i.e. for government to borrow the funny money it created in the first place.
Government borrowing is only rational if you have commodity money (gold, silver, or some other commodity) and you are borrowing that – not that I support government borrowing (I do not).
“But creating money from nothing is inflation” – so it is, but it is no less inflation to create the money from nothing, dish it out to the banks (and other such) and borrow it back again – at a higher rate of interest.
By the way…. both Britain and the United States have already defaulted on their National Debt – it was a gold debt, and Britain defaulted in 1931, the United States defaulted in 1933. Well the United States government defaulted on the debts owned to private citizens in 1933 – it defaulted on debts owned to foreign governments in 1971, President Nixon said this a temporary emergency, just as “FDR” said it was a temporary emergency in 1933 – I think after 92 years we can conclude that the United States government are a bunch of fraudsters, just as the British government is – and all other modern governments now are.
Anyone who lent money to the government AFTER this – knew (they knew) that the whole thing was just a fiat money scam – so they have no complaint if the government “repays” them with fiat money – after all fiat money (the contents of an empty bag) is what they lent the government.
You lent them the contents of an empty bag – and they repaid you with the contents of an empty bag. Fair enough.
My apologies – 93 years, not 92 years.
But that does not alter the point that the “temporary emergency” is clearly not temporary – the United States government defaulted on its contractual obligations to pay in gold, and it went futher (a step the British government did not take) – it also stole, by threat of violence, a lot of gold that was in private possession – insisting that private citizens give it to the government in return for pieces of paper, or be sent to prison.
“Fraudsters” was far too kind a word – “vicious gangsters” would have been a more accurate description.
What “Nobel Prize” winner Professor Krugman calls “men with guns” – he thinks that is a compliment, which tells us all we need to know about Professor Krugman.
I can think of at least 3 British giants on whose shoulders Hassabis stands:
John Locke
Alan Turing
Geoff Hinton
And there were non British giants, too.
As for the economy – Fraser has answered the question already.
Unless there is some sort of technological miracle – endless government spending, fianced by funny money (sorry I mean “fiat money”), directly or indirectly, will destroy economic life.
There will be much suffering and death.
Sort of related to why communism doesn’t work well when there are free-market alternatives existing somewhere in the world.
Bad ideas require monopoly power.
bobby b – yes.
Under the Constitution of the United States (Article One – Section Ten) legal tender (in any State) can only be gold or silver – to which the corrupt respond by saying “that just limits the States – the Federal Government can do whatever it likes” – which would have been considered a extreme position even by King George III and Prime Minister Lord North. But let us say that people were given a CHOICE – they could make contracts in gold or silver – or in the funny money (Credit Bubble – “fiat” money) of the government and the banks (which are joined at the hip).
People, if given the choice, would make contracts in an actual commodity that they choose to value before-and-apart-from its use as money – so the government makes sure that people are NOT given a choice…..
The legal tender laws, originally intended to make sure that only gold and silver were used as money, have been, since 1933, used to enforce “fiat” (whim – command, order) “money” – for it was not just government contracts that were violated, the gold clauses in all PRIVATE contracts were “voided” as well.
As the dissenting Justices made clear in the 1935 gold clause cases – this wholesale violation of private contracts indicated the end of real contract law in the United States, if buyers and sellers can not specify what they will be pay and be paid in – there is no real contract law.
But the majority (five out of nine) Supreme Court Justices did-not-care – no more than the Supreme Court cared (before or after the election) about massive election fraud (“mail-in ballots” and so on) in 2020.
What to do when the Supreme Court is institutionally useless?
And things are going to get WORSE – due to the failure to win the war with Islamic Republic of Iran (as Senator Cruz has repeatedly pointed out – that war could-have-been-won) the Democrats will control Congress from January 2027.
Stand by for two years of “investigations” of President Trump – and his family and friends, the President has a pardon power for Federal crimes – but not for State level crimes, so Democrats at State level will prosecute the family and friends of the President – on utterly false (indeed absurd) charges – and Democrat juries in the Big Cities will CONVICT them (“you burned Rome in 64 A.D.” – why not, who is going to stop them doing stuff like that, especially as the media will act as cheerleaders).
With Congress in hostile hands – the President will have no real power over the cities and States, nothing he can threaten them with to get them to leave his family and supporters alone.
“But what about BRITAIN – the post is about BRITAIN!”
Run the economic numbers any way you like – there is no way the British economy, and the British polity (the British nation-state), survives the next three years before the General Election.
The rich are already leaving – and the rest of us are in for Hard-Times, very Hard-Times.
The United Kingdom can not feed itself – and it does not really (on balance) export manufactured goods in order to import food and raw materials, as it has a manufacturing deficit as well. “The City – The City will save us!” – “The City” is a Credit Bubble sustained by the Bank of England – it is not based on Real Savings (the actual sacrifice of consumption) – the government does not borrow Real Savings (what Real Savings are there?) it borrows “money” that was created from NOTHING – lent out to the banks (and other such) and then borrowed back again – at a higher rate of interest.
There is no good reason why foreigners should accept this nothing-money as “payment” for food, raw materials and manufactured goods.
The British government will continue to do as much harm as it can – it is pointless to appeal to Parliament against the unelected officials and “experts” – as the Parliament (and the Monarch) believe in the same Collectivist world view that the officials and “experts” believe it. And even when the House of Commons was made up of people who did NOT believe in these doctrines – they were powerless to change course.
“But they could have changed course – if the Conservatives had not been such weaklings!” – perhaps so, as Parliament (in modern theory) can do anything it likes – repeal the “independence” of the Bank of England, or indeed abolish this digusting entity – and the vile monetary and financial system that it maintains, Parliament, in theory, could even bring government spending under control.
But there is no chance, no chance whatever, of this happening now – look who now makes up Parliament (both Houses – for the hereditory Lords are gone) – the worst collection of people who have ever made up both Houses of Parliament.
They will not fight the unelected official and “experts” – they share all their opinions, on wild government spending, “Diversity and Inclusion”, crushing Freedom of Speech (more than 60 thousand arrests in the last couple of years – more than 60 thousand arrests for the peaceful expression of opinions the regime, and the use fo the word “regime” is fully justified, does not like) and crushing all other basic liberties.
And after the elections of 2026 and 2028 the United States will go the same way.
The campaign against the IRI was urged by Marco Rubio – who argued (I think correctly) that without the campaign the IRI would build up such a level of air defence that it would become impossible, in future, to destroy its nuclear weapons development – nuclear weapons IT WOULD USE. It would USE the nuclear weapons – and not “just” against Jews, it would use the nuclear weapons against “infidels” in general. They-live-to-kill-infidels – even “useful idiot” infidels such as Mr Tucker Carlson (the moment he is no longer useful).
I repeat – the conflict with the IRI could have been won (the IRI regime could have been overthrown), but President Trump (again and again since February) stopped or limited effective action – seeking “talks” and a “deal”.
No matter how bad the advice he was given (and, no doubt, the advice was terrible) the buck stops with the President.
His addiction to “talks” and “deals” – has sunk his Presidency and may well sink the United States. You can not make lasting “deals” with people whose desire is to kill-and-die for Allah, people who have no fear of death – and live to kill, and that is the Revolutionary Guard of the IRI.
There is still, just, time to prevent disaster in the midterm elections – but I have no confidence that effective action to destroy the IRI will be taken.
Remember – Early Voting has already started.
No victory in the campaign – means defeat in the elections.
“Then the campaign should not have been started” – see above, as Marco Rubio argued – NOT acting was not really an option.
The great fault of Marco Rubio is that he did not really push the President to WIN the war quickly – indeed he supported the endless (and utterly absurd) “talks and deals” idea. I believe that Senator Cruz would have followed a stronger policy.
But, again, the buck stops with the President – who (again) seems addicted to “talks and deals”.
Yes – there is still (just) time to change this – but time is running out, the votes are being cast.
Paul:
The dollar bill is not money, it is a debt instrument, which is used as money. There is no reason for the US government to “borrow” money from the Federal Reserve, money which does not exist until it is borrowed into life.
A US dollar is 371.25 grains of silver. Nothing else is a dollar. President Kennedy issued “silver certificates”, essentially dollars which were backed by silver, as an alternative to Federal Reserve dollar bills. Sadly, the idea died with him. In 1964 President Johnson even had the silver removed from the coinage. US domestic money has been backed by nothing since then, and of course debts to foreigners have been backed by nothing since 1971.
The only reason fiat currencies continue to exist is that everyone pretends to believe in them. People in foreign countries accept pounds and dollars in payment for real, physical goods. Things will get interesting when they begin to ask for payment in gold and silver instead. Maybe even oil and wheat, anything but worthless money created out of thin air.