You Can't Borrow From the Future

Pay no attention to the man behind the curtain

The problem is how much money we spend taking from one person and giving it to another—or even worse, borrowing it from our grandchildren to give it to someone else today.

-US Congressman Randy Fine

At the end of the day, this budget is going to allow $1.3 trillion more of money borrowed from our grandchildren, $1.3 trillion more, and doesn’t really address the number one problem that faces our national security, our economy, our education system, roads and bridges. And that’s our $31 trillion national debt.

-Senator Roger Marshall

What I would say though is that the Labor Party and the Greens right now want the Australian Government to keep borrowing from our children and grandchildren to fund consumption today.

-Mathias Cormann

If you ever have the misfortune of spending time listening to politicians talk, you’ll notice two types: the ones who constantly hyperventilate about why we need to spend more money, and the ones who constantly hyperventilate about how awful it is that we’re borrowing money from our grandchildren to spend. I’m sure everyone is already wise to the lies of the first group, but now I want you to understand why the second group isn’t much better.

Let’s get the important conclusion out of the way first. Nobody can borrow from anybody’s unborn grandchildren. Not you, not me, and not the US government. It’s simply not possible.

The reason is pretty simple, but not obvious at first glance because of a glaring and almost universal blind spot in our mental framework. It all comes back to the fact that money is not wealth, but almost everyone believes that money is only wealth and nothing else. I wrote an entire article about why that’s the case, explaining what money actually is. I’ll just give the tl,dr for now, if you want the full scoop you can read it here.

The bottom line is that money is a ledger of deferred consumption. It’s not wealth in itself, just an abstract representation of actual wealth. You can understand this easily when you think about borrowing.

Money is the thing we most commonly borrow, and always what’s being referred to when someone is talking about borrowing from our grandchildren or our future. But that’s not because we want money, it’s because we want the actual wealth we can buy with money. Nobody goes to the bank and takes out a loan just so they can put the cash in a shoebox and bury it in the backyard until the loan comes due. People borrow money because they want to buy something immediately and don’t have the money to do so. Exchanging it for real wealth (spending it) is ultimately the only value proposition of money.

The government is no different. They borrow money to immediately spend to build roads or buy bombs or feed orphans. Or maybe to feed the orphans they created by bombing the roads they previously built in Afghanistan. Something like that.

If you understand that perspective, you’ll see that what’s being borrowed isn’t really money, but rather the goods or services that can be purchased with money. If there were no goods or services available to buy, there would be no reason to borrow money.

And that’s why it’s impossible to borrow from the future. You can’t buy goods or services from the future because they don’t exist yet. You can’t buy and use something that does not exist. Unless you can build a time machine, there’s no way to go to the future and bring back a house built by your grandson or a day of skilled nursing care performed by your granddaughter. Since the government doesn’t have a time machine either, they’re in the same boat.

That of course begs the question; if we aren’t borrowing from the future, then who are we borrowing from? While the idea of borrowing from our grandchildren sounds bad, and some politicians use that argument to appeal to people’s sense of responsibility, it actually isn’t a very effective argument. Most people are happy to cause harm to someone in the future in exchange for a benefit to themselves today, even if it is their own grandchild. Exhibit A, the boomers reverse-mortgaging their houses to travel the world while their children struggle with exorbitant daycare costs and astronomical rents while trying to raise their grandchildren.

If we can’t borrow future goods and services because they don’t exist, then obviously we must be borrowing goods and services that already exist. We must be borrowing from someone who is creating goods and services today.

All borrowing is a wealth transfer in the present. It’s taking something one person owns or creates, and letting someone who didn’t own or create it use it for a period of time. The existence of money allows this to be intermediated through a third party.

I’ve explained how fractional reserve banking works here.

So let’s use the example of a house. Bob is a builder. He builds a house and puts it up for sale for $400,000. Jim is a dentist. He needs a house, so he decides to buy the house Bob built. But he doesn’t have the money to afford it right now. That means he hasn’t filled enough teeth and deferred consumption of the resulting earnings to equal the value of a house.

But that’s no problem, because he can go to the bank and get a loan. So he does. The bank creates a mortgage for $400,000 for Jim, and adds two items to their bank balance sheet. On the asset side is the mortgage they just created for Jim, where Jim signed his name and agreed to pay back the money he is borrowing from them over the next thirty years. On the liability side is Jim’s checking account, where the bank updates his balance and types in the dollar amount of the mortgage they just gave Jim ($400,000), creating new money out of thin air. Jim then writes Bob a check for the purchase price of the house, and Bob deposits it into his checking account. The bank then decreases Jim’s account by $400,000, and increases Bob’s account by $400,000.

The end result of this whole transaction is that Bob traded a house he could have lived in for $400,000 in his bank account, and Jim is borrowing a house to live in that he hasn’t worked hard enough to build himself. The reason Bob agrees to this trade is the implication that if he wants a house in the future, or something of equivalent value to a house, he can use his $400,000 and buy it. And if he did that tomorrow, sure, it would work. But what about next year? It might not work out quite as well.

All that creation of new money by banks making loans has an effect on prices. In simple terms, it causes inflation. The price of a house next year probably won’t be $400,000. It will probably be more like $425,000. So say Jim decided to move away and put his house up for sale, and Bob decided to buy it back. He couldn’t afford it with only his $400,000. He’d have to work to earn $25,000 or go to the bank and borrow it. Jim on the other hand paid $25,000 in interest on his mortgage in the first year. So his $425,000 sale price still leaves him with only $400,000 net, not enough to buy an equivalent value house at his new location after a year of house price inflation.

Put all this together, and you’ll notice that Bob effectively paid the bank $25,000 for the privilege of not living in a brand new house he built for a year. Jim borrowed a house from Bob for free for a year, and now Bob is $25,000 poorer for his trouble.

If you work a job and get paid in dollars and deposit those dollars into your checking account, you’re Bob in this example. You’re the one the US government is borrowing from. They’re borrowing and spending money created by banks or the Federal Reserve, buying up the goods and services you’re working hard to create and redistributing them to people who haven’t created that wealth. Real people work to build the vacation houses bought by government contractors who got rich off corrupt USAID grants, for example. That wealth was effectively redistributed from hard-working Americans who probably struggle to make the rent payment every month, much less own multiple vacation homes across the country.

Meanwhile you’re indirectly trading those goods and services for US government bonds, which the banks are buying with the paycheck you deposit into your checking account. The expectation is that when you decide to spend that money, you’ll get an equivalent value of goods and services back. But that’s not what happens, because during the time you keep that money in your account, prices will rise. When you do spend the money, you’ll get less value in return. The difference is the value the government and the banks redistributed away from you in exchange for the privilege of you not immediately consuming the wealth you created. Inflation is a tax too, paid to the government and the bankers without any consent or accountability from you, the citizen. And it’s not a wealth redistribution from your grandchildren, it’s a wealth redistribution from you, right here, today.

Even if you invest in Treasury bonds directly and collect the interest instead of giving it to the bank, you still lose. Here’s the chart of long term US bond total returns for the past quarter century against gold.

If you invested in bonds in 2000, you lost 75% of the value of your work against just holding gold.

Your grandchildren will have their own problems, but paying off the national debt won’t be one of them. It will either be more of the inflation and wealth redistribution caused by constant government deficit spending, or hyperinflation and complete currency collapse caused by reaching the ultimate end of the deficit spending road. Nobody today is benefitting from your grandchildren’s hard work, and anyone who does benefit at their expense will do so while they’re alive. They’ll be stolen from while they’re alive and working, just like you’re being stolen from today.

Don’t let any mealy-mouthed politician bamboozle you about that fact that the government is stealing from you today to redistribute the wealth you create to the parasite class. Don’t let them weasel out of their responsibility for the theft by claiming that they’re actually stealing from your unborn grandchildren instead. It’s not true, and no amount of obscure economic jargon can make it so. You can only redistribute what already exists. You can’t borrow from the future.