Shots Across the Bow

Q: How can you spend more money than you have?
A: If you're a person, you borrow it. If you're a crook, you steal it.

And if you're a country, you have a third option.

You print it.

Option one works great, as long as there are people willing to lend you money. The way you keep people willing to lend you money is you pay it back plus a little extra. If I borrow $4 from you today, I'll give you $5 on my next payday. The US has been using this option to fund the budget for decades now. That's what T-bills and T-bonds are when you get right down to it; payday loans for the entire country. Now, as long as people want to buy those bills and bonds,everything is cool.

But what happens when people decide that those bonds are no longer a good bargain?

Well, option two has worked well nationally as well,except instead of theft, we call it an income tax. But as kings and emperors have discovered in the past, tax a man too heavily, and he decides not to work quite so hard.

And that brings us to option three, printing money. Now when the average citizen tries to bridge an income deficit by printing money, he's called a counterfeiter, and spends a fair amount of time as a guest of the Federal government. But when the Federal government does it, it's called a fiscal stimulus package.

It's also called an inflationary nightmare. When you print dollars without creating value to back those dollars, every single dollar is worth less. This is a bad thing, not just because the dollar you worked for is worth less today than it was yesterday, but the dollars that we use to pay off the T-bills and T-bonds are worth less as well, and future purchasers know that,and will be less likely to buy. Fewer sales means a bigger revenue gap, leading to printing more dollars.

This is called the inflationary death spiral, and history is littered with examples of countries who rode that spiral to the very end. Germany in the 1930s for example. Brazil in the 1980s. Think it couldn't happen here?

Last time I checked, the money for the bailouts, over a trillion dollars now, didn't just grow on trees. Not to mention the announcement that the US budget deficit has already set a record and we are only three months into the fiscal year.

Let me put it to you this way. Suppose you had a friend and he had borrowed $100 from you. He paid it back the next week, with an extra $10 in interest, then borrowed $150. This goes on for several months, and now he owes you a couple of thousand bucks. Then your friend comes up to you with a grea idea. He wants to borrow $10,000, and he'll pay it back by printing up these super special dollars that may not be worth much, but there are an awful lot of them.

Would you go for that deal?

And that's why it's called the death spiral.

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