Political Economy 101

No, Mister Bond. I expect you to die.

How to kill a "bond"... (work with me here)

Fact — inflation is a source of revenue for governments.  The reasoning is easy. Governments raise money by auctioning bonds in their own currency.  These bonds are a promise from the government to pay X amount to the bondholder at some point in the future. But inflation makes money, e.g. U.S. dollars, worth less in real terms.  So that promise to pay X dollars in the future isn’t worth as much as when the bond was issued.

The U.S. government faces costs in interest payments for debt that it holds. However, it also makes money through depreciation on any outstanding bonds it has issued.  The curious thing is that the former gets counted in our national budget, whereas the gains from inflation are not counted in revenues.

I asked my public finance professor about this, and he told me: political motives.  See, governments control currency (red flag, EU), so if the need comes up they can try to cause inflation to make their debt easier to handle (e.g. by printing more money).  But if they do initiate inflation, it functions similarly to a tax — every citizen’s wealth is decreased, because it is worth less, while the government gains.  The difference is, the central bank (unelected) controls the money supply.  You don’t need to push new taxes through the legislature to do this. Governments don’t want to draw attention to this indirect “taxation” tool at their disposal, so they leave it off their balance sheets.

I mean, it sounds plausible.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s