Wednesday, September 21, 2011
Household debt Government Debt Analogy is Stupid
It is often said that just as households must live within their means so too do governments; spending must not exceed income or there will be trouble. The problem is that analogy is stupid. It leaves out everything relating to monetary policy and over looks the simple fact that governments control the money supply. Households can not print money to cover their debts, but central banks can and sometimes do. Households can not print money in the hopes of inflating away some of their debt, but central banks can and sometimes do. On the flip side of things, no one in their right mind is going to purposely seek out higher interest rates to pay, but that is precisely what governments do when they try to cool off inflation. A great case in point is Canadian and American attempts to quell inflation during the 1980s.