From: wells@stein.u.washington.edu (Vernon Wells)
Newsgroups: talk.politics.misc,talk.politics.theory,alt.fan.rush-limbaugh
Subject: Re: National debt is not bad
Date: 23 Jan 1993 00:03:56 GMT
Organization: University of Washington
NNTP-Posting-Host: stein.u.washington.edu

borden@head-cfa.harvard.edu (Dave Borden) writes:


>In article <1993Jan19.183705.29526@midway.uchicago.edu>, thf2@ellis.uchicago.edu (Ted Frank) writes:
>> In article <WILLOCH.93Jan19171019@geos114.geos01.sinet.slb.com> willoch@geos01.sinet.slb.com (thorbjorn willoch) writes:
>> >In article <1993Jan19.140407.20741@midway.uchicago.edu> thf2@ellis.uchicago.edu (Ted Frank) writes:
>> >>   Yes.  Not a single US debt holder has ever gone unpaid.
>> >
>> >Well, many US debt holders bought long term papers with low nominal
>> >interest that was then reduced much in value by inflation. So at least
>> >many US debt holders has gone underpaid. 
>> 
>> That risk was accounted for ex ante in the original interest rate.  Some
>> investors guessed wrong.  That just gives a better incentive to guess
>> right.  That's the free market, no?

>No.  Government is the only entity responsible for inflation in any significant
>way.  When we have high inflation, it's a failure of our government to keep the
>money supply sufficiently tight.  During the seventies, under Nixon, Ford and for
>the earlier part of his term, Carter, inflation spiralled up to a much much
>greater rate than it had been at previously.  This had the effect of transferring
>wealth from creditors to debtors, the biggest debtor being the federal government.

>> >Adam Smith noticed that goverment debt has sometimed been paid back
>> >with a pretended payment, but never with a real one.
>> 
>> That's empirically false.  People holding T-Bills can expect about 2-3%
>> real interest rates.

>Now they can.  We've been pretty stable for awhile.  But it happened before, and
>it can happen again.  Besides, paying interest doesn't amount to paying debt
>back, if that money is just borrowed again from someone else.


I would like to just mention that the government is not the only entity
that has a big contribution in inflation.  All aggragates do.  Inflation
is the general increase in price level.  That occurs over time
because there are bottlenecks in the economy.  As demand for certain
products goes up, the suppliers increase the price, unconsciously bringing
the market back into equilibrium.  This happens with more products over
time, because
as incomes go up, people have the ability to buy more scarce resources. 
But since there is only a limited amount of these resources, prices rise. 
Actually, Keynes believed that an increase in money supply was more a
*product* of inflation than its cause.  Of course Friedman has since come
along and introduced the Monetary theory, but until further validation,
I keep that theory mostly shelved in favor modern Keynesian theories, which
(currently) bears a greater empirical support.

As for inflation in the seventies, it is important to note that it was
*stagflation*, not just inflation.  That is the simultaneous rise in
unemployment, accompanied by high inflation rates.  (Normally, these are
inversely related.)  Most economists, monetarists and Keynesians alike,
have great difficulty explaining why this situation occured.  But again, I
will issue the Keynesian point-of-view, for reasons previously stated. 
They believed that it was the fault of a series of supply shocks.  OPEC,
at various times, slapped the US with oil restrictions.  In the directest
sense, it made gas and oil products more expensive, but in a more global
sense, it also made the price of most all goods more expensive, because
most goods depend on transportation costs, energy, and heating. 
Therefore, in response to higher costs of oil made more scarcely
available, producers generally increased their price.  

The government discovered that to combat stagflation, it was probably
better to let interest rates fluctuate freely than to tweek with the prime
lending rate.  

It is further important to note that these conditions in the 70's are
relatively unique in the history of modern economics.  It is difficult to
speculate on them.  For all of these reasons, I think it is unfair to
blame the government exclusively, or possibly even mostly, for inflation,
and it is unfair to blame the presidents of the 70's for stagflation. 
It may well have had external causes well out of the realm of
presidential control.  (That is why the Republican sound bite that
attacks Carter's spending taxing policies and spending policies, which some
proclaim caused high inflation in the late 70's, bothers me a bit.  It seems
highly probably that that had little to do with it.)  

Please E-mail responses, or post them in alt.politics.talk.  I do not
read the other groups that this is apparently going to.  Thank you for your
time and attention.

--Vernon Wells (wells@u.washington.edu)
Newsgroups: talk.politics.misc,alt.sex,talk.religion.misc,soc.college,alt.peeves