Introduction
Premise of this article
- Worldwide people despise inflation, as it raises the price of food, clothing and shelter. Thus it seems accurate tocharacterize inflation as the enemy of citizens world wide. But paradoxically inflation is the friend of governments worldwide in their battle to reduce and pay off national debt. It appears, that of the five methods available to governments to payoff their debts, they choose the one which nourishes inflation, because it is the least harmful one politically.
I know you may find this hard to understand initially, but when it is explained in the context of a universal cause and effect model: Which one does the least amount of political damage, which can cost a politician their job. When you look at the problem from this cynical but reaslitic approach you understand this premise. Thus the interests of the governments and the citizens are at odds, as citizens ask the government to reduce inflation, while the government uses inflation to devalue/reduce and thus payoff national debt.
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Inflation
What is inflation?:
In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. This means that your money buys less than it used to, leading to a decrease in the purchasing power of currency.
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What are the effects of inflation?**
Inflation can erode the purchasing power of consumers, making it harder to afford goods and services. It can also impact businesses, potentially leading to uncertainty and difficulties in planning.
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How do governments combat inflation?
Governments reduce debt primarily by increasing revenue (through tax increases or revenue-generating policies) and/or decreasing spending (through cuts or reforms)
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What methods can governments use to reduce their national debt?
- Using Debt to Pay Debt: Governments issue bonds to borrow money and avoid raising taxes. This helps pay expenditures and stimulate the economy through public spending. The government must pay interest to its creditors with debt issues.
.2. Interest Rates: Maintaining interest rates at low levels can help stimulate the economy, generate tax revenue, and ultimately reduce the national debt.
.3. Spending Cuts: The government can reducing it's spending to match the amount of it's revenue earned by the government eash year.
.4. Raising Taxes: Governments can raise taxes to pay for expenditures and pay down their debt. Taxes can include federal, state, and local income and business taxes.
.5. Bailout or Default: The government decides it cannot pay it's obligations and defaults or asks it's lenders to forgive the debts.
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Why do governments chose Using Debt to Pay off Debt, which increases inflation?
- Spending cuts, as you can imagine are unpopular, as it demands sacrifice from those receiving aid or support from the government, and this includes bot private citizens, private companies and public goods like roads, bridges, electrical grids, water supplies, schoold and hospitals.
- Raising taxes is also very unpopular, and many countries citizens and busineses already feel like their taxes are to high. So proposing tax rate increases is very unpopular.
- Increasing revenues is easy to say, but hard to do, as economic policy is challenging, and many times government policies have the opposite of the intended effect. Plus in democracies government interference in the economy is always viewed with suspicion.
- Default on debts, is as you can imagine for most nations not a viable choice as it destroys your credit and can make it impossible to raise funds in the future by selling bonds.
- Selling bonds or increasing the money supply by printing currency to pay bills. While few countries actually physically print currency, they just make ledger entries signifying a bank has more money and then use it to pay bills. Unfortunately this is the least painful politically for politicians, so it is the most commonly used tactic of governements worldwide. Paradoxically this causes inflation, which is an indirect tax on the citizenry, but because it is a hidden tax, it is also better politically for politicians, so this is another reasin it is the most commonly used tactic.
- Paradoxically then the most common method used by governments to pay their debts, encourages or creates the conditions which increae the rate of inflation.
- Thus we see how inflation becomes the governments friend to fight national debt.
Conclusion:
Inflation is inevitable, so rising asset prices are inevitable.
- Based on the discussion above I think you now understand that becaue other methods of paying down national debt are politically untenable. It is inevitable that most governements will use debt to pay debt, fueling or increasing inflation.
- It appears that inflation is the lesser of the evils for elected politicians, so it becomes the governments friend, despite the fact it is the citizens enemy.
- Please see my next article on why if inflation is inevitable, the rise in bitcoin price is inevitable.