Tag Archives: debt

Why Christians Care About Economics

How we make our money is just as important as how we spend it.

Economic activity is one of the most common and basic forms of human interaction and the Bible has much to say about it. However, it takes time to understand the complexities of our modern economy so that we can better apply God’s principles to our everyday activity. Here are five reasons your effort will be worthwhile.

1) Good stewardship includes taking care of the economy.

Everything is God’s (Psalm 24:1). We are given the privilege of being stewards of God’s creation. (Genesis 1:26–28). But good stewardship involves more than charitable giving, wise spending, and performing our jobs with integrity.

Good stewardship includes taking care of the economy. In Israel, people provided for their families utilizing land, capital (tools and animals), and their own labor. Prohibitions against theft, laziness, and moving boundary markers were designed to maintain everyone’s ability to steward his allotted piece of God’s creation.

In today’s complex economy, protecting each person’s ability to steward from the evil schemes of others is no less important. In an agricultural society you literally reap what you sow. But in our economy, most people entrust their money to a local bank, the government, or a financial institution. The problem is, as attested by events leading up to the 2008 financial crisis, they may invest your money in dishonest ways that enrich some while bankrupting others. You might become a victim or unwittingly victimize others.

How we make our money is important because, if we gain wealth at the expense of others rather than produce wealth, we take what God has given to others to steward and thus deprive them of that opportunity.

A better understanding of economics will help Christians identify, oppose, and refrain from participating in investment vehicles that simply transfer wealth rather than produce it.

2) God expects us to defend the defenseless and deliver them from the hand of the wicked.

The Bible often describes the wicked in terms of economic interaction. The wicked have no concern for the poor (Proverbs 29:7), use dishonest and deceptive means to gain wealth (Micah 6:10–12), and are free to oppress the poor when society honors their vile practices (Psalm 12:5–8).

Psalm 82:2–4 neatly sums up our responsibility to defend the poor, orphans, and the oppressed from the wicked. We can only maintain their rights and rescue them when we stop defending laws and systems that show partiality to the wicked.

Understanding economics helps us uncover wicked practices in an economy that is, by design, complex and non-transparent. Further motivation to study economics comes from knowing God’s heart to defend the poor and his determination to judge their oppressors (Isaiah 3:13–14).

3) We want our government to restrain evil, not enable it.

We know stealing and lying are wrong, but in our economy there are legal ways to get something for nothing and deceive others on a grand scale. Economists refer to one such practice as “rent seeking” which has been popularly described as an effort to grab a bigger slice of the economic pie rather than make the pie bigger. One familiar form of rent seeking is lobbying to gain an unfair advantage. Those with more money have more opportunity to obtain rents from the government. Thus these transfers of wealth tend to be from the majority of taxpayers to the rich, though sometimes, economic equals compete for rents.

Also, when government fails to properly restrain evil in financial markets, wealth is transferred by deceptive or fraudulent practices simply because people can do so without consequences. Quite the contrary, they often can expect the government to bail them out.

Legalized theft is not a new problem. Consider this from the Heidelberg Catechism (1563):

Question 110. What does God forbid in the eighth commandment? 
 Answer. Not only such theft and robbery as are punished by the magistrate; but God views as theft all wicked tricks and devices, whereby we seek to draw to ourselves our neighbor’s goods, whether by force or with show of right, such as unjust weights, ells, measures, wares, coins, usury, or any means forbidden of God; so moreover all covetousness, and all useless waste of His gifts. (emphasis mine)

4) We want to leave an inheritance to the next generation, not debt and a ruined economy.

A good man leaves an inheritance to his children’s children (Proverbs 13:22). One can argue, considering other passages that condemn the accumulation of wealth for selfish purposes (Luke 12:16–21) or for security (Job 31:24Psalm 52:7), that the biblical emphasis is on preserving the ability of the next generation to steward resources. In economic terms, this means stewarding present resources in a manner that leaves the next generation unburdened by debt and in a position to work productively.

5) We need to keep ourselves unstained by the world economy.

Any economic system devised by sinful humanity will often be opposed to biblical values. Our economic system encourages covetousness and scoffs at contentment. It rewards debtors and punishes savers. It implements immoral wealth transfers. It enables one generation to live beyond its means and pass the bill to the next.

We must not be deceived into thinking that conservatism or liberalism has the answers. God has given us the answers in the Bible. Our first priority is to learn what the Bible says about money, but an understanding of economics helps Christians test economic practices and the words of economists, bankers, business leaders, and politicians against biblical truth.

God, the “Father of the fatherless and the protector of widows” (Psalm 68:5), views our religion as pure and undefiled when we look after them in their distress (James 1:27). To rescue the needy or to be a Good Samaritan or oppose oppressors will always cost us something. Whatever cost, inconvenience, or trial we encounter because we choose to live by biblical economic principles cannot compare to the immeasurable joy that belongs to us who, because we are followers of Jesus, steward our time and money wisely (Matthew 25:22–23).

(This article first appeared at desiringGod.org.)

The Wizard of Odd – Trump Edition

wizard hat and money

Two years ago I wrote an article that poked fun at President Obama’s notion that America’s economy was strong and that it would adapt to the global economy. Since then the elephant in the room that President Obama and most of America ignored has only gotten fatter.

Swamped by debt, American households owe more money now than ever before. Government debt is at an all time high. Our trade deficit has worsened. America’s high standard of living rests on a foundation made of sand.

If you went out and borrowed a large sum of money you could purchase all sorts of goods and services and make it appear that your personal financial situation is strong. You might even think to yourself that future pay raises will allow you to pay off your debt and maintain your lifestyle. But deep down you know, or you should, that there is a limit to how much debt you can take on. Some day the party ends and you have to pay back what you borrowed. Then your standard of living will decrease.

But somehow, according to most politicians and economists, when you multiply the above scenario by 325 million people, it’s different. Magically, government debt presents no problem at all!

In his state of the union address, President Trump touted the rise in the stock market and decreases in unemployment since he took office. This is odd since during the presidential campaign he called the stock market a “big, fat, ugly bubble” and described the unemployment numbers as fake.

After the election, based on the promise of a business-friendly Trump administration, the stock market rocketed upward anticipating economic growth. Though it is true that consumers and companies spend more money when they feel wealthier because of asset price gains; it is also true that spending money based on unrealized gains may not be the most prudent plan. With recent tax cuts, an action that increases the national debt, many businesses felt even richer and they increased spending and hiring. This led many people to believe that all is well with the economy. Perhaps this explains the relative silence about the massive increases in spending (and debt) that will result from the latest budget legislation.

I have a few questions.

Who is going to buy the increased production of American workers this faux economic boom provides?

President Trump vowed to decrease the trade deficit but, in 2017, it increased. If he continues to fail in his goal, we will increase our debt to other nations as we consume our production plus that of export nations.

Oddly, hardly anyone is talking about what happens if he succeeds. In 2017, the U.S. dollar lost 12 percent of its value against a basket of currencies that included the euro, yen, pound sterling and Canadian dollar. This means the price of foreign goods will rise and that we can buy fewer of them. Significantly, a larger percentage of our collective work effort will be going into producing goods that foreigners consume—in other words, into exports. Since we will buy fewer foreign products and consume fewer of our own, our standard of living must decrease. The wealth that has been flowing our way for so many years will reverse.

How have we been deceived into thinking that our national debt doesn’t matter?

It is odd that President Trump and other elected leaders believe making America great again means prosperity powered by increased indebtedness.

Governments may think they can borrow forever but the Bible says otherwise. To repay debt with more debt is not repaying at all. The Bible says it is wicked to do so (Psalm 37:21). Christians surely know our nation will suffer serious consequences for this behavior. We should be outraged at recent tax cuts followed by spending increases.

Inevitably, massive debt erodes the value of a nation’s currency to the point where foreign holders of dollars would rather buy U.S. assets or our exports than buy treasuries (debt). This means interest rates must rise to attract buyers of government debt used to run our oversized government. The cost to run government becomes more onerous as interest payments on the national debt increase. (Think of an adjustable-rate mortgage on a national scale.)

Higher interest rates increase the cost of doing business and cut into profits. Consumers buy fewer houses and automobiles because of increased loan costs. The economy slows down into a recession and workers get laid off.

The supply of goods collapses because we can buy fewer imports and more of the goods made here are exported. Less supply means prices increase further. If we try to maintain the current level of government spending, inflation will get even worse.

Does this scenario sound to you like a booming economy? The power brokers in our nation would like us to believe the economy is so good that it is in danger of overheating. They turn the facts on their heads, claiming rising prices result from too much of a good thing (demand from a booming economy) instead of from too much of a bad thing (demand caused by inflation of the money supply via debt). Instead of taking blame for high prices resulting from money inflation, they tell us they can control it. (This article explains why they won’t be able to next time).

But, as I said in my article two years ago, reality takes a back seat to hope in the Land of Odd. In Obama’s make-believe world, government supplied us with hope; in Trump’s fairy tale, “free” markets that are “fair” to America will deliver us from our folly.

America’s Level of Prosperity Is Not Sustainable

The proposition that the level of prosperity the U.S. enjoys is unsustainable will inevitably draw scorn from patriots and economists alike. Wealth creation, to many, has no fixed ceiling. Whether because of faith in the idea of American exceptionalism or in Yankee ingenuity or that America possesses an unsurpassed entrepreneurial spirit, or in our military might or that the good times will continue because we are the recipients of God’s favor, many cannot be convinced that our fortunes will decline significantly and for a considerable length of time.

Whatever one may think about the United States, one thing Christians should know is that the U.S. is not special enough to violate God’s principles without repercussions. The borrower is still slave to the lender (Proverbs 22:7) and the wicked borrow and do not repay (Psalm 37:1). And that is the problem – we are a debtor nation, have been for a long time and may not be able to repay what we owe.

IOUs and You

We must reap what we have sown (Galatians 6:7).

The United States has had a trade deficit each of the past 40 years. Simply stated, on a net basis, we have obtained goods and services from other nations in exchange for IOUs in the form of dollars. Essentially, what this means is that we have enjoyed a portion of the fruit of the labor of people in other nations in addition to the fruit of our own labor. We consume more than we produce. If we ever intend to pay them back, we must reverse the process and produce more than we consume with the excess production going to our creditors. This obviously requires a lower average standard of living in the U.S.

Another option to make good on our IOUs, and one that is occurring now, is for people of other nations holding dollars to buy up our real estate and corporations. Certainly we are not as wealthy or prosperous when foreigners own our land and factories and we possess our returned IOUs.

A third option is to not repay or at least not repay everything we owe. This is why, in my opinion, the Federal Reserve targets an inflation rate of 2%. When successful, the value of our debt is reduced by nearly half after 30 years. Whatever circumstances Psalm 37:1 includes, it certainly must mean that those with a planned goal to continue consuming other’s goods and not fully repay the debt they owe are acting wickedly.

Postponing the Inevitable

When illuminated by the light of Scripture, our nation’s current economic policies and monetary maneuvers can be seen for what they are – attempts to deny the consequences of debt and postpone the inevitable day of reckoning.

We really don’t have to look very hard to see that we are already beginning to reap a harvest of misery. The decrease in our standard of living is evidenced by increased underemployment, increased inequality, stagnating wages and an intractable dependence on entitlements even as we continue to increase our indebtedness.

A Christian Response

How should we, as American Christians, respond to the unpleasant facts of our economic situation? Even though changes could be made to our nation’s fiscal policies or to the global economic system that would, over time, improve our debt burden; and even though it is true that increases in productivity lead to increases in living standards, we still have this reality facing us – our standard of living is going to decrease.

If it is true that we should repay our debts, and I believe it is, then even if our leaders make wise economic choices from here on, we still face a major reduction in our prosperity.

How will hard economic times affect your walk with the Lord?

May I suggest a few ways one’s faith can increase? What if hard times help deliver us from our idols and lead to a greater trust in God? What if we learn contentment instead of covetousness and generosity instead of greed? What if, having been stripped of our security blanket of riches, we become free in the arms of Providence to love fully and fearlessly?

Would these things not make us richer than we are now?

We adhere to a faith that teaches us to be thankful for and content with much less wealth than we have now (1 Timothy 6:6-10; Philippians 4:12-13; Proverbs 30:8; Matthew 6:11). Would it really be a disaster if we had to live with less? Can Christians not, if prepared to do so, be beacons of light amid the darkness of whatever economic trouble lies ahead?  I pray we will be.

Note:

If you study economics at all, then you probably won’t be surprised to hear that some economists claim that we needn’t worry about the next generation because government debt cannot be passed from one generation to the next and that it is impossible for the United States to default on its debt because it can always print money. This article and this article make these claims. An interesting exercise, for anyone so inclined, is to discover and expose the non-biblical worldview lying beneath these assertions.

 

Feeling Repressed?

Do you feel repressed? No? Well, maybe you should.

Please let me explain. If you live in a nation that has a central bank (and who doesn’t?) then you are probably subjected to some form of financial repression.

Governments spend money on wars or the preparation for war and on social programs. Governments spend a lot of money. Trouble is, they don’t have any money. But you do. You have money because you worked and provided a tangible good or service for which someone else was willing to pay you.

Since the government has no money they get it from you through taxation or through borrowing. Governments issue bonds that people purchase and in return the government pays back the bondholders both principal and interest. So, where does the government get the money to pay back its creditors?

Tax increases are obvious and unpopular so governments usually pay back bondholders by selling yet more bonds. As long as the government can find buyers for its debt, then its leaders are lulled into thinking they need not raise taxes or cut spending.1  Instead, government debt is continuously increased. Eventually paying even the interest on all the debt becomes burdensome. 2

There are a few ways a government can reduce its debt. Economic growth and the increased taxes that accompany it is one way. A two-pronged approach of raising taxes and decreasing spending is the most obvious solution, but tax increases are opposed by one side as vehemently as spending decreases are by the other. Outright default or restructuring of debt is not an avenue that the U.S. is willing to go down at this point.

What if there was another way to pay off the debt? What if there was some sort of “hidden tax” that the government could levy to pay down its debt? There is. It’s called financial repression.

What Is Financial Repression?

Financial repression refers to methods used by governments and central banks to liquidate public and private debts and ease the burden of servicing those debts following periods of war or financial crisis.3  Governments promote monetary policies that favor debtors because they themselves are debtors.

Financial repression includes but is not limited to the following: capping interest rates banks can pay on savings deposits, interest rates for loans capped through the central bank’s target interest rate, and requiring pension funds to hold government debt.4  All of these actions direct funds to government that would normally flow elsewhere. It makes borrowing cheap for government.

But when the Federal Reserve talks about interest rates it doesn’t mention anything about trying to reduce government debt or financial repression. Instead, they base their monetary policy on “promoting maximum employment, stable prices, and moderate long-term interest rates.” They believe their mandate is best accomplished by monetary policy that has a 2% rate of inflation as its goal.5  Setting interest rates charged to banks near zero for the past seven years has been an attempt to stimulate the economy and increase employment.

So why do I believe that Fed policy is, in fact, financial repression and not economic stimulus?

 

  • First, their policy is based on the erroneous belief that demand creates supply and the irrational fear that deflation is the worst thing that can happen to an economy. In short, I don’t believe their policies can accomplish their stated purpose.
  • Second, the fact is, paying interest on our nation’s debt has already reached the point of being burdensome. The only rate of interest we can really afford is 0%. Therefore it is imperative that interests rates be kept near zero.
  • Third, employing quantitative easing (QE) proves how desperate the government is to keep interest rates low. When the Fed buys government bonds from banks in large amounts, the interest rate on bonds naturally goes down. Therefore, the government doesn’t have to offer higher rates to attract buyers (creditors) so the interest burden on its debt is less than if interest rates were higher. The Fed creates the artificial demand for its own debt and keeps interest rates down by printing money! It is only incidental that the fed hopes the money will circulate causing the economy to grow yielding more taxes to reduce the debt.
Why Use the Term Financial Repression?

So, you may ask, why use the term financial repression? Who gets hurt when the government and central bank intervene in the marketplace in this manner?

  • If there is any inflation at all, anyone who saves will see the purchasing power of his savings erode. Retirees are especially vulnerable because they are usually not in a position to put their money into higher yield, higher risk investments such as stocks that have the potential for large losses.
  • People who live within their means are forced to subsidize spendthrifts. Not only do Fed policies reduce the debt of the government, they reduce the debt of private individuals and corporations as well which have reached record levels in the last decade. The Fed’s policies make it possible for borrowers to get their hands on money at a lower interest rate than they could in a free market. A lower interest rate is forced upon savers who, without such interference, would receive a higher rate of interest from banks competing for deposits. This is not wealth creation; this is yet another example of wealth transferred from one group to another.
  • The economy as a whole suffers when financial repression is employed. Inequality rises when capital flows into stocks, not solely based on value, but because other alternative places to park money yield no return thanks to the Federal Reserve. Then, of course, prices are bid up and a bubble forms.  The system is set up in favor of the rich who have access to the first use of capital.6 When the bubble pops, capital is wiped out having served little purpose in growing the economy.  Then, the Fed and the Treasury bail out the financial sector.
  • Unemployed workers are harmed when they can only find part-time work or work at a lower wage because capital has been funneled into non-productive asset bubbles instead of being used to build factories or start new businesses.
  • Proponents of current monetary policy would argue that low-interest rates allow more people to obtain a home mortgage. Aside from the fact that indebting yourself for most of your working life might not be a good idea, the Federal Reserve’s policies essentially remove an important option for many people – to wait until they have saved more money. People who want to buy a home are harmed as the government entices them to borrow by offering low interest rates and tax incentives, and by producing asset bubbles prompting people to buy before they would normally for fear of being priced out of the market. This is especially true during a period of stagnating wages that are also a direct result of the same Fed policies.
Summary

Financial repression punishes you for saving, rewards you for going into debt, increases inequality, provides a disincentive for elected officials to balance the national budget, is a deceptive way to fund government spending, and tends to replace unemployment with underemployment. It produces a boom-bust economic cycle and then is offered as additional medicine to cure the diseases it caused in the first place.

On second thought, if you are retired or you live within your means or you are a member of the future generation who will more than likely pay the highest price for the Fed’s misguided policies, then maybe you shouldn’t feel repressed. The term is too vague. Maybe you should feel like someone who has been forced to contribute to someone else’s prosperity and later forced to suffer the consequences of their financial folly when the economy crashes because borrowers’ short-term gains came at the expense of long-term investment in the economy.

 

 

Notes:
  1. In the case of the wars in Iraq and Afghanistan, taxes were decreased and spending increased. Evidently it was believed that the tax cuts would increase tax revenues from individuals and corporations due to economic growth enough to offset the cost of the wars.  It didn’t turn out that way.
  2. Anyone with substantial credit card debt knows this. The difference between the credit card holder and the government is that the government can lower to zero the percentage interest rate it pays on the balance owed.
  3. “Financial Repression Redux”, Finance & Development, June 2011, Vol. 48, Carmen M. Reinhart, Jacob F. Kirkegaard, and M. Belen Sbrancia
  4. “The Liquidation of Government Debt” Carmen M. Reinhart, M. Belen Sbrancia, NBER Working Paper 16893
  5. “Statement on Longer-Run Goals and Monetary Policy Strategy”
  6. Read about the Cantillon Effect in my blog – Inequality, Part 3