Home > Miscellaneous Musings, Predictions > Why it’s worse – much worse – than you think

Why it’s worse – much worse – than you think

People think the government can’t go bankrupt.  Yes it can.  Forget about democracy.  Focus on money.  Think that people “vote” with their own money and earnings all the time.  Some passively.  Others actively.  Now those votes matter.

Let me explain.  As Gary North comments:

Mises was a senior advisor to the equivalent of the Austrian Chamber of Commerce after World War I. He understood monetary theory. His book on money, The Theory of Money and Credit, had been published in 1912, two years before the war broke out.

In the post-War edition of his book, he wrote of the process of the hyperinflationary breakdown of a currency. He made it clear that such a currency is short-lived. People shift to rival currencies.

The emancipation of commerce from a money which is proving more and more useless in this way begins with the expulsion of the money from hoards. People begin at first to hoard other money instead so as to have marketable goods at their disposal for unforeseen future needs – perhaps precious-metal money and foreign notes, and sometimes also domestic notes of other kinds which have a higher value because they cannot be increased by the State ‘(e.g.the Romanoff rouble in Russia or the ‘blue’ money of communist Hungary); then ingots, precious stones, and pearls; even pictures, other objects of art, and postage stamps. A further step is the adoption of foreign currency or metallic money (i.e. for all practical purposes, gold) in credit transactions. Finally, when the domestic currency ceases to be used in retail trade, wages as well have to be paid in some other way than in pieces of paper which are then no longer good for anything. The collapse of an inflation policy carried to its extreme – as in the United States in 1781 and in France in 1796 does not destroy the monetary system, but only the credit money or fiat money of the State that has overestimated the effectiveness of its own policy. The collapse emancipates commerce from etatism and establishes metallic money again (pp. 229-30).

In 1949, his book Human Actionappeared. In it, he discussed hyperinflation. He called this phase of the business cycle the crack-up boom.

The characteristic mark of the phenomenon is that the increase in the quantity of money causes a fall in the demand for money. The tendency toward a fall in purchasing power as generated by the increased supply of money is intensified by the general propensity to restrict cash holdings which it brings about. Eventually a point is reached where the prices at which people would be prepared to part with “real” goods discount to such an extent the expected progress in the fall of purchasing power that nobody has a sufficient amount of cash at hand to pay them. The monetary system breaks down; all transactions in the money concerned cease; a panic makes its purchasing power vanish altogether. People return either to barter or to the use of another kind of money (p. 424).

Later in the book, Mises discussed the policy of devaluation: the expansion of the domestic money supply in a fruitless attempt to reduce the international value of the currency unit.

If the government does not care how far foreign exchange rates may rise, it can for some time continue to cling to credit expansion. But one day the crack-up boom will annihilate its monetary system. On the other hand, if the authority wants to avoid the necessity of devaluing again and again at an accelerated pace, it must arrange its domestic credit policy in such a way as not to outrun in credit expansion the other countries against which it wants to keep its domestic currency at par (p. 791).

People think that the United States government can never go bankrupt. It can print its way out of every obligation.

No, it can’t.

People will eventually be forced – by sheer necessity – to vote for something else.  This is when the government really does lose the election.

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