Inflation – Why Do We Have It? Government Debt

Inflation is created by central banks to facilitate government borrowing.

The Bank of England. It allows the British government to borrow money by reducing the value of the pound sterling every year.

There are only 2 reasons money is borrowed.

1. Pleasure. Money is borrowed to improve quality of life without a measurable economic improvement.

2. Profit. Money is borrowed to invest in new methods or technology which reduces operating costs for the same volume of production. The reduction in overheads pay for the loan in the short-term and improves profitability in the medium to long-term.

Again, these are the only two reasons money is borrowed and both are voluntary.

Government borrowing, borrowing which is paid for through taxation will never meet these two essential conditions.

In short, government borrowing is illogical and would not happen in a free market.

Looking at the above points in more detail.

1. Pleasure.

By definition, taxation is involuntary. The government compels people to pay taxes which by definition means the people paying the taxes do not believe giving money to the government would result in a better life when compared to what they could do with the money is they spent it themselves.

Summary – Government borrowing fails to satisfy point 1 completely.

2. Profit.

Any country with a central bank has debt. A debt which it is unable to repay, the debt is simply serviced through interest payments.

To give a very basic example of borrowing in a free market. A business/person would borrow 100 pounds (at 10% interest) to buy a new machine. The machine would reduce the cost of producing widgets by 10 pence. The machine would be repaid after 1000 widgets had been produced. The next 100 widget would pay the 10 pound interest. Every widget produced after the first 1100 would increase the profits of the business by 10%.

Borrowing money has increased the wealth of the business/person.

Central bank controlled governments never pay back the principle, they only pay the interest.

If a party/government is unable to pay back the principle then it makes no sense for that party to borrow. They would be better of financially never having borrowed in the first place. They would have more money.

The interest payments are the least desirable part of borrowing money and yet this is the only thing governments do. Pay interest on borrowed money, indefinitely.

Summary – To state the obvious, government borrowing does not meet the requirements of borrowing money in any way shape or form.

Free market.

Take the gun away from government, in other words take away the government’s power to coerce you to pay taxes and they would be unable to borrow.

Government borrowing does not meet either of the reasons to borrow money so it makes no sense for it to borrow.

But even in a coercive society, government borrowing still does not work!

Government borrowing is so unproductive it can not even operate in a system where it can force people to pay its interest payments.

And this is why we have inflation. The only way for government debt to be sustainable is for the value of the money to be eroded every year. To put it another way, the only way for government debt to be sustainable is for the debt to be devalued and the only way this can happen is if the value of the money is reduced.

Without inflation governments would quickly default on their obligations, they would not even be able to pay the interest, even though they can compel people to pay.

Let me repeat that last point. Government borrowing is so unproductive that the government would not even be able to pay the interest on its debt if the value of the money/the amount of debt were not reduced every year through devaluation of the currency.

There is only one conclusion that can be drawn from the whole situation of government debt.

Government debt and specifically the interest on the government debt is a business model whereby the central banks and the money centre banks profit off the interest payments, the interest payments which are funded by the people through government coercion.

Click here to find out how inflation destroys your value.

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