When an individual finds himself with too much debt, there are several remedies he can try. (1) He can cut back on his spending; (2) He can ask his boss for a raise; (3) He can increase his productivity (work more hours or get a second job); (4) He can run out on his obligations.
Federal governments can do similar things when faced with mounting debts. (1) They can cut spending; (2) They can increase taxes; (3) They can attempt to grow the economy; (4) They can default on their debt.
Defaulting on the debt is the most distasteful, because it places in doubt the ability to raise funds in the future and, depending on the size the economy, can be socially and politically disruptive. It is also morally corrupt. For the United States to default on its bonds, considered the safest debt in the world, would be disastrous.
Cutting spending and increasing taxes are generally unpopular with voters. Therefore, governments hope that their economies will continue to grow. Right now, that's not happening, or only modestly.
Federal governments have a further choice that individuals usually don't have, unless there is a rich uncle willing to indulge them. This is the central bank. Central banks are able to loan their governments money to bail them out. The loan may never be paid back. Cynics call this "printing money". The popular term today is "quantitative easing", meaning that the amount of money being supplied to the economy is increased. The consequence is usually inflation. Carried to its extreme, it means the collapse of the value of money.
Societies are generally willing to tolerate a certain amount of inflation. Economists tell us that it is necessary to maintain employment. Individuals may like it in terms of pay increases, although in real (inflation-adjusted) terms, these may be illusory. Of course, it is another form of taxation and redistribution of wealth.
Whether the quantitative easing stimulates the economy (producing more wealth) or simply destroys savings remains to be seen. Speculators have driven the price of gold to a record high. Another bubble or a store of value? There's sure to be lots of discussion.
"(3) He can increase his productivity (work more hours or get a second job)"
ReplyDeleteI'm definitely in this category. Actually, I'm not in debt because I don't care for the concept. But I haven't had a raise in two years due to the economic meltdown being particularly hard on the sector I work in - publishing. The simple solution has been to do freelance writing to offset my stagnating salary. I've had to do this, no choice, because inflation has been extreme, see the recent hikes in food prices. Actually, I enjoy doing freelance because I love to write, but it comes at a price; I can't spend as much time with my family. On more than one occasion, I have had to put cartoon DVDs on for my daughter so that I could write (my wife works in the evenings, so I babysit). I'm sure there are many more out there in exactly my shoes. I'll be interested to see the data / assessments that come in for this phenom.