Published on January 11th, 2012 | by Bojidar Marinov5
Krugman’s Financial Perpetual Motion Machine
Lend that $1 to someone at interest. What? You are saying that this is stupid; interest rates are so low these days? Ha ha, I am not stupid, it is those people out there that lend money at low interest rates that are stupid. But why lend money at a low interest rate when you can lend it at a very high interest rate. How about 100%! No, not 100% a year, that won’t do the job. One hundred percent an hour, my man, that’s what’s gonna make you rich in no time! No need to tarry about with APRs, who has ever become rich from annual percentages? You lend a buck at a 100% an hour. An hour later you take your two bucks and lend them again at the same rate. Two hours later you got $4. Lend them again, and you got $8 in 3 hours. Now, have you done the math? Hold fast, this may come like a blow from a sledgehammer:
In 20 hours, only 20 hours, you will have . . . $1,048,576. Yes. An in another 20 hours you’ll be passing $1 trillion. Do the math, man, it is so obvious! Nothing stops you from doing it. Forget about going to work, sleepless nights at your office, all the efforts to keep the business above the water, etc., etc. Two days, and you’ll be able to put the world in your pocket.
What do you say? You can’t find a borrower that would agree to borrow money at that rate? Ha, here again, ingenuity comes to rescue, my friend. Your reasoning is old-fashioned, conservative, and therefore you can’t see all the possibilities. You’ll have to find a borrower whom you can convince. And who is the closest person to you?
Lend the money to yourself! You don’t need too much convincing by yourself, do you? After all, you know that at the end, it is going to be your fortune. So you lend to yourself and you borrow from yourself and pay back to yourself every hour, 100% an hour. No need to set up shop, no need to open offices, no need to wait for thousands of small pesky borrowers to come to you and agree to borrow money from you at your preferred rate! Just lend the money to yourself, then pay back yourself, and in two days you have a trillion.
Ah, you are not convinced? You say that you will have a trillion dollars but you will also owe a trillion dollars. But why is that a problem? You owe it to yourself! Just as you convinced yourself to borrow at the high rate, you can also convince yourself to pay later. Or never pay at all. After all, you just owe it to yourself. You have a trillion dollars, my man, why do you need your money back from yourself? But even if you wanted to be fair and get the payment back, you can pay a day later. That is, on the second day you will have to pay yourself only a million dollars, but by that time you will have a trillion. And even if you have to pay the whole sum on any given day, remember, you have the money to pay back in case you need it. So why worry about payments? Makes sense?
No? I am an idiot?
But I am not alone. Paul Krugman is with me. He says, “No one understands debt.” And you know what, I am only a micro-idiot, I think on micro-level, individuals. Unlike me, Krugman is mega-idiot (that’s why he writes for the New York Times), he thinks on mega-levels, governments and nations. And see what he says: government debt is irrelevant, we don’t have to pay it, it is money we owe to ourselves. He can’t see why the big fuss about government debt. We can have as much government debt as we need, governments don’t have to pay it back. $15 trillion? Phew, that’s nothing. We can owe $15 quadrillion, same thing.
There are only a few problems with what Krugman says. I suppose it is because he is so focused on the big picture that he can’t see the small picture. That’s why we have micro-people like me who can see the picture.
One problem is this:
First, families have to pay back their debt. Governments don’t…
The man can’t see on a micro level. He is unfair to families – why should families have to pay back and governments not? But the solution is so obvious that one wonders why he hasn’t seen it: Convert all private debt into government debt! Instead of the individual families buying houses and cars and flat screen TVs and expensive vacations, and overborrow, make the government buy all these good things for everyone. The government can’t overborrow – there is no level of debt that is too much for the government. And the sweet part: The government doesn’t have to pay back! It is a money we owe to ourselves! So instead of forcing the individual families to struggle with too much debt, here’s the solution: the government borrows, buys for every family what they want, and we don’t need to worry about it anymore! And you call me an idiot?
Krugman’s inconsistency continues immediately after that:
…all they need to do is ensure that debt grows more slowly than their tax base.
But why? Why do the governments need the tax base at all? They don’t need to repay that debt, remember? After all, he himself says that the debt from the WWII was never repaid, it became irrelevant. So why is the tax base involved in the equation at all? Governments borrow, don’t repay, just wait for the debt to become irrelevant, and the tax base is not necessary at all.
This lack of consistency, of course, makes him take an unnecessary rabbit trail:
Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion. But these costs are a lot less dramatic than the analogy with an overindebted family might suggest.
Here again, I do not understand Krugman and his deviation from his original principles. Governments need not repay their debt. Then why have taxes at all, and impose that unnecessary cost on the economy, the diversion of resources away from productive activities into tax avoidance and evasion? Have zero taxes, no tax avoidance and evasion, and don’t repay the government debt, it will become irrelevant anyway with the growth of the economy.
The other solution is also possible: If the only cost on the economy is in tax avoidance and evasion, then the tax rates do not really affect the motivation of people to work and innovate. An entrepreneur will be just as committed to develop a business for no profit as he would be for maximum profit. Therefore let’s impose 100% taxes, if we have to impose them at all. Right now, the greatest cost for IRS is to find out how much of what a person has is legally his and how much is avoided or evaded taxes. But if by law the government can take everything, one unnecessary cost to the economy is removed: IRS won’t have to wonder whether what we have is lawful; it will be all unlawful, and therefore subject to confiscation. The endless litigation between tax-payers and tax-collectors will stop and the economy will prosper again, this time under the government; and in addition to it, there will be no debt problem because no private borrower will be able to borrow – what are they going to repay it with if all they make goes to the government? Only government debt, and we know that government debt is not a problem.
So why settle for half-way solutions? Either 100% or 0% taxes, and unlimited government debt, which is anyway irrelevant.
Unfortunately, Krugman is even more inconsistent when he says that we owe the money to ourselves but we need to pay taxes to the government. Why? I don’t need the government to pay a debt that I owe to myself. I can pay it myself. I need no help to pay the local grocery shop myself, nor do I need help to pay the payment for my house; and that’s money that goes to other people. Why would I need help to pay money to myself? Get a whole government involved to tax me and then pay the debt that I owe to myself? Does Krugman believe we need that bureaucratic machine for that purpose? No need of that, Mr. Krugman. It is money that I owe to myself, and I will gladly repay that money to myself, without unnecessary taxes and tax agencies. So make more government debt, that is, debt that we owe to ourselves, and leave us free to repay it to ourselves. It is that easy, and your concern about tax evasion and avoidance is solved right there.
Ah, but the biggest inconsistency of all is this:
We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way.
Trust me, I can’t see what makes the man betray his great ideas and say such a thing. He is saying that people can’t have jobs unless there is government spending. What does he need government spending for? Pay their wages? Does he mean that people can’t have jobs unless they are paid for the work they do? What an old-fashioned, conservative, right-wing idea! He must be a covert conservative, that Krugman man. If government debt doesn’t have to be repaid, and if it becomes irrelevant over time, and if it debt that we owe to ourselves, then there is a solution for the unemployment crisis that Krugman himself doesn’t see.
Here’s the solution:
We put these unemployed people to work. But we don’t pay them. We transform the promises for payment into . . . yes, you got it, it is so obvious, we transform them into government debt! Instead of the government borrowing from banks and investors, we make the government borrowing from the unemployed people themselves. It is a very logical solution that follows directly from Krugman’s premises. The people have jobs – that’s what Krugman wants. The government borrows from them their labor – and government debt is not dangerous, in fact, it becomes irrelevant over time. And you know what, the sweetest part of all is, because it is government debt, we don’t have to pay it back! It’s government debt, for crying out loud, and Krugman says that governments don’t have to repay their debt. And if these people complain, Krugman can explain to them that there is nothing to complain about, it is just money that they owe to themselves, so no need to worry about paying for the work they have done. It is government debt.
But if some insist, then we can apply Krugman’s rule about debt and taxes: The debt shouldn’t be higher than the tax base. Well, what’s the debt in this case? These people’s wages. What’s the tax base? These people’s wages. The debt just can’t get bigger than their wages. The solution is simple, and a responsible government – which according to Krugman is a government that is “willing to impose modestly higher taxes when the situation warrants it” – will assess the situation rightly and will tax the people hired by the government “as the situation warrants it,” at 100%. Thus they have jobs, and they don’t get nothing because they have only repaid the debt they owe themselves. It that easy, and logical, if one understands debt . . . er, as Krugman understands it, anyway.
One wonders though why Krugman hasn’t sold his advice for “debt owed to ourselves” to the New York Times yet, and why they have to borrow money like crazy from banks and investors to stay afloat. If they just understood debt as Krugman understands it, they could have borrowed from themselves and could have been out of the hole long ago. It’s a perpetual motion machine, and nothing can stop it, if one follows his logic. Apparently, he gives his advice to governments only. When he gets to an individual level, he refuses to be consistent. I wonder why.
So you see, my friend, I am not the only idiot out there. There are greater idiots than me. So get to work, lend and borrow to yourself, and call me in two days when you get past the trillion.
And on a more serious note, now you know why I am saying that the Left is running out of brainpower.