Political Economics in the 21st Century

Written in answer to a series of comments by a friend:

Gavan, I have a different take on this. Those governments didn’t loan money in good faith.
They INVESTED money in US bonds with the expectation that they would be paid back, and that this investment was in their economic self interest. They’ve also been permitted to ride along as the US economy boomed, investing in American companies and even buying some outright. Diversification, in effect the financialization of national economies, has protected all the world’s economies to an extent.
The Constitution requires that we pay our debts. Any bondholder who faces default on American debt has the right to sue in federal court to get paid. And our courts would have no option but to force payment on the debt.
Meantime, we’ve got a political party that’s in the minority but which is willing to stop the US Government in order to force their vision on our politics. And they appear not to care at all whether other nations get paid. Regardless of the Constitution they claim to respect.
But the US is a sovereign nation, not bound by such things as Euro Union entanglements. Many have advocated simply creating money by fiat, as our laws permit (and also the laws of Australia and Canada and Britain, I think). That possibility was always there, and the nations and individuals who purchased US investments knew it when they invested. They did so, invested their money, with no assurance other than the belief that the US Treasury Bonds (German bonds, too) were the safest places in the world to invest. That’s why interest rates, set by auction, are so low on those bonds. Lower, in fact, than the rate of inflation.
So what’s being discussed is an end run around that arguably-insane political party. They, the Republicans and specifically the Tea Party Caucus of the Republican Party, are willing to see the government shut down rather than tax their wealthy sponsors. They also insist on cutting health care and unemployment and pensions paid to old persons, people who’ve been paying into the system for years already. They aren’t really about paying off the deficit, so much as they are about cutting payments to people they consider to be ‘freeloaders’. And the people who are sponsoring them, the real freeloaders who game the tax system to avoid paying taxes, are happy for this to go on.
Congress first votes to spend the money; they then refuse to raise taxes to fund the projects they’ve agreed to spend money on, and also to raise the debt ceiling to borrow money to spend on what they’ve agreed to fund. Get the picture? Only Congress can vote to spend money, and only Congress can set the tax rates. The debt ceiling is a fairly recent maneuver. There are a couple of other Congressional maneuvers they’ve used, as well; our two-party system allows the Speaker of the House, the leader of the majority party in the US House of Representatives, can block legislation from being voted on. He represents the majority, and sometimes a minority of that majority can force their will on the others. That’s what the Tea Party has done. They call it the ‘Hastert Rule’, after a former Speaker.
And so our Congress is paralyzed by this minority.
But there are a couple of ways that the President can bypass them. Rather than shutting down the government, he can either issue scrip coupons that could be bought by exchange houses, who would then make money by discounting those scrip coupons. They would be the ones to profit by Congressional gridlock, while people like me would lose because of the discounting. Or the Treasury could simply mint one or more platinum coins, in any denomination they wished. Those coins would then be deposited with the Federal Reserve, and an equivalent amount issued to government agencies to pay their bills or even pay off the debt. This has the advantage of not incurring any debt at all. Normally this course might be inflationary; but our inflation rate, because of the economic ills of the world, is quite low. Economists such as Paul Krugman, a Nobel winner, think it’s too low. So if the injection of money into the economy via government spending were to slightly raise the inflation level, that would be a good thing if it also stimulated the economy to begin producing.
And the restaurant owner gets paid, too.


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