What Alternatives Does the Government Have

If a person or a private company has a debt to pay they either dip into the funds they have available or borrow money from an institution that has accumulated deposits and can lend out some of these funds. This is how private banking and private business works. If banks lend out more than they can cover when the depositors want their money there is a run on the bank and the bank becomes bankrupt ( i.e. out of funds to pay its obligations).

Enter the government. When the government runs up a big debt and there are not enough tax revenues to pay for the obligations it has incurred, the government borrows until its credit becomes suspect ( from accruing too much debt). Then when it has exhausted the tax revenues and its borrowing capacity ti begins to print more money. It can raise taxes to reduce its debt but new taxes usually turns into a source of more spending by government on such things that will give the politicians favorable ratings by the voters. Thus the debt grows and the inflation grows and the point arrives where the realization of high inflation and impending collapse into depression appears. If the government allows the failures to mount then the collapse into depression is inevitable. If the government bails out the failing companies the cycle toward hyperinflation continues. As the hyperinflation continues, the money becomes worth less and less until it loses its utility. When this happens nobody can pay their obligations including the government. The military being unpaid rebels, the government employees find they are unable to buy even basic food and quit working for worthless wages, The same effect is felt by all workers who watch their paycheck buy nothing. The alternatives the government have had are exhausted and the economy of the nation collapses into a depression. Additional printing of money is useless at this point. People return to simple barter and use what ever other currency has value if any.

The government has nothing stockpiled to pay off the huge debts it has accumulated. A bank may accumulate reserves that will cover a run on the bank and the most reputable have books that show they make loans that are well secured and paid back. They earn a reputation for issuing solid currency ( usually gold and silver in various denominations) and they succeed by becoming a trustworthy establishment. This is how banking got started and flourished until some bankers tried shortcuts and lent money on margins that would not cover their depositors need for their savings. Enter the government. Denouncing the ones that failed the government tried to "fix ' the problem by taking over the banking system and regulating it. Similarly the government found that some people could not get loans so they changed the rules to favor those who couldn´t qualify for loans and insured the loans so the bankers really had no incentive to use good sound qualification criteria when approving or rejecting loans so many bad loans began to be made. When the loans became delinquent the banks collected from the government who incurred more debt from bad loans. This was money the government spent on a bad investment. This was a contribution to the inflation that was increasing rapidly. Coupled with entitlement programs and military expenses the debt kept the inflation pressure going and the printing presses pounding out increasingly dollars of lesser and lesser value.

Did the government have any alternatives? Only two. It could keep on printing and inflating or it could let businesses fail, the economy collapse and undergo a deep depression. The longer the inflation the deeper the ensuing depression if the printing presses stopped. This is the only result of an economy where the government is allowed to act outside its nature and run up an unpayable debt. A business can accumulate funds by allocating some of its profits to a fund to cover emergencies. A government theoretically could set aside a fund for emergencies and some attempts have been tried. The problem is a government needs to hold itself accountable and politicians intent on reelection operate without restraint to respond to "crises" with the cycle of debt accumulation deficit spending creates.

We are seeing this today. The government is desperately trying to avoid what it clearly sees is a collapse of the economy as big financial firms fail. The failure of banks and businesses was a hallmark widely witnessed during the beginning of the great depression. To prevent a reoccurrence of that fateful day in 1929 the government realizing credit was needed for the institutions failing to survive offered the generous hand of government printing presses to save the day. The beginning of a new wave of inflation ensued and the next crisis will require even more printing. As the printing magnifies the correction needed will magnify. This is all the government has to offer. A quick fix that will rebound into a greater crisis.

Since this is all the government can do to handle a financial crisis it only stands to reason the government is not the institution needed to create and maintain a stable economy and a viable currency. Surpluses are needed and these can only come from businesses that accumulate surpluses from profits. The best businesses will proved the best goods and services and by reputation thrive and prosper. The banks that make the loans to the most qualified borrowers and have the best services at the lowest costs will accumulate surpluses and guard against "runs" with funds to cover periods of uncertainty. The government will be restricted to the functions it is best suited for. Protecting the individual rights of its citizens. It will not tax but will receive its revenue by voluntary payments selling itself and its services just as any business is required to do. This approach will eliminate the eventual instability a limitless government creates.

This is not a world the people of today are ready to embrace. What they evidently prefer is the alternative of hyperinflation or a depression. That preference will be provided and endured with all its pain and suffering. This pain and suffering being preferable to rethinking what could and should be. History is replete with the choices of men who refusing to face reality suffered the consequences. Recognizing the alternatives a government has to correct a faltering economy is the first step in realizing the role of government necessarily must be limited. For only an unlimited government can put its citizens in the position where they must observe the government struggle to vacillate between inflation and depression as the only alternatives they have to offer. When the government is limited, the alternatives disappear and the stability of an unfettered economy becomes a reality. Supply and demand are met by market conditions and the long lines of government rationing fade away. Political corruption is minimized and wealth is pursued and acquired. This is what is possible. This is what the politicians cannot promise or deliver. This is where civilization must ascend to. Anything less is simply historical repetition.