Karl Explains Why "It" Is Screwed Up

Since people seem to be grabbing the obvious now, we'll take a look at what will FIX this problem. In response to runaway deficits and deflation we get the following from The Market Ticker -

If one actually "prints" then the immediate response in the marketplace is to shut down all lending of capital. Why? Because the person with capital has no means of assessing the damage to their purchasing power. Remember, interest is what's charged for the time value of money, the risk of default and the risk of dilution of your purchasing power by either naked shorting of the currency or outright unbacked emission.

The "deal" that all debt-backed currency systems make is that unbacked emission won't happen. Naked shorting (which is what issuing unsecured credit is against a currency) is bad enough; unbacked emission is ruinous to those who have lent capital on fixed terms.

The danger is that nobody knows in advance exactly where the edge of that cliff lies. Greece and Iceland found it the hard way and suffered ruinous damage to their economies. Neither thought the cliff was near; both engaged in hinky accounting to try to hide exactly how bad the damage was, just like the pension funds, states and federal government are doing right here, right now, in The United States.

"Austerity" connotes starving in the streets among the public but in point of fact thrift - saving back 10 or 20% of one's income and a government that spends less than what it takes in via taxes, paying down accumulated deficits, is not a dirty word at all.

Capital seeks return, and when you engage in austerity you free capital. The combined earnings power of the nation is incredible; government can, at best, extract perhaps a fifth of it and redirect it, but in the process loses so much to internal costs, fraud and waste that it makes a poor allocator.

Growth comes from the productive use of credit - that is, credit taken for the purpose of expanding factories, machine shops and innovative businesses that invent things like transistors and microprocessors.
Credit used for consumption - which includes virtually all credit taken by state and federal governments - is corrosive to to the financial health of the nation over time. The negative impacts don't appear right away, as it is the compound nature of interest that causes the problem. In the short term such expenditures look great, as the pulled-forward demand causes more production to take place.

But the debt left behind still needs to be serviced, and even under the argument that government essentially creates that demand by issuing, the fact remains that the exponential nature of both growth and debt means that one cannot escape from the crush that comes from the use of credit for either consumptive or speculative purpose.

The Real Effect
While borrowing can serve a legitimate purpose, it's application is quite limited. For instance, many believe that borrowing to finance a "College Education" is a laudable goal. Of course these individuals would prefer no borrowing, but debt is the norm, not the exception to this goal. What an individual should rightly do in these situations is to compute what their return on their investment would be. Perhaps this post by Vox Day will clear up any misconceptions there may be.

Now our present "crisis" at hand is caused precisely because we are pulling forward demand with excess credit and the solution is to allow the excess credit to be drained an put to productive use.

• End ZIRP. This is driving commodity inflation and causing undue hardship as the American consumer has to pay for a given commodity REPEATEDLY.
• Allow banks to fail. Including "too big to fail"
• Cut unproductive assets and spending. Feds, I'm looking squarely at you.
• Cut taxes. DEEP! (See previous point)
• End excessive regulations, hold criminals accountable. (In that order)
• Above all, NO MORE WARS! Wars inherently destroy capitol.

These actions will allow for new innovations, that the Feds CANNOT predict, to prosper and lift our productivity.