Funny money and Fiscal irresponsability

The term funny money, I use here to define the situation we have today regarding currencies. We live in a world of floating-exchange rates which means that our money is always changing value. This is funny money.

Fiscal irresponsibility refers simply to governments around the world running large, unsustainable deficits.

So what do these things have in common?

The story is simple: With the aid of financial markets, countries can finance their deficits with debt. This works doubly well for them, since the existence of floating exchange rates means States can alter the value of their currency. As we know from macroeconomics 101, devaluing the currency, making the currency lose value, will be beneficial for debt issuers, who can return their debts with less valuable money, in fact, by cheating the creditors. The creditors here don’t complain, since they are part of the chosen elite the government can sustain through its illegal practices.

It’s not hard to see, and in fact empirical evidence proves this, that the tendency will be for States to abuse this power, and will build up their deficits further and further, while also devaluing, in a less obvious way, the currency further and further.

This contrast starkly with the situation that comes about when we have hard money, money that is stable in value.

Under this premise, the power of the state to manipulate the currency disappears, and indeed, so do the incentives to engage in large deficits, since the debt will have to be repaid in the future with money that will be just as valuable as before.

Funny money, will inevitably lead to reckless fiscal practices, while hard money will keep fiscal policy sane and sustainable.

This is not to say, however, that hard money will inhibit countries from running deficits. On the contrary, by being fiscally responsible, the incentives to lend to a country increase. This is why during the gold standard era, Great Britain could issue debt of infinite maturity at around 3% interest rate.

Another problem arises with large deficits subsidized by the financial market. The governors, whose main source of income used to be taxes, has now secured a new source of income, totally independent. What does this mean for politics?

It means, and as is evident by now, that the desires of taxpayers are no longer important, and come second to those who truly finance the State.

It means that the chain of incentives has changed.

It means that we live in a world where there are truly no restraints on what the system can do to us, no restraints on the power of government and privileged elite, and no restraints on the elimination of our freedom.




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