Blog Why Not?!

Pension Pays Dept
Innocent, ignorant and will pay through the nose
Economics, 100314

I am not skilled in economics and this post is merely my humble attempt to understand what is happening.

From what I gather, it goes a little something like this. For the money to survive, an overvalued supply of money must gain purchasing power. The purchasing power may increase if there is stronger demand. If the supply contracts the demand is likely to rise. When there is debt default, the money supply contracts. Debt default thus increase the value of money. When a money issuer is indebted and the debt is payed of with money created by magic printing machines, a default on the debt would be to inflate the supply of money. This kind of default does not increase the purchasing power of the money supply. One could perhaps argue that in this version of debt default by inflation, everyone owning this kind of money help to pay of the debt. Since those who lent the money in the first place is getting paid back in the inflated money, they help to pay of the debt. They pay by not getting paid. The money supply which was overvalued in the first place, now has even less purchasing power.

Another type of dept default that the indebted money issuer could do, is to simply say that hey I can not pay. Not issuing more money, would not increase the money supply. An indebted issuer defaulting on its debt does not make the money attractive as a commodity, since the lender will not get the money back. If the demand for the money decreases, the purchasing power of the money dwindle. Everyone owning the money loose purchasing power and thus could be said to pay for this debt.

An indebted issuer anticipating such a development could perhaps confiscate part of the money supply by means of taxation and use this money to pay of the debt its lenders. This would decrease the supply of money for those being affected by taxation. Though the money supply neither increases or decreases in total, those not belonging to the selected few who get money back and do not have to pay tax, would have less money thus less purchasing power. Just as if there had been inflation they would find life getting more expensive, just as if there had been deflation they would find it harder to get the money they need feel that life is cheap. Those who lend money get the money back so perhaps they are happy, but those who both lend and pay tax, make no profit since they are, besides paying money to themselves, also paying to those lenders who does not have to pay tax. Why would anyone want to do that? Perhaps it is impossible to escape the taxation, but at least one could stop lending money to the money issuer and position the purchasing power in an asset the gives a better return on the money.

If this happens, this means an even less demand for the money and so the total purchasing power of the total supply of money decreases and to make the debt more attractive, the issuer will have to promise the potential lender a greater return on investment. If this can not be financed by more taxes, something will have to give. Either a blatant default or money supply inflation. Either way, the loosing part is the part owning the debt since they will get paid in useless money or not get paid at all.

Did I walk this through correctly or did I miss anything? Am I right or is it a very good idea to buy treasury bonds. Someone will have to make good and pay for the debt. My guess is that it is those who seek a safe-heaven and are risk adverse. Old people will suffer. :-(

UPDATE 100315: Today I came across this link.

- Aramis

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