Last night I went to see Madame Butterfly at Music Hall. First, let me state, I am not a big opera person. But, before I went to Music Hall, I did some reading about the opera Madame Butterfly. Madame Butterfly was first performed in Italy in 1904. And to think, they had our number that far back. Nothing has changed in over one hundred years, the United States is still playing its same old tricks. Madame Butterfly was first performed at the Met in New York City in 1907, but I will bet that the tickets did not cost what I paid to see Madame Butterfly in 2008.
Today, I am going to examine two words. The first word is debt. The dictionary defines debt as sin, trespass, but also as something owed, an obligation. The state of owing as in "deeply in debt." And finally, the common-law action for the recovery of money held to be due. The second word is monetize. Monetize means to coin into money, to establish as legal tender. Remember in a previous posting, it was noted that on the Federal Reserve Note (also known as our paper money) that the words “This Note is Legal Tender for All Debts, Public and Private” appears in the top left corner. The definition of monetize goes on to say, to purchase (public or private debt) and thereby free for other uses moneys that would have been devoted to debt service. Debt service is defined as the amount of interest due annually on long-term debt.
Monetization is the process of converting or establishing something into legal tender. It usually refers to the printing of bank notes by central banks.
Debt Monetization occurs when a nation’s central bank (The Federal Reserve Bank) buys government bonds. If a government’s expenses exceed its tax revenue, debt monetization prevents the government from taking capital out of the private capital markets. Since there is a limit to the amount of capital available in the capital markets, there will be less available funds for business growth if the government takes a substantial portion of the available capital. Debt monetization can be seen as a flat tax (it hits everyone equally(?) as in, not a progressive tax) because the government acquires additional funds while the currency decreases in value.
I know, it sounds complicated. It also sounds like magic because in a way, it is magic. And, only central banks have a license to perform that kind of magic. When individuals try to engage in this kind of magic, the government frowns upon this type of activity. No one likes competition, especially when it comes to the business of creating money.
Why do they call it a flat tax? The reason it is referred to as a flat tax is because, like a sales tax, it hits everyone. The question to ask: Is it equal? The answer, in my opinion, is that it is not equal. Let me try and explain. If you can borrow lots of money because 1) you already have lots of money and you can back your loan with money or assets, or 2) you have the income to borrow and you are willing and able to assume debt, the long-term debt you incur, such as a mortgage, is paid off with our currency (US dollars) of decreased value. For those that choose to borrow over a long time frame, mild inflation gives the debtor the opportunity to repay his obligation with cheaper dollars. Those people that can not borrow or do not want to borrow long-term debt, for whatever reason, their attempt to build wealth is much more difficult. Redlining and other tactics used to deny people mortgages that existed for so many years and that were used by banks and savings banks, kept segments of the population from owning a home and creating wealth for their family. The mortgage crisis today is a perversion of an attempt to right a previous wrong. But, that is getting away from the subject of monetizing the debt, in a way and then again, maybe not.
Monetizing the debt in plain English helps the rich get richer and the poor get poorer. No Einstein, or, no economist is going to be able to disprove this fact. When the government spends more money than it is taking in in tax and fee revenue, and needs to borrow money in the capital markets, and causes the central bank to absorb the debt, thus monetizing the debt, the result is that there is more money in circulation and more money in circulation leads to price inflation. If you are importing raw materials and goods and your country is running a huge trade deficit, eventually the rest the the world catches on to what your government is doing to the value of its currency. This is then seen in the fact that the US dollar declines in value to other major currencies and the exchange rate is down.
Madame Butterfly was only 15 years old and a very innocent young girl. Today, the United States is dealing with far more sophisticated and knowledgeable people. While we here in the United States may be side tracked by issues that having nothing to do with our economic well being, others have heard and seen our actions before and are not taken in as easy as they once were. The curtain is falling on the inflated US dollar around much of the world. The curtain is about ready to rise on the next act of this opera. Stay tuned.
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2 comments:
There was a time, in Germany, when it took a wheelbarrow full of money just to buy a loaf of bread. It can get worse than it is. Will it?
No, I don't believe the Fed would every let the money supply grow so rapidly that inflation would come anywhere near the kind of inflation they had in Germany once. Germany, by the way, has one of the best run central banks in the world today. They don't make the same mistake twice.
Later, after I wrote the piece for today, I thought I might have talked about banking in the 1800's in the United States before the Fed. Banks issued their own Bank Notes. These Bank Notes were accepted by people around the country on the basis of reputation and the bank's ability to pay when presented with their note for gold or silver. Depending on the quality of the bank, these Bank Notes were discounted. In other words, a $100 Bank Note from a bank in St.Louis may only get the owner 80 or 90 cents on the dollar in say Chicago. The party that accepted the Bank Note took a real gamble on the solvency of that bank who issued the note. With the Fed, the problem of trust is almost eliminated, except for the exchange value of the US dollar. The dollar can go up or down in value depending on supply/demand and the desire to hold US dollars.
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