Debt and Taxation
November 20, 2013Posted by on
The role that economic theory plays in the ‘creation of money’ and the role played by all politicians in the manipulation of ‘economic theory’ for the purpose of a fiscal policy, bear little relationship to the social responsibility that Drucker applied to a private enterprise.
“The first responsibility of business is to make enough profit to cover the costs for the future. If this social responsibility is not met, no other social responsibility can be met.”
When economist, politicians and ultimately governments introduce a fiscal policy it always involves debt and taxation. Ideally the taxation revenue income stream would fund government budgeted expenditure that included paying off the capital and interest on any ‘borrowing’. Politicians, however, buy support with promises that lead to budget deficits. The last time the UK government ran an absolute budget surplus was in 2001 and has only balanced the books in seven out of the last 50 years.
Government budget deficits create a debt burden that usually appears as an in increase in the national debt. This government fiscal deficit is financed initially by the issue promissory notes in the form of bonds (gilts). When gilts fail to increase the revenue by a sufficient amount the government may resort to the simple expedient of printing of more money, a process that is clearly inflationary. The expediency of quantitative easing is claimed not to be as inflationary (or at least have less significance), in that the monies created are not actually printed but are issued electronically; this is the process that the government now favours to increase the money supply. Financing budget deficits by any means other than the revenue stream of tax inputs, inevitably leads to a bankrupt state.
An electorate has the expectation that a government will pursue a fiscal policy for a stable economy; a Pollyannaism that politicians count on. Individuals that pay off the debts incurred on one credit card by using another credit card, are scoffed at for doing so, yet this is exactly how the government finances its budget deficits. In addition: the government is unfettered in its ability to inflate its way out of debt by increasing the money supply in a fiat money based economy.
Those individuals having to live with the fiat money issued by a government and especially those that have no discretionary income, or very little, are always penalised the most. Government fiscal policy introduced to correct its own fiscal imprudence, whether it is a government issuing bonds, actually printing more money or electronically printing money as in quantitative easing, it always increases debt and inflation.
Inflation benefits the debtor, in that inflation allows the debtor to repay previously borrowed ‘good money’ with (inflated) ‘bad money’. It always penalizes the holders of fiat money in that it always erodes its purchasing power. If any fiat income does not keep pace with ‘real inflation’, it has the same effect as reducing that income, be it a tax revenue income stream, a salary, a pension, a welfare income, or fiat currency savings.
To paraphrase Alexandre Dumas (père)
Fiscal Policy? It’s quite simple; it’s other people’s money.