4 ms·

Simple: It creates misguided incentives in all kinds of directions. The simple idea that money is limitless has led to municipalities over-promising on pension

Simple: It creates misguided incentives in all kinds of directions. The simple idea that money is limitless has led to municipalities over-promising on pension benefits for just one example. Who got these developments approved? The developers who made millions and extracted the wealth in partnership with the taxpayers. Same as it ever was.

jakewins 10y ago
> The simple idea that money is limitless has led to municipalities over-promising on pension benefits for just one example. Would I be right in restating your argument like this? "A fiat currency allows the state to inflate away loans. That incentivizes taking very large loans, which in turn means the state builds infrastructure it cannot actually afford." Assuming it is, I'd like to note at least a few things. On fiat currency This is implicitly, in my reading of it, arguing fiat currency is distinct from commodity currency vis-a-vis inflation: If we had the gold standard, the state would not be able to inflate loans away, and the issue would go away. As I'm sure you're aware, this is not the case - every major state in existence have inflated their commodity currencies away to pay state debt. If you had tried to buy a pound (lb) sterling silver using a Pound (£) Sterling in 1913, you'd be sorely disappointed. If you're not aware of this, Adam Smiths extensive exposition on policy and inflation through dilution of metal currency in Roman, French and British history is a fascinating part of Wealth of Nations, albeit dreadfully boring due to Adams use of prose instead of tables to present his data. On inflation Independent of this - the argument is nonsensical to me. Yes, the state can pay off loans through inflating currency. There is a crucial aspect missing to the argument: This would only be a problem if the state acted as if this were true, but it in fact was not. The fact is that the state can pay off debt by inflating the currency. Hence, the argument must be restated as "1) The state can pay loans through inflation, 2) the state takes on loans, because it knows it can pay them off through (1), and 3) the state is then unable to pay these loans". This is obviously a logical error. On loans And finally - this is not about loans. The article is a simple calculation saying "here's how much this infrastructure costs to maintain, and here is now much the tax base around it can pay for". It's not about the cities inability to pay off the initial leverage it used to first build the infrastructure, it's about building and paying off infrastructure that is incorrectly dimensioned for it's tax base. The fact that the initial construction can be discounted through inflation does not remove the cities incentive to build infrastructure it can then pay for in perpetuity.
- battlebot 10y ago
  My point was they don't have to pay off all those loans at one time, which is what accrual accounting assumes. It is a false argument, in other words. As far as inflation goes--you're making the original commenter's point about why the Fed is bad. They inflate away debt, in other words, it was all a confidence game. We get paid in deflated dollars and wonder aloud why the change in our pockets is worthless.
Dylan16807 10y ago
These are local governments we're talking about. To them, the money supply might as well be fixed. Everyone could be using gold and it wouldn't change the problem of building a street without budgeting for upkeep. They treat money as limitless because they get tax income every year and they are thinking short-term. Not because of anything the federal government does. Not because of debt.
- zigzigzag 10y ago
  They treat money as limitless because they "know" they'll be bailed out in future by government further up.

jakewins 10y ago

> The simple idea that money is limitless has led to municipalities over-promising on pension benefits for just one example. Would I be right in restating your argument like this? "A fiat currency allows the state to inflate away loans. That incentivizes taking very large loans, which in turn means the state builds infrastructure it cannot actually afford." Assuming it is, I'd like to note at least a few things. On fiat currency This is implicitly, in my reading of it, arguing fiat currency is distinct from commodity currency vis-a-vis inflation: If we had the gold standard, the state would not be able to inflate loans away, and the issue would go away. As I'm sure you're aware, this is not the case - every major state in existence have inflated their commodity currencies away to pay state debt. If you had tried to buy a pound (lb) sterling silver using a Pound (£) Sterling in 1913, you'd be sorely disappointed. If you're not aware of this, Adam Smiths extensive exposition on policy and inflation through dilution of metal currency in Roman, French and British history is a fascinating part of Wealth of Nations, albeit dreadfully boring due to Adams use of prose instead of tables to present his data. On inflation Independent of this - the argument is nonsensical to me. Yes, the state can pay off loans through inflating currency. There is a crucial aspect missing to the argument: This would only be a problem if the state acted as if this were true, but it in fact was not. The fact is that the state can pay off debt by inflating the currency. Hence, the argument must be restated as "1) The state can pay loans through inflation, 2) the state takes on loans, because it knows it can pay them off through (1), and 3) the state is then unable to pay these loans". This is obviously a logical error. On loans And finally - this is not about loans. The article is a simple calculation saying "here's how much this infrastructure costs to maintain, and here is now much the tax base around it can pay for". It's not about the cities inability to pay off the initial leverage it used to first build the infrastructure, it's about building and paying off infrastructure that is incorrectly dimensioned for it's tax base. The fact that the initial construction can be discounted through inflation does not remove the cities incentive to build infrastructure it can then pay for in perpetuity.

battlebot 10y ago
My point was they don't have to pay off all those loans at one time, which is what accrual accounting assumes. It is a false argument, in other words. As far as inflation goes--you're making the original commenter's point about why the Fed is bad. They inflate away debt, in other words, it was all a confidence game. We get paid in deflated dollars and wonder aloud why the change in our pockets is worthless.

Dylan16807 10y ago

These are local governments we're talking about. To them, the money supply might as well be fixed. Everyone could be using gold and it wouldn't change the problem of building a street without budgeting for upkeep. They treat money as limitless because they get tax income every year and they are thinking short-term. Not because of anything the federal government does. Not because of debt.

zigzigzag 10y ago
They treat money as limitless because they "know" they'll be bailed out in future by government further up.